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An Introduction To Cost Terms and Purposes

- Managerial accounting measures, analyzes, and reports financial and non-financial information to help managers make decisions to fulfill organizational goals. - Financial accounting focuses on reporting to external users like investors, creditors, and government agencies. - Managerial accounting is more future-oriented and flexible while financial accounting is past-oriented and adheres to GAAP. - Cost management and analysis helps add value at each stage of a company's value chain.

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Amit Dey
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97 views17 pages

An Introduction To Cost Terms and Purposes

- Managerial accounting measures, analyzes, and reports financial and non-financial information to help managers make decisions to fulfill organizational goals. - Financial accounting focuses on reporting to external users like investors, creditors, and government agencies. - Managerial accounting is more future-oriented and flexible while financial accounting is past-oriented and adheres to GAAP. - Cost management and analysis helps add value at each stage of a company's value chain.

Uploaded by

Amit Dey
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRODUCTION

COST TERMS AND PURPOSES


ACCOUNTING DISCIPLINE OVERVIEW

• MANAGERIAL ACCOUNTING – MEASURES, ANALYZES AND


REPORTS FINANCIAL AND NONFINANCIAL INFORMATION TO
HELP MANAGERS MAKE DECISIONS TO FULFILL
ORGANIZATIONAL GOALS.

• FINANCIAL ACCOUNTING – FOCUS ON REPORTING TO


EXTERNAL USERS INCLUDING INVESTORS, CREDITORS, AND
GOVERNMENTAL AGENCIES.
MAJOR DIFFERENCES BETWEEN
FINANCIAL AND MANAGERIAL ACCOUNTING

Managerial Accounting Financial Accounting

Communicate financial position to


Purpose Decision making
outsiders

Primary Users Internal managers External users

Focus/Emphasis Future-oriented Past-oriented

Do not have to follow GAAP; cost vs. GAAP compliant;


Rules
benefit CPA audited
Ultra current to very long Historical monthly, quarterly
Time Span
time horizons reports
Designed to influence employee Indirect effects on
Behavioral Issues
behavior employee behavior
MANAGEMENT ACCOUNTING AND VALUE

• VALUE CHAIN IS THE SEQUENCE OF BUSINESS FUNCTIONS IN WHICH


CUSTOMER USEFULNESS IS ADDED TO PRODUCTS OR SERVICES
PLANNING AND CONTROL SYSTEMS

• PLANNING SELECTS GOALS, PREDICTS RESULTS, DECIDES HOW


TO ATTAIN GOALS, AND COMMUNICATES THIS TO THE
ORGANIZATION
BUDGET – THE MOST IMPORTANT PLANNING TOOL

• CONTROL TAKES ACTIONS THAT IMPLEMENT THE PLANNING


DECISION, DECIDES HOW TO EVALUATE PERFORMANCE, AND
PROVIDES FEEDBACK TO THE ORGANIZATION
BASIC COST TERMINOLOGY

• COST – SACRIFICED RESOURCE TO ACHIEVE A SPECIFIC OBJECTIVE

• ACTUAL COST – A COST THAT HAS OCCURRED

• BUDGETED COST – A PREDICTED COST

• COST OBJECT – ANYTHING OF INTEREST FOR WHICH A COST IS DESIRED


COST OBJECT EXAMPLES AT MARUTI SUZUKI

Cost Object Illustration


Product ALTO-800 vehicle
Service Dealer-support telephone hotline
Project R&D project on DVD system enhancement
Herb Chambers Motors, a dealer that purchases a broad
Customer
range of this vehicles
Activity Setting up production machines
Department Environmental, Health & Safety
BASIC COST TERMINOLOGY

• COST ACCUMULATION – A COLLECTION OF COST DATA IN AN ORGANIZED MANNER

• COST ASSIGNMENT – A GENERAL TERM THAT INCLUDES GATHERING ACCUMULATED


COSTS TO A COST OBJECT. THIS INCLUDES:

• TRACING ACCUMULATED COSTS WITH A DIRECT RELATIONSHIP TO THE COST


OBJECT AND

• ALLOCATING ACCUMULATED COSTS WITH AN INDIRECT RELATIONSHIP TO A


COST OBJECT
DIRECT AND INDIRECT COSTS

• DIRECT COSTS – CAN BE CONVENIENTLY AND ECONOMICALLY TRACED (TRACKED) TO A COST OBJECT
PARTS
ASSEMBLY LINE WAGES

• INDIRECT COSTS – CANNOT BE CONVENIENTLY OR ECONOMICALLY TRACED (TRACKED) TO A COST


OBJECT. INSTEAD OF BEING TRACED, THESE COSTS ARE ALLOCATED TO A COST OBJECT IN A RATIONAL
AND SYSTEMATIC MANNER
ELECTRICITY
RENT
PROPERTY TAXES
BMW: ASSIGNING COSTS TO A COST OBJECT
COST BEHAVIOR

• VARIABLE COSTS – CHANGES IN TOTAL IN PROPORTION TO CHANGES IN THE RELATED LEVEL OF


ACTIVITY OR VOLUME

• FIXED COSTS – REMAIN UNCHANGED IN TOTAL REGARDLESS OF CHANGES IN THE RELATED LEVEL OF
ACTIVITY OR VOLUME

• COSTS ARE FIXED OR VARIABLE ONLY WITH RESPECT TO A SPECIFIC ACTIVITY OR A GIVEN TIME PERIOD

• VARIABLE COSTS – ARE CONSTANT ON A PER-UNIT BASIS.

• FIXED COSTS – CHANGE INVERSELY WITH THE LEVEL OF PRODUCTION. AS MORE UNITS ARE PRODUCED,
THE SAME FIXED COST IS SPREAD OVER MORE AND MORE UNITS, REDUCING THE COST PER UNIT
COST BEHAVIOR SUMMARIZED

  Total Dollars Cost Per Unit


Variable Costs Change in proportion with Unchanged in relation to output
output
More output = More cost

Fixed Costs Unchanged in relation to output Change inversely with output


More output = lower cost per unit
COST BEHAVIOR VISUALIZED
OTHER COST CONCEPTS

• COST DRIVER – A VARIABLE THAT CAUSALLY AFFECTS COSTS OVER A GIVEN TIME
SPAN

• RELEVANT RANGE – THE BAND OF NORMAL ACTIVITY LEVEL (OR VOLUME) IN


WHICH THERE IS A SPECIFIC RELATIONSHIP BETWEEN THE LEVEL OF ACTIVITY
(OR VOLUME) AND A GIVEN COST
FOR EXAMPLE, FIXED COSTS ARE CONSIDERED FIXED ONLY WITHIN THE
RELEVANT RANGE.
MULTIPLE CLASSIFICATION OF COSTS

COSTS MAY BE CLASSIFIED AS:

• DIRECT / INDIRECT, AND

• VARIABLE / FIXED

THESE MULTIPLE CLASSIFICATIONS GIVE RISE TO IMPORTANT COST COMBINATIONS:

• DIRECT & VARIABLE

• DIRECT & FIXED

• INDIRECT & VARIABLE


MULTIPLE CLASSIFICATION OF COSTS, VISUALIZED
• Mahindra and Mahindra ltd specializes in producing one specialty vehicle. It is called Sufer is
styled to easily fit multiple surfboards in its back area and top mounted storage racks. Mahindra
and Mahindra ltd has the following manufacturing costs:
• Plant management costs- Rs. 1200 lakh per year
• Cost of leasing equipment-Rs. 1800 lakh per year
• Workers’ wages Rs. 70000 per Sufer Vehicle produced
• Direct Materials Costs: Steel-Rs. 150000 per sufer; Tires- Rs. 12,500 per tire, each Sufer takes 5
tires (one Spare).
• City license, which is charged monthly based on the number of tires used in production:
• 0-500 tires-Rs. 50 lakh
• 501-1000 tires – Rs. 74.5 lakh
• More than 1000 tires- Rs. 200 lakh
• Mahindra and Mahindra ltd currently produces 110 vehicles per month.

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