Slides explain the impact of poor cost information

FASAB’s SFFAS #4• Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4 • How do we know that FASAB Considers Cost Ac

Explain the Impact of Poor Cost

Information on a Decision

Principles of Cost Analysis and

Management

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 a cost advisor technician with

access to all regulations/course handouts, and

awareness of Operational Environment

(OE)/Contemporary Operational Environment (COE) variables and actors.

• Standard: with at least 80% accuracy:

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,

and unit

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?

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?

Conduct Check on Learning

• Who defines the relevance of information?

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:

Total Cost / 5 units =

Let’s Start a Business

What’s wrong with this picture?

Product: Selling Price:

1

2

3

4

• What went wrong?

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

Conduct Check on Learning

• Would the methodology used in the

demonstration have passed an audit?

FASAB’S SFFAS #4

• This is a self-study activity.

• Follow the steps in the student version of the

slides with the above title and attempt to fill in the blanks.

• Think about how this guidance on Cost

Reporting would affect your organization What would it measure? What methods might it use?

• We will then review as a class.

FASAB’s SFFAS #4

• 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

• 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

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

FASAB’s SFFAS #4

Who are the users of federal financial

information?

Users Decisions:

1 Government -spend resources to

Managers achieve expected results

2 Congress -program decisions

Federal Executives -evaluate performance

3 Citizens -resource allocation

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

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

Managerial cost accounting should provide budgetary

accounting with cost information

accounting should provide budgetary accounting with cost

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

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…”

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

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

4 Standard 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

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

received from other entities, if Significant and

Identifiable

• 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

Conduct Check on Learning

• What are the three appropriate potential

methods of cost assignment according to the SFFAS?