Q17-1RQ - Horngren'S Financial And Managerial Accounting

Question

Question: Why do managers need to know the cost of their products?

Step-by-Step Solution

Answer

Answer:

Manager need to know about the cost of their product to decide the selling price of the product and to control the cost of raw material and other resources required to produce the products. It is computed to know the cost of goods sold and the cost of inventory.

Step 1: Cost of the products

Cost of the product is defined as the total cost incurred by an organization for manufacturing the products. It includes both direct and indirect cost.

Step 2: Use of the cost of the product

The cost of the product is used by the management of the company to determine the selling price of the product by adding the profit margin to the cost. If the cost of the product is high due to which selling price is high, then the manager need to control the cost of raw materials etc. The manager compute the cost of goods sold for the income statement and the cost of inventory for the balance sheet.