Cost Accounting

ACCOUNTING SYSTEM
What is the Mission Accounting?

The simplest answer to this question is that

accounting provides information for owners or
managers to use in operating the business.

Operating a business requires many kinds of

information and decisions such as inventory volume,
pricing, number of employees, amount of capital etc.
These decisions produce financial results which are
critical to understand the performance and the
financial situation of businesses.

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 What are the Business Activities ?

An entity has An entity performs these activities

for
 planning,
 producing/purchasing
 financing,
 selling goods and services and
 investing and
 to yield a satisfactory return
Accounting generates  operating activities. on investment.
financial information
about the business
activities.

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 What are the Business Activities ?

Planning Activities
A company has specific goals and strategies to gain profit from its activities. A
company plans expected opportunities (expected return, expected cash flow
etc.) and obstacles (market risk, interest rate risk, inflation risk, political risks
etc.).
Investing Activities
Investing activities are the business activities that involve the acquiring and
selling of long-term assets, the acquiring and selling of equity or debt
securities other than trading.

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 What Are The Business Activities ?
Financing Activities

A company needs financing in purchasing raw material plant and equipment and technology. In
financing assets company use most common forms of financing; debt and equity.

Operating Activities
Operating activities refers to the carrying out of the business plan. These activities contains
five basic components:
 Research,
 Purchase/Produce,
 Marketing and
 Labor.

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 Who Uses Accounting Numbers?
External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements. decision makers.

There are information users such as owners, managers, creditors, suppliers

etc. Two main groups of information users are internal users and external
users. According to users we can classify accounting as Managerial
Accounting and Financial Accounting.
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 Users of Accounting Numbers
Internal Users
Managerial accounting provides
information needs for internal
decision makers.
Managers have different roles, and these
roles determine the main needs for using
financial information. For example, one of the
most important decisions made by a marketing
manager is pricing of goods and services.
To make such a decision, marketing managers
should know the total production cost. In
these cases, managerial accounting produce
internal reports to help internal users in their
decision-making process.
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 Users of
Accounting
Numbers
To decide, managers should know
the total production cost. In
these cases, managerial
accounting produce internal
reports to help internal users in
their decision-making process.

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 Users of Accounting Numbers
There are several types of external users
External Users and they can be individuals or
organizations outside a company such as
investors, creditors, taxing authorities,
government, customers, suppliers etc.

Financial accounting provides The primary external users are investors

external users with financial and creditors, because they have a direct
statements.
financial interest in a business.

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 Users of Accounting Numbers
External Users Financial accounting is the main tool to
answer the questions asked by external
users. In other words, financial
accounting provides information about the
business entity to external information
Financial accounting provides
external users with financial
users. This book focuses on financial
statements. accounting.

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 What is the Mission Accounting?

Generating Presenting
True and Fair Financial
Mission Financial
Information
(Financial
Information Statements)

The objective of financial statement is to provide

useful financial information about the reporting entity’s
activities.

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What is the
Accounting?
Accounting is a system which
 identifies,
 collects,
 recognizes,
 classifies and reports the economic and
financial events that an entity meets.

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Accounting Discipline Overview
 Financial Accounting-Bookkeeping

Journal Withdrawals Closing entries are recorded in

the Journal at the end of the
Revenue accounting period.
Entries are then posted to
Expense Ledger Accounts.
Ledger Ledger accounts are then
listed in the Post-Closing Trial
Balance.
Then the Financial Statements
are prepared.
Post-Closing
Trial Balance
Income Balance
Assets Statement Statement
Liabilities Revenue
Net Profit - Expenses
Assets =
Net Income/ Liabilities
or Loss + Net Worth
 Accounting Discipline Overview
ABC CO. 31.12.20X1 BALANCE SHEET
CURRENT
CURRENT ASSETS
LIABILITIES
Cash and cash
Bank Loans
equivalents
Financial Assets Trade Payables
Trade Receivables Tax Payable
Inventories Provisions
NON-CURRENT NON-CURRENT
ASSETS LIABILITIES
Property, Plant and
Bank Loans
Equipment
Bonds
Trade Payables
Provisions
EQUITY

TOTAL TOTAL
 Accounting Discipline Overview

Balance Sheet
Assets = Liabilities + Net Worth(*)

Cash, Accounts Amounts owed The difference

Receivable, others between Assets
Equipment, and Liabilities.
Buildings, Land, This is the part of
etc., elements the business
that help the “owned”.
business generate
income (*) Owner’s Equity
 Accounting Discipline Overview
ABC CO. 31.12.20X1 BALANCE SHEET

CURRENT ASSETS 100 CURRENT LIABILITIES 60

Cash and cash equivalents 20 Bank Loans 15

Financial Assets 15 Trade Payables 25
Trade Receivables 35 Tax Payable 10
Inventories 30 Provisions 10

NON-CURRENT ASSETS 200 NON-CURRENT LIABILITIES 90

Property, Plant and Equipment 200 Bank Loans 25

Bonds 55
Trade Payables 10
Provisions
EQUITY 150

TOTAL 300 TOTAL 300

Accounting Discipline Overview

ASSETS (Varlıklar)

The future economic benefits embodied in an asset is

the potential to contribute directly or indirectly to the
flow of cash and cash equivalents.

In a classified balance sheet assets and liabilities are

separated into current and non-current.

Current assets are expected to be converted to cash or

used in operations within one year or the operating cycle.

Non-current assets include tangible, intangible and

financial assets of a long-term nature.
 Accounting
Discipline Overview
LIABILITIES (Yabancı Kaynaklar (Borç))
Liabilities consist of,
Ø credit or loan,
Ø trade payables and bonds.
Ø Taxes and other legal charges and
Ø Provisions for liabilities and expenses.

Current liabilities are obligations that company must settle in

the same time period with assets. An entity shall classify all
other liabilities as non-current
EQUITIES (Özkaynaklar)
Funds contributed by share holders, retained earnings,
reserves are disclosed as equity.
 Accounting Discipline Overview

Income Statement
Sales INCOME STATEMENT
Cost of Goods Sold
Revenue and gains, expenses and
Gross Profit/Loss loses are reported in income
Operating Expenses statement.
Operating Profit/Loss
Finance Income
Finance Expense
Profit/Loss of Current Period
Tax Expense
Net Profit/Loss of Current Period
 Why do we Need Cost Accounting?
Financial accounting;
Financial accounting generates limited
information in making decisions.  does not help cost control (materials,
supplies, wages and etc.),
Thus, we need additional information
about operating activities.  does not help fixing price,

Cost accounting provides financial  does not classify expenses and

information in decision making.  generates limited information for

managers.

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 Role of Cost and Management Accounting

Planning Directing and Cost accounting and management

Organizing
accounting have realized deeply
analysis not only about the
Controlling
product cost but also the
business environment.
So, the role of cost and
management accounting have
been more strategic in decision
making, planning and controlling
process within the organization.

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 What is Cost
Accounting?
Cost accounting is a quantitative method
that accumulates, classifies, summarizes
and interprets information for three
major purposes:
 Operational planning and control
 Special decision and
 Product decision process

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The Place of Cost Accounting in Accounting Information System

Financial Cost Management

Accounting Accounting Accounting

In order to analyse the costs the financial information must be recorded and financial
accounting deals with recording the information. Cost accounting provides information for both
management accounting and financial accounting.

For example calculating cost of a product is cost accounting function that meets the need of
financial accounting system. On the other hand inventory valuation meets the need of
management in decision making.

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 What is Cost Accounting?

Cost accounting process involves

Financial  collecting,
Accounting
 analyzing,

Cost  summarizing and

Accounting
 evaluating various alternative courses of action.

Its goal is to advise the management on the most

Managerial
accounting appropriate course of action based on the cost efficiency
and capability.

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 What is Cost Accounting?

Cost accounting determines the total and unit cost of products or

Financial projects in order to report the correct amount on financial
Accounting statements (external purposes).

It assists management in making decisions and in the planning and

Cost control of an organization (internal purposes).
Accounting
Cost accounting assists management by providing analysis of cost
behaviour, cost-volume-profit relationships, operational and capital
Managerial
accounting budgeting, standard costing, variance analyses for costs and
revenues, transfer pricing, activity-based costing, and more.

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The Objectives of Cost Accounting

Cost accounting systematically

records the expenses and ascertain
the cost of each product and enable
management to know where to
economize on costs, how to fix
prices, how to maximize profits.
The Objectives of Cost Accounting
The objectives of cost accounting are
 calculating the total and unit cost of a product,
 analysis of financial records and costs by subdividing
expenditure,
 allocating the expenditures to selected cost centers and
build up a total cost for departments,
 controlling and reducing the costs,
 planning and budgeting the costs and
 helping management in making decisions.
The Objectives of Cost Accounting

Cost accounting gives information and reports to the management in the

following ways:

Control of Material Cost – Cost of material is a major portion of the total

cost of a product. It can be controlled by regular supply of material
maintaining optimum level of funds in stocks of materials and stores.

Control of Labor Cost: If workers complete their work within the specified
time cost of labor can be controlled.

Control of Overheads: By keeping a strict check over various overheads such

as factory, administrative and selling & distribution, this can be controlled.
 The Objectives of Cost Accounting
Measuring Efficiency: Cost accounting provides information
regarding standards and actual performance of the activity for
measuring efficiency.

Budgeting: The preparation of the budget is the function of

costing department and budgeting is done to ensure that the
practicable course of action prepared in detail. The analysis of cost
include the comparison of realized performance with the
estimated or budgeted performance.
 Cost Accounting System

Cost Accounting System

Generating Financial
Analyzing Costs
Information

Cost
Classifyin Planning
Recording Control Making
g the and
System and Decision
Costs Budgeting
Reducing