Costing principles

Costing Principles

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Cost and management
accounting


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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
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Functions of managerial
accounting

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Determining the cost
Providing relevant information for better

decision-making
Providing information for planning,
control, decision-making and
application

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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
4


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
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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

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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

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Element of cost






Cost object
Cost
Cost unit
Cost centre
Profit centre

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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

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Cost




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

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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

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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

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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

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Cost classification



Direct cost
Indirect cost (overhead)

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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:


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Direct materials
Direct labour
Direct expenses
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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

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Direct labour




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

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Direct expenses


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Other costs which are incurred for a
specific product or service

E.g. royalties

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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
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
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Indirect materials
Indirect labour
Indirect expenses
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Indirect materials


Such as stationery, consumable
supplies, spare parts for machine that

assist to the production of final
products

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Indirect labour


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

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Indirect expenses


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

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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

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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

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

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