Topic 1

Introduction
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Introduction
Cost accounting vs. Financial accounting
Elements of Costs
Material
Labour
Other Expenses
Classification of costs
Cost 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 grew
in size
> Sophisticated
market
Technologically
advanced
machine
in # of
competitors
in appreciation on
scarce resources
More cost
conscious
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 users
ii) Report requirement Flexible, no rules Under accounting standards
iii) 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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Material Labour
Other
Expenses
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Why do you need to understand
the cost concepts & classifications?
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1. Nature
i) Materials
ii) Labour
iii) 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. Function
i) 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. Behavior
Understand 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.


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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 Q1
Sept 2011 Q1
April 2011 Q1
Oct. 2010 Q1
April 2010 Q1
Oct. 2009 Q1
April 2009 Q1