The Institute of Chartered Accountants of Bangladesh

Certificate Level – Management Information

The fundamentals of costing

Cost
Value of the sacrifice made for acquire
goods or services and it measured in
monetary units by the reduction of assets
or incurrence of liabilities at the time of
benefits are acquired.

Deferred Expired
Unexpired Costs that give It is defined as expired costs
future benefits such as assets that has given a benefit

Expense Loss
An expense includes only expired cost It is the outflow of funds or cash
which is used up in earning revenues in which arises not due to business
Balance Sheet a company’s main operations. transactions but due to some
Examples: advertising, rent, raw other events. Examples: Loss due
material cost to lawsuit or due to fire in the
building in case it is not insured.

Introduction
Income Statement
Cost accounting involves the techniques for:
 Determining the costs of products, processes, projects, etc. in order to report the correct
amounts on the financial statements, and
 Assisting management in making decisions and in the planning and control of an
organization.

Planning process Decision making process Control process

 Assessing the external  Gather information
environment,  Identifying goals about actual results
organisation  Recognising achieved.
 Deciding objectives alternatives  Compare the actual
 Evaluating the  Evaluating the results and expected
alternatives alternatives results.
 Long term & short term  Choosing the best  Revise the actual
planning action results if necessary.

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Difference between cost accounting and financial accounting

subject Financial Accounts Cost Accounts

Time span Defined period – statement of comprehensive Period appropriate for purpose
income - usually 1 year, Specific date – e.g. the sales data relating to two
Statement Of Financial Position as on last day quarters
of the above period
Statutory Legal requirement Management choice but cost records
are recommended at times
Format Declared by law & Financial Reporting According to management choice &
Standards purpose of information
Focus All numbers are in aggregate & for Numbers are broken up into meaningful
organization as a whole. Financial accounts are chunks to aid decision-making, e.g. cost
consolidated for entire organization per product or service
Type of Monetary value Non-monetary measures as well as
informatio monetary values
n
Use Ensures all business assets & liabilities are Aids decision making. Internal measure
accounted for. FA is Historical. of achievement & control, hence
orientation: Historic, Present, Future
Cost objects
A cost object is often a product or department for which costs are accumulated or measured.
Example:
 A product is the cost object for direct materials, direct labor and manufacturing overhead.
 The factory maintenance department is a cost object for the cost of the maintenance
employees and the maintenance supplies. Later the factory maintenance department costs
will be assigned to products, which are also cost objects.
 A cost object can also be a customer, a machine, a group of machines, a group of
employees, etc.

For manufacturing For non-manufacturing

Cost object for the cloth manufacturing Cost object for a software company is a software
industry is unit of clothing produced developed

Cost units
Cost unit is a unit of product or service in relation to which costs are determined. A cost unit is the
basic measure of product or service for which costs are determined.
 Cost unit is a quantity which may be one or more of a product that has a relationship with
costs and
which can be easily expressed in financial terms
 Cost unit is the smallest unit for which cost is accumulated
Example
For manufacturing For non-manufacturing
Cost unit for the cloth manufacturing industry is Cost unit for a software development
the amount of meters of cloth produced. company may be the units of software sold.

Cost driver:
A cost driver is any factor that affects costs. A change in the cost driver will cause a change in the total
cost of a related cost object. Any one cost object almost always has numerous cost drivers. For
example, a production activity may have the following associated cost-drivers: a machine, machine
operator(s), floor space occupied, power consumed, and the quantity of waste and/or rejected output.

Cost classification for inventory valuation and profit measurement

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For the purpose of inventory valuation and profit measurement, the cost of one unit must be
determined. The total cost of a cost unit of product or service is made up of the following two elements
of cost:
 Production cost
 Non-production cost

Production cost
 Direct material - Cost of goods bought, which are used in producing a product
 Direct labour - Remuneration paid to workers involved directly in production process
 Direct expenses - Special machine hiring cost for specific job
 Manufacturing O/H - Rent of factory

Non-production cost
 Administrative cost
 Selling cost
 Distribution cost
 Finance cost

On the basis of production cost and Non-production cost the format of cost sheet will be

Cost Sheet
Particulars Amount Amount
Direct X
material................................................. X
Direct labour or direct X
wages........................... X
Direct X
expenses................................................ X
Prime X
cost ...................................................... X
Production overheads.................................... X
Production or factory or manufacturing X
cost
Administration cost......................................
Selling and distribution cost........................
Cost of sales................................................
Total
cost........................................................

Product costs
Product costs are costs identified with goods produced or purchased for resale. These costs are
allocated to the value of inventory until the goods are sold.
Period costs
Period costs are costs deducted as expenses during a particular period. These costs are not regarded
as part of the value of inventory.
Cost classification for planning and decision-making
Cost behavior patterns
Costs may be classified according to the way that they behave. Cost behaviour is the way in which
input costs vary with different levels of activity. Cost behaviour tends to classify costs as one of the
following:
 Fixed cost
 Variable cost
 Stepped fixed cost
 Semi variable cost.
Fixed costs
A fixed cost is a cost that, within a relevant range of activity levels, is not affected by increases or

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decreases in the level of activity.
Per unit Cost (Tk.)

Total Cost (Tk.)

Volume (Level of Activity)

Variable costs
A variable cost is a cost that increases or decreases as the level of activity increases or decreases.
A variable cost tends to vary directly with the level of activity. The variable cost per unit is the same
amount for each unit produced whereas total variable cost increases as volume of output increases.

Per unit cost

Total Cost (Tk.)

Volume of output

Stepped fixed cost / semi-fixed cost

This is a type of fixed cost that is only fixed within certain levels of activity. Once the upper limit of an
activity level is reached then a new higher level of fixed cost becomes relevant. Examples: Interest
rate, Electricity bill and telephone bill.

Cost

Volume of output
Semi variable costs
Semi variable costs contain both fixed and variable cost elements and are therefore partly affected by
fluctuations in the level of activity

Cost

Volume of output

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 Cost Classification for control

 Responsibility accounting
 Controllable and uncontrollable costs

Responsibility accounting
Responsibility accounting is a system of accounting that segregates revenue and costs into areas of
personal responsibility in order to monitor and assess the performance of each part of an organization.
A responsibility centre is a department or function whose performance is the direct responsibility of a
specific manager.

Controllable and uncontrollable costs

A controllable cost is a cost that can be influenced by management decisions and actions.
Example: Excessive overtime, buying material by higher price by the purchasing department

An uncontrollable cost is a cost that cannot be affected by management within a given time span.
Example: Increase in expenditure due to inflation.

Ethics – to be inserted

Bath questions analysis:

May-June 2017
1. (a) “Over time or over a specific range of activity, some costs tend to be unaffected by the level of
output, whereas others will change as output changes” – Briefly explain with the support of example,
each of the following three cost classifications: 3x3=9
i. Variable cost ii. Fixed cost iii. Mixed cost (semi variable/semi fixed cost)
May-June 2016
5. (a) Cost centers and profit centers are usually associated with planning and control in a decentralized
company – Explain.
Nov- Dec 2015
(1) Differentiate the followings (a) Product vs Period Cost
May-June 2015

1. Define the following cost with example

(a) Direct cost (b) Indirect cost (c) Product cost (d) Period cost
Nov- Dec 2014
1. (a) Define the following with suitable examples.
(i.) Cost unit. (ii). Product cost (iii) Period Cost
May-June 2014
1. Write briefly about the following items:
(a) Semi‐variable Costs; (b) Responsibility Accounting; (c) Controllable costs.
Nov-Dec 2013
a) Define cost object and cost unit. 4

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 b) Give at least two examples of cost object and cost unit.
May-June 2013
1. a. Explain and illustrate production and non-production costs?
b. Which of the following objects would be suitable cost units for a hotel?
i. Bar ii. Restaurant iii. Room/night iv. Meal served v. Conference delegate
vi. Fitness suite vii. Conference room/day
c. Give six examples of cost units applicable to different industries.
2. a. Define with example per unit fixed cost is variable and per unit variable cost is fixed.
Answer 1(b)
 Room/night
 Meal served
 Conference delegate
 Conference room/day
Answer 1(c)

Steelworks Tone of steel produced, Tone of coke used

Hospital Patient/day, Operation, Out-patient visit
Freight organization Tone/kilometer
Passenger transport organization Passenger/kilometer
Accounting firm Audit performed
Restaurant Meal served

1. Cost Accounting is concerned basically with all the following information EXCEPT
A. Identifying cost of things
B. Calculation and measurement of the resources used in the production of a
bag
C. Gathering data about the cost of products or services
D. Providing information to management that can be used to help run the business
E. Providing information about actual costs of items and activities

2. The sum of direct labour cost and manufacturing overhead is known as

A. Total cost
B. Prime cost
C. Overhead cost
D. Total variable cost
E. Conversion cost

3. Which of the following combination is Prime Cost?

A. Direct Material + Work –In-Progress + Direct Labour + Direct Expenses
B. Direct Material + Direct Labour + Manufacturing Overheads
C. Direct Materials + Direct Labour + Direct Expenses
D. Direct Materials + Direct Labour + Manufacturing Overhead + Expenses
E. Direct Materials + Direct Labour + Direct Expenses + Work–In–Progress

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4. Costs that have been incurred in the past and irrelevant to current decisions are referred
to as
A. Relevant costs
B. Historical costs
C. Irrelevant costs
D. Future costs
E. Sunk costs

5. Which of the following information would NOT be contained in a standard store ledger
card?
A. Description of the item
B. Minimum inventory level
C. Re-order quantity
D. Supplier’s address
E. Pricing method

6. Cigar Co had the following entries in its materials control account:

Opening inventory £13,000

Closing inventory £18,000

Deliveries from suppliers £250,000

Returns to suppliers £25,000

The value of the issue of direct materials to production is:

A. £220,000
B. £225,000
C. £230,000
D. £270,000

MATERIAL CONTROL ACCOUNTS

Opening 13,00 Returns 25,000
Inventories 0
Deliveries 250,0 Issue to Production 220,000
00

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 Closing Inventory 18,000
263,0 263,000
00

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