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 CHAPTER 1
Fundamentals of Costing

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 Introduction

 History
 Cost Accounting
– Ascertain costs
– Plan and control costs
– Make decisions

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 Conceptual overview of cost
accounting and cost management

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 Costing Principles

 Cost: amount of money spent on a thing

 Cost units: quantitative unit to which costs can
be associated, e.g. a litre of petrol
 Cost centres: sections or departments to
which costs can be related, e.g. production and
service cost centres

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 Classification of Costs

 Cost classification: classifying costs according

to the purpose for which costs are required, e.g.
behavior, function, controllability, normality, cost
units.
‒ Behaviour
• Fixed cost
• Variable cost
• Semi-variable or fixed cost

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 Classification of Costs (cont.)

‒ Function
• Production
• Administration
• Selling and distribution
• Research and development

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 Classification of Costs (cont.)

‒ Controllability
• Controllable cost
• Non-controllable cost
‒ Normality
• Normal cost
• Abnormal cost

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 Classification of Costs (cont.)

‒ Cost units
• Material
• Labour
• Expenses or overhead

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 Cost Statement

 A cost statement provides for the assembly of

the detailed cost of a cost centre or cost unit.
 It is also referred to as cost sheet or cost card.

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 Costing Methods

 Specific order
‒ Job
‒ Contract
Operation
‒ Process
‒ Service

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 Costing Techniques

 Marginal costing
 Absorption costing
 Budgetary control
 Standard costing
 Transfer pricing

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 Accounting for Costs

 Cost accounts
 Financial accounts
 Integrated accounts

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 Strategic Cost Accounting

 Value chain analysis

 Strategic position analysis
 Cost driver analysis

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