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A&MIS 212

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  1. A&MIS 212 William F. Bentz January 9,2002 Fisher College of Business W. F. Bentz

  2. Key Issues in Product Costing • Terminology • Points of potential confusion • Accounts • Exercise E2-3 W. F. Bentz

  3. Concept of “Cost” • Cost is a sacrifice; a measurable cost is the relinquishment of a measurable asset or the creation of a measurable liability. W. F. Bentz

  4. GAAP Product Cost • For Work-in-Process and Finished Goods inventory purposes (GAAP), only manufacturing costs are included in “product” costs. Product costs remain in inventory until the associated product are sold or decline in value. When the associated products are sold, the “product cost” is added to Cost of Goods Sold. W. F. Bentz

  5. Produc-tion Market-ing Distri-bution ConsumerService R&D Design Meanings of Product Cost Inventoriable product costs Reimbursable government contract costs Decision-relevant costs W. F. Bentz

  6. GAAP Expenses (Period Costs) • Costs are incurred for activities that do not directly create products, but support the creation of products. These costs are charged to expense accounts during the accounting period incurred and thus are called period expenses. W. F. Bentz

  7. GAAP Expenses--Examples • Administrative Expenses • Corporate officers • Corporate buildings • Corporate costs like the annual audit fees • Corporate costs like • Selling (Marketing) Expenses • Distribution Expenses W. F. Bentz

  8. Accounting-Speak Period Expenses Expensed During a Period Costs Incurred Product Costs (Inventory) Assets (Prepaids) (PP&E) W. F. Bentz

  9. Concept—Service Potential • In accounting, service potential can be thought of as the present value of the cash flows from an activity, at some level of risk, or adjusted for risk. W. F. Bentz

  10. Concept—Cost • Actions that decrease the present value of cash outflows, at a given level of risk, are actions that decrease cost. Actions that increase the present value of future cash outflows, at a given level of risk, are actions that increase cost. W. F. Bentz

  11. Concept—Cost • Actions that increase the risk of future cash flows are actions that increase cost. Actions that decrease the risk of future cash flows are actions that decrease cost. and so on. W. F. Bentz

  12. Terminology—Costing • Costing is the process of estimating the cost (sacrifice) of taking action. Costs are the result of undertaking and maintaining activities. Thus, costing is largely a matter of assigning costs (sacrifices) with the activities which caused those sacrifices. W. F. Bentz

  13. Terminology—Cost Object • A cost object is any activity for which a separate measurement of cost is desired. • An activity involves doing something • Cost objects are derived from the purposes for which the cost information is to be used (different costs for different purposes). W. F. Bentz

  14. Terminology—Costing Systems • Costing systems are the information systems used to accumulate cost data either regularly or intermittently. Usually cost systems are flexible enough to collect information for a variety of purposes. W. F. Bentz

  15. Terminology—Costing Systems • A variety of costing systems may exist in any one organization (engineering, accounting, production, distribution). W. F. Bentz

  16. Terminology—Cost Analysis • Cost analysis is the process of assessing the expected impact of managerial decisions on the financial performance of an entity. Decision analysis includes cost analysis. W. F. Bentz

  17. Terminology—Cost Incurred • Cost incurred is the cost that an entity has experienced as a result of the execution of some activity for a specified period of time. Although it is in the past, cost incurred may have to be estimated. Accurate, valid measures of cost incurred require information about separable activities. W. F. Bentz

  18. “Product Costs (GAAP) • Product (inventoriable) costs include all manufacturing costs regardless of traceability or behavior. • Direct materials • Direct labor • Indirect labor, materials, depreciation, services, etc. Conversion Prime cost W. F. Bentz

  19. Work in Process Finished Goods Inventory Cost of Goods Sold Inventory System Payroll System Indirect Costs Assigned The Flow of Costs W. F. Bentz

  20. Object 1 Costs Incurred Object 2 Object 3 Costing Objects Topic Shift Next, let us consider how one associates the costs incurred to a set of cost objects in the costing process. W. F. Bentz

  21. Cost Assignment • Tracing – direct costs can be traced to cost objects • Ability to trace with acceptable accuracy, validity, and cost • Technology is improving our ability to trace • The more complex the production process, the more difficult and costly the tracing process W. F. Bentz

  22. Cost Assignment • Tracing (continued) 2. Cost-effective to trace costs • The greater the cost, the greater the value of tracing • Technology is reducing the cost of tracing • The value of tracing increases with competition • More complex mfg. systems increase the need to trace W. F. Bentz

  23. Cost Assignment • Costallocation is the process of assigning costs to cost objects when those costs cannot be traced cost-effectively. • Cost allocation ranges from relatively unambiguous, with high face validity, to relatively arbitrary. • Most distortions in product and service costing are related to cost allocation, not cost tracing. W. F. Bentz

  24. W. F. Bentz