Accounting Information System
Consists interrelated manual and computer parts
Uses processes such as collecting, recording, summarizing, analyzing, and managing data to transform inputs into information provided to users
two major accounting information systems
The financial accounting information system
The cost management accounting information system
Major difference is the targeted user
Financial Accounting Information System
Produces outputs for external users
Follows rules and conventions set by the SEC and FASB
Provides outputs such as financial statements
Cost Management Information System
Produces outputs for internal users
Provides information for three broad objectives
Cost services, products, and other objects
Planning and control
Decision making
Criteria and formats are set internally
Purpose of Cost Accounting Information System
Assigns costs to individual products and services
Assists external financial reporting
Conforms to the rules and conventions set by the SEC and the FASB
Purpose of Operational Control Information System
provides accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities
factors affecting cost management
Global Competition
Growth of the Service Industry
Advances in Information Technology
Advances in Manufacturing Environment
Customer Orientation
New Product Development
Total Quality Management
Time as a Competitive Element
Efficiency
Global Competition
Improved transportation and communication has led to a global market
Increased the demand for more accurate cost information
Growth of the Service Industry
Service sector of the economy has increased in importance
Deregulation has increased competition
Advances in Information Technology
Use of computers to monitor and control operations
Integration of manufacturing with marketing and accounting data
Enterprise resource planning (ERP) software provides an integrated system capability
Emergence of e-commerce
Internet trading
Electronic dat
Advances in Manufacturing Environment
Theory of constraints: method used to continuously improve manufacturing activities and nonmanufacturing activities
Just-in-time manufacturing: strives to produce a product only when it is needed and only in the quantities demanded
Lean manufacturing: a p
Customer Orientation
Deliver value to the customer
Value chain: the set of activities required to design, develop, produce, market, and deliver products and services to customers
Satisfy internal customers
New Product Development
High proportion of production costs are involved during the development and design stage of new products
Cost management procedures
Target costing: encourages managers to assess the overall cost impact of product designs over the product's life cycle
Acti
Total Quality Management
Continuous improvement and elimination of waste are the two foundation principles
Objectives: producing products and services that actually perform according to specifications and with little waste
Time as a Competitive Element
Crucial element in all phases of the value chain
Decrease in non-value-added time increases quality
Efficiency
Improving efficiency is a vital concern
Cost is a critical measure of efficiency
Information for Planning, Controlling, Continuous Improvement, and Decision Making
Planning: a detailed formulation of future actions to achieve a particular end
Requires setting objectives and identifying methods to achieve those objectives
Controlling: a managerial activity of monitoring a plan's implementation and taking corrective a
value chain
set of activities required to design, develop, produce, market, deliver, and provide post-sales service
cost object
Things for which costs are measured and assigned
Includes products, customers, departments, projects, activities, etc.
direct tracing
process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object
driver tracing
use of drivers to assign costs to cost objects
Drivers are factors that cause changes in resource usage, activity usage, costs, and revenues
indirect cost tracing
Indirect costs cannot be traced to cost objects
Assignment of indirect cost is called allocation
service vs. product cost
Services differ from tangible products on three important dimensions
Intangibility
Perishability
Inseparability
production costs
costs associated with manufacturing goods or providing services
non production costs
costs associated with the functions of selling and administration
prime cost
sum of direct materials cost and direct labor cost
conversion cost
sum of direct labor cost and overhead cost
Nonproduction costs are divided into two categories. They are not inventoried and are called period costs
Period costs are expensed in the period in which they are incurred
Marketing (selling) marketing costs: costs necessary to market and distribute a product or service
Example: advertising, storage costs, and freight out
Administrative costs: costs that cannot be reasonably assigned to either marketing or production
Exampl
Cost of goods manufactured
represents the total manufacturing cost of goods completed during the current period
Only costs assigned to goods completed are the manufacturing costs of direct materials, direct labor, and overhead
Details of this cost assignment are given in a supporti
cost of goods sold
manufacturing cost of the units that were sold during the period
Traditional Cost Management Systems
Traditional Cost Accounting
Assumes that all costs can be classified as fixed or variable with respect to changes in the units or volume
Uses only unit-based activity drivers to assign costs
Traditional Cost Control
Assigns costs to organizational units
H
Activity-Based Cost Management Systems
Activity-Based Cost Accounting
Emphasizes tracing over allocation
Uses both unit- and non-unit-based activity drivers
Activity-Based Cost Control
Focuses on accountability for activities rather than costs
Activity- based management (ABM) focuses on improv
mixed costs
costs that have both a fixed and a variable component
Y = Fixed cost + Total variable cost
Y = F + VX
where
Y = Total cost (Usually a mixed cost)
flexible resources
Supplied as needed and used
Quantity of resource supplied equals quantity demanded
No unused capacity
committed resources
Supplied in advance of usage
A given quantity is obtained, whether or not that full amount is used
Unused capacity is possible
activities and mixed cost behavior
Many activities have characteristics of both flexible and committed resources
For example, a power department acquires long-term capacity for supplying power by investing in a building and equipment
It also acquires fuel to produce power on an as-needed b
high low method
Advantages
It is objective
It is simple to calculate
Disadvantages
The high and low points may be "outliers"
Other pairs of points may clearly be more representative
scatter plot method
Uses a scattergraph to visually assess the relationship between cost and output
Intercept is fixed cost
Slope is variable rate
Advantages
Allows for visual inspection of the data
Identifies nonlinearity, outliers, and shifts in the cost relationship
Disad
managerial judgment
The most widely used method in practice
Managers may just use their experiences and observations to determine fixed and variable costs
Managers may identify mixed costs and use experience to determine what part is fixed - thus denoting the rest as variabl
POHR
Overhead costs are assigned to products using predetermined overhead rates
POHR= budgeted annual OH/ budgeted annual driver level
applied OH= OH rateX actual driver usage
unit level drivers
factors that measure the demands placed on unit-level activities by products
unit level activities
activities performed each and every time a unit of a product is produced
Five most commonly used unit level drivers
Units produced
Direct labor hours
Direct labor dollars
Machine hours
Direct material dollars
OH variances
The difference between actual overhead and applied overhead
If actual overhead > applied overhead: underapplied overhead
If actual overhead < applied overhead: overapplied overhead
OH variance disposal
If immaterial, assign to cost of goods sold
If material, allocate among work-in-process inventory, finished goods inventory, and cost of goods sold
OH application departmental rates
Costs assigned to individual production department, creating departmental overhead cost pools
Unit level drivers are used to compute predetermined overhead rates for each department
Overhead is assigned to products by multiplying the departmental rates by
non unit related OH cost
Plantwide and department rates assume that a product's consumption of overhead is directly related to units produced
Some costs, however, such as setups cost a certain amount no matter how many products are produced
Other costs, such as engineering hours,
product diversity
Even if there are significant non-unit driven overhead costs, it will not cause distorted costing if the products all consume overhead in the same proportion as unit-level driven overhead costs
Products consume overhead activities in different proportions
problems with costing accuracy
The main problem with using either plantwide or departmental rates is the assumption that machine hours and/or direct labor hours drive or cause all overhead costs
activity rates
Instead of using a single pool or department pools based on units, expand the number of pools and rates and base them on activities
The rates are based on causal factors that measure consumption - both unit and non-unit level activity drivers
Costs are as
ABC costing system
Identify, define, and classify activities and key attributes
Assign the cost of resources to activities
Assign the cost of secondary activities to primary activities
Identify cost objects and specify the amount of each activity consumed by them
Calculate
Identify, define, and classify activities and key attributes
Activity inventory: a simple list of activities identified
Activity attributes: nonfinancial and financial information items that describe individual activities
Activity dictionary: lists the activities in an organization along with desired attributes
Pri
Assign the cost of resources to activities
The cost of an activity is the resources consumed by that activity
If a resource is exclusive to an activity, assign 100% of the cost to the activity
If the resource is split between more than one activity, determine a resource driver
Resource drivers are
Assign the cost of secondary activities to primary activities
Treat the secondary activity like a resource from the previous step
Identify cost objects and specify the amount of each activity consumed by them
Assign costs consumed by more than one activity in proportion to their usage of the activity as measured by the activity driver
Transaction drivers measure the number of times an activity is performed
Duration drivers measure the demands in terms of the a
Calculate primary activity rates
Primary activity rates are computed by dividing budgeted activity costs by practical activity capacity
Practical activity capacity is the activity output that can be produced when the activity is performed efficiently
Assign activity costs to cost objects
Multiply the activity rate by the actual number of activity drivers consumed.
Cost behavior differs by level
Classifying activities into categories aids in product costing because the cost behavior differs by level
Unit-level
Batch-level
Product-level
Facility-level
Before-the-Fact Simplification: TDABC
A before-the-fact simplification method, eliminates the need to identify resource drivers, eliminating the need for much of the detailed implementation interviews
First, it calculates total operating cost of a department or process
Second, it calculates a
After-the-Fact Simplification: TDABC
Approximately Relevant ABC Systems
Calculate the cost of your activities
Combine the less expensive activity costs into the more expensive activity costs making fewer categories
Equally Accurate Reduced ABC Systems
Use expected consumption ratios to reduc
Manufacturing Firms versus Service Firms
Manufacturing firms
Combines direct materials, direct labor, and overhead to produce a new product
The good produced is tangible and can be inventoried and transported
Service firms
Service is characterized by its intangible nature
It is not separable fro
Four areas in which services differ from products
Intangibility refers to the nonphysical nature of services as opposed to products
Inseparability means that production and consumption are inseparable for services
Heterogeneity refers to greater variation in the performance of services than production of
Unique versus Standardized Products and Services
Uniqueness of units of service or production affects costing method
Job-order costing is used for unique units with unique costs of production
Operation costing is a hybrid of job-order and process costing
Process costing is used when units are homogeneou
Cost accumulation
Refers to the recognition and recording of costs
Source documents keep track of costs as they occur
It describes a transaction
Examples: purchase orders, sales receipts, time tickets, checks, and deposit slips
cost measurement
Refers to classifying or organizing costs in a meaningful way
Two main ways to measure costs associated with production
Actual costing uses actual direct materials, direct labor, and overhead
Normal costing uses actual direct materials and labor, but appl
cost assignment
Refers to association of production costs with the units produced
Once costs have been accumulated, measured and assigned, unit costs can be calculated
importance of unit costs
Importance of Unit Costs to Manufacturing Firms
Essential for valuing inventory, determining income, and making a number of important decisions
Importance of Unit Costs to Nonmanufacturing Firms
Use cost data in much the same way that manufacturing firms
choosing the activity level
Expected activity level
Production level the firm expects to attain for the coming year
Normal activity level
Average activity usage that a firm experiences in the long term
Theoretical activity level
Absolute maximum production activity of a manufacturin
overview of the job-order costing system
Costs are accumulated by job
Once a job is completed, the unit cost is determined by dividing the total manufacturing cost by the number of units produced
Job-order cost sheet identifies each job and accumulates its manufacturing costs
Each job-order cost
Materials Requisitions
A source document used to assign direct materials cost to a job
Includes the description, quantity, unit cost of materials issued, and job number
Provides essential information for assigning direct materials costs to jobs
Helps maintain proper control ove
job time tickets
A source document used to assign direct labor cost to each job
Includes the name, wage rate, hours worked, and job number
Used only for direct labor
OH application
Jobs are assigned overhead costs with a predetermined overhead rate
Typically, direct labor hours are used as the measure to calculate overhead
Sometimes, another driver, such as machine hours, are used
accounting for IH application
Overhead costs flows into Work-in-Process Inventory through the predetermined overhead rate
Calculated by multiplying actual driver units used by the predetermined overhead rate
Debited to Work-in-Process and credited to Overhead Control
Actual overhead i
accounting for finished goods inventory
Direct materials, direct labor, and applied manufacturing overhead are totaled for completed jobs
The cost of a completed job is debited to Finished Goods Inventory and credited to Work-in-process
Schedule of Cost of Goods Manufactured
A schedule summariz
accounting for cost of goods sold
To the customer, the cost of the finished job becomes a cost of goods sold
The cost of a completed job is debited to Cost of Goods Sold and credited to Finished Goods Inventory
OH variances in COGS
It is usually immaterial and is therefore closed to the cost of goods sold account
Cost of goods sold before adjustment for an overhead variance is called normal cost of goods sold
After adjustment for the period's overhead variance takes place, the resul
accounting for nonmanufacturing costs
Selling and General Administrative Expenses
These costs are period costs and never assigned to inventory accounts
These costs flow to the income statement for the period
Job-Order Costing with Activity Based Costing
A single rate based on direct labor hours may result in inaccurate cost assignments
To solve this, departmental overhead rates and activity-based costing can be used
In job-order costing, departmental overhead rates and activity-based costing affect only
spoilage
Normal Spoilage
If not caused by any particular job, it is subsumed in the overhead rate and spread across all jobs through applied overhead
If caused due to exacting nature of the job, the extra cost is added to that job's cost
Abnormal Spoilage
Unexpect