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Managerial Accounting - Cost accounting

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Harshesh Chopra

on 20 January 2015

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Transcript of Managerial Accounting - Cost accounting

Basic Cost Management Concepts
Topic Objectives
After our presentation, you should be able to:
* Understand the Importance of Cost Accounting as manager
* understand the role of the cost/management accountant
Management Accounting

- Provide information for internal users- it identifies, collects, measures, classifies, and reports information that is useful to managers in planning, controlling, and decision making
Cost Accounting

- The establishment of budgets, standard costs and actual costs of operation, processes, activities or products; and the analysis of variances, profitability or the social use of funds
Role of the Cost/Management Accountant in the management process
1. Planning

-Planning process : Helps to formulate future plans
-Budgeting process: providing data on past performance
Role of the Cost/Management Accountant in the management process

-Producing performance report
-Assist the control function by providing prompt measurements of actions and identifying trouble areas.
Role of the Cost/Management Accountant in the management process

- Consolidate the organizational structure.
Role of the Cost/Management Accountant in the management process

Aids the communication function by installing and maintaining an effective communication and reporting system.
Role of the Cost/Management Accountant in the management process

- Budgets and performance reports have an important influence on the motivation of the personnel of the organization
- Provide valuable assistance in identifying potential managerial problem areas and highlighting those items for detailed investigations.
It is defined as the sacrifice made, usually measured by the resources given up to achieve a particular purpose
Product Costs, Period Costs and Expenses
Product costs
are costs associated with goods for sale until the time period during which the products are sold, at which time the costs become expenses.

Period costs
are expenses done during the time period in which costs are incurred.

are the consumption of assets for the purpose of generating revenue.

Period Costs

Operating expenses

Cost Classifications on Financial Statements – Income Statement
Cost Classifications on Financial Statements – Balance Sheet
Types of Production Processes
Manufacturing Costs


Manufacturing Overhead


Direct Material
Cost of raw material that is used tomake, and can be convenientlytraced, to the finished product.

Steel used to manufacture a automobile.

Direct Labor
Cost of salaries, wages, and fringebenefits for personnel who workdirectly on manufactured products.

Wages paid to anautomobile assemblyworker.

Manufacturing Overhead
All other manufacturing costs


Current Assets
Prepaid Expenses
Raw Materials
Work in Process
Finished Goods





Merchandise Inventory
Classifications of Costs in Manufacturing Companies
Manufacturing costs are often combined as follows:

Manufacturing Cost Flows

Product Costs

Cost of goods sold

Schedule of Cost of Goods Manufactured
Income Statement for a Manufacturer
Identifying Cost Drivers
Activities that cause costs to be incurred are called
cost drivers
Cost Classifications
Cost behavior means how a cost will react to changes in the level of business activity.

variable costs
change when activity changes.

fixed costs
remain unchanged when activity changes.
Total Variable Cost Example
total texting bill
is based on how many texts you send.

Variable Cost Per Unit
cost per text
sent is constant at Rs. 2 per text message.

Your monthly contract fee for your cell phone is fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make.

Fixed cost
What is cost?
Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.)

A. The cost of lighting the store.

B. The wages of the store manager.

C. The cost of ice cream.

Please Answer
Fixed Cost
Direct costs
Costs that can be easily and conveniently traced to a product or department.
Example: cost of paint in the paint department of an automobile assembly plant.

Indirect costs
Costs that must be allocated in order to be assigned to a product or department.
Example: cost of national advertising for an airline is indirect to a particular flight.

Direct and Indirect Costs
Controllable and Uncontrollable Costs
Controllable Cost
are the costs which can be influenced by the action of a specified member of the undertaking. They are incurred in a particular responsibility centres can be influenced by the action of the executive heading that responsibility centre. For
Opportunity Cost
The potential benefit that is given up when one alternative is selected over another.

Example: If you were not attending college,you could be earning$20,000 per year. Your opportunity cost of attending college for one year is $20,000.

Example :
a foreman incharge of a tool room can only control costs pertaining to the same department and the matters which come directly under his control, not the costs apportioned to other department. The expenditure which is controllable by an individual may be uncontrollable by another individual.
Uncontrollable Cost
are the costs which cannot be influenced by the action of a specified member of the undertaking.
Example :
Direct labour cost, direct material cost, direct expenses controllable by the shop level management.

Sunk Costs
All costs incurred in the past that cannot be changed by any decision made now or in the future are sunk costs. Sunk costs should not be considered in decisions.
Example: You bought an automobile that cost $12,000 two years ago. The $12,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the $12,000 cost.

Differential Costs
Costs that differ between alternatives.

Example: You can earn $1,500 per month in yourhometown or $2,000 per month in a nearby city.Your commuting costs are $50 per month in yourhometown and $300 per month to the city.
What is your differential cost?
$300 - $50 = $250

Marginal Costs and Average Costs
The extra costincurred to produceone additional unit
The total cost toproduce a quantitydivided by thequantity produced.

Marginal and average costs arelargely a function of cost behavior -- variable and fixed costs.

Costs and Benefits of Information
More information does not mean more benefits if information overload results.

You have been hired as a consultant by Cassanitti to advise him in his decisions. Write a memo to Cassanitti commenting on the costs of space and supervisory salaries included in the controller’s cost analysis. Explain in your memo about the “real” costs of the space occupied by the printer case department and the supervisor’s salary. What types of costs are these?
Independent of your response to the requirement one, suppose that Comp Tech’s controller had been approached by his friend
Jack Westford, the assistant supervisor of the printer case department. Westford is worried
that he will be laid off if the printer case department is closed down. Westford has asked his friend to understate the cost savings from closing the department, in order to slant the production manager’s decision toward keeping the department in operation. Comment on the controller’s ethical responsibilities.
Case Study
Group 1

Thank You
Full transcript