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What is Management Accounting?

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Costs can be classified into two categories, fixed and variable costs. These costs behave differently based on the level of sales volumes. Suppose we are running a restaurant and have identified certain costs along with the number of annual units sold of 1000.

Item: Raw Materials (cost for hamburgers)
Total Annual Cost: 650
Item: Building Rent
Total Annual Cost: 9000
Identify which cost item above is fixed and variable and why? What is the cost per unit of each? Suppose we increased our sales volume to 6000 units and then to 8000 units the following year (and are still within the relevant range), what would be the total annual cost and unit cost of fixed and variable costs?

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Solution Summary

The solution discusses what is management accounting, and identifies from the given data which item is fixed and variable and why.

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Complete answer to your question is provided in the attached file as follows.

1. Concept of Management Accounting

2. Classification of cost: Fixed cost and Variable cost

3. Treatment of Building Rent and Cost of Hamburgers

4. Total annual cost and unit cost of Fixed and variable nature if sales increased to 6000 and 8000 units level.

See attachment for proper format of solution.

1. Concept of Management Accounting:
Accounting which is concerned with providing information relating to the conduct of Business is called management Accounting. Management Accounting is a tool of Management. It is the merger of Management and Accounting. It is decision oriented. Management accounting itself is an information system. It is the advisory function. It is quite informal accounting where rules of debit and credit are not binding.
Analysis and interpretation of financial statements is one of the important function of Management accounting.
Financial statements include Trading & profit and loss Account and Balance sheet. They are formal and statutory in nature and therefore analysis of the financial statement is made by using various tools of analysis.
There are various tools of analysis such as ...

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