Cost management accounting and control 6e by hansen mowen guan chapter 02

COST MANAGEMENTAccounting & Control Hansen▪Mowen▪Guan Chapter 2 Basic Cost Management Concepts... Define tangible and intangible products, and explain why there are different product cos

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 2 Basic Cost Management

Concepts

Study Objectives

1 Explain the cost assignment process

2 Define tangible and intangible products, and

explain why there are different product cost

definitions

3 Prepare income statements for manufacturing

and service organizations

4 Explain the differences between traditional and

contemporary cost management systems

Cost Assignment: Direct Tracing,

Driver Tracing and Allocation

• A cost object is any item, such as products, customers, departments, projects, activities,

and so on, for which costs are measured and assigned

– Example: A bicycle is a cost object when you are determining the cost to produce a bicycle

• An activity is a basic unit of work performed within an organization

– Example: Setting up equipment, moving materials,

Cost Assignment: Direct Tracing,

Driver Tracing and Allocation

• Traceability means that costs can be assigned easily and accurately, using a causal

relationship

• Methods of tracing:

– Direct tracing: relies on physical observance of

causal relationships to assign costs to cost objects.

– Driver tracing: relies on drivers as causal factors to

assign costs to cost objects.

Cost Assignment Methods

Examples of Product Cost

Definitions

Product Costs

• Direct materials: those materials directly

traceable to the goods or services being produced.

– Example: The cost of wood in furniture.

• Direct labor: labor that is directly traceable to the

goods or services being produced

– Example: Wages of assembly-line workers.

• Overhead: all other manufacturing costs.

– Example: Plant depreciation, utilities, property

taxes, indirect materials, indirect labor, etc.

Prime and Conversion Costs

Nonproduction Costs

• Amount and timing of benefit cannot be

reasonably estimated

• Period costs

– Not inventoried

– Expensed as incurred

• Examples

– Research and development

– Marketing costs

– Administrative costs

Production and Nonproduction

Costs

External Financial Statements

• Income Statement ~ Manufacturing Firm

– Functional categories of expense

• Cost of goods sold

• Operating expenses – Supporting schedules

• Cost of goods manufactured

• Cost of goods sold

• Income Statement ~ Service Organization

– No finished goods inventory

Income Statement: Manufacturing Firm

From the Cost of Goods Sold Schedule

Statement of Cost of Goods

Manufactured

Cost of Goods Sold Schedule

Cost Management Systems

• Functional-Based

– Assumes a linear production cost behavior

– Assigns costs to organizational units

• Activity-Based

– Emphasizes tracing over allocation

– Identifies non-unit-based activity drivers

Functional-Based Cost Management

• Unit-based drivers

• Allocation-intensive

• Narrow and rigid product costing

• Focus on managing costs

• Sparse activity information

• Maximization of individual unit performance

• Uses financial measures of performance

Activity-Based Cost Management

• Unit- and non-unit-based drivers

• Tracing intensive

• Broad, flexible product costing

• Focus on managing activities

• Detailed activity information

• System-wide performance maximization

• Uses both financial and nonfinancial measures

of performance

Trade-Off between Measurement

Costs and Error Costs

Shifting Costs

COST MANAGEMENT

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Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 2