1 khalid aziz--0322-3385752 cost management systems and activity-based costing khalid aziz...
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11Khalid Aziz--0322-3385752Khalid Aziz--0322-3385752
Cost Management SystemsCost Management Systems
and Activity-Based Costingand Activity-Based Costing
Khalid AzizKhalid AzizACCOUNTING OF ICMAP, CA..B,C & D, ACCOUNTING OF ICMAP, CA..B,C & D,
PIPFA, BBA, MBA, M.COM, B.COMPIPFA, BBA, MBA, M.COM, B.COM0322-33857520322-3385752
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• COACHING CLASSES OF CA MODULE B & D.
• FA, ECONOMICS & COST ACCOUNTING.
• CONTACT NOW.
• 0322-3385752
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• FRESH CLASSES OF B.COM 1 & 2
• ALL IMPORTANT SUBJECTS
• COMPLETION OF SYLLABUS
• JOIN NOW
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• ACCOUNTING(FINANCIAL & COST) OFACCOUNTING(FINANCIAL & COST) OFICMAP STAGE 1,2,3,4 (NEW CLASSES)ICMAP STAGE 1,2,3,4 (NEW CLASSES)CA..MODULE B,C,DCA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)PIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3ACCA-F1,F2,F3BBA,MBABBA,MBAB.COM(FRESH),M.COMB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSMA-ECONOMICS..O/A LEVELSKHALID AZIZ…..0322-3385752KHALID AZIZ…..0322-3385752http://finance.groups.yahoo.com/group/cost-http://finance.groups.yahoo.com/group/cost-accountantsaccountants
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Learning Objective 1Learning Objective 1
Describe the purposes of
cost management systems.
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Cost Management SystemCost Management System
A cost-management system (CMS) is a collection of tools and techniques thatidentifies how management’s decisions affect costs.
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What is Cost Accounting?What is Cost Accounting?
Cost accounting is that part of theaccounting system that measures costsfor the purposes of management decisionmaking and financial reporting.
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Learning Objective 2Learning Objective 2
Explain the relationships
among cost, cost objective,
cost accumulation, and
cost allocation.
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Cost Accounting SystemCost Accounting System
CostAccumulation
Collecting costs by some“natural” classificationsuch as materials or labor
CostAllocation
Tracing costs to one or more cost objectives
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Cost Accounting SystemCost Accounting System
MACHININGDEPARTMENT
ACTIVITY ACTIVITY
FINISHINGDEPARTMENT
ACTIVITY ACTIVITY
RAW MATERIALCOSTS (METALS
CABINETS CABINETS
DESKS DESKS
TABLESTABLES
Cost Accumulation
Cost Allocationto Cost Objects:
1. Departments
2. Activities
3. Products
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CostCost
• 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.
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Cost ObjectiveCost Objective
What is a cost object or cost objective?
It is anything for which a separate measurementof costs is desired.
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Learning Objective 3Learning Objective 3
Distinguish among direct,
indirect, and unallocated costs.
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Direct CostsDirect Costs
Direct costs can be identified specifically and exclusively with a given costobjective in an economicallyfeasible way.
What are direct costs?
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Indirect CostsIndirect Costs
Indirect costs cannot be identifiedspecifically and exclusively with agiven cost objective in an economicallyfeasible way.
What are indirect costs?
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What Distinguishes What Distinguishes Direct and Indirect Costs?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.
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Categories of Categories of Manufacturing CostsManufacturing Costs
Any raw material, labor, or other inputused by any organization could,in theory, be identified as adirect or indirect costdepending on thecost objective.
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• ACCOUNTING(FINANCIAL & COST) OFACCOUNTING(FINANCIAL & COST) OFICMAP STAGE 1,2,3,4 (NEW CLASSES)ICMAP STAGE 1,2,3,4 (NEW CLASSES)CA..MODULE B,C,DCA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)PIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3ACCA-F1,F2,F3BBA,MBABBA,MBAB.COM(FRESH),M.COMB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSMA-ECONOMICS..O/A LEVELSKHALID AZIZ…..0322-3385752KHALID AZIZ…..0322-3385752http://finance.groups.yahoo.com/group/cost-http://finance.groups.yahoo.com/group/cost-accountantsaccountants
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Categories of Categories of Manufacturing CostsManufacturing Costs
• All costs which are eventually allocated to products are classified as either…
1 direct materials,
2 direct labor, or
3 indirect manufacturing.
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Direct Material Costs...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.
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Direct Labor Costs...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.
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Indirect Manufacturing Costs...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.
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Product Costs...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.
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Period Costs...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 28 29 30 3127
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Period or Product Costs 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.
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Period Costs – Merchandising Period Costs – Merchandising and Manufacturingand Manufacturing
• In both merchandising and manufacturing accounting, selling and general administrative costs are period costs.
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Learning Objective 4Learning Objective 4
Explain how the financial
statements of merchandisers
and manufacturers differ
because of the types of goods
they sell.
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Financial Statement Financial Statement PresentationPresentation
– Merchandising Companies– Merchandising Companies
MerchandiseInventory
MerchandiseInventory
SalesSales
Cost of Goods Sold(an expense)
Cost of Goods Sold(an expense)
Selling andAdministrative
Expenses
Selling andAdministrative
Expenses
Balance Sheet Income Statement
–
Equals Gross Margin
Equals Operating Income
–
Expiration
PeriodCosts
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Financial Statement Financial Statement PresentationPresentation
– Manufacturing Companies– Manufacturing Companies
FinishedGoods
Inventory
FinishedGoods
Inventory
SalesSales
Cost of Goods Sold(an expense)
Cost of Goods Sold(an expense)
Selling andAdministrative
Expenses
Selling andAdministrative
Expenses
Balance Sheet Income Statement
–
Equals Gross Margin
Equals Operating Income
–
Expiration
PeriodCosts
DirectMaterial
Inventory
DirectMaterial
Inventory
Work-in-Process
Inventory
Work-in-Process
Inventory
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Costs and Income StatementsCosts 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.
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Cost of Goods Sold Cost of Goods Sold for a Manufacturerfor a Manufacturer
• The manufacturer’s cost of goods produced and then sold is usually composed of the three major categories of cost:
1 Direct materials
2 Direct labor
3 Indirect manufacturing
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Cost of Goods SoldCost of Goods Soldfor a Retailer or Wholesalerfor 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.
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Learning Objective 5Learning Objective 5
Understand the main
differences between traditional
and activity-based costing
systems and why ABC systems
provide value to managers.
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Traditional Cost SystemTraditional Cost System
AllUnallocatedValue Chain
Costs
DirectMaterialResource
DirectLabor
Resource
AllIndirect
Resources
Products
DirectTrace
DirectTrace Cost
Driver
Unallocated
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Two-Stage Activity-BasedTwo-Stage Activity-BasedCost SystemCost System
AllUnallocatedValue Chain
Costs
DirectMaterialResource
DirectLabor
Resource
IndirectResource
A
Products
DirectTrace
DirectTrace Activity
1
Unallocated
OtherDirect
Resources
IndirectResource
Z
Activity10
% % % %
CostDriver
CostDriver
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Activity-Based CostingActivity-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.
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Example of Activities and Cost Drivers:
Activities:Account billingBill verificationAccount iniquityCorrespondence
Cost Drivers:No. of lines No. of accountsNo. of labor hoursNo. of letters
Activity-Based CostingActivity-Based Costing
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Learning Objective 6Learning Objective 6
Identify the steps involved in the
design and implementation
of an activity-based
costing system.
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Designing and Implementing an Designing and Implementing an Activity-Based Costing SystemActivity-Based Costing System
Determine cost ofactivities, resources,and related costdrivers.
Develop a process-basedmap representing the flowof activities, resources, andtheir interrelationships.
Step 1 Step 2
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Designing and Implementing an Designing and Implementing an Activity-Based Costing SystemActivity-Based Costing System
Collect relevant data concerning costsand the physical flow of the cost-driverunits among resources and activities.
Step 3
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Designing and Implementing an Designing and Implementing an Activity-Based Costing SystemActivity-Based Costing System
Calculate and interpret the new activity-based information.
Using an activity-based costing system toimprove the operations of an organizationis activity-based management (ABM).
Step 4
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Activity-Based ManagementActivity-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.
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Activity-Based ManagementActivity-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.
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Learning Objective 7Learning Objective 7
Use activity-based cost
information to improve the
operations of an organization.
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Using ABC InformationUsing ABC Information
Activity-based management…
provides costs of value-added andnon-value-added activities.
improves managers’ understanding of operations.
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Learning Objective 8Learning Objective 8
Understand cost accounting’s
role in a company’s
improvement efforts across
the value chain.
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Cost Accounting andCost Accounting andthe Value Chainthe Value Chain
A good cost accounting system is critical toall value-chain functions from research anddevelopment through customer service.
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• ACCOUNTING(FINANCIAL & COST) OFACCOUNTING(FINANCIAL & COST) OFICMAP STAGE 1,2,3,4 (NEW CLASSES)ICMAP STAGE 1,2,3,4 (NEW CLASSES)CA..MODULE B,C,DCA..MODULE B,C,DPIPFA (FOUNDATION,INTERMEDIATE,FINAL)PIPFA (FOUNDATION,INTERMEDIATE,FINAL)ACCA-F1,F2,F3ACCA-F1,F2,F3BBA,MBABBA,MBAB.COM(FRESH),M.COMB.COM(FRESH),M.COMMA-ECONOMICS..O/A LEVELSMA-ECONOMICS..O/A LEVELSKHALID AZIZ…..0322-3385752KHALID AZIZ…..0322-3385752http://finance.groups.yahoo.com/group/cost-http://finance.groups.yahoo.com/group/cost-accountantsaccountants
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