Chapter 1 Introduction to Cost Accounting

Learning Competencies:
1.Define Cost Accounting and Managerial Accounting
2.Describe the objective of Cost Accounting and Control
3. Explain the uses of Cost Accounting data
4. Describe the recent development in cost accounting

Definition
 Cost Accounting – is the branch of managerial accounting that is concerned with the
accumulating manufacturing cost for financial reporting and decision making purposes.
 Managerial Accounting – is the branch of accounting that uses both historical and estimated data
in providing information that management uses in conducting daily operation, in planning future
operation, and in developing overall business strategies.

Merchandising Versus Manufacturing Operation

 In Merchandising entity normally buys a product that is ready for sale when it is received while
manufacturing entity normally buys Materials, Labor, and Factory Overhead in order to produce a
product that is ready for sale.

Cost of Goods Sold of Merchandising entity

Beginning Merchandise Inventory PXXX
Add: Total Purchases XXX
Total Goods Available For Sale XXX
Less: Ending Merchandise Inventory XXX
Cost of Goods Sold XXX

Cost Flow for Merchandising Entity

Cost Flow for a Manufacturing Entity

Objective of Cost Accounting Data

 Determining product Cost
 Determining the selling price of a product
 Meeting competition
 Bidding on Contracts
 Analyzing Profitability
 Planning and Control

Recent Development in Cost Accounting

 Cost accounting is Experiencing Changes. Manual Bookkeeping reduces because of the use of
computer. The traditional role of cost accounting is to record full product cost for external
reporting. However the use of accounting data for decision making and performance evaluation
has gained importance in recent years.
 Two Basics product costing system
 Job Order Costing-A system for allocating cost to groups of unique product. It is applicable
to the production of customer specified products.
 Process Costing – A system applicable to a continuous process of production of the same or
similar goods.

Major difference between Job Order costing and Process costing

PROCESS COSTING JOB ORDER COSTING

1. Homogeneous units pass through a series of similar Unique jobs are worked during time period
processes.
2. Costs are accumulated by processing department Costs are accumulated by the individual job.

3. Unit costs are computed by dividing the individual Unit costs are determined by dividing total costs on the
processing departments’ costs by the equivalent production. job order sheet by the number of units on the job.
4. The cost of production report provides the detail for the The job cost sheet provides the detail for the work in
Work in process account for each processing department. process account.

END OF CHAPTER 1
Chapter 2 Costs - Concepts and Classifications

Definition
Costs – cash or cash equivalent value sacrificed for goods and services that are expected to bring a current
or future benefit to the organization.

Classification of Costs
As to relation to a product
 Manufacturing costs/product costs
1. Direct Materials
2. Direct Labor
3. Factory Overhead
 Non-Manufacturing costs/period costs
1. Marketing or selling expense
2. General or administrative expense

As to variability
1. Variable costs
2. Fixed costs
3. Semi-variable costs

As to relation to manufacturing departments

1. Direct departmental costs
2. Indirect departmental costs

As to their nature as common or joint

1. Common Costs
2. Joint costs

As to relation to an accounting period

1. Capital expenditures
2. Revenue expenditures

Costs for planning, control and analytical processes

1. Standard costs
2. Opportunity costs
3. Differential costs
4. Relevant costs
5. Out-of-pocket costs
6. Sunk costs
7. Controllable costs
8.

Manufacturing costs
 Direct materials – materials that become part of finished product and can be directly traced to
specific product units.
 Direct Labor – labor costs for specific work performed on products that can be directly traced to
end products.
 Factory Overhead – varied collection of production of production-related costs that cannot be
directly traced to end products such as:
1. Indirect materials - nails, screws, bolts and/or other small materials used
2. Indirect labor costs – ex. Maintenance labor, labor of supervisors and inspectors
3. Other indirect costs – ex. Maintenance costs, property taxes, rent expense, utility expense

Non-manufacturing costs
 Marketing or selling expenses – include all costs necessary to secure customer orders and get
finished product or service into the hands of customer.
o Ex. Advertising, shipping, sales commissions
 Administrative or general expenses – include all executive, organizational, and clerical expenses
that cannot be logically be included under either production or marketing.
o Ex. Executive compensation, general accounting, public relations
Costs as to variability
 Fixed costs – items of costs which remain constant in total, irrespective of the volume of
production.
o Ex. Depreciation computed on a straight line method, rent payments, insurance

 Variable costs – are those in which total costs changes in direct proportion to changes in volume,
or output, within the relevant range, while unit costs remains constant.
o Ex. Direct materials, Direct labor

 Semi-Variable/ Mixed Costs – items of costs with fixed and variable components

Common Cost vs Joint Cost

 Common cost – costs of facilities or services employed in two or more accounting periods,
operation, commodities or services.
 Joint cost – costs of materials, labor and overhead incurred in the manufacture of two or more
products at the same time.

Capital expenditure vs. Revenue expenditure

 Capital expenditure – expenditure intended to benefit more than one accounting periods and is
recorded as asset
 Revenue expenditure – expenditure that will benefit current period only and recorded as expense

Direct vs Indirect departmental charges

 Direct departmental charges - costs that are immediately charged to the particular manufacturing
department(s) that incurred the costs since the costs can be conveniently identified with the
departments that benefited from said costs.

 Indirect departmental charges – costs that are originally charged to some other manufacturing
department(s) or account(s) but are later allocated to another department(s) that indirectly
benefited from said costs.

Costs for planning, control and analytical processes

 Standard costs – predetermined costs for direct materials, direct labor, and factory overhead.

 Opportunity costs – the benefit given up when one alternative is chosen over another

 Differential cost – cost that is present under one alternative but is absent in whole or in part under
another alternative.
 Costs for planning, control and analytical processes
 Relevant cost – a future cost that changes across the alternatives.

 Out-of-pocket cost – cost that requires the payment of money (or other assets) as a result of their
incurrence.

 Sunk cost – A cost for which an outlay has already been made and it cannot be changed by
present or future decision
Chapter 3 Cost Accounting Cycle
Learning Competencies
1. Learn the parts of Cost of Goods Sold Statement
2. Prepare a Cost of Goods Sold Statement

Manufacturing Inventory Account

 Material Inventory Control Account is made up of the balances of material and supplies on hand.

Merchandise Inventory vs Materials Inventory

Work in Process Inventory

Finished Goods Inventory

Elements of Manufacturing Cost

 Direct Materials- which become part of the product cost which can be easily identified with a
certain product. Material that cannot easily identified are called Indirect Materials which can be
part of Factory Overhead.
 Direct labor- the cost of labor for those employees who work directly on the product
manufactured. The cost of labor for those employees who do not directly work on the product
produce are called Indirect Labor which can be part of Factory Overhead.
 Factory Overhead- Includes all cost related to manufacturing of a product except Direct labor and
Direct Materials.

Cost of Goods Sold of a Manufacturing Entity

Materials Inventory Beginning PXXX
Add: Purchases (net) XXX
Total material available for use XXX
Less: Material Inventory Ending XXX
Direct Material Used XXX
Direct Labor XXX
Factory Overhead XXX
Total Manufacturing Cost XXX
Add: Work in Process Inventory, Beg XXX
Total Goods put into Process XXX
Less: Work in Process Inventory, end XXX
Cost of Goods Manufactured XXX
Add: Finished Goods Inventory, Beg XXX
Total Goods available for Sale XXX
Less: Finished Goods Inventory, End XXX
Cost of Goods Sold XXX
Chapter 4 Job Order Costing
Learning Competencies
1. Define job Cost sheet
2. Discuss source document for Job Order Costing
3. Discuss Accounting for Materials, Labor and Factory Overhead

Job Cost Sheet

Job Cost sheet- is designed to collect the cost of material, labor and factory overhead applicable to
specific product.

Major Source Documents for Job Order Costing

 Job-order Cost Sheet
 Material Stockcard
 Finished goods stockcard
 Factory overhead control cost record
 Materials requisition, Time ticket and Clock Card

Accounting For Material

In practice all materials and supplies in one control account, Material and stores. Procedures that affect
the materials account
Material Stock Card

Material Requisition

Time Ticket

Accounting for Labor

Accounting For Factory Overhead
In practice there are two account used.
 Factory Overhead control – is used to accumulate actual overhead incurred.
 Factory Overhead applied – is used to accumulate estimated factory overhead applied to
production. In this case a Predetermined rate is used and this is computed using the following as a
base.
1. unit of production
2. Direct material cost
3. Direct labor hours
4. Direct Labor cost
5. Machines Hours

The applied factory overhead entered on the job order cost sheet for each job . The entry is

Debit Work in Process PXXX

Credit Applied Factory overhead PXXX
The Variance over or under applied overhead is computed as follows:
Actual Factory Overhead PXXX
Less: Applied Factory Overhead XXX
Variance XXX

 If actual Is greater than applied, the variance is called Under applied( unfavorable) and this is
taken as an addition to the cost of good sold.
 If Applied is greater than actual the variance is called Over applied( Favorable)and this is taken as
deduction from the cost of good sold.
Chapter 5 Process Costing
Learning Competencies:
1. Define Process Costing
2. Discuss characteristic of process costing
3. Explain the Cost of Production Report
4. Describe the product flow
5. Explain methods of costing

Define Process Costing

Process Costing – is a method of accumulating and assigning cost to units of production in companies
producing large quantities of homogenous product

Characteristic of Process Costing for product cost

Processing Department is any work center where work is performed and where material, labor and factory
overhead cost are added.

Product Flow
Product flow can through a factory in three different ways.
1. Sequential Product flow – Where all units go through all department in the same order.

2. Parallel is where not all units go through all departments. Some units go through one department while
other units go through other departments, in a parallel fashion.
3. Selective- The product moves to the different departments within the factory defending upon the
desired final product.

Procedures: Direct Materials, Direct Labor and Factory Overhead

Direct Materials
The entry to record the issuance of direct material by department 1 during the period as follows:
Work in Process Inventory Dept. 1 PXXX
Material Inventory PXXX

Direct Labor
One journal entry at the end of the month for each department;
Work in Process Inventory Dept. 1,2,3 PXXX
Payroll PXXX

Factory Overhead
Work In Process Inventory Dept. 1,2,3 PXXX
Factory Overhead Applied Pxxx

Cost Accumulation
 Cost Accumulation is usually simpler in a process costing . The reason is that cost only need to be
identified with a few processing department.
 A separate work in process account is maintained for each processing department, Material, labor
and Factory Overhead are entered directly into each department work in process account.
 EQUIVALENT UNITS OF PRODUCTION – consist of completed units and the equivalent in
terms of completed units, partially completed Units. It refers to the total equivalent units used to
compute unit cost in a process costing system.

Methods of costing under Process Costing

 FIFO METHOD- Under this method there is assumed flow of manufacturing operation and as
considered that those units which are placed into process are presumed to be the first ones
completed and those that are first completed are those are the ones transferred out.
 AVERAGE METHOD- under this method there is no assumed flow of manufacturing operation.
It involves the merging of the departmental cost, by element of the initial work in process
inventory with the cost incurred in the current moth and securing a representative average units
cost by dividing the total element of cost by the equivalent of production based upon the sum of
the units in the initial work in process inventory and the units placed into production.
The Cost of Production Report
Cost Production Report- is an analysis of the activity in the department or cost center
Steps in Cost of Production Report

1. Quantity Schedule – The purpose of quantity schedule is to show the flow of units through department.
The schedule shows the number of unit to be accounted for in a department and it shows how those units
have been accounted for:
Units to be accounted for:
Work in Process beginning Pxxx
Units Started xxx
Total units to be account For Pxxx
Units accounted For
Finished and Transferred Pxxx
Work in Process Ending xxx
units accounted for Pxxx
2. Calculate the Equivalent units and units cost- The concept of Equivalent is basic to process costing.
Equivalent unit cost = Cost added during the period divided by the
equivalent Units.
3. Determined the cost to be accounted for
4. Account for all cost