Reviewer

Cost Accounting
 COST ACCOUNTING
REVIEWER
Prepared by: Aubrey Mae A. Dela Cruz BSA 2

FINANCIAL ACCOUNTING:
For external/ general users
CHAPTER 1 Historical based
Strict in format, follow GAAP
Verifiability and freedom from bias
Focus in enterprise as a whole
Supported by documents (evidence)
Main and Primary Ojective of Cost
Accounting
MANAGERIAL ACCOUNTING:
to provide financial information For internal users
about economic entity to different Future focus
type of users. Need not to follow GAAP
TIMELINESS
Can uses foreign, pesos, units(pounds,
TYPES OF USERS gallons, etc.) and relationship expressed by
ratios.

INTERNAL USERS
Managers MERCHANDISING BUSINESS
EXTERNAL USERS Beginning merchandise inventory xxx
Add: Total Purchases xxx
Government
Total Goods Available for Sale
xxx
Less: Ending merchandise
COST ACCOUNTING. Provides
inventory
information about the cost incurred in xxx
Cost of goods sold
the business or organization. xxx

COST ACCOUNTING. Helps to

minimize or maximize cost and profit
respectively. 3 inventory accounts

COST ACCOUNTING. Intersection Materials Inventory. Unused

between financial accounting and purchases materials.
managerial accounting. Work in Process Inventory. Three
types of cost.
Finished Goods Inventory.
Completed units.
 COST ACCOUNTINGE REVIEWER
Prepared by: Aubrey Mae A. Dela Cruz BSA 2

UNIT COST INFORMATION IS

USEFUL IN MAKING A VARIETY
IMPORTANT MARKETING DECISION
Determining the selling price of a
JOB ORDER
product PROCESS COSTING
COSTING
Meeting competition
Bidding of contracts
Analyzing profitability
Unique jobs are
Homogenous units
worked on
pass through a series
PLANNING. Process of establishing during a time
of similar processes.
objectives or goals for the firm and period.
determining the means which the firm
attain them.
Costs are
accumulated by Cost are
3 COMPONENTS OF processing accumulated by
PLANNING department. individual job.
Strategic Planning. Long term
(3-5years)
Tactical Planning. Short term Unit costs are
Unit costs are
computed by
Operations Planning. Day to day computed by
dividing the
dividing the
individual
individual
departments’
CONTROL. Process of monitoring departments’ cost by
cost by the
company’s operation and whether the the equivalent
equivalent
objectives identified in the planning production.
production.
process.
The cost of
TWO BASIC PRODUCT-COSTING The job cost
production report
SYSTEMS sheet provides
provides the detail for
the detail for the
the WORK IN
Job order costing. System of allocation WORK IN
PROCESS account for
cost to groups of unique product. PROCESS
each department.
ACCOUNT.
Process costing. Continuous process of
production the same or similar goods.
 COST ACCOUNTINGE REVIEWER
Prepared by: Aubrey Mae A. Dela Cruz BSA 2

IV. Costs classifies as to their nature

CHAPTER 2 A. Common cost
B. Joint cost

Costs. The cash or cash equivalent V. Costs classifies as to relation to an

value sacrificed for goods and accounting period
services.
A. Capital expenditures
Costs. Expected to bring current and B. Revenue expenditures
future benefit for organization.
VI. Costs for planning, control, and
Expenses. Expired costs. Deductions analytical process
in revenues in the income statement
A. Standard costs
to determine the period’s profit. B. Opportunity costs
Loss. Cost that expires without C. Differential cost
producing revenue. D. Relevant cost
E. Out-of-pocket cost
Cost Accounting. The focus is on
F. Sunk cost
costs, not expenses. G. Controllable cost
Manufacturing/Product
Or Inventoriable Costs
CLASSIFICATION OF COSTS

Direct materials. Part of the

I. Costs classifies as to relation to a product finished product, can be
conveniently and economically
A. Manufacturing Cost/Product Cost
traced to specific product units.
1. Direct materials
2. Direct labor Indirect materials. Minor materials
3. Factory overhead and other production supplies that
cannot be conveniently and
A. Non-manufacturing Cost/Period Cost economically traced to specific
product units. It is accounted for
1. Marketing or selling expense factory overhead costs.
2. General or administrative expense Direct labor. The amount paid as
wages to those working directly on
II. Costs that are classified as to variability
the product. It include all labor
A. Variable costs
costs for specific work performed
B. Fixed costs
C. Mixed costs on products that can be
conveniently and economically
III. Costs classifies as to relation to traced to end products.
manufacturing departments Indirect labor. Labor cost for
production related activities that
cannot be conveniently and
economically traced to end
products. It is accounted for
factory overhead costs.

Prime costs. Costs directly incurred to
create a product or service.
PC = DL + DM
Conversion costs. All the costs incurred to
convert raw material into a finished good.
CC = DL + FOH
Total Manufacturing Cost = Direct
materials + Direct labor + Factory
Overhead
Factory Overhead ( Manufacturing overhead
or factory burden or indirect manufacturing
costs). Varied collection of product-related
costs that cannot be conveniently and
economically traced to end products.
MAJOR CLASSIFICATION OF FOH:
1. Indirect materials and supplies: nails, rivets,
lubricants, and small tools.
2. Indirect labor costs: lift-truck driver’s wages,
maintenance and inspection labor, engineering
labor, machine helpers, and supervisors.
Marketing or selling expenses. All costs
necessary to secure customer orders and get
the finished product or service into the hands of
the customer. (order-getting and order-filling
costs).
Examples:
Advertising, shipping, sales travel, sales
commissions, sales salaries, and expenses
associated with finished goods warehouses.
Administrative or general expenses. All
executive, organizational, and clerical expenses
that cannot logically be included under
production or manufacturing.
Examples:
Executive compensation, general accounting,
secretarial, public relations, and similar
expenses having to do with general
administration of the organization.
COST CLASSIFIED AS TO
VARIABILITY:
Activity. Measures the
organization’s output of products or
services.
Relevant range. Specific range of
activity.
Fixed cost. Remains constant in
total, irrespective of the volume of
production.
Examples:
Salaries of production executives,
depreciation of equipment computed
on a straight-line basis, periodic rent
payments, and insurance.
FIXED COST CATEGORIES:
1. COMMITED FIXED COSTS. Long-term
commitments on the part of the
management as a result of past decision.
(Depreciation on equipment).
2. MANAGED FIXED COSTS (also known as
DISCRETIONARY, PROGRAMMED, OR
PLANNED FIXED COSTS). Incurred in a
short-term basis and can be easily
modified in response to changes in
management objectives. (advertising,
research and development, and costs of
training of employees).
INVERSE RELATIONSHIP
ACTIVITY (INCREASES) - FIXED
COST/U (DECREASES) - TOTAL FIXED
COST (CONSTATNT)
Variable Costs. Varies directly in total
to volume of production.

Direct RELATIONSHIP
ACTIVITY (INCREASES) – VARIABLE
COST/U (CONSTANT) – TOTAL
VARIABLE COST (INCREASES)
Variable cost per unit remains
constant within a relevant range.
Mixed Costs. With fixed and variable
components.
TWO TYPES OF MIXED COST
Semivariable costs. Represents minimum fee for
making a particular item or service available. The
variable portion is the costs charged for actually
using the service.
Example:
The cost charged for using a cell phone under a
plan. (The cost of the plan is fixed and it is for
specified time used)
The flat fee (fixed portion).
The excess (variable portion).
Step costs. The fixed part of step costs abruptly
changes at various activity levels because these
are costs acquired in indivisible portions. Similar
to fixed costs with very small relevant range.
Example: supervisors salary
COMMON COST VS. JOINT COSTS
Common costs. Costs of facilities or services
employed in two or more accounting periods,
operations, commodities, or services. These cost
are subject to allocation.
Joint costs. Costs of materials, labor, and overhead
incurred in the manufacture of two or more
products at the same time. These cost are subject
to allocation.
CAPITAL EXPENDITURES OR
REVENUE EXPENDITURES
Capital expenditures. Intended to benefit
more than one accounting periods. Recorded
as an asset. The allocation of the cost to the
different period is-depreciation for fixed
tangible assets, amortization for intangible
assets and depletion for wasting assets.
Revenue expenditures. Intended to benefit
current period only. Recorded as an expense.
DIRECT VS INDIRECT
DEPARTMENTAL CHARGES
Direct departmental charges. Immediately
charged to particular manufacturing
department. Cost incurred that can be
conveniently identified or associated with
the department (s) that benefited from said
costs.
Indirect departmental charges. Costs that are
originally charged to other manufacturing
department (s) but are later allocated to
another department that indirectly benefited
from said cost.
COST FOR PLANNING, CONTROL AND
ANALYTICAL PROCESS
Standard costs. Budget for the production of one
unit of product or service. Cost chosen to serve
as the benchmark in budgetary control system.
Opportunity Costs. Benefit given up when one
alternative is chosen over another. Not usually
recorded in accounting system. Considered in
decision making.
Opportunity cost is ZERO when asset can be
used to perform only one function and cannot be
sold and used in other ways.
Differential costs. Presented under one
alternative but is absent in whole or in part
under another alternative. Both cost increases
(incremental) and cost decreases (decremental)
between alternatives. (fixed or variable costs)
 COST ACCOUNTINGE REVIEWER
Incremental costs. An increase in cost from
one alternative to another.
Decremental costs. A decrease in cost.
Marginal revenue. Revenue obtained in selling
one or more unit of product.
Marginal costs. Cost involved in producing one
more unit of product.
Relevant costs. Future costs that changes
across the alternatives.
Example:
Cost of goods sold, advertising, commissions,
and warehouse depreciation.
Out-of-pocket. Costs that requires payment of
money or other assets as a result of their
incurrence.
Sunk costs. Investment already incurred that
can't be recovered.
Controllable and Non-controllable costs
Controllable costs. Cost is considered to be a
controllable cost at a particular level of
management if that level has power to
authorize the cost.
Non-controllable costs. Those that a company
cannot change, such as rent and insurance.
Summary of important
formulas
TVC= Variable cost per unit x total output
Total Cost = total variable cost + total fixed
cost
Variable rate = highest point cost – lowest
point cost highest output –lowest output
Fixed costs = total highest cost – (variable
rate x output at highest point) or
Fixed costs = total lowest cost – (variable rate
x output at lowest point)
CHAPTER 3
Cost Accounting Cycle
Manufacturing Company:
Perpetual Inventory
Materials Inventory. Taken out of materials
inventory and requisitioned into
production is transferred in to the Work in
Process Inventory account not Cost of
Goods sold.
Work in Process Inventory. Issuance of
materials production begins the
production process. All manufacturing
cost incurred and assigned.
Finished Goods Inventory. The same
characteristics of the merchandise
inventory account
Cost of goods sold (Merchandising)
Beginning merchandise inventory
Plus: Purchases (merchandise)
Merchandise available for sale
Less: Merchandise inventory end
Cost of goods sold
Cost of goods sold (Manufacturing)
Beginning finished goods inventory
Plus: Cost of goods manufactured
Total goods available for sale
Less: Finished goods inventory end
Cost of goods sold
MANUFACTURING COST FLOW
Flow begins with costs being incurred it can be in
cash payments, incurred liabilities, fixed asset
depreciation or expired prepaid expenses.
Once these cost have been incurred they are
recorded as either direct materials, direct labor or
factory overhead cost.
 COST ACCOUNTINGE REVIEWER
From the cost of goods
sold statement, the
following different
equations are derived:
Materials + Purchases = Total Materials
available for use = Materials used +
Materials, end
WIP, beg. + Total mfg. cost = Total cost
of goods put into process = Cost of
foods manufactured + WIP, end
FG, beg. + Cost of Goods Manufactured
= Total goods available for sale = Cost of
goods sold + FG, end
Cost Flow manufacturingD
Direct Materials, Direct
Labor, & FOH TO WIP TO FGI-
Cost of goods sold
CHAPTER 4
BASIC PRINCIPLES
Costs and expenses are segregated into fixed
and variable elements.
Profit = Sales- Costs and expenses
Profit= Sales- Fixed costs- Variable costs
(The term costs means costs and expenses)
Activities and operations are made within
relevant range
BASIC ASSUMPTIONS WITHIN
THE RELEVANT RANGE
Linearity- The behavior of sales and costs
is linear.
Behavior of sales, costs, and expenses:
Sales- it changes directly in relation to the
level of units sold.
Fixed costs- Total fixed costs is constant
without regard to the change in the level of
units of production and sales; unit fixed
costs changes (inversely proportional).
Variable costs- Total variable costs change
in direct proportion with the level of units
produced and sold; unit variable costs is
constant (directly proportional).
SELLING PRICE- assumed to be constant.
WIP inventory- disregarded, there is no
WIP inventory
FG inventory- no change in the FG
inventory (production = sales)
Product(s) and sales mix:
There is only one product, or
If there are two more products produced
and sold, the sales mix is assumed to be
constant.
THE MARGINAL INCOME
STATEMENT (VARIABLE INCOME
STATEMENT)
THE CONDENSED FORMAT
Sales
Less: variable cost and expenses
Contribution Margin
Less: Fixed costs and expenses
Income before income tax
Tax rate
Income after tax
 COST ACCOUNTINGE REVIEWER

SUMMARY OF COSTS AND

EXPENSES BEHAVIOR WITHIN
THE RELAVANT RANGE:

Cost Volume Profit Analysis (CVP) Break Even Point

Estimates how changes in costs, sales volume
and price affect a company’s profit.
CVP is used by companies to determine the
break even point.
Managers use CVP analysis during times of
economic trouble to pinpoint problems and
find an appropriate solution.
To understand CVP, costs are classified
according to their tendency to vary with
production (MIXED, FIXED AND VARIABLE).
Allows managers to do sensitivity analysis by
examining the effect of various price or cost
levels on profit.
Show how revenues expenses and profits
behave as volume changes.
Which point of zero profit (no profit, no loss)
Total revenue equals total cost
BEP is determined to serve as a point of
reference to make managers be able to set
sales goals that should result in profit from
operations rather than losses.
Is affected by selling price, variable cost and
volume of sales.
There will be a decrease in BEP if total fixed
cost decrease or unit contribution increase.
There will be an increase in BEP if there is an
increase in fixed cost or a decrease in unit (or
percentage) contribution margin.

VARIABLE
FIXED
Direct materials
Fixed overhead
Direct labor
Fixed selling
Variable overhead
Fixed administrative
Variable selling
Variable administrative
COST ACCOUNTINGE REVIEWER

Relevant formulas:
 COST ACCOUNTINGE REVIEWER

SUMMARY OF COSTS AND

EXPENSES BEHAVIOR WITHIN
THE RELAVANT RANGE:
Relevant range – range of activity over which
variable cost per unit remains constant or
fixed cost per unit remains fixed in total.
Revenue – revenue per unit is assumed to
remain constant. Total revenue fluctuates in
direct proportion to volume.
Variable cost – variable cost per unit are
assumed to remain constant. Total variable
costs fluctuate in direct proportion to
volume.
Fixed cost – total fixed costs are re assumed
to remain constant regardless of changes in
volume and because of this fixed cost on a
per unit basis increases as volume decreases
and decreases as volume increases.
Mixed cost – before
CVP Analysis in a Multiproduct
Most companies often are producing 2
to 3 products, we simply convert the
multiple product problem to reasonably
straight forward.
The key is to identify the expected sales
mix, in units of the products being
produced and marketed.
Sales Mix- combination of the products
being marketed by the company. The
sales mix is measured in terms of units
sold.
Operating Leverages. Use of fixed cost
to get higher percentage changes in
profit as sales change.
Concerned with the relative mix of fixed
cost and variable cost.
Companies with higher operating
leverage will experience a greater
reduction in profit as sales decrease.
The greater the degree of operating
leverage, the more that changes in sales
will affect operating income.

Contribution Margin – is the amount

remaining after deducting the variable cost
per unit from the selling price per unit
Contribution Margin per unit – amount
contributed by each unit to the recovery of
the fixed
Margin of safety- is the units sold or revenue
earned above the BEP volume.
Represent the number of units or amount of
sales revenue that the company can absorb
before incurring a loss.

Statement for the break even

Sales Pxxx
Less: Variable cost xxx
Contribution Margin Pxxx
Less: Fixed Cost xxx
Net Income Pxxx