Present key features of cost accounting and cost management CHAPTER OVERVIEW Chapter 2 provides concepts and terms, the tools for working with costs.. Tracing accumulated costs that have
Trang 1CHAPTER 2 AN INTRODUCTION TO COST TERMS AND
PURPOSES LEARNING OBJECTIVES
1. Define and illustrate a cost object
2. Distinguish between direct costs and indirect costs
3. Explain variable costs and fixed costs
4. Interpret unit costs cautiously
5. Distinguish among manufacturing companies, merchandising companies, and service-sector companies
6. Describe the three categories of inventories commonly found in manufacturing companies
7. Differentiate between inventoriable costs and period costs
8. Explain why product costs are computed in different ways for different purposes
9. Present key features of cost accounting and cost management
CHAPTER OVERVIEW
Chapter 2 provides concepts and terms, the tools for working with costs Two basic concepts are explained: (1) cost is a relative term and must be used in relationship to something, a cost object; and (2) common understanding of the terms and concepts facilitates communication
Costs are critical information in most decisions Everything has a cost The critical need for accurate and reliable scorekeeping in which historical costs are properly identified and measured is underscored as decision support This chapter clearly defines the terms and concepts typically used in identifying costs
As mentioned in Chapter 1, costs are ideally accumulated in a database (data warehouse or infobarn),
measured and identified with various labels These data are assigned (“slice or dice”) to a specific cost object defined for a specific purpose Chapter 2 uses “the product” of a manufacturing company as an example of cost accounting
A good basic understanding of the terms and concepts introduced in this chapter are essential to an
understanding of the concepts contained in this text The terms, relationships, and models developed in the remaining chapters are built upon the definitions and explanations in this chapter The classification of costs
Trang 2CHAPTER OUTLINE
Learning Objective 1:
Define and illustrate a cost object
I. Costs and cost terminology—general
TEACHING TIP: The use of jargon in the communication process can privilege a group of individuals who
understand the meaning of the terms Jargon is used within families, companies, Greek fraternities and sororities, clubs, professional associations, etc Ask students to give examples of expressions or terms they use that carry special meaning to them within a particular group For example, a family may use the word
“interesting” to mean “I do not like the thing in question but I am not willing to say that to you.” One company uses the term “irate” to indicate a particularly troublesome customer The word carries special meaning to those who work within that department but the customer is unaware of being so branded The use of “menus” on company telephone systems is another way of branding callers—one must fit within a given category Cost concepts and terms are examples of jargon or branding that managers can learn to understand for being informed through the communication process
A. Use of cost concepts and terms to provide information
1. Able to best use information if managers understand concepts and terms
2. Facilitate communication among managers and management accountants if common
understanding
B. Definition of term cost
1. Resource sacrificed or forgone to achieve a specific objective
2. Measurement, usually a monetary amount, that must be paid to acquire goods and services
3. Use of term actual cost: cost incurred, historical, rather than budgeted or forecasted cost
C. Identification of cost object: anything for which a separate measurement of costs is needed/desired
[Exhibit 2-1]
D. Stages of accounting for costs in a costing system
1. Cost accumulation: collection of cost data in some organized means in an accounting system
2. Cost assignment: designation of cost object to aid in decision making [Exhibit 2-2]
a. Tracing accumulated costs that have a direct relationship to a cost object
Trang 3b. Allocating accumulated costs that have an indirect relationship to a cost object
Do multiple choice 1 Assignment—see fixed/variable section
II. Costs and cost terminology—specific
Learning Objective 2:
Distinguish between direct costs and indirect costs
A. Assignment to a cost object: accuracy important for decision making
1. Direct costs of a cost object: economically feasible to trace to cost object via cost tracing
2. Indirect costs: related to cost object but not economically feasible to trace; assigned via cost allocation
3. Factors affecting direct/indirect classification
a. Materiality of the cost in question
b. Available information-gathering technology
c. Design of operations
d. Choice of cost object: generally the broader the definition of the cost object, the higher the proportion of total costs that are direct costs and more confidence in cost accuracy
Do multiple choice 2 Assign Exercise 2-17.
Learning Objective 3:
Explain variable costs and fixed costs
B. Behavior pattern in relation to changes in the related level of total activity or volume
1. Costing systems: record cost of resources acquired and track how then used
2. Basic types of cost-behavior with respect to a specific cost object and given time period
a. Variable [Exhibit 2-3]
i. Changes in total in proportion to changes in the related level of total activity
Trang 4ii. Use as per unit for estimates of total costs
b. Fixed [Surveys of Company Practice]
i. Unchanged in total for a given time period despite wide changes in related level of total activity
ii. Always focus on total costs when making cost estimates for fixed costs
3. Individual costs not inherently variable or fixed but dependent upon related activity
4. Choice of cost driver: a variable with cause-and-effect relationship between change in level of
activity and change in level of total costs [Concepts in Action]
5. Consideration of relevant range: band of normal activity level with specific relationship
between level of activity and particular cost amount [Exhibits 2-4 and 2-5]
Do multiple choice 3 Assign Exercises 2-22 and 2-23 with special emphasis on identification of
the cost object.
Learning Objective 4:
Interpret unit costs cautiously
C. Total costs and unit costs
1. Generally total cost amounts should be used in decision making
2 Some decisions need unit costs (average costs) but should be used cautiously
Do multiple choice 4 Assign Exercises 2-24 and 2-25.
III.Accounting for the cost of a product
Learning Objective 5:
Distinguish among manufacturing companies, merchandising companies, and service-sector companies
A. Product defined in three types of companies [Exhibit 2-6]
1. Manufacturing-sector companies: convert materials and components into finished good
2. Merchandising-sector companies: purchase product and sell without changing basic form
3. Service-sector companies: provide services or intangible products
Trang 5Do multiple choice 5 Assign Exercises 2-18, 2-19, 2-20, and 2-27.
Learning Objective 6:
Describe the three categories of inventories commonly found in manufacturing companies
B. Product inventories for manufactured goods: stages in the conversion process
1. Direct materials: direct materials in stock and awaiting use in the manufacturing process
2. Work in process: goods partially worked on but not yet fully completed
3. Finished goods: goods fully completed but not yet sold
C. Product as cost object: classifications of manufacturing costs
1. Direct materials costs
2. Direct manufacturing labor costs
3 Indirect manufacturing costs, manufacturing overhead costs or factory overhead costs
Do multiple choice 6 Assign Exercises 2-28, 2-29 and 2-30, 2-36 and 2-37.
Learning Objective 7:
Differentiate between inventoriable costs and period costs
D. Product costs for financial statement placement [Exhibit 2-8]
1. Inventoriable costs: all costs of a product that are regarded as an asset (balance sheet) when
incurred and then become cost of goods sold (income statement) when product sold
a. Manufacturing company: all manufacturing costs are inventoriable costs
b. Merchandising company: costs of purchasing goods resold in their same form
c. Service company: no inventoriable costs because no inventories of product
2. Period costs: all costs in the income statement other than cost of goods sold
Do multiple choice 7 and 8 Assign Exercise 2-26.
E. Product cost reported: Schedule of cost of goods manufactured and sold [Exhibit 2-6]
1. Three categories of manufacturing costs = “manufacturing costs incurred during period ”
Trang 6a. Direct materials – both as inventory and manufacturing cost
b. Direct manufacturing labor costs
c. Indirect manufacturing costs
2. Three categories of manufacturing inventories—stages of the conversion process
a. Direct materials – used to calculate direct materials used at beginning of schedule
b. Work in process
c. Finished-goods [Exhibit 2-7]
F. Other terminology for product costs
1. Prime costs: all direct manufacturing costs
2. Conversion costs: all manufacturing costs other than direct material costs
IV Judgment factors
A Differences in way costs can be defined and classified [Exhibit 2-10]
1 Careful to define and understand way costs are measured in a company or situation
2 Illustrate by manufacturing labor costs
a. Detailed classification to enhance cause-effect relationship to extent possible
b. Detailed classification agreed upon to promote company-wide communication
c. Detailed classification for clarity to preclude disputes
B. Differences in uses of product cost: sum of costs assigned to a product for a specific purpose
Learning Objective 8:
Explain why product costs are computed in different ways for different purposes
1. Product cost for purpose of pricing and product-mix emphasis [Exhibit 2-9]
2. Product cost for purpose of contracting with government agencies
3. Product cost for purpose of preparing financial statements for external reporting under GAAP
Trang 7Do multiple choice 9 Assign Exercise 2-33.
Learning Objective 9:
Present key features of cost accounting and cost management
V. Features of a framework for cost management
A. Calculating the costs of products, services, and other cost objects
B. Obtaining information for planning and control and performance evaluation
C. Analyzing the relevant information for making decisions
Do multiple choice 10 Assign Problem 2-38.
CHAPTER QUIZ SOLUTIONS: 1.a 2.d 3.a 4.b 5.b 6.c 7.d 8.a 9.b 10.a
Trang 8CHAPTER QUIZ
1. Tanner Co management desires cost information regarding their Rawhide brand The Rawhide brand is a(n)
2. The cost of replacement light bulbs on campus would be a direct cost to a college but would need to be allocated as an indirect cost to
b. buildings d individual student instruction
3. What is the total fixed cost of the shipping department of EZ-Mail Clothing Co if it has the following information for 2002?
Salaries $800,000 75% of employees on guaranteed contracts
Packaging $400,000 depending on size of item(s) shipped
Postage $500,000 depending on weight of item(s) shipped
Rent of warehouse space $250,000 annual lease
4. Morton Graphics successfully bid on jobs printing standard notebook covers during the year using last year’s price of $0.27 per cover This amount was calculated from prior year costs, noting that no changes
in any costs had occurred from the past year to the current year At the end of the year, the company manager was shocked to discover that the company had suffered a loss “How could this be?” she exclaimed “We had no increases in cost and our price was the same as last year Last year we had a healthy income.” What could explain the company’s loss in income this current year?
a. Their costs were all variable costs and the amount produced and sold increased
b. Their costs were mostly fixed costs and the amount produced this year was less than last year
c. They used a different cost object this year than the previous year
d. Their costs last year were actual costs but they used budgeted costs to make their bids
5. Which type of company does not have inventoriable costs?
6. The three categories of inventories commonly found in many manufacturing companies are
a. direct materials, direct labor, and indirect manufacturing costs
b. purchased goods, period costs, and cost of goods sold
Trang 9c. direct materials, work-in-process, and finished-goods.
d. LIFO, FIFO, and weighted average
7. Inventoriable costs are
a. either finished goods or purchased goods for resale
b. a category of costs used only for manufacturing companies
c. recorded as expenses when incurred and later reclassified as assets
d. recorded as assets when incurred
8. Period costs are
a. all costs in the income statement other than cost of goods sold
b. defined as manufacturing costs incurred this period on the schedule of cost of goods manufactured
c. always recorded as assets when first incurred
d. those costs that benefit future periods
9. The cost of a product can be measured as any of the following except as cost
a. gathered from all areas of the value chain
b. identified as period cost
c. designated as manufacturing cost only
d. explicitly defined by contract
10.The primary focus of cost management is to
a. help managers make different decisions
b. calculate product costs
c. aid managers in budgeting
d. distinguish between relevant and irrelevant information
Trang 10WRITING/DISCUSSION EXERCISES
1. Define and illustrate a cost object
Describe and give an example of “cost” other than one with a conventional meaning (cash outlay) Everything has a cost Not all costs are evident or can they be identified and measured in a more
conventional manner – but they are costs nevertheless
Some costs are named but not accounted for in the traditional sense One example is opportunity cost
[defined in text at later point] that can be associated with any cost object Though financial amounts may be associated with this cost, they do not appear in the accounting records
“Human costs” are another example of costs that may be associated with most cost objects The text
emphasizes the importance of using a management accounting system to help individuals do their jobs better Sometimes companies engage in cost management that benefits the company by costing their employees (and society) on a personal basis The use of some types of chemicals can result in more efficient processing but they may have detrimental effects on the health of those who use them as prescribed by the company The manner in which the butter flavoring for microwave popcorn is applied may be such an example
Until recently, unused capacity was not identified as a cost In a later chapter costs are attached to this
situation and cost objects identified
2. Distinguish between direct costs and indirect costs
What is so important about the way in which costs are categorized? In their book, Sorting
Things Out: Classification and Its Consequences, Geoffrey Bowker and Susan Star describe the constant activity of labeling and sorting of all that we have and do in life They note that not all classifying is formal
or even noticed by us For those formal classification systems we can usually find some gaps in the system and are unable to assign everything to a specific category The example is given of disease classifications for medical records We do not have perfect knowledge of all diseases and the interaction of various ailments— yet a category must be picked Shakespeare’s “What’s in a name: That which we call a rose by any other
name would smell as sweet” (Romeo and Juliet) may not be so poetic when something or someone is
mistakenly assigned to what is perceived as an undesirable category (student grades, for example) In
studying the classification of costs, consideration should be given to such problems as imperfect knowledge, inaccurate description, and simplistic classification systems These do not negate the usefulness of the present classification system but can be used to inform it, especially when critical decisions are being made on the basis of that present system
Bowker, George & Star, Susan 1999 Sorting Things Out: Classification and Its Consequences Cambridge MA: MIT Press