The process ofpreparing management reports and accounts that provide accurate and

timely financial and statistical information required by managers to make day-to-day

and short-term decisions.
Unlike financial accounting, which produces annual reports mainly for external stakeholders,
management accounting generates monthly or weekly reports for an organization's internal
audiences such as department managers and the chief executive officer. These reports
typically show the amount of available cash, sales revenue generated, amount of orders in
hand, state of accounts payable and accounts receivable, outstanding debts, raw material and
inventory, and may also include trend charts, variance analysis, and other statistics.

Cost behaviour is associated with learning how costs change when there is a change in an
organization's level of activity. The costs which vary proportionately with the changes in the
level of activity are referred to as variable costs. The costs that are unaffected by changes in
the level of activity are classified as fixed costs.

Cost behaviours is not required for external reporting under U.S. GAAP. However, the
understanding of cost behaviours is very important for management's efforts to plan and
control its organization's costs. Budgets and variance reports are more effective when they
reflect cost behaviours patterns.

Process costing is a term used in cost accounting to describe one method for collecting and
assigning manufacturing costs to the units produced. Processing cost is used when nearly
identical units are mass produced. (Job costing or job order costing is a method used when
the units manufactured vary significantly from one another.)

Job order costing or job costing is a system for assigning manufacturing costs to an
individual product or batches of products. Generally, the job order costing system is used
only when the products manufactured are sufficiently different from each other. (When
products are identical or nearly identical, the process costing system will likely be used.)

Since there is a significant variation in the products manufactured, the job order costing
system will create a job cost record for each item, job or special order. The job cost record
will report the direct materials and direct laboractually used plus the manufacturing
overhead assigned to each job.
You can think of work-in-process (WIP) inventory as the goods that are on the factory floor.
The manufacturing of these goods has begun but has not yet been completed.

You can also think of work-in-process inventory as the general ledger current asset account
that reports the cost of the goods that are on the factory floor. In the U.S. the cost reported as
WIP should be the cost of the direct materials, direct labor and the allocation
of manufacturing overhead for the goods on the factory floor.

As the WIP goods become completely manufactured, their cost will be credited to the WIP
account and will be debited to the Finished Goods Inventory account.

An equivalent unit of production is an indication of the amount of work done by

manufacturers who have partially completed units on hand at the end of an accounting period.
Basically the fully completed units and the partially completed units are expressed in terms of
fully completed units. To illustrate, let's assume that a manufacturer uses direct
labour continuously in one of its production departments. During June, the department began
with no units in inventory and it started and completed 10,000 units. It also started an
additional 1,000 units that were 30% complete at the end of June. This department is likely to
state that it manufactured 10,300 (10,000 + 300) equivalent units of product during Jun

Direct materials are the traceable matter used in manufacturing a product. The direct
materials for a manufacturer of dessert products will include flour, sugar, eggs, milk,
vegetable oil, spices, and other ingredients in the recipes. In manufacturing, the direct
materials are listed in each product's bill of materials. (Indirect materials such as oil for
greasing the baking pans, etc. will likely be viewed as part of the manufacturing supplies and
will be allocated to products along with other manufacturing overhead.)

Conversion costs are the combination of direct labour costs plus manufacturing overhead
costs.

You can think of conversion costs as the manufacturing or production costs necessary to
convert raw materials into products. Expressed another way, conversion costs are a
manufacturer's product or production costs other than the costs of raw materials.