1. Explain the Impact of Poor Cost Information
Intermediate Cost Analysis
and Management
Show Slide #1: Explain the Impact of Poor Cost Information
Title: Explain the Impact of Poor Cost Information
References: Handouts, Excel Spreadsheets
Facilitator’s Material and Student Material: Dry erase markers, white boards, access to Excel spreadsheets, case-studies
Facilitator’s Material: Each primary Facilitator’s should possess a lesson plan, slide deck, course handouts, practical exercises, access to Excel spreadsheets, case-studies All required references and technical manuals will be provided by the local Command.
Student Material: Students should possess course handouts, practical exercises, access to Excel spreadsheets, case-studies and standard classroom supplies.
The 21st Century Soldier Competencies are essential to ensure Soldiers and leaders are fully prepared to prevail in complex, uncertain environments. This lesson reinforces the following 21st Century Soldier Competencies:
Communication and Engagement (Oral, written, and negotiation)
Critical thinking, intergovernmental, and multinational competence
Tactical and Technical Competence
Throughout the lesson discussion seek opportunities to link the competencies with the lesson content through the student’s experiences.

2. How much does a box of cereal cost?
Show Slide #2: Concrete Experience (Questions to consider)
Facilitator’s Note: (Concrete Experience 10 minutes) Present students the slide statements Ask students what their thoughts are on “The cost of a box of cereal”
Facilitator’s Note: (Publish and Process 10 minutes) The critical portion of this part of the ELM process is to force the students to reflect. Ask a series of thought influencing questions.
Introduction
Cereal is a familiar product and most of us have an idea of how much it costs. The best answer to the question, “How much does it cost?” is “It depends.” From a consumer standpoint, of course, it depends on what kind, what brand, what size, even what store. But from an internal managerial standpoint, the views of cost are even more diverse. Do you want to know about the cost of materials? Labor? Packaging? Machinery? Advertising? Getting the product to the customer? Cost of a particular product line? Cost of a brand? There are many views of cost, and many ways of measuring. All of these are wrapped up in the question, “how much does it cost?”

3. Terminal Learning Objective
Action: Explain the Impact of Poor Cost Information 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
Show Slide #3: TLO
Action: : Explain the Impact of Poor Cost Information on a Decision
Conditions: 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, and Explain the impact of poor cost information on a decision.
Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM , Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation
Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM Environmental Considerations and GTA ENVIRONMENTAL-RELATED RISK ASSESSMENT.
INSTRUCTIONAL LEAD-IN. There are many types of cost. Can you think of more?

4. Consider the Following Types of Cost:
There Are Many Possible Ways to Measure Costs
Consider the Following Types of Cost:
Direct, indirect, variable, fixed, sunk, period, inventoriable, reimbursable, 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
Show Slide #4: Introduction
Facilitator’s Note: There are many types of cost. Can you think of more? Those that are in bold we will specifically address in this course. Each has a different meaning and a different method of measurement. This is why there is no simple answer to the question, “What does it cost?” It’s important to know why the asker needs to know. How is he or she going to use the information? Without knowing how the information will be used, the cost measurer/reporter may give an answer that could result in a poor decision. For example, as a consumer you might be interested in the cost per ounce of cereal, or the cost per unit of some nutritional element that you deem important. However, none of these cost measurements would be useful in helping you prepare your tax return, since the cost of a box of cereal for personal consumption is not tax deductible. This brings up the idea of relevance. The pieces of information necessary to make a decision are as varied as the decisions themselves.

5. 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?
Show Slide #5: Introduction (Cont.)
Facilitator’s Note: illustration about how the user defines needs for 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?
The answers to these questions will differ depending upon the class members. It would be good to get other students’ input as to what criteria they would find useful in the same situation. The “Why” is just as important, if not more so, than the “what?” Different individuals might prefer different sources of information for various reasons. Some might ask friends, some might look at data in magazines such as Car and Driver or Consumer Reports, some might read reviews written by other owners.

6. Relevance of Information (Cont.)
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?
Show Slide #6: Relevance of Information (Cont.)
Facilitator’s Note: illustration about how different decisions require different information
How might your information needs differ if you were deciding where to pursue your Masters degree?
Decision criteria? Sources of information?

7. Let’s Start a Business What should we sell? List five products:
Product: Cost: 1. 2. 3. 4. 5.
Total Cost:
Show Slide #7: Demonstration of how poor cost info affects decisions
1. Learning Step/Activity #1 Demonstration of how poor cost info affects decisions
Method of Instruction: DSL (large or small group discussion)
Facilitator’s to Student Ratio:
Time of Instruction: 2.0 (Total)
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s’s Note: Ask the students to list five items. Encourage a variety of items, some high ticket (car, house) some low (coffee, candy bar, etc.) and some in between. After the list is complete, total up the cost of all of the items
Example:
Car $15,000
Cup of coffee $2
Notebook computer 1,000
Suit $400
DVD player $50
Total $16,452

8. Let’s Start a Business (Cont.)
Costing methodology:
Calculate unit cost
Add a markup on cost to guarantee a profit
Set selling price
Show Slide #8: Demonstration of how poor cost info affects decisions (Cont.)
Facilitator’s Note: Demonstration of how poor cost info affects decisions
Our Costing methodology for our business will be to: Calculate unit cost, Add a markup on cost to guarantee a profit, or Set selling price and get ready to make money!

9. Let’s Start a Business (Cont.)
Calculate Average Unit $ Cost:
Total Cost / 5 units =
$ per unit
Add a 30% markup on cost to calculate Selling Price:
* ( ) = $ per unit
Show Slide #9: Demonstration of how poor cost info affects decisions (Cont.)
Facilitator’s Note: Calculate Average Unit $ Cost:
Total Cost (from previous slide) / 5 units = $ Cost per unit
Example:
Car $15,000
Cup of coffee $2
Notebook computer 1,000
Suit $400
DVD player $50
Total $16,452
Average Unit cost = $16452/5 = $
We want to make a profit, so we will add a 30% Markup on cost to calculate Selling Price:
Unit $ Cost * ( ) This will be our selling price.
Example: Calculate selling price: $ * 1.30 = $
Another way to calculate the selling price would be to calculate the markup percentage and then add to the cost:
$ *.3 = = $

10. Let’s Start a Business (Cont.)
What’s wrong with this picture? Product: Selling Price:
Show Slide #10: Demonstration of how poor cost info affects decisions (Cont.)
Facilitator’s Note: What’s wrong with this picture?
Example:
Product: Selling Price:
Car $
Cup of coffee $
Notebook computer $
Suit $
DVD player $
If we continue with this strategy, we will likely sell lots of cars (or most expensive item) and nothing else. And we will lose money on each one!

11. 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
Show Slide #11: Demonstration of how poor cost info affects decisions (Cont.)
Facilitator’s Note: We followed the costing methodology to the letter.
We calculated unit cost and then selling price, to the penny. What went wrong? Our costing methodology was not appropriate for our purpose of setting prices given the fact that our products were very diverse.

12. LSA #1 Check on Learning
Q1. Direct, indirect, variable, fixed, sunk, period, reimbursable are just some types of this. A1. What is Cost?
Show Slide #12: LSA #1 Check on Learning
Facilitator’s Note: Ask the following Questions. Facilitate the answers given.
Q1. What is the equation to represent financial position?
A1. Assets = Liabilities + Financial Position
Q2. Which element of the equation represents future benefits of the entity?
A2. Assets

13. LSA #1 Summary
During this lesson, we introduced some Cost terminology and some important variables within when contemplating a purchase.
Show Slide #13: LSA #1 Summary
Facilitator’s Note: During this lesson, we introduced some Cost terminology and some important variables within when contemplating a purchase.

14. 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
Show Slide #14: Describe the provisions of FASAB SFFAS #4
2. Learning Step/Activity #2 Describe the provisions of FASAB SFFAS #4
Method of Instruction: DSL (large or small group discussion)
Facilitator’s to Student Ratio:
Time of Instruction: 2.0 (Total)
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s Note: How do we know that FASAB Considers Cost Accounting a High Priority?
FASAB tackled Cost Accounting very early in its standard setting process.
SFFAS = Statement of Federal Financial Accounting Standards. #4 means it was the only the fourth one issued.
List the Five Fundamental Elements of Cost Accounting:
(1) accumulating and reporting costs of activities on a regular basis for management information purposes,
(2) Establishing responsibility segments to match costs with outputs,
(3) determining full costs of government goods and services,
(4) recognizing the costs of goods and services provided among federal entities, and
(5) using appropriate costing methodologies to accumulate and assign costs to outputs.

15. FASAB’s SFFAS #4 (Cont.) 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
Show Slide #15: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: Help users to determine:
-- Costs of specific programs and activities and the composition of, and changes in, those costs;
-- Efforts and accomplishments associated with federal programs and their changes over time and in relation to costs; and
-- Efficiency and effectiveness of the government's management of its assets and liabilities

16. FASAB’s SFFAS #4 (Cont.)
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
Show Slide #16: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: Who are the users of federal financial information? And, who are the PRIMARY users?
Government managers are the primary users of cost information. They are responsible for carrying out program objectives with resources entrusted to them. Reliable and timely cost information helps them ensure that resources are spent to achieve expected results and outputs, and alerts them to waste and inefficiency. (Essentially this refers to decisions on how to spend the money.)
Congress and federal executives, including the President, make policy decisions on program priorities and allocate resources among programs. These officials need cost information to compare alternative courses of action and to make program authorization decisions by assessing costs and
benefits. They also need cost information to evaluate program performance.
Citizens, including news media and interest groups, are concerned with the costs and results of federal programs that affect their interests. They need program cost information to judge whether resources are allocated to programs rationally and if the programs operate efficiently and effectively.

17. FASAB’s SFFAS #4 (Cont.)
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
Show Slide #17: Describe the provisions of FASAB SFFAS #4
3. Learning Step/Activity #3 Describe the provisions of FASAB SFFAS #4
Method of Instruction: DSL (large or small group discussion)
Facilitator’s to Student Ratio:
Time of Instruction: 2.0 (Total)
Media: Power Point Presentation, Printed Reference Materials
Facilitator’s Note: These standards are aimed at achieving three general objectives:
-- Provide program managers with relevant and reliable information relating costs to outputs and activities…The cost information will assist them in improving operational economy and efficiency.
-- Provide relevant and reliable cost information to assist the Congress and executives in making decisions about allocating federal resources, authorizing and modifying programs, and evaluating program performance; and
-- Ensure consistency between costs reported in general purpose financial reports and costs reported to program managers.
What are objectives of managerial cost accounting information?
These standards are aimed at achieving three general objectives:

18. FASAB’s SFFAS #4 (Cont.)
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
Show Slide #18: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: List the topics;
(1) Requirement for cost accounting,
(2) Responsibility segments,
(3) Full cost,
(4) Inter-entity costs, and
(5) Costing methodology.

19. FASAB’s SFFAS #4 (Cont.)
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
Show Slide #19: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: List the purposes;
(1) budgeting and cost control,
(2) performance measurement,
(3) Determining reimbursements and setting fees and prices,
(4) program evaluations, and
(5) making economic choice decisions.

20. FASAB’s SFFAS #4 (Cont.)
Managerial cost accounting is the process of… 1. accumulating 2. measuring 3. analyzing 4. interpreting 5. reporting …cost information __[a]__to both__[b]__ and __[c]__ groups
Show Slide #20: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: Managerial cost accounting is the process of accumulating, measuring, analyzing, interpreting, and reporting cost information useful to both
internal and external groups.
a: Useful
a: Internal
a: External

21. FASAB’s SFFAS #4 (Cont.)
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
Show Slide #21: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: How are cost accounting and financial accounting related? Managerial cost accounting and financial accounting are closely related or integrated. In part, it is because 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.

22. FASAB’s SFFAS #4 (Cont.) What basis of accounting should be used?
“The measurement of costs can vary depending upon the __[a]__ and __[b]__ for which the measurement is to be used.”
“…using a basis of accounting …__[c]__ for the intended use of the information.”
Show Slide #22: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: What basis of accounting should be used?
A particular cost measurement has meaning only when considering its purpose.
The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.
Therefore, managerial cost accounting should provide cost information
“using a basis of accounting and recognition/measurement standards that are appropriate for the intended use of the information.”
When providing information to support financial decisions, the cost information should use the accrual basis of accounting.
When providing information to support budget decisions, the cost information should use the budgetary basis of accounting.
[a] Circumstances
[b] Purpose
[c] Appropriate

23. FASAB’s SFFAS #4 (Cont.)
Read the standard on Costing Methodology “The costs of resources that directly or indirectly contribute to the production of outputs should be to outputs through costing or cost techniques that are most to the segment's operating environment…”
Full
Assigned
Methodologies
Finding
Appropriate
Show Slide #23: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: 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…”

24. FASAB’s SFFAS #4 (Cont.)
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.
Show Slide #24: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: 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…”
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.

25. FASAB’s SFFAS #4 (Cont.) Costing Terminology: Cost accumulation –
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
the process of collecting cost data in an organized way
the process that identifies accumulated costs with reporting
periods and cost objects.
Show Slide #25: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: Costing Terminology:
Cost Accumulation. Cost accumulation is the process of collecting cost data in an organized way.
Cost Assignment The term "cost assignment" refers to the process that identifies accumulated costs with reporting periods and cost objects.
Cost Object The term "cost object" refers to an activity or item whose cost is to be measured.
In a broad sense, a cost object can be an organizational division, program, activity, task, product, service, or customer. The final cost objects of a responsibility segment are its outputs: the services or products that the segment produces and delivers, the missions or tasks that the segment performs, or
the customers or markets that the responsibility segment serves. There may be intermediate cost objects that are used in the course of the cost assignment process.
an activity or item whose cost is to be measured

26. FASAB’s SFFAS #4 (Cont.)
List the four Costing Methodologies outlined in the standard:
Activity Based Costing
Job Order Costing
Process Costing
Show Slide #26: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: List the four Costing Methodologies outlined in the standard:
1. Activity Based Costing
2. Job Order Costing
3. Process Costing
4. Standard Costing
We have already looked at Job Order Costing. We will look at Activity Based Costing on Day 8, and Standard costing (as it relates to cost explanation) on Day 13.
Standard Costing
an activity or item whose cost is to be measured

27. 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
Show Slide #27: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: 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

28. 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
Show Slide #28: Describe the provisions of FASAB SFFAS #4 (Cont.)
Facilitator’s Note: Full cost, as defined here, is useful in helping managers understand the impact of their decisions not only on costs incurred in their own responsibility segments, but also in other responsibility segments and other entities.
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

29. LSA #2 Check on Learning Q1. Match the title to it’s definition
Cost accumulation:
Cost assignment:
periods and cost objects.
Cost object:- an activity or item whose cost is to be measured
The process that identifies accumulated costs with reporting
periods and cost objects.
an activity or item whose cost is to be measured
Show Slide #29: LSA #2 Check on Learning
Facilitator’s Note: Ask the following Questions. Facilitate the answers given.
Q1. Match the title to it’s definition
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
The process of collecting cost data in an organized way

30. LSA #2 Summary
During this lesson, we discussed Provisions of SFFAS #4 in detail
Show Slide #30: LSA #2 Summary
Facilitator’s Note: During this lesson, we introduced some Cost terminology and some important variables within when contemplating a purchase.

31. 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
Show Slide #31: Conclusions
Facilitator’s Note: 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

32. TLO Summary
Action: Explain the Impact of Poor Cost Information 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
Show Slide #32: TLO Summary
Facilitator’s Note: Restate the TLO
Action: : Explain the Impact of Poor Cost Information on a Decision
Conditions: 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, and Explain the impact of poor cost information on a decision.
“Or”
Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.