Chapter 1-Introduction To Cost Accounting

Course Title: Cost Accounting
and Control
Topic: Introduction to Cost Accounting
By: RMM, CPA

Terms
• Internal Users
-those managers who plan, control and decides for the business.
• External Users
- the government, those who provide funds and those who have various
interests in the operations of the entity
Terms
• Financial Accounting
- is the use of accounting information for reporting to external
parties, including investors and creditors.
- Primarily concerned with FS for external use
- Based on historical transaction data
Terms
• Managerial Accounting
- focuses on the needs of parties within the organization
- information may be current or forecasted, quantitative or
qualitative, monetary or non-monetary and most of all
timely the data are futuristic and some of the costs are
not recorded on the accounting books
Cost Accounting
• Used by both financial and managerial accounting
• Provides product cost information to external and internal parties
• It informs management promptly with the cost of rendering a
particular service, buying and selling a product, and producing a
product
• It is a field of accounting that measure, records, and reports
information about costs
Cost Concepts
Cost – a measurement, in monetary terms, of the amount of resources used for
some purpose. When notified by a term that defines the purpose, cost becomes
operational, e.g., selling cost, acquisition cost, variable cost, etc.
Cost Pool – an account in which a variety of similar costs are accumulated

prior to allocation to cost objects it is a group of costs associated with an
activity. Example: overhead account, direct labor, direct material
Cost Concepts
Cost object – the intermediate and final disposition of cost pools. Example :
product, job
Cost driver – a factor that causes a change in the cost pool for a particular
activity. It is used as a basis for cost allocation; any factor or activity that has a
direct cause-effect relationship
Activity – any event, action, transaction, or work sequence that incurs costs
when producing a product or providing a service.
Cost Concepts
Illustration:
Lynn’s manufacturing plant has several different departments that make vary different products. One department
manufactures sunglasses. The sunglasses department’s operations can be divided up into three main pools:
design, molding, and assembly. The total costs for the department are $50,000.
Using the activity cost pools, Lynn comes up with the following cost drivers: factory square footage used,
maintenance hours, machine hours, labor hours, and number of units produced. Lynn can analyze these three
different pools in relation to the cost drivers and allocate the $50,000 total costs appropriately between the three
pools.
Activity - Design, Molding and Assembly
Cost Pools – Costs assigned for Design, Molding and Assembly from the total 50,000 (DL, DM, OH)
Cost Drivers - factory square footage used, maintenance hours, machine hours, labor hours, and number of units produced
Classification of Costs
• As to Function
• As to Timing of Recognition as Expense
• As to Traceability to Cost Object
• As to Managerial Influence
• As to Time-Frame Perspective
• For Decision Making
• As to Behavior
As to Function
1. Manufacturing Costs – all costs incurred in the factory to convert raw materials into finished goods.
• a. Direct Materials – raw materials cost that becomes integral part of the finished product and that can be
conveniently and economically assigned to specific units manufactured.
• b. Direct Labor – all labor costs related to time spent on products that can be conveniently and economically
assigned to specific units manufactured.
• c. Manufacturing Overhead – all other costs incurred in the factory aside from direct materials and direct labor.
*Prime Costs – DM +DL
*Conversion Costs – DL + MOH
2. Nonmanufacturing Costs – all cost other than manufacturing cost

As to Timing of Recogniton as Expense
1. Product Costs – costs that “attach” or cling to the units that are produced
and are reported as assets until the goods are sold.
2. Period Costs – costs that are recognized as expense in the income

statement on the period in which the cost was incurred.
As to Traceability to Cost Object
1. Direct Costs – costs that are related to a particular cost object and can
economically and effectively be traced to the cost object.
2. Indirect Costs – costs that are related to a cost object, but cannot practically,
economically, and effectively be traced to that cost object.
As to Managerial Influence
1. Controllable Costs – costs that are subject to significant influence by a

particular manager within the time period under consideration
2. Noncontrollable Costs – costs over which a given manager does not have
significant influence
As to Time-Frame Perspective
1. Committed Costs – costs that are inevitable as consequence of a previous

commitment
2. Discretionary Costs – costs for which the size or the time of incurrence is a
matter of choice
For Decision Making
1. Relevant Costs – future costs that will differ under alternative courses of
action.
2. Differential Costs – difference in costs between any two alternative courses
of action.
3. Opportunity Costs – income or benefit given up when one alternative is
selected over another.
4. Sunk Costs – costs already incurred and cannot be changed by any
decision made now or to be made in the future.
As to Behavior
Cost Behavior – describes how a cost behaves or changes as the amount of

cost driver changes.
Types of costs as to behavior:
1. FIXED COST – in total; constant within the relevant range as activity output
changes; per unit: changes as activity level changes
2. VARIABLE COST – in total; varies in direct proportion to chages in activity
output; per unit:remains constant
3. MIXED COST – has both fixed and variable components.
Illustration
WMSU Company, doing business in the city of Zamboanga, reports the following total costs at two levels of production:
Cost Item 2,000 units 5,000 units Answers

Notes:
Rent P20,000 P20,000 Fixed FIXED COST:
Direct materials 24,000 60,000 Variable TOTAL COST = CONSTANT

PER UNIT = CHANGES
Direct labor 16,000 40,000 Variable
VARIABLE COST:
Indirect materials 6,000 20,000 Mixed
TOTAL COST = CHANGES
PER UNIT = CONSTANT
Indirect labor 10,000 10,000 Fixed
Insurance 25,000 25,000 Fixed
Maintenance 5,200 14,000 Mixed
Depreciation 8,000 8,000 Fixed
Power 8,000 23,000 Mixed

Segregation of Fixed and Variable Elements of
Mixed Costs
1. High-Low Points Method
2. Statistical Scattergraph Method
3. Account Analysis Method
4. Engineering Approach
5. Conference Method
6. Method of Least Squares (Regression Analysis)
High Low Method
• the fixed and variable elements of the mixed costs are computed from two data points (period) – the high and low periods
as to activity level or cost driver.
High Low Method
JPIA is a small one-person company that provides elaborate and imaginative wedding cakes to order for very large wedding
receptions. The owner of the company would like to understand the cost structure of the company and has complied the
following records of activity and costs incurred. The owner believes that the number of wedding catered is the best measure
of activity.
Month Weddings Costs Incurred
January 3 P3,800
February 2 P3,600
March 6 P4,000
April 9 P4,300
May 12 P4,500
June 20 P5,200
Using the HIGH-LOW METHOD, estimate the variable cost per wedding and the total fixed cost per month
High Low Method
Solution
a. Variable Cost per unit = (5,200 – 3,600)/(20 – 2) = 88.89
b. Fixed Cost
Using the highest, Using the lowest,
= 5,200 – (20 x = 3,600 – (2 x 88.89)

88.89) = P3,422
=P3,422
Method of Least Squares
• This method uses the following equations in computing for the values of unit variable cost and fixed cost:
• Multiple Regression Analysis - is a statistical method of separating fixed and variable cost which is used when the
dependent variable (cost) is caused by more than one factor/independent variable.
• b = (n∑xy - ∑x∑y) / (n∑x2 – (∑x)2)
• a = (∑y - b∑x) / n
COST FORMULA: y = a + bx
Where: “y” denotes total cost. It is called the dependent variable because it is dependent on the value of another
variable, the activity level x.
“a” is an estimate of the fixed cost.
“b” is an estimate of the variable cost
JPIA is a small one-person company that provides elaborate and imaginative wedding cakes to order for very large wedding
receptions. The owner of the company would like to understand the cost structure of the company and has complied the
following records of activity and costs incurred. The owner believes that the number of wedding catered is the best measure
of activity.
Month Weddings Costs Incurred
January 3 P3,800
February 2 P3,600
March 6 P4,000
April 9 P4,300
May 12 P4,500
June 20 P5,200
Using the least-squares regression method, estimate the variable cost per wedding and the total fixed cost per month.
Find the following:
n?
Solution Month(n) Weddings(x) Costs Incurred(y)
∑x=?
∑y=?
January 3 P3,800
∑xy=?
February 2 P3,600 ∑x2=?
March 6 P4,000
April 9 P4,300
May 12 P4,500
June 20 P5,200
b = (n∑xy - ∑x∑y) / (n∑x2 – (∑x)2)

a = (∑y - b∑x) / n
Month(n) Weddings(x) Costs Incurred(y) xy x2 Totals
January 3 P3,800 11,400 9
n=6
February 2 P3,600 7,200 4
March 6 P4,000 24,000 36 ∑x= 52
April 9 P4,300 38,700 81
∑y= P25,400
May 12 P4,500 54,000 144
June 20 P5,200 104,00 400 ∑xy= P239,300
0 ∑x2=674
By using the formula,

b = (n∑xy - ∑x∑y) / (n∑x2 – (∑x)2)
b = [(6*239,300) – (52*25,400)] / [(6*674) – (52)2]
b = 85.52
a = (∑y - b∑x) /n
a = (25,400 – 85.52*52)/6
a = 3,492

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Course Title: Cost Accounting

By: RMM, CPA

Cost Pool – an account in which a variety of similar costs are accumulated

*Prime Costs – DM +DL

*Conversion Costs – DL + MOH

2. Nonmanufacturing Costs – all cost other than manufacturing cost

2. Period Costs – costs that are recognized as expense in the income

1. Controllable Costs – costs that are subject to significant influence by a

1. Committed Costs – costs that are inevitable as consequence of a previous

Cost Behavior – describes how a cost behaves or changes as the amount of

Cost Item 2,000 units 5,000 units Answers

Direct materials 24,000 60,000 Variable TOTAL COST = CONSTANT

Insurance 25,000 25,000 Fixed

Maintenance 5,200 14,000 Mixed

Depreciation 8,000 8,000 Fixed

Power 8,000 23,000 Mixed

Using the highest, Using the lowest,

= 5,200 – (20 x = 3,600 – (2 x 88.89)

b = (n∑xy - ∑x∑y) / (n∑x2 – (∑x)2)

By using the formula,

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