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Introduction to cost accounting
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Introduction to cost accounting

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  • 1. 1 Costing Principles
  • 2. 2 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
  • 3. 3 Functions of managerial accounting  Determining the cost  Providing relevant information for better decision-making  Providing information for planning, control, decision-making and application
  • 4. 4 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
  • 5. 5 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
  • 6. 6 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
  • 7. 7 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
  • 8. 8 Element of cost  Cost object  Cost  Cost unit  Cost centre  Profit centre
  • 9. 9 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
  • 10. 10 Cost  It is the amount of expenditure incurred on a specific cost object  Total cost = quantity used * cost per unit (unit cost)
  • 11. 11 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
  • 12. 12 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
  • 13. 13 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
  • 14. 14 Cost classification  Direct cost  Indirect cost (overhead)
  • 15. 15 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
  • 16. 16 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
  • 17. 17 Direct labour  The cost of remuneration for working time  E.g. assembly workers’ wages in toy assembly
  • 18. 18 Direct expenses  Other costs which are incurred for a specific product or service  E.g. royalties
  • 19. 19 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
  • 20. 20 Indirect materials  Such as stationery, consumable supplies, spare parts for machine that assist to the production of final products
  • 21. 21 Indirect labour  Such as salaries of factory supervision and office staff that do not directly involve in production of the final product
  • 22. 22 Indirect expenses  Such as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes
  • 23. 23 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
  • 24. 24 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
  • 25. 25 Reasons  To reducing error owing to descriptions  Enable easy recalling  Reduce computer file size as a code
  • 26. 26 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
  • 27. 27 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
  • 28. 28 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
  • 29. 29 Semi-variable cost  It processes characteristics of both fixed and variable cost  It increases or decreases with activity level but not in direct proportion
  • 30. 30 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
  • 31. 31 Cost for stock valuation  Unexpired and expired cost  Product and period cost
  • 32. 32 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
  • 33. 33 Expired costs  Expired costs are the expenses attributable to the generation of revenue in the current period
  • 34. 34 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
  • 35. 35 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
  • 36. 36 Comparison of cost, management and financial accounting
  • 37. 37 Meanings  Financial accounting  Cost accounting  Management accounting
  • 38. 38 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
  • 39. 39 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
  • 40. 40 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
  • 41. 41 Cost and management accounting Vs. Financial accounting
  • 42. 42 Management (cost)accounting Financial accounting Nature Records material, labour and overhead costs in product or job Reports produced are for internal management and contol Records company transaction events External financial statements are produced Accounting system Not based on the double entry system Follows the double entry system
  • 43. 43 Management (cost)accounting Financial accounting Accounting principles No need to use accounting principles Adopt any accounting techniques that generates useful accounting information Use Generally Accepted Accounting Principles for recording transactions Users of information Used by different levels of management or departments responsible for respective activities Used by external parties: shareholders, creditors, government, etc
  • 44. 44 Management (cost)accounting Financial accounting Operation guidelines or standards Based on management instructions and requirements Conforms to company Ordinances, stock exchange rules, HKSSAPs Time span Reports are prepared whenever needed They may be prepared on a weekly or daily basis Reports are prepared for a definite period, usually yearly and half yearly
  • 45. 45 Management (cost)accounting Financial accounting Time focus Future orientation: forecasts, estimates and historic data for management actions Past orientation: use of historic data for reporting and evaluation Perspectiv e Detailed analysis of parts of the entity, products, regions, etc Financial summary of the whole orgainisation
  • 46. 46 Cost accounting vs. Management accounting
  • 47. 47 Management accounting Cost accounting Objective To provide information for planning and decision making by the management To ascertain and control cost Basic of recording Concerned with transactions related to the future Based on both present and future transactions for cost ascertainment
  • 48. 48 Management accounting Cost accounting Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc. Covers matters relating to ascertainment and control of cost of product or service Utility Only the needs of internal management The needs of both internal and external interested groups
  • 49. 49 Management accounting Cost accounting Types of transactions Deals with both monetary any non- monetary transactions, covering both quantitative and qualitative aspects Deals only with monetary transactions, covering only quantitative aspect