Table of Contents
Acknowledgment......................................................................................................................iii
Table of Contents.......................................................................................................................v
CHAP...
COST ACCOUNTING
STUDY TEXT
ii
STUDYTEXT
COST ACCOUNTING
Table of Contents
Acknowledgment......................................................................................................................iii
Table of Contents.......................................................................................................................v
CHAPTER ONE...........................................................................................................................1
NATURE AND PURPOSE OF COST ACCOUNTING.................................................................3
CHAPTER TWO.........................................................................................................................21
COST CLASSIFICATION...........................................................................................................23
CHAPTER THREE.....................................................................................................................41
COST ESTIMATION...................................................................................................................43
CHAPTER FOUR.......................................................................................................................65
MATERIAL COSTS....................................................................................................................67
CHAPTER FIVE.......................................................................................................................101
LABOUR COSTS.....................................................................................................................103
CHAPTER SIX.........................................................................................................................129
OVERHEAD COSTS................................................................................................................131
CHAPTER SEVEN...................................................................................................................165
COST BOOK KEEPING...........................................................................................................167
CHAPTER EIGHT....................................................................................................................193
MARGINAL AND ABSORPTION COSTING...........................................................................195
CHAPTER NINE.......................................................................................................................253
COSTING SYSTEMS...............................................................................................................255
CHAPTER TEN........................................................................................................................315
BUDGETING AND BUDGETARY CONTROL.........................................................................317
CHAPTER ELEVEN.................................................................................................................355
STANDARD COSTING............................................................................................................357
CHAPTER TWELVE................................................................................................................373
VARIANCE ANALYSIS............................................................................................................375
CHAPTER THIRTEEN.............................................................................................................411
COST MANAGEMENT............................................................................................................413
ANSWERS TO EXAM & REVIEW QUESTIONS.....................................................................433
REFERENCES........................................................................................................................483
GLOSSARY............................................................................................................................487
INDEX.....................................................................................................................................495
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COST ACCOUNTING
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CHAPTER ONE
NATURE AND PURPOSE OF
COST ACCOUNTING
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CHAPTER ONE
NATURE AND PURPOSE OF COST ACCOUNTING
OBJECTIVES
After studying this chapter, you should be able to:
• Define cost accounting
• Distinguish between cost accounting and other accounting subjects such as financial
accounting and management accounting based on various aspects
• Define the various cost accounting terminologies
• Explain the role of a cost accounting department in an organization
• Explain the design and operation of a Cost and Management Accounting system
• Explain the relationship between nature of business enterprise and cost accounting
• Distinguish between qualitative and quantitative information
• Explain the features of an effective cost center framework
INTRODUCTION
The purpose of this chapter is to introduce the basic concepts of cost accounting, terminologies
and distinguish cost accounting from financial accounting. It is aimed at making it clear on what
cost accounting is all about and introduce some of the terminologies used in the chapters that
follow.
First, we will discuss the nature of cost accounting and budgeting and then introduce the key cost
accounting terminologies, which will act as the base for other discussions.
DEFINITION OF KEY TERMS
Cost: Cost is simply a quantification or measurement of the economic sacrifice made to achieve
a given objective. It is, therefore, a measurement of the amount of resources sacrificed in attaining
a specified goal
Cost object or cost unit: This is an activity for which a separate measure of cost is desired.
Cost Accountant: He/she is a member of the accounting department responsible for collecting
product costs and preparing accurate and timely reports to evaluate and control company
operations.
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Cost Analysis: This is an activity that uses engineering, time and motion studies, timekeeper’s
records and planning schedules from production supervisors.
,Cost center: This may be defined as any point at which costs are gathered in order to control
cost, fix responsibility and enable costs to be recharged on an equitable basis
EXAM CONTEXT
You must be prepared to answer questions touching on definition of cost accounting terminologies
and distinguish cost accounting from other disciplines of accounting such as management and
tax accounting. Questions normally set from this section are theoretical and thus you need to
understand the theory to be able to answer them well.
INDUSTRY CONTEXT
The applicability of this topic comes in handy when holding discussions with other managers in
a firm or during meetings. You need to understand the cost accounting terminologies and how
it relates to other disciplines for effective relay of the messages intended for managers of other
fields.
DEFINITION OF COST ACCOUNTING
In general, cost accounting is a field of accounting that measures, records and reports information
about costs. It involves the comprehensive set of principles, methods and techniques to determine
an appropriate analysis of costs to suit the various parts of organizational structure within the
enterprise.
There is, however, no watertight definition for cost accounting. Various authorities and scholars
have gone ahead to give their definitions. Some of the definitions include:
“That part of management accounting, which establishes budgets and standard costs
and actual costs of operations, processes, departments or products and the analysis
of variances, profitability or social use of funds.” (Chartered Institute of Management
Accountants - CIMA).
“That which identities, defines, measures, reports and analyzes the various elements of
direct and indirect costs associated with producing and marketing goods and services.
Cost accounting also measures performance, product quality and productivity.” (Letricia
Gayle Rayburn).
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“A systematic process of collecting, summarizing and recording data regarding the
various resources and activities in a firm so as to calculate the basis of production costs
used in financial accounting or making other relevant decisions in a firm.” (Horngren
c.T)
Cost accounting is broad and extends beyond calculating production costs for inventory
valuation, which government-reporting requirements largely dictate. However, accountants do
not allow external reporting requirements to determine how they measure and control internal
organization’s activities. In fact, the focus of cost accounting is shifting from inventory valuation
for financial reporting to costing for decision-making.
The main objective of cost accounting is communicating financial information to management for
planning, evaluating and controlling performance, and to assist management to make decisions
that are more informed. Its data are used by managers to guide their decisions.
From the definitions above, we can generally say that cost accounting is concerned
, with:
§ Cost planning and cost control of activities of operations since it aims at improving
efficiency by controlling and reducing costs
§ Resource allocation decisions, for instance, production, pricing and product costing
§ Performance measurement and evaluation of managerial performance; this is done
through variance analysis, comparing actual output with the standard or budgeted
output.
§ Formulation of overall strategies and long range plans; Cost accounting will be useful
in forecasting
Cost accounting aims at providing useful information to decision makers to enable them make
better decisions. It helps them in preparing various statements such as cash budgets and
performance reports, cost data collection and application of costs to products and services.
Cost Accounting Terms
a) Cost
A cost is simply a quantification or measurement of the economic sacrifice made to
achieve a given objective. It is, therefore, a measurement of the amount of resources
sacrificed in attaining a specified goal. For a product, cost represents the monetary
measurement of resources used such as materials, labor and overheads. For a service,
cost is the monetary sacrifice made to provide the service. Accountants generally use
cost with other descriptive terms, for example, historical, product, prime, labour or
material. Each of these terms defines some characteristic of the cost measurement
process or an aspect of the object being measured.
NATURE AND PURPOSE OF COST ACCOUNTING
6 COST ACCOUNTING
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b) Cost object or cost unit
This is an activity for which a separate measure of costs is desired. Examples include
cost of providing a service to a client or cost of manufacturing a specific product or
undertaking a specific assignment, and cost of running an organizational segment. In
other words, a cost object/cost unit is the quantitative unit of the product or service in
relation to which costs are ascertained. It is determined by the nature of the business
enterprise.
c) Cost accountant
He/she is a member of the accounting department responsible for collecting product
costs and preparing accurate and timely reports to evaluate and control company
operations. He/she assembles, classifies and summarizes financial and economic data
on the production and pricing of goods and services. Some of the roles that he plays in
the various aspects of the organization include:
§ Material cost control: this includes tracing materials issued to departments, reporting
of the cost of material wasted (variance analysis) and provision of information about
ordering and holding costs of stocks.
§ Labour cost control: this includes time keeping and payroll operation, establishing of
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