Cost Accounting

Cost Accounting
Uses of Cost Accounting Information
 Principles of cost accounting have been developed to enable manufacturers to

process the many different costs associated with manufacturing and to provide
built-in control features. The information produced by a cost accounting system
provides a basis for determining product costs and selling prices, and it helps
management to plan and control operations.
Determining Product Costs and Pricing
Cost accounting procedures provide the means to determine product costs that enable the
preparation of meaningful financial statements and other reports needed to manage
abusiness. The cost accounting information system must be designed to permit the
determination of unit costs as well as total product costs.
Ex. You can't say the labor cost is 100000$ per month when he produce 5000 unit of
finished product, the labor cost is 20 $ per unit.
Unit cost information is also useful in making a variety of important
marketing decisions such as:
1. Determining the selling price of a product . manufacturing cost of a product aids in
determining the desired selling price.
2. Meeting competition. If a product is being undersold by a competitor, detailed information
will useful to determine price keeping you in the market.
3. Bidding on contracts. unit costs attributable to a particular product is of great importance in
determining the bid price.
4. Analyzing profitability. Unit cost information enables management to determine the amount of
profit that each product earns.
Planning and Control
Planning is the process of establishing objectives or goals for the firm and determining the means by which
they will be met. Effective planning is facilitated by the following:
 1- Clearly defined objectives of the manufacturing operation . These objectives may be expressed in terms of the number of units
to be produced, the desired quality, the estimated unit cost, the delivery schedules, and the desired inventory levels.
 Production Plan: that will assist and guide the company in reaching its objectives.(Manufacturing operation, material. Human
resource …etc.)
Cost accounting information enhances the planning process by providing

historical costs that serve as a basis for future projection
 control is the process of monitoring the company’s operations and determining whether
the objectives identified in the planning process are being accomplished. Effective control
is achieved as follows:
 1-Assigning responsibilities: The essence of responsibility accounting is the assignment
of accountability for costs or production results to those individuals who have the most
authority to influence them. It requires a cost information system that traces the data to
cost centers and their managers
 A cost center is a unit of activity within the factory to which costs may be practically and
equitably assigned. A cost center may be a department or a group of workers; it could
represent one job, one process, or one machine
With responsibility accounting, the manager of a cost center is accountable only for those
costs that the manager controls. For example, labor and materials costs will be charged to the
cost center, but the manager may be responsible only for the quantity of materials used and
the number of labor hours worked, and he is not accountable for the unit cost of the material
or the hourly rate for the employee.
The manager may be responsible for the cost of machinery maintenance and repair due to misuse in the cost center, but not responsible for
the costs of depreciation, taxes, and insurance on the machinery if the decision to purchase the machinery was made at a higher level in the
organization. If production in the cost center for a given period is lower than planned, this could be due to poor supervision of production
workers which is the manager’s responsibility. If the decrease in production is caused by less-skilled workers being hired by Human
Resources, however, that would be beyond the manager’s control.
 Cost and production reports for a cost center reflect its costs, in dollars, and its production activity, in units. In
a responsibility accounting system, the specific data for which the manager is responsible would be highlighted for
the purpose of performance evaluation. Quite often, both with a separate performance report will be prepared for a
cost center.
 The performance report will include only those costs and production data that the center’s manager can control.
 2. Periodically Measuring and Comparing Results. The actual operating results should be reviewed
monthly, weekly, hourly this analysis is very important for comparison between the currant situation and plan. The
number of dollars spent or the quantity of units produced has little significance until compared with the budgeted
amounts.
 3. Taking Necessary Corrective Action. The performance reports may identify problem areas and deviations
from the business plan. Appropriate corrective action should be implemented where necessary. A significant
variance from the plan is a signal for attention. An investigation may reveal a weakness to be corrected or a
strength to be better utilized.
 Management wants to know not only the results of operations, but also how the results—whether favorable or
unfavorable—compare with the plan, why things happened, and who was responsible.
References
 Cost Accounting
 EDWARD J. VANDERBECK
 Professor Emeritus
 Department of Accountancy
 Xavier University
 To be continued

Cost Accounting

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Cost Accounting

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Cost Accounting

Uses of Cost Accounting Information

 Principles of cost accounting have been developed to enable manufacturers to

Cost accounting information enhances the planning process by providing

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