Cost management. Accounting and control

1. Cost Management ACCOUNTING AND CONTROL

HANSEN & MOWEN
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2. Basic Cost Management Concepts

2
2-2

3. A Systems Framework

1
A Systems Framework
Operational Model for an Accounting Information System
Economic Events
Collecting
Classifying
Summarizing
Analyzing
Managing
Special Reports
Financial Statements
Budgets
Performance Reports
Personal Communication
Inputs
Processes
Outputs
Users
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4. A Systems Framework

1
Financial Accounting Information System
Inputs: well-specified economic events
Processes: rules and conventions established by the
SEC and FASB
Outputs: financial statements for external users
Cost Management Information System
Inputs and processes: set by management; not
bound by externally imposed criteria
Outputs: reports for internal users
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5. A Systems Framework

1
The cost management information system has three
broad objectives that provide information for-1) Costing out services, products, and other objects
of interest to management
2) Planning and control
3) Decision making
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6. An Integrated Cost Management System

1
A Systems Framework
An Integrated Cost Management System
Design and
Development
System
Production
System
Cost
Management
System
Marketing and
Distribution
System
Customer
Servicing
System
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7. A Systems Framework

1
A Systems Framework
The Subsystems of the Accounting Information System
Accounting Information System
Financial Accounting
Information System
Cost Accounting
Information System
Assigns costs to
products, services or
objects
Cost Management
Information System
Operational
Control System
Provides performance
feedback
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8. Cost Assignment: Direct Tracing, Driver Tracing and Allocation

2
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,
maintaining equipment, designing products, etc.
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9. Cost Assignment: Direct Tracing, Driver Tracing and Allocation

2
Traceability means that costs can be assigned easily
and accurately, using a causal relationship.
Methods of tracing:
1. Direct tracing: relies on physical observance of
causal relationships to assign costs to cost objects.
2. Driver tracing: relies on drivers as causal factors to
assign costs to cost objects.
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10. Cost Assignment Methods

Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
2
Cost Assignment Methods
Cost of Resources
Resource Drivers
Direct
Tracing
Physical
Observation
Driver
Tracing
Allocation
Activity
Drivers
Convenience
Assumed
Linkage
Cost Objects
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11. Cost Assignment Methods

Cost Assignment: Direct Tracing,
Driver Tracing and Allocation
2
Cost Assignment Methods
Cost of Resources
Resource Drivers
Direct
Tracing
Physical
Observation
Driver
Tracing
Allocation
Activity
Drivers
Convenience
Assumed
Linkage
Cost Objects
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12. Examples of Product Cost Definitions

Product and Service Costs
3
Examples of Product Cost Definitions
Value-Chain
Product Costs
Operating Product
Costs
Traditional Product
Costs
Research and
Development
Production
Production
Marketing
Marketing
Customer Service
Customer Service
Pricing Decisions
Product Mix Decisions
Strategic Profitability
Analysis
Strategic Design
Decisions
Tactical Profitability
Analysis
Production
External Financial
Reporting
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13.

Product and Service Costs
3
Manufacturing Costs
(Production Costs)
Direct materials are those materials that are directly
traceable to the goods or services being produced.
Example: The cost of wood in furniture.
Direct labor is the labor that is directly traceable to
the goods or services being produced.
Example: Wages of assembly-line workers.
Overhead are all other manufacturing costs.
Example: Plant depreciation, utilities, property
taxes, indirect materials, indirect labor, etc.
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14.

Product and Service Costs
3
Manufacturing costs are
assigned to products and
carried in inventories until
the products are sold.
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15.

Product and Service Costs
3
Nonmanufacturing Costs
(Nonproduction Costs)
Marketing (selling) costs are the costs necessary to
market, distribute, and service a product or service.
Example: Advertising, storage costs, and freight
out.
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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16.

Product and Service Costs
3
For external financial reporting,
marketing and administrative costs
are not inventoried. They are are
expensed in the period incurred and
referred to as period costs.
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17.

Product and Service Costs
3
Production and Nonproduction Costs
Production or
Manufacturin
g Costs
Direct
Materials
Direct
Labor
Overhead
Nonproduction
or Operating
Costs
Prime Cost
Marketing Expense
Order-Getting Costs
Order-Filling Costs
Conversion
Cost
Administrative Expense
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18.

External Financial Statements
4
Manufacturing Organization
Income Statement
For the Year Ended December 31, 2007
Sales
$ 2,000,000
Less: Cost of goods sold
1,300,000
Gross margin
$ 700,000
Less operating expenses:
Selling expenses
$ 300,000
From 450,000
the Cost
Administrative expenses
150,000
of$ Goods
Sold
Operating income
250,000
Schedule
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19.

External Financial Statements
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2007
Direct materials:
Beginning inventory
$ 200,000
Add: Purchases
450,000
Materials available
$ 650,000
Less: Ending inventory
50,000
Direct materials used in production
$ 600,000
Direct labor
350,000
Manufacturing overhead:
Indirect labor
$ 122,500
Depreciation on building
177,500
Rental of equipment
50,000
Utilities
37,500
Property taxes
12,500
Maintenance
50,000
450,000
Total manufacturing costs added
$ 1,400,000
continued
4
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20.

External Financial Statements
Total manufacturing costs added
Add: Beginning work in process
Less: Ending work in process
Cost of goods manufactured
4
$ 1,400,000
200,000
400,000
$ 1,200,000
Work in process consists of all
partially completed units found in
production at a given point in
time.
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21.

External Financial Statements
4
Cost of Goods Sold Schedule
For the Year Ended December 31, 2007
Cost of goods manufactured
$ 1,200,000
Add: Beginning inventory finished goods
250,000
Cost of goods available for sale
$ 1,450,000
From the
Less: Ending inventory
finished goods
150,000
Statement of
Cost of goods sold
$ 1,300,000
Cost of Goods
Manufactured
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22. Activity-Based Management Model

Functional-Based and Activity-Based Cost
Management Systems
5
Activity-Based Management Model
Cost View
Resources
Process View
Driver
Analysis
Activities
Performance
Analysis
Why?
What?
How well?
Products and
Customers
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23.

Functional-Based and Activity-Based Cost
Management Systems
5
Functional-Based
1. Unit-based drivers
2. Allocation-intensive
3. Narrow and rigid product costing
4. Focus on managing costs
5. Sparse activity information
6. Maximization of individual unit performance
7. Uses financial measures of performance
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24.

Functional-Based and Activity-Based Cost
Management Systems
5
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. Uses both financial and nonfinancial
measures of performance
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25.

Functional-Based and Activity-Based Cost
Management Systems
5
Trade-Off Between Measurement and Error Costs
Cost
Total Cost
Measurement
Cost
Error Cost
Low
Accuracy
Optimal
Level
High
Accuracy
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26.

Functional-Based and Activity-Based Cost
Management Systems
5
Shifting Costs
Cost
Old Measurement Cost
New
Measurement
Cost
New Error
Cost
Old Error
Cost
Low
Old Optimum
Accuracy
New Optimum
High
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27. End of Chapter 2

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