Welcome to the series of using Python for Financial Accounting. This series will use the information from Financial Accounting - Tools for Business Decision Making, 7th Canadian Edition. Wiley. to form our AccountingPy knowledge.
This series will be brief in descriptions and explanations, as the focus in this book is joining your existing accounting knowledge with new Python knowledge. There will be a glossary for terms as a reference. This book ideally should be used with accounting classes as this does not go in depth of concepts, just how to use Python for specific calculations.
Managerial cost concepts and behavior analysis has 3 main components; managerial cost concepts, cost behavior analysis and manufacturing costs in financial statements.
To manage costs, a manager needs to have information in order to plan, direct and control operations.
Manufacturing is activities that convert raw materials into finished goods.The manufacturing process:
direct materials - raw materials, basic materials parts used in the manufacturing process.
indirect material - materials that do not physically become part of the finished product and they can’t be easily traced because physical association with the finished product is too small in terms of cost (accounted under manufacturing overhead).
direct labor - the employees that are physically and directly involved in the conversion of raw materials into finished goods.
indirect labor - work that is indirect is work that has no physical association with the finished product and is work is too cumbersome to trace back to the cost of goods made.
manufacturing overhead - costs that are indirectly associated with the finished product, these specific costs can’t be classified as direct materials or labor.
prime cost = sum of all the direct material and labor costsconversion costs = the sum of all direct labor and manufacturing overhead costsproduct costs - the sum of all necessary costs in producing the finished productperiod costs - costs that match the revenue of a specific time period instead of the cost of a salable product (non-manufacturing costs), selling and administrative expenses are period costs.This section will go through an example of cost. Say there is a company that makes hoverboards (like the ones in Back to the Future movie series), the following is the manufacturing costs.
We will use a data dictionary for storing the values from above. Then, let us make a function to calculate all of the costs.
hoverboards = {
'material_cost' : 30,
'labor_cost' : 40,
'depreciation_equipment': 25e3, # 25,000
'property_tax_bldg': 6e3, # 6,000
'advertising_cost': 30e3,
'maint_salaries': 45e3,
'salary_plant_manager': 70e3,
'shipping_cost': 18
}Make a function to calculate the total manufacturing costs. This function’s argument will use the data type dictionary as input for our calculations. The second thing we want to know is how many hoverboards were made? We can get user input for a number, as this makes the function flexible for future use.
def manufacturing_costs(dict , num_boards: int ):
manuf_costs = (dict['material_cost'] * num_boards) + (dict['labor_cost'] * num_boards) + \
dict['depreciation_equipment'] + dict['property_tax_bldg'] + \
dict['maint_salaries'] + dict['salary_plant_manager']
cost_per_unit = manuf_costs / num_boards
print("\nTotal manufacturing costs = ${:,}".format(manuf_costs))
print("\tcost per unit is = ${:.2f}".format(cost_per_unit))Now we call our function and say as that there were 10,000 hoverboards made.
manufacturing_costs(hoverboards, num_boards= 10e3)
Total manufacturing costs = $846,000.0
cost per unit is = $84.60The cost behavior analysis is the study of how specific costs respond to changes in the level of business activity. Start from determining the key business activities such as:
Activity level changes or volume of activity should be correlated with changes in costs. Activity Index is the activity that causes changes in the behavior costs.
variable costs = costs that vary in total, directly and proportionally with changes in the activity level. A variable cost is also defined as a cost that remains the same per unit at every level of activity. Variable costs include:
if level increases by 10% :
total variable costs increases by 10%
if level of activity decrease by 25%:
total variable costs decrease by 25%For example, a company’s variable cost is $10 for a camera inside the device. The activity index is the number of devices produced, say 2,000 are made. As each device is made, the total cost of each device increases by $10.
variable_cost = 10
activity_index = 2000
def total_variable_cost(var_cost, act_index):
total_var_cost = var_cost * act_index
print("Total variable costs = ${:,}".format(total_var_cost))
total_variable_cost(variable_cost, activity_index)Total variable costs = $20,000Fixed costs are costs that remain the same in total within the relevant range, regardless of activity level. These include:
if volume increases:
unit cost declines
if volume decreases:
unit cost increasesA company leases its production facility at a cost of $10,000 per month the total fixed costs of the facility will stay constant at every level of activity. Let us make a function to calculate the unit costs.
activity_index = 2000
lease_cost = 10e3
def unit_costs( act_index: int, lease_cost:int):
unit_cost = lease_cost / act_index
print("unit costs = ${:.2f}".format(unit_cost))
unit_costs(activity_index, lease_cost)unit costs = $5.00Mixed costs are costs that have both a variable element and a fixed element, semi-variable costs. Mixed costs change in total but not proportionally with changes in the activity level.
vehicle rental company has mixed cost, assume a 5 m truck rented, plus the insurance is $50 per day, then an additional 25 cents per km.
Using a for loop you can see what the starting mixed costs are, starting with the $50 rental and 0 kilometers, to 600 kilometers.
fixed_cost = 50
variable_cost = 0.25
kms_driven = range(600)
total = []
for x in kms_driven :
c = (x * variable_cost ) + fixed_cost
total.append(c)
print(f"Start of total costs = $ {total[1:5]}")
print(f"End of total costs = $ {total[-5:-1]}")Start of total costs = $ [50.25, 50.5, 50.75, 51.0]
End of total costs = $ [198.75, 199.0, 199.25, 199.5]The variable cost rises as the kilometers increase, but the fixed cost stays the same.
Mixed costs need to be classified into their respective fixed and variable elements. The standard method is to determine the variable cost and fixed cost of the total cost at the end of a time period. By using past experience to inform the future in cost classifications. One approach is called high-low method, but other approaches are scatter plots and least squares analysis.
The High-Low method uses costs incurred at the high and low activity levels, the difference in costs between the high and low is the variable costs.
variable cost per unit = \(\Delta\) in total costs / \(\Delta\) in activity levelsUsing a transportation company, data on its buses as an example :
| month | kms driven | total cost $ |
|---|---|---|
| Jan | 40,000 | 30,000 |
| Feb | 80,000 | 48,000 |
| Mar | 70,000 | 49,000 |
| April | 100,000 | 63,000 |
transport_co = {
'costs_high' : 63e3,
'costs_low' : 30e3,
'high_level': 100e3,
'low_level' : 40e3
}
def var_CostPerUnit( dict ):
delta_costs = dict['costs_high'] - dict['costs_low']
delta_activity = dict['high_level'] - dict['low_level']
vcpu = delta_costs / delta_activity
print("Total variable cost per unit = ${:.2}".format(vcpu))
tot_fix_cost_h = dict['costs_high'] - (dict['high_level'] * vcpu)
tot_fix_cost_l = dict['costs_low'] - (dict['low_level'] * vcpu)
print("\n----- Maintenance costs ------")
print("Total fixed cost (high activity) = ${:.2f} + ${:.2f} per km".format(tot_fix_cost_h, vcpu))
print("Total fixed cost (low activity) = ${:.2f} + ${:.2f} per km\n".format(tot_fix_cost_l, vcpu))
var_CostPerUnit( transport_co )Total variable cost per unit = $0.55
----- Maintenance costs ------
Total fixed cost (high activity) = $8000.00 + $0.55 per km
Total fixed cost (low activity) = $8000.00 + $0.55 per km
Manufacturing costs in financial statements have 2 sections that differ between all companies, the cost of goods (income statement) and the current assets (balance sheet). The income statement for a merchandiser and a manufacturer will be different in the cost of goods sold (COGS).
A company starts production of microchips on Jan 1 (beginning work in process inventory). The costs the company assigns to beginning work in process inventory is based on manufacturing costs incurred in the prior period. The total manufacturing cost is the sum of direct materials costs, direct labor costs, manufacturing overhead incurred in the current year. At the end of the year, part of the total production is complete, the costs of these units become the cost of the ending work in process inventory. Cost of goods manufactured is determined by subtracting incomplete microchip costs from the total cost of work in process.
Partial income statements for a merchandising and a manufacturing company. For the data dictionary we can use the key ‘cost of goods purchased’ to also be ‘cost of goods manufactured’ for manufacturing income statement, and the formula holds.
merch_co = {
'merchandise_inventory_jan_1' : 90e3,
'cost_of_goods_purchased': 370e3, # or manufactured
'merchandise_inventory_dec_31' : 80e3
}
def cost_of_goods_sold( dict):
cogs_available = dict["merchandise_inventory_jan_1"] + dict["cost_of_goods_purchased"]
cogs = cogs_available - dict["merchandise_inventory_dec_31"]
print("Cost of goods sold = ${:,}".format(cogs))
cost_of_goods_sold( merch_co )Cost of goods sold = $380,000.0The balance sheet for merchandising company is focused on inventory, the balance sheet for a manufacturer may have various inventory accounts.
Partial Balance sheets for merchandise company and a manufacturer.
merch_co = {
'cash' : 100e3,
'net_receivables': 210e3,
'merchandise_inventory' : 400e3,
'Prepaid_expenses': 22e3
}
manuf_co = {
'cash': 180e3,
'net_receivables': 210e3,
'finished_goods': 80e3,
'work_in_progress': 25200,
'raw_materials': 22800 ,
'prepaid_expenses': 18e3
}
def current_assets( dict):
assets = list( dict.values() )
tot_assets = sum(assets)
print("Total current assets = ${:,}".format(tot_assets))
current_assets( merch_co )
current_assets( manuf_co )Total current assets = $732,000.0
Total current assets = $536,000.0This example will be calculating the cost of goods manufactured with data on raw materials and labor. Cost of goods manufactured schedule for one month. This example is a bicycle manufacturer, and we will use 1,000 has the number for quantity produced.
manufacturer = {
'rent_manuf_equipment' : 2e3,
'bldg_insurance': 750,
'raw_materials': 80,
'manufacturing_utilities': 1000,
'labor' : 30,
'misc_materials': 1.20,
'property_tax_bldg_year': 2400, # per year
'supervisor_salary': 3000,
'bldg_depreciation' : 1500
}def manufacturing_cost( dict, num_produced: int):
base_costs = dict['rent_manuf_equipment'] + \
dict['bldg_insurance'] + \
dict['manufacturing_utilities'] +\
(dict['property_tax_bldg_year'] / 12) +\
dict['supervisor_salary'] + \
dict['bldg_depreciation']
# print(base_costs)
manuf_costs = (dict['raw_materials'] * num_produced) +\
(dict['labor'] * num_produced) + \
(dict['misc_materials'] * num_produced)
# print(manuf_costs)
tot_manuf_costs = base_costs + manuf_costs
cost_per_unit = manuf_costs / num_produced
print("\nTotal manufacturing costs = ${:,}".format(tot_manuf_costs))
print("\tcost per unit is = ${:.2f}".format(cost_per_unit))
manufacturing_cost( manufacturer, 1000 )
Total manufacturing costs = $119,650.0
cost per unit is = $111.20This function is very similar to the one at the start of the chapter, calculating the costs for hoverboards.