CH1 – INTRO TO COST ACCOUNTING
26 AUG 2023
DEFINITION:
ACCOUNTING

a service activity
 FUNCTION: provide quantitative
information about economic entities
(used in economic decision)
COST ACCOUNTING
 expanded phase of general or
financial accounting
 informs management promptly with
the cost of rendering a particular
service, buying and selling a product
and producing a product
 field of accounting that mainly
measures, records and reports
 information about costs
timing and relevance
of information to the
internal decision
maker.
involves other
information such as
physical measure
(lbs, kgs, liters etc.)
and relationships such
as ratios
Units of measurement
is limited to currencies
COST ACCOUNTING IN THE BUSINESS:
 Service
 Merchandising
 Manufacturing
USE OF CA DATA
DETERMINING PRODUCT COSTS:
The unit costs are important in marketing
Decisions:
1. Selling Price
2. Meeting Competition
3. Bidding on Contracts
4. Profitability
SCOPE OF COST ACCOUNTING
2 MAJOR AREAS:
1. Financial Accounting

For external users & regulators

Historical data

In general format (FS)
2. Managerial Accounting

Internal users

Reports and data are focused on
individual or division concerns rather
than as a whole

Data could be current, historical,
forecasted, monetary or nonmonetary, quantitative or qualitative
MANAGERIAL
FINANCIAL
Not as critical
Precise in reporting
historical information
greater significance in
terms of
PLANNING & CONTROL:
PLANNING – process of establishing
objectives or goals for the firm
a. Strategic Planning - setting long
range goals and objectives to
determine the overall direction
of the company
b. Tactical Planning - plans for a
shorter range or time-period and
emphasizes plans to achieve the
strategic goals
c. Operations Planning - day to day
implementation of tactical plans
 emphasizes the coordination of the
major factors of production
CONTROL – process of monitoring the
company’s operation
 determining if objectives are being
accomplished
RECENT DEVELOPMENTS
1.
2.
3.
4.
Dramatic Changes
Manual bookkeeping reduced due to
automations
Changes in production methods
Increase in emphasis on control
CA & OTHER FIELDS OF STUDY







Financial Accounting
Managerial Accounting
Applied Microeconomics
Marketing
Behavioral Science
Statistics/Mathematics
Industrial Engineering
2 BASIC PRODUCT COSTING
SYSTEM
1.
1.
JOB ORDER COSTING
system for allocating costs to groups
of unique products
2. production of customer specified
products
Accounting System:
Unit Cost=TMC/# of Units
Primary Characteristics:
a. collects all manufacturing costs and
assigns them to specific job or
batches of product
b. measures costs for each completed
job, rather than for set time periods
c. uses just one “Work in Process”
Inventory Control Account in the
general ledger (supported by a
subsidiary ledger)
2.
PROCESS COSTING
3.
continuous process of production of
the same goods
Accounting System:
4. System used by companies that make
large number of similar products or
maintain a continuous production
flow.
5. more economical approach to
account is by a period of time
Primary Characteristics:
a. Manufacturing costs are grouped by
department
b. Emphasizes on a weekly or monthly
time period
c. Several WIP Inventory accs (one for
each dept)
PROCESS
JOB ORDER
Homogeneous units
pass thru a series of
similar processes
Costs are accumulated
by processing
department
UNIT COSTS =
individual dept
costs/equivalent
production
The cost of production
report provides the
detail for the WIP
account for each
department
Unique jobs are
worked on during a
time period
3.
Costs are accumulated
by individual job
UNIT COSTS = total
costs on the job cost
sheet/number of units
on the job
The job cost sheet
provides the detail for
the WIP account.
OPERATION/HYBRID COSTING system that incorporates both
CH2 – COSTS: CONCEPST & CLASSIFIC.
02 SEPT 2023
COST – cash/cash equivalent value
6. Sacrificed for goods & services
7. Expected to bring current/future
benefit
COST
EXPENSES
Expected to
bring a
current/future
benefit to the
organization
Expired
costs
LOSS
Cost that
expire
w/o
producing
any
revenue
benefit
CLASSIFICATION OF COSTS:
I.
AS TO RELATION TO A PRODUCT
A. Manufacturing/Product Cost
1. DIRECT MATERIAL – become
part of a finished product; can
be economically traced to
product units
2. DIRECT LABOR – all labor costs
for specific work performed on
products; can be conveniently
trace
3. FACTORY OVERHEAD
B. Non-Manufacturing Cost/Period
Cost
1. MARKETING/SELLING EXP –
costs necessary to secure &
get finished product/service
into customer
2. GENERAL/ADMINISTRATIVE
EXP
–
executive,
organizational, and clerical
expenses that cannot be
included
in
production/marketing
II. AS TO VARIABILITY
A. Fixed
- remain constant irrespective of
volume
- not related to activity w/n range
TWO MAJOR CATEGORIES:
o Committed Fixed Costs represent relatively long-term
commitments on the part of
mngtmnt
o Managed Fixed Costs - incurred
on a short-term basis
- Easily modified in response to
objectives
B. Variable – vary directly in total, in
relation to volume of production
Cost/unit is
C. Mixed Cost – fixed & variable
1. SEMI-VARIABLE COST – fixed
portion (minimum fee for
making item/service)
 VARIABLE PORTION – cost
charged for using service
3.
2.
METHOD OF LEAST SQUARE
STEP COST – fixed part changes
abruptly at various levels bc
these costs are acquired in
indivisible portions
III. AS TO RELATION TO MANU DEPT.
A. Direct Departmental Charges
B. Indirect Departmental Charges
*FOR PLANNING PURPOSES: all costs must
be classified as either FIXED or VARIABLE.
MOST IMPORTANT STEP IN ESTIMATING
THE VARIABLE & FIXED COMPONENTS OF
MIXED COSTS – to examine the cause &
effect relationship between activities that
affect the costs
3 METHODS TO SEPARATE FIXED &
VARIABLE:
1. SCATTER GRAPH
2. HIGH-LOW POINT
IV. AS TO THEIR NATURE AS
COMMON/JOINT
A. Common Costs – employed in 2
or more acctng periods
Subject to allocation
B. Joint Costs – incurred in
manufacture of 2 or more products
at the same time
Not specifically identifiable
V. AS TO RELATION TO AN ACCTNG
PERIOD
A. Capital Expenditure – intended
to benefit more than 1 period
- Recorded as an asset
B. Revenue Expenditure – benefits
current period
- Recorded as expense
VI. COSTS FOR PLANNING, CONTROL,
& ANALYTICAL PROCESSES
A. STANDARD
COSTS
–
predetermined cost for DM, DL,
FO
- Established using info from past &
data from research
- Budget for production for one unit
of product/service
B. OPPORTUNITY COSTS – benefit
given up when one alternative Is
chosen over another
- Not recorded in acctng system
- Should be considered when
evaluating
alternative
for
decision making
C.
-
DIFFERENTIAL COSTS – present
under one alternative
Absent in whole/part in another
alternative
2 TYPES:
1. INCREMENTAL
increase in cost
2. DECREMENTAL
decrease in cost
COST
–
COST
–
D. RELEVANT COSTS – future costs
that change across alternatives
E.
OUT-OF-POCKET
COSTS
–
requires payment of money (or
other assets)
F.
SUNK COST – outlay that has
already been made
-
Cannot
be
changed
by
present/future decision
Not differential costs
Should be used in analyzing future
courses of action
G. CONTROLLABLE COST – power to
authorize cost at particular level
of management
H. UNCONTROLLABLE -