Managerial Accounting Notes

Introduction

Understanding costs and their classification is fundamental in managerial accounting. It helps in planning, decision-making, and controlling operations.

1. Classification by Behavior

Fixed Costs: Do not change with production levels (e.g., rent, salaries).

Variable Costs: Change directly with production (e.g., raw materials).

Semi-variable (Mixed) Costs: Have both fixed and variable components (e.g., utility bills).

2. Classification by Function

Production Costs: Related to the manufacture of products.

Administrative Costs: Associated with management and support.

Selling and Distribution Costs: Related to marketing and delivery of products.

3. Classification by Traceability

Direct Costs: Easily traced to a specific product (e.g., direct labor).

Indirect Costs (Overheads): Not directly traceable to a single product (e.g., factory maintenance).

4. Classification for Decision-Making

Relevant Costs: Future costs that will change based on decisions.

Sunk Costs: Past costs that cannot be recovered.

Opportunity Costs: The cost of the next best alternative foregone.

5. Importance of Cost Classification

Aids in cost control and reduction.

Helps in budgeting and forecasting.

Essential for pricing decisions.

Useful in performance evaluation.