Summary management accounting for FCI ch4

(LO 1) Cost management system (CMS) is a collection of tools and techniques that identify how
manager’s decisions affect costs.

The primary purposes of CMS are to arrange:

 Cost information for strategic management decisions;
 Cost information for operational control; and
 Measure the inventory value and COGS for financial reporting



(LO 2) A cost object refers to anything for which a separate unit of measurement of costs is desired.
Cost objects:

 Customers
 Service
 Departments
 Processing orders
 Product

The cost data that managers use for decision making come from the cost accounting system. Cost
accounting refers to a part of the cost management system that measures costs for the purpose of
management decision making and financial reporting. Without accurate and timely cost information,
many decisions can be harmful for the business.

Cost accounting includes 2 processes:

 Cost accumulation
o Collection of cost by classifications such as material and labor
 Cost assignment
o Tracing costs back to one or more cost objects.



[LO 3] cost allocation refers to assigning indirect costs to cost objects in proportion to the cost
object’s use of a particular cost-allocation base.

Cost allocation base:

Measures the input (labour hours / kg / surface ) and output (finished goods) that determines the
amount of cost (as a currency) to be allocated to a particular cost object. In simpler terms; cost
allocation base measures how much of the particular cost is caused by the cost object.



[LO 4] the 4 purposes of cost allocation:

1. Predict economic effects of strategic and operational control decisions;
2. Provide desired motivation and feedback for performance evaluation;
3. Compute income and asset valuations for final reporting;
4. Justify cost or obtain reimbursement