Cost Accounting

 Schaum's Outline of
theory and problems
Of
 Cost Accounting
3rd Edition
 CHAPTER 1

THE ROLE, CONCEPTS, AND

CLASSIFICATIONS OF COST ACCOUNTING
 Learning Objectives
3

1. Explain the distinguishing features of managerial accounting.

2. Identify the three broad functions of management.
3. Define the three classes of manufacturing costs.
4. Distinguish between product and period costs.
5. Indicate how cost of goods manufactured is determined.
 Place in the company
4

 Cost Accounting Provides Management with costs

for products , inventories , operations or functions
and compared actual to predetermined data. it also
provides a variety of data for many day-to- day
decisions as well as essential information for long-
range decisions.
 Managerial Functions
5

 The Managerial Functions are carried out by the

 Top management group, the president ,vice-
presidents and other executives
 Middle Management group: the division

Managers branch managers and other department

heads
 Lower management group( supervisors)

These groups require comprehensive analytic cost

data provided on timely basis and systematic basis
 Four Basic Managerial Functions
6

 There are four basic managerial functions that are

common to all activities ,no matter how large or small
the enterprise :
1. Planning
2. Organizing
3. Directing
4. And controlling
 Basic Managerial Functions continued
7

 Planning : the process of establishing organizational

goals (setting objectives) and strategy for their
accomplishment is known as planning . Its concerned
with the future-immediate /and or long range
 Organizing: Once objectives are set and basic plan
is established, the process of organizing involves
developing a framework for the activity and making
specific work assignments.
 Basic Managerial Functions continued
8

 Directing : This is the process by which management

achieves its objectives. it requires the ability to
supervise and motivate employees in order to obtain
optimal levels of productivity conforming to
established plans(e.g., budgets and standards for
sales, production ,costs etc.)
 Basic Managerial Functions continued
9

 Controlling : the process of review, evaluation and

reporting monitors the achievement of goals. It
involves comparing actual results with those
projected in planning as well as against actual
performance in past periods.
 There are two facets to reviewing enterprise's
activities :
1. The comparison of actual to projected results
2. individual traits
 Basic Managerial Functions continued
10

 Another kind of appraisal is the internal audit.

This is a systematic review of and evaluation made a
staff of internal auditors to assure management that
established controls are operating as planned
 Organization charts
11

 An organization chart establishes the flow of

authority and responsibility by defining the
relationships among the major management positions
of the enterprise. For purposes of cost accounting there
are two organizational charts that we should consider:
 Company chart. This chart depicts the flow of
authority and responsibility downward from the
stockholders , through the board of directors , the
president, the respective vice presidents and other
executives to the operating levels
 Organization Chart of a Manufacturing Company
12
 Organization charts continued
13

 Controllers division chart: the controller is the

top accounting officer in the company. As a

member of top management team, his or her
attention should be directed to providing services
to all levels of management and to all functions of
the company
 Controller’s Davison Organization Chart

14
 Line and staff responsibility
15

 Most responsibilities in a company can be divided

into line and staff functions

 The line function has the responsibility for decision

making, guidance and supervision

 The staff function provide advice and service to the

line function
 Managerial Functions

Review Question
The management of an organization performs several broad
functions. They are:

a. Planning, directing, and selling.

b. Directing, manufacturing, and controlling.
c. Planning, manufacturing, and controlling.
d. Planning, organizing, directing, and controlling.

LO 2 Identify the three broad functions of management.

 Cost department
17

 The cost department is usually supervised by the a controller or a

chief accountant. It is responsible for developing and reporting cost

data with respect to materials, labor and overhead, and maintaining
the necessary underlying records

 The extent to which the cost department participates in management

decisions is prescribed by the definition of cost accounting used by

the company . In some cases the cost department is responsible only
for compiling product costs and has no part in analysis for decision
making
Some Major Differences between Financial and
Managerial Accounting

Managerial Financial
HelpHelp
Managers
Managers Communicate
Purpose Make Decisions
Make Decisions Financial Position
Internal Managers External
Primary Users Internal Managers Stakeholders

Focus Future Oriented Past Oriented

Rules Cost-benefit GAAP
Time Span Varies Annual/Quarter
 Nature of cost accounting
19

 The broad definition of cost accounting is the process

of identifying ,summarizing and interpreting
information needed for:
1. Planning and control
2. Management decisions
3. And product costing
 Cost accounting and management accounting are terms
which are often used interchangeably. It is not correct
to do so. Cost accounting is part of management
accounting. Cost accounting provides a bank of data
for the management accountant to use.
 NATURE OF COST ACCOUNTING
20

 The various activities of a cost department under the broad

definition cover a wide range of responsibilities:
1. Preparing data required in planning and controlling operations.
2. Preparing data in connection with day-to-day decisions or special
projects that require a choice among alternative courses of action.
3. Participating in the creation and execution of budgets.
4. Establishing procedures to improve operations and reduce costs.
5. Developing cost systems and analyses to improve cost
determination and review of variances
6. Cost recording and reporting of costs by product or department.
 Cost Terminologies
21

Cost “the amount, measured in money, of cash expended

or other property transferred, capital stock issued,
services performed, or a liability incurred, in
consideration of goods or services received or to be
received.”
Expired costs are called expenses. In each period,
expenses are deducted from revenues on the income
statement to determine the period’s profit
operating, selling, or administrative expenses, interest, and
taxes.
 Items included in cost of manufacturing, such as materials,
labor, and overhead, should be described as costs, not expenses.
 Cost Terminologies continued
22

 Revenue is defined as the price of goods sold and

services rendered.

 A loss is a cost that expires without producing any

revenue benefit. For example, the cost of uninsured
inventory destroyed by a flood would be classified as a
loss on the income statement
 the excess of all expenses over revenues for a period
 Costs and their classifications
23

 Costs can be classified into various categories

 The principle Methods of accumulating costs are
described bellow:
 Function
 Manufacturing: costs applied to producing a
product
 Costs and their classifications
24

 Marketing: costs related incurred in selling a

product or service
 Administrative :costs incurred in policy making
activities
 Financial :costs related to financial activities
 Costs and their classifications
25

 Elements :
 Direct Material which is an integral part of a finished
product
 Direct labor :labor directly applied to the components
of the finished product
 Factory overhead : indirect material , indirect labor
and the manufacturing expenses that cannot be easily
allocated directly to specific units , jobs or products
 Also called factory overhead, indirect
manufacturing costs, or burden.
 Cost Terminologies
26

 Prime costs and conversion costs

 Prime cost is the sum of direct materials cost and
direct labor cost
 Conversion cost is the sum of direct labor cost and
overhead cost.
 Costs and their classifications
27

 Product
 Direct: costs which are directly charged to the
product
 Indirect :costs which must be allocated
 Costs and their classifications
28

 Department
 Production : A unit in which operations are
performed on the part or product
 Service: A unit not directly engaged in production
and whose costs are ultimately allocated to the
production unit
 Costs and their classifications
29

 When charged to income

 Product: costs included when product costs as
defined above, are computed. Product costs are
included in inventory when the product is produced
and in cost of sales when the product is sold
 Period costs: costs associated with a passage of
time rather than with the product. These costs are
not inventoried and are closed to income summary
A bicycle company has these costs: tires, salaries of employees
who put tires on the wheels, factory building depreciation, wheel
nuts, spokes, salary of factory manager, handlebars, and salaries
of factory maintenance employees. Classify each cost as direct
materials, direct labor, or overhead.

Direct Materials Direct Labor Overhead

 Tires.  Salaries of  Factory depreciation.

 Spokes. employees who put  Factory manager
tires on the wheels. salary.
 Handlebars.
 Factory maintenance
employees salary.

LO 4 Distinguish between product and period costs.

 Costs and their classifications
31

 Relation to volume
 Variable: costs which change in total in direct
proportion to changes in related activity . The unit
cost remains the same over the wide range of
volume( referred to as the relevant range
 Fixed: costs which do not change in total over the
wide range of volume. The unit costs decreases as
the volume increases
 Costs and their classifications
32

 Period covered
 Capital :costs which are expected to benefit future
periods and are classified as assets
 Revenue :which benefit only the current period and
are thus expensed as incurred
 Costs and their classifications
33

 Degree of averaging
 Total: The cumulative cost for established category
 Unit: The total cost divided by the number of units
of activity or volume
 Cost Systems
34

 The principle types of cost systems can be

classified According to their particular attribute and
are described bellow
 Periodic cost accumulation systems : these
provide only limited cost information during a
period and require quarterly or year end adjustment
to arrive at the cost of goods manufactured , they
are used by small manufacturing companies
 Cost Systems
35

 Perpetual cost accumulation systems :these

provide continuous information about work in
process, finished goods and cost of goods
manufactured :these systems are used by most
medium and large manufacturing companies .
Perpetual cost accumulation systems are usually
organized under either two cost systems:
36

 Job order cost: the cost unit is the job and costs are
accumulated by job: this format most suitable where
each job or order is different
 Process cost: the cost unit is the average cost for
the units produced in a specified period of time: this
format is most suitable where high volume of
similar products are produced
 Unit costs
37

 The total cost figure is usually un satisfactory from the

control standpoint since the quantity of production varies
greatly from period to period, so the unit cost figure can
be readily computed by individual unit costs by the
number of units produced.
 EXAMPLE: Assume that 3.000 units are produced at a total cost of
$4,500. or $1.50 per unit. If 2,500 units are sold and 500 remain in
inventory, the computation is as follows:
 COST ANALYSIS BY
38
BEHAVIOUR
 Definition Analysis of costs by behaviour
involves determining how a cost will vary if the
level of activity in the organisation varies.
 Costs can be classified by behaviour into:
 fixed costs
 variable costs
 semi-variable costs
 stepped costs.
 COST ANALYSIS BY
39
BEHAVIOUR
 Fixed
  costs are costs that are not affected in total by the
level of activity.
 For example, the rent paid on a factory is $5,000 per
month whether 2 or 200 units of output are made.
 the cost per unit must fall as the activity level increases,
 If 2 units are made the fixed cost per unit is per unit.
 If 200 units are made the fixed cost per unit is is per unit.
 Conclusion As the activity level increases, fixed costs
remain the same in total, but the cost per unit of activity
falls.
 COST ANALYSIS BY
40
BEHAVIOUR
 Variable costs are costs that change in total in direct
proportion to the level of activity.
 For example if the cost of materials for a unit of
output is 2 kg at $2 per kg, this amounts to $4 per
unit. So, total material cost is $4 if one is made, $8 if
2 are made and $800 if 200 are made.
 Conclusion As the level of activity increases, total
variable costs increase in direct proportion to the
increase in activity, but the variable cost per unit of
activity remains the same.
 COST ANALYSIS BY
41
BEHAVIOUR
 Semi-variable costs are costs that have both a
fixed element and a variable element.
 For example a telephone bill might be a semi-
variable cost. Line rental is fixed, but there is also a
variable cost of calls.
 Semi-variable costs are also referred to as semi-
fixed costs or mixed costs
 COST ANALYSIS BY
42
BEHAVIOUR
 Stepped-fixed costs are costs that are constant for
a range of activity levels, and then change, and
are then constant again for another range.
 For example, a factory supervisor’s bonus could
depend on output. At between 0 and 100 units of
production, the supervisor could be paid $200, for
100 to 200 units the supervisor could be paid $300
and so on.
 Stepped-fixed costs are also referred to as simply
stepped costs.
Review Question
Which of the following is not an element of manufacturing
overhead?

a. Sales manager’s salary.

b. Plant manager’s salary.
c. Factory repairman’s wages.
d. Product inspector’s salary.

LO 3 Define the three classes of manufacturing costs.

 Income statement
44

 The income statement of manufacturing company

and merchandising company reflect the basic
difference in operations of these two types of
enterprises
 The manufacturing company transforms raw
materials into finished goods through the use of
labor and factory facilities
 A merchandising company buys finished goods and
sells it in its form
 Income statement
45

 The income statements of a

merchandiser and a manufacturer differ
in the cost of goods sold section.
 Cost of Goods Sold Components –

(Periodic Inventory System)

 Income statement
46
 Balance Sheet

Inventory accounts for a manufacturer company : raw materials,

work in process, and finished goods.

The balance sheet for a merchandising company shows just one

category of inventory.
48

Prepare (a) a schedule showing the cost of goods sold, and (b) an Income Statement.
49

Folk, Incorporated
Schedule of Cost of Goods Sold
for month of November, 19X7
50
51

Folk, Incorporated
Schedule of Cost of Goods Sold
for month of November, 19X7
Manufacturing Costs in Financial Statements
 Example
54

 The following information are available for a

company :
The following information are available for ABC Company:

  Beginning Ending
Raw Materials $ 1,000.00 $ 1,000.00
Work In Process $ 2,000.00 $ 3,000.00
Finished Goods $ 2,000.00 $ 2,000.00

Other Related Data

Purchase of Raw material $ 2,000.00
Direct Labor $ 1,000.00
Manufacturing overhead $ 3,000.00
Sales Revenue $ 10,000.00
Selling expenses $ 1,000.00
Distribution expenses $ 1,500.00
Prepare
1. Direct Materials Used
2. Cost of Goods Manufactured
3.Prime cost and conversion cost
4. Finished Goods Inventory
4. Income Statement
 1. Direct Materials Used

55

Direct Materials Used

Beginning raw material $1,000
Purchase $2,000
Ending Raw Material 1000
Direct Materials Used $2,000
56

END