7b72de504960bfce0e38c14bdfeda3f1-original (1).ppt

Cost accounting principles.

1. 1
Costing Principles

2. 2
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

3. 3
Functions of managerial
accounting

Determining the cost

Providing relevant information for
better decision-making

Providing information for planning,
control, decision-making and
application

4. 4
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

5. 5
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

6. 6
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

7. 7
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

8. 8
Element of cost

Cost object

Cost

Cost unit

Cost centre

Profit centre

9. 9
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

10. 10
Cost

It is the amount of expenditure
incurred on a specific cost object

Total cost = quantity used * cost per
unit (unit cost)

11. 11
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

12. 12
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

13. 13
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

14. 14
Cost classification

Direct cost

Indirect cost (overhead)

15. 15
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

16. 16
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

17. 17
Direct labour

The cost of remuneration for working
time

E.g. assembly workers’ wages in toy
assembly

18. 18
Direct expenses

Other costs which are incurred for a
specific product or service

E.g. royalties

19. 19
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

20. 20
Indirect materials

Such as stationery, consumable
supplies, spare parts for machine that
assist to the production of final
products

21. 21
Indirect labour

Such as salaries of factory
supervision and office staff that do
not directly involve in production of
the final product

22. 22
Indirect expenses

Such as rent, rates, depreciation,
maintenance expenses that do not
have instant relationships with the
manufacturing processes

23. 23
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

24. 24
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

25. 25
Reasons

To reducing error owing to
descriptions

Enable easy recalling

Reduce computer file size as a code

26. 26
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

27. 27
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

28. 28
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

29. 29
Semi-variable cost

It processes characteristics of both
fixed and variable cost

It increases or decreases with activity
level but not in direct proportion

30. 30
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

31. 31
Cost for stock valuation

Unexpired and expired cost

Product and period cost

32. 32
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

33. 33
Expired costs

Expired costs are the expenses
attributable to the generation of
revenue in the current period

34. 34
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

35. 35
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

36. 36
Comparison of cost,
management and financial
accounting

37. 37
Meanings

Financial accounting

Cost accounting

Management accounting

38. 38
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

39. 39
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

40. 40
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

41. 41
Cost and management
accounting
Vs.
Financial accounting

42. 42
Management
(cost)accounting
Financial
accounting
Nature

Records material,
labour and
overhead costs in
product or job

Reports produced
are for internal
management and
contol

Records company
transaction events

External financial
statements are
produced
Accountin
g system

Not based on the
double entry
system

Follows the double
entry system

43. 43
Management
(cost)accounting
Financial
accounting
Accountin
g
principles

No need to use
accounting
principles

Adopt any
accounting
techniques that
generates useful
accounting
information

Use Generally
Accepted Accounting
Principles for
recording transactions
Users of
informatio
n

Used by different
levels of
management or
departments
responsible for
respective activities

Used by external
parties: shareholders,
creditors,
government, etc

44. 44
Management
(cost)accounting
Financial
accounting
Operation
guidelines
or
standards

Based on
management
instructions and
requirements

Conforms to
company Ordinances,
stock exchange rules,
HKSSAPs
Time span

Reports are
prepared
whenever needed

They may be
prepared on a
weekly or daily
basis

Reports are prepared
for a definite period,
usually yearly and half
yearly

45. 45
Management
(cost)accounting
Financial
accounting
Time
focus

Future
orientation:
forecasts,
estimates and
historic data for
management
actions

Past orientation: use
of historic data for
reporting and
evaluation
Perspectiv
e

Detailed analysis
of parts of the
entity, products,
regions, etc

Financial summary of
the whole
orgainisation

46. 46
Cost accounting
vs.
Management accounting

47. 47
Management
accounting
Cost accounting
Objective

To provide
information for
planning and
decision making by
the management

To ascertain and
control cost
Basic of
recording

Concerned with
transactions
related to the
future

Based on both
present and future
transactions for cost
ascertainment

48. 48
Management
accounting
Cost accounting
Coverage

Covers a wider
area: financial
accounts, cost
accounts, taxation,
etc.

Covers matters
relating to
ascertainment and
control of cost of
product or service
Utility

Only the needs of
internal
management

The needs of both
internal and external
interested groups

49. 49
Management
accounting
Cost accounting
Types of
transaction
s

Deals with both
monetary any non-
monetary
transactions,
covering both
quantitative and
qualitative aspects

Deals only with
monetary
transactions, covering
only quantitative
aspect