4 - 1 ©2002 prentice hall business publishing, introduction to management accounting 12/e,...

4 - 1©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Cost Management Systems

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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton

Learning Objective 1

Describe the purposes of

cost management systems.

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Cost Management System

A cost-management system (CMS) is a collection of tools and techniques thatidentifies how management’s decisions affect costs.

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What is Cost Accounting?

Cost accounting is that part of theaccounting system that measures costsfor the purposes of management decisionmaking and financial reporting.

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Explain the relationships

among cost, cost objective,

cost accumulation, and

cost allocation.

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Cost Accounting System

CostAccumulation

Collecting costs by some“natural” classificationsuch as materials or labor

CostAllocation

Tracing costs to one or more cost objectives

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Cost Accounting System

MACHININGDEPARTMENT

ACTIVITY ACTIVITY

FINISHINGDEPARTMENT

ACTIVITY ACTIVITY

RAW MATERIALCOSTS (METALS

CABINETS CABINETS

DESKS DESKS

TABLESTABLES

Cost Accumulation

Cost Allocationto Cost Objects:

1. Departments

2. Activities

3. Products

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Cost

A cost may be defined as a sacrifice or giving up of resources for a particular purpose.

Costs are frequently measured by the monetary units that must be paid for goods and services.

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Cost Objective

What is a cost object or cost objective?

It is anything for which a separate measurementof costs is desired.

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Distinguish among direct,

indirect, and unallocated costs.

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Direct Costs

Direct costs can be identified specifically and exclusively with a given costobjective in an economicallyfeasible way.

What are direct costs?

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Indirect Costs

Indirect costs cannot be identifiedspecifically and exclusively with agiven cost objective in an economicallyfeasible way.

What are indirect costs?

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What Distinguishes Direct and Indirect Costs?

Managers prefer to classify costs as direct rather than indirect whenever it is “economically feasible” or “cost effective.”

Other factors also influence whether a cost is considered direct or indirect.

The key is the particular cost objective.

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Categories of Manufacturing Costs

Any raw material, labor, or other inputused by any organization could,in theory, be identified as adirect or indirect costdepending on thecost objective.

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Categories of Manufacturing Costs

All costs which are eventually allocated to products are classified as either…

1 direct materials,2 direct labor, or3 indirect manufacturing.

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Direct Material Costs...

– include the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way.

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Direct Labor Costs...

– include the wages of all labor that can be traced specifically and exclusively to the manufactured goods in an economically feasible way.

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Indirect Manufacturing Costs...

– or factory overhead, include all costs associated with the manufacturing process that cannot be traced to the manufactured goods in an economically feasible way.

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Product Costs...

– are costs identified with goods produced or purchased for resale.

Product costs are initially identified as part of the inventory on hand.

These costs, inventoriable costs, become expenses (in the form of cost of goods sold) only when the inventory is sold.

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Period Costs...

– are costs that are deducted as expenses during the current period without going through an inventory stage.

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25 26 28 29 30 3127

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Period or Product Costs

In merchandising accounting, insurance, depreciation, and wages are period costs (expenses of the current period).

In manufacturing accounting, many of these items are related to production activities and thus, as indirect manufacturing, are product costs.

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Period Costs – Merchandising and Manufacturing

In both merchandising and manufacturing accounting, selling and general administrative costs are period costs.

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Explain how the financial

statements of merchandisers

and manufacturers differ

because of the types of goods

they sell.

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Financial Statement Presentation– Merchandising Companies

MerchandiseInventory

MerchandiseInventory

SalesSales

Cost of Goods Sold(an expense)


Selling andAdministrative

Expenses


Expenses

Balance Sheet Income Statement

–

Equals Gross Margin

Equals Operating Income

–

Expiration

PeriodCosts

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Financial Statement Presentation– Manufacturing Companies

FinishedGoods

Inventory

FinishedGoods

Inventory

SalesSales




Expenses


Expenses

Balance Sheet Income Statement

–

Equals Gross Margin

Equals Operating Income

–

Expiration

PeriodCosts

DirectMaterial

Inventory

DirectMaterial

Inventory

Work-in-Process

Inventory

Work-in-Process

Inventory

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Costs and Income Statements

On income statements, the detailed reporting of selling and administrative expenses is typically the same for manufacturing and merchandising organizations, but the cost of goods sold is different.

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Cost of Goods Sold for a Manufacturer

The manufacturer’s cost of goods produced and then sold is usually composed of the three major categories of cost:

1 Direct materials2 Direct labor3 Indirect manufacturing

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Cost of Goods Soldfor a Retailer or Wholesaler

The merchandiser’s cost of goods sold is usually composed of the purchase cost of items, including freight-in, that are acquired and then resold.

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