ACG-2071 Chapter Notes - Chapter 4: Direct Labor Cost, Activity-Based Costing, Cost Accounting

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Chapter 4: Cost Management Systems and Activity-
Based Costing 2/2/2011 11:15:00 PM
What are cost management systems?
A collection of tools and techniques that identifies how
management’s decisions affect costs
What is cost accounting?
That part of the cost management system that measure coast for
the purposes of management decision making and financial
reporting
Who needs cost accounting?
Manufacturing firms
Service companies
Nonprofit organizations
Cost accounting system design
Cost accumulation
o Collecting costs by some “natural” classification such as
material or labor
o Cost assignment tracing and reassigning costs one or more
cost objectives such as activities, departments, customers, or
products
Classification of Costs
Fixed, variable, mixed, etc
Cost a sacrifice or giving up of resources for a particular purpose
Costs are frequently measured by the monetary units that are used
to pay for goods
Cost Objective (Object) is defined as anything for which a separate
measurement of costs is desired
o Departments, products and activities
Direct Costs can be identified specifically and exclusively with a
given cost objective in an economically feasible way
Indirect Costs cannot be identified specially and exclusively with
a given cost objective in an economically feasible way
Direct vs. Indirect
Managers prefer to classify costs as direct rather than indirect
whenever it is “economically feasible” or “cost effective”
If the cost object is the maintenance department, the supervisor’s
salary is a direct cost
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In contrast, if the cost object is a service as a telephone call, the
supervisor’s salary is an indirect cost
Manufacturing costs
o Direct materials
Costs of materials that go into making the product
Can trace back to product
VARIABLE COST
o Direct labor
Cost of our people
Directly or easily traceable to product
VARIABLE COST
o Indirect manufacturing (overhead)
Anything that is involved with production
CANNOT be traced back
VARIBALE and FIXED COST
Prime Costs and Conversion Costs
Prime Costs the combined categories of direct labor costs plus
direct materials costs
Conversion Costs the costs you must incur to convert the
materials into the final product
Cost Accounting for Financial Reporting
Regardless of the type of cost accounting system used for internal
decision making purposes, the resulting
Product and Period Costs
Product costs are costs identified with goods produced or purchased
for resale
Product costs first become part of the inventory on hand
These costs (inventoriable costs) become expenses (in the form of
cost of goods sold) only when the inventory is sold
COGS = “Product Costs” = DM + DL + OH
Period costs are costs that are ducted as expenses during the
current period without going through an inventory stage
Merchandising vs. Manufacturing Balance Sheet Presentation of Costs
Merchandiser one inventory account
Manufacturer three inventory accounts
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