COST ACCOUNTING - GUERRERRO NOTES

Chapter 1- Cost Accounting- Basic Concepts and Job Order Cost Cycle
Accounting system provides information for:
1. Internal Reporting to managers, for use in planning and controlling operations
2. Internal Reporting to managers, for use in formulating plans and policies
3. External reporting to stockholders, government and other outside parties.
Cost accounting has the same three major purposes as those described above.
However, the third purpose is simultaneously deals with costing of products for inventory
valuation and income determination.
Cost Accounting is a system that records, summarizes, analyzes and interprets the details of the
costs of materials, labor, and overhead necessary to produce and sell an article.

 it also now refers to the gathering and providing information for decision needs of all
sorts, ranging from the management of recurring operations to be making of strategic
decisions and formulation of major organizational policies.
 It refers to recording, classifying and reporting all costs aspects of company
performance during a particular period of time.
 to reach decision and to evaluate results with greater intelligence.
 One of the most valuable management tool to control operations.

Estimating and Bidding

Planning, Budgets, and Control
The Cost accounting system also provides vital information needed to plan future operations.
~ Cost accounting is also used in preparing a company’s budget. A budget is the overall financial
plan for future activities.
Standard cost (predetermined cost). These are often based on the past experience of the firm
or on statistics of the industry. They are compared with actual cost and the difference can be
noted and analyze while there is still time to take remedial action.
With cost information to support the decisions, management can issue directives, perform
follow-up activities, and obtain the operating results that ensure prosperity and growth for the
enterprise.
Manufacturing Costs Classified
Manufacturing is the process of converting raw materials into finished goods by using labor and
incurring other costs, generally called manufacturing overhead.
Overhead costs include- utilities, supplies, taxes, insurance, and depreciation.
Three major manufacturing cost classifications:
1. Direct Materials- It is also called raw materials. These are materials that are a significant part
of the finished goods.
Notes: What is raw material to one manufacturer is considered finished goods by the supplier
of those materials.
2. Direct Labor- It represents the employees who work directly with the raw materials in
converting them into finished goods. (Salaries)
3. Manufacturing Overhead- All cost that is not considered direct material or direct labor. Also
called factory overhead, manufacturing expenses, or factory burden. 3 categories:
a) Indirect Material- usually cannot be easily traced. It also includes factory supplies or
operating supplies, items that are used in the manufacturing process but is not a part of
finished goods. (ex. Glue, thread, screw, cleaning supplies for factory, oil for machines)
b) Indirect Labor- Wages of factory personnel who do not work directly on raw materials.
(Wages and Salaries of factory workers such as storeroom clerks, janitors,
superintendent, factory supervisors).
c) Other overhead- Such costs as payroll taxes; rent, depreciation, insurance on factory
buildings and machinery; heat, light and power: repair and maintenance of machinery
and equipment.

Direct Materials Reflects the primary sources of cost for units

Prime Cost
in production.
Direct Labor
Indicates the costs required to convert the
Manufacturing Conversion Cost raw materials into finished products.
Overhead

Inventories for a Manufacturing Company

3 distinct inventory Accounts: (The balance of the 3 accounts will appear in the current asset
section of the balance sheet.)
1. Raw Materials Inventory account- cost of raw materials and factory supplies that will be
used in the manufacturing process. (Ito usually yung nasa storeroom pa, at once na maalis yun
duon para gamitin na sa process, it becomes a part of work in process).
2. Work in Process Inventory account- costs of raw materials, direct labor and manufacturing
overhead of goods on which manufacturing has begun but has not been completed at the end
of the fiscal period.
3. Finished Goods Inventory account- costs of goods that have been completed and are ready
for sale. This account corresponds to the Merchandise Inventory account of a merchandising
business. Any changes in this account are reflected in the Cost of Goods Sold section in income
statement.

System of Cost Accumulation (in accumulating a product’s cost)

1. Actual Cost System (Historical)- DM, DL, and OC are determined as the occur simultaneously
with the manufacturing operation but the total of these costs is known only after the operation
has been complete.
2. Standard Cost System (Predetermined)- Costs are determined in advance from analysis and
forecasts made before the actual production begins.
3. Normal Cost System- Combination of the actual cost system and the standard cost system.
Factory overhead costs are accumulated on the basis of predetermined rate. See below.

Product Costs Actual Costing Standard Costing Normal Costing

Direct Materials Actual Standard Actual
Direct Labor Actual Standard Actual
Factory Overhead Actual Standard Predetermined

Types of Cost Systems

a. Job Order Cost System- when products are produced in jobs or lots of varying quantities and
types. (per job, unique)
- Accumulates costs applicable to each specified job order or lot of similar gods manufactured
In a specific order for stock or for a customer. When production on a job begins a job cost sheet
is set up. When the JCS is complete, it shows the total costs of the completed job. The cost per
unit may then be obtained by dividing the total cost of the job by the number of units
completed.
b. Process Cost System- It is used when there is a continuous flow of goods of identical or
similar characteristics throughout the manufacturing process.
- Accumulates cost without attempting to allocate them during the accounting period to
specific units of goods being manufactured. At the end of the fiscal period, the average cost per
unit is determined by dividing the total number of units produced into the total cost
accumulated. It is often referred as average costing.
c. Dual Systems- Used when a company makes standard parts or subassemblies continuously
and then incorporates them into finished goods built to customer specifications. The cost of the
parts is accumulated and determined under a process cost system, and the cost of each
customer’s order for finished goods is computed under a job order cost system.

INTRODUCTION TO THE JOB ORDER COST CYCLE-NORMAL COSTING

Work Flow
1. Procurement: Materials and supplies needed for manufacturing are ordered, received and
stored. Direct and indirect factory labor and services are obtained.
2. Production: Materials are transferred from the storeroom to the factory. Labor tools,
machines, power, and other costs are applied to complete the product.
3. Warehousing: Finished goods are moved from the factory to the warehouse to be held until
they are sold.
4. Selling: Customers are found. Merchandise is shipped from the warehouse. Sales to
customers are recorded.
All cost elements are recorded as incurred and then charged to production as the work flows
through operating cycle.
Recording Costs as Incurred
1. Procurement : Purchase of materials, labor, and overhead. These costs will later be charged
to production.
2. Production: Work In Process
3. Warehousing: Finished Goods
4. Selling: The costs of the completed goods that have been sold must be recorded. Cost of
Goods Sold.
Additional Notes (from YT, For better understanding xd)
3 Inventories used.

Raw Materials Inventory

Beginning Inventory Ending Inventory
Purchases Direct Materials Used
*(PD, PRA)
Total Materials Available for Used Total Materials Available for Used

Work In Process
Beginning Inventory Ending Inventory
Total Manufacturing Cost Cost of Goods Manufactured
Direct Materials Used
Direct Labor
Factory Overhead
Total Goods Put Into Process Total Goods Put Into Process

Finished Goods
Beginning Inventory Ending Inventory
Cost of Goods Manufactured Cost of Goods Sold
Total Goods Put Into Process Total Goods Put Into Process
Additional Notes

Fixed Cost Variable Cost

Within the relevant range, if the level of cost driver change;
Total Fixed Cost- Constant Total Variable Cost- Change
Fixed Cost per unit- Change Variable Cost per unit- Constant

Separating Mixed Cost

High-Low Method (Format ko xd)

Difference
Units/Hours Cost VC/unit*Units/Hrs.
(Fixed Cost)
Highest Level
Lowest Level
Difference
VC per unit _____Cost_____
Units or hours

(Sample: How much is the total maintenance cost at 8,200 hours?)

Y= A+Bx
Y Total cost
A Fixed Cost
B Variable cost per unit
X Cost Driver (Hrs., Units, Productions)

Manufacturing Overhead
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