Broadly speaking, three types of information are comprised in management accounting; each is governed by a different set of principles. These are :
- full cost accounting,
- differential accounting, and
- responsibility accounting.
Full Cost Accounting
Cost is the monetary equivalent of the resources used to achieve any purpose. In manufactured goods, raw material, labour, etc. are part of the costs insofar as they are used/employed in the production of goods. Whatever is used (wholly) exclusively for the production of the goods is further classified as the direct cost, e.g. the material used. Whatever cannot be identified with the specific unit of production but can only be related to the organisation as a whole goes by the classification as indirect cost. Supervisory costs, factory and office rentals, license fees and power charges, etc., will be the indirect costs. Indirect costs have to be apportioned amongst various products and other purposes, i.e. only a fair share of the indirect costs shall be relevant and shall apply. The sum total of these two components becomes the total or full cost.
Assume that the direct cost of manufacturing an item is Rs. 10,000. And the indirect cost ASSOCIATED with it is Rs. 3,000. The full cost will be Rs. 13,000 (per unit) and, if profit margin is to be, say 1596, the sale price will be Rs. 14,950 (per unit). Thus, full cost is relevant in fixing the.sale price of goods and, also services.
Yet another instance or occasion when full cost will be relevant is in the preparation of Financial Accounts; in this (a) cost of goods sold is shown in the profit and loss account; (b) amount of inventory is shown on the assets side of the balance sheet.
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