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A&MIS 212. William F. Bentz January 9,2002 Fisher College of Business. Key Issues in Product Costing. Terminology Points of potential confusion Accounts Exercise E2-3. Concept of “Cost”.

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a mis 212
A&MIS 212

William F. Bentz

January 9,2002

Fisher College of Business

W. F. Bentz

key issues in product costing
Key Issues in Product Costing
  • Terminology
  • Points of potential confusion
  • Accounts
  • Exercise E2-3

W. F. Bentz

concept of cost
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

gaap product cost
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

meanings of product cost







Meanings of Product Cost

Inventoriable product costs

Reimbursable government contract costs

Decision-relevant costs

W. F. Bentz

gaap expenses period costs
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

gaap expenses examples
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

accounting speak

Period Expenses

Expensed During a Period

Costs Incurred

Product Costs (Inventory)

Assets (Prepaids) (PP&E)

W. F. Bentz

concept service potential
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

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

concept cost1
  • 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

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

terminology cost object
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

terminology costing systems
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

terminology costing systems1
Terminology—Costing Systems
  • A variety of costing systems may exist in any one organization (engineering, accounting, production, distribution).

W. F. Bentz

terminology cost analysis
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

terminology cost incurred
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

product costs gaap
“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.


Prime cost

W. F. Bentz

the flow of costs

Work in Process

Finished Goods Inventory

Cost of Goods Sold

Inventory System

Payroll System

Indirect Costs Assigned

The Flow of Costs

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costing objects

Object 1



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

cost assignment
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

cost assignment1
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

cost assignment2
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