1. Cost Management Systems
and Activity-Based Costing
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2. Cost Management System
A cost-management system (CMS) is a
collection of tools and techniques that
identifies how management’s decisions
affect costs.
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3. What is Cost Accounting?
Cost accounting is that part of the accounting
system that measures costs for the purposes of
management decision making and financial
reporting.
(Explain the relationships among cost, cost objective,
cost accumulation, and cost allocation.)
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4. Cost Accounting System
Collecting costs by some
Cost
“natural” classification
Accumulation
such as materials or labor
Cost Tracing costs to one or
Allocation more cost objectives
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6. Cost Accounting System
Cost Accumulation
Cost Allocation to
Cost Objects: RAW MATERIAL
1. Departments COSTS (METALS)
2. Activities
3. Products
MACHINING FINISHING
DEPARTMENT DEPARTMENT
ACTIVITY ACTIVITY ACTIVITY ACTIVITY
CABINETS CABINETS
DESKS DESKS
TABLES TABLES
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7. Cost
• 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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8. Cost Objective
What is a cost object or cost objective?
It is anything for which a separate
Measurement of costs is desired.
Distinguish among direct,
indirect, and unallocated costs.
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9. Direct Costs
What are direct costs?
Direct costs can be identified
specifically and exclusively
with a given cost objective in
an economically feasible way.
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10. Indirect Costs
What are indirect costs?
Indirect costs cannot be
Identified specifically and
exclusively with a given cost
objective in an economically
feasible way.
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11. Examples
Costs usually charged Costs either charged Costs usually allocated
directly directly or allocated indirectly
• Project staff indirectly • Utilities
• Consultants • Telephone charges • Rent
• Project supplies • Computer use • Audit and legal
• Publications • Project clerical • Administrative staff
• Travel personnel • Equipment rental
• Training • Postage and printing • Petrol
• Miscellaneous office • Maintenance
supplies
• Generator
• Security
• Telephone
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12. What Distinguishes
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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13. Categories of Manufacturing Costs
Any raw material, labor, or other input
used by any organization could, in theory,
be identified as a direct or indirect cost
depending on the cost objective.
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14. Categories of Manufacturing 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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15. 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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16. 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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17. 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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18. 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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19. 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 27 28 29 30 31
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20. Period Costs – Merchandising and
Manufacturing
• In both merchandising and
manufacturing accounting, selling and
general administrative costs are period
costs.
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21. Cost of Goods Sold for 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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22. Cost of Goods Sold
for 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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23. Understand the main
differences between traditional
and activity-based costing
systems and why ABC systems
provide value to managers.
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24. Traditional Cost System
Direct Direct All All
Material Labor Indirect Unallocated
Resource Resource Resources Value Chain
Costs
Direct Direct
Trace Trace Cost
Driver
Products Unallocated
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25. Two-Stage Activity-Based
Cost System
Direct Direct Other Indirect Indirect All
Material Labor Direct Resource Resource Unallocated
Resource Resource Resources A Z Value Chain
Costs
Direct Direct % % % %
Trace Trace Activity 1 Activity 10
Cost Cost
Driver Driver
Products Unallocated
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26. Activity-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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28. Activity-Based Costing
Example of Activities and Cost Drivers:
Activities: Cost Drivers:
Account billing No. of lines
Bill verification No. of accounts
Account iniquity No. of labor hours
Correspondence No. of letters
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29. Identify the steps involved in the
design and implementation
of an activity-based
costing system.
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30. Designing and Implementing an Activity-
Based Costing System
Step 1 Step 2
Determine cost of Develop a process-based
activities, resources, map representing the flow
and related cost of activities, resources, and
drivers. their interrelationships.
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31. Designing and Implementing an Activity-
Based Costing System
Step 3
Collect relevant data concerning costs
and the physical flow of the cost-driver
units among resources and activities.
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32. Designing and Implementing an Activity-
Based Costing System
Step 4
Calculate and interpret the new
activity-based information.
Using an activity-based costing system to
improve the operations of an organization
is activity-based management (ABM).
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35. Using ABC Information
Activity-based management…
provides costs of value-added and
non-value-added activities.
improves managers’ understanding of operations.
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36. The End
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