Slides ICAM 1 4 explain the impact of poor cost information

FASAB’s SFFAS #4• Read the Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4 • How do we know that FASAB Conside

Explain the Impact of Poor Cost

Information

How much does a box of cereal cost?

Terminal Learning Objective

• Task: Explain the Impact of Poor Cost Info on a

Decision

• Condition: You are training to become an ACE

with access to ICAM course handouts, readings, and spreadsheet tools and awareness of

Operational Environment (OE)/Contemporary

Operational Environment (COE) variables and

actors

• Standard: with at least 80% accuracy:

• Demonstrate understanding of Cost Terminology

• Explain the impact of poor cost information on a

decision

There Are Many Possible Ways

to Measure Costs

Consider the Following Types of Cost:

direct, indirect, variable, fixed, sunk, period,

inventoriable, reimburseable, capital, standard,

conversion, prime, carrying, incremental, separable,

joint, project, controllable, current, historical, normal, discretionary, full, responsibility, imputed,

opportunity, mixed, out-of pocket, relevant,

target, absorption, average, quality, estimated,

Relevance of Information

• Has anyone recently purchased a new vehicle?

• What were your top three criteria? Why?

• Where did you get your information? Why?

• What influenced your decision?

• How will you use the vehicle?

• How much will you drive it?

• In what stage of your life are you?

Relevance of Information

• How might your information needs differ if

you were deciding where to pursue your

Masters degree?

• How would your decision criteria differ?

• What different sources of information would you choose?

Let’s Start a Business

• What should we sell? List five products:

Let’s Start a Business

• Costing methodology:

• Calculate unit cost

• Add a markup on cost to guarantee a profit

• Set selling price

Let’s Start a Business

• Calculate Average Unit $ Cost:

Let’s Start a Business

What’s wrong with this picture?

1.

2.

3.

4.

• What went wrong?

• Costing methodology not appropriate for our purpose of setting prices for diverse items

FASAB’s SFFAS #4

• Read the Executive Summary of Federal Accounting

Standards Advisory Board’s Statement of Federal

Financial Accounting Standards #4

• How do we know that FASAB Considers Cost Accounting

a High Priority?

• List the Five Fundamental Elements of Cost Accounting: 1.

2.

FASAB’s SFFAS #4

• Read the Executive Summary of Federal Accounting

Standards Advisory Board’s Statement of Federal

Financial Accounting Standards #4

• How do we know that FASAB Considers Cost

Accounting a High Priority?

• List the Five Fundamental Elements of Cost Accounting:

1 Accumulating and reporting costs of activities

2 Establishing responsibility segments

3 Determining full costs of goods and services

4 Recognizing the costs of goods and services provided among federal entities

5 Using appropriate methodologies to assign costs

FASAB’s SFFAS #4

• Read the Introduction to SFFAS #4

• What are three goals of federal financial

reporting?

1

2

FASAB’s SFFAS #4

• Read the Introduction to SFFAS #4

• What are three goals of federal financial

reporting?

1 Costs of specific programs and activities and the composition of, and changes in, those costs;

2 Efforts and accomplishments associated with

federal programs and their changes over time and

in relation to costs

3 Efficiency and effectiveness of the government's management of its assets and liabilities

FASAB’s SFFAS #4

Who are the users of federal financial

information?

Federal Executives -evaluate performance

FASAB’s SFFAS #4

What are objectives of managerial cost

accounting information?

1 Provide program managers with relevant and

reliable information relating costs to outputs and activities

2 Provide relevant and reliable cost information to assist the Congress and executives in making

decisions about allocating federal resources

3 Ensure consistency between costs reported in

financial reports and costs reported to managers

FASAB’s SFFAS #4

List the five topics addressed by the standard:

1 Requirement for cost accounting

2 Responsibility segments

3 Full cost

4 Inter-entity costs

5 Costing methodology

FASAB’s SFFAS #4

What basis of accounting should be used?

“The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.”

“…using a basis of accounting …appropriate for the intended use of the information.”

FASAB’s SFFAS #4

What basis of accounting should be used?

“The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.”

“…using a basis of accounting …appropriate for the intended use of the information.”

FASAB’s SFFAS #4

Read the standard on Costing Methodology

“The full costs of resources that directly or

indirectly contribute to the production of

outputs should be assigned to outputs through costing methodologies or cost finding

techniques that are most appropriate to the

segment's operating environment…”

FASAB’s SFFAS #4

Read the standard on Costing Methodology

“The full costs of resources that directly or

indirectly contribute to the production of

outputs should be assigned to outputs through costing methodologies or cost finding

techniques that are most appropriate to the

segment's operating environment…”

basis.

FASAB’s SFFAS #4

The cost assignments should be performed by the following methods listed in the order of preference: (a) directly tracing costs wherever feasible and

economically practicable,

(b) assigning costs on a cause-and-effect basis, or (c) allocating costs on a reasonable and consistent

FASAB’s SFFAS #4

• Costing Terminology:

• Cost accumulation - the process of

collecting cost data in an organized way

• Cost assignment - the process that identifies accumulated costs with reporting periods

and cost objects

FASAB’s SFFAS #4

• Costing Terminology:

• Cost accumulation - the process of

collecting cost data in an organized way

• Cost assignment - the process that identifies accumulated costs with reporting periods

and cost objects

• Cost object - an activity or item whose cost

is to be measured

FASAB’s SFFAS #4

• Costing Terminology:

• Cost accumulation - the process of

collecting cost data in an organized way

• Cost assignment - the process that identifies accumulated costs with reporting periods

and cost objects

FASAB’s SFFAS #4

List the four Costing Methodologies

outlined in the standard:

1.

2.

3.

4.

FASAB’s SFFAS #4

List the four Costing Methodologies

outlined in the standard:

1 Activity Based Costing

2 Job Order Costing

3 Process Costing

Other Provisions of SFFAS #4

• Requires Cost Accounting

• Accumulate and report costs of activities for

management information purposes

• May use either Cost System or Cost Finding

Techniques

• Define Responsibility Segments

• Measure and report costs of each segment’s

outputs

Other Provisions of SFFAS #4

• Report and Measure Full Cost in General

Purpose financial reports

• Include direct and indirect costs incurred in the reporting segment AND

• Identifiable supporting costs incurred in other

segments and entities

• Incorporate cost of goods and services

• Cost information is only meaningful when

appropriate for its intended purpose

• Poor or inappropriate cost information can

lead to poor decisions

• We will learn many methods of cost

measurement, each with an appropriate use