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FNCE 3P93 (13)
Chapter 2

ACC 406 CHAPTER 2 NOTES.docx

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Department
Finance
Course
FNCE 3P93
Professor
Daniel Glenday
Semester
Fall

Description
ACC 406 CHAPTER 2 NOTESOne of the most important tasks of managerial accounting is to determine the cost of products services customers and other items of interest to managersCostis the amount of cash or cash equivalent of sacrificed goods andor services that are expected to bring a current or future benefit to the organization If a furniture manufacturer buys lumber for 10000 then the cost of that lumber is 10000 Sometimes one asset is traded for another asset Then the cost of the new asset is measured by the value of the asset given up If the same manufacturer trades office equipment valued at 8000 for a forklift then the cost of the forklift is 8000 value of the office equipment traded for it Costs are incurred to produce future benefits In a profitmaking firm those benefits usually mean revenues As costs are used up in the production of revenues they are said to expire Expired costs are called expenses We can look more closely at the relationship between cost and revenue by focusing on the unit sold The revenue per unit is called price Cost and price for a company are not the same For a company revenue and price are the same Price must be greater than cost in order for the firm to earn income Accumulating costsis the way that costs are measured and recorded The accounting system typically does this job quite well When a telephone bill comes into the company the bookkeeper records an addition to the telephone expense account and in addition to the liability account Accounts payableIn this way the cost is accumulated Assigning costsis the way that a cost is linked to some cost object A cost object is something for which a company wants to know the cost For example of the total telephone expense how much was for the sales department and how much was for manufacturing Assigning costs tells the company why the money was spent Cost objecta cost object is any item such as a product customer department project geographic region plant and so on for which costs are measured and assigned For example if the Royal Bank of Canada wants to determine the cost of a platinum credit card then the cost object is the platinum credit card All costs related to the platinum card are added in such as the cost of mailings to potential customers the cost of telephone lines dedicated to the card the portion of the computer department that processes platinum card transactions and bills and so on Cost Classificationa cost is a payment of cash or the commitment to pay cash in the future for the purpose of generating revenuesFor example cash or a note payable signed to purchase supplies is the cost of supplies In managerial accounting costs are classified according to the decisionmaking needs of management
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