Costing Principles

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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

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Costing & cost accounting
 A costing is an estimate of all the costs
involved in a project or a business
venture.
 Cost accounting is the classifying,
recording and appropriate allocation of
expenditure for the determination of the
costs of products or services, and for the
presentation of suitably arranged data for
purposes of control and guidance of
management.
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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
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Element of cost
 Cost object
 Cost
 Cost unit
 Cost centre
 Profit centre

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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

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Cost
 It is the amount of expenditure
incurred on a specific cost object
 Total cost = quantity used * cost
per unit (unit cost)

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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
 Industry sector Cost unit Brick-making 1000 bricks,
Electricity Kilowatt-hour (KwH), Professional services
Chargeable hour, Education Enrolled student,

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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
 For instance, an example of a production cost centre could be the machine shop in
a factory. The production overhead cost for the machine shop might be £100,000
for the period. If 1,000 cost units have passed through this cost centre we might
say that the production overhead cost relating to the machine shop was £100 for
each unit.

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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
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Classifying costs
 Element
 Nature
 Function
 Behaviour

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Cost classification-
elements
 Material
 Labour
 Expenses

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Cost classification- nature
 Direct cost
 Indirect cost

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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
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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

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Direct labour
 The cost of remuneration for
working time
 E.g. assembly workers’ wages in
toy assembly

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Direct expenses
 Other costs which are incurred for
a specific product or service
 E.g. royalties

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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

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Indirect materials
 Such as stationery, consumable
supplies, spare parts for machine
that assist to the production of
final products

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Indirect labour
 Such as salaries of factory
supervision and office staff that do
not directly involve in production
of the final product

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Indirect expenses
 Such as rent, rates, depreciation,
maintenance expenses that do not
have instant relationships with the
manufacturing processes

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Cost classification-
Function
 Production cost
 Non production cost

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Production cost & Non
production cost

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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

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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

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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

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Semi-variable cost
 It processes characteristics of both
fixed and variable cost
 It increases or decreases with
activity level but not in direct
proportion

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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

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Cost for stock valuation
 Unexpired and expired cost
 Product and period cost

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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
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Expired costs
 Expired costs are the expenses
attributable to the generation of
revenue in the current period

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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
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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

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Comparison of cost,
management and financial
accounting

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Meanings
 Financial accounting
 Cost accounting
 Management accounting

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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
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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
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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
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Cost and management
accounting
Vs.
Financial accounting

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 Management Financial
(cost)accountin accounting
g
Nature Records Records company

material, labour transaction events

and overhead External financial

costs in product statements are

or job produced
Reports

produced are for

internal
management and
contol
Accountin Not based on the Follows the double
g system double entry entry system
system 46
 Management Financial
(cost)accounting accounting
Accountin No need to use Use Generally
g accounting Accepted Accounting
principles principles Principles for
Adopt any recording
accounting transactions
techniques that
generates useful
accounting
information
Users of Used by different Used by external
informati levels of parties:
management or shareholders,
on
departments creditors,
responsible for government, etc 47
 Management Financial
(cost)accountin accounting
g
Operation Based on Conforms to
guideline management company
instructions and Ordinances, stock
s or
requirements exchange rules,
standards HKSSAPs
Time Reports are Reports are
span prepared prepared for a
whenever needed definite period,
They may be usually yearly and
prepared on a half yearly
weekly or daily
basis
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 Management Financial
(cost)accountin accounting
g
Time Future Past orientation:
focus orientation: use of historic data
forecasts, for reporting and
estimates and evaluation
historic data for
management
actions
Perspecti Detailed analysis Financial summary
ve of parts of the of the whole
entity, products, orgainisation
regions, etc

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 Cost accounting
vs.
Management accounting

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 Management Cost accounting
accounting
Objective To provide To ascertain and
information for control cost
planning and
decision making
by the
management
Concerned with Based on both
Basic of 

recording transactions present and future

related to the transactions for cost
future ascertainment

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 Management Cost accounting
accounting
Coverage Covers a wider Covers matters
area: financial relating to
accounts, cost ascertainment and
accounts, control of cost of
taxation, etc. product or service

Utility Only the needs The needs of both

of internal internal and external
management interested groups

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 Management Cost accounting
accounting
Deals with both Deals only with
Types of 

transactio monetary any monetary

non-monetary transactions,
ns
transactions, covering only
covering both quantitative aspect
quantitative and
qualitative
aspects

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