ee eae mi at o INTRODUCTION TO Cost ACCOUNTING LEARNING OBJECTIVES Upon ee this chapter, you should be able to: * Distinguish between financial managerial, and cost accountin; ee > , iB « Distinguish between merchandising and manufacturing operations ¢ Identify the uses of cost accounting data * Distinguish between job order costing and process costing ‘The main and primary objective of accounting is to provide financial information about an economic entity to different types of users. First we have internal ‘users — Managers for planning, controlling and decision making. Then we have external users — the government, those who provide funds and those who have various interests in the operations of the entity. Cost Accounting is an expanded phase of general or financial accounting which ‘informs management promptly with the cost of rendering a particular service, and selling a product, and producing a product. It is the field of accounting ‘measures, records, and reports information about costs iness entities - manufacturing, merchandising, and service ee rianon systems which provide the necessary financial data, of the nature of the manufacturing process, the information systems of ing entities must be designed to accumulate detailed cost data relating to . Thus, it is common today for small, medium, and large Beene to have structured costs accounting systems. These ould show what costs were incurred and where and how these costs were — fing today is recognized as being essential to efficient ‘of business and industry. pee portance of an efficient cost system, it is necessary to c Ofte menu ctoring process. In many ways, the activities of a tization are similar to those of a merchandising business. Both rchasing, storing, and selling goods; both must have efficient mate sources of capital; both may employ hundreds or Tn the manufacturing process itself, we see the distinctionCost Accounting buys items in marketable form two: merchandisers, such as SM which bu PHILACOR. which makes Once the merchandising organization has acquired and sions, the goods they sel. a ut the marketing function. The purchase of materia sy ‘goods, it Ei aia is only the beginning of a long, and eaetiies complex, aa avents that will eventally produce a finished article ready: for sale chain the ‘ reba eel to their i sion of rai materials into tinished Dae TOC Ge onde ineurence of various factory Se ee ee major investment in physical facilities Fee eT PeMTAIRTE MCSPENN ery speed types i Baer Yar euicine rt Grier fo Gay te manfacticing proces, ts Inanufacturer must purchase appropriate quantities of raw materia I. Pe esa pars and build up a work fore to conver these resources into finished woods Dace the goods are completed and are ready forsale, the manufacturer performs basica the same functions asthe merchandiser in storing and marketing the woods | Ineihods of accounting for sales, cost of goods sold, and selling and administrat expenses are also similar to those ofthe merchandising organization Although cost accounting is more pronounced in manufacturing operations to satis management's need for product cost information, cost accounting information is useful forall types of activities in all types of Organizations. Cost accounting is Sap ul tot only for proftseeking entities but also for not-for-profit organizations Such as governmental agencies, churches, and charities There are two major managerial accounting. al accounting. ani Porting to external accounting is primarily Pe ho sop ly funds 10 interest in the financial operations a panne are oldrs (the owners 0! the If the finan 4 Sole proprietors. c Nan aceg cia! statements Of the bccounting system, The Nerprise as a whote Fin, FMation m, tical an Is for external who may have vested Suppliers of funds include 5 dilors, entity. The Feports prepared !Meial accounting wy be historical id are supported by Counting is usuallyChapter 1 Introduction to Cost Accounting Presented in the form of financial statements, tax returns, and other formal reports distributed 10 various €xtemal users. The same information may also be used internally to provide a basis for financial analysis by management. Financial accounting is required for many firms Organized as corporations because of the requirements of the Securities and £ change Commission. The Bureau of Internal Revenue also requires financial accounting information for y compliance the country’s tax laws, Information based on accounting data is . required forall firms without regard to their size, ic ; e Managerial accounting focuses on the needs of Parties within the organization, d rather than interested parties outside the organization. ¢ information commonly addresses individual or divisional c y of the enterprise as a whole. The information may be current or forecasted, : quantitative or qualitative, monetary or non-monetary and most of all the data are futuristic and some of the ‘Costs are not recorded on the accounting books of the organization Managerial accounting is not separate and distinct from financial accounting Financial accounting data are used in the managerial accounting system Management decisions made today will affect the financial Statement of future Beriods. There is no requirement or legislation that mandates the fornet o- wae we managerial accounting, Managerial accounting methods are tools thet are svailabie for use to. management. Financial accounting attempts to present some degree of precision in reporting historical information white at the same time emphasizing verifibility and fender From bias in the information, relevance to the general user and some degree oF Aimeliness in reporting which is not as critical in managerial accounting. Toe timing OF information and ils relevance to the decision on hand has greater significance to the internal decision-maker. Management is more concerned on the timeliness of the information so management cannot wait until tomorrow for information tat is “Fequired for today’s decision. neasuring based in managerial accounting does not necessarily hav W to pesos. Various bases may be appropriate to report mich tion. Examples include: (1) an economic measure such as pesos: (2) a tons, or units; and (3) a relationshipCost Accounting 4 ing is the i etween financial and mana ting is the intersection be ra Goat sesamin nvormation is needed and used by both finan I ima i unt 0s ct cost information to extemal parties, ing. Cost accounting provides product cos! ; a Erne, creditors and various regulatory boards for credit and investment decisions. Cost accounting provides product cast information also io internal parties such as managers for planning and controlling, accountin, and Manager Relationship of Financial, Management, and Cost Accounting FINANCIAL cost ACCOUNTING |ACCOUNTING MANAGEMENT | ACCOUNTING | / / Merchandising versus Manufacturing Operations Much of our accounting education has centered on the i ‘Thus, it is important here to explain the difference in ee firms and merchandising firms, Many types of busi costs, but doing so is especially important in manufact ising organization counting for Manufacturing nesses gather information on turing. 3 ‘unsold item: “da Traiflerence between the cost en goods avainng UP the ending inventory balance. °F Bo0ds sold duting the we fOr sale and ending inventory Period. The following example shows 2S Tol phan Peay P 5,000 ‘sale 24.000 29,000on. ing Chapter 1 Introduction to Cos; Accounting a The example in the previous page and Figure 1-1 show how easy itis to compute the Sable eas Sold fora merchandising company. ‘The only expenditure occurs when falable woods are purchased. Any item unsold at year end make vp the ending Treen, lance: | Cost of goods sold is computed by subtracting the ending Inventory (MI end) balance from the total of the beginning inventory balance and Purchases during the period, Figure I-1. Cost of Goods sold for a Merchandising Company Balance Sheet Preparation Transaction Income Statement Preparation Purchases Plus: Merchandise Inventory beginning Cost of — | Goods Sold Cost of Goods Cost of Available for Unsold Items | sale old itemsCost Accounting Figure 1-2 Cost of Goods Sold for a Manufacturing Company Balance Sheet Transactions Income Statement Preparation Preparation Cash —Purchase of _ Materials Labor Factory OH Materials Storage J iltretion assim z [UHI thre were my beginning inventory bert ances is theChapter 1 Introduction to Cost Accounting @ Computing the cost of woods sold for a manufacturing company is more complex, As shown in Figure 1-2 instead of one inventory account, a manufacturer maintains three inventory accounts: Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. Purchased materia unused during the production fied plus ann CP, tHe” ending” Materials Inventory belance, The cost of materials Used plus the costs of labor services and factory overhead are transferred to the Work in Process Inventory account whey the materials, labor services, and Guerhead items are used in the production process, (Factory overhead includes such items as indirect materials, indirect labor utility costs, depreciation of factory machinery, depreciation of factory building, and supplies), The three types of costs (abboregiaeasy DRT called: direce materials, direct lator vot factory overhead (abbreviated DM, DL. and FO), These costs are Accumulated in the Work in Process Inventory (WP Invtry) Account during an accounting period. When a batch or order is completed. all manufacturing costs assigned to the completed units are moved to the Finished Goods Inventory account. Costs remaining in the Work in Process {nventory account belong to partly completed units, These cot. make up the ending falance in the Work in process Inventory account, The Frenne Goods Inventory (FG Inventory.)Account is set up in the same way as the Merchandise Inventory Finished Gancts Metehandising. Costs of completed yoods are entered ne the [inished Goods Inventory account Then costs attached to unsell ca at year end make up the ending balance in the Finished Goods Inventory secon All costs related to units sold are transferred to the Cost of Goods Sold account ead reported 6n the income statement USES OF COsT ACCOUNTING DATA ‘The information produced by ‘a cost accounting system Provides a basis for determining product cost and aids management in planning. and controlling operations. Determining Product Costs Ost accounting procedures help management in gathering the dia needed to Aetermine product costs and thus generate meaningful financial statements naa other _T=PorIs. Cost procedures must be designed to permit the computation of unit costs as ell as total product costs. For example. it a Mmanuliteturer spent P10, 060 for labor 8 certain een the information is insignificant; but if this labor produced 5.000 nits, the fact that the cost of labor was P2 per unit is significa because an be compared to the unit labor vost of other periods and the trendsCost Accounting Unit cost information is also usetial in making a variety of important: markc decisions. 1. Determining the selling price of a product. A knowledge of the cos! of manufacturing @ unit of product helps in setting the selling price, whic should be high enough to cover the cost of production. pay a portion os marketing and administrative expenses and provide a profit, It will be difficult to set the selling price without knowing the casts incurred in ¢ manufacture of a product and cost incurred in rendering a service. Nv ~ Meeting competition. |f a competitor is selling the product at a low price detailed information regarding unit costs can be used to determine the actio to be taken by the company. The company would know if selling price be reduced, or manufacturing costs must be reduced. or the product musi.» eliminated. ay eon = een Many ‘manufacturing firms must submit competitive on nie awarded manufacturing contracts by the government analysis of the unit Costs relating to the manufacture of the same provide profit for the com beable to compete with other bidders SOst accounting; i ting is the “sa Planning ang oo ofthe process of establishiny objectives or goals for the means by which the firm will attain them, Plasnin ement because it provides an Cost accounting helps in ans of velopment c ovid tnd sch ts for projecting data for planning. Mensserens mating Felatlonships: among such data as an aid ik esr mating fut tities chert’ and in making decisions reparding the sete eness i marketing strategies, and obtaining additional capt ional facilities. c n be divided into three (3) components Strategic planning — concemed with setting long range goals and objectives to determie the overall direction of the company * jsctical planatag ~ concerned with plans for a shorter range (or time Bosicd) and emphasizes plans to achieve the strategie goals Pmcniions Pltaming — relates i he ay today implementation of actical Plans. At Emphasizes the coordination of the major fae production (materials, labor and facilities) Control is the process of monitoring the company’s operations and di ‘whether the objectives identified in the planning process are being accomplished. RECENT DEVELOPMENTS IN Cost ACCOUNTING Cost accounting is experiencing dramatic changes Manual bookkeeping has been atcedl Because of the use of computers. Changes ip Production methods have Tage taditional applications of cost accounting obsolere some cases. Increasing crores ost control is seen now in hospitals, in indvesoe facing stif conan? and In many organizations that have ‘raditions hot focused control ‘The traditional role of cost accounting isto record fut Product cost d Pertomncs MeN tie se of accounting data for dec performance evaluation has gained importance in roserz years, lata for external ion making and SOST ACCOUNTING AND OTHER FIELDS OF sruDy 2 prod accounting. for externalCost Accoun ing 10 marketing. Cost accounting is also relate iv id behavior because it is 10 motivation and be in pl and perfo Sie Finally. tools from statistics, ! valuation. Fir ii used in planning « j nal i mathematics, and computer sciences are used to perform cost ahalysi TWO BASIC PRODUCT-COSTING SYSTEMS i duct. 1 1. Job order costing - a system for allocating costs to alee Sis cepicatle 15 the production of customer specified products peu encire Of special machines. Each job becomes a cost center ie i an Costs are accumulated. A subsidiary. record (job, cost fier) eat is mn iy track of all unfinished jobs (work in process) and finished jot. finishc ) 2 Process costing - a system applicable to 2 continuous process of production of the same or similar goods, e... oil refining and chemical production. Sine there is no need to determine the costs of dilferent #Foups of products because ‘he product is uniform. each processing department becomes a Cos center. Job Order versus Process Costing {ob order costing and process costing are the two traditional basic approaches to Predict cost accounting systems. Actual vost accounting systems may differ widely However all are based on one of thes ing Concepts. Once the wire of system is selected. it is then adjusted 10 fit a particular industry. company. creating depariment..‘The Sbicetive of the two systems is the same. They both ae Product unit « : Pricing. cost contro, faventory valuation, Work ote Siatemen preperation, ihm petiod values fur the Con oF Guods Sold, it Process Inventory. and Finfenen Goods inventory accounts aoe 5°! sing produc unt oe * accounts are computed OF Characteristics of Joh A Job order cost scouting syteyy making one-of-a-kind or Speciaorde pce direct labor, and factory overhead costs si In Computing unit ost order are divided by the umber of won rie that use & job order cost Scout seston inc large machines, and speciay 5 lobo Producing a set quantity of a Order CosChapter Introduction to Cost AccOunting i production run of 500 identical lawn Mowers, Procedures similar to those used in Job-order costing are used in many service industry firme cava these firms have no wark in process or finished goods inventories, In a public iecounting firms, for example. costs are assigned to audit engagements, For consulting and architectural firms. costs are assigned to contracts, while for universities it m ybe for every research project. ‘The primary characteristics ofa job order cost system are a follows: 1 Wt collects all manufacturing costs and assigns them to specitic job or batches of product. 2) {measures costs for eacti completed job. rather than for set time periods, 3) It ses just one Work in Process Inventory Control account in the general ledger. This account is supported by’ a subsidiary ledger of job onder ony ‘cards or sheets for each job in process at any point of time. of Process Costing cos accounting system is a product costing system used by companies Hay ake a large number of similar products or maintain a continuous production Maw, tn these enses, it is more economical to account for product-reloted cones ran Period of tiie (a seek oF a month) than to try to assign them to specific products or Hob orders. Unit eosts are computed by dividing total manufacturing costs ascigned th a Particular department or work center during a period by the equivalent urit of Production. If a product is routed through four departments, then four unit coe Sra ats aided to find the product's total unit cost. Companies producing painn ail ancl gas. sukomobiles. bricks, oF soft drinks use some torm of a procese costing “Fhe main characteristics of a process cost accounting system are as follows: 1) Manufacturing costs are grouped by departnent or work center, with lithe concern for specific job orders, 2) Wemphasizes a weekly oF monthty tinny peviea raher than the time taken to complete a specifi ord 4) Ie uses several Works in Process Inventory: accounts ~ one for each department or Work center in the manufacturing process, Many manuttcturing firms have product Job-order costing of process costing. bu systems which are not suited for strictly stead require a costing system whichCost Accounting 12 3 of ideas is knowr : as hybrid costing incorporates ideas’ from both. This blendi e rel ship between these cost The continuuin below demonstrates the relationship bev Ie Sy sh Job-order ————» Hybrid, Sic eaktin otc costing system ct-costing eel systems 3 The costing system an organization selects will mainly depend on its unde! : production system. Operation costing is a hybrid costing system otien ce repetitive manufacturing where finished product have common, as well distinguishing characteristics. For example. in the manufacture of clothing, suits can be assembled in one operation, These suits can then move on to the next operation and have a deluxe lining added. Based on the variations, the products and the related costs are identified by batches or by production runs. A television assembly plant, which produces a basic chassis and component system. but whic! varies options such as remote control and cabinetry would be a logical user of operation costing. ‘Some companies Production sequence. Each of the mM new batch is created. A furniture manufacturer then a batch of tables, pa teh » then a batch of drawers, and so » Job costing concepts are used to account for batch production and is treated as a job for costing purposes, z : ray produce a batch of chairs, forth. Generall each batch ae CESS & JOB ORDER COSTING ee ert np hg : JOB ORDER CosTING aa oa i pee jobs are worked on during a Proces: fe peri 2. Costs are accumulated by Processing departinent 2 as are accumulated by individual 3. Uni i : 3. Unit ividual departments’ conte rans ate determined by dividing the equivatent production e ie nt On the job cost sheet by of units on the job. ssChapter 1 Introduction to Cost Accounting 13 4, The cost of production report provides 4 the detail for the Work in Process account for ach department The job cost sheet provides the Details for the work in Process account In job costing, costs are accumulated for each job or batch produced. In process costing, costs are accumulated by department for an accounting period (for exampl a month) Process costing has less detailed recordkeeping, hence, if a company was choosing between job and process costing, it would generally find that recordkeeping costs are lower under process costing. Process costing does not provide as much information as job costing because records of the cost of each unit Produced are not kept using process costing. The choice of process versus job costing systems involves a comparison of the costs and benefits of each system, AS a general rule job systems are usually more costly than process systems. So if managers and accountants must decide whether to use job costing or process costing. recordkeeping costs must be compared with additional benefits that will be derived from knowing the actual cost of each unit. If recordkeeping costs. were equal under Job and process systems, for the units in a product line, then the job costing systems are better because they provide all of the data that process systems do.