Professional Documents
Culture Documents
CHAPTER
Basic
Management
Accounting
Concepts
2 -2
Objectives
Objectives
1. Describe the cost assignment process.
After
After studying
studying this
this
2. Define tangible and intangible products and
chapter,
chapter, you
you should
should
explain why there are different product cost
be
be able
able to:
to:
definitions.
3. Prepare income statements for manufacturing and
service organizations.
4. Outline the differences between functional-based
and activity-based management accounting
systems.
2 -3
Cost
Costisisthe
thecash
cashor
orcash-
cash-
Exactly
Exactlywhat
whatisismeant
meant equivalent
equivalent value sacrificedfor
value sacrificed for
by goods
goodsandandservices
servicesthat
thatisis
by“cost”?
“cost”?
expected
expectedto tobring
bringaacurrent
currentor or
future benefit to the organization.
future benefit to the organization.
IIsee…
see… It’s
It’saa
dollar
dollarmeasure
measureof of
the
theresources
resourcesused
used
totoachieve
achieveaagiven
given
benefit.
benefit.
2 -4
Cost
Cost Assignment
Assignment Methods
Methods
Cost of Resources
Direct Driver
Allocation
Tracing Tracing
Cost Objects
Interface of Services with 2 -9
Management Accounting
Services
Services cannot
cannot be be stored.
stored.
No
No patent
patent protection.
protection.
1. Intangibility Cannot
Cannot display
display or
or expire
Services
Services benefits
benefits expire
communicate
communicate services.
services.
quickly.
Customer
quickly.
Customer directly
directly
2. Perishability Price
Price difficult
difficult to
to set.
set.
Services
involved
Services may
involvedmay be
withbe repeated
with repeated
often
often for
for one
production
productiononeof customer.
of service.
customer.
service.
3. Inseparability
Centralized
Centralized mass
mass
Wide
Wide variation
variation in
in
production
production of services
of services
4. Heterogeneity service products
service products
difficult.
difficult.
possible.
possible.
Derived
Derived Properties
Properties
Interface of Services with 2 -10
Management Accounting
No
No inventories.
inventories.
Strong
Strong ethical
ethical code.
code.
1. Intangibility Price
Price difficult
difficult to to set.
set.
Demand
No
Demand
No for
inventories.
for more
inventories.more accurate
accurate
Costs
Costs often
often accounted
accounted
2. Perishability cost
Need
cost
Need assignments.
for standards
assignments.
for standardstype.and
and
for by customer
for by customer type.
consistent
consistent high
high quality.
quality.
Demand
Productivity
Demand
Productivityfor
for measure-
and quality
measure-
and quality
3. Inseparability
ment
ment and
and control
measurement
measurement andof
and
control of
quality
control
quality
control to
must
to maintain
be
maintain
must be
4. Heterogeneity
consistency.
ongoing.
consistency.
ongoing.
Impact on Total
Total
Management quality
quality manage-
manage-
Impact on Management
Accounting ment
ment critical.
critical.
Accounting
2 -11
Design
Service Develop
Distribute Produce
Market
Product Costing Definitions 2 -13
Marketing Marketing
Customer Customer
Service Service
Pricing Decisions Strategic Design Decisions External Financial
Product-Mix Decisions Tactical Profitability Reporting
Strategic Profitability Analysis
Analysis
2 -14
Noninventoriable
Noninventoriable (period)
(period) costs
costs
are
are expensed
expensed inin the
the period
period in
in
which
which they
they are
are incurred.
incurred.
Prime Cost :
Direct Materials Costs + Direct Labor Costs
Conversion Cost:
Direct Labor Costs + Overhead Costs
2 -19
External
Financial
Statements
Manufacturing Organization 2 -20
2-20
Income Statement
For the Year Ended December 31, 2004
Sales $2,800,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add: Cost of goods manufactured 1,200,000
Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory 300,000 1,400,000
Gross margin $1,400,000
Less operating expenses:
Selling expenses $ 600,000
Administrative expenses 300,000 900,000
Income before taxes $ 500,000
Statement of Cost of Goods Manufactured 2 -21
2-21
Income Statement
For the Year Ended December 31, 2004
Sales $300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000
Service costs added:
Direct materials $ 40,000
Direct labor 80,000
Overhead 100,000 220,000
Total $225,000
Less: Ending work in process 10,000 215,000
Gross margin $ 85,000
Less operating expenses:
Selling expenses $ 8,000
Administrative expenses 22,000 30,000
Income before income taxes $ 55,000
Functional-Based
Functional-Based
2 -24
Management
Management Model
Model
Cost View
Resources
Operational View
Efficiency Performance
Functions
Analysis Analysis
Products
Activity-Based
Activity-Based
2 -25
Management
Management Model
Model
Cost View
Resources
Process View
Driver Performance
Activities
Analysis Analysis
Why? What? How Well?
Products and
Customers
2 -26
Functional-Based Activity-Based
1. Unit-based drivers 1. Unit- and nonunit-based
drivers
2. Allocation-intensive 2. Tracing intensive
Chapter Two
The
The End
End
2 -28