Andong, Rocielyn T.
✓ Manufacturing overhead costs are
BSBA FM 1 - 2
Cost Accounting
Definition
✓ Cost accounting is a form of managerial
accounting that aims to capture a
company's total cost of production by
assessing the variable costs of each step of
production as well as fixed costs, such as
a lease expense.
✓ Cost accounting is used by a company's
internal management team to identify all
variable and fixed costs associated with the
production process. It will first measure
and record these costs individually, then
compare input costs to output results to aid
in measuring financial performance and
making future business decisions.
Purpose
✓ Cost accounting helps organizations
evaluate the costs associated with
manufacturing a product or providing a
service.
✓ While the process itself requires a
considerable level of detail and time, the
strategic insights gained make it a
worthwhile endeavor for most any
organization.
Manufacturing Costs
✓ Manufacturing costs are the costs
incurred during the production of a
product. These costs include the costs of
direct material, direct labor, and
manufacturing overhead. The costs are
typically presented in the income
statement as separate line items. An
entity incurs these costs during the
production process.
✓ Direct material is the materials used in
the construction of a product.
✓ Direct labor is that portion of the labor
cost of the production process that is
assigned to a unit of production.
applied to units of production based on a
variety of possible allocation systems,
such as by direct labor hours or machine
hours incurred. Examples of the types of
costs that can be included in
manufacturing overhead include:
• Salaries and wages for quality assurance,
industrial engineering, materials handling,
factory management, and equipment
maintenance personnel
• Equipment repair parts and supplies
• Factory utilities
• Depreciation on factory assets
• Factory-related insurance and property
taxes
When accounting for inventory, include all
manufacturing costs in the costs of work-in-
process and finished goods inventory.
Inventories in Manufacturing Company
✓ Inventory refers to all the items, goods,
merchandise, and materials held by a
business for selling in the market to earn a
profit.
✓ In a manufacturing business, inventory is
not only the final product manufactured
and ready to sell, but also the raw materials
used in production and the semi-finished
goods in the warehouse or on the factory
floor.
✓ Example: For a cookie manufacturer,
inventory will include the packets
of cookies that are ready to sell, the semi-
finished stock of cookies that haven’t been
cooled or packed yet, the cookies set aside
for quality checking, and raw materials like
sugar, milk, and flour
✓ Raw Materials Inventory consist of all the
items that are processed to make the final
 product. In a cookie manufacturing
company, the raw materials are items like
milk, sugar, and flour that are used in the
different stages of production.
✓ When we talk about raw materials, it is
essential to understand that raw materials
used by a manufacturing company
can either be sourced from a supplier or be
a by-product of a process. In our cookie
manufacturing company, the raw materials
will be mostly sourced from various
suppliers. However, in a sugar
manufacturing company, only
the sugarcane is brought in from different
farmers. When it is processed in the factory
to extract the juice, the residual substance
is known as bagasse. The juice is sent for
boiling and the bagasse is used as a
fuel. Here, the sugarcane,
juice, and bagasse will all be treated as raw
materials.
✓ The concept of raw materials as inventory
items exists only in the manufacturing
industry. In a trading industry, there is no
processing or manufacturing involved, so
there are no raw materials.
✓ Work-In-Process Inventory defined as
when raw materials have been sent for
processing but have not yet been approved
as finished goods, this stage is known as
work in progress.
✓ In a cookie manufacturing company, after
the raw materials have been processed and
the cookies have been molded, they go for
a quality check before they are passed for
final packaging. All the cookies which are
waiting for their quality check are
considered work in progress. To put it in
simple words, the work in progress category
consists of all the items that have been
processed but not sent for sale.
✓ Finished Goods Inventory are the final
items that are ready for sale in the
market. These goods have passed through
all stages of production and quality
checking.
✓ So for the cookie manufacturer, the final
packets of cookies that are sent to the
market for selling after undergoing quality
checks will be the finished goods.
System of Cost Accumulation (Actual Cost System,
Standard Cost System, Normal Cost System)
✓ Standard Costs are the estimated costs for
products that are predetermined and arise
from the units of material, labor and other
costs of production for the specific time
period.
✓ Actual Costs refer to the costs that are
actually incurred. It’s the realized value and
is not an estimate. The most common
methods of Actual Costing in manufacturing
units are – First In First Out (FIFO), Average
Costing and Last In First Out(LIFO).
✓ Normal Costs used to derive the cost of a
product. This approach applies actual
direct costs to a product, as well as a
standard overhead rate. It includes the
actual cost of materials, the actual cost of
labor, and a standard overhead rate that
is applied using the product's actual
usage of whatever allocation base is being
used (such as direct labor hours or
machine time).
Types of Cost System (Job Order Cost System,
Process Cost System)
✓ Cost Accumulation is the process of
collecting all costs information about the
business with the help of the cost
accounting system. It is a process of
collection of all relevant data regarding the
various costs incurred by the company at
various stages of production. This
calculation is the result or outcome of the
cost accounting system prevalent or
practices in the company.
 ✓ Job Order Costing System is most useful
when the total production quantity is small
or there exist small batches of production. It
is also relevant and important when each
job is unique. It is a process of accumulating
cost information about a particular project
or a specific production or product. Under
this system, linking and recording the
accumulation of direct labor, direct
materials, and manufacturing overhead
costs happens with respect to the particular
job or batch.
✓ Accumulation of cost through the Process
Costing System occurs when the production
of a huge amount of identical goods occurs.
In this system, the accumulation of costs for
a large batch of products takes place. And
afterward, further allocation of all such
accumulated costs takes place for an
individual unit.
✓ Process Costing System accumulates costs
on the basis of departments or divisions. In
this system, identification and booking of
costs to respective cost centers take place.
Cost centers are the places of origination of
the costs. Accumulation of costs takes place
according to the cost centers they belong
to.
Recording Costs as Incurred
✓ An incurred cost in accrual accounting is the
moment in time when a resource or asset is
consumed and an expense is recorded. In
other words, it’s when a company uses an
asset or becomes liable for the use of an
asset in the production of a product. These
assets cease to be a resource and are
converted into an expense.
✓ This accrual accounting concept requires
businesses to record expenses when they
are incurred rather than when they are
paid. This way the expenses are of the
company are recorded in the same period
as the revenues related to those expenses.
This concept is called the matching
principle. GAAP requires that the matching
principle be used on all financial accounting
and statements in order to present a
consistent picture of the company’s
activities.
Financial Statements for Manufacturing Firm
✓ There are other several accounts that are
prepared under the manufacturing
business, as compared to merchandise,
which is engaged in reselling the goods and
services purchased by them in order to earn
profits and service business that sells
services instead of the tangible goods to
earn profit. There are four main financial
statements prepared by manufacturing
business, namely, statement of cost of
goods manufactured, cash flow statement,
income statement, and balance sheet. A
manufacturing business is such a business
that uses raw materials to make some
physical products. The most important
income statement prepared by the
manufacturing business is the income
statement which also helps in the
determination of the cost of goods sold of
the manufacturing business.
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