LESSON 1

COST ACCOUNTING – INTRODUCTION TO COST ACCOUNTING

TOPICS TO BE DISCUSSED:
1 – COST ACCOUNTING FUNDAMENTALS
2 – MATERIAL PROCUREMENT USE AND CONTROL
3 – ACCOUNTING FOR LABOR
4 – FACTORY OVERHEAD
5 – COST VOLUME PROFIT ANALYSIS
6 – JOB ORDER COSTING
7 – PROCESS COSTING
8 – JUST IN TIME

COST ACCOUNTING OVERVIEW

PRELUDE - Measurement of Performance
Revenue, Cost, Profit

Cost Accounting
- It is a process via which we determine the costs of goods and services.
- It involves the recording, classification, allocation of various expenditures, and
creating financial statements.
- It deals with the cost of every unit, job, process, order, service, etc., whichever is
applicable and includes the cost of production, cost of selling and the cost of
distribution.

FINANCIAL ACCOUNTING VS COST ACCOUNTING

Financial Accounting Cost Accounting
Audience Involves the preparation of a Involves the preparation of a
standard set of reports for broad range of reports that
an outside audience management needs to run a
(investor, creditors, business.
government)
Format Highly specific as mandated Any format specified by
by GAAP or IFRS Management
Levels of Details Primarily focuses on Higher level of detail within
reporting the results and the company (individual
financial position of entire products, product line,
 business entity customers or subsidiaries)
Product Costs Compiles cost of raw Incorporates the reports
materials, work in process (product cost) to FS
and finished goods.
Regulatory Framework Governed by GAAP or IFRS No regulatory framework
Report Content Contains an aggregation of Can obtain both financial
the financial information information and operational
recorded through the information
accounting system
Report Timing Issue report at the end of Issue report at any time and
accounting period with any degree of
frequency, depending upon
management need for the
information
Time Horizon Only concerned with Same but also can involved
reporting the results of in variety of projections for
reporting periods that have future periods
already been completed

Importance of Cost Accounting to Management

- Classification of Costs
Ex. Cost-Volume-Profit (CVP) Analysis
- Fixing of Standards
Standard and Actual Standard favorable and unfavorable
- Cost Control
- Price Determination

FUNCTION OF COST ACCOUNTING:

• Bookkeeping – involves recording of all cost from their incurrence, then to
allocation of costs to departments, jobs, products or services.
• Cost Control – is exercised through utilization of cost information for exercising
control such as cost collection, cost analysis, cost presentation and cost
interpretation.
• Cost Analysis – it deals with the process of findings out the casual factors of why
actual cost differ from the budgeted costs.
• Cost Comparison – deals with the comparison between cost from alternative
courses of actions such as use the technology for production cost of producing
different products activities.
• Cost of Planning – involves the accounting of all cost in the records in proper
manner.
• Cost finding – is the measurement or estimation of different products department
or other segment of the company’s operation.

INVENTORY SYSTEM, COSTING, AND VALUATION

USES OF COST ACCOUNTING

1 – Cost Accounting System Actual, Normal, and Standard
2 – Inventory Valuation
3 – Cost Accumulation Methods (Procedures)
4 – Cost Flow Assumption
5 – Recording Interval Capability (Accounting system for Inventories)

COST ACCOUNTING SYSTEM

• Accounting System – is meant for simplifying the work of the manufacturers, who
need to track the flow of inventory on a continuous basis through various stages of
production.
• Actual Costing – uses actual costs incurred and allocation bases experienced; it
does not incorporate any budgeted amounts or standards.
• Standard Costing – the practice of substituting an expected cost for an actual cost
in the accounting records and variances are recorded to show the difference
between the expected and actual costs.
• Normal Costing – combination of actual costing and standard costing (direct
materials and direct labor are accumulated using actual costing and factory
overhead is accumulated using standard costing.
• Inventory Valuation Methods – used to assign cost of materials, labor, and
factory overhead for income statement reporting purposes.
• Throughput Costing – only direct materials are recorded as part of the inventory
whole direct labor and factory overhead costs are charged as an expense.
• Direct (Variable Costing) – cost are divided into two parts variable (product cost)
and fixed (period cost).
• Full Absorption Costing – all product cost (materials, labor, and factory overhead)
are capitalized in the inventory once incurred.
• Activity Based Costing – assigns factory overhead cost on the basis of direct
labor hours or machine hours.

COST ACCUMULATION METHODS (PROCEDURES)

Cost Accumulation Methods (Procedures) – the cost accumulation methods refer
to the various ways in which costs are collected or accumulated to determine the
cost of inventory.
• Job Order Costing – keeps the costs of different jobs, orders, contracts separate
during their manufacture.
• Process Costing – used when the units are not separately distinguishable from
one another during the manufacturing process.
• Backflush Costing – this method delays the costing process until the production of
goods is actually produced or completed.
Cost Flow Assumption – refers to the methods for moving the costs of a
company’s products from its inventory to its cost of goods sold.
• Specific Identification – the cost of the inventory is determined by simply
multiplying the inventory units by their corresponding unit cost.
• First In First Out (FIFO) – the goods first purchased are first sold and the goods
purchased at the end of the accounting period remain in ending inventory.
• Last In First Out – the goods last purchased are first sold and the goods in the
beginning of the period is assumed to remain in the ending inventory.
• Weighted Average – the beginning inventory units lose their separate identity
because they are combined together with the newly purchased inventory.

RECORDING INTERVAL CAPABILITY (ACCOUNTING SYSTEM)

• Perpetual – requires maintenance of records called stock cards.
• Periodic – requires the physical counting of inventories on hand at the end of the
accounting period to determine the total inventories.

COST FLOW ESTIMATION/ FLOW OF PRODUCT AND PERIOD COST

PRODUCT COST: Direct Material, Direct Labor, Factory Overhead

MERCHANDISING & MANUFACTURING COMPANY

Merchandising Company- is a company that buys merchandise (finished goods from
other businesses with the intent of reselling it to a customer at higher price.
Manufacturing Company – is a company that buys raw materials, converts them into
finished products and then sells the products to customers.