chapter 1 introduction to cost accounting
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Topic 1Introduction
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IntroductionCost accounting vs. Financial accountingElements of Costs
MaterialLabourOther Expenses
Classification of costsCost Statement (NF2F)Tutorial questions
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Definition
◦ The ascertainment (determination) of cost by applying accounting and costing principles, methods and techniques.
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Objective
◦ Providing management with cost information for purposes of planning and control.
◦ Decision making E.g.: to buy materials from outside or to make it
internally.
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THE IMPORTANCE
Business grewin size
> Sophisticatedmarket
Technologicallyadvancedmachine
in # of competitors in appreciation on
scarce resources
More costconscious
Financial Accounting Cost accounting
i) Analysis, classification & historical recording of transaction.
ii) Ascertainment of profit & loss.
iii) Ascertainment of assets & liabilities.
i) Uses info. from financial accounting system & gather info internally.
ii) Ascertain cost & analyzed cost and profits by cost centres, products, jobs or processes.
iii) Make use monetary or non-monetary data for current or future activities.
iv) Compare actual against expected performance & analyzed
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Management Accounting
Financial Accounting
i) Main Users Needs of internal users Needs of external usersii) Report requirement Flexible, no rules Under accounting
standardsiii) Reported frequency Report is done as
required(no specific period)
Reported done at specified period (e.g yearly or half-yearly)
iv) Time frame Current and future Past information or historical
v) Degree of precision Less precise, more subjective
Very precise, objectivity in principle
vi) Report accounting entity
Report are on segment of business(not all)
Report the business as a whole
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Why do you need to understand the cost concepts & classifications?
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1. Naturei) Materialsii) Labouriii) Expenses
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Classified into DIRECT &INDIRECT
Give an example for each….
Direct Costs◦ Cost that can specifically & exclusively identified
with a particular cost object.◦ E.g.: i) Direct material cost
ii) Direct labor cost Indirect Cost
◦ Cost that cannot be identified & exclusively with a given cost object.
◦ E.g.: i) Indirect material cost ii) Indirect labor cost
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2. Functioni) Production costs◦ Costs incurred from beginning process until completion to
finished goods to be dispatch to store.◦ Costs involve:
a)b)c)d)
ii) Administration costs◦ Incurred in the general administration
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iii) Marketing costs◦ Cost in publicizing
and presenting products to customers.
iv) Finance costs◦ Cost incurred in
financing the business
v) Research costs◦ Costs incurred to
produce new or better product or materials.
vi) Development costs◦ Costs on developing
new ideas & method for production of product.
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Classified into MANUFACTURING &
NON-MANUFACTURING
3. BehaviorUnderstand the way costs behave as the level of activity in the business changes.
i) Variable Cost◦ A variable cost changes in total, in direct
proportion to a change in the level of activity.
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ii) Fixed Cost◦ Cost that remain unchanged in total despite
changes in the level of activity.
iii) Semi-Variable or Semi-Fixed Costs◦ Costs consisting of fixed and variable costs.
iv) Step Cost◦ A fixed costs that changes at certain range of
activity & then rises to a new level as activity changes.
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4. Other type of cost:
4.1. Period and Product Cost◦ Period cost: Costs that are identified with goods
purchased or produced for resale.◦ Product cost: Costs that are not included in the
inventory valuation
4.2. Conversion cost◦ The sum of direct labour and manufacturing
overhead costs◦ It is the cost of converting raw materials into
finished products.16
4.3. Controllability
i) Controllable costs◦ Influence by the manager decisions or actions.◦ E.g.: Retrenchment of employees.
ii) Uncontrollable costs◦ Not influenced by the decisions.◦ E.g.: Increase of raw mtrls. price.
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4.4. Normality
i) Normal costs: Have been planned or known.ii) Abnormal costs: Have not been planned.
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Cost Statements◦ Statement that provides for the assembly &
detailed costs in the form of cost centre or cost unit.
◦ Also known as cost card or cost sheet.
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Past Year Question no.Oct 2012 Q1
March 2012 Q1Sept 2011 Q1April 2011 Q1Oct. 2010 Q1April 2010 Q1Oct. 2009 Q1April 2009 Q1
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