Managerial accounting contains different features of accounting, which aims to improve the quality of evidence delivered to management concerning the operations metrics of a corporate. Ideally, managerial accountants use information relating to the sales and cost revenue of products and services generated by a business. In managerial accounting, cost accounting is a large subsection that mainly aims at presenting a business’s total production costs by evaluating fixed costs and every step of production. Therefore, managerial accounting enables a business organization to detect and decrease excessive spending and maximize the business’s profit. The main goal of this reflection paper is to present my understanding of managerial accounting and cost concepts; therefore, some of the discussed topics include direct and indirect costs and the classification of manufacturing costs.
Direct and Indirect Costs
Understanding both direct and indirect costs is vital for business performance. Direct costs are costs that are directly tied to the creation of particular products or services. Analysis by Redfearn (2016) postulates that direct costs are generally variable expenses, meaning they change with the level of production. However, the researcher further claims that even though direct costs are variable, they can include fixed costs (Redfearn, 2016). Examples of direct costs in an organization include direct materials and direct labor. On the other hand, Redfearn (2016) argues that indirect costs are expenses that an organization uses for numerous activities; therefore, such costs cannot be allocated to particular cost objects. The cost objects associated with indirect costs are geographical regions, services, products, consumers, and distribution channels. Redfearn (2016) further contends that there are two types of indirect costs. These are; recurring indirect costs and fixed indirect costs. Recurring indirect costs happen at regular intervals, while fixed indirect costs are fixed for a particular organization (Redfearn, 2016). Thus, direct costs are costs that directly help in the production of goods or services. In contrast, indirect costs are general business costs that help to maintain the operation of the business.
Classification of Manufacturing Costs
Manufacturing costs are mainly classified into three sections. These sections are direct materials cost, direct labor cost, and manufacturing overhead cost. Analysis by Drobyazko et al. (2019) identifies that direct material costs are the expenses of raw materials that help develop a product. According to the researchers, the direct material cost is among the essential variable costs involved in the production procedures; therefore, it is an essential technique in throughput exploration where throughput is an income created by a product sale (Drobyazko et al., 2019). An organization can calculate direct material costs by developing a bill of materials that clarifies the quantity of every material item and constituents involved in the product. While calculating the direct material costs, it is essential to assign a standard cost of every object based on the current price and include a reasonable allowance for spoilage and scrap.
Direct labor cost is another vital component of manufacturing costs. Ideally, direct labor costs are costs incurred to develop goods or create services for the clients. Analysis conducted by Bayraktar & Böke (2017) identifies that direct labor costs mainly connect with products in a business environment where the production staffs are expected to note the amount of time they spend working on different jobs. For instance, in service corporate such as consulting, tax preparation, and auditing, workers are expected to record the number of hours in a particular job. Therefore, such acts fall under direct labor costs.
Manufacturing overhead cost is an added factor of manufacturing costs. Mainly, manufacturing overhead costs are the sum of the indirect costs incurred while developing a product or a service. Research by Huang (2018) opines that corporates should add manufacturing overhead costs to the cost of the final product along with direct labor and direct material costs. Additionally, the scholar presents that manufacturing overhead costs must be incorporated in the cost of completed products, inventory, and work in progress on a producer’s income statement and balance sheet (Huang, 2018). To calculate manufacturing overhead costs, organizations should sum all the indirect-company-related expenditures incurred in developing a product. Hence, while calculating the manufacturing overhead costs, it is essential to consider indirect labor, factory supplies, depreciation, electricity, insurance, and indirect materials.
In summary, managerial accounting is essential for any viable business since it helps interpret, analyze, and measure accounting information. On the other hand, the cost concept is also crucial for an organization since it determines the needed payment to attain goods and services. The analysis provides an overview of direct and indirect costs. For instance, direct costs are costs that an organization can easily link to a particular cost object: a project or a product. Conversely, indirect costs are expenses an organization incurs when it creates a product that includes costs that helps in maintaining and running a business. Moreover, the research discusses the classification of manufacturing costs. The components of manufacturing costs discussed in the study are direct material, direct labor, and manufacturing overhead costs. Direct material costs are the expenses of components and raw materials that help to develop a product. Moreover, direct labor costs are expenses incurred to create a good or service. Finally, manufacturing overhead costs add every indirect cost encountered while developing a product or service.
Bayraktar, B., & Böke, S. S. (2017). Labor Costs and Foreign Direct Investment: A Panel VAR Approach. Economies, 5(4), 36. https://doi.org/10.3390/economies5040036
Drobyazko, S., Дробязко, С., Pavlova, H., Павлова, Г. Є., Suhak, T., Сухак, Т., Kulyk, V., Кулик, В., Khodjimukhamedova, S., & Ходжимухамедова, Ш. (2019). Formation of hybrid costing system accounting model at the enterprise. Dspace.dsau.dp.ua, 23(6). https://dspace.dsau.dp.ua/handle/123456789/2174
Huang, Q. (Ivy). (2018). Skylar, Inc.: Traditional Cost System vs. Activity-Based Cost System – A Managerial Accounting Case Study. Applied Finance and Accounting, 4(2), 55. https://doi.org/10.11114/afa.v4i2.3496
Redfearn, R. (2016). (PDF) Practical Considerations of Direct Versus Indirect Costs for Nonprofit Organizations. ResearchGate. https://www.researchgate.net/publication/310323986_Practical_Considerations_of_Direct_Versus_Indirect_Costs_for_Nonprofit_Organizations