INTRODUCTION OF COST ACCOUNTING

Management Accounting Information System Collecting Measuring Storing Analyzing Reporting Managing Special Reports Product Costs Customer Costs Budgets Performance Reports Personal Communication Economic Events Inputs Processes Outputs Users

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Planning requires setting objectives and identifying methods to achieve those objectives. Planning Controlling Decision Making

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Controlling is the managerial activity of monitoring a plan’s implementation and taking corrective action as needed. Planning Controlling Decision Making

Management Process The Management Process is defined by the following activities: Planning Controlling Decision Making Control is usually achieved with the use of feedback.

Management Process Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan.

Management Process Planning Controlling Decision Making The Management Process is defined by the following activities: Planning Controlling Decision Making Decision making is the process of choosing among competing alternatives.

Differentiate Between Management Accounting and Financial Accounting

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused

Targeted Users Management accounting focuses on providing information for internal users.

Targeted Users ABC Company Annual Report Financial accounting focuses on provided information for external users.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules

Restrictions on Inputs and Processes Financial accounting reporting must follow the accounting procedures set by the SEC and the FASB. Management accounting is not subject to the requirements of generally accepted accounting principles.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information

Types of Information For management accounting, the financial or nonfinancial information may be much more subjective in nature. The restrictions imposed on financial accounting tend to produce objective and verifiable financial information.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation

Time Orientation Management accounting strongly emphasizes providing information about future events.

Time Orientation Financial accounting records and reports events that have already happened.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole

Degree of Aggregation Management accounting provides measures and internal reports used the evaluate performance of entities, product lines, departments, and managers.

Degree of Aggregation Financial accounting focuses on overall firm performance.

Management Accounting Financial Accounting 1. Internally focused 1. Externally focused 2. No mandatory rules 2. Must follow externally imposed rules 3. Financial and nonfinancial informa-tion; subjective information possible 3. Objective financial information 4. Emphasis on the future 4. Historical orientation 5. Internal evaluation and decisions based on very detail information 5. Information about the firm as a whole 6. Broad, multidisciplinary 6. More self-contained

Cost Assignment A cost object is any item such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned. Example: A bicycle is a cost object when you are determining the cost to produce a bicycle. An activity is a basic unit of work performed within an organization. Example: Setting up equipment, moving materials, maintaining equipment, designing products, etc.

Cost Assignment Traceability is the ability to assign a cost to a cost object in an economically feasible way by means of a cause-and-effect relationship. Direct costs are those costs that can be easily and accurately traced to a cost object. Example: If a hospital is the cost object, the cost of heating and cooling the hospital is a direct cost.

Cost Assignment Indirect costs are those costs that cannot be easily and accurately traced to a cost object. Example: The salary of a plant manager, where departments within the plant are defined as the cost objects.

Cost Assignment Tracing is the actual assignment of costs to a cost object using an observable measure of the resources consumed by the cost object. Tracing costs to cost objects can occur in the following two ways: Direct tracing is the process of identifying and assigning costs that are exclusively and physically associated with a cost object to that cost object. Driver tracing is the use of drivers to assign costs to cost objects. Drivers are observable causal factors that measure a cost object’s resource consumption.

Fixed Costs A cost that stays the same as output changes is a fixed cost.

Fixed Costs Cutting machines are leased for $60,000 per year and have the capacity to produce up to 240,000 units a year.

Fixed Costs Lease of Machines Number of Units 60,000 60,000 $1.00 Total Fixed Cost Graph Total Costs $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 60 120 180 240 Units Produced (000) F = $60,000 Fixed Costs Lease of Machines Number of Units $60,000 0 N/A 60,000 60,000 $1.00 60,000 120,000 0.50 60,000 180,000 0.33 60,000 240,000 0.25 Units Cost

Fixed Costs Lease of Machines Number of Units 60,000 60,000 $1.00 Unit Fixed Cost Graph Cost per Unit $1.00 $0.50 $0.33 $0.25 60 120 180 240 Units Produced (000) Fixed Costs Lease of Machines Number of Units $60,000 0 N/A 60,000 60,000 $1.00 60,000 120,000 0.50 60,000 180,000 0.33 60,000 240,000 0.25 Units Cost

A variable cost is a cost that, in total, varies in direct proportion to changes in output.

Variable Cost As the cutting machines cut each unit, they use 0.1 kilowatt-hour at $2.00 per kilowatt hour. Thus, the cost of each unit is $0.20 ($2 x 0.1).

Variable Cost Cost of Power Number of Units 12,000 60,000 0.20 Total Variable Cost Graph Total Costs Units Produced (000) $48,000 $36,000 $24,000 $12,000 60 120 180 240 Yv = .20x Variable Cost Cost of Power Number of Units $ 0 0 $ 0 12,000 60,000 0.20 24,000 120,000 0.20 36,000 180,000 0.20 48,000 240,000 0.20 Units Cost

Variable Cost Cost of Power Number of Units 12,000 60,000 0.20 Unit Variable Cost Graph 60 120 180 240 Units Produced (000) $0.40 $0.30 $0.20 $0.10 Cost per Unit Variable Cost Cost of Power Number of Units $ 0 0 $ 0 12,000 60,000 0.20 24,000 120,000 0.20 36,000 180,000 0.20 48,000 240,000 0.20 Units Cost

Step-Fixed Costs Cost $150,000 100,000 50,000 Normal Operating Range (Relevant Range) 2,500 5,000 7,500 Activity Usage