The Fundamentals of Costing Work of Management o Planning involves selecting a course of action and specifying how the action

will be implemented. i. The first step in planning is to identify the various alternatives. ii. Next, the alternative that does the best job of furthering the organizations objectives is selected. iii. Managements plans are usually expressed in budgets. Typically, budgets are prepared annually under the direction of the controller, who is the manager of the accounting department. o Directing & motivating: managers must oversee day-to-day activities to keep the organization running smoothly. Daily routine involves directing and motivating employees, determine work assignments, resolve conflicts, solve on-the-spot problems, and make many small decisions that affect both employees and customers. o Controlling: In carrying out the control function, managers seek to ensure that the plan is being followed There are seven key differences between managerial accounting and financial accounting: 1. User: Financial accounting reports are prepared for external parties, whereas, managerial accounting reports are prepared for internal users. 2. Time focus: Financial accounting summarizes past transactions. Managerial accounting has a future orientation. 3. Verifiability: Financial accounting data are expected to be objective and verifiable. Managerial accountants focus on providing relevant data even if it is not completely objective or verifiable. 4. Precision vs. timeliness: Financial accounting focuses on precision when reporting to external parties. Managerial accounting aids decision makers by providing good estimates as soon as possible rather than waiting for precise data later. 5. Subject: Financial accounting is concerned with reporting for the company as a whole. Managerial accounting focuses more on the segments of the company. Examples of segments include: Product lines, sales territories, divisions, departments, etc. 6. GAAP: Financial accounting conforms to GAAP. Managerial accounting is not bound by GAAP. 7. Requirement: Financial accounting is mandatory because various outside parties require periodic financial statements. Managerial accounting is not mandatory. A cost object is anything for which we are trying to ascertain the cost. E.g. Product, Department etc. A cost unit is the basic measure of product or service for which costs are determined. Composite Cost Unit: Two-part cost units are known as composite cost unit and they are used most often in service organizations. E.g. patient/day, passenger/kilometer Direct vs indirect costs: o Direct costs are costs indentified with a cost object. o Indirect costs cannot be identified with a particular cost object. Prime Cost vs. Conversion Costs: o Prime Cost: All direct costs o Conversion costs: Direct Labor, Direct Expenses and Indirect costs to convert RM to FG Product Cost vs. Period Costs: o Product costs include direct materials, direct labor, and manufacturing overhead. o Period costs are not included in product costs. They are expensed on the income statement. Inventory Flow:

Masud Majid/Management Information/01

The Fundamentals of Costing Beginning Balance+ Additions to Inventory = Ending balance + Withdrawals from Inventory

Cost Classifications for Predicting Cost Behavior: o Total variable costs change when activity changes.

Total fixed costs remain unchanged when activity changes.

Opportunity Cost: The potential benefit that is given up when one alternative is selected over another. Differential Costs and Revenues: Costs and revenues that differ among alternatives. Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions.

Masud Majid/Management Information/01