Vous êtes sur la page 1sur 30

COST ACCOUNTING

MANAGEMENT ACCOUNTING: COST TERMS AND


CONCEPTS
GROUP 1 MEMBERS:
NATHAN HONINDU, CLERINA REX, RINISOL AMAKO, MATHEW KABAL, HAREVELLA
HARRY, NIKITA TERENCE
INTRODUCTION

 Cost terms and concepts used in management accounting will be discussed through 10 learning
outcomes that are outlined in the 7th edition of the Management Accounting textbook.
 Costs are the resources that we give up to achieve a particular objective. It is useful to classify costs in
different ways for different purposes.
 Management accounting systems: Are business measures in which a company uses to assess and make
effective decisions on its resources.
 Management accounting systems include:
 Costing
 Budgeting
 Performance
 It provides reports on product costs, the costs of organisational units and information for cost
management
TRADITIONAL AND MODERN
MANAGEMENT ACCOUNTING SYSTEMS
(HAREVELLA)
 Modern management accounting systems have improved however other companies still use traditional
accounting systems with some employing a blend of both to suit their respective accounting
requirements.
 traditional and modern account systems share four key components:
1) Costing System
2) Budgeting System
3) Performance Measurement System
4) Cost Management System.
REASONS WHY MANAGEMENT
ACCOUNTANTS FOCUS ON COSTS

 Two main reasons:


1. Due to ready availability of cost data and information internally provided through accounting
systems, both traditional and modern
2. The need of allocating and managing resources effectively which cost information addresses.
THE PURPOSES OF DIFFERENT COSTS

 There are different classifications for cost depending on the nature or ‘cost behaviour’ of the object
 To provide managers with useful and relevant information to make decisions
 There are cost classifications to distinguish costs based on both qualitative and quantitative reasons.
COSTS ACCORDING TO THEIR
BEHAVIOURS (MATHEW)

 Variable Costs: Are the changes in proportion to the level of activity


 Fixed Costs: remain constant in total across changes in activity levels

For example:
1. Variable Cost: the salaries of the casual PMV bus crew
2. Fixed Cost: The salaries of permanent PMV bus driver
INDIRECT OR DIRECT COSTS

 Direct Costs: a cost that can be identified with, or traced to a particular cost object in an economic
manner
 Indirect Cost: a cost that cannot be identified with, or traced to the cost object in as economic manner.

For example:
In a company,
1. Direct Costs: company tax
2. Indirect Costs: goods and services tax
CONTROLLABLE OR UNCONTROLLABLE
COSTS

 Controllable Costs: costs that can be control by manager


 Uncontrollable Costs: costs that cannot be control by managers.
 The classification of cost as controllable and uncontrollable is relevant to both conventional and
contemporary management accounting system.

For example:
1. A restaurant manager can control cost of foods used in the restaurant
2. Manager for the Bank South Pacific (BSP) branch in Madang does not have the control over cost of
national accounting and data – processing operations for the BSP bank Head office.
COSTS ACCORDING TO THE SEGMENTS
OF THE VALUE CHAIN (NATHAN)

 The value chain is a set of linked process or activity that begins with
resources and ends with providing support to the product; goods and
services with customer’s value.
CONTINUE

 Segments of the value chain:


1. Upstream:
a. Research and development: It refers to the all cost involved in
producing or developing new product or goods or services.
Examples; the cost of building, running laboratory or research
facilities, developing and testing new product and obtaining market
data to ascertain demand the product
b. Design: It refers to all cost needed to design a new product or goods
or service include all process of obtaining new product.
c. Supply: It refers to all costs relate to the procurement and receipt of
all incoming materials, parts or components related to the production
of the product.
CONTINUE

1. Manufacturing
a. Production (goods and services): It refers to all costs include the costs associated with the
collection and assembly of the resources to produce a product or service
2. Downstream
a. Marketing: It refers to all costs of selling goods and services, together with promoting or advertising the
product.
b. Distribution: It refers to all cost of storing, handling and shipping finished product into the hands of the
customer, this include transport and storage, distribution channel costs and so on.
c. Customer Services: It comprises of all costs incurred in serving or supporting the customer: answering
inquiries, providing information about product features, installation, after-sales service, warranties and
repairs, and so on.
EXAMPLES- COMPUTER
MANUFACTURING
VALUE CHAIN SEGMENT EXAMPLES OF COSTS
Research and development Evaluating the suitability of using new material to manufacture the computers

Study of overseas trends to determine appropriate styles for local market


Design Developing a new look computer

Designing new functionality into the computers


Supply Cost of materials

Customs duties on imported materials


Manufacturing or production Direct materials and direct labour

Factory overhead
Marketing Media advertising to promote the product

Sales force costs associated with calling on prospective retail customers


Distribution Warehousing and storage

Delivery to customers
Customer service Warranty claims relating to defective workmanship

Answering customer queries relating to installation of software and so on


CLASSIFICATIONS OF COSTS USED IN
MANUFACTURING BUSINESSES (RINISOL)

 In manufacturing businesses costs are commonly known as production costs, which


are often referred to as Manufacturing Costs.
 The main reason for analyzing and classifying manufacturing costs is to determine the
cost of products.
 Manufacturing costs are divided into three categories;
1. Direct Material:
2. Direct Labour
3. Manufacturing Overhead
CONTINUE

1. Direct Materials are raw materials that:


a. is consumed in manufacturing process
b. is incorporated into a finished product
c. and can be traced to products of the same in an economic manner.
 Examples may include; cost of paints used in painting a house and the cost of
papers used in a newspaper.
CONTINUE

2. Direct Labour is the cost of salaries, wages and labour cost which are directly human effort that
works directly on the manufactured product.
 Examples may include wages of employees gathering apples, and the wages of production
workers operating the canned meat at a canned meat factory.
 Labour cost is an additional business cost that has incurred to employ workers, such as:
1. Payroll tax
2. Workers compensation insurance
3. Employers superannuation contributions
CONTINUE

3. Manufacturing Overhead are all other costs which are sometimes referred to as indirect manufacturing
costs or factory burden costs.
 It covers all manufacturing costs besides direct material and direct labour costs, and includes the
cost of indirect material and indirect labour, which covers any material and labour used in
production that is not classified as direct
 Manufacturing overhead costs also include:
 Overtime premium: which are extra wages paid to an employee who works beyond normal
working hours.
 Idle time: this refers to time which is not spent productively by an employee due to certain
events such as equipment break downs or new set up of production runs.
CONTINUE

 Conversion Costs: are the combination of direct labour costs and manufacturing overhead in which they
include the cost of ‘converting’ raw materials into finished products.
 Prime Costs: are the costs of direct material and direct labour combined together, as they are the major
costs which is more likely to be associated with the product
PRODUCT COST (CLERINA)

 Product cost is the cost assigned to goods that are either manufactured or purchased for resale. Product
cost is sometimes referred to as inventoriable cost or inventoried cost due to the fact that it is stored as a
product cost of the inventory until the goods are sold
 Following are examples of product costs;
 Direct labor
 Direct material
 Manufacturing overhead ( wages, machine maintenance and depreciation of assets)
 Period costs are cost that are expensed in the accounting period in which they are incurred and are not
directly related manufacturing products
CONTINUE

 Following are examples of period cost;


 Upstream cost (research and development cost)
 Support service cost (depreciation of office equipment)
 Downstream cost of selling and marketing (sales persons salaries, advertisement and promotion cost
and distribution cost)
CONTINUE

 Product Costs for Financial Accounting Reports


 For financial accounting reports such as balance sheet and income statement cost is regarded as
part of the asset inventory until the goods are sold.
 When the good are sold the product cost is transferred from inventory account to cost of goods sold
expense, which is an expense account.
 The cost of inventory acquired for resale by retailer or wholesaler consists of the purchase cost plus
the cost of delivering the goods from the supplier
 The product cost of manufactured inventory consist of manufacturing cost only, which is direct
material, direct labor and portion of manufacturing overhead cost.
COST FLOW IN A MANUFACTURING
BUSINESS

 COST FLOW IN A MANUFACTURING BUSINESS


1. When raw material for manufacturing production is purchased, its cost is added to raw materials
inventory.
2. As it is consumed in the production, its cost is removed from raw material inventory and added to
work in process inventory account, which records the cost of products on which manufacture has
begun but has only partially been completed at balanced date. Work in process inventory also
accumulates the cost of direct labor and manufacturing overhead incurred in the problem.
3. When products are finished, their cost are transferred from work in process inventory to finished goods
inventory, which refers to manufactured goods that are complete and ready for sale.
4. Finally, when products are sold their costs are transferred from finished inventory to cost of goods sold
account, which is an expense during the period when the sale is made.
CONTINUE

 COST FLOW IN A MANUFACTURING BUSINESS


CONTINUE

 Manufacturers often prepare a schedule of goods manufactured and a schedule of cost


of goods sold to summarise the flow of management costs during an accounting period
and link this information to financial accounting statements (Income Statements).
 Schedule of cost of goods manufactured: schedule detailing the cost of direct materials,
direct labour and manufacturing overhead applied to work in process during the period,
and showing the changes to the work in process inventory
 Schedule of cost of goods sold: report showing the cost of goods sold, which is equal to
the cost of goods manufactured adjusted for changes in finished goods inventory.
 Cost of goods manufactured and sold are calculated using respectively this formulas:
 Cost of goods manufactured= beginning work in progress + total manufacturing costs –
ending work in process
 Cost of goods sold= beginning finished goods + cost of goods manufactured – ending
finished goods
 These schedules are not reported externally
The following data refer to Maximus Manufacturing Ltd for the current year:

PROBLEM 2.39
sales revenue $2 526 000
Raw materials inventory ,1 January 106 800
Purchased of raw material 877 200

Raw materials inventory , 31 December 70 800

Direct labour cost incurred 568 800


Selling and administrative expense 322 800
Indirect labour incurred 180 800
Council rate 108 000
Depreciation on factory building 150 000
Income tax expense 30 000
Indirect material used 54 000
Depreciation on factory equipment 72 000
Insurance on factory and equipment 48 000
Electricity for factory 84 000
Work in process inventory , 1 January 0

Work in process inventory , 31 December 48 000

Finished goods inventory , 1 January 42 000

Finished goods inventory , 31 December 48 000


Problem 2.39

 Requirement:
 Prepare Maximus Manufacturing:
1. Schedule of Cost of Goods Manufactured
2. Schedule of Cost of Goods Sold
3. Income Statement
1: Maximus Manufacturing Ltd
Schedule of cost of goods manufactured
for the year ended 31 December
Direct material:
Solution 2.39
Raw materials inventory, 1 January $106 800
Add: Purchases of raw materials 877 200
Raw material available for use 984 000
Deduct: Raw materials inventory, 31 December 70 800
Raw material used $913 200
Direct labour 568 800
Manufacturing overhead:
Indirect material 54 000
Indirect labour 180 000
Depreciation on factory building 150 000
Depreciation on factory equipment 72 000
Electricity for factory 84 000
Council rates 108 000
Insurance 48 000
Total manufacturing overhead 696 000
Total manufacturing costs 2 178 000
Add: Work in process inventory, 1 January 0
Subtotal 2 178 000
Less: Work in process inventory, 31 December 48 000
Solution to Problem 2.39

2: Maximus Manufacturing Ltd


Schedule of Cost of Goods Sold
for the year ended 31 December
Finished goods inventory, 1 January $ 42 000
Add: Cost of goods manufactured 2 130 000
Cost of goods available for sale 2 172 000
Finished goods inventory, 31 December 48 000
Cost of goods sold $2 124 000
SOLUTION 2.39

3: Maximus Manufacturing Ltd


Income Statement
for the year ended 31 December
Sales revenue $2 526 000
Less: Cost of goods sold 2 124 000
Gross margin 402 000
Selling and administrative expenses 322 800
Profit before taxes 79 200
Income tax expense 30 000
Net profit $ 49 200
Conclusion

 Cost accounting gives us a better view and understanding of the different types of costs associated in
the production of a good/service.
 It also shows that any type of costs occurrences are also kept as records for financial purposes of the
businesses.
 Most accountants focus on the costs as they provide internal information and help manage resources
effectively with allocation of finance and resources.
 Costs may be the goods and services that we bought, the goods and services that are produced, and
other things that surrounds us. Our everyday life revolves around costs and we may not know it.
THE END