Introduction to Cost

Accounting
Cost Accounting
Cost accounting is the field of accounting that measures, records and reports information
about the cost of goods and services.
Cost accounting

Financial Cost Managerial

Accounting Accounting Accounting
Financial Accounting vs. Managerial Accounting
Financial Accounting Managerial Accounting
Primary Users External users (Investors and Internal users (Management)
creditors)
Type of report General purpose Specific purpose
Information Historical Historical and prospective
Primary financial in nature Both financial and non-financial
Quantitative Quantitative and qualitative
Compliance with GAAP Comply Does not comply
Frequency Prepared annually Prepared more frequently based on
management’s demand
Requirement Mandatory Optional
Scope Whole company May include whole company but
focuses on narrower scope such as
divisions
Merchandising vs Manufacturing
Merchandising companies buys goods that are already in its saleable condition and resells
it to its customers.

Manufacturing companies buys raw materials that are not yet in saleable condition and
converts the raw materials into the finish products which will be sold to its customers.
Cost of good sold - Merchandising
Merchandise inventory, beg. 5,000
Purchases 25,000
Goods available for sale 30,000
Merchandise inventory, end (10,000)
Cost of goods sold 20,000

Inventory, Inventory,
beg (5,000) end (10,000)
Goods available for sale
(30,000)
Cost of
Purchases
Goods Sold
(25,000)
(20,000)
Uses of Cost Accounting Data
1. Determining Product Costs
2. Planning and Control
Determining Product Costs
Importance of determining product costs:
• Determining the selling price of product
• Meeting competition
• Bidding on contracts
• Analyzing profitability
Planning and Control
Planning is the process of establishing objectives or goals for the firm and determining the
means by which the firm will attain them.

Planning can be divided into three components:

• Strategic planning
• Tactical planning
• Operations planning

Control is the process of monitoring the company’s operations and determining whether the
objectives identified is the planning process are being accomplished.
Two basic product – costing system
1. Job-order costing – a system for allocating costs to groups of unique product.
2. Process costing – a system applicable to a continuous process of production of the
same or similar goods.
Major Differences
Process Costing
Nature of production Homogenous units pass through
similar processes
Cost accumulation Costs are accumulated by
processing department
Unit cost Unit costs are computed by dividing
the individual departments’ costs
by the equivalent production
Job Order Costing
Unique jobs are worked on during a
time period
Costs are accumulated by individual
job
Unit costs are determined by
dividing the total costs on the job
cost sheet by the number of units
on the job