MANAGEMENT ACCOUNTING
Introduction & costs classifications
1.1 Introduction
Cost is a sacrificed or forgone resource to achieve a specific objective
- Actual cost is a cost that has occurred
- Budgeted cost is a predicted cost
Cost object is anything for which cost measurement is desired
a) Accumulation; collection of cost data in some organized way by means of an
accounting system
b) Assignment; encompasses tracing direct costs to a cost object and allocating indirect
costs to a cost object
Usefulness to managers:
- Making decisions
- Implementing decisions
Different types of firms
Manufacturing-sector companies purchase materials and components and convert them
into various finished goods
<Eg. Apple
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form
<Eg. Supermarket chain, Delhaize
Service- sector companies provide services (intangible products) like legal advice or audits
<Eg. KULeuven, service of education
1.2 Cost classification
The need for cost classification
Goal; grouping costs according to their common characteristics;
3 most commonly used types of cost classification:
o By behaviour: fixed, variable, semi-variable
o By association with cost object: direct costs and indirect costs
o By function: product and period costs
, Variable costs and fixed costs
Classification based on cost behaviour (=how a cost will
react to changes in the levels of business activities)
- Variable cost= expenses that fluctuate
proportionally with the quantity of output, over a defined period of time
- Fixed cost= one which is not affected by changes in the level of activity, over a
defined period of time, for a specific capacity
- Semi-variable cost is one which is partly fixed and partly varies with changes in the
level of activity, over a defined period of time. In this case, if activity levels increase;
cost per unit will reduce but not in proportion to the activity level
Eg. Waterbill, electricity
- Step cost is a fixed cost that increases in steps
<When higher than certain amount, higher cost
Eg. Restaurant and wages of waiters
,REMARK
For product mix & pricing decisions
Based on total costs rather than unit costs
Direct costs and indirect costs
Classification based on association with cost object
- Direct costs; directly traceable to an identifiable unit
- Indirect costs= overhead; no traceable, must be allocated, spread over a number of
identifiable units of the business
Direct materials: cost of raw material that is used to make a product and can be
conveniently traced to the finished product
Eg. Wood in furniture, leather in shoes
Direct labour: cost of salaries, wages and fringe benefits for personnel who work directly on
manufactured products
Eg. Wages paid to an automobile assembly worker
Indirect costs: all other costs
- Indirect materials; materials used to support the production process
Eg. Printing and stationary materials, consumables for maintenance of plant
and machinery
- Indirect labour: cost of personnel who don’t work directly on the product
Eg. Maintenance workers, director’s and supervisors’ salary and security
guards
- Other costs
Eg. Depreciation on plant and equipment, property taxes, insurance
Product costs and period costs
Classification based on function
Product costs: costs assigned to goods that were either purchased or manufactured for
resale
Eg. Materials, labour, transportation, depreciation of machines used in production
Period costs: costs that are treated as expenses in the period in which they are incurred
Eg. Administration costs, selling costs, R&D, depreciation of computers in accounting
department
, Production process & cost flow – Manufacturing company
Material purchases + direct labor +
manufacturing overhead = Cost of
goods manufactured (COGM)
Manufacturing cost flow – Income Statement Cost of goods manufactured
Product costs; not directly related to cost object
Direct; directly related or can be directly traced
through cost object
Indirect; needs to be divided across cost object
with allocation key
Period costs; immediate expenses that are taken
into account in a period where they are incurred
– not directly related to the production
Variable; commission
Full & variable costing
Introduction
A costing system is a framework used by companies to estimate the cost of their
products for profitability analysis, inventory valuation and cost control
Estimating the accurate cost of products is critical for profitable operations
- Full/absorption costing
- Variable/direct costing
Inventory-costing choice
Different costs for different purposes
Introduction & costs classifications
1.1 Introduction
Cost is a sacrificed or forgone resource to achieve a specific objective
- Actual cost is a cost that has occurred
- Budgeted cost is a predicted cost
Cost object is anything for which cost measurement is desired
a) Accumulation; collection of cost data in some organized way by means of an
accounting system
b) Assignment; encompasses tracing direct costs to a cost object and allocating indirect
costs to a cost object
Usefulness to managers:
- Making decisions
- Implementing decisions
Different types of firms
Manufacturing-sector companies purchase materials and components and convert them
into various finished goods
<Eg. Apple
Merchandising-sector companies purchase and then sell tangible products without
changing their basic form
<Eg. Supermarket chain, Delhaize
Service- sector companies provide services (intangible products) like legal advice or audits
<Eg. KULeuven, service of education
1.2 Cost classification
The need for cost classification
Goal; grouping costs according to their common characteristics;
3 most commonly used types of cost classification:
o By behaviour: fixed, variable, semi-variable
o By association with cost object: direct costs and indirect costs
o By function: product and period costs
, Variable costs and fixed costs
Classification based on cost behaviour (=how a cost will
react to changes in the levels of business activities)
- Variable cost= expenses that fluctuate
proportionally with the quantity of output, over a defined period of time
- Fixed cost= one which is not affected by changes in the level of activity, over a
defined period of time, for a specific capacity
- Semi-variable cost is one which is partly fixed and partly varies with changes in the
level of activity, over a defined period of time. In this case, if activity levels increase;
cost per unit will reduce but not in proportion to the activity level
Eg. Waterbill, electricity
- Step cost is a fixed cost that increases in steps
<When higher than certain amount, higher cost
Eg. Restaurant and wages of waiters
,REMARK
For product mix & pricing decisions
Based on total costs rather than unit costs
Direct costs and indirect costs
Classification based on association with cost object
- Direct costs; directly traceable to an identifiable unit
- Indirect costs= overhead; no traceable, must be allocated, spread over a number of
identifiable units of the business
Direct materials: cost of raw material that is used to make a product and can be
conveniently traced to the finished product
Eg. Wood in furniture, leather in shoes
Direct labour: cost of salaries, wages and fringe benefits for personnel who work directly on
manufactured products
Eg. Wages paid to an automobile assembly worker
Indirect costs: all other costs
- Indirect materials; materials used to support the production process
Eg. Printing and stationary materials, consumables for maintenance of plant
and machinery
- Indirect labour: cost of personnel who don’t work directly on the product
Eg. Maintenance workers, director’s and supervisors’ salary and security
guards
- Other costs
Eg. Depreciation on plant and equipment, property taxes, insurance
Product costs and period costs
Classification based on function
Product costs: costs assigned to goods that were either purchased or manufactured for
resale
Eg. Materials, labour, transportation, depreciation of machines used in production
Period costs: costs that are treated as expenses in the period in which they are incurred
Eg. Administration costs, selling costs, R&D, depreciation of computers in accounting
department
, Production process & cost flow – Manufacturing company
Material purchases + direct labor +
manufacturing overhead = Cost of
goods manufactured (COGM)
Manufacturing cost flow – Income Statement Cost of goods manufactured
Product costs; not directly related to cost object
Direct; directly related or can be directly traced
through cost object
Indirect; needs to be divided across cost object
with allocation key
Period costs; immediate expenses that are taken
into account in a period where they are incurred
– not directly related to the production
Variable; commission
Full & variable costing
Introduction
A costing system is a framework used by companies to estimate the cost of their
products for profitability analysis, inventory valuation and cost control
Estimating the accurate cost of products is critical for profitable operations
- Full/absorption costing
- Variable/direct costing
Inventory-costing choice
Different costs for different purposes
