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Basic Cost-Management
Concepts
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
2
Learning Objectives
Learning Objectives
(continued)
• Prepare and interpret an income statement for
both a manufacturing firm and a merchandising
firm
Basic Definitions
• A cost is incurred when a firm uses a resource for some
purpose
Product/Service Costing:
Cost Assignment
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
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
7
Materials
Handling Assembly Dishwasher
Supervision
Packing
Materials Washing
Packing
Machine
Final
Inspection
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
8
Manufacturing vs.
Merchandising
Cost Drivers
Fixed Costs
Total
Cost
$6,600
$6,500
$3,000
Total Fixed Cost
3,500 3,600
Units of the Cost Driver
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies 2008
18
Variable Costs
Total
Total Cost
Cost
$6,600
$6,500
Total Variable Cost
$3,000
3,500 3,600
Units of the Cost Driver
Short-Run Decision-Making
Cost Concepts
• Relevance is the most important characteristic for
information used in decision making
– Relevant costs have two properties: they differ for each
decision option and they will be incurred in the future
Chapter Summary
• There are different ways to classify (or categorize) cost
information, depending on the information needs of
management (“different costs for different purposes”):
– To prepare financial statements (GAAP)
– For strategic decision-making
– For short-term planning
– For short-term decision-making
– For control/feedback purposes