PrinciplesofAccounting II Lesson #6A Managerial Accounting .

Principles of Accounting IILesson #6AManagerial Accounting andCost ClassificationBy Laurie L. SwansonClick the button below to navigate to the next slide.

Managerial AccountingManagerial Accountingprovides information to theinternal decision makers of abusiness. Managerialaccounting provides bothfinancial and non-financialinformation.

Managerial Accounting TopicsSome of the topics of managerial accountingfollow: Determining the costs of products and services Product Pricing Cost Analysis Budgeting Break-even analysis Profit Planning

Managerial Accounting vs.Financial AccountingThe major differences between managerial and financialaccounting are in the following areas. See page 721 formore detail on these differences. Users and Decision Makers Time Dimension Purpose of Information Focus of Information Flexibility of Practice Nature of Information Timeliness of Information

Cost ClassificationsRecall that one of the purposes of managerialaccounting is to provide management withinformation about the costs of products orservices.Companies incur different types of costs thatcan be classified based on certaincharacteristics. Each cost classificationprovides management with a different type ofinformation to be applied in analyzingdifferent business situations.

Cost ClassificationsCosts can be classified into five categories: Behavior Traceability Controllability Relevance Function

Cost ClassificationsAny type of cost may be categorizedusing any one or a combination of thefive different classifications.

Classification by BehaviorCosts can be Fixed – a cost which does not change as thevolume of activity (production) changes Variable – a cost which changes with changes inthe volume of activity Mixed – a cost which has both fixed andvariable components

Classification by TraceabilityCosts can be Direct – a cost which is incurred for the benefitof one specific product (cost object) Indirect – a cost which is incurred for the benefitof more than one cost object or which cannot beeasily or efficiently traced to a specific costobject

Classification by ControllabilityCosts can be Controllable – a cost which can be affected(controlled) at the hierarchical level which isbeing measured Uncontrollable – a cost which cannot beaffected (controlled) at the hierarchical levelwhich is being measured

Classification by RelevanceCosts can be Sunk – a cost which has already been incurredand cannot be avoided or changed regardless offuture actions Out-of-pocket – a cost which requires futurecash outlays Opportunity – a cost measured as the loss ofpotential benefits by choosing one course ofaction over another

Classification by FunctionCosts can be Product – a cost which is necessary to produce afinished product Period – a cost which is necessary to run thebusiness during a specified fiscal period

Primary ClassificationsThe three cost classifications we willfocus on in our computations are Variable vs. Fixed Direct vs. Indirect Product vs. Period

Check Your ComprehensionMinchoy Company manufactures kitchencabinets. Check your comprehension ofthe ways in which costs can be classifiedby identifying the appropriate classificationfor the cost items listed on the followingslides for Minchoy Company.

Check Your Comprehension Classification by BehaviorVariable vs. Fixed Variable costs change with volume; fixed costsstay constant within a relevant range of activityWood used in producing cabinetsVariableFixedClick the button that matches yourclassification for the item listed.

Correct!The amount of wood used inproducing cabinets would vary withthe number of cabinets produced.

Think it ThroughThe amount of wood used inproducing cabinets would vary withthe number of cabinets produced;therefore, this would be classified as avariable cost.Try Another

Check Your Comprehension Classification by BehaviorVariable vs. Fixed Variable costs change with volume; fixed costsstay constant within a relevant range of activityCabinet pullsVariableFixedClick the button that matches yourclassification for the item listed.

Correct!The number of cabinet pulls usedwould vary with the number ofcabinets produced.

Think it ThroughThe number of cabinet pulls usedwould vary with the number ofcabinets produced, therefore,cabinet pulls used is a variable cost.Study this concept some more.Try Another Classification

Check Your Comprehension Classification by BehaviorDirect vs. Indirect Direct costs can be traced to a specific costobject; indirect costs benefit more than one costobject.Paint used on cabinetsDirectIndirectClick the button that matches yourclassification for the item listed.

Correct!Since it would be difficult to trace theexact amount of paint used on anygiven cabinet, this cost would beclassified as indirect.

Think it ThroughThis is a tough one. The amount ofpaint used on any givencabinet would be difficult totrace, therefore, paint wouldbe considered an indirect cost.Try Another

Check Your Comprehension Classification by BehaviorDirect vs. Indirect Direct costs can be traced to a specific costobject; indirect costs benefit more than one costobject.Cabinet pullsDirectIndirectClick the button that matches yourclassification for the item listed.

Correct!Since a specific cabinet pull can betraced to a specific cabinet, this wouldbe classified as a direct cost.

Think it ThroughSince a specific cabinet pull can betraced to a specific cabinet, this wouldbe classified as a direct cost.Try Another Classification

Check Your Comprehension Classification by BehaviorProduct vs. Period Product costs are incurred in producing aproduct or providing a service; period costs arecosts incurred in operating a business.Rent expense on administrative officesProductPeriodClick the button that matches yourclassification for the item listed.

Correct!Any administrative expense isconsidered a period cost. This costcannot be traced to a product.

Think it ThroughAny administrative expense isconsidered a period cost. This costcannot be traced to a product.Try Another

Check Your Comprehension Classification by BehaviorProduct vs. Period Product costs are incurred in producing aproduct or providing a service; period costs arecosts incurred in operating a business.Cabinet pullsProductPeriodClick the button that matches yourclassification for the item listed.

Correct!Because cabinet pulls are used in afinished product, they are considered aproduct cost.

Think it ThroughBecause cabinet pulls are used in afinished product, they are considered aproduct cost. Keep working on thisconcept.

Integrate Your KnowledgeRemember that costs can becategorized based on any of theclassifications discussed above. Tryidentifying multiple costclassifications for the same cost itemby taking the Cost Classification quiz.

End ofLesson #6AManagerial Accounting andCost ClassificationBy Laurie L. Swanson

Managerial Accounting vs. Financial Accounting The major differences between managerial and financial accounting are in the following areas. See page 721 for more detail on these differences. Users and Decision Makers Purpose of Information Flexibility of Practice Time