Chapter One
Overview of Cost and Management Accounting
1.1 Objectives of Cost & Management Accounting
1.2 Cost and mgt accounting in comparison with financial accounting:
• Their purposes,
• Role of cost accounting as part of a management infn system, and
• Need for both financial as well as non-financial information
1.3 Cost classification concepts and terms, such as:
• Direct and indirect costs,
• Fixed and variable costs,
• Period and product costs,
• Controllable and uncontrollable costs,
• Avoidable and unavoidable costs,
• Sunk costs,
• Budgeted, Std & actual costs and their comparisons and analyses
1.4 Use of linear, curvilinear & step functions and how their calculations
are used to analyse cost behavior
1.5 Concepts of cost units, cost centres and profit centres
Chapter One
Overview of Cost and Mgt Accounting
1.1. Objectives of Cost & Mgt Accounting
1) To ascertain & determine cost per unit of d/t prodts mfred.
2) To provide cost data that serve as a guide for fixing or
determine price of products mfred/services rendered.
3) To exercise effective control of RMs, WIP, and FG.
4) To use resources efficiently and economically.
5) To present and interpret data for mgt in planning, decision
making, and controlling.
6) To help in preparation of budgets.
7) To supply useful data to mgt to take various decisions such
as introducing new products, replacement of labor
1.2 Cost and Mgt Accounting in comparison with FA:
Cost Accounting: measures & reports financial and
nonfinancial infn acquiring & using resources.
Reports how costs accumulate as corporations use resources
to produce and sell their products and services.
Management accounting: measures, analyzes, and reports
financial and nonfinancial infn to internal managers.
The goal is to use past performance to predict the future.
Reports show how activities can be changed to affect and
improve what will happen in the future
Management accountants reorganize and analyse financial
and non-financial data using rigorous methods.
Financial accounting: focuses on reporting to external
parties such as investors, gov’t agencies, banks, etc.
Comparison of Management Accounting and FA
Cost terminologies
Cost object is any product, service, customer, activity, or
organizational unit to which costs are assigned
Products, services, and customers are generally cost objects;
mfring dep’ts are considered either cost pools or cost objects,
Cost assignment process of assigning resource costs to cost
pools and then from cost pools to cost objects.
There are two types of assignment - direct tracing & allocation
Cost tracing assigning of direct costs to the chosen cost object.
Cost allocation: assignment of indirect costs to cost pools and
cost objects
A relevant range range of cost driver in w/c a specific r/n s/p
b/n cost and cost driver is valid
Cost behavior r/n s/p b/n cost and activity or cost driver.
1.3 Cost classification concepts and terms
A. Classification of Costs: By Function
1) Manufacturing costs: costs associated with the production
function in the plant or factory.
›They can be further subdivided into:
a) Direct manufacturing costs: costs directly traceable to
the product being manufactured.
› Classified into direct material and direct labor.
b) Indirect manufacturing costs: all other mfring costs that
can not be traced to any one product.
› They are lumped into one category called manufacturing
over head/factory over head/ indirect product costs.
2) Non manufacturing costs: those costs associated with the
function of selling and administration.
› Selling costs include costs necessary to market and
distribute a product or service; for instance salaries and
commission for sales personnel, advertising, warehousing,
B. Classification of Cost: In Combination
1) Prime costs: all direct manufacturing costs incurred.
› Also called direct manufacturing costs.
› Prime cost = DM + DL
2) Conversion/processing cost: all mfring costs other than DM
› Costs of converting DMs into finished manufactured part.
› Conversion cost = DL + MOH
[Link] of Cost: By controllability
1) Controllable cost: cost heavily influenced by a manager, in
effect, a cost a manager is authorized to incur.
›Are regulated/controlled by specified member of organization.
2) Uncontrollable cost: cost over w/c a manager has no significant
influence.
› Cannot be controlled by specified member of undertaking
D. Classification of Costs: By Cost Behavior
1) Variable/Flexible cost: costs that change in total in proportion
to changes in a cost driver.
› It varies in direct proportion to the level of activity such as the
volume of output.
› Example: RM, labour, factory utilities,
2) Fixed/Static cost: costs that do not change in total despite
changes in a cost driver or level of activity.
› Examples: rents, insurance of Factory building, and factory
manager’s salary, factory depreciation.
E. Classification of Cost : External Reporting Purposes
1) Product/inventriable cost: those costs of production having
potential to produce revenues beyond current period.
› Example: DM, DL, FOH costs.
2) Period costs: costs that are expensed in the prd in w/c they are
incurred
› Some times called operating or non manufacturing costs.
F. Classification of Costs: By Cost Relevance
1) Avoidable costs: costs that will not continue if ongoing
operation is changed or deleted.
› Therefore, avoidable costs are relevant costs.
› Example: dep’t salaries & other costs that could be eliminated
by not operating the specific dep’t.
2) Unavoidable costs: costs that will continue even if operation is
halted or stopped.
› Unavoidable costs are not relevant.
› Example, store deprn, heating, air conditioning, and general
mgt expenses are costs of shared resources used by all dep’ts.
3) Sunk cost Costs that have already been incurred and will not
be changed or avoided by any present or future decisions..
› Example: costs that have been incurred in the past or are
committed for the future and are irrelevant to decision making.
› Amount spent in the past to purchase/repair a machine
Budgeted, Std & Actual costs & their comparisons & analyses
Standard costs are the estimated costs for products that are
predetermined and arise from the units of material, labour and
other costs of production for the specific time period.
Standard cost can be compared to actual cost once the product
has been created or manufactured.
Actual costs: costs that are actually incurred.
› It’s the realized value and is not an estimate.
› Example: total cost of materials, DL, and overhead costs that
are incurred due to production.
› FIFO, Average cost and LIFO
Generally,
Standard cost is estimate of expected cost, actual cost is what
was actually spent to produce the product.
Actual cost is a real cost of manufacturing a product, which
can be calculated after it has been produced.
1.4. Use of linear, curvilinear & step functions
Linear Cost Function:
• It is a mathematical method used by businesses to determine total
costs associated with a specific amount of production.
• This method of cost estimation can be done whenever the cost for
each unit produced remains the same no matter how many units
are produce.
Concepts of Cost Units, Cost Centers and Profit Centers
A. Cost Unit: is characterised as the unit of service, time,
movement, product, or mix according to which cost is assessed.
› At the time of setting up the cost proclamations, statements, and
records, a specific unit is needed to be chosen.
› It assists with distinguishing expense precisely and allot d/t
costs.
› It helps the expense estimation interaction of organisation and
advances correlation.
B. Cost Centre: is a division, function, dep’t or capacity
inside an association that doesn’t straight forwardly add to
benefit or profit yet at the same time costs the association
cash to operate.
C. Profit Centre: is a branch or division of a company that
directly adds or is expected to add to entire organization's
bottom line.
• It is treated as a separate, standalone business, responsible
for generating its revenues and earnings.
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