MANAGEMENT ACCOUNTING

AGUS SISWANDI 01153056

Chapter 1 -

Chapter Two

Basic Management Accounting Concepts

Chapter 1 -

Learning Objectives

Explain the cost assignment process. Define tangible and intangible products and explain why there are different product cost definitions.

Chapter 1 -

Learning Objectives (continued)

Prepare income statements for manufacturing and service organizations. Explain the differences between functional-based and activity-based management accounting systems.

Chapter 1 -

Basic Cost Concepts

Cost is the cash or cash-equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization. Opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another.
Example: Wages or salary foregone by attending college instead of working.

An expense is an expired cost or a cost used up in the production of revenues.

Example: Cost of materials in a product that was sold.
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Basic Cost Concepts (continued)

A cost object is any item such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned.
Example: A bicycle is a cost object when you are determining the cost to produce a bicycle.

An activity is a basic unit of work performed within an organization.

Example: Setting up equipment, moving materials, maintaining equipment, designing products, etc.

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Basic Cost Concepts (continued)

Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a cause-andeffect relationship. Direct costs are those costs that can be easily and accurately traced to a cost object.
Example: The salary of a supervisor of a department, where the department is defined as the cost object.

Indirect costs are those costs that cannot be easily and accurately traced to a cost object.
Example: The salary of a plant manager, where departments within the plant are defined as the cost objects.
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Methods Of Tracing
Tracing is the actual assignment of costs to a cost object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways:
Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object. Driver tracing is the use of drivers to assign costs to cost objects. Drivers are observable causal factors that measure a cost objects resource consumption.

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Cost Assignment Methods

Cost of Resources

Direct Tracing

Driver Tracing

Allocation

Physical Observation

Causal Relationship

Assumed Relationship

Cost Objects
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Some Activities with Potential Activity Drivers

Activity
Setting-up equipment Ordering materials Drilling holes Redesigning products Paying bills Inspecting finished goods

Potential Activity Driver

Number of setups Number of purchase orders Number of machine hours Number of engineering hours Number of invoices Number of batches produced

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Interface of Services with Management Accounting

1. Intangibility 2. Perishability 3. Inseparability 4. Heterogeneity

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Intangibility
Impact on Management Accounting
No Inventories.

Derived Properties
Services cannot be stored.

No patent protection.
Cannot display or communicate services. Price difficult to set.

Strong ethical code.*

Demand for more accurate cost assignment.*

*Many of these effects are also true of tangible products.

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Perishability
Impact on Management Accounting

Derived Properties

Service benefits expire quickly. Services may be repeated often for one customer.

No inventories. Need for standards and consistent high quality.*

*Many of these effects are also true of tangible products.

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Inseparability
Impact on Management Accounting
Costs often accounted for by customer type.* Demand for measurement and control of quality to maintain consistency.*

Derived Properties

Customer directly involved with production of service. Centralized mass production of services difficult.

*Many of these effects are also true of tangible products.

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Heterogeneity
Impact on Management Accounting
Productivity and quality measurement and control must be ongoing.*
Total quality management critical*

Derived Properties

Wide variation in service product possible.

*Many of these effects are also true of tangible products.

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Product Costing Definitions

Value-Chain Product Costs Research and Development Operating Product Costs Traditional Product Costs

Production Marketing
Customer Service

Production Marketing
Customer Service

Production

Pricing Decisions Product-Mix Decisions Strategic Profitability Analysis

Strategic Design Decisions Tactical Profitability Analysis

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External Financial Reporting

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Production Costs
Direct materials are those materials that are directly traceable to the goods or services being produced.
Example: The cost of tires on an automobile.

Direct labor is the labor that is directly traceable to the goods or services being produced.
Example: Wages of assembly-line workers.

Overhead are all other production costs.

Example: Plant depreciation, utilities, property taxes, indirect materials, indirect labor, etc.
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Production Costs (continued)

Prime Cost =
Direct Materials Costs + Direct Labor Costs

Conversion Cost =
Direct Labor Costs + Overhead Costs

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Nonproduction Costs
Marketing (selling) costs are the costs necessary to market, distribute, and service a product or service.
Example: Commissions, storage costs, and freight

Administrative costs are the costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production.
Example: Legal fees, salary of the chief executive officer.

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Statement of COGM
Direct Materials Used: Beginning inventory Add: Purchases Materials available Less: Ending inventory Direct Labor Manufacturing overhead: Indirect labor Depreciation Rent Utilities Property taxes Maintenance Total manufacturing costs added Add: Beginning work in process Total manufacturing costs Less: Ending work in process Cost of goods manufactured Chapter 1 $200,000 450,000 $650,000 50,000

$ 600,000 350,000

$122,500 177,500 50,000 37,500 12,500 50,000

450,000 $1,400,000 200,000 $1,600,000 400,000 $1,200,000 ======== 20

Income Statement for a Manufacturing Organization

Sales Less cost of goods sold: Beginning finished goods inventory Add: Cost of goods manufactured Cost of goods available for sale Less: Ending finished goods inventory Gross margin Less operating expenses: Selling expenses Administrative expenses Income before taxes $2,800,000
$ 500,000 1,200,000 $1,700,000 300,000

1,400,000 $1,400,000

$ 600,000 300,000

900,000 $ 500,000 ========

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Chapter 1 -

Income Statement for a Service Organization

Sales Less expenses: Cost of services sold: Beginning work in process Service costs added: Direct materials Direct labor Overhead Total Less: Ending work in process Gross margin Less operating expenses: Selling expenses Administrative expenses Income before taxes $300,000 $ $ 40,000 80,000 100,000 5,000

220,000 $225,000 10,000

215,000 $ 85,000

$ 8,000 22,000

30,000 $ 55,000 =======

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Chapter 1 -

Comparison of FBM and ABM Accounting Systems

Functional-Based
1. Unit-based drivers
2. Allocation-intensive 3. Narrow and rigid product costing 4. Focus on managing cost 5. Sparse activity information 6. Maximization of individual unit performance 7. Use of financial measures of performance

Activity-Based
1. Unit- and nonunit-based drivers
2. Tracing-intensive 3. Broad, flexible product costing 4. Focus on managing activities 5. Detailed activity information 6. Systemwide performance maximization 7. Use of both financial and nonfinancial measures of performance

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Functional-Based Management Model

Cost View

Resources

Operational View

Efficiency Analysis

Functions

Performance Analysis

Products
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Activity-Based Management Model

Cost View

Resources

Process View

Driver Analysis Why?

Activities What? Products and Customers

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Performance Analysis How Well?

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End of Chapter 2

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