Unit 1, Topic 1: Overview of Cost Accounting

COST ACCOUNTING
& CONTROL
Unit 1, Topic 1: OVERVIEW OF COST ACCOUNTING
LEARNING OUTCOMES:
At the end of the unit, the students will be able to:
a. Illustrate the flow of manufacturing costs using general
journal entries and T-accounts;
b. Determine cost according to its classifications and why such
classifications are useful;
c. Determine how overhead costs are allocated to products and
services
d. Analyse the causes and treatment of underapplied or
overapplied overhead; and
e. Prepare statement of cost of goods sold and income
statement for a manufacturer.

INTRODUCTION:
Have you ever been to a factory where large number of products are
being produced? Have you ever wondered how are prices of these product
being determined when they are brought to the market for sale?
This module will help you understand better how firms cost their
products or services and control these costs in order to maximize their firm’s
profits.

Activating Prior Learning

Before we proceed with our discussion about costs and cost
accounting, I want you to look at the statement presented below and write
your opinion about it on the box provided below.

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 Unit 1, Topic 1: Overview of Cost Accounting

Section 1: INTRODUCTION TO COST ACCOUNTING

Learning Objectives:
At the end of the topic, the students will be able to:
a. Define cost and explain cost accounting as a source of
information for internal parties within the organization;
b. Identify the objective of cost accounting
c. Determine the nature, advantages, functions and importance
of cost accounting; and
d. Differentiate cost accounting from management accounting
and financial accounting.

Presentation of Content

WHAT IS COST?

Cost is anything incurred during the production of the good or service

to get the output into the hands of the customer.
Cost is an expense incurred to a particular unit. In another way, the cost is
what the business sacrifices in order to produce one unit of product.

MEANING AND DEFINITION OF COST ACCOUNTING

The following are the different definitions of cost accounting given by
different authors.
✔ Cost accounting is a quantitative method that accumulates,
classifies, summarizes and interprets information for three major

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purposes: (i) Operational planning and control; (ii) special decision;

and (iii) Product decision. –Charles T. Horngren
✔ Cost accounting is the process of accounting for costs from the point
at which the expenditure is incurred or committed to the
establishment of its ultimate relationship with cost units. – Institute
of Cost and Management Accountants of London
✔ Cost Accounting is defined as the application of costing and cost
accounting principles, methods and techniques to the science, art and
practice of cost control and the ascertainment of profitability. –
Wheldon
✔ Cost Accounting is the process of analysing, recording,
standardizing, forecasting, comparing, reporting and recommending.
–Wilmot
✔ Cost accounting is the art and science of recording, classifying,
summarizing, and analyzing costs to help management make prudent
business decisions

OBJECTIVE OF COST ACCOUNTING

The main objectives of cost accounting are as follows:
1. Ascertainment of cost.
2. Cost control and cost reduction
3. Assisting management in decision-making including pricing,
profit planning, budgeting

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 Unit 1, Topic 1: Overview of Cost Accounting

NATURE OF COST ACCOUNTING

Cost accounting is a practice of cost control which is as follows:
a. Cost accounting is a branch of systematic knowledge that is
a discipline by itself. It consists its own principles, concepts
and conventions which may vary from industry to industry.
b. Cost accounting is both a science and art. It is a science
because it is a body of systematic knowledge relating to a
wide variety of subject and an art because without the
efficiency and experience of cost accountant it is not possible
to use costing techniques efficiently.

FUNCTIONS OF COST ACCOUNTING

There are basically three functions of cost accounting:
1. Cost Control
The first function of cost accounting is to control the cost within
the budgetary constraints management has set for a particular
product or service. This is important since management
allocates limited resources to particular projects or production
processes.
2. Cost Computation
This is the main function of cost accounting and this is the
source of all other functions of cost accounting.
3. Cost reduction
Cost computation helps the company reduce costs on projects
and processes. Reduction in costs means more profits since the
margin will naturally increase.

IMPORTANCE OF COST ACCOUNTING

Cost accounting gives information and reports it to the management
in the following ways:
a. Control of Material Cost
Cost of material is a major portion of the total cost of a product.
It can be controlled by regular supply of material and spares for
production, maintaining optimum level of funds in stocks of
materials and stores.
b. Control of Labor Cost
If workers complete their work within the specified time, cost of
labor can be controlled
c. Control of Overheads
By keeping a strict check over various overheads such as
factory, administrative and selling & distribution, this can be
controlled

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d. Measuring Efficiency
Cost accounting provides information regarding standards and
actual performance of the concern activity for measuring
efficiency
e. Budgeting
The preparation of the budget is the function of costing
department and budgeting is done to ensure that the
practicable course of action can be chalked out and the actual
perform corresponds with the estimated or budgeted
performance
f. Price Determination
On behalf of cost accounting information, management is
enable to fix remunerative selling price for various items of
products and services in different circumstances
g. Expansion
The management may be able to formulate its approach to
expansion on the basis of estimates of production of various
levels.

ADVANTAGES OF COST ACCOUNTING

A good system of costing is the technique of controlling the
expenditure and helps in bringing the economy in production, so it serves
the need of a large section of people in the following ways:

a. Benefits to the Management

The information revealed by cost accounting aims at mainly
assisting the management in decision making and optimizing
profit. Besides this, there are certain advantages of cost
accounting to the management, i.e. it helps in price fixation, in
revealing profitable and unprofitable activities, idle capacity, in
controlling cost and also helps in inventory control.
b. Benefits to the Employees
Cost accounting introduces wage scheme, bonus to the efficient
and sincere employees which in turn increasing productivity,
profitability and lowering cost.
c. Benefits to Creditors
The better management of finance through cost accounting
leads to timely debt servicing by company in the form of
repayment of loan and payment of interest
d. Benefits to the Government
Cost accounting enables the government to prepare plans for
economic development of the country, to make policies

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regarding taxation, excise duty, export, price, ceiling, granting

subsidy, etc.
e. Benefits to Consumers/Public
Cost accounting helps consumers in getting goods of better
quality

BRANCHES OF ACCOUNTING
o Financial Accounting: This is called original accounting, which is
mainly confined to the preparation of financial statement for the
various concern parties and financial institutions
o Cost Accounting: The process of accounting for cost which begins
with the recoding of income and expenditure or the bases on which
they are calculated and ends with the preparation of periodical
statements and reports for ascertaining and controlling cost.
o Management Accounting: It is a distinctive form of resource
management which facilitates management’s decision making by
producing information for managers within organization

COST ACCOUNTING VS. MANAGEMENT ACCOUNTING

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COST ACCOUNTING VS. FINANCIAL ACCOUNTING

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Application

These activities are assessment if you understand that discussions we had.

Though this will not be recorded, it will still form part of your class standing
so make sure to accomplish the tasks given to you. ☺

Your task:

Using a Venn Diagram, describe the relationship between Cost Accounting,

Management Accounting and Financial Accounting.

Feedback

True or False Questions:

Indicate whether the following statements are true or false by inserting in

the blank space provided a capital “T” for true or “F” for false.

___1. Reports prepared in financial accounting are general purpose reports,

whereas reports prepares in managerial accounting are usually special
purpose reports.
___2. Managerial accounting internal reports are prepared more frequently
than are classified financial statements.
___3. Determining the unit cost of manufacturing a product is an output of
financial reporting.
___4. Management accounting applies to all forms of business organizations.
___5. Controlling is the process of determining whether planned goals are
being met.
___6. Managerial accounting information generally pertains to an entity as a
whole and is highly aggregated.
___7. Job order costing system is for allocating costs to group of unique
product and is applicable to the production of customer specified products
such as the manufacture of special machine.
___8. Process costing is used by companies making one-of-a-kind products.
___9. Operation costing is a hybrid costing system often used in repetitive
manufacturing where finished products have common as well as
distinguishing characteristics.
___10. Cost accounting procedures help management in gathering the data
needed to determine product costs and thus generate meaningful financial
statements and other reports.

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Multiple Choice: Choose the best answer among the choices.

1. Financial statements for external users can be described as

a. User specific c. Special purpose
b. General purpose d. Management reports
2. Planning is a function that involves
a. Hiring the right people for a particular job
b. Coordinating the accounting information system
c. Setting goals and objectives for an entity
d. Analyzing financial statements
3. Which of the following is not a management function?
a. Constraining c. Controlling
b. Planning d. Directing and motivating
4. A manager that is establishing objectives is performing which
management function?
a. Motivating c. Planning
b. Directing d. Constraining
5. Management accounting information is generally prepared for
a. Stockholders c. Managers
b. Creditors d. Regulatory agencies
6. Managerial accounting is applicable to
a. Service entities
b. Manufacturing entities
c. Merchandising entities
d. All of the above
7. Which of the following is not an internal user?
a. Creditor
b. Department manager
c. Cost accountant
d. Controller
8. Managerial accounting is also called
a. Management accounting
b. Controlling
c. Analytical accounting
d. Inside reporting
9. Management accountants would not
a. Assist in budget planning
b. Prepare reports primarily for external users
c. Determine cost behavior
d. Be concerned with the impact of cost and volume on profits
10. Internal reports must be communicated
a. Daily c. annually
b. Monthly d. As needed

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