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    NOTES - CHAPTER II - Cost Accounting and Control

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    Hanna Casas
    The document discusses key cost concepts and classifications. It defines cost as a sacrifice of resources and distinguishes between outlay costs and opportunity costs. Costs are classified as product costs, period costs, prime costs, conversion costs, and fixed vs variable costs. Product costs include direct materials, direct labor, and manufacturing overhead. Costs flow through inventory, cost of goods sold, and income statement accounts. Variable costs change with activity while fixed costs remain constant within the relevant range.

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    NOTES - CHAPTER II - Cost Accounting and Control

    Uploaded by

    Hanna Casas
    38 views11 pages
    The document discusses key cost concepts and classifications. It defines cost as a sacrifice of resources and distinguishes between outlay costs and opportunity costs. Costs are classified as product costs, period costs, prime costs, conversion costs, and fixed vs variable costs. Product costs include direct materials, direct labor, and manufacturing overhead. Costs flow through inventory, cost of goods sold, and income statement accounts. Variable costs change with activity while fixed costs remain constant within the relevant range.

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    chapter 2 in cost accounting, cost behavior

    Original Title

    NOTES_CHAPTER-II_Cost-Accounting-and-Control

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    The document discusses key cost concepts and classifications. It defines cost as a sacrifice of resources and distinguishes between outlay costs and opportunity costs. Costs are classified as product costs, period costs, prime costs, conversion costs, and fixed vs variable costs. Product costs include direct materials, direct labor, and manufacturing overhead. Costs flow through inventory, cost of goods sold, and income statement accounts. Variable costs change with activity while fixed costs remain constant within the relevant range.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    38 views11 pages

    NOTES - CHAPTER II - Cost Accounting and Control

    Uploaded by

    Hanna Casas
    The document discusses key cost concepts and classifications. It defines cost as a sacrifice of resources and distinguishes between outlay costs and opportunity costs. Costs are classified as product costs, period costs, prime costs, conversion costs, and fixed vs variable costs. Product costs include direct materials, direct labor, and manufacturing overhead. Costs flow through inventory, cost of goods sold, and income statement accounts. Variable costs change with activity while fixed costs remain constant within the relevant range.

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    CHAPTER II: Cost Concepts and behavior

    BASIC CONCEPT OF COST


    Cost is a sacrifice of resources.

    The focus of cost accounting is on


    EXPENSE costs, not expenses.

    Cost charged against revenue in the accounting period.

    2 MAJOR CATEGORIES OF COST


    1. Outlay Cost
    Accounting systems typically
    Past, present or future cash outflows.
    record outlay costs but not
    opportunity costs.
    2. Opportunity Cost
    Forgone benefit from the best alternative course of action.

    A well-designed costa accounting system presents all relevant information to managers,


    including opportunity costs that they may otherwise ignore in decision making.

    PRESENTATION OF COSTS IN FINANCIAL STATEMENTS


    OPERATING PROFIT
    - The excess of operating revenue over costs necessary to generate those revenues.
    COST OF SERVICES SOLD
    - Cost of billable hours or the amounts of an employee's work time
    COST OF GOOD SOLDS
    Expense assigned to products sold during a period.
    - Cost incurred to manufacture product sold.
    - Product cost recoded as “inventory” when cost is incurred.
    - Expense when sold.
    MARKETING & ADMINISTRATIVE COSTS
    - Period costs recorded as expense in the period the cost is incurred.

    FINANCIAL STATEMENTS
    SERVICE COMPANY

    MERCHANDISE COMPANY
    2 TYPES OF MANUFACTURING COSTS
    PRODUCT COSTS
    Cost assigned to the manufacturing of products and recognized (expensed) for financial
    reporting when sold.
    - Costs related to inventory.
    - Costs that are recorded as an asset in inventory when incurred and expensed as Cost of Goods
    Sold when sold.
    PERIOD COSTS
    - Cost recognized for financial reporting when incurred.
    - Non-manufacturing costs related to the firm.

    A service company provides


    Most organizations are a mix of customers with an intangible
    service and manufacturing product.
    activities.
    Manufacturers often turn to Retail and wholesale firms sell
    service as a defensive strategy to but do not make a tangible
    protect the business from rivals. product.
    2 TYPES OF PRODUCT COSTS
    1. DIRECT MANUFACTURING COSTS
    o Product costs that can be identified with units of production.
    Classified into;
    DIRECT MATERIAL COST – materials that can be identified directly with the product
    DIRECT LABOR COST - Work directly traceable to transforming materials into the finished
    product.

    2. INDIRECT MANUFACTURING COSTS


    o All product costs except for direct costs.
    o Cannot be directly identified to the product cost.
    MANUFACTURING OVERHEAD
    All production costs except direct materials and direct labor.
    o Indirect materials. - Cost of workers who does not work directly on the product yet
    required so that the factory can operate (supervisors, maintenance workers, inventory
    storekeepers.)
    o Indirect labor. – not part of the final product but are needed to manufacture it.
    (Lubricants for machinery, polishing, and cleaning materials, repair parts, light bulbs.)
    o Other manufacturing costs. – expenses incurred to keep the factory operating.
    (Depreciation of factory building and equipment, taxes on the factory assets,
    insurance on the factory building and equipment, heat, light, power, and similar
    expenses.)

    Service firms, such as investment


    All firms, not just manufacturing banks, often have costs that are
    firms, classify costs as direct or mostly indirect.
    indirect.

    Small or insignificant materials or


    minor materials and not the main
    materials will be counted or
    recognized as Manufacturing
    overhead. (ex: nail cost used in
    production)
    2 CATEGORIES OF COSTS IN MANUFACTURING COMPANIES
    PRIME COSTS - The direct costs or primary costs of products.
    - Direct materials + Direct labor.
    Managers give prime costs much
    -
    Generally, companies with low attention because they give 80 –
    manufacturing overhead focus on 90% of total manufacturing costs.
    managing prime costs.

    CONVERSION COSTS - Costs necessary to convert materials into products.


    - Direct labor + manufacturing overhead.
    Managers give most attention to
    Companies with high direct labor conversion costs in cases of which
    and or manufacturing overhead the costs are to convert direct
    tend to be more concerned with materials into final products.
    conversion costs.

    Non-manufacturing (Period) Costs


    - Recognized as expenses when the costs are incurred.
    - Expensed periodically.

    2 ELEMENTS OF NONMANUFACTURING COSTS


    1. MARKETING COSTS - Costs necessary to sell the products.
    - Advertising, sales commissions, and shipping costs.

    2. ADMINISTRATIVE COSTS - Costs necessary to operate the business.


    - Executive salaries, costs of data processing, and legal costs.
    COST ALLOCATION
    It is the process of assigning indirect costs to products, services, business units, etc.

    COST POOL
    Collection of costs to be assigned to the cost objects.

    COST ALLOCATION RULE


    The method used to assign cost pool to cost objects.

    COST OBJECT
    Any end to which cost is assigned. (a product, department, or product line.)

    COST FLOW DIAGRAM


    A diagram or a flowchart illustrating the cost allocation process.
    DETAILS OF MANUFACTURING COST FLOWS
    Product costs are recorded in inventory when costs are incurred.

    (3) INVENTORY ACCOUNTS OF A MANUFACTURING COMPANY


    1. Raw Materials Inventory:
    - Materials purchased to make a product
    2. Work-in Process Inventory
    - Products currently in the production process, but not yet completed
    3. Finished Goods Inventory:
    - Completed products that have not yet been sold

    INVENTORY ACCOUNTS – THE BALANCE SHEET

    HOW COSTS FLOW THROUGH THE STATEMENTS


    COST BEHAVIOR
    How costs respond to a change in activity level within the relevant range.

    COST DRIVER – a factor


    that causes or drives costs.
    RELEVANT RANGE
    Activity levels within which a given total fixed cost or unit variable cost will be unchanged

    4 BASIC CATEGORIES OF BEHAVIOR OF COSTS


    FIXED COST
    - Fixed costs remain unchanged as volume changes within the relevant range.
    - Fixed costs per unit varies inversely to a change in activity.
    - Fixed costs are “fixed” in “total” as activity changes.
    VARIABLE COST
    - Costs that change in direct proportion with a change in the volume within the
    relevant range
    - Variable costs “vary” in “total” as activity changes.
    - Variable cost per unit stays constant when activity changes within the relevant
    range.
    SEMIVARIABLE COST / MIX COST
    - Costs that have both fixed and variable components.

    Not all costs are


    strictly fixed or
    variable.
    STEP COST / SEMIFIXED COST
    - Costs that increase in total with steps when the volume changes to a particular
    level

    COMPONENTS OF PRODUCT COSTS


    FULL COST
    The sum of all costs of manufacturing and selling a unit of the product
    FULL ABSORPTION COST
    The sum of all variable and fixed costs of manufacturing a unit of the product
    VARIABLE COST
    The sum of all variable costs of manufacturing and selling a unit of the product

    All variable cost, either


    manufacturing &
    nonmanufacturing.

    MAKING COST INFORMATION USEFUL


    FULL ABSORPTION COSTING
     Required by GAAP
    Used for:
     Financial purposes
     External reporting

    VARIABLE COSTING:
    Used for:
     Managerial purposes
     Internal decision making

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