Explain the Impact of Poor Cost Information © Dale R. Geiger 20111

How much does a box of cereal cost? © Dale R. Geiger 20112

Terminal Learning Objective Task: Explain the Impact of Poor Cost Info on a Decision Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools 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 20113

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 20114

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 20115

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 20116

Let’s Start a Business What should we sell? List five products: Product:Cost: Total Cost: © Dale R. Geiger 20117

Let’s Start a Business Costing methodology: Calculate unit cost Add a markup on cost to guarantee a profit Set selling price © Dale R. Geiger 20118

Let’s Start a Business Calculate Average Unit $ Cost: Total Cost / 5 units = $ per unit Add a 30% markup on cost to calculate Selling Price: $ per unit * (1 +.30) = $ per unit © Dale R. Geiger 20119

Let’s Start a Business What’s wrong with this picture? Product:Selling Price: © Dale R. Geiger

Conclusions Followed the costing methodology to the letter Calculated unit cost and selling price to the penny What went wrong? Costing methodology not appropriate for our purpose of setting prices for diverse items © Dale R. Geiger

FASAB’s SFFAS #4 Read the Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4 How do we know that FASAB Considers Cost Accounting a High Priority? List the Five Fundamental Elements of Cost Accounting: © Dale R. Geiger

FASAB’s SFFAS #4 Read the Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4 How do we know that FASAB Considers Cost Accounting a High Priority? List the Five Fundamental Elements of Cost Accounting: 1. Accumulating and reporting costs of activities 2. Establishing responsibility segments 3. Determining full costs of goods and services 4. Recognizing the costs of goods and services provided among federal entities 5. Using appropriate methodologies to assign costs © Dale R. Geiger

FASAB’s SFFAS #4 Read the Introduction to SFFAS #4 What are three goals of federal financial reporting? © Dale R. Geiger

FASAB’s SFFAS #4 Read the Introduction to SFFAS #4 What are three goals of federal financial reporting? 1. Costs of specific programs and activities and the composition of, and changes in, those costs; 2. Efforts and accomplishments associated with federal programs and their changes over time and in relation to costs 3. Efficiency and effectiveness of the government's management of its assets and liabilities © Dale R. Geiger

FASAB’s SFFAS #4 Who are the users of federal financial information? Users Decisions: © Dale R. Geiger

FASAB’s SFFAS #4 Who are the users of federal financial information? Users Decisions: 1. Government-spend resources to Managers achieve expected results 2. Congress-program decisions Federal Executives-evaluate performance 3. Citizens -resource allocation © Dale R. Geiger

FASAB’s SFFAS #4 What are objectives of managerial cost accounting information? © Dale R. Geiger

FASAB’s SFFAS #4 What are objectives of managerial cost accounting information? 1. Provide program managers with relevant and reliable information relating costs to outputs and activities 2. Provide relevant and reliable cost information to assist the Congress and executives in making decisions about allocating federal resources 3. Ensure consistency between costs reported in financial reports and costs reported to managers © Dale R. Geiger

FASAB’s SFFAS #4 List the five topics addressed by the standard: © Dale R. Geiger

FASAB’s SFFAS #4 List the five topics addressed by the standard: 1. Requirement for cost accounting 2. Responsibility segments 3. Full cost 4. Inter-entity costs 5. Costing methodology © Dale R. Geiger

FASAB’s SFFAS #4 List the five purposes for using cost accounting information: © Dale R. Geiger

FASAB’s SFFAS #4 List the five purposes for using cost accounting information: 1. Budgeting and cost control 2. Performance measurement 3. Determining reimbursements and setting fees and prices 4. Program evaluations 5. Making economic choice decisions © Dale R. Geiger

FASAB’s SFFAS #4 Managerial cost accounting is the process of… …cost information useful to both internal and external groups © Dale R. Geiger

FASAB’s SFFAS #4 Managerial cost accounting is the process of… 1. accumulating 2. measuring 3. analyzing 4. interpreting 5. reporting …cost information useful to both internal and external groups © Dale R. Geiger

FASAB’s SFFAS #4 How are cost accounting and financial accounting related? How are cost accounting and budgetary accounting related? © Dale R. Geiger

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 © Dale R. Geiger

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 © Dale R. Geiger

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

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

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

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

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

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

FASAB’s SFFAS #4 Costing Terminology: Cost accumulation Cost assignment Cost object © Dale R. Geiger

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

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

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

FASAB’s SFFAS #4 List the four Costing Methodologies outlined in the standard: © Dale R. Geiger

FASAB’s SFFAS #4 List the four Costing Methodologies outlined in the standard: 1. Activity Based Costing 2. Job Order Costing 3. Process Costing 4. Standard Costing © Dale R. Geiger

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

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

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