Chapter 1: Cost Accounting- Basic Concepts and the Job Order Cost Cycle
Accounting System Manufacturing Overhead
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.
Internal reporting is also known as management
accounting.
External reporting is known as financial
accounting.
Cost Accounting
 It 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.
 Now refers to the gathering and providing
of information for decision needs of all
sorts, ranging from the management of
recurring operations to the making of
strategic decisions and the formulation of
major organizational policies.
Purpose of Cost Accounting
 Estimating and Bidding
 Planning, Budgets, and Control
Manufacturing Costs Classified
Manufacturing- it is a process of converting
materials into finished goods by using labor and
incurring other costs, generally manufacturing
overhead.
Directs Materials
- Raw materials
- Those materials used in the manufacturing
process that become a significant part of
finished goods.
Direct Labor
- Employees who work directly with the
raw materials in converting them to
finished goods.
Xyra
- All costs incurred in the factory that
cannot be considered direct materials or
direct labor.
Indirect Materials
- Materials that are used in small amounts in
the manufacturing process or that cannot
easily be traced to specific products.
Indirect Labor
- The wages of factory personnel who do
not work directly on raw materials.
Other Manufacturing Overhead
- It is a growing part of the total cost of
production because of the increasing use
of labor-saving equipment such as
computers and robots in many
manufacturing processes.
Prime and Conversion Costs
 Prime cost
- sum of direct materials and direct labor.
- reflects the primary sources of costs for
units in production.
 Conversion cost
-total of direct labor and manufacturing
overhead.
-indicates the costs required to convert the
raw materials into finished products.
Inventories for a Manufacturing Company
Raw Materials Inventory – reflects the cost of
raw materials and factory supplies that will be
used in the manufacturing process. Once direct
materials are removed from the storeroom for use
in manufacturing process, their costs are no longer
part of the raw materials inventory. Instead, these
costs are then classified as part of work in process.
Work in Process Inventory - reflects the cost of
raw materials direct labor, and manufacturing
overhead of goods on which manufacturing has
begun but has not been completed at the end of
fiscal period.
Page 1
 Chapter 1: Cost Accounting- Basic Concepts and the Job Order Cost Cycle

Finished Goods Inventory – reflects the costs of Types of Costs Systems

goods that have been completed and are ready for
sale. Any changes in the Finished Goods Inventory
account are reflected in the Cost of Goods Sold
section of the income statement.
System of Cost Accumulation
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.

1. Actual Cost System (Historical) - The cost per unit per unit may then be obtained
- Direct materials, direct labor, and factory by dividing the total cost of the job by the number
overhead costs are determines as they of units completed.
occur simultaneously with the Process Cost System
manufacturing operation but the total of
these costs is known only after the -accumulates costs without attempting to allocate
operation has been completed. An actual them during the accounting period to specific units
cost system collects the actual amounts of of goods being manufactured.
direct material, direct labor, and factory
overhead that are incurred for each -the average cost per unit is determined by
product. dividing the total number of units produces into
the total cost accumulated.
2. Standard Cost System (Predetermined)
- Costs are determined in advance from
analysis and forecasts made before the
actual production begins. In a standard
cost system, standard unit costs are
computed for the direct materials, direct
labor, and factory overhead; these
amounts, rather than the actual costs, are
carried to Finished Goods inventory.

3. Normal Cost System

- This system accumulates only the actual
amounts of direct material and direct labor
costs. Factory overhead costs are
accumulated on the basis of a
predetermined rate.

Product Actual Standard Normal Costing

Costs Costing Costing
DM Actual Standard Actual
DL Actual Standard Actual
FOH Actual Standard Predetermined

Xyra Page 2