Costing is defined as the process of determining the cost of products or services by identifying, measuring, accumulating, analyzing, and assigning costs. It provides management with cost information to aid planning, control, and decision making. Costing extends financial accounting by gathering additional internal operational information. It forms the foundation for management accounting, which uses cost data to help management formulate policies and plans. Costs are classified in various ways including by behavior, function, and time for effective cost analysis and control.

1. INTRODUCTION TO
COSTING

2. Definition & importance of costing
• CIMA defined costing as the application of
accounting & costing principles, methods &
techniques in the ascertainment of costs and the
analysis of savings and / or excesses as compared
with previous experience or with standards.
• So, costing defined as the ascertainment of cost.
• Cost may be ascertained after they are incurred
or before they are incurred (known as
estimates).

3. • Its aims at providing management with cost
information for purposes of planning &
control.
• Also help management make policy decisions.
For instance, the cost information provided
may help management decide whether to buy
the component from outside or to make the
component internally.

4. Costing & Financial Accounting
• Costing is the extension of financial accounting.
• Financial accounting is the method of analyzing,
classifying & recording financial transactions for the
purpose of finding out the financial position of the
business.
• Accounts are prepared to comply with the Companies
Act, to satisfy the requirements of the IRB & for
presentation to shareholders.
• FA will give a general indication to management of the
performance of the business, ie. profit & loss
• Cost accountant will use the information from the FA
system & also gather information on the internal
operations of the business.

5. Costing & Management Accounting
• Costing provide cost information & mgt actg
uses this info to formulate policies and to plan
& control.
• Cost actg is the foundation for the
development of mgt actg.
• Mgt actg is a method of providing info to mgt
in order to assist in planning & control
activities.

6. Cost terms and concepts
Cost unit-the quantitative unit of product or
service in relation to which cost can be
ascertained.eg: kilograms of materials,
kilowatt hours, cost per patient per day.
Cost centre-a location, person or item of
equipment in respect to which costs may be
ascertained & related to cost units.
Cost centre are set up to help the cost
accountant in ascertain & control costs.

7. Direct costs
• Direct materials-material costs that can be
specifically & exclusively identified with a
particular cost object.
• Direct labour-labour costs that can be specifically
& exclusively identified with a particular cost
object.
Indirect costs
• Can’t be identified specifically & exclusively with
a given cost object.
• Consists of indirect labour, indirect materials and
indirect expenses. Known as ‘overhead’.

8. Product costs
• Cost that are identified with goods purchased/
produced for resale.
• In manufacturing organization, all manufacturing
costs is product costs
Period costs
• Costs that are not included in the inventory
valuation & treated as expenses in the period in
which they are incurred.
• All non manufacturing costs is period costs

9. Classification of costs
Costs can be classified in the following ways:
1) Behaviour -costs may or may not vary with the
level of activity. The level of activity refer to
volume of production/value of items sold.
a. Fixed costs: costs that will not change by
changes in activity.eg:insurance, depreciation,
director’s salary. It’s also referred to period cost.
Total fixed costs don’t increase as activity
increase.

10. b. Variable costs: costs that vary directly with the
level of activity.eg:direct materials, direct wages,
direct expenses. Total variable costs increase as
activity (no of units) increase.
c. Semi variable or semi fixed cost: costs that
contain both fixed and variable
costs.eg:telephone costs.
d. Step costs: costs that remain fixed until a certain
range of activity and then rise when the level of
activity increases.

11. 2) Nature- costs are classified into materials, labour
& other expenses. Materials may be classified into
raw materials, semi-finished materials,
components,etc. labour may be classified into
supervision, maintenance, etc. Expenses into
depreciation, insurance, rent,etc.
3) Function- costs are classified by function to
which they relate.
a.Production costs
b.Administration costs
c. Marketing costs
d.Finance costs
e.Research & development costs

12. 4) Controllability-2 categories of such costs.
a.Controllable costs: costs that are influenced by
the decisions or actions of a manager.
eg:retrenchment salaries.
b.Uncontrollable costs: costs that are not influenced
by the decisions of a manager. eg. Increased cost
of raw materials due to inflation.
5) Normality- 2 categories
a.Normal costs: that have been planned for. eg.
Loss due to evaporation.
b.Abnormal costs : costs that have not been
planned for. eg.loss production due to plant
breakdown

13. 6) Time when computed- costs that are based on
time when they are calculated.
a.Historical costs: past costs / costs that are already
incurred. Also referred to sunk costs.eg. Cost of
asset & fixed cost.
b.Future costs: costs that have to be
predetermined.eg. Standard cost
7) Cost units- costs of a cost unit made up of
material, labour & other expenses. These 3
elements are analyzed into:
a. Direct costs: are charged directly to a cost unit.
Include direct materials, direct labour & direct
expenses.

14. b. Indirect costs: also referred to as overhead. Its
relate to more than one cost unit. They can’t
charged directly to a cost unit. Its include indirect
materials, indirect labour & indirect expenses.
8) Change of state- 2 types of costs are incurred to
change the state of resources.
a.Conversion cost: cost of converting raw material
into finished goods.
b.Value added: money (including profit) added to
the raw material, semi-finished goods or finished
goods.

15. 9) Quality- costs are incurred in designing products
& making products according to specifications &
to satisfy customer needs. There are 4 types:
a.Prevention cost: costs incurred in preventing
defects.eg. Process improvements
b.Detection cost: costs incurred in detecting
defects.eg. Checking & inspection.
c. Internal failure cost: costs incurred in rectifying
poor quality products b4 they are delivered to
the customers. eg. Rework, testing
d.External failure cost: costs incurred in rectifying
poor quality products after they are delivered to
the customers. eg. Refunds, replacement, repairs.

16. Opportunity cost-the benefit forgone or lost
when an alternative is rejected.
- Is used in decision making where a manager
faced with a choice betw alternative courses of
action.
- He then has to decide which is the best
alternative to adopt.