NAGA COLLEGE
FOUNDATION, INC.
M.T. Villanueva Avenue,
Naga City
College of Accountancy and Finance
COST ACCOUNTING AND CONTROL (CAC)
INTRODUCTION TO COST ACCOUNTING
OVERVIEW
This lesson will discuss about value chain as introduction to cost accounting subject and
how other fields of accounting interrelated with cost accounting. It also emphasis the
uses of cost data and how it affects the trends in the operation of the business and its
competitors.
Cost accounting subject focuses on manufacturing entity and in this lesson, a
comparison with merchandising entity will also be discussed.
OBJECTIVES
At the end of this lesson, the students will be able to:
1. Understand value chain and its relationship to cost accounting
2. Be able to compare between financial, managerial, and cost
accounting 3. Distinguish between manufacturing and
merchandising operations
4. Describe the uses of cost data
5. Distinguish between job order costing and process costing
DISCUSSION
…Let us start discussing the concept of value creation and value chain
In cost accounting, our goal is to assist managers in achieving the maximum value of the
organization. We need to help measure the effects of the decisions on the value of the
organization. We have to understand how the information can and will be used to
increase value.
…What is value chain?
It is the set of activities that transforms raw resources into the goods and services end
users purchase and consumes which also includes the treatment and disposal of any
waste generated by the end users. For example, the value chain for mobile phones
starts from researches of materials to be used to produce a unit to producing the end
products to distribution to customers and lastly, on the disposal and recycle of the
disposed phones.
The cost accounting system provides much information across these steps and there will
be a time that managers will consider where in the value chain is the most efficient. We
call this value added activity wherein these are the activities that customers perceive as
adding utility to the goods or services purchased. For example, research and
development and production of the product. These activities are evaluated by managers
to determine how they will contribute to the final product’s service, quality, and cost.
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…What is supply chain and distribution chain?
There are activities that are outside the firm for example purchasing of resources and
supplies from a supplier (supply chain) and the selling of products to customers
(distribution chain). Although these two are outside firm’s boundaries, they add-up in the
value chain.
…Below table are sample activities and cost related to value chain
COMPONENT SAMPLE ACTIVITIES SAMPLE COSTS
of ideas related to new
 Research personnel 
Research and
products, services, or
Patent Applications 
Development (R&D)
Creation and development processes
Laboratory facilities
Design The detailed development and
Distribution Process for delivering
engineering of products, services, or
products or services to customers
processes
 Design center
 Engineering facilities used to develop
and test prototypes
Purchasing Acquisition of goods and
services needed to produce a good or
 Purchasing
service
department
personnel
 Vendor certification  Machines and
Production Collection and assembly of
equipment
resources to produce a product or deliver  Factory personnel  Advertising
a
 Focus group travel  Product
service
placement
Marketing and Sales Process of informing
potential customers about the attributes  Trucks
of
 Fuel
products or services that leads to
 Website creation
their sale
Customer Service
Support activities provided to
customers for a product or service
 Call Center
personnel 
Returns and
Processing
 Warranty Repairs
…Let us now discuss the accounting systems to decision makers
Accounting is called the language of business. As such, accounting can be viewed as
having different “dialects”. Financial Accounting “dialect” is often characterized as the
primary focus of accounting. Financial accounting concentrates on the preparation and
provision of financial statements. The second “dialect” of accounting is that of
management and cost accounting. Management Accounting is concerned with providing
information to parties inside an organization so that they can plan, control operations,
make decisions, and evaluate performance.
FINANCIAL VS. MANAGERIAL VS. COST ACCOUNTING
COMPONENT FINANCIAL MANAGERIAL
Purpose of
Information
Communicate
organization’s financial
position to investors,
banks, regulators, and
other outside parties
Help mangers make decisions
to fulfill an organization’s
goals
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COMPONENT FINANCIAL MANAGERIAL
Internal
Primary Users External
 Managers
 Suppliers
 Department Heads
 Investors/ Stockholders
 Owners
 Creditors
 Government
Future-oriented (budget for 2011 prepared
Focus and Emphasis Past-oriented
(reports on 2010 performance prepared in in 2010)
2011)
Whole (Aggregated) Parts
(segmented)
Primary Organizational Focus
 Quantitative  Monetary  Monetary or
Non-monetary  Timely
Information Characteristics  Verifiable
MAY BE:
 Reasonably Estimated, at
MUST BE:
minimum

Current
or
Forecasted
 Historical
 Quantitative or Qualitative
 Consistency
Overriding Criteria  GAAP (Generally  Verifiability
Accepted Accounting
 Usefulness (Situational Relevance)
Principles
 Cost-benefit analysis  Flexibility
financial reports, primarily nonfinancial reports on
on the company as a whole products,
Varies from hourly
Time Span and Type of
departments, territories, and
Reports
information up 15 to 20
strategies
Annual and Quarterly
years, with financial and
on reported financial results
Behavior Implications Primarily reports
Designed to influence the behavior of
economic events but also influence
managers and other employees
behavior because manager’s
compensation is often based
Record Keeping
Formal
Formal and Informal
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COST ACCOUNTING
 Field of accounting that measures, records, and reports information about costs 
Intersection between financial accounting and managerial accounting  Addresses
the informational demands of both financial and managerial accounting by providing
product cost information to:
o External Parties – for investment and credit decisions and for reporting
purposes o Internal Parties –for planning, controlling, decision making and
evaluating performance
…Let us list down what are the uses of cost accounting data
USES OF COST ACCOUNTING DATA
The information produced by a cost accounting system includes the following:
1. Determining Product Cost
 Helps management in gathering the data needed to determine product
costs  Cost procedure must be designed to permit the computation of both
unit costs and total product costs
 Usefulness of Unit Cost information:
a) Determining the Selling Price
- once cost is determined, the selling price can be set. This should
cover the productions cost, administrative and marketing
expenses, and a
determinable profit
b) Meeting Competition
- This helps management to be competitive especially for those
company selling products at low cost, so that the (1) selling price
can
be reduced to a competitive price, or (2) reduced the manufacturing
cost, or (3) the product can be eliminated
c) Bidding Contracts
- Many government agencies and private entities call for a bidding
process on who will they hire to take their projects. Setting a
competitive bid price would be enough to cover the production costs
and provides profit to the company, but not too high.
d) Analyzing Profitability
- Enables the management to determine the amount of profit for
each product and possibly eliminate the least profitable and
focus more the
efforts for those profitable
2. Planning and Control
a) Planning
 Process of establishing objectives or goals for the firm and determining
the means by which the firm will attain them
 Provides a means of coordinating all of the operations of the firm
 Helps develop plans by providing historical data to serve as basis for
projecting data, analyzing trends, and relationships in order to aid
estimating costs and operating results and making decisions regarding
acquisitions of capital investments (e.g. additional facilities), marketing
strategies, and obtaining capital
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 Components
1. Strategic Planning – concerned with setting long range goals and
objectives to determine the overall direction of the company
2. Tactical Planning – concerned with plans for a shorter range (or
time period) and emphasizes plans to achieve the strategic goals
3. Operations Planning – relates to day-to-day implementation of
tactical plans. It emphasizes the coordination of the major
factors of
production (materials, labor, facilities)
b) Control
 The process of monitoring the company’s operations and determining
whether the objectives identified in the planning process are being
accomplished
3. Performance Evaluation
 Managers can evaluate the performance of the operations (if gaining or
losing money) or the personnel (if following in the standards or over(under)
budget)  Outsiders may decide whether they could trust their money to the
company as investment
…Let us also discuss the trends in cost accounting throughout the value chain
Cost accounting continues to experience dramatic changes throughout the years. This
includes development on the recording of transactions through the use of technology,
thus decreasing the use of manual bookkeeping. The technology and cost accounting
have been very useful to any emerging and old type business such as fast-food chain,
professional organization, and government agencies.
With this rapid changes, managers would like to have information on the performance of
from suppliers, production, customers, and employees. Because of this changes, cost
accountants and cost accounting systems must be adaptable to provide relevant
information to managers.
1) Cost Accounting in Research and Development (R & D)
 Companies partner with suppliers in the development stage to ensure cost
effective of designs for products. Product engineers need cost accounting
to decide for alternative materials
2) Cost Accounting in Design
 Design for manufacturing is the concept that manufacturing cost and
complexity need to be considered in the design of the product. Cost
accountants help designers understand the trade-off by using methods
such as activity-based costing, which considers the activities or processes
that will be required to bring a product to market.
3) Cost Accounting in Purchasing
 As part of the operation, businesses will partner to suppliers and in order to
assess and ensure that partnership with them adds value, managers can
conduct performance measure. This is a metric that indicates how well an
individual, business unit, product, or firm is working. Benchmarking can
also help as it continually processes by measuring a company’s own
products, services, and activities against competitor’s performance.
4) Cost Accounting in Production
 Both financial accountants and operations managers use cost information
in the production stage to understand and report the costs of the multiple
products produced. Some of the cost systems are job order and process
costing, and just in-time method. Lean accounting will be used to support
these systems since it
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provides measures at the work cell or process level and minimizes
wasteful or unnecessary transaction processes.
5) Cost Accounting in Marketing
 Cost accounting provides information to marketing managers to understand
the profitability of different customer groups. Customer relationship
management (CMR) is a system that allows firms target profitable
customers by assessing customer revenues and costs
6) Cost Accounting in Distribution
 cost accountants work closely with managers to identify whether it is more
efficient (less costly) to perform an activity by the firm or to have another
firm produce or distribute the products. This is called outsourcing.
7) Cost Accounting in Customer Service
 The customers determine the company’s performance standards according
to what is important to them and this will be indicated through checking the
product warranty availed by the customers
8) Enterprise Resource Planning (ERP)
 Through the advancement of technologies, firms are now integrating ERP
in order to link various activities in the organization to facilitate ease in
financial information. Sample ERPs are QuickBooks, SAP, and Oracle.
…this subject focuses on manufacturing entities, since merchandising operations have
already been discussed in your basic accounting subjects. With this, you will need to be
familiarized the manufacturing operations in comparison to merchandising.
MERCHANDISING VS. MANUFACTURING OPERATIONS
Merchandising
 Involves only by buying the goods from a manufacturing company
 Cost of Goods Sold (COGS) computation:
Mdse. Inventory, BEG XXX
Add: Purchases XXX Less:
Reported in BS Reported in IS
Purchase Returns (XXX) Cost of
Goods Available for Sale XXX Less:
Mdse. Inventory, END (XXX) Cost
of Goods Sold XXX
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Manufacturing
Cost of Goods Sold XXX
 Involves the conversion of raw materials
into finished goods (salable)  Purchase
of raw materials
 Application of labor
 Incurrence of various factory expenses
 Cost of Goods Sold (COGS)
computation:
Direct Materials Used
Materials Inv., BEG XXX
Add: Purchases XXX
Less: Purchase Returns (XXX)
Total Available for Use XXX
Less: Materials Inv., END (XXX) XXX
Direct Labor XXX Applied Factory
Overhead XXX Total Manufacturing Cost
XXX Add: Work-in-process, BEG XXX
Cost of Goods Put Into Process XXX Less: Reported in BS Reported in IS
Work-in-process, END (XXX)
Cost of Goods Manufactured XXX Add:
Finished Goods, BEG XXX Total Goods
Available for Sale XXX Less: Finished
Goods, END (XXX)
Cost of Goods Sold (normal) XXX Add/
Less: Under (Over) Applied Overhead XXX
…Let us also have an overview on the most commonly used cost accounting system and
how they differ to each other. Detailed discussion will be done in separate chapters.
PRODUCT-COSTING SYSTEM
BASIC SYSTEMS:
COMPONENT JOB ORDER PROCESS
Product Characteristics  Unique
 Customer-specific
 Special Order
 Heterogeneous
 Batches / Set – identical
product
 Similar / Identical  Uniform
 Homogeneous
Process Worked for a time period Continuous, series of similar process
Manufacturing costs of all the processing
departments or work center
Accumulation of Cost All manufacturing
costs assigned to the specific job or batch
Measurement
Cost of Each Completed Job
By Department Per Time
period (e.g. monthly,
weekly)
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COMPONENT JOB ORDER PROCESS
Recording General Ledger: 
Work-in-Process
Inventory Control
Subsidiary Ledger:
 For each of the Job
Each Department’s Costs Equivalent Unit
of Production
Supporting Document (WIP)
Unit Cost Computation Total Mfg. Cost of Job Cost Sheet Cost of Production Report
the Job No. of Completed Units
Record Keeping - More Detailed - Higher
General Ledger:
Cost
 Work-in-Process
- Less Detailed - Lower Cost
Inventory for each
Department
Example Industry
 Accounting / Audit
Firms (engagements)
 Architectural
(contracts)
 Universities
(research project) 
Furniture Manufacturer
(Batch of Chairs, etc)
 Petroleum
 Paint
Operation Costing
- a hybrid costing system often used in repetitive manufacturing where finished
products have common, as well as distinguishing characteristics
- Examples:
o Clothing – basic suits can be assembled in one operation, but can be moved
to another operation for additional deluxe lining
o Television – produces basic chassis and component system, but varies to
remote control and cabinetry
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…It’s time to check your understanding of the lesson by answering some of the drills
below DRILLS
Matching Type: (Value Chain)
Write the corresponding letter from the Stage in Value Chain to the blank space at the
end of each cost below.
Stage in Value Chain:
A. Marketing
B. Customer Service
C. Design
D. Research and Development
E. Production
F. Distribution
Cost:
1. Purchase of tomatoes by a canning plant for Del Monte’s tomato soup products. 2.
Materials purchased for redesigning Saltridge Farm biscuit containers to make biscuits
stay fresh longer.
3. Payment to Backer, Spielvogel, & Bates, the advertising agency, for advertising work
on Healthy Request line of soup products.
4. Salaries of food technologists researching feasibility of a Domino Pizza sauce that has
minimal calories.
5. Payment to Safeway for redeeming coupons on Del Monte’s food products. 6. Cost of
a toll-free telephone line used for customer inquires about using Del Monte’s soup
products.
7. Cost of gloves used by line operators on the Town Fiesta breakfast-food production
line. 8. Cost of handheld computers used by Satridge Farm deliver staff serving major
supermarket accounts.
Classification: (Uses – Planning Vs. Control)
Conner Company makes and sells brooms and mops. It takes the following actions, not
necessarily in the order given. For each action, state whether it is a planning decision (P)
or controlling decision (C).
______ 1. Conner asks its marketing team to consider ways to get back market share
from its newest competitor, Swiffer.
______ 2. Conner calculates market share after introducing its newest product ______
3. Conner compares costs it actually incurred with costs it expected to incur for the
production of the new product
______ 4. Conner’s design team proposes a new product to compete directly with
Swiffer ______ 5. Conner estimates the costs it will incur to sell 30,000 units of the new
product in the first quarter of next fiscal year
REFERENCE:
Cost Accounting and Control (2019 Edition) by Norma D. De Leon, Ellery D. De Leon,
and Guillermo M. De Leon Jr.
Cost Accounting - Foundations and Evolutions (8th Edition) by Michael R. Kinney and
Cecily A. Raiborn
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