ENTR 20083 (Pricing and Costing): Module 1

Topic: Introduction to Cost Accounting

Reference: Cost Accounting and Control 2019 Edition
Prepared by: Mar Jonathan Flores, College Instructor

I. Learning Objectives

1. Define what is cost accounting.

2. Distinguish between financial, managerial, and cost accounting.
3. Identify the uses of cost accounting data.
4. Know the importance of cost accounting information.
5. Understand the Effective Cost Control

II. What is Cost Accounting?

 Cost accounting is the intersection between financial and managerial accounting.

 It provides product cost information to external parties, such as stockholders, creditors and various
regulatory boards for credit and investment decisions.

 It provides product cost information also to internal parties, such as managers for planning and
controlling.

 Provides detailed cost information management needs:

 Control operations
 Plan for the future.
 Allocation of resources to most efficient and profitable areas of the business.

III. Relationship of Cost Accounting to Management and Financial accounting.

Financial Accounting

 Focuses on gathering of historical financial information to be used in preparing financial statements

such as;

 Income Statement
 Retained Earnings Statement, Changes in Equity
 Balance Sheet
 Statement of Cash Flows

 External Function—Creditors, Investors, Regulators etc.

Management Accounting

 Focuses on both historical and estimated data that management needs to conduct ongoing
operations and do long- range planning.

Cost Accounting
  Includes both parts of financial and management accounting.

 Provides product cost data required for special reports to management (management accounting)
and for inventory costing in the financial statements (financial accounting).

 Helps determine whether to make or buy a product component.

 Determines if a special order can be accepted at a discounted price
 Determines the amount at which cost of goods sold should be reported on the income
statement; and the valuation of inventories on the balance sheet.

Comparison
Characteristics Financial Accounting Management Accounting

Users: • External
Parties • Internal Parties (Manager)
(Shareholders, Creditors,
Regulators)
• Primary users – Existing
and potential investors,
creditors and lenders
• Managers

Focus: Entire Business Segments of the Business

Uses of Cost Information:
Product Costs for Calculating Cost
of Goods Sold (Income Statement)
and Finished Goods, Work in
Process, and Raw Materials
Inventories (Balance Sheet) Using
Historical Costs and Generally
Accepted Accounting Principles.
• SpecialDecisions Such as Make
or Buy a Component, Keep or
Replace a Facility, and Sell a
Product at a Special Price.
• Nonfinancial Information Such as
Defect Rates, Percentage of
Products Returned, and
Percentage of On-Time Deliveries
(All of the Above Using a
Combination of Historical Data,
Estimates, and
Future Projections.

Management
Financial Accounting Accounting
Cost Accounting (For special reports to
(For inventory costing
(Product Cost management for
purposes in the
financial statements) Information) decision-making purposes)
IV. Uses of Cost Accounting Information

1. Determining Products Costs and Pricing

 Cost accounting information must be designed to permit determination of unit costs as well as total
product costs, for example;

 $100,000 for labor in a certain month is not, in itself, meaningful; but if this labor produced
5,000 finished units, the fact that the cost of labor was $20 per unit is significant.

 Uses of Unit Cost Information

 Determining the selling price of a product – Set a price high enough to cover the cost of
production, marketing, and administrative expenses as well as to provide a satisfactory profit
to the owners.

 Meeting competition – Resolve pricing issues on products being undersold by competitors.

 Bidding on contracts – submit competitive bids to be awarded contracts.

 Analyzing profitability – allocate scarce resources to those that are most profitable.

2. Planning and Control

 Planning is process of establishing objectives or goals and determining the means by which they
will be met.

 Effective planning is facilitated by the following:

 Clearly defined objectives of the manufacturing operation;

- Number of units to be produced

- Desired quality
- Estimated unit cost
- Delivery schedules
- Desired inventory levels

 A production plan that will assist and guide the company in reaching its objectives.

- Description of the manufacturing operations to be performed.

- Projection of human resource needs for the period.
- Coordination of the timely acquisition of materials and facilities.
V. Importance of Cost Accounting Information

 It enhances the planning process by providing historical costs that serve as a basis for future
projection.

VI. Effective Cost Control

 Control – process of monitoring the company’s operations to determine if objectives identified in

the planning process are being accomplished.

Effective control is achieved as follows:

 Assigning Responsibility

 Responsibility should be assigned for each detail of the production plan. Managers should
precisely know their responsibilities in terms of efficiency, operations, production and costs.

 Responsibility Accounting – Assignment of accountability for costs of production results to

those individuals with most authority/ influence.

 Cost Centers – Unit of activity within the company where costs may be practically and
equitably assigned.

Criteria for a cost center.

 a reasonable basis on which manufacturing costs can be traced or allocated.

 a person who has control over and is accountable for many of the costs charged to that center

Reports

 Cost and Production Report – Reflects costs of a cost center in currency, and its production in
units.

 Performance Report – Includes those costs and production data that the manager can control.

 Variance – Represents the amount by which the actual result differs from the budgeted/
planned amount. These reports must be furnished at regular intervals (monthly, weekly, or
daily) on a timely basis.

 Formula of computing variance = Budget – Actual = Variance (Negative, U; Positive, F)

 Periodically Measuring and Comparing Results

 Actual operating results which may be made monthly, weekly, daily or even hourly is a major
part of cost control to compare current performance with the overall plan.
  Actual amount spent, units produced, hours worked, or materials used are compared with the
budget.

 This comparison is a primary feature of cost analysis.

 Taking Necessary Corrective Action

 Appropriate corrective action should be implemented in problem areas and business plan
deviations identified through the performance reports.

 An investigation reveals a weakness to be corrected or a strength to be better utilized. Apart

from the results of the operation, it is important to know how the results—favorable or
unfavorable—compare with the plan.
Guide Questions

1. What is cost accounting?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
___________________________________________________________________

2. How cost accounting differs from financial and managerial accounting?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
___________________________________________________________________

3. What are the two uses of cost accounting information?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
___________________________________________________________________

4. Explain the importance of cost accounting information?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
___________________________________________________________________

5. Why it is important for a company to control the cost effectively?

_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
_____________________________________________________________________________________________
____________________________________________________________________________________