Chapter 2: Basic Managerial Accounting
Concepts
https://www.youtube.com/watch?v=qHRjF9i7jWw
https://www.youtube.com/watch?v=pW_B0fZzgCQ
1. The Meaning and Uses of Cost
Cost
Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that bring a current or
future benefit to the organization.
- Payable amount (cash)
- Asset for an Asset (cash equivalents)
Costs are incurred to produce future benefits. In a profit -making company these benefits are referred to as
“revenue”
- All cots are used up in producing/generating revenues, they are said to expire. Expired costs are
called expenses
- Profit = revenue – expenses
- The revenue per unit is called price
Differences between Costs and Expenses:
- Materials Bought – costs
- Materials used - expenses
- E.g you have 100m of material and you use 70m of it to create your product, only the 70m used is
considered an expense.
Accumulating and Assigning Costs
Accumulating Costs is the way that costs ar4e measured and recorded.
- Eg. Phone bill is recorded as “telephone expense” or “accounts payable”
Assigning costs is the way that a cost is linked to some cost object.
A cost object is something for which a company wants to know the cost.
A cost object can be any item such as:
- A product
- Customer
- Department
- Project
- Geographic region or plant
Assigning Costs to Cost Objects
Cost can be assigned to cost objects in a number of ways.
The choice of a method depends on a number of factors, such as the need for accuracy.
The objective is to measure and assign costs as well as possible, given management objectives.
Direct
Cost Costs
Objects Indirect
Costs
, Direct Costs
- Direct costs are costs that can be easily and accurately traced to a cost object.
- When a cost is easy trace, the relationship between the cots and cost object:
Can be physically observed
Is easily traceable
Results in more accurate cost assignment.
Indirect costs
- Indirect costs are costs that cannot be easily and accurately traced to cost object.
- Allocation means that an indirect cost is assigned to a cost object by using a reasonable and
convenient allocation method or basis.
- Object costing – some business refer to indirect costs as overhead costs or support costs.
Other Categories of costs
- Variable costs:
increases in total as output increases and decreases in total as output decreases.
- Fixed Costs:
a cost that does not increase in total as output increases and decreases in total as output
decreases
- Opportunity Costs:
An opportunity cost is the benefit given up or scarified when one alternative is chosen over
another.
Concepts
https://www.youtube.com/watch?v=qHRjF9i7jWw
https://www.youtube.com/watch?v=pW_B0fZzgCQ
1. The Meaning and Uses of Cost
Cost
Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that bring a current or
future benefit to the organization.
- Payable amount (cash)
- Asset for an Asset (cash equivalents)
Costs are incurred to produce future benefits. In a profit -making company these benefits are referred to as
“revenue”
- All cots are used up in producing/generating revenues, they are said to expire. Expired costs are
called expenses
- Profit = revenue – expenses
- The revenue per unit is called price
Differences between Costs and Expenses:
- Materials Bought – costs
- Materials used - expenses
- E.g you have 100m of material and you use 70m of it to create your product, only the 70m used is
considered an expense.
Accumulating and Assigning Costs
Accumulating Costs is the way that costs ar4e measured and recorded.
- Eg. Phone bill is recorded as “telephone expense” or “accounts payable”
Assigning costs is the way that a cost is linked to some cost object.
A cost object is something for which a company wants to know the cost.
A cost object can be any item such as:
- A product
- Customer
- Department
- Project
- Geographic region or plant
Assigning Costs to Cost Objects
Cost can be assigned to cost objects in a number of ways.
The choice of a method depends on a number of factors, such as the need for accuracy.
The objective is to measure and assign costs as well as possible, given management objectives.
Direct
Cost Costs
Objects Indirect
Costs
, Direct Costs
- Direct costs are costs that can be easily and accurately traced to a cost object.
- When a cost is easy trace, the relationship between the cots and cost object:
Can be physically observed
Is easily traceable
Results in more accurate cost assignment.
Indirect costs
- Indirect costs are costs that cannot be easily and accurately traced to cost object.
- Allocation means that an indirect cost is assigned to a cost object by using a reasonable and
convenient allocation method or basis.
- Object costing – some business refer to indirect costs as overhead costs or support costs.
Other Categories of costs
- Variable costs:
increases in total as output increases and decreases in total as output decreases.
- Fixed Costs:
a cost that does not increase in total as output increases and decreases in total as output
decreases
- Opportunity Costs:
An opportunity cost is the benefit given up or scarified when one alternative is chosen over
another.
