1.Introduction.pptx

Cost Accounting Logistics Management ID Wattuhewa Senior Lecturer General Sir John Kotelawala Defence University Ratmalana 1 INTENDED LEARNING OUTCOMES Learners should be able to : define Cost & Management Accoun...

Cost Accounting Logistics Management ID Wattuhewa Senior Lecturer General Sir John Kotelawala Defence University Ratmalana 1 INTENDED LEARNING OUTCOMES Learners should be able to : define Cost & Management Accounting distinguish between cost accounting and management accounting; evaluate different methods to value the product and service cost; evaluate the cost & management accounting information for planning, controlling and decision making. 2 AIM To provide detailed cost & management accounting information for planning, controlling and decision making. 3 Cost Accounting “Cost accounting is the process of accounting for costs from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and ascertainment of profitability of activities carried out or planned.” (Chartered Institute of Management Accountants – CIMA) 4 Management Accounting “The presentation of accounting information in such a way as to assist management in the creation of policy and in the day-to-day operations of an undertaking.” (Chartered Institute of Management Accountants – CIMA) 5 Financial Accounting “The art of recording, classifying and summarizing in a significant manner and in terms of money. Transactions and events, which are in part at least, of a financial character and interpreting the results thereof.” (American institute of Certified Public Accountants (AICPA)) 6 A Cost “The amount of expenditure (actual or notional) incurred on, or attributable to , a specified thing or activity.” Terminology Cost = Quantity x Price 7 Cost vs. Expense and Loss Expense s in P/L Expired (Dr} cost Losses in cost P/L (Dr) Unexpire Assets in d cost B/S 8 COST UNIT unit of product or service in relation to which costs are ascertained.” CIMA, London Eg.‘a kilowatt-hours’ of electricity ‘a meal’ of catering shop 9 COST CENTRE “a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control.” CIMA, London 10 Cost Centres are primarily of two types: Personal cost centre – which consists of a person or a group of persons. Impersonal cost centre – which consists of a location or an item of equipment or group of these. 11 Functional point of view, cost centre may be divide as follows Production cost centre. cost centre where actual production work takes place. e.g. weaving department in a textile mill, melting shop in a steel mill, cane crushing shop in a sugar mill, etc. Service cost centre. cost centre which are render services to production cost centres. e.g. power house, tool room, stores department, repair shop, canteen, etc. 12 Cost ascertainment Cost ascertainment is concerned with computation of actual costs incurred. It refers to the methods and processes employed in ascertaining costs. e.g. job costing, contract costing, batch costing, process costing 13 Cost estimation Except ascertainment of actual costs, costs may also be pre-determined. Cost estimation is the process of pre-determining costs of goods or services. 14 Total Cost of a product Direct material Direct wages Prime Cost Direct expenses Direct Cost Production Cost + Factory Cost Production Total Cost Overhead Selling + + Price Selling & Distribution Profit and Administration overheads 15 USERS OF INFORMATION Internal managers use information for making non-routine decisions e.g. investing in equipment, pricing products and services, choosing which products to emphasize and long-range plans. External parties e.g. investors and government authorities 16  Cost Classification 1. Element Cost of Materials Cost of wages and salaries (labour cost) Cost of other expenses Ex:- Rent and rates Electricity and Gas Depreciation 17  Cost Classification 2. Nature-Direct cost and Indirect Cost Materials, Labour and Other costs can be classified as Direct costs or Indirect costs. Indirect Cost A cost that is incurred in the course of Direct Cost making a product., providing a service A cost that can be traced in or running a department, but which full to the product or service cannot be traced directly and in full to the product, service or department Direct Material Indirect Material Direct Labour Indirect Labour Direct Expenses Indirect Expenses 18  Cost Classification Direct Material Cost Cost of materials that are known to have been used in making and selling a product or providing a service. Ex:- Component products – specially purchased for a particular job, order or process. Part finished goods – Which is transefred from department 1 to department 2 becomes finished work of department 1 and a direct material to department 2. Primary packing materials – Like cartons or boxes. 19  Cost Classification Direct Labour Cost These are specific costs of the workforce used to make a product or provide a service. Direct Labour costs are established by measuring the time taken for a job, or the time taken in direct production work. Ex:- Wages of factory workers Other Direct Expenses Those expenses that have been incurred in full as a direct consequence of making a product, providing a service or running a department. Ex:- Hire of tool or equipment for a particular job Maintenance cost of tools. 20  Cost Classification DIRECT MATERIAL + DIRECT LABOUR + DIRECT EXPENSES PRIME COST 21  Cost Classification Indirect Materials Materials which cannot be traced into the direct product Ex- Materials used in negligible amounts Indirect Wages All wages not direct charged to a product Ex:- Factory Supervisor’s salary Indirect expenses Expenses other than materials and labour which are not directly charged to production Ex:- rent, rates, insurance of the factory 22 Depreciation, fuel, electricity, water, factory maintenance  Cost Classification INDIRECT MATERIAL + INDIRECT LABOUR + INDIRECT EXPENSES Production Overheads (Factory Overheads) 23  Cost Classification Productio Total PRIME n = Productio COST + Overhead n Cost s 24  Cost Classification 3. Variability or Cost behavior Fixed Cost Cost which does not change in total for a given time period despite wide fluctuations in output or volume of activity. e.g. rent, property taxed, supervision salaries, depreciation on office facilities, advertising, and insurance. 25  Cost Classification Variable cost Costs that vary directly and proportionately with the output. This is a constant ratio between the change in the cost and change in the level of output. Variable cost is always expressed in terms of units or percentage of volume. e.g. material requirement per product 26 Cost Classification Semi-Variable or Semi- Fixed Costs Semi variable costs refer to costs which tend to vary with changes in the volume of output or sales. Eg: repairs and maintenance cost of plant, machinery and building, salary of supervisor etc. 27  Cost classification 4. Controllability Controllable cost Uncontrollable cost 28 Cost Classification for Control Controllable Cost “a cost which can be influenced by the action of a specified member of an undertaking”. Uncontrollable Cost “a cost which cannot be influenced by the action of a specified member of an undertaking.” 29 Cost Classification 5. Normality. Normal or unavoidable costs Cost of normal spoilage of material and the cost of normal idle time examples. Abnormal or avoidable costs Cost of spoilage of material over an above the normal limit is. An example of abnormal cost. 30  Cost Classification 6. Functional Cost Production Cost Costs which are incurred by the sequence of operations beginning with the supply of raw materials, and ending with the completion of the product ready for warehousing as a finished good item. Packaging costs are production costs where they relate to primary packing. 31  Cost Classification Administration cost Costs of managing an organization, that is planning and controlling its operations. Ex:- Salaries of managers and employees, rent expenses of office building. Selling and Distribution expenses Costs incurred in selling the products to customers and distributing them Ex:- Promotion expenses, advertising, insurance of distribution vehicles. 32 Cost Classification 7.Time Historical cost. Pre- determined cost. 33 Cost Classification 8. Relevance to decision making and control. Marginal cost. Sunk cost. Opportunity cost. Standard cost Shut down cost. Replacement cost. Abandonment cost. 34  Cost Classification Total Cost Calculation 35  Cost Centers These are collecting places for costs before they are further analyzed. Costs are further analyzed into cost units once they have been traced to cost centers. When costs are incurred, they are generally allocated to cost centers. Cost centers may include the following. - A department - A machine, group of machines - A project 36  Cost Units A unit of product or service to which costs can be related. It is the basic control unit for costing purpose Ex:- In a soft drink manufacturing company – Cost of a bottle In a hospital – A patient 37  Cost Object A cost object is any activity for which a separate measurement of costs is desired. If the users of management information wish to know the cost of something, that something is called a cost object. Ex:- -The cost of a product -The cost of operating a department -The cost pf a service 38 COST CONTROL, COST REDUCTION, COST MANAGEMENTS Cost Control Comparative analysis of actual costs with appropriate standards or budgets to facilitate performance evaluation and formulation of corrective measures. 39 Cost Reduction positive approach to bring costs down implies real and permanent reduction in the unit cost of goods manufactured or services The goal of cost reduction (i) by reducing the cost per unit and (ii) by increasing productivity. 40 Cost Management This includes both cost control and cost reduction. The objective is to increase productivity of resources and factors of production and to relate them to enhance profitability. 41 Questions Discuss the difference between Cost Control and Cost Reduction. 42 RECOMMENDED READINGS contd Lucey, T.,(1990), Cost & Management Accounting, DP Publications Ltd Lucey, T.,(2003), Management Accounting, 5th Edition,Book Power, UK. Patel, Bhavesh M., (1997), Cost Accounting for Management Decisions, Allied Publishers Ltd., New Delhi. Williamson, Duncon., (1998), Cost & Management Accounting, Prentice-Hall of India Pvt Ltd, New Delhi. 43 RECOMMENDED READINGS Brack, Horace R., Herrington, Linda A., (1999), Cost Accounting Principles & Applications, Mc Graw Hill, New York. Drurry, Colin., (2000), Management& Cost Accounting,5th Edition, Thomson Asia Pvt Ltd, Singapore Harris, E., (2002), Process Costing,Viva Books Pvt Ltd,New Delhi Horngren, Charles T., Foster George, Datar Srikant M., (2000), Cost Accounting A Managerial Emphasis, Prentice-Hall of India Pvt Ltd, New Delhi. 44 45  ? Thank you 46