Costing principles

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Costing Principles Cost and management accounting   Provides management with costs for products, inventories, operations or functions and compares actual to predetermined data It also provides a variety of data for many day-to-day decision as well as essential information for long-range decisions Functions of managerial accounting    Determining the cost Providing relevant information for better decision-making Providing information for planning, control, decision-making and application Planning  Deals with the estimation of product costs, setting up of costing system to record cost data, preparation of cost standards and budgets, planning of materials and manpower resources, analysing cost behavior with changes in levels of activity Control  Deals with the maintenance of product costing record, comparison of actual performance with standards or budgets, anlaysis of variances, recommendation of corrective actions, controlling cost to ensure operational efficiency and effectiveness Decision-making  Deals with whether it is more profitable to make or buy a component, determine the economic order quantity and production batch size, replace fixed asset, add or drop products, decide pricing Application   Cost accounting has extended from manufacturing operations to a variety of service industries such as hotels, bands, airline, etc Cost accounting system should be flexible and adaptable to meet the new business environment and the changing nature of the company Element of cost      Cost object Cost Cost unit Cost centre Profit centre Cost object   It is an activity or item or operation for which a separate measurement of costs is desired E.g the cost of operating the personnel department of a company, the cost of a repair fob, and the cost for control Cost   It is the amount of expenditure incurred on a specific cost object Total cost = quantity used * cost per unit (unit cost) 10 Period cost    Period cost related to the operation of a business They are treated as fixed cost and charged as expenses when they are incurred They should not be included in the stock valuation 35 Comparison of cost, management and financial accounting 36 Meanings    Financial accounting Cost accounting Management accounting 37 Financial accounting    Provides information to users who are external to the business It reports on past transactions to draw up financial statements The format are governed by law and accounting standards established by the professional accounting policies 38 Cost accounting    Is concerned with internal users of accounting information, such as operation managers The generated reports are specific to the requirement of the management The reporting can be in any format which suits the user 39 Management accounting   Comprises all cost accounting functions The accounting for product and service costs, management accounting extends to use various internal accounting reports for planning, control and decision making 40 Cost and management accounting Vs Financial accounting 41 Management (cost)accounting Nature Records material, labour and overhead costs in product or job Reports produced are for internal management and contol Accounting Not based on the double entry system system  Financial accounting Records company transaction events External financial statements are produced  Follows the double entry system  42 Management (cost)accounting Accounting No need to use principles accounting principles Financial accounting Use Generally Accepted Accounting Principles for recording Adopt any accounting techniques transactions that generates useful accounting information Used by different Used by external Users of information levels of management parties: shareholders, or departments creditors, government, responsible for etc respective activities  43 Management (cost)accounting Financial accounting Based on management instructions and requirements  Operation guidelines or standards  Time span  Conforms to company Ordinances, stock exchange rules, HKSSAPs Reports are prepared Reports are prepared whenever for a definite period, needed usually yearly and half yearly They may be prepared on a weekly or daily basis 44 Management (cost)accounting Time focus Financial accounting Future orientation: Past orientation: use forecasts, estimates of historic data for and historic data for reporting and management evaluation actions  Perspective Detailed analysis of parts of the entity, products, regions, etc Financial summary of the whole orgainisation  45 Cost accounting vs Management accounting 46 Management accounting Cost accounting Objective  To provide information for planning and decision making by the management  Basic of recording  Concerned with transactions related to the future  To ascertain and control cost Based on both present and future transactions for cost ascertainment 47 Management accounting Cost accounting Coverage  Covers a wider area: financial accounts, cost accounts, taxation, etc  Utility  Only the needs of internal management  Covers matters relating to ascertainment and control of cost of product or service The needs of both internal and external interested groups 48 Management accounting Deals with both Types of transactions monetary any non- monetary transactions, covering both quantitative and qualitative aspects Cost accounting Deals only with monetary transactions, covering only quantitative aspect  49
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