chapter 1

• cost accounting 


  the recording, classifying and summarising of cost data of an organisation
• management accounting


  the accounting in which both financial and non-financial information are provided to managers
• financial accounting


  an accounting system that focuses on the preparation of financial statement of an organization to provide the financial information to the interested parties
• comparison cost accounting & management accounting: information type

  CA: quantitative MA: quantative and qualitative
• comparison cost accounting & management accounting: objective

  CA: determine the cost of production

  MA: providing information to managers to set goals and forecast strategies
• comparison cost accounting & management accounting: scope


  CA: narrow, as it is limited only up to the cost information MA: its area of operation is wide
• comparison cost accounting & management accounting: specific procedure

  CA: yes MA: no
• comparison cost accounting & management accounting: recording


  CA: records past and present data MA: it gives more stress on the analysis of future projections
• differences between financial accounting and management accounting: user orientation


  FA: caters the needs of external and internal users MA: caters the needs of internal users
• differences between financial accounting and management accounting: report frequency


  FA: less frequent in nature (annually, quarterly) MA: more frequent (daily, weekly)
• differences between financial accounting and management accounting: time dimension


  FA: records on past / historical events MA: focuses on the current & future time period
• differences between financial accounting and management accounting: legal requirements

  FA: public limited companies are compulsory to reveal the financial statement

  MA: no specific format on rules for reporting on cost information
• differences between financial accounting and management accounting: standards requirement 


  FA: GAAP, approved accounting standards

  MA: flexible
• differences between financial accounting and management accounting: degree of precision 


  FA: report must be accurate and based on evidence for every financial transactions occurred

  MA: less accurate information since cost accounting mainly involves estimate and forecasts
• similarities of financial accounting and management accounting


  • Both types of information is used for internal reporting.

  •Both use similar techniques such as marginal costing, budgetary controls and standard costing.

  •Both types of information is used for the decision-making purposes.
• cost


  amount of expenditure paid for a specific activity
• cost unitthe quantitative units of product/service to measure cost
• cost unit


  the quantitative units of product/service to measure cost

  (a kilogram of flour, a dozen of can)
• cost centre


  a department/business unit where cost is allocated. It can be location, person, or item of equipment for which costs may be ascertained.

  Eg: production department, salesman (commission)
• cost according to nature: material


  supplies, components or parts used in the manufacture of products
• cost according to nature: labour


  the payment made to the employees, permanent or temporary, for their services
• cost according to nature: expenses

  costs other than material cost or labour cost which are involved in an activity
• traceability


  the ability to trace a particular cost to a particular product being manufactured or service rendered
• direct cost


  a cost which is incurred for the benefit of one specific product
• indirect cost


  a cost which is incurred for the benefit of more than one cost object or which cannot be easily or efficiently traced to a specific cost object
• direct material


  the costs of all materials that can be directly traceable to the product or service.

  • can be physically associated with the product or service
  • handbag - leather, fabrics, animal skin
• indirect material


  materials used in the production area but does not form part of the finished product

  • cleaning solutions used in cleaning the factory space
• direct labour costs


  wages paid to workers who directly involved in the production of goods and service

  • wages of machine operators
• indirect labour costs


  wages paid to workers who do not directly involved in the production of goods and service

  • salaries of factory supervisor, time-keeper, inspector
• direct expenses


  expenses that can be specifically attributed to the product or service

  • hiring of a special machine to complete job
• indirect expenses


  expenses which are not directly related to the production units but is expensed within the factory

  • cost of electricity and water
• cost according to function: production costs (factory/manufacturing costs)


  It is the cost of operating the manufacturing division of an undertaking.

  It includes the cost of direct materials, direct labour, direct expenses, packing (primary) cost and all overhead expenses relating to production.
• cost according to function: administration costs


  they are indirect and covers all expenditure incurred in formulating the policy, directing the organisation and controlling the operation of a concern, which is not related to research, development, production, distribution or selling functions.
• cost according to function: selling and distribution 


  cost selling cost is the cost of seeking to create and stimulate demand (advertisements, market research)
• cost according to function: selling and distribution

  distribution cost is the expenditure incurred which begins with making the package produced available for dispatch and ends with making the reconditioned packages available for re-use (warehousing, cartage). It includes expenditure incurred in transporting articles to central or local storage. Expenditure incurred in moving articles to and from prospective customers as in the case of goods on sale or return basis is also distribution cost.
• cost according to function: research and development costs

  they include the cost of discovering new ideas, process, products by experiment and implementing such results on a commercial basis.
• cost according to function: pre-production cost


  When a new factory is started or when a new product is introduced, certain expenses are incurred. There are trial runs. Such costs are termed as pre-production costs and treated as deferred revenue expenditure. They are charged to the cost of future production.
• cost according to behaviour: fixed costs



  a cost that is not affected in total by the changes in activity level

  (rental payment for a shop premise)

  
• fixed cost

  • fixed costs in total do not change in response to changes in activity levels.

  • fixed cost per unit will change in relation to changes in activity level.
• cost according to behaviour: variable cost


  a cost that changes in total in direct proportion to the level of activity

  (cost of wood planks in the production of dining tables)