m9 CHP 04 9 Textbook Powerpoint

Cost Management Systems and ActivityBased Costing
Chapter 4
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4-1
Learning Objective 1
Describe the purposes of cost management systems.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Cost Management System

A cost management system (CMS) is a collection of tools and techniques that identifies how managements decisions affect costs.
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Cost Management System

The primary purposes of a cost management system are to provide...
cost information for strategic management decisions,

cost information for operational control, and aggregate measure of inventory value and cost of goods manufactured.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4-4
Explain the relationships among cost, cost objective, cost accumulation, and cost assignment.
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Cost Accounting Systems

Cost accounting is that part of the cost management system that measures costs for the purposes of management decision making and financial reporting.
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Cost Accounting System

Cost accumulation: Collecting costs by some natural classification such as materials or labor
Cost assignment:
Tracing costs to one or more cost objectives
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Cost Accounting System

Cost accumulation
Cost allocation to cost objects 1. Departments 2. Activities
Material costs (metals)
Machining Department Activity Activity Activity Activity Cabinets
Finishing Department Activity Activity Activity Activity Cabinets Desks
3. Products
Desks Tables
Tables
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Cost
A cost is 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 measurement of costs is desired.

Customers Departments
Processing orders
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 4 - 10
Distinguish among direct, indirect, and unallocated costs.
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Direct Costs
What are direct costs? Direct costs can be identified specifically and exclusively with a given cost objective in an economically feasible way.
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Indirect Costs
What are indirect costs?
Indirect costs cannot be identified specifically and exclusively with a given cost objective in an economically feasible way.
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Direct, Indirect, and Unallocated Costs

Sales Cost of goods sold: Direct material Indirect manufacturing Total cost of goods sold Gross profit Operating expenses: Sales salaries Distribution Total operating expenses Contribution to corporate expenses and profit $470,000 $120,000 110,000 $230,000 $240,000 $ 47,000 30,000 $ 77,000 $163,000
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Cabinets Tables Chairs
Cost type, Assignment method
$470,000 120,000 110,000

$230,000 $240,000 $ 47,000 30,000 $ 77,000 $163,000
$280,000 50,000 45,000

95,000 185,000 $ 28,000 12,000 $ 40,000 $145,000
$100,000 30,000 30,000

80,000 40,000 $ 10,000 8,000 $ 18,000 $ 22,000
$90,000 40,000 35,000

75,000 15,000 $ 9,000 10,000 $19,000 $(4,000)
Direct, Direct trace Indirect, Allocation machine hours
Direct, Direct trace Indirect, Allocation weight
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Managers prefer to classify costs as direct rather than indirect whenever it is economically feasible or cost effective.
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Categories of Manufacturing Costs

Direct material costs
Direct labor costs
Indirect production costs
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Direct Material Costs

It includes the acquisition costs of all materials that a company identifies as a part of the manufactured goods. These costs are identified in an economically feasible way.
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Direct Labor Costs
These 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 Production Costs

Manufacturing overhead includes all costs associated with the production process that the company cannot be traced to the manufactured goods in an economically feasible way.
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Explain how the financial statements of merchandisers and manufacturers differ because of the types of goods they sell.
Product Costs and Period Costs

Product costs are costs identified with goods produced or purchased for resale. Product costs first become part of the inventory on hand. These costs, inventoriable costs, become expenses only when the inventory is sold.
Product Costs and Period Costs

Period costs are deducted as expenses during the current period without going through an inventory stage.
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Financial Statement Presentation Merchandising Companies

Balance Sheet
Income Statement
Sales
Merchandise inventory Expiration Cost of goods sold (an expense) Equals gross margin
Period costs
Selling and administrative expenses Equals operating income
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Financial Statement Presentation Manufacturing Companies

Balance Sheet
Income Statement
Sales
Direct material inventory
Expiration Cost of goods sold (an expense) Equals gross margin
Work-inprocess inventory
Finished goods inventory
Period costs
Selling and administrative expenses Equals operating income
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Current Asset Sections of Balance Sheets

Manufacturer
Cash Receivables Subtotal Finished goods Work in process Direct material Total inventories Other current assets Total current assets $ 4,000 25,000 $ 29,000 32,000 22,000 23,000 $ 77,000 1,000 $107,000
Retailer or Wholesaler
Cash Receivables $ 4,000 25,000
Merchandise inventories Other current assets Total current assets
77,000 1,000 $107,000
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Income Statement Presentation of Costs for a Manufacturer

The manufacturers cost of goods produced and then sold is usually composed of the three major categories of cost: Direct materials Direct labor
Indirect manufacturing
Income Statement Presentation of Costs for a Retailer

The merchandisers 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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Understand the main differences between traditional and activity-based costing (ABC) systems and why ABC systems provide value to managers.
Traditional Costing System and Statement of Operating Income

All indirect resources $220,000 Cost driver (direct labor hours All unallocated value chain costs $100,000
Direct materials for pen casings $22,500
Direct labor for pen casings $135,000
Direct materials for cell phone casings $12,000
Direct labor for cell phone casings $15,000 Unallocated $100,000

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Sales $360,000
Sales $80,000
Traditional Costing System and Statement of Operating Income

Traditional Cost Allocation System
Pen Casings Cell Phone Casings
Sales Direct materials Direct labor Indirect manufacturing Gross profit Corporate expenses Operating loss Gross profit margin
$440,000 34,500 150,000 220,000 $ 35,500 100,000 ($ 64,500)
$360,000 22,500 135,000 198,000 $ 4,500
$80,000 12,000 15,000 22,000 $31,000
1.25%
38.75%
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Activity-Based Cost System

Plant & machinery $80,000 60%
Processing activity $76,000
Cost driver (dir. labor hrs.)
20% 40%
Production support $140,000 80%

Production support activity $144,000
All unallocated value chain costs $100,000
Cost driver (distinct parts)
Direct materials for pen casings $22,500
Direct labor for pen casings $135,000
Direct materials for cell phone casings $12,000
Direct labor for cell phone casings $15,000 Unallocated $100,000

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Sales $360,000
Sales $80,000
Activity-Based Cost Allocation System

External Reporting Internal Purposes
Pen Casings
Sales Direct materials Direct labor Processing activity Production support activity Gross profit Corporate expenses Operating loss Gross profit margin $440,000 34,500 150,000 143,000 77,000 $ 35,500 100,000 ($ 64,500) 8.07% $360,000 22,500 135,000 128,700 15,400 $ 58,400
Cell Phone Casings

$80,000 12,000 15,000 14,300 61,600 ($22,900)
16.22%
(28.63%)
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Activity-Based Management
ABM is using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control.
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Activity-Based Management
A value-added cost is the cost of an activity that cannot be eliminated without affecting a products value to the customer. In contrast, nonvalue-added costs are costs that can be eliminated without affecting a products value to the customer.
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Benefits of Activity-Based Costing and Management Systems

ABC systems are adopted for many reasons: set a product mix and estimate profit margins determine the consumption of a companys shared resources
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Benefits of Activity-Based Costing and Management Systems

keep pace with new product techniques and technological change decrease the costs associated with bad decisions take advantage of reduced cost of ABC systems due to computer technology
Apply the process used to design a cost accounting system that includes activity-based costing.
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Design of an Activity-Based Cost Accounting System

Traditional Cost Accounting System
Maintenance costs Shipping costs Administrative costs Quality control costs Reactor hours
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- - Products 1 - 20
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Activity-based Cost Accounting System
Preprocess preparation activity Preparation hours P P R T 1 F
Reactor processing activity

Processing hours R W
Thin-tank processing activity

Processing hours T
Filtration process activity

Processing hours F P R T 20
Waste disposal activity

Batches W F W
- - Products 1 - 20
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Determine the key components of the cost accounting system.
Cost objectives Key activities Resources Related cost drivers
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Activity Cost Driver
Account billing Bill verification Account inquiry Correspondence Other activities
Number or printed pages Number of accounts verified Number of inquiries Number of letters Number of printed pages
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Determine the relationships among cost objectives, activities, and resources.
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Basic Concepts for Process Maps
Resource A Activity 1 Product T Activity 2 Product U Resource B Activity 3 Product V Product W Resource C Activity 4 Product X
Example 1. Resource A is an indirect cost with respect to activities and products.
Example 3. Example 2. Resource B is a Resource C is direct cost with respect to a direct cost with activity 3 but an indirect cost respect to activity with respect to both products. 4 and product X.
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Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities.
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Calculate and interpret the new activity-based information.
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Use activity-based cost information to make strategic and operational control decisions.
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Strategic Decisions, Operational Cost Control, and ABM

Outsourcing
Reducing operating costs

Identifying nonvalue-added activities Improving both strategic and operational decisions
Objective 8
Understand why multistage ABC systems give more value than two-stage ABC systems for strategic planning and operational control. (Appendix 4)
Key Attributes of Multistage ABC Systems

There are more than two stages of allocation. Cost behavior of resources is considered. There is a greater use of operational information such as cost drivers and consumption rates.
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End of Chapter 4
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Cost Management Systems and ActivityBased Costing

Describe the purposes of cost management systems.

Cost Management System

Cost Management System

cost information for strategic management decisions,

Cost Accounting Systems

Cost Accounting System

Tracing costs to one or more cost objectives

Cost Accounting System

Material costs (metals)

Machining Department Activity Activity Activity Activity Cabinets

Finishing Department Activity Activity Activity Activity Cabinets Desks

It is anything for which a separate measurement of costs is desired.

Distinguish among direct, indirect, and unallocated costs.

Direct, Indirect, and Unallocated Costs

Direct, Indirect, and Unallocated Costs

Cost type, Assignment method

$470,000 120,000 110,000

$280,000 50,000 45,000

$100,000 30,000 30,000

$90,000 40,000 35,000

Direct, Direct trace Indirect, Allocation machine hours

Direct, Direct trace Indirect, Allocation weight

Direct, Indirect, and Unallocated Costs

Categories of Manufacturing Costs

Direct labor costs

Indirect production costs

Direct Material Costs

Direct Labor Costs

Indirect Production Costs

Product Costs and Period Costs

Product Costs and Period Costs

Financial Statement Presentation Merchandising Companies

Selling and administrative expenses Equals operating income

Financial Statement Presentation Manufacturing Companies

Direct material inventory

Expiration Cost of goods sold (an expense) Equals gross margin

Finished goods inventory

Selling and administrative expenses Equals operating income

Current Asset Sections of Balance Sheets

Merchandise inventories Other current assets Total current assets

77,000 1,000 $107,000

Income Statement Presentation of Costs for a Manufacturer

Income Statement Presentation of Costs for a Retailer

Traditional Costing System and Statement of Operating Income

Direct materials for pen casings $22,500

Direct labor for pen casings $135,000

Direct materials for cell phone casings $12,000

Direct labor for cell phone casings $15,000 Unallocated $100,000

Traditional Costing System and Statement of Operating Income

$440,000 34,500 150,000 220,000 $ 35,500 100,000 ($ 64,500)

$360,000 22,500 135,000 198,000 $ 4,500

$80,000 12,000 15,000 22,000 $31,000

Activity-Based Cost System

Production support $140,000 80%

All unallocated value chain costs $100,000

Cost driver (distinct parts)

Direct materials for pen casings $22,500

Direct labor for pen casings $135,000

Direct materials for cell phone casings $12,000

Direct labor for cell phone casings $15,000 Unallocated $100,000

Activity-Based Cost Allocation System

Cell Phone Casings