UCP: CA 01_Introduction to Cost Accounting AY 2019-2020

Universal College of Paranaque

College of Business & Accounting

CA 01 – INTRODUCTION TO MANAGERIAL AND COST ACCOUTNING

LECTURE NOTES
Management – The process of planning, organizing and controlling task to realize the objectives of the
organization.
Basic Management Functions:

Planning - involves setting immediate and long-term objectives and deciding which alternative is best suited to
obtain the set objectives.
Organizing - involves deciding how to utilize available resources as plans are carried out and tackling activities
necessary to achieve objectives such as staffing, subordinating, directing and motivating
Controlling - involves comparing actual performance with set plans or standards and deciding what corrective
actions to take should there be any deviation between actual and standard performance.

Note: All management functions require certain amount of DECISION MAKING.

Management Accounting
Management Accounting is an application of appropriate techniques and concepts in processing historical and
projected economic data of an entity to assist management in establishing plan to meet economic data of an entity to
assist management in establishing plan to meet economic objectives and in making rational decisions with a view
toward achieving the objectives. (American Association of Accountants.)

Cost Accounting
Cost accounting can be defined as the collection, assignment and interpretation of cost. Cost accounting system is
utilized for internal reporting for use in management planning and control, and external reporting to the extent its
product-costing function satisfies external reporting requirements.

COSTING METHODS:

Cost Accounting by Joshua S. Umali, CPA Page 1 of 3

Dream… Believe… Survive…
UCP: CA 01_Introduction to Cost Accounting AY 2019-2020

Activity-based costing (ABC) - is a systematic costing method that mainly uses activities as basis to allocate
overhead and indirect costs to products. ABC provides reliable data for product costing by using multipole cost
drivers that are more reflective of the actual causes of incurred overhead costs.

Job order costing – a system for allocating costs to groups of unique products. It is is applicable to the production
of customer specified products such as the manufacture of special machines. Each job becomes a cost center for
which costs are accumulated.

Process costing – a system applicable to continuous process of production of the same or similar goods (e.g., oil
refining and chemical production). Since there is no need to determine the costs of different groups of products
because the product is uniform, each processing department becomes a cost center.

COSTING CONCEPTS:

Absorption Costing (also known as full costing, peanut-butter costing and GAAP costing) – a costing method that
includes all manufacturing costs (direct materials, direct labor, variable and fixed factory overhead) in the cost of a
unit of product. It treats fixed factory overhead as a product cost.

Variable Costing (also known as direct costing) – a costing method that includes only variable manufacturing cost
(direct materials, direct labor and variable manufacturing overhead) in the cost of a unit of a product. It treats fixed
factory overheard as period cost.

Additional: Throughput Costing – a costing method that includes only direct materials in the cost of a unit of
product. It treats everything else as period cost.

Absorption Costing vs. Variable Costing

Absorption Costing Variable Costing

Rationale All manufacturing costs – variable
and fixed - are necessary
ingredients for production to take
place and should not be ignored in
determining product cost.
Acceptability Consistent with accounting
standards. This method is
acceptable for financial accounting
Fixed factory overhead are incurred
in order to have the capacity to
produce units in a given period.
These are incurred whether or not
the capacity is actually used to
make output.
This violates the “matching
principle”. Not acceptable for
financial accounting and tax

Cost Accounting by Joshua S. Umali, CPA Page 2 of 3

Dream… Believe… Survive…
UCP: CA 01_Introduction to Cost Accounting AY 2019-2020

and tax purposes. purposes.

Inventory Fixed factory overhead is Fixed factory overhead is treated as
considered as a product cost. period cost.
Income statement Distinguishes between production Distinguishes between variable and
and operating cost. fixed cost.
Income computation Variable costing may differ from absorption costing income because of the
difference in the amount of fixed factory overhead recognized as an
expense during an accounting period. This is actually caused by the
difference between production and sales volume.

WRAP-UP EXERCISE
1. Costs are accumulated by responsibility center for control purposes when using:
Process Costing Job Order Costing
a. Yes Yes
b. Yes No
c. No No
d. No Yes

2. Actual, normal and standard cost systems may be used in conjunction with
a. Process costing only c. Either job order or process costing
b. Job order costing only d. Neither job order nor process costing

3. In a job order cost system, direct labor costs usually are recorded initially as an increase in:
a. Factory overhead applied c. Finished goods
b. Factory overhead control d. Work in process

4. Which costs are treated differently under absorption costing and variable costing?
a. Fixed manufacturing costs c. Fixed selling and administrative costs
b. Variable selling and administrative costs d. Variable manufacturing costs.

5. Which of the following is false regarding cost accounting?

a. Cost accounting is the intersection between financial and management accounting.
b. Information related to cost accounting is used by both financial and managerial accounting.
c. Cost accounting provides product cost information to internal parties such as managers, for planning and
controlling.
d. Cost accounting subject is hard to understand.

-END-

“We are never given guarantees in life. We are only given the opportunities and it is up to us to make the BEST
out of it.”

Cost Accounting by Joshua S. Umali, CPA Page 3 of 3

Dream… Believe… Survive…