CHE SITI SALWANI BT CHE YAHYA

2009600552

ASSIGNMENT MAF220

1. DIFFERENCES OF COST ACCOUNTING & FINANCIAL ACCOUNTING

Differences in term of users, for Financial Accounting → accounting reports are used by both
internal and external users and they emphasizes external user such as shareholders and creditors. For
Cost Accounting → usually reports are prepared specifically for the internal user such as
management.

Differences in term of legal requirement, for Financial Accounting → reports need to comply with
a lot of regulatory requirements such as the Companies Act & Financial Reporting Standards (FRS).
For Cost Accounting → compliance is not a mandatory.

Differences in term of contents of report, for Financial Accounting → describes the whole of the
organization and provides information according to the GAAP so that comparisons are possible. For
Cost Accounting → focuses on small parts of the organization. It can use whatever accounting rules it
finds most useful for decision making.

Differences in term of frequency, for Financial Accounting → reports are often published annually.
For Cost Accounting → reports prepared as desired by the management.

2. COST CLASSIFICATION (NATURE, FUNCTION & BEHAVIOUR)

NATURE

Material → Direct material consists of all materials that can be identified by specific product.
Indirect material cannot be identified with any specific product, because they are used for benefit for
all products rather than any one specific product. Indirect material is a part of manufacturing
overhead.

Labour → Direct labour consists of all labour costs that can be specifically traced to or identified
with a specific product. Indirect labour is a wages of all employees who do not work on the product
itself but who assist in the manufacturing operation. Indirect labour also a part of manufacturing
overhead.

Expenses costs → Direct expenses incurred specifically for a particular product, job, batch or
service; royalty paid per unit for a copyright design, plant or tool hires charges for a particular job or
batch. It does not have to be spread between various categories because the whole cost can be
attributed directly to a production unit or saleable service. Indirect costs cost that cannot be identified
specifically and exclusively with a given cost object. Relate to more than one cost unit. Indirect costs
cannot be charged directly to cost unit. Include indirect material, indirect labour and indirect
expenses. It also referred as overheads.

FUNCTION

Manufacturing Costs

It consists of cost of activities and processes that convert raw materials into finished goods. The sum
of direct materials, direct labour, and manufacturing overhead incurred in the current period.
 Product Costs or inventoriable costs are costs that are necessary and integral part of producing the
finished product. Under the matching principle, these costs do not become expenses until the
inventory to which they attach is sold.

Non Manufacturing Costs

Distribution costs include cost associated with transporting the finished products to the customer. E.g.
warehouse rent, transport costs, packing costs, vehicle depreciation

Selling or marketing costs include all costs associated with marketing finished products. E.g.
commissions, depreciation of finished goods warehouses, advertising, market research

Administrative costs include all costs associated with the general administration of an organization.
E.g. secretarial salaries, depreciation of general administrative facilities and equipment, executive
compensation, audit fees, light, office rent

Period costs are costs that are matched with the revenue of a specific time period and charged to
expenses as incurred.

BEHAVIOUR

Variable Costs: Costs that vary in direct proportion to changes in the level of activity. E.g. direct
material, direct wages and direct expenses.

Fixed Costs: Cost that will not change over a given range of activity (volume) and within a given
period of time. E.g. insurance, depreciation, director’s salary

Semi Variable/Semi Fixed/Mixed: These are costs that contain both fixed and variable costs. E.g.
telephone costs

3. TYPES OF COST
CONTROLLABLE COST: is one that a given manager can regulate or influence during a particular
time period. E.g shut down cost such as retrenchment salaries

UNCONTROLLABLE COST: is beyond the influence of the manager because he or she cannot
authorize it. E.g.Service manager can influence the mechanics’ labor by controlling such factors as
efficiency, idle time, overtime, the number of employees, and work scheduling. Consequently, the
related labor cost is controllable by the service manager. However the rent paid on the building
occupied by the entire firm is uncontrollable by the service manager. As such, the service manager
should not be held responsible for the amount of rent expense charged to his or her department,
Increase of raw material due to inflation.

NORMAL LOSS: Costs expected and planned for at a given level of output in specified conditions.
E.g. loss due to evaporation

ABNORMAL LOSS: Costs that is no planned for at a given level of output in the conditions that is
normally attained. E.g. lost of production due to plant breakdown
CONVERSION COST: labour cost and production overhead cost that incurred in converting raw
materials to finished goods.
PRODUCT COST: costs that are identified with goods purchased or produced for resale.
PERIOD COST: costs that not included in the inventory valuation and as a result are treated as
expenses in the period in which they are incurred.

4. COST UNIT, COST CENTRE, PROFIT CENTRE, INVESTMENT CENTRE

Cost unit is a quantitative unit of product or service to which costs can be related or a unit of product
or service in relation to which costs are ascertained. The nature of cost unit will depend on the type of
goods being produced. A cost unit that is most relevant to the purpose of the cost ascertainment
should be used.

Cost centres are a breakdown of a business into sections where costs can be allocated or charged.
CIMA definition: ‘a location, person or item of equipment or (group of these) in respect of which
costs may be ascertained and related to cost units. It is used as a ‘collecting place’ for costs.
Managers are normally accountable for only those costs that are under their control. E.g. advertising
department

Profit center are responsibility center whose manager are normally accountable for both revenues and
costs that are under their control. E.g. managers who are normally free to set selling price, choose
which markets to sell in make product mix and output decisions and select suppliers.

Investment center are responsibility center whose manager are normally accountable for both sales
revenues and costs and in addition have responsibility and authority to make working capital and
capital investment decisions. It represent by the highest level of managerial autonomy. E.g.
Company as a whole, operating subsidiaries operating groups and divisions.