Costing Principles
1
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
2
Functions of managerial
accounting



Determining the cost
Providing relevant information for better
decision-making
Providing information for planning,
control, decision-making and application
3
Planning

Deals with the estimation of product
costs, setting up of costing system to
record cost data, preparation of cost
standards and budgets, planning of
materials and manpower resources,
analysing cost behavior with changes in
levels of activity
4
Control

Deals with the maintenance of product
costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation
of corrective actions, controlling cost to
ensure operational efficiency and
effectiveness
5
Decision-making

Deals with whether it is more profitable
to make or buy a component,
determine the economic order quantity
and production batch size, replace fixed
asset, add or drop products, decide
pricing
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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
9
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
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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
12
Profit centre


It is location or function where
managers are accountable for sales
revenues and expenses
E.g. division of a company that is
responsible for the sales of products
13
Cost classification


Direct cost
Indirect cost (overhead)
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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
17
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
20
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 accumulation
•Prime cost = direct materials + direct labour + direct expenses
•Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw materials into
finished product
•Total cost = Prime cost + Overheads (admin, selling,distribution cost)
OR
= Production cost + period cost (administrative, selling,
distribution and finance cost)
•Period cost is treated as expenses and matched against sales for calculating
profit, e.g. office rental
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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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Reasons



To reducing error owing to descriptions
Enable easy recalling
Reduce computer file size as a code
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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
26
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
28
Semi-variable cost


It processes characteristics of both fixed
and variable cost
It increases or decreases with activity
level but not in direct proportion
29
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
31
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
32
Expired costs

Expired costs are the expenses
attributable to the generation of
revenue in the current period
33
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
34
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
35
Comparison of cost,
management and financial
accounting
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Meanings



Financial accounting
Cost accounting
Management accounting
37
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
38
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
39
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
40
Cost and management accounting
Vs.
Financial accounting
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Management
(cost)accounting
Nature
Records material,
labour and overhead
costs in product or
job
Reports produced
are for internal
management and
contol
Accounting Not based on the
double entry system
system

Financial accounting
Records company
transaction events
External financial
statements are
produced

Follows the double
entry system

42
Management
(cost)accounting
Accounting No need to use
principles accounting principles
Financial accounting
Use Generally
Accepted Accounting
Principles for recording
Adopt any
accounting techniques transactions
that generates useful
accounting
information
Used by different
Used by external
Users of
information levels of management parties: shareholders,
or departments
creditors, government,
responsible for
etc
respective activities

43
Management
(cost)accounting
Operation
guidelines
or
standards
Time span
Based on
management
instructions and
requirements

Financial accounting
Conforms to company
Ordinances, stock
exchange rules,
HKSSAPs

Reports are
Reports are prepared
prepared whenever for a definite period,
needed
usually yearly and half
yearly
They may be
prepared on a
weekly or daily basis

44
Management
(cost)accounting
Time focus
Financial accounting
Future orientation: Past orientation: use
forecasts, estimates of historic data for
and historic data for reporting and
management
evaluation
actions

Perspective Detailed analysis of
parts of the entity,
products, regions,
etc
Financial summary of
the whole orgainisation

45
Cost accounting
vs.
Management accounting
46
Management
accounting
Objective
Basic of
recording
To provide
information for
planning and
decision making by
the management

Concerned with
transactions related
to the future

Cost accounting
To ascertain and
control cost

Based on both present
and future transactions
for cost ascertainment

47
Management
accounting
Coverage

Utility

Covers a wider
area: financial
accounts, cost
accounts, taxation,
etc.
Only the needs of
internal
management
Cost accounting
Covers matters
relating to
ascertainment and
control of cost of
product or service

The needs of both
internal and external
interested groups

48
Management
accounting
Deals with both
Types of
transactions monetary any non-
monetary
transactions,
covering both
quantitative and
qualitative aspects
Cost accounting
Deals only with
monetary transactions,
covering only
quantitative aspect

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