1. Cost Accounting: A Managerial Emphasis Chapter 1&2 Vital Role of Managerial Accounting

2. Cost Accounting: A Managerial Emphasis Learning Objectives Q1: What is difference in Cost Accounting, Managerial Accounting and Financial Accounting? Q2: Cost Concepts and Classifications? Q3: Cost Behavior and Cost Flow? 2

3. Cost Accounting: A Managerial Emphasis Q1: What is difference in Cost Accounting, Managerial Accounting and Financial Accounting?

4. Cost Accounting: A Managerial Emphasis Cost Accounting Measures and reports financial and non- financial information related to the cost of acquiring or utilizing resources in an organization. Provides information on the accumulation and recovery of costs. 4

5. Cost Accounting: A Managerial Emphasis Managerial Management Identifying, reporting and analyzing costs of operations. An integral part of management strategies. Goal is to use past performance to predict the future. 5

6. Cost Accounting: A Managerial Emphasis Financial Accounting Focuses on reporting to external parties — investors, regulators and others. Goal is to present the economic health of a company, fairly. Uses standardized reports such as balance sheets, income statements and statements of cash flow. Based on GAAP and IFRS. 6

7. Cost Accounting: A Managerial Emphasis Managerial and Financial Accounting Comparison ManagerialFinancial Purpose Help Managers Make Decisions Communicate Financial Position Primary Users Managers of the Organization External Users FocusFuture-OrientedPast-Oriented RulesCost-BenefitGAAP, IFRS Time spanHourly to Many YearsAnnual/Quarterly Behaviour Influences Managers & Other Employees Influences Managers 7

8. Cost Accounting: A Managerial Emphasis The 5 Step Decision-Making Process Planning: the purposeful analysis of information to select and rank organizational goals: 1.Identify the problem and risk. 2.Obtain information. 3.Make predictions about the future. 4.Choose an alternative and implement. 5.Evaluate performance and learn. Control: actions to measure and evaluate performance 8

9. Cost Accounting: A Managerial Emphasis Management Accounting: Key Guidelines and Role Cost-benefit approach Different costs for different purposes Corporate governance Ethics Corporate social responsibility 9

10. Cost Accounting: A Managerial Emphasis Q2: Cost Concepts and Classifications?

11. Cost Accounting: A Managerial Emphasis Basic Cost Terminology Cost –A resource sacrificed or foregone to achieve a specific objective usually measured as a monetary amount paid Cost Object –Any “object” such as a product, machine, service, or process for which cost information is accumulated 11

12. Cost Accounting: A Managerial Emphasis Basic Cost Terminology Cost Driver - Production costs are driven by the number of products produced, labour costs, number of setups required, and the number of change orders; i.e., there is a causal relationship Cost Pools –Accumulated costs from different transactions Cost Assignment –Systematically links an actual cost pool to a distinct cost object 12

13. Cost Accounting: A Managerial Emphasis Classifying Costs ClassificationsApplicationsCost Terms RelevanceDecision-makingRelevant vs. irrelevant cost BehaviourCost estimationFixed vs. variable cost TraceabilityCost assignmentDirect vs indirect cost FunctionCost determinationProduct vs period cost ControllabilityPerformance evaluationControllable vs. uncontrollable cost 13

14. Cost Accounting: A Managerial Emphasis Summary All costs Product costs (Manufacturing costs) Period costs (Non-manufacturing costs) Direct material Direct Labour Overhead: -Indirect material -Indirect labour -Other indirect cost Selling expenses Administrative expenses Prime costs Conversion costs Indirect costs Direct costs 14

15. Cost Accounting: A Managerial Emphasis 15

16. Cost Accounting: A Managerial Emphasis Q3: Cost Behavior and Cost Flow?

17. Cost Accounting: A Managerial Emphasis Cost Behaviour Cost behaviour is the variation in costs relative to the variation in an organization’s activities –Useful for decision making such as production, merchandise sales, and services A cost driver is some input or activity that causes changes in total cost for a cost object 17

18. Cost Accounting: A Managerial Emphasis Cost Behaviour Linear Cost Behaviour Terminology Total variable costs: change proportionally with changes in activity levels Total fixed costs: do not vary with small changes in activity levels (e.g. rent) Mixed costs: costs that are partly fixed and partly variable Total costs: total variable costs plus total fixed costs 18

19. Cost Accounting: A Managerial Emphasis Cost Behaviour If costs are linear, then graphically, total costs will look like this Total Costs ($) Cost Driver 19

20. Cost Accounting: A Managerial Emphasis Cost Behaviour Total Costs ($) Cost Driver Total Cost (TC) Fixed Cost (F) Variable Cost (V) 20

21. Cost Accounting: A Managerial Emphasis Major Assumptions Costs are defined as variable or fixed in relation to a specific cost object Time horizon must be specified Total cost relationship is assumed to be linear TC = all VC + all FC There is only one cost driver for each cost The must be specified 21

22. Cost Accounting: A Managerial Emphasis Cost Flow Inventoriable (Product) Costs Direct Material Purchases Work-in- Process (WIP) Inventory Cost of Goods Sold Revenue Gross Margin Operating Expenses (Period Costs) Operating Income Income StatementBalance Sheet Materials Inventory Direct Labour Indirect Manufacturing Costs Finished Goods (FG) Inventory 22

23. Cost Accounting: A Managerial Emphasis 23 Raw Materials Purchase DM usage IDM usage Factory Payroll DL usage IDL usage Wages paid MOH Allocations Indirect costs incurred WIP DM DL MOH Costs of finished products Finished Goods Costs of finished products Costs of good sold Cost of Goods Sold Costs of products sold We use WIP to calculate COGM We use FG to Calculate COGS

24. Cost Accounting: A Managerial Emphasis 24 Calculation: Cost of Goods Sold (manufacturing firm) Beginning Inventory (FG) + Cost of Goods Manufactured - Ending Inventory (FG) = Cost of Goods Sold Calculation: Cost of Goods Sold (manufacturing firm) Beginning Inventory (FG) + Cost of Goods Manufactured - Ending Inventory (FG) = Cost of Goods Sold Calculation: Cost of Goods Manufactured Additions (DM, DL, MOH applied) + Beginning WIP - Ending WIP = Cost of Goods Manufactured Calculation: Cost of Goods Manufactured Additions (DM, DL, MOH applied) + Beginning WIP - Ending WIP = Cost of Goods Manufactured