5 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 1 all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burg Introduction to Management Introduction to Management Accounting Accounting Chapter 4 Chapter 4 Cost Management Systems Cost Management Systems and Activity-Based Costing and Activity-Based Costing
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AA cost management system cost management system (CMS) is (CMS) isa collection of tools and techniquesa collection of tools and techniquesthat identifies how management’sthat identifies how management’s
decisions affect costs.decisions affect costs.
AA cost management system cost management system (CMS) is (CMS) isa collection of tools and techniquesa collection of tools and techniquesthat identifies how management’sthat identifies how management’s
Cost accountingCost accounting is that part of the cost is that part of the costmanagement system that measuresmanagement system that measures
costs for the purposes of managementcosts for the purposes of managementdecision making and financial reporting.decision making and financial reporting.
A cost object (objective) is anything for which A cost object (objective) is anything for which A separate measurement of costs is desired.A separate measurement of costs is desired.
Direct, Indirect, and Unallocated Direct, Indirect, and Unallocated CostsCosts
Direct costs can be identified specifically and exclusively Direct costs can be identified specifically and exclusively with a given cost objective in an economically feasible way.with a given cost objective in an economically feasible way.
LearningLearningObjective 3Objective 3
Indirect costs cannot be identified specifically and exclusively Indirect costs cannot be identified specifically and exclusively With a given cost objective in an economically feasible way.With a given cost objective in an economically feasible way.
Unallocated costs are recorded but Unallocated costs are recorded but not assigned to any cost object. not assigned to any cost object.
Cost allocation is used to assign indirect costs to cost objects, in proportionCost allocation is used to assign indirect costs to cost objects, in proportion
to the cost object’s use of a particular cost-allocation base.to the cost object’s use of a particular cost-allocation base.
A cost-allocation baseA cost-allocation base is some measure of input or output that is some measure of input or output that
determines the amount of cost to be allocated to a particular cost object.determines the amount of cost to be allocated to a particular cost object.
An ideal cost-allocation base would measure how muchAn ideal cost-allocation base would measure how much
of the particular cost is of the particular cost is caused by caused by the cost objective.the cost objective.
Note the similarity of this definition to that of a cost driverNote the similarity of this definition to that of a cost driver—an output —an output
measure that causes costs. Therefore, measure that causes costs. Therefore, most allocation most allocation bases are cost driversbases are cost drivers..
Cost allocations support a company’s CMS—the system Cost allocations support a company’s CMS—the system
providing cost measurements for strategic decision making, providing cost measurements for strategic decision making,
operational control, and external reporting.operational control, and external reporting.
Four purposes of cost allocation: Four purposes of cost allocation:
Predict the economic effects of strategic and operational control decisions. Predict the economic effects of strategic and operational control decisions.
Provide desired motivation and to give feedback for performance evaluation. Provide desired motivation and to give feedback for performance evaluation.
Compute income and asset valuations for financial reporting. Compute income and asset valuations for financial reporting.
Justify costs or obtain reimbursement.Justify costs or obtain reimbursement.
A cost poolA cost pool is a group of individual costs that a company is a group of individual costs that a company allocates to cost objects using a single cost-allocation base.allocates to cost objects using a single cost-allocation base.
1.1. Accumulate indirect costs for a period of time. Accumulate indirect costs for a period of time. 2.2. Select an allocation base for each cost pool, preferably a cost driver, Select an allocation base for each cost pool, preferably a cost driver, that is, a measure that causes the costs in the cost pool. that is, a measure that causes the costs in the cost pool. 3.3. Measure the units of the cost-allocation base used for each cost Measure the units of the cost-allocation base used for each cost object and compute the total units used for all cost objects.object and compute the total units used for all cost objects.4.4. Determine the percentage of total cost-allocation base units Determine the percentage of total cost-allocation base units used for each cost object.used for each cost object.5.5. Multiply the percentage by the total costs in the cost pool to Multiply the percentage by the total costs in the cost pool to determine the cost allocated to each cost object.determine the cost allocated to each cost object.
Direct materials include the acquisition costs Direct materials include the acquisition costs of all materials that a company identifies of all materials that a company identifies
as a part of the manufactured goods.as a part of the manufactured goods.
These costs are identified inThese costs are identified inan economically feasible way.an economically feasible way.
Indirect Production Costs (Manufacturing Indirect Production Costs (Manufacturing Overhead)Overhead)
Manufacturing overheadManufacturing overhead includes all costs includes all costsassociated with the production processassociated with the production processthat the company cannot be traced tothat the company cannot be traced to
the manufactured goods in anthe manufactured goods in aneconomically feasible way.economically feasible way.
Product costs are costs identified with goods Product costs are costs identified with goods produced or purchased for resale. produced or purchased for resale.
These costs first become part of the These costs first become part of the inventory on hand, sometimes called inventory on hand, sometimes called inventoriable costs. inventoriable costs.
Inventoriable costs become expenses in Inventoriable costs become expenses in the form of cost of goods sold only when the form of cost of goods sold only when the inventory is sold.the inventory is sold.
Period costs are deducted as expensesPeriod costs are deducted as expensesduring the current period withoutduring the current period withoutgoing through an inventory stage.going through an inventory stage.
Current Asset SectionsCurrent Asset Sectionsof Balance Sheetsof Balance Sheets
CashCash $ 4,000 $ 4,000 ReceivablesReceivables 25,000 25,000 SubtotalSubtotal $29,000 $29,000 Finished goods Finished goods 32,000 32,000 Work in process 22,000 Work in process 22,000 Direct materialDirect material 23,000 23,000 Total inventoriesTotal inventories $77,000 $77,000 Other current assetsOther current assets 1,000 1,000 Total current assetsTotal current assets $107,000 $107,000
Merchandise inventories Merchandise inventories 77,000 77,000 Other current assetsOther current assets 1,000 1,000 Total current assetsTotal current assets $107,000 $107,000
Income Statement PresentationIncome Statement Presentationof Costs for a Manufacturerof Costs for a Manufacturer
Direct laborDirect labor
Indirect manufacturingIndirect manufacturing
The manufacturer’s cost of goods producedThe manufacturer’s cost of goods producedand then sold is usually composed ofand then sold is usually composed ofthe three major categories of cost:the three major categories of cost:
ABM is using the output of an activity-based ABM is using the output of an activity-based cost accounting system to aid strategic decisioncost accounting system to aid strategic decision
making and to improve operational control.making and to improve operational control.
A A value-added cost value-added cost is the cost of an activityis the cost of an activitythat cannot be eliminated without affectingthat cannot be eliminated without affecting
a product’s value to the customer.a product’s value to the customer.
In contrast, In contrast, nonvalue-added costs nonvalue-added costs are costsare coststhat can be eliminated without affectingthat can be eliminated without affecting
a product’s value to the customer.a product’s value to the customer.
Benchmarking is the continuous process of comparing products, services, and activities to the best industry standards.
Benchmarking is a tool to help an organization measure its competitive posture. Benchmarks can come from within the organization, from competing organizations, or from other organizations having similar processes.
Benefits of Activity-Based Costing and Benefits of Activity-Based Costing and Management SystemsManagement Systems
set an optimal product mix set an optimal product mix to estimate profit margins of new productsto estimate profit margins of new products determine consumption of company’s shared resourcesdetermine consumption of company’s shared resources keep pace with new product techniqueskeep pace with new product techniques and technological changesand technological changes decrease the costs associated with bad decisionsdecrease the costs associated with bad decisions take advantage of reduced cost of ABCtake advantage of reduced cost of ABC systems due to computer technologysystems due to computer technology
Companies adopt ABC systems to:Companies adopt ABC systems to:
Number or printed pagesNumber or printed pagesNumber of accounts verifiedNumber of accounts verifiedNumber of inquiriesNumber of inquiriesNumber of lettersNumber of lettersNumber of printed pagesNumber of printed pages
Activity PerformedResource Account Used to Inquiry Correspondence Billing Verification All OtherPerform Activity Activity Activity Activity Activity Activities Total
100%Printing machines 5 90 5 100%All other department resources 100
100%
Activity PerformedResource Account Used to Inquiry Correspondence Billing Verification All OtherPerform Activity Activity Activity Activity Activity Activities Total
100%Printing machines 5 90 5 100%All other department resources 100
100%
Determine the relationships among Determine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources.
Determine the relationships among Determine the relationships among cost objectives,activities, and resources.cost objectives,activities, and resources.
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Design of an Activity-Based Design of an Activity-Based Cost Accounting SystemCost Accounting System
Collect relevant data concerning costs and the physical Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities.flow of the cost-driver units among resources and activities.
Collect relevant data concerning costs and the physical Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities.flow of the cost-driver units among resources and activities.
Number of Cost Driver Number of Cost Driver UnitsUnits
Activity Activity Cost Driver Units Residential Cost Driver Units Residential CommercialCommercial Total Total