Cost Accounting and Control (formerly called Cost Accounting and Cost

Management)
Organizational Strategy and Cost Information
What is Cost Accounting?
 A company formulates a mission statement – the reason for the
Cost Accounting is a branch of accounting that deals with the process of company’s existence.
recording and summarizing the amount of cost that is spent on the  The development of the organization’s strategy roots from its mission
company’s activities. It includes all costs of process, product, or service statement.
used, provided, and sold. It is the intersection between financial and  Organizational strategy is the plan of action on how the entity will
managerial accounting. attain and realize its goals and objectives with the use of their own
resources that will be able to contribute the creation of VALUE both to
* Capital Intensive – more on machines
customers and shareholders.
* Labor Intensive – more on skilled workers  One of the ways an entity can attain competitive advantage is through
cost leadership – the ability of an entity to provide the lowest prices in
Financial Accounting vs. Management Accounting the market through proper management of costs.
Financial Accounting Managerial Accounting  Cost leadership differs from product differentiation in the perspective of
Definition Accounting is an Accounting system by providing unique products to be offered to the market where prices can
information that which information are be allowed to be relatively higher.
identifies records and presented and supplied  To become a cost leader, costs shall be managed well.
communicates the to management in  In order for costs to be managed well, COST ACCOUNTING information
economic events of an appropriate manner to is now of paramount importance – the entity’s cost accountants now
organization to operate business
play a vital role in the value creation process of the entity.
interested user. smoothly and
efficiently.  Properly managed costs > Lower costs of production > Lower prices >
Cost leader > More people will buy > added value to the entity
User External persons Managers who plan for
What about value?
(investors and and control on
creditors) who makes organization  A value chain is a set of activities an entity applies to be able to deliver a
financial decision valuable product to customers.
Time focus Historical perspective Future emphasis
 Value chain is a set of activities or functions that allows the conversion
Verifiability vs. Emphasis on Emphasis on relevance
of inputs into useful products and services.
Relevance verifiability for planning and
control  These are the activities relates to value chain: Research and
Precision vs. Timeliness Emphasis on precision Emphasis on timeliness Development, Design, Supply, Production, Marketing, Distribution,
Subject Primary focus is on the Focuses on segments of Customer Service
whole organization an organization o Research and Development – analysis, testing, and studying of
GAAP Must follow GAAP and Need not follow GAAP different methodologies of cost reduction or quality
prescribed formats and prescribed formats improvement.
Requirement Mandatory for external Not mandatory o Design – creation and development of product and service
reports
design fit for the market.
 o Supply – proper management of raw materials inventory o Overhead – all indirect costs necessary for product conversion
coming from suppliers. that are not direct materials and direct labor.
o Production – the process of acquisition and construction of  Indirect materials
company resources to create products and services.  Indirect labor
o Marketing – promotions made by an entity to make the product  Depreciation of equipment in the factory
or service attractive in the market.  Insurance of factory plant
o Distribution – process of delivery of products and services to  Maintenance and repairs of equipment
customers.  Factory utilities
o Customer Service – after-sales support for customers.
Prime Cost = Direct Materials + Direct Labor
What is a cost?
Conversion Cost = Direct Labor + Overhead
A cost reflects the amount of resources sacrificed in order for the company
Total Manufacturing Cost = Prime Cost + Overhead
to achieve a certain objective such as creation of goods or rendering of
services in order to earn revenues. Total Manufacturing Cost = Direct Materials + Conversion Cost

FS Classification Total Manufacturing Cost = Direct Materials + Direct Labor +

Manufacturing Overhead
Product Costs – are costs identified and incurred by an entity to
manufacture a product. It includes all raw materials used, labor costs Period Costs – the entity’s operating expenses. They are called as such since
incurred, and all other indirect costs. they are much more associated with time periods rather than
manufacturing process. They are all other expenses not related to
Three Component of Product Costs
manufacturing.
o Materials – all raw materials and other supplies used in the
o Marketing and Advertising – expenses incurred in promoting
manufacturing process.
the entity’s products and services.
Two Kinds of Materials
o Selling and Distribution – they include salaries of sales
 Direct Materials: costs of glass in lightbulb
personnel, and delivery expenses.
manufacturing
o Administrative Expenses – they include office utilities,
 Indirect Materials: cost of glue, lubricating oils, nails,
depreciation of office PPE, repairs and maintenance of office
screws, and the like
PPE, and all other expenses in the office.
o Labor – salaries and other benefits provided to all workers.
Two Kinds of Labor Cost Behaviors
 Direct Labor: costs of salaries paid to laborers of
Variable Costs – they are costs that change as the quantity of the goods
furniture associated directly in the process.
produced changes. Total amount of variable costs is dependent to the level
 Indirect Labor: salaries paid to all other factory
of production.
personnel necessary in the manufacturing process but is
not directly related in the conversion process.  Constant on a per-unit basis.
 Varies when presented as a total.
Example:  High-Low Method
Step 1: Determine the highest and lowest activity and the costs
 Cost of materials
associated thereunto.
 Cost of direct labor computed per piece
Step 2: Obtain the variable cost per unit by dividing the change in cost
Fixed Costs – at whatever level of production within the relevant range, this over the change in activity.
cost does not change. It is independent of the level of production. VC/unit = (Cost at highest activity – Cost at lowest activity) / (Highest
activity – Lowest activity)
 Constant when presented as a total. Step 3: Obtain the total fixed costs by removing the variable cost
 Varies on a per unit basis. component in the total costs.
Example:  Least Squares Regression Method
Step 1: Prepare a table calculating x (activity), y (total cost), xy, and x2
 Rent of facilities Step 2: Substitute the computed amounts in the following equation to
 Depreciation of equipment. get VC/unit.
Cost Equation – y = a +bx y=a+bx

y = total cost ∑ y=na+b ∑ x

a = total fixed cost

b = variable cost per unit

∑ xy =∑ x a+b ∑ x 2
Step 3: Substitute b to any equation to get a (fixed cost).
x = volume of activity
Opportunity Cost – benefits foregone in choosing one action over
Mixed Costs – refers to costs that has both variable and fixed components.
another.
Example:
Sunk Cost – cost incurred that will not affect a future decision.
 Utilities, since these are charged with a base amount and goes higher
Committed Cost – costs resulting from organizational structure or use of
with any usage over the base amount.
facilities.
Step Costs – costs that are constant on a certain level of activity but
Discretionary Cost – costs arising from managerial decisions.
increases on another certain level of activity.
Controllable Cost – costs that are able to be influenced on how much
Example:
shall be spent.
 Salaries and commission of agents that goes higher with different
Noncontrollable Cost – costs that cannot be controlled or influenced.
ranges of activity e.g., people served.
Three Kinds of Inventories
Separating Mixed Costs
Paragraph 6 of IAS 2 defines an inventory as follows:
In separating mixed costs, there can be two methods to be used:
Inventories are assets:
a. Held for sale in the ordinary course of business; Direct labor issued to production transferred to FGI
b. In the process of production for such sale; or Manufacturing overhead applied to
c. In the form of materials or supplies to be consumed in the production production
process or in the rendering of services. Ending balance

In a manufacturing perspective:
Finished Goods Inventory
 Raw materials inventory are the materials or supplies to be consumed Beginning balance Cost of goods sold
in the production process to be transformed as completed goods. Cost of goods completed from WIP
 Work-in-process inventory are items that are currently in process of Ending balance
production.
 Finished goods inventory are items that completed the production
Cost of goods sold
process and are held for sale in the ordinary course of business.
Cost of goods sold from FGI
Raw Materials Inventory
Beginning balance Return of inferior materials to
Statement of Cost of Goods Manufactured and Sold
Purchase of raw materials suppliers
Return of excess raw materials Issuance to production Raw Materials Inventory, Beginning
from production
Ending balance Add: Raw Materials Net Purchases

= Raw Materials Available for Use

Factory Salaries and Wages
Less: Raw Materials Inventory, Ending
Recognition of factory payroll Factory payroll charged to
production = Direct Materials Issued to Production

Add: Direct Labor

Manufacturing Overhead
Actual overhead incurred Overhead applied to production Manufacturing Overhead
Indirect materials Actual costing – all actual
= Total Manufacturing Cost
Indirect labor OH
Factory utilities Normal costing - Add: Work-In-Process Inventory, Beginning
Factory rent predetermined rates
Factory insurance = Total Cost of Work put into Process
Factory depreciation
Less: Work-In-Process Inventory, Ending

= Cost of Goods Manufactured

Work-in-process Inventory
Beginning balance Return of excess raw materials Add: Finished Goods Inventory, Beginning
Direct materials issued to from production
production Cost of goods completed = Cost of Goods Available for Sale
Less: Finished Goods Inventory, Ending NS

= Cost of Goods Sold - CGS

= GP

Easy Formula + OI

RMIb = REVENUE

+ Purchases - EXPENSES

= RMAFU = NIBT

- RMIe - IT Exp

- Indirect Mat = NI

= DM Normal Costing is a costing system that assigns actual direct materials and
direct labor costs to production, but is using a predetermined rate to assign
overhead costs.
DM
Direct Materials Direct Labor Factory Overhead
+ DL Actual Costing Actual Actual Actual
Normal Costing Actual Actual Applied
+ OH

= TMC Why use Normal Costing?

1. It allows an entity to get immediate cost information for decision-
+ WIPb making and pricing decisions without the need to wait for the actual
overhead costs which takes time to accumulate.
= TCWPIP
2. When overhead rates are predetermined, it allows uniform costing
- WIPe whatever season or circumstance the company is into.
3. Within relevant range, there will be no problems on fluctuations of
= CGM
activity levels and the cists related thereunto.
+ FGIb
Predetermined Overhead Rate
= CGAS
Predetermined Overhead Rate = Budgeted overhead cost / Specified
- FGle volume of activity

= CGS Remember that:

1. Overhead and activity levels are budgeted by an entity for the whole All raw materials and other supplies used in the manufacturing process.
accounting period.
Considerations in choosing materials:
2. The numerator and denominator in determining the POHR is being
studied well based on management estimates, past actual production,  Type of material needed
or other bases and targets.  Quality of materials
 Quantity needed
T-account for overhead
 Price (cost) per unit
Manufacturing Overhead
Quality Decisions
Actual overhead incurred Overhead applied to production
Indirect materials Actual costing – all actual Managers should remember that as material grade rises, so generally doe
Indirect labor OH price (cost).
Factory utilities Normal costing -
Factory rent predetermined rates Cost of Materials
Factory insurance When all quantity and price information is available, component quantities
Factory depreciation are multiplied by unit prices to obtain each component’s total cost.
Systems of Inventory Recording
With the use of actual costing:
Actual Overhead = Applied Overhead 1. Periodic Inventory System facilitates the physical counting of materials
Since actual amount of overhead is being applied to production at the end of an accounting or production period, whereby the updated
With the use of normal costing: balances of materials is based on this physical count.
Actual Overhead differs from Applied Overhead 2. Perpetual Inventory System facilitates recording of movement of
Since the MOH account is debited for actual overhead and the MOH materials in every purchase and issuance to production through the use
account is credited for the amount of OH applied to production of stock cards. Inventory records are updated every internal
manufacturing transaction.

Overhead Variance Forms used in production

Actual Overhead > Applied Overhead Inventory Stock Card – a form that is used in production that records the
movement of inventory between all material purchases (receipt to storage),
 MOH T-account debit is greater than MOH T-account credit usage in production (issuances), and balance after each activity.
 Overhead at the end of the period (before adjustments) is
Materials Requisition Form – a form that is used as a basis for the recording
UNDERAPPLIED
of raw materials issuance.
Actual Overhead < Applied Overhead This form facilitates the transfer of materials from storage to production.
 MOH T-account debit is lesser than MOH T-account credit 1. Someone in production will fill out the form to request for materials,
 Overhead at the end of the period (before adjustments) is OVERAPPLIED approved by the production manager.
2. The form will be forwarded to the warehouse to be notified of the
Materials
materials needed.
3. The storage clerk releases the materials requested by the department An entity shall consider that:
concerned.
4. Cost accounting department gets a copy for recording purposes  There are enough inventory stocks to meet customer demands.
(charging materials to production).  There should not be too much inventories where there would be higher
costs of storage and handling.
What about freight-in?
Economic Order Quantity (EOQ)
Remember that freight charges form part of product costs (costs of bringing
inventories to their present location). According to Investopedia, economic order quantity (EOQ) is the deal order
quantity a company should purchase to minimize inventory costs such as
 Perpetual inventory system > debited directly to raw materials holding costs, and order costs. The model assumes that demand, ordering,
 Periodic inventory system > debited as freight-in and holding costs all remain constant.
Freight can be allocated either through: According to Heitger, EOQ is the order size for an inventory item that results
in the lowest total inventory costs for a period. The lowest total cost for an
1. Invoice costs inventory occurs when the size of an inventory is large enough so that the
2. Units purchased cost of ordering that quantity of inventory is equal to the cost of carrying it.
3. Any other basis such as weights
EOQ Formula
Inventory cost flow methods
Entities can use the following cost flow methods in assigning raw materials
costs:
EOQ=
√ 2 x annual demand x cost per order
annual carrying cost per unit

 First-in, first-out method (FIFO) 0r

 Moving average method
What about periodic?
EOQ=
√ 2 CN
K
Raw materials Where:
Add: Net purchases 2 - constant
= Raw materials available for use C – cost of placing an order
Less: Raw materials inventory, ending --------- based on physical count at the N – number of units required annually
end of the period
K – carrying cost per unit of inventory
= Materials issued to production
Annual demand - annual number of units required
Inventory – the heart of business operation
Cost per order - ordering costs: cost of placing and receiving orders – cost of
One of the largest resource investment of an entity is their inventory. These processing documents, insurance for shipments, unloading costs
inventories are sold (merchandising) or transformed into salable products
Annual carrying cost per unit - carrying costs: warehouse storage fees,
(manufacturing) in order for an entity to earn revenue. With that given, until
taxes, insurance, employee costs
inventory is sold, inventory itself is not profitable.
 saves money by preventing investment in unnecessary stock, and
reducing the need to replace old stock.
Costs related when raw materials are purchased from suppliers:  Smaller investments: JIT inventory management is ideal for smaller
 Ordering cost companies that don’t have the funds available to purchase huge
 Carrying cost amounts of stock at once. Ordering stock as and when it’s needed helps
to maintain healthy cash flow.
Costs related when raw materials are produced by the entity itself:
Disadvantage of JIT
 Set-up cost (costs of preparing equipment and facilities)
 Carrying cost  Risk of running out of stock: by not carrying much stock, it is imperative
you have the correct procedures in place to ensure stock can become
EOQ can provide information about: readily available, and quickly. To do this, you need to have a good
 How many units shall be ordered in each order? relationship with your supplier(s). JIT means that you become extremely
 At what point in time shall the inventory be ordered? reliant on the consistency of your supply chain.
 Lack of control over time frame: having to rely on the timeliness of
Formula for Total Inventory Cost: suppliers for each order puts you at risk of delaying your customers’
receipt of goods.
Total Inventory Cost = Carrying Cost + Ordering Cost
 More planning required: with JIT management, it’s imperative that
Just-in-item Inventory System companies understand their sales trends and variances in close detail.

According to Investopedia, just-in-time (JIT) inventory system is a Labor

management strategy that aligns raw-material orders from suppliers directly
The physical or mental effort exerted by individuals in the creation of a
with production schedules. Companies employ this inventory strategy to
product. This also includes all salaries earned by employees in the factory.
increase efficiency and decrease waste by receiving goods only as they need
them for the production process, which reduces inventory costs. This Inclusions to labor costs
method requires producers to forecast demand accurately.
 Basic salaries of workers
“The inventory arrives JUST IN TIME when the entity needs it.”  Overtime pay
 Bonuses for exemplary performance
Proponent of JIT
 SSS, PHIC, HDMF dues (employer share)
In the 1970s, car manufacturer Toyota adopted the JIT system. It is also  Medical benefits and the like
known as the Toyota Production System.
Kinds of Labor
Advantage of JIT
 Direct Labor – costs of traceable work done to transform the raw
 Less space needed: with a faster turnaround stock, you don’t need as materials to finished goods.
much warehouse or storage space to store goods. This reduces the o Cutters, painters, assemblers, machinists
amount of storage an organization needs to rent or buy, freeing up  Indirect Labor – costs of work not directly traceable to production of
funds for other parts of the business. the product but is still related to the production process.
 Waste reduction: a faster turnaround stock prevents goods becoming o Factory supervisor, inventory clerks, timekeepers, janitor
damaged or obsolete while sitting in storage, reducing waste. This again
Proper costing of labor
 Time card
 Time ticket Step 2: Compute for the taxable income (basis for withholding tax)
 Production report
Gross pay
Summary of pay information Less: SSS EE contribution
Less: PHIC EE contribution
A payroll is a calculation of all employee’s compensation, statutory Less: HDMF EE contribution
contributions, taxes, deductions, and net payment for a certain time period. Less: Other nontaxable income
The formal document to present payroll is called a payroll register. TAXABLE INCOME
Payslip Step 3: Compute for the total deductions
A payslip is a document that explains the components of an individual’s pay SSS EE contribution
for a certain time period. It is a “personal” version of payroll register. PHIC EE contribution
Special considerations HDMF EE contribution
Withholding Tax
 A standard minimum wage can be paid to an employee, but can Other deductions
increase if a worker can produce more units. TOTAL DEDUCTIONS
 When jobs are rush, overtime pay is normally encountered to cover the
extra hours the worker has rendered. Normally, overtime premium is Step 4: Compute for the net pay using all earnings deducted by all
charged to overhead. However, if because of a rush job, it is inevitable deductions
to work overtime, the whole overtime pay can be charged to Gross pay
production. Less: Total Deductions
 Workers in a shift different from 8;00AM - 5PM shift is paid a special NET PAY
premium rate charged to factory overhead (e.g., 10% night shift
differential for work done between 10:00PM – 6:00AM. What about work done on special days?
 Workers are also paid during idle time. Idle time refers to the time
workers has no work to perform due to temporary charges in How much is the pay for the day of an employee if he/she works on…
production setup. This is charged to factory overhead. However, a loss A1. Rest Day (daily rate x 1.3)
account is to be established when the changes in production is due to A2. Special Holiday (daily rate x 1.3)
negligence or inefficiency. A3. Special Holiday at the same time Rest Day (daily rate x 1.5)
Fundamentals of payroll A4. Regular Holiday (daily rate x 2)
A5. Regular Holiday and Rest Day (daily rate x 1.3 x 2)
Step 1: Compute for the gross pay by getting the total of all earnings.
What about overtime?
Basic pay
Less: Lates and absences How much is the hourly rate if overtime is done…
Add: Overtime B1. An ordinary day (daily rate/8 x 1.25)
Add: Other taxable income B2. On a rest day (daily rate/ 8 x 1.3 x 1.3)
Add: Other nontaxable income B3. On a special holiday (daily rate/ 8 x 1.3 x 1.3)
GROSS PAY B4. On a special holiday at the same time rest day (daily rate/ 8 x 1.5 x 1.3)
B5. On a regular holiday (daily rate/ 8 x 2 x 1.3) Remember that:
B6. On a regular holiday at the same time rest day (daily rate/ 8 x 2.6 x 1.3) 1. Overhead and activity levels are budgeted by an entity for the whole
accounting period.
What about night differential? 2. The numerator and denominator in determining the POHR is being
How much is the hourly night differential pay if… studied well based on management estimates, past actual production,
or other bases and targets.
C1. An ordinary day (daily rate/8 x 1.1)
C2. On a rest day (daily rate/ 8 x 1.1 x 1.3) Predetermined overhead rates can be developed by an entity from a
C3. On a special holiday (daily rate/ 8 x 1.1 x 1.3) number of bases, some of which are:
C4. On a special holiday at the same time rest day (daily rate/ 8 x 1.1 x 1.5)  Cost of materials
C5. On a regular holiday (daily rate/ 8 x 1.1 x 2)  Cost of direct labor
C6. On a regular holiday at the same time rest day (daily rate/ 8 x 1.1 x 2.6)  Direct labor hours
 Machine hours
 Units of production
Manufacturing Overhead
Plant-wide Rate
Manufacturing overhead includes all costs incurred in the production
process which are not direct materials or direct labor, not directly traceable According to De Leon, De Leon, and De Leon, the rates that are computed
to the products completed but are still necessary to be incurred to convert are called plant-wide rates. All departments in the company will use the
raw materials to finished goods. same application rate for manufacturing overhead and the same base.
Single plant-wide rates are applicable when an entity manufactures only a
Examples: single product, or different products are being manufactured by goes
 Indirect materials (glue, tape, fasteners, cleaning supplies, oils) through the same series of productive departments
 Indirect labor (salary of factory supervisor and factory janitor) Departmental Rate
 Factory insurance
 Factory depreciation of equipment and machineries An entity shall use departmental rate when different products are being
 Repairs and maintenance of factory assets manufactured. Also, departmental rates are applicable when products do
 Factory rent not pass through the same series of steps of conversion or there is a need
 Factory utilities for a dissimilar application of overhead depending on company
circumstances and attention given to the products.
Predetermined Overhead Rate
Service Department Costs
1. It allows an entity to get immediate cost information for decision-
making and pricing decisions without the need to wait for the actual Service or support department is a unit on an organization that contributes
overhead costs which takes time to accumulate. in a very indirect way to the conversion of raw materials to finished goods.
2. When overhead rates are predetermined, it allows uniform costing They are, however and still, involved in producing goods.
whatever season or circumstances the company is into. These departments are the purchasing department, personnel department,
3. Within the relevant range, there will be no problems on fluctuations of warehousing department, and maintenance department. Since these
activity levels and the costs related thereunto. departments support the production process, the costs incurred in these
Budgeted overhead cost
Predetermined Overhead Rate=
Specified volume of activity
departments should be allocated to the production departments to
determine the cost of a product.
Methods of allocation service department costs:
 Direct method
Direct allocation of service costs to production department.
 Sequential method (step method)
The cost of the initially-ranked service department affects the cost of
the secondarily-ranked service department before allocation of costs to
the production department.
 Algebraic method
The use of mathematical cost functions to allocate service costs.