INTRODUCTION TO
COST ACCOUNTING
1. Cost accountancy is the
techniques and processes of ascertaining cost.
2.
The main purpose is to help managers make decisions by providing relevant
information
3. Cost accounting provides
information for planning and control, cost minimization, stock valuations,
estimate preparation and comparison of cost.
4. Limitations of cost accounting
arise from the insufficiency of its various techniques in peculiar problems or
from the complexity in particular problems or from the complexity in particular
methods and techniques.
5. Cost accounting is an
extension of the principles of financial accounting. There are certain differences
in the emphasis between the two approaches. Financial accounting renders
stewardship function of accounting i.e. satisfies internal and external users
of accounting.
6. Cost accounting on the other
hand provides management with accounting information for decision making
7. A cost unit is a unit of
quantity of product or service in relation to which cost may be ascertained.
8. A cost centre is a production
or service location function, activity or item of equipment for which cost are
accumulated
ELEMENT
OF COST
9. Costs can be analysed and
grouped to suit particular purposes.
10. Direct material, labour and
direct expenses are the elements of prime cost while prime cost in addition to
indirect costs constitutes total cost of goods sold.
11. The total cost of indirect
material, wages and expenses make up overheads, which can be regrouped into
production, administration and selling and distribution overheads. If analysed
according to time factor, there are fixed, semi-fixed and variable costs.
Other types of cost include
actual, unit, average, notional and opportunity costs.
12. Overheads can be sub-divided
into fixed variable and semi-variable elements:
13. The elements can be
re-grouped and analysed into:
- Production overhead
- Administrative overhead
- Selling and distribution overhead.
14. To ensure production efficiency,
a careful planned organisation structure should be in place with a clear line
of authority and responsibility.
STORES
AND STORES’ ACCOUNTS
15. Stores and Stores accounting
involves classification and recording of materials
purchased, issued, returned and
transferred to jobs and other cost units and centre.
16. The purchasing division is
headed by the purchasing manager who keeps track of prices, quality and new
products. He is responsible for the acquisition of material parts, supplies and
containers, equipment and repair parts and the sale of the disposal of wastes
and byproducts.
17. There are five general steps
in the purchasing of goods.
18. The receiving department
receives, records and inspects the goods to ensure that the quantity and
quality and other specifications stipulated agree with the purchase order.
The stores department headed by
the storekeeper should be honest and dedicated with a vast knowledge of stores
routine.
19. Centralised and decentralized
storage are stores with a main store and a number of departmental sub-stores
respectively. They have advantages and disadvantages.
20. Materials are not sent
directly from the vendor to the user department but to stores where the
materials are issued to the user department.
22. There are costs of holding
stock such as carrying ordering, stock out costs.
23. There are eight methods of
pricing stock e.g. FIFO, LIFO.
LABOUR
COSTING
24. Labour is one of the elements
of cost. It represents a large part of local cost of production. It is a factor
which can be easily influenced and measured.
24. The departments responsible
for the planning and control of labour in an organisation are personnel, time –
keeping, production, engineering and work study, wages and cost accounting departments
25. Time and output are recorded
for the preparation of payrolls. The method of recording time is based on
attendance time and the job time.
26. Remuneration methods are
day/time rate wages, piece rate and premium bonus.
27. Halsey, Halsey – Weir and
Rowan Schemes are methods of incentive Schemes.
28. Advantages of incentive
schemes are increased production and increased wages, rewards for extra effort
leading to improved workers morale.
29. Its disadvantages are
complexity of the scheme and problems of establishing performance rules/wages
30. Workers get paid for
overtime, idle time, fringe benefits and they are all accounted for accordingly.
OVERHEAD
COST
31. Overhead is the total of
indirect costs is overhead. It may be time or activity based.
32. Overhead may be analysed into
production, administrative, selling and distribution
33. To establish overheads you
define a number of cost centres, gather the indirect cost together and allocate
or apportion cost to the cost centres.
34. Overhead absorption methods
are percentage of material cost, machine hours, direct labour hours, percentage
of direct labour and percentage of prime cost.
35. The over-absorbed overhead
occurs when the actual overhead cost is less than the budgeted or predetermined
overhead cost.
36. There is an under-absorbed
overhead cost when the actual overhead cost is more than the budgeted/predetermined
overhead cost.
INTRODUCTION
TO COSTING METHOD
37. Costing method refers to the
system of cost finding and ascertainment. They are devised to suit the method
by which goods are manufactured or services are provided.
38. Costing methods are divided
into two broad categories of order costing and unit costing.
39. Costing techniques refer to the way of presenting
the cost information. There are two major costing techniques – absorption and
marginal costing.
40. Job costing is a form of
specific order costing in which costs are attributed to individual jobs.
41. Batch costing is a special
type of job costing or modification of job costing. It is used when production
involves the manufacture of a single product in lots of more than one as in
printing.
PROCESS
COSTING
42. Process costing is a method
used when production follows a series of sequential processes to ascertain the
cost of product at each stage of production.
43. In process costing, by
product, joint product, scrap and wastage frequently occur in the course of production.
44. Characteristics of process
costing include setting up cost centres for each operational stage and
accumulation of material cost, wages and overheads, determination of average
cost of all production in each process, the relevance of the cost unit chosen to
the organisation, the output of one process becomes the input of another.
45. Production system is broken
down into stages known as processes, material are processed through the various
processes, gathering cost to determine cost of unit of production.
46. Standard costing in
combination with process cost gives the management an efficient measure of
production.
CONTRACT
ACCOUNT
47. Contract costing has
similarities to job costing.
• Higher proportion of direct
cost
• Problem of cost control
• Excess materials
48. Direct materials are received
from store, directly purchased from outside or manufactured in the works are
all debited to the contract account.
49. Other costs such as direct
labour, direct expenses and overheads are recognized and debited to contract
account.
50. Plant purchased or moved from
company to site are recognized and debited to contract account. When the plant
is transferred from the site to another site or back to the company the plant
is valued and the cost credited to the contract account to note the
depreciation or usage.
51. The various methods of
calculating profit on uncompleted contract are:
a) If the contract is at early
stage of less than 30% complete, no profit should be taken or recognized.
b) When the substantial work has
been done i.e. between 30% - 80% complete.
Notional Profit x 2/3 x Cash
received/ Work certified
c) When the contract is nearing
successful completion
Notional Profit x work certified/
Contract price
COST
BEHAVIOUR
52. The three manufacturing elements of cost of
any finished product are material, labour, and expenses which are further
classified into direct and indirect costs/overheads.
53. Cost behaviour is the measure of how a cost
will respond to changes in the level of production. The most important ones are
variable costs, fixed costs and mixed costs. Mixed costs consist of fixed and
variable costs.
54. All cost functions are assumed to be linear so
that the rate of change is constant and easy to forecast. It is not likely to
have a perfect linear variable cost over all level of activities. The cost may
be linear only over the normal range of activity levels. We have non-linear or
curvilinear cost where costs do not vary in direct proportions to changes in
production.
55. Fixed costs are separated
from variable costs using statistical analysis, scatter diagrams and high and
low method.
BREAKEVEN/CVP
ANALYSIS
56. Breakeven, sometimes called
cost-volume profit, is based on the company’s profit function. It is the sales
level at which sales revenue and total costs are equal with no profit made or
loss sustained.
57. Breakeven/cost volume profit
gives a firm breakeven point in units and naira value using specified formulae.
58. Breakeven provides effect on
sales volume and profit if there are changes in selling price, fixed costs,
variable costs, selling and distribution costs.
59. Breakeven assumes that unit
sales price remain constant. Costs are variable and fixed; variable costs vary
with volume of production. Efficiency will not change, and volume is the only
factor affecting costs and revenue. Breakeven relates to one project only
particularly graphical approach. Stocks are values at variable costs only.
MARGINAL
AND ABSORPTION COSTING
60. Absorption costing is the
basis of all financial accounting statement and the process of absorption of
all overheads.
61. Marginal costing is the
process of charging variable costs to cost units and fixed costs to the
relevant period.
62. Marginal costing is used for
planning and decision making. It is used for the calculation of cost and
valuation of stock.
63. Production costs,
manufacturing, selling and administrative costs are analyzed into fixed and
variable costs. i.e. A mixed cost is separated into fixed and variable costs.
64. Marginal and absorption
costing are different in the timing of deduction of the fixed manufacturing
costs and in the valuation of stock.
STANDARD
COSTING 1
65. Standard costing involves
comparison of actual costs with pre-determined costs and analysing the
differences known as variances.
66. Standard relates to
individual items, processes and product, budgets relate to totals
67. Standards are set for each of
the elements of cost-materials, labour and overhead.
68. Variance analysis is the
process of analysing the differences between standard and actual performance of
materials, labour and overhead into favourable and unfavourable parts for decision
making.
69. The total cost variance is
the total of all the variances of direct labour cost variance and the variable
and fixed overhead variances
70. A budget is a financial and
quantitative statement prepared and approved prior to a defined period of time
of the policy to be pursued during that period to attain given objectives.
BUDGET
AND BUDGETING TECHNIQUE
71. Budgeting is a process of
expressing plans in qualitative terms and expressions.
72. A budget may be expressed in
monetary and non-monetary terms e.g. units of products, unit of time, etc.
73. A budget relates to a
definite future period of time and is prepared in advance of that time.
74. The purpose of a budget is to
implement policies formulated by management for attaining set objectives
75. Benefits of budgeting include
completed planning, enhanced coordination and motivation, performance
evaluation and instilled financial awareness.
76. Problems in budgeting
includes unpredictable rate of inflation, uncertainty of the volume of production
etc.
77. There are many types of
fundamental budgets such as cash, sales, capital expenditure production,
production cost, plan utilization, selling and distribution, cost purchasing
etc.
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