Introduction to Management Accounting
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Introduction to Management
Accounting
Chapter 4
Cost Management Systems
and Activity-Based Costing
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Learning
Objective 1
Cost Management System
A cost management system (CMS) is
a collection of tools and techniques
that identifies how managements
decisions affect costs.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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
measure of inventory value and cost
3 of goods sold for financial reporting.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Learning
Objective 2
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
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Cost Accounting System
Cost
accumulation
Cost assignment
to cost objects
Departments
Activities
Products
Material costs
(metals)
Machining Department Finishing Department
Activity Activity
Activity Activity
Activity Activity
Activity Activity
Cabinets
Cabinets
Desks
Tables
Desks
Tables
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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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.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Cost Object
A cost object (objective) is anything for which
A separate measurement of costs is desired.
Customers
Departments
Service
Processing orders
Product
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Learning
Objective 3
Direct, Indirect, and Unallocated
Costs
Direct costs can be identified specifically and exclusively
with a given cost objective in an economically feasible way.
ndirect costs cannot be identified specifically and exclusively
With a given cost objective in an economically feasible way.
Unallocated costs are recorded but
not assigned to any cost object.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Learning
Objective 4
Cost Allocation
ost allocation is used to assign indirect costs to cost objects, in proportio
to the cost objects use of a particular cost-allocation base.
A cost-allocation base is some measure of input or output that
determines the amount of cost to be allocated to a particular cost object
An ideal cost-allocation base would measure how much
of the particular cost is caused by the cost objective.
Note the similarity of this definition to that of a cost driver
an output
measure that causes costs. Therefore, most allocation
bases are cost drivers.
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Cost Pool
A cost pool is 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.
2. Select an allocation base for each cost pool, preferably a cost driver,
that is, a measure that causes the costs in the cost pool.
3. Measure the units of the cost-allocation base used for each cost
object and compute the total units used for all cost objects.
4. Determine the percentage of total cost-allocation base units
used for each cost object.
5. Multiply the percentage by the total costs in the cost pool to
determine the cost allocated to each cost object.
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Cost Allocation
Direct costs are physically traced to a cost object.
Indirect costs are allocated using a cost-allocation base.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Learning
Objective 5
Direct Material Costs
Direct materials include 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
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 Production Costs (Manufacturing
Overhead)
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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Product Costs
Product costs are costs identified with goods
produced or purchased for resale.
These costs first become part of the
inventory on hand, sometimes called
inventoriable 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
Period costs are deducted as expenses
during the current period without
going through an inventory stage.
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Learning
Objective 7
Traditional Costing System
All
All
Indirect
Indirect
Resources
Resources
$220,000
$220,000
All
AllUnallocated
Unallocated
Value
ValueChain
Chain
Costs
Costs
$100,000
$100,000
Cost Driver
[Direct Labor
Hours]
Direct
Direct
Labor
LaborFor
For
Cell
CellPhone
Phone
Casings
Casings
$15,000
$15,000
Unallocated
Unallocated $00,000
$00,000
Sales
Sales $80,000
$80,000
Direct
Direct
Materials
Materials
For
ForPen
Pen
Casings
Casings
$22,500
$22,500
Direct
Direct
Direct
Direct Materials
MaterialsFor
For
Labor
Cell
Labor
Cell
For
Phone
ForPen
Pen
Phone
Casings
Casings
Casings
Casings
$135,000
$12,000
$135,000 $12,000
Sales
Sales $360,000
$360,000
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Traditional Costing System
Statement of Operating Income
Traditional Cost Allocation System
Pen
Casings
Cell Phone
Casings
Sales
$440,000 $360,000 $80,000
Direct materials
34,500
22,500
12,000
Direct labor
150,000
135,000
15,000
Indirect manufacturing 220,000
198,000
22,000
Gross profit
$ 35,500 $ 4,500 $31,000
Corporate expenses
100,000
Operating loss
($ 64,500)
Gross profit margin
8.07%
1.25%
38.75%
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ABC System
Engineers
Engineersand
and
CAD
Equipment
CAD Equipment
$40,000
$40,000
20%
75%
80%
25%
Processing
Activity
$135,000
+ 8,000
$143,000
Production Support
Activity
$45,000
+32,000
$77,000
Cost Driver
Cost Driver
[Direct Labor Hours]
Direct
Direct
Labor
Labor
For
ForPen
Pen
Casings
Casings
$135,000
$135,000
[Distinct Parts]
Direct
Direct
Materials
MaterialsFor
For
Cell
Cell
Phone
Phone
Casings
Casings
$12,000
$12,000
Sales
Sales $80,000
$80,000
Direct
Direct
Materials
Materials
For
ForPen
Pen
Casings
Casings
$22,500
$22,500
All
AllUnallocated
Unallocated
Value
ValueChain
ChainCosts
Costs
$100,000
$100,000
Direct
Direct
Labor
LaborFor
For
Cell
Phone
Cell Phone
Casings
Casings
$15,000
$15,000
Unallocated
Unallocated $00,000
$00,000
Plant
Plantand
and
Machinery
Machinery
$180,000
$180,000
Sales
Sales $360,000
$360,000
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Activity-Based Cost Allocation
System
Internal Purposes
Cell
Pen
Reportin
Phone
g
Casin
Casing
gs
s
Sales
$440,000 $360,000 $80,000
Direct materials
34,500
22,500
12,000
Direct labor
150,000 135,000 15,000
Processing activity
143,000
128,700
14,300
Production support activity
77,000
15,400 61,600
Gross profit
$ 35,500 $ 58,400
($22,900)
Corporate expenses
100,000
Operating loss
($ 64,500)
Gross profit margin
8.07%
16.22%
(28.63%)
External
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The End
End of Chapter 4
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