Cost Management and Accounting Overview

Cost and Cost Object

• Management accounting and financial accounting are interconnected, with accounting functioning as an information system.
• Accounting involves recording, estimating, organizing, and summarizing financial and operational data.
• Financial accounting has mandatory standards, focused on external reporting (e.g., tax purposes, company-wide reports, balance sheets, and income statements) and uses yearly/quarterly reporting frequencies.
• Management accounting, which is optional, focuses on internal reporting for decision-making purposes, including segment (division, product, activity) reports and uses a when-needed reporting frequency.
• Cost management involves classifying costs according to nature (e.g., material, labor, machines) and destination.
• Organizations can be viewed as a "black box" where resources (materials, labor, machines) are transformed into income/revenue through production processes. Accounting focuses on tracing costs through this transformation.

Cost to Expenses

• Costs are tracked through different stages: supply, production, and sale stages. Raw material costs, including purchase and transportation, form initial costs.
• Production costs include raw material use and direct labor, culminating in production costs of goods.
• Sale costs include costs of finished goods sold, additional selling expenses (advertising, commissions), and operating expenses.
• Costs can be classified as manufacturing or non-manufacturing costs.

Cost Object

• Cost is a measure of resources consumed in achieving a specified objective or goal.
• A cost object is any item for which costs need to be measured independently (e.g., a product, a project, a customer, or a department).
• Costs can be categorized as direct or indirect, variable or fixed to better analyze and allocate costs.

Cost Behavior

• Variable costs change with the level of activity (e.g., more flour for more pancakes). A unit's variable cost is constant.
• Fixed costs remain the same regardless of activity level. Quantity production can impact fixed costs by steps.

Cost Assignment

• Resources are consumed by various objects.
• Costs can be direct (directly traceable to a single object, such as material for a shoe) or indirect (consumed by multiple objects).
• Costing methods include full costing (including all fixed and variable costs) and partial costing (including only some costs).

Costing Methods

• Full costing (or absorption costing) includes all production costs (variable and fixed).
• Partial costing involves including only some costs.

Income and Performance Indicators

• Performance indicators measure the economic success of a company.
• Margin and income relate to partial or full costing.

Variable Costing Method

• Variable costing distinguishes between variable and fixed costs, and only variable costs are treated as product costs.
• Fixed costs appear as period costs.
• The method facilitates short-term decisions and comparisons between different products/activities.
• Breakeven point is the point where total revenue equals total costs.

Advanced Contribution Margin Methods

• Advanced contribution margin methods calculate the contribution margin for each cost object in a multi-product environment.
• This method can analyze profitability by focusing on the contribution margin of individual cost objects
• Contribution margin analysis can be visualized using diagrams to help in decision-making.

Profitability Analysis Diagram

• Using visuals, this method categorizes costs as direct or indirect, variable or fixed and determines the profitability of products/segments, or determines actions (such as continuing/dropping production).
• Helps allocation method analysis
• Helps to determine the global output/reduction in fixed costs.

Short-Term Pricing

• Short-term pricing must consider direct variable costs and fixed costs when pricing to ensure enough revenue to cover costs.
• Pricing decisions involve cost-volume-profit analysis to optimize profits.