ACC466
FINANCIAL & MANAGEMENT ACCOUNTING
CHAPTER 4
INTRODUCTION TO COST AND
MANAGEMENT ACCOUNTING
By : Nur Hayati Ab Samad
Faculty of Accountancy
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LEARNING OUTCOMES
At the end of this chapter, students should be able to:
Differentiate between financial accounting, cost
accounting and management accounting
Able to explain and differentiate between cost, cost unit
and cost centre
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INTRODUCTION
ACCOUNTING
Financial Management Cost
Accounting Accounting Accounting
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Financial Management
Cost accounting
accounting accounting
The process of The process of The process of
classification, providing ascertainment
analysis and appropriate of cost of
recording the and essential goods
financial information to manufactured
transaction and internal users or services
determining for planning, rendered in the
how such controlling, business
transactions evaluating and
influence the decision
performance making for the
and financial business
position of the
business
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FINANCIAL ACCOUNTING VS COST ACCOUNTING
VS MANAGEMENT ACCOUNTING
AREA FINANCIAL COST MANAGEMENT
ACCOUNTING ACCOUNTING ACCOUNTING
Legal requirement Non-discretionary Discretionary and info should be
produced if benefits> cost
Users Internal and Internal users
external users
Reported Refers to the Refers to small units of organization
accounting entity entire
organization
Reporting Prepared annually May be prepared daily, weekly or
frequency or semi annually monthly
Accepted Should follow Flexible
accounting specific
principles requirements
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FINANCIAL ACCOUNTING VS COST ACCOUNTING
VS MANAGEMENT ACCOUNTING
AREA FINANCIAL COST MANAGEMENT
ACCOUNTING ACCOUNTING ACCOUNTING
Precision Report should be Estimated info which is based on past,
reasonably current and future data
accurate
Purpose Reports the To determine the To provide useful
results and cost of goods information for
position of manufactured or planning,
business to services rendered controlling and
stakeholders evaluating the
business
operation
Types of Measurable items Measurable items Qualitative and
information measurable items
Time dimension Historical data Current and future Future data
data
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FINANCIAL ACCOUNTING VS COST ACCOUNTING
VS MANAGEMENT ACCOUNTING
AREA FINANCIAL COST MANAGEMENT
ACCOUNTING ACCOUNTING ACCOUNTING
Judgement Information is used for decision making
Recording Use systematic record keeping procedure to prepare
relevant reports
Stewardship Focus on responsibility and accountability of the
function organization to stakeholders
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COST CONCEPT
Costing = the action or process of determining
cost of doing something
The objectives of costing are:
i. To determine cost
ii. To plan and control cost (compare actual vs
budget)
iii. To make decision
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COST TERMINALOGY
Cost object-any activity for which different measurement of cost is desired.
Eg.;a product is the cost object for direct materials, direct labor and
manufacturing overhead.
Cost unit the quantitative unit of product or service in relation to which
cost can be ascertained. E.g.; Kg, KWH, and liter.
Cost- the expenses incurred in producing a product or cost of providing
services to customers
Cost centres a break down of a business into sections where cost can be
collected or charged.
CIMA classified the cost centres into a location, person or item of
equipment which cost be determined and related to cost units.
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Classification of cost centres:
i. Process cost centres specific process or continuous
sequence of operations is performed.
E.g. Bakery business - mixing, baking, and packaging
departments
ii. Production cost centres where the production takes
place.
E.g. Car manufacturing company machine and
assembly departments.
iii. Service cost centres cost centre which provide
services to other cost centres.
E.g. Canteen, maintenance, and store.
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CLASSIFICATION AND TYPES OF COSTS
i. Nature
ii. Behaviours
iii. Controllability
iv. Normality
v. Function
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NATURE- ELEMENTS OF COSTS
MATERIALS
Direct materials all materials that can be physically identified to a
specific product or services.
Indirect materials items of material that cannot be physically
identified with a specific product or services.
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LABOUR
Direct labour labour costs that can be traced or identified to a
specific product or services.
Indirect labour wages of employees who do not work directly with
the product or services itself (just assist in the manufacturing
operation).
E.g. Carpenter Supervisor
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EXPENSES
Direct expenses expenses which are incurred specifically to a
particular product.
Indirect expenses all other costs needed to operate the factory
which is not charged directly to the product.
Indirect
Total direct cost= Prime costs
Total indirect costs= Production overhead costs
Conversion cost= Direct labour costs and production overhead
costs incurred in the production department that are used to
convert raw materials into finished goods
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COST BEHAVIOURS (4 types)
a) Fixed Cost Cost that will not change over a
given range of activity and period of time.
E.g. Rental
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b) Variable cost cost that vary in direct
proportion to the level of activity (volume of
production). E.g. material costs, labour costs
and etc.
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c) Mixed cost cost that contain both fixed and
variable cost. E.g. telephone bills
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d) Step cost cost that are fixed over a range of
activity and then rise to a new level as activity
level changes. E.g. supervisory salaries,
depreciation
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CONTROLLABILITY
Controllability classifying cost based on the
basis of managerial influence.
a) Controllable cost cost which can be
influenced by the action or decisions of the
relevant manager. E.g. labour cost and
overtime.
b) Uncontrollable cost cost that cannot be
influenced by the manager. E.g. cost of raw
materials, tax.
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NORMALITY
a) Normal cost cost that are expected and
planned for a given level of output. Cost which
are unavoidable.
E.g. Loss of liquid petrol that evaporates
under efficient operating conditions.
a) Abnormal cost cost that are not expected
to occur under efficient operating conditions.
Cost which are unavoidable.
E.g. Loss of production due to machine break-
down.
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FUNCTION
Function classifying the cost based on the function to
which they relate.
a) Production cost Cost of manufacturing product.
b) Administration cost Administrative cost of
operation in order to formulate policies, directing and
controlling operations.
c) Selling and distribution-Advertisement and
distribution cost
d) Finance- Cost incurred in financing of the business
e) Research and development-Cost in developing new
or improved ideas
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OTHER TYPES OF COSTS
Product cost Eg. Cost of stationaries which are
purchased for resale
Period cost Eg. rental for office building
Relevant cost Estimated future cost that may be
changed by a decision
Irrelevant cost - Estimated future cost that remains the
same and not affected by a decision
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OTHER TYPES OF COSTS
Irrelevant cost - estimated future cost that remains the same and not
affected by a decision
Avoidable cost -cost that may be saved by not accepting a given
alternative or action
Unavoidable cost -cost that cannot be omitted as a result of selecting
one alternative
Opportunity cost the benefit foregone by rejecting one alternative
while accepting other
Sunk cost cost of resources already incurred in the past where the
amount will not be affected by any decision made in the future
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COST STATEMENT
Prime cost = Direct material + Direct labour +
Direct Expenses
Production cost = Prime cost + Manufacturing
overhead
Total cost = Production cost + Non manufacturing
overhead
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Selling price = Total cost + Profit
Chapters Tutorial
1. Refer to past year question:
June 2016 (Q1 c & d)
Dec 2015 (Q1 c& d)
June 2015 (Q1 d)
Dec 2014 (Q1 d)
June 2014 (Q 1 c & d)
Its not that Im so smart, its just that I stay with problems longer.
~ Albert Einstein
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