Cost Classification

Topics: Management accounting, Costs, Cost accounting Pages: 16 (2564 words) Published: December 10, 2010


Purpose of the course - familiarize you with:

1. Managerial accounting concepts.
2. Managerial accounting practices.
3. Use of managerial accounting information for decision making. 4. Pitfalls.

Accounting is a branch of study concerned with the generation ( identification & measurement ) and provision (Communication) of information.

Managerial accounting is in particular accounting for the internal management of organizations.

A. Financial versus Managerial Accounting

Financial AccountingManagement Accounting

Approach! unifying concept: assets=equities! no underlying unity-- many approaches

Rules ! G.A.A.P.! no general principles

! mandatory! mostly optional

Measurement! almost exclusively $! many non-financial elements

! emphasis on precision, objectivity! subjective estimates

Past/Future! based on past! many future estimates and forecasts

Aggregation! overall summary of business! very segmented

! general purpose information! specific purpose reports

Frequency! less/mandatory frequency! more frequent and optional

Similarity! basic data source same

End result! ends with financial statements! integral part of other business aspects

B. Cost Accounting Terminology

1. Nature of Cost

Cost - A sacrifice of resources: Cost is a measurement in monetary terms of the amount of resources used for some purpose. Expense - The cost charged against revenue in a particular accounting period.

2. Purposes of Gathering Cost Information

Routine decision making: Managerialcontrol
Nonroutine decision making Cost
Cost of Goods Sold Financial Product
Accounting Costing
Inventory Valuation

B. Three Aspects (Basic costs) of Managerial Accounting:

1. Decision Making (Differential Costs)

Interface with decision models from operations research, economics and finance, competitive analysis of costs and prices, cost of capital calculations and investment decisions.

Example : Dominos Pizza almost bankrupt 6' pizza making losses

2. Product Costing (Full Costs)

Associating a $ value for the resources sacrificed in obtaining a product or service.

- used for financial reporting - valuation of inventory, COGS.

- used for internal decision making - product pricing, optimal product mix.

Example-poor costing led Rockwell International Inc., to overcharge customers - high volume product - heavy duty truck axles - attract competitors selling at lower prices hence trouble. -automobile industry controllable costs.

-steel industry died because of high wages.

3. Planning, Control & Performance Evaluation (Responsibility Costs)

- Quantification of goals, strategies and forecasts in the form of budgets - develop pro forma financial statements.

- Measure to what extent managers and organizational subunits (responsibility centers) did achieve their goals.

a) Informal control - social psychology.

b) Formal control - performance evaluation, incentive provisions, compensation, promotions and dismissals.

Example: Reimbursement mechanisms for hospitals,


3. What types of costs are incurred in a Manufacturing Firm?


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