Professional Documents
Culture Documents
CHAPTER
Basic
Management
Accounting
Concepts
2 -2
Objectives
Objectives
1. Describe the cost assignment process.
After
2. Define tangible studying
Afterand
studying this
this products and
intangible
explain whychapter,
chapter, you should
youdifferent
there are should product cost
definitions. be be able
able to:
to:
3. Prepare income statements for manufacturing
and service organizations.
4. Outline the differences between functional-
based and activity-based management
accounting systems.
2 -3
Objectives
Objectives
1
Describe
the cost assignment process
Cost
Cost Assignment:
Assignment: Direct
Direct Tracing,
Tracing, Driver
Driver
2 -4
Tracing,
Tracing, and
and Allocation
Allocation
1. To study management accounting, it is necessary to
understand the meaning of cost and the associated
cost terminology.
2. Assigning costs to products, services, customers,
and other objects of managerial interest is one of the
principal objectives of a management accounting
information system.
3. Increasing the accuracy of cost assignments
produces higher-quality information, which can then
be used to make better decisions.
2 -5
Cost
CostII is
see…
is the
see…the cash
It’s aor
It’s
cash cash-equivalent
cash-equivalent value
aordollar
dollar value
sacrificed for
measure
sacrificed
measurefor goods
of
of the
goods theand
and services
services that
that isis
expected
resources
expected
resourcesto
to bring
usedato
used
bring atocurrent
current or future
orExactly
future what
Exactly what isis
benefit
benefitato
achieve
achieve the
the organization.
atogiven
given meant
meant by
organization. by “cost”?
“cost”?
benefit.
benefit.
2 -6
Accuracy of Assignment:
The notion of accuracy is not evaluated based on
knowledge of some underlying "true" cost. Rather,
it is a relative concept and has to do with the
reasonableness and logic of the cost assignment
methods used. The objective is to measure and
assign, as well as possible, the cost of the resources
consumed by a cost object.
Methods Tracing
Tracing costs to cost objects can occur in one of two
ways: (1) direct tracing or (2) driver tracing.
(1) Direct Tracing: is the process of identifying and assigning
costs that are exclusively and physically associated with a
cost object to that cost object.
(2) Driver Tracing: is the use of drivers to assign costs to cost
objects. In a cost assignment context, drivers are observable
causal factors that measure a cost object's resource
consumption.
2 -11
Traceability
Cost
Cost Assignment
Assignment Methods
Methods
Cost of Resources
Direct Driver
Allocation
Tracing Tracing
Cost Objects
2 -16
Objectives
Objectives
2
Define tangible and intangible
products and explain why there are
different product cost definitions
2 -17
Management Accounting
Services
Services cannot
cannot be be stored.
stored.
No
No patent
patent protection.
protection.
1. Intangibility
Cannot
Cannot display
display or
or expire
Services
Services benefits
benefits expire
communicate
communicate services.
services.
2. Perishability quickly.
Customer
quickly.
Customer directly
directly
Price
Price difficult
difficult to
to set.
set.
Services
involved
Services may
involvedmay be
withbe repeated
with repeated
3. Inseparability often
often for
for one
production
productionone ofcustomer.
of service.
customer.
service.
Centralized
Centralized massmass
4. Heterogeneity production
Wide variation
production
Wide variationof services
ofin service
services
in service
difficult.
products
products possible.
difficult. possible.
Derived
Derived Properties
Properties
Interface of Services with 2 -19
Management Accounting
No
No inventories.
inventories.
Strong
Strong ethical
ethical code.
code.
1. Intangibility
Price
Price difficult
difficult to
to set.
set.
Demand
No
Demand
No for
for more
inventories.more
inventories. accurate
accurate
2. Perishability Costs
Costs often
often accounted
accounted
cost
Need
cost
Need assignments.
for standards
assignments.
for and
standardstype.
and
for by customer
for by customer type.
consistent
consistent high
high quality.
quality.
3. Inseparability Demand
Productivityfor
Demand for and
Productivity measure-
and quality
measure-
quality
ment
ment and
and control
measurement
measurement andof
and
control of
4. Heterogeneity quality
quality to
control
control to maintain
must be
maintain
must be
consistency.
ongoing.
consistency.
ongoing.
Impact on Total
Total
Management quality
quality manage-
manage-
Impact on Management
Accounting ment
ment critical.
critical.
Accounting
2 -20
Design
Service Develop
The Internal
Value chain
analysis
Distribute Produce
Market
Product Costs and External Financial 2 -23
Reporting
Research and
Development
Managerial objectives served
Marketing Marketing
Customer Customer
Service Service
Pricing Decisions Strategic Design Decisions External Financial
Product-Mix Decisions Tactical Profitability Reporting
Strategic Profitability Analysis
Analysis
2 -25
Noninventoriable
Noninventoriable (period)
(period) costs
costs
are
are expensed
expensed inin the
the period
period in
in
which
which they
they are
are incurred.
incurred.
Prime Cost :
Direct Materials Costs + Direct Labor Costs
Conversion Cost:
Direct Labor Costs + Overhead Costs
2 -30
Objectives
Objectives
3
Prepare income statements for
manufacturing and service
organizations
2 -31
External
Financial
Statements
Manufacturing Organization 2 -32
2-20
Income Statement
For the Year Ended December 31, 2004
Sales $2,800,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add: Cost of goods manufactured 1,200,000
Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory 300,000 1,400,000
Gross margin $1,400,000
Less operating expenses:
Selling expenses $ 600,000
Administrative expenses 300,000 900,000
Income before taxes $ 500,000
Statement of Cost of Goods Manufactured 2 -33
2-21
Income Statement
For the Year Ended December 31, 2004
Sales $300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000
Service costs added:
Direct materials $ 40,000
Direct labor 80,000
Overhead 100,000 220,000
Total $225,000
Less: Ending work in process 10,000 215,000
Gross margin $ 85,000
Less operating expenses:
Selling expenses $ 8,000
Administrative expenses 22,000 30,000
Income before income taxes $ 55,000
2 -36
Objectives
Objectives
4
Outline the differences between
functional-based and activity-based
management accounting systems
Functional-Based
Functional-Based
2 -37
Management
Management Model
Model
Cost View
Resources
Operational View
Efficiency Performance
Functions
Analysis Analysis
Products
Activity-Based
Activity-Based
2 -38
Management
Management Model
Model
Cost View
Resources
Process View
Driver Performance
Activities
Analysis Analysis
Why? What? How Well?
Products and
Customers
2 -39
Functional-Based Activity-Based
1. Unit-based drivers 1. Unit- and nonunit-based
drivers
2. Allocation-intensive 2. Tracing intensive
6. Systematic performance
maximization
6. Maximization of individual
unit performance 7. Use of both financial and
nonfinancial measures of
7. Use of financial measures of performance
performance
2 -40
Chapter Two
The
The End
End
2 -41