COST MANAGEMENT. Key Definitions UNIVERSITY OF MELBOURNE

Transcription

1 COST MANAGEMENT Key Definitions 2014 UNIVERSITY OF MELBOURNE

2 Week 1: Accounting Information for Management 1. Management Accounting: Management Accounting measures and reports financial information as well as other types of information that are intended primarily to assist managers in fulfilling the goals of the organisation. 2. Cost Accounting: Measures and reports financial and non-financial information related to the organisation s acquisition and consumption of resources. 3. Cost Management: Main goal to increase customer value and/or lower cost throughout the value chain [NOT TO MINIMISE COST] 4. Planning: Choosing goals, predicting results under various ways of achieving those goals, and then deciding how to attain those desired goals. 5. Control: Covers both the action that implements the planning decisions and deciding on performance evaluation and the related feedback that will help future decision making. 6. Decision Facilitating: Analysis of actual results vs budget results helps management decide if anything needs to be done to close the gap 7. Decision Influencing: The fact that the company will be collecting information to track progress against budget will influence the way employees behave 8. Value Chain: The sequence of business functions in which utility is added to the products or services of an organisation. 9. Supply Chain: Describes the flow of goods, services, and information, from cradle to grave, regardless of whether those activities occur in the same organisation or other organisations. 10. Long term: Where all costs and inputs are controllable and can be varied. 11. Short term: Where some of the costs/inputs (fixed costs) cannot be varied due to its nature and/or commitments already made. Decision Framework 1. Clarify the decision problem 2. Specify the decision criteria 3. Identify viable alternatives 4. Collect relevant information 5. Evaluate and compare costs and benefits of each alternative 6. Make a decision

3 Week 2(a): Fundamental Cost Concepts 1. Cost: A resource sacrificed or forgone to achieve a specific objective. 2. Expense: revenue cost are recorded as expenses of the accounting period when they are incurred. 3. Cost Object: Anything for which a separate measurement of cost is required. 4. Cost Accumulation: The collection of cost data in some organised way through an accounting system. 5. Cost Assignment: General term that encompasses both tracing and allocating accumulated costs to a cost object. 6. Trace: The assigning of direct costs to the chosen cost object. 7. Allocate: The assigning of indirect costs to the chosen cost object (based on an allocation base). 8. Direct Cost: Costs that are related to the particular cost object and that can be traced in an economically feasible way. 9. Indirect Cost: Costs that are related to the particular cost object but cannot be traced to it in an economically feasible way. They are allocated using an allocation method. 10. Cost Driver: Any factor that affects total costs; change in the level of cost driver will change the level of total costs. 11. Variable Cost: A cost that changes in total in proportion to changes in the related level of total activity or volume. 12. Fixed Cost: A cost that does not change in total despite changes in the related level of total activity or volume. *Variable and fixed costs are defined with respect to a specific cost driver 13. Relevant Range: The range of the cost driver in which a specific relationship between cost and the level of activity or volume is valid. 14. Relevant Cost/ Benefit: A cost/ benefit that differ among alternative courses of action. 15. Sunk Cost: Past costs that are unavoidable because they cannot be changed no matter what action is taken. 16. Controllable Cost/ Controllability: The degree of influence that a specific manager has over costs, revenues or other items in question. 17. Differential Cost: Difference in total costs between two alternatives. 18. Opportunity Cost: The value of the next best alternative forgone. 19. Overhead: All manufacturing costs considered to be part of the cost object, but cannot be traced to that cost object in an economically feasible way.

4 Week 2(b): Flow of resource Costs 1. Stock: Measured at a specific time and represent an existing quantity 2. Flow: Measure of changes over some period of time. 3. Manufacturing (organisation): Provide to their customers tangible products that have been converted to a different form from that of the products purchased from suppliers. 4. Merchandising (organisation): Provide to their customers tangible products they have previously purchased in the same basic form from their suppliers. 5. Service (organisation): Provide services or intangible products to their customers for example legal service or audit. 6. Inventoriable Cost (Stock related costs): Specific type of capitalised costs. Those capitalised costs associated with the purchase of goods for resale (in the case of merchandise stock) or costs associated with the acquisition and conversion of materials and all other manufacturing inputs into goods for sale (in the case of manufacturing stocks). 7. Raw Materials: Direct materials that have not been converted. 8. Direct Materials: Materials that eventually become part of the cost object and can be traced to that object in an economically feasible way. 9. Indirect Materials: Materials that are part of the cost object but cannot be traced to the cost object in an economically feasible way 10. Direct Labour: Includes the compensation of all manufacturing labour that is specifically identified with the cost object, and that can be traced to the cost object in an economically feasible way. 11. Indirect Labour: Labour that is identified with the cost object but cannot be traced to the cost object in an economically feasible way. 12. Work-in-Progress: Goods partially worked on but not yet fully completed. 13. Finished Goods: Goods fully completed but not yet sold. 14. Prime Costs: All direct manufacturing costs. 15. Conversion Costs: All conversion costs other than direct materials costs.

5 Week 3(a): Basic Cost Accumulation and Assignment 1. Cost Pool: A grouping of individual cost items. 2. Allocation Base: A practical representation of a cost driver, used to allocate indirect costs to cost objects. 3. Actual Costing: A costing method that traces direct costs to a cost object by using the actual direct cost rates times the actual quantity of the direct cost inputs and allocates indirect costs based on the actual indirect cost rates times the actual quantity of the cost allocation base. 4. Normal Costing: A costing method that traces direct costs to a cost object by using the actual direct cost rates times the actual quantity of the direct cost inputs and allocates the indirect costs based on the budgeted indirect cost rates times the actual quantity of the allocation base. 5. Absorption Costing: Stock costing method in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs. 6. Predetermined Overhead rate (POHR): Allocation rate using predicted period manufacturing costs and allocation base quantity for the period. 7. Over/under Allocation: Allocated amount of indirect costs in an accounting period is greater (lesser) than the actual amount in that period. (Also, over-applied indirect costs and over-absorbed indirect costs) 8. Pro-Rate/ Proportional allocation: The spreading of under-allocated or over-allocated overhead among closing stocks and cost of goods sold. Week 3(b): Job Costing 1. Job Costing/ Job-order Costing: Costing system in which the cost of a product or service is obtained by assigning costs to a distinct unit, batch or lot of a product or service. 2. Job Cost Record: Source document that records and accumulates all the costs assigned to a specific job. 3. Materials Requisition Record: Record used to charge departments and job costs records for the cost of the materials used on a specific job. 4. Labour Time Record: Record used to charge departments and job cost records for labour time used on a specific job. 5. Resource/ Cost Flows: Tracks the flow of resources and costs along the value chain.