Introduction to Cost

Accounting
Cost Accounting defined –
• Is a system of accounting that deals with the determination and
accumulation of cost of a product activity.

• Costing is a systematic procedure for determining the unit cost of

output produced, activities, or services rendered.

• Management accounting employs cost accounting for planning,

control, and decision-making, hence, there is an inevitable overlap
between the two.
Cost Control defined –
• It 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 variety of techniques in order to increase the

operating efficiency and maximize the profit earning capacity of the
business.

• Budgeting, is one of those controls. It relates to the establishment of a

comprehensive plan of operations expressed in financial terms.
 Cost Accounting System

Costing Cost Cost Flow Inventory

Costing Method
Technique Accumulation Assumption System

Actual or Specific
Full Costing Job Order Perpetual
historical Identification

Standard Variable Costing Process FIFO Periodic

Activity Based
Normal Backflush LIFO
Costing

Throughput Average
Ref. Integrated Cost Accounting by Flores
Costing Method –
• Actual or historical costing
• Past cost of DM, DL, FOH

• Standard costing
• Estimated or predetermined costs
• Actual vs. standard = variances

• Normal costing
• Actual cost, except for FOH
• Budgeted FOH = Actual quantity x standard OH rate
Costing Technique –
• Absorption or full costing
• All manufacturing costs, whether variable or fixed, are part of the product
costs.

• Variable or direct costing

• Variable costs are products costs while fixed costs are period cost.

• Activity based costing (ABC)

• Assumes that cost objects consume activities
Cost Accumulation System –
• Job order costing
• Specific customers orders

• Process costing
• Homogenous or very similar products are produced in large volumes.

• Backflush costing
• Focuses mainly on the output; then work backwards to allocate the product costs
between COGS and inventory.

• Throughput costing
• Direct materials as product cost, while the other costs are period cost.
Cost Object, Cost Center, and Cost Unit –
• Cost is the measurement of the amount of resources used in producing a
product or rendering of services.

• Cost object is anything for which costs are measured separately.

• Cost center represents a location, division, segment or area of activity for

which cost may be ascertained for purposes of controlling cost.

• Cost unit is a unit of product, service or activity for which cost may be
ascertained or expressed.
Cost classification –
• By nature of expense (materials, labor, overhead);

• By traceability (or in relation) to the product (direct and indirect);

• By function or activities (production, selling, distribution, R & D, G & A);

• By variability or behavior (fixed, variable, mixed);

• By controllability (controllable, non controllable);