FBS 222 Chapter 2
Basic Managerial Accounting Concepts
MEANING & USES OF COST
• Determine the cost of products, services, customers and other items to
managers.
Cost
• Amount of cash/cash equivalent sacrificed for goods and/or services that bring
current or future benefit to the organisation.
• All costs are used up in producing/generating revenues, they are said to
expire.
o Expired costs are called expenses.
• Profit = revenues – expenses.
• The revenue per unit is called price.
Accumulating costs
• The way that costs are measured and recorded.
• E.g. Phone bill recorded as accounts payable and telephone expense account.
Assigning costs
• The way that a cost is linked to some cost object.
• Tells company why the money was spent.
Cost objects
• Item (product, service, customer, department etc.) for which costs are
measured and assigned.
• Something for which the company wants to know the cost.
• E.g. Nedbank wants to determine cost of a platinum credit card, the cost
object is the platinum credit card.
KAYLA HUMPHRIES
, FBS 222 Chapter 2
ASSIGNING COSTS TO COST OBJECTS
• Can be assigned in a number of ways.
• Choice of method depends on a number of factors, such as the need for
accuracy.
• Objective = to measure and assign costs as well as possible, given management
objectives.
DIRECT COSTS
• Costs that can be easily and accurately traced to a cost object.
• When a cost is easy to trace, the relationship between cost and cost object:
o Can be physically observed
o Is easy to track
o Results in more accurate cost assignments
INDIRECT COSTS
• Costs that cannot be easily and accurately traced to a cost object.
• Allocation means an indirect cost is assigned to a cost object by using a
reasonable and convenient allocation method/basis.
• Also referred to as overhead or support costs.
ASSIGNING INDIRECT COSTS:
o Done by using allocation = indirect cost assigned to cost object using a
reasonable and convenient method.
o Based on convenience/assumed causal linkage.
o Needed to determine value of inventory and cost of goods sold.
OTHER CATEGORIES OF COST
• Costs can be analysed by a way in which cost changes when the level of
output changes.
o Variable cost: Increases in total as output increases and decreases in
total as output decreases.
▪ Company making more jeans, need more denim.
o Fixed cost: Does not increase in total as output increases and does not
decrease in total as output decreases.
▪ Property taxes stay the same regardless of jeans output.
o Opportunity cost: Benefit given up/sacrificed when one alternative is
chosen over another.
KAYLA HUMPHRIES
Basic Managerial Accounting Concepts
MEANING & USES OF COST
• Determine the cost of products, services, customers and other items to
managers.
Cost
• Amount of cash/cash equivalent sacrificed for goods and/or services that bring
current or future benefit to the organisation.
• All costs are used up in producing/generating revenues, they are said to
expire.
o Expired costs are called expenses.
• Profit = revenues – expenses.
• The revenue per unit is called price.
Accumulating costs
• The way that costs are measured and recorded.
• E.g. Phone bill recorded as accounts payable and telephone expense account.
Assigning costs
• The way that a cost is linked to some cost object.
• Tells company why the money was spent.
Cost objects
• Item (product, service, customer, department etc.) for which costs are
measured and assigned.
• Something for which the company wants to know the cost.
• E.g. Nedbank wants to determine cost of a platinum credit card, the cost
object is the platinum credit card.
KAYLA HUMPHRIES
, FBS 222 Chapter 2
ASSIGNING COSTS TO COST OBJECTS
• Can be assigned in a number of ways.
• Choice of method depends on a number of factors, such as the need for
accuracy.
• Objective = to measure and assign costs as well as possible, given management
objectives.
DIRECT COSTS
• Costs that can be easily and accurately traced to a cost object.
• When a cost is easy to trace, the relationship between cost and cost object:
o Can be physically observed
o Is easy to track
o Results in more accurate cost assignments
INDIRECT COSTS
• Costs that cannot be easily and accurately traced to a cost object.
• Allocation means an indirect cost is assigned to a cost object by using a
reasonable and convenient allocation method/basis.
• Also referred to as overhead or support costs.
ASSIGNING INDIRECT COSTS:
o Done by using allocation = indirect cost assigned to cost object using a
reasonable and convenient method.
o Based on convenience/assumed causal linkage.
o Needed to determine value of inventory and cost of goods sold.
OTHER CATEGORIES OF COST
• Costs can be analysed by a way in which cost changes when the level of
output changes.
o Variable cost: Increases in total as output increases and decreases in
total as output decreases.
▪ Company making more jeans, need more denim.
o Fixed cost: Does not increase in total as output increases and does not
decrease in total as output decreases.
▪ Property taxes stay the same regardless of jeans output.
o Opportunity cost: Benefit given up/sacrificed when one alternative is
chosen over another.
KAYLA HUMPHRIES
