Introduction to

Cost Accounting
Accounting
Accounting is a service activity. Its
function is to provide quantitative
information, primarily financial in
nature, about economic entities, that is
intended to be useful in making economic
decisions, in making reasoned choices
among alternative courses of action.
Financial Accounting
Financial Accounting deals with the
accumulation and preparation of
financial data for the investors, creditors,
regulators, and other external users.
Management Accounting
Management Accounting involves the
process of accumulating, summarizing,
and interpreting economic data about
the business primarily for management
and other internal users.
Cost Accounting
Cost Accounting is a
system of accounting
that deals with
determination and
accumulation of cost
of a product or activity.
Scope of Cost Accounting
1. Costing – Its main purpose is to determine
the cost of products, activities or services.
2. Cost Control – It covers the analysis of the
costs to determine whether the current level of
costs is satisfactory in the light of the
predetermined levels or standards.
3. Budgeting – It relates to the establishment of
a comprehensive plan of operations
expressed in financial terms.
Objectives of Cost Accounting
1. To ascertain the cost.
2. To determine the selling price.
3. To control cost.
4. Tofacilitate the preparation of
financial statements and other reports.
5. To
provide information for decision-
making.
Components of Cost Accounting

1. Costing Method
2. Costing Technique
3. Cost Accumulation
4. Cost Flow Assumption
5. Inventory System
Costing Method/Input Measurement
Basis
1. Actual or historical costing – refers to
the costing of a product based on the
actual historical costs after they are
incurred.
2. Standard costing – standard costs are
estimated or pre-determined by
management before the new accounting
period begins.
Costing Method/Input Measurement
Basis

3. Normal Costing – The cost of a product

is based on actual costs, except for the
overhead which is based on predetermined
rate. The overhead application rate is
charged per unit of activity during period.
Costing Technique
1. Absorption/full costing – All manufacturing
costs, whether fixed or variable, are charged to
products, activities or services.
2. Variable costing – All variable costs are
considered product costs, while all fixed costs
are considered period costs.
3. Uniform costing – Refers to the use by
several undertakings or organizations of
similar costing principles, methods or
practices.
Costing Technique

4. Activity-based costing (ABC) – ABC System

assumes that cost objects consume activities
unlike the traditional costing which assumes that
cost objects consume resources. Accordingly, ABC
assigns overhead costs to the activities that are
real cause of the overhead. It assigns the cost of
those activities only to the products that demand
such activities.
Cost Accumulation System
1. Job order costing – This is used when
products are produced based on specific
customer orders. The cost of a product is
tracked by individual job orders.
A. Batch costing
B. Contract or terminal costing
C. Multiple or composite costing
Cost Accumulation System
2. Process costing – This is used when
homogenous or very similar products are
produced in large volumes. Manufacturing
costs incurred are allocated to the proper
functions or departments within the
process, rather than to specific products or
job orders.
A. Unit or single output costing
B. Operating (service) costing
C. Operation costing
Cost Accumulation System
3. Backflush Costing – This focuses mainly
on the output of the business and then work
backwards to allocate the product costs
between cost of goods sold and inventories.
This costing was developed for just-in-time
(JIT) operations.
4. Throughput costing – This is also called
super-variable costing. It considers only direct
materials as true variable cost and other
remaining costs are treated as period costs.
Cost Flow Assumption
1. Specific Identification – When items are
sold, the actual cost of the item is
determined and recognized as cost of goods
sold. Specific identification is typical for
products that can be clearly differentiated,
have high value, and low sales volume.
2. First-in, First-out (FIFO) – Goods
purchased first are assumed to have been
sold first. The ending inventory is
comprised of items from most recent
purchases.
Cost Flow Assumption
3. Last-in, First-out (LIFO) – LIFO is based
on the assumption that the last items
purchased are sold first, leaving the oldest
items in the ending inventory.
4. Average method – This method is used
when same cost is applied to all units in the
inventory. The weighted-average unit cost is
determined by dividing the cost of goods
available for sale by the number of units
available for sale. Ending inventory is equal to
units on hand multiplied by the weighted
average price per unit.
Inventory System
1. Perpetual system – This system uses the “Inventory”
account to record purchases, sales and returns of goods.
The “Inventory” account is updated immediately after
each transaction based on the stock ledger card that is
used to control the inventory quantities.

2. Periodic system – This system uses the “Purchases”

account to record purchases, sales and returns of goods
periodically, usually at the end of each accounting
period, after a physical count. Periodic system does not
use a stock ledger card; hence, inventory quantities are
not updated continuously.
Classification and Purposes of Costs
1. By nature of expense
- Materials
- Labor
- Overhead
2. By traceability or in relation to the product
- direct
- indirect
Classification and Purposes of Costs
3. By function or activities
- production or manufacturing costs
- selling
- distribution
- research and development
- administrative
- general
Classification and Purposes of Costs
4. By variability or behaviour
- Fixed
- Variable
- Mixed
5. By controllability
- Controllable
- Non-controllable
Classification and Purposes of Costs
6. By normality
- Normal
- Abnormal
7. By time period
- Historical
- Predetermined
- Standard
- Estimated
Classification and Purposes of Costs
8. By purpose of management decision-making
- Marginal - Imputed
- Differential - Sunk
- Opportunity - Avoidable
- Replacement - Unavoidable
- Relevant
Elements of Product Cost
1. Direct Materials are those that can be
easily identified and related with specific
product, job, process, and activity.
2. Direct
Labor pertains to the wages of
the persons who are involved in the
manufacturing process.
3. FactoryOverhead represents all costs
incurred in the production of a finished
product, other than direct materials
and direct labor.
Classification of Inventories
1. Raw materials inventory – This is used
to account for the direct and indirect
materials purchased that will be used in
the production process.
2. Work in process inventory – This
pertains to the cost of uncompleted job
orders or process at the end of the period.
3. Finished goods inventory – This account
is used to accumulate the manufacturing
costs incurred relating to a finished
product ready for sale.