 Attempts to present  Measuring is not

CHAPTER 1: INTRODUCTION TO some degree of restricted to peso.

COST ACCOUNTING
Main Objective of Accounting:
 To 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, fund
providers, creditors and interested entities.
COST ACCOUNTING
Definition:
 Cost accounting informs management promptly
about the cost of rendering a particular service,
buying and selling a product, and producing a
product. It is the field of accounting that measures,
records, and reports information about costs.
 It is now recognized as being essential to the
efficient cooperation of business and industry.
Information System
 All types of business entities – manufacturing,
merchandising, and service businesses, require
information systems that show how costs were
incurred and where and how these costs were
utilized.
precision while
emphasizing
verifiability, freedom
from bias, relevance,
and timeliness.
Managerial Accounting is not separate from
Financial Accounting as the data in FA are used in the
Managerial Accounting System.
Management decisions made today will affect
the financial statement of future periods.
Intersection Between the Two
 Cost Accounting is the intersection between
financial and managerial accounting. It provides cost
information to external parties and product cost
information to internal parties.
MERCHANDISING VERSUS
MANUFACTURING OPERATIONS
Merchandising Operations
 A merchandising company buys a product that is
ready to release when it is received.
 The product does not undergo a process to be
salable unless you prepare a special package or

 IS must be designed to accumulate detailed cost data Inventory, beg. xxx

relating to the production process. Purchases xxx
Total Goods Available for Sale xxx
FINANCIAL, MANAGERIAL, AND COST Inventory, end. (xxx)
ACCOUNTING Cost of Goods Sold xxx
Financial Accounting Managerial Accounting display.
 Uses accounting  Uses accounting
information for information to satisfy Manufacturing Operations
reporting to external the needs of parties
parties. within the  A company that creates products through the
organization. production process of raw materials to finished
 Financial statements goods.
are the output from  Addresses individual  Has a more complex operation because it involves
an accounting or divisional three (3) inventory accounts:
system. concerns rather than  Materials Inventory
the enterprise as a  Work-in-Process Inventory
 The reports prepared whole.  Finished Goods Inventory
focus on the
enterprise as a whole.  Information may be
Materials Inventory, beg. xxx
current and
Purchases xxx
 It is based on forecasted and most
Total Materials Available for Production xxx
historical data which data are futuristic,
Materials Inventory, end (xxx)
are supported by and some of the costs
Total Materials Used xxx
evidence. are not recorded.
Direct Labor xxx
Manufacturing Overhead xxx
 It is required by  No legislation that Total Manufacturing Costs xxx
organizations such as mandates the format Work-in-Process Inventory, beg. xxx
the Securities and or use of managerial Total Goods Put into Process xxx
Exchange accounting. Work-in-Process Inventory, end. (xxx)
Commission (SEC) Cost of Goods Manufactured xxx
and the Bureau of  More concerned with Finished Goods Inventory, beg. xxx
Internal Revenue timeliness and timing Total Goods Available for Sale xxx
(BIR). of the information. Finished Goods Inventory, end. (xxx)
Cost of Goods Sold xxx
 USES OF ACCOUNTING DATA batches of production processing
(individual jobs). department.
The information produced by a cost accounting system
provides a basis for:  Unit cost = total  Unit Cost = total
1. Determining Product Cost manufacturing cost/ manufacturing cost of
number of good units a department /
Cost accounting procedures help management
produced equivalent unit of
in gathering the data needed to determine
production
product cost.
2. Making Marketing Decisions  Measures costs for  Emphasizes a weekly
Determining the selling price of a product each completed job, or monthly period
Meeting Competition rather than for set rather than the time
Bidding on contracts periods. taken to complete a
Analyzing profitability specific order.

 Uses one Work in  Uses several Works

PLANNING AND CONTROLLING Process Inventory in Process Inventory
Control Account in accounts- one for
 Another important function of cost accounting is the the general ledger. each department or
development of information that can be used by Also supported by a work center in the
management in planning and controlling. subsidiary ledger of manufacturing
job order cost cards process.
Planning or sheets for each job
a time.
 The process of establishing objectives or goals for
 Used by paint, oil and
the firm and determining how the firm will attain  Used by ships, gas. Automobiles,
them. It provides a means of coordinating all of the airplanes, large bricks, and soft
operations of firms. machines, and special drinks industries.
orders industries.
 Cost accounting helps in the development of plans
by providing historical costs that serve as the basis  More costly.  Recordkeeping costs
for projecting (forecasting) future data for planning. are lower.

 Strategic Planning- long-range goals to

determine overall direction.
 Tactical Planning- shorter-range plans to
achieve strategic goals.
 Operations Planning- daily implementation of
tactical plans
Hybrid costing
 Firms that are not suitfed for either of the mentioned
systems requires hybrid costing which incorporates
ideas from both.

Controlling Operation Costing

 The process of monitoring the company’s operations  A hybrid costing system used in repetitive
and determining whether the objectives identified in manufacturing where finished products have
the planning process are being accomplished. common, as well as distinguishing characteristics.

TWO BASIC PRODUCT-COSTING  Some companies process large identical order units
SYSTEMS as a group through production sequence. Each order
is called a batch.
Objectives:
 Provide product unit cost information for pricing,
cost control inventory, valuation, and income
statement preparation.

 Computation of End-of-Period values for COGS,

Work in Process Inventory, and Finished Goods
Inventory accounts.

Job Order Costing Process Costing

 Used by companies  Used by companies
making one-of-a-kind that make similar
or special products. products.

 Costs are assigned to  Costs are

specific job orders or accumulated by the

CHAPTER 2: COSTS – CONCEPTS
AND CLASSIFICATIONS
Costs
 Cost is the cash or cash equivalent value sacrificed
for goods and services that are expected to bring a
current or future benefit (revenue) to the
organization.
 Expired costs (costs used up in the production) that
produce benefits are called expenses, while expired
costs without producing benefits are called loss.
 Expenses are deducted from revenues to determine
the period’s profit.
CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
A. Manufacturing Costs/ Product Costs - accounting
term that refers to the total costs involved in
making a product and getting it ready for sale.
1. Direct Materials
 Materials that are transformed into
finished products through the use of
labor and factory overhead in the
production process. These can be traced
to the finished product.
 The costs of these materials are direct
costs.
 Examples are flour for bread and wood
for tables.
2. Direct Labor
 Represents the amount paid to wages as
to those working directly on the
product.
 The wages of machine operators and
other workers involved in actually
shaping the products are classified as
direct labor costs.
 These are the labor costs for
production-related activities that cannot
be traced to end products.
 The wages and salaries of such workers
as machine helps, supervisors, and other
support personnel are called indirect
labor costs.
 These are the labor costs for
production-related activities that can be
traced to end products.
3. Factory Overhead
 The total cost involved in operating all
production facilities of a manufacturing
business that cannot be traced directly
to a product.
 The collection of costs is also called
manufacturing overhead, factory
burden, and indirect manufacturing
costs.
 Examples are: indirect materials such as
nails and indirect labor costs such as
driver’s wages.
Formulas:
 Prime Costs = Direct labor + Direct Materials
 Conversion Costs = Direct labor + factory overhead
 Total manufacturing cost = direct materials + direct
labor + factory overhead
B. Non- Manufacturing Costs/ Period Costs- any
costs a company incurs indirectly related to the
production process.
1. Marketing or Selling Expenses
 Expenses on activities like
advertising campaigns, online
marketing efforts, and other
promotional strategies aimed at
reaching potential customers and
generating sales.
 Often referred to as order-getting and
order-filling costs.
2. General or Administrative Expenses
 Costs associated with running a
business that aren't related to
products or sales. In short, these are
the expenses you incur while
conducting business day-to-day
 Examples are executive
compensation, general accounting
secretarial, and public relations.
 As with marketing expenses, all
organizations have administrative
expenses.
II. Cost Classified as to Variability
A. Fixed Cost – an expense that does not change
when sales or production volumes increase or
decrease.
- Fixed costs are not related to activity within
the relevant range.
- Fixed cost per unit decreases as the volume
increases and increases as the volume
decreases.
1. Committed fixed costs
 Long-term commitment costs as a
result of past decisions (ex.
depreciation).
 2. Managed fixed costs
 Costs incurred on a short-term basis
(ex. Advertising and research
development).
B. Variable Costs - a corporate expense that
changes in proportion to how much a company
produces or sells.
- If activity increases, total variable costs also
increase, and if activity decreases, total
variable costs also decrease.
- Cost per unit remains constant as volume
changes within a relevant range.
C. Mixed Costs - this is an item of costs that are
partly fixed and variable.
1. Semi-variable costs
 The fixed portion of a semi-
variable cost presents a minimum
fee for making a particular item or
service available.
 The variable portion is the cost
charged for actually using the
service.
 An example is the cost of electricity
where there is a minimum charge
plus a specified cost per kilowatt
hour above the minimum.
 Total Cost = fixed portion +
variable portion
2. Step costs
 the fixed part under this cost
changes abruptly at various activity
levels because these costs are
acquired in indivisible portions.
 An example is a supervisor’s
salary.
Different methods in separating mixed costs
into fixed and variable components:
Scatter Graph
 Uses dots to represent values for
two different numeric variables.
The position of each dot on the
horizontal and vertical axis
indicates values for an individual
data point. Scatter plots are used to
observe relationships between
variables.
High- Low Point Method
 An accounting technique used to
separate out fixed and variable
costs in a limited set of data.
 It involves taking the highest level
of activity and the lowest level of
activity and comparing the
difference of the total costs at each
level.
Least Square Method
 the process of finding the best-
fitting curve or line of best fit for a
set of data points by reducing the
sum of the squares of the offsets
(residual part) of the points from
the curve.
There are three equations under this method:
Y = a + bx
∑Y = na + b∑x
∑XY = ∑xa + b∑x2
III. Costs Classified as to relation to
Manufacturing Departments
A. Direct Departmental Charges - Costs that are
immediately charged to the manufacturing
department(s) that incurred the costs since
the costs can be conveniently identified or
associated with the department(s) that
benefited from the said costs.
B. Indirect Departmental Charges - Costs that
are originally charged to some other
manufacturing department(s) or account(s)
but are later allocated or transferred to other
department(s) that indirectly benefited from
the said costs.
IV. Costs Classified to their Nature as Common
or Joint
A. Common Costs- Business expenses that
multiple departments share.
- Just like indirect costs, these costs are
subject to allocations.
B. Joint Costs - The expense incurred by
producers when creating more than one
product or process.
- These costs are also subject to allocations
V. Costs classified as to relation to an accounting
period
A. Capital Expenditures - This is money
invested by a company to acquire or upgrade
fixed, physical or non-consumable assets.
- Intended to benefit more than one
accounting period and is recorded as an
asset.
- Depreciation for fixed tangible assets,
amortization for intangible assets, and
depletion for wasting assets.
B. Revenue Expenditures - Short-term business
expenses usually used immediately or within
one year.
- Will only benefit current period only.
VI. Costs for planning, control, and analytical
process
 A. Standard Costs - Predetermined costs for
direct materials, direct labor, and factory
overhead.
- They are established by using information
accumulated from experience and data
secured from research studies.
- It is a budget for the production of one unit
of product or service and serves as
benchmark in budgetary control system.

B. Opportunity Costs - The benefit given up

when one alternative is chosen over another.
- They are usually not recorded in accounting
systems.

C. Differential Costs – Cost that is present

under one alternative but is absent in whole
or in part under another alternative.
- An increase in cost from one alternative to
another is known as incremental cost, while
a decrease in cost is known as decremental
cost.
- Can either be fixed or variable.

D. Relevant Costs - A future cost that changes

across the alternatives.

E. Out-of-Pocket Costs - Cost that requires the

payment of money (or other assets) as a
result of their incurrence.

F. Sunk Costs- A cost for which an outlay has

already been made and it cannot be changed
by present or future decision.
- They are not differential costs and should be
used in analyzing future courses of actions.

G. Controllable Costs- A cost is considered to

be a controllable cost at a particular level of
management if that level has a power to
authorize the cost.
SUMMARY OF IMPORTANT FORMULAS
 Total Variable Costs = 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 Cost = Total Cost at Highest - (Variable
Rate x Output at Highest Point)
 Fixed Cost = Total Cost at Lowest – (Variable
Rate x Output at Lowest Point
CHAPTER 3: COST ACCOUNTING
CYCLE