Introduction to Costing

Accounting

Management Cost
Financial
Accounting Information
Accounting
Information Accounting

Product Price Inventory

Determination Valuation

measures, analyses and reports financial
and non-financial information that helps
managers make decisions to fulfil the
goals of an organisation
measures, analyses and reports
financial and non-financial
information relating to the costs
of acquiring or using resources
in an organisation
focuses on reporting and providing
information to external parties, such as
investors, government agencies, banks
and suppliers
COST ???
What is meant by Cost?
 Value of resources sacrificed to achieve a specific objective,
such as manufacturing acquiring a good or providing a service.

 A monetary valuation of effort, material, resources, time and

utilities consumed, risks incurred, and opportunity forgone in
production and delivery of a good or service.

 A monetary measure of the resources sacrificed to achieve a

specific objective such as manufacturing or acquiring a product.
Cost Object
Anything for which a separate measurement of cost is
required.
Depends according to the requirement of the user
Examples:
A contract,
a customer,
a function,
a product,
a project,
a subdivision for which a separate cost measurement is recorded
A Garment Factory
A Hospital
Classification of Costs
Cost can be classified differently according to the purposes
1. Direct and Indirect Cost
2. Product and Period Cost
3. Variable and Fixed Cost
4. Relevant and Irrelevant Cost
5. Sunk Cost
6. Opportunity Cost
7. Incremental Costs
Direct and Indirect Cost
Classified based on the identification and traceability of costs
with a cost object.

Direct cost - cost specifically and exclusively identified with a

cost object

Indirect cost - cost that cannot be specifically and exclusively

identified with a cost object
 Cost

Indirect
Direct Cost Cost

Non-
Direct Direct Direct Manufacturing Manufacturing
Material Labour Other Overhead Cost Cost

Selling & Finance Other

Administrative Distribution
Company Profile – Manufactures and retails clothing
(1) Lubricant for sewing machines
(2) Compact disks (CDs) for general office computer
(3) Maintenance charges for general office photocopying machinery
(4) Cost of raw materials damaged by a fire
(5) Interest on bank overdraft
(6) Cost to broadcast music throughout the factory
(7) Salary of security guards for factory
(8) Carriage on purchase of basic raw material
(9) Royalty payable on number of units of product XY produced
(10) Revenue license fees for delivery vehicles
(11) Wages of operatives in the cutting department
(12) Royalty payable on number of units of product XY sold
 Total Manufacturing Cost
Direct material cost xxx
Direct labour cost xxx
Direct other manufacturing cost xxx
Total direct cost xxxx
Manufacturing overheads xxx
Total manufacturing cost xxxx
Product and Period Cost
This classification is often used for the external financial reporting
purpose.
Product costs
Costs identified with goods purchased or produced for resale.
Manufacturing Company all manufacturing costs are
regarded as product costs
the costs of goods purchased are
Trading Company
regarded as product costs
Product and Period Cost
Period costs
Treated as expenses in the period
in which they are incurred.
Not included in the inventory
valuation.
Administration, selling and
distribution, finance, and other
expenses are examples for period
costs.
 Accounting Treatment
Manufacturing Product Recorded as an asset
Cost Cost (inventory) and
becomes an expense
when the product is
sold

Recorded as an
expense in the
Non- Period current financial
manufacturing Cost period
Cost
Classification of costs for the purpose of
short-term decision making
Based on the cost behavior, following categories of cost can be
identified:
1. Variable cost
2. Fixed cost
3. Semi-variable cost
4. Step fixed cost
Variable Cost
The costs that vary in direct proportion to the volume of activity
are called variable cost. In other words, the cost is doubled
when the level of activity is doubled
Fixed Cost
Fixed costs are costs which remain constant over the wide
range of activity for a specific time period.
Semi-variable costs (Mixed costs)
Semi-variable costs include both fixed and variable costs
Eg: Fixed salary plus commission on units produced
Telephone charge which includes fixed rental plus the charges on the usage
 Step Fixed Cost
Up to a certain level of activity the fixed cost remain constant
and if that level of activity exceeds, additional fixed cost would
be required.

Eg: Assume that the maximum

capacity of a rented factory
building is 1000 units per month. If
the rent is Rs. 100 000 for the
month, up to 1000 units one
factory building is enough.
However, if we want to expand the
production above 1000 units per
month we have to get another
factory building and this costs
another Rs. 100 000.
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