March 2, 2010
University of Phoenix
Maria Villanueve founded Aunt Connie??™s cookies in 1986. Over the years the Aunt Connie??™s cookie brand has grown. The most popular flavors of cookies are lemon creme and real mint. Aunt Connie??™s is a family owned business and solely owned by Maria Villanueve. Recently Maria has faced some critical decisions:
??? Make or buy products
??? Sell or process further
??? Eliminate an unprofitable business segment
??? The allocation of limited resouces
Cost accounting is one type of accounting system Maria should investigate as a means to helping make critical decisions. By understanding what cost accounting is, it will better prepare her to make critical decisions. The following paper will explain how cost accounting works.
Cost Accounting System (CAS)
Cost accounting is a type of accounting system that captures production costs by assessing the cost of each step of a production process along with associated fixed costs. Cost accounting measures and records cost individually, comparing input and output results to assist a company in measuring financial performance. A CAS has five parts:
1. Input measurement basis.
2. Inventory valuation method.
3. Cost accumulation method.
4. Cost flow assumption.
5. Capability of recording inventory, cash flows at certain intervals (Investopedia,? n.d.).
Several different cost accounting systems exist, this is nice since you can combine the different systems and use them in different combinations, but you have to remember not all the alternatives are compatible.
The cost accounting base begins with a type of cost that would flow into and through the inventory accounts. Four types of costing flow through inventory accounts:
1. Pure historical costing: The system captures only historical costs. This refers to previously recorded costs.
2. Normal historical costing: Historical cost for direct material and labor overhead is charged using a predetermined overhead rate.
3. Standard costing: All manufacturing costs are applied or charged using predetermined prices and quantities. Differences between applied and actual cost are charged to variance accounts.
4. Throughput method: A complement to the theory of constraints. Only direct material costs are charged to the inventory. With direct costing, a greater amount of costs are traced in the throughput method, but less in the full absorption method (www.maaw.com, n.d.).
Traditional methods of cost accounting include direct costing and full absorption. Some relatively newer methods include throughput and activity-based. Inventory valuation methods are an important part of cost accounting because they help a company control the manner in how the net income will be determined. This method will only affect the direct material costs, which are charged to the inventory. With direct costing, a greater amount of the cost can be traced in the throughput method versus the full absorption method. Inventory valuation methods are important in helping determine net income. Full absorption costing is a traditional method in which all manufacturing costs are capitalized into the inventory. For example, a new charge into the inventory account becomes an asset. When the inventory is sold the charge becomes an expense. External reporting is required for full absorption, but could also be useful for internal company reporting.
There are many different ways that cost can be collected and indentified (e.g., by specific customers, batches, orders, departments, jobs, and processes). These methods are known as cost accumulation. Cost that is accumulated by departments, processes, or any other type of operations, is called process costing. In process costing, work is performed on the unit is standardized or uniformed and can be found in mass production or an assembly operation. Manufacturing plants like Aunt Connie??™s would benefit in using the costing system.
Cost flow assumption is when flows through inventory accounts cost. This is important to identify, because cost flow will not always be the same. Examples of cost flow assumption include first-in, first-out, last-in, last-out, first-out, and weighted average. According to www.maaw.com (n.d.), ???the weighted average cost first-in, first-out (FIFO) and assumptions are used in processing cost. Cost accumulated by a process or a department in the cost environment, the cost flow will be needed to determine what treatment of the beginning inventory.??? The units of a product in the beginning inventory are finished first and then transferred to the next department before the assembly of any future units in a given period; a process known as FIFO.
Weighted average cost flow assumption is used when the beginning inventory unit loses its separate identity. This happens when units are lumped together with other units of a product started during a different period. If a company is using the weighted average cost flow assumption the possibility of losing the identity of the previous units increases.
Inventory methods provide a company with a capability of maintaining continuous records of the quantity of their inventory and with flow accounts. Quarterly methods may require counting of the quantity of inventory before updating the records. Manufactures tend to keep regular inventories, but retailers tend to use the quarterly method.
Recently Maria has faced some critical decisions regarding Aunt Connie??™s cookies. With a clear understanding of how cost accounting works, Maria should be able to make solid decisions regarding the long-term effects of making a certain cookie product, how to eliminate an unprofitable business segment, and how to allocate her limited resources.
Cost accounting. (n.d.).? Retrieved from http://www.investopedia.com/terms/c/cost- accounting.asp Retrived February 25, 2010
What is cost accounting (n.d.).? Retrieved from http://www.maaw.info.5partsofcostsystem.htm
Retrieved February 25, 2010