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Chapter 2
Basic Cost Management
Concepts
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
Study Objectives
1. Explain the cost assignment process.
2. Define tangible and intangible products, and
explain why there are different product cost
definitions.
3. Prepare income statements for manufacturing
and service organizations.
4. Explain the differences between traditional and
contemporary cost management systems.
Product Costs
Direct materials: those materials directly
traceable to the goods or services being produced.
Example: The cost of wood in furniture.
Direct
+ Overhead = Conversion
Materials
Costs
Costs
Nonproduction Costs
Amount and timing of benefit cannot be
reasonably estimated
Period costs
Not inventoried
Expensed as incurred
Examples
Research and development
Marketing costs
Administrative costs
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10
Supporting schedules
Cost of goods manufactured
Cost of goods sold
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14
Activity-Based
Emphasizes tracing over allocation
Identifies non-unit-based activity drivers
15
Functional-Based
Cost Management
Unit-based drivers
Allocation-intensive
Narrow and rigid product costing
Focus on managing costs
Sparse activity information
Maximization of individual unit
performance
Uses financial measures of performance
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Activity-Based
Cost Management
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Shifting Costs
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COST MANAGEMENT
Accounting & Control
HansenMowenGuan
End Chapter 2
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