ACC116 - Chapter 1
ACC116 - Chapter 1
CHAPTER 1:
INTRODUCTION
Learning Outcome:
At the end of this topic, the student should be able to :
Define what is of Cost Accounting
Identify the objective of Cost Accounting
Differentiate between Financial Accounting and Cost Accounting
Differentiate between Cost unit and Cost centre
Identify the element of Costs
Classify cost according to nature, function, behaviour, controllability and
normality
Identify what is Cost statement
Definition of Cost Accounting
Cost accounting is “the application of accounting and
costing principles, methods and techniques in the
ascertainment of costs and the analysis of savings
and/or excesses as compared with previous experience
or with standards”. (CIMA)
What is Costing?
3. To make decision
Costing System – method of ascertaining costs with the ultimate aim to plan, control and to make
decisions in the operations of a business.
Financial accounting – the practice of preparing and reporting accounting information for parties
outside organisation
Costing and Financial Accounting
Financial accounting will give a general indication to management on the performance of the
business, profit or loss being the most important indicator.
Cost accounting, on the other hand, will give a detailed indication of the business performance.
The cost accountant will use the information from the financial accounting system and will also
gather information on the internal operations of the business.
He will ascertain costs and will analyse costs and profits by cost centres, products, jobs or
processes.
Differences between financial accounting and cost
accounting
Financial Accounting Cost Accounting
Objective It provides information about the financial It provide information of ascertainment of
performance and financial position of the cost to control cost and for decision making
business. about the cost.
Biscuit Kilogram
Cement Tonne
Steel Tonne
Classification of Costs
Production Controllable
Materials Fixed costs Normal costs
costs costs
Direct Materials
• All materials that can be physically identified with a specific product.
• Example: for Manufacturers such as Toyota, the direct materials include
steel, tires, engines, etc.
• Example: baking a cake: flour, sugar, eggs etc
Indirect Materials
• Items of material that cannot be physically identified with a specific
product.
• Example: oil and lubricants for the machines, cleaning supplies etc.
• Example: cake: box, candles etc
1. Nature, con’t..
Labour
Direct Labour
• Labour costs that can be traced or identified with a particular
product.
Indirect Labour
• Wages of employees who do not work on the product itself, just
assist in the manufacturing operation.
Indirect expenses
• All other costs needed to operated a factory which is not
charged directly to the product.
• Example: insurance, electricity, advertising etc.
2. Function
Cost are classified by function to which they relate.
Costs Function
Production Costs • Incurred from the time of acquisition of materials
until the despatch of completed items to store.
• Examples: Production overhead, direct materials,
direct labour and direct expenses.
Administration • Incurred in the general administration including
Costs directing and controlling the operations of an
organization.
• Examples: Audit fees, office rent, salaries for admin
staff
Marketing Costs • Incurred in selling, publicizing, distributing and
product servicing.
• Examples: Selling costs, publicity cost, distribution
2. Function, con’t..
Costs Function
Finance Costs • Incurred in financing the activity of the business.
• Examples: Interest, Commitment fee, insurance and
dividends.
Research • Incurred in seeking new or improved ideas, materials,
Costs methods and products.
• Examples: Cost of laboratory maintenance, salaries of
research staff.
Development • Incurred in developing the new or improved ideas and
Costs methods so that production can take place.
• Examples: Cost of test or trials runs, obsolescence and
supplies.
3. Behaviour
Costs may or may not vary with the level of activity.
◦ 1. Fixed costs
◦ Will not change (constants) over a given range of activity (volume) and within a
given period of time.
◦ Example: insurance, depreciation, director’s salary, rental
The total fixed
costs do not
increase as
activity
increases.
Fixed cost
2. Variable cost
◦ Costs that vary in direct proportion to changes in the level of activity (volume).
◦ If a factory shut down and stops production completely, no variable cots will
be incurred.
◦ Example: direct materials, direct wages, direct expenses.
Variable cost
3. Semi-variable or semi-fixed costs
◦ Costs that contains both fixed and variable costs.
◦ Example: telephone costs
The semi-variable
cost is made up of
a fixed and
variable cost
element.
4. Step cost
◦ Costs are fixed over a range of activity and then rises to a new level as activity
changes.
◦ Example: depreciation on machines may increase with an increase in the level of
activity as more machines are required.
Step costs
remain fixed
over a range
of activity.
4. Controllability
Controllable Uncontrollable
Period Cost
🞆 “Non-manufacturing costs”
🞆 Selling and Administrative costs: reported on the income statement as they are
incurred.
🞆 Examples: Anything at corporate headquarters, anything related to selling the
product, shipping costs, administrative salaries, executive salaries, administrative
office expenses, sales commissions, advertising, research and development, etc.
🞆 Warehouse costs and people who move inventory are period costs
Cost Statement
Cost statement is a statement showing all the costs that make up a product or
service.
RM
Direct Material Cost 3
Direct Labour Cost 2
Direct expenses 1
Prime Cost 6
Production overhead 3
Production Cost 9
Administration overhead 2
Selling & distribution overhead 1
Total Cost 12
Profit 3
Selling Price 15