COST ACCOUTING NOTES

Financial Accounting VS Managerial Accounting

Cost Accounting Cycle

 Cost Classification and Estimation

VARIABLE COSTS FIXED COST

 Vary directly proportional to the change in
the level of activity (volume) of production.
 Increases or decreases according to the
volume of production or activity levels.
 Costs that do not change regardless of the
change in the level of activity (volume). It
remains constant
 However, the cost per unit changes according
to the production or level of activity.
 These costs will be incurred even if there are
no units produced.

Examples: Examples:

- Rent - Shopping
- Loan Payments - Car Repairs
- Internet - Personal Care
- Gym membership - Medical copays

PERIOD COSTS

Marketing and Advertising Expenses

incurred in promoting the entity’s product
and services

Selling and distribution

include salaries of sales personnel and
delivery expenses

Administrative Expenses
include office utilities, depreciation of
office supplies PPE, repairs and
maintenance of office PPE, and all other
expenses in the office.
 LEAST SQUAREREGRESSION METHOD
COST EQUATION Example:

HIGH LOW METHOD Formula for Variable Cost per Unit:

Example:

Formula for Variable Cost per Unit

Formula for Fixed Cost

Formula for Fixed Cost

Note: In getting total Maintenance Cost, after getting its

VC and FC used the Cost Equation

Note: In getting total Maintenance Cost, after getting its VC

and FC used the Cost Equation
 Accounting for Materials

INVENTORY COSTING METHOD

Example:

FIRST IN, FIRST OUT (FIFO) METHOD

MOVING AVERAGE / WEIGHTED AVERAGE METHOD

 ECONOMIC ORDER QUANTITY (EOQ) DETERMINATION OF ORDER POINT
Safety Stock Formula
= (Maximum Daily Usage – Average
Daily Usage) Lead Time in days
Reorder Point Formula
= (Lead Time X Normal Use per Day) +
Safety Stock
Normal Maximum Inventory Formula
Order Point
(Average Daily use X Lead Time)
EOQ
Absolute Maximum Inventory Formula
Order Point
Example: (Minimum Daily Use X Lead Time)
EOQ
Number 1 Question: Total Average Inventory Formula
EOQ
÷
2
Average Inventory
Add: Safety Stock
Total Average Inventory
Number 2 Question:
Number 3 Question:

OTHER FORMULA

Total Ordering Cost Formula

= No. of orders X cost per order
Average No. of units in Carrying Cost Per Unit/Order
Inventory Order cost per unit
= EOQ ÷ 2 X
Carrying Cost
Carrying cost %
= Average No. of Units
X
Carrying Cost per Order
 Factory Overhead

PLANT WIDE/ BLANKET RATE OVERHEAD BASES

VS
DEPARTMENTAL

3 METHODS OF SERVICE DEPARTMENT

COSTS ALLOCATION
 Direct Method
 Step (Sequential) Method
 Algebraic (Reciprocal) Method
SPENDING VARIANCE

IDLE CAPACITY (VOLUME) VARIANCE

SPENDING VARIANCE
Favorable
Actual FOH Budgeted Allowance
< based on Actual Hours
Unfavorable
Actual FOH Budgeted Allowance
> based on Actual Hours
IDLE CAPACITY (VOLUME) VARIANCE
Favorable
Budgeted FOH Based on Applied FOH
Capacity Used
<
Unfavorable
Budgeted FOH Based on Applied FOH
Capacity Used
>

Activity Based Costing

Terminologies used in ABC

 Activity means any event, action, transaction, or work  Activity Cost Pool is a set of costs attributed to a
sequence that incurs costs when producing a product distinct type of activity.
 Cost Drivers mean any factors or activities that have  Cost Objects are responsibilities centers, product or
direct cause and effect relationship with resources services to which costs are assigned.
consumed
 Activity Rate is the budgeted activity cost divided by total activity base usage
 ACITIVTY BASED COSTING EXAMPLE
Problem

Step 1: Calculate for the overhead rates per activity based on cost drivers.

Step 2: Allocate overhead based on activity using the rates calculated.

Step 3: Compute for the total manufacturing cost for each product

Step 4: Compute for the gross profit

TRADITIONAL COSTING EXAMPLE
 Job Order Costing
Job order costing is a system that takes place when customers order small, unique FORMULA FOR MATERIAL
batches of products. This system determines the price of each individual product and LOSSES
1st Step: Compute Cost of Units
ensures that the cost for each product is reasonable enough for a customer to purchase
Produced
it while still allowing the company to make a profit. Direct Material
+ Direct Labor
MATERIAL AND PRODUCTION LOSSES SPOILAGE Factory Overhead
NORMAL LOSS/SPOILAGE ABNORMAL LOSS/SPOILAGE  Goods that have been Cost of Units Produced
 It is unavoidable and  It is avoidable, arises due damaged during the 2nd Step: Add Total Defective Unit
usual in the to inefficiency in manufacturing process Cost, Less Total Spoilage Unit Cost
production. operation. or goods that do not Cost of Units Produced
 It cannot be avoided  Treated as period costs meet the standard Total Defective Unit Cost
but may be controlled and charged as an required by the (Total Spoilage Unit Cost)
by the company to a expense. customer, which Total Costs of Units Produced
limited extent. Examples: cannot be brought 3rd Step: Compute Cost per Unit
 These losses are - Theft back in good state. Total Costs of Units Produced
transferred to factory - Fire  Sold at a reduced price. (÷)
overhead or work in - Breakage  Arises due to Number of Units Produced
process account. - Flood inefficiency in Cost per Unit
Example: - Accidents production.
- Losses due to loading
and unloading

Process Costing System

PROCESS COSTING VS. JOB ORDER COSTING SIMILARITIES OF
Basis Job Order Costing Process Costing PROCESS COSTING
1. Nature Work is performed per Work is performed on a AND JOB ORDER
customer instruction continuous mass COSTING
(customized order) production. (Standardized production) 1. To recording product
2. Assignment and Costs are accumulated per job Costs are accumulated per process or costs.
Accumulation of Cost department and then spread it over to the 2. They both classify
units produced product costs as direct
3. Cost Center Each job Each process or department materials, direct labor and
factory overhead.
4. Transfer of Cost No transfer of cost Costs are transferred from one process or 3. They both allocate
department to another factory overhead cost to
5. Report Costs are accumulated using Costs are accumulated using the cost of products
job-order cost sheet production report 4. They provide cost
6. Kind of Product Heterogeneous (dissimilar) Homogeneous (similar) products information for decision
Produced products making.
7. Determination of Upon completion of the order At the end of the costing period 5. They use a perpetual
Costs inventory system to record
materials, work in process

METHODS OF COSTING
FIFO Weighted Average
Beginning Inventory Completed are Beginning inventory completed and started this month units completed are
separately computed using its own stage combined and multiplied by 100% stage of completion.
of completion
EUP
Computation Note: The stage of completion (work done) of beginning inventory
completed units is ignored.
Only current month costs are included in The costs of the work in process beginning inventory are added to the costs
Units Cost the computation of costs per equivalent of the current month in the computation of costs per equivalent units.
Computation units.
 METHODS OF APPLICATION OF COSTS
Even Application of Costs Uneven Application of Costs
Materials, labor, factory overhead were applied at the same Materials, labor and overhead were applied at different stages of the
rate (stage of completion) throughout the production which production process, which resulted in a different equivalent unit of production
resulted to only one computation of equivalent unit of (EUP) for materials, labor and overhead.
production for material, labor and factory overhead. Example:
Example:

DETECTION OF LOST UNITS

A. Continuous Loss - loss occur evenly throughout the production process.

Continuous normal lost units Continuous Abnormal lost units

Inspection Stage of Completion Inspection Stage of Completion
Point Point
0% Use the method of neglect. It means that any lost units Start of the 0% - it excludes the lost units in
discovered at the start of production are treated as if they process the computation of EUP which
were never put into process because they are already result to a smaller number of
expected even before the actual production. Therefore, it total EUP.
Start of the excludes the lost units in the computation of EUP which 100% Lost units discovered during
process result to a smaller number of total EUP. A smaller number of the production process are
EUP leads to higher cost per equivalent units (unit cost). The assumed to have been inspected
costs of lost units are allocated proportionately over the During the at the end of the process because
good units (completed and work in process end) process the costs of lost units are
0% Lost units discovered during the production process are unnecessary in the production
During the assumed to have been inspected at the start of the process process and should be written-off
process because difficulties might arise finding the right stage of when incurred.
completion for lost units. The costs of lost units are allocated 100% because lost units
proportionately over the good units (completed and work in End of the discovered at the end of the
process end) process process has already been
100% because lost units discovered at the end of the process completed. The costs of lost units
End of the has already been completed. The costs of lost units are are allocated proportionately over
process allocated proportionately over the good units (completed the good units (completed units)
units)

B. Discrete Loss – it occurs at the specific point in the production process and it will be detected only when the firm performed a quality
control inspection at the inspection point.

All materials are added at the beginning of the process

Example:
All materials are added at the end of the process
Example:

FIRST IN, FIRST OUT (FIFO) EXAMPLE

WEIGHTED AVERAGE EXAMPLE
 Standard Costing and Variance Analysis

MATERIAL VARIANCE LABOR VARIANCE

FACTORY OVERHEAD VARIANCES

4 - Way 3 - Way

2 - Way 1 - Way