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01 Managerial Accounting 2
01 Managerial Accounting 2
RAIS AHMAD
ASSISTANT PROFESSOR
HOD, ACCOUNTS, FINANCE & ISLAMIC FINANCE,
KASBIT
M.PHIL (MANAGEMENT SCIENCES)
MBA (FINANCE),
MA (ECO)
FELLOW MEMBER OF PAKISTAN INSTITUTE OF
PUBLIC FINANCE ACCOUNTANT (FPFA 2379)
Cost & Managerial Accounting
PURPOSE
To plan future (Budget, Standards)
To control present (Comparing current
results with budget and standards)
FINANCIAL ACCOUNTING VS
COST & MANAGERIAL ACCOUNTING
Financial Accounting is largely concerned
with financial statements for external use
Managerial Accounting is primarily
concerned with the accumulation and
analysis of information relevant for
internal use for planning, controlling and
decision making.
FINANCIAL ACCOUNTING VS
MANAGERIAL ACCOUNTING
Financial accounting reports are
prepared for external parties such as
shareholders and creditors, whereas
managerial accounting reports are
prepared for managers inside the
organization.
MANAGERIAL ACCOUNTING
Emphasis on the Future
Relevance of Data
Less Emphasis on Precision
Segments of an Organization
Generally Accepted Accounting
Principles (GAAP) Not Mandatory
COST
Cost is defined as the “value” of the
sacrifice made to acquire goods or
services, measured in rupees.
At the time of acquisition, the cost
incurred is for present or future benefits.
When these benefits are utilized, the costs
become expenses.
DIRECT MATERIAL
All materials that can be identified with
the production of a finished product, that
can be easily traced to the product, and
that represent a major material cost of
producing that product. An example of
direct material is the lumber used to build
a bunk bed.
INDIRECT MATERIAL
All materials involved in the production of
a product that are not direct materials.
Indirect materials are included as part of
factory overhead. An example of an
indirect material is the glue used to build a
bunk bed.
DIRECT LABOR
All labor directly involved in the production
of a finished product that can be easily
traced to the product and that represents
a major labor cost of producing that
product. The work of machine operators in
a manufacturing company would be
considered direct labor.
INDIRECT LABOR
All labor involved in the production of a
product that is not considered direct labor.
Indirect labor is included as part of factory
overhead. The work of a plant supervisor
is an example of indirect labor.
FACTORY OVERHEAD
This all-inclusive cost pool is used to
accumulate indirect materials, indirect
labor, and all other indirect manufacturing
costs which can not be directly identified
with specific products. Examples of other
factory overhead costs, besides indirect
materials and indirect labor, are rent,
light, and heat for the factory, and
depreciation of factory equipment.
VARIABLE COSTS
Variable costs are those in which the total
cost changes in direct proportion to
changes in volume, or output, within the
relevant range, while the unit cost remains
constant. For example, if variable costs for
direct materials are Rs.100 per unit of
output, each time output increases by one
unit; the variable cost for direct material
will increase by Rs.100.
FIXED COSTS
Fixed costs are those in which total fixed
cost remains constant over a relevant
range of output, while the fixed cost per
unit varies with output. Beyond the
relevant range of output, fixed costs will
vary.
KEY CONCEPT
Total variable cost change in proportion
to changes in volume.
Per unit variable costs remain constant
when volume changes.
Total fixed costs remain constant when
volume changes.
Per unit fixed costs increase (decrease)
when volume decreases (increases).
PERIOD CHARGED TO INCOME
Costs may also be classified on the basis
of when they are to be charged against
revenue. Some costs are first recorded as
assets (capital expenditure) and then
expensed (charged as an expense) as they
are used or expire.
PRODUCT COSTS
These are costs directly and indirectly
identifiable with product. They are direct
materials, direct labor, and factory
overhead. These costs provide no benefit
until the product is sold. When the
products are sold, the total product costs
are recorded as an expenses, called the
cost of goods sold.
PERIOD COSTS
Those costs neither directly nor indirectly
related to the product. Period costs are
charged off immediately.
The following are examples of period
costs:
An accountant’s salary (Administrative Exp.)
Depreciation on a salesperson’s car
(Marketing Exp.)
Interest incurred on corporate bonds
(Financial Exp.)
Sunk costs
Sunk costs are past costs that are now
irrevocable, such as depreciation on
machinery. When confronted with a
choice, they are not relevant and should
not be considered in a decision-making
analysis, except for possible tax effects
upon their disposition.
OPPORTUNITY COSTS
Where a decision to pursue one alternative is
made, the benefits of other options are
foregone. Benefits lost from rejecting the next
best alternative are the opportunity costs of the
chosen action.
Since opportunity costs are not actually incurred,
they are not recorded in the accounting records.
They are, however, relevant costs for decision-
making purposes and must be considered in
evaluating a proposed alternative.
SHUTDOWN COSTS
Shutdown costs are those fixed costs
which would be incurred even if there
were no production.
COST ACCUMULATION SYSTEM
Cost accumulation in general is the organized
collection of cost data via a set of procedures or
systems.
Cost classification is the grouping of all
manufacturing costs into various categories in
order to meet the needs of management.
Cost data are accumulated under either a
periodic cost accumulation system or a perpetual
cost accumulation system.
PERIODIC COST
ACCUMULATION SYSTEM
Provides only limited product cost information
during a period and requires quarterly or year-
end adjustments to arrive at the cost of goods
manufactured.
Not considered a complete cost accumulation
system since the costs of raw materials, work-in-
process, and finished goods can only be
determined after physical inventories are taken.
Generally used only by the small manufacturing
companies.
PERPETUAL COST
ACCUMULATION SYSTEM
Accumulates product cost data, through
the three inventory accounts, that provide
continuous information about raw
materials, work-in-process, finished goods,
cost of goods manufactured and cost of
goods sold.
Generally used by most medium and large
manufacturing companies.
ACTUAL, NORMAL, AND STANDARD COSTS