Introduction to Cost

Accounting
Summary
By:
Arman Jay L. Dizon, CPA
 To discuss and describe the
nature and scope of cost
accounting

Learning To recognize the difference

between financial and
Objective management accounting and
s relate it to cost accounting
To apply the cost concepts
and classifications in
accounting for manufacturing
cost systems
 Accounting is a systematic process
of analyzing, recording, classifying,
summarizing and reporting financial
transactions and events and
interpreting the results thereof.

Accountin
g - Review
Encompasses several branches:

Finance
Financial Management (specifically
Taxation
accounting accounting financial
management)
Summary Comparison between
Financial and Management Accounting
As to: Financial Accounting Management Accounting
Focus External Internal
Scope of Whole (entire) Segments/divisions
organization
Cost Historical Current/Projected
measurement
Data provided Quantitative, Monetary Quantitative/Qualitative,
Monetary or nonmonetary
Quality of Verifiable Timely/reasonable estimate
report
Standard US GAAP/IFRS (PFRSs in Not required (as long as benefit
Philippines) exceeds cost)
Recordkeeping Formal Informal
Cost Accounting

system of accounting provide information to

that deals with the both internal and
determination and external users regarding
accumulation of cost of product or service cost
a product or activity information
Relationship of Financial,
Management, and Cost Accounting
Product
Costs

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING
Scope of Cost Accounting
• Costing
• The main purpose of costing is to determine the cost of products, activities, or
services.
• It involves the collection and classification of costs according to various
elements and proper allocation of the expenses to the product or activity.
• Cost Control
• Cost control covers the analysis of the costs to determine whether the current
level of costs is satisfactory in light of the predetermined levels or standards.
• Cost is managed using a variety of techniques in order to increase the operating
efficiency and maximize the profit earning capacity of the business.
• Budgeting
• Budgeting relates to the establishment of a comprehensive plan of operations
expressed in financial terms.
• While budget preparation is generally used in planning the operations or
activities, it is also used for control.
 To ascertain the cost.

Objectives To determine the selling price.

of Cost To control cost.

Accountin
g To facilitate the preparation of financial
statements and other reports.

To provide information for decision-

making.
Components of Cost Accounting
COSTING METHOD/INPUT
MEASUREMENT BASIS
Actual Costing Normal Costing Standard Costing

Direct Material Actual Actual Standard

Direct Labor Actual Actual Standard

Factory Overhead Actual Based on Standard

Predetermined
rate (budgeted)
 Absorption or full costing

• conventional costing technique where all manufacturing

costs, whether fixed or variable, are charged to products,
activities, or services.

Variable or direct costing

• All variable costs are considered product costs, while all

fixed costs are considered period costs. This technique is
sometimes called marginal costing.

COSTING Uniform costing

TECHNIQ • this refers to the use by several undertakings or

organizations of similar costing principles, methods, or

UE
practices. The system is applied by a number of units of the
same undertaking or several undertakings within the same
industry to promote operating efficiency by comparing
inter-unit or inter-firm performance data

Activity-based costing (ABC)

• The 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 the real cause of
the overhead. It then assigns the cost of those activities
only to the products that demand such activities.
 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.
• Batch
• Contract or terminal
• Multiple or Composite

Process costing
• This is used when homogeneous or very similar products are

COST produced in large volumes. Manufacturing costs incurred are

allocated to the proper functions or departments within the

ACCUMULAT
process, rather than to specific products or job orders.
• Unit or single output costing

ION SYSTEM • Operating (service) costing

• Operation costing

Backflush costing
• This focuses mainly on the output of the business and then works
backwards to allocate the product costs between cost of goods
sold and inventories. This costing was developed for just-in-time
operations.

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 in which they are incurred.
COST FLOW ASSUMPTION
• 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 sales low
volume.
• First-in. First-out (FIFO)
• Last-in, First-out (LIFO)
• Average method
• This method is used when same cost is applied to all units in the inventory.
The weighted average unit cast is determined by dividing the cost of goods
available for sale by the number of units available for sale. At the end of
the accounting period, the remaining units on hand are then multiplied by
the weighted average price per unit to determine cost of ending inventory. 
INVENTORY SYSTEM

• Perpetual system
• This system uses the "inventory" account to
record the 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.
• Periodic system
• This system uses the "purchases" account to
record the purchases, sales, and returns of goods.
The "inventory' account is updated 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. 
COST, COST OBJECT, COST
CENTER, AND COST UNIT 
• Cost is a measurement of the amount of resources
used in producing a product or rendering a service. 
• A cost object is anything for which costs are
measured separately.
• Cost center represents a location, division,
segment, or area of activity for which costs may be
ascertained for purposes of controlling costs.
• Cost unit is a unit of product, service, or activity for
which cost may be ascertained or expressed.
Classifications of Cost
 Materials

According Labor
to Nature

Overhead
According Direct
to Cost
Object
Indirect
 Production/manufacturing costs

According Period costs

to
• Selling costs (marketing, promotion, sales
salaries)
• Distribution costs (freight out)
Function • Research and development cost
• Administrative costs (commonly used as
general and administrative expenses)
• General/Other costs
 Fixed costs

According
to Variable costs

Behavior

Mixed costs
Cost Reaction to Changes in
Activity
• Variable cost • Fixed Cost

$ $
Total Total

# of Units # of Units

Per $ Per $
Unit Unit
# of Units # of Units
Within the relevant range
 Controllable costs

According to
Controllability
Noncontrollable
costs
According Normal Abnormal
to incurred in the normal
situation at a given level
do not occur in the
normal situation of

Normality of output in the

conditions in which that
level of output is
production process or
business environment.

achieved
 • Historical cost - the actual costs of acquiring
an asset or producing product or services.
• Predetermined cost for a product is
computed in advance of production, on the
basis of a specification of all the factors
affecting cost and cost data.
By Time • Standard cost is a predetermined cost
established by management at the
Period beginning of the accounting period to
control costs and measure overall
efficiency and productivity.
• Estimated cost refers to the cost of a
particular product or activity that is
developed before the actual operations
or before customer orders are accepted
(based on activity level of the plant).
By Purpose of Management
Decision-Making 
• Marginal cost (total of DM+DL+VOH)
• Marginal cost per unit is the change in the amount at any given volume of output
by which the aggregate cost changes if the volume of output is increased or
decreased by one unit.
• Differential cost
• change in cost due to change in activity level. It highlights the differences in costs
when adopting different alternatives.
• Relevant cost
• those that are relevant for different alternatives being considered.
• Sunk cost
• historical costs that were incurred in the past and are not relevant to the particular
decision-making problem being considered.
• Opportunity cost
• value of the alternatives foregone by adopting or pursuing a particular strategy or
certain action.
By Purpose of Management
Decision-Making 
• Replacement cost
• cost of an asset in the current market that will have to be paid
to replace an existing asset with a similar asset.
• Imputed costs
• hypothetical or notional costs, not involving cash outlay,
computed only for the purpose of decision-making
• Avoidable costs
• those costs which under given conditions of performance
efficiency should not have been incurred.
• Unavoidable costs
• inescapable costs that are essentially to be incurred, within
the limits or norms provided for. It is the cost that must be
incurred under a program of business restriction.
ELEMENTS OF PRODUCT
COST
• Direct materials – raw materials that are directly
traced to each unit of product
• Direct labor – hands-on labor/work that can be
directly traced to the product
• Factory overhead – other production costs that are
indirectly traced to the product
CLASSIFICATION OF
INVENTORIES
• Raw materials inventory (cost of materials and
freight in & other direct costs)
• Work in process inventory (goods still in process)
• Finished goods inventory (goods completed and
available for sale)
Flow of Costs in Manufacturing
Process
Review: Statement of Cost of goods manufactured
(periodic inventory system/non-cost system)
Review: Statement of Cost of Goods Sold
(Merchandising vs. Manufacturing; periodic
system)
Review: Pro-forma Income
Statement
Gross sales Pxxx
Less: Sales returns and allowances Pxxx
Sales discounts xxx xxx
Net sales Pxxx
Less: Cost of goods sold xxx
Gross profit Pxxx
Less: Period costs xxx
Income before tax Pxxx
Less: Income tax xxx
Net income Pxxx
Cost System (Perpetual Cost
System)
• Keeps records of inventory accounts (RM, WIP and
FG).
• Provides more timely information on the
movements of inventories
• Produces timely information about manufacturing
costs per unit (DM, DL, OH) for controlling costs.
• “Will be used in this subject and higher accounting subjects”