INTRODUCTION TO COST &

MANAGEMENT ACCOUNTING

BASIC COST ACCOUNTING

CONCEPTS
CHAPTER 1
PRESENTATION OVERVIEW:
• Definition
• Objectives
• Costs and management accountant code of ethics certifications
• Cost Terminology
• Classifications of Cost:
• By nature
• By function
• By behaviour
• Traceability
 ACCOUNTING

Financial Cost
Accounting Accounting

Record, classify &

analyze financial
transaction to
ascertain how it
???
effects performance
& financial position
of business
Cost Accounting is:

“The application of accounting and costing principles, methods and techniques

in the ascertainment of costs and analysis of savings and/or excesses as
compared with previous experience or with standards.” (CIMA)

Costing is:
- The process of determining cost of doing something
- i.e. Standard costing –usually associated with a manufacturing
company’s costs of direct material, direct labour and manufacturing
overhead.
- Standard cost >actual cost = favourable variance
 DIFFERENCES BETWEEN COST ACCOUNTING & FINANCIAL
ACCOUNTING
Differences Financial Accounting
Features -Must be accurate and timely
otherwise external users have
little confidence
Users -Internal users i.e. Employee
-External users i.e. Investor
- Public documents
Time period -Prepared for a definite period,
usually a year
Scope -Highly aggregated information
about overall organization
Legal -To comply with statutory
Requirement requirement i.e. Company Act
1965, FRS
Cost Accounting
-Usually approximate but relevant
at the time of decisions
-Internal users. (mgt purpose)
-i.e. production managers & senior
management
-Confidential documents / data.
-Prepared as and when required
-Disaggregated information to
support local decisions
-Not required by law
-Optional to produce if the benefits
from using it exceed the cost of
collecting it
DIFFERENCESBETWEENCOSTACCOUNTING,MANAGEMENTACCOUNTING&FINANCIAL
ACCOUNTING.
Difference Financial Accounting
s
1.Definition -Classification & recording of
monetary transactions of an entity
in accordance with established
concepts, principles, accounting
standards & legal requirements &
presentation of a view of those
transactions during & at the end of
an accounting period.
Cost Acounting
-Establishment of budgets,
standard costs & actual costs
of operations, processes,
activities/ products;and the
analysis of
variances,profitability / social
use of funds.
Management Accounting
-Management accounting is
concerned with the
provisions and use of
accounting information to
managers within
organizations, to provide
them with the basis in
making informed business
decisions that would allow
them to be better equipped
in their management control

2. Users -External users. - -Internal

users. (mgt purpose) - -Internal (within company)
Public documents Confidential documents / data. -Confidential documents /
data.

3. Legal - Statutory (Co. Act, IAS) - Optional - Optional

Requireme
nt
4.Time/ - Past events (historical basis) - Past & future events as to -Future & past information to
Purpose assist planning operations. help decision making.

6
 DifferencesbetweenCostAccounting,ManagementAccounting&Financial
Accounting
Differences Financial Accounting Cost Acounting Management
Accounting

5.Analysis/ -Reports activities for the - Focus on small parts of -Focus on small parts ;
Segments co. in monetary terms products, department. cost & profitability of
Deal with monetary & non products,services,
monetary terms. customers & activities.
6. Precision - Information must be - Estimates & - Estimates &
accurate approximations are approximations are
more useful. more useful.

7. Report - Published annually - Prepared daily,weekly - Prepared daily,weekly

/semi anually or monthly. or monthly.

7
 DIFFERENCE BETWEEN MA & FA
No Basic of differences Management Financial Accounting
Accounting

1. Class of users Internal users External users

2. Legal compliance none Must comply with

Companies Act 1956
3. Information time Relating to the future Relating to the past
dimension
4. Standard used None & flexible FRS or MASB

5. Accounting entity For organization’s dept For the whole

organization
6. Reporting interval/ When required Yearly/ quarterly basis
report frequency
8
7. Level of accuracy Estimation & more Objective & use of
subjective. accounting principles.
 OBJECTIVES OF COSTING
• To determine cost
• To ascertain cost of product, process, job etc.
• To plan and control cost
• Controlling cost by setting standards and compared with
actual, the variances between the two is identified and steps
taken to control them

• To make decision making

• The cost information provided may help management decide
whether to buy component from outside or to make
component internally.
PROFESSIONAL ETHICS

• The four standards of ethical conduct for management

accountants as advanced by the Institute of
Management Accountants:
• Competence
• Confidentiality
• Integrity
• Objectivity

© 2012 Pearson Education. All rights reserved.

1.4 – COSTING PRINCIPLES & CONCEPT

The amount of actual expenditure incurred on

Cost
to a specific thing or activity.

Cost unit

A breakdown of a business into sections where cost

Cost Centers
can be charged.

Classification of Process Cost

Cost Centers Centre
Production
Cost Center
Services
Cost Center 11
 COST DEFINITION: COST TERMINOLOGY
Cost – Amount of expenditure incurred in producing
product/service / resources forgone to achieve specific
objective i.e. material cost
Cost object – Any activity for which cost can be
ascertained i.e. cost of manufacturing a car
Cost unit – A quantitative unit of product/service to
which costs are ascertained
EXAMPLES OF COST UNIT
Item Cost units
Petrol Litres of petrol
Sugar Kilograms purchased
Textile Meters of fabric
Soft drink Gallons of per dozen cans
Electricity Kilowatt hours

Doctors Hours worked, No. of

patients
Hotel Bed per night, No. of guests
Public transport Tickets issued, miles travel
 COST TERMINOLOGY (CONT’D)
Cost Centre-A breakdown of a business into sections
(location or function) where cost can be charged.

Classification:
-Process CC - Specific process/continuous sequence of
operations carried out
-Production CC- production performed
-Service CC- Provision of service to other CC
COST CENTER:

Administr
Raw material
ation Cutting
storage
office
Assembly
Showroom

Product storage Finishing

Canteen Product inspection 15

COST CLASSIFICATION
1) By Function

• Production cost –Costs incurred in the prod process i.e.

direct material costs, direct labor costs, overheads

• Administrative cost –Costs incurred in the office i.e. admin

clerk salary, dep’n of office building, etc

Selling and distribution costs –Cost of advertising,

• presenting products to customers, securing orders, cost
to dispatch & deliver products to customers i.e.
salesmen’s commission, discount allowed, transportation
costs etc

• Research and development - Cost that relate to finding

new ideas, materials, methods, new scientific or technical
knowledge to produce new or improved products.
 Functions

4 types of costs

Production costs Research and evelopment

Admin
Selling and distributions

17
2) By behaviour

– How cost reacts with changes in units produced

• Fixed cost –costs that remain unchanged with changes in

units i.e. rental of factory, dep’n of machinery, etc
• Variable costs –costs that change in direct proportion
with changes in units produced i.e. direct material costs,
direct labour costs, royalty payable etc
• Semi-variable/Semi-fixed cost – costs that have both the
variable and fixed costs i.e. telephone costs (fixed line
plus monthly charges consumed)
• Step costs/Mixed costs -Cost remains unchanged for
certain level of production, once this level change, the
costs for the next relevant range will increase i.e.
production supervisor’s salary
GRAPHICAL ILLUSTRATION: COST
BEHAVIOUR

Variable cost Fixed cost

Cost (RM) Cost (RM)

0 No. of Unit 0 No. of Unit

GRAPHICAL ILLUSTRATION: COST
BEHAVIOUR
Step cost
Semi Variable cost
Cost (RM) Cost (RM)

Variable
element

Fixed element
0 No. of Unit 0 No. of Unit
 Cost Behavior

4 types of costs

Fixed Costs Step costs

Variable costs
Semi variable costs/
Semi fixed costs/
mixed cost 21
3) By Nature

• Materials
• Basic elements or ingredients of a product
• i.e. the materials cost of a cupboard is wood

• Labour
• People involved in making a product
• i.e. the labour cost of a cupboard comprises of the cost of
carpenter who made the cupboard

• Production overhead = indirect material +indirect

labour+ indirect expenses
• Manufacturing costs that are not directly traceable to
specific cost units
• i.e. varnish, electricity of workshop, janitors of factory
 Nature

3 types of costs

Production OH

Materials IM
IE

Labour IL
23
4) Traceability

• Direct costs –costs that can be traceable to the

products. i.e. for tables direct costs are wood, steel,
carpenter wages etc
• Indirect costs –costs that cannot be identified to the
products. i.e. for tables ind costs are glue, nails,
supervisor’s salaries, etc
 Traceability

2 types of costs

Direct Costs Indirect costs

25
 Cost classification

Behavior Nature Function Controllability

Material,
labour,
overhead
Contain
both fixed
and
variable Controllable
Uncontrollable
elements Administration
Production costs costs Marketing costs
R&D costs

Fixed cost
Variable cost Costs that are
Semi variable @
semi fixed costs Step costs influenced by Costs that are
the decision not
of a manager influenced by
Costs are fixed then
the decision
rise to a new level
Costs that of a manager

Costs that are changes

will not in the level
change of activity

5/18/2018 26
 EXERCISE
For each of the cost behaviour below in respect of a cake
shop,
a) Fixed cost
b) Variable cost
c) Semi variable cost

i- Define the cost

ii-Illustrate the cost behaviour pattern in graph Iii-

Provide an example each
A involves in producing ready-made clothes. Classify all
the items below into its types of cost; fixed, variable &
semi-variable cost
a) Depreciation for Plant & Machinery
b) Electricity charges
c) Fabrics in the production of clothes
d) Threads and needles
e) Wages paid to tailors
f) Salary of fashion designer
g) Factory rental
h) Fixed line telephone charges
i) Insurance on stocks
j) Maintenance of machinery
Classify each of the cost below according to its
function:
a)
b) Cost of needle in Jovian boutique factory
Developing a new product at the laboratory
c)
Depreciation of delivery van of Atlas Ice co.
d) Car bumper installed in Preve car by Proton
e) Entertainment expenses of salesmen
f) Fire insurance paid yearly on KHR office building
g) Sugar used in the production of Kuih Bahulu
h) Secretarial fees paid by a public listed company
Fruits in a can produced by F&N company.
i)
Discount allowed to customers for early payment of
j) their debts
k) Cost incurred in developing profitable vacuum cleaner
improvements in a vacuum cleaning company
END OF CHAPTER