Overview of Cost Accounting 3.

As Direct and Indirect

Cost Accounting • Direct costs: are costs which can be easily attributed to a particular cost
- involves recording, controlling estimating and reporting for costs. center/ product.
- process begins with the recording of expenditure or the bases on which Ex: the cost of hard disks while assembling an PC.
they are calculated and ends with the preparation of statements for • Indirect cost: costs that must be allocated in order to be assigned to a
ascertaining and controlling costs. product or department (this cannot be assigned directly to any particular
cost centre)
Cost - anything incurred during the production of the good or service to get Ex: Costs incurred by the computer maintenance and support group, wages
the output into the hands of the customer (e.g. Material cost, Labour cost, paid to security staff, storage cost of units produced.
electricity cost, fuel cost etc.)
*Capitalised Cost – the cost incurred on fixed assets (e.g. cost incurred to 4. By variability
purchase machineries). These cost are not covered here, except which is • Variable Costs: costs that vary directly and proportionately with the
subsequently treated as expenses (depreciation). output.
: there is a constant ratio between the change in cost and change in the
Cost Classification level of output
1. By Nature/ Elements Ex: direct wages, direct material, Petrol cost for vehicle.
• Material: cost which is incurred on physical substance or thing. • Fixed Cost: is a cost which does not change in total for a given time period
Ex: Components or raw materials purchased. despite wide fluctuations in output or volume of activity.
• Labour: cost incurred on human efforts. Ex: rent, property, taxes.
Ex: Salary, Wages, Bonus, Incentives, Retirement Benefits, Perquisites • Semi-variable Cost - costs that contain both fixed and variable
• Expenses: cost incurred for services (expenses other than material and components and thus partly affected by fluctuation in the level of activity.
labour are covered here)
Ex: Electricity expenses, Rent, Telephone 5. By controllability
• Controllable costs: costs which can be influenced by an action of the
2. By Function specified member of the undertaking.
• Production cost: materials, direct labour, stores overheads etc. • Uncontrollable cost: costs which are not controllable.
• Office & administration cost: cost of formulating policy, directing the - No cost is uncontrollable; it is only in relation to a particular individual that
organization and controlling the operations. we may specify a particular to be either controllable or uncontrollable
Ex: Rent of Office, Depreciation of Office equipment’s, Salary to Office staff, (Ex: Expenditure incurred by tool room is controllable by foreman in- charge
Director Fees, Remuneration to CEO. of that section but share which is apportioned to machine shop can
• Selling and distribution expenses or marketing cost: expenditure incurred not to be controlled by machine shop foreman)
generating demand, on moving articles to prospective customers.
6. By normality Ex: If we invest 1 lakh in a business then the opportunity cost would be the
• Normal cost - is incurred at a given level of output under the conditions in amount of interest that money would have earned if it was in bank. An
which that level of output is normally attained. individual is earning Rs. 2.5 lakhs in year, now if he think to start his own
Ex: Cost of material which is evaporated proprietary business of computer maintenance, his opportunity cost will be
• Abnormal cost – cost abnormally incurred 2.5 lakhs per annum.
Ex: Goods lost by fire or theft = abnormal loss
Marginal costs
7. By relevance - is the extra cost incurred to produce one additional unit
- are those future costs which differ between alternatives.
- may also be the cost which are affected and changed by a decision. Average cost
* Sunk costs: are all costs incurred in the past that cannot be changed by - is the total cost to produce a quantity divided by the quantity produced.
any decision made now or in the future.
: should not be considered in decisions. Product Cost
Ex: cost incurred on research of a product will be irrelevant while making - is the cost incurred to make or manufacture the product and sell it.
decision whether to undertake production or not, in make or buy (the raw - a.k.a. inventoriable costs.
materials) decision cost of the material, wage rate will be relevant on the Ex: Direct Material, Direct Labour, Direct Expenses, Power (if Identifiable to
other hand factory rent will be irrelevant. product)

Period Costs
- are the costs which are charged as expenses against the revenue of the
Differential costs period in which they are incurred.
- is the difference between any two alternatives. - these costs are not assigned to product/ project, but are treated as
- expenses of the period in which they are incurred.
A dditional variable expensesincurred ∈respect of the additional output Ex: Factory Rent, Security Charges, Maintenance, Factory Manager’s salary
I ncrease ∈¿ costs

Opportunity costs
- is the cost of opportunity lost.
- the cost of selecting one course of action in terms of opportunity which
are given up to carry out that course of action.
- is the benefit lost by rejecting the best competing alternative to one chose.
- usually the net earnings or profit that might have been earned from
rejected alternative.
COST MANAGEMENT 2. Directing and Motivating – involves overseeing the day-to-day activities,
Strategy – is a set of policies, procedures and approaches to business that seeing to it that the org. is functioning smoothly and the members of the
produce long-term success. org. are mobilized to carry plans.
Strategic management - involves the development of sustainable 3. Controlling – involves checking the performance of activities against the
competitive position. plan or standards set and deciding what corrective actions to take there be
Strategic cost management - involves the development of cost any deviation between the actual planned / standard performance.
management information to facilitate the principal management function
which is strategic management. Financial Accounting vs. Cost Accounting

Cost management information

- is the information that the manager needs to effectively manage the firm,
profit-oriented &not-for-profit organization.
- includes both financial information about cost and revenues & relevant
non-financial information about productivity, quality and other key
success factors for the firm or organization.

Cost management
- is the practice of acctg. in which the accountant develops and uses cost
management information.
- For competitive success, it is not enough to emphasize only on financial
information. This could lead manager to stress cost reduction while ignoring
or even lowering quality
standards.

Management Functions and the Needs for Management Acctg. Info.:

1. Planning – involves:
a) Setting of immediate, as well as long-range goals for the organization;
b) Predicting future conditions that are expected to prevail;
c) Considering the different means or strategies by which the goals set may
be achieved; and
d) Deciding which of the strategies should be used to attain such goals.
Importance of Ethical Behavior for Management Accountants subordinates’ activities to ensure compliance.
Standards of Ethical Conduct for Management Accountant (From the • Refrain from using confidential information for unethical or illegal
American Institute of Management Accountants) advantage.
- Management accountants - have an obligation to the organizations they
serve, their profession, the public, and themselves to maintain the highest INTEGRITY
standards of ethical conduct. • Mitigate actual conflicts of interest. Regularly communicate with business
- In recognition of this obligation, the Institute of Management Accountants, associates to avoid apparent conflicts of interest. Advise all parties of any
formerly the National Association of Accountants, has promulgated the ff. potential conflicts.
standards and ethical conduct for management accountants. Adherence to • Refrain from engaging in any conduct that would prejudice carrying out
these standards is integral to achieving the Objectiveness of Management duties ethically.
Accounting. • Abstain from engaging in or supporting any activity that might discredit
- Management accountants shall not commit acts contrary to these the profession.
standards not shall they condone the commission of
such acts by others within their organizations. CREDIBILITY
• Communicate information fairly and objectively
• Disclose all relevant info. that could reasonably be expected to influence
COMPETENCE an intended user’s understanding of the reports, or recommendations.
Management accountants have the responsibility to: • Disclose delays or deficiencies in info., timeliness, processing, or internal
• Maintain an appropriate level of professional expertise by continually controls in conformance with organization policy and applicable laws.
developing knowledge and skills.
• Perform their professional duties in accordance with relevant laws,
regulations, and technical standards. INTERNATIONAL CERTIFICATIONS
• Provide decision support information and recommendations that are The 3 certifications available to management accountants:
accurate, clear, concise ad timely. • Certificate of Management Accounting (CMA)
• Recognize and communicate professional limitations or other constraints - is one who has passed the rigorous qualifying examination, has met an
that would preclude responsible judgment or successful performance of an experience requirement, and participate in continuing educations.
activity. - The CMA Certificate is granted by the Institute Management Accountants
(IMA).
CONFIDENTIALITY • Certificate in Public Accounting (CPA)
• Keep information confidential except when disclosure authorized or - is one who has met the pre-qualification educational requirements,
legally required. passed the CPA licensure examinations given the Professional Regulatory
• Inform all relevant parties regarding appropriate use of confidential Board of Accountancy and has satisfied all other legal and regulatory
information. Monitor requirements of public accountant.
• Certificate in Internal Auditing (CIA)
- Since one of the management control responsibilities of the management
accountant is to develop effective systems to detect and prevent errors and
fraud in the accounting records, it is common for the management
accountant to have strong ties to the control-oriented organization such as
the Institute of Internal Auditors (IIA) granting Certification in Internal
Auditing (CIA).
- must pass a comprehensive examination designed to ensure technical
competence and have the required number of years of work experience.