Managerial Ch. 4 - Cost Management Systems | Horngren's Accounting

Product Costs Components

Direct materials, direct labor, and manufacturing overhead.

Direct Costs (Assignment)

Costs that are easily traced and assigned to the product, specifically direct materials costs and direct labor costs.

Indirect Costs (Allocation)

Costs that are allocated to the product, specifically manufacturing overhead costs.

Single Plantwide Rate (Definition)

The predetermined overhead allocation rate calculated before the period begins, representing the traditional and simplest method of allocating manufacturing overhead.

Single Plantwide Rate (Characteristics)

Uses only one allocation base applied to all units.

Predetermined Overhead Allocation Rate Formula (General)

Total estimated overhead costs divided by the Total estimated quantity of the overhead allocation base.

Example of Multiple Department Rates (Assembly Dept.)

Overhead allocation base is machine hours.

Example of Multiple Department Rates (Software Dept.)

Overhead allocation base is direct labor costs.

Refined Allocation System Analysis Result

Using a more refined system (like multiple department rates) can show that one product costs slightly more than originally thought, while another costs less than originally thought, compared to a single plantwide rate.

Activity-Based Management (ABM) Focus

Focuses on the primary activities the business performs.

Activity-Based Management (ABM) Use

Uses cost information to make decisions that lead to greater profits.

Activity-Based Costing (ABC) Definition

The process of determining the cost of the activities as building blocks for allocating indirect costs to products and services.

ABC Step 1

Identify activities and estimate their total indirect costs.

ABC Step 2

Identify the allocation base for each activity and estimate the total quantity of each allocation base.

ABC Step 3

Compute the predetermined overhead allocation rate for each activity.

ABC Step 4

Allocate indirect costs to the cost object.

Activity Example: Quality Inspection Allocation Base

Number of inspections.

Activity Example: Warranty Services Allocation Base

Number of service calls.

Activity Example: Shipping Allocation Base

Number of pounds of product shipped.

Activity Example: Setup Allocation Base

Number of batches.

Activity Example: Purchasing Allocation Base

Number of purchase orders.

Activity-Based Management Decisions

Decisions that increase profits while meeting customer needs, including pricing and product mix decisions and cost management.

Pricing Decision (ABM)

Determining if the selling price should change if the cost per unit changes.

Product Mix Decision (ABM)

Comparing the gross profit of two products and choosing to sell the product with the greatest gross profit to maximize total gross profit, while considering limited production capabilities.

Value Engineering

Reevaluates activities to reduce costs while still satisfying customer needs.

Target Price

The amount customers are willing to pay for a product or service.

Target Cost

The maximum cost to develop, produce, and deliver the product or service while still earning the desired profit.

Cost-Based Pricing

Full product cost (cost to develop, produce, and deliver) plus the desired profit determines the sales price.

Full Product Cost Components

Current total manufacturing cost per unit plus nonmanufacturing costs (operating expenses).

ABM in Service Companies

Uses the same four steps (Identify activities/costs, Identify allocation bases/quantities, Compute rates, Allocate costs) as manufacturing companies to develop overhead rates.

Just-in-Time (JIT) Management System Goal

Reduces inventory costs.

JIT Production Timing

Raw materials and finished goods are completed just in time for delivery to customers.

JIT Costing System Characteristic

Simplifies accounting for companies and tracks costs after the units are completed.

JIT Inventory Account Simplification

Combines Raw Materials Inventory and Work-in-Process Inventory into a single account called Raw and In-Process Inventory.

JIT Conversion Costs Account

Combines direct labor and manufacturing overhead costs.

Quality Management System (QMS) Definition

A system that helps managers improve business performance by providing quality products and services.

Goals of QMS

Improve performance, increase customer satisfaction, and increase profits.

Prevention Costs

Costs incurred to avoid poor-quality goods or services (e.g., employee training, preventive maintenance on equipment, evaluation of supplier processes).

Appraisal Costs

Costs incurred to detect poor-quality materials, goods, or services (e.g., inspection at various stages, product testing, inspection of final products).

Internal Failure Costs

Costs incurred to correct goods or services before delivery to customers (e.g., reworking substandard products, rejected products, production problems causing manufacturing to stop).

External Failure Costs

Costs incurred after delivery to the customer has occurred (e.g., warranty costs, service costs at customer sites, lost profits due to unhappy customers, sales returns due to product defects).