Explain the Impact of Poor Cost Information on a Decision Principles of Cost Analysis and Management © Dale R Geiger 2011 How much does a box of cereal cost? © Dale R Geiger 2011 Terminal Learning Objective • Task: Explain the impact of poor cost info on a decision • Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy: • Demonstrate understanding of Cost Terminology • Explain the impact of poor cost information on a decision © Dale R Geiger 2011 There Are Many Possible Ways to Measure Costs Consider the Following Types of Cost: direct, indirect, variable, fixed, sunk, period, inventoriable, reimburseable, capital, standard, conversion, prime, carrying, incremental, separable, joint, project, controllable, current, historical, normal, discretionary, full, responsibility, imputed, opportunity, mixed, out-of pocket, relevant, target, absorption, average, quality, estimated, and unit © Dale R Geiger 2011 Relevance of Information • • • • Has anyone recently purchased a new vehicle? What were your top three criteria? Why? Where did you get your information? Why? What influenced your decision? • How will you use the vehicle? • How much will you drive it? • In what stage of your life are you? © Dale R Geiger 2011 Relevance of Information • How might your information needs differ if you were deciding where to pursue your Masters degree? • How would your decision criteria differ? • What different sources of information would you choose? © Dale R Geiger 2011 Conduct Check on Learning Who defines the relevance of information? â Dale R Geiger 2011 Let’s Start a Business • What should we sell? List five products: Product: Cost: Total Cost: © Dale R Geiger 2011 Let’s Start a Business • Costing methodology: • Calculate unit cost • Add a markup on cost to guarantee a profit Set selling price â Dale R Geiger 2011 Let’s Start a Business • Calculate Average Unit $ Cost: Total Cost / units = $ per unit • Add a 30% markup on cost to calculate Selling Price: $ per unit * (1 + 30) = $ per unit © Dale R Geiger 2011 10 FASAB’s SFFAS #4 • How are cost accounting and financial accounting related? Cost information generally originates with transactions recorded for financial accounting purposes • How are cost accounting and budgetary accounting related? Managerial cost accounting should provide budgetary accounting with cost information accounting should provide budgetary accounting with cost information © Dale R Geiger 2011 30 FASAB’s SFFAS #4 What basis of accounting should be used? “The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.” “…using a basis of accounting …appropriate for the intended use of the information.” © Dale R Geiger 2011 31 FASAB’s SFFAS #4 What basis of accounting should be used? “The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.” “…using a basis of accounting …appropriate for the intended use of the information.” © Dale R Geiger 2011 32 FASAB’s SFFAS #4 Read the standard on Costing Methodology “The full costs of resources that directly or indirectly contribute to the production of outputs should be assigned to outputs through costing methodologies or cost finding techniques that are most appropriate to the segment's operating environment…” © Dale R Geiger 2011 33 FASAB’s SFFAS #4 Read the standard on Costing Methodology “The full costs of resources that directly or indirectly contribute to the production of outputs should be assigned to outputs through costing methodologies or cost finding techniques that are most appropriate to the segment's operating environment…” © Dale R Geiger 2011 34 FASAB’s SFFAS #4 The cost assignments should be performed by the following methods listed in the order of preference: (a) directly tracing costs wherever feasible and economically practicable, (b) assigning costs on a cause-and-effect basis, or (c) allocating costs on a reasonable and consistent basis © Dale R Geiger 2011 35 FASAB’s SFFAS #4 The cost assignments should be performed by the following methods listed in the order of preference: (a) directly tracing costs wherever feasible and economically practicable, (b) assigning costs on a cause-and-effect basis, or (c) allocating costs on a reasonable and consistent basis © Dale R Geiger 2011 36 FASAB’s SFFAS #4 • Costing Terminology: • Cost Accumulation • Cost Assignment • Cost Object © Dale R Geiger 2011 37 FASAB’s SFFAS #4 • Costing Terminology: • Cost Accumulation - the process of collecting cost data in an organized way • Cost Assignment - the process that identifies accumulated costs with reporting periods and cost objects • Cost object - an activity or item whose cost is to be measured © Dale R Geiger 2011 38 FASAB’s SFFAS #4 List the four Costing Methodologies outlined in the standard: © Dale R Geiger 2011 39 FASAB’s SFFAS #4 List the four Costing Methodologies outlined in the standard: Activity Based Costing Job Order Costing Process Costing Standard Costing © Dale R Geiger 2011 40 Other Provisions of SFFAS #4 • Requires Cost Accounting • Accumulate and report costs of activities for management information purposes • May use either Cost System or Cost Finding Techniques • Define Responsibility Segments • Measure and report costs of each segment’s outputs © Dale R Geiger 2011 41 Other Provisions of SFFAS #4 • Report and Measure Full Cost in General Purpose financial reports • Include direct and indirect costs incurred in the reporting segment AND • Identifiable supporting costs incurred in other segments and entities • Incorporate cost of goods and services received from other entities, if Significant and Identifiable © Dale R Geiger 2011 42 Conclusions • Cost information is only meaningful when appropriate for its intended purpose • Poor or inappropriate cost information can lead to poor decisions • We will learn many methods of cost measurement, each with an appropriate use © Dale R Geiger 2011 43 Conduct Check on Learning • What are the three appropriate potential methods of cost assignment according to the SFFAS? © Dale R Geiger 2011 44 ... Terminology • Explain the impact of poor cost information on a decision © Dale R Geiger 2011 There Are Many Possible Ways to Measure Costs Consider the Following Types of Cost: direct, indirect,...How much does a box of cereal cost? © Dale R Geiger 2011 Terminal Learning Objective • Task: Explain the impact of poor cost info on a decision • Condition: You are a cost advisor technician... Managerial cost accounting is the process of cost information useful to both internal and external groups © Dale R Geiger 2011 27 FASAB’s SFFAS #4 Managerial cost accounting is the process of accumulating