Topic 2 - Chapter 2 Basic Managerial Accounting Concepts...

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Chapter 2: Basic Managerial Accounting Concepts Learning objectives 1. Explain the meaning of cost and how costs are assigned to products and services. 2. Define the various costs of manufacturing products and providing services, as well as the costs of selling and administration. 3. Prepare income statements.
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The meaning and uses of cost Determine the cost of products, services, customers and other items to managers. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that bring a current or future benefit to the organisation. As costs are used up in the production of revenues, they are said to expire. Expired costs are called expenses . On the income statement, expenses are deducted from revenues to determine income (profit). We can look more closely at the relationship between cost and revenue by focusing on the units sold. The revenue per unit is called price LO-1
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Accumulating costs Accumulating costs is the way that costs are measured and recorded. Recorded Phone bill Accounts Payable & telephone expense account LO-1
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Assigning costs Assigning costs is the way that a cost is linked to some cost object. What is the cost object for the phone call? To support manufacturing? To support selling the product? ????? ????? LO-1
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Cost objects Managerial accounting systems are structured to measure and assign costs. A cost object is any item, such as a product, customer, department, project, geographic region or plant, for which costs are measured and assigned. LO-1
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Assigning costs to cost objects Costs can be assigned to cost objects in a number of ways. The choice of a method depends on a number of factors, such as the need for accuracy. The objective is to measure and assign costs as well as possible, given management objectives. LO-1
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Direct & Indirect costs Direct costs are costs that can be easily and accurately traced to a cost object. When a cost is easy to trace, we mean that the relationship between the cost and the object can be physically observed, is easy to track, and results in more-accurate cost assignments. Indirect costs are costs that cannot be easily and accurately traced to a cost object. Allocation means that an indirect cost is assigned to a cost object by using a reasonable and convenient method. Allocating indirect costs is based on convenience. LO-1
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Other categories of cost Costs are analysed by their behaviour patterns, or the way in which a cost changes when the level of the output changes. Variable cost : A variable cost is one that increases in total as output increases and decreases in total as output decreases. Fixed cost : A fixed cost is a cost that does not increase in total as output increases and does not decrease in total as output decreases.
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