COST ACCOUNTING
CHAPTER 1: Introduction to Cost Accounting
COST
•
Measurement in monetary terms of the amount
of resources used for the purpose of production
of goods or rendering services.
• The amount of money involved in production,
marketing and distribution.
ACCOUNTING
•
The art of recording, classifying and summarizing
in a significant manner and in terms of money,
transactions and events which are, in part at
least, of financial character and interpreting the
results thereof.
• Different branches: Financial Accounting,
Managerial Accounting, Cost Accounting,
Auditing, and Taxation
FINANCIAL ACCOUNTING
•
Primarily concerned with recording of a
company’s transactions and preparations of
financial statements
• Provides historical, monetary (financial), and
verifiable information to the company
(information is used by external users)
MANAGERIAL ACCOUNTING
•
Providing information to managers for use in
planning and controlling operations for decision
making
• Prepares financial reports (information) for
internal users (management) only
• Financials analysis, budgeting, and forecasting,
cost analysis, evaluation of business decisions
etc.
COST ACCOUNTING
•
•
•
Process of analyzing, recording, classifying,
summarizing and interpreting the details of cost
materials, labor and factory overhead necessary
to produce and sell the product
Subset of management accounting and financial
accounting
Intersection between financial accounting and
managerial accounting because it provides
information regarding cost of products and
services needed both financial and managerial
accounting
OBJECTIVES OF COST ACCOUNTING
• Cost accounting is a crucial tool for determining
production costs, providing detailed information
for inventory valuation and income determination.
It enhances financial accounting effectiveness and
aids management in determining product selling
prices and efficiency. Historically, it was used for
inventory and comprehensive income calculations.
Today, it aids in planning, controlling activities,
improving service quality, pricing, and decisionmaking.
COST ACCOUNTING DATA
•
•
Used for by both internal and external reports
Uses of cost accounting data
o Cost estimation and Price setting
o Decision Making
o Cost Control
COST ACCOUNTING SYSTEM
•
Used to track and allocate costs and
expenditures
• Assists management in planning and control of
the company’s operations as well as in analyzing
the product profitability
FIVE PARTS OF COST ACCOUNTING SYSTEM
I.
INPUT MEASUREMENT BASIS
TAKE NOTE:
Product Costs are Materials, Labor and Factory Overhead
a. Historical Costing (Actual Costing)
i. Product costs are determined as they occur
simultaneously with the manufacturing
operation
ii. Total of product costs is only known as the
operation has been completed
iii. Collects the actual amount of product costs
– Actual Costing
b. Standard Costing (Predetermined)
i. Product costs are determined in advance
ii. Using predetermined costs and quantities
iii. Difference between actual costs and
predetermined costs are charged to
variance account
c. Normal Costing
i. Combination of actual costing and standard
costing
ii. Direct materials and direct labor using
actual costing and factory overhead using
standard costing
iii. Factory Overhead = Rate per activity*actual
quantity of activity measure
iv. Difference between the applied factory
overhead cost and the actual overhead is
called variance
II.
INVENTORY VALUATION METHODS
a. Throughput Costing
i. Only direct materials are recorded as part of
the inventory
ii. Direct labor and factory overhead costs are
charged as an expense
iii. Total sales less costs of direct materials known
as throughput contribution
iv. Does not provide proper matching of cost and
revenue because direct labor and factory
overhead costs are expensed rather than
capitalizing it in the inventory
Computation of Cost of Goods Sold
Beginning Inventory
Add: Direct Materials
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
b.
Direct (Variable) Costing
i.
All variable costs as part of the inventory
(direct materials, direct labor, and variable
factory overhead)
ii.
All fixed costs as period costs
iii.
Does not provide proper matching of cost
and revenue because the fixed factory
overhead costs are charged to expense
Computation of Cost of Goods Sold
Beginning Inventory
Add: Direct Materials
Direct Labor
Variable Factory Overhead
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
c. Full Absorption Costing
i. All product costs (direct materials, direct
labor, variable factory overhead and fixed
factory overhead) are capitalized in the
inventory
ii. Provides proper matching of cost and revenue
iii. Used by companies for external reporting
purposes
Computation of Cost of Goods Sold
Beginning Inventory
Add: Direct Materials
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead
Goods Available for Sale
Less: Ending Inventory
Cost of Goods Sold
d. Activity Based Costing
i. Assigns factory overhead costs to produce in
a more logical manner
ii. Provides more accurate product costs
iii. Identifies a company’s activities and assigns
costs to product produced based on the
number of activities used by each product
iv. Direct materials, direct labor, variable factory
overhead and fixed factory overhead to
activity cost pools to inventory
III.
COST
ACCUMULATION
METHODS
(PROCEDURES)
a. Job Order Costing
i. Unique per job (individual job)
ii. Keeps the costs of different jobs, orders,
contracts separate during their manufacture
iii. Producing heterogeneous products
iv. Each job has different costs
v. Applicable for work done based on
customer’s specifications (made to order
products)
b. Process Costing
i. By department
ii. Units are not separately distinguishable from
one another during manufacturing process
iii. Cost is accumulated by departments,
operation or processes
iv. Applicable to companies producing large
quantities of homogenous products
c. Backflush Costing
i. Simplified cost accumulation method
ii. Adopts Just in Time (JIT) inventory system inventories will be there just when it is needed
iii. Delays the costing process until production of
goods is actually produced or completed
iv. Objectives is to zero out or minimize inventory on
hand
d. Hybrid Costing
i. Combination of job order and process costing
method
ii. Direct materials are accounted using job order
costing
iii. Conversion cost (labor and factory overhead) are
accounted using process costing
IV.
COST FLOW ASSUMPTION
a. Specific Identification
i. Actual cost of the item sold is determined and
charged as cost of goods sold
ii. Cost
of
inventory
=
Inventory
Units*Corresponding Unit Cost
b. First in; First out (FIFO)
i. Goods first purchased are first sold
ii. Goods purchased at the end of the accounting
period remain in ending inventory
iii. Inventory costs are recorded at recent or new
prices while the inventory sold is recorded at
older prices
c. Last in; First out (LIFO)
i. Goods last purchased are first sold
ii. Goods at the beginning of the period is assumed
to remain in the ending inventory
iii. Inventory is recorded in terms of older prices and
the cost of goods sold is recorded at recent prices
d. Weighted Average
i. Beginning inventory units lose their separate
identity because they are combined together
with the newly purchase inventories
ii. Average Cost per Unit = Cost of Goods Available
for Sale/ Number of Units Purchased
iii. Cost of Goods Sold = Average Unit Cost*Units
Sold
iv. Unit on hand to determine the ending
inventories
V.
RECORDING
INTERVAL
CAPABILITY
(ACCOUNTING SYSTEM FOR INVENTORIES)
a. Perpetual
i. Requires maintenance of records called stock
cards
ii. Stock cards updates the inventory accounts
after each purchase or sale
iii. Providing an up to date inventory balance and
a reduced level of physical inventory counts
b. Periodic
i. Requires the physical counting of
inventories on hand at the end of the
accounting period to determine the total
inventories
ii. Generally used by retailers whose
inventory items have small peso
investment
CHAPTER 2: COST CLASSIFICATION AND ESTIMATION
CLASSIFICATION OF COSTS
-
The process of arranging the components of
costs in logical groups having regard to their
nature and purpose.
A. As to Element or Nature
1. Material
2. Labor
3. Expenses – cost incurred other than material
and labor costs.
a. Direct expenses – also known as
chargeable expenses. can be directly
allocated to a particular product, cost
center or unit of service (e.g. direct
materials and labor).
b. Indirect expenses – cannot be
conveniently and directly allocated to a
particular product, cost center or unit of
service
❖ Overheads – the total of indirect materials,
labor costs and expenses.
➢ Factory Overheads – indirect costs
incurred in the factory
➢ Administrative Overheads – indirect costs
incurred in the administrative office (e.g.
office supplies, salary of office staff)
➢ Selling & Distribution Overheads – indirect
costs incurred in connection with the
selling and distribution of goods and
services (e.g. sales staff salaries,
commission, advertising)
B. As relation to Product
1. Product Costs – are costs of DM, DL, FOH used
in the manufacture of products
a. Prime Cost – sum of direct materials and
direct labor. Primary costs needed to
manufacture the products.
b. Conversion Cost – sum of direct labor and
factory overhead costs needed to be
incurred to convert RM into finished
products.
2. Period Costs – also known as commercial cost.
costs that are not associated with production
and treated as expense when incurred.
a. Selling or Marketing costs – cost incurred
necessary to secure the customer orders
and make the finished products shipped to
the customer. (e.g. delivery expenses, rent
and insurance of showrooms, cost of
samples)
b. Administrative/General costs – includes all
executives
and
clerical
expenses
associated with general administrative of
the company (e.g. salaries of executive
officers, rent of office building)
C. As to Behavior
1. Variable Cost – are costs that vary directly
proportional to the change in the level of
activity (volume) of production. (e.g. supplies,
DM, DL, variable OH, shipping costs)
2. Fixed Cost – are costs that do not change
regardless of the change in the level activity
(volume). Cost incurred even if there are no
units produced (e.g. rent, administrative and
sales salaries, insurance, depreciation).
a. Committed Fixed Cost – fixed costs that
may not be altered or significantly reduced
and long term in nature. (e.g.
depreciation, property taxes)
b. Discretionary Fixed Cost – fixed costs that
may be altered, reduced or eliminated by
current management decisions and has no
particular relationship with the production
output. (e.g. research & development
cost, advertising, donations)
3. Mixed (Semi-variable cost) – costs that have a
behavior of fixed and variable costs. (e.g.
electricity, water, post-paid cellphone plans)
D. As in relation to manufacturing departments
1. Direct Departmental charge – conveniently
identified costs that are immediately charged
2. Indirect Departmental charge – costs that are
originally charge to some other manufacturing
departments but are later allocated or
transferred to other departments that
indirectly benefitted from said costs.
E. As in nature as common or joint cost
1. Common Costs – benefit of which is enjoyed
by more than one cost center within an
organization (e.g. electrical expenses are
allocated to different departments)
2. Joint Costs – the cost of two or more
products that are produced simultaneously
by a single process (e.g. cost of chicken
divided into chicken breast, drumsticks etc.)
F. As to accounting period
1. Capital Expenditure – cost incurred to
acquire or improve assets for more than one
year. (e.g. PPE)
2. Revenue Expenditure – costs that are
directly charged as an expense because it
benefited only the current period. (e.g. rent,
utilities, salaries, repair expense)
G. By Normality
1. Normal Cost – regular costs incurred in the
normal conditions during the normal
operations of the organization.
2. Abnormal Cost – arises because of any
abnormal or irregular activity which are not
part of routine business operations. (e.g.
costs arising from floods, riots, earthquake)
H. By Time
1. Historical Costs – cost at the time of
acquisition or time of transaction. It reports
past event and therefore makes the
information out of date and irrelevant for
decision making.
2. Predetermined Costs – planned cost for a
unit of product or services rendered.
I. For Planning, Control & Analytical Processes
1. Standard Costs – Predetermined costs for
DM, DL, FOH
2. Opportunity Costs – the benefit given up
when one alternative is chosen over
another. Not recorded in the books of
accounts
3. Differential Costs – the difference in total
cost between two alternatives.
4. Relevant Costs – affect the decision making
of the management.
5. Out of pocket costs – also know as explicit
costs. Cost or expense relevant in decision
making that requires the payment of money
as a result of their incurrence.
6. Imputed Costs – also know as implicit cost. cost
which doesn’t involve an actual cash outlay
7. Sunk Costs – cost for which an outlay has already
been made and it cannot be changed by present or
future decision. (e.g. cost of PPE acquired a year
ago)
8. Controllable Costs – cost where the manager has the
power to influence or authorize the incurrence of
such cost.
9. Uncontrollable Costs – cost which cannot be
influenced by the manager/company.
10. Avoidable Costs – also know as escapable cost. cost
which will be eliminated or not incurred if a
department with which they are related is
discontinued.
11. Shutdown Costs – cost incurred by the company if
the operation is terminated or shutdown or
discontinued.
12. Marginal Costs – increase or decrease in the total
cost of production run for making one additional
unit of the item.
COST BEHAVIOR
1. Fixed Costs
Costs
Fixed
Total Amount
Constant
Variable
Increases
production
increases (directly
proportional)
Increase
less
proportionately as
production
increases (vs total
variable costs)
Mixed
Per unit amount
Decreases
as
production
increases
(inversely
proportional)
as Constant
Decrease
less
proportionately as
production
increases ( vs unit
fixed costs)
COST BEHAVIOR ASSUMPTIONS AND LIMITATIONS
1. Relevant Range assumption – range of activity
within which the cost behavior pattern is valid.
2. Time assumption – the cost behavior pattern
identified are true and only over a specified
period of time.
3. Linearity assumption – the cost is assumed to
manifest a linear relationship over a relevant
range despite its tendency to show otherwise.
SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF
MIXED COSTS
High-Low Method – quick and easy method of
determining the variable cost per unit and the total
amount of fixed costs that are part of mixed costs.
2. Variable Costs
3. Mixed Costs or Semi-Variable Costs
Algebraic Formula of Mixed Cost:
y = a + bx
Where: y = total costs (dependent variable)
a = total fixed costs
b = variable cost per unit
x = the activity or cost driver
bx = total variable costs
Advantage
Disadvantage
Simple, inexpensive and Use only 2 data points
easy to apply
which may not produce
accurate results
4 Steps of High-Low Method
1. Identify the high and low activity levels from the
data set. (Note: high and low activity not high
and low peso amount)
Months
Units
Total Cost
January
115,000
425,000
February
75,000
300,000
March
50,000
220,000
April
105,000
375,000
May
95,000
350,000
June
140,000
490,000
Highest level of activity = June: 140,000 units;
490,000
Lowest level of activity = March: 50,000 units;
220,000
2. Calculate the variable cost per unit
Variable cost per unit (b)
= Change in Costs (highest – lowest)
Change in activity (highest – lowest)
Variable cost per unit (b) = 490,000 – 220,000
140,000 – 50,000
Variable cost per unit (b) = 270,000
90,000
Variable cost per unit (b) = 3.00
3. Calculate the total fixed cost
Fixed Cost = Highest activity cost – (variable cost
per unit x highest activity units)
Or
Lowest activity cost – (variable cost
per unit x lowest activity units
Total Fixed Cost = 490,000 – (3 x 140,000)
Or
220,000 – (3 x 50,000)
Total Fixed Cost = 70,000
4. State the results in equation form. y = a + bx
y = 70,000 + 3.00x
SOURCE DOCUMENTS MAINTAINED
1. Purchase Requisition Form – document
originated from storeroom staff and sent to the
purchasing agent
2. Purchase Order – authorization signed by the
purchasing department sent to supplier/vendor
to supply goods at agreed price.
3. Receiving Report – document prepared by the
receiving department that shows the purchase
order number and other details about the
materials received.
4. Material Requisition form – document
authorizing the material storekeeper to deliver
the materials to the department requesting it.
5. Bill of Materials – list of materials needed to
produce a product
6. Return Materials Report – document prepared
when some materials requisitioned were not
used and returned to material storeroom.
7. Debit or Credit Memorandum – document
prepared when goods ordered differ from the
goods shipped by the supplier and an adjustment
must be made to the invoice.
Main Functions
Department
CHAPTER 3: MATERIALS PROCUREMENT, USE &
CONTROL
PROCUREMENT CYCLE
1. Engineering
and
planning
department
determines the cycle of operation and
establishes the material needed.
2. Materials requirement are developed
3. A purchase requisition form will be prepared by
the production department to inform the
purchasing agent of the material needed.
4. A purchase order will be prepared by the
purchasing dept. sent to the vendor to deliver
the materials needed.
5. Once the materials are delivered by the vendor,
a receiving report will be prepared by the
receiving dept.
6. A material requisition is issued to the material
storekeeper to issue the materials to the dept.
that requested the materials.
7. Material stock cards are maintained to record the
receipt and issuance of materials.
1.
2.
3.
4.
5.
6.
7.
8.
9.
of
Procurement
(Purchasing)
To receive purchase requisition
Purhase materials and services
Request proposals
Negotiate
Prepare purchase order
Follows up delivery
Handles all paper works
Coordinates with receiving and a/p dept
Ensure that the staff members comply with the
company’s policies
Forms/Documents Execution:
a. Purchase Requisition Form - Purchasing
department > storeroom
b. Purchase Order – receiving dept > inspection
dept > accounting dept > storeroom
MATERIALS CONTROL SYSTEM
-
Control over purchasing, handling, storing, and
use of materials to minimize wastes loss of
materials from the time it is received.
CONTROL PROCEDURES
1. Order cycling method – materials on hand are
reviewed on periodic cycle and orders are placed
to maintain desired level of inventory
2. ABC analysis – used by company that has
products with different sizes and values.
Materials are categorized
3. Two-bin system – divides into two bins: one bin
is for normal operation and othe bin is for backup
purposes. For companies who maintain
inexpensive materials.
4. Minimum-Maximum system – simplest method
to manage inventory. For companies with
inexpensive and perishable items.
5. Automatic order system – order is placed
automatically when the level of inventory
reaches predetermine point.
BASIC ASPECTS OF MATERIALS CONTROL
1. Physical and Operation Aspect – deals with
safeguarding materials
a. Limit the access to materials
b. Proper segregation of duties and
responsibilities
c. Accuracy in recording
2. Control of Investment – materials should be
planned and controlled so that there would be
no over-stocking and under-stocking.
ORDER POINT
-
Will trigger he placement of orders for addtl unit
of materials
Determination of Order Points based on Three Factors:
•
•
•
Usage – quantity of materials used each day
Lead time – estimated time in days to place an
order
Safety stock – estimated quantity of materials
maintained to avoid running out of stock
Accounting for Inventories
1. Periodic Inventory system – does not keep real
time record of inventory. Company does physical
inventory count of goods from time to time.
➢ Counting might be done weekly, monthly,
quarterly, semi-annually or annually
➢ Applicable to companies with small cost of
inventory (sari-sari store, groceries, auto supply
etc.)
2. Perpetual Inventory system – continuously
updates the balance of inventory thru ledger
card (stock cards)
➢ Applicable to companies with large cost of
inventory (real property, cars, jewelries etc.)
Inventory Costing Methods (PAS 2)
1. FIFO ( First in, First Out) – materials that first
purchase, first issue
➢ Ending balance is based on the most recent
purchase price, materials issued are based on
earliest prices
➢ Rising prices = higher net income
vs
Declining prices = lower net income
2. Weighted Average Method – average unit price
is computed every purchase
➢ Ending balance is based on average unit price x
material units on hand
➢ Rising prices = inventory value < current cost
vs
Declining prices = inventory
value > current cost
Accounting for Inventory Write-down
-
Cost < Net realizable value, inventory will be
carried at its cost
- Cost > Net realizable value, inventory will be
carried at its NRV
2 Methods of accounting for inventory write-down:
1. Direct Method – Each material ledger card is
adjusted at lower of cost or NRV, all ledger cards
are added = new valuation
➢ difference of cost of inventory and its NRV is
known as loss on inventory write-down
2. Allowance Method – Each material is recorded
at cost, any loss on inventory write-down is
accounted separately
➢ Loss on inventory (dr)
; allowance for
inventory write-down (cr)
Cost of Inventory
-
-
Includes cost of purchase, net of trade discounts
received (excluding taxes, freight & handling
cost), cost of conversion (DL & FOH)
FOB Shipping point: ownership is transferred
upon shipment
FOB Destination: ownership is transferred upon
receipt of buyer/ at location of buyer
-
Trade Discount: deducted from list price =
invoice price (no entry)
- Cash Discount: deducted from invoice price
when paid w/n discounting period
CHAPTER 4: Accounting for Labor
Labor – physical or mental effort exerted by individuals in
the creation of a product. Direct (WIP) or Indirect (FOH)
REQUIRES:
1. Correct timekeeping
2. Strict control of engagement
3. Analysis of time in terms of departments,
operation and production order
4. Improvement in the method of production
DEPARTMENTS:
1. Personnel – planning, recruitment and firing
2. Engineering and Work – maintaining control over
working conditions and production techniques
3. Timekeeping – accumulation of total hours
worked
4. Payroll – computation of gross earnings and
deductions
5. Cost Accounting – collecting, classifying and
assigning costs
TYPES OF WAGE PAYMENT PLANS
1. Time Based: Wage = number of time worked x
hourly rate
2. Piece Based: Wage = units produced x rate per
unit
3. Modified Based: combination of 1 and 2;
minimum hourly rate and bonus
4. Bonus or Incentive Schemes: premium bonus
plan – individual or group incentive plan
Accounting for Overtime Premium
1. Charged to specific job – rush orders: charged to
Work In Process
WIP
xx
Payroll
xx
2. Charged to Manufacturing Overhead control – regular
order that cannot be completed with regular working
hours: charged to FOH
WIP
xx
FOH Control
xx
Payroll
xx
PAYROLL
•
Calculation of all employee’s compensation,
contribution, taxes and net payment for the
period: payroll register
Highly confidential document
•
EE
name
Total
Mtly WT
Philhe HDM
SSS
Deduc Net Pay
GE
X
alth
F
tion
GROSS EARNINGS
•
•
Regular pay
Wages – based on production; variable, high or
low
Salaries – fixed amount; usually managerial
•
Deductions (Employee’s Contribution only)
1. SSS Premium – protection in cases of disability,
sickness, retirement and death
2. PAG-IBIG/HDMF
Monthly salary
at least 1k to 1.5k
EE
1%
ER
2%
Above 1.5k
2%
2%
3. Philhealth – half of percentage each for EE and
ER (2023 – 4.50%)
4. Withholding Tax – refer to table, based on
taxable income
Gross Earnings
xx
Less: Statutory Deductions (SSS, Philhealth, HDMF)
(xx)
Taxable Income
xx
Withholding tax
(xx)
Net Earnings
xx
JOURNAL ENTRIES
A. Payroll and employee contributions
Payroll
xx
Withholding Tax Payable
xx
OTHER LABOR RELATED CHARGED TO FOH
SSS premium payable
xx
Philhealth
xx
Pagibig
xx
Accrued Payroll
xx
B. Distribution of payroll
Work in process
xx
Factory Overhead Control
xx
Administrative Expenses
xx
Selling Expenses
xx
Payroll
xx
A. Employer’s Contribution
Factory Overhead Control
xx
Administrative Expenses
xx
Selling Expenses
xx
SSS Contribution Payable
xx
Philhealth
xx
Pagibig
xx
WORK ON SPECIAL DAYS
1. Rest Day – 30%
2. Special Holiday – 30%
Eg. EDSA Revolution, All Saints Day
3. Regular Holiday – daily rate x 2 (double pay)
Eg. Independence Day, Christmas Day
LABOR TIME LOSSES
IDLE TIME
•
Normal – merienda, getting tools, materials
Factory Overhead Control
xx
Payroll
•
xx
Abnormal – power failure, inefficiency of
workers, layoff
Abnormal Idle Time Loss/Expense
Payroll
xx
xx
1.
2.
3.
•
•
•
•
•
•
4.
5.
Overtime Premium (25%)
Statutory Contributions of Employer
Fringe Benefits
Paid sick leave
Holiday
Vacation pay
Health insurance
Pension payments
Hospitalization
Shift premium: Night differential pay (10%)
Incentive Plans
FORMULA & SAMPLE PROBLEMS: (EOQ)
EXAMPLE PROBLEM: (INVENTORY COSTING)
EXAMPLE PROBLEM: (COST OF INVENTORY)
EXAMPLE PROBLEM: (INVENTORY WRITEDOWN)
Problem 15: Inventory Valuation
Shiela has five product lines. On Dec. 31,2030, the
company provided the following data:
Product
Units
Unit Cost
NRV per unit
A
500.00
500.00
510.00
B
1,000.00
250.00
225.00
C
1,500.00
750.00
800.00
D
2,000.00
375.00
385.00
E
2,500.00
125.00
100.00