1D. Cost Management

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Costs

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Amount of resources given up in exchange for some goods and services

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Mixed Cost

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Cost that contain both fixed and variable components

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Cost Objectives

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Resources or activities that serve as the basis for management decisions

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Mixed Cost Synonym

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Semi Variable Cost

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Cost Object Synonym

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Cost Objectives

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Cost Pool

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Collection of Cost Elements assigned to Cost Objects using common basis of allocation

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Cost Pool Synonym

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Cost Centers

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Cost Driver Synonyn

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Activity Drivers

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Cost Driver

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Allocation Basis

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Cost Assignment

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Costs are assigned to cost pools using direct tracing or allocation

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Traditional Costing

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Assign Overhead with a single application rate

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Overhead Application Rate

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Total Budgeted Overhead Costs/Total Budgeted Costs Driver

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Applied Overhead

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Overhead Application Rate × Actual Costs Driver

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Activity-Based Costing

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Assumes the best way to assign indirect costs to products (cost objects) is based on the product's demand for resource-consuming activities

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Service Cost Allocation

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Service Department Costs are part of Overhead and should be allocated to the production departments that they serve

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3 Methods of Service Cost Allocation

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1. Direct Method

2. Step-Down Method

3. Reciprocal Method

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Normal Costing

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Uses actual costs for direct material and direct labor, and standard costs for overhead

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Underapplied Overhead

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Applied Overhead < Actual Overhead

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Overapplied Overhead

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Applied Overhead > Actual Overhead

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Absorption Costing

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All manufacturing Costs are treated as product Costs and Included in Inventory and COGS

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Absorption Cost Synonyms (4)

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1. Normal Costing

2. Conventional Costing

3. Full Costing

4. Full Absorption Costing

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Variable Costing

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Only variable manufacturing Costs are treated as product costs

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Variable Costing Synonym

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Direct Costing

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Joint Products

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Two or more products that are generated from a common input and represents outputs of significant value in the manufacturing process

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By-products

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Minor products of relatively small value that incidentally result from the manufacture of the main product

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Split-off Point

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The point in the production process at which the joint products can be recognized as individual products

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Job Order Costing

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Method of Product Costing that identifies the job as the cost objective and is used when relatively few units are produced and when each unit is unique or easily identifiable.

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Job Order Cost Sheet

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Primary records maintained for each product or service used to accumulate all costs for the job

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4 Production Losses in Job Order Costing

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1. Scrap

2. Waste

3. Rework

4. Spoilage

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Scrap

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Leftovers in the manufacturing process that gave economic value

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3 Income Statement Approach for Scrap

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1. Scrap Sales

2. Other Income

3. Deducted from COGS

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2 Balance Sheet Approach for Scrap

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1. Deducted from Factory Overhead Control

2. Deducted from Work In Process

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Waste

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Leftovers in the manufacturing process which have no economic value

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Rework

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Correction of defective units in order to bring them into salable condition

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Spoilage

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Defects in units which cannot be reworked

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Rework caused by Internal Failure

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Charged to Factory overhead Control

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Rework caused by Customer

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Charged to Work In Process

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Spoilage caused by Internal Failure

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Charged to Factory Overhead Control

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Spoilage Caused by Customer where FOH Application Rate does not include allowance for spoilage

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Charged to Work in process, net of proceeds value of the spoilage

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Spoilage Caused by Customer where FOH Application Rate includes allowance for spoilage

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Allowance for spoilage as part of applied FOH shall first be removed and actual spoilage costs is charged to Work in Process

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Process Costing

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Method of Product Costing that averages costs and applies them to a large number of homogeneous items

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Normal Spoilage

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Occurs under regular operating conditions and is included in the standard cost of the manufactured product; allocated to good units

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Abnormal Spoilage

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Should not occur under normal operating conditions and is excluded from standard cost of manufactured product; normally expensed

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Supply Chain Management (2 definitions)

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1. A system of organizations, people, activities, resources and information needed to transfer items from suppliers to customers

2. Describes the flow of goods and services from raw materials providers to manufacturers, to wholesalers, to retailers, and finally to consumers

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3 Objectives of Supply Chain Management

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1. To be flexible and responsive to meet the demands of customers and business partners

2. To reduce inventory investment throughout the chain

3. To build competitive advantage for the channel

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Lean Manufacturing

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Invests resources only in value-added activities

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5 interrelated principles of lean manufacturing

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1. Value Definition

2. Value Stream Mapping

3. Flow Design

4. Establishing Demand-Pull Systems

5. Continuous Improvement

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Value Definition

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Management must identify what the customers' value

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Value Stream Mapping

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Management identifies all activities that add value to customers

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Flow Design

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Ensuring that new process is designed to run with reduced non value added activities and company produces what is actually demanded by the customers

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Establishing Demand-Pull Systems

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Management should design work processes in a way that reduces inventory levels

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Continuous Improvement

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Continuous measure of principles of Lean Manufacturing to perform only value-added activities and to eliminate waste

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Just-in-time System

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A demand-pull system where raw materials are consumed exactly when needed for production and finished goods are shipped exactly when the customer needs them

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Kanban System

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A Japanese System meaning the 'card system' where a production worker needing raw materials gives a visual sign to the raw materials storekeeper, who delivers the materials to the work area for immediate use

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Material Requirements Planning System (MRP)

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A push-through system that schedules production based on demand forecasts from a traditional annual plan

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Enterprise Resource Planning (ERP)

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A cross-functional enterprise system integrating and automating business processes and systems.

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9 Benefits of Enterprise Resource Planning

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1. Improved Process Efficiency

2. Improved Forecasting

3. Improved Collaboration

4. Reduced Cost

5. Improve Standardization

6. Improved Connectivity

7. Improved Productivity

8. Improved Customer Service

9. Competitive Advantage

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Theory of Constraints

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Organizations are impeded from achieving objectives by the existence of one or more constraints

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Constraint

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Anything that impeded the accomplishment of an objective

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Internal Constraints

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Occur when the market demands more than the system can produce

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External Constraints

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Exist when the system produces more than the market requires.

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Outsourcing

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Contracting services done internally by the company to an external provider

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Offshoring

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Outsourcing of services or business functions to an external party in a different country

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Value Chain Analysis

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A strategic tool used to analyze a company's activities to determine which provide the greatest value

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Competitive Advantage

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Refers to superior performance relative to the industry average

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3 Major Analyses performed in Value Chain Analysis

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1. Internal Cost Analysis

2. Internal Differentiation Analysis

3. Vertical Linkage Analysis

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Internal Cost Analysis

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The firm analyzes the source of profits and the costs of internal activities to determine the firm's internal value-creating ability

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Internal Differentiation Analysis

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The firm analyzes its ability to create value through differentiation

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Vertical Linkage Analysis

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The firm analyzes vertical linkages to gain understanding of the activities of the suppliers and buyers of the product

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Customer Relationship Management System (CRMS)

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Used to manage customer relationships where it increases customer value and improves loyalty leading to a higher profitability

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Value Analysis Synonym

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Value Engineering

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Value Analysis

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Encourages management to substitute materials or methods used in production with ones that are less costly without sacrificing the functionality of the product

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Business Process Management (BPM)

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Focuses on continuous improvement of internal and external customer satisfaction

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Business Process Reengeneering (BRP)

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Refers to techniques to help organizations rethink how work is done to dramatically improve customer satisfaction and service

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Difference between BPM and BPR

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BPR seeks radical changes while BPM initiates incremental change

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Kaizen

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Continuous improvement in manufacturing to improve the efficiency and effectiveness of organizations through greater operational control

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Quality

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Product's ability to meet or exceed customer expectations

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Cost if Quality

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Includes costs associated with activities related to conformance with quality standards and opportunity costs or activities associated with correcting nonconformance with quality standards

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Conformance Cost

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Cost if ensuring conformance with quality standards

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2 Classifications of Conformance Cost

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1. Prevention Cost

2. Appraisal Cost

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Prevention Cost

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Incurred to prevent production of defective units

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Appraisal Cost

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Incurred to discover and remove defective parts before they are shipped to the customer or the next department

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Nonconformance Costs

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The costs of nonconformance with qualified standards and often come in the form of opportunity costs

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Internal Failure Costs

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Costs to cure a defect discovered before the product is sent to the customer

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External Failure Cost

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Costs to cure a defect discovered after the product is sent to the customer

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Quality Reporting

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Display the financial result of quality