C1- INTRODUCTION TO COST ACCOUNTING Uses of Cost Accounting Data

❖ Determining Product Cost

Comparison of Financial, Managerial and Cost ❖ Helps in making variety of important marketing decision:
Accounting 1. Determining the selling price of the product.
2. Meeting competition.
Financial Accounting 3. Building on contracts.
❖ use of accounting information for reporting to external 4. Analyzing profitability.
parties, including investors and creditors. It is primarily
concerned with financial statements for external use of Planning and Control
stakeholders. ❖ Planning is the process of establishing objectives or
Managerial Accounting goals for the firm and determining the means by which
❖ focuses on the needs of parties within the organization, the firm will attain them.
rather than interested parties outside the organization. 1. Strategic planning – setting long range goals and
Cost Accounting objectives to determine the overall direction of the
❖ the intersection between financial and managerial company.
accounting. It provides product cost information to the 2. Tactical planning – setting shorter range (or time
stakeholders. period) and emphasizes the strategic goals.
3. Operational planning – relates to the day-to-day
Merchandising vs. Manufacturing Operations implementation of tactical plans. It emphasizes the
coordination of the major factors of production.
Merchandising (materials, labor, facility)
❖ normally buys a product that is ready for resale when it is
received.Cost of goods sold refers to the direct costs Two Basic Product-Costing Systems
of producing the goods sold by a company. Also 1. Job order costing
referred to as Cost of sales. ❖ a system for allocating costs to groups of unique
❖ Computation for COGS: products.
Merchandise inventory, beginning xxxx ❖ applicable to the production of customer specific
Add: Total purchases xxxx products.
Cost of goods available for sale xxxx 2. Process costing
Less: Merchandise inventory, ending xxxx ❖ system applicable to a continuous process of
Cost of good sold xxxx production of the same or similar goods.

Manufacturing Major Difference between Process & Job Order Costing

❖ refers to a large-scale production of goods that
converts raw materials, parts, and components into
finished merchandise using manual labor and/or
machines. The cost of goods sold for manufacturing
companies is more complex than in merchandising
companies.
❖ Computation for COGS:
Process Costing Job Order Costing
1. Homogeneous units pass 1. Unique jobs are worked
through a series of similar on during a time period.
processes.
2. Costs are accumulated by 2. Costs are accumulated by
the processing department. individual jobs.

3. Unit costs are computed 3. Unit costs are determined

by dividing the individual by dividing the total costs on
departments’ costs by the the job cost sheet by the
equivalent production. number of units on the
job.

4. The cost of production 4. The job cost sheet

report provides the detail for provides the detail for the
the WIP account for each WIP account.
department4. The job cost
sheet provides the details
for the WIP account.

C2: COST – CONCEPTS AND CLASSIFICATION
Cost – is the cash or cash equivalent value sacrificed
for goods and services that are expected to bring a
current or future benefit to the organization.
Classification of Costs
I. Cost classified as to relation to a product
A. Manufacturing costs/Product costs
1. Direct materials (DM)
❖ materials that become part of a finished product
and can be conveniently and economically traced
to specific product units. These materials are direct
costs.
2. Direct labor (DL)
❖ labor costs for specific work performed on products
that can be conveniently and economically traced
to end products. These are direct costs.
3. Factory overhead (FOH)
❖ varied collection of production-related costs that
cannot be practically or conveniently traced
directly to end products. Indirect materials and
labor are part of factory overhead costs.
● Prime costs = DM +DL
● Conversion costs = DL + FOH
B. Non-manufacturing costs/Period costs
1. Marketing or selling expense
❖ costs necessary to secure customer orders and
get the finished product or service into the
hands of the customer.
2. Administrative or general expenses
❖ include all-executive, organizational, and clerical
expenses that cannot logically be included under
either production or marketing.
II. Cost classified as to variability
1. Fixed costs
❖ costs which remain constant in total, irrespective
of the volume of production.
❖ Two categories:
a. Committed fixed costs – costs that represent
relatively long term commitments on the part of
management as a result of a past decision.
Example is depreciation
b. Managed fixed costs – costs that are incurred on
a short-term basis and can be more easily
modified in response to changes in management
objectives. Examples are advertising, research
and development.
2. Variable costs
❖ costs which vary directly, in total, in relation to volume
of production.
3. Mixed costs
❖ costs with fixed and variable components.
❖ Two types of mixed costs:
a. Semi-variablecosts – fixed portions of a semi-
variable cost usually represents a minimum fee for
making a particular item or service available.
Example is the cost of electricity.
b. Step costs – the fixed part of step costs changes
abruptly at various activity levels because these costs
are acquired in indivisible portions. It is similar to a
fixed cost within a very small relevant range.
❖ There are different methods of separating mixed costs
into fixed and variable components:
1. Scatter graph
2. High-low point – identify the highest and lowest
activity then deduct both to get the value of
the denominator. Get the value of the cost of
the highest and lowest activity then deduct both
to get the value of your numerator. Then
divide to get the variable rate.
3. Method of least square – there are 3 formulas
to be used in least-square method:
● Y = a + bx
● ∑Y = na + b ∑x
● ∑XY = ∑xa + b ∑x2
Common cost –cost of facilities or services employed
in two or more accounting periods, operations,
commodities, or services.Joint costs –costs of materials,
labor, and overhead incurred in the manufacture of two
or more products at the same time.Capital expenditure –
expenditure intended to benefit more than one
accounting periods and is recorded as an asset. Example
is depreciation, amortization and depletionRevenue
expenditure –expenditure that will benefit current period
only and is recorded as an asset.Standard costs –
predetermined costs for DM, DL and FOH. It is a budget
for the production of one unit of product or
service.Opportunity costs –the benefit given up when one
alternative is chosen over another.Differential costs –costs
that ispresent under one alternative but is absent in whole
or in part under another alternative.