Cost Accounting // Ch. 2 Basic Cost Management Concepts

What are the two key features of an accounting information system that distinguish from others?

1) Accounting Information system's inputs are usually economic events, or transactions 2) Operational Model of an accounting information system is critically involved with the user of information which serves as a basis for action

The accounting information system can be divided into two subsystems, what are they?

1) Financial Accounting Information system 2) Cost management information system

Services differ from tangible products in three different dimensions. What are they?

1) Intangibility 2)Inseparability 3) Perishability

The ________________________________ is a cost management information system designed to ASSIGN COSTS to individual products and services and other objects of interest to managers.

COST ACCOUNTING INFORMATION SYSTEM

What is cash equivalent?

Cash equivalent because non-cash assets can be exchanged for the desired good or services.

Define Conversion cost

Conversion cost is the sum of direct labor costs and overhead costs. Conversion costs can be interpreted as the cost of converting raw materials into a final product

Cost accounting information systems are structured to measure and assign costs to cost objects. What are cost objects?

Cost objects can be anything for which costs are measured and assigned costs.

The output of these two cost systems satisfies what objective?

DECISION MAKING

Materials that become part of the a tangible product or those materials that are used in providing a service are usually classified as what?

DIRECT MATERIALS

Define DIRECT COSTS

Direct Costs are costs that can be traced easily and accurately to a cost object.

Define Direct Labor

Direct Labor is labor that is traceable to the goods or services being produced

Production costs can be furthered categorized into three elements what are they?

Direct Materials Direct Labor Manufacturing Overhead

What are product costs?

Direct materials, direct labor, and manufacturing overhead or just overhead

T/F Personal communication is not an information output

FALSE Personal communication is an information output. Often, users may not want to wait until formal reports and can obtain information on a timelier form by communicating directly with accountants

_______________ are costs that cannot be traced easily and accurately to a cost object

INDIRECT COSTS

Direct Materials that form an insignificant part of the final product are usually lumped into the overhead category called __________________

INDIRECT MATERIALS

What does Intangibility mean?

It means that buyers of services cannot see, feel, hear, or taste a service before it is bought.

Define non production costs

Nonproduction costs are those costs associated with the functions of selling and administration

Marketing or Selling Costs are also referred to as what?

ORDER-GETTING, AND ORDER-FILLING

Marketing and Administrative costs are not inventoried and are called what?

PERIOD COSTS

In a profit-making firm, future benefits usually mean what?

REVENUE!

A ______________ is a set of interrelated parts that performs one or more processes to accomplish specific objectives

SYSTEM

T/F The output may serve to confirm that the actions taken had the intended effects

TRUE

What are examples of Order-Getting costs?

salaries and commissions of sales personnel and advertising

The objectives of these two subsystems correspond to what objectives?

1) Costing out and 2) Planning and Control

The Cost Management information system provides information for three broad objectives, what are these three?

1) Costing services, products, and other object of interest 2) Planning and Control 3) Decision Making

Tracing costs to cost objects can occur in one of two ways. What are they?

1) Direct Tracing 2) Driver Tracing

Define Cost.

COST is the cash or cash equivalent value SACRIFICED for goods and services that are expected to bring current or future benefit to the organization

Emphasizing ______________ forces managers to determine which activities in the value chain are important to customers.

CUSTOMER VALUE!!!

What are examples of services by customers using an organization's products or facilities?

Car rental, video rental, and skiing

Define Driver Tracing.

Driver Tracing is the use of DRIVERS to assign cost to cost objects

As costs are used up in the production of revenues, they are said to expire. Expired costs are called what?

EXPENSES

The Financial Accounting Information System is primarily concerned with producing outputs for who?

EXTERNAL USERS

Define Loss.

Loss is a cost that expires without producing ANY revenue benefit

Organizations that produce tangible products are called what?

Manufacturing Organizations

What are the two categories in non production costs?

Marketing (Selling) Costs and Administrative Costs

Those that produce intangible products are called?

Service organizations

What are examples of Direct Labor?

workers on an assembly line, a chef in a restaurant, a surgical nurse for an open heart operation, and a pilot are all examples of Direct Labor

Assignment of indirect costs to cost objects is called what?

ALLOCATION

A _______________________ is an information system that consists of interrelated manual and computer parts and uses processes such as collecting, classifying, summarizing, analyzing, and managing data to provide information to users

Accounting Information System

What are examples of services for customers?

Accounting, medical care, dental care, funeral care

Activities have emerged as important cost objects especially in what type of cost accounting system?

Activity-Based Cost accounting system

Allocating indirect costs is based on what?

Allocating indirect costs is based on CONVENIENCE or some type of ASSUMED LINKAGE

What is an ERP or Enterprise Resource Planning?

An Enterprise resource Planning system, is an integrative, cross-functional system that coordinates information to facilitate timely and accurate reporting and decision making

Activities are a special kind of cost object. What is an ACTIVITY?

An activity is a basic unit of work performed within an organization. An Activity is defined as an aggregation of actions within an organization useful to managers for purposes of planning, controlling, and decision making

Many costs do not expire. These costs that do not expire are called __________________

Assets, and appear on the balance sheet

Why is Cost Information needed for planning and control in Cost management information system?

Cost Information is needed for planning and control and should help managers decide what should be done, why it should be done, how it should be done, and how well it is being done.

What are examples of cost objects?

Cost objects include: products, customers, departments, projects, activities, and so on.

________________ are those materials that are traceable to the good or service being produced.

DIRECT MATERIALS

____________________ is the process of identifying and assigning costs to a cost object that are SPECIFICALLY or Physically associated with the cost object.

DIRECT TRACING

___________ are factors that CAUSE changes in resource usage, activity usage, costs, and revenues

DRIVERS

What are examples of interrelated parts in an Accounting Information system?

Databases and Database management are examples of interrelated parts in an Accounting Information system. Databases are formed to collect information, usually in digital form. The database management system is needed to control, maintain, and use a given data base.

What are examples of overhead?

Depreciation on buildings and equipment, maintenance, supplies, supervision, materials handling, power, property taxes, landscaping for factory grounds, and plant security

T/F These two systems must be independent from each other

FALSE Ideally, the two systems should be integrated and have LINKED databases. Output of the two systems can be used as input for the other system

T/F It is not possible for a particular cost object to be classified as both a Direct cost and an Indirect Cost

FALSE A particular item can be classified as either direct or indirect cost dependent upon the cost object's point of reference!

T/F Allocating indirect costs to cost objects increases the overall accuracy of the cost assignments

FALSE Allocating indirect costs to cost objects REDUCES the overall accuracy of the cost assignments

T/F Cost Management information system is bound to certain externally imposed criteria that define inputs and processes

FALSE Cost information system is NOT bound by externally imposed criteria and instead are set by people IN THE COMPANY

T/F The product cost information is important in the process and is sufficient

FALSE Product COST IS important, but it is NOT sufficient The information needed for planning and control is broader and encompasses the entire value chain!

Financial accounting information is used for what types of things?

Financial Accounting Information is used for INVESTMENT DECISIONS, STEWARDSHIP EVALUATION, ACTIVITY MONITORING, AND REGULATORY SERVICES

What does it mean for a cost to be traced easily?

For a cost to be traced easily it means that costs can be assigned in an economically feasible way, using a causal relationship.

The Cost Management Information system is primarily concerned with producing outputs for who?

INTERNAL USERS using inputs and processes needed to satisfy management objectives.

What does Inseparability mean?

Inseperability means that producers of services and buyers must usually be in direct contact for an exchange to take place. Service groups are usually inseparable from their producers

What is one objective of the operational control information system?

It helps to ensure that the day-to-day activities support the long-range strategic objectives of the organization

The costs that are necessary to market and distribute a product or service are what costs?

Marketing or Selling Costs

All production costs other than direct materials and direct labor are lumped together into one category called what?

OVERHEAD

What is the cost of overtime categorized as?

OVERHEAD. But only overhead is treated as overhead.

Operational control is concerned with what?

Operation Control is concerned with determining what activities SHOULD BE performed and assessing how well they are being performed. It identifies opportunities for continuous improvement

The _________________________ is a cost management information system designed to provide accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities.

Operational Control Information System

What specific outputs are produced using the Financial Accounting Information system?

Outputs for the Financial Accounting Information System are BALANCE SHEETS, INCOME STATEMENTS, AND STATEMENT OF CASH FLOWS for external users

What are outputs of accounting information systems?

Outputs of accounting information systems are data reports that provide information for users

What is used to measure the quantity of labor used to produce a product or service

PHYSICAL OBSERVATION is used to measure the quantity of labor

Period costs appear on what financial report?

Period costs appear on the INCOME STATEMENT -- not the balance sheet

What does perishability mean?

Perishability means that services cannot be inventoried or stored

Define Prime Cost

Prime cost is the sum of direct materials cost and direct labor cost

Product costs calculated in accordance with the GAAP (Generally accepted Accounting Principles) are needed to calculate what two things?

Product costs are needed in order to calculate the value of INVENTORY on the balance sheet and the cost of goods sold expense on the income statement

Costs are subdivided into two major functional categories, what are they?

Production Costs and Nonproduction costs

Define production costs

Production costs are those costs associated with manufacturing goods or providing services

___________________ are tasks or activities performed for a customer or an activity performed by a customer using an organization's products or facilities

SERVICE

________________ are generally those materials necessary for production that do not become part of the finished product and are not used in providing a service

SUPPLIES

What are examples of direct materials

Steel in automobile, wood in furniture, alcohol in cologne, denim in jeans, braces for correcting teeth, anesthesia for an operation are ALL DIRECT MATERIALS

___________________ are goods produced by converting raw materials into finished products through the use of labor and capital inputs such as plant, land, and machinery

TANGIBLE PRODUCTS

How is Direct tracing most often accomplished?

THROUGH PHYSICAL OBSERVATION

What is the main difference between a cost being classified as an asset or as an expense?

TIMING!!!!

____________________ is the ability to assign a cost directly to a cost object in an economically feasible way by means of a causal relationship

TRACEABILITY

T/F A system works by using processes to transform inputs into outputs that satisfy the system's objectives

TRUE

T/F Cost information concerning quality, different product designs, and post-purchase customer needs is vital for managerial planning and control

TRUE

T/F For external financial reporting, FASB rules and conventions mandate that only production costs be used in calculating product costs

TRUE

T/F Only these three cost elements can be assigned to products for external financial reporting

TRUE

T/F The Cost Information produced by the cost management information system benefits the whole organization and should have an organization-wide perspective.

TRUE

T/F The cost accounting information system should produce costs that simultaneously are accurate and satisfy financial reporting conventions.

TRUE

T/F Understanding the relationship of costs to cost objects can increase the accuracy of cost assignments

TRUE

The Cost management information system has two SUBSYSTEMS, what are they?

The Cost Management Information system has two subsystems: 1) Cost Accounting Information System 2) Operational Control Information System

Who governs the conventions and rules for the criteria of financial accounting information systems?

The Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB), and possibly the International Accounting Standards Board all govern the criteria presented in Financial Accounting

What is the functional distinction between manufacturing and non manufacturing costs?

The functional distinction between the two is the concept of noninventoriable costs and inventoriable costs

What is the purpose of an information system?

The information system is designed to PROVIDE INFORMATION to people in the company who might need it

What is the most important cost object?

The most important cost object is the OUTPUT of the ORGANIZATION

What is the objective of assigning costs to cost objects?

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

What is the overall objective of an Accounting Information system?

The objective of an Accounting Information system is to provide information to users!!!

The ____________________ is the set of activities required to design, develop, produce, markets, deliver, and provide post-sale service for the products and services sold to customers

VALUE CHAIN

What does the financial accounting information systems uses as inputs?

Well specified economic events or transactions