Of Cost Accounting

OVERVIEW
OF COST
ACCOUNTING
DISCUSSION 1) To define cost accounting; determine
OBJECTIVES: its scope and objectives;
2) To explain the relationships of cost

accounting to financial and
management accounting;
3) To determine the nature, classification

and purposes of cost; and
4) To determine the elements of product

cost, flow of cost in service, trading
and manufacturing business
Cost Accounting
“It is an expanded phase of general
or financial accounting which
informs management promptly with
the cost of rendering a particular
service, buying and selling a
product, and producing a product.”
RELATIONSHIP OF FINANCIAL,
MANAGEMENT AND COST ACCOUNTING
Financial Cost Management

Accounting Accounting Accounting
COST ACCOUNTING:
It is the intersection
between financial and
managerial accounting.
The information it
provides is needed and
used by both financial
and managerial
accounting.
TYPES OF BUSINESSES
SERVICE MERCHANDISING MANUFACTURING

“It is the field of
accounting that measures,
records, and reports
information about costs.”
OBJECTIVES OF
COST ACCOUNTING
Determine Product Costs
Aside from being used to

generate meaningful financial
statements, unit cost
information is also useful in
making a variety of important
marketing decisions.
Marketing Decisions such as:
• Determining the selling

price of a product
• Meeting competition
• Bidding on contracts
• Analyzing profitability
OBJECTIVES OF
COST ACCOUNTING
Planning and Control
Cost accounting helps in the
development of plans by
providing historical costs that
serve as basis for projecting data
for planning. Planning can be
divided into three: Strategic,
Tactical and Operations.
OBJECTIVES OF
COST ACCOUNTING
Performance Evaluation
Cost accounting helps
accumulate the cost of providing
a service or manufacturing a
product. The trends of the
increases and decreases of such
cost helps top management
evaluate employees.
Cost Terminology
And Cost Behaviors
Association with
Cost object
Cost object – anything
for which management
wants to collect or
accumulate costs.
Product/ service cost –

costs of making a product
or performing a service.
Direct cost – are
conveniently and
economically traceable to
the cost object. (Direct
materials & direct labor)
Indirect cost – cannot be

economically traced to the
cost object but instead are
allocated to the cost object.
(factory overhead)
Reaction to changes
in activity
Relevant range – the

assumed range of activity that
reflects the company’s normal
operating range.
Variable cost – a cost that
varies in total proportionately
with activity.
- A constant amount per unit
Fixed cost – a cost that remains
constant in total within relevant range
of activity.
- Fixed cost varies inversely with
changes in the level of activity on a
per unit basis.
Mixed cost – a cost that
has fixed and variable
portion.
Predictor – an activity that

is accompanied by a
consistent, observable
change in a cost item.
Cost driver – a predictor

that has an absolute cause-
and-effect relationship to a
cost.
CLASSIFICATION ON
THE FINANCIAL
STATEMENTS
Period cost – related to

business functions other
than production. (Selling
and administration).
- Incurred
nonproduction areas.
Product cost – related to
making or acquiring the
products or providing the
services that directly
generate the revenues of
an entity. (Inventoriable
cost)
- DM + DL + FOH
- Incurred in the
production areas.
Direct material – any
material that can be easily
and economically traced
to a product.
Direct labor – refers to

the time spent by
individuals who work
specifically on
manufacturing a product
or performing a service.
Overhead – any factory or
production cost that is
indirect to manufacturing a
product or providing a
service.
- Fixed overhead
- Variable overhead
Conversion cost – those
costs that are incurred to
convert materials into
products.
DL + FOH
Prime cost – DM + DL
ACCUMULATION AND
ALLOCATION OF
OVERHEAD
Cost allocation –
refers to the
assignment of an
indirect cost to one
or more cost objects
using some
reasonable allocation
base or driver.
TWO ALLOCATION
METHODS
1. Actual cost system – actual
direct material and direct labor
costs are accumulated in Work in
process inventory as the cost are
incurred.
• Actual production overhead
costs are accumulated
separately in an overhead
control account and are
assigned to WIP inventory
either at the end of a period or
at completion of production.
TWO ALLOCATION
METHODS
2. Normal cost system –
combines actual direct material
and direct labor costs with
overhead that is assigned using
a predetermined rates.
Predetermined overhead rate – a

charge per unit of activity that is
used to allocate overhead cost from
the overhead control account to
work in process inventory for the
period’s production or services.
SEPARATION
OF MIXED
COSTS
𝑦 = 𝑎 + 𝑏𝑥
Where:
y = total cost
a = fixed portion
b = variable cost
x = the predictor, cost driver
MIXED COST
SEPARATION
1. High-Low Method
- analyzes mixed cost by first
selecting the highest and
lowest levels of activity in a
data set.
Outliers – abnormal
observations.
MIXED COST
SEPARATION
1. High-Low Method
- analyzes mixed cost by first
selecting the highest and
lowest levels of activity in a
data set.
Outliers – abnormal
observations.
MIXED COST
SEPARATION
∆ 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
𝑏=
∆ 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙
MIXED COST
SEPARATION
Least-square regression analysis
– a statistical technique that
analyzes the relationship between
independent and dependent
variables.
Simple regression analysis – uses

one independent variable to predict
the dependent variable based on
the y = a + bx formula for a straight
line.
MIXED COST
SEPARATION
Multiple regression analysis –
two or more independent
variables are used to predict the
dependent variable.
Regression line – any line that

goes through the means of the
independent and dependent
variables in a set of
observations.
MIXED COST
SEPARATION
∑𝑥𝑦 − 𝑛(𝑥)(
ҧ 𝑦)
ത
𝑏= 2 2
∑𝑥 − 𝑛 𝑥ҧ
𝑎 = 𝑦ത − 𝑏𝑥ҧ
END.
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OVERVIEW

2) To explain the relationships of cost

3) To determine the nature, classification

4) To determine the elements of product

Financial Cost Management

SERVICE MERCHANDISING MANUFACTURING

Aside from being used to

• Determining the selling

Product/ service cost –

Indirect cost – cannot be

Relevant range – the

Predictor – an activity that

Cost driver – a predictor

Period cost – related to

Direct labor – refers to

Predetermined overhead rate – a

Simple regression analysis – uses

Regression line – any line that

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