Quiz 2: Basic Managerial Accounting Concepts

Cost accounting: It is a set of procedure which is followed in order to prepare the statement of cost and income. Several steps need to be followed in a sequential order to achieve the objective of providing the information related to cost of products and services. • Cost is amount of cash or cash equivalent sacrificed to acquire a particular product or service. When we buy a product at a given price, the amount paid by us to purchase the good is cost for us. • Similarly, if an organization is purchasing raw material or machinery or lands for further use in the production process, the amount spend by the organization in purchase of raw material is cash equivalent which is also considered as cost. Thus, such costs appear on the balance sheet as asset of the organization. • Expense is that cost which has been used up. All expenses are cost but all cost is not expenses. A cost becomes an expense only when the said good or service is used up. • Expenses are charged against the revenues in income statement to determine the net income earned during the period. Thus, though cost appears in the balance sheet, expense appears in the income statement. Let us explain the same with the help of an example: Say a textile industry purchases buttons (raw material), worth $2000 to produce shirts (finished goods). This is cost for the company, and thus will appear in the balance sheet as assets worth $2000. Now the company uses half the buttons in a month in the completion of the shirts. Thus, the half of the buttons is now used up and thus would be called as expense and will appear in the income statement as expenses. The remaining half would continue to be treated as cost till they are used up in the production process. Thus, main difference between cost and expense is cash paid for the goods or services not in use or consumed is a cost and when goods or services are used or consumed, then that payment is converted into expense.

Costs: It is the amount of money spent on goods and services to obtain future benefits. Management process requires costs to be accumulated and assigned to products. Accumulating cost means that c. Cost must be measured and tracked. Explanation: Accumulating costs is a system to collect information about costs. Linking of cost to cost object and allocation to units is called assignment of costs. Thus, (b) (d) are incorrect. Point (e) is incorrect as transferring of expired cost from balance sheet to income statement is not accumulation of costs. Accumulating costs requires costs related to a single object to be pooled together. Thus, (a) is incorrect.

Accumulating cost is the way the costs are recorded in the financial books. This is a measure by which the accountants using the accounting principles measure the costs incurred and then record the same in a typical manner. This helps the management to make decisions in easy and convenient manner as the accumulated cost shows that how much is spend in a particular period of time. Assigning cost is the way the costs are allocated to specific items. This can be done in number of ways, where some give accurate results whereas the others are easy to calculate. This helps the management to know how much exactly is spend on the particular item. Let us explain the same with the help of an example: Say an organization receives electricity bill for a month of $200. Next month, it again receives a bill of $500. Now at the end of two months the total cost incurred on electricity bill is $700. This is accumulated cost. The bill gets on added for the accounting period under the same head of electricity and the management knows at the end of each month how much total electricity has been used up in the organization. This is how costs are accumulated. Next the management has to decide how much electricity has been used by the each department in the organization. Say, if there are two departments in the organization, one the factory and other sales department. Now the easy way to assign the electricity bill to both the departments is to divide the total bill amount by the number of departments equally. The other accurate but tedious measure would be to calculate the per unit consumption of each department and then dividing the total bill amount in the ratio of the units consumed by each department. This is how costs are assigned.