Summary of Managerial Accounting and Cost Control
Managerial Accounting & Cost Control Explained
Introduction
Cost accounting helps managers understand what resources are consumed to produce goods or services and how those costs behave. This material explains cost definitions, major cost classifications, methods for assigning costs to products or services, and practical tools used in manufacturing and service environments.
Definition: Monetary value of resources (inputs) consumed to achieve a goal (produce output). Cost is not the same as expense.
1. Nature and origin of costs
- Cost: value of resources used to produce goods or services. Includes acquiring, producing, and supporting activities, not only purchase price.
- Cost ≠ Expense: Costs become expenses when matched to revenue (e.g., inventory cost becomes COGS when sold).
2. Cost objects and tracing costs
What is a cost object?
- Anything for which the organization needs cost data: product, customer, department, project.
- To trace a cost directly, the cost must be caused by and measurable for that object (e.g., wood for a chair).
Direct vs Indirect costs
- Direct cost: Easily traced to a cost object (e.g., direct materials, direct labour).
- Indirect cost (overhead): Supports multiple objects and cannot be traced to one without allocation (e.g., rent, utilities).
- Common cost: A type of indirect cost shared by several cost objects.
Definition: Overheads = indirect costs incurred to support production but not directly traceable to a single product.
3. Cost classifications for manufacturing companies
- Manufacturing costs: Direct materials, direct labour, other direct costs, manufacturing overheads.
- Non-manufacturing costs: Selling, general & administrative (SG&A) expenses.
Table: Manufacturing vs Non-manufacturing
| Category | Examples | Traced to Product? |
|---|---|---|
| Direct materials | Wood, steel | Yes |
| Direct labour | Assembly wages | Yes |
| Manufacturing overhead | Machine fuel, depreciation, factory rent | No (allocated) |
| Selling & admin | Advertising, executive salaries | No (period expense) |
Prime and conversion costs
- Prime cost = Direct materials + Direct labour.
- Conversion cost = Direct labour + Manufacturing overhead.
4. Product (inventoriable) vs Period costs
- Product costs: Costs incurred to make products (materials, labour, manuf. overhead). Capitalized as inventory on the balance sheet until sold.
- Period costs: Selling and administrative expenses expensed in the period incurred.
Definition: Product cost = Direct materials + Direct labour + Manufacturing overhead.
5. Cost behaviour and relevant range
-
Costs behave as variable, fixed, or mixed.
-
In a limited activity range (the relevant range), behaviour is often approximated as linear: $$Y = a + bX$$ where $Y$ is total cost, $a$ is fixed cost, $b$ is variable cost per unit, and $X$ is activity level.
-
Variable costs (VC): Change in total with activity, constant per unit (e.g., materials, direct labour per unit).
-
Fixed costs (FC): Do not change in total within the relevant range (e.g., rent, insurance).
- Committed FC: Long-term, hard to change quickly (facilities, major equipment).
- Discretionary FC: Short-term managerial choices (advertising, training).
-
Mixed costs: Contain fixed and variable components (e.g., telephone base fee + per-minute charges).
Example: Annual license fee €25,000 plus €3 per event. For 1,000 events total cost = €25,000 + €3×1,000 = €28,000.
6. Estimating mixed costs
Methods to separate fixed and variable components:
- Account analysis (classify each cost by judgement)
- Engineering approach (detailed technical study)
- High-low meth
Sign up for the full summaryAlready have an account? Sign in
Cost Classification & Methods
Klíčová slova: Budgeting, Workplace Motivation, Cost Accounting: Classification & Methods, Managerial & Reporting Cost Accounting, Managerial Accounting, Financial Accounting
Klíčové pojmy: Cost is the monetary value of resources consumed; expense occurs when costs are matched with revenue, Direct costs are traceable to cost objects; indirect costs require allocation, Product costs (materials, labour, overhead) are inventoriable; period costs are expensed when incurred, Prime cost = Direct materials + Direct labour; Conversion cost = Direct labour + Manufacturing overhead, In the relevant range total cost can be modelled as $Y = a + bX$ where $a$ is fixed and $b$ is variable per unit, Mixed costs can be split using account analysis, engineering, high-low, or least-squares regression, Predetermined overhead rates (POR) allocate overheads; differences cause under/overapplied overhead to be adjusted, Job-order costing tracks costs by job; process costing accumulates by department and uses equivalent units, COGM = Total manufacturing costs + BI of WIP − EI of WIP; Unadjusted COGS = BI of FG + COGM − EI of FG, Target costing sets cost = Selling price − Desired profit and focuses on design-stage cost reduction, Kaizen costing focuses on continuous post-production cost reductions, Choose costing method based on product type, production environment, and the level of detail needed