Académique Documents
Professionnel Documents
Culture Documents
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
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
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
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
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
accumulation and recording where there is an identifiable activity (job or group of tasks) for which costs may be collected
making by: Establishing cost (costs are recorded on job cards) Calculating Selling Price Determining profit/loss on jobs
manufacture of customised furniture Order is of comparatively short duration All stages of production within factory easily traced to job
Element of cost
Cost object
Cost Cost unit Cost centre Profit centre
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
Cost
It is the amount of expenditure incurred on a specific
cost object Total cost = quantity used * cost per unit (unit cost)
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
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
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
Cost classification
Direct cost
Indirect cost (overhead)
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
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
Direct labour
The cost of remuneration for working time
E.g. assembly workers wages in toy assembly
Direct expenses
Other costs which are incurred for a specific product
traced to a given cost object They are identified with cost centres as overheads
Indirect materials
Indirect labour
Indirect expenses
Indirect materials
Such as stationery, consumable supplies, spare parts
Indirect labour
Such as salaries of factory supervision and office staff
Indirect expenses
Such as rent, rates, depreciation, maintenance
expenses that do not have instant relationships with the manufacturing processes
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
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
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
Semi-variable cost
It processes characteristics of both fixed and variable
cost It increases or decreases with activity level but not in direct proportion
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
Example : a company can produce 10,000 widgets during one eight-hour shift. If the company receives additional customer orders for more widgets, then it must add another shift, which requires the services of an additional shift supervisor. Thus, the cost of the shift supervisor is a step cost that occurs when the company reaches a production requirement of 10,001 widgets.
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 An unexpired cost is a cost that is left until an item has paid for it i.e. difference between the price paid for an item and the amount of money it has generated. An unexpired cost is an asset. It is an inventory until sold for example buildings and equipments. Under an unexpired cost the future benefits remain from the ownership of an asset being used in the production process. The unexpired or the unused portion of the economic benefits from the expenditure would represent an asset for the future use. The unexpired cost is a measure that is primarily used for financial reporting within the firm. The unexpired cost of an asset is calculated as Unexpired cost= Historical cost of an asset- accumulated depreciation
Expired costs
Expired costs are the expenses attributable to the generation of revenue
in the current period Example. If a company XYZ spends $10,000 to acquire product catalogs, which it records as a prepaid expense in January. The catalogs are handed over in a trade show in March and it charges the $10,000 cost to the marketing expense. The $10,000 becomes an expired cost in March. Expenses are expired costs when incurred and totally used for generating revenue. Some of the examples of revenue costs are cost of goods sold expense, selling and distribution expenses.
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
Product cost is the cost of direct labor, direct materials, and manufacturing overhead that are consumed to create a product. Product cost can also be considered the cost of the labor required to deliver a service to a customer.
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 A period cost is any cost that cannot be capitalized into inventory or fixed assets. Examples of period costs are:
Sales expenses Commissions General and administrative expenses Executive salaries Office rent Interest expense (that is not capitalized)
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
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
Management (cost)accounting
Financial accounting
Nature
Records material, Records company labour and overhead transaction events costs in product or External financial job statements are Reports produced produced are for internal management and contol Not based on the Follows the double double entry system entry system
Accounting system
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,
Management (cost)accounting
Based on management instructions and requirements
Financial accounting
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
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
Management accounting
Objective
To provide information for planning and decision making by the management
Cost accounting
Basic of recording
Management accounting
Coverage
Covers a wider area: financial accounts, cost accounts, taxation, etc.
Cost accounting
Utility
Management accounting
Cost accounting
COST CENTRES
In order to control costs it is necessary to trace them to
The Cost Centre acts as a collecting place for costs eg a manufacturing department, a machine, an operating theatre in a hospital.
Service Cost these are not involved in the actual manufacturing process but Centres
provide services to the production Cost Centres such as the maintenance and stores departments.
Cost Units
A Cost Unit is the final product or service being costed
Examples of Cost Units might be:
Direct Costs
Power, Lighting and Heating (when separately metered), Repairs and Maintenance to a machine
respect of which a manager is responsible for costs Characteristics of cost centres include: homogenous unit, single form of activity, identifiable manager
particular cost centre are allocated to that cost centre Indirect labour/materials can usually be allocated to specific cost centres
Depreciation, Rent, Rates, Heating and Lighting (not separately metered), Canteen costs, Supervision etc Cost Apportionment
Indirect Costs
overhead costs are shared out among various Cost Centres on some fair and equitable basis since the overhead cannot be directly allocated to any one particular cost centre. A suitable basis could be: Floor space for Heating and Lighting Number of Employees for Canteen Costs.
Cost apportionment
Where an overhead is not clearly identifiable with a
cost centre, then the overhead needs to be apportioned over all the relevant cost centres Establish a method of apportioning the overhead
Apportionment of Costs
Overhead Cost
Rent, rates, heating and lighting Depreciation and insurance of plant and machinery Canteen, factory administration costs Power
Basis of Apportionment
floor area, size of department book value of the fixed assets number of employees horse power of machines
Cost apportionment
Expense
Insurance
Basis of Apportionment
Floor Area
Rent/rates
Floor Area
Light/Heat
Volume
Administration Expenses
Number of Employees
Depreciation
Machinery Maintenance
Machine Hours
Step 2
So far we have dealt with Production Department Cost Centres. However, all businesses will incur Service Costs eg Maintenance or Personnel Departments.
These departments exist for the whole business not just one department and therefore these Service Costs must be APPORTIONED among the other Production Departments, again using a suitable basis.
Basis of Apportionment
Service Overhead Cost Basis of Apportionment
number of employees
Service Departments
Service Departments exist to support production
Overhead costs from service departments must be