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COST Notes - Cost accounting and control

Cost Accounting and Control (Pontifical and Royal University of Santo Tomas, The
Catholic University of the Philippines)

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CHAPTER 1 

INTRODUCTION TO COST ACCOUNTING 

COMPARISON OF FINANCIAL, MANAGEMENT, & 
COST ACCOUNTING 
 
FINANCIAL ACCOUNTING   
● preparation and provision of F/S 
● Balance sheet 
● Income statement 
● Cash flow statement 
● Statement of changes in stockholder’s equity 
- complies with GAAP 
- external parties 
- historical, quantitative, monetary and verifiable 
 
MANAGEMENT ACCOUNTING 
- gather financial and nonfinancial info to internal 
users 
- not required to adhere to GAAP 
- provides historical and forward looking info 
 
  FINANCIAL ACCOUNTING  MANAGEMENT ACCOUNTING 

Primary users  external  internal 

Primary org  whole (aggregated)  parts (segmented) 

focus  

Info  must be:  may be: 

Characteristics  ● Historical  ● Current or forecasted 
● Quantitative  ● Qualitative or quantitative 
● Monetary  ● Monetary or nonmonetary 
● Verifiable 
● Timely and estimated 

Overriding  GAAP  usefulness 

criteria 

Recordkeeping  formal  formal and informal 

 
COST ACCOUNTING 
- determination and use of product of service costs  
- provide product or service cost info to: 
- external: investment and credit decisions 
- internal: planning, controlling, decision 
making and evaluating org performance 

 
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CHAPTER 2 

COST TERMINOLOGY AND COST 

BEHAVIORS 
COST TERMINOLOGY 
COST MANAGEMENT SYSTEM -set of formal methods developed for 
planning and controlling an org’s cost generating activities 
COST CLASSIFICATION CATEGORIES 

  TYPES OF  DEFINITION 

COSTS 

Association with cost  ● Direct  conveniently and 

object    economically traceable 
Cost object - anything  ● Indirect  non traceable, must be 
for which management  allocated 
want to collect or 
accumulate costs 

Reaction to changes in  ● Variable  TOTAL COST:​ fluctuates 

activity (total cost)    in total 
Relevant range -    UNIT COST: ​constant 
assumed range of    throughout relevant range 
activity that reflects    costs of material, hourly 
the company’s normal    wages and sales 
operating cycle. Costs    commissions 
are variable and fixed.  ● Fixed  TOTAL COST:​ remains 
Within the relevant    constant throughout 
range, firms experience    relevant range 
stable effects on    UNIT COST: ​varies 
costs. Beyond,    inversely with changes in 
inefficient.    activity through relevant 
  range 
  ⬆activity ⬇per unit  
  salaries, depreciation & 
  insurance 
● Mixed  part variable, part fixed 
● Step  increases at certain 
activity levels 
● Variable: small steps 
● Fixed: large steps 

Classification in F/S  ● Unexpired  BS (ALE) 

● Expired  IS (IEx) 
● Product  inventoriable (prime and 
● Period  conversion) 
expensed (ex: salaries 
paid to salesforce) 

 
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NOTES 
● Predictor - ​activity that when changed, is 
accompanied by a consistent, observable change in a 
cost item 

● Cost driver - ​predictor that has an absolute cause 

and effect relationship to a cost 

● Distribution cost​ - cost incurred to warehouse, 

transport or deliver a service. Expensed as incurred. 
 
THE CONVERSION PROCESS 
INVENTORY ACCOUNTS 
1. RMI - work not started 

2. WIPI - work started but not completed 

3. FGI - work completed 

 
MANUFACTURERS VS. SERVICE COMPANIES  
- S​ ervice companies don’t have FGI 
 
COMPONENTS OF PRODUCT COST 
DM - readily identifiable part of a product 
DL - manufacture or provide service 
OH - includes Overtime or shift premiums, cost of idle time (waiting 
for machines to be maintained), IM & IL 
● Variable  
○ costs of IM 
○ Il on an hourly basis 
○ Lubricants for machines 
○ Variable portion of factory utility 
○ Depreciation (units of production or service 
life method) 
● Fixed 
○ Depreciation (straight line) 
○ Factory license fees, insurance and property 
taxes 
○ Fixed Il (supervisors, plant managers, etc.) 
○ Fixed portion of mixed costs (maintenance and 
utilities) 

 
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ACCUMULATION AND ALLOCATION OF OVERHEAD 

COST ALLOCATION 
- assignment of an indirect cost to one or more cost 
objects using cost driver/allocation base 
 
NORMAL COST SYSTEM 
- Combines actual DM & Dl costs with OH that is 
assigned using predetermined OHR 
- POHR: charge per unit of activity to allocate (apply) 
OH to WIP 

NOTES 
● Product costs - ​production/conversion area 

● Period costs​ - nonproduction/non-conversion area 

● Point of Sale​ - product/service costs will from FGI 

to COGS 

● High-quality products and services​ enhance a 

company’s ability to generate revenues and provide 
profits 

● High production process quality​ leads to shorter 

production time and reduced costs for spoilage and 
rework 

● Quality costs ​- costs of controlling quality/ failing 

to control quality 

○ Prevention costs - incurred to improve quality. 

research customer needs, implementing training 
programs 

○ Appraisal costs - incurred to find mistakes. 

monitoring or inspecting 

 
 
 
 
 

 
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CHAPTER 3 

PREDETERMINED OVERHEAD RATES & 

FLEXIBLE BUDGETS 
NORMAL COSTING AND PREDETERMINED OVERHEAD 
FORMULA FOR POHR 
T otal budgeted OH cost at a specif ied activity level
POHR =  
V olume of specif ied activity level
*COST DRIVERS: DL hours, DL dollars, Machine hours 
APPLYING OVERHEAD TO PRODUCTION 
- Overhead is applied to WIPI as production occurs 
- Applied OH​ debited to WIPI, credited to overall 
general ledger account  

Single overhead account for variable and fixed OH 

Manufacturing OH Control 

Total actual  Total OH 

OH incurred  applied 

Separate overhead accounts for variable and fixed OH 

Manufacturing Variable OH  Manufacturing Fixed OH 
(VOH) Control  (FOH) Control 

Total actual  Total VOH  Total actual  Total FOH 

VOH incurred  applied  FOH incurred  applied 

 
ACTUAL  APPLIED  

Variable MOH xx  WIPI xx 

Fixed MOH xx  Variable MOH xx 
Various accounts xx  Fixed MOH xx 

 
UNDERAPPLIED  OVERAPPLIED 

Actual FOH Cost > Expected  Actual FOH Cost < Expected 
FOH Cost  FOH Cost 
Actual Utilization <  Actual Utilization > 
Expected Util.  Expected Util. 

 
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DISPOSITION OF UNDERAPPLIED AND OVERAPPLIED OVERHEAD 

- Overhead accounts are temporary and are closed at 
period end 
- Disposition depends on materiality of the amount 
  MATERIAL  IMMATERIAL 

UNDERAPPLIED  WIPI xx  COGS xx 

debit balance  FGI xx  Fixed MOH 
in   COGS xx  xx 
Manuf OH  Fixed MOH  COGS:debit 
xx  normal 
 

OVERAPPLIED  Fixed MOH xx  Fixed MOH xx 

credit balance  WIPI xx  COGS xx 
in   FGI xx   
Manuf OH  COGS xx   
 

 
ALTERNATIVE CAPACITY MEASURES 
● Theoretical capacity:  
- estimated max. potential activity for a 
specified time 
- disregards realities such as machinery 
breakdowns 
● Practical capacity: 
- reducing theoretical capacity by ongoing, 
regular operating interruptions 
● Normal capacity: (required under GAAP) 
- encompasses firm’s long run average activity 
and represents an attainable level of activity 
● Expected capacity: 
- short run concept that represents firm’s 
anticipated activity level for the coming 
period 
 
SEPARATING MIXED COSTS 
MIXED COST 
- does not remain constant with changes in activity, 
nor does it fluctuate on a per unit basis in direct 
proportion to changes in activity 
- y = a + bX 
- y = total cost (dependent variable) 
- a = fixed portion 
- b = unit change of variable cost 
- X = activity base to which y is being 
related(cost driver/independent 
variable/activity level) 

 
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HIGH-LOW METHOD 
- analyzes mixed cost by first selecting the highest 
and lowest activity levels 

*Activity levels are used because activities cause costs to 

change, not vice versa 

- Outliers ​are abnormal observations; disregarded 

- Fixed cost​ does not fluctuate with changes in 
activity 
- y = a + bX 
- Computation of b: 
Cost at high activity − Cost at low activity
High activity − Low activity  
 
FLEXIBLE BUDGETS 
FLEXIBLE BUDGET 
- planning document that presents expected variable and 
fixed costs at different activity levels 
- help set POHR 
- Increment = variable cost per unit * quantity of add. 
activity 
 
PLANTWIDE VS. DEPARTMENTAL OH RATES 
 
LEAST SQUARES REGRESSION ANALYSIS 
LEAST SQUARES REGRESSION ANALYSIS 
- analyzes the relationship between independent 
(causal) and dependent (effect) variables 
- Simple regression:​ one independent variable 
- Multiple regression:​ two or more independent 
variables 
- Regression line:​ line that goes through the means of 
the independent and dependent variables in a set of 
observations 
- Calculator 
1. Mode 3 
2. Select 2 
3. Input values 
4. AC 
5. Shift 1 
6. Select 5 
 
CHAPTER 4 

ACTIVITY-BASED COSTING 
 
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ACTIVITY-BASED MANAGEMENT 
ACTIVITY-BASED MANAGEMENT   
● business process model focusing on the control of 
production or performance activities so that they can 
improve customer value and enhance profitability 
*activity - repetitive action  

VALUE ADDED VS. NON-VALUE-ADDED ACTIVITIES 

● Value-added (VA) activity:  
- increases the worth of a product or service to 
a customer  
- customer is willing to pay 
● Non-value-added activity: 
- increases the time spent on a product or 
service but does not increase its worth 
- unnecessary to customers 
● Business-value-added (BVA) activities: 
- essential to business but customers would not 
willingly choose to pay 
- ex. invoices (for sales and collections) 
 
*process - series of activities that satisfy an objective 
 
● Processing time: VA  
- actual time spent performing all necessary 
functions to manufacture a product or perform a 
service 
● Inspection time: NVA except pharma and food 
industries 
- time required to perform quality control  
● Transfer time: NVA  
- time consumed moving products or components 
from one place to another 
● Idle time: NVA 
- time goods spend in storage or waiting at 
production  
 
Total cycle (lead) time = Value-Added time + 
Non-Value-Added time 
 
*value chart - process map and time assessments combine 

MANUFACTURING CYCLE EFFICIENCY  

Manufacturing Cycle Efficiency = Total Value-Added Time / 
Total Cycle Time 

● Just-in-time manufacturing process 

- seeks to achieve higher efficiency by producing 
components and goods at the precise time they 

 
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are needed by next production station or the 

customer 

Service Cycle Efficiency = Total Actual Service Time / 

Total Cycle Time 
 
COST DRIVER ANALYSIS 
COST DRIVER - ​have direct cause & effect to a cost 
● Volume related - labor hours, machine hours 
● Non-volume related - setups, work orders, distance 
traveled 

​LEVELS AT WHICH COSTS ARE INCURRED 

  TYPES OF COSTS 

Unit-Level Costs  ● Direct material 

caused by production or  ● Direct labor 
acquisition of single unit of  ● Some machine costs if 
product or delivery of single  traceable 
unit service 

Batch-Level Costs  ● Purchase orders 

caused by group of things  ● Setup 
being made, handled or  ● Inspection 
processed at a single time 
● Movement 
- ex. Machine setup 
● Scrap, if related to the 
batch 

Product/Process-Level Costs  ● Engineering change orders 

caused by development,  ● Equipment maintenance 
production or acquisition of  ● Product development  
different items 
● Scrap, if related to 
product design 

Organizational/Facility-Level  ● Building depreciation 

Costs  ● Plant or division 
caused by supporting facility  manager’s salary 
operations  ● Organizational advertising  
*should not be assigned to 
products or services 
*should be subtracted only in 
total from net product 
revenues  

ACTIVITY-BASED COSTING 
ACTIVITY-BASED COSTING 

 
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- focuses on attaching costs to products and services 

based on activities conducted to produce, perform, 
distribute, and support those products and services 
 
TWO-STEP ALLOCATION   
- Collect costs in general ledger and subsidiary 
account 
- Identify activity centers 
- Accumulate costs into activity center cost pools—cost 
drivers 
- Allocate costs to products and services 
*activity center - part of the production or service 
process for which management wants a separate recording of 
costs 
*activity driver - measures the demands placed on 
activities 

TRADITIONAL VS. ABC COSTING  

When ABC is implemented:  

● Cost is reduced for high volume, standard products 

● Cost is increased for low-volume, complex specialty 

products 
 
 
 

 
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