Cost Accounting

 systematic set of procedures for recording and reporting measurements of the cost of
manufacturing goods and performing services in the aggregate and in detail.
 also a method of managerial accounting
o aims to capture the total production cost of a business by measuring
variable costs of each production phase as well as fixed cost.
Merchandising vs. Manufacturing
 
Merchandising
 buys a product that is ready for resale when it is purchased.
 product will not be changed to make it salable
 only merchandise inventory in the financial statements
 
Manufacturing
 buys raw materials and processes it in to finished goods to be sold.
 direct labor and overhead are incurred
 three kinds of inventories namely – raw materials, work in process and finished goods.

Product Costs/Manufacturing Costs

1. Direct Materials
o basic ingredients that are transformed into finished products
o can be traced to the finished product
o made from basic direct materials
2. Direct Labor
o amount paid as wages to those working directly on the product
o direct labor for table and chair is the wages paid to carpenter, for bread
the bakers’ wages, and chef’s wages for cooked meals/product.
3. Factory Overhead
o manufacturing costs that cannot be classified as direct material or direct
labor
o indirect materials, indirect labor, depreciation of plant building and
machineries, repairs and maintenance.
Indirect Materials
 Cannot be conveniently or economically traced to specific product.
Indirect Labor
 People who aren't actually present on the process of converting raw materials to finished
goods.
Non Manufacturing Costs/Period Costs
1. Marketing or selling expenses
o all costs necessary to secure customer orders and get the finished product
or service into the hands of the customer.
o advertising, shipping, sales travel, sales commissions, sales salaries and
expenses associated with finished goods.
2. Administrative or general expenses
o all executive, organizational and clerical expenses that cannot logically be
included under either production or marketing.
 o executive compensation, general accounting, secretarial and similar
expenses having to do with the overall administration.
Costs classified as to Variability
1. Fixed costs
o constant in total, irrespective of the volume of production.
o not related to activity within the relevant range
o assignable to department based on different allocation methods.
o Cost per unit decreases as volume increases, and increases as volume
decreases.
o salaries of production executives, depreciation of equipment computed on
a straight line method, periodic rent payments and insurance.
2. Variable costs
o items of cost which vary directly, in total, in relation to volume of
production.
o Cost per unit remains constant as volume changes within a relevant range.
o direct materials, direct labor, royalties and commission of salesmen.
3. Mixed costs
o items with fixed and variable components.
o vary with the level of production, though not in direct relation to it,
probably because part of the cost is fixed while the rest is variable.