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Chapter 1: Managerial Accounting and Cost ConceptsCost can be classified differently depending on the needs of management.Managerial Accounting is concerned with providing to managers within the organization so thatthey can formulate plans, control operations, and make decisions.COSTS:Purpose of cost classificationCost ClassificationAssigning costs to cost objectsDirect cost (can be easily tracked)Indirect cost (cannot be easily traced)Accounting for costs in manufacturingcompaniesManufacturing overheadNonmanufacturing costsSelling costsAdministrative costsPreparing financial statementsProduct costs (inventoriable)Period costs (expensed)Predicting cost behavior in response tochange in activityVariable costs (proportional to activity)Fixed costs (constant in total)Mixed costs (has variable and fixedcosts)Making decisionsDifferential costs (differs betweenalternatives)Sunk costs (should be ignored)Opportunity costs (foregone benefit)Costs are assigned to cost objects for pricing, preparing profitability studies and controllingspending.Acost objectis anything for which cost data are desired- including products, customers, andorganizational subunits.DIRECT COSTS:is a cost that can be easily and conveniently traced to a specific cost object.Example:if Adidas is assigning costs to its various regional and national sales offices, then the salaryof the sales manager in its Tokyo office would be a direct cost of that office, If a printing companymade 10,000 brochures for a specific customer, then the costs of the paper used to make thebrochure is the direct cost of that customer.INDIRECT COSTS:is a cost that cannot be easily and conveniently traced to a specified cost object.Example:Campbell Soup factory may produce dozens of varieties of canned soup. The factorymanager’s salary would bean indirect cost of a particular variety of soup because the factorymanager’s salary is incurred as a consequence of running the entire factory, it is not incurredto produce any one soup variety.Acommon costis a cost that is incurred to support a number of costs objects but cannot be tracedto them individually, it’s a type of indirect costs. Which cost is not be easily and conveniently traced?Direct costs usually benefit only one cost object. Items that are not direct costs are pooled and allocated based on cost drivers. Direct and indirect costs are the major costs involved in the production of a good or service. While direct costs are easily traced to a product, indirect costs are not.
Which costs are not traced directly to a product?Operating costs are expenses associated with day-to-day business activities but are not traced back to one product. Operating costs can be variable or fixed. Examples of operating costs, which are more commonly called operating expenses, include rent and utilities for a manufacturing plant.
Are those costs that can be easily and accurately traced to a cost object?(1) Direct costs are costs that can be traced easily and accurately to a cost object. (2) Indirect costs are costs that cannot be traced easily and accurately to a cost object.
What is related to the particular cost object but Cannot be traced to that cost object in an economically feasible cost effective way?Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way. Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object.
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