INTRODUCTION TO COST ACCOUNTING - Concerned with financial statements for

The main objective of accounting is to provide financial external use by

information about an economic entity to different types ● Suppliers of funds
of users ○ Stockholders
○ Partners
Internal Users ○ Sole Proprietors
● Managers ● Interested in financial operations
○ Planning ○ Creditors
○ Controlling - Based on historical transaction data
○ Decision making supported by documents
- Information may be
External users ● Historical
● Government ● Quantitative
● Those who provide funds ● Monetary
● Those who have various interests in the ● Verifiable
operations of the entity - Information is usually presented in
● Financial statements
Cost Accounting ● Tax returns
- An expanded phase of general or financial ● Other formal reports
accounting which informs management - It may also be used internally to provide a
promptly with the ff: basis for financial analysis by management
● Cost of rendering services - Required for many firms organized as
● Cost of buying and selling corporations because of SEC and BIR
● Cost of producing a product
- Field that measures, records, and reports Financial Statements
information about costs - Output from an accounting system
- More pronounced in manufacturing
operations, but useful for all types Managerial Accounting
- Focuses on the needs of parties within the
Manufacturing entities organization
- Converts raw materials into finished goods - Addresses individual or divisional concerns
- Must have informations systems designed rather than those of the enterprise as a
to accumulate detailed cost data relating to whole
the production process - Information may be
- Systems should show what costs were ● Current or Forecasted
incurred and where and how these costs ● Quantitative or Qualitative
were utilized ● Monetary or Non monetary
- Manufacturing process involves - Data are futuristic and some of the costs
● Labor are not recorded on the accounting books of
● Factory Expenses the organization
● Physical Facilities - Not separate and distinct from financial
● Specialized Machinery and accounting
Equipment - No requirement or legislation that mandates
● Raw materials the format or use of managerial accounting
- Once goods are completed, manufacturer - Managerial accounting methods are tools
performs the same functions as the that are available for use to management
merchandiser in storing and marketing
goods Difference of Financial Accounting and Managerial
Accounting
Comparison of Financial, Managerial, and - Financial Accounting attempts to present
some degree of precision in reporting
Cost Accounting
historical information
● Verifiability
Two major areas of Accounting
● Freedom from error
● Financial Accounting
● Relevance
● Managerial Accounting
● Timeliness
- Management Accounting finds greater
Financial Accounting
significance in the timing of information and
- Use of accounting information for reporting
its relevance to the decision in hand
to external parties
- Measurement may be economic, physical or
● Investors
relationship
● Creditors
Cost Accounting Finished Goods Inventory
- Intersection between financial and - All manufacturing costs assigned to the
managerial accounting completed units
- Information is needed and used by both - Set up in the same way as MI in
types of accounting merchandising
- Provides product cost information to external - Costs attached to unsold items at year end
parties to external and internal users make up the ending balance
- All costs related to units sold are transferred
Merchandising versus Manufacturing to COGS and reported on the income
Operations statement

Illustration assuming there were no beginning

Merchandising Operations
inventory balances in the three inventory accounts:
- Buys a product that is ready for resale when
it is received Balanc Trans Income
- Computing the Cost of Goods sold is
straightforward Cash
● Beg. MI + NP = End. MI + COGS
● End. MI = Cost assigned to unsold Purch
items Mate Labo Fact
● COGAS - End. MI = COGS
- The only expenditure occurs when salable
goods are purchased M Mat
Illustration:
Whe
Balance Trans Income W Production Process
Cash
F Finished Goods C
Purch

+ USES OF COST ACCOUNTING DATA

Cost of Cost of - Provides a basis for determining product
cost and aids management in planning and
Merchan = Cost of Cost controlling operations
- Managerial Accounting Purpose: costs are
used inside the organization by managers to
evaluate performance of operations or
Manufacturing Operations personnel, or basis for decision making
- Computing COGS is more complex - Financial Accounting Purpose: Used by
- Maintains three inventory accounts outsiders such as stockholders or creditors
● Raw Materials to evaluate the performance of top
● Work in Process management and make decisions about the
● FInished Goods organization

Raw Materials Inventory 1. Determining Product Costs

- Purchased materials unused during - Cost Accounting procedure help
production process management in gathering the data needed
to determine product costs and thus
Work in Process Inventory generate meaningful financial statements
- Partly completed units and other reports
- Materials, labor services, and overhead - Must be designed to permit the computation
items used in the production process of unit costs as well as total product costs
- Factory overhead includes - Unit cost information is useful in
● Indirect materials ● Determining the selling price of a
● Indirect labor product
● Utility costs ● Meeting competition
● Depreciation on factory machinery ● Bidding on contracts
● Depreciation on factory building ● Analyzing profitability
● Supplies
- DM, DL, and FO are accumulated in WP Inv.
2. Planning and Control ● Managerial Accounting:
- Cost accounting helps by providing historical - use of data in choosing between
costs that serve as basis for projecting data two or more alternatives
for planning ● Applied Microeconomics
- Management can analyze trends and - Differential Cost Analysis
relationships among such data as an aid in ● Finance, Operations Management, and
estimating future costs and operating results Marketing
- Making decisions regarding acquisition of - Provides data for use in decision
additional facilities, changes in marketing making
strategies, and obtaining additional capital ● Motivation and Behavior
- Used in planning and performance
Planning evaluation
- Is the process of establishing objectives or ● Statistics, Mathematics, and Computer
goals for the firm and determining the means Sciences
by which the firm will attain them - Tools are used in performing cost
- Provides a means of coordinating all of the analysis
operations of firm
TWO BASIC PRODUCT COSTING SYSTEMS
● Strategic planning
- Setting long range goals and 1. Job Order Costing
objectives to determine overall - Allocating costs to groups of unique product
direction of the company - Applicable to production of customer
● Tactical planning specified products
- Plans for a shorter range or time - Each job becomes a cost center for which
period and emphasizes palms to costs are accumulated
achieve the strategic goals - A subsidiary record (job cost sheet) is
● Operations planning needed to keep track of all unfinished jobs
- Day to day implementation of (WP) and finished jobs (FG)
tactical plans
- Emphasizes coordination of the 2. Process Costing
major factors of production - Applicable to a continuous process of
(materials, labor, facilities) production of the same or similar goods
- No need to determine the costs of different
Control groups because the product is uniform
- Process of monitoring the company’s - Each processing department becomes a
operations and determining whether the cost center
objectives identified in the planning process
are being accomplished Job Order versus Process Costing
- Both are two traditional basic approaches to
RECENT DEVELOPMENTS IN COST product cost accounting systems
ACCOUNTING - Actual cost accounting systems may differ
- Manual bookkeeping is reduced because of widely
the use of computers - Both provide product unit cost information for
- Changes in production methods have made pricing, cost control, inventory valuation, and
traditional applications of cost accounting income statement preparation
obsolete in some cases - End of period values for COGS, WP Inv.,
- Increasing emphasis on cost control is seen and FG Inv. are computed using the product
now in hospitals, in industries facing stiff unit cost data
foreign competition, and in any organizations
that have not focused on cost control Characteristics of Job Order Costing
- Traditional Role: record full product cost - Product costing system used by companies
data for external reporting making one of a kind or special order
- Recent Years: for decision making and products
performance evaluation - DM, DL, and FO are assigned specific job
orders or batches of production
COST ACCOUNTING AND OTHER FIELDS OF - In computing unit cost, the total
STUDY manufacturing cost for each job order are
divided by the number of good units
● Financial Accounting:
produced for that order
- recording of costs
- Industries include those that make ships,
- use of cost for valuation of
airplanes, large machines, and special
inventory and COGS for external
orders
reporting
Characteristics of Job Order Costing
 - May also be used when producing a set - Hybrid costing system often used in
quantity of product for inventory repetitive manufacturing where finished
replenishment products have common as well as
- Procedures are also used in many service distinguishing characteristics
industry firms - Example: In clothing, basic suits can be
assembled in one operation, and can then
1. Collects all manufacturing costs and assigns them to move on to the next operation and have a
specific job or batches of product deluxe lining added.
- Based on variations, products and related
2. Measures costs for each completed job rather than costs are identified by batches or by
for set time periods production runs

3. Uses just one WP INV control account in the general Batch

ledger, supported by a subsidiary ledger of job order - Large orders of identical units as a group
cost cards for each job in process at any point of time through the same production sequence
- In batch production, costs are allocated to
Characteristics of Process Costing each batch
- Product costing system used by companies - Whenever a change in the production line is
that make a large number of similar products required to continue production, a new batch
or maintains a continuous production flow is created
- More economical to account for product - Generally, job costing concepts are used to
related costs for a period of time than to try account for batch production and each batch
to assign them to specific products or job is treated as a job for costing purposes
orders
- Unit costs are computed by dividing total
MAJOR DIFFERENCES BETWEEN PROCESS
manufacturing costs assigned to a particular
AND JOB ORDER COSTING
department or work center during a period
by the equivalent unit of production
- Industries include companies producing Process Costing
paint, oil and gas, automobiles, bricks, or 1. Homogeneous units pass through a series of
soft drinks similar processes
2. Costs are accumulated by processing
1. Manufacturing costs are grouped by department or department for an accounting period
work center with little concern for specific job orders 3. Unit costs are computed by dividing the
individual departments’ costs by the
2. Emphasizes a weekly or monthly time period rather equivalent production
than the time taken to complete a specific order 4. The cost or production report provides the
detail for the WP account for each
3. Uses several WP Inv. accounts - one for each department
department or work center in the manufacturing 5. Less detailed recordkeeping, lower
process recordkeeping costs
6. Does not provide as much information as job
Hybrid Costing costing because records of the cost each
● Costing system which incorporates ideas unit produced are not kept
from both job order and process costing
● Many manufacturing firms have production Job Order Costing
systems which are not suited for strictly one 1. Unique jobs are worked on during a time
costing system period
2. Costs are accumulated by individual jobs or
Relationship between these costing systems batch produced
3. Unit costs are determined by dividing the
total costs on the job cost sheet by the
Job- Hybrid Process number of units on the job
order costing product 4. The job cost sheet provides the details for
the WP account
The costing system an organization selects will mainly 5. Usually more costly than process systems,
depend on its underlying product system recordkeeping must be compared with
additional benefits that will be derived from
The choice of process costing versus job costing knowing the actual cost of each unit
systems involves a comparison of the costs and 6. Provide all of the data that process systems
benefits of each system do

Operation Costing
COSTS - CONCEPTS AND G. Controllable cost
CLASSIFICATIONS MANUFACTURING COSTS / PRODUCT
COSTS / INVENTORIABLE COSTS
Costs are associated with all types of organizations.
Generally, the kinds of costs that are incurred and the Direct Materials
way in which these costs are classified will depend on - Basic ingredients that are transformed into
the type of organizations involved. finished products through the use of labor
and factory overhead
Cost - Those that can be traced to the finished
-
Cash or cash equivalent value sacrificed for product can they form part of the product
goods and services that are expected to - All manufactured products are made from
bring a current or future benefit to the basic direct materials
organization - Timely purchasing is important because if
- Cash equivalent: non-cash assets can be the company runs out of materials, the
exchanged for the desired goods or manufacturing process will be forced to shut
services. down
- Incurred to produce future benefits in a profit - Buying too many direct materials can lead to
making firm (revenue) high storage costs
- As costs are used up, they expire - Proper storage will avoid waste and spoilage
Expenses - Cost of these materials are direct costs
- Expired costs - In some cases, even though a material
- Deducted from revenues in the income becomes part of the finished product, the
statement to determine the period’s profit expense of actually tracing the cost of a
Loss specific material is too great
- Cost that expires without producing any ● Nails in furniture
revenue or benefit ● Bolts in automobiles
● Rivets in airplanes
The focus of cost accounting is cost, not expenses - Minor materials and other production
supplies are accounted for as indirect
CLASSIFICATION OF COSTS materials
I. As to relation to a product - Indirect material costs are part of FO cost
A. Manufacturing costs / Production
cost Direct Labor
1. Direct materials - Amount paid as wages to those working
2. Direct labor directly on the product
3. Factory Overhead - Include all labor costs for specific work that
B. Non-manufacturing costs / Period can be conveniently and economically traced
costs to the end products
1. Marketing or selling - Labor services are purchased from
expense employees working in the factory
2. General or - Labor costs usually associated with
administrative expense manufacturing
II. As to variability ● Machine operators
A. Variable costs ● Maintenance workers
B. Fixed costs ● Managers and supervisors
C. Mixed costs ● Support personnel
III. As to relation to manufacturing departments ● People who handle, inspect, and
A. Direct departmental charges store materials
B. Indirect departmental charges - Wages and salaries must be accounted for
IV. Nature as common or joint as production costs and costs of products
A. Common costs - Direct Labor Costs: wages of machine
B. Joint costs operators and other workers involved in
V. As to relation to an accounting period actually shaping the product
A. Capital expenditures - Indirect Labor Costs: Production related
B. Revenue Expenditure activities that cannot be conveniently and
VI. Planning, control, and analytical processes economically traced to end products
A. Standard costs - Indirect labor costs are part of FO cost
B. Opportunity cost
C. Differential cost Direct Labor + Direct Materials = Prime costs
D. Relevant Cost Direct Labor + Factory Overhead = Conversion costs
E. Out-of-pocket cost Direct Labor + Direct Materials + Factory Overhead =
F. Sunk cost Total Manufacturing Costs
 Fixed Cost
- Remain constant in total, irrespective of the
Prime
volume of production
- Not related to activity within the relevant
Direct Direct Factory range
- Cost per unit decreases as volume
increases, and increases as volume
decreases
Conversion
- Assignable to departments based on
difference allocation methods
Total Manufacturing Costs Examples
Factory Overhead ● Salaries of production executives
- Catchall for manufacturing costs that cannot ● Depreciation of equipment computed on
be classified as direct materials or direct straight-line basis
labor costs ● Periodic rent payments
- Varied collection of production related costs ● Insurance
that cannot be practically or conveniently
traced directly to end products Classification of Fixed Cost
- Also called manufacturing overhead, factory - Depending on the ability of management to
burden, and indirect manufacturing costs influence the levels of these costs in the
short term
NON MANUFACTURING COSTS / PERIOD
COSTS 1. Committed Fixed Costs
- Represent relatively long term commitments
Marketing or Selling Expenses on the part of the management as a result of
- Include all costs necessary to secure a past decision
customer orders and get the finished product Example
or service to the customer ● Depreciation on Equipment
- Order-getting and order filling
Examples 2. Managed Fixed Costs
● Advertising - Discretionary, programmed, planned fixed
● Shipping costs
● Sales travel - Incurred on a short-term basis and can be
● Sales commissions more easily modified in response to changes
● Sales salaries in management objectives
● Expenses associated with finished goods Example
warehouses ● Advertising, research and development, and
costs of training employees
Administrative or General Expenses
- All executive, organizational, and clerical Graph of total fixed costs
expenses that cannot logically be included
under either production or marketing
Examples Total
● Executive compensation
● General accounting
● Secretarial
● Public relations
1,
● Similar expenses having to do with the
overall general administration of the
organization
1 2 3 Acti
COST CLASSIFIED AS TO VARIABILITY
Activity Fixed Cost Per Unit Total Fixed
Activity Cost
- Measure of the organization’s output of 1 1,500 1,500
products or services 2 750 1,500
5 300 1,500
Relevant Range 10 150 1,500
- In specifying cost behavior, the managerial 20 75 1,500
accountant often limits the description to a 30 50 1,500
specific range of activity
Variable Costs
- Vary directly, in total, in relation to volume of
production
- Cost per unit remains constant as volume
changes within a relevant range
- As activity changes, total variable cost
increases or decreases proportionately with
the activity change, but unit variable cost
remains the same
Examples
● Direct materials
● Direct labor Step Costs
● Royalties - Fixed part of step costs changes abruptly at
● Commission of salesmen various activity levels
- Costs are acquired in indivisible portion
Graph of Total Variable Cost - Similar to a fixed cost within a very small
relevant range
Example
Total ● Supervisors Salary

3, Graph of Step Costs

2,
1,

1 2 3 Activ
Activity Fixed Cost Per Unit Total Fixed
Cost
1 100 100
10 100 1,000
20 100 2,000
METHODS OF SEPARATING MIXED COST
30 100 3,000
INTO FIXED AND VARIABLE COMPONENTS
Mixed Cost
- Items of cost with fixed and variable 1. High Low Point Method
components Steps:
- Vary with the level of production, though not Determining the Variable Rate
in direct relation to it ● Identify the Month with the Highest Direct
- Ideally, all costs would be classified as either Labor Hours and Cost
fixed or variable, with semi variable costs ● Identify the Month with the Lowest Direct
separated into their components Labor Hours and Cost
● Calculate the Differences between the Direct
Semi Variable Cost Labor Hours and Cost of the Highest and
- Fixed portion represents a minimum fee for Lowest Month (Subtract)
making the item or service available ● Determine the variable rate per Direct Labor
- Variable portion is cost charged for actually Hour (Difference of Cost divided by the
using the service difference of DLH)
Example
● Cost of electricity
● Using a cellphone under a plan

Graph of Semi-variable cost

Determining the Fixed Rate

● Use either the High or Low Data
● Identify the Total Cost of Electricity for the
month
● Subtract the variable proportion (Variable
Rate multiplied by DLH of the month)
Formula for projecting total monthly cost

Y = FC + VC Determining the Fixed Rate

or ● Substitute the value of b in Equation 2 to
compute for a
Wherein:
Y = Total Cost
V= Variable Cost per Unit
X = Activity Level
VC = Total Variable Cost
FC = Fixed Cost

2. Method of Least Square COST CLASSIFIED AS TO THEIR NATURE OF

Formulas: COMMON OR JOINT

Common Cost
a. y = a + bx - Cost of facilities or services employed in two
b. ∑y = na + b∑x or more accounting periods
c. ∑xy = ∑xa + b - Subject to allocation
Example
Wherein:
● If two departments are occupying the same
Y = Total Cost
building, the depreciation of the building is a
a = Fixed rate
common cost subject to allocation based on
b = Variable Rate
floor area occupied
n = Months
x = Activity / DLH
Joint Cost
- Cost of materials, labor, and overhead
Steps:
incurred in the manufacture of two or more
Prepare a table calculating x, y, xy, and x2
products at the same time
- Indivisible and are not specifically identifiable
with any of the products
- Subject to allocation
Example
● DM, DL, FO cost incurred to manufacture
two or more products up to the point of split
off

COST CLASSIFIED AS TO RELATION TO AN

ACCOUNTING PERIOD

Determining the Variable Rate Capital Expenditure

● Substitute Equation 2 - Intended to benefit more than one
● Multiply Equation 2 with the quotient of accounting period
∑x and n (Equation 2 x ∑x / n) - Recorded as an asset
● Substitute Equation 3 Example
● Subtract Equation 2 from Equation 3 ● Depreciation for fixed tangible assets
(Equation 3 - Equation 2) ● Amortization for intangible assets
● Solve for b ● Depletion for wasting assets

Revenue Expenditure
- Benefits the current period only
- Recorded as an expense
Example
● Salaries Expense
● Advertising Expense
● Utilities Expense
COST CLASSIFIED AS TO RELATION TO
MANUFACTURING DEPARTMENTS

Direct Departmental Charges

- Immediately charges to the particular
manufacturing department
- Can be conveniently identified or associated
with the department(s) that benefited from
the said costs
- Cost is relevant to the department

Indirect Departmental Charges

- Originally charged to some other Relevant Cost
manufacturing department or account - Future cost that changes across the
- Later transferred or allocated to another alternatives
department that indirectly benefited from Example
said costs ● COGS
- Cost is not much relevant to the department ● Advertising
charged, but is still beneficial ● Commission
● Warehouse Depreciation
COSTS FOR PLANNING, CONTROL, AND
Out of pocket cost
ANALYTICAL PROCESSES
- requires the payment of money or other
assets as a result of their incurrence
Standard Costs
- Predetermined costs for DM, DL, and FO
Sunk Cost
- Established by using information
- Outlay has already been made and it cannot
accumulated from past experience and data
be changed by present or future decision
secured from research studies
- Not differential cost, and should be used in
- Budget for the production of one unit of
analyzing future courses of action
product or service
- Benchmark in the budgetary control system
CONTROLLABLE AND
Opportunity Cost NON CONTROLLABLE COSTS
- Benefit given up when one alternative is
chosen over the other Controllable Cost
- Not usually recorded in the accounting - Considered to be controllable at a
system particular level of management if that
- Should be considered when evaluating level has power to authorize the cost
alternatives for decision-making
Example
- If an asset can be used to perform only one
function and cannot be sold or used in some
● Entertainment expense by sales
other ways, the opportunity cost is zero manager
● Advertising before a contract is signed
Differential Cost
- Present under one alternative but is absent Non-controllable Cost
in whole or in part under another alternative - Management or a specific level of
- Incremental Cost: increase in cost from one management cannot exercise control
alternative to another
over the cost
- Decremental Cost: decrease in cost from
one alternative to another Example
- In speaking of changes in cost and revenue, ● Depreciation
economists employ the terms marginal cost ● Advertising after a contract is signed
and marginal revenue
- Marginal Revenue: revenue that can be
obtained from selling one more unit of
product
- Marginal Cost: cost involved in producing
one more unit of product
THE COST ACCOUNTING CYCLE - When products are completed, their costs no
longer belong to WP and are transferred to
The general objective of accounting is the FG Inv.
accumulation of financial information that is useful in - The balance remaining in WP Inv.
making economic decisions. Although financial represents the costs that were assigned to
statements are important, additional reports, products partly completed and still in
schedules, and analysis are required for internal process at the end of the period
planning and control.

Manufacturing Inventory Accounts

- Most manufacturing companies use the
perpetual inventory approach. Assume that a
company uses the perpetual inventory
system unless otherwise stated.
- Three accounts must be used
● Materials Inventory
● Work in Process Inventory
● Finished Goods Inventory

Materials Inventory
- Made up of balances of materials and Finished Goods Inventory
supplies on hand - FG Inv. takes on the characteristics of
- Maintained the same way as the Merchandise Inventory
Merchandise Inventory account - When goods are sold, cost of those goods
- Item taken out of Materials Inventory and are moved from FG Inv. to COGS
requisitioned into production is transferred to - All costs debited to FG Inv. represent
the Work in Process Inventory Account transfers from WP Inv.
- At the end of the accounting period, the
balance in FG Inv. is made up of the cost of
products completed but unsold

Work in Process Inventory

- All manufacturing costs incurred and
assigned to products being produced are
classified as WP Inv. costs
- Issuance of materials begins the production
process
- Manufacturing cost elements (product costs)
● People
● Machines
● Buildings
● Electricity
● Supplies
● Materials
- Direct labor is also a product cost. Costs are
assigned to specific products by including
the labor peso earned as part of WP
- Overhead are product costs and must be
assigned to specific products
- Many overhead cost accounts are
accumulated under Factory Overhead
Control. Costs are then assigned to
products using an overhead rate