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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