Chapter 1

Introduction to Cost Accounting

Learning Objectives:
 Distinguish between financial, managerial and cost accouting.
 Distinguish between merchandising and manufacturing
 Identify the uses of cost accounting data
 Distinguish between job order costing and process costing
What is COST Accounting?
• Cost accounting is an expanded phase of general or financial
accounting which informs the management promptly with the cost of
rendering a particular service, buying or selling a product and
producing a product.
• Cost accounting is a process of recording, analyzing and reporting all
of a company’s costs related to the production of a product or
rendering a services.
Financial Accounting vs. Managerial Accounting
Venn Diagram

FINANCIAL COST MANAGERIAL

ACCOUNTING ACCOUNTING ACCOUNTING
 Uses of Cost Accounting Data

 Determining of Product Cost

o Determining the selling price of the product
o Meeting competition
o Bidding contracts
o Analyzing profitability
 Planning and Control
o Planning is the process of establishing objectives or goal for the firm and
determining the means by which the firm will attain them.
o Controlling is the process of monitorin the company’s operations and
determining whether the objectives identified are met or accomplished.
 Chapter 2
COSTS- Concept and Classification
 What is Cost?
Cost is the cash or cash equivalent value sacrificed for goods and
services that are expected to bring current or future economic benefit
to the organization.
 Cost Classified as to relation to a product/ as to FS
classification.
Product Cost/Manufacturing Cost
Cost incurred by entity to MATERIALS
manufacture a product, includes
all raw materials, labor, and all LABOR
indirect cost
FACTORY OVERHEAD
 MATERIALS
 All materials and other supplies
used in manufacturing a product.
 DIRECT MATERIALS
 Wooden Chair ni Lola
 INDIRECT MATERIALS
LABOR
 Salaries/wages and benefits
provided to all workers
 DIRECT LABOR
 INDIRECT LABOR
OVERHEAD
 All indirect cost for manufacturing a
product
 Indirect Materials
 Indirect Labor
 Utilities
 Rent
 Depreciation of machine equipment
 Insurance of Factory plant
 Repairs and maintenance in the
factory and machine equipment
Components of Product Cost

• Direct Materials

PRIME COST
• Direct Labor

• Factory Overhead
CONVERSION COST
Formula
DIRECT MATERIALS
+
DIRECT LABOR
+
FACTORY OVERHEAD
_______________________________________
TOTAL MANUFACTURING COST
 Cost Classified as to relation to a product/ as to FS
classification Con’t
Period Cost/Non-Manufacturing
Cost MARKETING EXPENSE
All other expensed not related
to manufacturing cost SELLING EXPENSE

GENERAL AND
ADMINISTRATIVE EXPENSE
Cost Classified as to variability/ as to behavior

FIXED COST VARIABLE COST

• cost which remain constant and
do not vary as the quantity of
goods changed
 Constant when presented as total
 Varies or changing per unit basis
• cost which vary directly or
change in total as the volume of
product changed.
 Varies or when presented as total
 Constant per unit basis
Problem
Assumes that Ingat Manufacturing Company produces 2000 to 4000
pieces of Biogesic with a variable cost of 5 pesos per unit and 10000
fixed cost.

FIXED COST VARIABLE COST

Pieces Produces Per Unit FC Total Fixed Cost Pieces Produces Per Unit VC Total Variable Cost
2000 6 12000 2000 2 4000
3000 4 12000 3000 2 6000
4000 3 12000 4000 2 8000
Cost Equation
Y= a + bx Sample Problem:
How much is the total cost BTS Company needs
to spend in order to produce light stick, variable
cost per unit is P25 and total manufacturing
Where: fixed cost of P40,000 at the following
production levels:
Y = cost
a = total fixed cost a. 2000 units
b. 4000 units
b = variable per unit c. 5500 units
x = volume or activity level
 @2000 units @4000 units @5500

Y = a+bx

Y = 40000 + (25)(2000)

Y = 40000 + 5000

Y = 9000
Con’t Cost Classified as to variability/ as to
behavior
MIXED COST
• cost which remain constant and
do not vary as the quantity of
goods changed
 Constant when presented as total
 Varies or changing per unit basis
 Con’t Cost Classified as to variability/ as to behavior

Mixed Cost
Cost with fixed and variable
components SEMI-VARIABLE COST

Electricity STEP COST

 Two Methods of Separating Mixed Cost

 HIGH-LOW POINT METHOD

Least Squares Method
Formula ( Shortcut)
b= (12)(284207)-(426)(7911)
• Find the b /variable using below 12(15620)-(426)(426)

formula b = 3410484 – 3370086

187440-181476
• b = N Σ(xy) − Σx Σy b = 40398/5964

N Σ(x2) − (Σx)2
b = 6.77

7911 = 12a + (6.77)(426)

• Go back to Equation 2 : ΣY= na+b Σx 7911 = 12a + 2884
-12a = 2884-7911
-12a = -5027
-12a/-12 = -5027/-12
a= 418.92