Module 2 Cost Estimation Costing Statement

MODULE 2:
COST ESTIMATION &

COSTING STATEMENT
DR. NUR LAILI AB GHANI
nurlaili@ukm.edu.my
ZCMA6022 MANAGERIAL ACCOUNTING
UKM-GRADUATE SCHOOL OF BUSINESS
SEMESTER 1, SESSION 2022/2023
Highlights
This module provides the understanding
on the ability to prepare and review the
relevant management accounting records
for costing and directing operational
activities.
Students will be able to understand the cost

management concept, estimate the cost and prepare the
costing statement which are relevant to achieve the
organisational goals.
DR. NUR LAILI AB GHANI UKM-GSB 2

Topics
Cost Management Concepts
Understands the basic cost management concepts and
determine the cost behaviour.
Cost Estimation
Performs the cost estimation techniques to determine how
the cost behaves.
Costing Statement
Prepares the Costing Statement using various costing
method.

COST ESTIMATION

Product Process
Costs Costs Predetermined
Cost Assignment & Estimation

Overhead Rate
Period Job-Order (POHR)
Costs Costs
Cost tracing
DIRECT MATERIAL Invoice Job Cost Sheet
FC
VC
DIRECT LABOUR Cost tracing Payslip,
Semi-VC
Salaries, wages, Employee Time Job Cost Sheet
fringe benefits Ticket
MANUFACTURING
Manufacturing
/ PRODUCTION
Cost Overhead
How to OVERHEAD
allocation Account
estimate Indirect material,
Allocate by using Job Cost Sheet
the Indirect labour,
Predetermined
costs? other
Overhead Rate
manufacturing
(POHR)
costs

Cost Estimation
Account- Least-Squares
High-Low Visual Fit
Classification Regression
Method Method
Method Method
Multiple Data Analytics

Engineering
Regression & Data
Method
Method Visualisation

Examination of organization’s
ledger accounts.
Classify each cost item: E.g. Direct

Material (VC), Depreciation (FC) or
Account Utilities (SVC).
Classification Based on analyst knowledge &

experience of business activities.
Method Estimate cost amounts from the
source documents.
Cost classified as SVC will be

estimated further using other
methods.
Account Classification Method
ROSE BAKES & TASTES
Operates a few chain of coffee & bakery shop around Klang Valley offering range of bakery & savoury items.
LIST OF COSTS COST BEHAVIOUR

Direct Material Ingredients for Donuts, Muffins & Sweet Rolls Variable Cost
Beverages Variable Cost
Napkins & Disposable Cups Variable Cost
Direct Labour Wages & Fringe benefits for Food Prepares Variable Cost
Sales-counter personnel Variable Cost
Overhead
Facilities Costs Property taxes Fixed Cost
Depreciation of donut shops & equipments Fixed Cost
Salaries of maintenance personnel Fixed Cost
Indirect labour Salaries of managers & assistance of donut shops Variable Cost
Delivery Trucks Rental payment under lease contract Fixed Cost
Costs of gasoline, oil & tires Variables Cost
Maintenance Variable Cost
Utilities Electricity Semi-Variable Cost
Telephone & Internet Semi-Variable Cost
Trash collection Variable Cost
DR. NUR LAILI AB GHANI 2021 UKM-GSB 8

SVC approximation is computed
using exactly 2 data points.
Choose the highest and lowest

activity levels.
High-Low Find the difference between
Method costs to the highest & lowest

activity levels.
FORMULA Find the difference between the

Difference between the costs to the highest & lowest activity levels.
highest & lowest activity levels
___________________________________
Difference between the highest & lowest
activity levels

High-Low Method
NATION’S CAPITAL FITNESS
Operates chain of fitness centers in the Washington, D.C., area. The firm's controller is accumulating data to be used in preparing its
annual profit plan for the coming year. The cost behaviour pattern of the firm's equipment maintenance costs must be determined.
MONTH HOUR OF MAINTENANCE MAINTENANCE

SERVICE (COST DRIVER) COSTS PER MONTH
January 520 RM4,470 HIGHEST VC per unit = (Highest Cost - Lowest Cost) RM
February 490 RM4,260 (Highest Cost Driver - Lowest Cost Driver) Hours / Units
March 300 RM2,820 LOWEST
VC per unit = (RM4,470 - RM2,820)
April 500 RM4,350
(520 Hours - 300 Hours)
May 310 RM2,960
June 480 RM4,200 VC per unit = RM7.50
July 320 RM3,000
August 400 RM3,600 Total Semi-variable Cost = Fixed Cost + Variable Costx
September 470 RM4,050
Total Semi-Variable Cost RM43,200.00
October 350 RM3,300
Total Variable Cost RM36,000.00 VC per unit x Total Cost Drivers
November 340 RM3,160
Total Fixed Cost RM7,200.00
December 320 RM3,030
Total 4800 RM43,200
Average 400 RM3,600

Cost classified as SVC or no idea
of cost behavior.
Plot recent observations of the

cost at various activity level &
Visual-Fit obtain scatter diagram.
Visualise relationship between

Method cost and level of activity (cost
driver)
Visually fit a line to all data using

ruler on the plotted points.
Line is positioned so that roughly

equal numbers of plotted points
lie above and below the line.
Visual-Fit Method

January 520 RM4,470 Visual Fit Method
RM5,000
February 490 RM4,260 RM4,500
March 300 RM2,820 RM4,000
RM3,500
April 500 RM4,350 RM3,000
May 310 RM2,960 RM2,500
RM2,000
June 480 RM4,200 RM1,500
FC = RM600
July 320 RM3,000 RM1,000
RM500
August 400 RM3,600 RM0
0 100 200 300 400 500 600
October 350 RM3,300 Fixed cost per month = RM600.00
November 340 RM3,160 Total Semi-Variable Cost RM43,200.00

December 320 RM3,030 Total fixed cost RM7,200.00
Total Variable Cost RM36,000.00
Total 4800 RM43,200
Average 400 RM3,600

Objective estimation of cost
behaviour using all available data.
Cost line is positioned to
Least-Square minimize the sum of squared

deviations between cost line and
Regression
data points.
Make cost predictions and
Method drawing inference about the

estimated relationship between
cost & activity.
Y = a + bX Estimation of cost behaviour
pattern should be restricted to
Y is dependent variable (estimated SVC).
X is independent variable (activity level). the relevant range.

Least-Square Regression Method

Least-Square Regression Method
January 520 RM4,470 RM5,000
February 490 RM4,260 RM4,500
RM4,000
March 300 RM2,820 RM3,500
April 500 RM4,350 RM3,000
RM2,500
May 310 RM2,960 fSVC VC fFC
RM2,000
June 480 RM4,200 RM1,500 y = 7.2884x + 684.65
RM1,000
July 320 RM3,000
RM500
August 400 RM3,600 RM0
0 100 200 300 400 500 600
October 350 RM3,300 Fixed cost per month = RM684.65
November 340 RM3,160
Total Semi-Variable Cost RM43,200.00
December 320 RM3,030 Total fixed cost RM8,215.80
Total Variable Cost RM34,984.20
Total 4800 RM43,200
Average 400 RM3,600

Based on two or more
independent variables (cost
driver).
Take into account all important

Multiple predictors of cost behaviour.
Regression Estimate a linear (straight-line)

relationship between 1
Method Dependent Variable & 2 or more

Independent Variables.
Y = a + b 1 X1 + b 2 X2
Y is dependent variable (estimated SVC).

X1 is first independent variable (first cost driver).
X2 is second independent variable (second cost driver).

Engineering
Method
Ask how much material
should be needed & how
Manufacturing Industry: much it should cost.
detailed study of production
technology in the production
process.
Perform time and motion
Study the process of cost studies to determine the
incurrence. steps required for people to
perform the process.
Estimate cost behaviour

patterns based on
engineering analysis.

125
EXERCISE: REFER 100
TO EXCEL FILE 75
M2 – COST 50
ESTIMATION
TECHNIQUE 25
0
Item 1 Item 2 Item 3 Item 4 Item 5

What are the
advantages &
disadvantages of
these cost
estimation
techniques?

Cost Estimation Techniques
METHOD ADVANTAGES DISADVANTAGES
Account- Easy to use for simple organization. More complex to explain without in depth experience.
Classification Highly depend on professional judgement.
High Low More objective, leaves no room for analyst’s judgement. Only use 2 data points, ignore the remainder.
Method
Visual-Fit Able to spot outliers in the data and discover the reason Provide little or no information on cost relationship outside the relevant
Method behind it. range.
Use all available data. Only based on analyst knowledge of the firm’s facilities & understanding
Easy to explain. of costs.
Lack of objectivity: 2 analyst may provide different visually fit cost lines.
Least-Squares Objective method, use all available data. Require more computation.
Regression Has desirable statistical power to predict costs & draw Evaluation requires further analysis in relation to economic plausibility
Method inferences about relationship between cost & activity. and goodness of fit.
Multiple Take into account all important predictors. More complex and requires more statistical capabilities.
Regression More accurate cost predictions.
Method
Engineering Not based on historical data compared to others. Time consuming & expensive.
Method Provide highly accurate cost estimation. Lack of objectivity, two analyst may give different report.
Helpful for high-technology industries that has no
historical data.
Forward looking.

Using Data Analytics & Data Visualisation
Volume:
possibility of • Analysis of information → Data
data collection Managerial Analytics.
from various
sources.
Accounting • Communication of information analysis
to managers → Data Visualisation.
Velocity:
• Examining the data sets to draw
BIG DATA
management of
data streams in Data conclusions about the information.
timely manner. Analytics • Use specialized systems and computer
software.
• Help managers to visualize the key

Variety: data message in the analysis.
comes in all
types of
Data • Present data in a graphical or pictorial
formats. Visualisation format to obtain patterns, trends,
relationships & complex scenarios
embedded in the data.

COSTING STATEMENT

Costing Statement
Contribution Activity-
Absorption
Margin Based
Costing
Costing Costing (ABC)
Target Target
Costing Pricing

Product Costing System
Work In Process Inventory Finished Goods Inventory Cost of Goods Sold

Direct Material
Direct Labour When goods When goods
Manufacturing are finished are sold
Overhead
(Fixed &
Variable)

Sales
Absorption Costing Less: COGS
= Gross Profit
Less: SGA Expenses
Net Profit before Tax
When costs When goods When goods

are incurred are finished are sold
Direct Material
Direct Labour Work in
Finished Goods Expense on
Process
ALL Inventory on Income
Inventory on
Manufacturing Balance Sheet Statement
Balance Sheet
Overhead

Sales
Contribution Margin Costing Less: Variable Cost (COGS or SGA)
= Contribution Margin
Less: Fixed Cost (COGS or SGA)
Net Profit before Tax
When costs When goods When goods
are incurred are finished are sold
Direct Material Work in Finished

Direct Labour Process Goods Expense on
VARIABLE Inventory on Inventory on Income
Manufacturing Balance Balance Statement
Overhead Sheet Sheet
When costs
are incurred
FIXED Manufacturing Overhead Expense on Income Statement

Interviews
Activity-Based Costing Data

Collection
Storyboarding
Project Teams
Identify significant activities in the

production of the various Unit-Level Machine
products. Activity Related
Assign overhead costs to each

Stage 1 activity based on the resources Setup, Purchasing,
used by the activity. Batch-Level Material Handling,
Activity Quality Assurance,
Overhead costs assigned to Packing/Shipping
Special Two-Stage each activity = ACTIVITY COST
Procedure to assign POOL.
overhead costs to Product-
products sustaining-Level Engineering Design
Identify appropriate cost Activity
drivers for each cost pool.
Facility: Salaries,
Stage 2 Allocate overhead costs from Facility-Level Depreciation, Taxes,
each activity cost pool to each Activity Maintenance,
product line in proportion to Insurance
the amount of the cost driver
consumed by the product line

Target Costing
Price-led costing Focus on the Focus on the Focus on the

First, set the price. customer product design process design
Then, determine the target
product cost. Specify raw materials, Use of touch labour,
What products? What
Target cost = Target price – components in the production technology, global sourcing
features? Willingness to pay?
Target profit process. in procurement.
Cross-functional Life-cycle costs Value-chain

teams Incorporate product planning & orientation
concept design, preliminary
Contribution of relevant Projected costs > target costs
design, detailed design & testing,
expertise responsible for the Eliminate non-value added costs
production, distribution and
entire product. to reduce projected costs.
customer service.

Which target
costing strategy
that is by your
organisation?

Life-Cycle Costing

125
EXERCISE: REFER 100
TO EXCEL FILE 75
M2 – COSTING 50
STATEMENT
25
0
Item 1 Item 2 Item 3 Item 4 Item 5

Target Pricing
Customer Actions of
Demand Competitors
Product-design issues & Define its product. How if
pricing consideration competitor reduces its price?
Costs
Depends on type of industry.
Political, legal and
Agricultural: market forces.
Public utilities: regulatory agency.
image-related
Others: managers set price based issues
on production costs.

Let’s Recap
Product costs Understand the Know the cost Fixed costs

Period costs
Job-order costs
basic cost behaviour related Variable costs
Semi-variable costs
Process costs management to your business Step-fixed costs
POHR concept activities Step-variable costs
Account classification
Absorption Costing Know how to Understand the High-Low Method
Contribution margin
Costing
prepare the best cost estimation Visual-Fit
Activity-Based Costing costing technique for all Least Square Regression
Multiple Regression
Target Costing statement costs Engineering Method

GROUP EXERCISE
Get into groups, discuss
the cost estimation
technique and costing
statement suitable for
your organisation.

Module 2 Cost Estimation Costing Statement

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MODULE 2:

COST ESTIMATION &

Students will be able to understand the cost

DR. NUR LAILI AB GHANI UKM-GSB 2

DR. NUR LAILI AB GHANI UKM-GSB 3

DR. NUR LAILI AB GHANI UKM-GSB 4

Cost Assignment & Estimation

DR. NUR LAILI AB GHANI UKM-GSB 5

Multiple Data Analytics

DR. NUR LAILI AB GHANI UKM-GSB 6

Classify each cost item: E.g. Direct

Account Utilities (SVC).

Classification Based on analyst knowledge &

Cost classified as SVC will be

LIST OF COSTS COST BEHAVIOUR

DR. NUR LAILI AB GHANI 2021 UKM-GSB 8

Choose the highest and lowest

High-Low Find the difference between

Method costs to the highest & lowest

FORMULA Find the difference between the

DR. NUR LAILI AB GHANI UKM-GSB 9

MONTH HOUR OF MAINTENANCE MAINTENANCE

DR. NUR LAILI AB GHANI 2021 UKM-GSB 10

Plot recent observations of the

Visual-Fit obtain scatter diagram.

Visualise relationship between

Visually fit a line to all data using

Line is positioned so that roughly

MONTH HOUR OF MAINTENANCE MAINTENANCE

November 340 RM3,160 Total Semi-Variable Cost RM43,200.00

DR. NUR LAILI AB GHANI 2021 UKM-GSB 12

Cost line is positioned to

Least-Square minimize the sum of squared

Method drawing inference about the

DR. NUR LAILI AB GHANI UKM-GSB 13

MONTH HOUR OF MAINTENANCE MAINTENANCE

DR. NUR LAILI AB GHANI 2021 UKM-GSB 14

Take into account all important

Regression Estimate a linear (straight-line)

Method Dependent Variable & 2 or more

Y is dependent variable (estimated SVC).

DR. NUR LAILI AB GHANI UKM-GSB 15

Estimate cost behaviour

DR. NUR LAILI AB GHANI UKM-GSB 16

EXERCISE: REFER 100

DR. NUR LAILI AB GHANI UKM-GSB 17

DR. NUR LAILI AB GHANI UKM-GSB 18

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• Help managers to visualize the key

DR. NUR LAILI AB GHANI UKM-GSB 20

DR. NUR LAILI AB GHANI UKM-GSB 21

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Work In Process Inventory Finished Goods Inventory Cost of Goods Sold

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When costs When goods When goods

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Direct Material Work in Finished

FIXED Manufacturing Overhead Expense on Income Statement

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Activity-Based Costing Data

Identify significant activities in the

Assign overhead costs to each

DR. NUR LAILI AB GHANI UKM-GSB 26