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Topic 2 - Basic Concepts
Topic 2 - Basic Concepts
Topic 2 - Basic Concepts
CHAPTER
Basic
Management
Accounting
Concepts
2 -2
Objectives
Objectives
1. Describe theAfter
cost studying
assignment process.
this
After studying this
2. Define tangible and
chapter, intangible
you should
chapter, you should products and
explain why there be are different
able to:
be able to: product cost
definitions.
3. Prepare income statements for manufacturing
and service organizations.
4. Outline the differences between functional-
based and activity-based management
accounting systems.
2 -3
Cost
II see…
Costsee…isis the
the cash
It’s
It’s or
or cash-equivalent
aa dollar
cash dollarcash-equivalent
value sacrificed
valuemeasure
sacrificed
measure offor
of thegoods
the
for goods and
and services
services
that isis expected
resources
that expected
resources used
used to bring
totobring aa current
to current or
Exactlyor what
Exactly what isis
future
achieve
future
achievebenefit to
to the
aa given
benefit given the organization.
meant
meant by
organization. by “cost”?
“cost”?
benefit.
benefit.
2 -4
Cost
Cost Assignment
Assignment Methods
Methods
Cost of Resources
Direct Driver
Allocation
Tracing Tracing
Cost Objects
Interface of Services with 2 -9
Management Accounting
Services
Services cannot
cannot be be stored.
stored.
No
No patent
patent protection.
protection.
1. Intangibility Cannot
Cannot display
display or
or expire
Services
Services benefits
benefits expire
communicate
communicate services.
services.
quickly.
Customer
quickly.
Customer directly
directly
2. Perishability Price
Price difficult
difficult to
to set.
set.
Services
involved
Services may
involvedmay be
withbe repeated
with repeated
often
often for
for one
production
productiononeof customer.
of service.
customer.
service.
3. Inseparability
Centralized
Centralized mass
mass
Wide
Wide variation
variation in
in
production
production of services
of services
4. Heterogeneity service products
service products
difficult.
difficult.
possible.
possible.
Derived
Derived Properties
Properties
Interface of Services with 2 -10
Management Accounting
No
No inventories.
inventories.
Strong
Strong ethical
ethical code.
code.
1. Intangibility Price
Price difficult
difficult toto set.
set.
Demand
No
Demand
No for
for more
inventories.more
inventories. accurate
accurate
Costs
Costs often
often accounted
accounted
2. Perishability cost
Need
cost
Need assignments.
for standards
assignments.
for and
standardstype.and
for by customer
for by customer type.
consistent
consistent high
high quality.
quality.
Demand
Productivity
Demand
Productivityfor
for measure-
and quality
measure-
and quality
3. Inseparability
ment
ment and
and control
measurement
measurement andof
and
control of
quality
control
quality
control to
to maintain
must be
maintain
must be
4. Heterogeneity
consistency.
ongoing.
consistency.
ongoing.
Impact on Total
Total
Management quality
quality manage-
manage-
Impact on Management
Accounting ment
ment critical.
critical.
Accounting
2 -11
Design
Service Develop
Distribute Produce
Market
Product Costing Definitions 2 -13
Marketing Marketing
Customer Customer
Service Service
Pricing Decisions Strategic Design Decisions External Financial
Product-Mix Decisions Tactical Profitability Reporting
Strategic Profitability Analysis
Analysis
2 -14
Noninventoriable
Noninventoriable (period)
(period) costs
costs
are
are expensed
expensed inin the
the period
period in
in
which
which they
they are
are incurred.
incurred.
Prime Cost :
Direct Materials Costs + Direct Labor
Costs
Conversion Cost:
Direct Labor Costs + Overhead Costs
2 -19
External
Financial
Statements
Manufacturing Organization 2 -20
2-20
Income Statement
For the Year Ended December 31, 2004
Sales $2,800,000
Less cost of goods sold:
Beginning finished goods inventory $ 500,000
Add: Cost of goods manufactured 1,200,000
Cost of goods available for sale $1,700,000
Less: Ending finished goods inventory 300,000 1,400,000
Gross margin $1,400,000
Less operating expenses:
Selling expenses $ 600,000
Administrative expenses 300,000 900,000
Income before taxes $ 500,000
Statement of Cost of Goods Manufactured 2 -21
2-21
Income Statement
For the Year Ended December 31, 2004
Sales
$300,000
Less expenses:
Cost of services sold:
Beginning work in process $ 5,000
Service costs added:
Direct materials $ 40,000
Direct labor 80,000
Overhead 100,000 220,000
Total $225,000
Less: Ending work in process 10,000
215,000
Gross margin
$ 85,000
Less operating expenses:
Selling expenses $ 8,000
Functional-Based
Functional-Based
2 -24
Management
Management Model
Model
Cost View
Resources
Operational View
Efficiency Performance
Functions
Analysis Analysis
Products
Activity-Based
Activity-Based
2 -25
Management
Management Model
Model
Cost View
Resources
Process View
Driver Performance
Activities
Analysis Analysis
Why? What? How Well?
Products and
Customers
2 -26
Functional-Based Activity-Based
1. Unit-based drivers 1. Unit- and nonunit-based
drivers
2. Allocation-intensive 2. Tracing intensive
Exercise
2-3 Cost Assignment Methods (TropicalSpa) (LO1)
2-7 Product and Period Costs (Loring Company)
LO2
2-12 Cost of Goods Manufactured and Sold (Mellon
Company) LO3
Problem
2-20 Functional-Based versus Activity-
Based Management Accounting Systems LO4
Variation
2-8 Product Costs (Kyoto Company) LO2
2-18 Cost Identification (LO2)
2 -28
Chapter Two
The
The End
End