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1.1 Definition of Cost Accounting: Alfonso T. Yuchengco College of Business

The document provides an overview of cost accounting, including its definition, general principles, objectives, importance, differences from financial accounting, and relationship to management accounting. Specifically, it defines cost accounting as the process of classifying, accumulating, assigning and controlling costs, and outlines its key objectives like analyzing costs and determining cost of production.

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Juan Frivaldo
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60 views3 pages

1.1 Definition of Cost Accounting: Alfonso T. Yuchengco College of Business

The document provides an overview of cost accounting, including its definition, general principles, objectives, importance, differences from financial accounting, and relationship to management accounting. Specifically, it defines cost accounting as the process of classifying, accumulating, assigning and controlling costs, and outlines its key objectives like analyzing costs and determining cost of production.

Uploaded by

Juan Frivaldo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ALFONSO T.

YUCHENGCO COLLEGE OF BUSINESS

MODULE 1

Topic 1: OVERVIEW OF COST ACCOUNTING

1.1 Definition of Cost Accounting

It is a specialized branch of accounting which involves classification, accumulation,


assignment and control of costs.

It is the process of accounting for costs from the point at which expenditure is incurred
or committed to the establishment of its ultimate relationship with cost centers and cost
units. In its widest usage, it embraces the preparation of statistical data, the application
of cost control methods and the ascertainment of profitability of activities carried out or
planned.

It is the classifying, recording and appropriate allocation of expenditure for


determination of costs of products or services and for the presentation of suitably
arranged data purposes of control and guidance of management.

1.2 General Principles of Cost Accounting

1. A cost should be related to its causes.


2. A cost should be charged only after it has been incurred.
3. The convention of prudence should be ignored.
4. Abnormal costs should be excluded from cost accounts.
5. Past costs not to be charged to future period.
6. Principles of double entry should be applied wherever necessary.

1.3 Objectives of Cost Accounting

1. To analyze and classify all expenditure with reference to the cost of products and
operations.
2. To arrive at the cost of production of every unit, job, operation, process, department
or service and to develop cost standard.
3. To indicate to the management any inefficiencies and the extent of various forms of
waste, whether of materials, time, expenses or in the use of machinery, equipment
and tools.
4. To provide data for periodical profit and loss accounts and balance sheets at such
intervals, e.g. weekly, monthly or quarterly as may be desired by the management
during the financial year, not only for the whole business but also by departments or
individual products. Also, to explain in detail the exact reasons for profit or loss
revealed in total in the profit and loss accounts.
5. To reveal sources of economies in production having regard to methods, types of
equipment, design, output and layout. Daily, Weekly, Monthly or Quarterly
information may be necessary to ensure prompt constructive action.
6. To provide actual figures of costs for comparison with estimates and to serve as a
guide for future estimates or quotations and to assist the management in their price
fixing policy.
ALFONSO T. YUCHENGCO COLLEGE OF BUSINESS

7. To show, where Standard Costs are prepared, what the cost of production ought to
be and with which the actual costs which are eventually recorded may be compared.
8. To present comparative cost data for different periods and various volume of output
and to provide guidance in the development of business. This is also helpful in
budgetary control.
9. To record the relative production results of each unit of plant and machinery in use
as a basis for examining its efficiency. A comparison with the performance of other
types of machines may suggest the necessity for replacement.
10. To provide a perpetual inventory of stores and other materials so that interim Profit
and Loss Account and Balance Sheet can be prepared without stock taking and
checks on stores and adjustments are made at frequent intervals. Also, to provide
the basis for production planning and for avoiding unnecessary wastages or losses of
materials and stores.

1.4 Importance of Cost Accounting

1. Costing as an aid to management:


- helps in periods of trade depression and trade competition.
- aids price fixation.
- helps in making estimates.
- helps in channelizing production on right lines.
- eliminates wastages.
- makes comparisons possible.
- provides data for periodical Profit and Loss Account.
- helps in determining and enhancing efficiency.
- helps in inventory control.
2. Costing as an aid to creditors
- provides a base for judgement about the profitability and further prospects of
the company
3. Costing as an aid to employees
- makes available systems of incentives, bonus plans etc.
- indirectly benefits through increase in consumer goods and directly through
continuous employment and higher remuneration
4. Costing as an aid to national economy
- facilitates control of costs, elimination of wastages and inefficiencies, thus,
leading to the progress of the industry and in consequence of the nation as a
whole

1.5 Financial Accounting and its Limitations

Cost Accounting is a branch of accounting and has been developed due to limitations of
financial accounting.

Financial accounting is a branch of accounting that is primarily concerned with record


keeping directed towards the preparation of financial statements (such as the balance
sheet and income statement).

The limitations of Financial Accounting which led to the development of cost


accounting are:

1. No clear idea of operating efficiency


2. Weakness not spotted out by collective results
3. Does not help in fixing the price
4. No classification of expenses and accounts
5. No data for comparison and decision making
6. No control on cost
ALFONSO T. YUCHENGCO COLLEGE OF BUSINESS

7. Does not provide standards to assess the performance


8. Provides only historical information
9. No analysis of losses
10. Inadequate information for reports
11. No answer for certain questions on short-term and long-term decisions

1.6 Management Accounting and Its Objectives

A viewpoint in accounting it that cost accounting encompasses both management and


financial accounting.

Management accounting can be defined as a field of accounting that provides economic


and financial information for internal users, particularly the managers or decision-
makers in an organization. It is the process of identification, measurement,
accumulation, analysis, preparation, interpretation, and communication of financial
information used by management to plan, evaluate, and control within an organization
and to assure appropriate use of and accountability for its resources.

Objectives of Management Accounting:


a. Better decision making
b. Proper planning and formulation of policies
c. Controls management performance
d. Interprets financial information
e. Motivates employees
f. Communicates up-to-date information
g. Evaluates policies effectiveness

1.7 Management Accounting vs. Financial Accounting

Management Accounting Financial Accounting


Users of Report Internal users: officers and External users: stockholders,
managers creditors, concerned govern-
ment agencies

Purpose To provide internal users To provide external users


with information that may be with information about the
used by managers in carrying company’s financial position
out the functions of planning, and results of operations
controlling, decision-making,
and performance evaluation

Types of Reports Different types of reports, Financial statements and


such as budgets, financial notes to financial statements
projections, cost analyses, etc.

Standard of Management decides on what Reports in accordance with


Presentation presentation accounting standards

Reporting Entity Focus of reports is on the Financial reports relate to


company's value chain, business as a whole
such as business segment,
product line, supplier or customer

Period Covered Dependent on management need Reports usually cover a year,


quarter, or month

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