ch02 - Cost Management Concepts and Cost Behavior Chapter 2...

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Cost Management Concepts and Cost Behavior Chapter 2
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What Does Cost Mean? There is no single definition of cost Costs are developed and used for some specific purpose The way the cost is to be used will define the way it should be computed Management accountants have used different systems, or classifications, to develop cost information
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Expenditure – company purchases raw materials for $100 Cost – company reports $100 of raw materials on balance sheet Expense – company records $100 expense on income statement when it sells the product that uses the raw material
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Financial Reporting - GAAP GAAP defines cost as the monetary value of goods and services expended to obtain current or future benefits Expenses are the costs of goods or services that have expired. i.e., used up in the process of creating goods or services Costs incurred to receive future benefits are recorded as assets
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Financial reporting - GAAP The key issues for external users of accounting information: Consistency Reasonably accurate allocation of costs between the income statement and the balance sheet GAAP prescribes how to determine costs for external reporting
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Product Costs Organizations incur product costs to produce the volume and mix of products made during the period Manufacturing costs Materials costs, labor costs, and the cost of equipment, machinery and buildings Allocated between ending inventory and cost of goods sold
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Financial reporting - GAAP Only manufacturing costs included in calculation the cost of inventory Historical cost Costing systems designed in the past conserved on information-processing costs by adopting the structure imposed by GAAP Most cost accounting systems tend to be driven by the rules that determine product costs for inventory valuation and cost of goods sold under GAAP
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Internal Use of Cost Information Costs are used for planning and evaluation. The objective is to determine all the components, both manufacturing and nonmanufacturing, of the costs associated with a cost object
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Internal Use Of Cost Information Planning Using cost as a basis for determining the selling price of a prospective product Using cost in a budgeting model to forecast costs under different levels of activity Evaluation Deciding whether the market price for an existing product makes the product profitable Determining whether a process is cost efficient compared to similar internal or external processes
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Cost Object Management accounting concept A cost object is something for which we want to compute a cost: A product A product line An organizational unit
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Financial accounting is concerned with the total cost of inventory while management accounting is concerned with the cost of an individual unit of inventory. In financial accounting, product cost
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ch02 - Cost Management Concepts and Cost Behavior Chapter 2...

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