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Cost Volume Profit Analysis

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1.0 Introduction to Accounting

• Accounting is the process of identifying, measuring and communicating information to permit informed judgments and decisions by users of the information.

• There are two main types of accounting:

1. Financial accounting

This is primarily concerned with the recording of transactions between the business and other individuals and organisations. It also includes the preparation of reports on the performance of the business as a whole. The purpose is to provide financial information in the form of financial statements for external users. It is also a report on the stewardship of the directors as to how the resources entrusted to them have been utilised. Financial Accounting involves the application of relevant legislation and the relevant accounting standards.

2. Management accounting

This is mainly concerned with the preparation of internal financial information to be used by the managers to run the business more effectively. This information can be used in decision making, planning, and control. Management accounting is dealt with in another module of your course. Management Accounting is an integral part of management activity concerned with identifying, presenting and interpreting information used for the following:

• Formulating strategy • Planning and controlling activities • Decision making • Optimising the uses of resources

Key Definitions

a) Cost unit- the cost of an item a product or service. This could be a single item, a batch, a contract what ever is appropriate for the organisation. b) Cost classification - to group costs for analysis and control purposes c) Cost centre - a function or location for which costs are ascertained dividing into production (primary) and service (secondary) areas.

1. THE

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