BASIC COST MANAGEMENT CONCEPTS

Cost accounting is a field of accounting that measures, records, and reports information about
costs. It informs management with the cost of rendering a particular service, buying and selling a
product, and producing a product.

Financial Accounting
 Financial reporting is intended for external users like creditors, suppliers, shareholders,
etc.
 Financial statements are the outputs of the accounting system.
 Reports focus on the enterprise as a whole.
 Financial accounting is based on historical transaction data (must be supported by
documents or evidences).
 Financial information is historical, quantitative, monetary, precise and verifiable.
 May also be used by internal users as basis for financial analysis.
 Required by the Securities and Exchange Commission and the Bureau of Internal
Revenue.

Management Accounting
 Financial reporting is intended for internal users (management).
 Various financial reports, by segment or division, are prepared.
 Addressed segment or divisional concerns rather than the enterprise as a whole.
 Focus is the future and some information are not recorded in the accounting books.
 Financial information may be current or forecasted, quantitative or qualitative, relevant to
decision-making and timely.
 There is no mandated or legislated requirement as to the format or use.

Cost accounting information is needed in both financial and management accounting information
systems. Product cost information is provided to external users for various purposes and to
internal users for planning, controlling, and decision-making.

Uses of Cost Accounting Data

 In determining product costs – both for unit costs as well as for total product costs. Cost
information is useful in (1) setting the selling price of a product; (2) meeting competition
and bidding on contracts; (3) analyzing profitability; and (4) evaluating performance of
management.
 For planning and control. Planning is the process of establishing objectives and
determining the means to attain these goals. Controlling is the process of monitoring
operations and determining whether the established objectives are met, and if not, making
the necessary corrective actions and adjustments.

Basic Product Costing Systems

1. Job-order costing – a costing system applicable to the production of customer-specified
products or special-order products completed on a per job basis. In this system, direct
materials, direct labor, and factory overhead costs are assigned to specific job orders or
batches of production. Each job becomes a cost center for which costs are accumulated.
In computing unit costs, the total manufacturing costs for each job is divided by the
number of good units produced for that order.

Job-order costing measures costs for each completed job, rather than for set time periods,
using one Work in Process Inventory account supported by subsidiary ledgers of job cost
sheets for each job in process at any point in time.

2. Process costing – a costing system applicable to a continuous or uniform production

process of a large number of same or similar goods where each processing department
becomes a cost center. In process costing, it is more economical to account costs of
products for a period of time rather than to assign costs to specific job orders. Unit costs
are computed by dividing total manufacturing costs assigned to a particular department
during a period by the equivalent unit of production.

Since products are costed based on time periods (such as weekly or monthly) rather than
specific completed job-orders, it is more convenient to use several Work in Process
Inventory accounts (for each department) to accumulate manufacturing costs.

3. Hybrid costing or operation costing – a costing system that incorporates both job-order
and process costing systems. This system is used in repetitive manufacturing processes
where finished products have common, as well as distinguishing features. A company
processing large orders or batch of identical units in a group through the same production
sequence and then places each batch in succeeding varied processes is using hybrid
costing.