INTRODUCTION

TO COST
ACCOUNTING
Cost Accounting
▸ Cost accounting is the Pricing
process of tracking, recording
Financial Process
and analyzing costs ssociated statements Review
with the products or activities
of an organization. Financial Managerial
Cost Control
Accounting Accounting
▸ Cost accounting is a staff Performance
Evaluation
function that provides advice
to those in the line position. Cost Accounting

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Two Basic Stages
Cost Object
Cost ▸ Cost accumulation is the collection of cost
Item #1 data in an organized way by means of an

Cost
Item #2
A Cost
Item #1
▸
accounting system.
Cost assignment is a general term that
embraces both cost tracing and cost
Cost
Item #3 B Cost
Item #2
▸
allocation.
Cost object refers to any unit, activity, or
Cost segment for which management wants to
Item #4
C Cost
Item #3
▸
accumulate and measure a cost.
Cost tracing refers to the assignment of
direct costs to a particular cost object.
Stage 1: Stage 2: ▸ Cost allocation refers to the assignment of
Cost Accumulation Cost Assignment indirect costs to several cost objects.

o Cost Tracing
o Cost Allocation
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Cost Classifications
Direct Material
Fixed
Direct Prime Cost
Remains constant
Direct Labor Manufacturing/ regardless of changes
Directly traceable Financial
Product Costs in activity level
to a cost object
Conversion Accounting
Associated with
Cost production activities; Variable
inventoriable
Factory
Varies in total as
Overhead
activity level
Production costs changes
Indirect other than direct
costs
Fixed
Difficult to trace to Non-
Non- Manufacturing/
a cost object or
common to several manufacturing Period Costs
cost objects Costs associated with Variable
selling, administrative;
expensed outright
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Direct and Indirect Costs
Mahogany Table Bamboo Chair Steel Cabinet
Direct Indirect Direct Indirect Direct Indirect

Welder Production Factory Tools dep’n. (TD)

TD Utilities (U)
U
Mahogany Bamboo Steel Common Bamboo
lumber pieces sheets carpenter craftsman Screws Supervisor Janitor Factory dep’n. (FD)
FD Factory
PS
(PS) FJ
(FJ) Factory rent (FR)
Paint FR insurance (FI)
FI

Production Department
► Direct costs are traced.
Direct Indirect ► Indirect costs are allocated.
ML, BP, SS, CC, BC, E.g., Allocated costs ► The classification whether
W, P, S, PS, FJ, TD, from Administrative direct or indirect depends on
FD, FR, U, FI offices the cost object.

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Direct and Indirect Costs
Mahogany Table Bamboo Chair Steel Cabinet
Direct Indirect Direct Indirect Direct Indirect

Welder Production Factory Tools dep’n. (TD)

TD Utilities (U)
U
Mahogany Bamboo Steel Common Bamboo
lumber pieces sheets carpenter craftsman Screws Supervisor Janitor Factory dep’n. (FD)
FD Factory
PS
(PS) FJ
(FJ) Factory rent (FR)
Paint FR insurance (FI)
FI

Production Department
► Direct costs are traced.
Direct Indirect ► Indirect costs are allocated.
ML, BP, SS, CC, BC, E.g., Allocated costs ► The classification whether
W, P, S, PS, FJ, TD, from Administrative direct or indirect depends on
FD, FR, U, FI offices the cost object.

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Manufacturing/Product Costs
Prime Costs Direct Materials: Mahogany lumber
Direct Labor: Common carpenter

Conversion Direct Labor: Common carpenter

Costs Overhead: Screws, paint, production supervisor, factory janitor,
tools dep’n., factory dep’n., factory rent, utilities, factory insurance

Prime Costs Direct Materials: Bamboo pieces

Direct Labor: Bamboo craftsman

Conversion Direct Labor: Bamboo craftsman

Costs Overhead: Screws, paint, production supervisor, factory janitor,
tools dep’n., factory dep’n., factory rent, utilities, factory insurance

Prime Costs Direct Materials: Steel sheets

Direct Labor: Welder

Conversion Direct Labor: Normal carpenter

Costs Overhead: Screws, paint, production supervisor, factory janitor,
tools dep’n., factory dep’n., factory rent, utilities, factory insurance

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Non-Manufacturing/Period Costs

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Fixed and Variable Costs
TOTAL COST PER UNIT COST
FIXED COSTS Remains constant regardless Changes in inverse proportion to
of change in activity level the change in activity level
VARIABLE Changes in direct proportion to Remains constant regardless of
COSTS the change in activity level change in activity level

FIXED COST VARIABLE COST

► Production supervisor ► Direct materials: Mahogany lumber
► Tools depreciation Bamboo pieces, Steel sheets
► Factory depreciation ► Direct labor: Common carpenter,
► Factory rent bamboo craftsman, welder
► Factory insurance ► Paint, screws, utilities, factory janitor

Relevant range – the range of activity where the assumption about cost behavior is valid.

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THANKS!
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