Cost management systems

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Cost management systems

  1. 1. Cost Management Systemsand Activity-Based Costing Kh.Otgonjargal MBA-W1190 1
  2. 2. Cost Management System A cost-management system (CMS) is a collection of tools and techniques that identifies how management’s decisions affect costs.Kh.Otgonjargal MBA-W1190 2
  3. 3. What is Cost Accounting? Cost accounting is that part of the accountingsystem that measures costs for the purposes of management decision making and financial reporting.(Explain the relationships among cost, cost objective, cost accumulation, and cost allocation.) Kh.Otgonjargal MBA-W1190 3
  4. 4. Cost Accounting System Collecting costs by someCost “natural” classificationAccumulation such as materials or laborCost Tracing costs to one orAllocation more cost objectives Kh.Otgonjargal MBA-W1190 4
  5. 5. Kh.Otgonjargal MBA-W1190 5
  6. 6. Cost Accounting SystemCost AccumulationCost Allocation to Cost Objects: RAW MATERIAL1. Departments COSTS (METALS)2. Activities3. Products MACHINING FINISHING DEPARTMENT DEPARTMENT ACTIVITY ACTIVITY ACTIVITY ACTIVITY CABINETS CABINETS DESKS DESKS TABLES TABLES Kh.Otgonjargal MBA-W1190 6
  7. 7. 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. Kh.Otgonjargal MBA-W1190 7
  8. 8. Cost ObjectiveWhat is a cost object or cost objective?It is anything for which a separateMeasurement of costs is desired. Distinguish among direct, indirect, and unallocated costs.Kh.Otgonjargal MBA-W1190 8
  9. 9. Direct Costs What are direct costs? Direct costs can be identified specifically and exclusively with a given cost objective in an economically feasible way.Kh.Otgonjargal MBA-W1190 9
  10. 10. Indirect Costs What are indirect costs? Indirect costs cannot be Identified specifically and exclusively with a given cost objective in an economically feasible way.Kh.Otgonjargal MBA-W1190 10
  11. 11. ExamplesCosts usually charged Costs either charged Costs usually allocateddirectly directly or allocated indirectly• Project staff indirectly • Utilities• Consultants • Telephone charges • Rent• Project supplies • Computer use • Audit and legal• Publications • Project clerical • Administrative staff• Travel personnel • Equipment rental• Training • Postage and printing • Petrol • Miscellaneous office • Maintenance supplies • Generator • Security • Telephone Kh.Otgonjargal MBA-W1190 11
  12. 12. 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.Kh.Otgonjargal MBA-W1190 12
  13. 13. Categories of Manufacturing CostsAny raw material, labor, or other inputused by any organization could, in theory,be identified as a direct or indirect costdepending on the cost objective. Kh.Otgonjargal MBA-W1190 13
  14. 14. Categories of Manufacturing CostsAll costs which are eventuallyallocated to products are classified aseither…1. direct materials,2. direct labor, or3. indirect manufacturing. Kh.Otgonjargal MBA-W1190 14
  15. 15. Direct Material Costs...* include the acquisition costs of all materialsthat are physically identified as a part of themanufactured goods and that may be traced tothe manufactured goods in an economicallyfeasible way. Kh.Otgonjargal MBA-W1190 15
  16. 16. Direct Labor Costs...* include the wages of all labor that canbe traced specifically and exclusively tothe manufactured goods in aneconomically feasible way.Kh.Otgonjargal MBA-W1190 16
  17. 17. Indirect Manufacturing Costs...*or factory overhead, include all costsassociated with the manufacturing processthat cannot be traced to the manufacturedgoods in an economically feasible way.Kh.Otgonjargal MBA-W1190 17
  18. 18. Product Costs...*are costs identified with goods producedor 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.Kh.Otgonjargal MBA-W1190 18
  19. 19. Period Costs...* are costs that are deducted as expensesduring the current period without goingthrough 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 31Kh.Otgonjargal MBA-W1190 19
  20. 20. Period Costs – Merchandising and Manufacturing• In both merchandising and manufacturing accounting, selling and general administrative costs are period costs. Kh.Otgonjargal MBA-W1190 20
  21. 21. 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 Kh.Otgonjargal MBA-W1190 21
  22. 22. 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.Kh.Otgonjargal MBA-W1190 22
  23. 23. Understand the maindifferences between traditional and activity-based costingsystems and why ABC systems provide value to managers. Kh.Otgonjargal MBA-W1190 23
  24. 24. Traditional Cost System Direct Direct All All Material Labor Indirect Unallocated Resource Resource Resources Value Chain Costs Direct Direct Trace Trace Cost Driver Products UnallocatedKh.Otgonjargal MBA-W1190 24
  25. 25. Two-Stage Activity-Based Cost System Direct Direct Other Indirect Indirect AllMaterial Labor Direct Resource Resource UnallocatedResource Resource Resources A Z Value Chain Costs Direct Direct % % % % Trace Trace Activity 1 Activity 10 Cost Cost Driver Driver Products Unallocated Kh.Otgonjargal MBA-W1190 25
  26. 26. Activity-Based CostingUnderstanding the relationships amongactivities, resources, costs, and costdrivers is the key to understanding ABCand how ABC facilitates managers’understanding of operations.Kh.Otgonjargal MBA-W1190 26
  27. 27. Kh.Otgonjargal MBA-W1190 27
  28. 28. 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 Kh.Otgonjargal MBA-W1190 28
  29. 29. Identify the steps involved in the design and implementation of an activity-based costing system. Kh.Otgonjargal MBA-W1190 29
  30. 30. Designing and Implementing an Activity- Based Costing System Step 1 Step 2Determine cost of Develop a process-basedactivities, resources, map representing the flowand related cost of activities, resources, anddrivers. their interrelationships. Kh.Otgonjargal MBA-W1190 30
  31. 31. Designing and Implementing an Activity- Based Costing System Step 3Collect relevant data concerning costsand the physical flow of the cost-driverunits among resources and activities. Kh.Otgonjargal MBA-W1190 31
  32. 32. Designing and Implementing an Activity- Based Costing System Step 4Calculate and interpret the newactivity-based information.Using an activity-based costing system toimprove the operations of an organizationis activity-based management (ABM). Kh.Otgonjargal MBA-W1190 32
  33. 33. Kh.Otgonjargal MBA-W1190 33
  34. 34. Kh.Otgonjargal MBA-W1190 34
  35. 35. Using ABC InformationActivity-based management…provides costs of value-added andnon-value-added activities.improves managers’ understanding of operations. Kh.Otgonjargal MBA-W1190 35
  36. 36. The EndKh.Otgonjargal MBA-W1190 36

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