BASIC COST MANAGEMEN T CONCEPTS

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CHAPTER 2

BASIC COST MANAGEMEN T CONCEPTS

DISCUSSION QUESTIONS

• An accounting information system is a sys-

tem consisting of interrelated manual and computer parts, using processes such as collecting, recording, classifying, summariz- ing, analyzing, and managing data to provide output information to users.

• The financial accounting information system

is primarily concerned with producing out- puts for external users using well-specified economic events as inputs and processes that meet certain rules. The cost manage- ment system, on the other hand, produces outputs for internal users, and the criteria that govern inputs and processes are directly related to management objectives. As a re- sult, the cost management system is more flexible than the financial system.

• The three broad objectives of a cost man-

agement information system are: (1) to cost

out products, services, and other cost ob- jects; (2) to provide information for planning and control; and (3) to provide information for decision making.

• The cost accounting information system is a

cost management subsystem designed to assign costs to products, services, and other objects as management needs specify. The operational control information system is a cost management information subsystem designed to provide accurate and timely feedback concerning the performance of managers and others relative to their plan- ning and control of activities.

• A cost object is anything for which costs are

measured and assigned. Examples include:

activities, products, plants, and projects.

• An activity is a basic unit of work performed

within an organization. Examples include materials handling, inspection, purchasing, billing, and maintenance.

• A direct cost is a cost that can be easily and

accurately traced to a cost object. An indirect cost is a cost that cannot be easily and accu- rately traced to cost objects.

• Traceability is the ability to assign a cost di-

rectly to a cost object in an economically feasible way using physical observation or a causal relationship.

• Allocation is the assignment of indirect costs

to cost objects based on convenience or as- sumed linkages.

• Driver tracing uses drivers based on a causal

relationship to trace costs to cost objects.Often, this means that costs are first traced to activities using resource drivers and then to cost objects using activity drivers.

• Tangible products are goods that are made by

converting raw materials into a final product through the use of labor and capital inputs.

• A service is a task or activity performed for a

customer or an activity performed by a cus- tomer using an organization’s products or fa- cilities. Services differ from tangible products

on three important dimensions: intangibility,

perishability, and inseparability. Intangibility means that buyers of services cannot see, feel, taste, or hear a service before it is bought. Perishability means that services cannot be stored. Inseparability means that producers of services and buyers of services must be in direct contact (not true for tangible products).

• Three examples of product cost definitions

are value-chain, operating, and traditional def- initions. The value-chain definition includes cost assignments for research and develop- ment, production, marketing, and customer service (all value-chain activities). Operational product costs include all costs except for re- search and development. Traditional product costs include only production costs. Different costs are needed because they serve differ- ent managerial objectives.

• The three cost elements are direct materials,

direct labor, and overhead.

• The income statement for a service firm

does not need a supporting cost of goods manufactured schedule. Since services can- not be stored, the cost of services produced equals the cost of services sold (not neces- sarily true for a manufacturing firm).Cornerstones of Cost Management 3rd Edition Hansen Solutions Manual Visit TestBankDeal.com to get complete for all chapters

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CORNERSTONE EXERCISE S

Cornerstone Exercise 2.1

• Unit prime cost

= (Direct materials + Direct labor)/Units

= ($120,000 + $60,000)/50,000

= $3.60

• Unit conversion cost

= (Direct labor + Variable overhead + Fixed overhead)/Units

= ($60,000 + $25,000 + $220,000)/50,000

= $6.10

• Unit variable product cost

= (Direct materials + Direct labor + Variable overhead)/Units

= ($120,000 + $60,000 + $25,000)/50,000

= $4.10

• Unit product cost

= (Direct materials + Direct labor + Variable overhead + Fixed overhead)/Units

= ($120,000 + $60,000 + $25,000 + $220,000)/50,000

= $8.50

• Total direct materials, total direct labor, and total variable overhead would all

increase by 10 percent since the units increased by 10 percent and these are strictly variable costs. Total fixed overhead would remain the same. Unit prime cost would increase by 10 percent since both direct materials and direct labor are strictly variable, and 10 percent more units would require 10 percent more variable cost. However, unit conversion cost would increase by less than 10 percent because of the presence of fixed costs.

New unit product cost

= [($120,000 + $60,000 + $25,000)(1.10) + $220,000)]/55,000

= $8.10

2-3 ©© 22001155 CCeennggaaggee LLeeaarrnniinngg.. AAllll RRiigghhttss RReesseerrvveedd.. MMaayy nnoott bbee ssccaannnneedd,, ccooppiieedd oorr dduupplliiccaatteedd,, oorr ppoosstteedd ttoo aa ppuubblliiccllyy aacccceessssiibbllee wweebbssiittee,, iinn wwhhoollee oorr iinn ppaarrtt..Cornerstone Exercise 2.2

• Pietro Frozen Foods, Inc.

Statement of Cost of Goods Manufactured For the Coming Year

Direct materials Beginning inventory .................................................. $ 5,600 Add: Purchases ......................................................... 119,300 Materials available ..................................................... $ 124,900

Less: Ending inventory ............................................. 4,900

Direct materials used in production .............................. $ 120,000 Direct labor ...................................................................... 60,000 Manufacturing (Factory) overhead ................................ 245,000 Total manufacturing costs added ................................. $ 425,000

Add: Beginning work in process ................................... 12,500

Less: Ending work in process ....................................... 14,600

Cost of goods manufactured ......................................... $ 422,900

• If the ending inventory of direct materials were $2,000 higher, then the direct

materials used in production would be $2,000 smaller, the total manufactur- ing costs added would be $2,000 lower, and the cost of goods manufactured would be $2,000 lower. No other line items would be affected.Cornerstone Exercise 2.3

• Pietro Manufacturing, Inc.

Statement of Cost of Goods Sold For the Coming Year

Cost of goods manufactured ............................................................... $422,900 Add: Beginning finished goods ........................................................... 42,500 Cost of goods available for sale .......................................................... $465,400 Less: Ending finished goods ............................................................... 34,000 Cost of goods sold ............................................................................... $431,400

• If beginning finished goods were $5,000 lower, then the cost of goods sold

would be $5,000 lower.

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Percent Sales ($12.50 × 49,300) .............................. $ 616,250 100.00 Cost of goods sold .................................... 431,400 70.00 Gross margin ............................................. $ 184,850 30.00

Less operating expenses:

Selling expenses .................................. $ 26,000 Administrative expenses ..................... 134,000 160,000 25.96 Operating income ...................................... $ 24,850 4.03

• If the cost of goods sold has been 65 percent of sales for the past few years,

managers would probably be concerned. Cost of goods sold has risen by 5%, and profit has probably declined. Managers should investigate to see why the increase occurred, and take steps to decrease product costs or increase price, if possible, in the coming year.Cornerstone Exercise 2.5

• Unit prime cost

= (Direct materials + Direct labor)/Units

= ($27,000 + $472,500)/15,000

= $33.30

• Unit conversion cost

= (Direct labor + Variable overhead + Fixed overhead)/Units

= ($472,500 + $15,000 + $18,000)/15,000

= $33.70

• Unit variable services production cost

= (Direct materials + Direct labor + Variable overhead)/Units

= ($27,000 + $472,500 + $15,000)/15,000

= $34.30

• Unit services production cost

= (Direct materials + Direct labor + Variable overhead + Fixed overhead)/Units

= ($27,000 + $472,500 + $15,000 + $18,000)/15,000

= $35.50