Fundamentals of Costing

Instructor’s Manual

CHAPTER Fundamentals of
ONE Costing

The cost of a thing is that amount of life which must be exchanged for it.
Henry David Thoreau

Learning Outcomes
The study of this chapter should enable students to:
 explain the concepts, principles, methods and techniques of cost
 discuss the role of cost and information systems
 describe how cost is accumulated, classified and applied for purposes of costing, planning and
control
 identify the position of the accountant
 provide an overview of cost accounting and cost management
 recognize the critical role cost accounting plays in an organization

Instructor’s Focus
❏ Introduce, describe and explain:
¤ cost accounting;
¤ costs;
¤ cost management;
¤ costing system;
¤ relationship with financial and management accounting;
¤ concepts, principles and conventions of costs;
¤ classification and behavior of costs;
¤ accounting for costs;
¤ cost statements;
¤ costing methods and techniques, and
¤ strategic cost accounting.
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❏ Present a conceptual overview of cost accounting and cost management as shown in Figure 1.1

ASCERTAINING COSTS
Accumulating & Product costing
Classifying
Method:
Apply: Specific order
Costing principles Process
C
Costing conventions Techniques:
O Cost estimation absorption/marginal
Budgetary/
S standard
Accounting
T for Costs Making product
Integrity Information Making profit
Integrated
A Interlocking For:
Traditional
Decision-making
C function INTERNAL (tactical)
OPERATION Planning control
C Competence
O EXTERNAL MANAGING COSTS
ENVIRONMENT
U Strategic Accumulating Cost
function Strategic Information management
N Ethical
T Both: Market
Financial Customer
A Non-financial Competitors Winning &
Apply: retaining
N customers
Balanced scorecard Information
T
For:
Accounting for Strategic
Strategic Information decision-making

Figure 1.1  Conceptual overview of cost accounting and cost management

❏ Present a comparison of cost accounting and cost management as shown in Figure 1.6.
Strategic Cost Management Traditional Cost Accounting

Approach Approach

Managing costs Planning and control

Information Information
Financial and non-financial Financial

Focus Focus

External: markets, customers, Internal: business operations

competitors

Goal Goal
Winning and retaining customers Making products and making
company profitable

How to achieve? How to achieve?

1 Value chain analysis 1 Material, labour and overhead

2 Strategic position analysis costing
3 Cost driver analysis 2 Costing methods
3 Costing techniques

Figure 1.6  Strategic cost management and traditional cost accounting compared
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❏ Conclude with a discussion of the strategic approaches in a changing environment, that is risk
management and enterprise management.
❏ End with an attempt of the structured questions and multiple choice questions.