PowerPoint Presentation by Gail B. Wright Professor Emeritus of Accounting Bryant University Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. MANAGEMENT ACCOUNTING8TH EDITIONBYHANSEN & MOWEN2 BASIC MANAGEMENT ACCOUNTING CONCEPTSSTUDENT EDITION

LEARNING OBJECTIVESDescribe the cost assignment process.Define tangible, intangible products, & explain why there are different product cost definitions.Prepare income statements for manufacturing & service organizations.Outline differences between functional-based and activity-based management accounting systems.

COST: DefinitionCost is the cash or cash-equivalent value sacrificed for goods and services that is expected to bring a current or future benefit to the organization.11Hansen & Mowen, 2007, p. 35.LO 1

OPPORTUNITY COST: DefinitionOpportunity cost is the benefit given up or sacrificed when one alternative is chosen over another.22Hansen & Mowen, 2007, p. 35.LO 1

COST OBJECT: DefinitionA cost object is any item such as product, customer, project, activity & so on, to which costs are measured and assigned.33Hansen & Mowen, 2007, p. 35.LO 1

Is there such a thing as TRUE COST?NO. It is better to be approximately correct than precisely inaccurate.LO 1

COST ASSIGNMENTCause & effect relationship when assigning costs to cost objectsDirect costs are easily traceableIndirect costs not so easily traceableLO 1

Can you name 3 ways of assigning product costs?Direct tracingDriver tracingIndirect costsLO 1

Tangible products are goods produced by converting raw materials. Example: televisions, hamburgersServices are intangible products. Example: dental or medical care.LO 2

DIFFERENCESServices differ from products on 4 dimensionsIntangibilityPerishabilityInseparabilityHeterogeneityLO 2

COST ANALYSIS & INTERNAL VALUE CHAINDifferent costs for different purposesStrategic profitability analysisUses all costs & revenues associated with productShort run (tactical) profitability analysisUses production, marketing, distributing & servicing, especially for special ordersExternal financial reportingUses only production costsLO 2

INTERNAL VALUE CHAINEXHIBIT 2-3LO 2STRATEGIC PROFITABILITY ANALYSIS

INTERNAL VALUE CHAINEXHIBIT 2-3LO 2TACTICAL PROFITABILITY ANALYSIS

INTERNAL VALUE CHAINEXHIBIT 2-3LO 2EXTERNAL FINANCIAL REPORTING

PRODUCT COSTSProduction costs includeDirect materialsTraceable to goods, services producedDirect laborTraceable to goods, services producedOverheadAll other production costsLO 2

What is cost of goods manufactured?Cost of goods manufactured is the total of production costs (direct materials & labor & overhead) for the period.LO 3

INCOME STATEMENT:Manufacturing FirmEXHIBIT 2-5LO 3

How does the income statement for a service company differ from that of a manufacturing company?A service company doesnt have the manufacturing costs associated with producing a product.LO 3

Can you name 2 ways to design a management accounting system?Functional based accounting (FBM) & activity based accounting (ABM) are 2 ways to design a management accounting system.LO 4

How does an FBM system differ from an ABM system?FBM & ABM systems differ in the ways they assign costs and how they assign responsibility for efficient operations.LO 4

MANAGEMENT ACCOUNTING SYSTEMS (FBM)Functional-based management system (FBM)Cost viewOnly uses drivers related to the production function to assign costsDirect materials, direct labor, machine hoursOperational efficiency viewHolds managers of each function (e.g., engineering) responsible for controlling costs to derive operating efficiencyLO 4

MANAGEMENT ACCOUNTING SYSTEMS (ABM)Activity-based management system (ABM)Cost viewDriver analysis, activity analysis, performance evaluationA tracing-intensive systemOperational efficiency viewFocuses on managing activities and improving values for operational efficiencyLO 4

COMPARING FBM & ABMEXHIBIT 2-10LO 4

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