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Introduction to Management Accounting

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Introduction to Management
Accounting
Chapter 4

Cost Management Systems


and Activity-Based Costing

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Learning
Objective 1

Cost Management System

A cost management system (CMS) is


a collection of tools and techniques
that identifies how managements
decisions affect costs.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost Management System


The primary purposes of a cost
management system are to provide...

cost information for strategic


management decisions,

cost information for


operational control, and

measure of inventory value and cost


3 of goods sold for financial reporting.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost Accounting Systems


Cost accounting is that part of the cost
management system that measures
costs for the purposes of management
decision making and financial reporting.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Learning
Objective 2

Cost Accounting System

Cost
accumulation:

Collecting costs by some


natural classification
such as materials or labor

Cost
assignment:

Tracing costs to one or


more cost objectives

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost Accounting System


Cost
accumulation

Cost assignment
to cost objects
Departments
Activities

Products

Material costs
(metals)
Machining Department Finishing Department
Activity Activity
Activity Activity
Activity Activity
Activity Activity
Cabinets

Cabinets

Desks
Tables

Desks
Tables

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost
A cost is a sacrifice or giving up of
resources for a particular purpose.
Costs are frequently measured by
the monetary units that must be
paid for goods and services.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Cost Object
A cost object (objective) is anything for which
A separate measurement of costs is desired.
Customers

Departments
Service

Processing orders

Product

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgs

Learning
Objective 3

Direct, Indirect, and Unallocated


Costs

Direct costs can be identified specifically and exclusively


with a given cost objective in an economically feasible way.

ndirect costs cannot be identified specifically and exclusively


With a given cost objective in an economically feasible way.

Unallocated costs are recorded but


not assigned to any cost object.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Learning
Objective 4

Cost Allocation

ost allocation is used to assign indirect costs to cost objects, in proportio


to the cost objects use of a particular cost-allocation base.
A cost-allocation base is some measure of input or output that

determines the amount of cost to be allocated to a particular cost object


An ideal cost-allocation base would measure how much
of the particular cost is caused by the cost objective.
Note the similarity of this definition to that of a cost driver
an output
measure that causes costs. Therefore, most allocation
bases are cost drivers.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Cost Pool
A cost pool is a group of individual costs that a company
allocates to cost objects using a single cost-allocation base.

1. Accumulate indirect costs for a period of time.


2. Select an allocation base for each cost pool, preferably a cost driver,
that is, a measure that causes the costs in the cost pool.
3. Measure the units of the cost-allocation base used for each cost
object and compute the total units used for all cost objects.
4. Determine the percentage of total cost-allocation base units
used for each cost object.
5. Multiply the percentage by the total costs in the cost pool to
determine the cost allocated to each cost object.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Cost Allocation
Direct costs are physically traced to a cost object.
Indirect costs are allocated using a cost-allocation base.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Learning
Objective 5

Direct Material Costs

Direct materials include the acquisition costs


of all materials that a company identifies
as a part of the manufactured goods.
These costs are identified in
an economically feasible way.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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Direct Labor Costs

Direct Labor costs include the


wages of all labor that can be
traced specifically and exclusively
to the manufactured goods in an
economically feasible way.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Indirect Production Costs (Manufacturing


Overhead)
Manufacturing overhead includes all costs
associated with the production process
that the company cannot be traced to
the manufactured goods in an
economically feasible way.

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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Product Costs
Product costs are costs identified with goods
produced or purchased for resale.

These costs first become part of the


inventory on hand, sometimes called
inventoriable costs.
Inventoriable costs become expenses in
the form of cost of goods sold only when
the inventory is sold.

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Period Costs

Period costs are deducted as expenses


during the current period without
going through an inventory stage.

10

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13

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21

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28

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30

31

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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Learning
Objective 7

Traditional Costing System


All
All
Indirect
Indirect
Resources
Resources
$220,000
$220,000

All
AllUnallocated
Unallocated
Value
ValueChain
Chain
Costs
Costs
$100,000
$100,000

Cost Driver
[Direct Labor
Hours]

Direct
Direct
Labor
LaborFor
For
Cell
CellPhone
Phone
Casings
Casings
$15,000
$15,000

Unallocated
Unallocated $00,000
$00,000

Sales
Sales $80,000
$80,000

Direct
Direct
Materials
Materials
For
ForPen
Pen
Casings
Casings
$22,500
$22,500

Direct
Direct
Direct
Direct Materials
MaterialsFor
For
Labor
Cell
Labor
Cell
For
Phone
ForPen
Pen
Phone
Casings
Casings
Casings
Casings
$135,000
$12,000
$135,000 $12,000

Sales
Sales $360,000
$360,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Traditional Costing System


Statement of Operating Income
Traditional Cost Allocation System
Pen
Casings

Cell Phone
Casings

Sales
$440,000 $360,000 $80,000
Direct materials
34,500
22,500
12,000
Direct labor
150,000
135,000
15,000
Indirect manufacturing 220,000
198,000
22,000
Gross profit
$ 35,500 $ 4,500 $31,000
Corporate expenses
100,000
Operating loss
($ 64,500)
Gross profit margin
8.07%
1.25%
38.75%

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ABC System
Engineers
Engineersand
and
CAD
Equipment
CAD Equipment
$40,000
$40,000

20%
75%

80%
25%

Processing
Activity
$135,000
+ 8,000
$143,000

Production Support
Activity
$45,000
+32,000
$77,000
Cost Driver
Cost Driver

[Direct Labor Hours]

Direct
Direct
Labor
Labor
For
ForPen
Pen
Casings
Casings
$135,000
$135,000

[Distinct Parts]

Direct
Direct
Materials
MaterialsFor
For
Cell
Cell
Phone
Phone
Casings
Casings
$12,000
$12,000

Sales
Sales $80,000
$80,000

Direct
Direct
Materials
Materials
For
ForPen
Pen
Casings
Casings
$22,500
$22,500

All
AllUnallocated
Unallocated
Value
ValueChain
ChainCosts
Costs
$100,000
$100,000

Direct
Direct
Labor
LaborFor
For
Cell
Phone
Cell Phone
Casings
Casings
$15,000
$15,000

Unallocated
Unallocated $00,000
$00,000

Plant
Plantand
and
Machinery
Machinery
$180,000
$180,000

Sales
Sales $360,000
$360,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

Activity-Based Cost Allocation


System

Internal Purposes
Cell
Pen
Reportin
Phone
g
Casin
Casing
gs
s
Sales
$440,000 $360,000 $80,000
Direct materials
34,500
22,500
12,000
Direct labor
150,000 135,000 15,000
Processing activity
143,000
128,700
14,300
Production support activity
77,000
15,400 61,600
Gross profit
$ 35,500 $ 58,400
($22,900)
Corporate expenses
100,000
Operating loss
($ 64,500)
Gross profit margin
8.07%
16.22%
(28.63%)
External

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst

The End

End of Chapter 4

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton
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ce Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgst