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Cost Management Systems

Learn about cost management systems, cost objectives, direct and indirect costs, cost accumulation, prime costs, product and period costs, and income statements.

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Cost Management Systems

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  1. Cost ManagementSystems 4

  2. Cost Management Systems Cost • a sacrifice or giving up of resources for a particular purpose Cost Objective • a department, service or product for which cost information is collected Direct Cost • a cost which can be identified specifically and exclusively with a given cost objective in an economically feasible way • examples: direct material and direct labour Indirect Cost • a cost which cannot be identified specifically and exclusively with a given cost objective in an economically feasible way • factory overhead cost (or factory burden) • all factory costs other than direct material and direct labour • power, supplies, indirect labor, supervisory salaries, property taxes, rent, insurance and depreciation

  3. Cost Accumulation and Assignment 1. Cost Accumulation 2. Cost charged to cost objectives a. To departments b. To products Raw material costs (metals) Finishing Department Machining Department Product X-1 (Cabinets) Product X-1 (Cabinets) Product Y-1 (Desks) Product Y-1 (Desks) Product Z-1 (Tables) Product Z-1 (Tables)

  4. Manufacturing Costs Prime Costs • Direct material and direct labour costs • in many companies direct labour has become so insignificant that it is simply lumped in with overhead Conversion Costs • Direct labour and factory overhead costs • cost of converting material into finished product Prime Costs Direct Materials Direct Labour Factory Overhead Conversion Costs

  5. Classification of Labour-Related Costs • Forklift truck operators (internal handling of materials) • Maintenance • Production setup • Expediting (overseeing special and rush orders) • Janitors • Plant guards • Rework labour • Overtime premium (factory workers) • Idle time • Managers’ salaries • Employee benefit costs (e.g. pension costs)

  6. Product and Period Costs - Retailer Product Cost • cost identified with goods purchased for resale • are expensed only when product is sold Period Cost • costs which are expensed during the current period without going through an inventory stage Balance Sheet Income Statement Cost of Goods Sold Merchandise Inventory Product Costs Selling & Administrative Expenses Period Costs

  7. Product and Period Costs - Manufacturer Product Cost • cost identified with goods produced • are expensed only when product is sold Period Cost • costs which are expensed during the current period without going through an inventory stage Balance Sheet Income Statement Direct Material Inventory Work in Process Inventory Finished Goods Inventory Cost of Goods Sold Selling & Administrative Expenses Product Costs Period Costs

  8. Cost Behaviour and Income Statements Absorption Income Statement Sales $20,000 Cost of Goods Sold: Direct material $7,000 Direct labour 4,000 Factory overhead 4,00015,000 Gross margin 5,000 Selling expenses 3,000 Administrative expenses 1,000 Total selling & administrative expenses 4,000 Operating Income $1,000 Contribution Income Statement Sales $20,000 Variable expenses: Direct material $7,000 Direct labour 4,000 Variable overhead 1,000 Variable selling 1,000 Variable administrative 100 Total variable expenses 13,100 Contribution margin 6,900 Fixed expenses: Manufacturing $3,000 Selling 2,000 Administrative 900 Total fixed expenses 5,900 Operating Income $1,000

  9. Period and Product Costs Contribution Costing Variable Selling & Administrative Fixed Selling & Administrative Fixed Manufacturing Overhead Variable Manufacturing Absorption Costing Variable Selling & Administrative Fixed Selling & Administrative Fixed Manufacturing Overhead Variable Manufacturing Period Costs Product Costs

  10. Variable & Absorption Costing Variable Costing Income Statement • Also called "direct" or "variable" • Classify costs based on behaviour • Inventory comprised of variable production costs only • Net income is a function of sales Absorption Costing Income Statement • Also called "full" costing • Classify costs by function - selling & administration versus manufacturing • Inventory comprised of variable and fixed production costs • Net income is a function of sales and production Converting Between the Two Models of Income • Difference in net income is equal to the dollar change in the value assigned to inventories on the two statements Revenue Variable Costs Contribution Margin Fixed Costs Net Income Revenue Cost of Goods Sold Gross Margin Sell & Admin Costs Net Income

  11. Cost Flows: Variable Costing Direct material Direct labour Variable manufacturing overhead Inventoried Costs on Balance Sheet Expense on Income Statement Costs to Account For Initially applied to inventory as unexpired costs Become expenses when inventory is sold As goods are sold Fixed manufacturing overhead Become expenses immediately Expires immediately All selling & administrative costs

  12. Cost Flows: Absorption Costing Direct material Direct labour Variable manufacturing overhead Fixed manufacturing overhead Inventoried Costs on Balance Sheet Expense on Income Statement Costs to Account For Initially applied to inventory as unexpired costs Become expenses when inventory is sold As goods are sold Become expenses immediately Expires immediately All selling & administrative costs

  13. Fixed Manufacturing Overhead & Absorption Costing • Firms use a fixed overhead rate to smooth the application of overhead to work in process and determine "full" product costs Fixed = Budgeted fixed manufacturing overhead overhead rate Expected volume of production Production Actual - Expected x fixed-overhead volume = volume volume rate variance

  14. Flow of Fixed Manufacturing Costs - Variable Fixed Manufacturing Overhead Incurred Inventoried Costs on Balance Sheet Expense on Balance Sheet None $150,000 $150,000

  15. Flow of Fixed Manufacturing Costs - Absorption Inventoried Costs on Balance Sheet Expense on Balance Sheet Fixed Manufacturing Overhead Incurred Fixed-overhead costs in beginning inventory: $30,000 $140,000 $150,000 Cost of goods sold: $30,000 + $140,000 - $10,000 = $160,000 Costs added to product: $140,000 Fixed-overhead costs in ending inventory: $10,000 Unfavourable production volume variance: $10,000 $10,000 Total expense = $170,000

  16. Segment Reporting • Reporting the contribution of a business unit or segment • Any business unit this is important enough to warrant a segmented reporting • Variable costing is better suited than absorption costing to evaluate segment i.e. allows us to evaluate the contributions to the company’s profitability of various product lines, divisions, departments, or business segments

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