A&MIS 212
William F. Bentz
January 9,2002
Fisher College of Business
A&MIS 212
W. F. Bentz
1
Key Issues in Product Costing
Terminology
Points of potential confusion
Accounts
Exercise E2-3
A&MIS 212
W. F. Bentz
2
Concept of “Cost”
 Cost is a sacrifice; a measurable
cost is the relinquishment of a
measurable asset or the creation of
a measurable liability.
A&MIS 212
W. F. Bentz
3
GAAP Product Cost
For Work-in-Process and Finished Goods
inventory purposes (GAAP), only
manufacturing costs are included in
“product” costs. Product costs remain in
inventory until the associated product are
sold or decline in value. When the
associated products are sold, the “product
cost” is added to Cost of Goods Sold.
A&MIS 212
W. F. Bentz
4
Meanings of Product Cost
R&D
Design
Reimbursable
government
contract costs
Produc- Markettion
ing
Distri- Consumer
bution
Service
Inventoriable
product costs
Decision-relevant costs
A&MIS 212
W. F. Bentz
5
GAAP Expenses (Period Costs)
 Costs are incurred for activities that do
not directly create products, but support
the creation of products. These costs
are charged to expense accounts during
the accounting period incurred and thus
are called period expenses.
A&MIS 212
W. F. Bentz
6
GAAP Expenses--Examples
 Administrative Expenses
◈
◈
◈
◈
Corporate officers
Corporate buildings
Corporate costs like the annual audit fees
Corporate costs like
 Selling (Marketing) Expenses
 Distribution Expenses
A&MIS 212
W. F. Bentz
7
Accounting-Speak
Costs
Incurred
Assets
(Prepaids)
(PP&E)
A&MIS 212
Period
Expenses
Product
Costs
Expensed
During a
Period
(Inventory)
W. F. Bentz
8
Concept—Service Potential
 In accounting, service potential can
be thought of as the present value
of the cash flows from an activity,
at some level of risk, or adjusted for
risk.
A&MIS 212
W. F. Bentz
9
Concept—Cost
 Actions that decrease the present
value of cash outflows, at a given
level of risk, are actions that
decrease cost.
Actions that
increase the present value of future
cash outflows, at a given level of
risk, are actions that increase cost.
A&MIS 212
W. F. Bentz
10
Concept—Cost
 Actions that increase the risk of
future cash flows are actions that
increase
cost.
Actions
that
decrease the risk of future cash
flows are actions that decrease
cost. and so on.
A&MIS 212
W. F. Bentz
11
Terminology—Costing
 Costing is the process of estimating
the cost (sacrifice) of taking action.
Costs are the result of undertaking
and maintaining activities. Thus,
costing is largely a matter of
assigning costs (sacrifices) with the
activities which caused those
sacrifices.
A&MIS 212
W. F. Bentz
12
Terminology—Cost Object
 A cost object is any activity for which
a separate measurement of cost is
desired.
 An activity involves doing something
 Cost objects are derived from the
purposes for which the cost
information is to be used (different
costs for different purposes).
A&MIS 212
W. F. Bentz
13
Terminology—Costing Systems
 Costing systems are the information
systems used to accumulate cost
data either regularly or intermittently.
Usually cost systems are flexible
enough to collect information for a
variety of purposes.
A&MIS 212
W. F. Bentz
14
Terminology—Costing Systems
 A variety of costing systems may
exist in any one organization
(engineering, accounting,
production, distribution).
A&MIS 212
W. F. Bentz
15
Terminology—Cost Analysis
 Cost analysis is the process of
assessing the expected impact of
managerial decisions on the
financial performance of an entity.
Decision analysis includes cost
analysis.
A&MIS 212
W. F. Bentz
16
Terminology—Cost Incurred
 Cost incurred is the cost that an entity
has experienced as a result of the
execution of some activity for a specified
period of time. Although it is in the past,
cost incurred may have to be estimated.
Accurate, valid measures of cost
incurred require information about
separable activities.
A&MIS 212
W. F. Bentz
17
“Product Costs (GAAP)
 Product (inventoriable) costs include all
manufacturing costs regardless of
C
traceability or behavior.
• Direct materials
Prime
cost
• Direct labor
• Indirect labor, materials, depreciation,
services, etc.
A&MIS 212
W. F. Bentz
o
n
v
e
r
s
i
o
n
18
The Flow of Costs
Inventory
System
Work in
Process
Payroll
System
Finished
Goods
Inventory
Cost of
Goods Sold
Indirect
Costs
Assigned
A&MIS 212
W. F. Bentz
19
Costing Objects
Next, let us consider how one associates
the costs incurred to a set of cost objects in
the costing process.
Object 1
Object 2
Object 3
A&MIS 212
W. F. Bentz
20
Cost Assignment
 Tracing – direct costs can be
traced to cost objects
1. Ability to trace with acceptable
accuracy, validity, and cost
•
•
A&MIS 212
Technology is improving our ability to trace
The more complex the production process, the
more difficult and costly the tracing process
W. F. Bentz
21
Cost Assignment
Tracing (continued)
2. Cost-effective to trace costs
• The greater the cost, the greater the value of
tracing
• Technology is reducing the cost of tracing
• The value of tracing increases with competition
• More complex mfg. systems increase the need
to trace
A&MIS 212
W. F. Bentz
22
Cost Assignment
 Cost allocation is the process of assigning
costs to cost objects when those costs cannot
be traced cost-effectively.
 Cost allocation ranges from relatively unambiguous,
with high face validity, to relatively arbitrary.
 Most distortions in product and service costing are
related to cost allocation, not cost tracing.
A&MIS 212
W. F. Bentz
23
A&MIS 212
W. F. Bentz
24