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Emphasis on cost
Why do management accountants pay so much attention to costs?
Historic focus on production costs, to value inventory and COGS for external reporting Ready availability of cost data within the transaction-based accounting system Importance of cost information in managers decisions
Non-financial information has assumed increased importance in contemporary management accounting systems
Cost classifications
Before classifying costs, need to consider how managers intend to use the cost information in decision making Different cost and classifications are used for different purposes The same cost can be classified in a number of ways depending on the intended use of the cost information
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Cost classifications
What are costs?
Resources given up to achieve a particular objective If the benefit extends beyond the current accounting period these costs are classified as assets If the benefit is used, the costs are classified as expense Measured in monetary terms
Cost behaviour
Managers must understand how costs change as the as the level of activity in the business changes
The level of activity is the level of work performed in the organisation
Variable costs
Change in total in direct proportion to a change in the level of activity Sometimes referred to as unit-level costs in continued product costing as they incurred for each unit of product/service produced
Cost behaviour
Fixed costs
Remain unchanged in total despite changes in the level of activity Can be described as committed costs
Result from an organisations ownership or use of premises and its basic organisation structure, and is difficult to change in the short-term
or as discretionary costs
Result from managements decision to spend a continued particular amount of money for some purpose, and can be easily changed
Cost behaviour
Cost drivers
Any activities or factors that drive (cause) costs
Conventional approaches focus on production volume as the level of activity (or cost driver)
Costs are classified as variable or fixed with respect to production volume
Whether a cost is classified as direct or indirect depends on the nature of the cost object
Downstream costs
Marketing costs are the cost of selling products and the cost of advertising and promotion Distribution costs are the cost of storing, handling and shipping finished products Customer service costs are the costs of
Manufacturing costs
Manufacturing costs are incurred within the factory area, whereas upstream and downstream costs are sometimes called non-manufacturing costs Manufacturing costs include three categories: direct material, direct labour and manufacturing overhead
This classification assumes that products are continued the relevant cost objects
Manufacturing costs
Direct material
Material that is consumed in the manufacturing process Physically incorporated into the finished products; and Can be traced to products conveniently
Direct labour
The cost of wages and labour on-costs of staff who work directly on manufacturing a product continued However, contractual arrangement sometimes means that such labour is a committed cost
Manufacturing costs
Manufacturing overhead
All manufacturing costs other than direct material and direct labour Also called indirect manufacturing costs or factory burden Includes the cost of indirect material and indirect labour, depreciation and insurance on factory equipment, utilities and the costs of manufacturing support departments Also includes cost of overtime premium and continued idle time
Manufacturing costs
Conversion costs
The total of direct labour and manufacturing overhead costs The cost of converting material into product
Prime costs
The total of direct material and direct labour costs The major cost associated with producing a continued product
Manufacturing costs
Contemporary costing systems analyse costs in greater detail than under conventional costing systems
Labour costs, and upstream and downstream costs may be classified within an activity framework
In general, direct material tends to be the largest proportion of manufacturing cost, and direct labour costs the smallest
Product costs
Managers need estimates of product costs for different purposes In financial accounting reports
To determine cost of goods sold To value inventory on hand