Basic Cost Management Concepts
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe a
cost management information system, its objectives and major subsystems, and
indicate how it relates to other operating and information systems.
2. Explain the cost assignment process.
3. Define
tangible and intangible products, and explain why there are different product
cost definitions.
4. Prepare income statements for manufacturing
and service organizations.
5. Explain the differences between traditional
and contemporary cost management systems.
CHAPTER SUMMARY
This chapter introduces a systems framework as a logical
basis for the study of cost management. The major objective of the cost
accounting system is to assign costs to cost objects through direct tracing,
driver tracing, and allocation. Allocation is the least accurate and least desirable
approach, and thus, a cost accounting system should be designed to minimize
allocations. Product and service costs are introduced because they are
important for external financial reporting. Given the increasing magnitude of
the service sector, you should pay attention to the types of services, how they
differ from tangible products, and the format for external income statements
for service firms. The chapter explains the differences between
functional-based and activity-based cost management systems.
CHAPTER REVIEW
This chapter introduces
the fundamental cost concepts and the associated information systems that
produce the cost information.
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I. A Systems
Framework
A system is a set of interrelated parts that performs one or more
processes to accomplish specific objectives.
A. Accounting
Information Systems
An accounting
information system is a system consisting of interrelated manual and
computer parts, using processes such as collecting, recording, summarizing,
analyzing, and managing data to provide output information to users.
1. An accounting
information system (AIS) consists of the following:
a. Objectives, which provide information to
users.
b. Interrelated
parts, which include subsystems such as order entry and sales, billing
accounts receivable and cash receipts, inventory, general ledger, and
cost accounting.
c. Processes,
which include activities of collecting, recording, summarizing, analyzing,
and managing data.
d. Outputs, which include data and reports that provide
needed information for users.
2. An accounting
information system has two distinguishing characteristics:
a. Inputs are
usually economic events.
b. Accounting information system output is critically
involved with the users of information, since the output produces user
actions:
n
Serving as the basis
for tactical and strategic decisions.
n
Confirming that the
actions taken had the intended effects.
n
Providing feedback.
3. The accounting information system can be divided
into two major subsystems: (a) the financial
accounting information system and
(b) the cost management information
system.
a. Financial
Accounting Information System
n
The financial accounting
information system is primarily concerned with producing outputs for
external
users (investors, creditors, government agencies, and other outside users).
n
The financial accounting information system uses well-specified economic
events as inputs.
n
The nature of the inputs
and the rules and conventions governing processes are defined by the SEC and
the FASB.
n
The overall objective is to
prepare financial statements such as the balance sheet, income statement, and statement of cash flows for external users.
These are used for investment decisions, stewardship evaluation, monitoring
activity, and regulatory measures.
b. Cost Management
Information System
n
The cost management information system is primarily concerned with producing
outputs for internal users.
n
The cost management
information system uses inputs and processes to satisfy management objectives.
A cost management information system is not bound by any formal criterion that
defines inputs or processes.
n
A cost management
information system has three broad objectives:
(1) To provide
information for costing out services, products, and other objects of interest
to management.
(2) To provide
information for planning and control.
(3) To provide
information for decision making.
B. Relationship
to Other Operational Systems and Functions
A cost management
information system should be integrated with the organization’s
operational systems because of the current competitive environment.
Review textbook Exhibit 2-3, which illustrates
an integrated cost management system.
an integrated cost management system.
C.
Integrated Information
Systems
Enterprise Resource Planning (ERP) systems are computerized information systems that keep track of
data across the company. A well-designed ERP system will:
1. Strive to input data once and reduce data
errors.
2.
Store the data in a single
integrated database and make it available instantaneously to people across the
company for whatever purposes it may serve.
3.
Include both financial and
nonfinancial data, allowing greater control through the generation of
operational measures of achievement.
4.
Generate different reports
for different purposes (e.g., financial statements, management reports, and
sales forecasts).
D. Different
Systems for Different Purposes
Different systems satisfy different purposes. The cost
management information system has two
subsystems: the cost accounting
information system
and the operational control information system.
1. Cost Accounting
Information System
The cost accounting information system is a
cost management subsystem designed to assign costs to individual products
and services and other objects as specified by management.
a. For external
financial reporting, the cost accounting system must:
n
Assign costs to products in
order to value inventories and determine cost of sales.
n
Conform to SEC and FASB
rules and conventions.
The rules require that
inventory values and cost of sales reported in the aggregate on the financial
statements be reasonably accurate. At the individual product level, however,
product costs may be distorted because costs assigned to individual products
are not causally related to the demands of the product.
b. For internal decision making, accurate product
costs are needed. The cost accounting information system may need to
produce two sets of product costs:
n
One that satisfies
financial reporting criteria.
n
Another that satisfies
management decision-making needs.
2. Operational
Control Information System
The operational control information system
is a cost management subsystem designed to provide accurate and timely feedback
concerning the performance of managers and others relative to their
planning and control of activities.
Operational control
is concerned with what activities should be performed and assessing how
well they are performed. The operational control information system must:
n
Provide information that helps managers engage in a program of continuous
improvement of all aspects of their businesses.
n
Provide broad information that encompasses the entire value chain to improve
the value received by customers.
n
Provide cost information
concerning quality, different product designs, and post-purchase customer
needs.
Review textbook Exhibit 2-4,
which illustrates the various
subsystems of the accounting information system.
subsystems of the accounting information system.
II. Cost Assignment: Direct Tracing, Driver
Tracing, and Allocation
Terms used to describe the cost assignment process are
defined as follows:
n
Cost is the cash or cash equivalent value sacrificed
for goods and services that are expected to bring a current or future
benefit to the organization.
n
Expenses are the expired costs that have been used up in the
production of revenues.
n
A loss is a cost that expires without producing any revenue benefit.
n
Assets are the costs that do not expire in a given
period; they are reported on the balance sheet.
Note that expenses and losses are expired costs and are
reported on the income statement.
A. Cost Objects
1. Cost objects are items that are used in
management accounting systems to measure and assign costs.
2. Common cost objects include products, customers,
departments, projects, and activities.
3. An activity is a basic unit of work
performed within an organization. An activity can also be defined as an
aggregation of actions within an organization useful to managers for purposes
of planning, controlling, and decision making.
4. Activities have
emerged as important cost objects.
B. Accuracy of
Assignments
1. The objective of
cost assignment is to measure and assign accurately the cost of the resources used by a cost
object.
2. The accuracy of cost assignment depends on traceability, which is the ability to
assign a cost directly to a cost object in an economically feasible way by
means of a causal relationship. The more
costs that can be traced to the object, the greater the accuracy of the
cost assignments.
3. There are two
methods of tracing costs to cost objects:
a. Direct tracing is the process of
identifying and assigning costs to a cost object that are specifically or
physically associated with the cost object.
(1) Direct
costs are costs that can be traced
easily and accurately to a cost object.
(2) Indirect
costs are costs that cannot be
traced easily and accurately to a cost object.
b. Driver tracing is the use of drivers to
assign costs to cost objects.
Drivers are the
cause-and-effect factors that can be used to measure a cost object’s resource consumption. Drivers are factors
that cause changes in resource usage, activity usage, costs, and revenues.
4. Allocation is the assignment of
indirect costs to cost objects.
a. Allocation is based on convenience or
some assumed linkage because no causal relationship exists between the cost and the cost
object or the tracing is not economically feasible.
b. Arbitrary allocation of indirect costs reduces the
overall accuracy of cost assignments.
5. The following is
a summary and comparison of the cost assignment methods:
n
Direct tracing is the most
precise method.
n
The accuracy of driver
tracing depends on the quality of the causal relationship described by the
driver.
n
Allocation is the least precise method. It is simple and has a low cost
of implementation.
Review
textbook Exhibit 2-5, which summarizes the methods of
assigning costs to cost objects.
III. Product and Service Costs
The output of an organization (product and/or service)
represents one of the most important cost objects. There are two types of
output:
n
Tangible products are goods that are produced by converting raw
materials through the use of labor and capital inputs.
n
Services are tasks or activities performed for a customer
or an activity performed by a customer using an organization’s products
or facilities.
n
Services are intangible
products because buyers of services cannot see, feel, hear, or taste a service
before it is bought (intangibility).
n
Services are perishable
because they cannot be stored (perishability).
n
Services are inseparable from their producers because producers and
buyers must usually be in direct contact for an exchange to take place
(inseparability).
A. Different
Costs for Different Purposes
Product cost
definitions can differ according to the managerial objective being served.
1. All traceable costs in the value chain need to be
assigned to the product for long-term decisions such as pricing, product
mix, and strategic profitability analysis.
2. The production, marketing, and customer service
costs (including customer post-purchase costs) are assigned to the
product for strategic product design decisions and tactical profitability
analysis.
3. Only production costs are used in calculating
product costs for external financial reporting.
Review textbook Exhibit 2-6, which provides three examples of
product cost definitions and some of the objectives they satisfy.
product cost definitions and some of the objectives they satisfy.
B. Product Costs
and External Financial Reporting
For external financial reporting, costs are subdivided
into two functional classifications:
n
Production costs are those costs associated with the manufacture of
goods or the provision of services.
n
Nonproduction costs are those costs associated with the functions of
selling and administration.
1. Production costs
in a manufacturing firm can be further classified as follows:
a. Direct
materials are those materials that
are traceable to the good or service being produced.
b. Direct
labor is the labor that is
traceable to the goods or services being produced.
c. Overhead includes all production costs other than direct
materials or direct labor.
Examples of overhead costs include:
n
Those supplies that are
necessary for production but that do not become part of the finished
product.
n
Materials that are
insignificant.
n
An overtime premium that is
common to all production runs.
2. Nonproduction
costs are categorized as follows:
a. Marketing
(selling) costs are the costs necessary to market and distribute a product
or service. They are often referred to as order-getting and order-filling
costs.
b. Administrative
costs are all costs associated
with the general administration of the organization that cannot be reasonably
assigned to either marketing or production.
Note the following:
n
Marketing and
administrative costs are period (noninventoriable)
costs. None of these costs are assigned to products because they relate to
nonmanufacturing activities.
n
Marketing and administrative costs are period costs that are expensed in
the
period in which they are incurred.
period in which they are incurred.
3. Other related
cost terms include the following:
a. Prime cost is the sum of direct
materials cost and direct labor cost.
b. Conversion
cost is the sum of direct labor
cost and overhead cost. For a manufacturing
firm, conversion cost can represent the cost of converting raw materials
into a final product.
Review textbook Exhibit 2-7, which illustrates the
various types of production and nonproduction costs.
various types of production and nonproduction costs.
IV. External Financial Statements
The functional classification is the cost classification
required for external reporting.
A. Income
Statement: Manufacturing Firm
1. The income
statement of a manufacturing firm reports absorption-costing
income or full-costing income in
which:
a. All
manufacturing costs are fully assigned to the product.
b. Income is computed by following a functional
classification of the two major categories of expenses:
n
Cost of goods sold is the cost of direct materials, direct labor,
and overhead attached to units sold.
n
Operating expenses.
Review textbook Exhibit 2-8, which shows an income statement
based on a functional classification for a manufacturing firm.
based on a functional classification for a manufacturing firm.
2. Supporting
Schedules for the Income Statement
a. A statement of cost of goods manufactured:
n
Reports the total manufacturing cost of goods completed during the current
period.
n
Includes only the manufacturing costs of direct materials, direct labor,
and overhead.
n
Involves the work-in-process inventory computation. Work in process consists of all partially completed units
found in production at any point in time.
BI (WIP) + Added
manufacturing costs = Cost of goods manufactured + EI (WIP)
where BI (WIP) = Costs of beginning inventory work
in process
EI
(WIP) = Costs of ending inventory work in process
Review textbook Exhibit 2-9, which shows a statement of cost
of goods manufactured.
b. A statement of
cost of goods sold:
n
Reports the manufacturing
cost of units that were sold during the period.
n
Involves the finished goods
inventory computation.
BI (FG) + Cost of goods manufactured = Cost of goods
sold + EI (FG)
where BI (FG) = Costs of beginning inventory
finished goods
EI
(FG) = Costs of ending inventory finished goods
Review textbook Exhibit 2-10, which shows a cost of
goods sold schedule for a manufacturing firm.
goods sold schedule for a manufacturing firm.
B. Income
Statement: Service Organization
1. The income
statement for a service organization reports cost of services sold.
2. The service firm has no finished goods inventory
because services cannot be stored.
3. The income
statement involves the work-in-process inventory computation. Work in process
consists of all partially completed projects found at any point in time.
BI (WIP) + Added service costs = Cost of services
sold + EI (WIP)
where BI (WIP) = Costs of beginning inventory work
in process
EI
(WIP) = Costs of ending inventory work in process
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V. Functional-Based
and Activity-Based
Cost Management Systems
Cost management
systems can be broadly classified as functional-based and activity-based.
Both systems are found in practice because
different systems meet the needs of different companies. The differences
between the two cost management systems are as follows.
A. Functional-Based
Cost Management Systems
A functional-based cost management system is made up of
two subsystems:
1. A
functional-based cost accounting system (functional-based
cost system):
a. Assumes that all costs can be classified as fixed
or variable with respect to changes in the units or volume of product produced.
b. Uses primarily unit- or volume-based cost drivers
to assign costs to cost objects.
c. Tends to be
allocation-intensive because much of the product cost assignment is based on
assumed linkages or convenience.
d. Meets the financial reporting objectives of
assigning production costs to inventories and cost of goods sold.
2. A functional-based operation control system:
a. Assigns costs
to units and then holds the unit manager responsible for controlling the
assigned costs.
b. Rewards
individuals based on their ability to control costs.
c. Emphasizes
financial measure performance by comparing actual outcomes with standard
(budgeted) outcomes.
d. Assumes that the performance of the overall
organization is achieved by maximizing the performance of individual
organizational subunits.
B. Activity-Based
Cost Management Systems
The overall objective of an activity-based cost
management system is to improve the quality, content, relevance, and timing of
cost information.
1. An
activity-based cost accounting system [activity-based
cost (ABC) system]:
a. Emphasizes tracing over allocation by identifying
drivers unrelated to the volume of product produced.
b. Improves the accuracy of cost assignments by using
both unit- and nonunit-based activity drivers.
c. Improves the
overall quality and relevance of cost information by producing cost information
for a variety of managerial objectives.
2. An
activity-based operation control system [activity-based
management (ABM)]:
a. 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.
b. Refers to the
process view of the ABM model, identifying factors that cause an activity’s
cost, assessing what work is done, and evaluating the work performed and the
results achieved.
c. Focuses on
accountability for activities rather than costs.
d. Emphasizes the
maximization of systemwide performance instead of individual performance.
e.
Uses both financial and
nonfinancial performance measures.
Review textbook Exhibit 2-11, which presents the
activity-based management model.
In conclusion, the advantages of an activity-based cost
management system include:
n
Greater product-costing
accuracy.
n
Improved decision making.
n
Enhanced strategic
planning.
n
Better ability to manage
activities.
Review textbook Exhibit 2-12, which compares the
characteristics of the functional-based
and activity-based cost management systems.
C. Choice of a
Cost Management System
1. The optimal cost management system is the one that
minimizes the sum of measurement costs and error costs.
a. Measurement costs are the costs
associated with the measurements required by the cost management system.
b. Error
costs are the costs associated with
making poor decisions based on inaccurate product costs or bad cost
information.
Review textbook Exhibit 2-13, which graphically illustrates
the trade-off between measurement and error costs.
the trade-off between measurement and error costs.
2. Recent changes in the manufacturing environment
have changed the trade-off between measurement costs and error costs
because:
a. New information
technology decreases measurement costs.
b. Changes in the
nature of the competition increases error costs.
c. Deregulation
and JIT manufacturing increase the cost of errors.
d. Ethical
misconduct increases the cost of errors.
The net result is a decrease in measurement costs and an
increase in error costs. Therefore, a more
accurate cost management system is mandated because of changes in error
and measurement costs.
Review textbook Exhibit 2-14, which graphically illustrates
shifting
costs and justification for a more accurate costing system.
costs and justification for a more accurate costing system.
KEY TERMS TEST
Set #1
From the list that follows, select the term that best
completes each statement and write it in the space provided.
accounting information system
activity-based costing
activity-based management (ABM)
cost accounting information system
cost management information system
error costs
financial accounting information system
functional-based cost system
functional-based operation control system
intangibility
measurement costs
nonproduction costs
operational control information system
production (or product) costs
system
1. The costs associated with the measurements required by the cost
management system are the ______________________________.
2. The _________________________________________________________ is
designed to assign costs to individual products and services.
3. ____________________________________ uses both unit- and nonunit-based activity drivers to assign costs
to cost objects.
4. A cost accounting system that
uses only unit-based activity drivers to assign costs to cost objects is
considered a(n) _______________________________________________.
5. A(n) _________________________________________________ consists of interrelated manual and computer parts, using processes such
as collecting, recording, summarizing, analyzing, and managing data to
provide output information to users.
6. ____________________________ are associated with the manufacture
of goods or the provision of services.
7. A(n)
_________________________________________________________ assigns costs to
organizational units and then holds the manager responsible for controlling the
costs.
8. The ___________________________________________________________ is concerned with producing outputs for internal
users; the _______________________________ _________________________________________
is concerned with producing outputs
for external users.
9. The activity-based control
system known as _______________________________ ___________
includes driver analysis, activity analysis, and performance evaluation.
10. Costs associated with the functions of selling and administration
are ________________ _____________________.
11. A(n)
____________ is a set of interrelated parts
that performs one or more processes to accomplish specific objectives.
12. __________ means that buyers of services cannot see, feel, hear,
or taste a service before it is bought because services are intangible
products.
13. The
_______________________________________________________________ is designed to provide accurate and timely feedback
concerning the performance of managers relative to their planning and
control of activities.
14. The costs associated with making poor decisions based on
inaccurate product costs are the __________________.
Set #2
From the list that follows, select the term that best
completes each statement and write it in the space provided.
absorption-costing income
activity
cost object
direct costs
direct tracing
driver tracing
drivers
indirect costs
inseparability
period costs
perishability
resource drivers
service
tangible products
traceability
work in process
1. ____________________________ consists of all partially completed
units found in production at a given time.
2. Any item for which costs are measured and assigned is a(n) __________________.
3. A task or activity performed for a customer is a(n) ____________.
4. __________________________________________ is income computed
following a functional classification.
5. Factors that cause changes in
resource usage, activity usage, costs, and revenues are ____________; the
use of these to assign costs to cost objects is called ___________
___________.
6. Goods that are produced by
converting raw materials by using labor and capital are
____________________________.
7. ________________________ cannot be traced to a cost object.
8. ________________________ is
the process of identifying costs that are specifically or physically
associated with a cost object.
9. __________ means that services are perishable because they cannot
be stored.
10. The basic unit of work performed within an organization is a(n)
______________.
11. ______________________ can be easily and accurately traced to a
cost object.
12. The ability to economically assign a cost directly to a cost
object using a causal relationship is known as __________________.
13. __________ means that services
are inseparable from their producers because producers and buyers must usually
be in direct contact for an exchange to take place.
14. Marketing and administrative
costs are _______________ that are expensed in the period in which they
are incurred.
Set #3
From the list that follows, select the term that best
completes each statement and write it in the space provided.
administrative costs
allocation
assets
conversion cost
cost
cost of goods manufactured
cost of goods sold
direct labor
direct materials
expenses
full-costing income
loss
marketing costs
overhead
prime cost
supplies
1. _________ is the cash or cash
equivalent value sacrificed for goods or services that are expected to
bring a current or future benefit to the organization.
2. The costs that cannot be
reasonably assigned to either marketing or production are the
________________________________.
3. ____________________________ are materials that are traceable to
the goods or services being produced.
4. All production costs other than
direct materials and direct labor are included in _______________.
5. The sum of direct labor cost and overhead cost is called
_________________________; the sum of
direct materials cost and direct labor cost is called
_________________________.
6. Materials necessary for production but which do not become part of
the finished product are ______________.
7. The total cost of goods
completed during the current period is the ______________________
_______________________; the total cost assigned to goods sold during the
period is the _____________________________________________.
8. Those costs necessary to market
and distribute a product or service are the __________________________.
9. The assignment of indirect costs to cost objects is called
_________________.
10. _____________________ is labor that is traceable to the goods or
services being produced.
11. Expired costs are _______________.
MULTIPLE-CHOICE QUIZ
Complete each of the following statements by circling the
letter of the best answer.
1. The assignment of
indirect costs to cost objects is called:
a. activity-based
costing.
b. allocation.
c. driver
tracing.
d. mixed
costs.
e. variable
costs.
2. Direct
tracing is:
a. assigning
indirect costs to cost objects.
b. identifying
cost objects attributed to activity drivers.
c. assigning
costs to cost objects using drivers.
d. identifying
costs that are specifically or physically associated with a cost object.
e. identifying
factors that cause costs to change.
3. Which
of the following is not a method of assigning costs to cost
objects?
a. allocation
b. conversion
costing
c. direct
tracing
d. driver
tracing
e. All
of the above are methods for assigning costs to cost objects.
4. The
accounting information subsystem that is primarily concerned with producing
outputs for external users is:
a. the
cost accounting information system.
b. the
cost management information system.
c. the
financial accounting information system.
d. the
operational control information system.
e. none
of the above.
5. The
cost management system should not be integrated with which of the
following?
a. customer
servicing system
b. design
and development system
c. marketing
and distribution system
d. production
system
e. The
cost management system should be integrated with all of the above systems.
6. The
cost management subsystem that is designed to provide accurate and timely
feedback concerning the performance of managers relative to their planning and
control of activities is:
a. the
activity-based costing information system.
b. the
cost accounting information system.
c. the
financial accounting information system.
d. the
operational control information system.
e. none
of the above.
7. Expired
costs are:
a. assets.
b. expenses.
c. liabilities.
d. losses.
e. revenues.
8. Which
of the following methods of tracing costs will yield the most precision?
a. allocation
b. direct
tracing
c. driver
tracing
d. indirect
costing
e. none
of the above
9. Product
costs used for external financial reporting will include which of the
following?
a. customer
service costs
b. marketing
costs
c. production
costs
d. research
and development costs
e. all
of the above
10. The
optimal cost management system is the one that:
a. minimizes
the error costs.
b. minimizes
the measurement costs.
c. minimizes
the sum of the error costs and the measurement costs.
d. costs
the least to operate.
e. uses
contemporary cost management principles.
11. Which
of the following statements is true?
a. The
optimal cost management system will never be a traditional system.
b. A multiproduct firm will have more accurate
product costs because there are more products over which to spread the
costs.
c. The
costs of measurement have been increasing as new information technology is
used.
d. The use of direct tracing rather than allocation
should cause the cost of errors to decrease.
e. As
costs of measurement increase, a more accurate cost system will become optimal.
Use the following
information for Questions 12 through 14:
Sawmill Corp. started
December with 500 units in beginning finished goods. During the month,
4,000 units were produced, and 3,700 units were sold. Costs added during
December were direct materials, $2,000;
direct labor, $400; and production overhead, $1,400. Sales salaries totaled
$1,200; administrative costs totaled $800. Inventory balances were as
follows:
Beginning
work in process................. $250
Beginning
finished goods................... 450
Ending
work in process..................... 600
Ending
finished goods........................ 690
12. What
is the cost of goods manufactured?
a. $3,210
b. $3,450
c. $3,800
d. $5,450
e. $5,800
13. What
is the cost of goods sold?
a. $3,210
b. $3,450
c. $3,800
d. $5,450
e. $5,800
14. If
each unit sold for $2.00, what would the absorption costing profit be?
a. $1,600
b. $1,950
c. $2,190
d. $2,590
e. none
of the above
PRACTICE TEST
EXERCISE 1
Required:
Describe three ways that functional cost accounting
differs from activity-based cost accounting.
EXERCISE 2
Darwin Company manufactured 30,000 widgets last year while
selling 29,000 units for $15 each. The actual production costs (on a per-unit
basis) for the widgets were as follows:
Direct
materials.............................. $3.50
Direct
labor.................................... 1.25
Variable
overhead.......................... 0.75
Fixed
overhead.............................. 3.75
Total
unit cost................................. $9.25
Selling costs included a commission of $1 per unit sold and
advertising of $50,000. Administrative expenses,
all fixed, totaled $35,000. There were no work-in-process inventories. There
was no beginning finished goods inventory.
Required:
Prepare an
absorption-costing income statement.
EXERCISE 3
ABB Company manufactures paperweights. During May, direct
labor cost was $35,400, raw materials of
$66,000 were purchased, and overhead totaled $59,000. The following information
has been obtained from the inventory reports:
May
1 May 31
Raw
materials inventory............................ $3,500 $4,700
Work-in-process
inventory........................ 2,600 4,100
Finished
goods inventory........................... 9,800 8,700
Required:
1. Prepare a cost of goods manufactured statement for May.
2. Prepare
a cost of goods sold statement for May.
EXERCISE 4
Southport Architects
provides architectural services for real estate developers. During October,
Southport completed and invoiced contracts totaling $215,000.
At the beginning of October there were 10 jobs in progress,
with accumulated costs of $34,000.
Materials and supplies totaling $23,000 were used
during the month, architect salaries of $75,000 were paid, and overhead was
estimated to be $56,000.
There were 5 unfinished jobs at the end of October with accumulated
costs of $21,500. Administrative salaries were $26,000, and related
administrative overhead was estimated to be $15,000.
Required:
Prepare an income statement for the month of October for
Southport Architects.
“CAN YOU?” CHECKLIST
q
Can you identify the
characteristics of an information system, explain what makes an accounting
information system different from other information systems, and explain the
distinctions among the following subsystems of the accounting information
system?
n
cost accounting information
system
n
cost management information
system
n
financial accounting
information system
n
operational control
information system
q
Can you describe the cost
assignment process and explain when direct tracing, driver tracing, and
allocation would be used? Can you explain under what conditions each of these approaches
will give more accurate product costs?
q
Can you describe the
difference between an activity driver and a resource driver? Can you explain
what each one measures?
q
Can you describe the
difference between a tangible product and a service? Can you prepare an income
statement for each?
q
Can you differentiate
between the cost of goods manufactured and the cost of goods sold for a
manufacturing company? for a service company? Can you prepare the required
statements?
q
Can you describe the
connection between activity drivers and cost behavior?
q
Can you explain the
differences between traditional and contemporary cost accounting systems?
between traditional and contemporary operational control systems?
ANSWERS
KEY TERMS TEST
Set #1
1. measurement
costs
2. cost
accounting information system
3. Activity-based
costing
4. functional-based
cost system
5. accounting
information system
6. Production
(or product) costs
7. functional-based
operation control system
8. cost
management information system, financial accounting information system
9. activity-based management
10. nonproduction
costs
11. system
12. Intangibility
13. operational
control information system
14. error
costs
Set #2
1. Work
in process
2. cost
object
3. service
4. Absorption-costing
income
5. drivers,
driver tracing
6. tangible
products
7. Indirect
costs
8. Direct
tracing
9. Perishability
10. activity
11. Direct
costs
12. traceability
13. Inseparability
14. Period costs
Set #3
1. Cost
2. administrative
costs
3. Direct
materials
4. overhead
5. conversion
cost, prime cost
6. supplies
7. cost
of goods manufactured, cost of goods sold
8. marketing
costs
9. allocation
10. Direct
labor
11. expenses
MULTIPLE-CHOICE QUIZ
1. b
2. d
3. b
4. c
5. e
6. d
7. b
8. b
9. c
10. c
11. d
12. b Cost of goods
manufactured + EI (WIP) = BI (WIP) + Added manufacturing costs
Cost of goods manufactured = BI (WIP)
+ Added manufacturing costs – EI (WIP)
Cost of
goods manufactured = BI (WIP) + (Direct materials + Direct labor +
Production overhead) – EI (WIP)
Cost of goods manufactured = $250 + ($2,000 + $400 +
$1,400) – $600 = $3,450
13. a Cost of goods sold + EI (FG) = BI (FG) +
Cost of goods manufactured
Cost of goods sold = BI (FG) + Cost
of goods manufactured – EI (FG)
Cost of
goods sold = $450 + $3,450 – $690 = $3,210
14. c Revenues (3,700
units sold × $2.00)............................................... $7,400
Less
cost of goods sold....................................................................... 3,210
Gross
margin......................................................................................... $4,190
Less
selling and administrative expenses ($1,200 + $800)....... 2,000
Net
income............................................................................................. $2,190
