Chapter 16 - Managerial Accounting Cost Concepts and Cost...

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Chapter 16 Author: Anna Rovira Beavers Needles 2008 8/18/08 1 Managerial Accounting Cost Concepts and Cost Allocation Chapter 16 I. Cost Information and the Management Cycle Management use cost information thorough the management cycle. The management cycle may be used to valuate current operations or a specific or special project. Planning: Estimates may be used of direct materials, manufacturing overhead and labor, selling price of the product number of units that may be required. Performing: Estimates are used to make decisions as to the Gross Margin and Operation income on product sold. Managers can then make decisions as to a particular product line; such as increase production or drop a line, for example. Other decisions may include the valuation of plant capacity. This may result in outsourcing areas of the manufacturing process to meet demand or because the process could be made chipper elsewhere. Evaluating : Basically managers want to know the significant differences between estimated cost and actual cost, to make decisions as to overruns and identify potential problems. Managers may review sales; productions costs, or merchandise cost. Communicating: Managers may want to see financial statements including actual cost associated with operating activities in the executing stage. II. Cost Classification and its Uses: A single cost can be classified and used in several ways, depending on the purpose of the analysis. The classification of cost is important because it helps managers to the following: 1. Control cost by determining which are traceable to a particular cost object, subject or product? 2. Calculate the number of units that must be sold to achieve a certain level of profit (cost behavior) 3. Identify the costs of activities that do and do not add value to a product or service 4. Classify costs for the preparation of the financial statements.
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Chapter 16 Author: Anna Rovira Beavers Needles 2008 8/18/08 2 Study the following chart showing Cost Classifications. We will using these terms through out the semester. A. Cost Traceability Answers the question Can cost be trace to a product, service, or department? If the answer is yes, then cost is classified as Direct Cost , if the answer is no, then cost is classified as Indirect Cost. Examples: Direct Cost : The wages of the hamburger preparer at McDonalds Restaurant, the wood used to make a desk, the flight attendants on Southwest Airlines. All this cost and easy be determine and trace. Indirect Cost: The cleaning crew of a McDonalds Restaurants, the electricity used in making a desk, the check in attendant for Southwest Airlines at the airport. All of these costs are incurred to provide a service or a product but they are very difficult to be trace to a specific product B. Cost Behavior Answers the question, Does cost changes because of volume? If the answer is yes, then cost is classifies Variable Cost . If the answer is no, then cost is classified as Indirect Cost.
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Chapter 16 - Managerial Accounting Cost Concepts and Cost...

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