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Overview

This module covers the topics as contained in the course syllabus for Accounting 5 – Cost Accounting
and Control. Discussion, examples and illustrations for every lesson or topic were direct-to-the-point to facilitate
easy learning and mastery of the course.

Module Part 1 (Midterm coverage) has 3 topics:

1. Introduction to Cost Accounting
2. Cost terms, concepts, classification ,behavior, cost flows in a trading and manufacturing business
3. Job Order Costing
a. Concept and application
b. Accounting for Materials
c. Accounting for Labor
d. Accounting for Factory Overhead

Learning Outcomes:
After completing this learning material, the student shall be able to do the following in accordance with
generally accepted accounting principles:

1. Define cost accounting, management accounting and financial accounting and explain the role of
cost accounting to financial and management accounting and the relationship of cost accounting to
other fields of study.

2. Enumerate and explain the elements of product cost,the different classification of costs and
the flow of costs for service, merchandising and manufacturing concern.

3. Illustrate the flow of costs under job order costing and Make journal entries under job order costing
with corresponding entries for subsidiary records.

4. Outline the procedure for materials cost control stating the forms and records used and distinguish
the five common control procedures used to assist management in keeping inventory costs to a
minimum.

5. Explain the use of time tickets, daily time report and their importance in controlling labor cost,
prepare payroll and make the corresponding entries based on the payroll.

6. Compute the factory overhead rate using the different bases, compute service department cost to
be allocated to producing departments and record applied and actual factory overhead.

7. Define Activity based costing, identify cost drivers, cost activities and compute department costs
using ABC Costing
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UNIT 1 – INTRODUCTION TO ACCOUNTING

COST ACCOUNTING

 a system that records, summarizes, analyzes and interprets the details of cost of materials, labor and
overhead necessary to produce and sell an article.

 refers to recording, classifying and reporting all costs aspects of company’s performance during a
particular period of time.

 involves gathering and providing of information for decision needs of all sorts, ranging from
management of recurring operation to the making of strategic decisions and formulation of major
organization policies.

 provides management with information for planning new products to evaluating the success of the
marketing campaign.

 Yields insights into what the managers and accountants do in an organization.

 measure the effects of decision on the value of organization.

COST ACCOUNTING INFORMATION

 Cost accounting information are used by management

1. to choose strategy, to communicate it and to determine how best it should be implemented.
2. to coordinate their decision about designing, producing and marketing of a product or service.

 The goal is to help management in achieving the maximum value of the organization

Cost Accounting and the value chain

 Value chain – is the set of activities that transform raw resources into goods or services that end
users purchase and consume and the treatment or disposal of any waste generated by them

 The objective of modern cost accounting is to ensure that the entire value chain is as efficient as
possible.

 Managers at each of stage of value chain may require information on the performance of the products,
services, suppliers, employees and customers. Managers and cost accountant work together at each
stage to make decision that increase firm values

 Cost accounting information are needed by end users or persons under research and development,
design of products and processes, purchasing, production, marketing and customer’s service.

Scope
 cost accounting serves multi-purposes.

 Cost accounting concepts and techniques are applicable not only to manufacturing concern to
satisfy management needs for product cost information but also to every type and kind of activity,
regardless of size, in all types of organizations. Non manufacturing activities should employ cost
accounting in order to operate efficiently.

 Cost accounting is essential not only to profit-seeking entities but also to not-for-profit seeking entities,
such as government agencies, churches and charities.
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 Cost accounting is no longer confined to manufacturing concern. It is now widely used by

organizations, such banks, schools, fact food outlets, hospitals, professional organizations,
government agencies, charitable organizations and others

Purpose/Objectives

 generally, the major function it to provide detailed product cost information to be able to compute unit
cost of products to manufacture, sell goods or render various services.

 Cost accounting provides product cost information to:

1. external parties – stockholders, creditors and various regulatory boards – for credit and
investment decisions
2. internal parties – managers – for planning, controlling activities, decision-making and
evaluating performance.

 cost accounting also provides vital information needed to plan for future operations, prepares
company’s budget and a the most valuable management tools to control operations – helps
management weigh the various courses of action before any final commitment are made.

 Once operation begin, cost accounting reveals how efficiently the work being done, where the weak
and strong points/spots are and how to improve performance. Management can issue directives,
perform follow-up activities and obtain the operating results the ensure the prosperity and growth for
the enterprise.

Relationship of Cost accounting to financial and management accounting

Cost Accounting -
 creates an overlap between financial accounting and management accounting by providing product
cost information for financial statements and quantitative, disaggregated, cost –based information
that managers need to perform their responsibilities.

 acts as a bridge between financial and management accounting.

 provides product cost information to:

1. external parties – stockholders, creditors, regulatory bodies – for investment and credit
decision.
2. internal parties – managers – for planning, controlling, decision-making and evaluating
performance.

 Provides financial and nonfinancial information to help management in decision making

Financial accounting

 designed to meet external information needs and to comply with generally accepted accounting
principles.

 product cost information pertains to costs incurred to make a unit of product - to be accounted for in
compliances with GAAP – IAS , IFRS.

Management accounting
 attempts to satisfy internal user’s information needs.

 Product cost information can be developed outside the constraints of GAAP. – such as cost for
research and development and distribution costs.

 Management need forward-looking information to be able to prepare plans, evaluate performance and
make more companies decisions.
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 When making pricing decision – management needed to account for the:

1. upstream costs – research, development and product design
2. downstream costs – marketing, distribution and customer service.

Differences between Financial and Management Accounting

Financial Accounting Management Accounting
Primary user External Internal

Primary organizational focus Whole (aggregate) Parts (segmented, divisional)

Information characteristics Must be: May be:

- Historical - current or forecasted
- Quantitative - quantitative or qualitative
- Monetary - monetary or non-monetary
- Verifiable - timely and at a minimum
reasonably estimated

overriding criteria GAAP - situational relevance

usefulness)
Consistency - benefits in excess of costs
Verifiable - flexibility

Recordkeeping Formal Combination of formal & informal

Cost Accounting interface with other fields of study. It provides data for use in decision models for finance,
operations management, and marketing. It also relates to motivational behavior because it used for planning
and performance evaluation.

Two basic stages to account for costs in the cost system:

1. Cost accumulation – involves the collection of cost data in some organized way by means of accounting
system.

2. Cost assignment – cost system traces direct costs and allocates indirect costs to designated cost
objects. Managers will be able to compute total costs and unit cost of a product or service and use this
information in pricing and management decisions.

Primary Application of Cost Accounting Systems

1. Cost accounting system provide data for compliance with reportorial, contractual and regulatory
requirements.
 costs are used for external purposes – used by external users.
 costs used for financial accounting purposes – cost used by outside parties, stockholders or creditors
– to evaluate the performance of the company.

 For compliance of requirements purposes – BIR, SEC, etc.

2. Obtaining information for planning control and performance evaluation

 Costs are used by internal users – management - to plan, evaluate performance of operation or
personnel or as a basis for decision making – managerial accounting purposes.

 At the end of a period, planned performance is compared to actual performance and the difference is
analyzed .
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3. Analyzing the relevant information for making decisions.

 Managers and cost accountants helps identify what information in relevant and irrelevant when
making decisions.

Key Financial Managers in an Organization

Major responsibilities and

Title Primary Duties Example Activities

Chief financial officer Manages entire finance and a. sign off financial statements
accounting functions b. determines policy on debt
versus equity ratio.

Treasurer a. manages liquid assets a. determine whether to invest

b. conducts business with banks and cash balance.
other financial institution b. obtains line of credit
c. oversees public issues of stock
and debt.

Controller a. Plans and designs information and a. determines cost accounting

incentive systems. policies
b. maintains the accounting
records.
Internal Auditor a. ensures compliance with laws and a. ensures the procurement
regulations and company policies rules are followed.
and procedures b. recommends policies and
b. provides consulting and auditing procedures to reduce
services within the firm. inventory losses.

Cost accountant a. records, measures, estimates and a. evaluates costs of products

analyzes costs. and processes
b. works with financial and b. recommends cost effective
operational manager to provide methods to distribute
relevant information for decisions. products

The Code of Conduct

Management and cost accountants have important ethical responsibilities that are related to competence,
confidentiality, integrity and objectivity. The accountant must comply with the Standards of Ethical Conduct
for Practitioners of Management Accounting and Financial Accounting issued by the Institute of Management
Accountants.

Management and cost accountants have a responsibility to maintain the highest levels of ethical conduct.
They also have a responsibility to maintain professional competency, refrain from disclosing confidential
Information, maintain integrity and objectivity in their work

(source: Cost Accounting and Control by Ma. Elenita B. Cabrera and Gilbert Anthony Cabrera)
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UNIT I – INTRODUCTION TO COST ACCOUNTING

Name: ______________________ Score: ______
Section: _____________________ Date: ________

Assignment 1 – Classify the following into: (write only the letter of the correct answer):

A. Financial Accounting B. Management Accounting

___ 1. Must comply with PFRS

___ 2. Focuses reporting on the parts or segments.
___ 3. Has future orientation
___ 4. Relevance is emphasized
___ 5. Objectivity and verifiability of data are emphasized.
___ 6. Provides information about the company as a whole.
___ 7. Reports are still useful even if submitted late.
___ 8. Timeliness of information is required.
___ 9. Need not follow PFRS
___10. Reports to various interested parties.

II – True or False: If the statement is false, underline the word or group of words which makes the
statement false. IGNORE all correct statements. STRICTLY NO ERASURES.

1. Management accounting information focuses on external reporting.

2. Financial Accounting is broader in scope than management accounting.
3. Cost accounting measures and reports short-term, long-term financial and non-financial information.
4. The statement of financial position, income statement and cash flow statement are used for financial
accounting but not for management accounting.
5. Cost management provides information that helps increase value of customers.
6. Modern cost accounting plays a significant role in management accounting.
7. Cost accounting is synonymous to management accounting.
8. The controller’s function is basically an accounting function while that of a treasurer refers to monetary
function of the entity.
9. The objective of financial accounting is to organize accounting information for interested parties within the
organization
10. Financial accounting reports financial and non-financial information that helps managers implement
company strategies.

II – Multiple Choice:

___1. Which of the following groups would be LEAST likely to receive detailed management accounting
reports?
a) Stockholders c) Sales representatives
b) Production supervisors d) Managers

___2. The person MOST likely to use management accounting information is a (n):
a) Banker evaluating credit application c) government taxing authority
b) Shareholder evaluating stock investment d) assembly department supervisor

___3. Management accounting information includes:

a) Tabulated results of customer satisfaction surveys
b) The percentage of units produced that are defective
c) The cost of producing a product
d) All of the above
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___4. Which of the following types of information are used in management accounting?
a) Financial information c) information focused on the long term
b) Non-financial information d) all of the above

___5. Management accounting includes:

a) Implementing strategies c) preparing special studies & forecasts
b) Developing budgets d) all of the above

___6. Management accounting is considered successful when it:

a) Is accurate c) is relevant and reported annually
b) Helps managers improve their decision d) helps reditors evaluate the company’s
performance.

___7. Which of the following is not a basic feature of financial accounting?

a) Objective information c) future oriented reports
b) Reports on past performance d) highly aggregated data

___8. An area of accounting that emphasizes developing accounting information for use within an entity.
a) Cost accounting c) management accounting
b) Financial accounting d) all of the above

___ 9. An accounting field that facilitates the performance by management of its planning and control
functions.
a) Cost accounting c) management accounting
b) Financial accounting d) all of the above

___10. This includes strategic, tactical and operating aspects.

a) Controlling b) communication c) planning d) evaluating

IV - Answer the following questions(5 pts)

1. Define Cost Accounting.

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

2. Discuss briefly the relationship and role of cost accounting to financial and management accounting.

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________

3. Discuss briefly the objectives of management in relation to cost accounting.

_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
_________________________________________________________________________________
________________________________________________________________________________
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4. Distinguish financial accounting from management accounting according to the following area of
comparison:
Financial Accounting Management Accounting
a) primary users

b. organization focus

c. Overriding criteria

d. Recordkeeping

e. information characteristics

5. (source: Cost Accounting and Control by Ma. Elenita B. Cabrera and Gilbert Anthony Cabrera)
The Philippine Sports Management Group (PSMG) manages and promotes sporting events and
sporting personalities. It’s managers are currently examining the following reports and accounting
statements.

a) Five year projections for expanding into managing sports television network for cable television.
b) Income statement to be included in a six-month interim report to be sent to investors and filed with
SEC.

c) Profitability comparison of golf tournaments directed by different managers, each of whom

receives a percentage of the tournaments profit.

d) Monthly reports of office costs for each of the 14 PMSG offices nationwide.

e) Statement showing the revenues PSMG earns from different types of sporting events ( for
example, golf, motor racing and tennis).

REQUIRED: Classify the reports above ( a – e) into one of the 3 major purpose or application of
accounting system

a.

b.

c.

d.

e.

End