Fundamental Managerial Accounting Concepts.

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Explain the effect of under costing or over costing on profitability.

Cost is the expenditure incurred to provide a service or product to the customer. Ascertaining and estimating correct cost is important as it provides following information:

? Cost of providing a service or manufacturing a product
? Determining the behavior of costs and expenses as activity levels change
? Analyzing cost-volume profit relationships within a company
? Assisting management in profit planning and budgeting
? Providing a basis for controlling costs and expenses by comparing actual results with planned objectives and standard cost
? Accumulating and presenting relevant data for management decision making

Hence costing is a key part of general management strategies and their implementation.

Thus cost accounting provides economic and financial information for managers and other internal users. Hence if its not properly calculated the management will not be able to take the following decisions in a right manner:
1) Break even analysis of the product/project
2) Product strategy as incorrect costs will provide incorrect profitability.
3) Budgeting and Profit planning will be incorrect
4) The organization will not be able to do correct comparison and hence this will lead to ineffective control.

Thus over costing or under costing will lead to ineffective strategy implementation and the organization can suffer losses. Managers will not be able to examine the past performance in the proper manner due to faulty system and will not be able to make quality decisions.

2. Explain ratio analysis and their purpose. Do you think that all of the ratio ...