This document is a summary of the 'Finance and Managerial accounting' book used in the first and second year of International Business and Management studies at the Hogeschool Utrecht (HU) / University of applied sciences Utrecht. I created this summary myself as I am not good at finance, and this ...
Chapter 15
Both financial and managerial accounting reports stick to the concepts of cost
measurement and recognition.
The role of managerial accounting is enable people to make:
Make informed decisions
Be more effective at their jobs
Improve the organization’s performance
Both managerial accounting and financial accounting assist decision makers by
identifying, measuring, processing, and communicating relevant information.
Differences between Managerial accounting and financial accounting
In addition to recognize costs for financial reporting, a single cost can be
classified and used in several ways, depending on the purpose of the analysis.
Cost recognition classifications enable managers to:
1. Control costs (Cost traceability)
2. Calculate the number of units that must be sold to achieve their ‘profit
goal’ (cost behavior)
3. Identify the cost of activities that do and do not add value (Value-adding
attributes)
4. Recognize and measure costs, to prepare financial statements (Financial
reporting)
Cost are traceable in 2 ways:
o Direct costs, can be measured by tracing them to a cost object (Labor,
direct materials)
o Indirect costs, cannot be measured by tracing them to a cost object
, Costs can be recognized as:
Period costs non-inventorial costs, cannot be assigned to products (selling ,
administrative expenses)
Are recognized as operating expenses on the income statement
Product cost inventorial costs, can be classified as direct or indirect costs
Include: direct materials, direct labor and overhead
Are recognized as COGS on the income statement and inventory on the
balance sheet
Product unit cost is the cost of manufacturing a single unit of a product.
Service unit cost is the cost to perform one service.
Product or service costs can be defined as:
1. Direct materials, cost that can be measured when making specific units
of a product
2. Direct labor, the labor needed to make a product that can be measured
when making specific units
3. Overhead cost, cannot be measured directly to the end product. They
include
Materials costs: small tools, engineering design etc.
Indirect labor costs: maintenance, inspection, supervision etc.
The three elements of product cost can also be grouped into:
Prime costs: the primary costs of production.
direct materials + direct labor
Conversion costs: the costs of turning the direct materials into a finished
product.
direct labor + overhead cost
The relationship among the product cost recognition classifications
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