Management Accounting: Student Edition

STUDENT EDITION
MANAGEMENT
PowerPoint Presentation by ACCOUNTING
Gail B. Wright
Professor Emeritus of Accounting 8TH EDITION
Bryant University
BY
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
HANSEN & MOWEN
2 BASIC MANAGEMENT ACCOUNTING CONCEPTS

1
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 functional-
based and activity-based management
accounting systems.
2
LO 1
COST:
COST: Definition
Definition
“Cost is the cash or cash-

equivalent value sacrificed for
goods and services that is
expected to bring a current or
future benefit to the
organization.”1
Hansen & Mowen, 2007, p. 35.

1
3
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

2
4
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

3
5
LO 1
Is there such a thing as TRUE

COST?
NO. “It is better to be

approximately correct than
precisely inaccurate.”
6
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
7
LO 1
Can you name 3 ways of

assigning product costs?
1. Direct tracing
2. Driver tracing
3. Indirect costs
8
LO 2
Tangible products are goods

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

products. Example: dental or
medical care.
9
LO 2
DIFFERENCES

Services
Servicesdiffer
differfrom
fromproducts
productson
on44
dimensions
dimensions

Intangibility
Intangibility

Perishability
Perishability

Inseparability
Inseparability

Heterogeneity
Heterogeneity
10
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
11
LO 2
INTERNAL VALUE CHAIN

STRATEGIC PROFITABILITY ANALYSIS
EXHIBIT 2-3
12
LO 2

TACTICAL PROFITABILITY ANALYSIS
EXHIBIT 2-3
13
LO 2

EXTERNAL FINANCIAL REPORTING
EXHIBIT 2-3
14
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
15
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.
16
LO 3
INCOME STATEMENT:
Manufacturing Firm
EXHIBIT 2-5
17
LO 3
How does the income

statement for a service
company differ from that of a
manufacturing company?
A service company doesn’t

have the manufacturing costs
associated with producing a
product.
18
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.
19
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.
20
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
21
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
22
LO 4
COMPARING FBM & ABM
EXHIBIT 2-10
23
CHAPTER 2
THE
THE END
END
24

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STUDENT EDITION

2 BASIC MANAGEMENT ACCOUNTING CONCEPTS

“Cost is the cash or cash-

Hansen & Mowen, 2007, p. 35.

“Opportunity cost is the benefit

Hansen & Mowen, 2007, p. 35.

“A cost object is any item such

Hansen & Mowen, 2007, p. 35.

Is there such a thing as TRUE

NO. “It is better to be

Can you name 3 ways of

Tangible products are goods

Services are intangible

COST ANALYSIS & INTERNAL

INTERNAL VALUE CHAIN

INTERNAL VALUE CHAIN

INTERNAL VALUE CHAIN

What is “cost of goods

“Cost of goods manufactured”

How does the income

A service company doesn’t

Can you name 2 ways to

Functional based accounting

How does an FBM system

FBM & ABM systems differ in

COMPARING FBM & ABM

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