DEFINITION OF COST ACCOUNTING AND RELATIONSHIP TO FINANCIAL AND MANAGEMENT

ACCOUNTING

It is an expanded phase of general or financial accounting, which informs management promptly with the
cost of rendering a particular service, buying selling a product, and producing a product.

It is a field of accounting that measures, records, and reports information about costs. It is not only
essential to profit business but also for not-for-profit organizations such as governmental agencies,
churches and charities.

RELATIONSHIP OF FINANCIAL, MANAGERIAL AND COST ACCOUNTING

Financial accounting is the use of accounting information for reporting to external parties,
including investors and creditors.
Managerial accounting focuses on the needs of parties within the organization, rather than
interested parties outside the organization.
Cost accounting is the intersection between managerial and financial accounting.

The information of cost accounting is needed by both managerial and financial accounting. Cost
accounting provides product cost for both external and internal parties.

DISTINCTION BETWEEN MERCHANDISING AND MANUFACTURING OPERATIONS

A merchandising company normally buys a product that is ready for resale when it is received. Nothing
needs to be done to the product to make it salable except possibly to prepare a special package or
display. As we will shown in the figure, total beginning merchandise inventory is the basis for computing
both the cost of goods sold and ending merchandise inventory (MI) balances. Computing the cost of
goods sold for manufacturing company is more complex. As we shown in the figure instead of one
inventory account, a manufacturer maintains the three inventory accounts: Materials Inventory, Work in
Process Inventory and Finished Goods Inventory.

Materials inventory are the purchased materials unused during the production process
Work in Process inventory is unfinished goods during the production process. The 3 types of
cost accumulated in work in process inventory are direct material, direct labor and factory
overhead
Finished Goods inventory it is set up as the same way as the merchandise inventory account
under Merchandising. Then costs attached to unsold items at year end make up the ending
balance in the finished goods inventory.
Cost of Goods Sold is the units in finished goods inventory and reported in the Income
statement.

USES OF COST ACCOUNTING DATA

Planning is the process of establishing objectives or goals for the firm and determining the means
by which the firm will attain them.
Cost accounting helps in the development of plans by providing historical costs that serves as
basis for projecting data for planning.
The 3 components of planning are: strategic planning, tactical planning & operational planning
Control is the process of monitoring the company’s operations and determining whether the
objectives identified in the planning process are being accomplished.

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2. Determining the selling price of the product - Cost of manufacturing unit products in setting the
selling price which should be high enough to recover cost of production, cost to sale and administrative
cost plus tax and desired profit it will be difficult to set the selling price without cost information.

3. Meeting competition - If a competitor is selling the product at a lower price, the accountant should
the selling price competitively.

4. Bidding on contracts - The Company must be ready to submit competitive bids in order to be
awarded by manufacturing contracts by the government or private firms and analysis of the unit cost
relating to manufacturing of a particular product is of great importance in determining the bid price to be
submitted.

5. Analyzing profitability - Unit cost information enables management to determine the amount of
profit that each product earns and passively eliminate those who are less profitable thereby concentrating
efforts on the item that are most profitable.

What is the bearing of cost to internal and external users?

Cost are said to be used for managerial accounting purposes when costs are used inside the organization
by managers to evaluate the performance of operations or personnel, or a basis for decision making.
When costs are used by outsiders, such as stockholders or creditors, to evaluate the performance of top
management and make decisions about the organization, we say costs are used for financial accounting
purposes.

Lesson 1: DEFINITION OF COST AND THREE INTEGRAL COMPONENTS OF PRODUCT

COST - Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to
bring a current or future benefit to the organization. We say cash equivalent because non-cash assets can
be exchanged for the desired goods or services.

Cost are incurred to produce future benefits in a profit making firm, future benefits usually mean
revenue. As costs are used in the production of revenues, they are said expire. Expired costs are called
expenses. A loss is a cost without revenue Benefit.

Integral Components of Product

Direct materials are materials that become part of a finished product and can be conveniently and
economically traced to specific product units.
Indirect materials are minor materials and other production supplies that cannot be conveniently
or economically traced to specific products. It is part of factory overhead costs.
Direct labor includes all labor costs for specific work performed on products that can be
conveniently and economically traced to end products.
Indirect labor includes all labor costs production related activities that cannot be conveniently or
economically traced to end products. It is part of factory overhead.
Factory overhead is the third manufacturing cost element is a catchall for manufacturing costs
that cannot be classified as direct materials or direct labor costs.

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COSTS CLASSIFIED AS TO VARIABILITY

Fixed cost - items of cost which remain constant in total, irrespective of the volume of production.
There are two categories of fixed cost.
Committed fixed costs - costs that represent relatively long term commitments on the part of
management as a result of a past declaration. Ex. depreciation on equipment.
Managed fixed costs - costs that are incurred on a short-term basis and can be more easily
modified in response to changes in management objectives. Ex. advertising, research &
development and cost of employee training program
Mixed cost - items of cost with fixed and variable components.
Semi-variable cost - the fixed portion of a semi-variable cost usually represents a minimum fee for
making a particular item or service available. The variable portion is the cost charged for actually
using the service.
Step costs - the fixed part of step costs changes abruptly at various activity levels because these
costs are acquired in indivisible portions. A step cost is similar to a fixed cost within a very small
relevant range.
Common cost - cost of facilities or services employed in two or more accounting periods,
operations, commodities, or services.
Joint cost - cost of materials, labor and overhead incurred in the manufacture of two or more
products at the same time.
Capital expenditure - expenditure intended to benefit more than one accounting periods and is
recorded as an asset.
Revenue expenditure - expenditure that will benefit current period only and is recorded as an
expense.
Direct departmental charges - costs that are immediately charged to the particular manufacturing
departments that incurred the costs since the costs can be conveniently identified or associated
with the departments that benefited from said costs.
Indirect departmental charges - costs that are originally charged to some other manufacturing
departments or accounts but are later allocated or transferred to another department that indirectly
benefited from said costs.
Standard cost - predetermined costs for direct materials, direct labor and factory overhead.
Opportunity cost - the benefit given up when one alternative is chosen over another.
Differential cost - cost that is present under one alternative but is absent in whole or in part under
another alternative.
Relevant cost - a future cost that change across the alternative
Out-of-pocket cost - cost that requires the payment of money (or other assets) as a result of their
incurrence.
Sunk cost - a cost for which an outlay has already been made and it cannot be changed by
present or future decisions.

Lesson 1: THREE ELEMENTS OF MANUFACTURING

Direct Labor – This are payment to the employees directly working on the product.
Direct Material - This are the materials that are clinging to the product at the end of processing.
Factory Overhead – These are the expenses of the factory which cannot be considered as direct
materials and direct Labor.

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Lesson 1.1 MANUFACTURING INVENTORY ACCOUNT

Materials Inventory - is made up of the balances of materials and supplies on hand.

Work in Process- all manufacturing costs incurred and assigned to products being produced.
Finished Goods - it is set up as the same way as the merchandise inventory account under
Merchandising. Then costs attached to unsold items at year end make up the ending balance in
the finished goods inventory

Lesson 2: MANUFACTURING COST FLOW

Raw materials purchase is stored in a stock room and the working department requests some materials
so that they could use it in processing the product. After processing this product and considered as
finished product, they are transfer to the stored room and available for sale and deliver to customer.

Lesson 3: STATEMENT OF COST OF GOODS MANUFACTURED AND SOLD AND COST

ACCOUNTING CYCLE

Manufacturing Statement

- Financial statements or manufacturing companies differ from those of merchandising companies.

Depending on the industry, the account titles found on the balance sheet are the same in most
corporations. Even the income statement for a merchandiser and a manufacturer are similar.
However, a closer look shows that the head Cost of Goods Manufactured is used in place of the
Purchase account. In addition, finished Goods Inventory replaces Merchandise Inventory account.

Statement of Cost of Goods Manufactured and Sold

- This statement will present total cost goods manufactured plus finished goods inventory beginning
equals the available for sale less finished goods inventory end equals cost goods sold. Income
statement is shows the result of manufacturing business.

Lesson 1: JOB ORDER COSTING

Job Order costing - Job order cost procedure keeps the costs of various jobs or contracts separate
during their manufacture or construction.

 The method is applicable to job order work in factories, workshops, and repair shops as well as to
work by builders, construction engineers, shipbuilders and printers.
 In job order costing, each job is an accounting unit to which materials, labor and factory overhead
costs are assigned by means of job order numbers.
 Job order sheet a summary sheet where the cost of each order produced for a given customer or
the cost of each lot to be placed or recorded in stock.

Lesson 2 - Job-order Cost Sheet

Job Order Cost sheet - These records accumulate product costs of specific units or small batches of unit
for both product costing and control purposes. The file of job-order sheets for uncompleted jobs serves as
a perpetual book inventory and the subsidiary ledger for Work in Process Control. A separate cost sheet
is prepared for each job.

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Lesson 3 - ACCOUNTING PROCEDURES FOR MATERIALS

Procedures that affect the materials account involve the:

1. Purchase of materials and supplies

2. Issuance of materials and supplies

a. Direct materials

b. Indirect materials

Recording the purchase of materials

The account debited when materials are purchased is Materials or Stores and the account credited is

Accounts Payable or Voucher Payable.

Lesson 1: ACCOUNTING PROCEDURES FOR LABOR

The accounting procedures for labor may be divided into two distinct phases:

1. Collection of payroll data, computation of earnings, calculation of payroll taxes and payment of wages.

2. Distribution and allocation of labor costs to jobs, departments and other cost classifications

The clearing account for the total wages due to the factory personnel is the payroll account summarized
as follows:

PAYROLL
1. Total wages and salaries earned by factory 1. Total payroll during the payroll period at the same
personnel during the payroll period time debiting work in process for direct labor and
overhead for indirect labor

The account used to accumulate the liability for payroll or factory overhead is the Accrued Factory Payroll
summarized as follows:
ACCRUED FACTORY PAYROLL
1. Total wages paid to factory personnel at the time 1. Balancing beginning
crediting accounts payable or cash Total amount of wages and the salaries due to factory
personnel at the same time debiting payroll

Manufacturing overhead applied - account used for accumulating the total overhead charged to
production during period.

MANUFACTURING OVERHEAD CONTROL

1. Cost of indirect materials and supplies issued from 1. Total debit footing at the end of the accounting
the warehouse at the same time period closing the books
2. Cost of indirect labor at the same time crediting
payroll
3. Cost of indirect expense purchased from outsiders
4. Cost of other indirect expense incurred by the
company

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 MANUFACTURING OVERHEAD APPLIED
Total credit footings at the end of the accounting Cost of overhead allocated to production and computed by
Period upon closing of the books. multiplying the actual factor being used during the period by
the predetermined rate, at the same time, debiting work in
process.

Over/under applied overhead- the difference between the actual overhead incurred and the applied
overhead

OVER/UNDER APPLIED OVERHEAD

Difference between the actual manufacturing overhead Difference between actual manufacturing overhead and the
and the applied overhead when actual is more the applied applied overhead when the applied is more than the actual

Work in process - controlling used to record the flow of the elements of cost through the factory of cost
through the factory during a given period.

1. Cost of beginning inventory 1. Cost of materials, labor, and factory overhead

2. Cost of direct materials issued to production a t applied to jobs completed during the period at the same
the same time crediting materials time debiting finished goods.
3. Cost of direct labor applied to production during 2. Cost direct materials returned to the warehouse
the period at the same time crediting the payroll account at the same time debiting materials
4. Amount of overhead applied to production at t he
same time crediting applied overhead

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