cost accounting systems -- the techniques used to determine the cost of the product, service, customer, or other cost objective
cost accounting -- the part of the cost management system that measures costs for the purposes of management decision-making and financial reporting
cost accumulation -- collecting costs by some natural classification such as activities performed, labor, or materials
cost assignment -- tracing or allocating costs to one or more cost objectives such as activities, departments, customers, or products
cost -- a sacrifice or giving up of resources for a particular purpose, frequently measured by the monetary units that organization must pay for goods and services
cost objective -- anything for which decision-makers desire a separate measurement of costs. Example include departments, products, activities, and territories
direct costs -- costs that can be identified specifically and exclusively with a given cost objective in an economically feasible way
indirect costs -- costs that cannot be identified specifically and exclusively with a given cost objective and economically feasible way
cost allocation -- assigning indirect costs to cost objects using plausible and reliable cost drivers
unallocated costs -- costs for which we can identify new relationship to a cost objective
direct material costs -- the acquisition costs of all materials that a company identifies as part of the manufactured goods and traces to the manufactured goods in an economically feasible way
direct labor costs -- the wages of all labor and a company can trace specifically in exclusively to the manufactured goods
indirect production costs -- all costs other than direct material or direct labor that are associated with the manufacturing process. Such as indirect manufacturing costs, factory burden, factory overhead, manufacturing overhead
product costs -- costs identified with goods produced or purchased for resale
period costs -- costs that become expenses during the current period without going through an inventory stage
traditional costing systems -- one that does not accumulate or report costs of activities or processes
cost pool -- a group of individual costs that a company allocates to cost objectives using a single cost driver
activity based costing (ABC) systems -- a system that first accumulates overhead costs for each of the activities of the area being caustic, and then assigns the costs of activities to the products, services, or other cost objectives that require that activity
two stage ABC system -- a costing system with two stages of allocation to get from the original cost to the final product or service cost. The first stage allocates resource costs to activity cost pools. The second stage allocates activity costs to products or services
activity based management (ABM) -- using an activity based costing system to improve the operations of an organization
value added cost -- the necessary cost of an activity that cannot be eliminated without affecting a product's value to the consumer
non-value added costs -- costs that a company can eliminate without affecting a product's value to the consumer
benchmarking -- the continuous process of comparing products, services, and activities against the best industry standards
process map -- a schematic diagram capturing interrelationships between cost objects, activities, and resources
multistage ABC (MSABC) systems -- costing systems with more than two stages of allocations and cost drivers other than percentages
Cost management systems provide cost information for external financial reporting, for strategic decision-making, and for operational cost control.
Cost accounting systems provide cost information for various types of objectives -- products, customers, activities, and so on. A system first accumulates resource costs by natural classifications such as materials, labor, and energy. Then it assigns these costs to cost objectives, either tracing them directly or signing them indirectly through allocation.
Accountants can specifically in exclusively identify direct costs with a cost objective in an economically feasible way. When this is not possible, accountants may allocate costs to cost objectives using a cost driver. Such costs are called indirect costs. The greater the proportion of direct costs, the greater the accuracy of the cost system. When the proportion of indirect costs is significant, accountants must take care to find the most appropriate cost drivers. Some costs are unallocated because the accountants can determine no plausible and reliable relationship between resource costs of cost objectives.
The primary difference between the financial statements of a merchandiser and the manufacturer is the reporting of inventories. A merchandiser has only one type of inventory whereas a manufacturer has three types of inventory -- raw materials, work in process, and finished goods.
Traditional systems usually allocate only the indirect costs of the production function. ABC systems allocate many of the costs of the value chain functions. Traditional costing accumulates costs using categories such as direct material, direct labor, and production overhead. ABC systems accumulate costs by activities required to produce a product or service. The key value of ABC systems is in their increased costing accuracy and better information provided that can lead to process improvements.
Designing and implementing an activity based costing system involves four steps.
- First, managers determine the cost objectives, key activities, and resources used, and they identify cost drivers for each resource and activity.
- Second, they determine the relationship among cost objectives, activities, and resources.
- The third step is collecting costs and operating data.
- The last up is to calculate and interpret the new activity based information.
Activity based management is using ABC information to improve operations. A key advantage of an activity based costing system is its ability to aid managers in decision-making. ABC improves the accuracy of cost estimates, including product and customer costs and the costs of value added versus non-value-added activities. ABC also improves managers understanding of operations. Managers can focus their attention on making strategic decisions, such as product mix, pricing, and process improvements.
For some organizations that have operations that are highly complex, two stage ABC systems do not offer enough costing accuracy or decision-making information. The three key attributes of MSABC systems that lead to more value for these organizations include more than two stages of allocation, cost behavior of resources, and much more operational information.
