BPC 32603 INDUSTRIAL PRODUCTION
COSTING
INTRODUCTION TO
COSTING
By Dr. Kamilah
2023
CHAPTER LEARNING OUTCOMES
✓1.1 Introduction to cost
✓1.2 Cost management concept
✓1.3 Objectives of cost management
✓1.4 Fundamental principles of costing
✓1.5 Factors affecting cost management
ACCOUNTING DISCIPLINE OVERVIEW
▪ Management accounting measures, analyzes, and reports
financial and nonfinancial information that helps managers make
decisions to fulfill organizational goals. Management accounting
need not be GAAP (accounting standard) compliant.
▪ Managers use management accounting information to:
▪ Develop, communicate, and implement strategies
▪ Coordinate product design, production, and marketing decisions and
evaluate a company’s performance
ACCOUNTING DISCIPLINE OVERVIEW
▪ Financial accounting focuses on reporting financial information
to external parties such as investors, governmental agencies,
banks, and suppliers, based on GAAP.
▪ Cost Accounting measures, analyzes, and reports financial and
nonfinancial information related to the costs of acquiring or using
resources in an organization.
MAJOR DIFFERENCES BETWEEN MANAGEMENT AND
FINANCIAL ACCOUNTING
Exhibit 1.1 Major Difference Between Management and Financial
Accounting
Management Accounting Financial Accounting
Purpose of Help managers make decisions Communicate an organization’s
information to fulfill an organization’s goals financial position to investors,
banks, regulators, and other
outside parties
Primary users Managers of the organization External users such as investors,
banks, regulators, and suppliers
Focus and Future-oriented (budget for Past-oriented (reports on 2019
emphasis 2020 prepared in 2019) performance prepared in 2020)
Rules of Internal measures and reports Financial statements must be
measurement and do not have to follow GAAP but prepared in accordance with
reporting are based on cost-benefit GAAP and be certified by
analyses external, independent auditors
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MAJOR DIFFERENCES BETWEEN MANAGEMENT AND
FINANCIAL ACCOUNTING
Management Accounting Financial Accounting
Time span and Varies from hourly information Annual and quarterly financial
type of reports to 15 to 20 years, with financial reports, primarily on the
and nonfinancial reports on company as a whole
products, departments,
territories, and strategies
Behavioral Designed to influence the Primarily reports economic
implications behavior of managers and events but also influences
other employees behavior because manager’s
compensation is often based on
reported financial results
Copyright © 2021 Pearson Education Ltd.
INTRODUCTION
DO YOU THINK BUSINESS SHOULD
UNDERSTAND THEIR BUSINESS OR
PRODUCTS COSTS?
WHY?
?
WHAT IS
1.1 INTRODUCTION TO COST
What is a cost?
The amount of money needed to acquire or produce
some goods or services.
Money, Materials, Labor and Time.
Term “cost” conveys multiple meanings and
there are different costs for different purposes.
BASIC COST TERMINOLOGY
Cost
A sacrificed or forgone resource to achieve a specific
objective.
Actual cost
A cost that has occurred
Budgeted cost
A predicted cost
Cost object
Anything for which a cost measurement is desired.
Any item that a company wishes to measure separately
COST OBJECT EXAMPLES AT BMW
Cost Object Illustration
Product A BMW X6 sports activity vehicle
Telephone hotline providing information and assistance to
Service
BMW dealers
R&D project on DVD system enhancement in BMW cars
Project
Herb Chambers Motors, a dealer that purchases a broad
Customer
range of BMW vehicles
Setting up machines for production or maintaining
Activity
production equipment
Department Environmental, Health and Safety department
INTRODUCTION TO COST, CONT..
BMW managers not only want to know the cost of
various products, such as the BMW X6 sports
activity vehicle, but they also want to know the
costs of services, projects, activities, departments,
and supporting customers. Managers use their
knowledge of these costs to guide decisions on
product innovation, quality, and customer service
etc.
1.2 COST MANAGEMENT CONCEPT
✓ A process of planning and controlling actual and
forecast business costs.
✓ It includes collecting, analyzing and reporting cost
information to more effectively budget, forecast and
monitor costs
✓ Not only concerned with how much costs but
also factors that drive costs.
✓ Requires a deep understanding of a firm’s
cost structure.
1.2 COST MANAGEMENT..CONT..
It encompasses cost accounting and management
accounting (MA) system.
Cost accounting provides cost information about
products, customers, services, projects, activities,
processes and other details that may be of interest
to management.
MA is concerned with how cost information and
other financial and nonfinancial information
should be used for planning, controlling,
continuous improvement, and decision making.
1.2 COST MANAGEMENT..CONT..
Users of
accounting
information
✓External parties: outside the organization (financial
accounting).
✓Internal parties :within the organization
(management accounting).
COST MANAGEMENT IN PERSPECTIVE
Cost Management in perspective
Know your cost of
producing your
services /products
Know your cost of
and relevance in
Stay competitive
doing business
business
Know your cost of doing
business
Know your cost of
serving customers
1.3 OBJECTIVES OF COST MANAGEMENT
1. Determine product costs and pricing
• Determining the selling price
• Meeting competition
• Bidding on contracts
• Analyzing profitability
1.3 OBJECTIVES OF COST MANAGEMENT..CONT..
2. Planning, Controlling, Continuous
improvement, & Decision making
Effective control is achieved through:
• Assigning responsibility
• Periodically measuring and comparing results
• Taking necessary corrective action
1.4 FUNDAMENTAL PRINCIPLES OF COSTING
1. Cost is related to its cause.
2. Cost is charged after it is incurred.
3. Abnormal costs are excluded from costing.
4. Past records are not charged to future periods.
6. Accounting for cost is based on double-entry principle.
EXERCISES
▪ WHAT WILL HAPPEN IF SOME COSTS ARE
IGNORED?
▪ WHAT DO YOU THINK FACTORS
AFFECTING COST MANAGEMENT IN
OPERATIONS/BUSINESS?
