Lecture #1
Accounting Definition: Accounting is the science of measuring, reporting, and controlling performance.
Financial accounting: Management accounting
- External reporting ( investors, creditors, SEC, ESMA) - Internal reporting (compensation, production decisions, pricing, forecasting)
- Defined by GAAP/IFRS - Defined by management
- Only focus is financial performance - Financial and non-financial performance
Cost Accounting:
- Costs of acquiring or using resources in an organization
- One piece of management accounting
- subset of management accounting!
Management Accounting Important Roles (outside of financial accounting)
1.Decision-facilitating: Information improves decisions (nutri facts)
2.Decision-influencing: Motivate employees to work hard, prevent and detect unethical behavior (HW)
3.Coordination-facilitating: Coordinate decisions across units (e.g. sales lets production know how many units to make)
Cost: A sacrifice in order to achieve a specific purpose
Expense: Reduction in wealth; hits the income statement
Opportunity Cost: “The road not taken” The options you gave up when you made a decision.
Cost Object: Something we’re trying to figure out the cost of. Something that “accumulates costs.”
Variable cost: A cost that increases when you make one additional item. Total variable costs increase
when production increases e.g.Materials, Electricity, Hourly Wages
Fixed cost: A cost that does not increase when you make one additional item. Total fixed costs remain
the same when production increases e.g. Rent, Salaries
Average Cost: how much the average unit costs = + all costs / # units produced
Marginal Cost: costs to make one more unit. Calculated as the Δ in total costs if you make one extra
unit.
Cost Driver: a variable, such as the level of activity or volume, that causes
costs to change. E.g. number of hours worked causes total wages to change
Relevant Range the band or range of normal activity (or volume) in which
there is a specific relationship between the level of activity (or volume) and
the cost in question E.g. once employees go over 40 hours in a week, then
we have to pay overtime.
Direct Costs can be traced directly to a cost object
Indirect Costs are not traced to a cost object, because it is not economically or technologically feasible.
, Factors Affecting Direct/Indirect Cost Classification:
- Materiality of the cost in question (how important is it?)
- Availability of information-gathering technology (can we measure it accurately, do we have tech to do this?)
- Design of operations (small scale vs large scale productions)
Inventoriable Costs (aka Product Costs)
Costs used in the manufacturing of a product.
→ costs stay on the balance sheet as assets (i.e., they are capitalized) until they are sold. Then they hit
COGS as an expense.
Period Costs
SG&A ( selling, general and administrative ) costs that generally don’t hit the balance sheet. E.g., sales
commissions, CEO salary, advertising costs, etc.
→ Expensed as incurred
→ Important for decision-making, but not our main focus since they are not part of COGS.
Product costs OR “inventoriable costs → When the products are sold, these costs are expensed as COGS on the
income statement. Period costs are the costs that cannot be directly linked to the production of end-products.
Direct Material (DM) Raw materials that will be turned into finished goods; can be traced to individual
jobs
Direct Labor (DL) Labor costs that can be traced to individual jobs
Manufacturing Overhead (MOH) All other manufacturing costs: all costs that are indirect and/or fixed
→ Prime Costs = DM + DL (everything but MOH; also called “Direct Costs”)
→ Conversion Costs (CC) = DL + MOH (everything but DM; cost of turning DM into Finished Goods)
- Service Companies → No Inventory!
- Merchandising Companies → Merchandise Inventory (Purchased Inventory)
- Manufacturing Companies
→ Raw Materials (RM) sometimes called “Direct Materials” (DM) resources in stock and available for use
→ Work-in-Process (or progress, WIP) products started but not yet completed.
→Finished Goods (FG) products completed and ready for sale
Accounting Definition: Accounting is the science of measuring, reporting, and controlling performance.
Financial accounting: Management accounting
- External reporting ( investors, creditors, SEC, ESMA) - Internal reporting (compensation, production decisions, pricing, forecasting)
- Defined by GAAP/IFRS - Defined by management
- Only focus is financial performance - Financial and non-financial performance
Cost Accounting:
- Costs of acquiring or using resources in an organization
- One piece of management accounting
- subset of management accounting!
Management Accounting Important Roles (outside of financial accounting)
1.Decision-facilitating: Information improves decisions (nutri facts)
2.Decision-influencing: Motivate employees to work hard, prevent and detect unethical behavior (HW)
3.Coordination-facilitating: Coordinate decisions across units (e.g. sales lets production know how many units to make)
Cost: A sacrifice in order to achieve a specific purpose
Expense: Reduction in wealth; hits the income statement
Opportunity Cost: “The road not taken” The options you gave up when you made a decision.
Cost Object: Something we’re trying to figure out the cost of. Something that “accumulates costs.”
Variable cost: A cost that increases when you make one additional item. Total variable costs increase
when production increases e.g.Materials, Electricity, Hourly Wages
Fixed cost: A cost that does not increase when you make one additional item. Total fixed costs remain
the same when production increases e.g. Rent, Salaries
Average Cost: how much the average unit costs = + all costs / # units produced
Marginal Cost: costs to make one more unit. Calculated as the Δ in total costs if you make one extra
unit.
Cost Driver: a variable, such as the level of activity or volume, that causes
costs to change. E.g. number of hours worked causes total wages to change
Relevant Range the band or range of normal activity (or volume) in which
there is a specific relationship between the level of activity (or volume) and
the cost in question E.g. once employees go over 40 hours in a week, then
we have to pay overtime.
Direct Costs can be traced directly to a cost object
Indirect Costs are not traced to a cost object, because it is not economically or technologically feasible.
, Factors Affecting Direct/Indirect Cost Classification:
- Materiality of the cost in question (how important is it?)
- Availability of information-gathering technology (can we measure it accurately, do we have tech to do this?)
- Design of operations (small scale vs large scale productions)
Inventoriable Costs (aka Product Costs)
Costs used in the manufacturing of a product.
→ costs stay on the balance sheet as assets (i.e., they are capitalized) until they are sold. Then they hit
COGS as an expense.
Period Costs
SG&A ( selling, general and administrative ) costs that generally don’t hit the balance sheet. E.g., sales
commissions, CEO salary, advertising costs, etc.
→ Expensed as incurred
→ Important for decision-making, but not our main focus since they are not part of COGS.
Product costs OR “inventoriable costs → When the products are sold, these costs are expensed as COGS on the
income statement. Period costs are the costs that cannot be directly linked to the production of end-products.
Direct Material (DM) Raw materials that will be turned into finished goods; can be traced to individual
jobs
Direct Labor (DL) Labor costs that can be traced to individual jobs
Manufacturing Overhead (MOH) All other manufacturing costs: all costs that are indirect and/or fixed
→ Prime Costs = DM + DL (everything but MOH; also called “Direct Costs”)
→ Conversion Costs (CC) = DL + MOH (everything but DM; cost of turning DM into Finished Goods)
- Service Companies → No Inventory!
- Merchandising Companies → Merchandise Inventory (Purchased Inventory)
- Manufacturing Companies
→ Raw Materials (RM) sometimes called “Direct Materials” (DM) resources in stock and available for use
→ Work-in-Process (or progress, WIP) products started but not yet completed.
→Finished Goods (FG) products completed and ready for sale
