cost management systems - collections of tools and techniques that identify how management's decisions affect costs - includes, (1) cost information for strategic management decisions; (2) cost information for operational control; (3) and measures of inventory value and cost of goods sold for financial reporting to investors, creditors, and other external stakeholders.
CMS - what it is and what it provides
for strategic reasons, such as deciding on the optimal product and customer mix, choosing the value-chain functions to receive special focus or to outsource, and making investment decisions
What are some reasons why managers need accurate and timely cost information?
the costs of individual products, services, customers, and processes associated with value-chain functions.
For these decisions (management strategic decisions), managers want to know ___
by controlling costs.
Managers also strive for efficiency ___
the part of a CMS that measures costs for the purposes of management decision making and financial reporting
a sacrifice or giving up of resources for a particular purpose
anything for which decision makers desire a separate measurement of costs; also called a cost objective
Examples include customers, departments, territories, and activities such as processing orders or moving materials.
What are some examples of possible cost objects?
cost accounting system.
The cost data that managers use for decision making come from the __
cost accounting system
The __ is the most fundamental component of a cost management system.
cost accumulation and cost assignment
What two processes are typically included in a cost accounting system?
Collecting costs by some "natural" classification, such as materials or labor, or by activities performed such as order processing or machine processing.
Attaching costs to one or more cost objects, such as activities, processes, departments, customers, or products.
Costs that accountants can identify specifically and exclusively with a given cost object in an economically feasible way
Costs that accountants cannot identify specifically and exclusively with a given cost object in an economically feasible way
Assigning indirect costs to cost objects in proportion to the cost object's use of a particular cost-allocation base
Part and materials included in a product
___ are the most common types of direct costs.
that accountants can physically identify the amount of the costs related to a given cost object in an economically feasible way.
A key characteristic of direct costs is __
Physically identifying the amount of a direct cost that relates exclusively to a particular cost object.
Examples of indirect costs include facilities rental costs, depreciation on equipment, and many staff salaries.
What are some examples of indirect costs?
Examples are supplies such as tacks and glue in a furniture-making company and the cost of ink in a printing company.
What are some examples of indirect costs that are variable?
most depreciation and supervisors' salaries
What are some examples of indirect costs that are fixed?
most cost allocation bases are cost drivers; some measure of input or output that determines the amount of costs to be allocated to a particular cost object
an output measure that causes costs
allocated; cost driver
Whenever an accountant uses the term __, we know the related cost is an indirect cost assigned to a cost object using a cost allocation base (or a ___).
When the allocation base measures how much cost is caused by the cost objects.
When are allocated costs relevant for decision making?
(1) To predict the economic effects of strategic and operational control decisions; (2) To provide desired motivation and to give feedback for performance evaluation; (3) To compute income and asset valuations for financial reporting; (4) To justify costs or obtain reimbursement
What are the four purposes of cost allocation?
Managers need to predict the economic effects - both benefits and costs - of process improvement efforts, and they should be aware of all the consequences of their decisions, even consequences outside of their unit.
Expand on the first major reason for allocating costs.
Cost allocations influence management behavior and can help motivate managers to make decisions that are in the company's best interest, because companies often hold managers responsible for total costs that include allocated costs.
Expand on the second major reason for allocating costs.
Companies allocate costs to products to measure inventory costs for their balance sheets and cost of goods sold to their income statements.
Expand on the third major reason for allocating costs.
Sometimes organizations base prices directly on costs by specifying a price that includes reimbursement for costs plus some profit margin - in these instances, cost allocations directly determine the revenue received from a product or service.
Expand on the fourth major reason for allocating costs.
a group of individual costs that a company allocates to cost objects using a single cost-allocation base
(1) Accumulate indirect costs for a period of time into one or more cost pools; (2) Select an allocation base for each cost pool; (3) Measure the units of the cost-allocation base used for each cost object; (4) Determine the percentage of total cost-allocation base units used for each cost object; (5) Multiply the percentage in step 4 by the total costs in the cost pool to determine the cost allocated to each cost object
What is the five-step process of allocation?
allocate, apply, absorb, attribute, reallocate, assign, distribute, redistribute, load, burden, apportion, and reapportion
You may encounter terms such as __ being used interchangeably to describe the allocation of indirect costs to cost objects.
to leave such costs unallocated.
There are some costs that lack an identifiable relationship to a cost object, often it is best ___
costs that an accounting system records but does not allocate to any cost object
R&D, process design, legal expenses, accounting, information services, and executive salaries
What are some examples of possible unallocated costs?
manufacturing costs; product versus period costs; costs on the balance sheet; and costs on the income statement
What are the four attributes discussed in regards to aggregate measures of inventory value and cost of goods manufactured for external reporting to investors, creditors, and other external stakeholders?
__ are frequently the cost object in manufacturing operations.
(1) direct material, (2) direct labor, or (3) indirect production costs
How do manufacturing companies classify production costs?
include the acquisition costs of all materials that a company identifies as a part of the manufactured products and that it can trace to the products in an economically feasible way
minor items, such as tacks or glue; the cost of tracing these items is greater than the possible benefit of having more precise product costs
Direct materials often do not include __; because __
include the wages, and sometimes benefits, paid to employees that a company can trace specifically and exclusively to the manufactured goods in an economically feasible way
no direct labor costs; all workers may spend time overseeing numerous products; economically infeasible to physically trace any labor cost directly to specific products
In highly automated factories with a flexible workforce, there may be __, because ___, making it ____
also called indirect manufacturing costs, factory overhead, factory burden, or manufacturing overhead - include all costs associated with the production process that a company cannot trace to products or services in an economically feasible way
indirect production costs
many labor costs, such as that of janitors, forklift truck operators, plant guards, and storeroom clerks and others such as power, supplies, supervisory salaries, property taxes, rent, insurance, and depreciation
What are some examples of indirect production costs?
its production costs
What must a company include in its financial statements for external financial reporting purposes?
The costs appear on both the income statement, as cost of goods sold, and on the balance sheet, as inventory amounts.
Where do the production costs appear on the financial statements?
costs identified with products manufactured or purchased for resale; also called inventoriable costs
Because these costs first become part of the inventory.
Why are product costs also called inventoriable costs?
inventoriable costs; COGS
These ___ become expenses in the form of ___ when the company sells the inventory.
become expenses during the current period without becoming part of inventory
___ are associated with nonproduction value-chain functions (research and development, design, marketing, distribution, and customer service).
Accounting information systems accumulate these costs by departments, such as R&D, advertising, and sales.
How are period costs accumulated?
Most firms' financial statements report these costs as selling and administrative expenses.
How are period costs usually reported?
___ do not become a part of the reported inventory cost of the manufactured products for financial reporting purposes.
the composition of product costs.
The only accounting difference between manufacturing and merchandising companies is in ____
account for period costs the same.
Although merchandising and manufacturing companies differ in how they account for product costs, they ___
sales - COGS (only includes purchases) = gross margin - period costs (selling and administrative expenses) = operating income
What's the income statement formula for merchandising companies?
sales - COGS (direct materials used + direct labor + indirect production) = gross margin - period costs (selling and administrative expenses) = operating income
What's the income statement formula for manufacturing companies?
direct materials, direct labor, and indirect productions costs
What three major categories usually compose the COGS for manufacturing companies?
purchase cost of items, including freight in, that are acquired and then resold
What is the COGS for merchandise companies (retailers or wholesalers) composed of?
a broad term that describes the amount paid for an activity, product, or service
specifically denote all costs deducted from revenue on an income statement in a given period
All costs eventually become an expense
What do all costs eventually become?
selling and administrative costs
What kinds of costs become expenses immediately in all types of companies?
often use a single cost pool for all indirect production costs with labor cost or labor hours as a cost-allocation base
traditional costing systems
a system that first accumulates indirect resource costs for each of the activities of a particular planet, department, value-chain function, or other cost objects that require that activity
activity-based (ABC) system
Because traditional systems often focus on simply measuring inventory values for financial reporting purposes, and GAAP does not allow companies to include nonproduction costs in the inventory value of a product.
Why do traditional systems generally assign only production costs - and not the costs of other value-chain functions - to the products?
a schematic diagram that captures the interrelationships among cost objects, activities, and resources
using the output of an activity-based cost accounting system to aid strategic decision making and to improve operational control of an organization
activity-based management (ABM)
the cost of an activity that a company cannot eliminate without affecting a product's value to the customer
costs that a company can eliminate without affecting a product's value to the customer
Activities such as handling and storing inventories, transporting partly finished products from one part of the plant to another, and changing the setup of production-line operations to produce a different model of the product
What are some examples of non-value-added costs?
the continuous process of comparing products, services, and activities to the best industry standards
(1) Determine the key components of the activity-based cost accounting system; (2) Determine the relationships among cost objects, activities, and resources; (3) Collect relevant data concerning costs and the physical flow of the cost-driver units among resources and activities; (4) Calculate and interpret the new activity-based cost information
What are the four steps in designing an activity-based costing system?
cost objects, key activities, resources, and related cost drivers
What are the key components of an activity-based cost accounting system?
a company using a perpetual system makes an entry to record cost of goods sold and to reduce inventory each time a sale is made
a company using a perpetual system does not determine cost of goods sold until the end of the period
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold
What's the basic COG formula for the periodic system?