Transcript Cost and Cost Classification

2
Basic
Management
Accounting
Concepts
PowerPresentation® prepared by
David J. McConomy, Queen’s University
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
2-1
Learning Objectives
Explain the cost assignment process.
Define tangible and intangible products
and explain why there are different
product cost definitions.
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
2-2
Learning Objectives

Prepare income statements for
manufacturing and service
organizations.

Outline the differences between
functional-based and activity-based
management accounting systems.
Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
2-3
Basic Cost Concepts
Cost is 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 cost is the benefit given up or
sacrificed when one alternative is chosen over
another.
An expense is an expired cost or a cost used up
in the production of revenues.
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Costs and Activities

A cost object is any item for which
costs are measured and assigned.

An activity is a basic unit of work
performed within an organization.
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Cost Traceability
Traceability is the ability to assign a cost to a cost object
in an economically feasible way by means of a cause-andeffect relationship.
Direct costs are those costs that can be
easily and accurately traced to a cost object.
Indirect costs are those costs that cannot be
easily and accurately traced to a cost object.
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2-6
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.
Direct tracing is the process of identifying and
assigning costs that are specifically or 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 object’s resource consumption.
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Assigning Indirect Costs
Indirect Costs

Cannot be assigned directly

No causal relationship exists

Must assume a linkage
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2-8
Cost Assignment Methods
Cost of Resources
Direct
Tracing
Driver
Tracing
Allocation
Physical
Observation
Causal
Relationship
Assumed
Relationship
Cost Objects
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Interface of Services with
Management Accounting
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
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2-10
Intangibility
Derived Properties
Impact on
Management Accounting
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.*
*Many of these effects are also true of tangible products.
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2-11
Perishability
Derived Properties
Impact on
Management Accounting
Service benefits expire quickly.
No inventories.
Services may be repeated often
for one customer.
Need for standards and
consistent high quality.*
*Many of these effects are also true of tangible products.
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Inseparability
Derived Properties
Impact on
Management Accounting
Customer directly involved
with production of service.
Costs often accounted for by
customer type.*
Centralized mass production
of services difficult.
Demand for measurement and
control of quality to maintain
consistency.*
*Many of these effects are also true of tangible products.
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2-13
Heterogeneity
Derived Properties
Wide variation in service
product possible.
Impact on
Management Accounting
Productivity and quality
measurement and control
must be ongoing.*
Total quality management
critical*
*Many of these effects are also true of tangible products.
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2-14
Product Costing Definitions
Value-Chain
Product Costs
Operating
Product Costs
Traditional
Product costs
Research and
Development
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions
Product-Mix Decisions
Strategic Profitability
Analysis
Strategic Design
Decisions
Tactical Profitability
Analysis
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Production
External Financial
Reporting
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Production Costs
Direct materials are those materials that are
directly traceable to the goods or services
being produced.
Direct labour is the labour that is directly
traceable to the goods or services being
produced.
Overhead are all other production costs.
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2-16
Nonproduction Costs
Marketing (selling) costs are the costs
necessary to market, distribute, and
service a product or service.
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.
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2-17
Further Distinction of Costs
Prime Cost =
Direct Materials Costs + Direct Labour
Costs
Conversion Cost =
Direct Labour Costs + Overhead Costs
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2-18
Statement of COGM
Direct Materials Used:
Beginning inventory
Add: Purchases
Materials available
Less: Ending inventory
$200,000
450,000
$650,000
50,000
Direct Labour
$ 600,000
350,000
Manufacturing overhead:
Indirect labour
Amortization
$122,500
177,500
Rent
50,000
Utilities
37,500
Property taxes
12,500
Maintenance
50,000
Total manufacturing costs added
Add: Beginning work in process
Total manufacturing costs
Less: Ending work in process
Cost of goods manufactured
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450,000
$1,400,000
200,000
$1,600,000
400,000
$1,200,000
========
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Income Statement for a
Manufacturing Organization
Sales
$2,800,000
Less cost of goods sold:
Beginning finished goods inventory
Add: Cost of goods manufactured
Cost of goods available for sale
Less: Ending finished goods inventory
$ 500,000
1,200,000
$1,700,000
300,000
Gross margin
1,400,000
$1,400,000
Less operating expenses:
Selling expenses
Administrative expenses
Income before taxes
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$ 600,000
300,000
900,000
$ 500,000
========
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Income Statement for a
Service Organization
Sales
Less expenses:
Cost of services sold:
Beginning work in process
Service costs added:
Direct materials
Direct labour
Overhead
Total
Less: Ending work in process
Gross margin
Less operating expenses:
Selling expenses
Administrative expenses
Income before taxes
$300,000
$
$ 40,000
80,000
100,000
5,000
220,000
$225,000
10,000
$ 8,000
22,000
215,000
$ 85,000
30,000
$ 55,000
=======
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Comparison of FBM and ABM
Accounting Systems
Functional-Based
Activity-Based
1. Unit-level drivers
1. Unit- and nonunit-level drivers
2. Allocation-intensive
2. Tracing-intensive
3. Narrow, rigid product costing
3. Broad, flexible product costing
4. 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
performance
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7. Use of both financial and
nonfinancial measures of
performance
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Functional-Based Management Model
Cost View
Resources
Operational View
Efficiency Analysis
Functions
Performance Analysis
Products
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2-23
Activity-Based Management Model
Cost View
Resources
Process View
Driver Analysis
Why?
Activities
What?
Performance Analysis
How Well?
Products and
Customers
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2-24