1. Conceptual Foundation
Management accounting is the internal process of identifying, measuring, analyzing, and communicating financial and operational information to managers. Unlike financial accounting, which provides historic data to external stakeholders under rigid GAAP/IFRS rules, management accounting is forward-looking, highly customized, and focuses on driving internal strategic decisions.
 
2. Cost Classifications by Behavioral and Operational Profiles
To analyze, plan, and control corporate performance, costs must be classified according to how they behave and how they relate to the business operations:
By Behavior (Reaction to Changes in Activity Volume)
  • Variable Costs: Costs that change in direct proportion to changes in the level of activity or production volume (e.g., direct materials, piece-rate labor, sales commissions). Cost per unit remains constant.
  • Fixed Costs: Costs that remain constant in total amount within a relevant range of activity, regardless of production volume changes (e.g., factory rent, executive salaries, straight-line depreciation). Cost per unit decreases as volume increases.
  • Step-Fixed Costs: Costs that remain fixed over a certain range of volume but jump to a higher level once production exceeds a specific threshold (e.g., hiring an additional supervisor for every 10,000 units produced).
  • Semi-Variable (Mixed) Costs: Costs that contain both a fixed and a variable component (e.g., utility bills with a flat base fee plus a per-kilowatt usage charge).

By Traceability (Relationship to a Cost Object)
  • Direct Costs: Costs that can be easily and cost-effectively traced directly to a specific cost object (e.g., the wood used to manufacture a table).
  • Indirect Costs (Overhead): Costs that cannot be easily or cost-effectively traced to a specific cost object and must be allocated using an allocation base (e.g., factory electricity, factory cleaning supplies).

By Financial Reporting Function (Product vs. Period)
┌───────────────────────────────────────────────────────────────────────────┐
│                     FUNCTIONAL COST CLASSIFICATION                        │
├─────────────────────────────────────┬─────────────────────────────────────┤
│            PRODUCT COSTS            │            PERIOD COSTS             │
├─────────────────────────────────────┼─────────────────────────────────────┤
│ • Capitalized in Inventory (Balance │ • Expensed immediately on the       │
│   Sheet) until sold                 │   Income Statement when incurred    │
│ • Direct Materials                  │ • Selling Expenses (Marketing,      │
│ • Direct Labor                      │   Shipping)                         │
│ • Manufacturing Overhead (MOH)      │ • Administrative Expenses (HR, HQ)  │
└─────────────────────────────────────┴─────────────────────────────────────┘

 
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