Cost Terms and Concepts in Cost & Management Accounting Part 1, Accounting Step-by-Step, Mike Werner

Introduction

This tutorial covers essential cost terms and concepts in Cost and Management Accounting, based on Mike Werner's video. Understanding these concepts is crucial for preparing management accounting schedules and reports. This guide will help you grasp key classifications of costs and their applications in accounting.

Step 1: Understand Cost Classifications

Cost classifications help in analyzing costs for decision-making. Here are the main categories:

• Direct Costs

  • Costs that can be directly traced to a specific product or service.
  • Examples include raw materials and direct labor.

• Indirect Costs

  • Costs that cannot be traced directly to a single product.
  • Common examples include utilities and rent.

Step 2: Learn About Cost Behavior

Understanding how costs behave is vital for budgeting and forecasting. Costs can be classified into:

• Fixed Costs

  • Costs that remain constant regardless of production levels (e.g., rent, salaries).

• Variable Costs

  • Costs that change in direct proportion to the level of production (e.g., materials, labor).

Step 3: Distinguish Between Product Costs and Period Costs

These classifications impact how costs are reported:

• Product Costs

  • Costs incurred to manufacture a product, including direct materials, direct labor, and manufacturing overhead.

• Period Costs

  • Costs that are expensed in the period they are incurred, such as selling and administrative expenses.

Step 4: Identify Key Financial Statements

Understanding the financial statements is crucial for interpreting cost data:

• Cost of Goods Sold (COGS) Schedule

  • Shows the total cost of goods sold during a specific period. Essential for calculating gross profit.

• Income Statement for Merchandisers

  • Summarizes revenues and expenses, providing insights into profitability.

Step 5: Explore Merchandise Inventory

Inventory management is a key aspect of cost accounting. It includes:

• Merchandise Inventory

  • Goods available for sale, classified as current assets on the balance sheet.

• Inventory Valuation Methods

  • Different methods (FIFO, LIFO, and weighted average) affect COGS and profit margins.

Practical Tips

• Familiarize yourself with accounting software that can automate the calculation of these costs.
• Keep updated with industry standards for cost classifications to enhance decision-making.

Common Pitfalls to Avoid

• Misclassifying costs, which can lead to inaccurate financial reporting.
• Neglecting to regularly review and adjust for fixed and variable costs due to changes in production levels.

Conclusion

Understanding cost terms and classifications is foundational for effective cost management and reporting in accounting. As you proceed, ensure to review Part 2 of this series, where more complex concepts like manufacturing costs and inventory handling will be introduced. Use this guide as a reference for your studies and practice in cost and management accounting.