COST ACCOUNTING FOR NON-ACCOUNTING STUDENT

COST ACCOUNTING (ACC 116)

TOPIC 1: INTRODUCTION TO COST ACCOUNTING

1.1 DEFINITION OF COST ACCOUNTING 1.2 - OBJECTIVES OF COST ACCOUNTING 1.3 - RELATIONSHIP BETWEEN CA,MA &FA 1.4 COSTING PRINCIPLES & CONCEPT 1.5 DIFFERENCES BETWEEN MA & FA 1.6 MANAGERIAL PROCESS 1.7 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 todays 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)

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)

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.

1.3 - RELATIONSHIP BETWEEN CA,MA &FA

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

Financial accounting

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

-method of analyzing, classifying & recording financial transaction for the purpose of looking at the financial position, financial performance & changes in financial position -An extension of financial -concerned with accounting. analysis, classification, recording historical data, determine profit/loss & position of asset & liability of co.

-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.

1.4 DIFFERENCES BETWEEN MA & FA

No Basic of differences Class of users Legal compliance Management Accounting Internal users None Financial Accounting External users Must comply with Companies Act 1956 Relating to the past FRS or MASB For the whole organization
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1. 2.

3. 4. 5.

Information time dimension Standard used Accounting entity

Relating to the future None & flexible For organizations dept

Cont
6. Reporting interval/ report frequency Level of accuracy When required Yearly/ quarterly basis Estimation & more subjective. Objective & use of accounting principles.

7.

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1.5 COSTING PRINCIPLES & CONCEPT

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

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Cont
2. Cost Unit : A quantitative unit of product or services to which cost can be ascertained.  Example of cost unit: Cost Unit Kilowatt Hours Litres Consulting hours Uses To determine electricity costs To determine cost of petrol / liquid To determine codst of treating a patient by a medical clinic
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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
Process Cost Centre Where a specific process or a continuous sequence of operation is performed. Example : in a food processing organization are: the Mixing, cooking, sterilizing & packaging department.

Production Cost Center Where production is performed. Example : in a furniture manufacturing usiness are the machine dept, assem l dept & finishing dept.

Services Cost Center Is a servicing centre for other cost centres. Example are a canteen & a maintenance dept.
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1.6 MANAGERIAL PROCESS

Planning

Controlling

Decision making

Organizing

Directing /Leading

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1. Planning
The most important area that addressed on what to do and how to do (setting of objectives). An initial phase of management by objectives (MBO)
Example: the business organization has set a target of 5% decrease in cost for a new product that has been introduced last year. At this stage the business has set up the budgeted cost structure dealing with all types of costs involved.

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2. Organizing
In order to ensure that activities meet the planned, it is vital for organization to develop the organizational structure.
The organizational structure will show the responsibility for each worker in the organization. It will also provide structure, capacity, and guidelines within which management will work to achieve its plan.

Example: in order to achieve the above target (5% decrease in cost) the business organization will come out with strategies to ensure they can achieve that plan.
This include dividing business into sub unit or department, allocating resources in proper way and in the most economical and obtaining quality resources (material & labour) at reasonable price.
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3. Directing
As managers, they need to make sure the right person has been assigned to handle certain job. With regards of this, communication plays a significant role to ensure information have been delivered in the right manner especially from top management to subordinates , from subordinates to management and within the line.

The role of top management is very important to ensure activities run smoothly. Directing concerns activities performed and directed in accordance to plan.

For example: manager will assign resources to each department in a proper way to ensure they can achieve 5% decrease in cost.

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4. Controlling
Controlling deals with evaluating the actual results compared against planned performed.

Any differences between those two figures is known as variances. The variances either favourable or unfavourable(adverse) Favourable variances arise when actual cost is lower than budgeted figure while adverse variances arises when the actual cost is higher than the budgeted costs. Any differences occurred will be investigated and corrective action taken.

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5. Decision making
This process involved with making a choices among several alternatives, whereby, they will choose the best alternatives among stated.

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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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1)Cost Behavior
 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 companys cost behavior so that he may predict the impact of his decisions on profit and in controlling costs.
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1)Cost Behavior
4 types of costs

Fixed Costs Variable costs

Step costs
Semi variable costs/ Semi fixed costs/ mixed cost
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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) insurance  Fixed cost/unit varies according to the level of activity.
Cost (RM)

30 20 TFC 10

10

20

30

unit

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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 expenses  Variable cost/unit remain constant unless of the changes in the level of activity/ volume.
Cost (RM)

30 20 10

TVC

10

20

30

unit

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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)

30 20 10

10

20

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) TC 30 20 10 TFC 10 20 30 unit

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Ways of segregating Mixed Cost

 Linear Cost Function:
y = a + bx

Where, y = Total Cost a = fixed cost b = variable cost/unit x = volume

 3 methods of segregating the mixed costs are : i) Scatter graph ii) Least squares method iii) High-low method only discuss this method.
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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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2)Cost Function
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

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Cont Direct material Direct labour Direct expenses Prime cost Production Overhead: Indirect material Indirect labour Indirect expenses Factory/ manufacturing/ production cost RM X X X XX X X X 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 managers 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.
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Cont
Direct material Direct labour Direct expenses Prime cost Production Overhead: Indirect material Indirect labour Indirect expenses Factory/ manufacturing/ production cost Administrative cost Marketing, selling & distribution cost Research & Development cost TOTAL COSTS RM X X X XX X X X XX X X X XXX
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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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