Cost and management accounting systems & a bc costig
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Cost Management Systems and Activity-Based Costing Khalid Aziz ACCOUNTING OF ICMAP, CA..B,C & D, PIPFA, BBA, MBA, M.COM, B.COM STATISTICS OF MA-ECONOMICS 0322-3385752
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Transcript of Cost and management accounting systems & a bc costig
Cost Management Systemsand Activity-Based Costing
Khalid AzizACCOUNTING OF ICMAP, CA..B,C & D, PIPFA, BBA, MBA,
M.COM, B.COMSTATISTICS OF MA-ECONOMICS
0322-3385752
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Learning Objective 1
Describe the purposes of cost management systems.
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Cost Management System
A cost-management system (CMS) is a collection of tools and techniques thatidentifies how management’s decisions affect costs.
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What is Cost Accounting?
Cost accounting is that part of theaccounting system that measures costsfor the purposes of management decisionmaking and financial reporting.
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Learning Objective 2
Explain the relationships among cost, cost objective,cost accumulation, andcost allocation.
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Cost Accounting System
CostAccumulation
Collecting costs by some“natural” classificationsuch as materials or labor
CostAllocation
Tracing costs to one or more cost objectives
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Cost Accounting System
MACHININGDEPARTMENT
ACTIVITY ACTIVITY
FINISHINGDEPARTMENT
ACTIVITY ACTIVITY
RAW MATERIALCOSTS (METALS
CABINETS CABINETS
DESKS DESKS
TABLESTABLES
Cost Accumulation
Cost Allocationto Cost Objects:
1. Departments
2. Activities
3. Products
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Cost
A cost may be defined as a sacrifice or giving up of resources for a particular purpose.
Costs are frequently measured by the monetary units that must be paid for goods and services.
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Cost Objective
What is a cost object or cost objective?It is anything for which a separate measurementof costs is desired.
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Learning Objective 3
Distinguish among direct,indirect, and unallocated costs.
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Direct Costs
Direct costs can be identified specifically and exclusively with a given costobjective in an economicallyfeasible way.
What are direct costs?
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Indirect Costs
Indirect costs cannot be identifiedspecifically and exclusively with agiven cost objective in an economicallyfeasible way.
What are indirect costs?
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What Distinguishes Direct and Indirect Costs?
Managers prefer to classify costs as direct rather than indirect whenever it is “economically feasible” or “cost effective.”
Other factors also influence whether a cost is considered direct or indirect.
The key is the particular cost objective.
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Categories of Manufacturing Costs
Any raw material, labor, or other inputused by any organization could,in theory, be identified as adirect or indirect costdepending on thecost objective.
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Categories of Manufacturing Costs
All costs which are eventually allocated to products are classified as either…
1 direct materials,2 direct labor, or3 indirect manufacturing.
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Direct Material Costs...
– include the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way.
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Direct Labor Costs...
– include the wages of all labor that can be traced specifically and exclusively to the manufactured goods in an economically feasible way.
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Indirect Manufacturing Costs...
– or factory overhead, include all costs associated with the manufacturing process that cannot be traced to the manufactured goods in an economically feasible way.
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Product Costs...
– are costs identified with goods produced or purchased for resale.
Product costs are initially identified as part of the inventory on hand.
These costs, inventoriable costs, become expenses (in the form of cost of goods sold) only when the inventory is sold.
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Period Costs...
– are costs that are deducted as expenses during the current period without going through an inventory stage.
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Period or Product Costs
In merchandising accounting, insurance, depreciation, and wages are period costs (expenses of the current period).
In manufacturing accounting, many of these items are related to production activities and thus, as indirect manufacturing, are product costs.
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Period Costs – Merchandising and Manufacturing
In both merchandising and manufacturing accounting, selling and general administrative costs are period costs.
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Learning Objective 4
Explain how the financialstatements of merchandisersand manufacturers differbecause of the types of goodsthey sell.
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Financial Statement Presentation– Merchandising Companies
MerchandiseInventory
Sales
Cost of Goods Sold(an expense)
Selling andAdministrative
Expenses
Balance Sheet Income Statement
–
Equals Gross Margin
Equals Operating Income
–
Expiration
PeriodCosts
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Financial Statement Presentation– Manufacturing Companies
FinishedGoods
Inventory
Sales
Cost of Goods Sold(an expense)
Selling andAdministrative
Expenses
Balance Sheet Income Statement
–
Equals Gross Margin
Equals Operating Income
–
Expiration
PeriodCosts
DirectMaterial
Inventory
Work-in-Process
Inventory
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Costs and Income Statements
On income statements, the detailed reporting of selling and administrative expenses is typically the same for manufacturing and merchandising organizations, but the cost of goods sold is different.
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Cost of Goods Sold for a Manufacturer
The manufacturer’s cost of goods produced and then sold is usually composed of the three major categories of cost:
1 Direct materials2 Direct labor3 Indirect manufacturing
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Cost of Goods Soldfor a Retailer or Wholesaler
The merchandiser’s cost of goods sold is usually composed of the purchase cost of items, including freight-in, that are acquired and then resold.
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Learning Objective 5
Understand the maindifferences between traditionaland activity-based costingsystems and why ABC systemsprovide value to managers.
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Traditional Cost SystemAll
UnallocatedValue Chain
Costs
DirectMaterialResource
DirectLabor
Resource
AllIndirect
Resources
Products
DirectTrace
DirectTrace Cost
Driver
Unallocated
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Two-Stage Activity-BasedCost System
AllUnallocatedValue Chain
Costs
DirectMaterialResource
DirectLabor
Resource
IndirectResource
A
Products
DirectTrace
DirectTrace Activity
1
Unallocated
OtherDirect
Resources
IndirectResource
Z
Activity10
% % % %
CostDriver
CostDriver
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Activity-Based Costing
Understanding the relationships among activities, resources, costs, and cost drivers is the key to understanding ABC and how ABC facilitates managers’ understanding of operations.
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Example of Activities and Cost Drivers:Activities:Account billingBill verificationAccount iniquityCorrespondence
Cost Drivers:No. of lines No. of accountsNo. of labor hoursNo. of letters
Activity-Based Costing
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Learning Objective 6
Identify the steps involved in thedesign and implementationof an activity-basedcosting system.
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Designing and Implementing an Activity-Based Costing System
Determine cost ofactivities, resources,and related costdrivers.
Develop a process-basedmap representing the flowof activities, resources, andtheir interrelationships.
Step 1 Step 2
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Designing and Implementing an Activity-Based Costing System
Collect relevant data concerning costsand the physical flow of the cost-driverunits among resources and activities.
Step 3
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Designing and Implementing an Activity-Based Costing System
Calculate and interpret the new activity-based information.
Using an activity-based costing system toimprove the operations of an organizationis activity-based management (ABM).
Step 4
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Activity-Based Management
Activity-based management aims to improve the value received by customers and to improve profits by identifying opportunities for improvements in strategy and operations.
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Activity-Based Management
A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer.
In contrast, non-value-added costs are costs that can be eliminated without affecting a product’s value to the customer.
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Learning Objective 7
Use activity-based cost information to improve the operations of an organization.
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Using ABC Information
Activity-based management…
provides costs of value-added andnon-value-added activities.
improves managers’ understanding of operations.
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Learning Objective 8
Understand cost accounting’s role in a company’simprovement efforts acrossthe value chain.
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Cost Accounting andthe Value Chain
A good cost accounting system is critical toall value-chain functions from research anddevelopment through customer service.
