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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-1
Learning Objective 1
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-2
Cost Management System
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-3
What is Cost Accounting?
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-4
Learning Objective 2
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-5
Cost Accounting System
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-6
Cost Accounting System
ost Accumulation RAW MATERIAL
ost Allocation COSTS (METALS
Cost Objects:
Departments MACHINING FINISHING
DEPARTMENT DEPARTMENT
Activities ACTIVITY ACTIVITY ACTIVITY ACTIVITY
CABINETS CABINETS
DESKS DESKS
Products
TABLES TABLES
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-7
Cost
A cost may be defined as 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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-8
Cost Objective
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4-9
Learning Objective 3
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 10
Direct Costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 11
Indirect Costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 12
What Distinguishes
Direct and Indirect Costs?
Managers prefer to classify costs as direct
rather than indirect whenever it is
“economically feasible” or “cost effective.”
Other factors also influence whether a cost
is considered direct or indirect.
The key is the particular cost objective.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 13
Categories of
Manufacturing Costs
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 14
Categories of
Manufacturing Costs
All costs which are eventually allocated
to products are classified as either…
1 direct materials,
2 direct labor, or
3 indirect manufacturing.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 15
Direct Material Costs...
– include the acquisition costs of all materials
that are physically identified as a part of the
manufactured goods and that may be traced
to the manufactured goods in an
economically feasible way.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 16
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.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 17
Indirect Manufacturing Costs...
– or factory overhead, include all costs
associated with the manufacturing process
that cannot be traced to the manufactured
goods in an economically feasible way.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 18
Product Costs...
– are costs identified with goods produced
or purchased for resale.
Product costs are initially identified as part
of the inventory on hand.
These costs, inventoriable costs, become
expenses (in the form of cost of goods sold)
only when the inventory is sold.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 19
Period Costs...
– are costs that are deducted as expenses
during the current period without going
through an inventory stage.
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4 5 6 7 8 9 10
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©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 20
Period or Product Costs
In merchandising accounting, insurance,
depreciation, and wages are period costs
(expenses of the current period).
In manufacturing accounting, many of
these items are related to production
activities and thus, as indirect
manufacturing, are product costs.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 21
Period Costs – Merchandising
and Manufacturing
In both merchandising and manufacturing
accounting, selling and general
administrative costs are period costs.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 22
Learning Objective 4
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 26
Cost of Goods Sold
for a Manufacturer
The manufacturer’s cost of goods produced
and then sold is usually composed of the
three major categories of cost:
1 Direct materials
2 Direct labor
3 Indirect manufacturing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 27
Cost of Goods Sold
for a Retailer or Wholesaler
The merchandiser’s cost of goods sold is
usually composed of the purchase cost of
items, including freight-in, that are acquired
and then resold.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 28
Learning Objective 5
Direct Direct
Trace Trace Cost
Driver
Products Unallocated
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 30
Two-Stage Activity-Based
Cost System
Direct Direct Other Indirect Indirect All
Material Labor Direct Resource Resource Unallocated
Resource Resource Resources A Z Value Chain
Costs
Direct Direct % % % %
Trace Trace Activity Activity
1 10
Cost Cost
Driver Driver
Products Unallocated
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 31
Activity-Based Costing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 32
Activity-Based Costing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 33
Learning Objective 6
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 34
Designing and Implementing an
Activity-Based Costing System
Step 1 Step 2
Determine cost of Develop a process-based
activities, resources, map representing the flow
and related cost of activities, resources, and
drivers. their interrelationships.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 35
Designing and Implementing an
Activity-Based Costing System
Step 3
Collect relevant data concerning costs
and the physical flow of the cost-driver
units among resources and activities.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 36
Designing and Implementing an
Activity-Based Costing System
Step 4
Calculate and interpret the new
activity-based information.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 37
Activity-Based Management
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 38
Activity-Based Management
A value-added cost is the cost of an activity
that cannot be eliminated without affecting
a product’s value to the customer.
In contrast, non-value-added costs are costs
that can be eliminated without affecting a
product’s value to the customer.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 39
Learning Objective 7
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 40
Using ABC Information
Activity-based management…
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 41
Learning Objective 8
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 42
Cost Accounting and
the Value Chain
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 43
End of Chapter 4
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 4 - 44