2-1 right © 2004 by Nelson, a division of Thomson Canada Limited. Basic Basic Management Management Accounting Accounting Concepts Concepts 2 2 PowerPresentation® prepared by PowerPresentation® prepared by David J. McConomy, Queen’s David J. McConomy, Queen’s University University
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2-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Basic Basic Management Management Accounting Accounting ConceptsConcepts
22
PowerPresentation® prepared by PowerPresentation® prepared by
David J. McConomy, Queen’s UniversityDavid J. McConomy, Queen’s University
2-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Explain the cost assignment process.
Define tangible and intangible products and explain why there are different product cost definitions.
2-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Learning ObjectivesLearning Objectives
Prepare income statements for manufacturing and service organizations.
Outline the differences between functional-based and activity-based management accounting systems.
2-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Basic Cost ConceptsBasic 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.
2-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
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.
Costs and ActivitiesCosts and Activities
2-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Cost TraceabilityCost 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 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.
2-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Methods Of TracingMethods 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.
2-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Assigning Indirect CostsAssigning Indirect Costs
Indirect Costs
Cannot be assigned directly
No causal relationship exists
Must assume a linkage
2-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Cost Assignment MethodsCost Assignment Methods
Cost of Resources
DirectTracing
DriverTracing
Allocation
PhysicalObservation
CausalRelationship
AssumedRelationship
Cost Objects
2-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Interface of Services withInterface of Services withManagement AccountingManagement Accounting
1. Intangibility
2. Perishability
3. Inseparability
4. Heterogeneity
2-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
IntangibilityIntangibility
Derived PropertiesImpact on
Management Accounting
*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.*
2-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
PerishabilityPerishability
Derived PropertiesImpact on
Management Accounting
*Many of these effects are also true of tangible products.
Service benefits expire quickly. No inventories.
Services may be repeated often Need for standards and
for one customer. consistent high quality.*
2-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
InseparabilityInseparability
Derived PropertiesImpact on
Management Accounting
*Many of these effects are also true of tangible products.
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 maintain
consistency.*
2-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
HeterogeneityHeterogeneity
Derived PropertiesImpact on
Management Accounting
*Many of these effects are also true of tangible products.
Wide variation in service Productivity and quality
product possible. measurement and control
must be ongoing.*
Total quality management
critical*
2-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Product Costing DefinitionsProduct Costing Definitions
Research andDevelopment
Production
Marketing
Production
Marketing
Production
Pricing DecisionsProduct-Mix DecisionsStrategic Profitability Analysis
Strategic Design DecisionsTactical Profitability Analysis
External FinancialReporting
Value-Chain Operating Traditional Product Costs Product Costs Product costs
Customer Service Customer Service
2-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Production CostsProduction 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.
2-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Nonproduction CostsNonproduction 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.
2-18Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Further Distinction of CostsFurther Distinction of Costs
Prime Cost =
Direct Materials Costs + Direct Labour Costs
Conversion Cost =
Direct Labour Costs + Overhead Costs
2-19Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Statement of COGMStatement of COGMDirect Materials Used:
Beginning inventory $200,000
Add: Purchases 450,000
Materials available $650,000
Less: Ending inventory 50,000 $ 600,000
Direct Labour 350,000
Manufacturing overhead:
Indirect labour $122,500
Amortization 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance 50,000 450,000
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========
2-20Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Income Statement for aIncome Statement for aManufacturing OrganizationManufacturing Organization
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========
2-21Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Income Statement for aIncome Statement for aService OrganizationService Organization
Sales $300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000
Service costs added:
Direct materials $ 40,000
Direct labour 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 taxes $ 55,000=======
2-22Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Comparison of FBM and ABMComparison of FBM and ABMAccounting SystemsAccounting 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 performanceperformance maximization
7. Use of financial measures of 7. Use of both financial and performance nonfinancial measures of
performance
2-23Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Functional-Based Management ModelFunctional-Based Management Model
Cost View
Operational View
Efficiency Analysis Functions Performance Analysis
Resources
Products
2-24Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
Activity-Based Management ModelActivity-Based Management Model
Cost View
Process View
Driver Analysis Activities Performance Analysis
Resources
Products andCustomers
Why? What? How Well?
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