MAC2601 Notes
LU 2 – Cost Concepts and classification
3 types of business orginisations
• Manufacturers
• Merchandisers
• Service Organisations
Cost – the amount of money paid to get something
Product costs – manufacturing costs (treated as assets (inventory))
Period costs – non-manufacturing costs
Expired costs – the value of manufactured goods that have been sold
Unexpired costs – the value of manufactured goods that have not been sold
Product costs have 3 elements:
• Materials cost
• Labour costs
• Factory overhead cost (Indirect materials, indirect labour, factory overheads)
Product costs can be:
• Direct costs
o Direct material costs (raw materials)
o Direct labour (touch labour)
• Indirect costs
o Indirect material costs
o Indirect labour
• Prime costs – direct costs (direct material and direct labour)
• Conversion costs – costs incurred in converting direct materials into finished goods (cost of
indirect labour and cost of production overheads)
Production costs = cost of direct materials + direct labour + production overheads
Production overheads = Indirect materials + Indirect labour + Factory overheads
• Total Fixed costs – remain unchanged regardless of output
, • Total Variable costs – will increase in direct proportion to an increase in output
Total cost = variable cost + fixed cost
• Mixed costs – semi-variable cost, contains both fixed cost and variable cost
, • Stepped costs – behavior of fixed costs at various output levels
LU 3 – Cost Accounting System
Objective of integrated cost accounting system is to determine the cost of products for planning and
control purposes.
3 possible basis for cost accounting system:
• Actual costing basis – use actual numbers
• Normal costing basis – use estimates for actual numbers
• Standard costing basis – use standard rates to calculate
5 Methods used for treatment of production costs
• Method used for valuing finished goods manufactured
o Absorption costing method (full costing method)
o Variable costing method (direct costing method and the marginal costing method)
▪ Profit is called contribution
• Method used for apportioning production overheads
o Traditional costing method – output volumes as cost drivers
o Activity-based costing (ABC) method – actual activities as cost drivers
, • Method used for accumulating production costs
o Job costing (aka job-order costing)
o Process costing
Work-in-Progress - general ledger account into which production costs are collected
3 cost flow assumptions:
• First-in-first-out (FIFO) method (process costing)
• Weighted average method (process costing)
• Specific identification (job costing)
Frequency with which inventory records are updated:
• Perpetual method
• Periodic method
LU 2 – Cost Concepts and classification
3 types of business orginisations
• Manufacturers
• Merchandisers
• Service Organisations
Cost – the amount of money paid to get something
Product costs – manufacturing costs (treated as assets (inventory))
Period costs – non-manufacturing costs
Expired costs – the value of manufactured goods that have been sold
Unexpired costs – the value of manufactured goods that have not been sold
Product costs have 3 elements:
• Materials cost
• Labour costs
• Factory overhead cost (Indirect materials, indirect labour, factory overheads)
Product costs can be:
• Direct costs
o Direct material costs (raw materials)
o Direct labour (touch labour)
• Indirect costs
o Indirect material costs
o Indirect labour
• Prime costs – direct costs (direct material and direct labour)
• Conversion costs – costs incurred in converting direct materials into finished goods (cost of
indirect labour and cost of production overheads)
Production costs = cost of direct materials + direct labour + production overheads
Production overheads = Indirect materials + Indirect labour + Factory overheads
• Total Fixed costs – remain unchanged regardless of output
, • Total Variable costs – will increase in direct proportion to an increase in output
Total cost = variable cost + fixed cost
• Mixed costs – semi-variable cost, contains both fixed cost and variable cost
, • Stepped costs – behavior of fixed costs at various output levels
LU 3 – Cost Accounting System
Objective of integrated cost accounting system is to determine the cost of products for planning and
control purposes.
3 possible basis for cost accounting system:
• Actual costing basis – use actual numbers
• Normal costing basis – use estimates for actual numbers
• Standard costing basis – use standard rates to calculate
5 Methods used for treatment of production costs
• Method used for valuing finished goods manufactured
o Absorption costing method (full costing method)
o Variable costing method (direct costing method and the marginal costing method)
▪ Profit is called contribution
• Method used for apportioning production overheads
o Traditional costing method – output volumes as cost drivers
o Activity-based costing (ABC) method – actual activities as cost drivers
, • Method used for accumulating production costs
o Job costing (aka job-order costing)
o Process costing
Work-in-Progress - general ledger account into which production costs are collected
3 cost flow assumptions:
• First-in-first-out (FIFO) method (process costing)
• Weighted average method (process costing)
• Specific identification (job costing)
Frequency with which inventory records are updated:
• Perpetual method
• Periodic method
