MODULE CAE08: COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANAGEMENT

CHAPTER 1 INTRODUCTION TO COST ACCOUNTING

What I Need to Know?

1. Distinguish between financial, managerial, and cost accounting
2. Distinguish between merchandising and manufacturing operations
3. Distinguish between job order costing and process costing

The main and primary objective of accounting is to provide financial information about
an economic entity to different types of users:

Internal users – managers for planning, controlling and decision making.

External users – the government, those who provide funds and those who have various
interests in the operation of the entity.

Cost Accounting 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. It is the field of accounting that measures, records,
and reports information about costs.

Cost Accounting is the intersection between financial and managerial accounting. Cost
Accounting information is needed and used by both financial and managerial
accounting. Cost accounting provides product cost information to external parties such
as stockholders, creditors and various regulatory boards for credit and investment
decisions. Cost Accounting provides product cost information also to internal parties
such as managers for planning and controlling.
Service VS Merchandising VS Manufacturing Operations

1
 MODULE CAE08: COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANAGEMENT

Cost of Goods Sold - Merchandising Company

Cost of Goods Sold - Manufacturing Company

2
MODULE CAE08: COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANAGEMENT

3
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Two Basic Product- Costing Systems

Job order costing is a method of assigning costs to a specific unit or product. For
example, a construction project to build a house from beginning to end is a job order.
Another example might be the building of a bulletproof SUV for a popular musician. The
overall concept here is that the product or service is a one-time event. The auto repair
shop that Joey works at will rebuild the engine of Customer A's car. Then it will replace
the spark plugs and serpentine belt on Customer B's truck. As they continue to provide
repairs, each customer's needs are specific to their vehicles. Joey's boss will assign
costs to each of the jobs dependent on the parameters of the job.

Process costing is a method of assigning costs for a mass quantity of a product or

service. For example, a bank provides the same service of receiving deposits to all
customers. Another one would be that a company manufactures computer chips for
thousands of customers. The concept here is that a company makes many numbers of
a product and sells that exactly similar product to everyone.

4
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Sample Problem:
1. The following costs were incurred in July:

$35,00
Direct materials ......................... 0
$13,00
Direct labor ............................... 0
$15,00
Manufacturing overhead ........... 0
$14,00
Selling expenses....................... 0
$30,00
Administrative expenses ........... 0

Prime costs during the month totaled:

A) $48,000
B) $28,000
C) $107,000
D) $63,000

Solution:
$35,00
Direct materials.... 0
Direct labor .......... 13,000
$48,00
Total .................... 0

5
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

2. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct
labor is $38,000 and if direct materials are $47,000, the manufacturing overhead
is:
A) $152,000
B) $11,750
C) $21,250
D) $9,500

Solution:
Conversion costs = Direct labor + Manufacturing overhead
Conversion costs = $38,000 + Manufacturing overhead

0.20 × Conversion costs = Manufacturing overhead

0.20 × ($38,000 + Manufacturing overhead) = Manufacturing overhead
$7,600 + 0.20 × Manufacturing overhead = Manufacturing overhead
$7,600 = 0.80 × Manufacturing overhead
Manufacturing overhead = $9,500

3. During the month of July, direct labor cost totaled $12,000 and direct labor cost was
30% of prime cost. If total manufacturing costs during July were $86,000, the
manufacturing overhead was:
A) $46,000
B) $40,000
C) $28,000
D) $74,000

Solution:
0.30 × Prime cost = Direct labor
0.30 × Prime cost = $12,000
Prime cost = $40,000

6
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Prime cost = Direct materials + Direct labor

$40,000 = Direct materials + $12,000
Direct materials = $28,000

Total
Direct Direct Manufacturin
manufacturing = + +
materials labor g Overhead
costs
Manufacturin
$86,000 = $28,000 + $12,000 +
g Overhead
Manufacturing overhead = $46,000

4. In July direct labor was 40% of conversion cost. If the manufacturing overhead cost
for the month was $34,000 and the direct materials cost was $23,000, the direct labor
cost was:
A) $22,667
B) $15,333
C) $51,000
D) $34,500

Solution:
0.40 × Conversion costs = Direct labor
0.60 × Conversion costs = Manufacturing overhead
0.60 × Conversion costs = $34,000
Conversion costs = $56,667
Conversion costs = Direct labor + Manufacturing overhead
$56,667 = Direct labor + $34,000
Direct labor = $22,667

7
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

5. Shown below are a number of costs incurred last year at Mecca Publishing Co., a
manufacturer of elementary school textbooks:

Solvents and cleaners used by the custodians to

clean the textbook printing presses ........................ $500
Depreciation on the automobiles used by sales $4,20
representatives ..................................................... 0
$2,00
Fire insurance on factory building ........................... 0
$3,70
Shipping costs on textbooks sold............................ 0

What is the total of the manufacturing overhead costs above?

A) $500
B) $2,500
C) $6,200
D) $6,700

Solution:
Solvents and cleaners used by the custodians to
clean the textbook printing presses................
Fire insurance on factory building........................
Total ....................................................................

8
 MODULE COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANANGEMENT

Reference:
Compilation of Lecture Notes of Guia Mae B. Abaja, CPA, Part-time Professor

For further discussion please refer to the link provided:

CHAPTER 1-Introduction to Cost Accounting - https://www.youtube.com/watch?v=hpYBmdeQLpM
CHAPTER 1-Job Order Costing- https://www.youtube.com/watch?v=qPvZMRBgxJQ
CHAPTER 1-Process Costing- https://www.youtube.com/watch?v=iY962ymhV-8