BUSN7031 · Management Accounting and Cost Analysis
Introduction to Management Accounting & Cost Terms
BUSN7031 Management Accounting and Cost Analysis at the Australian National University opens with the vocabulary the entire course runs on. Week 1 separates financial accounting (past-oriented, rule-bound, for outsiders) from management accounting (future-oriented, cost-vs-benefit, for internal managers), then defines the cost terms that every later topic assumes you own: direct vs indirect (does the cost trace to the object?), fixed vs variable (how does total cost behave over a relevant range?), product vs period costs, and prime vs conversion costs. It finishes with the cost-flow pipeline DM → WIP → FG → COGS and the schedule of cost of goods manufactured. Get these axes clean and CVP, job costing, ABC, budgeting and variances all fall into place.
What this chapter covers
- 011. Financial vs management accounting — users, horizon, rules, detail
- 022. What management accounting is — decision-relevant financial and non-financial information
- 033. Cost object and cost assignment — accumulate, then trace (direct) or allocate (indirect)
- 044. Direct vs indirect costs — and why the classification depends on the object chosen
- 055. Fixed vs variable costs over a relevant range — the per-unit trap
- 066. Prime cost (DM + DL) vs conversion cost (DL + MOH) — direct labour in both
- 077. Product (inventoriable) vs period costs — when a cost hits profit
- 088. Cost flows DM → WIP → FG → COGS and the COGM schedule (vs COGS)
Worked example: schedule of cost of goods manufactured
- +1(a) Direct materials used = beginning DM + purchases − ending DM = 8,000 + 40,000 − 6,000 = $42,000. This is the material that actually went into production, not the material bought.
- +1(b) Manufacturing overhead = indirect labour + factory power + equipment depreciation = 9,000 + 5,000 + 6,000 = $20,000. Marketing is excluded — it is a period cost, not a factory cost.
- +1Total manufacturing costs incurred = DM used + direct labour + MOH = 42,000 + 30,000 + 20,000 = $92,000.
- +1Add beginning WIP — work already in process at the start belongs to what gets finished this period: + 5,000.
- +1Less ending WIP — work still unfinished at period-end is carried forward, not part of COGM: − 7,000.
- +1(c) Cost of goods manufactured = 92,000 + 5,000 − 7,000 = $90,000. Note COGM adjusts for the change in WIP (what got finished), not Finished Goods (that adjustment comes later, in COGS).
Key terms
- Cost object
- Anything for which a separate cost measurement is wanted — a product, a job, a department, an activity or a customer. Costs are first accumulated in a category, then assigned to cost objects. Every direct/indirect classification is stated relative to a chosen cost object.
- Direct vs indirect cost
- A direct cost can be economically and conveniently traced to the cost object (direct materials, direct labour) — assigning it is called cost tracing. An indirect cost cannot be economically traced, so it is spread using an allocation base — assigning it is called cost allocation. The classification depends on the object chosen: a supervisor's salary is direct to a department but indirect to a single unit.
- Fixed vs variable cost
- Behaviour over a relevant range. A variable cost changes in total in proportion to the driver but is constant per unit; a fixed cost is unchanged in total within the range but falls per unit as volume rises. Total cost = fixed cost + (variable cost per unit × volume).
- Relevant range
- The band of activity over which the assumed cost behaviour actually holds. Inside it, fixed costs stay constant and the variable rate per unit is stable; outside it, fixed costs step up and per-unit rates can change.
- Prime cost vs conversion cost
- Two ways to regroup the three manufacturing inputs. Prime cost = direct materials + direct labour (the directly-traced inputs). Conversion cost = direct labour + manufacturing overhead (the cost of converting materials into finished goods). Direct labour sits in both — never add prime + conversion, because it double-counts direct labour.
- Product (inventoriable) vs period cost
- A product cost (DM, DL, MOH) is capitalised into inventory and expensed as cost of goods sold only when the goods are sold. A period cost (marketing, distribution, R&D, admin, customer service) is expensed in the period it is incurred and never enters the cost of goods manufactured.
- Cost of goods manufactured (COGM)
- The cost of units finished during the period = (direct materials used + direct labour + manufacturing overhead) + beginning work-in-process − ending work-in-process. It adjusts for the change in Work-in-Process; cost of goods sold then adjusts for the change in Finished Goods.
- Cost driver
- The activity or volume factor whose change causally changes total cost — units produced, machine-hours, number of set-ups. Choosing the driver that truly causes a cost is the basis of accurate cost allocation later in the course.
Introduction to Management Accounting & Cost Terms FAQ
Can AI help me with cost terms and cost classification?
Yes — ask Sia to walk through any cost-terms or cost-classification problem or concept step by step, the way Australian National University tests it. Sia is an AI tutor that explains the method: it will take a cost you are unsure about, ask you what the cost object is, then reason through direct-or-indirect and variable-or-fixed with you until the two axes are clear, rather than just stating an answer.
What is the difference between financial accounting and management accounting in BUSN7031?
Financial accounting is past-oriented, must follow accounting standards (GAAP) and is prepared for external users such as investors, lenders and the ATO. Management accounting is future-oriented, has no mandated rules (only a cost-vs-benefit test), is detailed by product or activity, uses financial and non-financial information, and is prepared for internal managers. BUSN7031 lives almost entirely in the management-accounting column.
Why does whether a cost is direct or indirect depend on the cost object?
Because direct/indirect is about traceability to a specific object, and the same dollar can trace to one object but not another. A production supervisor's salary is direct to the production department (it traces straight there) yet indirect to a single unit made in that department (you would have to allocate it). Always answer the question 'direct to what?' before classifying — never label a cost direct or indirect in the abstract.
Is fixed cost per unit really fixed?
No — this is the single most common Week-1 error. Only total fixed cost is constant within the relevant range. Fixed cost per unit falls as volume rises because the same total is spread over more units: $60,000 of rent is $6.00 per unit at 10,000 units but $4.00 per unit at 15,000 units. It is variable cost per unit that stays constant while its total climbs.
What is the difference between COGM and COGS?
Cost of goods manufactured (COGM) is the cost of units finished this period and adjusts for the change in Work-in-Process. Cost of goods sold (COGS) is the cost of units sold this period and adjusts for the change in Finished Goods: COGS = beginning FG + COGM − ending FG. Both follow the same rhythm — add the costs in, add beginning inventory, subtract ending inventory — but on a different account, so keep the WIP and FG adjustments separate.
Why are marketing and admin costs never in the cost of goods manufactured?
Because they are non-manufacturing period costs. Only costs incurred inside the factory — direct materials, direct labour and manufacturing overhead — are product (inventoriable) costs that flow through inventory and become COGS when sold. Marketing, distribution, R&D and general admin are expensed below gross profit in the period incurred, so putting them into overhead (a favourite distractor) overstates COGM.
Studying with AI? Sia — free AI accounting tutor works through BUSN7031 step by step.
Exam move
Treat Week 1 as vocabulary you over-learn, because every later chapter quietly assumes it. Drill two independent axes until they are automatic: direct-or-indirect (does the cost trace to the named object?) and variable-or-fixed (how does total cost behave as the driver changes?) — and make sure you can produce a direct-and-fixed cost and an indirect-and-variable cost on demand, because those combinations are where marks are lost. Memorise the per-unit trap (total fixed cost is constant, fixed cost per unit falls with volume) and the prime/conversion groupings (direct labour is in both, so never add them). Then rehearse the cost-flow pipeline DM → WIP → FG → COGS by rebuilding a COGM schedule and income statement from memory: DM used, MOH from factory costs only, total manufacturing cost, the WIP adjustment to COGM, the FG adjustment to COGS, and the period-cost deduction to operating profit. Because the exam is closed-book with no formulae sheet, practise writing the schedule layout from a blank page, not just plugging numbers into a template.
