All costs are accumulated to facilitate someone's decisions. But all these decisions cannot be foreseen, so systems are designed to fulfill predetermined general desires that are commonplace among managers. We will frequently distinguish between the product-costing purpose of a system and all other purposes. For convenience, we will sometimes refer to all other purposes as planning and control purposes, budgetary-control purposes, or, for brevity, as the control purpose.
Aside from meeting the obvious external reporting demands for inventory valuation and income determination, managers want product costs for guiding their decisions regarding pricing and product strategies. In addition, managers want departmental costs (or costs of other parts of the organization) for judging the perforrnance of their subordinates and the parts of the organization as economic investments.
Management accounting systems fulfill these general planning and control purposes by choosing parts of the organization as cost objectives. The aim is to compile costs by responsibility or accountability center. For example, costs are often routinely traced to a cost center, the smallest segment of activity or area of responsibility for which costs are accumulated. Typically, cost centers are departments, but in some instances a department may contain several cost centers. For example, although a machining department may be under one foreman, it may contain various groups of machines, such as lathes, punch presses) and milling machines. Each group of machines is sometimes regarded, as a separate cost center with its olvn assistant foreman.
Another major cost objective is product costing lor purposes of inventory valuation and income determination. Therefore, the systerir must trace costs to these two major cost objectives: departments and products. This tracing is frequently accomplished in two steps: (1) accumulation of costs by departments and (2) application of the department costs to the physical units (or other measures of output) that pass through the departments. This second step is sometimes called cost absorption rather than cost application,
Note especially that no matter what label is used to describe how costs are applied for product costing, the costs are always accumulated by responsibility center for control purposes, The three major ways of achieving product costing will be described in sequence.
Aside from meeting the obvious external reporting demands for inventory valuation and income determination, managers want product costs for guiding their decisions regarding pricing and product strategies. In addition, managers want departmental costs (or costs of other parts of the organization) for judging the perforrnance of their subordinates and the parts of the organization as economic investments.
Management accounting systems fulfill these general planning and control purposes by choosing parts of the organization as cost objectives. The aim is to compile costs by responsibility or accountability center. For example, costs are often routinely traced to a cost center, the smallest segment of activity or area of responsibility for which costs are accumulated. Typically, cost centers are departments, but in some instances a department may contain several cost centers. For example, although a machining department may be under one foreman, it may contain various groups of machines, such as lathes, punch presses) and milling machines. Each group of machines is sometimes regarded, as a separate cost center with its olvn assistant foreman.
Another major cost objective is product costing lor purposes of inventory valuation and income determination. Therefore, the systerir must trace costs to these two major cost objectives: departments and products. This tracing is frequently accomplished in two steps: (1) accumulation of costs by departments and (2) application of the department costs to the physical units (or other measures of output) that pass through the departments. This second step is sometimes called cost absorption rather than cost application,
Note especially that no matter what label is used to describe how costs are applied for product costing, the costs are always accumulated by responsibility center for control purposes, The three major ways of achieving product costing will be described in sequence.
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