Basic Cost
Management Concepts
2
2-1
A Systems Framework
1
Financial Accounting Information System
• Inputs: well-specified economic events
• Processes: rules and conventions established by the
SEC and FASB
• Outputs: financial statements for external users
Cost Management Information System
• Inputs and processes: set by management; not
bound by externally imposed criteria
• Outputs: reports for internal users
2-2
A Systems Framework
1
The cost management information system has three
broad objectives that provide information for:
1) Costing services, products, and other objects of
interest to management
2) Planning and control
3) Decision making
The value chain is the set of activities required to
design, develop, produce, market, deliver, and provide
post-sales service for the products and services sold to
customers.
2-3
Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
2
• Costs are sacrifices made to obtain goods or
services. As long as they remain unexpired,
they are on the balance sheet as an asset.
• Expenses are expired costs which are
deducted from revenues on the income
statement.
• Cost Objects are anything for which costs are
measured and assigned. Some cost objects
are tangible, such as the product we make;
others are not such as activities we for which
we wish to accumulate cost information.
2-4
Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
2
Traceability means that costs can be assigned easily
and accurately, using a causal relationship.
Methods of tracing:
1. Direct tracing: relies on physical observance of
causal relationships to assign costs to cost objects.
2. Driver tracing: relies on drivers as causal factors to
assign costs to cost objects.
Costs that cannot be traced are considered indirect
costs and are allocated products in some
predetermined way.
2-5
Product and Service Costs
3
• Tangible products are goods produced by
converting raw materials into finished
products.
• Services are activities performed for a
customer or by a customer using the service
provider’s products or facilities. Services have
three characteristics that separate them from
tangible products:
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•
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Intangibility
Perishability
Inseparability
2-6
Product and Service Costs
3
Manufacturing Costs
(Production Costs)
• Direct materials are those materials that are directly
traceable to the goods or services being produced.
•
Example: The cost of wood in furniture.
• Direct labor is the labor that is directly traceable to the
goods or services being produced.
•
Example: Wages of assembly-line workers.
• Overhead are all other manufacturing costs.
•
Example: Plant depreciation, utilities, property
taxes, indirect materials, indirect labor, etc.
2-7
Product and Service Costs
3
Prime and Conversion costs
• Prime Cost is the sum of direct materials and direct
labor.
• Conversion Cost is the sum of direct labor and
overhead.
•Hint: Never add prime cost and conversion cost or you
will have double counted labor because it is included in
each definition!
2-8
Product and Service Costs
3
Nonproduction Costs
(Period Costs)
• Marketing (selling) costs are the costs necessary to
market, distribute, and service a product or service.
•
Example: Advertising, storage costs, and freight
out.
• 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.
2-9
External Financial Statements
4
• Income Statement: Manufacturing Firm
•
•
•
•
•
•
Prepared for external parties
Follows standard format
Is referred to as an absorption-costing or fullcosting income statement because all manufacturing
costs are absorbed into the cost of goods.
Cost of Goods Manufactured represents the total
manufacturing cost of goods completed during the period.
Work in Process consists of all partially completed unites
found in production at a given point in time (usually the end
of one period/beginning of the next).
Cost of Goods Sold is the manufacturing cost of all goods
that were sold during the period.
2-10
Traditional and Activity-Based Cost
Management Systems
•
5
Traditional Cost Management Systems
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Traditional Cost Accounting
•
Assumes all costs can be classified as fixed or
variable with respect to changes in units or
volume.
•
Allocates costs that are not unit-based.
Traditional Cost Control
•
Assigns costs to organizational units and holds
the unit manager responsible for controlling the
assigned costs.
•
Performance is measured by comparing actual
outcomes with standard or budgeted outcomes.
•
Emphasis is on financial measures of
performance.
2-11
Traditional and Activity-Based Cost
Management Systems
•
5
Activity-Based Cost Management Systems
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Activity-Based Cost Accounting
•
Emphasizes tracing over allocation
•
Identifies non-unit-based activity drivers.
•
Flexible system capable of producing cost
information for a variety of purposes.
Activity-based Cost Control
•
Seeks to understand and control activities rather
than costs.
•
•
Activity-based management (ABM) focuses on
improving customer value.
Looks at the process view and focuses accountability
on activities to maximize systemwide performance.
2-12