1.4. Cost Accounting and Activity Based Costing

Question 1

What is Cost Accounting?

Answer 1

• process and techniques of measuring and assigning costs

Question 2

Cost Object (=Cost Objectives)
For which Objects (products, services, customers) do we want to measure costs?

1.
2.
3.

Answer 2

• decision makers want more than simply the cost of a resource used (e.g. for labor)
• they want to know the cost of something in particular, such as a product or service
• cost object = anything for which a separate measurement of cost is desired, e.g. products, services, customers, departments, territories, activities such as processing orders

Question 3

What are the two Processes in a Cost Accounting System?

1. 2.

Answer 3

1. Cost Accumulation: Collecting costs by some “natural” classification such as materials or labor
2. Cost Assignment: Tracing costs to one or more cost objects

Question 4

What is a cost object?

Answer 4

• is anything for which decision makers desire a seperate measurement of costs, e.g. products, services, customers, departments, territories, activities such as processing orders

Question 5

What are direct costs?

Answer 5

• these costs accountants identify specifically and exclusively with a given cost objective in an economically feasible way (traceable)
• e.g. parts and materials included in a product

Question 6

What are indirect costs?

Answer 6

• these costs accountants cannot identify specifically and exclusively with a given cost objective in an economically feasible way
• e.g. facility rental costs, depreciation on equipment, many staff salaries

Question 7

Direct costs | what is Tracing?

Answer 7

• physically idnetifying the amount of a direct costs that exclusively relates to a cost object

Question 8

Cost terms | What is the goal of cost allocation?

Answer 8

• assignment of indirect costs to cost objects in proportion to the cost object´s use of a particular cost-allocation base

Question 9

Cost terms | What is a cost-allocation base?

1.
2.
3.

Answer 9

• a measure of input/output that determines the amount of cost to be allocated to a particular cost object
• ideally measures how much of the particular cost is caused by the cost object (i.e. how much of the resource is consumed by the cost object and thus associated cost to be assigned)
• most cost allocation bases are cost drivers (bc cost drivers is factor that causes costs)

Question 10

What are the four purposes of cost allocation/ cost assignment?

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2.
3.
4.

Answer 10

1. predict economic effects of strategic and operational control decisions
2. provide a desired motivation and feedback for performance evaluation
3. compute income and asset valuations for financial reporting
4. justify costs or obtain reimbursement

Question 11

What is a Cost Pool?

Answer 11

• a group of individual indirect costs that a company allocated to cost objects using a single cost allocation base

Question 12

What are allocated costs?

1.
2.
3.
4.

Answer 12

• some costs do not have identifiable relationship to a cost object
• often it´s best to leave such costs unallocated
• = costs an accounting system records but does not allocate to any cost object
• e.g. R&D (research and development), legal expenses, executive salaries

Question 13

Cost Terms used for external reporting purposes
Remember: Cost management systems provide aggregate measures of inventory value and cost of goods manufactured

What are the four attributes of these costs?

1.
2.
3.
4.

Answer 13

1. manufacturing costs
2. product versus period costs
3. costs on the balance sheet
4. costs on the income statement

Question 14

What are manufacturing costs made of?

Answer 14

• total manufacturing costs=
• direct material costs +
• direct labor costs +
• indirect production costs

Question 15

Definition Expenses

Answer 15

• specifically denotes the costs deducted from revenue on an income (P&L) statement
• All costs (e.g. manufacturing costs) become expenses, but they are not expenses (e.g. COGS) until accountants deduct them from revenue in the income statement

Question 16

What are product costs? (inventoriable costs)

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2.
3.
4.

Answer 16

1. Costs identified with goods produced or purchased for resale
2. Costs first become part of the inventory
3. These costs become expenses in the form of cost of goods sold only when inventory is sold
4. E.g. manufacturing costs

Question 17

What are period costs?

1.
2.
3.
4.

Answer 17

1. Costs that become expenses during the current period without becoming part of inventory
2. Deducted as expenses in profit and loss statement during the current period without going through an “inventory stage”
3. Period costs are associated with nonproduction value-chain functions (R&D, design, marketing, distribution, customer service)
4. Most of these cost reported as selling and administrative expenses

Question 18

Two general types of accounting systems | Traditional Accounting System

1.
2.
3.

Answer 18

• Allocation of indirect production costs straight to cost objects
• Often use of only single cost pool (labor-based or machine based) to allocate all indirect production costs
• Works well with simple production processes where indirect production costs are a small percentage of total costs

Question 19

Two general types of Accounting Systems | Acitivity-Based (ABC) systems

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2.
3.
4.

Answer 19

• First, accumulation of indirect costs for each activity
• Second, assignment of costs of each activity to the cost objects that require that activity
• More complex but also more accurate cost estimates for respective cost objects such as products or services
• Requires a clear process map, i.e. a schematic diagram capturing the relation between resources, activities and cost objects

Question 20

What is Activity Based Management and what is it´s goal?

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2.

Answer 20

• ABM
• using the output of an activity based cost accounting system to aid strategic decision making and to improve operational control of an organization

Question 21

What are benefits and potential applications of ABC systems and ABM?

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4.
5.

Answer 21

1. Estimating profit margins of new products (provide better information on profitability)
2. Determining consumptions of shared resources, which may vary a lot across products and customers (bc greater diversity in products results in greater operating complexity!)
3. Can identify potential efficiency increases and cost reduction
4. Estimate costs more accurately (product life cycles much shorter due to automatization; no time to make adjustments)
5. Computer technology has reduced costs of developing and operating ABC systems

Question 22

What are the four steps (vereinfacht) to Design and ABC system?

1.
2.
3.
4.

Answer 22

1. determine key components of the cost accounting system
2. (stage 1) allocation of cost from resources to activities
3. (stage 2) allocation of cost from acitivties to cost objects
4. calculate and interpret the new activity-based information

Question 23

Activity-based costing systems should be used instead of traditional accounting systems if…

1.
2.

Answer 23

1. indirect production costs are a large percentage of production costs
2. different products consume resources at different rates

Question 24

The cost object is a chair made by craftsmen in a factory. An accountant can identify the amount and cost used to manufacture the chair. This is called …….. a …….. to a cost object

Answer 24

1. tracing
2. direct cost

Question 25

A merchandising firm has …… inventory accounts. A manufacturing firm has ……. inventory accounts.

Answer 25

1. one
2. three

Question 26

What is the relationship among cost, cost object, cost accumulation and cost assignment?

Answer 26

• A cost is like a sacrifice that we make for a specific purpose. Decision makers want to know the cost of each thing in detail. Decision makers often want to measure different costs separately. The thing measured is then called a cost object.
• Cost accumulation and cost assignment are the two processes in a cost accounting system. Cost accumulation collects the costs by some sort of natural classification, i.e. activities performed or materials used or labor. Cost assignment refers/ attaches the costs to one or more cost objects (activities, department, customers, products)

Question 27

Why do the results comparing Traditional and ABC system ususally differ so much?

1.
2.

Answer 27

• traditional does not take into account differences in production process for each product
• ABC seperates costs and allocates each activity based on the proportion

Question 28

When proposing a product mix strategy, what would be ideas?

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2.
3.
4.
5.

Answer 28

• raise prices
• change design, reduce nr of distinct parts
• work with suppliers and reduce cost of direct materials
• improve efficiency of direct labor
• drop product line