Cost Accounting

Chapter 4
Cost Systems and Cost Accumulation
Learning Objectives
1. Present the flow of manufacturing costs using general and T
accounts.
2. Prepare a statement of cost of goods sold for a manufacturer.
3. Prepare financial statements for a manufacturer.
4. Name different kinds of cost systems, state how each system
measures costs, and tell which cost elements are treated as
product costs—inventoried—under each system.
5. Distinguish between job order and process costing, and give
examples of businesses in which each is used.

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FIGURE 4-1 Flow of Manufacturing Costs

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4-1 Flow of Production Costs
• The transactions corresponding to the first entries, (a)
through (g), are as follows:
a. Payments on account
b. Expenses paid in advance
c. Purchases and improvements of long-lived
manufacturing assets
d. Various payments for resources
e. Payments of wages and salaries
f. Purchases of raw materials and factory supplies on
credit
g. Recording payroll
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FIGURE 4-2 Relationships Between General Accounts
and Cost Accounts (Under Absorption Costing)

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4-1 Flow of Production Costs
• The transactions corresponding to entries (h) through
(r) are as follows:
h. Issuing factory supplies (indirect materials) to production
i. Incurring various indirect manufacturing costs on credit
j. Manufacturing portion of any prepayments that have
expired
k. Manufacturing portion of depreciation
l. Manufacturing portion of various other resources used

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4-1 Flow of Production Costs
• The transactions corresponding to entries (h) through
(r) are as follows:
m. Charging all types of indirect labor cost to production
n. Issuing direct materials to production
o. Charging manufacturing overhead costs to production
p. Charging direct labor cost to production
q. Charging cost of completed units to the finished goods
account
r. Charging cost of sold units to the cost of goods sold
account

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4-1 Flow of Production Costs
• Source documents

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EXHIBIT 4-1

9
4-2 Reporting the Results of Operations
• Comprehensive Income Statement

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EXHIBIT 4-2

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EXHIBIT 4-3

12
4-2 Reporting the Results of Operations
• Balance Sheet

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EXHIBIT 4-4

14
4-3 Cost Systems
• actual cost system
• historical cost system
• standard cost system
• absorption costing
• direct costing
• variable costing

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FIGURE 4-3 A Classification of Cost
Systems

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4-4 Cost Accumulation
• job order costing
• process costing

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4-4 Cost Accumulation
• Job Order Costing
– In job order costing, costs are accumulated for each batch,
lot, or customer order.
– Applicable to made-to-order work.

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4-4 Cost Accumulation
• Process Costing
– Process costing accumulates costs by production process
or by department.
– Applicable to industries such as flour mills, breweries,
chemical plants, and textile factories.

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4-4 Cost Accumulation
• Aspects Common to Both Job Order and Process
Costing
– both job order and process costing are also used by service
organizations.

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