2 -1
Basic
Basic
Management
Management
Accounting
Accounting
Concepts
Concepts
CHAPTER
2 -2
1. Describe the cost assignment process.
2. Define tangible and intangible products and
explain why there are different product cost definitions.
3. Prepare income statements for manufacturing and
service organizations.
4. Outline the differences between functional-based
and activity-based management accounting systems.
Objectives
Objectives
Objectives
Objectives
After studying this
After studying this
chapter, you should
chapter, you should
be able to:
be able to:
After studying this
After studying this
chapter, you should
chapter, you should
be able to:
2 -3
Exactly what is meant by “cost”?
Exactly what is meant by “cost”? Cost is the cash or cash-equivalent value
sacrificed for goods and services that is expected to bring a current or future
benefit to the organization.
Cost is the cash or cash-equivalent value sacrificed for goods and services that is
expected to bring a current or future benefit to the organization.
I see… It’s a dollar measure of the resources used to
achieve a given benefit.
I see… It’s a dollar measure of the resources used to
2 -4
A cost objectcost object is any item such as products,
customers, departments, projects, activities, and so on, for which costs are measured and assigned.
Example
Example: A bicycle is a cost object when you are determining the cost to produce a bicycle.
An activity activity is a basic unit of work performed within an organization.
Example:
Example: Setting up equipment, moving materials,
2 -5
Traceability
Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a cause-and-effect relationship.
Direct costs
Direct costs are those costs that can be easily and accurately traced to a cost object.
Example:
Example: If a hospital is the cost object, the cost of heating and
2 -6
Indirect costs
Indirect costs are those costs that cannot be easily and accurately traced to a cost object.
Example:
2 -7
Tracing
Tracing is the actual assignment of costs to a cost
object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways:
Direct tracing
Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object.
Driver tracing
Driver tracing is the use of drivers to assign costs to cost objects. DriversDrivers are observable causal factors that
2 -8
Cost Assignment Methods
Cost Assignment Methods
Cost of Resources Cost of Resources
Direct Direct Tracing Tracing
Driver Driver Tracing
Tracing AllocationAllocation
Physical Physical Observation Observation
Causal Causal Relationship Relationship
Assumed Assumed Relationship Relationship
2 -9
Interface of Services with
Management Accounting
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
Services cannot be stored. No patent protection.
Cannot display or
communicate services. Price difficult to set.
Services cannot be stored. No patent protection.
Cannot display or
communicate services. Price difficult to set.
Derived Properties
Derived Properties Derived Properties
Derived Properties
Services benefits expire quickly.
Services may be repeated often for one customer. Services benefits expire
quickly.
Services may be repeated often for one customer. Customer directly
involved with
production of service. Centralized mass
production of services difficult.
Customer directly involved with
production of service. Centralized mass
production of services difficult.
Wide variation in service products possible.
2 -10
Interface of Services with
Management Accounting
No inventories.
Strong ethical code. Price difficult to set.
Demand for more accurate cost assignments.
No inventories.
Strong ethical code. Price difficult to set.
Demand for more accurate cost assignments.
Impact on Management
Impact on Management
Accounting
Accounting
Impact on Management
Impact on Management
Accounting
Accounting
No inventories.
Need for standards and consistent high quality. No inventories.
Need for standards and consistent high quality. Costs often accounted
for by customer type. Demand for
measure-ment and control of quality to maintain consistency.
Costs often accounted for by customer type. Demand for
measure-ment and control of quality to maintain consistency.
Productivity and quality measurement and
control must be ongoing.
Total quality manage-ment critical.
Productivity and quality measurement and
control must be ongoing.
Total quality manage-ment critical.
1. Intangibility
2. Perishability
3. Inseparability
2 -11
Product cost
is a cost assignment that
supports a well-specified managerial
object. Thus, what
product cost
means
2 -12
Design
Design
Produce
Produce
Market
Market
Distribute
Distribute
Service
2 -13
Product Costing Definitions
Pricing Decisions Product-Mix Decisions
Strategic Profitability Analysis
Strategic Design Decisions Tactical Profitability Analysis External Financial Reporting Research and Research and Development Development Production Production Marketing Marketing Customer Customer Service Service Value-Chain Product Costs Production Production Marketing Marketing Customer Customer Service Service Operating Product Costs Traditional Product Costs Production Production M an ager ia
l obj
ec
ti
ves
se
2 -14
Direct materials are those materials that are directly traceable to the goods or services being produced.
Steel in an automobile
Wood in furniture
Alcohol in cologne
Denim in jeans
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Direct labor is the labor that is directly traceable to the goods or services being produced.
Workers on an assembly line at Chrysler
A chef in a restaurant
A surgical nurse attending an open heart operation
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Overhead are all other production costs.
Depreciation on building and equipment
Maintenance
Supplies
Supervision
Power
2 -17
Noninventoriable (period) costs are expensed in the period in
which they are incurred.
Noninventoriable (period) costs are expensed in the period in
which they are incurred.
Salaries and commissions of
sales personnel (marketing)
Advertising (marketing) Legal fees (administrative) Printing the annual report
2 -18
Prime Cost :
Direct Materials Costs + Direct Labor Costs
Conversion Cost:
2 -19
2 -20
Manufacturing Organization
Manufacturing Organization
Income Statement
Income Statement
For the Year Ended December 31, 2004
For the Year Ended December 31, 2004
Sales $2,800,000 Less cost of goods sold:
Beginning finished goods inventory $ 500,000 Add: Cost of goods manufactured 1,200,000 Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory 300,000 1,400,000 Gross margin $1,400,000 Less operating expenses:
Selling expenses $ 600,000
Administrative expenses 300,000 900,000 Income before taxes $ 500,000
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2 -21
Direct materials:
Beginning inventory $200,000
Add: Purchases 450,000
Materials available $650,000 Less: Ending inventory 50,000
Direct materials used $ 600,000
Direct labor 350,000
Manufacturing overhead:
Indirect labor $122,500
Depreciation 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance 50,000 450,000
Total manufacturing costs added $1,400,000
Statement of Cost of Goods Manufactured
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2004
For the Year Ended December 31, 2004
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2-21
continued on next slide
continued on next slide continued on next slide
2 -22
Total manufacturing costs added $1,400,000 Add: Beginning work in process 200,000
Total manufacturing costs $1,600,000
Less: Ending work in process 400,000 Cost of goods manufactured $1,200,000
2 -23
Service Organization
Service Organization
Income Statement
Income Statement
For the Year Ended December 31, 2004
For the Year Ended December 31, 2004
Sales $300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000 Service costs added:
Direct materials $ 40,000 Direct labor 80,000
Overhead 100,000 220,000
Total $225,000
Less: Ending work in process 10,000 215,000
Gross margin $ 85,000
Less operating expenses:
Selling expenses $ 8,000
Administrative expenses 22,000 30,000 Income before income taxes $ 55,000
2-23
2 -24
Functional-Based
Management Model
Functional-Based
Management Model
Efficiency
Efficiency
Analysis
Analysis
Performance
Performance
Analysis
Analysis
Operational View
Resources
Resources
Functions
Functions
Products
Products
2 -25
Activity-Based
Management Model
Activity-Based
Management Model
Resources
Resources
Activities
Activities
Products and
Products and
Customers
Customers
Cost View
Driver
Driver
Analysis
Analysis
Performance
Performance
Analysis
Analysis
Process View
2 -26
1. Unit-based drivers
2. Allocation-intensive
3. Narrow and rigid product costing
4. Focus on managing cost
5. Sparse activity information
6. Maximization of individual unit performance
7. Use of financial measures of performance
1. Unit- and nonunit-based drivers
2. Tracing intensive
3. Broad, flexible product costing
4. Focus on managing activities
5. Detailed activity information
6. Systematic performance maximization
7. Use of both financial and nonfinancial measures of performance
2 -27
The End
The End
The End
The End
Chapter Two
