Accounting Classifications and Purposes Quiz

Study Notes

Financial Accounting vs. Managerial Accounting

Financial accounting reports financial information to external parties, such as stockholders, creditors, and regulators.
Managerial accounting provides information to employees within an organization to formulate plans, control operations, and make decisions.

Purposes of Cost Classification

Assigning costs to cost objects.
Accounting for costs in manufacturing companies.
Preparing financial statements.
Predicting cost behavior in response to changes in activity.
Making decisions.

Cost Classification

Direct Costs: can be easily and conveniently traced to a unit of product or other cost object (e.g. direct material, direct labor).
Indirect Costs: cannot be easily and conveniently traced to a unit of product or other cost object (e.g. manufacturing overhead).
Common Costs: indirect costs incurred to support a number of cost objects, which cannot be traced to any individual cost object.

Direct Materials and Direct Labor

Direct Materials: raw materials that become an integral part of the product and can be conveniently traced directly to it (e.g. a seat in an aircraft).
Direct Labor: labor costs that can be easily traced to the individual units of product (e.g. wages paid to automobile assembly workers).

Manufacturing Overhead, Selling Costs, and Administrative Costs

Manufacturing Overhead: includes all manufacturing costs except direct material and direct labor, which cannot be readily traced to finished products.
Selling Costs: costs necessary to secure the order and deliver the product, which can be either direct or indirect costs.
Administrative Costs: all executive, organizational, and clerical costs, which can be either direct or indirect costs.

Cost Classifications for Financial Statements

Product Costs: include all costs involved in acquiring or making a product, which "attach" to a unit of product as it is purchased or manufactured and remain attached to each unit of product as long as it remains in inventory awaiting sale.
Period Costs: not related to product costs.

Cost Behavior

Cost Behavior: refers to how a cost will react to changes in the level of activity.
Variable Costs: a cost that varies, in total, in direct proportion to changes in the level of activity, with a constant variable cost per unit.
Fixed Costs: a cost that remains constant, in total, regardless of changes in the level of activity, with an average fixed cost per unit that varies inversely with changes in activity.
Mixed Costs: a combination of variable and fixed costs.

Differential Cost and Revenue, Opportunity Costs, and Sunk Costs

Differential Cost (or Incremental Costs): the difference in cost between any two alternatives.
Differential Revenue: the difference in revenue between two alternatives.
Opportunity Costs: the potential benefit that is given up when one alternative is selected over another, not usually found in accounting records, but must be explicitly considered in every decision.
Sunk Costs: costs that have already been incurred and cannot be changed now or in the future, which should be ignored when making decisions.

Description

Test your knowledge on financial accounting, managerial accounting, and cost classification purposes. Learn about reporting financial information, providing information within organizations, and cost behavior predictions.