8/28/2022

Learning Objectives
1. Describe a cost management information system, its objectives, and its
major subsystems, and indicate how it relates to other operating and
information systems
Chapter 2 2. Explain the cost assignment process
3. Define tangible and intangible products, and explain why there are different
Basic Cost Management Concepts product cost definitions
4. Prepare income statements for manufacturing and service organizations
5. Explain the differences between traditional and contemporary cost
management systems

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

systems framework (1 of 2) systems framework (2 of 2)

• System: Set of interrelated parts that performs one or more processes to • Accounting information system
accomplish specific objectives o Provides information to people in a company
o Works by using processes to transform inputs into outputs o Collects, classifies, summarizes, analyzes, and manages data to provide
information to users
o Inputs are usually economic events
o Operational model is critically involved with the user of information
o Two major subsystems
• Financial accounting information system
• Cost management information system

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 2.2 - Operational Model of an Accounting Exhibit 2.2 - Operational Model of an Accounting
Information System (1 of 2) Information System (2 of 2)
• Inputs • Outputs
o Economic Events o Special Reports
• Processes o Financial Statements
o Collecting o Budgets
o Classifying o Performance Reports
o Summarizing o Personal Communication
o Analyzing • Users
o Managing

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1
 8/28/2022

Financial accounting information system Cost management information system

• Primarily concerned with producing outputs for external users • Primarily concerned with producing outputs for internal users using inputs
• Inputs - Well-specified economic events and processes needed to satisfy management objectives
• Inputs and processes - Governed by rules and conventions established by • Inputs and processes - Set by management and not bound by externally
the SEC, FASB, and IASB imposed criteria
• Outputs - Financial statements for external users • Provides information for:
o Cost services, products, and other objects
o Planning and control
o Decision making

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Value chain Exhibit 2.3 - Value Chain

• Set of activities required to design, develop, produce, market, deliver, and • Design
provide post-sales service for the products and services sold to customers • Develop
• Produce
• Market
• Deliver
• Post-Sale Service

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Relationship to other operational systems and Different systems for different purposes
functions
• An integrated cost management system receives information from and • Cost accounting information system: Assigns costs to individual products
provides information to all operational systems and services and other objects of interest to managers
• Enterprise resource planning systems • Operational control information system: Provides accurate and timely
o Integrative, cross-functional systems that coordinate information to facilitate feedback concerning the performance of managers and others relative to
timely and accurate reporting and decision making their planning and control of activities
o Identifies opportunities for improvement

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

2
 8/28/2022

Exhibit 2.4 - Subsystems of the Accounting Information Cost Assignment: Direct Tracing, Driver Tracing, and
System Allocation (1 of 4)
• Accounting Information System • Cost: Cash or cash equivalent value sacrificed for goods and services that
o Financial Accounting Information System are expected to bring a current or future benefit
o Cost Management Information System • Expenses: Expired costs that are deducted from revenues on the income
statement
• Cost Accounting Information System
• Operational Control Information System • Loss: Cost that expires without producing any revenue benefit
• Assets: Unexpired costs that appear on the balance sheet

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost Assignment: Direct Tracing, Driver Tracing, and Cost Assignment: Direct Tracing, Driver Tracing, and
Allocation (2 of 4) Allocation (3 of 4)
• Cost objects • Traceability: Ability to assign cost directly to a cost object in an economically
o Things for which costs are measured and assigned feasible way by means of a causal relationship
o Include products, customers, departments, projects, activities, etc. o Indirect costs: Costs that cannot be traced easily and accurately to a cost object
• Activity o Direct costs: Costs that can be traced easily and accurately to a cost object
o Basic unit of work performed within an organization
o Plays a prominent role in assigning costs to other cost objects

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost Assignment: Direct Tracing, Driver Tracing, and Assigning indirect costs
Allocation (4 of 4)
• Methods of tracing • Allocation: Assignment of indirect costs to cost objects
o Direct tracing: Process of identifying and assigning costs to a cost object that o Arbitrarily allocating indirect costs to cost objects reduces the overall accuracy of
are specifically or physically associated with the cost object the cost assignments
o Driver tracing: Use of drivers to assign costs to cost objects
• Drivers: Factors that cause changes in resource usage, activity usage, costs, and
revenues

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3
 8/28/2022

Product and service costs (1 of 2) Product and service costs (2 of 2)

• Tangible products: Goods produced by converting raw materials into • Services differ from tangible products on the following important dimensions:
finished products o Intangibility: Buyers of services cannot see, feel, hear, or taste a service before
• Services: Tasks or activities performed for a customer or an activity it is bought
performed by a customer using an organization’s products or facilities o Perishability: Services cannot be stored
o Inseparability: Producers of services and buyers of services must usually be in
direct contact for an exchange to take place

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 2.5 - Examples of Product Cost Definitions Product costs and external financial reporting (1 of 5)
• Production (or product) costs: Costs associated with manufacturing goods
or providing services
o Also known as manufacturing costs
• Nonproduction costs: Costs associated with the functions of selling and
administration
o Also known as nonmanufacturing costs

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Product costs and external financial reporting (2 of 5) Product costs and external financial reporting (3 of 5)
• Direct materials: Materials traceable to the goods or services being • Prime cost: Sum of direct materials cost and direct labor cost
produced • Conversion cost: Sum of direct labor cost and overhead cost
• Direct labor: Labor that is traceable to the goods or services being produced
• Overhead: Production costs other than direct materials and direct labor
o Supplies: Materials necessary for production that do not become part of the
finished product
o Indirect materials: Direct materials that form an insignificant part of the final
product that are lumped together

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

4
 8/28/2022

Product costs and external financial reporting (4 of 5) Product costs and external financial reporting (5 of 5)
• Nonproduction costs are divided into: • Period costs: Marketing and administrative costs that are not inventoried
o Marketing (selling) costs: Costs necessary to market and distribute a product or o Expensed in the period in which they are incurred
service
• Example - Advertising, storage costs, and shipping
• Also referred to as order-getting and order-filling costs
o Administrative costs: Costs that cannot be reasonably assigned to either
marketing or production
• Example - Top-executive salaries, legal fee, and research and development

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

External financial statement (1 of 2) External financial statement (2 of 2)

• Income statement - Manufacturing firm • Cost of goods manufactured: Total manufacturing cost of goods completed
o Income statement prepared for external parties follows the standard format during the current period
o Referred to as absorption-costing income or full-costing income because all o Only costs assigned are the manufacturing costs of direct materials, direct labor,
manufacturing costs are fully assigned to the product and overhead
• Expenses are separated according to function and then deducted from revenues to • Statement of cost of goods manufactured – Supporting schedule that has the details
arrive at operating income of the cost assignment

• Two major functional categories of expense are cost of goods sold and operating • Cost of goods sold: Manufacturing cost of the units that were sold during
expenses the period

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Traditional and activity-based cost management Activity-based cost management systems

systems
• Traditional cost accounting • Activity-based cost (ABC) system
o Assumes that all costs can be classified as fixed or variable with respect to o Emphasizes tracing over allocation
changes in the units or volume of product o Uses both unit- and non-unit-based activity drivers
o Uses only unit-based activity drivers to assign costs
• Activity-based cost control
• Traditional operation control system o Focuses on accountability for activities rather than costs
o Assigns costs to organizational units o Activity-based management (ABM)
o Holds the organizational unit manager responsible for controlling the assigned • Focuses on the management of activities with the objective of improving the value
costs received by the customer and the profit received by the company in providing this
o Traces costs to individuals who are responsible for costs value

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

5
 8/28/2022

Exhibit 2.7 - Activity-Based Management Model Exhibit 2.8 - Comparison of Traditional and Activity-
Based Cost Management Systems
Traditional Activity-Based
Unit-based drivers Unit- and non-unit-based drivers
Allocation intensive Tracing intensive
Narrow and rigid product costing Broad, flexible product costing
Focus on managing costs Focus on managing activities
Sparse activity information Detailed activity information
Maximization of individual unit Systemwide performance
performance maximization
Uses financial measures of Uses both financial and
performance nonfinancial measures of
performance

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Choice of a cost management system (1 of 2) Choice of a cost management system (2 of 2)

• Activity-based cost management system offers significant benefits that • Measurement costs: Costs associated with the measurements required by
includes: the cost management system
o Greater product costing accuracy • Error costs: Costs associated with making poor decisions based on bad
o Improved decision making cost information
o Enhanced strategic planning
o Increased ability to manage activities

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Exhibit 2.9 - Trade-Off between Measurement and Exhibit 2.10 - Shifting Measurement and Error Costs
Error Costs

Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All Rights Reserved. May not
be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.