Managerial accounting and cost concept assigned by Parvati Panjwani

1. MANAGERIALACCOUNTING AND
COST CONCEPT
17TH EDITION
S u b m i t t e d b y : P a r v a t i P a n j w a n i
A s s i g n e d t o : M a d a m N a d i a a n j u m

2. MANAGERIAL ACCOUNTING:
AN OVERVIEW
Managerial accounting focuses on providing financial
and operational information to help managers make
better decisions. Understanding cost concepts, such as
direct and indirect costs, is crucial for effective cost
management and control.
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3. COST CLASSIFICATIONS:
Costs are assigned to cost objects for a variety of purposes including
pricing, preparing profitability studies, and controlling spending
costs are classified as either direct or indirect:
• Direct Costs: Costs that can be directly traced to a specific product or
cost object, such as raw materials and direct labor.
• Indirect Costs: Costs that cannot be directly traced to a specific
product or cost object, such as factory overhead, administrative
expenses, and utilities.
Careful classification of costs into direct and indirect is crucial for
accurate product costing and pricing decisions.
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4. TITLE GOES HERE
S U B T I T L E G O E S H E R E
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purus. Proin dolor mi, ultrices sit amet ipsum placerat,
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nec sem convallis, in ornare est accumsan. Lorem ipsum
dolor sit amet, consectetur adipiscing elit. Ut gravida eros
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5. THREE BASIC MANUFACTURING COST
CATEGORIES:
Manufacturing cost divided into three categories:
1. Direct Materials (DM):
Raw materials that are physically incorporated into the final product, such as wood for furniture or fabric for clothing. For
example.. wood for furniture, steel for cars, cotton for clothing
2. - Direct Labor (DL):
The labor of workers directly involved in the manufacturing process, like assemblers on an assembly line.
For example… assembly line workers, carpenters, welders
3. - Manufacturing Overhead (MOH):
Indirect production costs excluding direct materials and labor
Indirect costs associated with production For Examples…. factory rent, utilities, maintenance, insurance, depreciation
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6. NONMANUFACTURING COSTS:
Nonmanufacturing costs are divided into two categories:
1. Selling costs:
Costs incurred to secure customer orders and deliver finished products.
For Examples… advertising, shipping, sales travel, sales commissions, sales
salaries, finished goods warehouses.
2. Administrative costs:
Costs associated with general management and administration -
Examples: executive compensation, general accounting, legal counsel,
secretarial, public relations
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7. TITLE GOES HERE
S U B T I T L E G O E S H E R E
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gravida eros erat. Proin a tellus sed risus lobortis sagittis
eu quis est. Duis ut aliquam nisi. Suspendisse vehicula mi
diam, sit amet lacinia massa sodales ac. Fusce
condimentum egestas nunc a maximus. Quisque et orci
purus. Proin dolor mi, ultrices sit amet ipsum placerat,
congue mattis turpis. Donec vestibulum eros eget mauris
dignissim, ut ultricies dolor viverra. Phasellus efficitur ante
nec sem convallis, in ornare est accumsan. Lorem ipsum
dolor sit amet, consectetur adipiscing elit. Ut gravida eros
erat. Proin a tellus sed risus lobortis sagittis eu quis est.
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8. COST CLASSIFICATIONS FOR PREPARING
FINANCIAL STATEMENTS:
1. Product Costs:
Product Costs are the costs associated with
producing a product or service. These costs are
directly tied to the production process and are
typically included in the Cost of Goods Sold (COGS)
on the income statement.
For Example… Direct Materials (e.g., raw
materials, components)- Direct Labor (e.g., wages,
salaries)- Manufacturing Overhead (e.g., factory
rent, utilities, equipment depreciation)
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9. COST CLASSIFICATIONS FOR PREPARING
FINANCIAL STATEMENTS (CONT..):
2. Period Costs:
Period Costs, on the other hand, are costs
associated with operating the business during a
specific period (e.g., month, quarter, year). These
costs are not directly tied to the production
process and are typically expensed on the income
statement as Operating Expenses.
For Examples…. Selling Expenses (e.g., advertising,
sales commissions)- Administrative Expenses (e.g.,
office salaries, utilities, insurance)- Research and
Development Costs- Utilities and Insurance for the
office building
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COST CLASSIFICATIONS FOR PREDICTING COST BEHAVIOR:
Cost behavior refers to how a cost reacts to changes in the level of activity. As the
activity level rises and falls, a particular cost may rise and fall as well—or it may
remain constant
• Variable Costs
Costs that vary directly and proportionally with changes in a company's sales,
production, or activity levels. Variable costs are typically short-term and can be easily
changed or avoided .Vary directly with sales or production volume.
Examples: direct materials, direct labor, marketing expenses
• Fixed Costs:
Costs that remain constant and unchanged even if a company's sales, production, or
activity levels vary. Fixed costs are typically long-term and cannot be easily changed or
avoided
Examples: rent, salaries, insurance, utilities
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COST CLASSIFICATIONS FOR PREDICTING COST
BEHAVIOR(CONT..):
• Discretionary Fixed Costs:
A type of fixed cost that can be reduced or eliminated if necessary, typically related to
non-essential activities or projects.
Non-essential expenses that can be reduced or eliminated
Examples: training programs, research and development
• Committed Fixed Costs:
A type of fixed cost that cannot be reduced or eliminated in the short term, typically
related to essential activities or operations, such as rent or salaries.
Examples: rent, salaries, lease payments
• Mixed Cost
A cost that contains both fixed and variable components- Changes with changes in
activity level, but not proportionally.
Formula:- Mixed Cost = Fixed Component + (Variable Rate x Activity Level)
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COST CLASSIFICATION FOR DECISION MAKING:
Cost classification is the process of categorizing costs to help managers make informed
decisions.
Objective: To identify relevant costs and benefits to choose the best alternative.
Key Concepts:
• Relevant Costs: Costs that differ between alternatives and impact the decision.
• Relevant Benefits: Benefits that differ between alternatives and impact the decision.
• Differential Cost: The difference in cost between two or more alternatives.
• Incremental Cost: The additional cost of choosing one alternative over another
• Opportunity Cost: The benefit forgone by choosing one alternative over another.6.
• Sunk Cost: A cost already incurred and cannot be changed by the decision.
• Irrelevant Costs: Costs that do not differ between alternatives and do not impact the
decision.
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DIFFERENTIAL COST AND REVENUE :
• Differential Cost:
The difference in cost between two or more alternatives- Represents the additional cost of choosing
one option over another- Formula: Differential Cost = Cost of Alternative 1 - Cost of Alternative 2.
• Differential Revenue:
The difference in revenue between two or more alternatives- Represents the additional revenue
generated by choosing one option over another- Formula: Differential Revenue = Revenue of
Alternative 1 - Revenue of Alternative 2.
Example:…… Alternative 1: Produce 1,000 units at $10 per unit- Alternative 2: Produce 1,500 units at
$12 per unit- Differential Cost: ($12 x 1,500) - ($10 x 1,000) = $18,000 - $10,000 = $8,000-
Differential Revenue: ($12 x 1,500) - ($10 x 1,000) = $18,000 - $10,000 = $8,000
Importance:
Helps managers evaluate the financial impact of different alternatives
Identifies the most profitable option
Informed decision-making

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OPPORTUNITY COST AND SUNK COST:
• Opportunity Cost:
The benefit forgone by choosing one alternative over another- Represents the value of the next best
option- Formula: Opportunity Cost = Benefit of Alternative 2 - Benefit of Alternative 1
Example…… Alternative 1: Invest $10,000 in Stock A
Alternative 2: Invest $10,000 in Stock B
Opportunity Cost: If Stock B earns 10% return, the opportunity cost is 10% of $10,000 = $1,000
• Sunk Cost:_
A cost already incurred and cannot be changed by the decision
Irrelevant to the current decision
Formula: None (already incurred)
Example……Spend $5,000 on marketing campaign last year
- Decision today: Continue or stop the campaign
- Sunk Cost: $5,000 (already spent, cannot be changed)

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THE TRADITIONAL FORMAT INCOME
STATEMENT:
Also known as the Classic Format or the Single-Step Format
Presents all revenues and gains together, followed by all expenses and losses
Calculates net income in a single step
Format:
Revenues:
+ Sales
+Other revenues
+ Gains
Total Revenues
Expenses:
+ Cost of goods sold
+ Operating expenses
+ Non-operating expenses
+ Losses
Total Expenses
Net Income

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THE CONTRIBUTION FORMAT INCOME STATEMENT:
Purpose:
To evaluate profitability and identify areas for improvement
Key Components
Sales
Variable Costs
Contribution Margin (Sales - Variable Costs)
Fixed Costs
Net Income (Contribution Margin - Fixed Costs)
Benefits:
Helps identify profitable products/services
Reveals areas for cost reduction
Informed pricing and production decisions
Supports breakeven analysis and budgeting

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20. THANK YOU!
FOR YOUR ATTENTION
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