lec19cost_acc - Introduction To Cost Accounting 15.501/516...

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6 Introduction To Cost Accounting ± 15.501/516 ± ± ± ± ± Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology April 28, 2004 7 Outline ¾ ² ¾ ¾ ¾ ¾ Overview of managerial accounting issues Brief discussion of performance evaluation Cost accounting terminology Cost behavior Product costing: traditional method Product costing: activity based costing (ABC) 8 ) Costing Cost Centers Mix or Buy Managerial Accounting What are the Goals? Performance Evaluation (Control Budgeting Variance Analysis Profit and Decision Making Pricing Production Product Make Change Methods Discontinue Financial Reporting Page 1
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A few words about Performance Evaluation ¾ “You get what you pay for” ¾ Strongly recommended reading: “On the folly of rewarding A, while hoping for B” ± Doctors and litigation – penalty for type II errors. ² Where else is this evident? Auditors ² Litigation risk induced conservatism ± Insurance company – reward for attendance but hoping for performance. ± Financial markets – focus on quarterly earnings while hoping for long-term growth in profitability 9 10 Basic Cost Terms: Cost ¾ ¾ Cost Driver ¾ $ Cost Objects and Drivers A sacrifice of resources. Distinguish from “expense.” Cost Object Any activity or item for which a separate measurement of costs is desired. Any factor whose change “causes” a change in the total cost of a related cost object. Note: Cost drivers can be factors other than volume Cost Driver e.g. Processing Sales Order Cost Object e.g., Product 11 Basic Cost Terms: ¾ ( ¾ ¾ j ¾ j Obj X Obj Y Direct and Indirect Costs Direct Costs Costs that can be traced to a given cost object product, department, etc.) in an economically feasible way. Indirect Costs Costs that cannot be traced to a given cost object in an economically feasible way. These costs are also known as “overhead”. Cost Assignment Direct costs are traced to a cost ob ect. Indirect costs are allocated or assigned to a cost ob ect. Direct Cost A Direct Cost B ect ect Indirect Cost C Page 2
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12 Basic Cost Terms: Product and Period Costs ¾ ( as ¾ ( ). ¾ Product Costs Costs that “attach” to the units that are produced i.e., manufacturing costs) and are not reported expenses until the goods are sold. Period costs Costs that must be charged against income in the period incurred and cannot be inventoried e.g., selling and administrative expenses Unit Costs Total cost of units divided by units produced. Direct Cost Product X Indirect Cost Period Cost Income Statement Product Costs Sale Inventory Basic Cost Terms: Cost Behavior Variable Costs ¾ Costs that change directly in proportion to changes in the related cost driver Fixed Costs ¾ Costs that remain unchanged for a given time period regardless of changes in the related cost driver.
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This note was uploaded on 03/05/2010 for the course ACCT 322 taught by Professor Dilss during the Spring '10 term at École Normale Supérieure.

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lec19cost_acc - Introduction To Cost Accounting 15.501/516...

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