Adnan Sami

Student

BBA(Finance),

From DIHE

PURPOSE

To plan future (Budget, Standards)

To control present (Comparing current results

with budget and standards)

Financial Accounting is largely concerned

with financial statements for external use

Managerial Accounting is primarily concerned

with the accumulation and analysis of

information relevant for internal use for

planning, controlling and decision making.

Financial accounting reports are

prepared for external parties

such as shareholders and

creditors, whereas managerial

accounting reports are prepared

for managers inside the

organization.

Cost is defined as the “value” of the sacrifice

made to acquire goods or services, measured

in rupees.

At the time of acquisition, the cost incurred

is for present or future benefits. When these

benefits are utilized, the costs become

expenses.

All materials that can be identified with the

production of a finished product, that can be

easily traced to the product, and that

represent a major material cost of producing

that product. An example of direct material

is the wood used to build a table.

All materials involved in the production of a

product that are not direct materials.

Indirect materials are included as part of

factory overhead. An example of an indirect

material is the glue used to build a table.

All labor directly involved in the production

of a finished product that can be easily

traced to the product and that represents a

major labor cost of producing that product.

The work of machine operators in a

manufacturing company would be considered

direct labor.

All labor involved in the production of a

product that is not considered direct labor.

Indirect labor is included as part of factory

overhead. The work of a plant supervisor is

an example of indirect labor.

This all-inclusive cost pool is used to

accumulate indirect materials, indirect labor,

and all other indirect manufacturing costs

which can not be directly identified with

specific products. Examples of other factory

overhead costs, besides indirect materials

and indirect labor, are rent, light, and heat

for the factory, and depreciation of factory

equipment.

Variable costs are those in which the total

cost changes in direct proportion to changes

in volume, or output, within the relevant

range, while the unit cost remains constant.

For example, if variable costs for direct

materials are Rs.100 per unit of output, each

time output increases by one unit; the

variable cost for direct material will increase

by Rs.100.

Fixed costs are those in which total fixed

cost remains constant over a relevant range

of output, while the fixed cost per unit

varies with output.

Total variable cost change in proportion to

changes in volume.

Per unit variable costs remain constant

when volume changes.

Total fixed costs remain constant when

volume changes.

Per unit fixed costs increase (decrease)

when volume decreases (increases).

These are costs directly and indirectly

identifiable with product. They are direct

materials, direct labor, and factory

overhead. These costs provide no benefit

until the product is sold. When the products

are sold, the total product costs are

recorded as an expenses, called the cost of

goods sold.

Those costs neither directly nor indirectly related

to the product. Period costs are charged off

immediately.

The following are examples of period costs:

An accountant’s salary (Administrative Exp.)

Depreciation on a salesperson’s car (Selling Exp.)

Interest incurred on loans (Interest Exp.)