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Costing Principles. Cost and management accounting. Provides management with costs for products, inventories, operations or functions and compares actual to predetermined data
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Cost and management accounting • Provides management with costs for products, inventories, operations or functions and compares actual to predetermined data • It also provides a variety of data for many day-to-day decision as well as essential information for long-range decisions
Functions of managerial accounting • Determining the cost • Providing relevant information for better decision-making • Providing information for planning, control, decision-making and application
Planning • Deals with the estimation of product costs, setting up of costing system to record cost data, preparation of cost standards and budgets, planning of materials and manpower resources, analysing cost behavior with changes in levels of activity
Control • Deals with the maintenance of product costing record, comparison of actual performance with standards or budgets, anlaysis of variances, recommendation of corrective actions, controlling cost to ensure operational efficiency and effectiveness
Decision-making • Deals with whether it is more profitable to make or buy a component, determine the economic order quantity and production batch size, replace fixed asset, add or drop products, decide pricing
Application • Cost accounting has extended from manufacturing operations to a variety of service industries such as hotels, bands, airline, etc • Cost accounting system should be flexible and adaptable to meet the new business environment and the changing nature of the company
Element of cost • Cost object • Cost • Cost unit • Cost centre • Profit centre
Cost object • It is an activity or item or operation for which a separate measurement of costs is desired • E.g. the cost of operating the personnel department of a company, the cost of a repair fob, and the cost for control
Cost • It is the amount of expenditure incurred on a specific cost object • Total cost = quantity used * cost per unit (unit cost)
Cost unit • It is a quantitative unit of product or service in which costs are ascertained, e.g. cost per table made, cost per metre of cloth
Cost centre • It is a location or function of an organisation in respect of which costs are ascertained • E.g. the rent, rates and maintenance of buildings; the wages and salaries of strorekeepers
Profit centre • It is location or function where managers are accountable for sales revenues and expenses • E.g. division of a company that is responsible for the sales of products
Cost classification • Direct cost • Indirect cost (overhead)
Direct cost • Cost that can be identified specifically with or traced to a given cost object • The direct costs consist of the following three elements: • Direct materials • Direct labour • Direct expenses
Direct materials • The cost of materials – the cost of materials used entering into and becoming the elements of a product or service • E.g. fabrics in garments
Direct labour • The cost of remuneration for working time • E.g. assembly workers’ wages in toy assembly
Direct expenses • Other costs which are incurred for a specific product or service • E.g. royalties
Indirect cost (overhead) • Cost that cannot be identified specifically with or traced to a given cost object • They are identified with cost centres as overheads • Indirect materials • Indirect labour • Indirect expenses
Indirect materials • Such as stationery, consumable supplies, spare parts for machine that assist to the production of final products
Indirect labour • Such as salaries of factory supervision and office staff that do not directly involve in production of the final product
Indirect expenses • Such as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes
Cost accumulation • Prime cost = direct materials + direct labour + direct expenses • Production cost = Prime cost + factory overhead • OR • = Direct materials + Conversion cost • *Conversion cost is the production cost of converting raw materials into finished product • Total cost = Prime cost + Overheads (admin, selling,distribution cost) • OR • = Production cost + period cost (administrative, selling, • distribution and finance cost) • Period cost is treated as expenses and matched against sales for calculating • profit, e.g. office rental
Cost coding • A code is a system of symbols designed to be applied to a classified set of items to give a brief, accurate reference, facilitating entry, collation and analysis • Coding is important in modern computerised accounting systems for catergories various composite accounting items
Reasons • To reducing error owing to descriptions • Enable easy recalling • Reduce computer file size as a code
Cost behaviour • Costs can be classified into variable, fixed, semi-variable, or step-costs according to how they behave with respect of changes in activity levels
Variable cost • It increases or decreases in direct proportion to levels of activity, but the unit variable cost remains constant • E.g. cost of food served in a restaurant
Fixed cost • Total fixed cost remains constant over a relevant range of activity level but unit fixed cost falls with an increase in activity volume
Semi-variable cost • It processes characteristics of both fixed and variable cost • It increases or decreases with activity level but not in direct proportion
Step cost • It remains constant for a range of activity levels, then, on further increase in activity, the cost jumps to a new level and remains constant over a certain range until the next jump occurs
Cost for stock valuation • Unexpired and expired cost • Product and period cost
Unexpired cost • Unexpired costs are the resources that have been acquired and are expected to contribute to the future revenue • They will be recorded as assets in current period • They will be charged as expenses when they have been consumed in the generation of revenue
Expired costs • Expired costs are the expenses attributable to the generation of revenue in the current period
Product cost • Product cost are related to the goods purchased or produced for resale • If the products are sold, the product cost will be included in the cost of goods sold and recorded as expenses in current period • If the products are unsold, the product costs will be included in the closing stock and recorded as assets in the balance sheet
Period cost • Period cost related to the operation of a business • They are treated as fixed cost and charged as expenses when they are incurred • They should not be included in the stock valuation
Meanings • Financial accounting • Cost accounting • Management accounting
Financial accounting • Provides information to users who are external to the business • It reports on past transactions to draw up financial statements • The format are governed by law and accounting standards established by the professional accounting policies
Cost accounting • Is concerned with internal users of accounting information, such as operation managers • The generated reports are specific to the requirement of the management • The reporting can be in any format which suits the user
Management accounting • Comprises all cost accounting functions • The accounting for product and service costs, management accounting extends to use various internal accounting reports for planning, control and decision making
