INTRODUCTION TO COST

ACCOUNTING
Chapter 1

Financial Accounting Managerial Accounting

is the use of accounting
information for reporting to
external parties, including
investors and creditors. It is
primarily concerned with the
financial statements for external
use by those who supply funds to
the entity and other persons who
may vested interest in the
financial operations of the firm.
focuses on the needs of parties
within the organization, rather than
interested parties outside the
organization. The information maybe
current or forecasted, quantitative or
qualitative, monetary or non-
monetary and most of all timely. The
data are futuristic and some of the
costs are not recorded in the
accounting books of the
organization.

Cost Accounting

Is the intersection between financial

and managerial accounting.
Provides product cost information to
both external and internal parties.
 INTRODUCTION TO COST
ACCOUNTING
Chapter 1

Manufacturing Three Types of Costs

Inventory Accounts Direct Materials
Direct Labor
Work in Process Inventory
Factory Overhead
Work in Process Inventory
Finished Goods Inventory

PLANNING
Is the process of establishing objectives or goals for the firm and
determining the means by which the firm will attain them.

Planning can be divided into three (3) components:

Strategic Planning - long range goals.
Tactical Planning - shorter range goals.
Operations Planning - day to day implementation of tactical plans.

CONTROL
is the process of monitoring the company's operations and determining
whether the objectives identified in the planning are being
accomplished.
 INTRODUCTION TO COST
ACCOUNTING
Chapter 1
MAJOR DIFFERENCES BETWEEN PROCESS & JOB
ORDER COSTING

Process Costing Job Order Costing

1. Homogeneous unit pass through
a series of similar processes.
2. Costs are accumulated by
processing department.
3. Unit costs are computed by
dividing the individual
departments' costs by the
equivalent production.
4. The costs of production report
provides the detail for the Work
in Process account for each
department.
1. Unique jobs are worked on
during a time period.
2. Costs are accumulated by
individual job.
3. Unit costs are determined by
dividing the total costs on the
job cost sheet by the number of
units on the job.
4. The job cost sheet provides the
details for the Work in Process
account.

Hybrid Costing - costing system which incorporates ideas

from both process and job-order costing.
Operation Costing - a hybrid costing system often used
in repetitive manufacturing where finished products have
common and distinguishing characteristics.
Batch - large orders of identical units as a group through
the same production sequence.
 COSTS - CONCEPTS AND
CLASSIFICATIONS
Chapter 2

I. Costs classified as to relation to a product

A. Manufacturing
Costs/ Product Costs
1. Direct Materials - are those
that can be traced to the
finished product.
2. Direct Labor - represent the
amount paid as wages to those
working directly on the product.
3. Factory Overhead - are a
varied collection of production-
related costs that cannot be
practically or conveniently
traced directly to end products.
B. Non-manufacturing
costs/ Period Costs
1. Marketing or Selling Expense -
all costs necessary to secure
customer orders and get the
finished product or service into
the hands of the customer.
2. Administrative or General
Expenses - include all executive,
organizational, and clerical
expenses that cannot logically be
included under production or
marketing.

Direct Labor Costs include all labor costs for

specific work performed on products that can be
conveniently and economically traced to end
products.
Indirect Labor Costs are labor costs for
production related activities that cannot be
conveniently and economically traced to end
products.
 COSTS - CONCEPTS AND
CLASSIFICATIONS
Chapter 2
II. Costs classified as to variability

A. Variable Costs - vary directly, in total, in relation to volume of production. As

activity changes, total variable cost increases or decreases proportionately with
the activity change, but unit variable cost remains the same.
B. Fixed Costs - remain constant in total, irrespective of the volume of
production.
1. Committed fixed costs - represent relatively long term commitments.
2. Managed fixed costs (discretionary, programmed, or planned fixed costs)
- costs that are incurred on a short-term basis and can be more easily
modified in response to changes in management objectives.
C. Mixed Costs - items of costs with fixed and variable costs.
1. Semivariable Costs. The fixed portion of a semi-variable cost usually
represents a minimum fee for making a particular item or service available.
2. Step Costs. The fixed part of step costs changes abruptly at various
activity levels because these costs are acquired in indivisible portions.

III. Costs classified as to relation to manufacturing

departments
A. Direct departmental charges - costs that are immediately charged to the
particular manufacturing departments that incurred the costs.
B. Indirect departmental charges - costs that are originally charged to some
other manufacturing departments or accounts but later allocated or transferred
to another departments that indirectly benefited from said costs.

IV. Costs classified to their nature as common or joint

A. Common Costs - costs of facilities or services employed in two or more

accounting periods, operations, commodities, or services.
B. Joint Costs - costs of materials, labor, and overhead incurred in the
manufacture of two or more products at the same time.
 COSTS - CONCEPTS AND
CLASSIFICATIONS
Chapter 2
Costs for Planning, Control, and Analytical Processes
Standard Costs
Predetermined costs for direct materials, direct labor, and factory overhead.
They are established by using information accumulated from past
experience and date secured from research studies.
Opportunity Costs
The benefit given up when one alternative is chosen over another.
Differential Costs
Costs that is present under one alternative but is present in whole or in part
under another alternative.
Incremental Costs is an increase in costs from one alternative to another.
Decremental Costs is a decrease in costs.
Marginal Revenue
Can be obtained from selling one more unit of product.
Marginal Costs
Costs involved in producing one more unit of product.
Relevant Cost
A future cost that changes across the alternatives.
Out-of-pocket Cost
Costs that requires the payment of money (or other assets) as a result of
their incurrence.

SUMMARY OF IMPORTANT FORMULAS

Prime Costs = Direct Labor + Direct Materials
Conversion Costs = Direct Labor + Factory Overhead
Total Manufacturing Costs = Direct Materials + Direct Labor + Factory Overhead
Total Variable Costs = Variable Costs per unit x Total output
Variable Costs = highest point cost - lowest point cost
highest output - lowest output
Fixed Cost = Total Cost at highest - (variable rate x output at highest point) or
Fixed Cost = Total Cost at lowest - (variable rate x output lowest point)
 COST ACCOUNTING CYCLE
Chapter 3
Manufacturing Inventory Accounts

Materials Inventory (Materials Inventory Control)

Made up of balances of materials and supplies on hand.
An item taken out of Materials Inventory and requisitioned into production is
transferred to the Work in Process Inventory Account (not Cost of Goods
Sold).
Work In Process Inventory
All manufacturing costs incurred and assigned to products being produced
are classified here.
The issuance of materials production, begins the production process.
Direct labor earned by factory employees are are assigned to products as
part of the Work in Process Inventory.
Overhead costs are products costs and must be assigned to specific
products. Thus, they are included in this account.
Finished Goods Inventory
All costs debited to the Finished Goods Inventory account represent
transfers from the Work in Process Inventory Account.
At the end of the accounting period, the balance in the Finished Goods
Inventory is made up of the cost or products completed by unsold as of that
date.

COMPUTATION OF COST OF GOODS SOLD

Beginning finished goods inventory
Plus: Cost of goods manufactured
Total Goods Available for Sale
Less: Finished goods inventory end
Cost of Goods Sold
 COST ACCOUNTING CYCLE
Chapter 3

Statement of Cost of Goods Manufactured and Sold

Name of Company
Cost of Goods Sold Statement
For the year end xxxx
Direct Materials used
Materials Inventory - Beginning xxx
Add: Purchases xxx
Total Available for use xxx
Less: Materials Inventory - End xxx xxx
Direct Labor xxx
Factory Overhead xxx
Total Manufacturing Costs xxx
Add: Work in Process - Beg. xxx
Cost of goods put into process xxx
Less: Work in Process - End xxx
Cost of Goods Manufactured xxx
Add: Finished goods - Beg xxx
Total Goods Available for Sale xxx
Less: Finished Goods - End xxx
Cost of Goods Sold xxx
 COST VOLUME PROFIT ANALYSIS
Chapter 4
Cost Volume Profit Analysis
Estimates how changes in costs (variable and fixed), sales
volume, and price affect a company's profit.

Variable Costs includes: Fixed Costs includes:

direct materials fixed overhead
direct labor fixed selling
variable overhead fixed administrative
variable selling
variable administrative

Break Even Point

is the point of zero profit (no profit, no loss).
determined to serve as a point of reference.
the break even point where total revenue equals total costs.

BREAK EVEN POINT (UNITS) = Total Fixed Cost

Sales Price - Variable Cost
BREAK EVEN POINT (UNITS) = Total Fixed Cost
Contribution Margin Unit
BREAK EVEN POINT (PESOS) = Total Fixed Cost
Contribution Margin Ratio
BREAK EVEN POINT (PESOS) = BEP in units x Selling price per unit

Contribution Margin
is the amount remaining after deducting the variable cost per unit from
the selling price per unit.

CONTRIBUTION MARGIN/UNIT = Selling Price - Variable Cost

CONTRIBUTION MARGIN RATIO = CM PER UNIT
Sales Price per unit
 COST VOLUME PROFIT ANALYSIS
Chapter 4
If a statement is prepared for the break even sales, it will appear as:

Sales xxx
Variable Cost (xxx)
Contribution Margin xxx
Fixed Cost (xxx)
Net Income xxx

Margin of Safety
is the units sold or revenue earned above the BEP volume.
it represents the number of units or amount of sales revenue that the
company can absorb before incurring a loss.

Margin of Safety = Current Sales - BEP Sales

CVP ANALYSIS IN MULTIPRODUCT

Sales Mix
is the combination of products being marketed by the company.

Break even in Total Units = Total Fixed Cost

Weighted Average Contribution Margin

Sales and Units with Desired Profit

Sales = Total fixed Cost + Desired Profit
Contribution Margin per unit
Operating Leverage
is the use of fixed cost to get higher percentage changes in profit as
sales changes.
Degree of Operating Leverage = Operating Margin
Operating Income