POLL QUESTIONS
1. Have you taken your cost accounting subject?
a. Yes, but I want to have a review about it.
b. I’m currently taking it.
c. Not yet but I want to have an advance knowledge about it.
2. How well do you understand cost accounting?
a. I don’t understand it at all.
b. I read some materials, but I still don’t have a clear grasp about it.
c. I’m pretty good at it.
d. I feel great about it.
COST ACCOUNTING
BACKGROUND
INTRODUCTION
TO
COST ACCOUNTING
BACKGROUND
Early 1900s – Financial accounting as
primary source of information for
evaluating business operations; ROI for
divisional performance
BACKGROUND
Mid-1900s – managers were often no
longer owners but, instead, individuals
who had been selected for their positions
because of their skills in accounting,
finance, or law
FINANCIAL AND MANAGEMENT ACCOUNTING
Primary Users
Financial Accounting
Management Accounting
External
Internal
Primary organizational focus Whole (aggregated)
Parts (segmented)
Information characteristics
May be
• Current or forecasted
• Quantitative or qualitative
• Monetary or nonmonetary
• Timely and, at a minimum,
reasonably estimated
Must be
• Historical
• Quantitative
• Monetary
• Verifiable
FINANCIAL AND MANAGEMENT ACCOUNTING
Overriding criteria
Recordkeeping
Financial Accounting
Management Accounting
PFRS/IFRS/GAAP
Situational relevance
(usefulness)
Consistency
Benefits in excess of costs
Verifiability
Flexibility
Formal
Combination of formal and
informal
Relationship of Financial, Management, and
Cost Accounting
COST ACCOUNTING
Cost Accounting is a business practice in
which we record, examine, summarize,
and study the company’s cost spent on
any process, service, product or anything
else in the organization.
COST ACCOUNTING
It is a process via which we determine the
costs of goods and services. It involves
the recording, classification, allocation of
various expenditures, and creating
financial statements. This data is
generally used in financial accounting.
COST ACCOUNTING
The Chartered Institute of Management
Accountant (CIMA) has defined costing as –
“The techniques and processes of
ascertaining cost.” Cost Accounting is a
formal system of accounting for costs in the
books of accounts by means of which cost of
products and services are ascertained and
controlled.
ORGANIZATION STRATEGY
MISSION STATEMENT
- expresses the purposes for which
the organization exists, what the
organization wants to accomplish, and
how its products and services can uniquely
meet its targeted customers’ needs.
ORGANIZATION
STRATEGY
Factors Influencing Organizational Strategy
STRATEGIES
• Cost leadership - a company’s ability to
maintain its competitive edge by undercutting
competitor prices
• Product differentiation - a company’s ability to
off er superior quality products or more unique
services than competitors; such products and
services are, however, generally sold at
premium prices.
ORGANIZATIONAL STRUCTURE
- reflects the way in which authority
and responsibility for making
decisions are distributed in an
organization.
ORGANIZATIONAL CONSTRAINTS
•Monetary capital
•Intellectual capital
•Technology
ENVIRONMENTAL CONSTRAINTS
is any limitation caused by external
cultural, fiscal (such as taxation
structures),legal/regulatory, or
political situations and by the
competitive market structures
VALUE CHAIN
a set of valueadding functions
or processes that
convert inputs
into products
and services for
company
customers.
COST TERMINOLOGY
AND COST BEHAVIORS
COSTS
- reflects the monetary
measure of resources used to attain
an objective such as making a good
or performing a service
COSTS
• Unexpired cost - balance sheet
value of an asset
• Expired cost - portion of an asset’s
value consumed or sacrificed during
a period is an expense
COST CLASSIFICATION CATEGORIES
Cost Classifications
Types of Costs Included
Associated with Cost Object
• Direct costs - conveniently and
economically traceable to the cost
object
•Indirect costs - cannot be
economically traced to the cost
object but instead are allocated to
the cost object
Associated with Cost Object
COST OBJECT is anything for
which management wants to
collect or accumulate costs
COST CLASSIFICATION CATEGORIES
Cost Classifications
Types of Costs Included
Reacts to changes in activity
Every organizational cost will
change if sufficient time passes
or if an extreme shift in
activity level occurs.
Reacts to changes in activity
• Variable cost - cost that varies in
total proportionately with activity
• Fixed cost - a cost that remains
constant in total within the relevant
range of activity is considered
Comparative Total and Unit Cost Behavior
Definitions
Reacts to changes in activity
•Mixed cost - has both a variable
•and a fixed component.
•Step cost - shifts upward or
downward when activity changes
by a certain interval or “step”.
Reacts to changes in activity
Predictor - is an activity that,
when changed, is accompanied by
a consistent, observable change in
a cost item
Reacts to changes in activity
Cost driver - a predictor that has
an absolute cause-and-effect
relationship to a cost
COST CLASSIFICATION CATEGORIES
Cost Classifications
Types of Costs Included
According to classification in FS
•Product costs - related to making or
acquiring the products or providing the
services that directly generate the
revenues of an entity
• are inventoriable costs and include
direct costs (direct material and direct
labor) and indirect costs (overhead)
According to classification in FS
•Product costs
•Conversion costs – DL + OV
•Prime costs – DM + DL
According to classification in FS
•Distribution costs - cost incurred to
warehouse (store), transport, or
deliver a product or service.
According to classification in FS
•Period costs - related to business
functions other than production,
such as selling and administration
CONVERSION PROCESS
CONVERSION PROCESS
CONVERSION PROCESS
COMPONENTS OF PRODUCT COST
•Direct Material
•Direct Labor
•Overhead
ACCUMULATION AND ALLOCATION OF
OVERHEAD
Overhead costs are allocated to cost objects
for three reasons:
1.
2.
3.
to determine the full cost of the cost object,
to motivate the manager in charge of the
cost object to manage it efficiently, and
to compare alternative courses of action
for management planning, controlling,
and decision making
ACCUMULATION AND ALLOCATION OF
OVERHEAD
Overhead costs can be allocated
in 2 ways:
1. Actual Cost System – Actual DM
+ DL (WIP), Actual OH (OH
Control)
ACCUMULATION AND ALLOCATION OF
OVERHEAD
Overhead costs can be allocated
in 2 ways:
2. Normal Cost System – Actual DM
+ DL (WIP), Pre-determined OH
Perpetual Inventory
Accounting System
• all product costs
flow through Work in
Process (WIP)
Inventory to Finished
Goods (FG) Inventory
and, ultimately, to
Cost of Goods Sold
(CGS)
Sources:
• https://www.accountingnotes.net/cost-accounting/what-is-costaccounting-2/17513
• https://www.toppr.com/guides/fundamentals-ofaccounting/fundamentals-of-cost-accounting/meaning-of-costcosting-and-cost-accounting/
• Cost Accounting: Foundations and Evolutions by Michael B. Kinney
and Cecily A. Raiborn
POLL QUESTIONS
1. Which of the following changes in the cost
structure can change average total cost?
a) Fixed costs increase
b) Variable costs decrease
c) Quantity produced decreases
d) All of the changes listed, with all else remaining
the same, will change the average total cost.
POLL QUESTIONS
2. Which of the following statements is TRUE?
a) Direct costs are expenses that are tied to a specific
department or project.
b) Direct costs are used to analyze whether it is more costeffective to outsource projects or manage them inhouse.
c) Direct costs are calculated to ensure projects are
profitable and departments are running efficiently.
d) All of the above.
POLL QUESTIONS
3. Which of the following best describes direct
labor?
a)
b)
c)
d)
e)
A Prime cost.
A Period cost.
A Product cost.
Both A and B.
Both A and C.
POLL QUESTIONS
4. In costs terminology, conversion costs consist
of:
a)
b)
c)
d)
Direct and indirect labor
Direct materials and labor
Direct labor and overhead
Indirect labor and variable overhead
POLL QUESTIONS
5. Which one of the following categories of cost
is most likely not considered a component of
fixed factory overhead?
a)
b)
c)
d)
Rent
Property taxes
Depreciation
Power
POLL QUESTIONS
6. Inventoriable costs
a) Include only prime costs of manufacturing a product
b) Include only the conversion costs of manufacturing a
product
c) Are expensed when products become part of finished
goods inventory
d) Are regarded as assets before products are sold