Chapter 3 - Basic cost management concepts. In this chapter, the learning objectives are: Understand the strategic role of basic cost concepts ; explain cost-driver concepts at the activity, volume, structural, and executional levels; explain the cost concepts used in product and service costing; demonstrate how costs flow through the accounting system; prepare and interpret an income statement for both a manufacturing firm and a merchandising firm. | Basic Cost Management Concepts Chapter Three 3-2 Understand the strategic role of basic cost concepts Explain cost-driver concepts at the activity, volume, structural, and executional levels Explain the cost concepts used in product and service costing Demonstrate how costs flow through the accounting system Prepare and interpret an income statement for both a manufacturing firm and a merchandising firm Learning Objectives 3-3 Basic Definitions A cost is incurred when a firm uses a resource for some purpose Costs are assembled into meaningful groups called cost pools (., by type of cost or source) Any factor that has the effect of changing the level of total cost is called a cost driver A cost object is any product, service, customer, activity, or organizational unit to which costs are assigned for some management purpose 3-4 The process of assigning costs to cost pools or from cost pools to cost objects Direct costs can be conveniently and economically traced to a cost pool or a cost object Indirect costs cannot be traced conveniently or economically to a cost pool or a cost object Because indirect costs cannot be traced, assignment is made through the use of cost drivers (cost allocation) These cost drivers are often called allocation bases Product/Service Costing: Cost Assignment 3-5 Cost Assignment: General Principles Costs Electric Motor Materials Handling Supervision Packing Materials Cost Pools Assembly Packing Cost Objects Dishwasher Washing Machine Final Inspection Cost Drivers and Cost Assignment 3-6 Direct and Indirect Product Costs for a Manufacturer Direct material costs = cost of materials that can be readily traced to outputs = purchase price of materials + freight – purchase discounts + reasonable allowance for scrap and defective units Indirect material costs = cost of materials that cannot readily be traced to outputs (., rags, lubricants, and small tools) Direct labor costs = labor that can be readily traced to outputs = wages paid plus a | Basic Cost Management Concepts Chapter Three 3-2 Understand the strategic role of basic cost concepts Explain cost-driver concepts at the activity, volume, structural, and executional levels Explain the cost concepts used in product and service costing Demonstrate how costs flow through the accounting system Prepare and interpret an income statement for both a manufacturing firm and a merchandising firm Learning Objectives 3-3 Basic Definitions A cost is incurred when a firm uses a resource for some purpose Costs are assembled into meaningful groups called cost pools (., by type of cost or source) Any factor that has the effect of changing the level of total cost is called a cost driver A cost object is any product, service, customer, activity, or organizational unit to which costs are assigned for some management purpose 3-4 The process of assigning costs to cost pools or from cost pools to cost objects Direct costs can be conveniently and economically traced to a cost pool or a .
