COST ACCOUNTING

ASSINGEMENT 1.

NIKKI WANOFAFIA

USN: 17002835600

COST ACCOUNTING TERMS

1. Comparison of; Management Accounting, Cost Accounting &Financial

Accounting.

Management Accounting – This involves preparing management reports and

accounts that provide accurate and timely financial and statistical information
required by managers to make day-to-day and short-term decisions.

Cost Accounting – A method by which all costs incurred in carrying out an activity
or accomplishing a purpose are collected, classified, and recorded. This data is
then summarized and analyzed to arrive at a selling price, or to determine where
savings are possible.

Financial Accounting - Treats money as a means of measuring economic

performance instead of as a factor of production. It encompasses the entire
system of monitoring and control of money as it flows in and out of an
organization as assets and liabilities, and revenues and expenses.
Financial accounting gathers and summarizes financial data to prepare financial
reports such as balance sheet and income statement for the organization's
management, investors, lenders, suppliers, tax authorities, and other
stakeholders.

2. System of Accumulation

a. Non- Cost System – A system of accounting under which two separate sets of
account books are maintained—one for cost accounts and the other for financial
accounts. In other words, cost accounts are maintained separately from financial
accounts.

b. Cost System – It is a framework used by firms to estimate the cost of their

products for profitability analysis, inventory valuation and cost control. Estimating
the accurate cost of products is critical for profitable operations.
 i. Actual Cost System - Actual cost system is
a costing methodology where the actual costs incurred are used
to arrive on the total cost of the production or the cost of the
final product.

ii. Normal Cost System - A method of costing that is used in the

derivation of cost. In normal costing, usually the actual data is
used in order to derive the cost for a product with the exception
of manufacturing overhead rate, whereas in standard costing,
the costs used are all predetermined i.e. budgeted costs.

iii. Standard Cost System - It is a tool for planning budgets,

managing and controlling costs, and
evaluating cost management performance. A standard costing
system involves estimating the required costs of a production
process.

3. Types of Cost System

a. Job Order cost System - A system for assigning and accumulating

manufacturing costs of an individual unit of output. The job order costing
system is used when the various items produced are sufficiently different from
each other and each has a significant cost.

b. Process cost system - Term used in cost accounting to describe one method
for collecting and assigning manufacturing costs to the units produced.
A processing cost system is used when nearly identical units are mass
produced.

c. Dual System (Contribution of Job order & Process cost) – This is the term
used when both Job order system and Process cost system are used.

d. ABC (Costing) - Activity-based costing (ABC) is a costing method that

identifies activities in an organization and assigns the cost of each activity to
all products and services according to the actual consumption by each. This
model assigns more indirect costs (overhead) into direct costs compared to
conventional costing.
4. Manufacturing Cost Classification

a. Direct Material - All items such as raw materials, standard and specialized
parts, and sub-assemblies required to assemble or manufacture a complete
product. Direct material costs are assignable to a specific product, cost
center, or work order.

b. Direct Labour - Employees or workers who are directly involved in the

production of goods or services. Direct labour costs are assignable to a
specific product, cost center, or work order.

c. Manufacturing Overhead (Factory Overhead) - he costs associated with the

manufacturing process, like parts for a machine.

d. Indirect Materials - Consumables (such as cleaning chemicals, disposable

tools, protective devices) not used as raw materials, but which make the
production of a good or service possible, more efficient, or safer. Indirect
material costs are not readily identifiable with a specific product or job. They
are termed indirect costs and are charged to overhead accounts.

e. Indirect Labour - Employees or workers (such as accountants, supervisors,

security guards) who do not directly produce goods or services, but who
make their production possible or more efficient. Indirect labor costs are not
readily identifiable with a specific task or work order. They are termed indirect
costs and are charged to overhead accounts.

f. Other Manufacturing Overhead – Depreciation, rent and property taxes on

the manufacturing facilities. depreciation on the manufacturing equipment.
managers and supervisors in the manufacturing facilities. repairs and
maintenance employees in the manufacturing facilities.

5. What is Prime Cost & Commission cost – Prime Cost is the total of direct material
costs, direct labor costs, and direct expenses .And Conversion Cost are direct
and indirect expenditure incurred in converting a currency, material, or security
from one form or type into another.

6. Manufacturing Inventories
a. Raw Materials Inventory - Raw materials inventory is the total cost of all
component parts currently in stock that have not yet been used in work-in-
process or finished goods production. There are two subcategories of raw
materials, which are: Direct materials. These are materials incorporated into
the final product.
b. Work – in – Process inventory - WIP refers to the raw materials, labor, and
overhead costs incurred for products that are at various stages of the
production process. WIP is a component of the inventory asset account on
the balance sheet. These costs are subsequently transferred to the finished
goods account and eventually to cost of sales.

c. Finished Goods inventory - Refers to the number of manufactured products

in stock that are available for customers to purchase. The finished goods
inventory formula is an important inventory ratio that can be used to calculate
the value of these goods for sale.

d. Factory Supplies inventory - These supplies include maintenance materials,

janitorial supplies, and items that are considered incidental to the production
process. They are usually charged to expense as incurred, in which case
the supplies expense account is included within the cost of goods sold
category on the income statement.