Professional Documents
Culture Documents
Basic Concept
Basic Concept
1
Cost and management
accounting
Provides management with costs for
products, inventories, operations or
functions and compares actual to
predetermined data
It also provides a variety of data for
many day-to-day decision as well as
essential information for long-range
decisions
2
Functions of managerial
accounting
Determining the cost
Providing relevant information for better
decision-making
Providing information for planning,
control, decision-making and application
3
Planning
Deals with the estimation of product
costs, setting up of costing system to
record cost data, preparation of cost
standards and budgets, planning of
materials and manpower resources,
analysing cost behavior with changes in
levels of activity
4
Control
Deals with the maintenance of product
costing record, comparison of actual
performance with standards or budgets,
anlaysis of variances, recommendation
of corrective actions, controlling cost to
ensure operational efficiency and
effectiveness
5
Decision-making
Deals with whether it is more profitable
to make or buy a component,
determine the economic order quantity
and production batch size, replace fixed
asset, add or drop products, decide
pricing
6
Application
Cost accounting has extended from
manufacturing operations to a variety of
service industries such as hotels, bands,
airline, etc
Cost accounting system should be
flexible and adaptable to meet the new
business environment and the changing
nature of the company
7
Element of cost
Cost object
Cost
Cost unit
Cost centre
Profit centre
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Cost object
It is an activity or item or operation for
which a separate measurement of costs
is desired
E.g. the cost of operating the personnel
department of a company, the cost of a
repair fob, and the cost for control
9
Cost
It is the amount of expenditure incurred
on a specific cost object
Total cost = quantity used * cost per
unit (unit cost)
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Cost unit
It is a quantitative unit of product or
service in which costs are ascertained,
e.g. cost per table made, cost per
metre of cloth
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Cost centre
It is a location or function of an
organisation in respect of which costs
are ascertained
E.g. the rent, rates and maintenance of
buildings; the wages and salaries of
strorekeepers
12
Profit centre
It is location or function where
managers are accountable for sales
revenues and expenses
E.g. division of a company that is
responsible for the sales of products
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Cost classification
Direct cost
Indirect cost (overhead)
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Direct cost
Cost that can be identified specifically
with or traced to a given cost object
The direct costs consist of the following
three elements:
Direct materials
Direct labour
Direct expenses
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Direct materials
The cost of materials – the cost of
materials used entering into and
becoming the elements of a product or
service
E.g. fabrics in garments
16
Direct labour
The cost of remuneration for working
time
E.g. assembly workers’ wages in toy
assembly
17
Direct expenses
Other costs which are incurred for a
specific product or service
E.g. royalties
18
Indirect cost (overhead)
Cost that cannot be identified
specifically with or traced to a given
cost object
They are identified with cost centres as
overheads
Indirect materials
Indirect labour
Indirect expenses
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Indirect materials
Such as stationery, consumable
supplies, spare parts for machine that
assist to the production of final products
20
Indirect labour
Such as salaries of factory supervision
and office staff that do not directly
involve in production of the final
product
21
Indirect expenses
Such as rent, rates, depreciation,
maintenance expenses that do not have
instant relationships with the
manufacturing processes
22
Cost accumulation
•Prime cost = direct materials + direct labour + direct expenses
25
Cost behaviour
Costs can be classified into variable,
fixed, semi-variable, or step-costs
according to how they behave with
respect of changes in activity levels
26
Variable cost
It increases or decreases in direct
proportion to levels of activity, but the
unit variable cost remains constant
E.g. cost of food served in a restaurant
27
Fixed cost
Total fixed cost remains constant over a
relevant range of activity level but unit
fixed cost falls with an increase in
activity volume
28
Semi-variable cost
It processes characteristics of both fixed
and variable cost
It increases or decreases with activity
level but not in direct proportion
29
Step cost
It remains constant for a range of
activity levels, then, on further increase
in activity, the cost jumps to a new level
and remains constant over a certain
range until the next jump occurs
30
Cost for stock valuation
Unexpired and expired cost
Product and period cost
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Unexpired cost
Unexpired costs are the resources that
have been acquired and are expected
to contribute to the future revenue
They will be recorded as assets in
current period
They will be charged as expenses when
they have been consumed in the
generation of revenue
32
Expired costs
Expired costs are the expenses
attributable to the generation of
revenue in the current period
33
Product cost
Product cost are related to the goods
purchased or produced for resale
If the products are sold, the product cost will
be included in the cost of goods sold and
recorded as expenses in current period
If the products are unsold, the product costs
will be included in the closing stock and
recorded as assets in the balance sheet
34
Period cost
Period cost related to the operation of a
business
They are treated as fixed cost and
charged as expenses when they are
incurred
They should not be included in the
stock valuation
35
Comparison of cost,
management and financial
accounting
36
Meanings
Financial accounting
Cost accounting
Management accounting
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Financial accounting
Provides information to users who are
external to the business
It reports on past transactions to draw
up financial statements
The format are governed by law and
accounting standards established by the
professional accounting policies
38
Cost accounting
Is concerned with internal users of
accounting information, such as
operation managers
The generated reports are specific to
the requirement of the management
The reporting can be in any format
which suits the user
39
Management accounting
Comprises all cost accounting functions
The accounting for product and service
costs, management accounting extends
to use various internal accounting
reports for planning, control and
decision making
40
Cost and management accounting
Vs.
Financial accounting
41
Management Financial accounting
(cost)accounting
Nature Records material, Records company
42
Management Financial accounting
(cost)accounting
Accounting No need to use Use Generally
43
Management Financial accounting
(cost)accounting
Operation Based on Conforms to company
guidelines management Ordinances, stock
instructions and exchange rules,
or
requirements HKSSAPs
standards
44
Management Financial accounting
(cost)accounting
Time focus Future orientation: Past orientation: use
forecasts, estimates of historic data for
and historic data for reporting and
management evaluation
actions
45
Cost accounting
vs.
Management accounting
46
Management Cost accounting
accounting
Objective To provide To ascertain and
information for control cost
planning and
decision making by
the management
47
Management Cost accounting
accounting
Coverage Covers a wider Covers matters
area: financial relating to
accounts, cost ascertainment and
accounts, taxation, control of cost of
etc. product or service
48
Management Cost accounting
accounting
Deals with both Deals only with
Types of
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