Topic 11 Cost Accounting And Management


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Topic 11 Cost Accounting And Management

  1. 1. Topic 10<br />Cost Accounting and Management<br />
  2. 2. Learning Objectives<br />Cost behaviour analysis - variable, fixed and mixed cost behaviour.<br />Explain the costs involved in manufacturing activities – direct material, direct labour and overhead. <br />
  3. 3. Cost Behaviour Analysis<br />Cost behaviour analysis:<br />Examines how costs behave when levels of business activity change:<br />Some costs change<br />Some costs stay the same<br />Helps in planning and choosing between alternatives.<br />Starts with identification of key activities and their relationships with various costs.<br />
  4. 4. Variable Costs<br />Variable costs change in total with increases and decreases in activity level.<br />e.g. direct materials, direct labour, COGS, freight costs, fuel<br />They are identified on a per-unit basis<br />Variable costs stay the same per unit as activity level changes.<br />Total variable costs change in proportion to change in activity level.<br />
  5. 5. Variable Costs (cont’d)<br />
  6. 6. Fixed Costs<br />Fixed costs do not change with increases and decreases in activity level.<br />e.g. rates, rent, insurance, supervisors’ salaries<br />Fixed cost per unit = total cost divided by units of activity level.<br />Total fixed costs stay the same.<br />Fixed cost per unit changes as activity level changes.<br />
  7. 7. Fixed Costs (cont’d)<br />
  8. 8. Mixed Costs<br />Mixed costs are also called semi-variable costs.<br />Mixed costs includes a fixed cost component plus a variable cost according to activity level.<br /> e.g. telephone (fixed line charge plus charge per unit consumed)<br />Mixed costs are often separated into fixed and variable components at end of period.<br />
  9. 9. Mixed Costs (cont’d)<br />
  10. 10. Importance of Identifying Costs<br />Identification of costs as fixed or variable is important for business decisions:<br />1. Effect on profitability of reduction in sales price.<br />Effect on activity level when expenses increase per unit to keep current profitability.<br />Minimum level of sales to cover costs.<br />Costs of maintaining level of production for different manufacturing methods.<br />
  11. 11. Manufacturing costs consists of:<br /><ul><li>Direct material: material and parts used directly during the manufacturing process.
  12. 12. Direct labour: the work of factory employees that are directly involved in producing the product.
  13. 13. Manufacturing overhead: costs that are indirectly associated with the manufacturing of the finished goods. Eg. Indirect material, indirect labour, depreciation on factory buildings.</li></li></ul><li>All costs<br />Product costs<br />(Manufacturing costs)<br />Period costs<br />(Non-manufacturing costs)<br />Direct materials<br />Selling expenses<br />Prime costs<br />Direct labour<br />Administrative <br />expenses<br />Conversion<br />costs<br />Manufacturing <br />overhead<br />
  14. 14. Product Costs – costs that are necessary and integral part of producing the finished product.<br />Direct labour and manufacturing overhead are incurred in converting raw materials into finished goods, these costs elements are often referred to as conversion costs.<br />Period costs– costs that are identified with a specific time period rather with a salable product. These costs relate to non-manufacturing costs and therefore are not inventorial costs.<br />
  15. 15. Manufacturing Costs in Financial Statements<br />Format Manufacturing Accounts<br />ABC Manufacturing Company<br />Manufacturing account for the year ended December 2007<br />Direct MaterialsRMRM<br /> Raw material as at 1 January 2007 xx<br />Add: Purchases of Raw Material xx<br /> Carriage Inward xx<br /> Import Duty xx<br />Total Raw Material Available for Use xxx<br /> (-) Raw material as at 31 December 2007 (xx)<br />DIRECT MATERIAL USED xxx<br />Direct Labour<br /> Wages xxx<br />Direct Expensesxxx<br />PRIME COSTS xxx<br />
  16. 16. Continue..<br />PRIME COSTS xxx<br />Overhead Costs<br /> Indirect Labor xx<br /> Factory repairs xx<br /> Depreciation – factory machine xx<br />TOTAL OVERHEAD COSTSxxx<br /> TOTAL MANUFACTURING COSTS xxx<br />Add: WIP – Opening xx<br />Less: WIP – Closing (xx)<br />COST OF GOODS MANUFACTUREDXXX<br />
  17. 17. ABC Manufacturing Company<br />Income Statement for the year ended December 2007<br />RMRM<br /> Sales xxx<br />Less: Cost of Goods Sold:<br /> Finished goods – 1 Jan xx<br />Add:Cost of goods manufacturedxx<br /> Goods Available for Sale xx<br />Less: Finished goods – 31 Dec (xx)<br />COST OF GOOD SOLDxx<br />GROSS PROFIT XX<br />Less: Operating Expenses<br /> Selling and Distribution Expenses xx<br /> Administrative Expenses xx<br />NET / LOSS XX<br />
  18. 18. Mutiara Ltd incurs the following manufacturing costs and expenses during the month of May.<br /> 1. Assembly line wages<br /> 2. Raw materials used directly in product<br /> 3. Depreciation on office equipment<br /> 4. Property taxes on factory building<br /> 5. Rent on factory building<br /> 6. Sales commissions<br /> 7. Depreciation on factory equipment<br /> 8. Factory utilities<br /> 9. Wages for factory maintenance workers<br /> 10. Advertising<br /> 11. Indirect materials used in production<br /> 12. Factory manager&apos;s salary<br />
  19. 19. Complete the following matrix by placing an X mark under the appropriate headings.<br />