Understanding Cost Categories for Business Decision Making in Managerial Accounting, Essays (high school) of Advanced Calculus

Download Understanding Cost Categories for Business Decision Making in Managerial Accounting and more Essays (high school) Advanced Calculus in PDF only on Docsity! Managerial Accounting and Cost Classification By Laurie L. Swanson PrinciplesofAccounting II Lesson #6A Click the button below to navigate to the next slide. Managerial Accounting Managerial Accounting provides information to the internal decision makers of a business. Managerial accounting provides both financial and non-financial information. Cost Classifications Recall that one of the purposes of managerial accounting is to provide management with information about the costs of products or services. Companies incur different types of costs that can be classified based on certain characteristics. Each cost classification provides management with a different type of information to be applied in analyzing different business situations. Cost Classifications Costs can be classified into five categories: Behavior Traceability Controllability Relevance Function Cost Classifications Any type of cost may be categorized using any one or a combination of the five different classifications. Classification by Controllability Costs can be Controllable – a cost which can be affected (controlled) at the hierarchical level which is being measured Uncontrollable – a cost which cannot be affected (controlled) at the hierarchical level which is being measured Classification by Relevance Costs can be Sunk – a cost which has already been incurred and cannot be avoided or changed regardless of future actions Out-of-pocket – a cost which requires future cash outlays Opportunity – a cost measured as the loss of potential benefits by choosing one course of action over another Classification by Function Costs can be Product – a cost which is necessary to produce a finished product Period – a cost which is necessary to run the business during a specified fiscal period Check Your Comprehension - Classification by Behavior Variable vs. Fixed Variable costs change with volume; fixed costs stay constant within a relevant range of activity Wood used in producing cabinets Variable Fixed Click the button that matches your classification for the item listed. Correct! The amount of wood used in producing cabinets would vary with the number of cabinets produced. Think it Through The amount of wood used in producing cabinets would vary with the number of cabinets produced; therefore, this would be classified as a variable cost. Try Another Think it Through The number of cabinet pulls used would vary with the number of cabinets produced, therefore, cabinet pulls used is a variable cost. Study this concept some more. Try Another Classification Check Your Comprehension - Classification by Behavior Direct vs. Indirect Direct costs can be traced to a specific cost object; indirect costs benefit more than one cost object. Paint used on cabinets Direct Indirect Click the button that matches your classification for the item listed. Correct! Since it would be difficult to trace the exact amount of paint used on any given cabinet, this cost would be classified as indirect. Correct! Since a specific cabinet pull can be traced to a specific cabinet, this would be classified as a direct cost. Think it Through Try Another Classification Since a specific cabinet pull can be traced to a specific cabinet, this would be classified as a direct cost. Check Your Comprehension - Classification by Behavior Product vs. Period Product costs are incurred in producing a product or providing a service; period costs are costs incurred in operating a business. Rent expense on administrative offices Product Period Click the button that matches your classification for the item listed. Check Your Comprehension - Classification by Behavior Product vs. Period Product costs are incurred in producing a product or providing a service; period costs are costs incurred in operating a business. Cabinet pulls Product Period Click the button that matches your classification for the item listed. Correct! Because cabinet pulls are used in a finished product, they are considered a product cost. Think it Through Because cabinet pulls are used in a finished product, they are considered a product cost. Keep working on this concept.