Scribd
Upload
53 views

Introduction To Cost Terms & Concepts: BP21103 Management Accounting 1

Uploaded by

reyna_mohamed
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
53 views

Introduction To Cost Terms & Concepts: BP21103 Management Accounting 1

Uploaded by

reyna_mohamed
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 20

BP21103 Management Accounting 1

Introduction to cost terms & concepts


Cost Objects?

A cost object is any activity for which a separate measurement of


cost is required (e.g. cost of making a product or providing a
service).

A cost collection system normally accounts for costs in two broad


stages:

1. Accumulates costs by classifying them into certain


categories (e.g. labour, materials and overheads).

2. Assigns costs to cost objects.


Direct and Indirect Costs?

Direct costs can be specifically and exclusively identified with a


given cost object.

Indirect costs (i.e. overheads) cannot be specifically and


exclusively identified with a given cost object.

- are assigned to cost objects on the basis of cost allocations.


-Cost allocations =process of assigning costs to cost objects that
involve the use of surrogate, rather than direct measures.

The distinction between direct and indirect costs depends on what


is identified as the cost object.
Categories of Manufacturing Costs

Traditional cost systems accumulate product costs as follows:

Direct materials xxx


Direct labour xxx
Prime cost xxx
Manufacturing overhead xxx
Total manufacturing cost xxx
Non-manufacturing overheads xxx
Total cost xxx
Period and Product Costs?

Product costs are those that are attached to the products and
included in the stock (inventory valuation).

Period costs are not attached to the product and inventory


valuation.
Example

Product costs =RM100,000


Period costs =RM 80,000
50% of the output for the period is sold and there are no
opening inventories.

Production cost (product costs) 100,000


Less closing stock (50%) 50,000
Cost of goods sold (50%) 50,000
Period costs (100%) 80,000
Total costs recorded as an expense for the period 130,000
Treatment of product & period costs
Classification by cost behaviour

Important to predict costs and revenues at different activity levels for many
decisions.
Variable costs vary in direct proportion with activity; L1
Fixed costs remain constant over wide ranges of activity; L2
Semi-fixed costs are fixed within specified activity levels, but they eventually
increase or decrease by some constant amount at critical activity levels; L3
Semi-variable costs include both a fixed and a variable component (e.g.
telephone charges) L4

N.B.
The classification of costs depends on the time period involved. In the short term some
costs are fixed, but in the long-term all costs are variable.
Avoidable and unavoidable costs

Avoidable costs are those costs that can be saved by not adopting
a given alternative, whereas unavoidable costs cannot be saved.

Avoidable/unavoidable costs are alternative terms sometimes


used to describe relevant/irrelevant costs.
Relevant and irrelevant costs and revenues

Relevant costs and revenues are those future costs and revenues
that will be changed by a decision, whereas irrelevant costs and
revenues will not be changed by a decision.
Example
Materials previously purchased for RM100 have no alternative
use other than being converted for sale at a cost of RM200.The
sale proceeds after conversion would be RM250.

Do not
Convert Convert
RM RM
Materials 100 100 Irrelevant
Conversion costs – 200 Relevant
Revenue – (250) Relevant
Net cost 100 50

Note that in the short-term not all costs may be relevant for
decision-making.
Sunk costs
Sunk costs are the costs of resources already acquired and are
unaffected by the choice between the various alternatives (e.g.
depreciation).
Sunk costs are irrelevant for decision-making.

Opportunity costs
A cost that measures the opportunity that is lost or sacrificed when the
choice of one course of action requires that an alternative course of
action be given up.

Example
To produce product X requires that an order that yields RM1000
contribution to profits is rejected. The lost contribution of RM1000
represents the opportunity cost of producing product X.
Marginal and incremental costs/revenues

Incremental costs and revenues are the additional costs/revenues


from the production or sale of a group of additional units.

Marginal cost/revenue represents the additional cost/revenue of one


additional unit of output.
Job and process costing systems

There are two types of costing systems that companies can adopt
– job and process costing systems.

Job costing applies where each unit or batch of output of


product or service is unique so that the cost of each unit must be
calculated separately.
Process costing relates to those situations where masses of
identical units are produced so that it is unnecessary to assign
costs to individual units of output.
Cost per unit is assumed to be the average cost per unit of
output.
In practice these two systems represent extreme ends of a
continuum.
Maintaining a cost database

A cost and management accounting system should generate


information for meeting the following requirements:

1. Inventory valuation for internal and external profit measurement


2. Provide relevant information to help managers make better
decisions
3. Provide information for planning, control and performance
measurement

A database should be maintained with costs appropriately coded and


classified so that relevant information can be extracted to meet each
of the above requirements.
The End

© 2006 Colin Drury 1-88480-349-X


Variable Costs
Fixed Costs
Semi-fixed Costs (step fixed costs)
Example
Labor costs (increases responding to demand capacity)
Semi-variable Costs (Mixed costs)
Example: Planned maintenance; commission based
salary

You might also like