C1: Introduction to Cost Accounting - intersection between financial and

managerial accounting
Cost Accounting - used by both managerial and
- measures, records, and reports financial accounting
information about the cost of goods - provides product cost information to
and services external parties for credit and
- essential to efficient cooperation of investment decisions
business and industry - provides cost information also to
In manufacturing entities internal parties for planning and
- designed to accumulate detailed controlling
cost data relating to the production
process Financial Accounting vs Managerial
- show what costs were incurred and Accounting
where and how these costs were Financial Managerial
utilized Primary External Internal Users
users
Comparison of Financial, Management, Type of General Specific
and Cost Accounting report purpose purpose
Information Historical Historical and
prospective
Primary Both financial
financial in and non-
nature financial
Quantitative Quantitative
and qualitative
Compliance Comply Does not
with GAAP comply
Frequency Prepared Prepared more
annually frequently
based on
Financial Accounting management’s
demand
- use of accounting information
Requirement Mandatory optional
reporting to external parties
Scope Whole May include
- usually presented in the form of company whole company
financial statements, tax returns, and but focuses on
other formal reports narrower scope
- supported by documents/evidence such as
- focus on the enterprise as a whole divisions
- historical transaction data
- monetary and verifiable date Merchandising vs Manufacturing
- Merchandising companies buys
Managerial Accounting goods that are already in its saleable
- focuses on needs of parties within condition and resells it to its
the organization customers.
- addresses individual or divisional - Manufacturing companies buys raw
concerns materials that are not yet in saleable
- may be current or forecasted condition and converts the raw
- monetary or non-monetary materials into the finish products
- futuristic which will be sold to its customers.

Cost Accounting
 Process Job-order
Uses of Cost Accounting Data costing costing
1. Determining product costs Nature of Homogenous Unique jobs
2. Planning and control production units pass are worked
through on during a
similar time period
Determining Product Costs
processes
a. Importance of determining product costs:
Cost Costs are Costs are
- Determining the selling price of
accumulation accumulated accumulated
product by by individual
- Meeting competition processing job
- Bidding on contracts department
- Analyzing profitability
b. Permit computation of unit costs as well Unit cost Unit costs are Unit costs are
as total product costs computed by determined
dividing the by dividing
individual the total
Planning and Control departments’ costs on the
- Planning: process of establishing costs by the job cost
objectives or goals for the firm and equivalent sheet by the
- determining how the firm will attain production number of
units on the
them
job
- Divided into 3 components
o Strategic planning – long
Cost of Job cost
range goals and objectives to production sheet
determine overall direction of report provides the
the company provides the details for the
o Tactical planning – plans for detail for the WIP account
a shorter range and WIP account
emphasize plans to achieve for each
strategic goals department
o Operations planning – day to
Primary Characteristics of a Job Order
day implementation of
Cost System
tactical plans; coordination of
1. Collects manufacturing costs and
major factors of production
assigns them to specific job or
- Control: process of monitoring the
batches of product
company’s operations and
2. Measures costs for each completed
determining whether the objectives
job, rather than for set time periods
identified in the planning process are
3. Uses just 1 WIP Inventory Control
being accomplished
account in the general ledger ->
supported by a subsidiary ledger of
Two basic product – costing system
job order cost cards or sheets for
1. Job-order costing – system for
each job in process at any point of
allocating costs to groups of unique
time
products
2. Process costing – system applicable
Main Characteristics of a Process Cost
to a continuous process of
System
production of the same or similar
1. Grouped by department or work
goods
center, with little concern for specific
job orders
 2. Emphasizes weekly or monthly time
period rather than the time taken to
complete a specific order
3. Uses several WIP Inventory
accounts -> one for each department
or work center in the manufacturing
process
*Hybrid costing – blending of both process
and job-order
*Operation costing – hybrid costing system
where finished products have common and
distinguishing characteristics: batches
C2: Concepts and Classifications
Costs
- Depend on the type of organization
involved
- Cash or cash equivalent value
sacrificed for goods and services
that are expected to bring. Current
or future benefit to the organization
- Non-cash assets can be exchanged
for the desired goods or services
- Are incurred to produce future
- benefits in a profit-making firm:
revenue
- Expenses: expired costs
- Cost accounting focuses on the
costs not the expenses
Classification of Costs
I. Costs classified as to relation to
a product
A. Manufacturing costs/ product
costs
1. Direct materials
2. Direct labor
3. Factory overhead
B. Non-manufacturing costs/
period costs
1. Marketing or selling
expense
2. General or administrative
expense
II. Costs classified to variability
A. Variable costs
B. Fixed costs
C. Mixed costs
III. Costs classified as to relation to
manufacturing departments
A. Direct departmental charges
B. Indirect departmental
charges
IV. Costs classified to their nature as
common or joint
A. Common costs
B. Joint costs
V. Costs classified as to relation to
an accounting period
A. Capital expenditures
B. Revenue expenditures
VI. Costs for planning, control, and
analytical processes
A. Standard costs
B. Opportunity costs
C. Differential cost
D. Relevant cost
E. Out-of-pocket cost
F. Sunk cost
G. Controllable cost
Manufacturing Costs/Product Costs/
Inventoriable Costs
Direct Materials
- Basic ingredient that are
transformed into finished products
with the use of labor and FO
- Timely purchasing is important
- Proper storage
- Direct costs: can be conveniently
and economically traced to specific
product units
- Indirect materials: minor materials
and other production supplies that
cannot be conveniently or
economically traced to specific
products; part of FO costs
Direct Labor
- Represent amount paid as wages to
those working directly on the product
- Direct labor cost: include all labor
costs for specific work performed on
products that can be conveniently
traced to end products
- Indirect labor cost: cannot be
conveniently traced’ FO cost
 Direct labor + direct material = prime
cost
Direct labor + factory overhead =
conversion costs
Total manufacturing costs = direct
materials + direct labor + FO
Factory Overhead
- Cannot be classified as direct
materials or direct labor costs
- Varied collection of production
related costs that cannot be
practically traced directly to end
products
- Aka manufacturing overhead, factory
burden, and indirect manufacturing
costs
Non-Manufacturing Costs/ Period Costs
Marketing or selling expenses
- Include all costs necessary to secure
customer orders and get the finished
product into the hands of the
customer
- Order-getting or order-filling costs
Administrative or general expenses
- Executive, organizational, and
clerical expenses that cannot be
logically included under either
production or marketing
Costs Classified as to Variability
- Cost changes in relation to changes
in the activity of the organization
- Activity: measure of the
organizations output of products or
services
- Relevant range: limits description to
a specific range of activity
Fixed Costs
- Remains constant in total,
irrespective of the volume of
production
- Not related to activity within the
relevant range
- ↑ activity increases/decreases, total
fixed cost remains the same
- Cost per unit ↓ as volume ↑, and ↑
as volume ↓
Committed fixed costs
- Long term commitments on the part
of management because of a past
decision
Managed fixed costs
- Incurred on a short-term basis and
can be more easily modified in
response to changes in
management objectives
Variable Costs
- Vary directly, in total, in relation to
volume of production
- Activity ↑, total variable cost ↑
- Cost per unit remains constant as
volume changes within a relevant
range
- Variable cost per unit remains the
same as activity changes
- As activity changes, total variable
cost increases or decreases
proportionately with the activity
change, but unit variable cost
remains the same
Mixed Cost
- With fixed and variable components
- Vary with the level of production, but
not in direct relation to it
- Part of cost is fixed while the rest is
variable
Semi-variable cost
- Fixed portion of this cost usually
represents a minimum fee for
making a particular item or service
available
- Variable portion of this is the cost
charged for using the service
- Ex. electricity, postpaid plans
Step cost
- Fixed part of this cost changes
abruptly at various activity levels
because these costs are acquired in
indivisible portions
- Similar to a fixed cost within a very
small relevant range
Methods of separating mixed costs into
fixed and variable components
1. Scatter graph
2. High-low point method
3. Method of Least square
Y = a + bx
ΣY = na + bΣX
ΣXY = Σxa + bΣx2
Common cost vs Joint cost
Common cost
- Costs of facilities or services
employed in two or more accounting
periods, operations, commodities, or
services
- Subject to allocation
Joint cost
- Costs of materials, labor, and
overhead incurred in the
manufacture of two or more products
at the same time
- Indivisible
- Not specifically identifiable with any
of the products being simultaneously
produced
- Subject to allocation
Capital expenditure vs Revenue
expenditure
Capital expenditure
- Benefit more than one accounting
periods
- Recorded as an asset
Revenue expenditure
- Benefit current period
- Recorded as an expense
Direct vs Indirect departmental charges
Direct departmental charges
- Costs that are immediately charged
to the particular manufacturing
departments that incurred the costs
since the costs can be conveniently
identified with the department that
benefitted from said costs
Indirect departmental charges
- Costs that are originally charged to
some other manufacturing
department or account but are later
allocated to another department that
indirectly benefitted from said costs
Costs for Planning, control, and
analytical processes
Standard costs
- Predetermined costs for DM, DL, FO
- Established from information
accumulated from past experience
and data secured from research
studies
- Budget for the production of 1 unit of
product/service
- Cost chosen by the managerial
accountant to serve as the
benchmark in the budgetary control
system
Opportunity Cost
- Benefit given up when one
alternative is chosen over another
- Considered when evaluating
alternatives for decision-making
Differential cost
- Cost that is present under one
alternative but is absent in whole or
in part under another alternative
- Incremental cost: increase in cost
from one alternative to another
- Decremental cost: decrease in cost
Relevant cost
- Future cost that changes across
alternatives
Out-of-pocket cost
- Cost that requires payment of
money because of their incurrence
Sunk cost
- Cost for which as outlay has already
been made
- Cannot be changed by present or
future decision
- Should be used in analyzing future
courses of action
Controllable and Non-controllable costs
- A cost is considered to be a
controllable cost at a particular level
of management if that level has
power to authorize the cost

Summary of important formulas

1. Total variable cost = variable cost
per unit x total output
2. Total cost = total variable cost total fixed
cost
3. Variable rate = highest point cost –
lowest point cost/ highest output –
lowest output
4. Fixed cost = total cost at highest –
(variable rate x output at highest
point) or
5. Fixed cost = total cost at lowest –
(variable rate x output at lowest rate)