Chapter

Chapter

20

Managerial Accounting
Lecture 02: Managerial
Accounting (Concepts &
Principles)

Masud Jahan
Department of Science and
Humanities
Military Institute of Science and
Technology
Cost Vs Expense

Cost is the amount An Expense is a cost

of expenditure, i.e. with expired benefits.
sacrifice of Generally, costs are
resources (actual or recognized as
expenses on the
notional) incurred on
income statement in
or attributable to
the period that
acquisition of a benefits from the
specific objective costs
Cost Object Vs Cost Unit

A cost object is a cost unit is a unit

anything for which of product, service or
time in relation to
cost data are which costs may be
desired- including ascertained or
products, product expressed. In other
line, customers, job words cost unit is
unit of measurement
etc of cost
Classification Of Costs

By Traceability
By association
By Behavior
By Function
By controllability
By relevance
Learning Objective

To classify costs by
traceability
with jobs,
products, or
services

LO1
 Cost Classifications by
traceability
Direct costs
Costs that can be
easily and conveniently
traced to a unit of product or
other cost objective.
Would not be incurred if the
product or activity were
discontinued.
Examples: direct material
and direct labor
Indirect costs
Costs cannot be easily and
conveniently traced to a unit
of product or other cost
object.
Would be incurred even if
the product or activity were
discontinued.
Example: indirect material
and indirect labor
Learning Objective

To classify costs
by activity
to which they
associate

LO2
Cost Classifications by
association
costs
costs are
are classified
classified into
into four
four categories.
categories.
i)i) Manufacturing
Manufacturing Costs
Costs
ii)
ii) Administrative
Administrative Costs
Costs
iii)
iii) Selling
Selling Costs
Costs
iv)
iv) Distribution
Distribution Costs
Costs
Manufacturing Costs

Manufacturing
Manufacturing costs
costs are
are those
those costs
costs related
related
to
to factory
factory operations
operations which
which are
are essential
essential toto
the
the completion
completion of
of the
the product.
product.

ItIt includes
includes direct
direct material
material costs,
costs, direct
direct labor
labor
costs
costs and and manufacturing
manufacturing overheads.
overheads.
Administrative Costs

Administrative
Administrative costs
costs includes
includes all
all those
those costs
costs
incurred
incurred on
on the
the general
general administration
administration and
and
control
control of
of the
the firm.
firm.

Examples
Examples of of such
such costs
costs are
are :: salaries
salaries of
of the
the
office
office staff,
staff, rent
rent of
of the
the office
office building,
building,
depreciation
depreciation and and repairs
repairs ofof the
the office
office
furniture
furniture etc.
etc.
Selling Costs

Selling
Selling costs
costs are
are those
those costs
costs which
which are
are
incurred
incurred in
in connection
connection with
with the
the sale
sale of
of
goods.
goods.

Some
Some examples
examples of
of such
such costs
costs are
are :: Cost
Cost of
of
warehousing,
warehousing, advertising,
advertising, salesmen
salesmen salaries
salaries
etc.
etc.
Distribution Costs

Distribution
Distribution costs
costs are
are those
those costs
costs which
which are
are
incurred
incurred on
on dispatch
dispatch ofof finished
finished products
products to
to
customer
customer including
including transportation.
transportation.

Examples
Examples of of such
such costs
costs are:
are: packing,
packing,
carriage,
carriage, insurance,
insurance, freight
freight outwards,
outwards, etc.
etc.
Components of
Manufacturing Cost

The
The cost
cost to
to produce
produce aa
unit
unit of
of product
product
includes:
includes:
Direct
Direct material
material
Direct
Direct labor
labor
Manufacturing
Manufacturing
overhead
Lightbulbs

overhead Supplies
Direct Materials

Raw materials
& component Can be traced
parts that directly and
become an conveniently
integral part to products.
of finished
products.

IfIf materials
materials cannot
cannot be
be traced
traced directly
directlyto
toproducts,
products,
the
thematerials
materialsareare considered
considered indirect
indirect and
andare
arepart
part
of
of manufacturing
manufacturing overhead.
overhead.
Direct Labor

Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.

Those
Those employees
employees
who
whowork
workdirectly
directly
on
onthe
thegoods
goodsbeing
being
manufactured.
manufactured.

The
Thecost
cost of
of employees
employees who
whododonot
not work
work
directly
directlyon
onthe
thegoods
goodsis
isconsidered
considered indirect
indirect
labor
labor and
andisispart
partof
ofmanufacturing
manufacturingoverhead.
overhead.
 Manufacturing Overhead

All
All manufacturing
manufacturing costs
costs other
other than
than direct
direct
materials
materials and
and direct
direct labor.
labor.

Includes:
Includes:
Indirect
Indirect materials.
materials. Lightbulbs

Indirect labor.
Indirect labor. Supplies

Machinery and
Machinery and
equipment
equipment costs.
costs. Does
Does not
not include
include
Cost of regulatory selling
sellingor
or general
generaland
and
Cost of regulatory administrative
administrative
compliance.
compliance. expenses.
expenses.
 Flow of Physical Goods in
Production
Direct
Direct Direct
Direct
Materials
Materials Materials
Materials
Purchased
Purchased Used
Used

Finished
Finished
Goods
Goods

Manufacturing
Manufacturing
Direct
DirectLabor
Labor Overhead
Overhead Goods
GoodsSold
Sold

MegaLoMart
Accounting for Manufacturing
Operations
Manufacturing
Manufacturing costs
costs are
are often
often
combined
combined asas follows:
follows:

Direct
Direct Direct
Direct Manufacturing
Manufacturing
Materials
Materials Labor
Labor Overhead
Overhead

Prime Conversion
Cost Cost
Learning Objective

To classify costs
by
behavior with
activity level

LO3
Cost Classifications by
Behavior
Cost
Cost Behavior
Behavior
How
How aa cost
cost will
will react
react to
to
changes
changes in
in the
the level
level of
of business
business activity.
activity.

Total
Total variable
variable costs
costs change
change
when
when thethe level
level of
of activity
activity changes.
changes.
Total
Total fixed
fixed costs
costs remain
remain unchanged
unchanged
when
when thethe level
level of
of activity
activity changes.
changes.
 Typical Examples

Typical variable costs

Raw materials
Direct labor Typical fixed costs
Factory utilities Real estate taxes
Sales commissions Factory rent

Shipping costs Supervisory salaries

Workers welfare cost

Depreciation
Total Variable Cost
A variable cost is one that changes in total
in proportion to changes in the volume of activity.
Total electricity bill
is based on how many units you use.
Total Electricity Bill

Units Used
Variable Cost Per Unit
On a per unit basis, a variable cost
remains constant over a wide range of activity.
The cost per unit electricity used is constant.
For example, Tk 10 per unit .

Electricity Charge
Per Unit

Units Used
Total Fixed Cost
A fixed cost is one that remains constant in total
even when the volume of activity changes.
Monthly factory rent does not change when
production level is more or less.
Monthly Factory Rent

Units produced
Fixed Cost Per Unit
On a per unit basis, a fixed cost changes
as the volume of activity changes.

Factory rent per unit produced

declines as more units are produced .

factory rent
Per unit

Units produced
Semi variable Cost

A semi variable or
mix cost has both
fixed and variable
components.
Consider
Land Phone Bill
example.
Semi variable Cost

Y
Total Utility Cost

ost
c
b le
a ria Variable
i v
sem
ta l Utility Charge
To

Fixed Monthly
Utility Charge
X
Activity (Minutes Talked)
Cost Classifications for Predicting
Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost changes Variable cost per unit remains
as activity level changes. the same over wide ranges
of activity.
Fixed Total fixed cost remains Fixed cost per unit goes
the same even when the down as activity level goes up.
activity level changes.
Learning Objective

To classify costs
by function

LO4
Cost Classifications by
Function
Learning Objective

To classify costs
by controllability

LO5
Cost Classifications by
controllability

Controllable Uncontrollable
costs are costs
those costs which can are those costs which
be controlled by a cannot be controlled or
specified person or a influenced by a specified
level of person of an
management enterprise

Example:
Example: Material
Material cost
cost Example:
Example: Factory
Factoryrent
rent
Learning Objective

To classify costs
by
relevance to
decision-making

LO6
 Cost Classifications by
relevance
Sunk costs Out-of-pocket costs
Costs already incurred Costs require a future

that can not be avoided outlay of cash.

or changed. Relevant for future

Irrelevant to future decision making.

decision making. Example: Future
Examples: Equipment purchase of equipment
previously purchased.
End of Lecture 02
THANK YOU ALL