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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
Chapter 14
Learning Objective 1
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 3
Cost Management System
A cost-management system (CMS) is a
What is Cost Accounting?
Cost accounting is that part of the
accounting system that measures costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 5
Learning Objective 2
Explain the relationships
among cost, cost objective,
cost accumulation, and
Cost Accounting System
Cost
Accumulation
Collecting costs by some “natural” classification such as materials or labor
Cost
Allocation
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 7
Cost Accounting System
MACHINING
to Cost Objects: 1. Departments 2. Activities
Cost
A cost may be defined as a sacrifice or
giving up of resources for a particular purpose.
Costs are frequently measured by the
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 9
Cost Objective
What is a cost object or cost objective?
Learning Objective 3
Distinguish among direct,
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 11
Direct Costs
Direct costs can be identified specifically and exclusively with a given cost
objective in an economically feasible way.
Indirect Costs
Indirect costs cannot be identified specifically and exclusively with a
given cost objective in an economically feasible way.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 13
What Distinguishes
Direct and Indirect Costs?
Managers prefer to classify costs as direct
rather than indirect whenever it is
“economically feasible” or “cost effective.”
Other factors also influence whether a cost
is considered direct or indirect.
Categories of
Manufacturing Costs
Any raw material, labor, or other input
used by any organization could,
in theory, be identified as a
direct or indirect cost
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 15
Categories of
Manufacturing Costs
All costs which are eventually allocated
to products are classified as either…
1 direct materials, 2 direct labor, or
Direct Material Costs...
– include the acquisition costs of all materials
that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 17
Direct Labor Costs...
– include the wages of all labor that can be
Indirect Manufacturing Costs...
– or factory overhead, include all costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 19
Product Costs...
– are costs identified with goods produced
or purchased for resale.
Product costs are initially identified as part
of the inventory on hand.
These costs, inventoriable costs, become
Period Costs...
– are costs that are deducted as expenses
during the current period without going through an inventory stage.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 21
Period or Product Costs
In merchandising accounting, insurance,
depreciation, and wages are period costs (expenses of the current period).
In manufacturing accounting, many of
these items are related to production activities and thus, as indirect
Period Costs – Merchandising
and Manufacturing
In both merchandising and manufacturing
accounting, selling and general
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 23
Learning Objective 4
Explain how the financial
statements of merchandisers
and manufacturers differ
Financial Statement Presentation
– Merchandising Companies
Merchandise
Cost of Goods Sold (an expense)
Cost of Goods Sold (an expense)
Balance Sheet Income Statement
–
Equals Gross Margin
–
Expiration
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 25
Financial Statement Presentation
– Manufacturing Companies
Finished
Cost of Goods Sold (an expense)
Cost of Goods Sold (an expense)
Balance Sheet Income Statement
–
Equals Gross Margin
Equals Operating Income
Costs and Income Statements
On income statements, the detailed
reporting of selling and administrative expenses is typically the same for
manufacturing and merchandising
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 27
Cost of Goods Sold
for a Manufacturer
The manufacturer’s cost of goods produced
and then sold is usually composed of the three major categories of cost:
1 Direct materials 2 Direct labor
Cost of Goods Sold
for a Retailer or Wholesaler
The merchandiser’s cost of goods sold is
usually composed of the purchase cost of
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 29
Learning Objective 5
Understand the main
differences between traditional
and activity-based costing
Activity-Based Costing
Understanding the relationships among activities, resources,
costs, and cost drivers is the key to understanding ABC and how ABC facilitates managers’
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 33
Example of Activities and Cost Drivers:
Activities:
No. of accounts No. of labor hours No. of letters
Learning Objective 6
Identify the steps involved in the
design and implementation
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 35
Designing and Implementing an
Activity-Based Costing System
Determine cost of activities, resources, and related cost
drivers.
Develop a process-based map representing the flow of activities, resources, and their interrelationships.
Designing and Implementing an
Activity-Based Costing System
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 37
Designing and Implementing an
Activity-Based Costing System
Calculate and interpret the new activity-based information.
Using an activity-based costing system to improve the operations of an organization
is activity-based management (ABM).
Activity-Based Management
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 39
Activity-Based Management
A value-added cost is the cost of an activity
that cannot be eliminated without affecting a product’s value to the customer.
In contrast, non-value-added costs are costs
Learning Objective 7
Use activity-based cost
information to improve the
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 41
Using ABC Information
Activity-based management…
provides costs of value-added and non-value-added activities.
Learning Objective 8
Understand cost accounting’s
role in a company’s
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 43
