COST ACCOUNTING Ma. Cristina P.

Obeso, CPA, MBA

COST – an exchange price, a foregoing, a sacrifice made to secure a benefit

 A foregoing measured in monetary terms, incurred or potentially to be incurred to

achieve a specific objective
 The foregoing or sacrifice is represented by a current or future diminution in cash or
other assets
EXPENSES – gross decreases in assets or gross increases in liabilities recognized and measured
in conformity with generally accepted accounting principles that result to profit directed
activities of an enterprise and that can change owners’ equity.

 All expired cost which are deductible from revenues

Ex. Cost of goods sold, OPEX, selling/administrative exp., loss on sale of property

EVERY EXPENSE IS A COST, BUT NOT EVERY COST IS AN EXPENSE.

USES OF COST DATA
1. Planning profit by means of a budget
2. Controlling costs via responsibility accounting
3. Measuring annual or periodic profit, including inventory costing
4. Assisting in establishing selling prices and a pricing policy
5. Furnishing relevant cost data for analytical processes for decision making
CLASSIFICATION OF COSTS
A. COST IN RELATION TO A PRODUCT
2 elements of total operating cost
1. Manufacturing cost – sum of direct materials, direct labor and factory
overhead (elements of manufacturing cost)
2. Commercial expenses – composed of marketing expenses and administrative
expenses
 DM DL PRIME COST

INDIRECT INDIRECT OTHER INDIRECT FACTORY

MATERIALS LABOR COST OVERHEAD
Factory supplies Supervision Rent
Lubricants Superintendence Insurance-fire
Inspection and liability
Salaries of Property tax
factory clerks Depreciation
Defective works Maintenance
Experimental and repairs
work Power, light,
heat
Employer payroll
taxes
Small tools
Misc. FOH

MANUFACTURING
COST

MARKETING ADMINISTRATIVE COMMERCIAL

EXPENSES EXPENSES EXPENSES

Sales salaries Administrative & Office

Commissions to sale staff Salaries
Employer payroll taxes Employer Payroll Taxes
Advertising Rent
Supplies Depreciation
Entertainment Property Taxes
Travel Expenses Auditing Expenses
Rent Legal Expenses
Depreciation Uncollectible Accounts
Prop. Taxes Telephone & Telegraph
Telephone & Telegraph Stationery & Printing
Stationery & Printing Postage
Postage Misc. Admin Expenses
Freight & Cartage Cost
Misc. Marketing Expenses

TOTAL OPERATING
COST
 DIRECT MATERIALS – all
materials that form an integral part of a finished product and included explicitly in calculating
cost of the product
DIRECT LABOR – labor that converts direct materials into finished product and can be
assigned feasibly to a specific product
FACTORY OVERHEAD – also called manufacturing overhead, manufacturing exp., or
factory burden
Consists of all manufacturing costs except DM & DL not traced directly to specific
output
INDIRECT MATERIALS – those materials needed for completion of a product but are not
classified as direct materials because they do not become part of the product
INDIRECT LABOR – labor not directly traced to construction or composition of finished
product
MARKETING EXPENSES – include expenses for promotion, selling and delivery
ADMINISTRATIVE EXPENSES – expenses incurred in directing and controlling
organization

B. COST IN RELATION TO VOLUME OF PRODUCTION

1. Variable costs – the total amount change in proportion to changes in activity
o Total cost increase when production also increases
o Cost per unit remains fixed regardless of production
 Ex. DM, DL, some FOH
2. Fixed costs – total amount is constant regardless of changes in activity
 Total cost is constant when production increases
 Fixed cost per unit decreases when production increases
Ex. Factory rent, salary of executives
3. Semi-variable cost – cost that contains both fixed and variable elements

VARIABLE OVERHEAD FIXED OVERHEAD SEMI-VARIABLE

Supplies, fuel, small tools,
spoilage, salvage &
reclamation exp., receiving
costs, royalties,
communication costs,
overtime premium,
Salaries of production
executives, property tax,
depreciation, patent
amortization, supervisory
salaries, insurance prop. &
liab, wages of security
Electricity, inspection cost
dept. services, payroll
dept. services, personnel
dept. services, factory
office services, materials &
inv. Services, water &
 materials handling guards & janitors, sewage, maintenance &
maintenance & repair of repair of plant machinery,
bldg. and grounds compensation insurance,
health and accident
insurance, payroll taxes,
industrial relations
expense, heat, light, &
power

C. COST IN RELATION TO MANUFACTURING DEPT.

1. Producing dept. – one whose costs may be changed directly to product because it
has contributed directly to its production
Ex. Machining, assembling, & painting dept.
2. Service dept. – one that is not directly engaged in production but renders a
particular type of service for the benefit of other dept.
Ex. Maintenance, payroll, data processing, cost accounting, food services

D. COST IN RELATION TO THEIR NATURE

1. Common cost – cost of facilities or services employed in 2 or more operations
2. Joint cost – occur when the production of one product may be possible only if one or
more other products are manufactured at the same time.
E. COST IN RELATION TO DECISION, ACTION, OR EVALUATION
1. Differential cost – cost relevant to a choice or course of action among several
alternatives
2. Out of pocket cost – A differential cost will be incurred only if one particular
alternative is adopted
3. Opportunity cost – amount of revenue that will be missed or lost if a particular
alternative is adopted
4. Sunk cost – cost that has already been incurred and is therefore irrelevant to a
decision

Other costs
PRODUCT COST
PERIOD COST
PRIME COST
CONVERSION COST
COST ATCCOUNTING – area of accounting concerned with cost determination and cost
control
COST DETERMINATION – accumulation of cost data by products, processes, or services
to be able to arrive at unit cost or cost per work unit
COST CONTROL – standards are set for costs per unit and per work unit and are
subsequently compared with the figures per actual operations so that remedial
measures may be adopted
FINANCIAL ACCOUNTING
3 types of business enterprise
1. Trading – buy goods for sale; exchange goods
2. Manufacturing – convert raw materials into finished products through manpower
and plant facilities
3. Service concern – use only talents and skills to provide service to clients
4. Combination

COST ACCOUNTING – manufacturing firm

Nature and characteristics of a manufacturing firm:
1. Buys raw materials to convert them into finished goods with use of manpower and
plant facilities
2. Plant facilities (factory building, warehouse)
3. Machinery, equipment and furniture
4. Employees, factory workers, foreman, production manager (plant manager)
5. Different depts.
Producing dept – actual manufacturing operations are performed
Service dept – rendering services to producing and other service dept.
COST OF GOODS SOLD
Manufacturing
Direct materials
Mat. Inv. Beg. xxx
Add: Net purchases
Purchases xxx
Freight-in xxx
Purchase ret. Allow & discounts (xxx) xxx xxx
Less: Mat. Inv. End. xxx___
Direct Labor xxx
Factory overhead
Indirect materials xxx
Indirect labor xxx
Depr. xxx
Insurance xxx
Gen. FOH xxx xxx
Total manufacturing cost xxx
Add: WIP, beg xxx
Total cost put into process xxx
Less: WIP, end xxx
Cost of goods manufactured xxx
Add: F/G, beg xxx
Cost of goods available for sale xxx
Less: F/G, end xxx
Cost of goods sold xxx

TRADING CONCERN
Beg. Inv. XXX
Add: Net purchases
Purchases XXX
Purchase return & allowances (XXX)
Purchase discounts (XXX)
Freight in XXX_____XXX____
Goods available for sale XXX
Less: Ending inv. XXX____
Cost of goods sold XXX _
TYPES AND USES OF COST DATA FOR DECISION MAKING
RELEVANT COSTS – cost that change in value as different alternatives are compared. It
has two characteristics: 1) future cost and 2) differential cost

PERIOD COSTS – are costs that can be directly identified with measured time interval
like month, quarter, semester or year. These are charged against income in the period
incurred and cannot be inventoried. Normally, fixed costs are period costs

PRODUCT COSTS – are costs that can be directly identified with the unit of product.
These cling to the unit produced and are reported as assets until the units are sold
(inventoriable cost)

OUT-OF-POCKET COSTS – are costs that requires a current cash outlay (salaries)

SUNK COSTS - are cost of which the outlay has already been made (cost of acquired
machine)

IMPUTED COSTS – are cost that do not involve at any time actual cash outlay and which
do not, as a consequence, appear in the financial records, nevertheless, such costs
involve a foregoing on the part of the person whose costs are being calculated

OPPORTUNITY COSTS – is the measurable advantage forgone (sacrificed) as a result of

the rejection of the alternative use of resources

CONTROLLABLE COSTS – costs that are authorized to be incurred in a level of

management, in department, or by a manager, (can be heavily influenced by a manager)

DIFFERENTIAL COSTS – are the difference in cost between one course of action and
another. It means both incremental (costs increases) and decremental costs (cost
decreases)

AVOIDABLE COSTS – costs that will be eliminated if a specific segment is eliminated

(Direct departmental costs)

POSTPONABLE COSTS – costs which incurrence may be deferred to the future

COMMITTED COSTS – costs which have been committed by the management. It can not
be eliminated in the short run
DISCRETIONARY COSTS – costs that may or may not bring benefits to the company
hence its incurrence is in the discretion of the company. It can be changed quickly by the
management (advertising costs)

VALUE-ADDED COSTS – costs that add value to the product. Effort should be made to
eliminate those costs that do not add value to the product such as storage and materials
handling