Cost Accounting &

Cost Management
For Financial Management Students
Who?
Gil Ortua Anasin
Certified Public Accountant
 Licensed Professional Teacher
Currently – SHS Teacher at Minuyan National High School and a Part-time
Instructor at St. Joseph College of Bulacan and Immaculada Concepcion College
 A graduate of Bachelor of Science in Accountancy at Polytechnic University of
the Philippines, Sta. Mesa.
 Former Comptroller /Finance Manager/Accounting Manager - Citihomes Realty,
Inc. and Goodhaven Homes Inc.
 Former Accounting Instructor – Polytechnic University of the Philippines, Sta
Mesa
 Former Accounting & Math Instructor – Colegio de San Gabriel Arcangel
What – My Primary Objectives ?
• About cost assignment
• Factors influencing choice of an optimal cost system
• The differences between costing systems
• Joint and by-product costing
• Job Order Costing and understand when it should be applied
• Process costing
• The relevance of cost and revenues for decision-making
• That alternative cost accumulation systems have an effect on income
• Practice on problems
What – My Objectives ?
My objective is not to make your life miserable.
My objective is not to overload you with irrelevant assignments
or make-work tasks.
My objective is to make this class relevant, useful, stimulating,
fun and enjoyable. – You have many commitments … But, the
lowest cost, lowest effort approach to benefit from and “cruise”
through this class is to attend class.
Basically, I am serving it to you on “silver platter.”
Why?
• The course aims to give the students fundamental knowledge,
both theoretically and practically on cost accounting. There will be
a focus on how managers or leaders could use cost accounting as a
control mechanism . The course will combine lectures with case
studies and assignments related to the manufacturing sector.
• The course intends to give some background for students aiming
at an accounting/ management position in manufacturing
companies, but may also give relevant background knowledge for
accounting work at more administrative levels.
How - Grading
Class Standing
• 11 assignments 220 pts
• 6 Quizzes (in class) 300 pts
• Practice Set 300 pts
• Class Contribution (Participation/others) 180 pts
• Total 1000 pts - 60%
Midterm and Final Examination 100 pts - 40%
Final Grade = (Midterm Grade + Final Grade)/ 2
How – Practice Set
Each student will be responsible for completion
Practice Set
This practice sets will provide each student with a
full grasp of accountant’s work in a manufacturing
type of business specifically analysis of variances
How – Classroom Approach
The classes will be casual, fun and informal.
I think the best way to learn is through numerous
examples. Therefore, we will examine many interesting
“cases” from the hand-outs
To keep things lively, I will ask questions and get your
input during class. My questions are not intended to
put you on the spot … I am a very easy-going and
forgiving person
Cost concepts, classifications and cost accounting cycle
1. Differentiate financial accounting and cost accounting and explain the uses of cost
accounting information.
2. Identify and define the different classification of costs
3. Raw materials inventory system
4. Flow of costs and the income statement of manufacturing firms
5. Identify the three basic elements of product costs
6. Identify the three inventory accounts of a manufacturing firm
7. Cost accounting cycle
8. Illustrate basic cost accounting procedures using actual and normal method of
accumulating costs
9. Compute product cost using actual and normal costing
10. Journalize acquisition and issuance of raw materials; incurrence and distribution of
factory labor and overhead
11. Prepare statement of cost of goods manufactured and sold
Accounting for Raw Materials

1. Differentiate perpetual inventory and periodic inventory system of

handling inventories
2. Journalize transactions related to raw materials purchases, returns to
suppliers and freight under perpetual and periodic inventory system
3. Differentiate FIFO and average method of inventory valuation
4. Understand and apply economic order quantity (EOQ) as a method of
managing raw materials inventories
5. Journalize transactions under just-in-time (JIT) using back flush
accounting
6. Account for scarp materials
7. Compute the cost of raw materials used using standard costing system
Accounting for Factory Labor
1. Know the different types of labor remuneration
2. Differentiate direct from indirect labor
3. Account for overtime, shift and night premium
4. Compute for the correct deductions from payroll like absences,
tardiness, SSS, WHT, Philhealth, and Pagibig
5. Prepare factory payroll
6. Distribute factory payroll to proper accounts
7. Journalize factory payroll
Accounting for Factory Overhead
1. Journalize incurrence of various manufacturing overhead
2. Compute predetermined overhead rate using plant wide rate and
departmental overhead rate
3. Dispose overhead variance using two assumptions; (a) overhead
variance is immaterial and (b) overhead variance is material
4. Allocate service cost using direct method, step method and
reciprocal method
Activity Based Costing
1.Differentiate the value-added activities from
non-value-added activities
2.Compute product costs using activity based
costing system
Job Order Costing System
1. Know the characteristics of job order costing system
2. Journalize the flow of costs using actual, normal and
standard costing
3. Post entries to job cost sheets
4. Account for production losses
5. Prepare cost of production report
Process Costing System

1. Define the nature and characteristics of a process costing

system
2. Determine the equivalent units of production under weighted
average method and FIFO method of accumulating costs using
actual costing
3. Journalize the flow of costs in a process costing system
4. Prepare cost of production report
5. Accretion in units in subsequent department
6. Account for production losses at the point of inspection
Allocation of Joint Costs and Accounting for By-Products
1.Distinguish joint products from by-products
2.Allocate the joint costs using different methods
3.Determine inventoriable costs and cost of goods sold
4.Identify which products need to undergo additional
processing
5.Account for by-products
Standard Costing System and Analysis of Variances
1.Concept, definition and nature of standard cost vs. Budgeted
cost
2.Rationale, uses, benefits, limitations on the use of standard
costing systems
3.Kinds of standards used and how they are set
4.Performance measurement and evaluation
5.Variance analysis for direct materials and direct labor
6.Variance analysis for factory overhead using 2, 3 and 4 variances
What is Cost Accounting?
Cost Accounting is a system that records,
summarize, analyzes, and interprets the
details of the costs of materials, labor, and
overhead necessary to produce and sell an
article.
What is Cost Accounting?
Cost Accounting measures and reports
financial and non-financial information
relating to the cost of acquiring or
consuming resources in an organization
Uses of Cost Data
Useful in determining product and service costs and in setting prices
for the product and the service
Helps management in deciding whether to maintain, to reduce or to
increase the selling price of the product to have a fair competition in
the market
Helps management in planning to attain the company’s goals and
objectives.
Contents of Production Plan
The number of units to be produced
The type of manufacturing operations to be performed
The desired quality of the product
The number of personnel to be utilized
The type of materials to be used
The level of materials inventory to be maintained
The delivery schedules
Difference between Cost Accounting & Financial Acccounting
COST ACCOUNTING
It relates to different costing
methods and techniques in
accumulating the cost of the
product, process, project or
services and also the processes in
reducing total costs to improve
the profitability of the entity.
FINANCIAL ACCOUNTING
It relates to the classifying,
recording and analyzing
business transactions and
events. The end product of
which is financial statements
Difference between Cost Accounting & Financial Acccounting

COST ACCOUNTING FINANCIAL ACCOUNTING

The main objective is to
determine the cost to produce a
unit, process or projector cost to
deliver a service
Its objective is to reflect the
correct financial
picture/information of the
entity to different
stakeholders.
Difference between Cost Accounting & Financial Acccounting

COST ACCOUNTING FINANCIAL ACCOUNTING

The reports required by
management are the Cost of
Production Report and Statement
of Cost of Goods Manufactured
and Sold
The basic financial statements are
the end product .
1. Statement of Financial Position
2. Statement of Comprehensive
Income
3. Statement of Changes in equity
4. Statement of Cash Flows
Elements of Product Costs
Materials - includes raw materials and other factory supplies
used in operation
Labor – represents the compensation and other benefits paid to
the workers in the factory
Manufacturing Overhead – are indirect product costs and it
includes production costs other than direct materials and direct
labor
Materials
Direct Materials – those materials which are traceable to
the product being produced.
Examples – lumber in the manufacture of furniture;
galvanized iron and steel in the manufacture of jeepneys
and trucks; leather in the manufacture of bags, belts,
wallets and shoes; fabrics in the manufacture of shirts,
dresses and other apparels; flour and sugar, butter in the
manufacture of breads and other pastries
Materials
Indirect Materials – those materials necessary in
manufacturing operations but are not directly included in
or not a significant part of the product
Examples:
Janitorial and Factory supplies used in the factory, nails,
screws, washers, glue, sand paper, lubricating oil, grease,
cleaning materials
Labor
Direct Labor – represents compensation and benefits
paid to those who physically work on the conversion of
raw materials into a finished products and easily traceable
to a specific process or job order.
It includes basic pay, COLA, 13th Month Pay and cash
equivalent of noncash incentives given on a regular basis
Labor
Indirect Labor – represents wages of personnel other
than the direct laborers, which are necessary to the
manufacturing process or service but are not directly
related to the actual conversion of raw materials into a
finished product
It includes supervisor’s fee, wages paid to other workers
such as janitors, inventory control clerks, guards, and
other personnel in the factory, and employees benefits
given to workers
Manufacturing Overhead
Factory supplies such as oil and other cleaning materials
Wages of supervisors, factory maintenance personnel, raw
materials handlers and security officers stationed in the
factory premise
Depreciation of factory plant and equipment
Insurance and property taxes on factory plant and
equipment
Maintenance and repairs on factory plant and equipment
Power, light and water consumed in factory
Period Costs
Period costs are operating expenses that are associated
with time periods rather than with the production of
goods and services. It is charged directly to expense
accounts on the assumption that their benefit is
recognized entirely in the period when the cost is
incurred. They are non-manufacturing costs and non-
inventoriable costs.
Period Costs
Marketing and Selling Costs – these are costs of getting
and filling orders such as cost of customer service,
documentation, salaries and commissions of sales
personnel, advertising, and other expenses associated with
the sale of the goods or services
Distribution Costs – these are costs of warehousing,
transporting and delivering a product or service
Administrative Costs – these are costs associated with the
general administration of the organization that cannot be
reasonably assigned to either marketing or production
Direct Cost
Direct Costs are costs that can be obviously and physically
traced to a manufacturing process, job order, business unit,
segment or department. These costs are those that would
be saved if the segment or business unit would be
discontinued or if the product would not be manufactured.
It includes salary of auto mechanics in Automotive Service
Company, salary of binder in Printing company, oil and
lubricants in a trucking company, steel bars used in
construction company, bond papers and telephone expense
in a law office, cost of detergent in a laundry shop,etc.
Indirect Costs
These are costs related to a particular cost object but
cannot be traced to that cost object in an economically
feasible way. It is normally incurred for the benefit of
several segments within the organization. In a
manufacturing company, these are the overhead costs
incurred in the process of production.
Common Costs
These are mutually beneficial costs, which occur when the
same resource is used in the output of two or more
services or products, or simply the costs of facilities or
services shared by two or more departments or operations.
Examples are building repairs and maintenance cost, rent
of building occupied by different departments, power and
utilities costs, salaries and wage of personnel serving two
or more departments, taxes for land and building, permits
and licences
Joint Costs
These are costs incurred in a single process that
yields two or more products. They are production
costs incurred up to the point where products are
separately yield identified.
Examples are the cost of dough, labor of baker, and
overhead incurred by a bakeshop
Opportunity Costs
Opportunity costs represent the benefits foregone
because one course of action is chosen over another.
Examples are: the rent revenue foregone if a
company decides to use part of a building rather than
leasing it; the salary foregone if a student decides to
be a full time student rather than a working student
Sunk Costs
Sunk costs are costs that have already been incurred
and will be changed or avoided by any future decision.
They are past costs that are unavoidable because they
cannot be changed no matter what action is taken by
the management.
Examples are: the acquisition cost of an office
equipment; the manufacturing costs of finished goods
on hand
Committed Costs
Committed costs are costs resulting from an
organization’s structure or use of facilities and its basic
organization structure.
Examples
Property taxes
Depreciation on building & equipment
Salaries of management personnel
Cost of renting facilities
Discretionary Costs
These are costs resulting from management decision
to spend a particular amount of money for a specific
purpose.
Examples
Amount of money to spend on research and development
Management development program and contributions to
charitable institution
Advertising and promotion
Controllable Costs
These are costs that are primarily subject to the
influence of a given responsibility center manager for a
given period of time.
Example
The cost of raw materials used in manufacturing leather
products ( manager has the ability to control the materials to
be used by selecting materials of high quality, thereby reducing
waste and spoilage)
Non-controllable Costs
These are costs that cannot be controlled or influenced by a
responsibility center manager
Examples:
cost of renting equipment – the owner of the equipment
has the control over the amount of rent not the production
manager
cost of raw materials – the supplier has control over the
cost of raw materials
Out of Pocket Costs & Budgeted Costs
Out of pocket costs. These costs refer to the
cash outlay required to complete a proposed
project or to extend an activity undertaken.
Budgeted costs. These costs refer to planned
or predetermined costs
Fixed Costs
These are costs that are constant in total within the relevant
range but variable on a per unit basis. As the activity level
increases or decreases, total fixed costs remains constant but
unit cost declines or goes up
Examples are:
Depreciation using the straight line method
Factory rent and factory taxes
Factory insurance
Supervision fee
Wages of indirect laborers
Illustration: Assume the following:
Total fixed cost for the period PHp 100,000
Production in units: Case 1 – 8,000
Case 2 – 9,000
Case 3 – 9,500
Relevant range 8,000 – 10,000 units
Variable Costs
These are costs that vary in total in direct proportion to
changes in the volume of production. As activity changes, total
variable costs increases or decreases proportionately with the
activity change; but unit variable costs remains the same
Examples are:
Direct materials and direct labor
Fuel and other factory supplies
Overtime premium
Materials handling costs
Maintenance costs
Illustration: Assume the following:
Variable cost per unit:
> Direct Materials P 5.00
> Direct Labor 6.00
> Overhead 3.00
Total Variable Costs P14.00
Separating Mixed Costs
When cost is classified as mixed, it is appropriate to separate the
fixed cost from the variable cost
One of the method in separating mixed costs is the HIGH-LOW
METHOD
Variable cost per unit is computed as Change in total costs
Change in Activity Level
Change in total cost = Cost at High level – cost at low level
Change in Activity level = Highest Activity – Lowest Activity
See hand-outs for example