ch02.ppt

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BasicBasic

ManagementManagementAccountingAccounting

ConceptsConcepts

CHAPTERCHAPTER

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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. utline the differences between functional!basedand activity!based management accounting

systems.

ObjectivesObjectives

ObjectivesObjectives

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:

After studying thisAfter studying this

chapter, you shouldchapter, you should

be able to:be able to:

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"xactly what ismeant by #cost$%

"xactly what ismeant by #cost$%

&ost is the cash or cash!e'uivalent value

sacrificed for goods and services that is

expected to bring a current or futurebenefit to the organization.

&ost is the cash or cash!e'uivalent value

sacrificed for goods and services that is

expected to bring a current or futurebenefit to the organization.

( see) (t*s a dollar

measure of the

resources used to

achieve a given

benefit.

( see) (t*s a dollar

measure of the

resources used toachieve a given

benefit.

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A cost objectcost objectis any item such as products,

customers, departments, projects, activities, and

so on, for which costs are measured and assigned.

ExampleExample: A bicycle is a cost object when you are

etermining the cost to prouce a bicycle!

An acti"ityacti"ity is a basic unit of work performed

within an organiation.

Example:Example:#etting up e$uipment% mo"ing materials%

maintaining e$uipment% esigning proucts%

etc!

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TraceabilityTraceability is the abi"ity to assign a cost to a

cost object in an economica""y feasib"e way by

means of a cause-and-effect re"ationship.

&irect costs&irect costsare those costs that can be easi"yand accurate"y traced to a cost object.

Example:Example: '( a hospital is the cost object%

the cost o( heating ancooling the hospital is

a irect cost!

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'nirect costs'nirect costsare those costs that cannot beeasi"y and accurate"y traced to a cost object.

Example:Example: The salary o( a plant manager% where

epartments within the plant are e(ineas the cost objects!

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TracingTracing is the actua" assignment of costs to a costobject using an observab"e measure of the resourcesconsumed by the cost object. %racing costs to cost

objects can occur in the fo""owing two ways&&irect tracing&irect tracingis the process of identifying and assigningcosts that are e'c"usive"y and physica""y associated with acost object to that cost object!

&ri"er tracing&ri"er tracingis the use of drivers to assign costs to costobjects. &ri"ers&ri"ers are observab"e causa" factors thatmeasure a cost object(s resource consumption.

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&ost +ssignment ,ethods&ost +ssignment ,ethods

*ost of +esources*ost of +esources

irectirect

%racing%racing

riverriver

%racing%racing A""ocationA""ocation

hysica"hysica"

bservationbservation

*ausa"*ausa"

+e"ationship+e"ationship

AssumedAssumed

+e"ationship+e"ationship

*ost bjects*ost bjects

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2-/'nter(ace o( #er"ices with

Management Accounting

1. 0ntangibi"ity

2. erishabi"ity

3. 0nseparabi"ity

4. eterogeneity

-ervices cannot be stored.

o patent protection.

&annot display or

communicate services.Price difficult to set.

-ervices cannot be stored.o patent protection.

&annot display or

communicate services.

Price difficult to set.

Derived PropertiesDerived PropertiesDerived PropertiesDerived Properties

-ervices benefits expire

'uic/ly.

-ervices may be repeatedoften for one customer.

-ervices benefits expire

'uic/ly.

-ervices may be repeatedoften for one customer.

&ustomer directly

involved withproduction of service.

&entralized mass

production of services

difficult.

&ustomer directly

involved withproduction of service.

&entralized mass

production of services

difficult.0ide variation in service

products possible.

0ide variation in service

products possible.

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2-1'nter(ace o( #er"ices with

Management Accounting

o inventories.

-trong ethical code.


Demand for more accuratecost assignments.

o inventories.-trong ethical code.


Demand for more accurate

cost assignments.

(mpact on ,anagement(mpact on ,anagement

+ccounting+ccounting

(mpact on ,anagement(mpact on ,anagement

+ccounting+ccounting

o inventories.

eed for standards andconsistent high 'uality.

o inventories.

eed for standards andconsistent high 'uality.

&osts often accounted

for by customer type.Demand for measure!

ment and control of

'uality to maintain

consistency.

&osts often accounted

for by customer type.Demand for measure!

ment and control of

'uality to maintain

consistency.

Productivity and 'uality

measurement and

control must be

ongoing.

otal 'uality manage!

ment critical.

Productivity and 'uality

measurement and

control must be

ongoing.

otal 'uality manage!

ment critical.

1. 0ntangibi"ity

2. erishabi"ity

3. 0nseparabi"ity

4. eterogeneity

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Product costis a cost assignment that

supports a well!specified managerialobect. hus whatproduct costmeans

depends on the managerial obective

being served.

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DesignDesign

ProduceProduce

,ar/et,ar/et

DistributeDistribute

-ervice-ervice DevelopDevelop

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Prouct Costing &e(initions

Pricing Decisions

Product!,ix Decisions

-trategic Profitability +nalysis

-trategic Design Decisions

actical Profitability

+nalysis

"xternal inancial

5eporting

+esearch and+esearch andeve"opmenteve"opment

ProductionProduction

,ar/eting,ar/eting

*ustomer*ustomererviceervice

6alue!&hain

Product &osts


,ar/eting,ar/eting

*ustomer*ustomererviceervice

perating Product

&osts

raditional Product

&osts


,

a na g e ri a l o

b 2e c tiv e s

s e

r v e d

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&irect materials are those materia"s that are direct"y

traceab"e to the goods or services being produced.

-teel in an automobile0ood in furniture

+lcohol in cologne

Denim in eans

7races for correcting teeth

Next

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The ProductThe Product

Direct

Materials

Direct

MaterialsDirect

Labor

Direct

LaborManufacturing

Overhead

Manufacturing

Overhead

anufacturing *osts

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irect ateria"s

%hose materia"s that becomean integra" part of the product and

that can be convenient"y traced direct"y to it.

Example: A radio installed in an automobileExample: A radio installed in an automobile

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&irect laboris the "abor that is direct"y traceab"e to

the goods or services being produced.

0or/ers on an assembly

line at &hrysler

+ chef in a restaurant

+ surgical nurse attending

an open heart operation

+irline pilot

Next

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irect 5abor

%hose "abor costs that can be easi"y traced toindividua" units of product.

Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers

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anufacturing costs that cannotbe traced direct"y tospecific units produced.

anufacturing verhead

Examples: ndirect labor and indirect materialsExamples: ndirect labor and indirect materials

Wages paid to employeeswho are not directly

in!ol!ed in production"Examples:

maintenance workers#$anitors and security guards"

%aterials used to supportthe production process"

Examples:lubricants and cleaning

supplies used in theautomobile assembly plant"

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)"erheaare a"" other production costs.

Depreciation on building

and e'uipment

,aintenance

-upplies

-upervision

Power

Property taxes

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oninventoriable 8period9 costs

are expensed in the period in

which they are incurred.

oninventoriable 8period9 costs

are expensed in the period in

which they are incurred.

-alaries and commissions of

sales personnel 8mar/eting9

+dvertising 8mar/eting9

:egal fees 8administrative9

Printing the annual report

8administrative9

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&elling and

Administrati!e

Expenses

Period

Costs

anufacturing *ost 6"ows

'inished

(oods

Cost o)

(oods&old

&elling and

Administrati!e

%anu)acturing

*!erhead

Work inProcess

+irect ,abor

Costs

ncome

&tatementExpenses

%aterial Purchases -aw %aterials

.alance &heetn!entories

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Prime Cost :

irect ateria"s *osts 7 irect 5abor *osts

Con"ersion Cost:

irect 5abor *osts 7 verhead *osts

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"xternalinancial

-tatements

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2-2!anufacturing rganiationanufacturing rganiation

0ncome tatement0ncome tatement

6or the 8ear 9nded ecember 31, 246or the 8ear 9nded ecember 31, 24

-ales ;2

7eginning finished goods inventory ; ?=====

+dd> &ost of goods manufactured 12=====

&ost of goods available for sale ;1@=====:ess> "nding finished goods inventory 3===== 14=====

Aross margin ;14=====

:ess operating expenses>

-elling expenses ; B=====

+dministrative expenses 3===== C=====

(ncome before taxes ; ?=====

2!2=2!2=

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Direct materials>

7eginning inventory ;2=====+dd> Purchases 4?====,aterials available ;B?====:ess> "nding inventory ?====Direct materials used ; B=====

Direct labor 3?====,anufacturing overhead>

(ndirect labor ;122?==Depreciation 1@@?==5ent ?====

tilities 3@?==Property taxes 12?==,aintenance ?==== 4?====

otal manufacturing costs added ;14=====

tatement of *ost of :oods anufacturedtatement of *ost of :oods anufactured


2!212!21

continued on ne't s"idecontinued on ne't s"idecontinued on ne't s"idecontinued on ne't s"ide

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2-2$

otal manufacturing costs added ;14=====

+dd> 7eginning wor/ in process 2=====otal manufacturing costs ;1B=====

:ess> "nding wor/ in process 4=====

&ost of goods manufactured ;12=====

0or/ in process consists of all

partially completed units found inproduction at a given point in time.

i i i i i ti

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2-2)ervice rganiationervice rganiation

0ncome tatement0ncome tatement


-ales ;3=====:ess expenses>

&ost of services sold>

7eginning wor/ in process ; ?===

-ervice costs added>

Direct materials ; 4====Direct labor "nding wor/ in process 1==== 21?===

Aross margin ;

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unctional!7ased

,anagement ,odel

unctional!7ased

,anagement ,odel

"fficiency"fficiency

+nalysis+nalysisPerformancePerformance

+nalysis+nalysis

perational 6iew

5esources5esources

unctionsunctions

ProductsProducts

&ost 6iew

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+ctivity!7ased

,anagement ,odel

+ctivity!7ased

,anagement ,odel

5esources5esources

+ctivities+ctivities

Products andProducts and

&ustomers&ustomers

&ost 6iew

DriverDriver

+nalysis+nalysisPerformancePerformance

+nalysis+nalysis

Process 6iew

0hy% 0hat% Eow 0ell%

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1. nit!based drivers

2. +llocation!intensive

3. arrow and rigid productcosting

4. ocus on managing cost

?. -parse activity information

B. ,aximization of individualunit performance

@. se of financial measures of

performance

1. nit! and nonunit!baseddrivers

2. racing intensive

3. 7road flexible productcosting

4. ocus on managingactivities

?. Detailed activityinformation

B. -ystematic performancemaximization

@. se of both financial and

nonfinancial measures oferformance

unctional!7ased +ctivity!7asedunctional!7ased +ctivity!7ased

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he "ndhe "ndhe "ndhe "nd

&hapter wo&hapter wo

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ch02.ppt