Chapter 1: Introduction to Cost Accounting

Chapter 2: Costs – Concepts and Classifications Indirect Materials and Supplies – Nails, rivets, lubricants, and small tools.
Indirect Labor Costs – Lift-truck drivers wages, maintenance and inspection
Cost – The cash or cash equivalent value sacrificed for goods and services that labor, engineering labor, machine helpers and supervisors.
are expected to bring a current or future benefit to the organization. Other Indirect Factory Costs – Building maintenance, machinery and tool
maintenance, property taxes, property insurance, pension costs,
 Future Benefits = Revenue
depreciation on plant and equipment, rent expense and utility expense.
 Expired Costs = Expenses
B. Non-Manufacturing Costs/Period Costs
Classification of Costs
1. Marketing or Selling Expense – Include all costs necessary to secure
customer orders and get the finished product or service into hands of the
I. Costs Classified as to Relation to a Product
customer. These expenses are often referred to as order-getting and order-
A. Manufacturing Costs/Product Costs
filling costs.
Examples: Advertising, shipping, sales travel, sales commission, sales salaries
1. Direct Materials – The basic ingredients that are transformed into finished
and expenses associated with finished goods warehouses.
products through the use of labor and factory overhead in the production
process. These are those that can be traced to the finished product they
2. General or Administrative Expense – Include all executive, organizational,
form part of.
and clerical expenses that cannot logically be included under either
Indirect Materials - Minor materials and other production supplies that cannot be
production or marketing.
conveniently or economically traced to specific products.
Examples: Executive compensation, general accounting, secretarial, public
relations, and similar expenses.
2. Direct Labor – The amount paid as wages to those working directly on the
product.
II. Costs Classified as to Variability
Direct Labor Costs – Includes all labor costs for specific work performed on
Activity – Refers to a measure of the organization’s output of products or
products that can be conveniently and economically traced to end products.
services.
Examples: Wages of machine operators and other workers involved in actually
Relevant Range – Limits the description to a specific range of activity.
shaping the product.
A. Fixed Costs - Items of costs which remain constant in total, irrespective of
Indirect Labor Costs – Labor costs for production related activities that cannot be
the volume of production. These are not related to activity within relevant
conveniently and economically be traced to end products.
range. Fixed costs are assignable to departments based on difference
Examples: Wages and salaries of such workers as machine helpers, supervisors,
allocation methods.
and other support personnel.
Examples: Salaries of production executives, depreciation of equipment
computed on a straight-line basis. Periodic rent payments, and insurance.
Prime Costs Conversion
Committed Fixed Costs – Costs that represent relatively long-term commitments
on the part of management as a result of a past decision.
Direct Direct Factory Example: Depreciation of equipment
Material Labor Overhea
s d Managed Fixed Costs (known as discretionary, programmed or planned fixed
costs) – Costs that are incurred on a short-term basis and can be more easily
Total Manufacturing Costs modified in response to changes in management objectives.
Example: Advertising, research and development and costs of training of
3. Factory Overhead – A varied collection of production related costs that
employees.
cannot be practically or conveniently traced directly to the end product. This
is also called manufacturing overhead, factory burden, and indirect
B. Variable Costs – These are the items of cost which vary directly in total in
manufacturing costs.
relation to volume of production.
Examples:
Examples: Direct Materials, Direct Labor, Royalties and commission of salesmen.
 IV. Costs Classified to their nature as common or joint
Fixed Cost Total Variable Total A. Common Costs – Costs of facilities or services employed in two or more
per Unit Fixed Costs per Variable C. accounting periods, operations, commodities, or services. These are subject
Costs Unit Costs to allocation
Volume Decreases Constant Constant Increases Example: Two departments occupying the same building is subject to
Increases depreciation based on relative floor plan occupied.
Volume Increases Constant Constant Decreases
B. Joint Costs – Costs of materials, labor, and overhead incurred in the
Decreases
manufacture of two or more products at the same time. They are indivisible
Mixed Costs – Item of cost with fixed and variable components. It varies
and not specifically identifiable with the products simultaneously produced
with the level of production, though not in direct relation to it.
and these costs are also subject to allocation.
Semi Variable Costs – The fixed portion of semi-variable cost usually represents a
Example: Materials, labor or overhead incurred to manufacture two or more
minimum fee for making a particular item or service available. The variable
products up to the point of split off.
portion is the cost charged for actually using the service
Example: Cost of electricity, cost of charge using a cell phone under a plan
V. Costs Classified as to relation to an accounting period
A. Capital Expenditures – Expenditure intended to benefit more than one
Step Costs – The fixed part of step costs changes abruptly at various activity
accounting period and is recorded as an asset
levels because these costs are acquired in indivisible portions. It is similar to
B. Revenue Expenditures – Expenditure that will benefit current period only
a fixed cost within a very relevant range.
and is recorded as an expense
Example: Supervisors salary
VI. Costs for Planning, Control and Analytical Processes
 All costs would be classified as either fixed or variable, with semi variable
A. Standard Costs – Predetermined costs for direct materials, direct labor and
costs being separated into their fixed and variable components
factory overhead. It is a budget for the production of one unit of product or
service.
Methods of Separating Mixed costs into Fixed and Variable Components
B. Opportunity Costs – The benefit given up when one alternative is chosen over
1. Scatter Graph
another.
2. High-Low Point Method
C. Differential Costs -
Y = FC + VC or Y = FC + VX
3. Method of Least Square
Y =a+bx
∑ Y =na+b ∑ x
2
∑ XY =∑ xa+b ∑ x
Where:
Y = Total Costs VC = Total Variable Cost
X = Activity Level V / b = Variable Cost per Unit
N = Number of Activities FC / a = Fixed Costs

III. Costs Classified as to Relation to Manufacturing Departments

A. Direct Departmental Charges – Costs that are immediately charged to the
particular manufacturing departments that incurred the costs since the costs
can be conveniently identified or associated with the departments that
benefited from said costs.
B. Indirect Departmental Charges – Costs that are originally charged to some
other manufacturing departments or accounts but are later allocated or
transferred to another department that indirectly benefited from said costs
Chapter 3: Cost Accounting Cycle Service Cost Flow

Manufacturing Inventory Accounts

1. Materials Inventory – Made up of the balances of materials and supplied on
hand
2. Work in Process – All manufacturing costs incurred and assigned to products
being produced.
3. Finished Goods – Made up of the cost of products completed but unsold as
of the date.

Manufacturing Cost Flow

Merchandising Cost Flow

Chapter 4: Job Order Costing