Costing

Principles
Prof.Dr.S.Kathirrvelu
EiTEX, Bahir Dar University,
Ethiopia.

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

Control

Deals with the maintenance of product

costing record, comparison of actual
performance
budgets,

with

anlaysis

standards
of

or

variances,

recommendation of corrective actions,

controlling cost to ensure operational
efficiency and effectiveness

Decision-making

Deals

with

profitable

whether
to

make

it

is

or

more

buy

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

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

Cost

It

is

the

amount

of

expenditure

incurred on a specific cost object

Total cost = quantity used * cost per

unit (unit cost)

10

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

11

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
13

Cost classification

Direct cost

Indirect cost (overhead)

14

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

15

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

19

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 expens

Production cost = Prime cost + factory overhead
OR
= Direct materials + Conversion cost
*Conversion cost is the production cost of converting raw
materials into finished product

Total cost = Prime cost + Overheads (admin, selling,distribution c

OR
= Production cost + period cost (administrative, selling,

distribution and finance cost)

Period cost is treated as expenses and matched against sales for calcula
rofit, e.g. office rental
23

Cost coding

A code is a system of symbols designed

to be applied to a classified set of items
to give a brief, accurate reference,
facilitating entry, collation and analysis

Coding

is

important

in

modern

computerised accounting systems for

catergories
accounting items

various

composite
24

Reasons

To

reducing

error

owing

to

descriptions

Enable easy recalling

Reduce computer file size as a

code
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

31

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

generation of revenue

32

in

the

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

35