Managerial accounting is the process of obtaining, creating, and analyzing information to help achieve organizational goals. In sum, managerial accounting can create organizational value by improving the decision-making process and managing members of an organization.
The key difference between financial accounting and managerial accounting is that financial accounting aims to provide information to outsiders while Managerial accounting provides financial and non-financial information to organizing managers and other internal decision-makers.
What does the term cost mean?
What do we mean by cost? Well, cost is the usage of resources. In this sense, resources are something you own or have the right to use, and once you use them, you no longer have that ownership.
Types of cost behavior
Cost classification by behavior refers to a cost’s reaction to changes in the level of business activity. Cost can be classified in several ways. One of the most popular methods is classification according to fixed costs and variable costs.
1) Fixed costs - Predetermined expenses that do not change, like office rent.
2) Variable costs - Change with production.
– Direct labor
- Direct materials
3) Mixed costs - Combines 1 and 2.
Organizing cost information
We can take different approaches to organize cost information. One way is by the cost object. You can think about manufacturing goods as the cost object. There are two main categories:
Direct costs: can trace to a single cost object
– Material
– Labor
Indirect costs: Necessary costs but difficult to trace to that particular cost object. Indirect cost is often referred to as overhead.
Classification by function
Product Costs: Costs capitalized to inventory.
Period Costs: Costs identified with a period rather than a product, such as selling, general, and administrative expenses.
Cost of goods manufactured
Includes Direct materials, Direct labor, and Manufacturing overhead.
Direct materials — Materials that are separately traced to a particular product. Example: metal, glass, and lens used to manufacture the camera.
Direct Labor — Labor costs that are separately traced to finished product. Example: Wages paid to a camera assembly technician.
Factory Overhead — Includes all manufacturing costs except direct material and direct labor. Examples: Indirect labor – maintenance , Indirect materials - cleaning supplies, Factory utility costs, and Supervisory costs.
Overhead allocation
If multiple products are being manufactured inside the same factory, then there is an allocation of overhead to the different types of the product, and how we allocate those costs affects the perceived cost of the product.
If the overhead allocation is inaccurate, it can lead to poor decisions. If the cost information is wrong, so will pricing and other profitability decisions.
