Cost Management Basic Theory

Process of management involves formulating strategy, planning, control, decision making, and directing operational activities. Manager can perform these functions efectively with managerial accounting information. One of the most important information focuses on  cost incurred by an organization.

Basically, cost is defined as the sacrifice made to achieve a particular purpose. It is measured by the resource given up to reach the purpose. The definition may grow depend on the context in which it is used.

Cost data that recorded in one particular way for one purpose may be inappropriate for another use. Therefore, different cost concepts and classification are used for different purposes. By understanding this concepts and classification, we can use managerial accounting to provide appropriate cost data to the stakeholder who need it.

An important issue in managerial and financial accounting is the timing which costs of acquiring asset or services are recognized as expenses. Expense is defined as the cost inccured when an asset is used up or sold for purpose of generating revenue.

Terms of product cost and period cost are used to describe the timing with which various expenses are recognized. Product cost is a cost assigned to goods that were purchased or manufactured for resale. Product cost is used to value inventory of manufactured goods or merchandise until the goods are sold. In period of sales, product costs are recognized as an expense called cost of goods sold.

All costs that are not product cost are called period costs. These cost are identified with period of time in which they are inccured rather than with units of purchased and produced goods. Period cost are recognized as expenses during time period in which they are inccured. Some examples are research and development, selling, and administrative costs are treated as period costs.

In services industry, there is no inventoried product costs. Therefore, services industry generally reffer to the costs of producing services as operating expenses. Operating expenses are treated as period costs.

To assist managers in planning, decision making, and cost management, managerial accountants classify costs by the functional area of organization to which cost relate. Some of them are manufacturing, marketing, administration, and R&D.

Manufacturing costs are futher classified : direct material, direct labor and manufacturing overhead. Direct material is raw material that is consumed by manufacturing process. The cost of salaries, wages, fringe benefits for personal costs who work directly on the manufactured products is lassified as direct-labor cost. All of other costs of manufacturing are classified as manufacturing overhead, which includes three type : indirect material, indirect labor, and other manufacturing costs.

Other functional area of organization will also have other classification. Marketing, administration, and R&D cost classification will be disscussed further in next articles.

 

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