Cost Accounting (ACCTG 201)

Discussion 1 – Introduction to Cost Accounting

Cost Accounting / Cost accounting and Control

➢ Formerly called COST ACCOUNTING AND COST MANAGEMENT. Serves both financial
and management accounting.
➢ A branch of accounting that tackles the methodologies and processes involved in the
calculation, recording, and summarizing of the amount of cost spent on company activities to
properly report items in the financial statements and make better economic decisions.
➢ It includes all costs of process, product cost, or service used, service provided, and sold. It
centers on the question, “How much?” and eventually to how much should be recorded and
reported, this information can help a company make better economic decisions moving
forward.

Example
Accounting for Cost in Creating
Ice Cream • Capital Intensive (machine-based operations)
• Raw Materials (Ingredients, Cone)
• Fruits (Delivery for supplies, for farmers)
• Machineries (those involved in creating the product)
• Laborers (those who operate the machineries; not skill intensive)
Furniture • Labor Intensive (skill-based Laborers for company operations)
• Raw Materials (Wood)
• Equipment (involved in the process of creating the furniture)
NOTE: In cost accounting, it analyzes the amount of cost required to produce certain products
and the details breaking down what and how it attributed to the total cost and product or service.

Comparisons of Financial and Managerial Accounting

Financial Accounting
Definition Accounting is an information
system that identifies records
and communicate the economic
events of an organization to
interested user
User External persons who make
financial decision
Time Focus Historical Perspective (Uses
recorded data of past transactions
and summarizes it in financial
statements for users)
Managerial Accounting
Accounting system by which
information are presented and
supplied to management in
appropriate manner to operate
business smoothly and efficiently
Managers who plan and control an
organization
Future Emphasis (for planning and
organizing)
 Verifiability versus Emphasis on verifiability (To
Relevance verify past transactions found on
financial statements)
Precision versus Precision-focused (correct
Timeliness recording and calculations)
Subject Primary focus is on the whole
organization (report totality of a
whole organization such as
consolidated financial
statements; e.g., how much the
organization as a whole earned)
GAAP Must follow GAAP and
prescribed formats (reports
financial information based on
standards)
Requirement Mandatory for external reports
Emphasis on relevance for planning
and control of future business
operations
Emphasis on timeliness
(information that comes late is
irrelevant)
Focuses on segments of an
organization (segmented details are
provided for managerial purposes;
e.g., how much each department
accumulated in profits)
Follows GAAP and prescribed
formats but is flexible (reports
relevant information according to
subjective interest)
Not mandatory

Venn Diagram Overlap

FINANCIAL MANAGERIAL
COST
ACCOUNTING ACCOUNTING
ACCOUNTING

➢ Information about the cost of a product or service is needed in financial accounting for
reporting purposes and information of the product cost and service cost is needed in
management accounting for decision making. As such cost accounting information is
required for creating financial statements under financial accounting and making decisions
for managerial accounting.

Organizational Strategy and Cost Information

• A company formulates a mission statement – The reason for a company’s existence.
 • The development of an organization’s strategy roots from its mission statement.
• Organizational Strategy is the plan of action on how the entity will attain and realize its
goals and objectives with the use of their own resources that will be able to contribute to
the creation of VALUE both to customers and shareholders.
• One of the ways an entity can attain competitive advantage is through cost leadership –
the ability of an entity to provide the lowest prices in the market through proper
management of cost.
• Cost leadership differs from product differentiation in the perspective of providing unique
products to be offered to the market where prices can be allowed to be relatively higher;
while cost leadership reduces the cost in producing products to reduce product price. If one
is to become a cost leader, your cost information should be the best.
• To become a cost leader, costs should be managed well.
• In order for costs to be managed well, COST ACCOUNTING information is now of
paramount importance – the entity’s cost accountants now play a vital role in the value
creation process of the entity.
• Importance of proper management cost - Properly managed cost leads to; Lower cost
of production which in turn results in; Lower product prices thereby making you; A good
cost leader which will make; More people buy from you which will; Add value to the
entity not just for the customers but also to shareholders.

Value Chain
• A value chain is a set of activities an entity applies to be able to deliver a valuable product
to customers.
• Value chain is a set of activities or functions that allows the conversion of inputs into useful
products and services.

Value Chain Activities include;

1. Research and Development – Emphasis on analysis, testing, and studying different
methodologies of cost reduction or quality improvement.
2. Design – Creation and development of product and service design that is fit for the market.
3. Supply – Proper management of raw materials inventory coming from suppliers.
4. Production – The process of acquisition and construction of company resources to create
product and services (production or manufacturing process).
5. Marketing – Promotions made by an entity to make the product or service attractive in the
market.
6. Distribution – Process of delivery of product and services to customers.
7. Customer Service – After-sales support for customer.