2 -1

CHAPTER
Basic
Management
Accounting
Concepts
 2 -2

Objectives
Objectives
1. Describe the cost assignment process.
2. Define tangible and intangible products and
explain why there are different product cost
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
Cost isis the
the cash
cash or or cash-equivalent
cash-equivalent value
value
sacrificed
sacrificed forfor goods
goods andand services
services that
that isis
IIexpected
see…
see… It’s
expected to
It’stoaabring
dollaraa current
dollar
bring current or
or future
future
benefit to the organization.Exactly
Exactly what
what isis
measure
benefit
measure of the
oftothethe organization.
meant
meant by
by “cost”?
“cost”?
resources used
resources used to to
achieve
achieve aa given
given
benefit.
benefit.
 2 -4

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.
 2 -5

Traceability is the ability to assign a cost to a

cost object in an economically feasible way by
means of a cause-and-effect relationship.
Direct costs are those costs that can be easily
and accurately traced to a cost object.

Example: If a hospital is the cost object,

the cost of heating and
cooling the hospital is
a direct cost.
 2 -6

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.
 2 -7

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 object’s resource consumption.
 2 -8

Cost
Cost Assignment
Assignment Methods
Methods
Cost of Resources

Direct Driver
Allocation
Tracing Tracing

Physical Causal Assumed

Observation Relationship Relationship

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 with repeated
involved
Services may
may be
withbe repeated
3. Inseparability often for
production
often for
productionone
one ofcustomer.
of service.
customer.
service.
Centralized
Centralized massmass
4. Heterogeneity production
Wide variation
production
Wide variationof services
ofin service
services
in service
difficult.
products
products possible.
difficult. 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
for more
inventories.more
inventories. accurate
accurate
Costs
Costs often
often accounted
accounted
2. Perishability cost
Need
cost
Need assignments.
for standards
assignments.
for and
standardstype.
and
for by customer
for by customer type.
consistent
consistent high
high quality.
quality.
3. Inseparability Demand
Productivityfor
Demand for and
Productivity measure-
and quality
measure-
quality
ment
ment and
and control
measurement
measurement andof
and
control of
4. Heterogeneity quality
quality to
control
control to maintain
must be
maintain
must be
consistency.
ongoing.
consistency.
ongoing.
Impact on Total
Total
Management quality
quality manage-
manage-
Impact on Management
Accounting ment
ment critical.
critical.
Accounting
 2 -11

Product cost is a cost assignment that

supports a well-specified managerial
object. Thus, what product cost means
depends on the managerial objective
being served.
 2 -12

Design

Service Develop

Distribute Produce

Market
 Product Costing Definitions 2 -13

Value-Chain Operating Product Traditional Product

Product Costs Costs Costs
Research and
Development
Managerial objectives served

Production Production Production

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

Direct materials are those materials that are directly

traceable to the goods or services being produced.
Steel in an automobile
Wood in furniture
Alcohol in cologne
Denim in jeans
Braces for correcting teeth
 2 -15

Direct labor is the labor that is directly traceable to

the goods or services being produced.
Workers on an assembly
line at Chrysler
A chef in a restaurant
A surgical nurse attending
an open heart operation
Airline pilot
 2 -16

Overhead are all other production costs.

 Depreciation on building
and equipment
 Maintenance
 Supplies
 Supervision
 Power
 Property taxes
 2 -17

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.

 Salaries and commissions of

sales personnel (marketing)
 Advertising (marketing)
 Legal fees (administrative)
 Printing the annual report
(administrative)
 2 -18

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

For the Year Ended December 31, 2004

Direct materials:
Beginning inventory $200,000
Add: Purchases 450,000
Materials available $650,000
Less: Ending inventory 50,000
Direct materials used $ 600,000
Direct labor 350,000
Manufacturing overhead:
Indirect labor $122,500
Depreciation 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance 50,000 450,000
Total manufacturing costs added $1,400,000
continued
continuedon
onnext
nextslide
slide
 2 -22

Total manufacturing costs added $1,400,000

Add: Beginning work in process 200,000
Total manufacturing costs $1,600,000
Less: Ending work in process 400,000
Cost of goods manufactured $1,200,000

Work in process consists of all

partially completed units found in
production at a given point in time.
 Service Organization 2-23
2 -23

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 Management
2 -24

Management
Model
Model basisnya
basisnya fungsional
fungsional
Cost View

Resources

Operational View

Efficiency Performance
Functions
Analysis Analysis

Products
 Activity-Based
Activity-Based Management
Management Model
Model
2 -25

(ada
(ada 22 cara
cara pandang)
pandang) aktivity
aktivity base
base
Cost View

Resources (pengunaan sumber2)

Process View

Driver Performance
Activities
Analysis Analysis
Why? What? How Well?

Products and
Customers (baru
bisa dihitung
berapa ini)

Functional-Based
1. Unit-based drivers
2. Allocation-intensive (alokasi
biaya intensif) cth departemen a
meallui beberapa proses produksi
dan untuk menentukan produk a
perlu alokasi
3. Narrow and rigid product costing
(lebih simpit dan kaku)
4. Focus on managing cost (fokus
pada pengelolaan biaya
manajemen cost dgn daras sumsi
dan sebab akibat)
5. Sparse activity information
6. Maximization of individual unit
performance (performer
individual)
7. Use of financial measures of
performance (hanya finansial
ukuranya)
2 -26
Activity-Based
1. Unit- and nonunit-based
drivers
2. Tracing intensive
(penelusuranya) pengunaan
produk a berapa jam butuhnya
dan produk b berapa?
3. Broad, flexible product
costing(lebih luas dan
fleksibel)
4. Focus on managing activities
(megelola aktivitas baru bisa
dikelola biayanya)
5. Detailed activity information
(sangat detail)
6. Systematic performance
maximization (kepuasan,
loyalitas, brand)
7. Use of both financial and
nonfinancial measures of
performance (bisa financial/
non cth kepuasan, loyalitas dll)
 2 -27

Chapter Two

The
The End
End