Topic 1: The nature, concept & classification of Cost Accounting The nature, concept & classification of Cost Accounting 1

Topic 1, Slide 2 Early 1900s Mid 1900s

Management & Financial Accounting Differences Topic 1, Slide 3

Strategy & Management Accounting Strategy – match capabilities with opportunities to accomplish its objectives. Cost leadership strategy, eg. Southwest Airlines Product differentiation strategy, eg. Apple Inc. Strategic Cost Management – focuses specifically on the cost dimension within a firm’s overall strategy Topic 1, Slide 4

Strategy & Management Accounting Management accounting helps answer important questions such as: Who are our most important customers, and how do we deliver value to them? Amazon.com & Barnes and Noble What substitute products exist in the marketplace, and how do they differ from our own? Hewlett-Packard What is our critical capability? Kellogg Company Will we have enough cash to support our strategy or will we need to seek additional sources? Proctor & Gamble, Gillette. Topic 1, Slide 5

The Value Chain & Management Accounting Value Chain is the sequence of business functions in which customer usefulness is added to products or services Topic 1, Slide 6

Management Accounting & Decision Making Topic 1, Slide 7

Key Management Accounting Guidelines Topic 1, Slide 8

Organization Structure & the Management Accountant Topic 1, Slide 9

BLAH 10

COST TERMINOLOGY & CLASSIFICATION Topic 1, Slide 11

Topic 1, Slide 12 Basic Cost Terminology Cost – sacrificed resource to achieve a specific objective Actual cost – a cost that has occurred Budgeted cost – a predicted cost Cost object – anything of interest for which a cost is desired

Topic 1, Slide 13 Cost Object example at BMW Cost Object Illustration Product BMW X 5 sports activity vehicle Service Dealer-support telephone hotline Project R&D project on DVD system enhancement Customer a dealer that purchases a broad range of BMW vehicles Activity Setting up production machines Department Environmental, Health & Safety

Topic 1, Slide 14 Basic Cost Terminology Cost accumulation – a collection of cost data in an organized manner Cost assignment – a general term that includes gathering accumulated costs to a cost object. This includes: Tracing accumulated costs with a direct relationship to the cost object and Allocating accumulated costs with an indirect relationship to a cost object

Topic 1, Slide 15 Direct & Indirect

Topic 1, Slide 16 Factors affecting Direct/Indirect Cost Classification Cost Materiality Availability of information-gathering technology Operational Design

Topic 1, Slide 17 Cost Behavior Variable costs – changes in total in proportion to changes in the related level of activity or volume Fixed costs – remain unchanged in total regardless of changes in the related level of activity or volume Costs are fixed or variable only with respect to a specific activity or a given time period (relevant range!!!!)

Topic 1, Slide 18 Cost Behavior Total DollarsCost per Unit Variable Costs Change in proportion with output More output = More cost Fixed Costs Unchanged in relation to output Change inversely with output More output = lower cost per unit Unchanged in relation to output

Topic 1, Slide 19 Cost Behavior Visualized

Topic 1, Slide 20 Cost Behavior

Topic 1, Slide 21 Multiple classification of costs Costs may be classified as: Direct / Indirect, and Variable / Fixed These multiple classifications give rise to important cost combinations: Direct & Variable Direct & Fixed Indirect & Variable Indirect & Fixed

Topic 1, Slide 22 Multiple classification of costs

Topic 1, Slide 23 Types of Firms Manufacturing-sector companies Merchandising-sector companies Service-sector companies Types of Manufacturing Inventories Direct Materials – resources in-stock and available for use Work-in-Process (or progress) – products started but not yet completed. Often abbreviated as WIP Finished Goods – products completed and ready for sale

Topic 1, Slide 24 Accounting Distinction between costs Inventoriable costs – product manufacturing costs. These costs are capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold. Direct Materials Direct Labor ( Overtime labor costs are considered part of overhead due to the inability to precisely know the true cause of these costs ) Indirect Manufacturing – factory costs that are not traceable to the product. Other common names for this type of cost include Manufacturing Overhead costs or Factory Overhead costs. Prime Cost = Direct Material + Direct Labor Conversion Cost = Direct Labor + Indirect Manufacturing Period costs – have no future value and are expensed as incurred.

Topic 1, Slide 25 Cost Flow

Topic 1, Slide 26 Cost Flow Now do you recall the computations/prepar ation of Cost of goods manufactured Cost of goods sold Multi-step Income statement

Topic 1, Slide 27 Different definition of costs for different application

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