Cost Accounting and Control

Introduction to Cost Accounting

Objectives FINANCIAL ACCOUNTING VS
1. Distinguish between Financial, MANAGERIAL ACCOUNTING
Managerial, and Cost Accounting
2. Distinguish between Merchandising *PRIMARY USERS OF REPORTS
and Manufacturing operations Financial Accounting
3. Identify the uses of Cost Accounting ● EXTERNAL USERS: Stockholders,
data creditors, and regulators
4. Distinguish between Job Order ● **Internal users may also use the
Costing and Process Costing same information to provide a basis
for financial analysis by
COST management.
● Is the cash or equivalent value Managerial Accounting
sacrificed for goods and services ● INTERNAL USERS: Officers and
that are expected to bring a current managers
or future benefit to the organization.
● Sacrifice of resources or an outlay of *TYPES AND FREQUENCY OF REPORTS
cash or promises to pay cash in the Financial Accounting
future ● FINANCIAL STATEMENTS -
ACCOUNTING Quarterly and annually
● Is a service activity Managerial Accounting
● Its function is to provide quantitative ● INTERNAL REPORTS - As
information, primarily financial in frequently as needed
nature, about economic entities that
is intended to be useful in making *PURPOSE OF REPORTS
economic decisions Financial Accounting
COST ACCOUNTING ● GENERAL PURPOSE: Help those
● Is an expanded phase of general or external users make economic
financial accounting which informs decision: credit terms, investment,
management promptly with the cost and other decisions
of rendering a particular service, Managerial Accounting
buying and selling a product, and ● SPECIAL-PURPOSE FOR
producing a product. SPECIFIC DECISIONS: Assist the
● It is the field of accounting that internal users in the planning and
measures, records, and reports control decision making process
information about costs.
● It is a system that records, *CONTENT OF REPORTS
summarizes, analyzes, and Financial Accounting
interprets the details of the cost of ● Focused on the enterprise as a
materials, labor, and overhead whole
necessary to produce and sell an ● Highly aggregated (condensed)
article. ● Limited to double entry accounting
and cost data
● Generally Accepted Accounting
Principles (GAAP)
 Cost Accounting and Control
Introduction to Cost Accounting
Managerial Accounting parties such as managers for
● Pertains to subunit of the business planning and controlling.
● Very detailed
● Extends beyond the double entry MERCHANDISING VERSUS
accounting to any relevant data MANUFACTURING OPERATIONS
● Standard is relevance to decisions A merchandising normally buys a
product that is ready for resale when it is
*NATURE OF REPORTS received. Nothing needs to be done to the
Financial Accounting product to make it salable except possibly to
● Monetary prepare a special package or display.
Managerial Accounting
● Monetary and non-monetary On the other hand, the purchase of
information materials by manufacturer is the only
beginning of a long and sometimes complex
*VERIFICATION PROCESS chain of events that will eventually produce
Financial Accounting a finished article. The manufacturing
● Audited by CPA process involves the conversion of raw
Managerial Accounting materials into finished goods through the
● No independent audits application of labor and the incurrence of
various factory expenses.
RELATIONSHIP OF FINANCIAL,
MANAGERIAL, AND COST ACCOUNTING Note:
● Although cost accounting is more
pronounced in manufacturing
operations to satisfy management’s
need for product cost information,
cost accounting information is useful
for all types of organizations.
(Merchandising, manufacturing, or
service)
● Cost accounting is essential not only
COST ACCOUNTING is the intersection
for profit-seeking entities but also for
between financial and managerial
not-for-profit organizations such as
accounting.
government agencies, churches and
charities.
Cost accounting information is needed and
used by both financial and managerial
MERCHANDISING INDUSTRY
accounting.
Merchandising companies have only
● Cost accounting provides product
one inventory - merchandise inventory.
cost information to external parties
Cost of goods sold is simply
such as stockholders, creditors and
computed by subtracting the ending
various regulatory boards for credit
inventory from the total of the beginning
and investment decisions.
inventory and purchases during period.
● Cost accounting provides product
cost information also to internal
 Cost Accounting and Control
Introduction to Cost Accounting

USES OF COST ACCOUNTING DATA

MANUFACTURING INDUSTRY The information produced by a cost
Computing cost of goods sold for a accounting system provides a basis for
manufacturing company is more complex. determining product cost and aids
Instead of one inventory accounts, management in planning and controlling
manufacturer maintains three: operations.
a. Materials inventory 1. Determining Product Costs
b. Work in process inventory ● Cost accounting procedures
c. Finished goods inventory help management in
gathering the data needed to
determine product costs and
thus generate meaningful
financial statements and
other reports.
● Cost procedures must be
designed to permit the
computation of unit costs as
well as total product costs.
1. Determining Product Costs
Unit cost information is also
useful in making a variety of
important marketing decisions.
a. Determining the selling
price of a product
● A knowledge of the
cost of manufacturing
a unit of product
helps in setting the
selling price, which
should be high
 Cost Accounting and Control
Introduction to Cost Accounting
enough to cover the able to cover costs to
cost of production, be incurred and at the
pay a portion of same time, provide
marketing and profit for the
administrative company. It must not
expenses and provide be set so high as to
a profit. It will be be able to compete
difficult to set the with the other
selling price without bidders.
knowing the costs d. Analyzing profitability
incurred in rendering ● Unit cost information
a service. enables management
b. Meeting competition to determine the
● If a competitor is amount of profit that
selling the product at each product earns
a low price, detailed and possibly
information regarding eliminate those that
unit costs can be are least profitable,
used to determine the thereby concentrating
action to be taken by efforts on those items
the company. The that are most
company would know profitable.
if selling price must 2. Planning and Controlling
be reduced, or PLANNING
manufacturing costs ● Is the process of establishing
must be reduced, or objectives and goals of the firm and
the product must be determining the means to attain
eliminated. these. Planning is essential to good
c. Bidding on contracts management because it provides
● Many manufacturing means of coordinating all of the
firms must submit operations of the firm.
competitive bids in a. Strategic Planning - setting long
order to be awarded range goals to determine overall
manufacturing direction of the company
contracts by b. Tactical Planning - plans for a
government or private shorter ranger, emphasizes plans to
firms. An analysis of achieve the strategic goals
the unit costs relating c. Operational Planning - day to day
to the manufacture of implementation of tactical plans.
a particular product is Coordination of the major factors of
of great importance in production (materials, labor,
determining the bid facilities)
price to be submitted,
The bid price must be
 Cost Accounting and Control
Introduction to Cost Accounting
CONTROL PROCESS COSTING
● Is the process of monitoring the ● Continuous production of similar
company’s operations and products
determining whether the objectives ● Costs are accumulated by
in planning process are met, if not, processing department
making necessary actions ● Several Work in process inventory
accounts - one for each department
RECENT DEVELOPMENTS IN COST ● Unit costs are computed by dividing
ACCOUNTING the individual department cost by the
equivalent production.
Cost Accounting is experiencing
dramatic changes. Manual bookkeeping has
been reduced because of the use of
computers. Changes in production methods
have made traditional applications of cost
accounting obsolete in some cases.
Increasing emphasis on cost control is seen
now in hospitals, in industries facing stiff
foreign competition and in many
organizations that have traditionally not
focused on cost control.
The traditional role of cost
accounting is to record full product cost data
for external reporting. However, the use of
accounting data for decision making and
performance evaluation has gained
importance in recent years.

JOB VS PROCESS COSTING - TWO

BASIC PRODUCT-COSTING SYSTEM

JOB ORDER COSTING

● Unique jobs are worked on during a
time period
● Costs are accumulated for each job
or batch produced
● The Job cost sheet provides the
details for the Work in process
account
● Unit costs are determined by
dividing the total costs on the job
cost sheet by the number of units on
the job.