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Costing Principles
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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
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Functions of managerial accounting
Determining the cost
Providing relevant information for better
decision-making Providing information for planning, control,
decision-making and application
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Control
Deals with the maintenance of product costing
record, comparison of actual performance
with standards or budgets, anlaysis ofvariances, 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 batchsize, 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 personneldepartment 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 (unitcost)
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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 ofbuildings; 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 responsiblefor 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 threeelements:
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
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 specificallywith or traced to a given cost object
They are identified with cost centres asoverheads
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 intofinished 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
To reducing error owing to descriptions
Enable easy recalling
Reduce computer file size as a code
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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
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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
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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
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Semi-variable cost
It processes characteristics of both fixed and
variable cost
It increases or decreases with activity levelbut not in direct proportion
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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
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Cost for stock valuation
Unexpired and expired cost
Product and period cost
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Unexpired cost
Unexpired costs are the resources that havebeen acquired and are expected to contributeto the future revenue
They will be recorded as assets in currentperiod
They will be charged as expenses when they
have been consumed in the generation ofrevenue
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Expired costs
Expired costs are the expenses attributable to
the generation of revenue in the current period
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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 asexpenses 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
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Period cost
Period cost related to the operation of a
business
They are treated as fixed cost and charged asexpenses when they are incurred
They should not be included in the stock
valuation
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Comparison of cost, managementand financial accounting
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Meanings
Financial accounting
Cost accounting
Management accounting
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Financial accounting
Provides information to users who are
external to the business
It reports on past transactions to draw upfinancial statements
The format are governed by law and
accounting standards established by the
professional accounting policies
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Cost accounting
Is concerned with internal users of accounting
information, such as operation managers
The generated reports are specific to therequirement of the management
The reporting can be in any format which
suits the user
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Management accounting
Comprises all cost accounting functions
The accounting for product and service costs,
management accounting extends to usevarious internal accounting reports for
planning, control and decision making
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Cost and management accounting
Vs.
Financial accounting
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Management
(cost)accounting
Financial accounting
Nature Records material,labour and overhead
costs in product or job
Reports produced are
for internalmanagement and
contol
Records company
transaction events
External financial
statements are produced
Accountingsystem
Not based on thedouble entry system
Follows the double entrysystem
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Management
(cost)accounting
Financial accounting
Accounting
principles
No need to use
accounting principles
Adopt any accounting
techniques that
generates usefulaccounting information
Use GenerallyAccepted
Accounting Principles for
recording transactions
Users of
information
Used by different
levels of management ordepartments responsible
for respective activities
Used by external parties:
shareholders, creditors,government, etc
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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 preparedwhenever needed
They may be
prepared on a weeklyor daily basis
Reports are prepared for
a definite period, usually
yearly and half yearly
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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 ofparts of the entity,
products, regions, etc
Financial summary of
the whole orgainisation
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Cost accounting
vs.
Management accounting
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Management
accounting
Cost accounting
Objective To provideinformation 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
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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 ofinternal management
The needs of both
internal and external
interested groups
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Management
accounting
Cost accounting
Types of
transactions
Deals with both
monetary any non-
monetary transactions,
covering both
quantitative andqualitative aspects
Deals only with
monetary transactions,
covering only quantitative
aspect
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