A coherent and complete summary of the given lectures of Management Accounting (BT2113) including some slides to further improve and clarify the theory. + all the formulas
Lecture 1 (ch. 3)
● What is the cost?
○ A resource used to achieve a specific objective (e.g., production)
● Costs are assembled into meaningful groups called cost pools:
○ by type (costs of labor, costs of material)
○ by source (department 1, department 2)
○ by responsibility (manager 1, manager 2)
● What is a cost driver?
○ A variable that causes a change in total cost (e.g., production volume)
● What is a cost object?
○ Any product, service, customer, activity or organizational unit to which costs
are assigned
→ Cost Assignment is the process of assigning costs to cost pools or from cost pools to cost
objects
→ Direct costs can be conveniently and economically traced to a specific cost object e.g.,
cost of steel and tires to an e-bike
→ Indirect costs cannot be traced conveniently or economically to a cost object e.g., salary
cost of a manager overseeing the whole production plant. Will be assigned to a cost object
according to an allocation schedule.
1
,● Variable costs do change in proportion with volume of a cost driver, such as
production or sales quantity
○ e.g., Material costs such as steel and tires are variable costs; they increase with
the number of bikes produced
● Fixed costs do not change in proportion with volume of a cost driver, at least not
within the relevant range
○ e.g., Supervision costs for production plant or for specific assembly line;
independent of whether 1 or 1000 bikes are produced and sold
2
, Formulas:
● Total cost = FC + VC
● Average cost = TC/Q
● Marginal cost = derivative of TC/Q
→ A relevant cost is a future cost that differs between/among decision alternatives
● Both characteristics must be present for a cost to be relevant
● Relevant costs can be variable or fixed, but variable costs are generally relevant
while fixed costs are not
● Relevant cost analysis and total cost analysis produce the same results
→ Product costs include only the costs necessary to complete the product at the
manufacturing step in the value chain (manufacturing) or to purchase and transport the
product to the location of sale (merchandising)
Expensed in the period the product is sold
→ Period costs (also called non-product costs) include all other costs incurred by the firm in
managing or selling the product (costs outside the manufacturing step of the value chain)
3
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