Cost Terms, Concepts and Classification MANAGERIAL ACCOUNTING
Jan 21, 2015
Cost Terms, Concepts and Classification
MANAGERIAL ACCOUNTING
COSTS
- are associated with all types of organizations business, non business, service, retail and manufacturing.
- also classified depending on the type of organization involved.
Difference of COST between Financial Accounting and Managerial Accounting
• Financial Accounting – cost is a sacrifice made in order to obtain some good or service.
Sacrifice – may be cash expended, property transferred,service performed, and so on.
• Managerial Accounting – cost is used in many different ways.
- it is according to the immediate needs of management.
Manufacturing Costs
Difference between Manufacturing and Merchandising
• Manufacturing – transformation of raw materials into finished product.
• Merchandising – marketing of products without changing their basic form or content.
Manufacturing Costs
A manufacturing firm is more complex than most other types of organizations.
Three Basic Elements:Direct MaterialsDirect LaborManufacturing Overhead
Manufacturing Costs
• DIRECT MATERIALS – materials that become an integral part of a company’s finished product, and which can be traced into it.
- generally termed raw materials.
Manufacturing Costs
• DIRECT LABOR – labor costs which are directly traceable to the creation of products.
• MANUFACTURING OVERHEAD – including all cost of manufacturing except direct materials and direct labor.
Nonmanufacturing Costs
Nonmanufacturing costs
Two categories:
• Marketing Cost – to secure customer orders and to get the finished product/services into the hands of the customer.
• Administrative cost – all executive, organizational, and clerical costs which is not under marketing.
Period Costs
• Period Cost – identified with measured time intervals, rather than with goods delivered or services provided.
- All Selling and Administrative Costs are treated as period costs.
- Nonmanufacturing Costs are all considered Period Costs and will appear on income statement as expenses on time-period basis.
Product Costs
• Product Cost – involved in the manufacture of goods.
- often called inventoriable costs.
-includes direct materials, direct labor and manufacturing overhead.
COST Classification on FINANCIAL STATEMENT• Financial Statement prepared by a
manufacturing firm are more complex than the statements prepared by a merchandising firm.
• The production process gives rises to many costs that does not exist in a merchandising firm.
Income Statement
• Merchandising = cost of goods sold = purchase cost of goods from a supplier.
• Manufacturing = consist of many different cost which incurred in the manufacturing process.
Balance Sheet
• Merchandising = one class of inventory = goods purchased from the supplier
• Manufacturing = three classes of inventory : manufactured products, work in process, finished goods
Cost Flow
• Operations = work in process (asset), finished goods (asset), cost of goods sold (expense)
• Selling and Administrative activities = expense as period cost
Idle Time
• It represents the costs of direct labor workers who are unable to perform their assignments due to machine breakdowns, material shortages, power failures.
• It will be treated as manufacturing overhead or indirect labor.
Overtime Premium
• It is considered to be part of manufacturing overhead both with direct and indirect labor.
• It is because production is usually scheduled on a random basis. If so, then it would be unfair to charge an overtime premium against a particular batch simply because it happened to fall on the tail end of the daily scheduling unit.
Payroll Fringe Benefits
• These are made up of employment-related costs paid by the employer.as
• Many firms treat this as indirect labor by adding them in total to manufacturing overhead.
COST and CONTROL
• Cost Classification is different with preparing a financial statement and a manager controlling operations and preparing for future.
Classification of Cost for control purpose:• Variable and Fixed• Direct and Indirect• Controllable and Noncontrollable
• Variable Cost – cost which vary, in total, in direct proportion to changes in the level of activity.
• Fixed Cost – cost which remain constant.
- not affected by changes in volume.
• Direct Cost – can be obviously and physically traced to the particular segment under consideration.
• Indirect Cost – they must be allocated in order to be assigned to units of products or other segments of a company.
• Controllable Cost and Noncontrollable Cost
- a cost is controllable at a particular level of management if that level has a power to authorize the cost.
- in some situation there is a time dimension to controllability.
OTHER Cost Concepts
• Differential Cost – difference in cost between one alternative and another.
• Opportunity Cost – potential benefit that is lost or sacrificed when the choice requires the giving up of an alternative course of action.
• Sunk Cost- a cost that has already been incurred, and which cannot be changed now or in the future.