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Cost and Management Accounting


Cost & Management Accounting (MGT-402)
VU
LESSON# 1
COST CLASSIFICATION AND COST BEHAVIOR
INTRODUCTION
Cost Accounting
Cost Accounting is an expanded phase of financial accounting which provides management
promptly with the cost of producing and/or selling each product and rendering a particular service.
Management Accounting
Management accounting is application of professional knowledge and skill in the preparation and
presentation of financial information in such a way as to assist management in decision making and
in the planning and control of operations of the entity
Objectives
Objective of cost accounting is computation of cost per unit, whereas the objective of management
accounting is to provide information to the management for decision making purposes.
Users
Users of cost & management accounting are the decision makers and the managers of the
entity/organization for which all this exercise is undertaken.
Uses of Cost and Management Accounting
1. It determines total cost of production and cost of sales
2. It determines appropriate selling price
3. It discloses the profitable products, areas and activity/capacity levels
4. It is used to decide whether to manufacture or purchase for outside
5. It helps in planning and controlling the cost of production
Elements of Cost
Any product that is manufactured is the result of consumption of some resources. The
management, for its planning and controlling functions, must know the cost of using these
resources. The constituent elements of cost are broadly classified into three distinct elements:
1 Direct Material Cost
2 Direct Labor Cost
3 Other Production Cost
a) Direct Cost
b) Indirect Cost
COST CLASSIFICATION
Elements of cost (Direct Material, Direct Labor, Other Production costs) can be classified as direct
cost or indirect cost.
Direct Cost
A direct cost is a cost that can be traced in full to the product or service for which cost is being
determined.
Costs that can be economically identified with a specific saleable product or service (cost unit).
a) Direct material costs are the costs of materials that are known to have been used in
producing and selling a product or rendering a service.
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