Chapter 02 Managerial Accounting

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Managerial Accounting

Chapter 2

Managerial Accounting and

Cost Concepts

Faculty: Rezwanul Mumtahin Husain


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After studying this chapter, you should

be able to understand

1.Manufacturing and nonmanufacturing cost

2.Product cost v/s Period cost

3.Prime cost and conversion cost

4.Schedule of Cost of goods manufactured

5.Variable cost v/s Fixed cost

6.Direct cost v/s Indirect cost

7.Differential cost, Sunk cost and Opportunity

cost


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General cost classificationsIn a manufacturing company costs are classified as

1.Manufacturing cost

2.Non-manufacturing cost

Manufacturing costs can be divided into three broadcategories:

1.Direct materials

2.Direct labor

3.Manufacturing overhead

Nonmanufacturing costs includes selling costs and

administrative costs.


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Manufacturing cost

1. Direct materials: Materials that becomes an integral part ofthe final product and whose costs can be conveniently traced

to the final product.

2.Direct labor: Labor costs that can be easily traced to theindividual units of product also known as touch labor.

3.Manufacturing overhead: It includes all manufacturing

costs except direct materials and direct labor. It is also known

as indirect manufacturing cost or factory overhead or burden.

Exp: Indirect materials, Indirect labor, depreciation,

maintenance and repairs.

-Prime costs and Conversion costs


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Nonmanufacturing Costs

Selling costs: All costs that are incurred to secure

customer orders and get the finished products to the

customers.

Administrative costs: All executive, organizational and

clerical costs related with the general management of

the organization.

Nonmanufacturing costs are also known as the selling,

general and administrative costs (SG&A).


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Product cost v/s Period cost

Product Cost

-All cost involved in acquiring and making a product.

-These costs are usually first assigned to inventories.

E.g. direct materials, direct labor and manufacturingoverhead

Period Cost

-All costs that are not part of the purchase andmanufacturing of goods

-Treated as an expense in the income statement.

E.g. rental cost and administrative cost


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Manufacturing Costs

(Product costs)

Direct LaborManufacturing

OverheadDirect Materials

Prime CostConversion

cost

Nonmanufacturing costs

( Period costs or selling andadministrative costs)

Selling costsAdministrative

costs


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Schedule of Cost of Goods Manufactured

Direct Materials:

Beginning RM Inventory XXX

Add: RM Purchases XXX

XXXX

Less: Ending RM Inventory (XXX)

Raw material used in production XXXX

Direct Labor XXX

Manufacturing overhead XXX

Total Manufacturing Costs XXXXAdd: Beginning WIP Inventory XXX

Less: Ending WIP Inventory (XXX)

Cost of Goods Manufactured XXXX


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Cost Classifications for predicting Cost

Behavior

Variable Cost-A cost that varies in total in direct proportion to changes in the

level of activity

-Variable cost per unit is constant

Fixed Cost-A cost that remains constant in total regardless of changes in

level of activity

-Average fixed cost varies inversely with changes in the level ofactivity

-Relevant range is the range of activity level within which

assumptions about fixed and variable costs are valid.


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Cost Classifications for assigning costs to cost

objects

Cost Object: Anything for which you need to allocate costs.

Direct costThese are costs that can be directly related to a specified cost object

E.g. direct materials and direct labor

Indirect cost

These are cost that cannot be easily and conveniently traced to aspecified cost objects because they act more like common costs.

E.g. a factory managers salary


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Cost Classifications for Decision Making1.Differential cost

2.Opportunity cost

3.Sunk cost

Differential costCost between two alternative options

Company

ABC

Sell Directly

(Option A)

Sell through

Intermediary

(Option B)

Differential

Cost/Revenue

Revenues 700000 800000 100000

Total expenses (540000) (625000) (85000)

Net Profit 160000 175000 15000


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Opportunity cost

It is the potential benefit which is given up whenone alternative is selected over another.

Sunk cost

A cost that has already been incurred and cannot

be changed by any decisions made now or in the

future.


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Cost summary and Classification Purpose

Cost classification Purpose of cost classification

Product cost v/s Period cost For the purpose of preparing

external financial statements

Variable cost v/s Fixed cost For the purpose of predicting

cost behavior in response to

changes in activity

Direct cost v/s Indirect cost For the purpose of assigning

cost to cost objects

Differential cost, Sunk cost and

Opportunity cost

For the purpose of making

company decisions

Documents

Chapter 02 Managerial Accounting