Question

What is managerial accounting and how is it used to aid decision makers? Identify and describe the three categories of manufacturing costs.

Identify and describe the three categories of manufacturing costs.

Answer 1

Managerial accounting refers to an accounting process which identifies, processes and communicates information to the management. It is also commonly known as cost accounting. The reports are prepared according to the requirement of the management. Managerial accounting provides a variety of analysis such as margin analysis, breakeven analysis , trend analysis etc. This helps decision makers in the following ways:

-Deciding pricing policy by assessment of profitability at different prices.

-Finding out the quantity to be sold which is required to cover fixed costs i.e. break even analysis.

- Whether to continue a product line or discontinue it.

The three categories of manufacturing costs are as follows:

Direct Material:

​The first category refers to the raw material which is used to manufacture a product. For example, leather will be a direct material for a shoe manufacturing company.

Direct labour:

​​The second category is the manpower cost required to maufacture a product. For example, the shoe designer's salary will be a direct labour cost.

Factory overhead:

All other expenses attributable to the manufacturing process are called factory overhead. For example, rent of the shoe factory shall be a factory overhead.