INTRODUCTION

CHAPTER 1:
TO COST ACCOUNTING
JMCNNCPA
What is the primary reason why
people do business?

To earn PROFIT
How do you earn profit?
Revenue – Expense =
PROFIT

ELIMINA
TE
MAXIMIZE MINIMIZE
The first step in managing
cost is to understand it

COST ACCOUNTING
Review: What is the definition of
accounting?
 It 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 (AICPA)
 the art of recording, classifying, and summarizing in a significant
manner and in terms of money, transactions and events which are, in
part at least of financial character, and interpreting the results thereof
(AICPA)

Simply, cost accounting is…

 It is a service activity. Its function is to provide quantitative
information, primarily about costs of economic entities that is intended
to be useful in making economic decisions
 the art of recording, classifying, and summarizing in a significant
manner and in terms of money, costs which are, in part at least of
financial character, and interpreting the results thereof
 Where does cost
accounting rooted?
Major Branches of Accounting
Financial Accounting
 External users
 Holistic approach
 Governed by standards
(PAS/PFRS)
 Information are monetary in
nature (pesos)
 General purpose FS
 Reports are precise, verifiable
and unbias
Managerial
Accounting
 Internal users
 Divisional approach
 No governing standards
 Uses various of bases
 Specific purpose FS
 Report are timely and relevant
 Accountin
g

Financial Managerial
Accounting Accounting

Cost Accounting
As the business structure
becomes more complex,
costs are more difficult
to understand
Merchandising VS Manufacturing

Merchandising
 Products are ready for resale
 Maintains one inventory account
only (Merchandise Inventory)
 Simple computation of COGS
 Purgold, Ace Hardware,
Penshoppe, Ukay-ukay
Manufacturing
 Products need to go
processing/conversion
 Maintains three inventory
accounts (Materials, WIP, FG)
 Complex computation of COGS
 Jollibee, Red Ribbon, Apple,
Furniture shops

After the conversion of units, all processes are the same

between Merchandising and Manufacturing
 Formula for Cost of Goods Sold
Merchandising Manufacturing
Beg. Materials Inventory XX
Beginning Inventory Net Materials Purchases
XX Gross Purchase XX
Purch. Discount (XX)
Net Purchases
Purch. Returns (XX) XX
Gross Purchase XX Total Materials Avail. For Use XX

Purch. Discount (XX) End. Materials Inventory (XX)

Materials Used XX
Purch. Returns (XX) XX Direct Labor XX
Total Goods Avail. For Sale XX Factory Overhead XX
Total Manufacturing Cost XX
Ending Inventory (XX)
Beg. Work-in-Process Inv. XX
Cost of Goods Sold XX Total cost put into process XX
End. Work-iin-Process Inv. (XX)
Cost of Goods Manufactured XX

Beg. Finished Goods Inv. XX

Total Goods Available for Sale XX
End. Finished Goods Inv. (XX)
Cost of Goods Sold XX
Uses of Cost Accounting Data
Determining the Product Cost
• Unit cost
• Total Product cost
Importance of Product Cost
 Determining the selling price
 Meeting competition
 Bidding on contracts
 Analyzing profitability
Planning and Controlling
Planning is the process of establishing
objectives or goals and determining the
means by which the firm will attain
them
 Use of historical costs as basis of
forecast
Control is the process or monitoring
the company’s operations and
determining whether objectives
identified in the planning process are
being accomplished
 Cost analysis, profit measurement
Product-costing systems
A. Job Order Costing  a product costing system used by companies
making unique products. Costs are assigned to specific job orders or
batches
Examples: Tailor shops, furniture shops
B. Process Costing  a product costing system used by companies that
make a large number of similar products or maintain a continuous
production flow. Costs are measured using period of time rather than
assigning to specific jobs.
Examples: Papers, candies
C. Hybrid/Operations costing  a costing system often used in repetitive
manufacturing where finished products have common as well as
distinguishing characteristics
Examples: Cakes, hotdogs
Job Order Costing VS Process Costing
Job Order Costing
 Unique units/jobs/batches
 Costs are accumulated by
individual job
 Unit cost = Total cost/Total units
(per job)
 Job Cost Sheet
Process Costing
 Homogeneous units
 Costs are accumulated by
processing department
 Unit cost = Total costs / EUP (per
department)
 Cost of Production Report
THANK YOU!
JMCNNCPA