Introduction to Cost

& Management
Accounting
By Brendon Tazvinga
 Definition of key terms
• Cost accounting – A method of accounting where all
the costs associated with a particular activity or
product are collected together, classified and recorded.
• Management accounting- the process of preparing
reports and accounts which can be used by managers
as a basis for making decisions on the future
performance of the business.
Cost can be classified as follows:
 Element/Nature
• It is classified into three:
1. Material
• It is the cost of ingredients/elements/ basic parts in making a
product. It is classified as:
 Direct material- which can be directly or easily identified in the
product e.g. Timber in furniture.
 Indirect material- which cannot be easily identified in the product
e.g. in a factory they would be things like lubricants, oil and other
consumables , etc.
 Cont.
2. Labour
• The cost spent on the person who is responsible in changing/
transforming the material into a product or finished good(s). It is
classified into:
Direct labour- is one which can be conveniently identified or attributed
wholly to a particular job, product or process e.g. wages paid to
carpenter , etc.
Indirect labour- is one which cannot be conveniently identified or
attributed wholly to a particular job, product or process e.g. in a factory,
the gate keeper’s salary ,etc.
 Cont.
3. Production/ Manufacturing Overheads
• The cost which is indirectly incurred in the process of changing
the materials into a product. They are classified as follows:
Direct overheads- are those expenses which can be directly
allocated to particular jobs, processes or products e.g. excise
duty, royalty ,etc.
Indirect overheads- are those expenses which cannot be directly
allocated to a particular job, process or product e.g. factory rent,
factory insurance, factory lighting ,etc.
 Identifiability/ Traceability
Direct costs
• Costs that can be directly identified to the cost units.
• They include Direct Materials + Direct Labour + Direct Expenses {these are also called Prime
Costs}
 Indirect costs
• Costs that are incurred in the process of production but cannot be directly identified to the units
produced.
• The include Indirect Materials + Indirect Labour + Indirect Expenses { these are also called
Overhead costs}
 Prime costs and Overhead costs are required to produce a product.
 Direct Labour + Manufacturing Overhead = Conversion cost{ the cost to convert
raw materials into a finished good}
 Behavior of costs
Fixed costs
o The cost that remain constant regardless the level of output, e.g. rental, advertising, etc.
Variable costs
o The costs that change as output levels change e.g. material or ingredients to produce a
product, etc.
Mixed cost/semi-variable/semi-fixed
o Combination between variable and fixed costs e.g. electricity and telephone bill.
STEP
o Cost that is unchanged at a certain level of output but increases to next level e.g. salary
of production supervisor
 Function
Production
o Cost incurred from the time of acquisition of material until
the dispatch of completed items to store e.g. depreciation of
machinery or material and labour.
Administration
o It is a cost incurred in the general administration including
directing and controlling the operations of an organization
e.g. account clerk salary or stationery in printing.
 Cont.
Marketing/ Selling/Distribution
o It is marketing such as commission to salesman,
advertisement of a product or transportation cost can be
defined as costs incurred in selling, publicizing, distribution
and product servicing.
 Finance
o It is a cost incurred in financing the activity of the business
e.g. interest on loan
 Controllability
Controllable
 Cost that can be managed by management in the department , commonly
e.g. variable costs.
 Cost that are influenced by the decisions or actions of a manager e.g. shut
down cost such as retrenchment salaries.
Uncontrollable
 Cost that cannot be managed by the management in the department e.g.
fixed costs or cost determined by the top management.
 Costs that are not influenced by the decision or action of a manager e.g.
increased cost of raw materials due to inflation.
 Normality
Expected
• Cost expected to be incurred in the making of a product e.g.
scrap cost
 Unexpected
• Cost not expected to be incurred e.g. natural disaster, fire
black-out.
Calculations
 Cont.

Mixed cost
• = Fixed cost + Variable cost
• Y = A + BX (X is number of
units)
 Absorption{Total costing}
• It is a method of costing that involves calculating the cost
of production by including all the variable and fixed
production costs.
• The cost of inventory includes all the direct costs { Prime
cost} and indirect production costs { overheads}.
• It determines total the cost of production.
• This means that all costs incurred in the production of the
product are absorbed into the cost of production.
Cont.
Cont.
 Why calculate unit cost of
production?
• Determine the selling price per unit
• Calculation of profit per unit
• Comparison and control of costs
• It is also necessary for long-term planning, since total
revenue must cover both direct costs and overheads.
 What are Overheads?
• Overheads are business costs that are related to the day-to-day
running of the business. Unlike operating expenses, overheads
cannot be traced to a specific cost unit or business activity.
Instead, they support the overall revenue-generating activities of
the business.
• For example, a vehicle retail company pays a premium rent for
business space in an area with additional space to accommodate a
showroom. The premium rent is one of the overhead costs of the
business. A business must pay its overhead costs on an ongoing
basis, regardless of whether its products are selling or not.
 Types of Overheads
• There are three main types of overhead that businesses incur. The
overhead expenses vary depending on the nature of the business and
the industry it operates in.

• 1. Fixed overheads
• Fixed overheads are costs that remain constant every month and do
not change with changes in business activity levels. Examples of
fixed overheads include salaries, rent, property taxes, 
depreciation of assets, and government licenses.
 Cont.
• 2. Variable overheads
• Variable overheads are expenses that vary with business activity
levels, and they can increase or decrease with different levels of
business activity. During high levels of business activity, the
expenses will increase, but with reduced business activities, the
overheads will substantially decline or even be eliminated.
• Examples of variable overheads include shipping costs, office
supplies, advertising and marketing costs, consultancy service
charges, legal expenses, as well as maintenance and repair of
equipment.
 Cont.
• 3. Semi-variable overheads
• Semi-variable overheads possess some of the characteristics of both
fixed and variable costs. A business may incur such costs at any time,
even though the exact cost will fluctuate depending on the business
activity level. A semi-variable overhead may come with a base rate
that the company must pay at any activity level, plus a variable cost
that is determined by the level of usage.
• Examples of semi-variable overheads include sales commissions,
vehicle usage, and some utilities such as power and water costs that
have a fixed charge plus an additional cost based on the usage.
Thank You !
By Brendon Tazvinga