management accounting- lecture 3

8/15/2019 Management Accounting- Lecture 3

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Lecture 3

Cost Terms, Concepts and Classifications

Cost Behavior–Analysis & use

Management Accounting

Purpose of cost classifications

Financial Reporting

Predicting Cost

Behavior

Assigning Costs to

Cost Objects

Making Business

Decisions


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Schedules of Cost of Goods Manufactured andCost of Goods Sold


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Problem 1

Variable Costs

Fixed Costs

Cost Classifications for Predicting cost behaviors


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Variable Cost

A cost that varies, in total, in direct proportion to changes in the

level of activity.

Number of units

T o t a l v a r i a b l e c o s t s

Fixed CostA cost that remains constant, in total, regardless of changes in the level

of the activity.

Number of units

T o t a l f i x e d

c o s t


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Variable Cost Per Unit

However, variable cost per unit is constant with in a relevant range.

Number of units

V a r i a b l e

C o s

t P e r u n i t

Fixed Cost Per Unit

However, if expressed on a per unit basis, the average fixed cost per unit varies inversely

with changes in activity.

Number of units

F i x e d c o s t s p e r u n i t


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Examples

Research and DevelopmentExpense

Examples

Depreciation on Buildings andEquipment

Types of Fixed Costs

Discretionary

May be altered in the shortterm by current managerial

decisions

Discretionary

May be altered in the shortterm by current managerial

decisions

Committed

Long-term, cannot besignificantly reduced in the

short term.

Committed

Long-term, cannot besignificantly reduced in the

short term.

Cost Classifications for making futuredecisions

Differential costs

Sunk Costs

Opportunity Cost


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In business decisions, each alternative will have costs and

benefits that must be compared to the costs and benefits of

the other available alternatives. A difference in costs between

any two alternatives is known as a differential cost.

A differential cost is also known as an incremental cost.

A difference in revenues between any two alternatives is

known as differential revenue.

Differential Cost


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Opportunity cost is the potential benefit that is given up

when one alternative is selected over another.

Opportunity Cost


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Opportunity costs are not usually found in the accounting

records of an organization, but they are costs that must be

explicitly considered in every decision a manager makes.

Point to remember

A sunk cost is a cost that has already been incurred and that

cannot be changed by any decision made now or in the future.

Because sunk costs cannot be changed by any decision, they are

not differential costs.

Sunk Costs

management accounting- lecture 3

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