COST ACCOUNTING AND CONTROL - ACTG22A Marketing

CHAPTER 1 ✔ Used in evaluating the profitability of

customer-groups.
Cost Accounting - defined as "a systematic set
of procedures for recording and reporting Distribution
measurements of the cost of manufacturing goods
and performing services in the aggregate and in ✔ Helps in choosing the best way to deliver
detail”. the goods to the customers.

Goal of Cost Accounting Customer-Service

✔ Valuation of inventory of cost of goods sold ✔ Helps in tracking quality costs and
warranty.
✔ Aid in adding value to the organization by
aiding managers in decision-making. Financial Accounting vs. Management
Accounting
The Value Chain – set of activities that
transforms raw resources into the goods and ➢ Cost accounting serves both financial
services that end users purchase and consume and accounting and management accounting.
the treatment or disposal of any waste generated ➢ Subfield of both fields.
by them.
➢ Reports such as balance sheets and income
Value-Added Activities – activities that statements are common to both fields.
customers perceive as adding utility to the goods
or services they purchase. FINANCIAL MANAGERIAL
ACCOUNTING ACCOUNTING
Cost Accounting in the Value Chain Intended for external Intended for internal
and internal users users
Research and Development
Objective and Verifiable Financial and
✔ Develop cost-effective designs. Information Non-financial: more
subjective in nature;
✔ Help in making informed decisions relevance is more
regarding alternative materials. emphasized.
Design Precision is required. Timeliness is required.
Historical orientation. Future-oriented.
✔ Very critical stage because a large part of a Overall firm Reports about
product’s cost is locked in once a design is performance. departments, product
chosen. lines, and sub-units.
✔ Cost Accounting helps designers to Generally, embraces Embraces other
understand the effects of accounting concepts branches of knowledge
design-modifications to the behavior of only. like economics,
industrial engineering,
costs.
and statistics.
Purchasing
✔ Aid in evaluating the performance of
suppliers SCOPE OF MODERN COST ACCOUNTING
Production 1. Cost Accumulation – organized
✔ Aids in valuation of inventory and cost of collection of data.
goods sold. 2. Cost Assignment – Designing costs to
✔ Aids in developing the ideal inventory cost objects.
policies. 3. Application of mathematical and statistical
✔ Facilitates in planning capacity. techniques.
 4. Cost Management – Active use of
information to plan and control costs.
Primary Application of Cost Accounting Systems:
1. Cost Accounting systems provide data for
compliance with reportorial, contractual
and regulatory requirements.
2. Obtaining information for planning and
control and performance evaluation.
Feedback
a. Promote learning and future improvement.
b. Control and evaluate the performance of
various decisions, departments and
managers.
ORGANIZATIONAL ENVIRONMENT
➢ Cost Accounting Function is the
responsibility of the controller |Chief
Accounting Office|.
Controller – responsible for supplying
management with accounting data for planning,
performance evaluation, and decision making and
for overseeing the company’s internal control
system.
KEY FINANCIAL MANAGERS IN AN
ORGANIZATION
● Chief Financial Officer (CFO) –
manages the entire finance and accounting
function.
● Treasurer – Manages liquid assets,
conducts business with banks and other
financial institutions, and oversees public
issues of stock and debt.
● Controller – Plans and designs
information and incentive systems.
● Internal Auditor – ensures compliance
with laws, regulations and company
policies and procedures, provides
consulting and auditing services within the
firm.
● Cost Accountant – records, measures,
evaluates costs of estimates and analyzes
costs. Works with financial and operational
managers to provide relevant information
for decisions.
ETHICAL ISSUES AND GUIDELINES
Standards of Ethical Conduct for Practitioners of
Management Accounting and Financial
Management (IMA):
COMPETENCE, CONFIDENTIALITY,
INTEGRITY AND OBJECTIVITY.
Cost – value foregone or sacrifice of resources for
the purpose of achieving some economic benefit
which will promote the profit-making ability of the
firm. It is also an outlay or expenditure of money.
Costing System: Cost accumulation and Cost
Assignment
Cost Pools are costs collected into meaningful
groups. Cost pools may be classified:
1. By type of cost (labor cost in one pool,
material costs in another)
2. By source (department 1, 2 and so on)
3. By responsibility (manager 1, 2, and so on)
Cost Object – any product, service, or
organizational unit to which costs are assigned for
some management purpose.
● Cost Objects: Products and Services
● Cost Pools: manufacturing departments.
Cost Drivers – critical first step for achieving a
competitive advantage. It is any factor that has the
effect of changing the level of total cost.
Such as Business Functions; research and
development, design of products, services and
processes, production, marketing, distribution,
and customer service.
Cost Accumulation – process of assigning costs
to cost pools or from cost pools to cost objects.
Cost Assignment – assignment of indirect costs
to cost pools.

CHAPTER 2
CLASSIFICATION OF COSTS
A. Cost classified by Nature or Management
Function
Manufacturing Costs – All costs associated
with production of goods.
⮚ Direct Materials – all raw material costs.
⮚ Direct Labor – all labor costs
⮚ Manufacturing Overhead – all costs of
manufacturing specifically indirect materials,
indirect labor, property taxes, insurance,
supervisor’s salaries, depreciation of factory
building. (Overtime premium and idle time)
Conversion Costs: Direct Labor and Overhead
Prime Costs: Direct Materials and Direct Labor
● Nonmanufacturing Costs –
general costs not related to the
production of goods.
● Marketing Costs – marketing or
selling costs include all associated
with marketing or selling a product
or all costs incurred by the
marketing division. (e.g.,
advertising, shipping, sales
commissions, and storage costs.)
● General and Administrative
Costs – general administrative
costs include all executive,
organizational and clerical costs
associated with the general
management of the organization
rather than with manufacturing,
marketing or selling.
Production Costs in Service Industry Firms
and Nonprofit Organizations
Service industry is also engaged in production. A
service is consumed as it is produced.
B. Costs classified according to the Timing of
Recognition as Expense
➢ An expense is defined as the cost incurred
when an asset is used up or sold for the
purpose of generating revenue.
● Product Costs – “INVENTORIABLE
COSTS” costs attached or cling to the units
that are produced and are reported as
assets until the goods are sold. Might be
incurred during one period but not treated
as an expense until a following period.
● Period Costs – costs that are identified
with the accounting period and not
included in product costs. These costs are
expensed on the income statement in the
period in which they are incurred. (e.g.,
administrative expenses, sales
commissions, office rent, and
transportation expenses)
C. Cost Classification on Financial Statements
➢ Financial statements prepared by a
manufacturing company are more complex
than the statements prepared by a
merchandising company.
THE STATEMENT OF FINANCIAL
POSITION
● Merchandise Inventory – goods
purchased from suppliers that are awaiting
to resale to customers.
● Raw Materials – materials used to make
a product
● Work in Process – partially complete.
● Finished Goods – completed goods.
THE INCOME STATEMENT
➢ Merchandising and manufacturing firms’
income statements are very similar.
D. Cost classification for Predicting Cost Behavior
● Cost behavior refers to how a cost will
react or respond to changes in the business
activity.
● Variable Costs – costs that change
directly in proportion to changes in activity.
● Fixed Costs – remain unchanged for a
given time period.
● Semi variable or Mixed Costs – (e.g.,
social security taxes, materials handling,
personnel services, heat, light and power)
E. Cost classified by Types of Inventories
● Raw Materials Inventory – materials
that have been purchased but not used at
the end of the accounting period.
● Work-in-process – partially completed
goods at the end of the accounting period.
● Finished Goods Inventory – cost of
completed goods that have not been sold at
the end of the accounting period.
● Merchandise Inventory – purchased
merchandise.
F. Cost classification according to Traceability to
Cost Objective
● Direct Costs (Traceable; separable) –
costs that can be economically traced to a
single cost object.
● Indirect Costs – costs that are not
directly or easily traceable to the cost
object.
G. Cost classification according to Managerial
Influence
● Controllable Costs – costs that are
subject to significant influence by a
particular manager within the time period
under consideration.
● Noncontrollable costs – costs over
which a given manager does not have a
significant influence.
H. Cost Terminologies Used for Planning and
Control
● Standard Costs – a predetermined cost
estimate that should be attained; usually
expressed in terms of costs per unit.
● Budgeted Costs – used to represent the
expected/planned cost for a given period.
For example, a company plans to
manufacture 1,000 units of product X,
which has a standard cost per unit of P4,
would have budgeted cost for the period of
P4,000 for product X.
● Absorption Costing “Full cost method”
– costing method that includes all
manufacturing costs including VARIABLE
AND FIXED manufacturing overhead – in
the unit of product.
● Direct Costing “Variable costing” – a
type of product costing where fixed costs
are charged against revenue as incurred
and are not assigned to specific units of
product manufactured.
● Information Costs – costs of obtaining
information.
● Ordering Costs – costs that increase
with the number of orders placed for
inventory.
● Out-of-pocket costs – costs that must be
met with a current expenditure or cash
outlay.
I. Cost classification according to a Time-frame
Perspective
Committed Cost – cost that is the inevitable
consequence of a previous commitment.
Discretionary Cost (programmed; managed
costs) – costs for which the size or the time of
incurrence is a matter of choice.
J. Cost classified according to the Time period for
which the Cost is incurred.
● Historical Costs (past costs) – costs that
were incurred in a past period.
● Future Costs – budgeted costs that are
expected to be incurred in a future period.
● K. Cost classifications for
Decision-making and other analytical
purposes
● Relevant Costs – future costs that are
different under one decision alternative
than under another decision alternative.
● Incremental Costs – difference in cost
between two or more alternatives. In
evaluating a given alternative, incremental
cost is additional cost to determine the
feasibility of this particular alternative.
● Sunk Costs – past costs that have been
incurred and are irrelevant to a future
decision.
● Opportunity Costs – the value of the
best alternative foregone as the result of
selecting a different use of resources or by
choosing a particular strategy.
● Marginal Costs – cost associated with
the next unit or the next project or
incremental cost associated with an
additional project as opposed to the next
discrete unit.
● Value-Added Costs – costs that add
value to the product.
CHAPTER 3
COST BEHAVIOR ANALYSIS AND USE 𝑌 = 𝑎 + 𝑏𝑋
Y= total mixed cost (dependent variable)
Cost Behavior – refers to how a cost will react as
changes take place in the level of business activity. a = total fixed cost

Importance of Studying Cost Behavior b = Variable cost per unit

● Planning – management makes decisions X = the level of activity (independent variable)

based in part on expectations as to the
future. The independent variable is “Explanatory Variable
● Control – process of using feedback or Cost Driver”
information for comparison with
expectations and the implementation of
COST ESTIMATION
actions on the basis of that comparison.
● Cost Analysis – an integral part of the - Account Analysis Method
planning and control function. The key to
effective cost prediction lies in an - Industrial Engineering Method
understanding of cost behavior patterns. - Conference Method

TYPES OF COST BEHAVIOR PATTERNS High-Low Method

1. Variable Costs – change in total as the ● Variable Cost Rate
level of activity changes in the short run
within the relevant range.
a. Relevant Range – range activity ● Fixed Cost
within which assumptions relative
to variable cost and fixed cost
behavior are valid. Regression Analysis Method
b. Variable cost per unit - is 𝑌 = 𝑎 + 𝑏𝑋
constant within this range.
Least-squares Regression Method
c. Activity base – a measure of
whatever causes the incurrence of ● separating mixed costs.
variable cost “Cost Driver”
TWO LINEAR EQUATIONS:
2. Fixed Costs – costs that remain constant
Equation (1) = ∑𝑌 = 𝑁𝑎 + 𝑏∑𝑋
in total regardless of changes in the level of
activity. Equation (2) = ∑𝑋𝑌 = ∑𝑋𝑎 + 𝑏∑𝑋
2

a. Committed Fixed Costs – long Where:

term; can’t be significantly reduced
even for short periods. Y = Total cost
b. Discretionary fixed costs a = Fixed Cost
(Managed Fixed Costs) – annual
b = Variable Cost Rate
decisions by management; can be
adjusted. X = Measure of Activity
3. Mixed Costs (Semi variable Costs) – both N = Number of Observations
variable and fixed cost.
GRAPH Step costs
Fixed costs

Variable costs

Semi-variable costs

Mixed costs
CHAPTER 4 Profit-Volume Graph
COST-VOLUME -PROFIT RELATIONSHIPS
The Variable Costing Income Statement

Total Per Unit

Net Sales P500,000.00 P 10.00

Variable Costs P 300,000.00 P 6.00

Contribution P 200,000.00 P 4.00

Margin

Fixed Costs P 150,000.00

Net Profit P 50,000.00
CVP Analysis for Break-even Planning
Contribution Margin
● the excess of sales over variable cost (S-VC)
● may be per unit or in total
● CM in total is the amount that can be used
to contribute to paying fixed expenses and
providing return to owners
● may be expressed as a ratio = CM/S
Break-even Point
● the level of sales where net income is zero.
● no profit; no loss
● may be expressed in sales volume (units) or
in peso
Assumptions and Limitations
1. The analysis is valid within a relevant
range.
2. All costs can be categorized as fixed and
variable.
3. Revenues change proportionately with
volume.
4. Constant product mix.
5. Changes in volume alone causes changes
in revenue and costs.
6. There is no significant change in
inventories (sales=production)
7. Operation leverage questions can be dealt
with.
8. Appropriate data can be found without
difficulties.
Formulas:

Note: Ratios are based on sales. Variable cost (VC) per unit = total VC/sales volume

❖ at BEP, net income is zero VC ratio = VC per unit/sales per unit

❖ this means FC=CM = P 150,000.00
❖ BEP in units = CM and BEP/CM per unit
= P 150,000.00/P 4.00
= 37,500 units
❖ BEP in peso = BEP in units x SP per unit
= 37,500 units x P 10.00
= P 375,000.00
Alternative Solution:
❖ BEP in peso = CM and BEP/CM ratio
❖ BEP in units = BEP in peso/SP per units
= total VC/total sales
CM per unit = sales per unit/VC per unit
= total CM/sales volume
CM ratio = CM per unit/Sales per unit
= total CM/total sales
Remember: Sales, VC, and CM increase
hand-in-hand proportionately.
Total sales = sales per unit x sales volume
VCE ratio = VC per unit/ sales per unit
Total VCE = VC ratio x total sales
CM ratio = sales ratio - VC ratio
CM per unit = sales per unit x CM ratio
= sales per unit - VC per unit
Total CM = total sales - total VC `
= total sales x CM ratio
= CM ratio x sales volume
Target total CM = target pre-tax income + FCE
Sales volume = target total CM/CM per unit
Target pre-tax income = target after - tax
income/(100% - tax)
(Target pre-tax income + FCE)/CM per unit