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Basic

M anagementAccounting

Concepts

CHAPTER


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1. Describe the cost assignment process.2. Define tangible and intangible products and

explain why there are different product costdefinitions.

3. Prepare income statements for manufacturingand service organizations.

4. Outline the differences between functional- based and activity-based managementaccounting systems.

Objectives

After studying thischapter, you should

be able to:


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Exactly what ismeant by cost?

Cost is the cash or cash-equivalent valuesacrificed for goods and services that is

expected to bring a current or future benefit to the organization.

I see Its a dollarmeasure of the

resources used toachieve a given

benefit.


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Traceability is the ability to assign a cost to acost object in an economically feasible way bymeans of a cause-and-effect relationship.

Direct costs are those costs that can be easilyand accurately traced to a cost object.

Example: I f a hospital is the cost object,

the cost of heating andcooli ng the hospital isa direct cost.


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I ndirect costs are those costs that cannot beeasily and accurately traced to a cost object.

Example: The salary of a plant manager, where

departments within the plant are def inedas the cost objects.


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2 -9 I nter face of Services withM anagement Accounting

1. Intangibility

2. Perishability

3. Inseparability

4. Heterogeneity

Services cannot be stored. No patent protection.Cannot display or

communicate services.Price difficult to set.

Derived Properties

Services benefits expirequickly.

Services may be repeatedoften for one customer.

Customer directly

involved with production of service.

Centralized mass production of servicesdifficult.

Wide variation in service products possible.


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2 -10 I nter face of Services withM anagement Accounting

No inventories.Strong ethical code.Price difficult to set.Demand for more accurate

cost assignments.

Impact on ManagementAccounting

No inventories. Need for standards and

consistent high quality.

Costs often accounted

for by customer type.Demand for measure-

ment and control ofquality to maintainconsistency.

Productivity and qualitymeasurement andcontrol must beongoing.

Total quality manage-ment critical.

1. Intangibility

2. Perishability

3. Inseparability

4. Heterogeneity


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Product cost is a cost assignment that

supports a well-specified managerialobject. Thus, what product cost means

depends on the managerial objective

being served.


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Design

Produce

Market

Distribute

Service Develop


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2 -13 Product Costing Defini tions

Pricing DecisionsProduct-Mix Decisions

Strategic ProfitabilityAnalysis

Strategic Design DecisionsTactical Profitability

Analysis

External FinancialReporting

Research andDevelopment

Production

Marketing

CustomerService

Value-Chain

Product Costs

Production

Marketing

CustomerService

Operating Product

Costs

Traditional Product

Costs

Production


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Direct mater ials are those materials that are directlytraceable to the goods or services being produced.

Steel in an automobileWood in furniture

Alcohol in cologne

Denim in jeans

Braces for correcting teeth

N t


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The Product

DirectMaterials

DirectLabor

ManufacturingOverhead

Manufacturing CostsNextPag e

Clic kHer e

Next


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Direct Materials

Those materials that becomean integral part of the product and

that can be conveniently traced directly to it.

Example: A radio installed in an automobile

NextPag e

Clic kHer e


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Direct labor is the labor that is directly traceable tothe goods or services being produced.

Workers on an assemblyline at Chrysler

A chef in a restaurant

A surgical nurse attendingan open heart operation

Airline pilot

Next


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Direct Labor

Those labor costs that can be easily traced toindividual units of product.

Example: Wages paid to automobile assembly workers

NextPag e

Clic kHer e

Next


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Manufacturing costs that cannot be traced directly tospecific units produced.

Manufacturing Overhead

Examples: Indirect labor and indirect materials

Wages paid to employeeswho are not directly

involved in production.

Examples:maintenance workers,

janitors and security guards.

Materials used to supportthe production process.

Examples: lubricants and cleaning

supplies used in theautomobile assembly plant.

NextPag e

Clic kHer e


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Overhead are all other production costs.

Depreciation on buildingand equipment

Maintenance

Supplies

SupervisionPower

Property taxes


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Noninventoriable (period) costsare expensed in the period in

which they are incurred.

Salaries and commissions ofsales personnel (marketing)

Advertising (marketing)Legal fees (administrative)Printing the annual report

(administrative)

Next


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Selling andAdministrative

Expenses

PeriodCosts

Manufacturing Cost Flows

FinishedGoods

Cost of

GoodsSold

Selling andAdministrative

ManufacturingOverhead

Work inProcess

Direct Labor

Costs

Income

StatementExpenses

Material Purchases Raw Materials

Balance SheetInventories

Pag e

Clic kHer e


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Prime Cost :

Direct Materials Costs + Direct Labor Costs

Conversion Cost:

Direct Labor Costs + Overhead Costs


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ExternalFinancialStatements


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2 -25 Manufacturing OrganizationIncome Statement

For the Year Ended December 31, 2004

Sales $2,800,000

Less cost of goods sold:

Beginning finished goods inventory $ 500,000

Add: Cost of goods manufactured 1,200,000Cost of goods available for sale $1,700,000

Less: Ending finished goods inventory 300,000 1,400,000

Gross margin $1,400,000

Less operating expenses:Selling expenses $ 600,000

Administrative expenses 300,000 900,000

Income before taxes $ 500,000

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Direct materials:

Beginning inventory $200,000Add: Purchases 450,000Materials available $650,000Less: Ending inventory 50,000Direct materials used $ 600,000

Direct labor 350,000Manufacturing overhead:

Indirect labor $122,500Depreciation 177,500Rent 50,000Utilities 37,500Property taxes 12,500Maintenance 50,000 450,000

Total manufacturing costs added $1,400,000

Statement of Cost of Goods ManufacturedFor the Year Ended December 31, 2004

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continued on next slide


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Total manufacturing costs added $1,400,000

Add: Beginning work in process 200,000Total manufacturing costs $1,600,000Less: Ending work in process 400,000Cost of goods manufactured $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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2 -30 Activity-BasedManagement Model

Resources

Activities

Products and

Customers

Cost View

DriverAnalysis

PerformanceAnalysis

Process View

Why? What? How Well?


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1. Unit-based drivers

2. Allocation-intensive3. Narrow and rigid product

costing4. Focus on managing cost

5. Sparse activity information

6. Maximization of individualunit performance

7. Use of financial measures of performance

1. Unit- and nonunit-baseddrivers

2. Tracing intensive3. Broad, flexible product

costing

4. Focus on managingactivities

5. Detailed activityinformation

6. Systematic performancemaximization7. Use of both financial and

nonfinancial measures of performance

Functional-Based Activity-Based


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The End

Chapter Two


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