TAILIEUCHUNG - Accounting for Managers Part 6

11 Accounting Decisions. This chapter explains how accountants classify costs and determine the costs of products/services through differentiating product and period costs, and direct and indirect costs. The chapter emphasizes the overhead allocation problem: how indirect costs are allocated over products/services. | 11 Accounting Decisions This chapter explains how accountants classify costs and determine the costs of products services through differentiating product and period costs and direct and indirect costs. The chapter emphasizes the overhead allocation problem how indirect costs are allocated over products services. In doing so it contrasts absorption with activity-based costing. The chapter concludes with an overview of contingency theory Japanese approaches to management accounting and the behavioural consequences of accounting choices. Cost classification Product and period costs The first categorization of costs made by accountants is between period and product. Period costs relate to the accounting period year month . Product costs relate to the cost of goods or services produced. This distinction is particularly important to the link between management accounting and financial accounting because the calculation of profit is based on the separation of product and period costs. However the value given to inventory is based only on product costs a requirement of accounting standards see later in this chapter . Although Chapters 8 9 and 10 introduced the concept of the contribution sales less variable costs as we saw in Chapter 6 there are two types of profit gross profit and net profit gross profit sales cost of sales The cost of sales is the product or service cost. It is either the cost of providing a service or the cost of buying goods sold by a retailer or the cost of raw materials and production costs for a product manufacturer. net or operating profit gross profit expenses Expenses are the period costs as they relate more to a period of time than to the production of product services. These will include all the other selling 156 ACCOUNTING FOR MANAGERS administration finance etc. costs of the business . those not directly concerned with buying making or providing goods or services but supporting that activity. To calculate the cost of sales we need to take

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