INTRODUCTION TO COST ACCOUNTING

COST PURPOSE OF COST ACCOUNTING

- is the monetary measure (cash or o ascertain costs

cash equivalent) of the amount of o cost control
resources given up for some purpose. o determination of selling price
o preparation of budgets and
- the monetary value of goods or
reports
services expended to obtain current
o basis of operating policy
or future benefits (revenue).

ACCOUNTING ADVANTAGES OF COST ACCOUNTING

- it is the art of recording, classifying, o helps in choosing alternative

and summarizing in a significant courses of action
manner, and in terms of money, o helps in organizational
transaction and events which are, in management
part of at least financial character, o helps in decision making
and interpreting results thereof. (pricing and capital
expenditure)
COST ACCOUNTING
LIMITATIONS OF COST ACCOUNTING
- branch of accounting dealing
classification, recording, allocation, o is expensive
summarization and reporting of o is complex
costs. o inapplicability of same
costing] method and
- a facet of managerial accounting technique
concerned with accounting of costs o lack of accuracy
of products or services to furnish
information for management’s LABOR INTENSIVE
decision-making.
– skills
- all costs (amount spent in entity’s
CAPITAL INTENSIVE
activities).
– machine
NATURE OF COST ACCOUNTING
COST OF PRODUCT OR SERVICE
o branch of knowledge
o a science - needed in both financial and
o an art management/managerial accounting.
o a profession
 FINANCIAL ACCOUNTING COST ACCOUNTING MANAGERIAL ACCOUNTING

- information system that - intersection between - information are presented

identifies records and financial and managerial and supplied to
communicates the accounting. management in appropriate
economic events of an manner to operate business
organization to interested - needed both in smoothly and efficiently
users. preparation of financial
statement and in - for INTERNAL users who
- for EXTERNAL users who decision making. plan for and control
makes financial decision. organization.
- is cost of a product or
- HISTORICAL perspective. services. - FUTURE perspective.

- emphasis on verifiability. - emphasis on relevance.

- emphasis on precision.
- emphasis on timeliness.
- primary focus on WHOLE
- focuses on SEGMENTS of an
organization.
organization.
- must follow GAAP and
prescribed formats. - need not to follow GAAP
and prescribed formats.
- mandatory for external
reports. - not mandatory.

MANAGEMENT ACCOUNTING COST ACCOUNTING

- covers a wider area: financial accounts, - covers matters relating to ascertainment

cost accounts, taxation etc. and control of cost of product or service.

- deals with both monetary any non- - deals only with monetary transactions.
monetary transactions.
- covering only quantitative aspect.
- covering both quantitative and
qualitative aspects.
COST OF GOODS SOLD FOR A MERCHANDISING COMPANY

CASH

PURCHASES

MI, BEG.

UNSOLD COGAS SOLD

MI, END COGS

COST OF GOODS SOLD FOR MANUFACTURING COMPANY

BALANCE SHEET INCOME STATEMENT

CASH

PURCHASES

UNUSED DM DL FO

MATERIALS MATERIALS
INVENTORY STORAGE

UNFINISHED

W.I.P USED IN PRODUCTION PROCESS

INVENTORY
COMPLETE

UNSOLD FINISHED GOODS STORAGE SOLD

F.G. COGS
INVENTORY

SELLING AND OPERATION

ADMINISTRATIVE EXPENSE
ORGANIZATION STRATEGY - emphasizes plans.
 OPERATIONS PLANNING
- company > “mission statement” –
- day to day implementation
reason of company’s existence.
of tactical planning.
- roots of…
CONTROL
STRATEGY
- process of monitoring.
- plan of action on how to attain
VALUE CHAIN
objective.
- set of activities to deliver valuable
- creation of value.
products to customers.
- it helps...
- conversion of inputs into useful
COST INFORMATION products and services.

 Cost Leadership PROCESS COSTING

- ability to provide the lowest
- continuous process of production.
possible price through
proper management costs. - product is UNIFORM.
 Product Differentiation
JOB ORDER COSTING
- offers unique products even
in relatively higher price. - system of allocating costs to a
group of unique products.
Properly Managed Cost
- customized SPECIFIC product.
Lower Costs of Production
MAJOR DIFFERENCES:
Lower Prices
PROCESS COSTING
Cost Leader
- homogenous unit passed through a
More Buyers series of similar process.
- costs are accumulated by
Added Value to Entity processing department.
PLANNING JOB ORDER COSTING
- unique products are worked on
- process of establishing goals. during a time period.
- costs are accumulated by individual
 Strategic Planning
job.
- long-range goals.
- overall direction of
company.
 Tactical Planning
- short-term goals.
COSTS AND CONCEPT
CLASSIFICATIONS:
ELEMENTS OF COSTS AS TO TYPE
 Materials  Product Costs
- substance from which - incurred by an entity to
the finished product is manufacture a product
made. - all raw materials, labor
Direct Materials and other indirect costs.
- one which can be easily Direct Materials
or directly identified in the Direct Labor
product Factory Overhead
Indirect Materials  Period Costs
- one which cannot be - entity’s operating
easily identified in a expenses not related to
product. manufacturing.
 Labor Marketing and Advertising
- human effort required to - promotion of products.
convert materials into Selling and Distribution
finished product. - salaries of sales
Direct Materials personnel and delivery
- one which can be expense.
conveniently identified or Administrative Expense
wholly to a particular job, - expenses of office.
product or process.
AS TO TRACEABILITY
Indirect Materials
- one which cannot be  Direct Costs
conveniently identified or - can be conveniently and
wholly to a particular job, economically traced.
product or process.  Indirect Costs
 Factory/Manufacturing - cannot be conveniently
Overhead and economically traced.
- all indirect costs.
AS TO FUNCTION
- expenses other than
material and labor.  Manufacturing Costs
 - incurred to convert raw  Sunk/Past/Historical costs
materials into finished – already incurred and
goods. cannot be changed by any
Direct Manufacturing decision made now or to
Costs be made in the future.
Indirect Manufacturing
AS TO BEHAVIORS
Costs
 Non-Manufacturing Costs  Variable Costs
– not incurred in - costs changes as
transforming materials to production changes.
finished goods. - DEPENDENT on the level
Research and of production within the
Development relevant range.
Marketing Costs  Fixed Costs
Distribution Costs - costs does not change
Selling costs (constant).
After-Sales Costs - INDEPENDENT on the
General and level of production within
Administrative Costs the relevant range.
Committed Costs
FOR DECISION-MAKING
- long-term commitment.
 Relevant Costs Managed Fixed Costs
– future costs that will - shot-term and easily
differ under alternate modified in the changes of
courses of action. management object.
 Differential Costs
MAJOR DIFFERENCE
– difference in costs
between any two VARIABLE COSTS
alternative courses of - constant per unit basis.
action. - varies when presented as
Incremental Costs total.
Decremental Costs FIXED COSTS
 Opportunity Costs - varies on per unit basis
– benefit given up when - constant when presented as
one alternative is selected total.
over the other.
 Mixed Costs
 - has both variable and COST DRIVER
fixed component. - any variable that usually affects
 Step Costs costs over a period of time.
- when activity changes, a
step cost shifts upward or COST POOL
downward by a certain - a grouping of individual cost items.
interval or step.
- an account in which a variety of
COMMON COSTS similar costs are accumulated.

- costs employed in two or more ACTIVITY

accounting periods, operations,
- an event, action, transaction, task,
services, etc. (subject to allocation).
or unit of work with a specified
JOINT COST purpose.

- cost of DM, DL, FO incurred in the TYPE OF ACTIVITY LEVELS

manufacturing of two or more
 Line Level – activity that
products at the same time (not
must be done for each unit
specifically indentifiable with any of
of production.
the products.
 Batch Level – performed for
CAPITAL EXPENDITURES each batch of product
produced, rather than each
- benefit to more than one
unit.
accounting period.
 Product Level – activities that
- asset. are needed to support the
entire product line regardless
REVENUE EXPENDITURE of the number of units and
- benefit for the current period only. batches produced.
 Facility Level – performed in
- expense. order for the entire
Direct Material + Direct Labor = production process to occur.
Prime Cost

Direct Labor + Overhead =

COST ACCOUNTING CYCLE
Conversion Cost

COST OBJECT
THREE KINDS OF INVENTORY
- anything for which cost is
computed.  Raw Materials Inventory
 - in manufacturing
perspective, are materials or
supplies to be consumed in
the production process to be
In payroll, it accounts GROSS pay not
transformed as complete
net pay.
goods.
 Work In-Process Inventory
- are items that are currently
in the process of production.
 Finished Goods Inventory
- are items that completed
the production process and
are held for sale in the
It accounts all INDIRECT COSTS.
ordinary course of business.

COMPONENTS OF PRODUCT COSTS

Direct Materials
+
Direct Labor
+
Overhead

Total Manufacturing Costs

NEW ACCOUNT TITLES

Net sale XX
Cost of Goods Sold (XX)
Gross Profit XX
Other Income XX
Revenue XX
Expenses (XX)
Net Income Before Tax XX
Income Tax Expense (XX)
Net Income XX
PRATICE PROBLEM
JOB ORDER COSTING

JOB ORDER COSTING  Materials Stock Card

- these records are the
- is a system that takes place when perpetual book inventory of
customers order small, unique costs and quantities of
batches of products. materials on hand.
- it determines the price of each - unused materials ->
individual product and ensures that Materials Control
the costs are reasonable enough for - separate stock card is
a customer to purchase while still prepared for each type of
allowing the company to make profit. material on hand.

- prepared by batch or by order in

accordance with the customers’
specifications.

- the costs of M, L and O is

summarized in WIP account while
maintaining job cost sheet for each
job.

JOB ORDER COSTING SYSTEM

- can gain and track information from  Finished Goods Stock Card
financial resources like material - these records are the
costs, payroll records, supplier perpetual book inventory of
invoices and overhead allocations. costs and quantities of
completed goods for sale.
- will use these resources to gather - unsold goods -> FG Control
data or track using job cost sheet
(contains details of M, L and O) to
better track of the money spent on
each item and prevent losses.

- may also use job order database to

track each product using a specific
identifying number for each product.

DOCUMENTS USED IN JOB ORDER

COSTING SYSTEM
 Factory Overhead Control materials, labor, overhead,
- detailed manufacturing pricing and inventory
overhead costs by accurate.
department.  - accumulate product costs
- accounting period -> FOH of specific units or small
Control. batches of units for both
 Materials Requisition Form product costing and control
- a form that is used as a purposes.
basis for the recording of raw  - uncompleted jobs -> WIP
materials issuance. Control
 - a separate cost sheet is
prepared for each job.

 Time Ticket/Clock Card

- as an employee works on a
unique order, they are often
required to fill out a
timesheet recording the
work they have complete.

 Job Cost Sheet

- is the main source for
tracking an item to keep
JOURNAL ENTRIES:  favorable variance
 deduction to COGS
ACCOUNTING FOR MATERIALS

Purchase of Materials
MATERIALS XX
AP/CASH XX

Return of Materials
AP/CASH XX
MATERIALS XX

Issuance of Materials
WIP XX
MATERIALS XX

ACCOUNTING FOR LABOR

Payroll
PAYROLL XX
WH TAX PAYABLE XX
SSS PREMIUM PAYABLE XX
PHILHEALTH CONTR. PAYABLE XX
ACCRUED FACTORY PAYROLL XX

Payment of Payroll
ACCRUED FACTORY PAYROLL XX
CASH XX

Distribution of Payroll per Job Order

WIP XX
FOH CONTROL XX
PAYROLL XX

ACCOUNTING FOR FACTORY

OVERHEAD

Actual OH > Applied OH =

underapplied

 unfavorable variance
 addition to COGS

Actual OH < Applied OH =

overapplied
PRACTICE PROBLEM