Cost Management Systemsand Activity-Based Costing                  Khalid Aziz     ACCOUNTING OF ICMAP, CA..B,C &     D, P...
Learning Objective 1Describe the purposes ofcost management systems.                           2
Cost Management SystemA cost-management system (CMS) is acollection of tools and techniques thatidentifies how management’...
What is Cost Accounting?Cost accounting is that part of theaccounting system that measures costsfor the purposes of manage...
Learning Objective 2Explain the relationshipsamong cost, cost objective,cost accumulation, andcost allocation.            ...
Cost Accounting System               Collecting costs by someCost               “natural” classificationAccumulation      ...
Cost Accounting SystemCost Accumulation              RAW MATERIALCost Allocation                COSTS (METALSto Cost Objec...
Cost A cost may be defined as a sacrifice or  giving up of resources for a particular  purpose. Costs are frequently mea...
Cost ObjectiveWhat is a cost object or cost objective?It is anything for which a separate measurementof costs is desired. ...
Learning Objective 3Distinguish among direct,indirect, and unallocated costs.                              10
Direct CostsWhat are direct costs?Direct costs can be identified specificallyand exclusively with a given costobjective in...
Indirect CostsWhat are indirect costs?Indirect costs cannot be identifiedspecifically and exclusively with agiven cost obj...
What Distinguishes    Direct and Indirect Costs? Managers prefer to classify costs as direct  rather than indirect whenev...
Categories ofManufacturing CostsAny raw material, labor, or other inputused by any organization could,in theory, be identi...
Categories of    Manufacturing Costs   All costs which are eventually allocated    to products are classified as either…1...
Direct Material Costs...–   include the acquisition costs of all materials    that are physically identified as a part of ...
Direct Labor Costs...–   include the wages of all labor that can be    traced specifically and exclusively to the    manuf...
Indirect Manufacturing Costs...–   or factory overhead, include all costs    associated with the manufacturing process    ...
Product Costs...– are costs identified with goods produced  or purchased for resale. Product costs are initially identifi...
Period Costs...–   are costs that are deducted as expenses    during the current period without going    through an invent...
Period or Product Costs In merchandising  accounting, insurance, depreciation, and  wages are period costs (expenses of t...
Period Costs – Merchandising    and Manufacturing   In both merchandising and manufacturing    accounting, selling and ge...
Learning Objective 4Explain how the financialstatements of merchandisersand manufacturers differbecause of the types of go...
Financial Statement Presentation– Merchandising CompaniesBalance Sheet                Income Statement                    ...
Financial Statement Presentation     – Manufacturing Companies     Balance Sheet                  Income Statement        ...
Costs and Income Statements   On income statements, the detailed    reporting of selling and administrative    expenses i...
Cost of Goods Sold    for a Manufacturer   The manufacturer’s cost of goods produced    and then sold is usually composed...
Cost of Goods Sold    for a Retailer or Wholesaler   The merchandiser’s cost of goods sold is    usually composed of the ...
Learning Objective 5Understand the maindifferences between traditionaland activity-based costingsystems and why ABC system...
Traditional Cost System   Direct     Direct       All           All  Material    Labor      Indirect    Unallocated  Resou...
Two-Stage Activity-BasedCost System Direct     Direct      Other     Indirect   Indirect          AllMaterial    Labor    ...
Activity-Based Costing  Understanding the relationships  among activities, resources,  costs, and cost drivers is the key ...
Activity-Based CostingExample of Activities and Cost Drivers:Activities:            Cost Drivers:Account billing        No...
Learning Objective 6Identify the steps involved in thedesign and implementationof an activity-basedcosting system.        ...
Designing and Implementing an     Activity-Based Costing SystemStep 1                   Step 2Determine cost of        Dev...
Designing and Implementing anActivity-Based Costing SystemStep 3Collect relevant data concerning costsand the physical flo...
Designing and Implementing anActivity-Based Costing SystemStep 4Calculate and interpret the newactivity-based information....
Activity-Based Management  Activity-based management aims  to improve the value received by  customers and to improve prof...
Activity-Based Management A value-added cost is the cost of an activity  that cannot be eliminated without affecting  a p...
Learning Objective 7Use activity-based costinformation to improve theoperations of an organization.                       ...
Using ABC InformationActivity-based management…provides costs of value-added andnon-value-added activities.improves manage...
Learning Objective 8Understand cost accounting’srole in a company’simprovement efforts acrossthe value chain.             ...
Cost Accounting and the Value ChainA good cost accounting system is critical toall value-chain functions from research and...
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Cost and management accounting systems & a bc costig

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  • my question about this useful ppt.
    1. cost is a past or future thing?
    2.what is economically feasible way?
    3. what is merchandise inventory?
    4. why for activity 'account bill' drive is no. of lines?
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Cost and management accounting systems & a bc costig

  1. 1. Cost Management Systemsand Activity-Based Costing Khalid Aziz ACCOUNTING OF ICMAP, CA..B,C & D, PIPFA, BBA, MBA, M.COM, B.COM STATISTICS OF MA-ECONOMICS 0322-3385752
  2. 2. Learning Objective 1Describe the purposes ofcost management systems. 2
  3. 3. Cost Management SystemA cost-management system (CMS) is acollection of tools and techniques thatidentifies how management’s decisionsaffect costs. 3
  4. 4. What is Cost Accounting?Cost accounting is that part of theaccounting system that measures costsfor the purposes of management decisionmaking and financial reporting. 4
  5. 5. Learning Objective 2Explain the relationshipsamong cost, cost objective,cost accumulation, andcost allocation. 5
  6. 6. Cost Accounting System Collecting costs by someCost “natural” classificationAccumulation such as materials or laborCost Tracing costs to one orAllocation more cost objectives 6
  7. 7. Cost Accounting SystemCost Accumulation RAW MATERIALCost Allocation COSTS (METALSto Cost Objects:1. Departments MACHINING FINISHING DEPARTMENT DEPARTMENT2. Activities ACTIVITY ACTIVITY ACTIVITY ACTIVITY CABINETS CABINETS DESKS DESKS3. Products TABLES TABLES 7
  8. 8. Cost A cost may be defined as a sacrifice or giving up of resources for a particular purpose. Costs are frequently measured by the monetary units that must be paid for goods and services. 8
  9. 9. Cost ObjectiveWhat is a cost object or cost objective?It is anything for which a separate measurementof costs is desired. 9
  10. 10. Learning Objective 3Distinguish among direct,indirect, and unallocated costs. 10
  11. 11. Direct CostsWhat are direct costs?Direct costs can be identified specificallyand exclusively with a given costobjective in an economicallyfeasible way. 11
  12. 12. Indirect CostsWhat are indirect costs?Indirect costs cannot be identifiedspecifically and exclusively with agiven cost objective in an economicallyfeasible way. 12
  13. 13. What Distinguishes Direct and Indirect Costs? Managers prefer to classify costs as direct rather than indirect whenever it is “economically feasible” or “cost effective.” Other factors also influence whether a cost is considered direct or indirect. The key is the particular cost objective. 13
  14. 14. Categories ofManufacturing CostsAny raw material, labor, or other inputused by any organization could,in theory, be identified as adirect or indirect costdepending on thecost objective. 14
  15. 15. Categories of Manufacturing Costs All costs which are eventually allocated to products are classified as either…1 direct materials,2 direct labor, or3 indirect manufacturing. 15
  16. 16. Direct Material Costs...– include the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way. 16
  17. 17. Direct Labor Costs...– include the wages of all labor that can be traced specifically and exclusively to the manufactured goods in an economically feasible way. 17
  18. 18. Indirect Manufacturing Costs...– or factory overhead, include all costs associated with the manufacturing process that cannot be traced to the manufactured goods in an economically feasible way. 18
  19. 19. Product Costs...– are costs identified with goods produced or purchased for resale. Product costs are initially identified as part of the inventory on hand. These costs, inventoriable costs, become expenses (in the form of cost of goods sold) only when the inventory is sold. 19
  20. 20. Period Costs...– are costs that are deducted as expenses during the current period without going through an inventory stage. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 20
  21. 21. Period or Product Costs In merchandising accounting, insurance, depreciation, and wages are period costs (expenses of the current period). In manufacturing accounting, many of these items are related to production activities and thus, as indirect manufacturing, are product costs. 21
  22. 22. Period Costs – Merchandising and Manufacturing In both merchandising and manufacturing accounting, selling and general administrative costs are period costs. 22
  23. 23. Learning Objective 4Explain how the financialstatements of merchandisersand manufacturers differbecause of the types of goodsthey sell. 23
  24. 24. Financial Statement Presentation– Merchandising CompaniesBalance Sheet Income Statement Sales –Merchandise Expiration Cost of Goods Sold Inventory (an expense) Equals Gross Margin – Selling and Period Administrative Costs Expenses Equals Operating Income 24
  25. 25. Financial Statement Presentation – Manufacturing Companies Balance Sheet Income Statement Sales Direct – Material Expiration Cost of Goods SoldInventory (an expense) Equals Gross Margin –Work-in- Finished Selling and Period Process Goods Administrative CostsInventory Inventory Expenses Equals Operating Income 25
  26. 26. Costs and Income Statements On income statements, the detailed reporting of selling and administrative expenses is typically the same for manufacturing and merchandising organizations, but the cost of goods sold is different. 26
  27. 27. Cost of Goods Sold for a Manufacturer The manufacturer’s cost of goods produced and then sold is usually composed of the three major categories of cost:1 Direct materials2 Direct labor3 Indirect manufacturing 27
  28. 28. Cost of Goods Sold for a Retailer or Wholesaler The merchandiser’s cost of goods sold is usually composed of the purchase cost of items, including freight-in, that are acquired and then resold. 28
  29. 29. Learning Objective 5Understand the maindifferences between traditionaland activity-based costingsystems and why ABC systemsprovide value to managers. 29
  30. 30. Traditional Cost System Direct Direct All All Material Labor Indirect Unallocated Resource Resource Resources Value Chain Costs Direct Direct Trace Trace Cost Driver Products Unallocated 30
  31. 31. Two-Stage Activity-BasedCost System Direct Direct Other Indirect Indirect AllMaterial Labor Direct Resource Resource UnallocatedResource Resource Resources A Z Value Chain Costs Direct Direct % % % % Trace Trace Activity Activity 1 10 Cost Cost Driver Driver Products Unallocated 31
  32. 32. Activity-Based Costing Understanding the relationships among activities, resources, costs, and cost drivers is the key to understanding ABC and how ABC facilitates managers’ understanding of operations. 32
  33. 33. Activity-Based CostingExample of Activities and Cost Drivers:Activities: Cost Drivers:Account billing No. of linesBill verification No. of accountsAccount iniquity No. of labor hoursCorrespondence No. of letters 33
  34. 34. Learning Objective 6Identify the steps involved in thedesign and implementationof an activity-basedcosting system. 34
  35. 35. Designing and Implementing an Activity-Based Costing SystemStep 1 Step 2Determine cost of Develop a process-basedactivities, resources, map representing the flowand related cost of activities, resources, anddrivers. their interrelationships. 35
  36. 36. Designing and Implementing anActivity-Based Costing SystemStep 3Collect relevant data concerning costsand the physical flow of the cost-driverunits among resources and activities. 36
  37. 37. Designing and Implementing anActivity-Based Costing SystemStep 4Calculate and interpret the newactivity-based information.Using an activity-based costing system toimprove the operations of an organizationis activity-based management (ABM). 37
  38. 38. Activity-Based Management Activity-based management aims to improve the value received by customers and to improve profits by identifying opportunities for improvements in strategy and operations. 38
  39. 39. Activity-Based Management A value-added cost is the cost of an activity that cannot be eliminated without affecting a product’s value to the customer. In contrast, non-value-added costs are costs that can be eliminated without affecting a product’s value to the customer. 39
  40. 40. Learning Objective 7Use activity-based costinformation to improve theoperations of an organization. 40
  41. 41. Using ABC InformationActivity-based management…provides costs of value-added andnon-value-added activities.improves managers’ understanding of operations. 41
  42. 42. Learning Objective 8Understand cost accounting’srole in a company’simprovement efforts acrossthe value chain. 42
  43. 43. Cost Accounting and the Value ChainA good cost accounting system is critical toall value-chain functions from research anddevelopment through customer service. 43
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