Managerial Accounting & Cost Concepts
Introduction:
The work of Management focuses on
-Planning, which includes setting objectives and Outlining how to
attain these objectives.
-Controlling, which includes the steps taken to ensure that objectives
are realized.
To carry out these planning and controlling responsibilities managers
need information about organization. These information often
relates to the cost of the organization.
In Managerial accounting, the term cost used in many different ways.
The reason behind these there are many types of costs, and these
costs are classified according to the need of management.
-External Reports-Historical cost data
-Planning budgets-Future cost data
-Decision Making-Future cost data
Definition of Cost
Generally cost is the consideration paid for goods or
services or acquiring assets. In another word cost
denotes the amount of money that a company
spends on the creation or production of goods or
services. It does not include the mark-up for profit.
The term cost refers to the monetary value of
expenditures for raw materials, equipment, supplies,
services, labor, products, etc. It is an amount that is
recorded as an expense in bookkeeping records.
AN OVERVIEW OF COST TERMS
Purpose of classification Cost classifications
Preparing an income statement • Product costs
and balance sheet • Direct materials
• Direct labor
• Manufacturing overhead
• Period costs (non manufacturing
costs)
• Marketing and selling costs
• Administrative costs
Predicting changes in cost due to • Variable costs
changes in activity • Fixed costs
Assigning costs (Tracing) • Direct costs
• Indirect costs
Making decisions • Differential costs
• Sunk costs
• Opportunity costs
General Cost Classification
1.Manufacturing Costs
-Direct Materials: Material that goes into the final production
-Direct Labor : Consists of labor costs that can be easily(Physically and
conveniently)traced to individual units of products .ie, Assembly line workers,
carpenter for home builders , electricity installation of an equipment.
-Manufacturing overhead:
-Indirect material, indirect labor , maintenance and repair, heating and lighting
in factory.
2.Non Manufacturing Costs
-Selling costs: Selling costs include all costs that are incurred to secure
customer orders and get the finished products to the customers. It also
called order getting and filling costs.ie advertizing ,shipping , sales travel
,sales commission ,sales salaries , cost of finished goods warehouse.
-Administrative costs:
Executive Compensation ,General Accounting, Secretarial,Public relations.
COST CLASSIFICATIONS IN MANUFACTURING COMPANIES
Cost Classification in Manufacturing Companies
Product Costs Vs. Period Costs
Product Costs: For financial accounting purposes product
costs include all costs involved in acquiring or making a
product
1.It includes all direct and indirect costs to complete products
2.The product is made is called inventory and shown in the
balance sheet.
3.The expensed are incurred are deducted as cost of goods
sold.
Period costs: Period costs are non product costs:
1.Selling and distribution
2.Administrative costs
Product Costs Versus Period Costs
Product costs include direct Period costs include all
materials, direct labor, and marketing or selling
manufacturing overhead. costs and administrative
costs.
Inventory Cost of Good Sold Expense
Sale
Balance Income Income
Sheet Statement Statement
The Income Statement
Cost of goods sold for manufacturers differs only slightly
from cost of goods sold for merchandisers.
Product Cost Flows
As items are removed from raw materials inventory
and placed into the production process, they are
called direct materials.
Product Cost Flows
Conversion costs are
costs incurred to convert
the direct material into a
finished product.
Product Cost Flows
All manufacturing costs incurred during the period are
added to the beginning balance of work in process.
Product Cost Flows
Costs associated with the goods that are completed during
the period are transferred to finished goods inventory.
Product Cost Flows
Manufacturing Cost Flows
Balance Sheet Income
Costs Inventories Statement
Expenses
Material Purchases Raw Materials
Direct Labor Work in
Process
Manufacturing
Overhead Cost of
Finished
Goods
Goods
Sold
Selling and Period Costs Selling and
Administrative Administrative
