END3972 – Cost & Management Accounting

Week 1 – 27/2/2023

Assist. Prof. Mert Edalı

medali@yildiz.edu.tr

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 Outline
 Course Syllabus
 Introduction to Cost and Management Accounting

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 CHAPTER 1 & 2

The Manager and Management Accounting

An Introduction to Cost Terms and Purposes

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© 2012 Pearson Prentice Hall. All rights reserved.
 Accounting
 Financial accounting
 focuses on reporting to external parties such as investors, government agencies, banks, and
suppliers
 statements are based on generally accepted accounting principles (GAAP)
 Kamu Gözetimi Muhasebe Denetim Standartları Kurumu (Public Oversight Accounting and
Auditing Standards Authority)
 Management accounting
 measures, analyzes, and reports financial and nonfinancial information that helps managers
make decisions to fulfill the goals of an organization.
 Cost accounting
 measures, analyzes, and reports financial and nonfinancial information relating to the costs of
acquiring or using resources in an organization.
 provides information for management accounting and financial accounting.

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 Accounting

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 Basic Cost Terminology
 Cost
 sacrificed resource to achieve a specific objective
 measured as the monetary amount that must be paid to acquire goods or services.
 Actual cost
 a cost that has occurred
 Budgeted cost
 a predicted cost
 Cost object
 anything of interest for which a cost is desired
 want to calculate the cost of it…

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 Cost Object Examples at BMW

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 Cost
 Budgeted (predicted/anticipated) cost vs. actual cost
 Good for making decisions.
 Helps managers
 evaluate how well they did
 learn about how they can do better in the future

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 BMW: Assigning Costs to a Cost Object

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 Basic Cost Terminology
 Think about the following costs;
 Material cost
 Supervision cost / managerial costs

 Sandwiches sold at a university cafe

 cheese, bread
 rent of the cafe
 the salary of the person preparing sandwiches

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 Direct and Indirect Costs
 Direct costs
 can be conveniently and economically traced (tracked) to a cost object.
 e.g.,
 the cost of steel (BMW X5)
 the cost of bread, the cost of cheese (toast)
 cost tracing is the assignment of direct costs to a particular cost object.
 Indirect costs
 cannot be conveniently or economically traced (tracked) to a cost object.
 e.g.,
 plant administration costs, rent, electricity, insurance
 Instead of being traced, these costs are allocated to a cost object in a rational and
systematic manner.

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 Basic Cost Terminology
 How does a cost system determine the costs of various cost objects?
 Cost Accumulation:First costs are accumulated.
 Cost Assignment: Then we assign them to cost objects.

 Cost accumulation: a collection of cost data in an organized manner (like

categories) through an accounting system
 e.g., BMW collects (accumulates) costs in various categories such as
 different types of materials,
 different classifications of labor,
 costs incurred for supervision

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 Basic Cost Terminology
 Cost assignment: assigning accumulated costs to a cost object, i.e., different
models of cars.
 Cost information is used in making and implementing decisions,
 how to price different models of cars or
 how much to invest in R&D and marketing
 by rewarding employees for reducing costs.

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 Challenges in Cost Allocation
 Costs should be accurately assigned to cost objects
 Otherwise it misleads managers about the profitability of different products
 unknowingly promote unprofitable products
 deemphasizing profitable products
 e.g., if you allocate all the rent to the tea…

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 Factors Affecting Direct/Indirect Cost Classification
 Cost materiality (relevance/importance)
 The costs of smaller amounts (immaterial costs), are less likely economically feasible to
trace.
 data processing and administrative costs of tracing vs. the cost
 Availability of information-gathering technology
 Bar codes (like checkouts at supermarkets)
 Operational design
 Dedicated facilities (e.g., manufacturing a single product in a facility)

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 Factors Affecting Direct/Indirect Cost Classification
 Note that the direct/indirect classification depends on the choice of the cost object
 the broader the definition of the cost object
 the higher the proportion of total costs that are direct costs
 the more confidence a manager has in the accuracy of the resulting cost amounts
 e.g., the cost of the worker for the tea and sandwiches
 Direct cost if you consider the shop (i.e., if the cost object is the shop)
 Indirect cost if you consider the sandwiches (i.e., if the cost object is the sandwich).

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