CAVENDISH UNIVERSITY ZAMBIA

ASSIGNMENT BRIEF AND FEEDBACK FORM

STUDENT NUMBER: 082-130_

JAN 2021
INTAKE
ONE/TWO YEAR

LECTURER: MR LEE

MANAGERIAL ACCOUNTING
SUBJECT:

ASSIGNMENT NO. 1

DATE HANDED OUT: 8TH August 2022

DATE DUE IN: 15TH AUGUST

DAY/EVE/DL DAY

ASSIGNMENT BRIEF

Cost Terms and Concepts

STUDENT INSTRUCTIONS:

1. This form must be attached to the front of your assignment

2. The assignment must be handed in without fail by the submission date (see assessment schedule for your course)
3. Ensure that the submission form is date stamped by the reception staff when you hand it in
4. Late submission will not be entertained unless with prior agreement with the subject tutor
5. All assessable assignments must be word processed

ASSIGNMENT GUIDANCE

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This assignment is intended to assess the student’s knowledge in all of the
following areas. However, greater emphasis should be given to those items
marked with a
(Tutor: - please tick as applicable)
ASSESSABLE SKILLS Please Tick.
Good and adequate interpretation of the questions

Knowledge and application of the relevant theories

Use of relevant and practical examples to back up theories

Ability to transfer and relate subject topics to each other

Application or use of appropriate models

Evidence of library research

Knowledge of theories

Written Business English communication skills

Use of visual (graphs) communications

Self Assessed ‘time management’

Evidence of field research

Tutor’s Mark Contribution

MARKS
(Administration only *)

LECTURERS FEEDBACK:

TABLE OF CONTENT

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TABLE OF CONTENT
INTRODUCTION TO COST TERMS…………………………………………………… 4
COST OBJECTS ………………………………………………………………………….. 4
MANUFACTURING, MERCHANDISING AND SERVICE ORGANISATIONS …... 4
DIRECT AND INDIRECT COSTS……………………………………………………….. 5
PRODUCT AND PERIOD COSTS ………………………………………………………. 6
RELEVANT AND IRRELEVANT COSTS ……………………………………………… 7
AVOIDABLE AND UNAVOIDABLE COSTS …………………………………………. 8
SUNK COSTS ……………………………………………………………………………… 8
OPPORTUNITY COSTS …………………………………………………………………. 8
INCREMENTAL AND MARGINAL COSTS …………………………………………… 9
THE COST AND MANAGEMENT INFORMATION SYSTEM ……………………… 9
CONCLUSION …………………………………………………………………………….. 9
REFERENCE ……………………………………………………………………………... 11

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Introduction
This research study will look at understanding various cost terms and concepts using practical
examples. Cost data that are classified and recorded in a particular way for one purpose may
be inappropriate for another purposes. The important point is that different cost concepts and
classification are used for different purposes. Clear understanding of the concepts of costs
and their classification would enable one to provide useful and appropriate cost data for
managerial decision making. Cost reflects a monetary measure of the resources given up to
attain some objectives such as acquiring a good or service. Examples include inventory,
payroll and rent sales commissions, gas for business vehicles and shipping costs.
COST OBJECTS
Cost objects are simply any items or activities that require a separate measurement. When
users of accounting want to find out the cost of an activity or item, this activity/item is
referred to the cost object. There exist three types of cost objects namely; output related cost
object, operational cost object, business relationship cost objects.
1) OUTPUT-RELATED COST OBJECTS
A company’s output simply refers to the goods or services produced. It is the most
common and important cost object, this is because every company needs to
understand the breakeven cost so that it can set the price of their output service/goods
accordingly to achieve profitability, growth and wealth creation, which are all goals of
a business
2) OPERATIONAL COST OBJECT
Operational cost objects are projects, departments, processes and other objects within
a business. Operating costs are the ongoing expenses incurred from normal day to day
of running a business. Operating costs include both cost of goods sold (COGS) and
other operating expenses such as selling, general and administrative expenses.
3) BUSINESS RELATIONSHIP COST OBJECTS
Business relationship are external cost objects outside a company that help the
business survive and grow. Examples include customers, through maybe promotional
fees, as well as suppliers, with commission fees.

MANUFACTURING, MERCHANDISING AND SERVICE ORGANISATIONS

MANUFACTURING ORGANISATIONS
A manufacturing organisation is one which purchases raw materials from its suppliers
and transforms these materials into finished tangible products using factors of

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production such as labour and capital inputs. In a manufacturing organisation there
exist three types of inventories that need to be accounted for, these inventories are; (i)
Raw materials, which are purchased goods awaiting the transformation process. (ii)
Work in progress, consists of goods that have begun the transformation process but
are not complete. (iii) Finished products are complete goods have not been sold in an
accounting period.
MERCHANDISING COMPANIES
These companies simply buy finished goods from their suppliers then resell these
goods to their consumers. These goods are sold in the exact same form they were
bought in. Their inventories consist only of finished goods. All wholesale and retail
companies are merchandising companies.
SERVICE COMPANIES
Service companies provide a service to their clients. A key characteristic about a
service is that it is perishable, meaning it can’t be stored for future use. With this
service companies have no finished goods or inventory except for maybe work in
process, this occurs when a client has not received their full service by the end of an
accounting period.
DIRECT AND INDIRECT COSTS
DIRECT COSTS
Direct costs are expenses that a company can easily connect to a specific cost object.
These costs are in two types which are direct materials and direct labour. Direct
material costs can be specifically and exclusively identified with a particular cost
object. An example is raw material, this is physically seen that it is a part of the
finished product, the amount or cost that went into a batch of goods can easily be
assigned to that particular batch’s raw material cost. Direct labour cost is wages that
are incurred in order to produce goods or provide services to customers, includes the
cost of regular working hours, as well as the overtime hours worked. It also includes
related payroll taxes and expenses such as social security, Medicare, unemployment
tax, and worker's employment insurance.
INDIRECT COSTS
 Indirect costs represent the expenses of doing business that are not readily identified
with a particular cost object but are necessary for the general operation of the
organization and the conduct of activities it performs. We have indirect labour,
materials and expenses. An example is maintenance employees, these employees are

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paid to keep the work area clean and conducive to work in, their work hours can’t
however be identified with a particular cost object. Indirect materials can include the
cost of equipment used to maintain or fix machinery. Indirect costs are often referred
to as overhead costs instead. In the case of indirect costs, a cost allocation has to be
carried out. A cost allocation the process of assigning costs when a direct measure
does not exist for the quantity of resources consumed by a particular cost object.
PERIOD AND PRODUCT COST
PRODUCT COST
Product cost refers to the costs incurred to produce a product or purchase products for
resale. These costs include direct labour, direct materials, production supplies,
and factory overheads. Product cost can also be considered the cost of the labour
required to deliver a service to a customer. Examples include raw material, wages on
labour, production overheads, rent on the factory, distribution costs etc. For unsold
inventory costs are recorded as assets in the balance sheet, because the inventory will
be sold in future to generate revenue. Sold inventory costs are recorded as expenses in
the profit and loss statement. The classification of costs into period and product cost
is vital in order to measure profit as well as valuate inventory. In a manufacturing
organization they are costs that are attached to the product and that are included in the
inventory valuation for finished goods, or for partly completed goods (work in
progress), until they are sold; they are then recorded as expenses and matched against
sales for calculating profit. Product costs are also referred to as manufacturing costs.
PERIOD COSTS
Period costs are non-manufacturing costs; all are not included in product costs. Period
costs are not directly tied to the production process. Overhead or sales, general, and
administrative (SG&A) costs are considered period costs. Examples of period costs
include marketing expenses, office depreciation, and indirect labour. Also, interest
expense on a company's debt would be classified as a period cost. Period costs are
recorded as expenses in the profit and loss account. There are two reasons why non-
manufacturing costs are considered a period costs and not included in the inventory
valuation. First, inventories are assets (unsold production) and assets represent
resources that have been acquired and that are expected to contribute to future
revenue. Manufacturing costs incurred in making a product can be expected to
generate future revenues to cover the cost of production. There is no surety, however,
that non-manufacturing costs will bring in future revenue, because they do not

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 represent value added to any specific product. Therefore, they are not included in the
inventory valuation. Second, many non-manufacturing costs (e.g. distribution costs)
are not incurred while the product is still in storage. Hence it is inappropriate to
include such costs within the inventory valuation.
RELEVANT AND IRRELEVANT COSTS AND REVENUES
RELEVANT COSTS AND REVENUES
The costs which should be used for decision making are often referred to as "relevant
costs". CIMA defines relevant costs as 'costs appropriate to aiding the making of
specific management decisions'.
To affect a decision a cost must be:
a) Future: Past costs are irrelevant; these are known as sunk costs, as we cannot affect
them by current decisions and they are common to all alternatives that we may
choose.
b) Incremental: Meaning, expenditure which will be incurred or avoided as a result of
making a decision. Any costs which would be incurred whether or not the decision is
made are not said to be incremental to the decision.
c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not
relevant. Similarly, the book value of existing equipment is irrelevant, but the disposal
value is relevant.
IRRELEVANT COSTS AND REVENUES
These are costs and revenues that are not affected by current decisions. These costs
have either already happened or are not based on the outcome of your decision, they
will occur either ways. Now we’ll look at a practical example that’ll help us further
understand relevant and irrelevant costs;
A company is considering publishing a limited edition book bound in a special
leather. It has in stock the leather bought some years ago for K500. To buy an
equivalent quantity now would cost K1000. Other costs of publishing the book will be
around K300. The best price the company can sell the book at is K400. The company
has no plans to use the leather for other purposes, so it will consider the possibilities
before it makes a decision on whether to go ahead with the project or not:
Not make the book (k) Make the book (k)
Materials 500 500
Conversion costs 300
Revenue (400)
Net costs 500 400

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In calculating the likely profit from the proposed book before deciding to go ahead with the
project, the leather would not be costed at K500. The cost was incurred in the past for some
reason which is no longer relevant. The leather exists and could be used on the book without
incurring any specific cost in doing so. The relevant cost here is the conversion cost. The cost
incurred when the book is not made is greater than if the book were made, so the decision to
make the book will be taken considering the relevant costs.

AVOIDABLE AND UNAVOIDABLE COSTS

An avoidable cost is the cost of an activity that can be avoided if that activity is not
performed, resulting in a monetary savings. Avoidable costs are typically variable costs,
while most fixed costs are unavoidable. Avoidable costs can include things such as labour
costs or packaging. Also referred to as relevant costs. Unavoidable costs however are costs
that cannot be avoided whether an activity is performed or not, also referred to as irrelevant
costs.

SUNK COSTS

A sunk cost is money that has already been spent and cannot be recovered. The resources
were acquired in the past therefore are unaffected by the choice between various alternatives
in the present. Sunk costs are irrelevant for business decisions but not all sunk costs are
irrelevant costs. Examples of sunk costs include salaries, insurance, rent, non-refundable
deposits, or repairs (as long as each of those items is not recoverable). Sunk costs also cover
certain expenses that are committed but yet to paid. If a company let’s say has entered into a
contract to buy 1,000 KG of raw materials for the next year. If the company is contractually
obligated to uphold their end of the deal, the raw materials are a sunk cost whether the
company has paid for them or not because the company will incur the costs regardless of
what the company decides to do with the materials.

OPPORTUNITY COSTS

An opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires an alternative course of action to be gives up. For
example; A business owner wants to add a new product to the line-up. It requires an upfront
investment of K1,000 to build and market. The opportunity cost is the potential value of that
money being spent elsewhere or saved for the future. If no alternative use of resources exist

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then the opportunity cost is zero , but if resources have an alternative use, and are scarce then
an opportunity cost exists.

INCREMENTAL AND MARGINAL COSTS

Incremental (also known as differential) costs and revenue are the difference between cost
and revenues for the corresponding items under each alternative being considered.
Incremental costs are similar to the economic version of marginal cost. Marginal cost is the
additional cost of one extra unit of output. For example, the incremental costs of increasing
output from 100 to 150 units per week are the additional costs of producing 50 units per
week. Incremental costs may or may not include fixed costs. If fixed costs do not change as a
result of a decision, the incremental cost will be zero.

The main difference is that marginal costs and marginal revenues represent the additional
cost of one extra unit of output whereas incremental cost/revenue represents the additional
cost/revenue resulting from a group of additional units of output.

THE COST AND MANAGEMENT ACCOUNTING INFORMATION SYSTEM

Cost Accounting Information System (CAIS) is an accounting information system which
determines the costs of products manufactured or services provided and records these costs in
the accounting records. It is the key to management's assessment of the company's efforts, It
aids in positive decision making which in turn achieves profit. CAIS should be able to
generate information that meets the following requirements;
 Allocates costs between costs of goods sold and inventories for internal and external
profit measurement and inventory valuation.
 To provide information for planning, control and performance measurement.
 To provide relevant information to aid managers make better and informed decisions.

CONCLUSION
In managerial accounting, costs are classified into fixed costs, variable costs or mixed
costs (based on behaviour); product costs or period costs (for external reporting);
direct costs or indirect costs (based on traceability); and sunk costs, opportunity costs

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or incremental costs (for decision-making). Management accountants need to
understand cost concepts because they are vital in many areas of planning, control,
and decision-making. Managers should be able to use cost concepts and understand
which are needed and affected by decisions they make. This’ll ensure a positive
output and growth for the organisation.

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REFERENCES
TUOVILA A. (2022) ‘Corporate finance ‘
DRURY COLIN (2001) “MANAGEMENT ACCOUNTING FOR BUSINESS
DECISIONS; SECOND EDITION”
DR. RAMACHANDRA A.A. (2012) “MANAGERIAL ECONOMICS AND
FINANCIAL ANALYSIS “ THE MCGRAW-HILL COMPANIES 1.
PROF O’BRIENW. F. (2002) “MANAGERIAL ACCOUNTING STRATEGIC
COST ANALYSIS”

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