INTRODUCTION TO

COST AND MANAGEMENT

ACCOUNTING
LECTURER: WAN MARDYATUL MIZ A WAN
TAHIR

ACC466
LEARNING OUTCOMES:
• At the end of this topic, you should be
able to:
–differentiate between financial accounting,
cost accounting and management
accounting.
–explain and differentiate between cost,
cost unit, cost centre and classes of cost.
–identify the importance of management
accounting knowledge for related
industries.
 CONCEPTS
• Financial Accounting
– The process of CLASSIFYING, RECORDING, SUMMARIZING the
business activities and INTERPRETING business result
• Management Accounting
– The application of professional knowledge and skill in the preparation and
presentation of accounting information in such a way to assist
management in the formulation of policies and in the planning and control
of operations of the undertaking
• Cost Accounting
– The application of accounting and costing PRINCIPLES, METHODS,
TECHNIQUE and APPROACHES in :
1. Ascertaining of COST
2. PLANNING and controlling
3. DECISION making
DIFFERENCES OF COST ACCOUNTING &
FINANCIAL ACCOUNTING
Area of differences Costing and management Financial accounting
accounting

Legal requirement Not required Should comply with statutory

Optional and information should requirement such MASB, FRS
only be produced if the benefits and others regulation.
from using it exceed the cost of
collecting it.

Users Internal user such as manager to External users such public,

help them in decision making, potential investor and internal
planning and controlling. user as well.

Reported Focus on small part of the Reports refer to the whole of

accounting organization such as departments, the organization such as
entity individual products or activities. statement of financial position
or income statement.
 DIFFERENCES OF COST ACCOUNTING &
FINANCIAL ACCOUNTING
Area of differences Costing and management Financial accounting
accounting
Accepted accounting Flexible to use whatever accounting Must prepare the reports to
principles rules that is useful for decision meet the requirement of the
making. Company Act and other
standards for accounting
practice.
Reporting frequency Report may be prepared at daily, Reports are prepared annually
weekly or monthly or whenever or semi annually.
required
Time dimension It concerned with future and current It concerned with past
information as well as past information
information.
Precision Manager may require information Report should be reasonably
rapidly, as many decisions cannot be accurate otherwise external users
delayed until the information is would have little confidence in
available. the content of the published
Approximate information is accounts.
normally sufficient for manager
decision making
 SIMILARITIES OF COST
ACCOUNTING & FINANCIAL
ACCOUNTING
• Both are involved in functions such as
decision making, recordkeeping and
performance evaluation.

• Information is used to evaluate the

effectiveness of the use of resources.

• The same information system is used to

collect data and develop the information.
 OBJECTIVES OF COST
ACCOUNTING
1. DETERMINE COST
– Ensure cost are assigned to respective department in organization
– Each department will be responsible on the costs which have been given
or allocated to them
2. PLANNING AND CONTROL
– Set and prepare activities, target or goals
– Compare between actual cost and budgeted cost and enable corrective
actions to be made.
3. DECISION MAKING
– Cost information will assist manager or person-in-charge in decision
making purpose.
 COSTING
• Definition of Cost
– Cost is defined as the expenditure incurred in producing a product or a service.
– The ascertainment of cost by applying accounting and costing principles, methods
or techniques. It may be determine after or before the cost are incurred.
• Cost object
– Any activity for which separate measurement of cost is desired
– Example:
• Cost of manufacturing a car
• Cost of rendering a service such hotel

• How to do costing?
– Costing involves:
• Collecting and classifying expenditure according to cost elements (materials? labour?
overheads?)
• Then assign the expenditure to the cost centres or the cost units or both.
 BASIC TERM
• Cost
– Amount spent/used on making product or doing an activity
– Must be in monetary form.
– Eg RM10, RM0.20, £5, ¥1000
• Cost unit
– Quantitative unit measurement of products or services where cost can be related
– Eg: Sugar(kg/gram), silk (cm/m)
• Cost centre
– Business section or department where cost can be charged
– Can be classified into:
• Process cost centre where specific process or continuous sequence of
operations is performed. Eg: In food processing manufacturing company, the cost
centres are mixing and cooking departments
• Production cost centre involved in making or manufacturing product. Eg:
Machining, Assembly, Mixing, Cutting
• Service cost centre provide support and service to production department. Eg:
Maintenance department, Canteen, Store
 BASIC TERM
• Profit Centre
– units within an organization whose managers are accountable for both
revenues and costs.
• Investment Centre
• units whose managers are responsible for both revenues and costs and in addition have
responsibility and authority to make
– working capital – decision on day to day operation; and
– capital investment – decision made for long term investment
 Opportunity cost
• The benefit foregone or lost when one alternative is rejected while
accepting another
• Eg. a building which could either be rented out or sold. If the building
sold, the opportunity to earn rental income is lost.
 Sunk cost
• Costs or expenses that have already paid or incurred where the total
will be unaffected by the choice between various alternatives.
• Eg. Training cost incurred last year
 BASIC TERM
• Relevant and irrelevant cost and revenue
– For decision making, cost and revenue can be classified according to whether
they are relevant to a particular decision.
– Relevant cost and revenue
• Those future cost and revenue that will be changed by a decision
• Eg. Opportunity cost
– Irrelevant cost and revenue
• Those that will not be affected by the decision
• Eg. Sunk cost
• Incremental and marginal costs
• Incremental cost/ differential cost
– The difference between the costs of each alternative action that being considered
• Marginal cost
– Similar to incremental cost except for the marginal cost/revenue represents the additional
cost/revenue of one extra unit of output whereas incremental cost measure a group of extra units
of output.
COST CLASSIFICATION
• Nature/element
– Nature of the cost whether classified into material,
labour or expenses
• Identifiability/traceability
– Direct or indirect
• Behavior
– How costs or revenues will vary with different levels of
activity or volume
• Function
– Cost by function to which they relate
• Controllability
• Normality
 NATURE/ELEMENT

Production/
Materials Labour Manufacturing
Overhead

Cost of ingredients/ Cost spent on person Cost indirectly incurred

elements/basic parts who is responsible in in the process of
in making a product changing/transforming changing the materials
the material into into a product
product/finished goods
 NATURE/ELEMENT of
Wooden furniture

Production/
Materials Labour Manufacturing
Overhead

Woods Furniture maker/ Rental of workshop

Craftperson/ Carpenter
 Identifiability/
traceability

Costs that are incurred in the

Costs that can be directly process of production but cannot
identified to the cost units Direct cost Indirect cost be directly identified to the units
produced

Direct Indirect
Material Material

Overhead
Indirect
Prime Cost Direct Labor
Labor

Direct Indirect
Expenses expenses
NOTE:
Essentially, Prime Cost and Overhead are required to produce a product.
Direct Labour + Manufacturing Overhead = CONVERSION COST
CONVERSION COST = to convert raw materials into finished goods
Example: Dress boutique
Direct expenses are those can Indirect labour is a cost charge
Direct material is a cost on a person who is indirectly
be allocated to a cost unit/centre
of basic elements involved involved in a boutique business.
of boutique business
in making a dress Eg. Sales girl, Cashier
Eg. Hire of special sewing machine
Eg. Fabric
Indirect material is a cost of a
Direct labour is a cost Indirect expenses are those cannot dress as needed to make it
spent on person in making be allocated to cost unit/centre but complete, useful, look nice
a dress have to be apportioned to the cost and saleable.
Eg. Dressmaker/Tailor unit/centre of boutique business Eg. Accessories ,Ribbon,
Eg. Rental of shop, Utility, Button, Zipper
Depreciation, Rates & insurance
 COST
BEHAVIOR

Mixed cost/
Fixed Cost Variable cost Semi-variable/ Step cost
Semi-Fixed

Cost unchanged at
Cost remains Cost of combination
Cost changes as the certain output level
constant regardless between variable and
level output change but increase to next
the level of output fixed cost
level

Eg. Eg. Salary of

Eg. Rental, advertising, Eg. Electricity &
Material/ingredient to production
depreciation telephone bill
produce product supervisor

Avoidable vs Unavoidable cost:

An avoidable cost refers to variable costs that can be avoided, unlike
most fixed costs, which are typically unavoidable.
 COST BEHAVIOR GRAPH
Fixed cost Variable cost
Total cost (RM) Total cost (RM)

Activity (Volume) Activity (Volume)

Mixed cost Step cost

Total cost (RM) Total cost (RM)

Activity (Volume) Activity (Volume)

 COST FUNCTION
• Production
– Cost incurred from the time of acquisition of material until the dispatch of
completed items to store.
• Administration
– Costs incurred in the general administration including directing and controlling the
operations of an organization
• Marketing
– Costs incurred in selling, publicizing, distributing and product servicing.
• Finance
– Costs incurred in financing the activity of the business
• Research & development
– Costs incurred in developing, seeking new or improved ideas, materials, methods
and products
• Human resources
– Costs incurred relate to employees or staff of an organization
 COST
FUNCTION

Marketing, Selling
Administration Research &
Production cost & Distribution Finance cost Human resource
cost development
cost

Eg. Depreciation Eg. Account clerk Eg. Commission Eg. Interest on

Eg. Market survey Eg. Training cost
of machinery salary to salesman loan

Eg. Material and Eg. Stationery & Eg. Advertisement Eg. Advertisement
labour printing of product for new staff

Eg. Transportation
cost
MANUFACTURING/NON-
MANUFACTURING
• Product Cost
– Product Costs are manufacturing costs that can be identified with goods purchased or
manufactured for resale.
– Example: Direct material, direct labour, direct expenses, variable overheads
• Period Cost
– Period Cost are non-manufacturing costs that are not included in the valuation of
inventory. They are treated as expenses in the period in which they are incurred.
– Example: Office Rental, Electricity, Telephone
• NOTE:
– Manufacturing/Production Cost is PRODUCT COST.
– Administrative, Selling and Distribution Costs are PERIOD COST.
 CONTROLLABILITY

Controllable Uncontrollable

Cost which cannot be

Cost can be managed by
managed by the management
management in the
in the department i.e. fixed
department, commonly
cost or cost determined by
variable cost
the top management

Cost that are influenced by Cost that are not influenced

the decisions or actions of a by the decision or action of a
manager. Eg, shut down cost manager. Eg, increased cost of
such as retrenchment salaries raw material due to inflation
 NORMALITY

Abnormal cost /
Normal / Expected
unexpected

Cost is expected to be Cost which is not

incurred in the process expected to be
of making a product incurred e.g. natural
e.g. scrap cost disaster, fire, black-out
IMPORTANCE OF MANAGEMENT
ACCOUNTING KNOWLEDGE FOR
RELATED INDUSTRIES
• Help in planning
• Assist in decision making
• Efficiency in operation, management
and control
THE PURPOSE OF
CLASSIFICATION OF COSTS
• Different costs are used for different purpose such as following;
– Direct or indirect cost- used when assigning costs to cost object
– By behaviour – to look at how costs and revenues vary with different
levels of activities and essential for decision making. i.e. will it be wiser to
pay the supervisors fixed salary or according to volume produced by
his/her team or combination of both.
– Relevant or irrelevant cost – for management to decide whether or not
to accept customers’ orders.
– Opportunity costs – to help management decide in choosing among
alternatives course of action.
PAST YEAR QUESTIONS
• June 2019 (Q2)

• December 2018 (Q2)

PAST YEAR QUESTIONS
• June 2018 (Q2)

• January 2018 (Q2)

PAST YEAR QUESTIONS
• June 2016 (Q1)
 PAST YEAR QUESTIONS
• December 2015 (Q1)

• June 2015 (Q1)

PAST YEAR QUESTIONS
• December 2014 (Q1)

• June 2014 (Q1)

EXERCISE
1. Define the meaning of ‘cost object’ and provide two examples of cost
objects.
2. Distinguish between a direct and indirect cost.
3. Provide examples of each of the following:
1. Direct labour
2. Indirect labour
3. Direct materials
4. Indirect materials
5. Indirect expenses
4. Explain the meaning and provide examples of each of the following terms:
1. Variable cost
2. Fixed cost
3. Mixed cost
EXERCISE
5. Describe three different methods of cost classification and explain the
utility of each method.
6. Cost terminology used in costing include:
1. Period cost
2. Product cost
3. Variable cost
4. Opportunity cost
Required:
Explain each of these classifications, with examples of the types of cost that
may be included.
7. Explain whether you agree with each of the following statements:
1. All direct costs are variable.
2. Variable costs are controllable and fixed costs are not.
3. Sunk cost are irrelevant when providing decision-making information.