COST ACCOUNTING AND CONTROL

Textboook: Cost Accounting – Principles and Procedural Application 2018 Ed. By

Pedro P. Guerrero

Module 1
Chapter 1 – Cost Accounting – Basic Concepts and the Job Order Cost Cycle
BASIC CONCEPTS
The accounting system is the major quantitative system in almost every organization. It
provides information for:
1.       Internal reporting to managers, for use in planning and controlling operations
2.       Internal reporting to managers, for use in formulating plans and policies
3.       External reporting to stockholders, government and other outside parties
Management Accounting – internal reporting caters to management needs and
purposes.
Financial Accounting – external reporting, it is principally concerned with the historical
and stewardship aspects of accounting.
Cost Accounting – is management accounting, plus a small part of financial accounting
to the extent that its product costing function satisfies the needs of external reporting.

COST ACCOUNTING DEFINED

Cost Accounting is a system that records, summarizes, analyzes, and interprets the
details of the costs of materials, labor, and overhead necessary to produce and sell an
article.
Cost Accounting refers to recording, classifying, and reporting all costs aspects of
company performance during a particular period of time.

THE PURPOSE OF COST ACCOUNTING

Estimating and Bidding
A knowledge of the costs of doing business is needed to estimate a jo or to bid for jobs
or contracts.
Attempting to bid without detailed cost information can mean losing job, or it can mean
winning the job but having to perform the work at a loss.
Planning, Budget, and Control
The cost accounting system also provides vital information needed to plan future
operations. Cost data help resolve questions relating to proposed projects or policies.
Cost accounting is also used in preparing a company’s budget. A budget is the overall
financial plan for future activities. It is even possible to compute flexible budgets that will
tell what the costs for any volume of output should be. Then actual costs can be
compared with a realistic budgeted amount.
Standard cost procedures are helpful in evaluating the results of operations. Unit costs
are projected on the basis of standard conditions. These standards are often based on
the past experience of the firm or on statistics from the industry. Then, actual costs are
incurred, they are compared with these standard costs. The differences between the
two sets of cost figures can be noted and analyzed while there is still time to take
remedial action.
Cost accounting is one of the most valuable management tools to control operations.
Knowledge of making and selling the firm’s product or services helps management
weigh the various courses of action before any final commitments are made. Once
operations begin, cost accounting reveals how efficiently the work is being done, where
the strong and weak spots are, and how to improve performance.
The cost of making a product or providing a service is one of the most critical factors in
a firm’s ability to meet the competition. With cost information to support the decisions,
management can issue directives, perform follow-up activities, and obtain the operating
results that ensure prosperity and growth for the enterprise.

MANUFACTURING COSTS CLASSIFIED

Manufacturing is the process of converting materials into finished goods by using labor
and incurring other costs, generally called manufacturing overhead. Overhead costs
include utilities, supplies, taxes, insurance, and depreciation. One of the functions of a
cost accounting system is to classify and record all costs according to category.
The three major manufacturing cost classifications
1.       Direct Materials
2.       Direct Labor
3.       Manufacturing Overhead
Manufacturing Overhead is subdivided into three categories
1.       Indirect Materials
2.       Indirect Labor
3.       Other Manufacturing Overhead

PRIME AND CONVERSION COST

Prime cost - the sum of direct materials and direct labor. Prime cost reflects the primary
sources of costs for units in production.
Conversion cost - the total direct labor and manufacturing overhead. Conversion cost
indicates the costs required to convert the raw materials into finished products.
INVENTORIES FOR A MANUFACTURING COMPANY
A manufacturing company has three distinct inventory accounts:
1.       Raw Materials Inventory
2.       Work in Process Inventory
3.       Finished Goods Inventory

SYSTEM OF COST ACCUMULATION

The basic objective of cost accounting is the determination or accumulation of a
product’s cost for inventory valuation and income determination. The following systems
may be used in accumulating a product’s cost.
1.       Actual Cost System (Historical)
2.       Standard Cost System (Predetermined)
3.       Normal Cost System

TYPE OF COST SYSTEMS

Job Order Cost System
The job order cost system accumulates costs applicable to each specified job order or
lot of similar goods manufactured on a specific order for stock or for a customer. When
production on a job begins, the job is assigned a number, and a form called a job cost
sheet is set up.
Process Cost System
The process cost system accumulates costs without attempting to allocate them during
the accounting period to specific units of goods being manufactured. At the end of the
fiscal period, the average cost per unit is determined by dividing the total number of
units produced into the total cost accumulated. Because of this technique, process
costing is often referred to as average costing. If the process cost system is used, the
goods manufactured must be similar in nature so that an average cost will be
meaningful.
The process cost system is commonly used in such manufacturing operations as
cement plants and flour mills, in which the production process is standardized and
continuous and the product remains essentially the same from day to day.
Dual Systems
Some manufacturers use both the job order cost system and the process cost system.
A dual system is often used when a company makes standard parts or subassemblies
continuously and then incorporates them into finished goods built to customer
specifications. The cost of the parts is accumulated and determined under a process
cost system, and the cost of each customer’s order for finished goods is computed
under a job order cost system.
INTRODUCTION TO THE JOB ORDER COST CYCLE – NORMAL COSTING
The flow of these costs through the accounting system parallels the flow of products
through the manufacturing operations.
WORK FLOW
The steps in a typical cycle of operations of a firm using Job Order Cost System are
outlined below:
1.       Procurement
2.       Production
3.       Warehousing
4.       Selling
The cost accountant’s job is to design a system in which all cost elements are recorded
as incurred and then charged to production as the work flows through the operating
cycle.
RECORDING COSTS AS INCURRED
As each cost is incurred, it must be recorded in an appropriated general ledger account.
Different accounts are needed at different points in the operating cycle. The following
information includes usual account titles and numbers:
1.       Procurement
2.       Production
3.       Warehousing
4.       Selling

MATCHING COST FLOW AND WORK FLOW

The provision for special cost accounts sets the stage of charging costs in accordance
with the flow of work. The process can best be understood if analyzed step by step as
followes.
1.       Procurement
2.       Production
3.       Warehousing
4.       Selling
 
Chart of Accounts
The chart of accounts used by manufacturing company used Job Order Cost System:
·       Manufacturing Overhead
501 Manufacturing Overhead Control
507 Overapplied or Underapplied Manufacturing Overhead
 
·       Most of the accounts are familiar in any type of company except the following
account in manufacturing company:
121 Materials
122 Work in Process
126 Finished Goods
415 Cost of Goods Sold
500 Factory Payroll
501 Manufacturing Overhead Control
507 Overapplied or Underapplied Manufacturing Overhead
 
·       Beginning Balances
·       Raw Materials Purchased
·       Raw Materials Used
·       Factory Wages Earned
·       Labor Charged to Production
·       Manufacturing Overhead Costs
·       Manufacturing Overhead Applied to Products
·       Transfer of Finished Goods
·       Sales of Finished Goods
 
Financial Statements
·       Schedule of Manufacturing Overhead
·       Statement of Costs of Goods Manufactured
·       Statement of Comprehensive Income