chapter4 - Management Accounting | 51 Classification of...

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Management Accounting | 51 Classifcation oF ManuFacturing Costs and Expenses Introduction Management accounting, as previously explained, consists primarily of planning, performance evaluation, and decision‑making models useful to management in making better decisions. In every case, these tools require cost and revenue infor‑ mation. A basic assumption of management accounting is that it is the responsibility of the management accountant to provide the needed cost and revenue information. Consequently, the management accountant needs a complete understanding of the different types of costs required by the various models. In Figure 4.1, the major costs associated with each management accounting tool is listed. In management accounting, as in fnancial accounting, it may be said that a major building block in the conceptual Foundation is cost. Both the fnancial and manage ment accountant must have a sound understanding of the varied and complex rami‑ fcations oF cost. ±rom a fnancial accounting viewpoint, a Faulty understanding oF cost may cause fnancial statements to be incorrectly prepared. ±rom a management accounting viewpoint, an inadequate understanding or use of costs will result in poor decisions. There are two broad aspect of the term cost that needs to be understood: cost classifcation and cost behavior. Cost classifcation reFers to the separation oF costs into categories For proper preparation oF fnancial statements or For use in deci sion‑making models. Cost behavior refers to the effect that volume (production or sales ) has on total expenses or costs. In this chapter, both aspects will be discussed in some depth.
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52 | CHAPTER FOUR • Classifcation o± Manu±acturing Costs and Expenses Cost Classifcation In accounting, the term cost refers to the expenditure or sacriFce made to acquire something of value. In Fnancial accounting, all transactions are recorded in terms of historical cost; that is, the money expended or to be expended at the date of the transaction. The monetary value associated with an asset acquired is said to be its cost. Cost is the sacriFce made in resources to acquire another resource. Cost is measured in monetary units which in the United States is the dollar. For example, a machine is purchased by paying $4,000 in cash and trading in an old machine having a sales value of $1,000. The cost of the new machine is $5,000 because resources worth a total of $5,000 were given in the exchange. Stated differently, resources worth $5,000 were sacriFced. Figure 4.1 Tools Cost In±ormation Required Flexible Budget Fixed and variable costs Cost‑volume‑proFt analysis ±ixed and variable costs Direct costing Fixed and variable costs Budgeting Planned data, Fxed and variable costs Variance analysis Fixed and variable costs Incremental analysis Escapable , opportunity, relevant Segmental reporting Indirect costs, direct costs Inventory models Purchasing cost, carrying cost Present value models Cash in²ows, cash out²ows
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chapter4 - Management Accounting | 51 Classification of...

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