topic 1 introduction notes costing

28 September 2011 Prepared by: Marshita Hashim 1

INTRODUCTION

l Definition Cost Accounting, Management and Financial Accounting

l Difference and similarities between FA info and MA info

l Characteristics of MAl Role of management accountantl Cost classification

Cost, cost unit and cost centersl Cost- the amount spent on a thing or activity

l Cost unit- quantitative unit unit of product or services- (direct material, labour, exp, ohd)

l Cost center-l a location , person or items of equipment in

respect of which costs may be ascertained and related to cost units

l costs relates to sections or parts of a business.


Introduction

Definition:l Accounting:l A process whereby an economic

information is recorded and communicated to the interested parties to make decision.

l “… … .the art of recording, classifying and summarising in a significant manner, in monetary terms, the transaction and event and interpreting the result thereof”.


l Management Accounting:l ‘the application of accounting techniques to provide

information that will help management to make favorable decision’.

l Those info are used for:l Formulation of policies or strategiesl Planning and controlling activitiesl Decision-taking on alternative courses of actionl Optimizing the use of resourcesl Disclosure of info to external users and employeesl Safeguarding assets


Introduction (users)

l Internal Users:l Ownersl Profits earned from investments l Financial stability and growth of the business.

l Managersl Planning and organizingl Controll Appraisall Analyses the operation of the business

l Employeesl Steady employmentl Bus ability to progress and expandl Earning capacityl Other monetary benefits


Introduction (users)l External Users:l Creditors (Banker & Supplier)l Financial stabilityl Ability to pay debt in short term

l Investorsl Solvency of the bus: ability to repay debts

when duel Financial strengthl Earning capacity

l Governmentl Taxing authorities = business profitsl Plan for expansion of industry & other govm

activitiesl Publicl Reduction of selling price


DIFFERENCE BETWEEN FA INFO AND MA INFO

l User Orientationl FA info: External parties-required general

purpose of financial statements. Eg: shareholders=used FA to evaluate performance of the co.

l MA info: used by managers in dec making which is necessary to operate the company. –mgrs need more comprehensive and detailed info for future planning, organised resources, direct activities and control performance.


l Freedom of choices/ legal requirement:l FA : l Required by statute (public limited co)= to

produce annual report.l Co Act 1965= co must report financial info to

shareholders.l MA:l Intended for internal used of the co; not

required by external body = optional.l Info is used to assist mgr with specific dec,

types & amount of info provided depends on relevance and must be compare continually with their costs to assure that they are cost benefit.


l Time frame:l FA:l Concerned with historical data- what has

happened in the past.l Eg: purchased of buildings. –report in the

balance sheet at historical cost.l MA:l Focus on the future.l Futuristic = past performance evaluations are

mainly used as benchmarks for predicting the future.

l Eg: total cost last year RM10,000. So this year try to maintain or cut down.


l Reporting flexibility:l FA:l Governed by GAAP (provide guidance and

facilitate comparisons)= reports same and similar transactions in the same way.

l Flexible in terms of what info to report & its form.

l MA:l Choosen by organisationl Reports all relevant info for dec making


l Reporting Entity:l FA:l Report the activities of the

organisation as a wholel External users concern with

performance of organisation as a whole

l MA:l Segment of the organisation onlyl Most mgr reponsible for one segment

onlyl Eg production department


l Reporting Frequency:l FA:l Well-defined schedulel Eg one year

l MA:l Whenever needed –subject to

management choices


l Degree of precision:l FA:l Objectivity principle and precise

measurementl Rely on past data

l MA:l More subjective and less precisel Rely on forecasted data


SIMILARITIES:

l Decision makingl Firms must be responsible and accountable

for its financial and operating performance.l Record keepingl Use of common data collection system

l Performance evaluationl Main concerns


CHARACTERISTIC OF MA:

l Relevancel To be relevant, info must make a difference in a

decision being consideredl Accuracyl Timelinessl Info should be as current as possible- otherwise it

will lost valuel Eg 1 Uero = RM?

l Understandabilityl Understandable to users (some of them are not an

accountant)l Cost effectivenessl The value of info must exceed its cost


ROLE OF M ACCOUNTANT:l Planningl Future activities of each departmentl Eg; prod dept: next month production= establishes

budgetl Assembles all sections budget into one master

planl Controll Compare budgeted info with actual info= the

deviations (favourable or unfavourable)l Make corrective action

l Organising/ operatingl Involves in designing and implementing of the

accounting systeml The system must tailored with the orga structure

l Communicationl motivation

Classification and types of cost


l Product and period costs:l Product :l Those cost that are assigns to the product that

the firm sells (identifiable with gds purchased/ produce for resale)

l Eg selling expense which can be traced to individual product

l Period:l Those cost incurred to obtain gds/services that

the firm uses in operation.l Treated as expense in the period in which they

incurred


l Direct and indirect costs:l Direct:l Can be traced directly to specific cost objectivel Incurred solely for the benefits of that cost

objectivel EG; direct material

l Indirect:l Cannot be traced directlyl Incurred for multiple cost objectivesl Indirect cost is assigned to cost obj based on

some allocation basis.l Eg; building rental (occupied by several

department) –allocated on the basis of square footage used.


l Controllable and uncontrollable costs:l Controllable costsl Costs that are influenced by the decision or

actions of a manager. l Example, material cost is controllable cost for

purchasing managerl uncontrollable costsl Costs that are not influenced by the decision or

actions of a manager.l Example, material cost is uncontrollable cost

for production manager


l Avoidable and unavoidable costsl Avoidable costs:l Costs that may be saved by not adopting a given

alternativel Relevant for decision making

l Unavoidable costs:l Cannot be saved


l Opportunity cost:l Cost that measures the opportunity that is lost or

sacrificed when the choice of one course of action requires that an alternative course of action be given up.


COST BEHAVIOUR

Fixed cost:l Cost that remain constant in total

eventhough there is changes in activity level for a given range of activity.

l Example: rental, depreciation. l CPU change, total cost constantl Graph.


Variable Cost:l Change in a direct proportion with

production in a relevant rangel CPU constant; total cost changel Eg: direct material


Semi-fixed / semi- variable cost:l Vary with production but not in direct

proportionl Has both fixed and variable elementsl Eg; telephone bills ( deposit = fixed:

calls = variable)l High-low method:l VC/ unit = (highest RM- lowest RM)/

(Highest unit –lowest unit)l Equation : y = a + bx


Step cost:l Cost that are fixed in total for a given

range of activity only and will eventually increase by a constant amount at some points.

l Example: supervisor salary, telephone bills.

l Graph.

Function

l Production costs- incurred during production process, eg:direct m/l/exp; production ohd

l Adiministrative cost- incurred for general admin work; eg audit fees, office rent

l Marketing costs- incurred in selling, publicizing, distributing and producing servicing

l Finance costs- incurred in financing the activities; Eg interest, commitment fees, insurance, dividends

l Research costs- seeking new @ improved ideas, materials, methods & products

l Development costs- incurred in developing new or improved ideas; Eg cost of test/ trial runs

Normality

l Normal costs- have been planned for: Eg loss due to evaporation

l Abnormal Costs- have not been planned for: Eg lost production due to plant breakdown.

Quality

l Incurred in designing & producing productsl 4 types:l Prevention costs-eg: high grade material,

preventive maintenance, process improvements, supplier reliability

l Detection costs- eg: testing, checking, inspectionl Internal failure costs: to rectify poor quality

products before delivered to customer; Eg:rework, retesting, scrap

l External failure costs-to rectify poor quality products after they have been delivered to customer. Eg: product liability claims, refunds, replacement, repairs, transportation costs

topic 1 introduction notes costing

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