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The management accounting process consists primarily of planning, decision making models and performance evaluation which are useful to management for taking better decisions. In all cases, these tools have the definite requirement of cost and revenue information. The basic assumption of the process of management accounting is that it considers the accountant’s role as primary in providing the needed cost and revenue information to the management. Thus, the management accountant must have good knowledge of all the different types of costs which are involved in business and are required by various models,

The major building block in the conceptual foundation of management accounting is cost. The financial as well as management accountant must have a sound understanding of the various variables as well as complex ramifications of cost as inadequate understanding results in poor decisions. Cost is divided into two major aspects. These are cost classification and cost behavior. Separation of costs is done in order to properly prepare financial statements to be included in various decision making models. Cost behavior is the effect on production and sales volume on the total cost expenses.

Cost classification

Accounting describes cost as an expenditure or sacrifice for acquiring something of value. The financial accounting records all transactions in terms of historical costs. The monitory value associated with an asset acquisition is called cost. The major cost classifications are- expired and unexpired costs, manufacturing and non manufacturing costs and the fixed and variable costs.

The expired and unexpired costs

The expired costs and expense can also be termed as the used up value of the assets. The expired costs are shown on the income statement as the deductions from the revenue. The portion of the asset value benefiting current operations is also termed as expired costs. The expired costs are also thought as former assets value, for example the expense on supplies is an expired cost.

Manufacturing and non manufacturing costs

The goods manufactured statement shows all the current period manufacturing costs. The manufacturing costs are defined as materials which are use, the expenses which are incurred and the manufacturing overhead incurred. These costs are the costs that are found relating to the cost of goods manufactured statement. The good manufacturing statement, which contains the cost, has this manufacturing statement. The expense or the non manufacturing costs are those expenses which are noted under administration and in the selling processes. These are the expenses which are incurred in a current period directly for the benefit of generating revenue. The cost of inventory does not include the non manufacturing expenses. In those divisions, the costs are further classified as direct and indirect cots. This classification is made on the basis of material which is used in manufacturing that are use directly or indirectly in the produced material. Direct material is those which become a part of the final product like wood in a wooden chair. Indirect materials are usually not significant in amount and are called indirect material, like glue or screw.

Fixed and variable costs

Volume is the most volatile variable in a business. With changes n volume, some costs change i.e. either increase or decrease. This is a noted and fundamental aspect of any business. The costs which change with the change in activity are termed as variable while the costs or expenses which do not change are called fixed. The classification of costs on the basis of variable and fixed costs the most useful classification in management accounting for costs.

Various fixed and variable cost inputs are- cost volume profit, flexible budgeting, direct costing, profit planning and variance analysis. It also benefits other tools such as incremental analysis and other present value models. The thorough and detailed study of variable and fixed costs is called the study of cost behavior. Since the cost behavior or its study is fundamental to many management accounting tools, they represent the first area of management accounting to be studied in depth.

Cash flow

Cash flow is the movement of cash into or out of a business, financial product or project. Its measurement is done for a specified time interval. Cash flows are used for determining a projects rate of return or value, as an alternative measure to profits in business, for determining problems with business liquidity, for evaluation of the risks with a financial product, or for evaluation of the quality of the generated income. The total net cash flows are attained by the summing up of the cash flows of other areas, which include the operational cash flow, financing cash flow and the investment cash flows.

The cash flow and cost classification help the accountant to understand various aspects of business and provide him tools for undertaking various financial accounting processes.