Definition
Engineered Costs
Engineered costs entail the careful building up of cost levels for a production process by creating synthetic costs. This involves a logical consideration of each cost item’s makeup. An example is determining the expected labor cost for a particular product by using time studies to calculate the labor time required and multiplying this by the expected rates of pay. This method is crucial for standard costing, budgeting, and planning purposes, especially when estimated unit costs are needed before the actual production occurs.
Examples
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Manufacturing Process:
- Suppose a company plans to produce 1,000 units of a new electronic gadget. Through time studies, they determine that each unit requires 2 hours of assembly labor. If the expected labor rate is $20 per hour, the engineered labor cost per unit would be $40, leading to a total labor cost of $40,000 for the planned production.
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Construction Project:
- In a construction project, engineered costs can be used to estimate the material costs required to build a house. By calculating the amount of cement, steel, bricks, and other materials needed and multiplying these by their unit costs, the project manager can prepare a budget and plan accordingly.
Frequently Asked Questions (FAQs)
What are engineered costs?
Engineered costs involve constructing anticipated costs for a production process by using logical and detailed studies of cost components, such as labor and materials, before production actually takes place.
How are engineered costs used in standard costing?
In standard costing, engineered costs are used to set predetermined costs. These costs become benchmarks for evaluating actual performance and identifying variances for corrective actions.
Why are engineered costs important?
Engineered costs help businesses forecast expenses accurately, aiding in budgeting, planning, and providing a basis for setting standard costs which can be compared against actual costs to manage and control expenses effectively.
What is the difference between engineered costs and actual costs?
Engineered costs are estimated costs built up logically before production, whereas actual costs are the real expenditures incurred during the production process.
Can engineered costs evolve over time?
Yes, engineered costs can be adjusted based on new time studies, changes in pay rates, material costs, or improvements in technology that affect the production process.
Standard Costing
Standard costing involves assigning expected costs to products and services, which are then compared to actual incurred costs to analyze variances and control business operations.
Budgeting
Budgeting is the process of creating a plan to spend money. It involves forecasting revenues and expenses over a period, helping businesses allocate resources and manage financial performance.
Planning
Planning in a business context refers to the process of setting goals, creating strategies, and outlining tasks and schedules to achieve these goals.
Online References
- Investopedia: Standard Costing
- Wikipedia: Cost Accounting
- American Institute of CPAs
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Management Accounting” by Anthony A. Atkinson, Robert S. Kaplan, and S. Mark Young
- “Principles of Accounting” by Belverd E. Needles Jr., Marian Powers, and Susan V. Crosson
Accounting Basics: “Engineered Costs” Fundamentals Quiz
### What are engineered costs primarily used for?
- [x] Standard costing, budgeting, and planning
- [ ] Marketing purposes
- [ ] Financing new equipment
- [ ] Distribution strategies
> **Explanation:** Engineered costs are primarily used for standard costing, budgeting, and planning, as they help in estimating unit costs and setting benchmarks before production takes place.
### How are labor costs calculated in engineered costs?
- [ ] Based on past invoices
- [x] Using time studies and expected rates of pay
- [ ] By averaging last year's costs
- [ ] Through market surveys
> **Explanation:** Labor costs in engineered costs are calculated using time studies to determine the required labor time and then multiplying this time by the expected rates of pay.
### Why is it important to consider each cost item’s makeup in engineered costs?
- [ ] To meet regulatory requirements
- [x] To accurately estimate future expenses
- [ ] To justify budget overruns
- [ ] To simplify financial reporting
> **Explanation:** It is important because considering each cost item's makeup allows for the accurate estimation of future expenses essential for budgeting and planning.
### In what scenario are engineered costs least useful?
- [ ] During product development
- [ ] When setting prices
- [x] For analyzing historical cost data
- [ ] For financial planning
> **Explanation:** Engineered costs are least useful for analyzing historical cost data as they are forward-looking estimates rather than records of past expenditures.
### What is a major advantage of using engineered costs?
- [ ] They reduce the need for audits.
- [ ] They eliminate the need for actual cost tracking.
- [x] They provide a basis for setting standard costs before production.
- [ ] They enhance employee productivity.
> **Explanation:** A major advantage is that engineered costs provide a sound basis for setting standard costs before production, aiding in effective cost management.
### Who would most typically use engineered costs?
- [ ] Sales managers
- [ ] Human resources departments
- [x] Cost accountants and production managers
- [ ] Legal departments
> **Explanation:** Cost accountants and production managers most typically use engineered costs as part of setting budgets, production plans, and standard costs.
### Engineered costs can evolve over time. What might cause this?
- [ ] Installation of new software
- [x] Changes in labor rates or material costs
- [ ] Rebranding of the company
- [ ] External audits
> **Explanation:** Engineered costs can change over time due to changes in labor rates, material costs, or new time studies affecting the production process.
### What is the first step in calculating engineered costs?
- [ ] Determining shipping costs
- [x] Conducting time studies
- [ ] Negotiating supplier contracts
- [ ] Estimating overhead rates
> **Explanation:** The first step is conducting time studies to determine the labor times likely required for production.
### How do engineered costs benefit the budgeting process?
- [ ] They simplify tax calculations.
- [x] They provide a detailed estimate of future expenses.
- [ ] They inflate budget figures to allow for flexibility.
- [ ] They focus solely on revenue forecasts.
> **Explanation:** Engineered costs benefit the budgeting process by providing a detailed and logical estimate of future expenses, facilitating accurate and effective budgeting.
### What element is NOT typically included in the engineered costs process?
- [ ] Material costs
- [ ] Labor rates
- [ ] Production times
- [x] Advertising budgets
> **Explanation:** Advertising budgets are typically not included in the engineered costs process, which focuses on estimating direct production costs.
Thank you for exploring the concept of engineered costs and testing your knowledge with our quiz. Keep advancing your skills and understanding in the field of accounting!
