C1- INTRODUCTION TO COST ACCOUNTING Uses of Cost Accounting Data

❖ Determining Product Cost

Comparison of Financial, Managerial and Cost ❖ Helps in making variety of important marketing decision:
Accounting 1. Determining the selling price of the product.
2. Meeting competition.
Financial Accounting 3. Building on contracts.
❖ use of accounting information for reporting to external 4. Analyzing profitability.
parties, including investors and creditors. It is primarily
concerned with financial statements for external use of Planning and Control
stakeholders. ❖ Planning is the process of establishing objectives or
Managerial Accounting goals for the firm and determining the means by which
❖ focuses on the needs of parties within the organization, the firm will attain them.
rather than interested parties outside the organization. 1. Strategic planning – setting long range goals and
Cost Accounting objectives to determine the overall direction of the
❖ the intersection between financial and managerial company.
accounting. It provides product cost information to the 2. Tactical planning – setting shorter range (or time
stakeholders. period) and emphasizes the strategic goals.
3. Operational planning – relates to the day-to-day
Merchandising vs. Manufacturing Operations implementation of tactical plans. It emphasizes the
coordination of the major factors of production.
Merchandising (materials, labor, facility)
❖ normally buys a product that is ready for resale when it is
received.Cost of goods sold refers to the direct costs Two Basic Product-Costing Systems
of producing the goods sold by a company. Also 1. Job order costing
referred to as Cost of sales. ❖ a system for allocating costs to groups of unique
❖ Computation for COGS: products.
Merchandise inventory, beginning xxxx ❖ applicable to the production of customer specific
Add: Total purchases xxxx products.
Cost of goods available for sale xxxx 2. Process costing
Less: Merchandise inventory, ending xxxx ❖ system applicable to a continuous process of
Cost of good sold xxxx production of the same or similar goods.

Manufacturing Major Difference between Process & Job Order Costing

❖ refers to a large-scale production of goods that
converts raw materials, parts, and components into Process Costing Job Order Costing
finished merchandise using manual labor and/or
machines. The cost of goods sold for manufacturing 1. Homogeneous units pass 1. Unique jobs are worked
companies is more complex than in merchandising through a series of similar on during a time period.
companies. processes.
❖ Computation for COGS:
2. Costs are accumulated by 2. Costs are accumulated by
the processing department. individual jobs.

3. Unit costs are computed 3. Unit costs are determined

by dividing the individual by dividing the total costs on
departments’ costs by the the job cost sheet by the
equivalent production. number of units on the
job.

4. The cost of production 4. The job cost sheet

report provides the detail for provides the detail for the
the WIP account for each WIP account.
department4. The job cost
sheet provides the details
for the WIP account.
 2. Variable costs
C2: COST – CONCEPTS AND CLASSIFICATION ❖ costs which vary directly, in total, in relation to volume
of production.
Cost – is the cash or cash equivalent value sacrificed 3. Mixed costs
for goods and services that are expected to bring a ❖ costs with fixed and variable components.
current or future benefit to the organization. ❖ Two types of mixed costs:
a. Semi-variablecosts – fixed portions of a semi-
Classification of Costs variable cost usually represents a minimum fee for
making a particular item or service available.
I. Cost classified as to relation to a product Example is the cost of electricity.
A. Manufacturing costs/Product costs b. Step costs – the fixed part of step costs changes
1. Direct materials (DM) abruptly at various activity levels because these costs
❖ materials that become part of a finished product are acquired in indivisible portions. It is similar to a
and can be conveniently and economically traced fixed cost within a very small relevant range.
to specific product units. These materials are direct ❖ There are different methods of separating mixed costs
costs. into fixed and variable components:
2. Direct labor (DL) 1. Scatter graph
❖ labor costs for specific work performed on products 2. High-low point – identify the highest and lowest
that can be conveniently and economically traced activity then deduct both to get the value of
to end products. These are direct costs. the denominator. Get the value of the cost of
3. Factory overhead (FOH) the highest and lowest activity then deduct both
❖ varied collection of production-related costs that to get the value of your numerator. Then
cannot be practically or conveniently traced divide to get the variable rate.
directly to end products. Indirect materials and 3. Method of least square – there are 3 formulas
labor are part of factory overhead costs. to be used in least-square method:

● Prime costs = DM +DL ● Y = a + bx

● Conversion costs = DL + FOH ● ∑Y = na + b ∑x
● ∑XY = ∑xa + b ∑x2
B. Non-manufacturing costs/Period costs
1. Marketing or selling expense Common cost –cost of facilities or services employed
❖ costs necessary to secure customer orders and in two or more accounting periods, operations,
get the finished product or service into the commodities, or services.Joint costs –costs of materials,
hands of the customer. labor, and overhead incurred in the manufacture of two
2. Administrative or general expenses or more products at the same time.Capital expenditure –
❖ include all-executive, organizational, and clerical expenditure intended to benefit more than one
expenses that cannot logically be included under accounting periods and is recorded as an asset. Example
either production or marketing. is depreciation, amortization and depletionRevenue
expenditure –expenditure that will benefit current period
II. Cost classified as to variability only and is recorded as an asset.Standard costs –
1. Fixed costs predetermined costs for DM, DL and FOH. It is a budget
❖ costs which remain constant in total, irrespective for the production of one unit of product or
of the volume of production. service.Opportunity costs –the benefit given up when one
❖ Two categories: alternative is chosen over another.Differential costs –costs
a. Committed fixed costs – costs that represent that ispresent under one alternative but is absent in whole
relatively long term commitments on the part of or in part under another alternative.
management as a result of a past decision.
Example is depreciation

b. Managed fixed costs – costs that are incurred on

a short-term basis and can be more easily
modified in response to changes in management
objectives. Examples are advertising, research
and development.