02 Basic Management Accounting Concepts

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Chapter 1 - 1

AGUS SISWANDI

01153056

MANAGEMENT

ACCOUNTING


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Chapter 1 - 2

Chapter Two

Basic ManagementAccounting Concepts


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Chapter 1 - 3

Learning Objectives

Explain the cost assignment process.

Define tangible and intangible productsand explain why there are different

product cost definitions.


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Chapter 1 - 4

Learning Objectives (continued)

Prepare income statements for

manufacturing and service organizations. Explain the differences between

functional-based and activity-based

management accounting systems.


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Basic Cost Concepts

Costis the cash or cash-equivalent value sacrificed for

goods and services that are expected to bring a current or

future benefit to the organization.

Opportunity costis the benefit given up or sacrificed whenone alternative is chosen over another.

Example: Wages or salary foregone by attending college instead

of working.

An expense is an expired cost or a cost used up in theproduction of revenues.

Example: Cost of materials in a product that was sold.


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Basic Cost Concepts (continued)

A cost objectis any item such as products, customers,

departments, projects, activities, and so on, for which costs

are measured and assigned.

Example: A bicycle is a cost object when you are determining

the cost to produce a bicycle.

An activity is a basic unit of work performed within an

organization.Example: Setting up equipment, moving materials, maintaining

equipment, designing products, etc.


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Basic Cost Concepts (continued)

Traceability is the ability to assign a cost to a cost objectin an economically feasible way by means of a cause-and-effect relationship.

Direct costs are those costs that can be easily and

accurately traced to a cost object.

Example: The salary of a supervisor of a department, where thedepartment is defined as the cost object.

Indirect costs are those costs that cannot be easily and

accurately traced to a cost object.Example: The salary of a plant manager, where departments

within the plant are defined as the cost objects.


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Methods Of 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 is the process of identifying and assigning costs that are

exclusively and physically associated with a cost object to that cost object.

Driver tracing is the use of drivers to assign costs to cost objects. Drivers

are observable causal factors that measure a cost objects resource

consumption.


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Cost Assignment Methods

Cost of Resources

Direct

Tracing

Driver

Tracing Allocation

Physical

Observation

Causal

Relationship

Assumed

Relationship

Cost Objects

i i i i h i l


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Some Activities with Potential

Activity Drivers

Activity Potential Activity Driver

Setting-up equipment Number of setups

Ordering materials Number of purchase ordersDrilling holes Number of machine hours

Redesigning products Number of engineering hours

Paying bills Number of invoices

Inspecting finished goods Number of batches produced

I f f S i i h


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Interface of Services with

Management Accounting

1. Intangibility

2. Perishability

3. Inseparability

4. Heterogeneity


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Intangibility

Derived PropertiesImpact on


*Many of these effects are also true of tangible products.

Services cannot be stored. No Inventories.

No patent protection. Strong ethical code.*

Cannot display or

communicate services.

Price difficult to set. Demand for more accurate

cost assignment.*


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Perishability




Service benefits expire quickly. No inventories.

Services may be repeated often Need for standards and

for one customer. consistent high quality.*


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Inseparability




Customer directly involved Costs often accounted for by

with production of service. customer type.*

Centralized mass production Demand for measurement and

of services difficult. control of quality to maintainconsistency.*


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Heterogeneity




Wide variation in service Productivity and quality

product possible. measurement and control

must be ongoing.*

Total quality managementcritical*


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Product Costing Definitions

Research andDevelopment

Production

Marketing

Production

Marketing

Production

Pricing Decisions

Product-Mix Decisions

Strategic Profitability

Analysis

Strategic Design

Decisions

Tactical Profitability

Analysis

External Financial

Reporting

Value-Chain Operating Traditional

Product Costs Product Costs Product Costs

Customer Service Customer Service


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Production Costs

Direct materials are those materials that are directly

traceable to the goods or services being produced.

Example: The cost of tires on an automobile.

Direct laboris the labor that is directly traceable to the

goods or services being produced.

Example: Wages of assembly-line workers.

Overheadare all other production costs.

Example: Plant depreciation, utilities, property taxes, indirect

materials, indirect labor, etc.


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Production Costs (continued)

Prime Cost =

Direct Materials Costs + Direct Labor Costs

Conversion Cost =

Direct Labor Costs + Overhead Costs


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Nonproduction Costs

Marketing (selling) costs are the costs necessary to market,

distribute, and service a product or service.

Example: Commissions, storage costs, and freight

Administrative costs are the costs associated with research,

development, and general administration of the organization that

cannot reasonably be assigned to either marketing or production.

Example: Legal fees, salary of the chief executive officer.


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Statement of COGM

Direct Materials Used:

Beginning inventory $200,000

Add: Purchases 450,000

Materials available $650,000

Less: Ending inventory 50,000 $ 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 $1,400,000Add: 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========

I St t t f


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Income Statement for a

Manufacturing Organization

Sales $2,800,000

Less cost of goods sold:

Beginning finished goods inventory $ 500,000

Add: Cost of goods manufactured 1,200,000Cost 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 $ 600,000Administrative expenses 300,000 900,000

Income before taxes $ 500,000========

I St t t f


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Income Statement for a

Service OrganizationSales $300,000

Less expenses:

Cost of services sold:

Beginning work in process $ 5,000

Service costs added:

Direct materials $ 40,000

Direct labor 80,000Overhead 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 taxes $ 55,000=======

C i f FBM d ABM


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Comparison of FBM and ABM

Accounting Systems

Functional-Based Activity-Based

1. Unit-based drivers 1. Unit- and nonunit-based drivers

2. Allocation-intensive 2. Tracing-intensive

3. Narrow and rigid product costing 3. Broad, flexible product costing4. Focus on managing cost 4. Focus on managing activities

5. Sparse activity information 5. Detailed activity information

6. Maximization of individual unit 6. Systemwide performance

performance maximization

7. Use of financial measures of 7. Use of both financial and

performance nonfinancial measures of

performance


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Functional-Based Management Model

Cost View

Operational View

Efficiency Analysis Functions Performance Analysis

Resources

Products


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Activity-Based Management Model

Cost View

Process View

Driver Analysis Activities Performance Analysis

Resources

Products and

Customers

Why? What? How Well?


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End of Chapter 2

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02 Basic Management Accounting Concepts