Introduction to Cost and Management Accounting
What the domain tests
This section tests the distinction between financial, cost and management accounting, cost classification, cost sheet preparation and the use of cost information for planning and control.
Core rules
- Financial accounting reports overall profit to external users; cost accounting measures product or service cost; management accounting supplies information for planning, control and decision-making.
- Know cost object, cost unit and cost centre. Elements of cost are material, labour and expenses. Direct costs trace to the product; indirect costs are overheads.
- Cost sheet: prime cost = direct material + direct labour + direct expenses; works cost = prime cost + factory overhead; cost of production = works cost + production-related administration overhead; cost of sales = cost of production + selling and distribution overhead.
- Profit = sales - cost of sales. Financial items such as interest and income tax are excluded from product cost.
Worked example
Direct material Rs. 50,000; direct labour Rs. 30,000; direct expenses Rs. 5,000; factory overhead Rs. 15,000; administration overhead Rs. 10,000; selling overhead Rs. 5,000. Prime cost = Rs. 85,000. Works cost = Rs. 1,00,000. Cost of production = Rs. 1,10,000. Cost of sales = Rs. 1,15,000. If sales are Rs. 1,40,000, profit is Rs. 25,000. If the Rs. 10,000 administration cost were a financial expense, it would not be included in production cost.
Traps
Do not include financial expenses in cost of production; do not treat all administration costs as production overhead; do not omit direct expenses; and do not confuse cost of production with cost of sales.