Batangas State University

Pablo Borbon Campus

The National Engineering University

LEARNING MODULE IN
ACC 204

Introduction to Cost Accounting

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OBJECTIVES

1. Distinguish between Financial, Managerial and Cost Accounting

2. Distinguish between Merchandising and Manufacturing operations.
3. Identify the uses of Cost Accounting data
4. Distinguish between Job Order Costing and Process Costing.

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COST
- Is the cash or cash equivalent value sacrificed for goods and services that are expected
to bring a current to bring current or future benefit to the organization.
- sacrifice of resources or an outlay of cash or promises to pay cash in the future

ACCOUNTING
- Is a service activity
- Its function is to provide quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions

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COST ACCOUNTING
- Is an expanded phase of general or financial accounting which informs
management promptly with the cost of rendering a particular service,
buying and selling a product and producing a product.
- It is the field of accounting that measures, records and reports
information about costs
- It is a system that records, summarizes, analyzes and interprets the
details of the cost of materials, labor and overhead necessary to produce
and sell an article

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FEATURE FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING

PRIMARY USERS OF EXTERNAL USERS: Stockholders, creditors and INTERNAL USERS: Officers and managers
REPORTS regulators

*Internal users may also use the same information to

provide a basis for financial analysis by management
TYPES AND FREQUENCY OF FINANCIAL STATEMENTS INTERNAL REPORTS
REPORTS Quarterly and Annually As frequently as needed
PURPOSE OF REPORTS GENERAL PURPOSE SPECIAL-PURPOSE FOR SPECIFIC DECISIONS
Help those external users make economic decision: Assist the internal users in the planning and control
credit terms, investment and other decisions decision making process
CONTENT OF REPORTS Focused on the enterprise as a whole Pertains to subunit of the business
Highly aggregated (condensed) Very detailed
Limited to double entry accounting and cost data Extends beyond the double entry accounting to any
Generally Accepted Accounting Principles (GAAP) relevant data
Standard is relevance to decisions
NATURE OF REPORTS Monetary Monetary and non monetary information

VERIFICATION PROCESS Audited by CPA No independent audits

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Relationship of Financial, Managerial

and Cost Accounting
COST ACCOUNTING is the
intersection between financial and
managerial accounting.

Cost accounting information is

needed and used by both financial
and managerial accounting
FINANCIAL COST MANAGERIAL
ACCOUNTING ACCOUNTING ACCOUNTING ✔ Cost accounting provides
product cost information to
external parties such as
stockholders, creditors and
various regulatory boards for
credit and investment decisions

✔ Cost accounting provides

product cost information also to
internal parties such as
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Merchandising versus Manufacturing Operations

A merchandising normally buys a product that is ready for resale when it is received. Nothing needs
to be done to the product to make it salable except possibly to prepare special package or display.

On the other hand, the purchase of materials by manufacturer, is only the beginning of a long and
sometimes complex, chain of events that will eventually produce a finished article. The
manufacturing process involves the conversion of raw materials into finished goods through the
application of labor and the incurrence of various factory expenses.

Note:
✔ Although cost accounting is more pronounced in manufacturing operations to satisfy
management’s need for product cost information, cost accounting information is useful for all
types of organizations. (Merchandising, manufacturing or service)
✔ Cost accounting is essential not only for profit-seeking entities but also for not-for-profit
organizations such as government agencies, churches and charities.

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Merchandising Industry Pablo Borbon Campus
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Merchandising company has only one inventory – merchandise inventory.

Cost of goods sold is simply computed by subtracting the ending inventory from the total of the
beginning inventory and purchases during period.

Beginning Merchandise Inventory XX

Add: Purchases XX
Cost of Goods available for sale XXX
Less: Ending Merchandise Inventory (XX)
Cost of Goods Sold XX

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Merchandising Industry Pablo Borbon Campus
The National Engineering University

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Manufacturing Industry

Computing cost of goods sold for a manufacturing company is more complex. Instead of one
inventory accounts, manufacturer maintains three:
a. Materials inventory
b. Work in process inventory
c. Finished goods inventory

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Manufacturing Industry Pablo Borbon Campus
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Direct Materials
Raw Materials Inventory, beg XX
Add: Raw Materials Purchases XX
Total Raw Materials available for use XX
Less: Raw Materials Inventory, End (XX)
Direct Materials Used XX
Add: Direct Labor XX
Add: Manufacturing Overhead XX
Total Manufacturing Cost XX
Add: Work in Process, Beg XX
Total Cost of Work in Process XX
Less: Work in Process, End (XX)
Cost of Goods Manufactured XX
Add: Finished Goods Inventory, Beg XX
Total Goods Available for Sale XX
Less: Finished Goods Inventory, End (XX)
Cost of Goods Sold XX
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Manufacturing Industry Pablo Borbon Campus
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Pablo Borbon Campus
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Uses of Cost Accounting Data

The information produced by a cost accounting system provides a basis for determining
product cost and aids management in planning and controlling operations.

1. Determining Product Costs

- Cost accounting procedures help management in gathering the data needed to
determine product costs and thus generate meaningful financial statements and other
reports.
- Cost procedures must be designed to permit the computation of unit costs as well as
total product costs.

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1. Determining Product Costs

Unit cost information is also useful in making variety of important marketing decisions.

a. Determining the selling price of a product

- A knowledge of the cost of manufacturing a unit of product helps in setting the selling price,
which should be high enough to cover the cost of production, pay a portion of marketing and
administrative expenses and provide a profit. It will be difficult to set the selling price without knowing
the costs incurred in rendering a service.
b. Meeting competition
- If a competitor is selling the product at a low price, detailed information regarding unit costs can
be used to determine the action to be taken by the company. The company would know if selling price
must be reduced, or manufacturing costs must be reduced, or the product must be eliminated.

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1. Determining Product Costs
Unit cost information is also useful in making variety of important marketing decisions.

c. Bidding on contracts
- Many manufacturing firms must submit competitive bids in order to be awarded manufacturing
contracts by government or private firms. An analysis of the unit costs relating to the manufacture of a
particular product is of great importance in determining the bid price to be submitted. The bid price
must be able to cover costs to be incurred and at the same provide profit for the company. It must not
be set so high so as to be able to compete with the other bidders.
d. Analyzing profitability
- Unit cost information enables management to determine the amount of profit that each product
earns and possibly eliminate those that are least profitable, thereby concentrating efforts on those
items that are most profitable.

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2. Planning and Controlling Pablo Borbon Campus
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Planning
- is the process of establishing objectives and goals of the firm and determining the means to
attain these. Planning is essential to good management because it provides means of
coordinating all of the operations of the firm.

a. Strategic planning – setting long range goals to determine overall direction of the company
b. Tactical planning – plans for a shorter range, emphasizes plans to achieve the strategic goals
c. Operational planning – day to day implementation of tactical plans. Coordination of the major
factors of production (materials, labor, facilities)

Control
- is the process of monitoring the company’s operations and determining whether the objectives
in planning process are met, if not, making necessary actions

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Recent Developments in Cost Accounting

Cost Accounting is experiencing dramatic changes. Manual bookkeeping has been reduced
because of the use of computers. Changes in production methods have made traditional
applications of cost accounting obsolete in some cases. Increasing emphasis on cost control is
seen now in hospitals, in industries facing stiff foreign competition and in many organizations that
have traditionally not focused on cost control.

The traditional role of cost accounting is to record full product cost data for external reporting.
However, the use of accounting data for decision making and performance evaluation has gained
importance in recent years.

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

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 Batangas State University
Pablo Borbon Campus
The National Engineering University

Two Basic Product-Costing System

JOB ORDER COSTING PROCESS COSTING

Unique jobs are worked on during a time period Continuous production of similar products

Costs are accumulated for each job or batch produced Costs are accumulated by processing department

The Job cost sheet provides the details for the Work in Several Work in process inventory accounts – one for
process account each department
Unit costs are determined by dividing the total costs on Unit costs are computed by dividing the individual
the job cost sheet by the number of units on the job. departments cost by the equivalent production

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Building the Nation
 Batangas State University
Pablo Borbon Campus
The National Engineering University

End of Presentation
Thank you! ☺

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