MANAGEMENT

ACCOUNTING
Prepared by:
Syazliana Kasim
Faculty of Accountancy
UiTM Shah Alam
Syazliana Hj. Kasim
Fakulti Perakaunan UiTM Shah Alam 2
CLASSIFICATION OF COSTS
CONTROLLABLE VS.
UNCONTROLLABLE
DIRECT VS.
INDIRECT
BEHAVIOUR
PRODUCT VS.
PERIOD
FUNCTIONS
NATURE
COSTS
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Fakulti Perakaunan UiTM Shah Alam 3
NATURE
Material
Labour
Expense

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Fakulti Perakaunan UiTM Shah Alam 4
FUNCTION
Selling
Administration
Production
Research dan development
Distribution and transportation

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Fakulti Perakaunan UiTM Shah Alam 5
PRODUCT VS. PERIOD
Product cost
Cost of making or buying an inventory for the
purpose of resale
Costs that are included on a stock valuation
Period cost
Costs that are being charged to the Income
Statement for the period which are not directly
related to the production of a product or
services.
It relates to the passage of time rather than
output of individual goods or services.
Costs that will not be included in the stock
valuation and calculation of gross profit
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Fakulti Perakaunan UiTM Shah Alam 6
BEHAVIOUR
Fixed costs costs that are not affected in
total by the changes in activity level
Variable costs costs that change in total
in direct proportion to the level of activity
Semi-variable costs costs that have both
fixed element and variable element
Stepped costs costs that are constant for
a range of activity levels and then change
and then remain constant again for another
range
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Fakulti Perakaunan UiTM Shah Alam 7
DIRECT VS. INDIRECT
Direct costs costs that can be
directly attributed to any cost
centre/cost unit
Indirect costs costs that cannot
be directly attributed to any cost
centre/cost unit and thus must be
shared on equitable basis.
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Fakulti Perakaunan UiTM Shah Alam 8
CONTROLLABLE VS.
UNCONTROLLABLE
Controllable costs
Costs that are influenced by the
decisions or actions of a manager
Example: shut down cost such as
retrenchment benefits
Uncontrollable costs
Costs that cannot be influenced by the
decisions or actions of a manager
Example: increased cost of raw
materials due to inflation
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Fakulti Perakaunan UiTM Shah Alam 9
DIRECT MATERIALS
Materials that can be directly attributed to
a unit of production, or a specific job, or a
service provided directly to a customer.
In a manufacturing business, direct
materials are therefore the raw materials
and components that are directly input
into the products that the organisation
makes.
Example: Flour to make bread; steel to
make spoon
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Fakulti Perakaunan UiTM Shah Alam 10
INDIRECT MATERIALS
Other materials that cannot be directly
attributed to a unit of production.
An example of indirect materials might be
the oil used for the lubrication of
production machinery. This is a material
that is used in the production process but
it cannot be directly attributed to each
unit of finished product.
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Fakulti Perakaunan UiTM Shah Alam 11
DIRECT LABOUR
Labour costs incurred in producing a
good/service that could directly be
attributed to a unit of production.
These are the costs paid to the
employees who are directly involved
in producing goods or services for
customers.
Example: the production operators
who works
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Fakulti Perakaunan UiTM Shah Alam 12
INDIRECT LABOUR
Employees who are not directly
involved in producing goods or
services for customers.
Example: factory supervisors
salaries, storemans wages,
maintenance workers wages

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Fakulti Perakaunan UiTM Shah Alam 13
LABOUR COST
There are two types of labour
costing that can be applied in any
organisation:
TIME RELATED PAY
OUTPUT RELATED PAY
PIECERATE WITH GUARANTEE
DIFFERENTIAL PIECEWORK
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Fakulti Perakaunan UiTM Shah Alam 14
TIME RELATED PAY
Under this scheme, employees will
be paid for the hours they spent at
work regardless of the output of
production or output they achieve
within that time frame.
Salaried employees salary will be
fixed for each month
Hourly rate employees will be paid
based on a set hourly rate for each
hour worked
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Fakulti Perakaunan UiTM Shah Alam 15
OUTPUT RELATED PAY
Employees will be paid according to results or
piecework whereby a fixed amount will be paid per
unit or output achieved irrespective of the time
spent.
Piecerate with guarantee
If an employees earnings for the amount of units
produced in the period are lower than the guaranteed
amount, the employee will be paid with the
guaranteed amount.
It provides some sense of security if employer does
not provide enough work in a particular time.
Differential piecework
Piece rate will increase as successive targetsfor a
period are achieved and exceeded.
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Fakulti Perakaunan UiTM Shah Alam 16
OVERTIME
Overtime is the number of hours worked
greater than the number of hours set by the
organisation as the normal working week.
Overtime premium is the amount over
and above normal hourly rate that
employees are paid for overtime hours.
Overtime premium will be considered as
direct cost if the overtime is incurred to
fulfill specific request for a customer.
Overtime premium will be considered as
indirect cost if the overtime is incurred
just because of a general increased level of
activity.
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Fakulti Perakaunan UiTM Shah Alam 17
DIRECT EXPENSES
These are all business costs that are
not classified as materials or labour
cost.
These are the costs that are
incurred specifically for a particular
product, job, batch or service.
For example, royalties paid per unit
for copyright design, plant or tool
hire charges for a particular job or
batch.
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Fakulti Perakaunan UiTM Shah Alam 18
INDIRECT EXPENSES
Majority of expenses cannot be traced to a specific cost
unit and therefore are classified as indirect expenses or
better known as overheads.
A. Manufacturing expenses
Power for machinery, lighting and heating for factory,
insurance of machinery, depreciation of machinery
B. Selling expenses
Advertising, depreciation of packing machine, cost of
delivering goods to customers, costs of after-sales service,
warehouse rental for storage of goods, commission paid to
sales representative
C. Administration expenses
Rent of building, business rates, insurance, telephone and
utilities charges, stationery, auditors fees
D. Finance expenses
Loan interest, lease charges on any equipment or buildings
which are being leased rather than being purchased
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Fakulti Perakaunan UiTM Shah Alam 19
TYPES OF EXPENSES
Directly attributable expenses
These are the expenses that can be directly
attributed to a single cost centre.
The process of allotting a whole item of
overhead cost to a cost centre is called
allocation.
Apportioned expenses
These are the expenses that need to be shared
between a number of cost centres.
For example, rental of building, utilities,
insurance etc.
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Fakulti Perakaunan UiTM Shah Alam 20
APPORTIONMENT BASIS
Needs to ensure that the basis is suitable
for different types of expenses
Rent & rates, heating & lighting floor
area/space occupied
Supervision, welfare of employees, canteen
expenses number of employees
Depreciation, insurance of asset asset values
Power consumed technical estimates
Materials handlings number of material
requisitions
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Fakulti Perakaunan UiTM Shah Alam 21
REAPPORTIONMENT OF SERVICE
COST CENTRE
Once the overheads have been allocated
and apportioned to the cost centres, it is
necessary to re-apportion all service cost
centres overheads to production cost
centres.
Only the production cost centres are
directly involved in the manufacturing of
a product.
The basis for reapportionment will have to
depend upon the type of services being
provided by these service cost centres.
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Fakulti Perakaunan UiTM Shah Alam 22
ABSORPTION OF OVERHEAD COSTS
A method of including a fair proportion of the total
overheads costs in the cost of each cost unit.
It is part of the process of building up a full product
cost which adds direct costs and a proportion of
production overhead costs by means of one or a
number of overhead absorption rates.
Absorption basis:-
Based on units produced only suitable if the
products are identical (single product line)
Based on time depending on time spent to produce
one unit of product
Labour hour basis suitable for labour intensive
production cost centres
Machine hour basis suitable for machine intensive
production cost centres
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Fakulti Perakaunan UiTM Shah Alam 23
ACTIVITY-BASED COSTING (ABC)
ABC is an approach to the costing and monitoring
of activities which involves identifying the
activities that are responsible for the generation
of costs.
ABC is invented due to known problems of
treating the overheads since the manufacturing
processes have become more automated and less
labour intensive.
The production overheads which are mostly fixed
have become a large proportion of the total costs.
The traditional absorption method of overheads
have been rendered less useful since it will not
provide accurate figures.
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Fakulti Perakaunan UiTM Shah Alam 24
PRINCIPLES OF ABC
1. Activities (not products) generate costs.
2. Products consume activities.

An activity is a process which adds value and
consumes resources.
Cost driver is any factor which causes a change
in the cost of an activity. It represents the
allocation bases in an ABC system, instead of
the traditional overhead apportionment bases in
the traditional ansorption costing system.
Cost pool will result from the pooling or
accumulation of overhead costs which relate to
a specific activity.
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Fakulti Perakaunan UiTM Shah Alam 25
ADVANTAGES OF ABC
The perceived benefit of introducing an activity-based costing
system is that the unit costs should more accurately reflect
the activities performed and therefore the resources used.
An improved more accurate product cost may enable a
company to concentrate on a more profitable mix of products
or customers. ABC has been effectively used in identifying
customers who are unprofitable to service and products
which are unprofitable to produce.
It helps identify those activities that add more to value than
to cost, so that the non-value added items can be appraised
effectively with a view to elimination. As such, it forces
managers and supervisors to consider the drivers that affect
costs and what these drivers contribute to the final product.
By focusing attention on cost drivers, managers will have a
better understanding of the costs of production and the costs
of the activities performed by the company.
Syazliana Hj. Kasim
Fakulti Perakaunan UiTM Shah Alam 26
DISADVANTAGES OF ABC
The ability of one cost drives to explain all
the items in a cost pool is questionable.
Some measure of cost apportionment may
still be required at the cost pooling stage
for items like rent, rates and building
depreciation. If an ABC system has many
cost pools then the need for cost
apportionment may be greater.
ABC is sometimes introduced because it is
fashionale and not because it will be used
by the management. In such cases the
traditional system can be followed as it is
simpler to operate.
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Fakulti Perakaunan UiTM Shah Alam 27
FORMULA
DIRECT MATERIAL + DIRECT LABOUR +
DIRECT EXPENSE = PRIME COST

INDIRECT MATERIAL + INDIRECT
LABOUR + INDIRECT EXPENSE =
OVERHEADS

PRIME COST + PRODUCTION OVERHEADS
= PRODUCTION COST
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Fakulti Perakaunan UiTM Shah Alam 28
CAPITAL EXPENDITURE VS.
REVENUE EXPENDITURE
Capital expenditure
These are the expenditure arising when non-
current assest are being purchased.
The amount will not be charged into the I/S as an
expense.
It will be written-off as a depreciation charge over
the useful life of the asset.
Depreciation expenses will be charged to the I/S
at the end of the accounting period.
Revenue expenditure
These are the expenditure incurred on everyday
items such as the cost of running fixed assets,
rent, business rates, insurance etc.
These expenses will be written-off to the I/S in
the period to which it relates.
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Fakulti Perakaunan UiTM Shah Alam 29
COST-VOLUME PROFIT AND
BREAK-EVEN ANALYSIS
Break-even refers to the point at which a
company neither makes a profit nor suffer a loss.
The management needs to analyse the
relationship between cost, volume and profit
especially for the purpose of planning and
controlling their operations.
When the contribution margin ratio is low, there is
a strong need to increase the sales volume as to
enable the company to earn higher net profit.
This analysis would assist the management to
determine the most profitable combinations of the
fixed and variable cost factors.
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Fakulti Perakaunan UiTM Shah Alam 30
ASSUMPTIONS IN BREAK-EVEN
ANALYSIS
Fixed cost is constant in total.
Variable cost is constant per unit.
Selling price is constant per unit.
All costs can be differentiated into
fixed and variable elements.
Efficiency and productivity are
expected to remain at the same
level.
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Fakulti Perakaunan UiTM Shah Alam 31
LIMITATIONS OF BREAK-EVEN
ANALYSIS
A fixed cost is fixed only within a given time span and
over a given range of activity called the relevant range.
Fixed cost may change from the budget year to budget
year or when the activity level changes too greatly.
Variable cost per unit is assumed to be constant.
However, variable cost may fall as volume increases and
trade discounts or economies of scale are achieved. It will
then rise when the demand for resources exceed supply.
Selling price may be reduced to achieve greater volume
of sales.
In practice, it is not always feasible to resolve all cost into
their fixed and variable elements.
Efficiency and productivity do change thus affecting costs.
Volume, though important, is not the only factor affecting
costs. Other factors such as efficiency, productivity, war,
government legislation would also affect costs.
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Fakulti Perakaunan UiTM Shah Alam 32
MARGINAL COSTING
A costing principle whereby variable costs
are charged to cost units and the fixed
cost attributable to the relevant period is
written-off in full against the contribution
for that period.
Marginal costing distinguishes between
fixed costs and variable costs.
The marginal cost of a product is its
variable costs: direct materials, direct
labour and direct expenses and variable
overheads.
Contribution is the difference between
Sales and Marginal Cost.
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Fakulti Perakaunan UiTM Shah Alam 33
USES OF MARGINAL COSTING
As a basis for providing information to the
management for planning and decision-
making. It is particularly appropriate for
short run decisions onvolving changes in
volume or activity and the resulting cost
changes.
It can also be used in routine cost
accounting system for the calculation of
cost and the valuation of stocks.
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Fakulti Perakaunan UiTM Shah Alam 34
ABSORPTION COSTING
Using absorption costing, all costs
are absorbed into production and
thus operating statements do not
distinguish between fixed and
variable costs.
The valuation of stocks and WIP
contain both fixed and variable
elements.
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Fakulti Perakaunan UiTM Shah Alam 35
BUDGETING PROCESS
A budget is a plan in monetary terms
Benefits of a budgeting system:-
Planning and co-ordination
Budget serves a formal planning framework
Authorisation and delegation
Need not to continuosly ask for top managements decision and
responsibility is being delegates to respective managers
Performance evaluation
Budget is benchmark to assess performance
Trend identification
Early detection of future trends
Communication and motivation
Budget is to be used by everyone and act as a source of motivation in
the sense that everyone is working on achieving the budget
Control
Budget acts as a yardstick which actual performance can be measured
and variances being analysed. Actions could be taken to adjust
performance or targets.
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Fakulti Perakaunan UiTM Shah Alam
36
BUILDING UP THE BUDGET
SALES BUDGET
FACTORY OVERHEAD RAW MATERIALS
PRODUCTION BUDGET
LABOUR
COST OF GOODS SOLD BUDGET
SELLING AND DISTRIBUTION
EXPENSES BUDGET
GENERAL AND ADMINISTRATION
EXPENSES BUDGET
BUDGETED I/S
BUDGETED BALANCE SHEET
CASH BUDGET
CAPITAL
EXPENDITURE
BUDGET
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Fakulti Perakaunan UiTM Shah Alam 37
STANDARD COSTING AND
VARIANCE ANALYSIS
Standard costing is an accounting control system which
uses the concept of pre-determined measures which
can be used as benchmarks and the feedback features
for correcting performance and plans.
Standard costing compares standard costs and
revenues with actual results, in order to report
variances for the purposes of performance
measurement and control.
A standard cost is the planned unit cost of the
products, components or services produced in a period.
It is built up from an assessment of the value of cost
elements.
Its main uses are providing bases for performance
measurement, control by exception reporting, valuing
inventory and establishing prices.

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Fakulti Perakaunan UiTM Shah Alam 38
TYPES OF STANDARD
Basic standard
A standard cost per unit that is established for use
over a long period of time.
Current standard
A standard that represents costs and efficiencies
that are currently being achieved.
Expected/attainable standard
A standard which can be attained if a standard unit
of work is carried out efficiently, a machine properly
operated or material properly used. Allowances are
made for normal losses, waste and machine
downtime.
Ideal standard
A standard that can be attained under the most
favourable conditions, with no allowance for normal
losses, waste and machine downtime.
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Fakulti Perakaunan UiTM Shah Alam 39
VARIANCE ANALYSIS
A variance is the difference between an
actual cost and an expected (standard)
cost.
Variances indicate that actual results are
either better or worse than the standard.
When performance is better than
standard, the variance is favourable.
When performance is worse than
standard, the variance is unfavourable or
adverse.