COSTING & PRICING:
INTRODUCTION
03 | 04 | 23
COSTPRI | 3-ABE
J. K. DELA VEGA, CPA, MB A
2 PARTS OF COSTPRI:
• Costing = technique of ascertaining costs -> Cost Accounting
• Pricing = fixing the value that a company will receive in the
exchange for its goods and services
WHAT IS COST ACCOUNTING?
• Expanded phase of accounting which informs
management promptly with the cost of:
• rendering a particular service;
• Buying and selling a product; or
• Producing a product
• Field of accounting which focuses on how to measure,
record, and report information about costs.
OBJECTIVES OF COST ACCOUNTING
• to ascertain the cost of production for every process,
department or service of a business (what to include, what not to
include)
• to report, analyze, and lead to the improvement of internal
cost controls and efficiency (e.g. preparation of budgets and
implementation of budgetary control)
• to help in fixing the price of products manufactured or
services rendered
• to determine the profitability of each of the products and
help management in the maximization of these profits
cost accountant collects
product's material, labor
and overhead cost and try
to calculate total and per
unit cost of product
SCOPE OF
COST
ACCOUNTING
cost accountant maintains
cost books, vouchers,
ledgers, reports and other
cost related documents for
future comparison and
reference
Cost
Ascertainment
Cost
Recording
cost accountant uses
different techniques and
methods for controlling the
cost like budgetary control,
standard costing, break
even point analysis and
many other techniques
Cost Control
DEFINING
‘COST’
Cost vs. Expense
‘halaga’
‘gastos’
Are they similar or different with each other?
DEFINING
Examples:
‘COST’
DEFINING
‘COST’
• Cash or cash equivalent value sacrificed for goods and
services that are expected to bring a current
or future
benefit to the organization
• Expired costs = expenses
• Loss - cost that expires without producing any revenue benefit
• Focus of Cost Accounting – cost, not expenses and losses
COST
ACCOUNTING
ELEMENTS OF PRODUCT COST
1. Direct materials
2. Direct labor
3. Factory overhead
Can you identify DM, DL, and
FOH for this table?
Merchandising
VS.
Manufacturing
Do you think SM Store and Philux Furniture use the same costing system?
TYPES OF BUSINESS ORGANIZATIONS:
MERCHANDISING VS. MANUFACTURING
OPERATIONS
• Merchandising company - business that purchases
finished products and resells them to consumers
• Manufacturing company - business that uses raw
materials, parts, and components to assemble finished
goods
• Service company - business that provides a service to
its customers, not a product
FLOW OF COSTS
FOR A MERCHANDISING COMPANY
Cash
Purchases
Ending
Merchandise
Inventory
Cost of unsold items
Beginning Merchandise
Inventory
Cost of Goods
Available
for Sale
Cost of
Goods Sold
Cost of sold items
FLOW OF COSTS
FOR A MANUFACTURING COMPANY
Cash
Purchase of:
Materials
Materials
Inventory
Work-in-Process
Inventory
Unused
Factory
OH
Labor
Assumption:
No beginning inventory
balances for Materials,
WIP Inventory, and FG
Inventory
Materials
Materials
Storage
Storage
Unfinished
When Used
Production Process
When finished
Finished Goods
Inventory
Unsold products
Finished Goods
Storage
Sold products
Cost of Goods
Sold
WHY DO WE NEED TO
DETERMINE PRODUCT COSTS?
• Cost procedures must be designed to permit the computation of
• unit costs; and
• total product costs
Example:
PHP 10,000 for labor in February – significant? X
If labor produced 5,000 finished units, then cost of labor per unit is
PHP 2.00 – significant?
P
WHY DO WE NEED TO
DETERMINE PRODUCT COSTS?
•Determining the selling price of a product
•Meeting competition
•Bidding contracts
•Analyzing profitability
PLANNING AND CONTROLLING
• Planning – process of establishing objectives or
goals for the firm and determining the means by
which the firm will attain them.
Components:
1. Strategic Planning
2. Tactical Planning
3. Operational Planning
PLANNING AND CONTROLLING
• Controlling
– another primary goal of cost accounting
– the process of monitoring the company’s operations and determining
whether the objectives in the planning process are being achieved
– As businesses began to grow in scale, the need for keeping track of
costs arose.
----------------------------------------------------------- Controlling ---------------------------------------------------------------
Costing
Planning
Costing
Controlling
----------------------------------------------------------- Controlling ---------------------------------------------------------------
2 BASIC PRODUCT-COSTING SYSTEMS
1. Job Order Costing – a system for
allocating costs to groups of unique
products. Each job becomes a cost center
for which costs are allocated.
Examples: special / customized machines, furniture,
cakes
2. Process Costing – a system applicable
to a continuous process of production of
the same or similar goods. Each processing
department becomes a cost center.
Examples: oil-refining and chemical production
HYBRID COSTING SYSTEM
• ‘Operation costing’
• combination of Job-Order Costing and Process Product-costing
• Finished products have both common and distinguishing characteristics
• ‘Batch production’ – costs are allocated to each batch. Whenever there’s a
change in production line to continue production, a new batch is created.
QUESTIONS?
THANK
YOU