D. Cost Management

Measurement concepts
a. Types of cost and cost behavior
b. Actual and normal costs
c. Standard costs
d. Absorption (full) costing
e Variable (direct) costing
f. Joint and by-product costing
Costing systems
a. Job order costing
b. Activity-based costing
c. Life-cycle costing
d. Other costing systems
Overhead costs
a. Fixed and variable overhead expenses
b. Corporate vs. departmental overhead
c. Determination of allocation base
d. Allocation of service department costs
Supply chain management
a. Lean resource management techniques
b. Enterprise resource planning (ERP)
c. Capacity management and analysis
Business process improvement
a. Value chain analysis
b. Value-added concepts
c. Process analysis, redesign, and standardization
d. Continuous improvement concepts
e. Benchmarking and best practice analysis
f. Cost of quality analysis

Part 1 – Section D.1. Measurement concepts

The candidate should be able to:

a. calculate fixed, variable, and mixed costs, and demonstrate an understanding of the behavior of each in the long and short term and how a change in assumptions regarding cost type or relevant range affects these costs
b. identify cost objects and cost pools, and assign costs to appropriate activities
c. demonstrate an understanding of the nature and types of cost drivers and the causal relationship that exists between cost drivers and costs incurred
d. demonstrate an understanding of the various methods for measuring costs and accumulating work-in-process and finished goods inventories
e. identify and define cost measurement techniques, such as actual costing, normal costing, and standard costing; calculate costs using each of these techniques; identify the appropriate use of each technique; and describe the benefits and limitations of each technique
f. demonstrate an understanding of variable (direct) costing and absorption (full) costing and the benefits and limitations of these measurement concepts
g. calculate inventory costs, cost of goods sold, and operating profit using both variable costing and absorption costing
h. demonstrate an understanding of how the use of variable costing or absorption costing affects the value of inventory, cost of goods sold, and operating income
i. prepare summary income statements using variable costing and absorption costing
j. determine the appropriate use of joint product and by-product costing
k. demonstrate an understanding of concepts such as split-off point and separable costs
l. determine the allocation of joint product and by-product costs using the physical measure method, the sales value at split-off method, constant gross profit (gross margin) method, and the net realizable value method, and describe the benefits and limitations of each method

Part 1 – Section D.2. Costing systems

For job order costing and activity-based costing, the candidate should be able to:

a. define the nature of the system, understand the cost flows of the system, and identify its appropriate use
b. calculate inventory values and cost of goods sold
c. demonstrate an understanding of the proper accounting for normal and abnormal spoilage
d. discuss the strategic value of cost information regarding products and services, pricing, overhead allocations, and other issues
e. identify and describe the benefits and limitations of each cost accumulation system

For specific cost accumulation systems:

f. demonstrate an understanding of process costing and the concept of equivalent units (no calculations required)
g. define the elements of activity-based costing, such as cost pool, cost driver, resource driver, activity driver, and value-added activity
h. calculate product cost using an activity-based system, and compare and analyze the results with costs calculated using a traditional system
i. explain how activity-based costing can be utilized in service companies
j. demonstrate an understanding of the concept of life-cycle costing and the strategic value of including upstream costs, manufacturing costs, and downstream costs

Part 1 – Section D.3. Overhead costs

The candidate should be able to:

a. distinguish between fixed and variable overhead expenses
b. determine the appropriate time frame for classifying both variable and fixed overhead expenses
c. demonstrate an understanding of the different methods of determining overhead rates (e.g., corporate-wide rates, departmental rates, and individual cost driver rates)
d. describe the benefits and limitations of each of the methods used to determine overhead rates
e. identify the components of variable overhead expense
f. determine the appropriate allocation base for variable overhead expenses
g. calculate the per-unit variable overhead expense
h. identify the components of fixed overhead expense
i. identify the appropriate allocation base for fixed overhead expense
j. calculate the fixed overhead application rate
k. describe how fixed overhead can be over- or under-applied and how this difference should be accounted for in the cost of goods sold, work-in-process, and finished goods accounts
l. compare traditional overhead allocation with activity-based overhead allocation
m. calculate overhead expense in an activity-based costing setting
n. identify and describe the benefits derived from activity-based overhead allocation
o. explain why companies allocate the cost of service departments such as human resources or information technology to divisions, departments, or activities
p. calculate service or support department cost allocations using the direct method, the reciprocal method, the step-down method, and the dual allocation method
q. demonstrate an understanding of how regression can be used to estimate fixed costs

Part 1 – Section D.4. Supply chain management

The candidate should be able to:

a. explain supply chain management
b. define lean resource management techniques
c. identify and describe the operational benefits of implementing lean resource management techniques
d. define material requirements planning (MRP)
e. identify and describe the operational benefits of implementing a just-in-time (JIT) system
f. identify and describe the operational benefits of ERP
g. explain the concept of outsourcing and identify the benefits and limitations of choosing this option
h. describe how capacity level affects product costing, capacity management, pricing decisions, and financial statements
i. explain how using practical capacity as the denominator for the fixed cost allocation rate enhances capacity management
j. calculate the financial impact of implementing the above-mentioned methods

Part 1 – D.5. Business process improvement

The candidate should be able to:

a. define value chain analysis
b. identify the steps in value chain analysis
c. explain how value chain analysis is used to better understand a company’s competitive advantage
d. define, identify, and provide examples of a value-added activity and explain how the value-added concept is related to improving performance
e. demonstrate an understanding of process analysis and business process reengineering, and calculate the resulting savings
f. define best practice analysis and discuss how it can be used by an organization to improve performance
g. demonstrate an understanding of benchmarking process performance
h. identify the benefits of benchmarking in creating a competitive advantage
i. explain the relationship between continuous improvement techniques and quality performance
j. explain the concept of continuous improvement and how it relates to implementing ideal standards and quality improvements
k. identify and describe the components of the costs of quality, commonly referred to as prevention costs, appraisal costs, internal failure costs, and external failure costs
l. calculate the financial impact of implementing the above-mentioned processes