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AC-1203-Intro_2025

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AC-1203-Intro_2025

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mcrahney1444
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AC 1203 (COST ACCOUNTING &

CONTROL)
2ND SEM SY 2024-2025
ORIGIN OF COST ACCOUNTING

The roots of cost accounting can be traced back to the industrial revolution in the late 18th and early 19th centuries. As
industries grew in complexity and size, businesses began to require more detailed financial information to manage their
operations effectively. The idea was to help the businessmen to record and keep track of their costs and expenses.
Before the golden age of industrialization, most of the expenses of these businesses were categorized as variable
costs. However, when industrialization took off, these businesses had more ‘fixed costs’ which are the costs not directly
related to the production of goods or services such as rent, depreciation, and storage costs. As railroads, steel industry
and other such large industries developed, understanding of fixed costs became important. Allocating them became of
importance to managers and owners for their decision making, pricing, and product development. This led to the origin
of modern cost accounting. Cost accounting has seen rapid evolution and growth in the business world. New procedures
and techniques were developed to further refine the process of cost accounting.
When cost accounting was developed in the 1890s, labor was the largest fraction of product cost which was
considered as variable cost. Born in 1862, Jerome Lee Nicholson, often called the Father of Cost Accounting,
entered the professional practice of accountancy in New York in 1889, under his own name. The firm name was later
changed to J. Lee Nicholson and Co. After the origin and evolution of cost accounting, management accounting was the
next field of accounting being developed. Cost accounting is not GAAP-compliant, and used internally by management
in order to make fully informed business decisions. Hence, it is regarded as a form of managerial accounting that aims to
capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed
costs. Cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of
management. It is an internally focused, firm-specific system used to implement cost controls. There are many
types of costs involved in cost accounting, each performing its own function for the accountant. Individually assessing a
company's cost structure allows management to improve the way it runs its business and therefore improve the value of
the firm.
FATHER OF COST ACCOUNTING
In 1913, Nicholson published Cost Accounting Theory
and Practice, a very famous textbook which shows the
results of his teaching experiences at New York and
Columbia Universities. In 1919, Nicholson conceived and
organized the National Association of Cost
Accountants (NACA). For a start he had initiated a
special meeting of the American Institute of Accountants
to talk about the subject of cost accounting in
manufacturing industries. This meeting was held October
13, 1919 in Buffalo, New York, and led to the founding of
the NACA, forerunner of the Institute of Management
Accountants (IMA). He was elected its first President in
1919–1920. Nicholson’s experiences as head of a
management consulting firm focused his attention on the
relationship between cost accounting and
industrial efficiency. He emphasized that cost accounting
is a service function whose value depends on its
usefulness to other departments. He refined and
disseminated new knowledge about cost accounting,
which had recently undergone revolutionary changes...
As one of the earliest American cost accountants to
teach the subject at the university level, he helped
standardize practice and facilitate the interaction of ideas
between the academe and practitioners.
WHAT IS COST ACCOUNTING?

•A specialized branch of accounting which involves


cost classification, cost accumulation,
cost assignment and control of costs
used in determining the unit cost and the total cost
in product costing as well as in service costing.
COST ACCOUNTING
plays as the foundation of financial and management
accounting. One cannot prepare financial statements
nor generate internal management reports without
first determining accurately as possible the cost of
the product or service it provides.
USES OF COST ACCOUNTING INFO.
Provides the detailed cost information
that management needs
to control current operations and plan for the future.
Management uses this cost information
to decide how to allocate resources to the most
efficient and profitable areas of the business.
A COST ACCOUNTING SYSTEM
is an AIS or framework used by firms
to estimate the cost of their
products/services
for profitability analysis,
inventory valuation
and cost control.
FIVE (5) PARTS OF A COST
ACCOUNTING SYSTEM
1. an input measurement basis
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2. an inventory valuation method
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3. a cost accumulation method,
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4. a cost flow assumption, and
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5. a capability of recording inventory cost flows at

certain intervals
INPUT MEASUREMENT BASIS
The basis of a cost accounting system
begins with the type of costs that flow
into and through the inventory accounts
using either Actual Costing, Normal
Costing or Standard Costing.
INVENTORY VALUATION METHOD
Applying the method of valuing inventories such as throughput
costing, ABC, absorption or full costing, direct or variable costing.
Throughput costing involves tracing the least amount of cost to the
inventory, while activity based costing includes tracing the
greatest amount of costs to the inventory. In direct (or variable)
costing, a greater amount of cost is traced than in the throughput
costing, but less than the full or absorption costing method. Direct
costing and full absorption costing are the traditional methods,
while the throughput and activity based methods are relatively
new. These inventory valuation methods are very important
because they control the manner in which net income is
determined.
COST ACCUMULATION METHOD
Cost accumulation refers to the manner in which
costs are collected and identified with specific
customers, jobs, batches, orders, departments and
processes. Such method will include job order
costing, process costing, hybrid or operation costing,
joint product costing, standard costing, ABC and
backflush costing. They are influenced by the type of
production operation and the extent to which detailed
cost accounting information is needed by
management.
COST FLOW ASSUMPTION
refers to how costs flow through the inventory
accounts, not the flow of work or products on a
production line. This distinction is important because
the flow of costs is not always the same as the flow
of work. The various types of cost flow assumptions
include: Specific Identification (e.g., by job), First-In,
First-Out (FIFO), and Weighted Average method.
RECORDING INTERVAL CAPABILITY
Inventory records can be maintained using either perpetual or a
periodic inventory basis. Conceptually, the perpetual inventory
method provides a company with the capability of maintaining
continuous records of the quantities of inventory and the costs
flowing through the inventory accounts. The periodic method, on
the other hand, requires counting the quantity of inventory before
inventory records can be updated. In the past, manufacturers
tended to keep perpetual inventories, while retailers used the
periodic method. However, today a variety of modern Point Of
Sale (POS)devices and dedicated microcomputer software are
readily available to provide any company with perpetual inventory
capability.
FIVE PARTS OF A COST
ACCOUNTING SYSTEM
DEFINITION OF TERMS
Reporting costs means providing cost
information to various stakeholders.
Estimating costs means the process of
forecasting a future result in terms of cost
based on information available at that time.
Actual cost means an amount determined on the
basis of costs incurred including standard cost
properly adjusted for applicable variance/s.
Indirect cost pool means a grouping of incurred
costs identified with two or more objects but not
identified specifically with any final cost objects.
FLOW OF COSTS
WITHOUT JOURNAL ENTRIES
DM
MATERIALS
IM

DL
LABOR
IL

OVERHEAD OIMC
3 CLASSES OF INVENTORIES
HELD BY MANUFACTURING FIRMS

Materials

Work In Process

Finished Goods
Raw Materials are the unprocessed materials that have not been
converted yet or have not undertaken the conversion process.
They are extracted from minerals or produced from natural or
chemically created substances. Example: Crude Oil ; Wood
The materials that become part of a certain manufactured product
and can readily be traced or identified with that product are called
Direct Materials.
Used in the … Examples of Direct Materials
making of furniture Lumber
making of tires Natural and synthetic rubber
production of clothing Fabric
production of steel products Iron Ore
INDIRECT MATERIALS
are those materials needed to complete a product but the
use of which is so minimal or so complex that treating them
as direct materials is futile. They may become an integral
part of the finished product but tracing it into the product
involves great cost and inconvenience; or those materials
and supplies whose costs are relatively insignificant, making
it not cost effective to trace them to specific products.
Example: Glue; nails; sandpaper used in sanding
furniture; rivets; lubricants used on machinery;
and other items for general factory use.
DIRECT LABOR VS. INDIRECT
LABOR COSTS
Only labor costs involved in the hands-on production of goods
and services which are directly traceable to the finished product is
considered as product cost called Direct Labor. The distinction
between direct and indirect labor is important because it helps:
(i) To determine accurate product cost,
(ii) To measure efficiency of performance,
(iii) To minimize error in overhead allocation, and
(iv) To ensure better cost analysis for decision-making and control.
Examples of indirect labor are as follows:
 Labor employed as supervisors, repair workmen,
inspectors.
 Maintenance workers such as workshop cleaner,
mechanics, etc.
 Wages paid to those engaged in purchasing, stores,
factory office, time-keeping, canteen, etc.
SAMPLE # 1
You are changing the way that you do production.
Instead of making 1,300 units, you will be able to make
1,450 units. The total costs will go from P125 to P140.
What is the marginal cost?
A. P1.50
B. P1.40
C. P0.12
D. P0.10
SAMPLE # 2
It costs P1.25 to make each wallet. The
marketing cost is P1,500 and the
warehouse cost is P2,500. What is the
total average cost for 5,000 wallets?
A. P1.55
B. P 1.65
C. P 2.05
D. P 2.25

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