1. Explain the Impact of Poor Cost Information
Intermediate Cost Analysis
and Management

2. How much does a box of cereal cost?

3. Terminal Learning Objective
Action: Explain the Impact of Poor Cost Information on a Decision
Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors
Standard: With at least 80% accuracy:
Demonstrate understanding of Cost Terminology
Explain the impact of poor cost information on a decision

4. Consider the Following Types of Cost:
There Are Many Possible Ways to Measure Costs
Consider the Following Types of Cost:
Direct, indirect, variable, fixed, sunk, period, inventoriable, reimbursable, capital, standard, conversion, prime, carrying, incremental, separable, joint, project, controllable, current, historical, normal, discretionary, full, responsibility, imputed, opportunity, mixed, out-of pocket, relevant,
target, absorption, average, quality, estimated,
and unit

5. Relevance of Information
Has anyone recently purchased a new vehicle?
What were your top three criteria? Why?
Where did you get your information? Why?
What influenced your decision?
How will you use the vehicle?
How much will you drive it?
In what stage of your life are you?

6. Relevance of Information (Cont.)
How might your information needs differ if you were deciding where to pursue your Masters degree?
How would your decision criteria differ?
What different sources of information would you choose?

7. Let’s Start a Business What should we sell? List five products:
Product: Cost: 1. 2. 3. 4. 5.
Total Cost:

8. Let’s Start a Business (Cont.)
Costing methodology:
Calculate unit cost
Add a markup on cost to guarantee a profit
Set selling price

9. Let’s Start a Business (Cont.)
Calculate Average Unit $ Cost:
Total Cost / 5 units =
$ per unit
Add a 30% markup on cost to calculate Selling Price:
* ( ) = $ per unit

10. Let’s Start a Business (Cont.)
What’s wrong with this picture? Product: Selling Price:

11. Conclusions Followed the costing methodology to the letter
Calculated unit cost and selling price to the penny
What went wrong?
Costing methodology not appropriate for our purpose of setting prices for diverse items

12. LSA #1 Check on Learning
Q1. Direct, indirect, variable, fixed, sunk, period, reimbursable are just some types of this. A1.
Q1. Direct, indirect, variable, fixed, sunk, period, reimbursable are just some types of this.
A1. What is Cost?

13. LSA #1 Summary
During this lesson, we introduced some Cost terminology and some important variables within when contemplating a purchase.

14. FASAB’s SFFAS #4
Read the Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4
How do we know that FASAB Considers Cost Accounting a High Priority?
List the Five Fundamental Elements of Cost Accounting:
1. Accumulating and reporting costs of activities
2. Establishing responsibility segments
3. Determining full costs of goods and services
4. Recognizing the costs of goods and services provided among federal entities
5. Using appropriate methodologies to assign costs

15. FASAB’s SFFAS #4 (Cont.) Read the Introduction to SFFAS #4
What are three goals of federal financial reporting?
1. Costs of specific programs and activities and the composition of, and changes in, those costs;
2. Efforts and accomplishments associated with federal programs and their changes over time and in relation to costs
3. Efficiency and effectiveness of the government's management of its assets and liabilities

16. FASAB’s SFFAS #4 (Cont.)
Who are the users of federal financial information? Users Decisions: 1. Government -spend resources to Managers achieve expected results 2. Congress -program decisions Federal Executives -evaluate performance 3. Citizens -resource allocation

17. FASAB’s SFFAS #4 (Cont.)
What are objectives of managerial cost accounting information?
1. Provide program managers with relevant and reliable information relating costs to outputs and activities
2. Provide relevant and reliable cost information to assist the Congress and executives in making decisions about allocating federal resources
3. Ensure consistency between costs reported in financial reports and costs reported to managers

18. FASAB’s SFFAS #4 (Cont.)
List the five topics addressed by the standard: 1. Requirement for cost accounting 2. Responsibility segments 3. Full cost 4. Inter-entity costs 5. Costing methodology

19. FASAB’s SFFAS #4 (Cont.)
List the five purposes for using cost accounting information: 1. Budgeting and cost control 2. Performance measurement 3. Determining reimbursements and setting fees and prices 4. Program evaluations 5. Making economic choice decisions

20. FASAB’s SFFAS #4 (Cont.)
Managerial cost accounting is the process of… 1. accumulating 2. measuring 3. analyzing 4. interpreting 5. reporting …cost information __[a]__to both__[b]__ and __[c]__ groups
a: Useful
a: Internal
a: External

21. FASAB’s SFFAS #4 (Cont.)
How are cost accounting and financial accounting related?
Cost information generally originates with transactions recorded for financial accounting purposes
How are cost accounting and budgetary accounting related?
Managerial cost accounting should provide budgetary accounting with cost information

22. FASAB’s SFFAS #4 (Cont.) What basis of accounting should be used?
“The measurement of costs can vary depending upon the __[a]__ and __[b]__ for which the measurement is to be used.”
“…using a basis of accounting …__[c]__ for the intended use of the information.”
[a] Circumstances
[b] Purpose
[c] Appropriate

23. FASAB’s SFFAS #4 (Cont.)
Read the standard on Costing Methodology “The costs of resources that directly or indirectly contribute to the production of outputs should be to outputs through costing or cost techniques that are most to the segment's operating environment…”
Full
Assigned
Methodologies
Finding
Appropriate

24. FASAB’s SFFAS #4 (Cont.)
The cost assignments should be performed by the following methods listed in the order of preference:
(a) directly tracing costs wherever feasible and economically practicable,
(b) assigning costs on a cause-and-effect basis, or
(c) allocating costs on a reasonable and consistent basis.

25. FASAB’s SFFAS #4 (Cont.) Costing Terminology: Cost accumulation –
Cost assignment- the process that identifies accumulated costs with reporting periods and cost objects.
Cost object - - an activity or item whose cost is to be measured
the process of collecting cost data in an organized way
the process that identifies accumulated costs with reporting
periods and cost objects.
an activity or item whose cost is to be measured

26. FASAB’s SFFAS #4 (Cont.)
List the four Costing Methodologies outlined in the standard:
Activity Based Costing
Job Order Costing
Process Costing
Standard Costing
an activity or item whose cost is to be measured

27. Other Provisions of SFFAS #4
Requires Cost Accounting
Accumulate and report costs of activities for management information purposes
May use either Cost System or Cost Finding Techniques
Define Responsibility Segments
Measure and report costs of each segment’s outputs

28. Other Provisions of SFFAS #4
Report and Measure Full Cost in General Purpose financial reports
Include direct and indirect costs incurred in the reporting segment AND
Identifiable supporting costs incurred in other segments and entities
Incorporate cost of goods and services received from other entities, if Significant and Identifiable

29. LSA #2 Check on Learning Q1. Match the title to it’s definition
Cost accumulation:
Cost assignment:
periods and cost objects.
Cost object:- an activity or item whose cost is to be measured
The process that identifies accumulated costs with reporting
periods and cost objects.
an activity or item whose cost is to be measured
Q1. Match the title to it’s definition
Cost accumulation: The process of collecting cost data in an organized way
Cost assignment: The process that identifies accumulated costs with reporting
periods and cost objects.
Cost object:- an activity or item whose cost is to be measured
The process of collecting cost data in an organized way

30. LSA #2 Summary
During this lesson, we discussed Provisions of SFFAS #4 in detail

31. Conclusions
Cost information is only meaningful when appropriate for its intended purpose
Poor or inappropriate cost information can lead to poor decisions
We will learn many methods of cost measurement, each with an appropriate use

32. TLO Summary
Action: Explain the Impact of Poor Cost Information on a Decision
Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors
Standard: With at least 80% accuracy:
Demonstrate understanding of Cost Terminology
Explain the impact of poor cost information on a decision