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1 Costing Principles. 2 Cost and management accounting Provides management with costs for products, inventories, operations or functions and compares.

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Presentation on theme: "1 Costing Principles. 2 Cost and management accounting Provides management with costs for products, inventories, operations or functions and compares."— Presentation transcript:

1 1 Costing Principles

2 2 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

3 3 Functions of managerial accounting Determining the cost Providing relevant information for better decision-making Providing information for planning, control, decision-making and application

4 4 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

5 5 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

6 6 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

7 7 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

8 8 Element of cost Cost object Cost Cost unit Cost centre Profit centre

9 9 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

10 10 Cost It is the amount of expenditure incurred on a specific cost object Total cost = quantity used * cost per unit (unit cost)

11 11 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

12 12 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

13 13 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

14 14 Cost classification Direct cost Indirect cost (overhead)

15 15 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

16 16 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

17 17 Direct labour The cost of remuneration for working time E.g. assembly workers’ wages in toy assembly

18 18 Direct expenses Other costs which are incurred for a specific product or service E.g. royalties

19 19 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

20 20 Indirect materials Such as stationery, consumable supplies, spare parts for machine that assist to the production of final products

21 21 Indirect labour Such as salaries of factory supervision and office staff that do not directly involve in production of the final product

22 22 Indirect expenses Such as rent, rates, depreciation, maintenance expenses that do not have instant relationships with the manufacturing processes

23 23 Cost accumulation Prime cost = direct materials + direct labour + direct expenses 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 cost) OR = Production cost + period cost (administrative, selling, distribution and finance cost) Period cost is treated as expenses and matched against sales for calculating profit, e.g. office rental

24 24 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 various composite accounting items

25 25 Reasons To reducing error owing to descriptions Enable easy recalling Reduce computer file size as a code

26 26 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

27 27 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

28 28 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

29 29 Semi-variable cost It processes characteristics of both fixed and variable cost It increases or decreases with activity level but not in direct proportion

30 30 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

31 31 Cost for stock valuation Unexpired and expired cost Product and period cost

32 32 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

33 33 Expired costs Expired costs are the expenses attributable to the generation of revenue in the current period

34 34 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

35 35 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

36 36 Comparison of cost, management and financial accounting

37 37 Meanings Financial accounting Cost accounting Management accounting

38 38 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

39 39 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

40 40 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

41 41 Cost and management accounting Vs. Financial accounting

42 42 Management (cost)accounting Financial accounting Nature Records material, labour and overhead costs in product or job Reports produced are for internal management and contol Records company transaction events External financial statements are produced Accounting system Not based on the double entry system Follows the double entry system

43 43 Management (cost)accounting Financial accounting Accounting principles No need to use accounting principles Adopt any accounting techniques that generates useful accounting information Use Generally Accepted Accounting Principles for recording transactions Users of information Used by different levels of management or departments responsible for respective activities Used by external parties: shareholders, creditors, government, etc

44 44 Management (cost)accounting Financial accounting Operation guidelines or standards Based on management instructions and requirements Conforms to company Ordinances, stock exchange rules, HKSSAPs Time span Reports are prepared whenever needed They may be prepared on a weekly or daily basis Reports are prepared for a definite period, usually yearly and half yearly

45 45 Management (cost)accounting Financial accounting Time focus Future orientation: forecasts, estimates and historic data for management actions Past orientation: use of historic data for reporting and evaluation Perspective Detailed analysis of parts of the entity, products, regions, etc Financial summary of the whole orgainisation

46 46 Cost accounting vs. Management accounting

47 47 Management accounting Cost accounting Objective To provide information for planning and decision making by the management To ascertain and control cost Basic of recording Concerned with transactions related to the future Based on both present and future transactions for cost ascertainment

48 48 Management accounting Cost accounting Coverage Covers a wider area: financial accounts, cost accounts, taxation, etc. Covers matters relating to ascertainment and control of cost of product or service Utility Only the needs of internal management The needs of both internal and external interested groups

49 49 Management accounting Cost accounting Types of transactions Deals with both monetary any non- monetary transactions, covering both quantitative and qualitative aspects Deals only with monetary transactions, covering only quantitative aspect

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