horngren_ima15_im 04.doc

A cost accounting systems all kinds of organizations

Info icon This preview shows pages 4–6. Sign up to view the full content.

View Full Document Right Arrow Icon
A. Cost Accounting Systems All kinds of organizations need some form of cost accounting, that part of the cost management system that measures costs for the purposes of management decision making and financial reporting. The cost accounting system typically involves two processes: (1) Cost Accumulation - collecting costs by some "natural" classification such as materials or labor, and (2) Cost Allocation/Assignment - attaching costs to one or more cost objectives. (See EXHIBIT 4-1 ) B. Cost Objectives {L. O. 2} Cost - a sacrifice or giving up of resources for a particular purpose. Cost Object (or Cost Objective) - anything for which managers want a separate measurement of costs (e.g., a product, a department, a sales region, a program, or something else for which decisions are made). II. Cost Terms Used for Strategic Decision Making and Operational Control Purposes A. Direct, Indirect, and Unallocated Costs {L. O. 3} Direct Costs - identified specifically and exclusively with a given cost objective in an economically feasible way ( tracing ). Indirect Costs - not identified specifically and exclusively with a given cost objective in an economically feasible way. Cost allocation – to assign indirect costs to cost objects. 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. Managers prefer to classify many costs as direct whenever it is "economically feasible" because it gives them greater confidence in their 46
Image of page 4

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
costs of products and services (i.e., less subjectivity). A particular cost can be direct for one cost objective but indirect for others. B. Purposes of Cost Allocation {L. O. 4} Four purposes of cost allocation: (1) To predict the economic effects of strategic and operational control decisions; (2) To provide desired motivation and to give feedback for performance evaluation; (3) To compute income and asset valuations for financial reporting; and (4) To justify costs or obtain reimbursement. Allocating fixed costs usually creates the greatest problems. C. Methods of Cost Allocation Allocating indirect costs is a 5-step process: 1. Accumulate indirect costs for a period of time into one or more cost pools. A cost pool is a group of individual costs that a company allocates to cost objects using a single cost-allocation base. 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 for each cost object (e.g., a product) and compute the total units for all cost objects (e.g., all products). 4. Determine the percentage of total cost-allocation base units used for each cost object. 5. Multiply the percentage in step 4 by the total costs in the cost pool to determine the cost allocated to each cost object. D. Unallocated Costs Unallocated Costs are too difficult to establish a cause-and-effect relationship (see EXHIBIT 4-2 ). Unallocated costs are costs that an accounting system records but does not allocate to any cost object (e.g., research and development, process design, legal expenses, accounting, information services, and executive salaries).
Image of page 5
Image of page 6
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern