(BQ) Part 2 book "Accounting for management" has contents: Where will all this new knowledge take you, advanced fraud, taxation, other management accounting systems, cost accounting in action, management cost accounting. | 6 1 Management Cost Accounting B reakeven and its related cost/volume/profit concepts apply to all profit-making activities. In this chapter we’ll discuss inventory and overhead, two important topics. Cost Behavior, Inventory, and Overhead Understanding inventory costing is another part of cost accounting that affects primarily business managers. Inventory in merchandising, where you buy a finished good to sell to customers, is more straightforward than inventory in manufacturing, where you have three levels of inventory to track, as we’ll discuss shortly. Managers at all levels of government, educational institutions, and nonprofit organizations join businesses in tackling the fundamental concept of overhead. In a standard accounting textbook, overhead is usually defined as the sum of all costs after direct materials and labor have been subtracted. But that’s just the tip of the iceberg. 102 Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use. Management Cost Accounting 103 How inventory and Overhead The costs of overhead are tracked and doing business other than recorded has an impact on direct materials and direct both the income statement labor. Overhead includes rent, insurance, heat, light, supervision costs, and the balance sheet. facilities maintenance, and indirect When factors like net income or return on invest- materials and indirect labor. ment serve as compensation criteria, managers will strive to push those numbers into the bonus range. For example, many managers get performance bonuses if they meet certain net income targets. Since inventory is valued on the balance sheet as an asset and is not reported as an expense on the income statement until it is sold, keeping inventory at a high level can increase net income. Bonus time! Your cost accounting approach to inventory and overhead will vary depending on whether you make or provide a product or a service. Added considerations include the performance metrics .
