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Summary FBS222 Chapter 2: Basic Managerial Accounting Concepts R50,00
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  3. University Of Pretoria (UP)
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  5. FBS222 (FBS222)

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Summary FBS222 Chapter 2: Basic Managerial Accounting Concepts

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Chapter 2 of FBS222 defines cost and how to cost items. The cost of manufactured goods and goods sold as well as income statements.

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  • August 15, 2022
  • 8
  • 2022/2023
  • Summary

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Chapter 2: Basic Managerial Accounting
Concepts
https://www.youtube.com/watch?v=qHRjF9i7jWw
https://www.youtube.com/watch?v=pW_B0fZzgCQ

1. The Meaning and Uses of Cost
Cost
 Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that bring a current or
future benefit to the organization.
- Payable amount (cash)
- Asset for an Asset (cash equivalents)
 Costs are incurred to produce future benefits. In a profit -making company these benefits are referred to as
“revenue”
- All cots are used up in producing/generating revenues, they are said to expire. Expired costs are
called expenses
- Profit = revenue – expenses
- The revenue per unit is called price
 Differences between Costs and Expenses:
- Materials Bought – costs
- Materials used - expenses
- E.g you have 100m of material and you use 70m of it to create your product, only the 70m used is
considered an expense.

Accumulating and Assigning Costs
 Accumulating Costs is the way that costs ar4e measured and recorded.
- Eg. Phone bill is recorded as “telephone expense” or “accounts payable”
 Assigning costs is the way that a cost is linked to some cost object.
 A cost object is something for which a company wants to know the cost.
 A cost object can be any item such as:
- A product
- Customer
- Department
- Project
- Geographic region or plant

Assigning Costs to Cost Objects

 Cost can be assigned to cost objects in a number of ways.
 The choice of a method depends on a number of factors, such as the need for accuracy.
 The objective is to measure and assign costs as well as possible, given management objectives.


Direct
Cost Costs
Objects Indirect
Costs

,  Direct Costs
- Direct costs are costs that can be easily and accurately traced to a cost object.
- When a cost is easy trace, the relationship between the cots and cost object:
 Can be physically observed
 Is easily traceable
 Results in more accurate cost assignment.
 Indirect costs
- Indirect costs are costs that cannot be easily and accurately traced to cost object.
- Allocation means that an indirect cost is assigned to a cost object by using a reasonable and
convenient allocation method or basis.
- Object costing – some business refer to indirect costs as overhead costs or support costs.
 Other Categories of costs
- Variable costs:
 increases in total as output increases and decreases in total as output decreases.
- Fixed Costs:
 a cost that does not increase in total as output increases and decreases in total as output
decreases
- Opportunity Costs:
 An opportunity cost is the benefit given up or scarified when one alternative is chosen over
another.

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