Much of what was discussed in Chapter 2 had to do with the types of cost assignment — direct tracing of costs, driver tracing of costs, and allocation of costs. Please discuss you understanding of these types as they relate to a manufacturing company. How do you believe the different methods of tracing costs interfaces with the book’s discussion of both a traditional cost management system and an activity-based management system? need show the reference !
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CORNERSTONES OF COST
MANAGEMENT, 3E
HANSEN/MOWEN
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BASIC COST MANAGEMENT
CONCEPTS
CHAPTER 2
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CHAPTER 2 OBJECTIVE
1. Describe a cost management information
system, its objectives, and its major
subsystems, and indicate how it relates to
other operating and information systems
2. Explain the cost assignment process
3. Define tangible and intangible products,
and explain why there are different
product cost definitions
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
CHAPTER 2 OBJECTIVE
4. Prepare income statements for
manufacturing and service organizations
5. Explain the difference between traditional
and contemporary cost management
systems
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
A SYSTEMS FRAMEWORK
• System: a set of interrelated parts that
performs one or more processes to
accomplish specific objectives
• Works by using processes to transform inputs into
outputs
LO-1
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A SYSTEMS FRAMEWORK
Accounting Information Systems
•Provides information to people in a company
•Collects, classifies, summarizes, analyzes, and
manages data to provide information to users
•Inputs are usually economic events
•The operational model is critically involved with the
user of information
•Two major subsystems
• The financial accounting information system
• The cost management information system
LO-1
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.2—OPERATIONAL MODEL OF AN
ACCOUNTING INFORMATION SYSTEM
LO-1
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A SYSTEMS FRAMEWORK
Financial Accounting Information System
•Primarily concerned with producing outputs for
external users
•Inputs: well-specified economic events
•Processes: rules and conventions established by the
SEC, FASB, and IASB
•Outputs: financial statements for external users
LO-1
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
A SYSTEMS FRAMEWORK
Cost Management Information System
•Primarily concerned with producing outputs for
internal users using inputs and processes needed to
satisfy management objectives
•Inputs and processes: set by management; not
bound by externally imposed criteria
•Provides information for three broad objectives
• Cost services, products, and other objects
• Planning and control
• Decision making
LO-1
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A SYSTEMS FRAMEWORK
• Value chain: set of activities required to
design, develop, produce, market, deliver,
and provide post-sales service
LO-1
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EXHIBIT 2.3—THE VALE CHAIN
LO-1
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A SYSTEMS FRAMEWORK
Relationship to Other Operational Systems
and Functions
•An integrated cost management system
receives information from and provides
information to all operational systems
•Enterprise resource planning systems:
integrative, cross-functional systems that
coordinate information to facilitate timely and
accurate reporting and decision making
LO-1
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
A SYSTEMS FRAMEWORK
Different Systems for Different Purposes
•Cost accounting information system: assigns
costs to individual products and services and
other objects of interest to managers
•Operational control information system: provides
accurate and timely feedback concerning the
performance of managers and others relative to
their planning and control of activities
LO-1
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.4—SUBSYSTEMS OF THE
ACCOUNTING INFORMATION SYSTEM
LO-1
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COST ASSIGNMENT: DIRECT TRACING,
DRIVER TRACING, AND ALLOCATION
• Cost: cash or cash equivalent value
sacrificed for goods and services that are
expected to bring a current or future benefit
• Expenses: expired costs that are deducted
from revenues
• Loss: cost that expires without producing
any revenue benefit
• Assets: unexpired costs and appear on the
balance sheet
LO-2
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
COST ASSIGNMENT: DIRECT TRACING,
DRIVER TRACING, AND ALLOCATION
Cost Objects
•Things for which costs are measured and
assigned
•Includes products, customers, departments,
projects, activities, etc.
LO-2
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
COST ASSIGNMENT: DIRECT TRACING,
DRIVER TRACING, AND ALLOCATION
• Traceability: ability to assign cost directly to
a cost object
• Methods of Tracing
• Direct tracing: process of identifying and
assigning costs to a cost object that are
specifically or physically associated with the cost
object
• Driver tracing: use of drivers to assign costs to cost
objects
• Drivers are factors that cause changes in resource
usage, activity usage, costs, and revenues
LO-2
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
COST ASSIGNMENT: DIRECT TRACING,
DRIVER TRACING, AND ALLOCATION
Assigning Indirect Costs
•Indirect costs cannot be traced to cost
objects
•Assignment of indirect cost is called
allocation
LO-2
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
• Tangible products: goods produced by
converting raw materials into finished
products
• Services: tasks or activities performed for a
customer or activity performed by a
customer using an organization’s products
or facilities
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
• Services differ from tangible products on
three important dimensions
• Intangibility
• Perishability
• Inseparability
LO-3
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EXHIBIT 2.5—EXAMPLES OF PRODUCT COST
DEFINITIONS
LO-3
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PRODUCT AND SERVICE COST
Product Costs and External Financial Reporting
•Production (or product) costs: costs
associated with manufacturing goods or
providing services
•Nonproduction costs: costs associated with
the functions of selling and administration
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
Product Costs and External Financial Reporting
•Direct materials: materials traceable to the goods or
services being produced
• Example: the cost of wood in furniture
•Direct labor: labor that is traceable to the goods or
services being produced
• Example: wages of assembly-line workers
•Overhead: production costs other than direct
materials and direct labor
• Example: plant depreciation, utilities, property taxes,
indirect materials, indirect labor, etc.
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
Product Costs and External Financial Reporting
• Prime cost: sum of direct materials cost and direct
labor cost
• Conversion cost: sum of direct labor cost and
overhead cost
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
Product Costs and External Financial Reporting
• Nonproduction costs are divided into two
categories
• Marketing (selling) costs: costs necessary to market
and distribute a product or service
• Example: advertising, storage costs, and freight out
• Administrative costs: costs that cannot be reasonably
assigned to either marketing or production
• Example: salaries, legal fee, and research and
development
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
PRODUCT AND SERVICE COST
Product Costs and External Financial Reporting
• Marketing and administrative costs are not
inventoried and are called period costs
• Period costs are expensed in the period in which
they are incurred
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.6—PRODUCTION AND
NONPRODUCTION COSTS
LO-3
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXTERNAL FINANCIAL STATEMENT
Income Statement: Manufacturing Firm
• Income statement prepared for external parties
follows the standard format
• Referred to as absorption-costing income or fullcosting income because all manufacturing costs
are fully assigned to the product
• Expenses are separated according to function and
then deducted from revenues to arrive at operating
income
• Two major functional categories of expense are cost
of goods sold and operating expenses
LO-4
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXTERNAL FINANCIAL STATEMENT
• Cost of goods manufactured: represents the
total manufacturing cost of goods completed
during the current period
• Only costs assigned to goods completed are the
manufacturing costs of direct materials, direct
labor, and overhead
• Details of this cost assignment are given in a
supporting schedule, called the statement of cost of
goods manufactured
• Cost of goods sold: manufacturing cost of the
units that were sold during the period
LO-4
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
TRADITIONAL AND ACTIVITY-BASED
COST MANAGEMENT SYSTEMS
Traditional Cost Management Systems
•Traditional Cost Accounting
• Assumes that all costs can be classified as fixed or
variable with respect to changes in the units or volume
• Uses only unit-based activity drivers to assign costs
•Traditional Cost Control
• Assigns costs to organizational units
• Holds the organizational unit manager responsible for
controlling the assigned costs
• Traces costs to individuals who are responsible for
costs
LO-5
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
TRADITIONAL AND ACTIVITY-BASED
COST MANAGEMENT SYSTEMS
Activity-Based Cost Management Systems
•Activity-Based Cost Accounting
• Emphasizes tracing over allocation
• Uses both unit- and non-unit-based activity drivers
•Activity-Based Cost Control
• Focuses on accountability for activities rather than
costs
• Activity- based management (ABM) focuses on
improving customer value
LO-5
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.7—ACTIVITY-BASED
MANAGEMENT MODEL
LO-5
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.8—COMPARISON OF TRADITIONAL AND
ACTIVITY-BASED COST MANAGEMENT SYSTEMS
LO-5
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EXHIBIT 2.9—TRADE-OFF BETWEEN
MEASUREMENT AND ERROR COSTS
LO-5
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a passwordprotected website for classroom use.
EXHIBIT 2.10—SHIFTING MEASUREMENT
AND ERROR COSTS
LO-5
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END OF CHAPTER 2
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