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COST ACCOUNTING
PRINCIPLE AND TECHNIQUES
VOLUME 1

1

FOREWORD
This note has been carefully designed to cover a range of material that is
sufficiently comprehensive to accommodate various course objectives
...

This note has adequately covered the following topics:-Cost Ascertaination,
Classification of Costs, Learning Curve Theory, Cost separation Technique, Cost
Control and Cost Reduction and many others
...


2

CONTENTS
Chapter
Forward

Page
------------------------------------------------------------------

2

Table of Content ----------------------------------------------------------

3

1
...
Classification of Costs ----------------------------------------------3
...
As a system, it is a quantitative information system which
has to do with business transaction and the exchange or transfer of value in
respect of goods and services
...

Accounting as a discipline is divided into two major parts; Financial Accounting
and Management Accounting
...

The field of financial accounting is concerned mainly with how accounting can
serve the following set of people;i
...


Shareholders (existing and potential shareholders) use financial reports
to decide whether to buy or sell the company’s share
...


4

iii
...

v
...


Governments (local, state and federal) use financial reports to
determine the current and prospective contribution of an organization
to economic well-being and employment in the area
...

Suppliers, customers and competitors use financial reports for business
contacts
Employees use financial reports to determine the security of
employment and future prospects for job in the organization
...

Management accounting otherwise known as managerial accounting provides
management with accounting information or reports for the purpose of planning
and running a business
...

It is concerned with how accounting can serve internal decision makers such as
managers and board of directors
...


Costing Accounting
It is that part of management accounting which establishes budgets, standard
costs and actual cost of operations, processes, departments or products and the
analysis of variances, profitability or social uses of fund
...

From the above discussion, it can be inferred that book-keeping is the basis of
recording system of financial transactions while cost accounting is the foundation
of reporting to managers, Sometimes, costing is used as being synonymous to
cost accounting but for the sake of clarity, costing can be described as the process
of determining the cost of doing something e
...
The cost of manufacturing an
article, rendering a service or performing a function
...


Why Costing Accounting
Cost accounting as a tool is an essential aid to management in establishing prices
and providing information for day to day control and operations
...

ii
...


iv
...


To arrive at the cost of production of every unit, job, operation, process,
department or service and to develop cost standard
...

To identify and analyze sources of economics and any inefficiencies in
production
...

To provide in details the periodic profit and loss accounts and balance
sheet for the whole business by department and individual product at
intervals like weekly, monthly or quarterly and to indicate the exact
cause(s) of a decrease or an increase in profit or loss shown by the
financial accounts;
To provide the cost information necessary for realistic stock valuations;
6

vi
...


viii
...


To provide data for the preparation of budgets and standard cost and
for the analysis of variances from plan;
To show comparative cost data for different periods and various value of
production output, for control purposes and to provide guidance in the
development of the business;
To provide information upon which estimates and tenders can be based;
To provide a better control of labour results through detailed accounting
for wages
...

ii
...

iv
...


vi
...

viii
...
i
...
what kind of information is
needed by management?
Size and pattern of operations of the concern, so as to determine the
costing system, cost units, cost centers and so on
...
What will their attitude
be and will there be a need to reduce the workforce?
Will it be necessary to engage or employ additional clerical staff or can
existing staff be instructed?
Is the existing office adequate to cope with the costing system in terms
of space and accounting machinery? Will any capital expenditure on
such items be needed?
Will there be need to change goods receiving points, stores and card
clocking points
...
Will it be time or piece work, with
bonus or without bonus basis?
Should the cost and financial accounts be integrated or interlocked?
Provision should also be made for future expansion of production of the
accounts
...


The person that is to be responsible for running the system after
successful installation must also be taken into consideration
...
To avoid too much detailed figures may be included in form of
appendices if necessary
...

ii
...

iv
...


It should be sufficiently accurate and produced promptly
...

Costing statement should have appropriate heading
...
For instance
cost accounting information relating to material usage should be sent to
production manager as he is the one responsible for the control of
material utilization
...


Items of information obtainable from a costing system include
i
...

iii
...

v
...

Job cost broken down into material, labour and over-heads showing a
comparison with estimates
...

Periodic stock valuations for interim operating statement to be
prepared
...

8

vi
...

viii
...


Product cost per unit and in total
...

Budgets for planning and control purposes
...


Essentials of Costing System
...

ii
...

iv
...


There must be an efficient system of stores and stock control
...

There must be standard printed forms stating the names of the form
(like job card, clock card, bin card) and instructions as to how to use it
...

There must be plan for the collection of all indirect expenses (i
...

production, administration, selling and distribution overheads) and for
its absorption to products, jobs or service departments in a
predetermined basis
...

i
...

iii
...

v
...

Amount of data processing equipment available
...

ii
...

iv
...

vi
...


Definition of responsibilities;
Definition of cost centers;
Compilation of comprehensive coding system;
Definition of indirect and direct costs, fixed and variable cost
...


Financial Accounting versus Cost Accounting
Financial Accounting
i
...


3
...

5
...

7
...

Financial accounts are prepared
yearly or half-yearly
...

The focus of financial accounting is on
the past
...


Cost Accounting
It is concerned with transactions that affect
internal workings of the business

There is no need to make reference to
company laws

It emphasizes on segment reporting of the
Profit or loss of each product or fraction of the
business
...

Cost account is meant for management
...

Keeping of costing records is optional
...


It deals with monetary data only
...
etc

9
...


Scope of Cost Accounting
A costing system is a system designed to provide a detailed breakdown of cost
over products, processes, departments or services, showing the composition of
the elements of costs
...
Cost
accounting as related to non-manufacturing sectors are analyzed below
...

ii
...


iv
...

vi
...

Cost per passenger kilometer is used in transport undertakings for cost
ascertainment and cost control purposes
...

To farmers, cost accounting system can be of importance decision
making information e
...
utilizing marginal costing system on whether to
accept or reject a farm or crop
...

Cost per full time or part time student is used by colleges for cost
ascertainment and cost control purposes
...
It is the amount of
expenditure (actual or notional) incurred on or attributable to a specific thing or
activity
...
For instance,
the cost of a book to student would be the price paid at the bookshop from which
it was purchased
...
The publisher would consider the cost to be
represented by the sum of expenditure on material, labor and other expenses
incurred in publishing the text book
...
It has to do with the actual
cost of material used, wages and all other expenses incurred
...
It is performed with regards to the market prices
and wages rates anticipated to be ruling at the time the work will be done
...
e
...

Cost Unit
A cost unit is “a quantitative unit of product or service in relation to which costs
are ascertained, related or expressed” CIMA Terminology
...

ii
...
g
...

Length – centimeter of timber, meters of satin lace
12

iii
...

v
...


Area - square meter of floor cleaned
...

Value – Capital value of building occupied, plant used
...

Ton of Steel
Ton of saleable coal raised
Standard barrel of beer brewed
1,000 of bricks made
Tonne-mile, passenger- mile, miles
traveled
...

Meal served
...

Meal served
...
Units of production i
...
number of cars produced, tonnes of materials used,
liters of liquid consumed, tonnes of cement used etc
...
Units of Service- Such as kilowatt-hours, Passengers/ Miles etc
...

The main objectives of cost centers are:i
...

13

ii
...

iv
...


A factory can be divided into cost centers ( such as a person or a homogeneous
group of person, a machine or group of machines and a location like department)
to analyze cost to natural units, this division of factory into cost centers enables
detailed costs to be recorded and controlled by the means of budgets
...


ii
...

iv
...


vi
...
For instance in a
bakery, the mixture stage of the bakery operation is a process cost
center and machining of the mixed flour is another process cost center
...
g
...
It should be emphasized that this term does not apply
where the output of an organization is a service rather than goods
...
g
...

Administration Cost Center:- This is a cost center in which the whole
organization is being directed, controlled and administered e
...

personnel department
...
g
...

Distribution cost center:- This is a cost center in which products are
made to reach their destination e
...
distribution department
...

In order to facilitate the collation and processing of a wide variety of data, costing
system needs symbols, codes and accounts numbers
...

The Importance of Coding are:i
...

iii
...

v
...

It avoids ambiguity which arise if descriptions are used;
Coding aids memory and helps clerical work to be carried out speedily
and efficiently;
Through the use of coding, errors in cost classification can be minimized
...

ii
...

iv
...


It should be simple, easily remembered, the notation used for coding
should be avoid ambiguity
...
e
...

It should consist of either all numeric or all alphabetic characters
...

It should be as brief as possible
...
For instance part of the code for vehicle tyres could indicate
the actual size of the tyre
...

15

vi
...
This is also to facilitate processing and avoid missing of
characters
...

This method does not allow for the introduction of extra items into a group of
similar items as each new item has to take a number at the end of the list
...

The method creates room for expansion as extra numbers can be reserved for
future usage when new items arise e
...
If the code for depreciation is “25” and
there are five types of fixed assets, the number for depreciation will extend from
2501-2505 in sequence coding but with block coding the numbers for
depreciation could range from 2501-2530 leaving 2506-2530 as reserves for
future use
...
The method allows easy
identification of various items as the representing letters relate to the item of
expenses
...
This method is mostly used for book classification in libraries and
it is capable of indefinite expansion
...
The first
figure is given to major classification and the succeeding digits are given to minor
classifications
...
Define cost accounting and state the main differences between Cost
Accounting and Financial Accounting
...
Costing and Cost Accounting are often interpreted as meaning the same
thing, do you agree?

3
...
List the major factors to be considered and analyzed before a costing
system is introduced
...
What is the typical information obtainable from a costing system?
6
...

7
...

Cost units in manufacturing firms
ii
...
Define a cost center and give examples
...
What purposes are served by dividing a factory into cost centers? Suggest
at least three ways in which the division may be made
...
i
...

ii
...
Cost
classifications are necessary for the development of cost data that aid
management in achieving its cost planning and control objectives
...
Hence, the following
headings are often used for cost classification by function:- Production cost,
Marketing cost otherwise known as Selling and Distribution cost, General
Administration costs
...

This classification of cost grouped costs according to broad divisions of activity
...

Marketing Cost-includes the cost incurred in retaining customers, promoting sales
and getting the finished goods from factory to the final consumer
...

General Administration Cost- is the cost of formulating the policy, directing and
controlling an organization which includes personnel, legal fees, auditing
expenses, property tax miscellaneous administrative expenses etc
...
By nature, cost can be classified into direct cost and
18

Indirect cost
...

Direct costs- are those costs which are chargeable directly to the product, service,
job, batch or process
...

These costs include materials, wages and direct expenses
...

i
...


iii
...
raw materials purchased to be transformed into a saleable product or
service e
...
steel, timber, flour etc
...
Products made completely or partly by other companies and totally
Incorporated into finished products or services e
...
springs, electric
Motors etc
...
This includes wages and other remuneration paid to
all employees who directly contribute to the conversion of direct
materials into saleable products or services
...

Royalties payable by an organization to use a process
Which is the property or right of another organization
...

Special tools used in manufacturing the product
...

Hire charges for special equipment used in
manufacturing
...

Cost of special layout, designs or drawings
...
Indirect Cost- are those costs which cannot be easily and directly identified
with a particular cost Centre or cost unit
...
Overhead is the term used to describe all
those elements of cost which are indirect to a product, job, service or batch
...


ii
...


Indirect materials- are those materials which cannot be traced as part
of production
...

Indirect Labour- are those labour expenses which do not alter the
construction, formation, composition or condition of the product but
which contributes generally to the completion of the product
...

Indirect expenses- are expenses incurred for the purpose of a business
as a whole
...
Examples of indirect expenses include rent and rates for the factory,
repairs of factory machinery, office stationery, advertising and
catalogues
...

2
...

4
...
The sum of (3) and (4) above gives the total-cost of sales
...
Level of activity refers to the amount of work done or the
number of event that have occurred or the number of students that graduated, or
the number of invoices issued or the quantity of goods produced or sold in a
period or the kilowatt of electricity consumed or the labour turnover etc
...

ii
...


Fixed cost
Variable cost
Semi-variable cost
...
Fixed cost
A fixed cost is a cost which accrues in relation to the passage of time and which
within certain output or turnover limit tends to be unaffected by fluctuations or
changes in volume of output or turn over
...
It is
sometimes referred to as period cost
...

ii
...

iv
...

Fixed cost decreases per unit as volume of output or turnover increases
within a relevant range
...

It is only executive management that has control responsibility over
these costs
...


22

Graphically
Y

FC
Cost
N

Level of activity

X

This graph represents the behavior of fixed cost in total to the volume of output
...

Y

Level of activity

x

This graph represents the behavior of fixed cost per unit
...


23

Fixed costs can be sub-divided into committed fixed costs and discretionary fixed
costs or programmed costs
...
They even arise when the
company is not producing
...

Discretionary fixed costs or programmed costs- are those costs that arise from
periodic decisions that directly reflect to management policies regarding the
maximum permissible amounts to be incurred or that do not have optimum
relationship between input and output
...
Examples are research and development cost, advertising,
promotion, charitable do-nations, management consultancy services, employee
training programmes etc
...
Most
fixed cost items like rent, salaries, depreciation are stepped cost because as the
level of activity increases more accommodation, equipment and salaried staff will
be required to handle the volume of activity
...
Variable Cost
Variable cost is one which in the aggregate, tends to vary in direct
proportion to changes in the volume of output or turnover
...


Variable costs in total move in direct proportion to variations in the level
of activity
...

iii
...

They are controllable by a specific department head
...

Variable Cost Patterns- Curve-Linear
Curvi-linear variable cost exists where costs do not vary in direct proportion to
changes in the level of activity
...
It is convex form where extra unit of output causes a less than
proportionate increase in cost
...
below
...
Hence, there is diminishing return
...
Semi Variable Costs
These costs are partly fixed and party varied with the level of activity
...


Separation of semi-variable cost into its fixed and variable elements
...
The common techniques of separating semivariable costs are:
i
...

iii
...


Account Analysis Method
High and Low Method
Scatter Graph Technique
Regression Analysis Method
...

Under this technique, the cost function is arrived as follows;
i
...


The accountant will obtain a detailed analysis of individual items that
make up a total of the cost item in the historical records at a point in
time
...

25

iii
...


For instance the cost of material may be treated as variable and administrative
overheads may be treated as fixed and other items of cost are treated as semivariable and an estimate will be made of the fixed element of the cost from the
available evidence
...

ii
...

It is not expensive and can be revised easily
...

II
...

IV
...


It is highly subjective, relying on the assumed nature of the cost
collected
...

It is sensitive to apportionment of indirect costs which are fixed for the
firm as a whole but variable for the departments
...

The treatment of semi-variable cost is arbitrary
...
Historical records relating to a defined period of time are
used and in particular two records are extracted corresponding to:
i
...


The highest level of activity and the associated cost;
The lowest level of activity and the associated cost
...
It needs be
emphasized that where inflation makes the costs in each period impossible to
compare, the costs should be adjusted to the same price level by means of a price
level index
...

The costs of operating the maintenance department of a computer manufacturing
company for the last 6 months have been as follows:

Month
January

Production Cost
$
220,000

Production Volume in Standard
Hours
7,000

February

230,000

8,000

March

222,000

7,700

April

194,000

6,000

May

200,000

6,500

June

210,000

6,800

What cost should be expected in the month of July, when output is expected to
be 7,500 hours? Ignore inflation
...

Total Cost = fixed cost

+ Variable Cost

= $86,000 (Note 2) + (7,500x 18 (Note 1)
= $ (86,000 +135,000)
= $221,000
...


Calculation of Variable Cost/ Standard hour
Hrs
...


=

230,000

Lowest Level

6000 hrs
...


= $18

Calculation of Fixed Cost

Total Cost at 8000 standard hours

= $ 230,000

Variable cost at 8000 standard hours

= 18 x 8,000
= $144,000

TC = FC +VC
By substitution,

--- FC

= TC –VC
Fixed Cost

= $ (230,000 -144,000)
= $86,000

28

Illustration 2
...

Year
1993
1994
1995
1996
1997

Output (units)
65,000
80,000
90,000
60,000
75,000

Total Cost ($)
290,000
358,400
418,000
403,000
496,000

Average Price
110
112
123
144
160

Required:
What cost should be expected in 1998? If output is 85,000 units and the average
price level index is 180
...


SOLUTION
Expected cost for output level of 85,000 units at price level index of 180
...

Calculation of Fixed Cost
For highest level of activity (9,000), total cost is $340,000
While variable cost is ($2 x 90,000)
Fixed Cost

= Total Cost - Variable Cost

Fixed Cost

= $ (340,000 – 180,000) = $ 160,000
...

Ayomo Company has computed its factory overhead costs at high and low levels
of activity to be as follow:
Level of Activity
Low
Direct Labour Hours
Total factory overhead costs

High

$50,000

$ 75,000

$285,000

$352,500

Assume that the factory overhead costs above consist of indirect materials, rent
and maintenance expenses
...

You are required to:
1
...


31

2
...

SOLUTION
AYOMO COMPANY
Maintenance cost at high level of activity
Total factory overhead = Indirect Material + Rent + Maintenance
Maintenance cost

= Total factory overhead- (Indirect Material + Rent)

Maintenance cost

= Total factory overhead- Indirect Material- Rent

Maintenance Cost at high level
= $352,500 – 120,000 – (100,000 x 75,000)
(

50,000

)

= $ (232,500 – 150,000)
= $ 82,500
Maintenance cost function
Output

Cost

High

$75,000

$82,500

Low

$ 50,000

$ 65,000

Difference

$25,000

$ 17,500

Variable cost/Output = $ 17,500
$ 25,000

=$ 0
...
70)
= $82,500- $52,500
= $ 30,000
Cost function = fixed cost +variable cost = Total cost
Maintenance cost function = $ 30,000 + $ 0
...


Advantages
i
...

iii
...

It makes use of more periods data than Account Analysis Method

Disadvantages
i
...

iii
...
Hence the
cost function may therefore be rendered unreliable
...

The reliability of the cost function cannot be tested as in the case with
regression method
...
A line of best fit is then drawn
usually across these coordinate cutting the cost axis at the fixed cost level
...

Advantage – It is simple and convenient
...

Illustration 4
Plot the scatter graph from the following cost and activity levels in respect of
Ayifo PLC:
Activity level (units)

Cost ($)

36

800

49

970

59

900

67

1180

76

1020

92

1100

48

700

55

790

65

880

72

950

82

1200

94

1310

48

820

57

1050

66

1020

75

1170
34

SCATTER GRAPH METHOD

0

20

40

60

80

100

120

Level of Activity
The dotted is line is drawn to show the intersection with the vertical axis and it
gives an estimate of the fixed content $400
...
The linear
cost function can be represented by Y= a +bx where Y equals Total cost, a= fixed
component, b= rate of variability and X= level of activity
...
e
...

Advantages:

35

i
...

iii
...


It provides the line of best fit which could be reproduced by anybody
using the same set of data provided the relationship between the
variables is linear
...

It is susceptible to the use of computer
...


Disadvantages
i
...

iii
...


The assumption of linearity can be faulted in practice
...

The requirement of homogeneity is very difficult to make in practice i
...
,
Data must be homogenous before regression analysis can be used to
advantage
...


Illustration 1
From the following information relating to Araroba Company, you are required to
formulate the cost for function using regression analysis
...
385

37

Substitute for (a) in equation ---------------------- (i)
6a + (42x6
...
385)

= 30
...
6 +6
...
Stock has
been negligible at all relevant times
...

During the last five years, the only changes in the prices of resources used have
been an increase in the price of materials of 25% three years ago (at the end of
38

1994) and an increase in wages rate of 331/3% two years ago (at the end of 1995)
overhead costs have not been affected by the price changes
...
No further increases in
the prices of resources are expected
...
Cole) has provided
the following estimates of the sales price
...


b = ∑ (x-xˉ) (Y-Yˉ)
∑ (X-Xˉ)2
a = yˉ - bxˉ
Where yˉ = the mean of dependent variables
xˉ = the mean of independent variables

∑y

= an + b∑x

∑xy = a (∑x) + b (∑x2)

39

SOLUTION
Calculation of revised cost data

Overhead

1993
40
10
50
54
18
72
48

1994
56
14
70
72
24
96
48

Total

170

214

Material
Add 25%
Labour
Add 331/3%

year
1993
1994
1995
1996
1997

Units x
(’00)
42
56
68
62
80
308

Cost y
($’000)
170
214
244
236
268
1132

1996
74
74
96
96
66

1997
96
96
108
108
64

244

236

268

xˉ−x

y−yˉ

(x−xˉ)(y−yˉ) (x−xˉ)2

(19
...
6)
6
...
4
18
...
4)
(12
...
6
9
...
6
-

1105
...
44
112
...
84
765
...
8

X = 308
5

1995
84
84
78
26
104
56

384
...
36
40
...
16
338
...
20

y = 1132
= 61
...
4

By substitution
b = ∑ (x-xˉ) (Y-Yˉ)
∑ (X-Xˉ)2

=

2056
...
20

40

= 2
...
4 – 2
...
6)
2226
...
3284 = 67
...
0716 + 2
...

Cost function will be:
Y = $67, 0716 (1000) + ( 2
...

To achieve this objective, effective pricing system to compete with other suppliers
in the market must be in operation
...
e
...

The focus of this section is on the cost prediction for labour by the use of learning
curve theory
...


41

Labour cost has been picked for discussion for the following reasons;
i
...


iii
...

Where learning takes place within a regular pattern, it is important to
take account of the reduction in labour, hours and costs per unit, as they
have effect on production planning, work scheduling, standard costing,
overhead absorption and pricing policy
...


The cost of a particular product is a summation of material cost
...
It is necessary to mention at this juncture that the more
capital intensive an industry, the more automated, the greater the use robots and
so on, the less likely there is to be any form of regular learning effect
...

The learning curve theory states that, as the cumulative output is double, the
average time spent on each unit falls, at constant rate, when a repetitive job is
being performed
...

ii
...


Productions of items are made largely by labour effort rather than by a
highly mechanized process
...

Production process is complex and products are made in small quantity
for special order
...


42

The theory assumes that labour unlike machine learns from experience, the more
a man does a job, the more skillful and perfect he becomes, the lesser the time he
requires to complete the job
...

Assumption of Learning Curve Theory:
Some of the assumptions of the theory are stated below:
i
...


iii
...


It assumes a constant rate of learning
...
e
...

It is based on a standard and perfect condition of work
...


In reality, studies have shown that during the early stage of producing a new part
or carrying out a new process, experience and skill are gained, productivity
increases and there is a reduction of time taken per unit
...

Algebraic Approach
The learning curve can be expressed as Y = a x b
Where:
Y = average cumulative labour per unit
a = number of labour hours for the first batch (or first unit)
x = number of units in output level desired
number of units in the first batch of output
...
e
...

i
...

iii
...

v
...

Calculate the average time taken per unit for the second batch
...
e
...

Repeat the calculations for each subsequent batch which it will be
noticed in doubling the output of the previous batch
...

Cost Estimation: It is useful in estimating the labour cost per operation, and can
be used to estimate the cost of a prototype and expected cost of future
production
...

It may be used in profit planning using realistic cost estimates
...

It is useful in production scheduling and manpower planning
...
Learning effects must be considered when work measurement technique is
used in establishing a standard time because to neglect the effect of learning
curve will lead to pay drift to changes in output level
...
e
...

Limitation:
The theory suffers from the following defects:
It is only found in labour intensive operations and for production work like
shipbuilding, electronics, construction and other complex works
...

It assumes stabIe conditions at work (e
...
Of labour force and mix) which will
enable learning to take place
...

Extensive breaks between productions of items must not be encouraged because
workers will forget the production process and the learning process would have
to be started all over again
...

The learning process applies only to direct labour
...


45

Conclusively, it is clear that learning does take place and that average times are
likely to reduce but in practice it is highly unlikely that there will be a regular
consistent rate of decrease as exemplified above
...


Controllability Classification
Costs are divided into controllable costs and non-controllable costs
...
In some situation an executive may be held
responsible for those costs which he cannot influence by his own actions but he
can help to influence those persons who are responsible for such costs
...

Non- controllable costs
Are those costs which are not subject to direct authority or actions of an
individual at his level of responsibility
...
This is to confirm that cost items that are not controllable at one
level may be controllable at a higher or another level
...
For instance, if overtime is planned and
worked either regularly or during certain periods, the additional costs incurred is
a normal cost of production but if overtime had to be worked to complete an
order by a specific date then the cost of the overtime is an abnormal cost
...


Abnormal costs
Are those costs not normally incurred at a given level of output in the conditions
in which that level of output is normally attained
...


Expired Costs versus Unexpired Costs
Expired Costs: are measures of expenses and, they include the production costs
of goods sold that are associated with the revenue of the current period
...

They are measures of assets
...

These classifications include:
i
...

iii
...

v
...

vii
...


Actual Cost: Is the actual amount expended on a specific things or object
...

Budgeted Cost: is the amount expected by a cost center to expend
...
As one course
of action is chosen than the other, the possible benefit loss from the rejected
alternative is the opportunity cost
...
Example of sunk cost is investments in
fixed assets
...

Replacement Cost: is the amount that the firm would have to spend if it were to
replace its assets in the current condition
...
This is unlike out of pocket costs i
...
those costs that
involve cash outlays immediately or in future for decisions
...

They include interest on owner equity, rental value premises owned by the firm,
actual interest on the concessional loss granted by the financial institution, loss of
asset values and so on
...

Costing methods are mainly directed towards collecting and assembling of cost
data
...
It must
be noted that whatever costing method is employed, the basic costing principles
relating to analysis, allocation and apportionment should be used
...
e
...

Simply put, there are two major types of costing methods namely:
i
...


Specific order costing
Operation costing or Average unit method
...

Under this method of costing, each job, batch or contract serves as a cost unit to
accumulate the three elements of cost for goods manufactured
...

ii
...


Job Costing
Batch Costing
Contract Costing

49

i
...

iii
...

Contract costing is applicable to work which extends over a long period
...
Under this
method, costs are charged to process or operation being averaged over the units
produced during the period
...

There are three main sub-divisions of operation costing namely:i
...

iii
...

Each process serves as a cost center which collects the elements of cost in terms
of material, labour and expenses inform of overheads
...
Process
cost per unit is obtained with averaging technique of dividing the process cost by
the quantity in a process
...


50

Service Costing
This operation costing method is applicable where an under taking renders
services rather than produce goods
...
Each service serves as a cost center which
collects the elements of cost
...

Service using this method includes motor transport, railways, canteens, power,
heating, electricity, gas, personnel and welfare
...
Cost per unit
is arrived at by dividing the total costs for the period by the number of units
produced in the period
...


Costing Techniques
Costing techniques are the established principles and techniques devised to
convert cost data collected and assembled with the aid of costing methods into a
meaningful management information that suit the purpose for which the
information is required
...

In some literature, they are referred to as super imposed principles and
techniques of costing
...

The main costing principles and techniques that may be described as super
imposed are:-

51

i
...

iii
...

v
...

vii
...

ix
...
Absorption costing as a term may be applied where:
i
...


Production costs only, or
Costs of all functions are so allotted
...
The main problem with this principle is that although
variable costs tend to vary in direct proportion to changes in volume of activity,
fixed costs accrue in relation to the passage of time
...

Marginal Costing
This is a technique whereby marginal costs are ascertained
...
Contribution
is the difference between the variable cost and selling price
...

52

Actual Cost Ascertainment
This is a principle whereby costs of cost centers and cost units are ascertained,
subject to certain approximations, are deemed to represent actual costs: The
term’ historical costing’ is commonly used to describe this concept but it is not
recommended because the word historical may equally be applied to other
concepts e
...
statements of variances related to past events
...

The part of variance accounting which relates to the analysis parts of variance
between planned and actual performance is known as variance analysis
...

Standard Costing
This is a technique whereby the standard costs (predetermined costs) of products
and services are prepared
...

Budgetary Control
This is a technique whereby budgets are established for responsibility centers
...

Summarily put, the control has to do with establishment of budgets, relating the
responsibility of executive to the requirements of a policy, and the continuous
comparison of actual budgeted results to secure the objective of that policy or to
provide a basis for its revision
...
The technique studies the behavior of costs at different volumes of
output and sales and the relationship between contribution and sales value
...

The incremental costing format presents only the additional costs and revenues
likely to result from each degree of change
...
e
...

Trade associations recommend this technique to their members and a group of
companies also do so, to have useful comparisons of detailed costs which have
been prepared with the same costing principles and techniques
...

ii
...


It is ease genuine comparisons of cost between different firms and
organizations
...

It facilitates the transferability of staff between organizations
...


Being a tailor made system, it may not be appropriate for every firm
...


It takes time to adapt to changing conditions and demands
...
It involves all methods of controlling the cost of manufacturing or
processing of products or services through the various stages of production
...
A scientific approach of cost control is the
comparison of the actual performance with standard or predetermined budget
...

ii
...


The two techniques have three major steps in common as stated below:i
...

iii
...

Receiving feedback information as to whether the production processes
are proceeding according to the plan
...


To have an effective cost control, the following factors must be present:i
...

iii
...

v
...


A cost control system may be faced with the following problems:i
...

iii
...
The budgets for
cost center divide the costs centers while the budgets also threaten the
executive officers responsible for the cost centers
...

The standard contains subject elements, there is no such thing as totally
accurate standards or variance
...


Cost Reduction
Is the process whereby permanent savings are made without any reduction in the
quantity and/ or usefulness of the products
...

Cost reduction is a planned approach of reducing expenditure, because it is
excessive as a result of material wastage, too low labour productivity or excessive
idle time etc
...

Cost reduction programmes may face the following problems:i
...


iii
...

The cost reduction campaign may be introduced as a rushed, desperate
measure instead of being organized with care and well-thought out
exercise
...


ii
...


A cost reduction committee may be set up for the purpose of obtaining
permanent savings
...

The committee has to pay attention to the objectives of cost reduction
programmes which include setting up of objectives, establishment of
cost center, selecting the area of control and measuring of effectiveness
of the cost reduction programme
...

Design of the product to meet consumers demand
ii
...

iii
...


iv
Value analysis is part of the modern approach to cost reduction and this
comprises of ascertaining what the customer needs and wants, determining the
best method of performing the work to be done, ascertaining the appropriate
cost for standard performance and searching for better ways of performing work
...

ii
...
The techniques are applied to the existing procedures and problems areas
to eliminate waste and improve efficiency
...

The study comprises of:i
...


Method study and
Work measurement
...

It is a systematic recording and critical examination of existing ways of doing
things in order to develop easier and more effective method and reduce costs
...

ii
...

iv
...


Produce the most economical method of carrying out a task in terms of
cost and efforts;
Improve working conditions
...

Reduce wastage by utilizing materials and equipment more effectively
...

ii
...

iv
...

vi
...

Critical examination of the facts
...

Installation of this effective method
...


Work Measurement
This is a management technique for reducing or eliminating items of cost, by
questioning the need to use the particular materials, labour or services specified
in the original process
...

Among the objectives of work measurement are to:i
...

iii
...


Provide information for labour cost control and a basis for sound
incentives schemes
...

Enable a comparison to be made between methods of carrying out a
task
...


The stages involve in work measurement include:
i
...

iii
...


Selection of work to be measured
...

Breaking down of the job into elements
...


Value Analysis
The British Standard Institution has defined value analysis as ‘ a systematic interdisciplinary examination of design and other factors affecting the cost of a

59

product or service, in order to devise means of achieving the specified purpose
most economically at required standard of quality and reliability’
The analysis aims at reducing the production cost of a product without reducing
its quality, performance or value to the customer
...
It needs be emphasized that
often there is insufficient time at this stage to investigate, compare and secure
the cost of alternatives as required by the application of value analysis
...

2
...

4
...
BPP-ACCA-Costing- Practice and Revision Kit BPP Publishing Limited, 1982
...
Wilfred Hingley- Accounting Made Simple
...

3
...
Lucey- Management Accounting
...
Vale, Guernsey
Channel Islands
...

4
...
M
...

5
...
Upson- Success in Accounting and Costing
...
London
...


61

AUTHOR’S PROFILE
My name is Odewoye Francis Sunday, A graduate of Electronics and
Telecommunications Engineering
...
I am a professional Registered
Engineer, Registered with Engineering Council, United Kingdom (UK) and
also registered with the Council for the Regulation of Engineering in Nigeria
(COREN)
...


62



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