1
CHAPTER 1
Cost Accounting
 Informs management about the cost of rendering services,
buying and selling a product and producing a product.
 It is a field of accounting that measures, records and reports
information about costs
 It is needed and used by both financial and managerial
accounting.
 It provides product cost information to external users such as
stockholders, creditors and investors.
 It provides product cost information to internal parties such
as managers for planning and control.
Financial Accounting
 Concerned on providing financial information to external
users such as the government, those who provide funds and
those who are interested in the company’s operation.
 It reports an enterprise as a whole.
 Information is historical, quantitative, monetary and
verifiable.
 It is required to be submitted by entities formed as
corporation by the SEC and BIR.
 Emphasizes relevance, timeliness, verifiability and free from
bias
Managerial Accounting
 It focuses on the needs of parties within organization
 It addresses the individual or divisional concerns rather than
those of the enterprise as a whole.
 Information is current/forecasted, quantitative/qualitative,
monetary/non-monetary, and timely.
 Emphasizes Relevance and Timeliness.
Manufacturing process
 Involves conversion of raw materials into finished product
through the application of labor and incurrence of various
factory expenses.
Planning
 Is the process of establishing objectives and goals of the firm
and determining the means by which the firm will attain
them.
Control
 Is process of monitoring company’s operations and
determining whether the objectives set in planning process
are being accomplished.
Job-order Costing
 Product costing system used by companies making one-of-a-
kind or special-order products.
 Allocating cost to a group of unique products or production
of customer specified products.
 Each Job becomes cost center
 Subsidiary record (job cost sheet) for unfinished jobs (work In
process) and finished jobs (finished goods).
 Collects manufacturing cost and allocate them to specific jobs
or batches of product.

 Measured cost for each completed job
 Maintains 1 work in process control account, supported by
subsidiary record of job cost sheet.
Process Costing
Manufacturing Cost/Product Cost
 Product costing system that Is used by companies that make
1. Direct Materials
large number of similar products or maintain continuous
production flow.
 A system applicable to a continuous process of production
same or similar goods.
 The products are uniform so as the cost.
 Each processing department becomes cost center.
 Manufacturing costs are grouped per department or work
center.
 Measures cost per weekly or monthly time period.
 Maintains several work in process inventory accounts – one
for each department or work center.
Operation Costing (Hybrid Costing)
 Hybrid costing often used in a repetitive manufacturing
where finished products have common as well as 2. Direct Labor
distinguishing characteristics.
CHAPTER 2
Cost
 Cash or cash equivalent value sacrificed for goods and
services that are expect ed to bring a current or future benefit
to the organization.
Expenses – Expired Costs (used in production)
2
Loss – cost that expired without producing any revenue
benefit.
 Basic ingredients that are transformed into finished products
through the use of labor and factory over head in production
process.
 Materials that become parts of finished products and can be
conveniently and economically traced to specific product
units.
1.1. Indirect Materials
o minor materials and other productions supplies that
cannot be conveniently and economically traced to a
specific product.
o Part of factory overhead costs
 Represents the amounts paid as wages to those working
directly on the product.
 The wages of machine operators and other workers
involved in actually shaping the products are classified
under direct labor costs.
 Work performed on products that can be conveniently
and economically traced to end products.
2.1.1. Indirect labor costs

o Labor cost that cannot be conveniently and
economically traced to end products
o e.g. wages/salaries machine helpers,
supervisors and other support personnel.
o Part of factory overhead co
Prime Cost = Direct Labor + Direct Material
Conversion Costs = Factory Overhead + Direct Labor
3. Factory Overhead
 Manufacturing cost that cannot be classified as direct
labor or direct materials
 It cannot be conveniently and economically traced to an
end products
Non-Manufacturing Cost/Period Cost
1. Marketing or Selling Expenses
 “Order-getting or Order-filling”
 All costs necessary to secure customer orders and get the
finished product into the hands of customer.
 Included in operating expenses
 E.g. advertising, shipping, sales travel, sales commissions,
sales salaries and expenses associated with finished goods
warehouses.
2. General or Administrative Expenses
 All executive, organizational and clerical expenses that
cannot be logically include under production or marketing.

3
 Included in operating expenses
 E.g. executive compensation, general accounting, secretarial,
public relations, etc.
Cost Classified as to variability
1. Fixed Costs
 Total fixed costs remains in constant, irrespective of the
volume of production.
 Cost per unit decreases as volume increases, and
increases as volume decreases. (inverse)
 E.g. Salaries of production executives, depreciation of
equipment computed on straight line basis, periodic rent
payments and insurance.
2 Categories of fixed costs:
a) Committed fixed Costs
o costs that represent relatively long-term commitments of
the management.
b) Managed fixed costs
o Costs incurred on a short-term basis.
2. Variable Costs
o Total variable costs vary directly in relation to the volume
of production.
o Total variable cost changes proportionately with the
activity (total variable costs increases as volume
increases, total variable cost decreases as volume
decreases)
o Cost per unit remains constant as volume changes.
o E.g. direct materials, direct labor, royalties and
commission of sales men.
 4

3. Mixed Costs Cost Classified as to their nature as common or joint

 Items of cost with fixed and variable components. Common Cost

2 Categories of mixed costs:  Costs of facilities or services that is employed in two or more
accounting periods, operations, commodities or services.
a) Semi-variable costs
 Subject to allocation
o The fixed portion represents minimum fee for
making a particular item or service available. Joint Cost
o Variable portion is cost charged for actually using the
service.  Cost of materials, labor or overhead incurred in the
o Cellphone plan manufacture of two or more products at the same time.
b) Step Costs  Subject to allocation
 Fixed portion changes abruptly at various activity
levels.
 Supervisors’ salary Cost Classified as to relation to accounting periods

1. Capital Expenditure
 Expenditure intended to benefit more than one accounting
Methods of separating mixed costs into fixed and variable period.
components  Recorded as an assets
I. High-Low Point Method (IC) 2. Revenue Expenditure

II. Method of Least Square (IC)  Expenditure that will benefit the current period only
 Recorded as an expenses
Steps:
1. Use the Equation 2 to derive function of a
Cost Classified as to relation to manufacturing departments
2. Use equation 3 to find b
3. Use the derived function of equation 2 in Substituting the 1. Direct Departmental Charges
value to compute for a  Costs that are immediately charged to a particular
4. Substitute the formula of high-low method or least square manufacturing department that incurred the costs.
method (equation 1).  Cost can be conveniently identified or associated with
the departments.
 5

2. Indirect Departmental Charges

 Cost originally charge to other manufacturing
departments or accounts but later allocated or
transferred to other departments that indirectly
benefited that costs.
Cost for Planning, Control and Analytical Process
1. Standard Costs
 Predetermine costs for direct materials, direct labor and
factory overhead.
 Budget for the production of one unit of product or
services.
 Benchmark of costs
2. Opportunity Costs
 The benefit given up when one alternative is chosen
over other.
 If an asset can be used to perform only one function
and cannot be sold or used, the opportunity costs of
that assets is zero.
3.3. Marginal Revenue
 Revenue obtained from selling one more unit of
product
3.4. Marginal Cost
 Cost involved in producing one more unit of products
4. Relevant Costs
 A future cost that changes across alternatives
5. Out-of-pocket costs
 Costs that require the payment of money or other
assets as a result of their incurrence.
6. Sunk Costs
 A Cost for which an outlay has already been made
and it cannot be changed by present or future
decision.
 Financial Investment that had already been made &
cannot be recovered.

Controllable Costs
3. Differential Costs
 Cost that is present under one alternative but is absent  If at the particular level of management, that level has power
in whole or part under another alternative. to authorize the costs
 Can be either fixed or variable costs

3.1. Incremental Cost CHAPTER 3

 Increase of costs from one alternative to another

Manufacturing Inventory Accounts

3.2. Decremental Costs
 A decrease of cost

 Most manufacturing companies uses perpetual Inventory
approach, unless otherwise indicated.
3 Accounts must be used:
1. Materials Inventory (Materials Inventory Control Account)
 Made up of balances ng supplies and materials on hand
 When it is issued for use in production;
2. Work in Process Inventory
 Direct labor, Direct Materials & Factory Overhead are
included here.
 When products are completed, their costs no longer belong
to work in process.
 The balance remaining in the work in process were products
partly completed and still in process at the end of period.
3. Finished Goods Inventory (IC)
 All costs debited to the finished goods inventory represents
transfers form work in process inventory account.
 The balance in the finished goods inventory account is made
up of products that is completed but unsold.
Statement of Cost of Goods Manufacture and Sold
 Summary of the major manufacturing costs such as direct
material, direct labor, factory overhead and work-in-place
(WP) account.
4 steps:
1. Compute the cost of materials used (materials inventory)
6
2. compute total manufacturing costs (work in process
inventory)
3. compute total cost of goods manufactured (finished goods
inventory)
4. compute Cost of goods sold – normal
5. compute cost of goods sold – actual
 Recording labor costs for a manufacturing company
requires 3 journal entries:
1. Total Payroll liability of the company
2. Payment of payroll liability
3. Accounting labor costs properly.
 The wages earned by laborers working directly on the
product are charged to work in process.
 The salaries and wages of the factory supervisor are charged
factory overhead control.
 Sales salaries and administrative salaries are charged to
selling and administrative expense control.
Underapplied Factory Overhead
 Unfavorable
 As the Cost of Goods sold increases, Gross profit decreases.
 Factory Overhead control > Factory Overhead applied
Overapplied Factory Overhead
 Favorable
 As COGS decreases, Gross profit increases
 Factory Overhead Control < Factory Overhead Applied