Period costs are all other costs not associated with purchasing or producing inventory for resale but are necessary for sustaining the organization, selling the inventory, and servicing customers. Product costs are all costs associated with purchasing or producing inventory for resale. As a general rule, product costs are capitalized as a part of the inventory asset account whereas, period costs are expensed as incurred. In financial accounting, product costs are treated differently than period costs. An important cost classification in accounting is distinguishing product costs from period costs. The costs incurred by an organization can be classified in many different ways. Cost classification: Product or period LO2Ĭost classification is the process of separating costs into different categories. Managers and internal decision makers are the primary users of managerial accounting reports and tools. Instead, they are customized to meet the specific needs of the organization’s internal users. Managerial accounting tools and reports are not prescribed by a regulatory body. Managerial accounting tools are used by management to plan, control, and evaluate business operations and to make internal business decisions. Managerial accounting is concerned with classifying, analyzing, and reporting data for internal decision making. Accountants, higher management, creditors, investors, and other external users are the primary users of financial accounting reports. Financial accounting is relatively uniform and prescribed by various regulatory bodies, such as the Securities and Exchange Commission, the Financial Accounting Standards Board, and the Public Company Accounting Oversight Board. In general, financial accounting is concerned with classifying, recording, and reporting financial transactions in a formal accounting system. Managerial accounting versus financial accounting LO1 LO8 Construct a contribution margin income statement and calculate the contribution margin amount and ratio LO7 Construct a traditional income statement LO6 Contrast the contribution margin income statement and the traditional income statement LO5 Use the high-low method to predict future costs LO4 Define the relevant range of production LO3 Distinguish between fixed, mixed, and variable costs, and relate them to cost drivers LO2 Distinguish between product and period costs and classify product costs as direct material, direct labor, or manufacturing overhead LO1 Distinguish the different purposes of financial accounting and managerial accounting
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