Introduction

to Cost
Accounting
 SEP

LEARNING OBJECTIVES 20

■ Distinguish between financial,

managerial, and cost accounting
■ Distinguish between merchandising
and manufacturing operations BSE 3
■ Identify the uses of cost accounting
data ELEC 7-Cost
■ Distinguish between job order costing Accounting &
and process costing Cost
Management
 Objective of Accounting
❑ Provide financial information about an economic entity to
different types of users.

❑ Internal Users
❑ Managers for planning, controlling and decision making.

❑ External Users
❑ The government

❑ Those who provide funds

❑ Those who have various interests in the operations of the

entity.
What is Cost Accounting?
✓ Cost accounting is an expanded phase of general and financial
accounting that informs management promptly about the cost of
rendering a service, buying and selling a product, and producing a
product.

✓ It is a field of accounting that measures, records, and reports

information about costs.

✓ It includes all costs of process, product, or service used, provided,

and sold.
What is Cost Accounting?
✓ All types of business entities require information system
which provide necessary financial data.

✓ Cost accounting systems – show what costs were

incurred and where and how these costs were utilized.

✓ Cost accounting is essential not only for profit-seeking

organizations such as government agencies, churches
and charities.
 Financial Accounting VS Managerial Accounting
Financial Accounting
❑ The use of accounting information for reporting to external parties
(investors and creditors).

❑ The reports prepared under financial accounting focus on the

enterprise as a whole.

❑ Financial accounting is based on historical transaction data.

❑ Financial accounting is required for firms organized as corporation

because of the requirements of the SEC and BIR (compliance with
tax laws).
 Financial Accounting VS Managerial Accounting
Managerial Accounting
❑ It focuses on the needs of parties within the organization.

❑ Managerial accounting information addresses individual

or divisional concerns.

❑ Information may be current or forecasted, quantitative or

qualitative, monetary or non-monetary, and futuristic.

❑ There is no requirement or legislation that mandates the

format or use of managerial accounting.
 Financial Accounting VS Managerial Accounting
Managerial Accounting
❑ The measuring based in managerial accounting does not
necessarily have to be restricted to pesos.

❑ Various bases may be appropriate to report managerial

information such as the following:

1. Economic Measure = pesos

2. Physical Measure = pounds, gallons, tons, or units

3. Relationship Measure = ratios

 Merchandising VS Manufacturing Operations

Merchandising
 Merchandising VS Manufacturing Operations

Manufacturing
Uses of Cost Accounting Data
The information produced by a cost
accounting system

● Provides a basis for determining product costs.

● Aids management in planning and controlling

operations.
 USES OF COST ACCOUNTING DATA

Determining Product Cost

❑ Cost accounting procedures help management in gathering data
needed to determine product costs.
❑ Cost procedures must be designed to permit the computation of unit
costs as well as total product costs.

For Example:
If a manufacturer spent ₱20,000 for labor for the month, the information
is insignificant; but if this labor produced 1,000 finished products, the
fact that the cost of labor was ₱ 20 per unit is significant. This figure
can be compared to the unit labor cots of other periods and the trends
analyzed.
 USES OF COST ACCOUNTING DATA

Determining Product Cost

Unit Cost information is also useful in making a variety of
important marketing decisions
❖ Determining the selling price of a product
Knowledge of the cost of manufacturing a unit of product helps in
setting the selling price, which is high enough to cover the cost of
production, pay a portion of marketing and administrative expenses,
and provide a profit.

❖ Meeting competition
If a competitor is selling the product at a low price, detailed information
regarding unit costs can be used to determine the action to be taken by
the company.
 USES OF COST ACCOUNTING DATA
Determining Product Cost
❖ Building on contracts
Manufacturing firms must submit competitive bids in order to be awarded
contracts by the government or private firms. An analysis of the unit costs
relating to the manufacture of particular product is of great importance in
determining the bid price to be submitted. The bid price must be able to
cover costs to be incurred and provide profit for the company.

❖ Analyzing profitability
Unit cost information enables management to determine the amount of profit
that each product earns and possibly eliminate those that are least profitable,
thereby concentrating efforts on those items that are most profitable.
 USES OF COST ACCOUNTING DATA
Planning and Control
What is Planning?
Planning is the process of establishing objectives or goals for the firm
and determining the means by which the firm will attain them.

Cost accounting helps in the development of plans by providing historical

cots that serve as a basis for projecting data for planning.

Management can
●Analyze trends and relationships among data to be used in estimating
future costs
●Make decision with regards to acquisition of additional facilities, changes
in marketing strategies and obtaining additional capital.
 USES OF COST ACCOUNTING DATA
Planning and Control
Components of Planning

1. Strategic Planning
Concerned with setting long range goals and objectives to determine
the overall direction of the company.
2. Tactical Planning
Concerned with plans for a shorter range (or time period) and
emphasizes plans to achieve the strategic goals.
3. Operations Planning
Relates to the day to day implementation of tactical plans. It
emphasizes the coordination of the major factors of production (materials,
labor and facilities)
 USES OF COST ACCOUNTING DATA
Planning and Control
What is Control?

Control is the process of monitoring the company’s

operations and determining whether the objectives
identified in the planning process are being
accomplished.
 TWO BASIC PRODUCT-COSTING SYSTEMS
JOB ORDER COSTING
• A system for allocating costs to groups
of unique products.
• It is applicable to the production of
customer-specified products such as the
manufacture of special machines
• Each job becomes a cost center for
which costs are accumulated.
• A subsidiary record (JOB COST
SHEET) is needed to keep track of all
unfinished jobs (WORK IN PROCESS)
and finished jobs (FINISHED GOODS)
PROCESS COSTING
• A system applicable to a continuous process
of production of the same or similar goods
such as oil refining and chemical production.
• Since there is no need to determine the
costs of different groups of products
because the product is uniform, each
processing department becomes a cost
center.
 Characteristics of Job Order Costing
● A job order cost accounting system is a product costing system used
by companies making one-of-a-kind or special-order products.
● Direct materials, labor and factory overhead costs are assigned to
specific job orders or batches of production.
● Companies that make ships, airplanes, large machines and special
orders use job order costing system.

The primary characteristics of a job order cost system are as follows:

1) It collects all manufacturing costs and assigns them to specific job or
batches of product.
2) It measures costs for each completed job, rather than for set time periods.
3) It uses one Work in Process Inventory Control account in the general
ledger This account is supported by a subsidiary ledger of job order cost
cards or sheets for each job in process at any point in time.
 Characteristics of Process Costing
● A job order cost accounting system is a product costing system used
by companies that make a large number of similar products or
maintain a continuous production flow.
● Companies producing paint, oil and gas, or soft drinks use process
costing system

The primary characteristics of a job order cost system are as follows:

1) Manufacturing costs are grouped by department or work center, with little
concern for specific job orders.
2) It emphasizes a weekly or monthly time period rather than the time taken
to complete a specific order.
3) It uses several Work in Process Inventory accounts-one for each
department or work center in the manufacturing process.
 What is a Hybrid Costing System
(Operation Costing System)?
● A hybrid costing system is a cost accounting system that includes
features of both a job costing and process costing system.

● A hybrid costing system is useful when a production facility

handles groups of products in batches and charges the cost of
materials to those batches (as is the case in a job costing
environment), while also accumulating labor and overhead costs at
the departmental or work center level and allocating these costs at
the individual unit level (as is the case in a process costing
environment).
 What is a Hybrid Costing System
(Operation Costing System)?
Hybrid costing is most commonly used in situations where there is identical
processing of a baseline product, as well as individual modifications that are
made beyond the baseline level of processing.

○ For example, this situation arises when identical products are

manufactured until they reach the painting operation, after which each
product receives a different coating, with each coat having a different
cost.
○ a company produces a variety of refrigerators, all of which require
essentially the same processing, but differing amounts of materials. It can
use a job costing system to assign varying amounts of materials to each
refrigerator, while using the process costing method to allocate the cost
of labor and overhead equally across all of the refrigerators produced.
 Major Differences Between Process Costing
and Job Order Costing
PROCESS COSTING JOB ORDER COSTING

1. Homogenous units pass 1. Unique jobs are worked on

through a series of similar during a time period.
processes. 2. Costs are accumulated by
2. Costs are accumulated by individual job.
processing department. 3. Unit costs are determined by
3. Unit costs are computed by dividing the total costs on the
dividing the individual job cost sheet by the number of
departments’ costs by the units on the job.
equivalent production.
End of Presentation!
Thank your for Listening!
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