1. Chapter 2 Basic Cost Management Concepts
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2. Study Objectives Explain the cost assignment process.
Define tangible and intangible products, and explain why there are different product cost definitions.
Prepare income statements for manufacturing and service organizations.
Explain the differences between traditional and contemporary cost management systems.

3. Cost Assignment: Direct Tracing, Driver Tracing and Allocation1.
A cost object is any item, such as products, customers, departments, projects, activities, and so on, for which costs are measured and assigned.
Example: A bicycle is a cost object when you are determining the cost to produce a bicycle.
An activity is a basic unit of work performed within an organization.
Example: Setting up equipment, moving materials, maintaining equipment, designing products, etc.

4. Cost Assignment: Direct Tracing, Driver Tracing and Allocation1.
Traceability means that costs can be assigned easily and accurately, using a causal relationship.
Methods of tracing:
Direct tracing: relies on physical observance of causal relationships to assign costs to cost objects.
Driver tracing: relies on drivers as causal factors to assign costs to cost objects.

5. Cost Assignment Methods1.

6. Examples of Product Cost Definitions2.

7. Product Costs 2.
Direct materials: those materials directly traceable to the goods or services being produced.
Example: The cost of wood in furniture.
Direct labor: labor that is directly traceable to the goods or services being produced.
Example: Wages of assembly-line workers.
Overhead: all other manufacturing costs.
Example: Plant depreciation, utilities, property taxes, indirect materials, indirect labor, etc.

8. Prime and Conversion Costs2.

9. Nonproduction Costs 2.
Amount and timing of benefit cannot be reasonably estimated
Period costs
Not inventoried
Expensed as incurred
Examples
Research and development
Marketing costs
Administrative costs

10. Production and Nonproduction Costs2.

11. External Financial Statements
Income Statement ~ Manufacturing Firm
Functional categories of expense
Cost of goods sold
Operating expenses
Supporting schedules
Cost of goods manufactured
Income Statement ~ Service Organization
No finished goods inventory

12. Income Statement: Manufacturing Firm3.
From the Cost of Goods Sold Schedule

13. Statement of Cost of Goods Manufactured3.

14. Cost of Goods Sold Schedule3.

15. Cost Management Systems4.
Functional-Based
Assumes a linear production cost behavior
Assigns costs to organizational units
Activity-Based
Emphasizes tracing over allocation
Identifies non-unit-based activity drivers

16. Functional-Based Cost Management4.
Unit-based drivers
Allocation-intensive
Narrow and rigid product costing
Focus on managing costs
Sparse activity information
Maximization of individual unit performance
Uses financial measures of performance

17. Activity-Based Cost Management4.
Unit- and non-unit-based drivers
Tracing intensive
Broad, flexible product costing
Focus on managing activities
Detailed activity information
System-wide performance maximization
Uses both financial and nonfinancial measures of performance

18. Trade-Off between Measurement Costs and Error Costs4.

19. Shifting Costs 4.

20. End Chapter 2
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.