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    Cost Concepts: Ilene D. Padilla Cpa, Mba

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    Cost accounting is the process of accumulating costs to assign them to cost objects for decision making and reporting. There are various types of costs including direct and indirect costs, variable and fixed costs, product and period costs. Costs flow through the accounts as raw materials are issued, overhead is incurred, goods are produced, and finished goods are sold. Management uses cost classifications and allocation methods like normal and standard costing to value inventory and determine product costs.

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    Cost Concepts: Ilene D. Padilla Cpa, Mba

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    harley_quinn11
    59 views53 pages
    Cost accounting is the process of accumulating costs to assign them to cost objects for decision making and reporting. There are various types of costs including direct and indirect costs, variable and fixed costs, product and period costs. Costs flow through the accounts as raw materials are issued, overhead is incurred, goods are produced, and finished goods are sold. Management uses cost classifications and allocation methods like normal and standard costing to value inventory and determine product costs.

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    Cost accounting is the process of accumulating costs to assign them to cost objects for decision making and reporting. There are various types of costs including direct and indirect costs, variable and fixed costs, product and period costs. Costs flow through the accounts as raw materials are issued, overhead is incurred, goods are produced, and finished goods are sold. Management uses cost classifications and allocation methods like normal and standard costing to value inventory and determine product costs.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    59 views53 pages

    Cost Concepts: Ilene D. Padilla Cpa, Mba

    Uploaded by

    harley_quinn11
    Cost accounting is the process of accumulating costs to assign them to cost objects for decision making and reporting. There are various types of costs including direct and indirect costs, variable and fixed costs, product and period costs. Costs flow through the accounts as raw materials are issued, overhead is incurred, goods are produced, and finished goods are sold. Management uses cost classifications and allocation methods like normal and standard costing to value inventory and determine product costs.

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    of 53

    COST CONCEPTS

    ILENE D. PADILLA
    CPA, MBA
    COST ACCOUNTING
     The system of accumulating the cost so that cost can
    be assigned to the cost object that management can
    use for decision making and reporting purposes.
    COST
    Monetary measure of resources given up to attain an
    objective (such as acquiring a good or delivering a
    service)
    COST OBJECT
     is anything for which management wants to collect or
    accumulate costs
    COST CLASSIFICATIONS

    Association with cost object

    Reaction to changes in activity

    Classification on the financial statements


    Association with cost object
    Direct cost
    Conveniently and economically traceable to the cost
    object.
    Indirect cost
    Non-traceable cost and must be allocated to the cost
    object
    Association with cost object- cost behavior
    Variable
     is a cost that varies in total in direct proportion to changes in activity; it is constant on
    a per unit basis.
    Fixed
     cost that remains constant in total within a relevant range of activity.
    Mixed
     a cost that has both a variable and a fixed component; it changes with changes in
    activity, but not proportionately; a mixed cost is assumed by accountants to be linear.
    Step
     is a type of cost that shifts upward or downward when activity changes by a certain
    interval or “step”.
    Identified Within the
     Relevant Range—normal operating range. It is the specified range of activity over
    which a variable cost remains constant per unit or a fixed cost remains fixed in total.
    Classification on the Financial Statements
    Unexpired cost - are assets on the balance sheet.
    • Expired-are an expense or a loss that is shown on
    the income statement.
     Product cost - is a cost that is associated with producing or
    acquiring inventory, and is therefore referred to as an
    inventoriable cost. Product costs include direct material, direct
    labor, and overhead costs.
     Period-is any cost other than one associated with making or
    acquiring inventory. Period costs are related to other business
    operations and are more closely associated with a particular time
    frame rather than with the production or acquisition of a product or
    the performance of a service.
    Product Costs- Inventoriable Cost
    Direct Materials
     Used and measurable part of a product
     is any readily identifiable part of a product.
    Direct Labor
     refers to the cost of the time spent by individuals who work specifically on
    manufacturing a product or performing a service.
     The wages (or salaries) of these individuals are considered direct labor cost.
    Factory Overhead
     is any factory or production cost that is indirect to manufacturing a product
    or providing a service; it does not include direct material or direct labor.
    Prime cost – Direct Materials and Direct Labor
    Conversion cost – Direct labor and manufacturing overhead
    Factory Overhead
    Overhead may be variable or fixed.
    Overhead includes indirect material and indirect labor as well as other
    costs incurred in the production process.
    Overhead has become a progressively larger portion of total
    manufacturing costs.
    Quality cost is an important type of overhead cost.
     Prevention cost is a quality control cost that is incurred to improve quality by
    preventing defects from occurring.
     An appraisal cost is a quality control cost that is incurred for monitoring or

    inspection. Appraisal costs compensate for mistakes not eliminated through


    prevention.
     A failure cost is a quality control cost that is associated with goods or services

    that have been found not to conform or perform to the required standards as well
    as all related costs. Failure cost may be internal (scrap and rework) or external
    (product returns, warranty costs, customer complaints).
    The Conversion Process
    Change inputs into outputs
    Recorded in the Work in Process
    Inventory account.
    G
    Product Cost Behavior
    Direct Material Variable

    Direct Labor Variable

    Overhead Variable, fixed, or mixed


    Valuation and Allocation of Cost
    Methods of valuation and allocating cost
    Actual Costing
    In a actual cost system, factory overhead is assigned directly to products and services.
    A debit to the Factory Overhead account represents actual overhead costs.
    assigns overhead as it occurs during the manufacturing cycle.
     Normal Costing
    In a normal cost system, factory overhead is assigned to an overhead control account and then
    allocated to products and services.
    assigns overhead at the end of the manufacturing process.

    Standard Costing
    In a standard cost system unit norms or standards are developed for direct material, direct
    labor, quantities and/or costs. Overhead is applied to production using a predetermined rate
    that is considered the standard.
    These standards can be used to plan future activities and to value the various inventory accounts
    and Cost of Goods Sold. A standard cost system allows companies to quickly recognize
    variances from expected production costs and to correct problems from excess usage and/or
    costs.
    Predetermined Overhead Rate
     Allows overhead to be assigned during the period,
    fulfilling the matching principle
     Adjusts for variations not related to activity
     Compensates for fluctuations in activity level that do
    not affect fixed overhead
     Allows managers to be aware of product, product line,
    customer, and vendor profitability
    Predetermined Overhead Rate
    A budgeted, constant charge per unit of activity used
    to assign overhead to production or services
    The Activity Level: The Denominator
     Relationship between the overhead cost and the
    activity
     Production volume
     Direct labor hours
     Direct labor cost
     Machine hours
     Number of purchase orders or parts
     Machine setups
     Material handling time
     Direct labor cost/direct materials cost
    Flow of Cost
    Cost Flow of inventory (perpetual system)
    1 Purchased raw materials

    Raw Materials inventory xxx

    Cash/Accounts Payable xxx

    2a Issuance of raw materials to production-direct materials

    Work in Process inventory xxx

    Raw Materials Inventory xxx

    2b issuance of raw materials to production-indirect

    Factory overhead xxx

    Raw Materials Inventory xxx

    3 Incurrence/payment of overhead cost

    Factory overhead-depreciation xxx

    factory overhead-indirect labor cost xxx

    factory overhead-payment of insurance/others xxx

    factory overhead-incurrence of other cost in the production xxx

    Accumulated depreciation xxx


    Cash xxx
    prepaid insurance/rent/others xxx
    4 Payroll of the business

    Work in Process Inventory-direct labor cost xxx


    Factory overhead-indirect labor cost xxx
    Selling/administrative expense xxx
    Payroll xxx

    5 Application of Factory overhead to production


    Work in Process xxx
    Factory overhead xxx

    6a Factory overhead-understated and immaterial


    Cost of goods sold xxx
    Factory Overhead xxx

    6b Factory overhead-ovestated and immaterial


    Factory overhead xxx
    Cost of Goods sold xxx

    6c Factory overhead-understated/material-prorated
    Work in Process inventory xxx
    Finished Goods inventory xxx
    Cost of goods sold xxx
    Factory overhead xxx

    6d Factory overhead-overstated/material-prorated
    Factory overhead xxx
    Work in Process inventory xxx
    Finished Goods inventory xxx
    Cost of goods sold xxx

    7 Goods completed during the period.


    Finished goods inventory xxx
    Work in Process inventory xxx

    8 Goods sold
    Cost of Goods Sold xxx
    Finished Goods Inventory xxx
    Note: The raw materials inventory is the stock of direct materials and indirect materials

    Factory overhead can be of two accounts - variable and fixed

    The application of factory overhead to production can be of actual cost or a

    predetermined overhead. If thed actual cost will be used, no difference

    in the debit and credit of factory overhead.

    If the predetermined overhead cost will be used, difference will occur.

    It is either an overstated or understated ammount as the case may be.

    if the difference is debit balance, or the debit is more than credit-understated

    If the difference is credit balance, or the credit is more than the debit-overstated

    For immaterial difference in the overhead account, it should be adjusted to

    Cost of Goods Sold account.

    TMC - Total Manufacturing Cost

    TCGM - Total Cost of Goods Manufactured

    RMI - Raw Materials Inventory - unused materials for issuance in the production.

    WIP - Unfinished goods still in process in the production at the end of period.

    FGI - Finished Goods Inventory - unsold goods at the end of period.


    Analyzing Mixed Costs
    Separating Mixed Costs
    Methods for Separating Mixed Costs
    Variable Costing
    When variable costing is used, all product costs are
    treated as variable.
    In the application of "variable costing" as a cost-
    allocation process in manufacturing, variable indirect
    manufacturing costs are treated as product costs.
    Sometimes called as direct costing income
    statementvariable indirect manufacturing costs are
    treated as product costs.
    Case problem 1
    Questions on case problem 1
    Case problem 2
    Answer to case 2
    Case 3
    Answer to case 3
    Case 4
    Answer to case 4
    Case 5
    Answer to case 5
    Case 6
    THANK YOU.
    KNOW YOUR COST.
    GOD BLESS….

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