Hansen Aise Im Ch02

PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
Copyright 2007 Thomson South-Western, a part of The

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MANAGEMENT
ACCOUNTING
8TH EDITION
BY
HANSEN & MOWEN
2 BASIC MANAGEMENT ACCOUNTING CONCEPTS

1
LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS
After studying this

chapter, you should
be able to:
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Describe the cost assignment process.
2. Define tangible, intangible products, &
explain why there are different product cost
definitions.
3. Prepare income statements for
manufacturing & service organizations.
4. Outline differences between functionalbased and activity-based management
Click the button to skip
accounting systems. Questions to Think About
QUESTIONS TO THINK ABOUT:

Blue Ribbon Baking
What is the difference

between products & services?
How might that affect
accounting?

Blue Ribbon Baking
Why wouldnt current product

cost accounting provide useful
information for expansion into
the 2 new product lines?

Blue Ribbon Baking
How would the pilot projects

allow Blue Ribbon Baking to
gather new accounting
information?

Blue Ribbon Baking
Is assigning costs for services

as important as it is for
products?
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Describe the cost

assignment process.
LO 1
COST:
COST: Definition
Definition
Cost is the cash or cashequivalent value sacrificed for
goods and services that is
expected to bring a current or
future benefit to the
organization.1
1
Hansen & Mowen, 2007, p. 35.

9
LO 1
OPPORTUNITY
OPPORTUNITY COST:
COST: Definition
Definition
Opportunity cost is the benefit

given up or sacrificed when one
alternative is chosen over
another.2

10
LO 1
FACTS ABOUT COSTS

Minimizing cost means a firm is becoming
more efficient
Costs are incurred to produce future benefits,
(e.g. revenues)
Costs are used up (expire) to produce revenues
Expired costs are expenses
Cost & price are related
Price must exceed cost
11
LO 1
COST
COST OBJECT
OBJECT:: Definition
Definition
A cost object is any item such

as product, customer, project,
activity & so on, to which costs
are measured and assigned.3

12
LO 1
Is there such a thing as TRUE

COST?
NO. It is better to be
approximately correct than
precisely inaccurate.
13
LO 1
COST ASSIGNMENT
Cause
Cause &
& effect
effect relationship
relationship when
when
assigning
assigning costs
costs to
to cost
cost objects
objects
Direct
Direct costs
costs are
are easily
easily traceable
traceable
Indirect
Indirect costs
costs not
not so
so easily
easily traceable
traceable
14
LO 1
Can you name 3 ways

of assigning product
costs?
15
LO 1
COST ASSIGNMENT METHOD 1

Direct tracing
Method of identifying & assigning costs that are
exclusively and physically associated with a cost
object
Example: cost of pizza & drink for lunch
16
LO 1
COST ASSIGNMENT METHOD 2

Driver tracing
Using observable causal factors to measure
resource consumption in assigning cost to a cost
object
Example: proportionate cost of shared lunch based on #
slices of pizza and # of drinks consumed by each person
17
LO 1
COST ASSIGNMENT METHOD 3:

Indirect Costs
Indirect costs have no causal relationship with
cost object
Indirect costs may or may not be allocated to
cost objects
18
LO 1
RESOURCE COSTS
Cost
Costassignment
assignment
process.
process.
EXHIBIT 2-1
19
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Define tangible &

intangible products;
explain why there are
different product cost
definitions.
20
LO 2
Tangible products are goods

produced by converting raw
materials.
Example: televisions, hamburgers
Services are intangible products.

Example: dental or medical care.
21
LO 2
DIFFERENCES
Services
Servicesdiffer
differfrom
fromproducts
productson
on44
dimensions
dimensions
Intangibility
Intangibility
Perishability
Perishability
Inseparability
Inseparability
Heterogeneity
Heterogeneity
22
LO 2
COST ANALYSIS & INTERNAL

VALUE CHAIN
Different costs for different purposes
Strategic profitability analysis
Uses all costs & revenues associated with product
Short run (tactical) profitability analysis

Uses production, marketing, distributing & servicing,
especially for special orders
External financial reporting

Uses only production costs
23
LO 2
INTERNAL VALUE CHAIN

STRATEGIC PROFITABILITY ANALYSIS
EXHIBIT 2-3
24
LO 2
PRODUCT COSTS
Production
Productioncosts
costsinclude
include
Direct
Directmaterials
materials
Traceable
Traceabletotogoods,
goods,services
servicesproduced
produced
Direct
Directlabor
labor
Traceable
Traceabletotogoods,
goods,services
servicesproduced
produced
Overhead
Overhead
All
Allother
otherproduction
productioncosts
costs
25
LO 2
OTHER COSTS
Prime costs
Direct materials and direct labor
Selling & administrative costs

Noninventoriable (period) costs
Expensed as incurred in period
26
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Prepare income
statements for
manufacturing and
service organizations.
27
LO 3
What is cost of goods

manufactured?
Cost of goods manufactured is

the total of production costs
(direct materials & labor &
overhead) for the period.
28
INCOME STATEMENT:
LO 3
Manufacturing Firm
EXHIBIT 2-5
29
COST OF GOODS
MANUFACTURED
LO 3
EXHIBIT 2-6
30
LO 3
How does the income

statement for a service
company differ from that of a
manufacturing company?
A service company doesnt have

the manufacturing costs
associated with producing a
product.
31
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
Outline differences
between functionalbased and activity-based
management accounting
systems.
32
LO 4
Can you name 2 ways to

design a management
accounting system?
Functional based accounting

(FBM) & activity based
accounting (ABM) are 2 ways to
design a management accounting
system.
33
LO 4
How does an FBM system

differ from an ABM system?
FBM & ABM systems differ in

the ways they assign costs and
how they assign responsibility for
efficient operations.
34
LO 4
MANAGEMENT ACCOUNTING
SYSTEMS (FBM)
Functional-based management system (FBM)
Cost view
Only uses drivers related to the production function to
assign costs
Direct materials, direct labor, machine hours
Operational efficiency view

Holds managers of each function (e.g., engineering)
responsible for controlling costs to derive operating
efficiency
35
LO 4
FBM
EXHIBIT 2-8
36
LO 4
MANAGEMENT ACCOUNTING
SYSTEMS (ABM)
Activity-based management system (ABM)
Cost view
Driver analysis, activity analysis, performance
evaluation
A tracing-intensive system
Operational efficiency view

Focuses on managing activities and improving values
for operational efficiency
37
LO 4
ABM
EXHIBIT 2-9
38
CHAPTER 2
THE
THE END
END
39

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PowerPoint Presentation by

Copyright 2007 Thomson South-Western, a part of The

2 BASIC MANAGEMENT ACCOUNTING CONCEPTS

After studying this

QUESTIONS TO THINK ABOUT:

What is the difference

QUESTIONS TO THINK ABOUT:

Why wouldnt current product

QUESTIONS TO THINK ABOUT:

How would the pilot projects

QUESTIONS TO THINK ABOUT:

Is assigning costs for services

Describe the cost

Hansen & Mowen, 2007, p. 35.

Opportunity cost is the benefit

Hansen & Mowen, 2007, p. 35.

FACTS ABOUT COSTS

A cost object is any item such

Hansen & Mowen, 2007, p. 35.

Is there such a thing as TRUE

Can you name 3 ways

COST ASSIGNMENT METHOD 1

COST ASSIGNMENT METHOD 2

COST ASSIGNMENT METHOD 3:

Define tangible &

Tangible products are goods

Services are intangible products.

COST ANALYSIS & INTERNAL

Short run (tactical) profitability analysis

External financial reporting

INTERNAL VALUE CHAIN

Selling & administrative costs

What is cost of goods

Cost of goods manufactured is

How does the income

A service company doesnt have

Can you name 2 ways to

Functional based accounting

How does an FBM system

FBM & ABM systems differ in

Operational efficiency view

Operational efficiency view

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