ACCT 312 CH 2

System

• Set of interrelated parts that perform one or more processes to accomplish specific objectives

• Works by using processes to transform inputs into outputs

• Each part of the system is critical for achievement of the overall objective

• Ex: Cell phone

Accounting information system

• Provides information to people in a company

• Collects, classifies, summarizes, analyzes, and manages data to provide information to users

Cost accounting information system

Assigns costs to individual products and services and other objects of interest to managers

Operational control information system

Provides accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities

Cost

Cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit

Expenses

As costs are used up in the production of revenues, they are said to expire; Expired costs which are deducted from revenues on the income statement

Loss

Cost that expires without producing any revenue benefit (e.g., the cost of inventory destroyed by a flood)

Assets

Unexpired costs that appear on the balance sheet

Cost objects

• Things for which costs are measured and assigned

• Include products, customers, departments, projects, activities, etc.

Activity

• Basic unit of work performed within an organization

• Plays a prominent role in assigning costs to other cost objects

• Essential elements of an activity-based cost accounting system

Cost assignment

The objective is to measure and assign as accurately as possible the cost of the resources used by a cost object.

Traceability

• Ability to assign cost directly to a cost object in an economically feasible way by means of a causal relationship

Indirect costs

• Costs that cannot be traced easily and accurately to a cost object

• cannot be traced to cost objects because of no causal relationship

Direct costs

Costs that can be traced easily and accurately to a cost object

Direct tracing

• Process of identifying and assigning costs to a cost object that are physically associated with the cost object

• e.g., Blue jeans. The materials and labor are physically observable; therefore, they can be directly charged to a jeans

Driver tracing

• Use of drivers to assign costs to cost objects

• It is often impossible to physically observe the exact amount of resources being used by a cost object

Drivers

Factors that cause changes in resource usage, activity usage, costs, and revenues

Allocation

• Assignment of indirect costs to cost objects

• Arbitrarily allocating indirect costs to cost objects reduces the overall accuracy of the cost assignments

Data analytics

Process through which a company utilizes various amounts and types of data to help connect strategy and key goals to improve throughout the company

Corporate sustainability reporting (CSR)

Voluntary public disclosure of qualitative and/or quantitative information about an organization’s performance on one or more financial and/or nonfinancial dimensions

United States

While comprehensive federal mandates face delays, state-level rules—such as California’s climate accountability laws (SB 253)—make reporting mandatory for large corporations doing business in those states

External verification

• a verification that an independent party provides concerning the content of a corporate sustainability report and/or the process used in preparing a corporate sustainability report

• People are more likely to trust C S R information if it has been verified by an unbiased party

Tangible products

Goods produced by converting raw materials into finished products

Service

Tasks or activities performed for a customer or an activity performed by a customer using an organization’s products or facilities

Intangibility

Buyers of services cannot see, feel, hear, or taste a service before it is bought

Perishability

Services cannot be stored

Inseparability

Producers of services and buyers of services must usually be in direct contact for an exchange to take place

Different costs for different purposes

• A fundamental cost management principle

• Product cost definitions can differ according to the objective being served

Production (or product) costs

• Costs associated with manufacturing goods or providing services

• Also known as manufacturing costs

• Can be further classified as direct materials, direct labor, and overhead

Nonproduction (Period) costs

• Costs associated with the functions of selling and administration

• Also known as nonmanufacturing costs

Direct materials

Materials traceable to the goods or services being produced

Direct labor

Labor that is traceable to the goods or services being produced

Overhead

Production costs other than direct materials and direct labor

Prime cost

Sum of direct materials cost and direct labor cost

Conversion cost

Sum of direct labor cost and overhead cost

Period costs

• Marketing and administrative costs that are not inventoried

• Expensed in the period in which they are incurred

Nonproduction costs

Divided into marketing (selling) costs and administrative costs

Marketing (selling) costs

Costs necessary to market and distribute a product or service

Ex: Advertising, storage costs, and shipping0

Administrative costs

Costs that cannot be reasonably assigned to either marketing or production

Ex: Top-executive salaries, legal fee, and research and development

Income statement

statement prepared for external parties with a standard format

Absoprtion-costing income / full-costing income

• all manufacturing costs are fully assigned to the product

• Expenses are separated according to function and then deducted from revenues to arrive at operating income

• Two major functional categories of expense are the cost of goods sold and operating expenses

Cost of goods manufactured

Total manufacturing cost of goods completed during the current period

Cost of goods sold

Manufacturing cost of the units that were sold during the period

Variable costing

assigns only variable manufacturing costs, such as, direct materials, direct
labor, and variable overhead, to the product. Fixed overhead is treated as a period expense and is excluded from the product cost

Absorption costing

assigns all manufacturing costs, such as direct materials, direct labor, variable overhead, and fixed overhead, to the product. Under this costing, fixed overhead is viewed as a product cost, not a period cost

Traditional cost accounting

• Assumes that all costs can be classified as fixed or variable with respect to changes in the units or volume of product

• Uses only unit-based activity drivers to assign costs

Traditional operation control system

• Assigns costs to organizational units

• Holds the organizational unit manager responsible for controlling the assigned costs

• The approach assumes that maximizing the performance of the overall organization is achieved by maximizing the performance of individual organizational subunits

Activity-based cost (ABC) system

• Emphasizes tracing over allocation

• Uses both unit- and non-unit-based activity drivers

Activity-based cost control

Focuses on accountability for activities rather than costs

Activity-based management (ABM)

Focuses on the management of activities with the objective of improving the value received by the customer and the profit received by the company in providing this value

Measurement costs

Costs associated with the measurements required by the cost management system

Error costs

Costs associated with making poor decisions based on bad cost information