ACC116

CHAPTER 1: INTRODUCTION
 1.1 FINANCIAL ACCOUNTING VS
COST ACCOUNTING
• Cost Accounting
– Helps in finding out cost of product and control of
cost.
– Process of determining and accumulating the cost
of product or activity.
– Measures the operating efficiency of the
enterprise.
• Financial Accounting
– Helps in knowing the financial position of the
company.
– Recording the business transaction in the book of
accounts.
 DIFFERENCES BETWEEN
FINANCIAL ACCOUNTING AND COST ACCOUNTING
Basic Financial Accounting Cost Accounting

It provides information about It provide information of

the financial performance and ascertainment of cost to control
1 Objective
financial position of the cost and for decision making
business. about the cost.

It classifies, records, presents

It classifies records, presents
and interprets in a significant
2 Nature and interprets transactions in
manner the material, labour
terms of money.
and overheads cost.

It also records and presents the

estimated/budgeted data. It
3 Recording Of Data Its records historical data.
makes use of both the historical
costs and pre-determined costs.
 Basic Financial Accounting Cost Accounting

The users of financial

accounting statements are
The cost accounting
Users Of shareholders, creditors,
4 information is used by internal
Information financial analysts and
management at different levels.
government and its agencies,
etc.

It provides the details of cost

Analysis of costs and It shows the profit/loss of the
5 and profit of each product,
profits organisation.
process, jobs, contracts, etc.

Financial Statements are

Its reports and statements are
6 Time Period prepared for a definite period,
prepared as and when required.
usually a year.

A set format is used for

Presentation Of There are not any set formats
7 presenting financial
Information for presenting cost information.
information.
1.2 ELEMENTS OF COSTS (NATURE)
i. Materials
⚫ Supplies purchased from outside sources which are used to
manufacture products for sale.
⚫ E.g. cotton, steel

ii. Labour
⚫ Work force that keep the business going.
⚫ E.g. factory workers

iii. Other Expenses

⚫ The cost of obtaining the factors of production and services
which may include payment for materials, labour, goods
and services.
⚫ E.g. advertising
 1.3 CLASSIFICATION OF COSTS
1. Traceability
⚫ the relation of cost element with the cost object
relation of cost element with the cost object he
relation
Costof cost Nature

• Cost that can be traced to specific cost

Direct cost: objective
• can be conveniently identified with and
Direct Material allocated to a particular unit of final
Direct Labor product.
Direct Expenses • known as prime cost

Indirect cost:
• cannot be traced to a specific unit 
• can be apportioned to cost centres or
Indirect Material
cost units.
Indirect Labor
• Known as overhead
Indirect Expenses
2. Function : classified by function they relate.

Costs Function

1 Production Costs • Time of acquisition to completed items.

• Examples: Production overhead, direct materials,

direct labour and direct expenses.

2 Administration Costs • Incurred in the general administration including

directing and controlling the operations of an
organization.

• Examples: Audit fees, office rent.

3 Selling & Distribution • Incurred in selling, publicizing, distributing and

Costs / Marketing cost product servicing.

• Examples: Selling costs, publicity cost,

distribution cost
 Function

Costs Functions

4 Finance Costs • Incurred in financing the activity of the business.

• Examples: Interest, Commitment fee, insurance

and dividends.

5 Research Costs • Incurred in seeking new or improved ideas,

materials, methods and products.

• Examples: Cost of laboratory maintenance,

salaries of research staff.

6 Development Costs • Incurred in developing the new or improved ideas

and methods so that production can take place.

• Examples: Cost of test or trials runs,

obsolescence and supplies.
3. Behaviour : may or may not vary with the level of
activity.

a. Fixed Costs

The total fixed costs do

not increase as activity
increases.

⚫ Will not change (constants) over a given range of activity

(volume) and within a given period of time.
⚫ Example: insurance, depreciation
b. Variable Costs

The total variable costs

increase as activity
(number of units)
increase.

⚫ Costs that vary in direct proportion to changes in the level of

activity (volume).
⚫ Example: direct materials, direct wages, direct expenses.
c. Semi-variable or Semi-fixed Costs

The semi-variable cost is

made up of a fixed and
variable cost element.

⚫ Costs that contains both fixed and variable costs.

⚫ Example: telephone costs , water & electricity.
d. Step Costs

Step costs remain fixed

over a range of activity.

⚫ Costs are fixed over a range of activity and then rises to a new
level as activity changes.
⚫ Example: depreciation on machines may increase with an
increase in the level of activity as more machines are required.
4. Product Cost vs Period Cost
Product Cost
🞆 Include all costs that are required to make a product
“manufacturing costs” : included as part of inventory and shown on
the balance sheet until the product is sold (cost of goods sold).
🞆 Example: Direct Material, Direct Labor, Manufacturing Overhead

Period Cost
🞆 “Non-manufacturing costs”
🞆 Selling and Administrative costs: reported on the income
statement as they are incurred.
🞆 Examples: Anything at corporate headquarters, anything related to
selling the product, shipping costs, administrative salaries,
executive salaries, administrative office expenses, sales
commissions, advertising, research and development, etc.
🞆 Warehouse costs and people who move inventory are period
costs
5. Conversion Cost
🞆 Money spent to change from the raw materials state to semi-
finished or finished state.
🞆 Conversion Cost = Direct Labor Cost +
Manufacturing Overhead Cost

6. Controllability
Controllable
🞆 Costs that are influenced by the decisions or actions of a
manager.
🞆 Example: retrenchment salaries.
Uncontrollable
🞆 Costs that are not influenced by the decisions or actions of a
manager.
🞆 Example: increased cost of raw materials due to inflation.
7. Normality
Normal Costs
🞆 Costs that have been planned.
🞆 Normally incurred at a given level of output.
🞆 Part of cost production.
🞆 Example: loss due to evaporation, maintenance, salaries paid to
employees.

Abnormal Costs
🞆 Costs that have not been planned for.
🞆 Not normally incurred at a given level of output.
🞆 Not charged to the cost of production; transferred to profit
or loss account.
🞆 Example: lost production due to plant / machine breakdown,
destruction due to fire
1.4 COST STATEMENT
RM RM

Direct material 1,000

Direct labour 1,500
Direct expenses 1,000
TOTAL PRIME COST 3,500

PRODUCTION OVERHEAD
Indirect material 1,000
Indirect labour 1,000
Indirect expenses 1,000 3,000
TOTAL PRODUCTION COST 6,500

NON-PRODUCTION OVERHEAD
Administration 500
Selling & distribution 500
Finance 100
Research & development 100 1,200
TOTAL COST 7,700
Profit 2,000
SELLING PRICE 9,900
1.5 COST UNITS, COST CENTERS, PROFIT CENTERS, INVESTMENT
CENTERS

Cost units • Cost unit is a unit of product, service or a combination of

them in relation to which costs are ascertained or
expressed.

Cost centers • A unit in which the manager is held accountable for cost
incurred in that unit.

Profit centers • A unit in which the manager is accountable for profit of that
company.

Investment • A unit in which the manager is accountable for profit

centers generated and invested capital used to generate profit in
that unit.
 COST UNIT
🞆 Cost unit is a unit of product, service or a combination of them
in relation to which costs are ascertained or expressed.

🞆 Selection of suitable cost unit depends upon several factors,

such as nature of business, process of information,
requirements of costing system, etc. (usually relates to the
natural unit of the product or service).
🡺 For example, in steel and cement industry, the cost unit is ‘tonne’,
while in transportation services, the unit may be passenger-kilometre
or tonne-km.
• EXAMPLE OF COST UNIT

Industry / Product Cost Unit

Automobile Number
Biscuit Kilogram
Chemical Litre, Gallon, Kilogram
Cement Tonne
Gas Cubic Foot, Cubic Metre
Hospital Patient Day
Hotel Guest-day, Guest Room
Power and electricity Kilowatt-hour
Steel Tonne
Transport Passenger Kilometre, Tonne-kilometre
 COST CENTRE
🞆 Defined as a location, person or item of equipment (or group
of them) in respect of which costs may be ascertained and
relate to the cost units for the purposes of cost control.
🞆 Classification
⚫ Production cost centre – relate to the centre where the
manufacturing take place.
⚫ Service cost centre – refer to those, which are ancillary and render
services to the production cost centres, so that manufacturing
activities can take place.
⚫ Example : Biscuit Manufacturing Company

Production Cost Centre Service Cost Centre

Making, baking, packing Personnel, purchase, stores, canteen
MAIN PURPOSE OF COST CENTRE IS TO FOLD:
i. Recovery Of Cost
Costs are collected, classified and accumulated in respect of
a location, person, or an item of equipment and then the
cost are distributed over the products for the recovery of
incurred cost;

ii. Cost Control

Cost centres assist in making a person responsible for the
control of expenditure incurred by the cost centre. Manager
of each cost centre shall control costs incurred in his area of
responsibility.