lOMoARcPSD|15793120
Management accounting 1 for business
Week 1
Required reading: Chapter 1-4
Management accounting is the actions managers undertake in the short-turn and long-run planning
and control of costs that increase value for customers and lower the costs of products and services.
Companies add value through research and development (R&D), design of products and processes,
production marketing, distribution and customer service. Customers want companies to deliver
performance through cost and efficiency, quality, timeliness and innovation.
An actual cost is the cost incurred (a historical or past coast) as distinguished from a budgeted cost,
which is a predicted, or forecasted cost (a future cost). The cost object is anything for which a
separate measurement of costs is desired.
A costing system typically accounts for costs in two basic stages:
1. Cost accumulation: the collection of cost date in some organised way through an
accounting system
2. Cost assignment: general term that encompasses both (1) tracing accumulated costs to a
cost object, and (2) allocating accumulated costs to a cost object. (cost tracing and cost
allocation)
- Direct cost of a cost object: costs that are related to the particular cost object and
that can be traced to it in an economically feasible (cost-effective) way. Cost tracing is
the assigning of direct costs to the chosen cost object.
- Indirect cost of a cost object: costs that are related to the particular cost object but
cannot be traced to it in an economically feasible (cost- effective) way. Indirect costs
are allocated to the cost object using a cost-allocation method. Cost allocation is the
assigning of indirect costs to the chosen cost object.
Cost driver is any factor that affects total cost. A change in the level of the cost driver will cause a
change in the level of the total cost of a related cost object.
Two type of cost behaviour pattern are:
1. Variable cost: a cost that changes in total in proportion to changes in the related level of
total activities or volume. The variable cost per unit does not change with the number of
volumes.
2. Fixed cost: a cost that does not change in total despire changes in the related level of
total activity or volume. Fixed costs become progressively smaller on a per unit basis as
the cost driver increases (volume increases).
A relevant range is the range of the cost driver in which a specific relationship between cost and the
level of activity or volume is valid.
A unit cost (average cost) is calculated by dividing some amount of total cost by the related number
of units. (see formula page)
Business sectors
Service-sector companies Merchandising-sector Manufacturing-sector
,lOMoARcPSD|15793120
, lOMoARcPSD|15793120
companies companies
Provide services or intangible Procide tangible products Provide tangible products that
products to their customers. they have previously have been concerted to a
These companies do not purchased in the same basic different form from that of
have any stock of tangible form from suppliers. the products purchased from
product at the end of an Merchandise purchased but suppliers. At the end of an
accounting period ot sold at the end of an accounting period, a
accounting period is held as manufacturer has stock that
stock can include direct materials,
work in progress or finished
goods.
Direct materials: direct materials is stock that will be used in the manufacturing
process. Work- in-progress: goods partially worked on but not yet completed.
Finished goods: Goods completed, but not yet sold.
Manufacturing cost can be divided in three terms: direct materials cost, direct manufacturing labour
cost and indirect manufacturing cost (manufacturing overhead cost or factory overhead cost)
Cost classifications are:
• Capitalised costs: that are first recorded as an asset, when they are incurred, these
costs are presumed to provide future benefits to the company. These costs are written
of to those periods assumed to benefit from their incurrence. (depreciation)
• Revenue costs: which are recorded as expenses of the accounting period when they
are incurred. (administration, marketing)
• Operating cost: all costs associated with generating revenue other than cost of goods
sold (see formula page)
• Stock-related costs (inventoriable cost) are all costs of a product that are considered
assets in a company’s balance sheet when the costs are incurred and that are
expensed as cost of goods sold only when the product is sold. (all manufacturing
costs)
• Period costs: all costs in the income statement other than cost of goods sold Period
costs are treated as expenses of the accounting period in which they are incurred,
because
managers expect these costs to increase revenues in only that period and not in future
periods (non manufacturing costs: such as, design cost, marketing, distribution)
• Prime costs: all direct manufacturing costs.
• Conversion cost: all manufacturing costs other than direct material costs. These are
the costs for transforming direct materials into finished goods.
• Product cost: sum of the costs assigned to a product for a specific purpose.
Cost pool is a grouping of individual cost items. Cost pools can range from the very broad, to the very
narrow.
Cost allocation base: a factor that is the common denominator for systemically linkinh an in direct
cost or group of indirect costs (pool) to a cost object. A cost-allocation base can be financial or non
financial. Companies often seek to use the cost driver of the indirect costs as the cost-allocation
base.
Management accounting 1 for business
Week 1
Required reading: Chapter 1-4
Management accounting is the actions managers undertake in the short-turn and long-run planning
and control of costs that increase value for customers and lower the costs of products and services.
Companies add value through research and development (R&D), design of products and processes,
production marketing, distribution and customer service. Customers want companies to deliver
performance through cost and efficiency, quality, timeliness and innovation.
An actual cost is the cost incurred (a historical or past coast) as distinguished from a budgeted cost,
which is a predicted, or forecasted cost (a future cost). The cost object is anything for which a
separate measurement of costs is desired.
A costing system typically accounts for costs in two basic stages:
1. Cost accumulation: the collection of cost date in some organised way through an
accounting system
2. Cost assignment: general term that encompasses both (1) tracing accumulated costs to a
cost object, and (2) allocating accumulated costs to a cost object. (cost tracing and cost
allocation)
- Direct cost of a cost object: costs that are related to the particular cost object and
that can be traced to it in an economically feasible (cost-effective) way. Cost tracing is
the assigning of direct costs to the chosen cost object.
- Indirect cost of a cost object: costs that are related to the particular cost object but
cannot be traced to it in an economically feasible (cost- effective) way. Indirect costs
are allocated to the cost object using a cost-allocation method. Cost allocation is the
assigning of indirect costs to the chosen cost object.
Cost driver is any factor that affects total cost. A change in the level of the cost driver will cause a
change in the level of the total cost of a related cost object.
Two type of cost behaviour pattern are:
1. Variable cost: a cost that changes in total in proportion to changes in the related level of
total activities or volume. The variable cost per unit does not change with the number of
volumes.
2. Fixed cost: a cost that does not change in total despire changes in the related level of
total activity or volume. Fixed costs become progressively smaller on a per unit basis as
the cost driver increases (volume increases).
A relevant range is the range of the cost driver in which a specific relationship between cost and the
level of activity or volume is valid.
A unit cost (average cost) is calculated by dividing some amount of total cost by the related number
of units. (see formula page)
Business sectors
Service-sector companies Merchandising-sector Manufacturing-sector
,lOMoARcPSD|15793120
, lOMoARcPSD|15793120
companies companies
Provide services or intangible Procide tangible products Provide tangible products that
products to their customers. they have previously have been concerted to a
These companies do not purchased in the same basic different form from that of
have any stock of tangible form from suppliers. the products purchased from
product at the end of an Merchandise purchased but suppliers. At the end of an
accounting period ot sold at the end of an accounting period, a
accounting period is held as manufacturer has stock that
stock can include direct materials,
work in progress or finished
goods.
Direct materials: direct materials is stock that will be used in the manufacturing
process. Work- in-progress: goods partially worked on but not yet completed.
Finished goods: Goods completed, but not yet sold.
Manufacturing cost can be divided in three terms: direct materials cost, direct manufacturing labour
cost and indirect manufacturing cost (manufacturing overhead cost or factory overhead cost)
Cost classifications are:
• Capitalised costs: that are first recorded as an asset, when they are incurred, these
costs are presumed to provide future benefits to the company. These costs are written
of to those periods assumed to benefit from their incurrence. (depreciation)
• Revenue costs: which are recorded as expenses of the accounting period when they
are incurred. (administration, marketing)
• Operating cost: all costs associated with generating revenue other than cost of goods
sold (see formula page)
• Stock-related costs (inventoriable cost) are all costs of a product that are considered
assets in a company’s balance sheet when the costs are incurred and that are
expensed as cost of goods sold only when the product is sold. (all manufacturing
costs)
• Period costs: all costs in the income statement other than cost of goods sold Period
costs are treated as expenses of the accounting period in which they are incurred,
because
managers expect these costs to increase revenues in only that period and not in future
periods (non manufacturing costs: such as, design cost, marketing, distribution)
• Prime costs: all direct manufacturing costs.
• Conversion cost: all manufacturing costs other than direct material costs. These are
the costs for transforming direct materials into finished goods.
• Product cost: sum of the costs assigned to a product for a specific purpose.
Cost pool is a grouping of individual cost items. Cost pools can range from the very broad, to the very
narrow.
Cost allocation base: a factor that is the common denominator for systemically linkinh an in direct
cost or group of indirect costs (pool) to a cost object. A cost-allocation base can be financial or non
financial. Companies often seek to use the cost driver of the indirect costs as the cost-allocation
base.
