THE UNIVERSITY OF GOROKA

SCHOOL OF HUMANITIES
BUSINESS STUDIES DIVISION

Course Title: Cost Accounting 1

Course Code: HAF 213
Available: Semester 1

Module 1: Introduction to Cost Accounting

Learning Outcomes

After studying this module, you should be able to:

 Explain the term Cost Accounting;

 Identify the users and explain the uses of cost accounting information;
 Describe the importance of planning and control using costs data;
 Describe the relationship of cost accounting to financial and management accounting
 Differentiate between presentation of cost of goods sold for a merchandiser and a
manufacturer on the income statement
 Identify the three basic elements of manufacturing costs
 Distinguish between the two basic types of cost accounting systems
 Illustrate a Job order cost system
 Describe the ethical responsibilities and certification requirements for management
accountants, as well as corporate governance.

Cost Accounting defined:

 It is the specialised type of accounting used to accumulate, or gather product costs as

production takes place or services are rendered.
 Cost accounting is a managerial accounting process that involves recording, analyzing, and
reporting a company's costs for the control of costs.

Question: Explain the term cost accounting in one paragraph.

The importance of Cost Accounting to Management

Managers need cost accounting information on a timely basis to be able to control costs and make
better operational plans in order to be competitive in the market. Management uses this
information to decide how to allocate resources to the most efficient and profitable areas of the
business.

All types of business entities; manufacturing, merchandising, and service businesses, require cost
accounting information.

Question: Describe the importance of Cost Accounting to management in one paragraph.

Users and Uses of Cost Accounting Information

Cost Accounting System

(Accumulates Cost Information)

Characteristics Financial Accounting Management Accounting

Users:  External Parties Internal Parties
(Shareholders, Creditors, (Managers)
Governments)
 Managers

Focus: Entire Business Segments of the business

Uses of Cost Product Costs for calculating Cost  Budgeting

Information of Goods Sold (Income Statement)  Special decisions such as
and Finished Goods, Work in make or buy a component,
Process and Raw Materials keep or replace a facility, and
Inventories (Balance Sheet) using sell a product at a special
Historical costs and Generally price.
Accepted Accounting Principles  Non-financial information
such as defect rates,
percentage of products
returned, and percentage on-
time deliveries. (All the above
using a combination of
historical data, estimates, and
future projections).

Question: Identify the different users and uses of cost accounting information.

Planning and Control

Planning is the process of establishing objectives or goals for a company and determining the means
by which they will be met.

Effective planning is facilitated by the following:

1. Clearly defined objectives of the manufacturing operation;

2. A production plan that will assist and guide the company in reaching its objectives.

Control is the process of monitoring the company’s operations and determining whether the
objectives identified in the planning process are being accomplished.
Effective Control is achieved through:

1. Assigning responsibilities
This involves responsibility accounting and cost centres. Responsibilities are assigned to
managers of different cost centres – departments, who report on the production results of
the particular department at the end of a reporting period.
2. Periodically measuring and comparing results
Actual operation results should be reviewed periodically and compared to the objectives
established in the planning process
3. Taking necessary corrective action
Performance reports may identify problem areas and deviations from business plans which
require corrections or strengths to be better utilised.

Example: Relationship of Planning and Control for ICTSI Engineering Department

PLANNING

CLEARLY DEFINED OBJECTIVE:

Reduce fuel consumption to 30,000Ltrs

PLAN TO REACH THE OBJECTIVE:

Reduce machine hours worked

CONTROL

MEASURE AND COMPARE RESULTS:

Compare budgeted to actual fuel consumption in litres

TAKE CORRECTIVE ACTIONS:

1. Educate machine operators, 1. Limit idle time, 2.
Implement tracking system, 3. Upgrade machineries
through maintenance

Build corrective actions into plan

Question: Describe the importance of costs data in planning and control.

Relationship of Cost Accounting to Financial and Management Accounting

Financial Accounting focuses on gathering historical financial information to be used in preparing

financial statements for external users.

Management Accounting focuses on both historical and estimated data that management needs to
conduct ongoing operations and do long-range planning.
Cost Accounting includes those parts of both financial and management accounting that collect and
analyse cost information. It provides the product cost data required for special reports to
management (management accounting) and for inventory costing in the financial statements
(financial accounting)

Question: Describe the relationship of cost accounting to financial and management accounting

Three Basic Elements of Manufacturing Costs

There are three basic elements of manufacturing costs:

1. Direct Materials – are those that become part of a certain manufactured product and can be
readily identified with that product;
2. Direct Labour – the labour of employees who work directly on the product manufactured;
3. Factory Overhead – includes all costs related to the manufacture of a product except direct
materials and direct labour.

The costs of direct materials and direct labour are sometimes combined and described as the prime
cost of manufacturing a product. Prime cost plus factory overhead equals the total manufacturing
cost.

Direct labour cost and factory overhead, which are necessary to convert the direct materials into
finished goods, can be combined and described as conversion cost.

Question: What are the basic elements of manufacturing costs? Briefly explain each of them.

Question: ABC Ltd used K4,000 worth of direct materials and K2,000 worth of indirect materials
during the month of February 2024. The direct labour cost calculated for that month was K3,500
and indirect labour cost was K2,000. After analysing the various manufacturing overhead costs,
the other total overhead costs excluding indirect materials and indirect labour for the month was
K2,100.
Required: Calculate the following costs as at 29th February 2024:
(i) Prime cost
(ii) Conversion cost
(iii) Total manufacturing cost

Costs of Goods Sold

 Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a
company. This amount includes the cost of the materials and labor directly used to create
the good. It excludes indirect expenses, such as sales and marketing expenses.
  Presentation of COGS by a Merchandising company and a manufacturing company on the
income statement:

 Merchandising
Beginning Inventory
Plus: purchases (merchandise)
=Merchandise available for sale
Less: ending merchandise inventory
=Cost of Goods Sold

 Manufacturing
Beginning finished goods inventory
Plus: cost of goods manufactured
= Finished goods available for sale
Less: ending finished goods inventory
= Cost of Goods Sold

Because a manufacturer makes, rather than buys, the products it has available for sale, the term
finished goods inventory replaces merchandise inventory, and the term cost of goods manufactured
replaces purchases in determining the cost of goods sold.

Question: Differentiate between presentation of cost of goods sold for a merchandiser and a
manufacturer on the income statement.

Basic Types of Cost Accounting Systems

There are two basic types of Cost Accounting Systems:

1. Job Costing – involves the accumulation of costs of materials, labour, and overhead for a
specific job
2. Process Costing – accumulates cost from each process or department and allocates them to
the individual products produced.

Standard Costing system uses estimated costs based on statistics and management experiences.
These estimates are then compared with actual costs accumulated using either job or process cost
systems to aid in decision making.

Flow of Costs in Job Order Cost System

Flow of costs through the Ledger Accounts
Materials Work in Process
Cost of
materials Cost of direct Cost of direct Cost of
purchased materials used materials goods finished
Cost of indirect Cost of direct
materials used labour
Factory
overhead

Payroll Finished Goods

Cost of direct Cost of goods Cost of finished

Gross Wages labour finished goods sold
Cost of indirect
indirect labour

Factory Overhead Cost of Goods Sold

Transferred to
Cost of indirect Work in Cost of finished
materials Process goods sold
Cost of indirect
labour
Other indirect
factory
expenses

Question: What are the basic types of cost accounting systems? Briefly explain each of them.

Professional Ethics, CMA Certification, and Corporate Governance

The Institute of Management Accountants (IMA) has issued a Statement of Ethical Professional
Practice that must be adhered to by its members for accuracy and fairness in preparation of internal
accounting reports.

A member’s failure to comply with the following standards may result in disciplinary action:
 Competence
 Confidentiality
 Integrity
 Credibility

Certified Management Accountant (CMA) Certificate is issued by IMA for competency after
completing following:
1) A four year college degree
2) Two years’ experience in management accounting and financial management
3) A four part examination whose topics include; business analysis, management accounting
and reporting, strategic management, and business application with a strong emphasis on
ethics.

Since companies have faced accounting scandals, the Sarbanes-Oxley Act of 2002 was written to
protect shareholders and other stakeholders of publicly-traded companies by improving corporate
governance.
Corporate governance is the means by which a company is directed and controlled.

Question: Why must cost accountants be certified?

Question: What is corporate governance?