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Fundamentals of Cost
and Management Accounting
Ninth Edition
Fundamentals of Cost
and Management Accounting
Ninth Edition
SR de Wet
PhD Finance (UJ)
MCom (UJ), BCom Hons (UJ)
Faculty Lead: Accounting and Financial Management
Johannesburg Business School
University of Johannesburg
Senior Lecturer: Business and Financial Strategy
School of Finance and Accounting
IIE MSA
Director
Asset Orchestration. Value. (Pty) Ltd
Members of the LexisNexis Group worldwide
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© 2022
First edition 1988
Second edition 1992
Third edition 1997, Reprinted 1998, 1999, Revised reprint 1999, Reprinted 2000, 2001
Fourth edition 2001, Reprinted 2002, 2003, 2004
Fifth edition 2004, Revised reprint 2006, 2007
Sixth edition 2012
Seventh edition 2016
Eight edition 2017, Reprinted 2019, 2020, 2022
Ninth edition 2022
Copyright subsists in this work. No part of this work may be reproduced in any form or by any means without
the publisher’s written permission. Any unauthorised reproduction of this work will constitute a copyright
infringement and render the doer liable under both civil and criminal law.
Whilst every effort has been made to ensure that the information published in this work is accurate, the
authors, editors, publishers and printers take no responsibility for any loss or damage suffered by any person
as a result of the reliance upon the information contained therein.
Dr Shaun de Wet
November 2022
v
Preface to the eighth edition
vii
viii Fundamentals of Cost and Management Accounting
It is our wish that every young South African that sets out on the journey of becoming
skilled in business and finance will find this textbook useful and filled with relevant
information.
The Authors
October 2017
We have started the practice of including the preface to the previous edition in order to
track the evolution of the textbook from one edition to the next.
Preface to the seventh edition
ix
x Fundamentals of Cost and Management Accounting
We are also excited to announce a further expansion of our online offering to lecturers.
From January 2016 the online component to this textbook will include the solutions to
the exercises at the back of each chapter, along with 25 multiple choice questions and
solutions per chapter. Each chapter will also have a set of comprehensive slides
available that can be used in lectures. The online component can be accessed via
www.myacademic.co.za.
The quantity of online and printed information has expanded more in the last few years
than in the history of mankind. With more and more information available it’s almost no
wonder that students are reading less and less. This is perhaps the most significant
strength of this textbook: A book that gets to the point by communicating in an effec-
tive manner.
The Authors
September 2015
Contents
Page
Preface to the ninth edition......................................................................... v
Preface to the eighth edition ...................................................................... vii
Preface to the seventh edition ................................................................... ix
xi
xii Fundamentals of Cost and Management Accounting
Page
THE CONCEPT OF COST ....................................................................................... 14
COST OBJECTS ...................................................................................................... 15
ACCOUNTING FOR COST ..................................................................................... 16
COST CLASSIFICATION ......................................................................................... 17
Classification of costs by their nature ................................................................ 17
Classifying costs by their timing ........................................................................ 18
Classifying costs by their function ..................................................................... 20
Classifying costs according to their behaviour.................................................. 24
Variable costs ............................................................................................... 24
Fixed cost ..................................................................................................... 25
Step cost ....................................................................................................... 25
Mixed cost .................................................................................................... 26
SUMMARY .............................................................................................................. 27
PERSPECTIVES ON COSTING ............................................................................... 27
KEY TERMS AND CONCEPTS ................................................................................ 28
REVIEW PROBLEMS ............................................................................................... 28
EXERCISES ............................................................................................................. 32
Page
ASSIMILATION OF INFORMATION ........................................................................ 58
LABOUR REMUNERATION .................................................................................... 59
Methods of remuneration ................................................................................... 59
Important terminology ........................................................................................ 60
Calculation of remuneration ............................................................................... 61
WAGE INCENTIVE SCHEMES ................................................................................ 63
Straight piecework ............................................................................................. 63
Taylor’s differential piecework system ............................................................... 64
Halsey bonus scheme ....................................................................................... 65
Emerson’s efficiency scheme ............................................................................ 65
Bonus points ...................................................................................................... 65
Measured day work ........................................................................................... 65
Group bonus systems, share incentive schemes and
profit-sharing schemes ...................................................................................... 65
RECOVERY OF DIRECT LABOUR COSTS ............................................................. 66
LEARNING CURVE ................................................................................................. 67
The learning curve effect ................................................................................... 67
Learning curve formula ...................................................................................... 68
Application value ............................................................................................... 70
Challenges with the application of the learning curve ....................................... 70
SUMMARY .............................................................................................................. 70
REVIEW PROBLEMS – LABOUR ............................................................................ 71
MANUFACTURING OVERHEADS ........................................................................... 74
COST PRICE CALCULATION AND MANUFACTURING OVERHEADS .................. 75
Problems associated with overheads ................................................................ 75
Classification and analysis of overheads........................................................... 76
TOTAL MANUFACTURING OVERHEADS AND THE LINEAR FUNCTION ............. 79
TECHNIQUES FOR DIVIDING MANUFACTURING OVERHEADS .......................... 79
Scatter diagram ................................................................................................. 79
High-low method ................................................................................................ 81
Simple regression .............................................................................................. 82
Multiple regression............................................................................................. 84
SUMMARY .............................................................................................................. 85
REVIEW PROBLEM – MANUFACTURING OVERHEADS ........................................ 85
MARKETING COSTS ............................................................................................... 88
BASES FOR APPORTIONMENT ............................................................................. 88
PLANNING AND CONTROL ................................................................................... 89
Products ............................................................................................................. 90
Sales representatives......................................................................................... 91
Areas .................................................................................................................. 92
Size of orders ..................................................................................................... 94
SUMMARY .............................................................................................................. 96
REVIEW PROBLEM – MARKETING ........................................................................ 97
PERSPECTIVES ON COSTING ............................................................................... 98
xiv Fundamentals of Cost and Management Accounting
Page
KEY TERMS AND CONCEPTS ................................................................................ 99
EXERCISES ............................................................................................................. 100
IT is at Lisbon that we are able for the first time to put our finger
decisively upon Columbus. The stray glimpses which we catch of
him before that time, whether at Genoa, Pavia, Naples, or Cape
Carthagena, are fleeting and unsatisfactory; his trustworthy
biography begins with his residence at Lisbon. He reached there, we
do not know by what route, in the year 1470, having no money and
no visible means of support. Instead of borrowing money and buying
an organ, or calling on the leader of one of the Lisbon political “halls”
and obtaining through his influence permission to set up a peanut
stand, he took a far bolder course—he married. Let it not be
supposed that he represented himself to be an Italian count, and
thereby won the hand of an ambitious Portuguese girl. The fact that
he married the daughter of a deceased Italian navigator proves that
he did not resort to the commonplace devices of the modern Italian
exile. Doña Felipa di Perestrello was not only an Italian, and as such
could tell a real count from a Genoese sailor without the use of
litmus paper or any other chemical test, but she was entirely without
money and, viewed as a bride, was complicated with a mother-in-
law. Thus it is evident that Columbus did not engage in matrimony as
a fortune-hunter, and that he must have married Doña Felipa purely
because he loved her. We may explain in the same way her
acceptance of the penniless Genoese; and the fact that they lived
happily together—if Fernando Columbus is to be believed—makes it
clear that neither expected anything from the other, and hence
neither was disappointed.
The departed navigator, Di Perestrello, had been in the service
of the Portuguese king, and had accumulated a large quantity of
maps and charts, which his widow inherited. She does not appear to
have objected to her daughter’s marriage, but the depressed state of
Columbus’s fortunes at this period is shown by the fact that he and
his wife went to reside with his mother-in-law, where he doubtless
learned that fortitude and dignity when exposed to violence and
strong language for which he afterwards became renowned. Old
Madame Perestrello did him one really good turn by presenting him
with the maps, charts, and log-books of her departed husband, and
this probably suggested to him the idea which he proceeded to put
into practice, of making and selling maps.
Map-making at that time offered a fine field to an imaginative
man, and Columbus was not slow to cultivate it. He made beautiful
charts of the Atlantic Ocean, putting Japan, India, and other
desirable Asiatic countries on its western shore, and placing
quantities of useful islands where he considered that they would do
the most good. These maps may possibly have been somewhat
inferior in breadth of imagination to an average Herald map, but they
were far superior in beauty; and the array of novel animals with
which the various continents and large islands were sprinkled made
them extremely attractive. The man who bought one of Columbus’s
maps received his full money’s worth, and what with map-selling,
and occasional sea voyages to and from Guinea at times when
Madame Perestrello became rather too free in the use of the stove-
lid, Columbus managed to make a tolerably comfortable living.
The island of Porto Santo, then recently discovered, lay in the
track of vessels sailing between Portugal and Guinea, and must
have attracted the attention of Columbus while engaged in the
several voyages which he made early in his married life.
It so happened that Doña Felipa came into possession, by
inheritance, of a small property in Porto Santo, and Columbus
thereupon abandoned Lisbon and with his family took up his
residence on that island. Here he met one Pedro Correo, a bold
sailor and a former governor of Porto Santo, who was married to
Doña Felipa’s sister. Columbus and Correo soon became warm
friends, and would sit up together half the night, talking about the
progress of geographical discovery and the advantages of finding
some nice continent full of gold and at a great distance from the
widow Perestrello.
At that time there were certain unprincipled mariners who
professed to have discovered meritorious islands a few hundred
miles west of Portugal; and though we know that these imaginative
men told what was not true, Columbus may have supposed that their
stories were not entirely without a basis of truth. King Henry of
Portugal, who died three years after Columbus arrived at Lisbon, had
a passion for new countries, and the fashion which he set of fitting
out exploring expeditions continued to prevail after his death.
There is no doubt that there was a general feeling, at the period
when Columbus and Correo lived at Porto Santo, that the discovery
of either a continent on the western shore of the Atlantic, or a new
route to China, would meet a great popular want. Although the
Portuguese had sailed as far south as Cape Bojador, they believed
that no vessel could sail any further in that direction without meeting
with a temperature so great as to raise the water of the ocean to the
boiling-point, and it was thus assumed that all future navigators
desirous of new islands and continents must search for them in the
west. The more Columbus thought of the matter, the more firmly he
became convinced that he could either discover valuable islands by
sailing due west, or that at all events he could reach the coast of
Japan, China, or India; and that it was clearly the duty of somebody
to supply him with ships and money and put him in command of an
exploring expedition. With this view Correo fully coincided, and
Columbus made up his mind that he would call on a few respectable
kings and ask them to fit out such an expedition.
[Æt. 34; 1474]
During the same winter the King and Queen held their court at
Salamanca, after having made a very brilliant foray into the Moorish
territory, and having also suppressed a rebellion in their own
dominions. Columbus went to Salamanca, where he made the
acquaintance of Pedro Gonsalvez de Mendoza, the Cardinal-
Archbishop of Toledo, who was decidedly the most influential man in
the kingdom. When Columbus first mentioned his project, the
Cardinal told him the Scriptures asserted that the earth was flat, and
that it would be impious for him to prove it was round; but Columbus
soon convinced him that the Church would be greatly benefited by
the discovery of gold-mines all ready to be worked, and of heathen
clamoring to be converted, and thus successfully reconciled science
and religion. The Cardinal heartily entered into his scheme, and soon
obtained for him an audience with the King.
Columbus says that on this occasion he spoke with an
eloquence and zeal that he had never before displayed. The King
listened with great fortitude, and when Columbus temporarily paused
in his oration had still strength enough left to dismiss him with a
promise to refer the matter to a scientific council. In pursuance of this
promise he directed Fernando de Talavera, the Queen’s confessor,
to summon the most learned men of the kingdom to examine
Columbus thoroughly and decide upon the feasibility of his plan. As
for the Queen, she does not appear to have been present at the
audience given to Columbus, either because her royal husband
considered the female mind incapable of wrestling with geography,
or because he did not think her strong enough to endure Columbus’s
conversation.
The scientific Congress met at Salamanca without any
unnecessary delay, and as few people except priests had any
learning whatever at that period, the Congress consisted chiefly of
different kinds of priests. They courteously gave Columbus his
innings, and listened heroically to his interminable speech, after
which they proceeded to demonstrate to him that he was little better
than a combined heretic and madman. They quoted the Bible and
the opinions of the Fathers of the church in support of the theory that
the earth was flat instead of round.
When Columbus in his turn proved that the Bible and the Fathers
must be understood in a figurative sense, the priests then took the
ground that if the world was round, Columbus could not carry
enough provisions with him to enable him to sail around it, and that
he could not sail back from his alleged western continent unless his
vessels could sail up-hill.
Gradually the more sensible members of the congress came to
the conclusion that it would be better to agree to everything
Columbus might propose, rather than listen day after day to his
appalling eloquence. Still, the majority were men of ascetic lives and
great physical endurance, and they showed no disposition to yield to
argument or exhaustion. The sessions of the Congress were thus
prolonged from day to day, and Columbus was kept in a painful state
of suspense. Little did he imagine that in the land which he was
destined to discover, another Congress would meet, not quite four
hundred years later, and would even surpass the Congress of
Salamanca in the tediousness and uselessness of its debates.
CHAPTER IV.
HE RECEIVES HIS COMMISSION.
At last the day came when, the war being ended, Columbus was
summoned to meet a committee of which De Talavera appears to
have been the chairman. This time the feasibility of his scheme was
admitted, and it only remained to settle the terms upon which he
would agree to furnish Spain with new continents. Though Columbus