Professional Ethics

Learning Objective 7: Understand what professional ethics mean to management accountants

After really big ethical fuck ups by the likes of big companies like Enron, Lehman Brothers, Toshiba, and many more, ethical conduct in accounting is more important than ever. When ethics fail, entire markets can fail.

Institutional Support

Because accountants are accountable both in and out of the company for financials, they have special obligations. The Sarbanes-Oxley Act exists as a means of putting these obligations into law. They impose tough standards and criminal punishments for anyone who doesn't meet those standards. It also opens a door for whistleblowers.

Under the Sarbanes-Oxley Act, CEOs and CFOs must prove their financial statements as legitimate, usually through outside auditing. For this reason, the Act empowers the audit committee of any company's board to hire, compensate, and fire public accounting firms to audit the company. As a counterbalance to this, the Act also limits the services an public accounting firm can give to a company they are auditing to reduce dependency. These audits and auditors are in turn audited by the Public Company Accounting Oversight Board. What this means is that companies are easily audited by independent public accounting firms while these same accounting firms are diversified and held under strict scrutiny to avoid any funny business.

Accountants also find institutional support from Professional Accounting Organizations, who represent management accountants. These organizations certify that these accountants have the technical knowhow and expertise, as well as advocate high ethical standards. In the United States, these are instead actual ethical guidelines. The Institute of Management Accountants (IMA) provides guidance on this front, and even has an ethics hotline for Accountants to walk through any ethical dilemma.

Statement of Ethical Professional Practice

https://quizlet.com/464550048/statement-of-ethical-professional-practice-flash-cards/

Resolution of Ethical Conduct

When faced with ethical issues, follow established policies to resolve the problem. If they don't work, then:

1. Discuss with immediate supervisor, unless they are involved already (in which case, keep going up levels). If you get to the CEO or equivalent, you can go to a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contacting above superiors should be done with superior's knowledge (if she is not involved with the initial problem). Communicating outside the organization is not appropriate, unless there is a violation of law.
2. Talk confidentially with an IMA Ethics Counselor or impartial advisor to clarify ethical issues.
3. Consult attorney regarding legalities

What are the ethical responsibilities of management accountants?

Management Accountants are responsible to many both in and out of the organization. For this reason, it is important for them to emphasize high standards in Competence, Integrity, Confidentiality, and Credibility. Laws like the Sarbanes-Oxley Act, as well as many outside ethical advisory groups and organization exist to help support Accountants in deriving solutions to ethical problems

Hybrid Costing Systems

Learning Objective 6: Understand the need for hybrid-costing systems such as operation costing

Overview of Operation-Costing Systems

ARE 140 Farm Management February 6 Lecture: Obtaining and Using Credit

Credit: What and Why?

Credit is the ability to borrow money. Creditors are particularly interested in your ability to pay it back.

Leverage - Jumpstarts starting point for business. Eat credit interest for higher return from business.

Credit: How and When?

Provide proof you can pay it back, this being in past records and plans to make more money with the loan.

Single parent or lump sum

Lines of credit - Provide big money account. Charge interest whenever you withdraw money, often reward putting money back in

Amortized loans - Kill over time

Balloon payment loans - Pay interest for first few years, pay whole thing at the end

Common costs of borrowing

Interest: Simple or compound

Points: Fee for getting loan

Appraisal fees 

Administrative fees

Rates may be fixed or variable

How to compare offers of credit?

Translate payments into PV.

Other means of sourcing capitol

• Leasing - Temporary possession of property
• Outside equity from investors
• Contracts

Equity Investors:

Entrepreneur provides idea and likely management services, and the equity investor proves the money capital.

Investor is likely to have the upper hand in valuing ownership.

Contracts:

Forward contracts: Pay now for service later (lock in price of grain for next year)

Crowdsourcing

Slow Money

Borrowing places demands on the borrower

The assumption made is that the borrower will make more money than the interest of the money they borrowed. 

Transferred-In Costs in Process Costing

Learning Objective 5: Apply process-costing methods to situations with transferred-in costs

They're basically the same as Direct Materials and Conversion Costs, but their own category.

Case 3: Process Costing with Some Beginning and Some Ending Work-in-Process Inventory

Learning Objective 4: Use the weighted-average method and the first-in, first-out (FIFO) method of process costing

Weighted-Average Method

Combine the beginning inventory with work started this period.

1. Physical Units: Add up Beginning WIP with Work Started this Period. It should match Units completed and transferred out + Ending WIP (225+175=400+100)
2. Equivalent Units: Convert WIP accounts to Equivalent Units and add to their respective start and completed Units, these should equal each other. (For expediency, you only need to calculate Completed+Ending WIP)
3. Total Costs: Add up Beginning WIP Costs and Costs added during period
4. Cost/Equivalent Unit: It's just math
5. Allocate Costs: Where'd it go between completed and ending WIP

First-In, First-Out Method

I, look I know what FIFO is.

1. Physical Units: Beginning WIP -> Completed and Transferred first. The difference must be units started during this period that are Completed and Transferred. Any units started this period that aren't Completed and Transferred should end up in Ending WIP.
2. Equivalent Units: Note, Equivalent Units of work done this period. This means if Beginning WIP inventory is [100% | 30%], the Equivalent Units of work done this period is [0% | 70%]. Ending WIP is more of the same.
3. Total Costs: Duh
4. Cost/Equivalent Unit: Also Duh
5. Allocate Costs: Allocate to Work Done this period to your Beginning Inventory, then Work Started and Completed, then Ending Inventory.

Two Things to note: 

FIFO should look mostly the same as Weighted Average except that it shifts the Cost of Goods Completed and Transferred Out with the Ending WIP. This is because Costs from the Beginning WIP first go through Completed and Transferred Out before Ending WIP (if they even get there). Compare this to Weighted Average, which distributes that cost proportionally between Transferred out and Ending WIP.

FIFO mostly applies only to items being transferred out. While it is possible to apply FIFO to units coming in as well, matching both up is cumbersome and is generally avoided.

Comparing the Weighted-Average and FIFO Methods

It should be noted that Weighted-Average and FIFO only really differentiate if the cost of inputs fluctuate by a significant amount, or if the Ending WIP to Products Completed and Transferred ratio is particularly high.

If Inputs drop, this causes FIFO to carry these higher costs into what eventually will be CoGS. If Inputs increase, Weighted-Average will do this. The higher CoGS will make the income of the company look smaller (even though the actual money they make is the same either way). This helps avoid taxes. On the other hand, going the opposite route for a lower CoGS may make a manager look better in the short term, though it does end up getting taxed more.

What are the Weighted-Average and FIFO methods of process costing? Under what conditions will they yield different levels of Operating Income?

Weighted Average and FIFO are different ways of allocating Process Costs onto the products created. Weighted Average simply distributes leftover costs from the previous month into the next, while FIFO gets those previous costs out of the door first.

They're mostly the same until Costs fluctuate and if Ending Inventory is significantly large, at which point FIFO makes costs look bigger if costs are falling and vice versa.

Try It! 17-3

Consider Stanton Processing Company Again. With the same information for 2017 as provided in Try It! 17-2, redo the problem assuming Stanton uses FIFO costing instead.

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Physical Units:
The 3,000 Units in the Beginning WIP Inventory are Completed and Transferred Out
27,000 Units Started this month are Completed and Transferred Out
2,000 Units Started this month end up incomplete and in the WIP Inventory

Equivalent Units:
From the Beginning WIP Inventory, the Equivalent Units of work that needs to be done is:
3,000 Units [60%|90%]
[1,800 | 2,700]
Units Started and Completed this month:
27,000 Units [100%|100%]
[27,000 | 27,000]
Units Started and end up in Ending WIP:
2,000 Units [80%|40%]
[1,600 | 800]
Total:
[30,400 | 30,500]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Cost/Equivalent Units:
[$5.97 | $10.60]

Allocate Costs
Finish WIP: [$10,746 | $28,620]
Started and Completed: [$161,190 | $286,200]
Started and WIP: [$9,552 | $8,480]

Try It! 17-2

The Stanton Processing COmpany had work in process at the beginning and end of March 2017 in its Painting Department as follows:

March 1   (3000 Units) [40%|10%]
March 31 (2000 Units) [80%|40%]

The company completed 30,000 units during March. Manufacturing costs incurred during March were direct materials costs of $176,320 and conversion costs of $312,625. Inventory at March 1 was carried at a cost of $16,155 (direct materials, $5,380 and conversion costs, $10,775).

Assuming Stanton uses weighted-average costing, determine the equivalent units of work done in March, and calculate the cost of units completed and the cost of units in ending inventory.

Physical Units:
3,000 Beginning
X Started
30,000 Completed
2,000 Ending

X=29,000 Started

Equivalent Units:

30,000 [100%|100%]
  2,000 [80%  |  40%]
[31,600 | 30,800]

Total Costs:
Started: [$176,000 | $312,625]
WIP:     [    $5,380 |   $10,775]
Total:    [$181,380 | $323,400]

Total Cost/Equivalent Units:
[$181,380 | $323,400] / [31,600 | 30,800]
[$5.74 | $10.50]

Allocate Costs:
30,000 [30,000 | 30,000]
  2,000 [  1,600 |      800]
30,000 [$172,200 | $315,000]
  2,000 [    $9,184 |     $8,400] (minor rounding error in allocated WIP Direct Materials)

17-1 Try It

Big Band Corporation produces a semiconductor chip used in communications. The direct materials are added at the start of the production process, while conversion costs are added uniformly throughout the production process. Big Band had no inventory at the start of June. During the month, it incurred direct materials costs of $935,750 and conversion costs of $4,554,000. Big Band started 475,000 chips and completed 425,000 of them in June. Ending inventory was 50% complete as to conversion costs.

Compute (a) the equivalent units of work done in June, and (b) the total manufacturing cost per chip. Allocate the total costs between the completed chips and those in ending inventory

(a)

475,000 physical units
425,000 completed
50,000 [100% | 50%] incomplete [(Direct Materials) | (Conversion Costs)]
50,000 Equivalent Units in Direct Materials (incompleted)
25,000 Equivalent Units in Conversion Costs (incompleted)
475,000 Equivalent Units in Direct Materials (total)
450,000 Equivalent Units in Conversion Costs (total)

(b)

$935,750 Direct Materials Cost / 475,000 Equivalent Units
$4,554,000 Conversion Costs / 450,000 Equivalent Units
$1.97 / Equivalent Unit (Direct Materials)
$10.12 / Equivalent Unit (Conversion Costs)

Completed:
(1.97+10.12)*425,000=$5,138,250
Incomplete:
50,000*1.97+25,000*10.12=$351,500

Double Check:
$5,135,250+$351,500=$5,489,750
$935,750+$4,554,000=$5,489,750

Case 2: Process Costing with Zero Beginning Inventory and Some Ending Work-In-Process Inventory

Learning Objective 3: Describe the five steps in process costing and calculate equivalent units

It should be noted that the estimation for % conversion for units is simply that, an estimation. Different businesses estimate differently based on the care and accuracy of the estimators/managers and the physical limitations of the business.

This % however, no matter how estimated, grants us a concept of equivalent units. These can be used to help measure the costs of our completed and incomplete units for a period. Process Costing for this type of problem follows its own process:

1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Summarize the total costs to account for
4. Compute the cost per equivalent unit
5. Assign the total costs to the units completed and to the units in ending work-in-process inventory

Summarizing the Physical Units and Equivalent Units (Steps 1 and 2)

Step 1: Summarize the flow of physical units of output

Physical units are the number of units, be it complete or incomplete. The flow is the measurement of what goes into the system and where it goes out. For example, consider a batch of 400 Simple Meals. We would record 400 simple meals started this period. However, let's say only 175 got completed, the other 225 only being partially completed. The flow then considers the 175 transferred out, and the 225 goes into Work-In-Progress.

Step 2: Compute Output in terms of equivalent units

Let's say the 225 units that are only partially completed are measured to have 100% of their materials, but only 60% converted. This would mean we have 225 physical units in our WIP, but what would this mean in Equivalent Units?

To calculate equivalent units, you multiply the amount of physical units there are by the percentage of completion. In this case, you have 225 equivalent units in Direct Materials, but only 135 equivalent units in Conversion Costs.

Note: Equivalent Units are calculated separately per input (in this case, Direct Materials and Conversion Costs)

For now, focus on quantities of units, not dollar amounts

Calculating Product Costs (Steps 3, 4, and 5)

Step 3: Summarize the Total Costs to Account For

In this case, the only costs we summarize are the ones added this period. Let's say it costs $32,000 in Direct Materials and $18,600 in Conversion Costs

Step 4: Compute the Cost Per Equivalent Unit
This is why you calculate equivalent units separately for input, by the way.

Divide the Material Cost by Equivalent Units in Direct Materials, and Conversion Costs to their Equivalent Units, to get the Cost Per Equivalent Unit.

Step 5: Assign the Total Costs to the Units Completed and to the Units in Ending WIP 

You now have the number of Equivalent Units Completed and in Progress (Steps 1 and 2), as well as the Cost Per Equivalent Units (Steps 3 and 4). Simply multiply them together to get your total costs within each inventory (Transferred out and WIP). These numbers should add up and match your recorded Total Production Costs

Journal Entries

In Process Costing, there are WIP Entries for each Process.


Why Accuracy in Conversion % is important

Inaccurate Conversion % would ultimately mean inaccurate costs being recorded, affecting the perceived performance of the manager/company.

If Conversion % is too high, this raises the apparent CoGS for the period. This is improves the performance indicators for some people in the company, meaning there's an unethical incentive to lie. The reverse is also true, where Supervisors could estimate low to help smooth over unnatural high points in productivity, which can then be used to cover up any future low points or spike future high points. Top Management should always emphasize obtaining the correct answer, regardless of how it affects reported performance.

What are the five steps in a process costing system, and how are equivalent units calculated?

1. Physical Units
2. Equivalent Units
3. Total Costs
4. Total Costs/Equivalent Units
5. Allocate Costs

Equivalent Units are calculated by measuring the amount of incomplete units in terms of both Direct Materials and Conversion Costs. So, at the end of the period if there's a WIP of 100 Units, 100% of Direct Materials are in there, but the Units are only 50% converted, that means you have 100 Equivalent Units in Direct Materials and 50 Equivalent Units in Conversion Costs. These Equivalent Units are then added to the Completed Units for the Time Period (which are treated (and defined) as 100% | 100% completed).

Case 1: Process Costing with No Beginning or Ending Work-in-Process Inventory

Learning Objective 2: Understand the basic concepts of process costing and compute average unit costs

How are average unit costs computed when no inventories are present?

When no inventories are present, this means that 100% of conversion was completed in this period for 100% of units produced in this period. In other words, average unit costs is a simple average of Direct+Indirect Costs of production (Direct Materials+Conversion Costs) and the # of units made.

Illustrating Process Costing

Learning Objective: Identify the situations in which process-costing systems are appropriate

Difference Between Job-costing and Process-costing systems

Process-Costing: Assigns cost by dividing total costs by the number of units, creating $/Unit. This is because in a mass manufacturing process, each unit receives the same or similar treatment (costs).

This process of treating each unit of production the same or similarly is actually the main difference between Job-costing and Process-costing. In a Job-costing system, each product produced does not receive the same or similar amount of products or work. Thus if you try to take an average of all the products and assign them to each job like Process-costing does, the measurement for each individual job is going to be inaccurate.

Some jobs mix both homogenous processes and unique jobs. These will be covered under "hybrid" costing systems in a later Learning Objective.

Direct-Cost vs Indirect-Costs (Direct Materials+Conversion Costs)

Although the chapter isn't actually clear what differentiates Direct-Costs and Indirect-Costs, the examples given are Direct Materials and Conversion Costs. A quick look online clarifies that Direct-Costs tend to be the variable costs in a system, where as Indirect-Costs tend to be fixed or period costs.

For example, let's say I have a Simple Meal plant where the main expenses are Corn which I buy from a nearby farm, a team of colonists who live on the plant, and the upkeep of the plant itself. The Corn I buy would be my Direct-Costs, the Direct Materials to produce Simple Meals, whereas the Colonists and the Plant would be Indirect-Costs, in this case the required Conversion to turn Corn into Simple Meals. It should be noted that if demand for Simple Meals changes, my demand for Corn changes as well (making Corn a variable cost), but the costs of the Colonists and Plant are Period and Fixed costs respectively, meeting the earlier clarification.

Process-costing systems separate costs into cost categories according to when costs are introduced into the process

Typically, Direct-Costs are applied right at the start of the process while Indirect-Costs are applied throughout the process based on completion.

Let's say we have an order for 100 Simple Meals. I order 1000 Corn for $1000, and let's say it will cost another $1000 to convert all of the Corn into 100 Simple Meals. The moment I receive my order for 1000 corn, the process records the costs of all "Simple Meals" in production at this point as costing $1000, applying the Direct-Cost upfront. Let's then say over the course of two days, I produce 50 Simple Meals. At this point of time, I'm only 50% done with Conversion (Indirect Costs). If I were to record the value of my "100" Simple Meals at this point, it would be the $1000 in Corn + half of the Conversion Costs for the order, in this case $500, for a total of $1,500 of Simple Meals at this point of time.

More complicated processes will have multiple different Direct and Indirect Costs throughout the process, however the rules still generally follow if you break these more complicated processes into steps. At the beginning of each step, if Direct Materials are added into the system, those costs are always recorded right away. Through the completion of the product, Indirect Costs for that step of Conversion or Completion are only added as a percentage of completion.

Under what conditions is a process-costing system used?

Process-costing systems are best used when dealing with large amounts of homogeneous products produced mostly or entirely the same throughout their production process. Process-costing will then record the cost of these products based on a function of Direct and Indirect Costs.

Chapter 17: Process Costing

Let's say we develop a process for creating Simple Meals in Rimworld. Now, Simple Meals are easy to mass produce, it's far better to consider their production a perpetual process than a core project; if you want to measure and keep track of them, you should use Process Costing.

There are three questions that Process Costing wants to solve. First, how many Simple Meals do you have at the end of the month/season/year? Second, how far along are the meals in progress? Third, how much exactly does a Simple Meal cost over the course of the process?

In particular for that last problem, there are many ways to value inventory, and depending on the method used, it would affect the measurable wealth of your economy (if Rimworld required you to write your own wealth reports), which in turn could affect enemy spawns and Pawn happiness. This is especially relevant if the cost of any particular ingredient during the process suddenly fluctuates.

The example given by the book is a story of if prices drop. Of the methods mentioned, FIFO, LIFO, and Weighted-Average, let's assume that our colony reports in FIFO. Simple Meals are for the most part mass produced through Corn, limited largely through a low-skill Grower. Let's assume we recruit a high-skill, high-passion Grower, and the "cost" of producing Corn drops. Even though the "Cost" of producing Simple Meals now has effectively dropped, FIFO requires us to maintain the costs of all of our old inventory before the newest Grower was hired. If this was a competitive Market, and all of the other Factions had their own influx of High-Skilled Growers, our own Colony's Simple Meals would look extremely expensive since we must carry through the costs of our old Grower's more expensive Corn, even though the Simple Meals we are producing are cheaper than ever.

Learning Objectives:

1. Identify the situations in which process-costing systems are appropriate
2. Understand the basic concepts of process costing and compute average unit costs
3. Describe the five steps in process costing and calculate equivalent units
4. Use the weighted-average method and the FIFO method of process costing
5. Apply process-costing methods to situations with transferred-in costs
6. Understand the need for hybrid-costing systems such as operation costing

Management Accounting Lecture January 27

Chapter 17 Process Costing

Process Costing -> Cost per Unit

Why do you want to know the cost per unit?

• Price of product
• Profit
• Control the cost
• How efficient production is
• Helps calculate CoGS
• Ending Inventory on Balance Sheet

Cost Accumulation

• Job Order
• Easily identifiable products
• Custom units, expensive yachts
• Often require contracts before going into production
• Process Costing
• Mass production 
• Toilet paper, toothpaste

Learning Objectives:

1. Identify the situations in which process-costing systems are appropriate
2. Understand the basic concepts  of process costing and compute  average unit costs
3. Describe the five steps in process  costing and calculate equivalent  units
4. Use the weighted-average method  and the first-in, first-out (FIFO)  method of process costing
5. Apply process-costing methods to  situations with transferred-in costs
6. Understand the need for hybridcosting systems such as operation  costing

Process Costing

Calculating unit costs by assigning total costs over identical/similar units of output.

ex. $1,000,000 operating cost over 100,000 identical untis = $10 Unit cost

Process-Costing Cost Categories

Process-Costing systems separate costs into 2 cost categories

1. Direct Materials - Often accumulated at the beginning of production/work station
1. The raw materials that will eventually become the final product
2. Conversion costs - Often accumulated throughout process
1. The work required to turn raw materials into a final product
2. For simplicity, these are added evenly throughout the process

Process-Costing: Three Cases

1. No beginning or ending work-in-process inventories
2. No beginning WIP and some ending WIP
3. Both beginning and ending WIP inventories

Case #1: No beginning or ending WIP inventories

Five-Step Process-Costing Allocation

1. Summarize the flow of physical units of output
2. Compute output in terms of equivalent units
3. Sumarize total costs to account for
4. Compute cost per equivalent unit
5. Assign total costs to units completed and to units in ending work-in-process

Equivalent Units

For now, focus on the equivalent number of units (for example, 100 units 80% complete ~ 80 equivalent units).

In case 1, in order to calculate cost per unit, you simply need to divide the total costs by the number of units.

Case #2: No beginning WIP, but some ending WIP

Because Direct Materials are counted 100% at the beginning of the process, their value is recorded entirely. However, conversion costs are calculated based on completion of the unit. If the units are 60% done, 60% of the conversion costs are recorded. This % of conversion costs are used to calculate unit costs for the time period.

Weighted-Average Process-Costing Method

Weighted Average method or the FIFO method

Calculates cost per equivalent unit of all work done to date (regardless of accounting period in which it was done)

FIFO focuses on current costs and matching revenues and expenses to time periods

Case #3: Both Beginning and ending WIP inventory

Costs from last period (in the beginning Inventory) are carried forward and mixed in with current period's costs. These total costs are divided by the total units completed and in process this period (adding the beginning inventory and work done there).

First-In, First-Out (FIFO Process-Costing Method

Assigns cost of the beginning inventory (from last period) units to the equivalent number of units completed in this period.

Work done in different periods have their costs separated.