 Attempts to present  Measuring is not

CHAPTER 1: INTRODUCTION TO some degree of restricted to peso.

COST ACCOUNTING precision while
emphasizing
Main Objective of Accounting:
verifiability, freedom
from bias, relevance,
 To provide financial information about an economic
and timeliness.
entity to different types of users.
 Internal Users – managers for planning, Managerial Accounting is not separate from
controlling, and decision making Financial Accounting as the data in FA are used in the
 External Users – the government, fund Managerial Accounting System.
providers, creditors and interested entities.
Management decisions made today will affect
COST ACCOUNTING the financial statement of future periods.
Definition:
Intersection Between the Two
 Cost accounting informs management promptly
about the cost of rendering a particular service,  Cost Accounting is the intersection between
buying and selling a product, and producing a financial and managerial accounting. It provides cost
product. It is the field of accounting that measures, information to external parties and product cost
records, and reports information about costs. information to internal parties.
 It is now recognized as being essential to the
efficient cooperation of business and industry. MERCHANDISING VERSUS
MANUFACTURING OPERATIONS
Information System
Merchandising Operations
 All types of business entities – manufacturing,
merchandising, and service businesses, require  A merchandising company buys a product that is
information systems that show how costs were ready to release when it is received.
incurred and where and how these costs were  The product does not undergo a process to be
utilized. salable unless you prepare a special package or

 IS must be designed to accumulate detailed cost data Inventory, beg. xxx

relating to the production process. Purchases xxx
Total Goods Available for Sale xxx
FINANCIAL, MANAGERIAL, AND COST Inventory, end. (xxx)
ACCOUNTING Cost of Goods Sold xxx
Financial Accounting Managerial Accounting display.
 Uses accounting  Uses accounting
information for information to satisfy Manufacturing Operations
reporting to external the needs of parties
parties. within the  A company that creates products through the
organization. production process of raw materials to finished
 Financial statements goods.
are the output from  Addresses individual  Has a more complex operation because it involves
an accounting or divisional three (3) inventory accounts:
system. concerns rather than  Materials Inventory
the enterprise as a  Work-in-Process Inventory
 The reports prepared whole.  Finished Goods Inventory
focus on the
enterprise as a whole.  Information may be
Materials Inventory, beg. xxx
current and
Purchases xxx
 It is based on forecasted and most
Total Materials Available for Production xxx
historical data which data are futuristic,
Materials Inventory, end (xxx)
are supported by and some of the costs
Total Materials Used xxx
evidence. are not recorded.
Direct Labor xxx
Manufacturing Overhead xxx
 It is required by  No legislation that Total Manufacturing Costs xxx
organizations such as mandates the format Work-in-Process Inventory, beg. xxx
the Securities and or use of managerial Total Goods Put into Process xxx
Exchange accounting. Work-in-Process Inventory, end. (xxx)
Commission (SEC) Cost of Goods Manufactured xxx
and the Bureau of  More concerned with Finished Goods Inventory, beg. xxx
Internal Revenue timeliness and timing Total Goods Available for Sale xxx
(BIR). of the information. Finished Goods Inventory, end. (xxx)
Cost of Goods Sold xxx
 USES OF ACCOUNTING DATA batches of production processing
(individual jobs). department.
The information produced by a cost accounting system
provides a basis for:  Unit cost = total  Unit Cost = total
1. Determining Product Cost manufacturing cost/ manufacturing cost of
number of good units a department /
Cost accounting procedures help management
produced equivalent unit of
in gathering the data needed to determine
production
product cost.
2. Making Marketing Decisions  Measures costs for  Emphasizes a weekly
Determining the selling price of a product each completed job, or monthly period
Meeting Competition rather than for set rather than the time
Bidding on contracts periods. taken to complete a
Analyzing profitability specific order.

 Uses one Work in  Uses several Works

PLANNING AND CONTROLLING Process Inventory in Process Inventory
Control Account in accounts- one for
 Another important function of cost accounting is the the general ledger. each department or
development of information that can be used by Also supported by a work center in the
management in planning and controlling. subsidiary ledger of manufacturing
job order cost cards process.
Planning or sheets for each job
a time.
 The process of establishing objectives or goals for
 Used by paint, oil and
the firm and determining how the firm will attain  Used by ships, gas. Automobiles,
them. It provides a means of coordinating all of the airplanes, large bricks, and soft
operations of firms. machines, and special drinks industries.
orders industries.
 Cost accounting helps in the development of plans
by providing historical costs that serve as the basis  More costly.  Recordkeeping costs
for projecting (forecasting) future data for planning. are lower.

 Strategic Planning- long-range goals to

determine overall direction. Hybrid costing
 Tactical Planning- shorter-range plans to
achieve strategic goals.  Firms that are not suitfed for either of the mentioned
 Operations Planning- daily implementation of systems requires hybrid costing which incorporates
tactical plans ideas from both.

Controlling Operation Costing

 The process of monitoring the company’s operations  A hybrid costing system used in repetitive
and determining whether the objectives identified in manufacturing where finished products have
the planning process are being accomplished. common, as well as distinguishing characteristics.

TWO BASIC PRODUCT-COSTING  Some companies process large identical order units
SYSTEMS as a group through production sequence. Each order
is called a batch.
Objectives:
 Provide product unit cost information for pricing,
cost control inventory, valuation, and income
statement preparation.

 Computation of End-of-Period values for COGS,

Work in Process Inventory, and Finished Goods
Inventory accounts.

Job Order Costing Process Costing

 Used by companies  Used by companies
making one-of-a-kind that make similar
or special products. products.

 Costs are assigned to  Costs are

specific job orders or accumulated by the
 business that cannot be traced directly
CHAPTER 2: COSTS – CONCEPTS to a product.
AND CLASSIFICATIONS
Costs  The collection of costs is also called
manufacturing overhead, factory
 Cost is the cash or cash equivalent value sacrificed burden, and indirect manufacturing
for goods and services that are expected to bring a costs.
current or future benefit (revenue) to the
organization.  Examples are: indirect materials such as
nails and indirect labor costs such as
 Expired costs (costs used up in the production) that driver’s wages.
produce benefits are called expenses, while expired
costs without producing benefits are called loss. Formulas:
 Prime Costs = Direct labor + Direct Materials
 Expenses are deducted from revenues to determine
the period’s profit.
 Conversion Costs = Direct labor + factory overhead

CLASSIFICATION OF COSTS  Total manufacturing cost = direct materials + direct

labor + factory overhead
I. Costs classified as to relation to a product
B. Non- Manufacturing Costs/ Period Costs- any
A. Manufacturing Costs/ Product Costs - accounting costs a company incurs indirectly related to the
term that refers to the total costs involved in production process.
making a product and getting it ready for sale.
1. Marketing or Selling Expenses
1. Direct Materials  Expenses on activities like
 Materials that are transformed into advertising campaigns, online
finished products through the use of marketing efforts, and other
labor and factory overhead in the promotional strategies aimed at
production process. These can be traced reaching potential customers and
to the finished product. generating sales.
 The costs of these materials are direct  Often referred to as order-getting and
costs. order-filling costs.
 Examples are flour for bread and wood
for tables. 2. General or Administrative Expenses
 Costs associated with running a
2. Direct Labor business that aren't related to
 Represents the amount paid to wages as products or sales. In short, these are
to those working directly on the the expenses you incur while
product. conducting business day-to-day
 Examples are executive
 The wages of machine operators and compensation, general accounting
other workers involved in actually secretarial, and public relations.
shaping the products are classified as  As with marketing expenses, all
direct labor costs. organizations have administrative
expenses.
 These are the labor costs for
production-related activities that cannot II. Cost Classified as to Variability
be traced to end products. A. Fixed Cost – an expense that does not change
when sales or production volumes increase or
 The wages and salaries of such workers decrease.
as machine helps, supervisors, and other - Fixed costs are not related to activity within
support personnel are called indirect the relevant range.
labor costs. - Fixed cost per unit decreases as the volume
increases and increases as the volume
 These are the labor costs for decreases.
production-related activities that can be
traced to end products. 1. Committed fixed costs
 Long-term commitment costs as a
3. Factory Overhead result of past decisions (ex.
 The total cost involved in operating all depreciation).
production facilities of a manufacturing
 2. Managed fixed costs  the process of finding the best-
 Costs incurred on a short-term basis fitting curve or line of best fit for a
(ex. Advertising and research set of data points by reducing the
development). sum of the squares of the offsets
B. Variable Costs - a corporate expense that (residual part) of the points from
changes in proportion to how much a company the curve.
produces or sells.
- If activity increases, total variable costs also There are three equations under this method:
increase, and if activity decreases, total Y = a + bx
variable costs also decrease. ∑Y = na + b∑x
- Cost per unit remains constant as volume ∑XY = ∑xa + b∑x2
changes within a relevant range.
III. Costs Classified as to relation to
C. Mixed Costs - this is an item of costs that are Manufacturing Departments
partly fixed and variable.
A. Direct Departmental Charges - Costs that are
1. Semi-variable costs immediately charged to the manufacturing
 The fixed portion of a semi- department(s) that incurred the costs since
variable cost presents a minimum the costs can be conveniently identified or
fee for making a particular item or associated with the department(s) that
service available. benefited from the said costs.
 The variable portion is the cost
charged for actually using the B. Indirect Departmental Charges - Costs that
service. are originally charged to some other
 An example is the cost of electricity manufacturing department(s) or account(s)
where there is a minimum charge but are later allocated or transferred to other
plus a specified cost per kilowatt department(s) that indirectly benefited from
hour above the minimum. the said costs.
 Total Cost = fixed portion +
variable portion
IV. Costs Classified to their Nature as Common
2. Step costs or Joint
 the fixed part under this cost
changes abruptly at various activity A. Common Costs- Business expenses that
levels because these costs are multiple departments share.
acquired in indivisible portions. - Just like indirect costs, these costs are
 An example is a supervisor’s subject to allocations.
salary.
B. Joint Costs - The expense incurred by
Different methods in separating mixed costs producers when creating more than one
into fixed and variable components: product or process.
Scatter Graph - These costs are also subject to allocations
 Uses dots to represent values for
two different numeric variables. V. Costs classified as to relation to an accounting
The position of each dot on the period
horizontal and vertical axis
indicates values for an individual A. Capital Expenditures - This is money
data point. Scatter plots are used to invested by a company to acquire or upgrade
observe relationships between fixed, physical or non-consumable assets.
variables. - Intended to benefit more than one
accounting period and is recorded as an
High- Low Point Method asset.
- Depreciation for fixed tangible assets,
 An accounting technique used to
amortization for intangible assets, and
separate out fixed and variable
depletion for wasting assets.
costs in a limited set of data.
 It involves taking the highest level
B. Revenue Expenditures - Short-term business
of activity and the lowest level of
expenses usually used immediately or within
activity and comparing the
one year.
difference of the total costs at each
- Will only benefit current period only.
level.
VI. Costs for planning, control, and analytical
Least Square Method
process
 A. Standard Costs - Predetermined costs for
direct materials, direct labor, and factory
overhead.
- They are established by using information
accumulated from experience and data
secured from research studies.
- It is a budget for the production of one unit
of product or service and serves as
benchmark in budgetary control system.

B. Opportunity Costs - The benefit given up

when one alternative is chosen over another.
- They are usually not recorded in accounting
systems.

C. Differential Costs – Cost that is present

under one alternative but is absent in whole
or in part under another alternative.
- An increase in cost from one alternative to
another is known as incremental cost, while
a decrease in cost is known as decremental
cost.
- Can either be fixed or variable.

D. Relevant Costs - A future cost that changes

across the alternatives.

E. Out-of-Pocket Costs - Cost that requires the

payment of money (or other assets) as a
result of their incurrence.

F. Sunk Costs- A cost for which an outlay has

already been made and it cannot be changed
by present or future decision.
- They are not differential costs and should be
used in analyzing future courses of actions.

G. Controllable Costs- A cost is considered to

be a controllable cost at a particular level of
management if that level has a power to
authorize the cost.
SUMMARY OF IMPORTANT FORMULAS
 Total Variable Costs = Variable Cost per Unit
x Total Output
 Total Cost = Total Variable Cost Total Fixed Cost
 Variable Rate = Highest Point Cost – Lowest
Point Cost / Highest Output – Lowest Output
 Fixed Cost = Total Cost at Highest - (Variable
Rate x Output at Highest Point)
 Fixed Cost = Total Cost at Lowest – (Variable
Rate x Output at Lowest Point
CHAPTER 3: COST ACCOUNTING
CYCLE