Professional Documents
Culture Documents
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Chapter Two
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Learning Objectives
Explain the cost assignment process. Define tangible and intangible products and explain why there are different product cost definitions.
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Prepare income statements for manufacturing and service organizations. Explain the differences between functional-based and activity-based management accounting systems.
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Indirect costs are those costs that cannot be easily and accurately traced to a cost object.
Example: The salary of a plant manager, where departments within the plant are defined as the cost objects.
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Methods Of Tracing
Tracing is the actual assignment of costs to a cost object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways:
Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object. Driver tracing is the use of drivers to assign costs to cost objects. Drivers are observable causal factors that measure a cost objects resource consumption.
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Direct Tracing
Driver Tracing
Allocation
Physical Observation
Causal Relationship
Assumed Relationship
Cost Objects
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Intangibility
Impact on Management Accounting
No Inventories.
Derived Properties
Services cannot be stored.
No patent protection.
Cannot display or communicate services. Price difficult to set.
Perishability
Impact on Management Accounting
Derived Properties
Service benefits expire quickly. Services may be repeated often for one customer.
Inseparability
Impact on Management Accounting
Costs often accounted for by customer type.* Demand for measurement and control of quality to maintain consistency.*
Derived Properties
Customer directly involved with production of service. Centralized mass production of services difficult.
Heterogeneity
Impact on Management Accounting
Productivity and quality measurement and control must be ongoing.*
Total quality management critical*
Derived Properties
Production Marketing
Customer Service
Production Marketing
Customer Service
Production
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Production Costs
Direct materials are those materials that are directly traceable to the goods or services being produced.
Example: The cost of tires on an automobile.
Direct labor is the labor that is directly traceable to the goods or services being produced.
Example: Wages of assembly-line workers.
Conversion Cost =
Direct Labor Costs + Overhead Costs
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Nonproduction Costs
Marketing (selling) costs are the costs necessary to market, distribute, and service a product or service.
Example: Commissions, storage costs, and freight
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.
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Statement of COGM
Direct Materials Used: Beginning inventory Add: Purchases Materials available Less: Ending inventory Direct Labor Manufacturing overhead: Indirect labor Depreciation Rent Utilities Property taxes Maintenance Total manufacturing costs added Add: Beginning work in process Total manufacturing costs Less: Ending work in process Cost of goods manufactured Chapter 1 $200,000 450,000 $650,000 50,000
$ 600,000 350,000
1,400,000 $1,400,000
$ 600,000 300,000
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215,000 $ 85,000
$ 8,000 22,000
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Activity-Based
1. Unit- and nonunit-based drivers
2. Tracing-intensive 3. Broad, flexible product costing 4. Focus on managing activities 5. Detailed activity information 6. Systemwide performance maximization 7. Use of both financial and nonfinancial measures of performance
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Resources
Operational View
Efficiency Analysis
Functions
Performance Analysis
Products
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Resources
Process View
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End of Chapter 2
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