Concept of Cost
COST CLASSIFICATION
CONCEPT OF COST:
DEFINITION:
A SACRIFICE OR GIVING UP OF RESOURCES FOR A PARTICULAR PURPOSE FREQUENTLY MEASURED BY THE MONETARY UNITS (RUPEES, DOLLARS) THAT MUST BE PAID FOR GOODS AND SERVICES .
➢ EMPHASIS ON COST INFORMATION:
MANAGEMENT ACCOUNTANTS PAY A LOT OF ATTENTION TO COSTS BECAUSE COST HAVE A VITAL ROLE TO PLAY IN PLANNING , EVALUATING AND DECISION MAKING. FOR
EXAMPLE IN PLANNING THE ROUTE AND FLIGHT SCHEDULES THE MANAGER OF AN AIR LINE MUST CONSIDER AIR CRAFT FUEL COST, SALARIES OF FLIGHT CREWS, AND COST OF LANDING ETC.
➢ CLASSIFICATION OF COST:
BEFORE MANAGEMENT ACCOUNTANTS CAN CLASSIFY COST THEY NEED TO CONSIDER HOW MANAGERS WILL USE THE INFORMATION. DIFFERENT COST CONCEPTS AND CLASSIFICATIONS ARE USED FOR DIFFERENT PURPOSE, SOME ARE USED FOR PLANNING AND CONTROL AND OTHER ARE RELEVANT FOR COSTING PRODUCTS AND REPORTING RESULTS. THE SAME COST CAN BE CLASSIFIED IN NUMBER OF WAYS DEPENDS ON INTENDED USE OF THE COST INFORMATION.
➢ COMMON COST CLASSIFICATIONS IN MANAGERIAL ACCOUNTING
THE FOLLOWING ARE SOME BASIS ON WHICH COST CAN BE CLASSIFIED INTO VARIOUS TYPES
1. MANUFACTURING (PRODUCT COST) 2. NON MANUFACTURING(PERIOD COST) 3. TRACEABILITY 4. BEHAVIOR 5. CONTROLLABILITY
1. MANUFACTURING COST: THE COST INCURRED WITHIN THE MANUFACTURING AREA
CLASSIFICATION: a. DIRECT MATERIAL b. DIRECT LABOR c. FACTORY OVERHEADS (INDIRECT MANUFACTURING COST)
USED TO: i. ESTIMATE COST OF PRODUCT ii. COGS ( PROFIT AND LOSS ACCOUNT) iii. INVENTORY FOR BALANCE SHEET
RECALL THE LECTURE “CONCEPT OF COST” OF COST ACCOUNTING.
2. NON MANUFACTURING COST (PERIOD COST): REFERRED TO ALL COST INCURRED OUTSIDE THE MANUFACTURING AREA.
CLASSIFICATION: a. SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (OPERATING EXPENSES)
USED TO: i. PREPARE PROFIT AND LOSS
CONCEPT OF COST:
DEFINITION:
A SACRIFICE OR GIVING UP OF RESOURCES FOR A PARTICULAR PURPOSE FREQUENTLY MEASURED BY THE MONETARY UNITS (RUPEES, DOLLARS) THAT MUST BE PAID FOR GOODS AND SERVICES .
➢ EMPHASIS ON COST INFORMATION:
MANAGEMENT ACCOUNTANTS PAY A LOT OF ATTENTION TO COSTS BECAUSE COST HAVE A VITAL ROLE TO PLAY IN PLANNING , EVALUATING AND DECISION MAKING. FOR
EXAMPLE IN PLANNING THE ROUTE AND FLIGHT SCHEDULES THE MANAGER OF AN AIR LINE MUST CONSIDER AIR CRAFT FUEL COST, SALARIES OF FLIGHT CREWS, AND COST OF LANDING ETC.
➢ CLASSIFICATION OF COST:
BEFORE MANAGEMENT ACCOUNTANTS CAN CLASSIFY COST THEY NEED TO CONSIDER HOW MANAGERS WILL USE THE INFORMATION. DIFFERENT COST CONCEPTS AND CLASSIFICATIONS ARE USED FOR DIFFERENT PURPOSE, SOME ARE USED FOR PLANNING AND CONTROL AND OTHER ARE RELEVANT FOR COSTING PRODUCTS AND REPORTING RESULTS. THE SAME COST CAN BE CLASSIFIED IN NUMBER OF WAYS DEPENDS ON INTENDED USE OF THE COST INFORMATION.
➢ COMMON COST CLASSIFICATIONS IN MANAGERIAL ACCOUNTING
THE FOLLOWING ARE SOME BASIS ON WHICH COST CAN BE CLASSIFIED INTO VARIOUS TYPES
1. MANUFACTURING (PRODUCT COST) 2. NON MANUFACTURING(PERIOD COST) 3. TRACEABILITY 4. BEHAVIOR 5. CONTROLLABILITY
1. MANUFACTURING COST: THE COST INCURRED WITHIN THE MANUFACTURING AREA
CLASSIFICATION: a. DIRECT MATERIAL b. DIRECT LABOR c. FACTORY OVERHEADS (INDIRECT MANUFACTURING COST)
USED TO: i. ESTIMATE COST OF PRODUCT ii. COGS ( PROFIT AND LOSS ACCOUNT) iii. INVENTORY FOR BALANCE SHEET
RECALL THE LECTURE “CONCEPT OF COST” OF COST ACCOUNTING.
2. NON MANUFACTURING COST (PERIOD COST): REFERRED TO ALL COST INCURRED OUTSIDE THE MANUFACTURING AREA.
CLASSIFICATION: a. SELLING, DISTRIBUTION AND ADMINISTRATIVE EXPENSES (OPERATING EXPENSES)
USED TO: i. PREPARE PROFIT AND LOSS