FINANCIAL STATEMENTS :

THE BASES FOR PLANNING

AND CONTROL
Lecture # 4

DETERMINING PRODUCT COSTS AND PRICING

Cost accounting is used to determine

products costs and help with
marketing decisions.
1.

2.
3.
4.

Determining the selling price of a

product.
Meeting competition.
Bidding on contracts.
Analyzing profitability.

PLANNING AND CONTROL

Planning is the process of establishing

objectives or goals for the firm and
determining the means by which the firm
will attain them. Effective planning is
facilitated by the following:
1.
2.

Clearly defined objectives of the manufacturing

operation.
A production plan that will assist and guide the
company in reaching its objectives.

PLANNING AND CONTROL (CONT.)

Control is the process of monitoring the

companys operations and determining
whether the objectives identified in the
planning process are being accomplished.
Effective control is achieved through the
following:
1.
2.
3.

Assigning responsibility.
Periodically measuring and comparing results.
Taking necessary corrective action.

RESPONSIBILITY ACCOUNTING

Responsibility accounting is the

assignment of accountability for costs or
production results to those individuals who
have the most authority to influence them.
A cost center is a unit of activity within the
factory to which costs may be practically and
equitably assigned. The manager of a cost
center is responsible for those costs that the
manager controls.

REPORTING

Cost and production reports for a cost

center reflect all cost and production data
identified with that center.
The performance report will include
only those costs and production data that
the centers manager can control.
A variance is the favorable or
unfavorable difference between actual
costs and budgeted costs.

EVALUATING ANNUAL RESULTS TO ORIENT

THE OUTSIDERS

Current ratio
Acid test ratio
Income before income tax as a %
os sales
Net income as a % of sales
Gross profit as a % of sales
Rate of return on capital employed

FIXED FACTORY OVERHEADS

Salaries of production executives

Depreciation
Property tax
Patent amortization
Wages of security guards and fire
fighters
Maintenance and repairs of
building and grounds
Insurance- property and liability

VARIABLE FACTORY OVERHEADS

Supplies
Fuel
Power
Small tools
Spoilage, salvage and reclamation
expenses
Receiving costs
Hauling within plant
Royalties
Communication costs
Overtime premium

SEMI VARIABLE FACTORY

OVERHEADS

Supervision
Inspection
Payroll department services
Personnel department services
Factory office services
Materials and inventory services
Cost department services
Maintenance and repairs of machinery and
equipment
Compensation insurance
Health and accident insurance
Payroll taxes
Industrial relations and employees welfare expenses
Heat, light and power

CONTROLLABLE AND UNCONTROLLABLE COSTS

Controllable costs:

Costs that can be controlled or heavily influenced by

the manager.

Uncontrollable costs:

Costs that a manager cannot influence significantly.

MANUFACTURING OPERATIONS
AND MANUFACTURING COSTS

Job Shop:

Low production volume; little standardization; one of

a kind product.

Batch:

Multiple products; low volume

Assembly line:

A few major products; higher volume.

Mass customization:
Higher production volume; many standardized
components ; customized components of
components.

Continuous flow:

Higher production volume; highly standardized

commodity products.

MORE COST
CLASSIFICATIONS

Opportunity costs:

Is defined as a benefit that is sacrificed when the choice of

one action preludes taking an alternative course of action.

Out of pocket costs:

Costs that require payment of cash or other assets as a

result of their incurrence.

Sunk costs:

Costs that have been incurred in the past.

They do not affect future costs and cannot be changed by
any current or future action.
Irrelevant to all future decisions.

MORE COST
CLASSIFICATIONS

Differential costs:

It is the amount by which the cost differs under two

alternative actions.

Incremental costs:

The increase in cost from one alternative to another.

Marginal costs:

Additional costs incurred when an additional unit is

produced.

Average costs:

It is the total cost for whatever quantity is

manufactured, divided by the number of units
manufactured.

Standard costs:

Pre determined costs for direct materials, direct labor

and factory overhead.
They are established by using information
accumulated from past experience and data secured
from research studies.