Fundamentals of costing and cost elements

Get Started. It's Free
or sign up with your email address
Fundamentals of costing and cost elements by Mind Map: Fundamentals of costing and cost elements

1. /not only to prepare financial statement but also reduce the cost of the company

1.1. The action to reduce the costs can increase profit to company.

2. Cost accounting is to calculate when we produce a product or when we provide a service.

2.1. Financial accounting is to prepare financial statements only.

2.2. Therefore, we can set up the price of cost and reduce the cost to get higher profit

2.3. For example, the price of BTS meal is RM 14.90 the cost must lower than the price (Cost of material, salary, royalty to BTS and electricity= RM 8.88). So that, our profit is RM 14.90- RM 8.88= RM 6.02

2.4. *The price should higher than the cost, but cannot set too high, there will be less customers because too expensive.

3. Meaning- costs

3.1. /Cost is an amount that has to be paid or speny to buy or obtain something.

3.2. /Example, a company has spent in order to produce product.

3.3. Cost= expenditure (expense) paid for an object or activity.

3.4. Example, subscribe to Netflix

3.5. Example 2, 1 piece of Sambal Bilis Bun cost is RM 1.05, we sell to our friend RM 2.10 (selling price)- cost RM 1.05 (spent)= profit we earn will be RM 1.05.

4. Elements of costs

4.1. 3 Types businesses

4.1.1. Manufacturers- produce the product

4.1.1.1. Example, Samsung and Milo.

4.1.2. Merchandisers- it is a retailer- buy the product and sale to customers

4.1.2.1. Example, 7-eleven, Family mart, Popular.

4.1.3. Service- provide service

4.1.3.1. Example, TGV cinemas, Airasia, Foodpanda

4.2. Service can refer to intangible product, it is something we cannot be touch like movie.

4.3. These costs generally fall into 3 primary groups (example product- Ferarri)

4.3.1. Material

4.3.1.1. Is the cost of commodities supplied to an undertaking

4.3.1.1.1. Example, rubber, glass, mental.

4.3.2. Labour

4.3.2.1. The remuneration paid for physical or mental effort expended in production and distribution.

4.3.2.1.1. Example, wages, salaries, commissions, bonus.

4.3.3. Expenses

4.3.3.1. Expenditure other than material and labour is the third element of cost known as expenses

4.3.3.1.1. Example, electricity, rental.

5. Product cost (manufacturing) (Classification by Association with the product)

5.1. /Meaning- is the cost that can be apportioned to the product.

5.1.1. Basis- volume

5.1.2. Which cost is regarded as product/ period cost- variable cost

5.1.3. Are these costs included in inventory valuation?- yes

5.1.4. It is comprises of manufacting and production costs.

5.1.5. It is a costs incurred to manufacture a product.

5.1.6. Part of cost of production- yes

5.1.7. Example, cost of raw material, wages on labor, production overheads, rent on the factory, deprecation on machinery

5.2. Direct costs/ main costs (Classification by Degree of Traceability)

5.2.1. Easy to calculate cost for 1unit/ costs which are easily identifiable with a product.

5.2.1.1. Direct material (Natural Classification of Costs)

5.2.1.1.1. The cost of materials which are conveniently and economically traceable to specific units of output.

5.2.1.1.2. Example, cotton in textiles, rubber for shoe production, colth for making garments.

5.2.1.1.3. /Example, leather used in the case of production of leather goods and lime in production of chalk.

5.2.1.1.4. Example, Nike shoes- rubber for shoes RM 50

5.2.1.2. Direct labour also called direct wages (Natural Classification of Costs)

5.2.1.2.1. The remuneration paid to production workers for work directly related to production.

5.2.1.2.2. Example, auditor's fee in audit firm, machining workers' wages, assembly employees' wages.

5.2.1.2.3. /Example, workmen engaged in assembling parts, carpenters engaged in furniture making.

5.2.1.2.4. Example, nike shoes- factory operators RM 20 *wages to make 1pair of shoes.

5.2.1.3. Direct expense (Natural Classification of Costs)

5.2.1.3.1. Expenses incurred specifically for a particular product, job, batch or service.

5.2.1.3.2. Example, royalties paid per unit for a copyright design, plant or tool hire charges for a particular job or batch, direct cost of sub-contractors.

5.2.1.3.3. /Example, hire charges of special plant used for a job, cost of special patterns, designs or plans for a particular job work order.

5.2.1.3.4. Example, cost to rent a special machine, royalty for a copyright design RM 30.

5.2.1.3.5. *Nike wanted to put picture of Captain America (royalty fee to marvel is RM 30 for 1pair)

5.2.1.3.6. *Produce limited edition Nike shoes (50pairs in the world)

5.2.1.3.7. Rental: RM 1000 to produce 50 pairs- 1pair of shoes (RM 1000/ 50pairs= RM 20per pair)

5.3. Indirect costs (Classification by Degree of Traceability)

5.3.1. Costs which cannot be identified with a product.

5.3.1.1. Manufacturing overhead (Natural Classification of Costs)

5.3.1.1.1. Indirect material

5.3.1.1.2. Indirect labour

5.3.1.1.3. Indirect expense

6. Period cost (non-manufacturing) (Classification by Association with the product)

6.1. Selling, distribution and admin costs

6.2. /Meaning- is the cost that cannot be assigned to the product, but charged as an expense.

6.2.1. Basis- time

6.2.2. Which cost is regarded as period cost- fixed cost

6.2.3. Are these cots included in inventory valuation?- no

6.2.4. Part of cost of production- no

6.2.5. It is comprises of non manufacture costs like office & administration, selling & distribution.

6.2.6. It is a costs that are not incurred to manufacture a product. Therefore, it cannot be assigned to the product.

6.2.7. Example, marketing costs, sales costs, audit fees, rent on the office building, salary, depreciation on office assets

7. Classification by Function

8. Classification by Cost Behaviour (in relation to changes in output)

8.1. Variable cost

8.2. Fixed cost

8.3. Mixed cost (Semi-Variable, Semi-Fixed)

8.3.1. Semi-Variable costs

8.3.2. Semi-Fixed/ Step-Fixed costs

9. Methods of costing

9.1. Job costing

9.2. Batch costing

9.3. Contract or terminal costing

9.4. service costing

9.5. process costing

10. High-low method

10.1. Step 1 select the highest & lowest activity level of the period

10.2. Step 2 determine the total costs & total units at the lowest & highest point

10.3. Step 3 compute the variable cost per unit

10.3.1. Total cost at highest point- total cost at lowest point/ Total units at highest point- total units at lowest point

10.4. Step 4 determine the fixed cost

10.4.1. Total cost at highest point- total variable cost at highest point

10.4.2. Total cost at lowest point- total variable cost at lowest point

10.5. Advantages

10.5.1. Easy to understand

10.5.2. Easy to use

10.6. Disadvantages

10.6.1. Relies on historical data: activity & historical level

10.6.2. Uses only 2 values (highest & lowest)