cost accounting

• Cost accounting


  The establishment of budgets, standard costs and actual costs of operations, processes, activities or products; and the analysis of variances, profitability or the social use of funds
• Management accounting


  Concerned with the provision of information to people within the organization to help them make better decisions
• Financial accounting


  Concerned with the provision of information to external parties outside the organization
• Cost


  An amount that has to be paid or given up in order to get something. In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses.
• Cost unit


  A unit of product or service in relation to which costs are ascertained. Examples of cost units are cost per student, cost per site developed, cost per bottle, cost per kg and cost per case.
• Suitable cost units


  • A college - cost per student, cost per equivalent full time student, cost per student per hour
  • A house builder - cost per completed house, cost per site developed
  • A carpet manufacturer - cost per roll, cost per 1,000 square metres
  • A coal mine - cost per tonne coal mine
  • An accountant in practice - cost per chargeable client per hour
  • A hospital - cost per outpatient treated, cost per bed occupied per day
  • A water treatment plant - cost per bottle, cost per case
• Cost centre


  A defined area, machine or person to whom direct and indirect cost are allocated. Cost centre also is a production or service location, function, activity or item of equipment for which costs are accumulated. The manager and employers of cost centre are responsible for its costs but not responsible for revenues or investment decisions.
• Types of cost centre

  • Process cost centre
  • Product cost centre
  • Service cost centre
• Ways of classifying costs

  • Behaviour
  • Function
  • Cost units
  • Controllability
  • Normality
• Direct materials


  Consist of all those materials that can be physically identified with a specific product
• Direct labour


  Consists of those labour costs that can be specifically traced to or identified with a particular product
• Prime cost


  Refers to the direct costs of the product and consists of direct labour costs plus direct material costs plus any direct expenses
• Manufacturing overhead


  Consists of all manufacturing costs other than direct labour, direct materials and direct expenses. It therefore includes all indirect manufacturing labour and material costs plus indirect manufacturing expenses.
• Indirect materials


  Consist of materials used for the repair of a machine that is used for the manufacture of many different products. These items of materials cannot be identified with any one product, because they are used for the benefit of all products rather than for any one specific product.
• Indirect labour


  Consists of those labour costs that cannot be specifically identified with the product.
• In a manufacturing organization, all manufacturing costs are regarded as product costs and non-manufacturing costs are regarded as period costs
• In manufacturing organizations, the calculation of product costs consists of three elements: direct materials, direct labor, direct expenses and manufacturing overhead
• Product costs


  Are those costs that are identified with goods purchased or produced for resale. In a manufacturing organization, they are costs that the accountant attaches to the product and that are included in the stock valuation for finished goods or for work in progress.
• Period costs


  Are those costs that are not included in the stock valuation and as a result are treated as expenses in the period in which they are incurred
• Fixed costs


  Remain unchanged when activity changes (constant)
• Variable costs


  Change when activity changes
• Mixed Costs (semi variables or semifixed)


  Cost that have characteristics of fixed and variables cost, it depends on level of activity
• Step cost


  Does not change steadily with changes in activity volume, but rather at discrete points. The concept is used when making investment decisions and deciding whether to accept additional customer orders. A step cost is a fixed cost within certain boundaries, outside of which it will change.
• The cost of flour to produce 100 loaves of bread is $10. If RQB produce 200 loaves then the cost of flour is $20.
• The cost of flour per loaf does not change. What changes is the total cost of flour used in production.
• The cost of flour per loaf to produce 100 loaves is $0.10 (calculated as $10 / 100 loaves). When activity increases to 200 loaves, the cost of flour per loaf remains at $0.10 (calculated as $20 / 200 loaves).
• Fixed costs


  The cost of rent is not affected by how much RQB produces (the activity level). Rent is a fixed cost.
• Because the fixed cost of rent remains the same, the fixed cost per unit (loaf of bread) will decrease as more loaves are produced. This is because the fixed cost of the rent is spread over more loaves of bread.
• The $1,000 rent per month shared out over 1,000 loaves of bread is a fixed cost per loaf of $1.
• Variable costs


  Costs that change in response to changes in the level of activity
• Fixed costs


  Costs which are unaffected by changes in the level of activity
• In the long term all costs are variable because costs (such as rent for the office) inevitably change over time
• Cost of flour per loaf

  Does not change, what changes is the total cost of flour used in production
• Cost of flour per loaf

  • $0.10 to produce 100 loaves
  • $0.10 to produce 200 loaves
• Fixed costs


  Costs that are not affected by the level of activity, such as rent
• As more loaves are produced

  The fixed cost per unit (loaf of bread) decreases
• Mixed costs


  Costs that include a fixed element and a variable element
• As the level of activity increases


  The total cost increases
• As the level of activity increases


  The cost per unit decreases
• Stepped-fixed costs


  Costs that remain fixed over a certain range of activity, but once the level of activity increases past a certain point, the cost takes a significant 'step up'