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.