Conceptual Framework of Cost and Management Accounting

They are affected by the product structure, manufacturing methods and also customer demands.

Cost accounting is concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement.

Cost accounting can be defined as a system in which financial data regarding business transactions are collected, classified, recorded, evaluated and reported for the following three purposes:

• To find the cost of product or service,

• Planning and controlling activities,

• Decision-making process.

Effective planning is made easier by the following:

Clearly defined objectives of the manufacturing operation and a production plan that will aid and lead the company in reaching its objectives.

Effective control achieved by periodically measuring and comparing results, assigning responsibility and taking necessary corrective action.

A cost driver is any factor that has the effect of changing the amount of total cost.

Cost accumulation is the collection of cost data in some organized way by means of an accounting system.

Cost assignment is a general term that includes both (1) tracing accumulated costs that have a direct relationship to a cost object and (2) allocating accumulated costs that have an indirect relationship to a cost object.

A direct cost is a price that can be completely assigned to the production of specific goods or services.

The manufacturing overhead costs consist of a combination of many different cost elements. All costs related to production other than direct raw materials and direct labor are under this heading. Manufacturing overhead cost includes items such as indirect raw materials, indirect labor, depreciation expenses of fixed assets used in production, insurance, tax and rent expenses of fixed assets used in production, energy and fuel costs used in production and service expenses.

Direct labor cost combined with the direct material cost is called prime cost.

Cost behavior is defined as how a particular cost element may change or behave in accordance with the changes in the volume of business activity.

This cost can be defined as a cost which shows the characteristics of fixed costs initially and it jumps to a higher point when the quantity increases and shows against the characteristics of fixed cost until production amount changes.

This cost can be defined as a cost that includes both fixed and variable cost.

A cost function is a mathematical formula used to chart how production costs will change at different production levels.

1. Raw material and supplies inventory,

2. Work-in-process inventory,

3. Finished goods inventory.

Relevance, Reliability, Comparability and Understandability.

Information identification,
Information recording,
Information analysis,
Information reporting.

• Internal users within the organization,

• External users such as shareholders, creditors, and regulatory agencies, outside the organization.

Legal requirements,

Focus on individual parts or segments of the business,

Generally accepted accounting principles,

Time dimension.