Cost and Cost Object in Management Accounting

Cost and Cost Object

• Management accounting vs. financial accounting: Management accounting focuses on internal information systems to aid decision-making. Financial accounting is for external reporting.
• Accounting information systems: Recording, estimating, organizing, and summarizing financial and operational data are key functions.
• Types of financial management: Mandatory (standard, external, company-wide) and optional (standard, internal, divisional).
• Financial reporting data sources: External reports (tax purposes, company-wide), internal reports (segments/divisions), and financial and non-financial data.
• Cost Classifications: Expenses are categorized by nature (e.g., materials, labor, machines) and destination (frequency: yearly, quarterly, as needed).
• Organization as a black box: Resources (materials, labor, machines, etc.) undergo transformations to produce income. This is viewed through financial accounting lenses, focusing on costs and revenue.

Through Financial Accounting Lenses

• Transformation process: A diagram depicting resources transforming into cost, a product forming, and the process producing revenue. Resource → cost → transformation process → product/services → revenue.

Cost to Expenses (Stages)

• Supply stage: Raw material (purchase cost, transporting) and acquisition cost.
• Production stage: Raw material used and direct labor, forming production costs.
• Manufacturing stage: Costs of goods manufactured (e.g., inventory of finished goods).
• Sale stage: Costs of goods sold (COGS), sales, selling, general, administrative expenses, and non-manufacturing expenses. (e.g., Finished goods sold are COGS, selling/other expenses, operating expenses).

Cost Object

• Cost: The resource cost of doing something. This represents the expense associated with activities. A cost object is the focus of cost measurement. Example: a new product or a department.
• Categorizing costs: Variable vs. fixed costs, direct vs. indirect costs.
• Variable Costs: These change based on activity levels (e.g., more cakes, more flour).
• Fixed Costs: Costs that remain constant regardless of activity changes (e.g., rent).
• Direct Costs: Costs directly attributable to a specific cost object (e.g. raw materials).
• Indirect Costs: Costs that can't be easily traced to a specific cost object (e.g., electricity).

Cost Management Systems (CMS)

• Purpose: Collect, accumulate, and classify costs to assign to cost objects. This supports decision-makers.
• Costing methods: Differentiating between costing methods based on managerial decision types. The methods can be based on 'choose (best way)' to calculate cost.
• Cost Allocation: Resource consumption by multiple objects (e.g., a glue used by many products). Cost can be directly or indirectly traceable to a cost object (e.g. material cost of a shoe).

Costing Methods

• Full costing: Includes all costs (fixed/variable, direct/indirect).
• Partial costing: Includes only specific costs.

Income and Margin

• Economic Performance Indicators: Metrics that measure company economic performance (e.g., profit margin for partial costing, income for full costing).

Variable Costing Method

• Variable Costs: Costs that change in direct proportion to activity or volume.
• Calculation of Revenue: The summation of sales prices multiplied by the quantity sold.
• Variable Cost Calculation: The summation of all variable costs.
• Contribution Margin: Revenue less variable costs.
• Cost-Volume-Profit (CVP) Analysis: Analytical framework to study relationships between costs, volumes, and profits.
• Breakeven Point (BEP): The point where total revenue equals total costs.

Advanced Contribution Margin Methods

• Calculation: Sales revenue, direct costs (variable and fixed), and indirect costs. Includes calculation of contribution margins for individual products/activities, and total income.
• Specific BEP: The quantity sold when variable costs and direct fixed costs equal total revenue.
• Profitability Analysis: Evaluating if a product should be continued or dropped, using contribution margins.