Basic Cost Management Concepts

25 Basic Cost Management Concepts KEY TERMS TEST SET #1 From the list that follows, select the term that best completes each statement and write it in the space provided. accounting information system activity-based costing activity-based management (ABM) cost accounting information system cost management information system error costs financial accounting information system functional-based cost system functional-based operation control system intangibility measurement costs nonproduction costs operational control information system production (or product) costs system 1. The costs associated with the measurements required by the cost management system are the ______________________________. 2. The _________________________________________________________ is designed to assign costs to individual products and services. 3. ____________________________________ uses both unit- and nonunit-based activity drivers to assign costs to cost objects. 4. A cost accounting system that uses only unit-based activity drivers to assign costs to cost objects is considered a(n) _______________________________________________. 5. A(n) _________________________________________________ consists of interrelated manual and computer parts, using processes such as collecting, recording, summarizing, analyzing, and managing data to provide output information to users. 6. ____________________________ are associated with the manufacture of goods or the provision of services. 7. A(n) _________________________________________________________ assigns costs to organizational units and then holds the manager responsible for controlling the costs. 8. The ___________________________________________________________ is concerned with producing outputs for internal users; the _______________________________ _________________________________________ is concerned with producing outputs for external users. 9. The activity-based control system known as _______________________________ ___________ includes driver analysis, activity analysis, and performance evaluation. 10. Costs associated with the functions of selling and administration are ________________ _____________________. 26 Chapter 2 11. A(n) ____________ is a set of interrelated parts that performs one or more processes to accomplish specific objectives. 12. __________ means that buyers of services cannot see, feel, hear, or taste a service before it is bought because services are intangible products. 13. The _______________________________________________________________ is designed to provide accurate and timely feedback concerning the performance of managers relative to their planning and control of activities. 14. The costs associated with making poor decisions based on inaccurate product costs are the __________________. SET #2 From the list that follows, select the term that best completes each statement and write it in the space provided. absorption-costing income activity cost object direct costs direct tracing driver tracing drivers indirect costs inseparability period costs perishability resource drivers service tangible products traceability work in process 1. ____________________________ consists of all partially completed units found in production at a given time. 2. Any item for which costs are measured and assigned is a(n) __________________. 3. A task or activity performed for a customer is a(n) ____________. 4. __________________________________________ is income computed following a functional classification. 5. Factors that cause changes in resource usage, activity usage, costs, and revenues are ____________; the use of these to assign costs to cost objects is called ___________ ___________. 6. Goods that are produced by converting raw materials by using labor and capital are ____________________________. 7. ________________________ cannot be traced to a cost object. 8. ________________________ is the process of identifying costs that are specifically or physically associated with a cost object. 9. __________ means that services are perishable because they cannot be stored. 27 Basic Cost Management Concepts 10. The basic unit of work performed within an organization is a(n) ______________. 11. ______________________ can be easily and accurately traced to a cost object. 12. The ability to economically assign a cost directly to a cost object using a causal relationship is known as __________________. 13. __________ means that services are inseparable from their producers because producers and buyers must usually be in direct contact for an exchange to take place. 14. Marketing and administrative costs are _______________ that are expensed in the period in which they are incurred. SET #3 From the list that follows, select the term that best completes each statement and write it in the space provided. administrative costs allocation assets conversion cost cost cost of goods manufactured cost of goods sold direct labor direct materials expenses full-costing income loss marketing costs overhead prime cost supplies 1. _________ is the cash or cash equivalent value sacrificed for goods or services that are expected to bring a current or future benefit to the organization. 2. The costs that cannot be reasonably assigned to either marketing or production are the ________________________________. 3. ____________________________ are materials that are traceable to the goods or services being produced. 4. All production costs other than direct materials and direct labor are included in _______________. 5. The sum of direct labor cost and overhead cost is called _________________________ ; the sum of direct materials cost and direct labor cost is called _________________________. 6. Materials necessary for production but which do not become part of the finished product are ______________. 7. The total cost of goods completed during the current period is the ______________________ _______________________; the total cost assigned to goods sold during the period is the _____________________________________________. 28 Chapter 2 8. Those costs necessary to market and distribute a product or service are the __________________________. 9. The assignment of indirect costs to cost objects is called _________________. 10. _____________________ is labor that is traceable to the goods or services being produced. 11. Expired costs are _______________. MULTIPLE-CHOICE QUIZ Complete each of the following statements by circling the letter of the best answer. 1. The assignment of indirect costs to cost objects is called: a. activity-based costing. b. allocation. c. driver tracing. d. mixed costs. e. variable costs. 2. Direct tracing is: a. assigning indirect costs to cost objects. b. identifying cost objects attributed to activity drivers. c. assigning costs to cost objects using drivers. d. identifying costs that are specifically or physically associated with a cost object. e. identifying factors that cause costs to change. 3. Which of the following is not a method of assigning costs to cost objects? a. allocation b. conversion costing c. direct tracing d. driver tracing e. All of the above are methods for assigning costs to cost objects. 4. The accounting information subsystem that is primarily concerned with producing outputs for external users is: a. the cost accounting information system. b. the cost management information system. c. the financial accounting information system. d. the operational control information system. e. none of the above. Basic Cost Management Concepts 29 5. The cost management system should not be integrated with which of the following? a. customer servicing system b. design and development system c. marketing and distribution system d. production system e. The cost management system should be integrated with all of the above systems. 6. The cost management subsystem that is designed to provide accurate and timely feedback concerning the performance of managers relative to their planning and control of activities is: a. the activity-based costing information system. b. the cost accounting information system. c. the financial accounting information system. d. the operational control information system. e. none of the above. 7. Expired costs are: a. assets. b. expenses. c. liabilities. d. losses. e. revenues. 8. Which of the following methods of tracing costs will yield the most precision? a. allocation b. direct tracing c. driver tracing d. indirect costing e. none of the above 9. Product costs used for external financial reporting will include which of the following? a. customer service costs b. marketing costs c. production costs d. research and development costs e. all of the above 10. The optimal cost management system is the one that: a. minimizes the error costs. b. minimizes the measurement costs. c. minimizes the sum of the error costs and the measurement costs. d. costs the least to operate. e. uses contemporary cost management principles. 30 Chapter 2 11. Which of the following statements is true? a. The optimal cost management system will never be a traditional system. b. A multiproduct firm will have more accurate product costs because there are more products over which to spread the costs. c. The costs of measurement have been increasing as new information technology is used. d. The use of direct tracing rather than allocation should cause the cost of errors to decrease. e. As costs of measurement increase, a more accurate cost system will become optimal. Use the following information for Questions 12 through 14: Sawmill Corp. started December with 500 units in beginning finished goods. During the month, 4,000 units were produced, and 3,700 units were sold. Costs added during December were direct materials, $2,000; direct labor, $400; and production overhead, $1,400. Sales salaries totaled $1,200; administrative costs totaled $800. Inventory balances were as follows: Beginning work in process ............... Beginning finished goods ................. Ending work in process .................... Ending finished goods ...................... $250 450 600 690 12. What is the cost of goods manufactured? a. $3,210 b. $3,450 c. $3,800 d. $5,450 e. $5,800 13. What is the cost of goods sold? a. $3,210 b. $3,450 c. $3,800 d. $5,450 e. $5,800 14. If each unit sold for $2.00, what would the absorption costing profit be? a. $1,600 b. $1,950 c. $2,190 d. $2,590 e. none of the above Basic Cost Management Concepts PRACTICE TEST EXERCISE 1 Required: Describe three ways that functional cost accounting differs from activity-based cost accounting. 31 32 Chapter 2 EXERCISE 2 Darwin Company manufactured 30,000 widgets last year while selling 29,000 units for $15 each. The actual production costs (on a per-unit basis) for the widgets were as follows: Direct materials ............................ Direct labor ................................... Variable overhead ........................ Fixed overhead ............................ Total unit cost ............................... $3.50 1.25 0.75 3.75 $9.25 Selling costs included a commission of $1 per unit sold and advertising of $50,000. Administrative expenses, all fixed, totaled $35,000. There were no work-in-process inventories. There was no beginning finished goods inventory. Required: Prepare an absorption-costing income statement. 33 Basic Cost Management Concepts EXERCISE 3 ABB Company manufactures paperweights. During May, direct labor cost was $35,400, raw materials of $66,000 were purchased, and overhead totaled $59,000. The following information has been obtained from the inventory reports: Raw materials inventory........................... Work-in-process inventory ....................... Finished goods inventory ......................... May 1 May 31 $3,500 2,600 9,800 $4,700 4,100 8,700 Required: 1. Prepare a cost of goods manufactured statement for May. 2. Prepare a cost of goods sold statement for May. 34 Chapter 2 EXERCISE 4 Southport Architects provides architectural services for real estate developers. During October, Southport completed and invoiced contracts totaling $215,000. At the beginning of October there were 10 jobs in progress, with accumulated costs of $34,000. Materials and supplies totaling $23,000 were used during the month, architect salaries of $75,000 were paid, and overhead was estimated to be $56,000. There were 5 unfinished jobs at the end of October with accumulated costs of $21,500. Administrative salaries were $26,000, and related administrative overhead was estimated to be $15,000. Required: Prepare an income statement for the month of October for Southport Architects. 35 Basic Cost Management Concepts “CAN YOU?” CHECKLIST  Can you identify the characteristics of an information system, explain what makes an accounting information system different from other information systems, and explain the distinctions among the following subsystems of the accounting information system?  cost accounting information system  cost management information system  financial accounting information system  operational control information system  Can you describe the cost assignment process and explain when direct tracing, driver tracing, and allocation would be used? Can you explain under what conditions each of these approaches will give more accurate product costs?  Can you describe the difference between an activity driver and a resource driver? Can you explain what each one measures?  Can you describe the difference between a tangible product and a service? Can you prepare an income statement for each?  Can you differentiate between the cost of goods manufactured and the cost of goods sold for a manufacturing company? for a service company? Can you prepare the required statements?  Can you describe the connection between activity drivers and cost behavior?  Can you explain the differences between traditional and contemporary cost accounting systems? between traditional and contemporary operational control systems? ANSWERS KEY TERMS TEST SET #1 1. 2. 3. 4. 5. 6. 7. 8. measurement costs cost accounting information system Activity-based costing functional-based cost system accounting information system Production (or product) costs functional-based operation control system cost management information system, financial accounting information system 9. 10. 11. 12. 13. 14. activity-based management nonproduction costs system Intangibility operational control information system error costs 36 Chapter 2 SET #2 1. 2. 3. 4. 5. 6. 7. Work in process cost object service Absorption-costing income drivers, driver tracing tangible products Indirect costs 8. 9. 10. 11. 12. 13. 14. Direct tracing Perishability activity Direct costs traceability Inseparability Period costs 7. 8. 9. 10. 11. cost of goods manufactured, cost of goods sold marketing costs allocation Direct labor expenses SET #3 1. 2. 3. 4. 5. 6. Cost administrative costs Direct materials overhead conversion cost, prime cost supplies MULTIPLE-CHOICE QUIZ 1. 2. 3. 4. 5. 6. 7. 8. b d b c e d b b 9. c 10. c 11. d 12. b Cost of goods manufactured + EI (WIP) = BI (WIP) + Added manufacturing costs Cost of goods manufactured = BI (WIP) + Added manufacturing costs – EI (WIP) Cost of goods manufactured = BI (WIP) + (Direct materials + Direct labor + Production overhead) – EI (WIP) Cost of goods manufactured = $250 + ($2,000 + $400 + $1,400) – $600 = $3,450 13. a Cost of goods sold + EI (FG) = BI (FG) + Cost of goods manufactured Cost of goods sold = BI (FG) + Cost of goods manufactured – EI (FG) Cost of goods sold = $450 + $3,450 – $690 = $3,210 14. c Revenues (3,700 units sold × $2.00) ........................................... Less cost of goods sold ................................................................ Gross margin ................................................................................ Less selling and administrative expenses ($1,200 + $800) ......... Net income ................................................................................... $7,400 3,210 $4,190 2,000 $2,190 PRACTICE TEST EXERCISE 1 (Comparisons between Functional-Based and Activity-Based Cost Accounting) 1. The functional-based cost accounting systems use only unit-based activity drivers to assign costs to cost objects. The activity-based cost accounting systems use both unit- and nonunit-based activity drivers. 2. The functional-based cost accounting systems tend to be allocation-intensive. The activity-based cost accounting systems more often use direct tracing and driver tracing. 3. The functional-based cost systems tend to use an external financial reporting definition of product cost as the cost object. Thus, costs are divided into product (inventoriable) and period (noninventoriable) costs. The activity-based cost systems use a variety of cost objects, depending upon the decision being made. The cost objective may be the value-chain product cost or the operating product cost. 37 Basic Cost Management Concepts EXERCISE 2 (Absorption-Costing Income Statement) Darwin Company Income Statement For the Year Ended 2004 Sales (29,000 × $15)........................................................................... Cost of goods sold: Beginning finished goods inventory ................................................. Add: Cost of goods manufactured (30,000 × $9.25)...................... Goods available for sale .................................................................. Less: Ending finished goods inventory (1,000 × $9.25)................. Gross margin ....................................................................................... Less operating expenses: Selling expenses [$50,000 + (29,000 × $1)] ................................... Administrative expenses ................................................................. Operating income ................................................................................. $435,000 $ 0 277,500 $ 277,500 9,250 $ 79,000 35,000 268,250 $166,750 114,000 $ 52,750 EXERCISE 3 (Cost of Goods Manufactured and Sold Statements) 1. ABB Company Statement of Cost of Goods Manufactured For the Month Ended May 31, 2004 Direct materials: Beginning inventory ......................................................................... Add: Purchases .............................................................................. Materials available........................................................................... Less: Ending inventory ................................................................... Direct materials used in production ................................................. Direct labor........................................................................................... Manufacturing overhead ...................................................................... Total manufacturing costs .................................................................... Add: Beginning work in process .......................................................... Less: Ending work in process ............................................................. Cost of goods manufactured ................................................................ 2. ABB Company Statement of Cost of Goods Sold For the Month Ended May 31, 2004 Cost of goods manufactured ................................................................ Add: Beginning inventory finished goods ............................................ Cost of goods available for sale ........................................................... Less: Ending inventory finished goods ................................................ Cost of goods sold ............................................................................... $ 3,500 66,000 $69,500 4,700 $ 64,800) 35,400) 59,000) $159,200) 2,600) (4,100) $157,700) $157,700 9,800 $167,500 8,700 $158,800 EXERCISE 4 (Income Statement: Service Organization) Southport Architects Income Statement For the Month Ended October 31, 2004 Sales ................................................................................................... Cost of services provided: Materials and supplies..................................................................... Architect salaries ............................................................................. Overhead ........................................................................................ Total costs added ............................................................................ Add: Beginning work in process ..................................................... Total ................................................................................................ Less: Ending work in process ......................................................... Total cost of services provided ........................................................ Gross margin ....................................................................................... Operating expenses: Administrative salaries .................................................................... Administrative overhead .................................................................. Total operating expenses ................................................................ Operating income ................................................................................. $215,000 $ 23,000 75,000 56,000 $154,000 34,000 $188,000 21,500 166,500 $ 48,500 $ 26,000 15,000 $ 41,000 7,500