Fundamental Cost Accounting (MAF151)

CHAPTER 1

INTRODUCTION OF
COSTING

Presented by:
Mohd Mas Rizat Abdul Latif
Credit to:
Khadijah Suria
LEARNING
LEARNING OUTCOMES
OUTCOMES
At the end of this chapter, students should be able to:

Differentiate between cost and financial

accounting
Identify elements of costs
Explain the meaning of classification
Classify costs by nature, function and
behavior
INTRODUCTION
INTRODUCTION
 What is COSTING? It comes from the word
‘cost’.
 It means expenditure incurred for producing a
product or providing a service.
LET
LETUS
USTAKE
TAKEAALOOK
LOOKAT
ATTHE
THEPICTURES
PICTURES
BELOW:
BELOW:
Can you name the ingredients below?
What
Whatwouldwouldbe
bethe
theingredients
ingredientsin
inmaking
making
a.......
a.......
 WHAT
WHAT IS
IS FINANCIAL
FINANCIAL
ACCOUNTING??
ACCOUNTING??
• Financial accounting is a method to analysing,
classifying and recording of financial transaction and
ascertainment of how such transactions affect the
performance and financial position of a business.
 WHAT
WHAT IS
IS COST
COST
ACCOUNTING??
ACCOUNTING??
• It is concern with the provision of cost information to
people within the organization to help them to make
better decision to improve the efficiency and
effectiveness of existing of operation.
 FINANCIAL
FINANCIALACCOUNTING
ACCOUNTING COSTING
COSTING

FINANCIAL COSTING
ACCOUNTING
Definition Process of identifying, The application of
measuring and accounting and costing
communicating the principles, methods,
economic information to techniques in the
permit informed ascertainment of costs
judgments and
decisions by users of
the information
Users Orientation External parties Internal parties
Reporting Governed by Company No legal requirement
requirement Act 1965 and the
preparation of the
financial statements are
accordance to FRS
 FINANCIAL ACCOUNTING COSTING
FINANCIALACCOUNTING COSTING

FINANCIAL COSTING
ACCOUNTING
Reporting Entity Report for the company Report based on
as a whole different segments and
parts of the company
Reporting Frequency Annually or semi- Depend on the
annually management – weekly,
monthly, quarterly or
annually
Information Time Past information Past, present and
Dimension future
Degree of Accuracy Accurate because its Since focus on future,
reports the past events estimation amount is
considered sufficient
Freedom of Choice Restricted Complete freedom
 INTRODUCTION TO COST ACCOUNTING

• In order to produce a product, we need to have raw

materials.

• In cost accounting, it is very important to identify the raw

materials which are used to manufacture products for sale.

• Products includes consumables products for example food,

drinks or products for use example hand phones, computers
etc.

12
 WHY IS IT IMPORTANT TO IDENTIFY THESE RAW
MATERIALS?

• to enable the cost accountant to find out

the cost of raw materials to produce the
product.
 ELEMENTS OF COSTS
Manufacturing costs

Labour
Manufacturing
Material
Overhead
 CLASSIFICATION OF COSTS

Arrangement of costs items into logical groups.

Slide 15
CLASSIFICATION
CLASSIFICATION OF
OF COST
COST
COST

Nature Function Behavior

DIRECT/ INDIRECT
•Material
•Labour
•Expenses
TWO CATEGORIES OF COST
 DIRECT MATERIAL

Cost of raw material that is used to make, and can

be conveniently traced, to the finished product.

Example:
Steel
 INDIRECT MATERIAL

Items of material that cannot be physically

identified with a specific product.

Example:
Cleaning Supplies
 DIRECT LABOUR

Cost of salaries, wages, and fringe benefits for

personnel who work directly on manufactured
products. Example:
Wages to welder to
assemble motorbike
parts.
 INDIRECT LABOUR

Wages of employees who do not work on the product

itself, just assist in the manufacturing operation

Example:
Wages for supervisor
 MANUFACTURING OVERHEAD

All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

Materials
Materialsused
usedtotosupport
support
the
theproduction
productionprocess.
process.
Examples:
Examples:lubricants
lubricantsand
and
cleaning
cleaningsupplies
suppliesused
usedininan
an
automobile
automobileassembly
assemblyplant.
plant.
Slide 22
 MANUFACTURING OVERHEAD

All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

Cost of personnel who

do not work directly on
the product. Examples:
maintenance workers,
janitors and security
guards.
Slide 23
 MANUFACTURING OVERHEAD

All other manufacturing costs

Indirect Indirect Other

Material Labor Costs

Examples: depreciation
on plant and
equipment, property
taxes, insurance,
utilities, overtime
premium, and
unavoidable idle time.
Slide 24
 CLASSIFICATION OF COSTS IN
MANUFACTURING COMPANY

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost

Slide 25
CLASSIFICATION
CLASSIFICATION OF
OF COST
COST
COST

Nature Function Behavior

•Manufacturing
•Non manufacturing
FUNCTION
FUNCTION

•Selling & administrative

expenses
•Marketing expenses
•Research & development
CLASSIFICATION
CLASSIFICATION OF
OF COST
COST
COST

Nature Function Behavior

•Variability
•Controllability
•Normality
•Period/product
costs
 BEHAVIOUR

Cost behavior means how a cost will react to changes in

the level of business activity.

 Total variable costs

change when activity
changes.
 Total fixed costs
remain unchanged
when activity changes.
TOTAL FIXED COST EXAMPLE
The rate of streamyx bill per month.
Total Streamyx Bill

Data Usage per Month

 TOTAL VARIABLE COST EXAMPLE
Your total long distance telephone bill is based on how
many minutes you talk.
Total Long Distance
Telephone Bill

Minutes Talked
 SEMI VARIABLE COST (MIXED COST)
Slope is A semi-variable cost is partly
variable cost
per unit fixed and partly variable.
of activity.

le
a b
r i
a
Total Telephone Bill

iv
e m
s Variable
tal
o
T st Excess Charge
co

Fixed Monthly
Charge
Minutes Talked
 CONTROLLABILITY

cost that can be cost that cannot be

controlled/influenced by controlled/influenced
decisions/actions of by manager
manager Eg; price of raw
Eg; advertising cost materials.
 NORMALITY

Normal costs- cost that have been planned for or known

to happen and cannot be eliminated

Examples;
• Losses occur in cutting wood to make furniture
 NORMALITY

Abnormal costs – Losses/costs that are not expected

to happen under efficient operating conditions.

For example,
• improper mixing of ingredients,
• incorrect cutting of cloth,
• use of inferior ( bad/no quality) materials.
 Product Cost & Period Cost

Product costs – costs identified with goods produced

or produced for resale.

Period costs – costs that are not included for stock

valuation purposes.
• Period Costs:
• General and administrative
expenses
• Marketing expenses
• Insurance premiums
• Income taxes
• Nonmanufacturing costs
• Product Costs:
• Direct material costs
• Direct labor costs
• Manufacturing overhead
 MANUFACTURING COSTS FLOW

Direct
Material
Work in
Direct Labour Process
Inventory

Manufacturing
Overhead

Slide 38
 MANUFACTURING COSTS FLOW

Direct
Material
Work in
Direct Labour Process
Inventory

Manufacturing
Overhead Finished
Goods
Inventory

Slide 39
 MANUFACTURING COSTS FLOW

Direct
Material
Work in
Direct Labour Process
Inventory

Manufacturing
Overhead Finished Cost of
Goods Goods
Inventory Sold

Slide 40
Slide 41
How the Period Costs and Product Costs
Flow Through Financial Statement

Slide 42
And lastly…
• Preparation of a….
A Cost Statement of a product will look like
this….
RM RM
Direct Material cost xx
Direct Labour Cost xx
Direct Expenses xx
PRIME COST XXX
Add: Manufacturing overhead
Indirect material xx
Indirect labour xx
Indirect expenses xx
PRODUCTION COST XXX
Add: Non Manufacturing Cost
Administration expenses xx
Selling and distribution expenses xx
Finance cost xx XXX
TOTAL COST XXX
• Past semesters’ final exam question:
1.JUNE 2018(Q1)
2.JAN 2018 (Q1)
3.MAR 2017 (Q1)
4.OCT 2016 (Q1)
5.MAR 2016 (Q1)
THANK YOU