Cost Accounting

What is Cost Accounting?

• Cost accounting is a subset of managerial accounting that specifically
deals with the analysis, recording, and reporting of costs associated
with producing goods or services.
• Its primary objective is to determine and control costs to facilitate
management decision-making.
• Cost accounting focuses on collecting, classifying, and allocating costs
to various products, departments, or activities.
• It involves techniques like job costing, process costing, and activity-
based costing (ABC) to measure and assign costs accurately.
• Cost accounting provides information on cost behaviour, cost-volume-
profit analysis, variance analysis, and inventory valuation.
• It helps managers understand the cost structure of the organization,
identify areas of cost reduction, and evaluate profitability.
Management Accounting and Value Chain
Value chain is the sequence of business functions in which customer usefulness is
added to products or services.

The Value chain consists of:

Research & Design Production Marketing Distribution Customer

development service
An Introduction to Cost
Terms and Purposes
 Types of Firms

Manufacturing companies: purchase materials and

components and convert them into finished products.

Merchandising companies: purchase and then sell

tangible products without changing their basic form.

Service companies: provide services (intangible

products).
Basic Cost Terminology

Cost: sacrificed resource to achieve a specific objective

Cost object: anything of interest for which a cost is desired

Actual cost: a cost that has occurred

Budgeted cost: a predicted cost

Direct and Indirect Costs
Direct costs can be conveniently
and economically traced
(tracked) to a cost object.
Indirect costs cannot be
conveniently or economically
traced (tracked) to a cost
object. Instead of being traced,
these costs are allocated to a
cost object in a rational and
systematic manner.
Classifications of Manufacturing Costs/
Product Costs/ Inventoriable costs
Direct Direct Manufacturing
Materials Labor Overhead

The Product
Direct Materials
Raw materials that become an integral
part of the product and that can be
conveniently traced directly to it.

Example: A radio installed in an automobile

Direct Labor
Those labor costs that can be easily
traced to individual units of product.

Example: Wages paid to automobile assembly workers

Manufacturing Overhead Cost/ Factory overhead costs
It is all manufacturing costs that are related to the cost object (work in process and then
finished goods) but cannot be traced to that cost object in an economically feasible way.

Indirect manufacturing labour:

Indirect materials:
Overhead Cost: Wages paid to employees
Materials used to support
who are not directly
the production process involved in production work.
• Supplies • lubricants • Plant maintenance labour
• Plant rent • Cleaning supplies • Cleaning labour
• Plant insurance • Glue, tapes • Plant security guards
• Property taxes on the plant • paints
• Plant depreciation
• Compensation of plant
managers
 Types of Manufacturing Inventories

Direct materials: resources in stock and available for

use

Work-in-process (or progress): products started

but not yet completed, often abbreviated as WIP

Finished goods: products completed and ready

for sale
Non-manufacturing Costs/ period cost

Selling Administrative
Costs Costs

Costs necessary to All executive,

secure the order and organizational, and
deliver the product. clerical costs.
Accounting Distinction Between Costs

• Inventoriable costs—product manufacturing costs. These costs

are capitalized as assets (inventory) until they are sold and
transferred to Cost of Goods Sold.
• Period costs—have no future value and are expensed in the
period incurred.
Product Costs Versus Period Costs
Product costs include Period costs include all
direct materials, direct selling costs and
labor, and administrative costs.
manufacturing
overhead.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
 • The Cost of Goods Manufactured and the
Cost of Goods Sold section of the Income
Cost Flows Statement are accounting representations of
the actual flow of costs through a
production system.
• Note the importance of inventory
accounts in the following accounting
reports, and in the cost flow chart.
Classifications of Costs
Manufacturing costs are often
classified as follows:

Direct Direct Manufacturing

Material Labor Overhead

Prime Conversion
Cost Cost
The following costs were incurred in September:

Calculate: Prime cost, Conversion cost, Product cost (inventoriable costs or total
manufacturing cost) and Period cost (operating cost or non-manufacturing cost)
Answer

Prime cost = 38,000+ 29,000 = $67,000

Conversion cost= 29,000+ 21,000= $50,000

Product cost (inventoriable costs or total manufacturing cost) =

38,000+29,000+ 21,000= $88,000

Period cost (operating cost or non-manufacturing cost)= 17,000+32,000 =

$49,000
 Multiple-Step Income Statement
PANEL A: INCOME STATEMENT
Cellular Products
Income Statement
For the Year Ended December 31, 2011 (in thousands)
Revenues $210,000
Costs of goods sold:
STEP 4
Beginning finished goods inventory, January 1, 2011 $22,000
Costs of goods manufactured (see Panel B) $104,000
Costs of goods available for sale $126,000
Ending finished goods inventory, December 31, 2011 $18,000
Cost of goods sold $108,000
Gross margin (or gross profit) $102,000
Operating costs
R&D, design, mktg., dist., & cust.-service cost $70,000
Total operating costs $70,000
Operating income $32,000
 Cost of Goods Manufactured
PANEL B: COST OF GOODS MANUFACTURED
Cellular Products
Schedule of Cost of Goods Manufactured*
For the Year Ended December 31, 2011 (in Thousands)
Direct materials:
Beginning inventory, January 1, 2011 $11,000
STEP 1 Purchases of direct materials $73,000
Cost of direct materials available for use $84,000
Ending inventory, December 31, 2011 $8,000
Direct materials used $76,000
Direct manufacturing labor $9,000
Manufacturing overhead costs:
STEP 2 Indirect manufacturing labor $7,000
Supplies $2,000
Heat, light, and power $5,000
Depreciation-plant building $2,000
Depreciation-plant equipment $3,000
Miscellaneous $1,000
STEP 3 Total manufacturing overhead costs $20,000
Manufacturing cost incurred during 2011 $105,000
Beginning work-in-progress inventory, January 1, 2011 $6,000
Total manufacturing costs to account for $111,000
Ending work-in-progress inventory, December 31, 2011 $7,000
Cost of goods manufactured (to income Statement) $104,000
* Note that this schedule can become a Schedule of Cost of Goods Manufactured and Sold simply by including the beginning and ending finished goods inventory figures in the
supporting schedule rather than in the body of the income statement.