Intro

COST ACCOUNTING FOR NON-ACCOUNTING STUDENT

COST ACCOUNTING(ACC 116)

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TOPIC 1: INTRODUCTION TO COST ACCOUNTING

1.1 – DEFINITION OF COST ACCOUNTING1.2 - OBJECTIVES OF COST ACCOUNTING1.3 - RELATIONSHIP BETWEEN CA,MA &FA1.4 – COSTING PRINCIPLES & CONCEPT1.5 – DIFFERENCES BETWEEN MA & FA1.6 – MANAGERIAL PROCESS1.7 – CLASSIFICATION & TYPES OF COST

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INTRODUCTION Information is very important to ensure effective management. Thus,

cost accounting is needed in exercising the management functions of planning, decision making and control.

In today’s competitive environment the costing become more complex due to several factors such as expansion of business, market become more sophisticated, advanced in technology, newly introduced legislation to regulate the business and employees and management become more cost conscious.

All business organization services, retail, and manufacturing need to provide cost information in order to help them in making decision especially in determining the selling price. Therefore, costing is essential for the survival of an organization.

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Def of Costing :

the ascertainment of cost. The costs are ascertained by applying accounting and costing

principles, methods & techniques. Cost are ascertained after they are incurred or

before they are incurred (estimates)

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1.1 – DEFINITION OF COST ACCOUNTING

THE APPLICATION OF ACCOUNTING & COSTING PRINCIPLE, METHODS &

TECHNIQUE IN THE ASCERTAINMENT OF COSTS & ANALYSIS OF SAVINGS &/OR EXCESS AS COMPARED WITH PREVIOUS EXPERIENCE OR WITH

STANDARDS.(CIMA)

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1.2 - OBJECTIVES OF COST ACCOUNTING

To help in determining the cost structure.Facilitates estimates of price.

Providing management with cost information for the purpose of planning and controlling.

To help management make policy decision.The cost information provided may help

management decide whether to buy component from outside or to make component internally.

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1.3 - RELATIONSHIP BETWEEN CA,MA &FA

Cost accounting Financial accounting

Management accounting

-Method of ascertainment of cost for purpose of planning & controlling.

-An extension of financial accounting.

-method of analyzing, classifying & recording financial transaction for the purpose of looking at the financial position, financial performance & changes in financial position

-concerned with analysis, classification, recording historical data, determine profit/loss & position of asset & liability of co.

-method of providing information to management for planning & controlling business activities.

-management accountant will use information from cost accounting to formulate policies & planning & control.

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Cost accounting Financial accounting

-Give detail indication of business performance.

-Cost accountant will use information from both financial & costing for purpose of decision making.

-Cost accountant will determine & analyse cost by cost centre, product, job or process.

-give general indication to management about the business performance.

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1.4 – DIFFERENCES BETWEEN MA & FA

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Cont’

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1. Cost :

The amount of actual expenditure incurred on to a specific thing or activity.

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1.5 – COSTING PRINCIPLES & CONCEPT

2. Cost Unit :

A quantitative unit of product or services to which cost can be ascertained.

Example of cost unit:

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Cost Unit Uses

Kilowatt Hours To determine electricity costs

Litres To determine cost of petrol / liquid

Consulting hours To determine codst of treating a patient by a medical clinic

Cont’

3. Cost Centres :

A breakdown of a business into sections where cost can be charged.

Classification of cost Centres : Process Cost centre Production Cost Center ServicesCost Center

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Cont’

Cont’

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1.6 – MANAGERIAL PROCESS

1. Planning

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2. Organizing

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3. Directing

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4. Controlling

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5. Decision making

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1.7 – CLASSIFICATION & TYPES OF COST

Cost are classified depending on the purpose for which details are required.

It can be classified as:

1)Cost behavior

2)Cost Function

3)Controllable & uncontrollable cost , Normal & abnormal cost.

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Cost may or may not vary with the level of activity.

The level of activity : refer to volume of production or number or value of items sold.

Managers have knowledge about company’s cost behavior so that he may predict the impact of his decisions on profit and in controlling costs.

1)Cost Behavior

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1)Cost Behavior1)Cost Behavior

4 types of costs4 types of costs

Fixed Costs

Variable costsSemi variable costs/

Semi fixed costs/ mixed cost

Step costs

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Fixed cost

Definition : the cost that remain constant over a wide range of activity for a specified time.

Example :

a) depreciation

b) supervisory salary & director salary

c) insuranceFixed cost/unit varies

according to the level of activity.

Cost (RM)

unit

30

20

10

302010

TFC

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Variable Cost

Definition : the cost that varies in direct proportion to changes in the level of activity (volume)

Example :

a) direct material

b) direct labour

c) direct expensesVariable cost/unit remain

constant unless of the changes in the level of activity/ volume.

Cost (RM)

unit

30

20

10

302010

TVC

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Step Cost

These costs are fixed over a range of activity and then rises to a new level as activity changes.

Eg : A production supervisor

may supervise a given no of workers. No of workers increase due to increase production it is necessary to hire another supervisor. Thus, supervisor salaries are step costs.

Cost (RM)

10

10

20

20

30

30 unit

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Mixed cost/semi variable/semi fixed cost

Definition : the cost that contain both the variable & fixed element.

Example :

a) telephone charges/cost.

Cost (RM)

unit

30

20

10

302010

TFC

TC

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Ways of segregating Mixed Cost

Linear Cost Function:3 methods of

segregating the mixed costs are :

i) Scatter graph

ii) Least squares method

iii) High-low method – only discuss this method.

y = a + bx

Where,y = Total Costa = fixed costb = variable cost/unitx = volume

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High-low method

Step 1 : Identify the highest & lowest level of activity.

Step 2 : Compare the associated costs with relevant levels of activity in the form of a ratio or fraction to get the variable cost per unit :

Variable Cost/unit = Difference in cost Difference in activity

Variable cost/unit = Highest cost – lowest cost Highest activity – lowest activity

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Cont’

Step 3 : Substitute the variable cost/unit in the following equation to get the total fixed asset cost –

Total Cost = Total Fixed Cost (TFC) + Total Variable Cost (TC) (TVC)

TC = TFC + (Variable Cost per unit x Volume)

TFC = TC - TVC

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a) Production Cost – Costs involved in production such as direct material, direct labour, direct expenses which is called prime cost and also production overhead that comprise of indirect material, indirect labour and indirect expenses. A combination of prime cost & production overhead is called FACTORY/ MANUFACTURING/PROCUCTION COST

2)Cost Function

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Cont’

Direct material

Direct labour

Direct expenses

RM

X

X

X

Prime cost XX

Production Overhead:

Indirect material

Indirect labour

Indirect expenses

X

X

X

Factory/ manufacturing/ production cost

XX

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b) Administration Cost – costs incurred in the general administrative work including directing & controlling the operations of an organization such as administrative manager’s salary & clerk salary.

c) Marketing, selling & distribution Cost – costs incurred in selling, publicizing, distributing and product servicing include advertising, presenting products to customers, cost of securing orders, cost incurred to dispatch & deliver products to customers.

d) Research & Development Cost – Costs that relate to finding new ideas, materials, methods, new scientific or technical knowledge to produced new or improved products.

e) Finance costs – Costs incurred in financing the activities of the business. Eg : interest on loan, commitment fee, insurance and dividends.

Cont’

Direct material

Direct labour

Direct expenses

RM

X

X

X

Prime cost XX

Production Overhead:

Indirect material

Indirect labour

Indirect expenses

X

X

X

Factory/ manufacturing/ production cost XX

Administrative cost

Marketing, selling & distribution cost

Research & Development cost

X

X

X

TOTAL COSTS XXX35

3)Controllable & uncontrollable cost, Normal & abnormal Cost

a) Controllable Cost – can be influenced by the decisions or actions of top management.

Example : labor cost is controllable by the service manager by controlling such factors as efficiency, idle time, overtime & so on.

b) Uncontrollable Cost – cannot be influenced by the decisions or actions of top management

Example : increased price of raw material due to inflation.

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c) Normal Cost – is expected & planned for at a given level of output & cannot be avoided.Example : loss of liquid such as petrol that evaporates under efficient working condition.

d) Abnormal Cost – is not expected to occur under efficient operating conditions which can be avoided.Example : loss of production due to machine breakdown or due to use of low quality of material.

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