Cost & Management Accounting - Acc 416

COST & MANAGEMENT
ACCOUNTING – ACC 416
Chapter 1:
Introduction & Cost Accounting System
Tengku Fairuz Binti Tengku Embong
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CHAPTER 1:
INTRODUCTION & COST ACCOUNTING SYSTEM
Course
Outcomes
01 Differentiate Between Cost
Accounting And Financial Accounting
02 Cost Concepts
03 Cost Classifications
04 Cost Statement
What is ….. ?
01 Financial Accounting
 Provide information to parties outside of

the organization
 To judge a company’s past

financial performance
02 Cost & Management Accounting
 Provide information to the management
 Relating to costs for planning,

control and decision-making
purposes
Differences
FA CA/MA
Reports to those outside of the
organization – stockholders, Reports to those inside the
creditors, regulators organization for planning,
directing & motivating &
controlling – officers, managers
Financial Statements
Quarterly & Annually
Internal Reports
As frequently as needed
Emphasizes on past financial
transactions
Emphasizes decisions affecting
the future
Differences
FA CA/MA
Pertains to business as a
whole Pertains to subunits of the
Highly aggregated business
Very detailed
Emphasizes on accuracy
Emphasizes on timeliness
Must follow Generally
Accepted Accounting Principles
(FRS)
Need not follow GAAP
Differences
FA CA/MA
Mandatory i.e. must be done
as required by say, tax Not mandatory i.e. outside
authority bodies do not specify what is
to be done
Audit by CPA
No independent audits
Similarities
FA CA/MA
Information is used Both are involved The same

to evaluate the in functions such as information system
effectiveness of the decision making, is used to collect
use of resources recordkeeping and data and develop
performance the information
evaluation
What is
Cost ?
Cost is defined as
the expenditure
incurred in
producing a product
or a service
How to Do Costing ?
01
Collecting and classifying
$
expenditure according to
cost elements (materials?
labour? overheads?)
02
Then assign the
expenditure to the cost
centres or the cost units
or both
A measurement on
quantitative unit of
product @ service in
which, the costs can be
associated with.
What is Cost Unit ? A measurement on
Examples: which, the costs can be
associated with.
Type of Industry Cost Unit
Brick works per 1,000 bricks made
Collieries (coal mine) per kg of coal extracted
Textile mills per yard (meter) of cloth manufactured
Electrical companies per units of electricity generated
Transportation companies per passenger mile (km)
Steel mills per kg of steel made

What is Cost Unit ? A measurement on
Examples: which, the costs can be
Cost Unit Uses associated with.
Per kilowatt hours to determine cost of electricity
Per litre to determine cost of petrol
Per kilogram (of cement) to determine cost of cement
Per consulting hour(clinic) to determine cost of charging a

patient
Per patient night to determine cost of hospital room

Per kg-kilometer to determine cost of transportation
Per passenger-kilometer to determine cost of transportation

Question 1 14
The following businesses provide services to customers.

Identify the most appropriate cost unit for each.
Restaurant
College/University
Private hospital
Transport
ANSWER :
Restaurant – meal served

College/University – full time student
Private hospital – patient per day number of operations
Transport - kilometer travelled
What is Cost Centre ?
May be a department,
Responsibility centres location, person, section
whose managers are or part of an
normally accountable for organization, or an item
only those costs are under of equipment
their control
Contents Title
• department/location –
Examples: sales
• person – salesman
Type of Industry Cost Centre • item of equipment –
 Furniture Manufacturer Machining, Assembly, Finishing delivery truck
 Bakery Mixing, Baking, Packing
 Vase Making Factory Molding, Painting
Question 2 16
Give two examples of cost centres for the following services:

Education
Hotel
Hospital
Air Transportation
ANSWER :
Education – faculty, course, class, computer lab

Hotel – guest room, seminar room, restaurant,
kitchen,management office
Hospital - ambulance, ward, laboratory, operation
theatre
Airline - aircraft, airport, cabin crew, pilot, ground
crew
Charging of Costs
Cost Centre 1
Cost Centre 2
Total Cost
Cost per
Unit
Cost Centre 3
Cost Centre 4
Classification of Costs
Function
• Production
• Administrative Decision-making
Traceability • Selling &
Distribution Controllability
• Direct • Marketing
• Indirect • Financial
• R&D
2 4 6
1 3 5
Behaviour Decision-making
Manufacturing or
• Variable Non-Manufacturing Normality
• Fixed
• Mixed Manufacturing
Product Cost – related to prod
Non-Manufacturing
Period Cost – related to time
Traceability / Nature
Classification
Classifica
Of Costtion
Of Cost
Direct Cost Indirect Cost
INDIRECT COST /
DIRECT COST
A B OVERHEAD
Cost that can be
identified directly to Cost which cannot
the product identified directly to
the product
3 Elements of Cost
MATERIAL LABOUR EXPENSES

Classification
Classifica
Of Costtion
Of Cost
DIRECT MATERIAL
DIRECT COST
A B • Raw materials that can be
Cost that can be
identified directly to physically and directly
associated with the finished
the product product during the
manufacturing process.
• E.g: Car manufacturing -
steel, plastic
DIRECT LABOUR
DIRECT EXPENSES
• The work of employees that can
be physically and directly
• Expenses traceable to the associated with converting raw
manufacturing of products materials into finished goods.
• E.g: Royalty for the design of • E.g: Wages paid to contract
cutting tools workers
Classification
Classifica
Of Costtion
Of Cost
DIRECT COST
A B
Cost that can be
identified directly to
the product
DIRECT MATERIAL DIRECT LABOUR DIRECT EXPENSES
In the Cost Statement
All Direct Cost = PRIME COST

.
Classification
Classifica
Of Costtion
Of Cost
INDIRECT COST /
INDIRECT MATERIAL A B OVERHEAD
• Raw materials that cannot be Cost which cannot
easily associated with the identified directly to
finished product during the
manufacturing process. the product
• E.g: Car manufacturing -
lubricants, polishing
compounds
INDIRECT LABOUR INDIRECT EXPENSES
• The work of employees that
have no physical association • Costs needed to operate factory
with the finished product OR it – not directly charged to product
is not practical to trace costs
to the goods produced. • E.g: insurance, rent
• E.g: Wages of maintenance

employee, supervisor
Classification
Classifica
Of Costtion
Of Cost
INDIRECT COST /
A B OVERHEAD
Cost which cannot
identified directly to
the product
INDIRECT MATERIAL INDIRECT LABOUR INDIRECT EXPENSES
In the Cost Statement
All indrect Cost = OVERHEAD

.
Behaviour
Classification
Classifica
Of Costtion
Of Cost
Variable
Cost
To measure how the total amount Fixed

of the cost changes as the level of
activity changes
Cost
Mixed
Cost
Step
Cost
Behaviour
Classification
Classifica
Of Costtion
Of Cost
o The total variable cost varies

Variable with production.
o Increase in production will
Cost increase the cost and vice
versa.
o Examples:
However, the cost per unit o Flours in the production of
remain constant.
bread
Refer Graph 1 o Wood in the production of
furniture
o Rubber in the production of
tires
o The cost per unit remains

constant
Refer Graph 2
Behaviour
Classification
Classifica
Of Costtion
o The total fixed cost does not
Of Cost vary with production.
o Increase in production will not
increase the cost and vice
versa.
o Unlike variable cost, the fixed
Examples:
cost per unit will decrease
o Directors salary
with increase in production
o Factory rental
and vice versa
Refer Graph 1
Fixed
Cost
o Unlike variable cost, the

fixed cost per unit will
decrease with increase in
production and vice versa
Refer Graph 2
Behaviour
Classification
Classifica
Of Costtion
Of Cost
Examples:
o Utilities
 Electricity (fixed standing charge plus
o Mixed cost contains both variable cost per unit of electricity
variable and fixed cost consumed)
elements  Telephone (fixed line rental plus variable
cost per call)
Refer Graph
Mixed
Cost
Behaviour
Classification
Classifica
Of Costtion
Of Cost
o Fixed cost that is only fixed within

certain levels of activity. Once the
upper limit of an activity level is
reached then anew higher level of
fixed cost becomes relevant
Refer Graph Examples:

o Warehousing costs (as more space is
required, more warehouses must be
purchased or rented)
o Supervisors' wages (as the number of
employees increases, more supervisors are
Step required))
Cost
Classification
Production / Manufacturing Classific
Of Coatst
ion
Costs Of Cost
Production Costs are incurred in the
production/manufacturing department. Distribution Costs
Examples:
 Factory rental Incurred for distributing the
 Insurance of plant & machinery goods.
 Maintenance of plant & machinery
 Depreciation of plant & machinery Examples:
 Cost of power  Transport costs
 Indirect factory wages (see slide  Wages for workers at
number 3) warehouse
 Indirect factory materials  Insurance for goods kept in
Functional the warehouse
Administrative Costs Selling/Marketing Costs
Incurred for administrative Incurred for the purpose of

activities. selling / marketing goods.
Examples: Examples:
 Stationery cost  Salesmen salaries
 Office salaries  Advertising
 Audit fees
Manufacturing or Classification
Classificat
Of Costion
Non-Manufacturing
Of Cost
Product Cost Period Cost Conversion Cost

Product Costs are Period Cost are non-
manufacturing manufacturing costs Both direct labour
costs that can be that are not included in and overhead to
identified with goods the valuation of convert from raw
purchased or inventory.
They are treated as material until it
manufactured for
resale. expenses in the period becomes finished
in which they are goods
Example: DM, DL, incurred.
S c i Variable
e n c e Te cOverheads
h n o l o g y E n g i n e e r i n g A r t Example:
s Mathem atics
Factory
Classification
Classificat
Of Costion
Of Cost Decision Making
1 Controllability 2 Normality
Controllable Cost Normal Cost
Costs that are influenced by the Costs that have been planned for.
decisions or action of a manager.
Eg. Loss due to evaporation
Eg. Retrenchment salaries
Uncontrollable Cost Abnormal Cost
Costs that are not influenced by the Cost that have not been planned for.
decisions or action of a manager.
Eg. Plant breakdown – lost
Eg. Raw material price increase due production
to inflation
Cost Statement
Direct Material 1,000
Direct Labour 500
Direct Expenses 300
PRIME COST 1,800 CONVERSION
COST
Production Overhead
240
(Indirect Cost)
PRODUCTION COST 2,040
Administration Overhead 160
PERIOD COST
Selling & Distribution
150
Overhead
TOTAL COST 2,350
Profit (20% of total cost) 470
Selling Price 2,820
Question 3 33
Fill in the blanks with:
CONTROLLABLE COST PERIOD COST CONVERSION COST
DIRECT COST PRODUCT COST DIRECT PROPORTION
PRIME COST
a. Depreciation for the car used by the sales representative is treated as

________________________ in the Income Statement. In terms of cost behaviour,
it is a ______________________.
b. Wood used in making furniture is a _______________.
c. _______________ are costs that are necessary and integral part of producing
the finished product.
d. Variable costs are costs that vary in __________________ to changes in the level
of activity.
e. _______________________ is a cost that a given manager can regulate or

influence during a particular time period.
f. Direct labour and overheads costs are also known as ______________________.

Question 3 34
ANSWER :
a. Depreciation for the car used by the sales representative is treated as
PERIOD COST in the Income Statement. In terms of cost behaviour, it is a
DIRECT COST.
b. Wood used in making furniture is a DIRECT COST.
c. PRODUCT COST are costs that are necessary and integral part of producing
the finished product.
d. Variable costs are costs that vary in DIRECT PROPORTION to changes in the
level of activity.
e. CONTROLLLABLE COST is a cost that a given manager can regulate or

influence during a particular time period.
f. Direct labour and overheads costs are also known as CONVERSION COST.
Question 4 35
State whether the costs are:
FIXED COSTS ADMIN COST VARIABLE COST

PRODUCTION COST SELLING & DISTRIBUTION COST
a. Telekom Malaysia paid RM200,000 to advertise in TV3 for Chinese New

Year promotion.
b. Steering wheels installed in Myvi car by Perodua.
c. Directors of Honda Bhd are paid bonuses based on profit for the year.
d. Astro Bhd pays its sales agent 5% commission for each unit sold.
e. Insurance on KFC Holding corporate building is paid yearly.
f. Sugar used in production of carbonated drink, Pepsi.

Question 4 36
ANSWER :
a. Telekom Malaysia paid RM200,000 to advertise in TV3 for Chinese New

Year promotion.
FIXED COST / SELLING & DISTRIBUTION COST
b. Steering wheels installed in Myvi car by Perodua.
VARIABLE COST / PRODUCTION COST
c. Directors of Honda Bhd are paid bonuses based on profit for the year.
VARIABLE COST / ADMIN COST
d. Astro Bhd pays its sales agent 5% commission for each unit sold.
VARIABLE COST / SELLING & DISTRIBUTION COST
e. Insurance on KFC Holding corporate building is paid yearly.
FIXED COST / ADMIN COST
f. Sugar used in production of carbonated drink, Pepsi.
VARIABLE COST / PRODUCTION COST
Question 5 37
A bread factory produces two types of bread i.e. white bread and
wholemeal bread.
Classify the following costs in relation to the factory as direct
material, direct labour, production overhead or non-production
overhead.
• Sugar
• Production line workers salaries
• Factory manager’s salary
• Expenses relating to distributing the bread to customers
• Flour
• Cooking gas
Question 6 38
Classify the following costs into the following cost classifications.
Each cost item should belong to one cost classification.
Costs Business DM DL Prod Period

OH Cost
Flour Bakery
Gas for oven Hot bread shop
Electricity Hairdresser
Driver’s Transport
commission
Ink Printing
Computer rental Legal practice
Glue Cabinet maker
Question 6 39
ANSWER :
Costs Business DM DL Prod Period

OH Cost
Flour Bakery
Gas for oven Hot bread shop
Electricity Hairdresser
Driver’s commission Transport
Ink Printing
Computer rental Legal practice
Glue Cabinet maker

Question 7 40
Differentiate between Cost Accounting and

Financial Accounting in terms of the following
criteria:
• User
• Information time frame
• Reported accounting entity
• Frequency of reporting
Question 7 41
ANSWER :
CA FA
User Internal user such as External user such as the

production manager LHDN
Info time frame
Reported
accounting entity
Frequency of
reporting
Question 7 42
ANSWER :
CA FA

Past and future events, Past events, reporting

Info time frame forward looking what has happened
Reported
accounting entity
Frequency of
reporting
Question 7 43
ANSWER :
CA FA


Focus on small parts of the Focus on the whole

Reported Organization such as the organization as one entity
accounting entity testing & inspection dept
Frequency of
reporting
Question 7 44
ANSWER :
CA FA


Focus on small parts of the Focus on the whole

Reported Organization such as the organization as one entity
accounting entity testing & inspection dept
Reports are prepared daily, Reports are published

Frequency of weekly or monthly i.e. as semi-annually or annually
reporting needed by the management
DEC 2018 45
Parasol Corp is a famous company producing various types of
trendy umbrella. Recently, the company is planning to introduce
a new type of pocket size umbrella (ZRELLA) that would fit into a
coat pocket and purse.
You are required to classify the following costs involved in
producing ZRELLA according to the appropriate cost nature
(direct or indirect material / direct or indirect labour / direct or
i. Nylon Taffetaexpenses).
indirect Fabric used in producing ZRELLA.
ii. Wages of workers involved in assembling ribs and stretchers of
ZRELLA.
iii. Production space rental.
iv. ZRELLA advertising cost.
v. Wages of product tester who stands in a shower to make sure
the umbrella does not leak.
vi. Metal and steel used as part of the product component.
vii.Cost of a market research survey.
viii. Purchase of cutting machine specifically used for designing
ZRELLA.
ix. Salary of the sales manager.
DEC 2018 46
indirect expenses).
i. Nylon Taffeta Fabric used in producing ZRELLA. DIRECT MATERIAL
ZRELLA.
DEC 2018 47
indirect expenses).
ZRELLA. DIRECT LABOUR
iii. Production space rental.
DEC 2018 48
indirect expenses).
iii. Production space rental. INDIRECT EXPENSES
iv. ZRELLA advertising cost.
DEC 2018 49
indirect expenses).
iv. ZRELLA advertising cost. INDIRECT EXPENSES
v. Wages of product tester who stands in a shower to make sure the
umbrella does not leak.
DEC 2018 50
indirect expenses).
umbrella does not leak. DIRECT LABOUR
vi. Metal and steel used as part of the product component.
DEC 2018 51
indirect expenses).
vi. Metal and steel used as part of the product component. DIRECT
MATERIAL
vii.Cost of a market research survey.
DEC 2018 52
indirect expenses).
MATERIAL
vii.Cost of a market research survey. INDIRECT EXPENSES
viii. Purchase of cutting machine specifically used for designing ZRELLA.
DEC 2018 53
indirect expenses).
MATERIAL
DIRECT EXPENSES
ix. Salary of the sales manager.
DEC 2018 54
indirect expenses).
MATERIAL
DIRECT EXPENSES
ix. Salary of the sales manager. INDIRECT LABOUR
x. Electricity and water bill for office area.
DEC 2018 55
indirect expenses).
MATERIAL
DIRECT EXPENSES
ix. Salary of the sales manager. INDIRECT LABOUR
x. Electricity and water bill for office area. INDIRECT EXPENSES
JUNE 2018 56
DMX National Bhd (DMX) produces and assembles

“Prestige High Class” car model. Listed below are some of
the costs found for the production of the above car model.
You are required to classify the following costs according
to its behavior:
i. Electricity cost for DMX’s factory

ii. Annual fire insurance for DMX’s factory
iii.Wages paid to employees in DMX’s production department
iv. Hire of special machine to manufacture the car model
v. Maintenance costs of machinery used to produce the car
model
JUNE 2018 57
DMX National Bhd (DMX) produces and assembles
“Prestige High Class” car model. Listed below are some of
the costs found for the production of the above car model.
You are required to classify the following costs according
to its behavior:
i. Electricity cost for DMX’s factory
SEMI VARIABLE COST
ii. Annual fire insurance for DMX’s factory
FIXED COST
iii.Wages paid to employees in DMX’s production department
VARIABLE COST
iv. Hire of special machine to manufacture the car model
FIXED COST
v. Maintenance costs of machinery used to produce the
car model
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COST & MANAGEMENT

ACCOUNTING – ACC 416

Tengku Fairuz Binti Tengku Embong

 Provide information to parties outside of

 To judge a company’s past

02 Cost & Management Accounting

 Provide information to the management

 Relating to costs for planning,

Information is used Both are involved The same

Collieries (coal mine) per kg of coal extracted

Textile mills per yard (meter) of cloth manufactured

Electrical companies per units of electricity generated

Transportation companies per passenger mile (km)

Steel mills per kg of steel made

Per litre to determine cost of petrol

Per kilogram (of cement) to determine cost of cement

Per consulting hour(clinic) to determine cost of charging a

Per patient night to determine cost of hospital room

Per passenger-kilometer to determine cost of transportation

The following businesses provide services to customers.

Restaurant – meal served

Give two examples of cost centres for the following services:

Education – faculty, course, class, computer lab

Direct Cost Indirect Cost

MATERIAL LABOUR EXPENSES

Direct Cost Indirect Cost

Direct Cost Indirect Cost

DIRECT MATERIAL DIRECT LABOUR DIRECT EXPENSES

In the Cost Statement

All Direct Cost = PRIME COST

Direct Cost Indirect Cost

• E.g: Wages of maintenance

Direct Cost Indirect Cost

INDIRECT MATERIAL INDIRECT LABOUR INDIRECT EXPENSES

In the Cost Statement

All indrect Cost = OVERHEAD

To measure how the total amount Fixed

o The total variable cost varies

o The cost per unit remains

o Unlike variable cost, the

o Fixed cost that is only fixed within

Refer Graph Examples:

Administrative Costs Selling/Marketing Costs

Incurred for administrative Incurred for the purpose of

Product Cost Period Cost Conversion Cost

Controllable Cost Normal Cost

Uncontrollable Cost Abnormal Cost

a. Depreciation for the car used by the sales representative is treated as

b. Wood used in making furniture is a _______________.

e. _______________________ is a cost that a given manager can regulate or

f. Direct labour and overheads costs are also known as ______________________.

b. Wood used in making furniture is a DIRECT COST.

e. CONTROLLLABLE COST is a cost that a given manager can regulate or

FIXED COSTS ADMIN COST VARIABLE COST

a. Telekom Malaysia paid RM200,000 to advertise in TV3 for Chinese New

b. Steering wheels installed in Myvi car by Perodua.

e. Insurance on KFC Holding corporate building is paid yearly.

f. Sugar used in production of carbonated drink, Pepsi.

a. Telekom Malaysia paid RM200,000 to advertise in TV3 for Chinese New

Costs Business DM DL Prod Period

Costs Business DM DL Prod Period

Gas for oven Hot bread shop

Driver’s commission Transport