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Unformatted text preview: Becker 2008 Edition Chapter 5 Page 1 of 26 Chapter 5 Planning, Budgeting, and Cost Management Cost Measurement and Cost Measurement Concepts Cost Measurement Concepts: square4 Cost of goods manufactured and budgeting cost vs. actual cost. square4 Managerial accounting and internal reporting square4 Future orientation: usefulness and future orientation square4 Most accounting reports are for externals (creditors, etc) square4 Managerial accounting reports are for internal users Cost drivers: square4 Cost drivers change total costs square4 Direct causal relationship between change in cost driver and total costs square4 May be based on volume, activity, or other operational characteristic square4 Types of cost driver: executional (short-term) and structural (long-term) o Executional: manage short-term costs o Structure: decisions having long-term effects on cost square4 Type of operational cost driver: volume-based and activity-based o Volume-based: aggregate volume of output. Associated with traditional cost accounting systems o Activity-based: activity that adds value to output. Associated with contemporary cost accounting systems square4 Cost drivers as overhead (OH) allocation bases: o OH costs are indirect and must be applied on some basis. o OH must be added to direct material (DM) and direct labor (DL) to arrive at COGM o Allocation basis barb2right cost drivers. square4 Traditional industries use direct labor hours as allocation base for overhead square4 Cost driver = direct labor hours o Activity centers barb2right production departments (advertising, inspection, packaging). square4 Are activity bases closely correlated with incurrence of manufacturing OH square4 Contemporary industries accumulate OH with manufacturing and add value to its products square4 Cost drivers = machine hours Cost objects: resources or activities that serve as the basis for management decisions square4 i.e. products, product lines, departments, geographic territories square4 product costing + cost control measurement = maximize effectiveness of management accounting systems square4 Valuation = cost of goods manufactured square4 Cost control = cost comparison to standards and budgets Becker 2008 Edition Chapter 5 Page 2 of 26 Common Flow of Costs Identified by Cost Objects Prime Costs = DM/DL Conversion Costs = DL/OH Direct Materials Direct Labor Factory Overhead Work in Process barb2down Finished Goods barb2down Cost of Goods Sold Product costs = not expensed until the product is sold (manufacturing costs) square4 They sit on the balance sheet as an asset before being sold square4 Costs attach to the units of output square4 Consist of DM, DL, and mfg OH applied Period costs = non-mfg costs square4 Expensed in the period incurred and are NOT inventorial square4 Expenses include selling and administrative expenses, interest expense square4 Consist of selling the product and administering and managing the operations of the firm Manufacturing costs = treated as product costs...
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- Spring '10