ACF Topic 3 - Cost Accounting

theory

Cost Accounting

the measuring, analysing, recording and reporting on the costs of a product or service. It is useful to both financial and managerial accounting for:

• control of costs

• planning

• inventory valuation

• setting of selling prices

• determining profitablity

Cost

an economic sacrifice of resources for a particular purpose, such as making a product or providing a service, but it can be something other than an expense

• cost relationship

• level of activity

• asset or expense

Cost object

any object for which we require a value or any object for which costs are measured and assigned

Direct costs

costs that are able to be traced to a product or service with a high degree of accuracy. Directly traceable means the cost is physically and easily traced to the finished product

Indirect costs

costs that are not easily traced to a product or service. These items are not actually incorporated in the product or are too insignificant to make it worth tracing the cost of the finished product

Direct materials (include examples)

the materials and parts directly used to manufacture a product

(wood for furniture, steel panels for cars)

Indirect materials (include examples)

costs that relate to manufacturing in general, not specific products

(fuel or oil for machinery)

Direct labour (include examples)

costs of the employees who work in factory or office

(wages and other payroll costs)

Indirect labour (include examples)

costs associated with supervisors, managers and other staff who work in the factory or office

Overheads (include examples)

all the costs that are indirectly related to the manufacture of products

(factory rent, depreciation of factory equipment, facotry power used, factory cleaning, factory supervisor’s salary. 

Product costs

• inventoriable costs, recorded as finished goods in the balance sheet

• it is an asset because it has future economic benefit to the business

• the value of the inventory is the sum of the product costs associated with its manufacture

Period costs

• not product costs

• expense shown in the income statement

• relate to the current accounting period

• have no future economic benefits

• not carried forward with the product until the time of sale

Past costs

costs that have already been consumed and cannot be changed or managed

Future costs

costs that will be consumed in the future and can be managed in relation to the production process. They can be made more certain by planning and budgeting

Mark-up

the amount added to the unit cost of a product to calculate the selling price

Job order costing

• jobs that can be differentiated from each other

• manufacturing small number of identical products

• unique products

Process costing system

• making large volumes of an identical product for a long period of time

• mass-produce the product or service to many customers

• ongoing process of making the same product in a very large quantity

Actual costing system

• calculating cost of product/service using actual direct materials, actual direct labour and overhead costs

• actual overhead rate is applied at the end of accounting period

• most business don’t use this method, as they can’t wait for end of accounting period

Normal costing system

• calculates cost of job using actual direct materials, actual direct labour and a predetermined overhead rate

• predetermined overheads allocates the indirect costs

Standard costs

the projected cost of manufacturing a single product or number of products during an accounting period under current and anticipated operating conditions.