Kenneth Boyd

Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (www.accountingaccidentally.com), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (kenboydstl) has hundreds of videos on accounting and finance. In recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.

Articles From Kenneth Boyd

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163 results
163 results
How to Create a Normal Job Cost Sheet for Cost Accounting

Article / Updated 08-01-2023

When cost accounting, you put together your budgeting process for indirect costs with a plan for direct costs. Think of the combined process as normal costing. This is an important point: You trace direct costs and allocate indirect costs. Normal costing combines indirect cost rate with actual production. The process gets you closer to actual total costs for your product. Here are the two steps to implement normal costing: Direct costs: Traced to the cost object by multiplying (actual prices/rates) x (actual quantity for a specific job object) Indirect costs: Allocated to the cost object multiplying (predetermined or budgeted indirect cost rate) x (actual quantity for a specific job object) Note that both direct and indirect costs use actual quantity in the formula. While you come up with an indirect cost rate in planning, the rate is multiplied by actual quantities. In this case, the quantity is jobs for the month. A job cost sheet lists every cost you’ve incurred for a particular job. That includes direct material, direct labor, and all indirect costs. The job cost sheet is your basis for computing your sale price and your profit. You use this document to prepare a cost estimate for a client. Here is a job cost sheet using normal costing for a landscaping job. Normal Job Cost Sheet — Landscaping Job Type of Cost Amount or Quantity Price or Rate Total Cost (Rounded) Direct material 100 square feet of grass seed $12 per square foot $1,200 Direct labor 15 hours of labor $15 per hour $225 Mileage 30 miles driven $0.18 per mile $5 Indirect costs 30 miles driven $5.36 per mile $161 Total job costs $1,591 The indirect cost calculation (vehicle and equipment costs) uses the actual quantity (miles driven) and the estimated rate per mile. The other direct costs on the job sheet use actual quantities and actual prices/rates.

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13 Ways to Spot Fraud in Business Financial Statements

Article / Updated 09-15-2022

Financial statement fraud, commonly referred to as "cooking the books," involves deliberately overstating assets, revenues, and profits and/or understating liabilities, expenses, and losses. When a forensic accountant investigates business financial fraud, she looks for red flags or accounting warning signs that indicate suspect business accounting practices. These red flags include the following: Aggressive revenue recognition practices, such as recognizing revenue in earlier periods than when the product was sold or the service was delivered Unusually high revenues and low expenses at period end that can't be attributed to seasonality Growth in inventory that doesn't match growth in sales Improper capitalization of expenses in excess of industry norms Reported earnings that are positive and growing but operating cash flow that's declining Growth in revenues that's far greater than growth in other companies in the same industry or peer group Gross margin or operating margins out of line with peer companies Extensive use of off–balance sheet entities based on relationships that aren't normal in the industry Sudden increases in gross margin or cash flow as compared with the company's prior performance and with industry averages Unusual increases in the book value of assets, such as inventory and receivables Disclosure notes so complex that it's impossible to determine the actual nature of a particular transaction Invoices that go unrecorded in the company's financial books Loans to executives or other related parties that are written off A business that engages in such fraudulent practices stands to lose a tremendous amount of money when penalties and fines, legal costs, the loss of investor confidence, and a tarnished reputation are taken into account.

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Separable Cost Reduction in Cost Accounting

Article / Updated 08-11-2022

In cost accounting, the cost of goods available for sale represents the product’s total costs. Total costs have two components — joint costs and separable costs. When possible, you want to reduce separable costs, but first take a look at your company’s joint costs. Assume you manufacture leaf blowers. Your two products are heavy-duty blowers and yardwork blowers. The separable costs are $1,200,000 for the heavy-duty blower and $912,000 for the yardwork blower. If you know the separable costs and the cost of goods available for sale, you can compute the joint cost allocation. This table shows the process. Joint Cost Allocation Heavy-Duty Yardwork Total Cost of goods available for sale $1,751,163 $1,260,837 $3,012,000 Less separable costs $1,200,000 $912,000 $2,112,000 Equals joint cost allocation $551,163 $348,837 $900,000 Each company division provides the separable costs. So altogether, this table gives you a joint cost allocation. Now assume that the heavy-duty blower division is able to sharply reduce its separable costs to an amazingly low $500,000. The first table listed heavy-duty separable costs of $1,200,000. Consider what now happens to heavy-duty’s joint cost allocation. Take a look at the next table. Cost Allocation — Less Heavy Duty Separable Costs Heavy-Duty Yardwork Total Cost of goods available for sale $1,751,163 $1,260,837 $3,012,000 Less separable costs $500,000 $912,000 $1,412,000 Equals joint cost allocation $1,251,163 $348,837 $1,600,000 Heavy-duty’s joint cost allocation increases to $1,251,163 (from $551,163). That doesn’t seem right. The goal is to analyze costs to reduce or eliminate them. If you do, supposedly you increase your profits. In this case, the heavy-duty division’s reducing separable costs increased its joint cost allocation. There doesn’t seem to be a benefit to operating more efficiently. Here’s an explanation: The gross margin percentage method (calculated as gross margin ÷ total sales value x 100) locks in total costs as a percentage of sales value. If the gross margin is about 12.5 percent of sales value, it means that costs must be about 87.5 percent of sales value. For heavy-duty, that 87.5 percent total cost number is $1,751,163. Those costs are either separable or joint costs. If one increases, the other decreases. The heavy-duty manager may have a problem with this process. The manager works hard (using good old cost accounting) to lower the separable costs. The manager’s “reward” is a higher joint cost allocation. The heavy-duty division has lowered costs but doesn’t get any savings in total costs. The constant gross margin percentage method clarifies the revenue and profit calculations company-wide. This method eliminates some of the variation between company divisions. Although some managers may complain, each division has the same gross margin percentage. The process makes managing company profit easier. This is one of those “Here’s why the chief financial officer (CFO) makes the big bucks” moments. As CFO, you explain the gross margin percentage method to the heavy-duty division manager. The goal is to allocate joint costs so that each product maintains the same gross margin percentage of about 12.5 percent. If a division reduces separable costs, it must get a bigger joint cost allocation — otherwise, the gross margin percentage would increase. Now heavy-duty’s manager should be evaluated based on the successful cost reduction. The manager had a success, and you want to encourage more cost savings. Although the gross margin percentage process requires a bigger joint cost allocation, that must not take away from the manager’s good performance.

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Cost Accounting: Joint Cost Allocation and Gross Margin Percentage

Article / Updated 08-11-2022

In cost accounting, the cost of goods available for sale represents the product’s total costs. Total costs have two components — joint costs and separable costs. Assume the cost of goods available for sale are $1,751,163 and $1,260,837 for the heavy-duty blower and the yardwork blower. Say the separable costs are $1,200,000 and $912,000. If you know the separable costs and the cost of goods available for sale, you can compute the joint cost allocation. The first table shows the process. Joint Cost Allocation Heavy-Duty Yardwork Total Cost of goods available for sale $1,751,163 $1,260,837 $3,012,000 Less separable costs $1,200,000 $912,000 $2,112,000 Equals joint cost allocation $551,163 $348,837 $900,000 Each company division provides the separable costs. So altogether, the table gives you a joint cost allocation. Now calculate the gross margin percentage. Say your sales values are $2,000,00 and $1,440,000 for heavy-duty and yardwork blowers. The total cost is the cost of goods available for sale from the first table. The gross margin percentage is the gross margin divided by the sales value. For each product, the gross margin percentage is the same (12.442 percent) as the company’s overall gross margin. Verifying Gross Margin Percentage Heavy-Duty Yardwork Total Sales value (A) $2,000,000 $1,440,000 $3,440,000 Total cost (B) $1,751,163 $1,260,837 $3,012,000 Gross margin (A – B) $248,837 $179,163 $428,000 Gross margin percentage 12.442 12.442 Here’s the point of this table: it uses the traditional formula to compute gross margin and gross margin percentage. The table verifies that the calculations are correct. If the heavy-duty product has the higher sales value, it ends up with a higher gross margin in dollars than the yardwork product. However, both sale values are multiplied by the same gross margin percentage. Both products have a gross margin of about 12.5 percent (rounded). That means that about 87.5 percent of sales value represents cost of goods available for sale.

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Theoretical and Practical Capacity in Cost Accounting

Article / Updated 08-01-2022

In cost accounting, two types of capacity focus on production: theoretical capacity and practical capacity. Consider how much you could produce if customer demand was unlimited. Select a capacity method that makes sense to you, and use that as a tool to plan production and spending. Theoretical capacity assumes that nothing in your production ever goes wrong. Accountants describe this capacity as working at full efficiency all the time. Consider what your pie-in-the-sky or perfect-world capacity would be. It’s a world in which everything runs perfectly and no machines or equipment ever break down. It’s utopia where no worker ever makes a mistake. That would be great, wouldn’t it? That’s theoretical capacity, and you can’t reach it. It seems silly, but you need to see this level of capacity to understand the others. Say you own a business that makes athletic running shorts and other clothing. At maximum capacity, you can make 200 pairs of shorts per shift. You run three 8-hour shifts per day, 365 days a year. Based on those numbers, here is your theoretical capacity: Theoretical capacity = shorts x shifts x 365 days Theoretical capacity = 200 x 3 x 365 days Theoretical capacity = 219,000 Unfortunately, this level of capacity isn’t attainable. You need to take into account the unavoidable. That gets you to practical capacity. Practical capacity is the level of capacity that includes unavoidable operating interruptions. Another description is unavoidable losses of operating time. Consider maintenance on equipment, employee vacations, and holidays. You’re willing to accept a good, rather than perfect, capacity level. The people in your company can help you determine your practical capacity. Your production and engineering staff can answer questions about machine capacity and repair time. Your human resources staff can forecast employee availability, based on vacations and holidays. You determine that 250 days is a more realistic number of production days, given unavoidable operating interruptions. Also, you decide that two shifts per day are realistic. Here’s the practical capacity calculation: Practical capacity = shorts x shifts x days Practical capacity = 200 x 2 x 250 Practical capacity = 100,000 The practical capacity is 100,000 units (pairs of shorts) per year.

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1,001 Accounting Practice Problems For Dummies Cheat Sheet

Cheat Sheet / Updated 02-28-2022

Accounting, as you may guess, involves a lot of math. As you practice various types of accounting problems, and when you begin doing accounting work for real, you will need to utilize various formulas to calculate the information you need.

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Cost Accounting For Dummies Cheat Sheet

Cheat Sheet / Updated 12-15-2021

Cost accounting is a valuable tool you use to reduce and eliminate costs in a business. You also use cost accounting to determine a price for your product or service that will allow you to earn a reasonable profit. Familiarize yourself with the most important formulas, terms, and principles you need to know to apply cost accounting. You'll also want to get the scoop on text-taking strategies for cost accounting students.

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What Is a Limited Liability Company (LLC)?

Article / Updated 06-01-2017

The Limited Liability Company or LLC is an alternative type of business entity. A Limited Liability Company or LLC is like a corporation regarding limited liability, and it’s like a partnership regarding the flexibility of dividing profit among the owners. An LLC can elect to be treated either as a partnership or as a corporation for federal income tax purposes. Consult a tax expert if you’re facing this choice. The key advantage of the Limited Liability Company (LLC) legal form is its flexibility, especially regarding how profit and management authority are determined. For example, an LLC permits the founders of the business to put up, say, only 10 or 20 percent of the money to start a business venture but to keep all management authority in their hands. The other investors share in profit but not necessarily in proportion to their invested capital. LLCs have a lot more flexibility than corporations, but this flexibility can have a downside. The owners must enter into a very detailed agreement that spells out the division of profit, the division of management authority and responsibility, their rights to withdraw capital, and their responsibilities to contribute new capital as needed. These schemes can get very complicated and difficult to understand, and they may end up requiring a lawyer to untangle them. If the legal structure of an LLC is too complicated and too far off the beaten path, the business may have difficulty explaining itself to a lender when applying for a loan, and it may have difficulty convincing new shareholders to put capital into the business.

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Must Know Formulas for Cost Accounting

Article / Updated 03-26-2016

To reduce and eliminate costs in a business, you need to know the formulas that are most often used in cost accounting. When you understand and use these foundational formulas, you’ll be able to analyze a product’s price and increase profits. Breakeven Formula Profit ($0) = sales – variable costs – fixed costs Target Net Income Target net income = sales – variable costs – fixed costs Gross Margin Gross margin = sale price – cost of sales (material and labor) Contribution Margin Contribution margin = sales – variable costs Pre-Tax Dollars Needed for Purchase Pre-tax dollars needed for purchase = cost of item ÷ (1 - tax rate) Price Variance Price variance = (actual price - budgeted price) × (actual units sold) Efficiency Variance Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate) Variable Overhead Variance Variable overhead variance = spending variance + efficiency variance Ending Inventory Ending inventory = beginning inventory + purchases – cost of sales

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Important Terms and Principles Cost Accountants Should Know

Article / Updated 03-26-2016

Many accountants will tell you that cost accounting is the most difficult accounting subject to learn. That's because cost accounting has many terms that are not used in other areas of accounting (financial accounting and management accounting, to name a few). If you're looking for an overview of the most important terms and principles for this subject, you've found it! These concepts provide a foundation for learning cost accounting. Reviewing accounting basics Accountants use many principles to guide their decision-making process, such as the matching principle and the principle of conservatism. Matching principle: This principle states that your company’s revenue should be matched with the expenses that relate to that revenue. If you sell lamps in May, you create revenue for that month. The May revenue should be matched with the expenses you incurred for the lamps sold in May. So, the cost of the lamp is matched with the sales proceeds for the lamp’s sale. Principle of conservatism: Accountants often need to make judgments. Conservatism means that the decision should generate the least attractive financial result. If there’s a decision about revenue, the conservative choice is to delay recognizing revenue in the financial statements. Expenses should be posted to the financial statements sooner rather than later. These choices generate financial statements that are less optimistic, which is why the approach is called conservative. There are four basic types of cost that accountants need to keep in mind — direct, indirect, fixed, and variable costs. They are defined as follows: Direct costs: Direct costs can be directly traced to the product. Material and labor costs are good examples. Indirect costs: These can’t be directly traced to the product; instead, these costs are allocated, based on some level of activity. For example, overhead costs are considered indirect costs. Fixed costs: Fixed costs don’t vary with the level of production. A good example is a lease on a building. Variable costs: Unlike fixed costs, variable costs change with the level of production. For example, material used in production is a variable cost. Every cost can be defined with two of these four costs. For example, the cost to repair machinery is an indirect variable cost. You decide if the cost is direct or indirect, and if the cost is fixed or variable. Checking out cost accounting basics Just like in any discipline, you use specific cost accounting terms and ideas to communicate meaning and understand procedures. Understanding basic concepts in crucial, so to start using cost accounting analysis, you should be familiar with these terms: Contribution margin: This term is defined as sales minus variable cost. When you subtract your fixed costs from contribution margin, the amount left over is your profit. Breakeven point formula: The breakeven point is the level of sales where your profit is zero. The breakeven formula is sales minus variable cost minus fixed cost. You multiply your sales per unit by units sold. You also multiply the variable cost per unit by the same units sold. The sales level that makes the formula equal to zero is the breakeven point. Relevant range: Relevant range is a term that relates to machinery, equipment, or vehicles in your business. Think of relevant range as the maximum level of use for the item you operate in your business. Say you use a sewing machine. As long as you operate the machine at or below the relevant range, it should operate normally. The machine’s cost should come in at the level you expect. If you operate above the relevant range, the machine won’t operate as you expect. You need to invest in a second machine to operate above the relevant range. Digging deeper into cost accounting analysis As you further your study, you use more complex cost analysis tools. From job costing to variances, the more involved the job, the more involved your cost accounting tools become. Here are some important tools you’ll use: Job costing: This method of costing assumes that every customer job is different. Plumbers and carpenters are good examples of businesses that use cost accounting. Because every job is different, each customer job is assigned material, labor, and overhead costs. Process costing: Companies use process costing when partially completed units are moved from one production area to another. Process costing assumes that the products you produce are similar or even identical. Activity-based costing (ABC): ABC costing can be used for both job costing and process costing analysis. You use ABC costing to assign costs to your product more specifically. ABC costing analyzes the activities that cause you to incur costs; you then connect the cost to the activity. Variance: A variance is a difference between your planned or budgeted cost and your actual results. A favorable variance occurs when your actual costs are less than your budgeted or planned cost. An unfavorable variance is when actual costs are higher than planned. Inventoriable costs: These are costs that are directly related to the product. Production costs are inventoriable costs for a manufacturer. If you are a retailer, your cost to purchase inventory is also an inventoriable. Other costs you incur for goods are included, such as shipping and storage costs.

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