COLLEGE OF ACCOUNTANCY

C-AE22: Cost Accounting and Control

First Semester AY 2021-2022

A. Course Code – Title : C-AE22: Cost Accounting and Control

B. Module No – Title : M01 – Basic Concepts of Cost Accounting
and the Job Order Cost Cycle
C. Time Frame : 1 week (Week 1) – 6 hrs

D. Overview
This learning material provides a discussion of the basic concepts of cost
accounting as well as the manufacturing cost and inventory accounts. It also
includes a discussion of the cost and cost accumulation systems and an illustration
of the job order cost cycle.

E. Desired Learning Outcomes

At the end of the learning session, you should be able to:
1. Define cost accounting and describe its purpose;
2. Cite and explain the manufacturing costs
3. Inventory accounts of Manufacturing Company
4. Discuss the cost systems and the cost accumulation systems;
5. Types of Cost Systems

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Sheets
✓ Google Forms
✓ Quizizz

H. Content/Discussion

Lesson 1 - Definition and Purpose of Cost Accounting

Cost accounting is a system that records, summarizes, analyzes and

interprets the details of the costs of materials, labor and overhead necessary to
produce and sell an article. Basically, cost accounting now refers to the gathering
and providing of information for decision needs of all sorts, ranging from the
management of recurring operations to the making of strategic decisions and the
formulation of major organizational policies. It also helps fulfill the legal
requirement of reporting to stockholders, creditors, government agencies and other
external users.

Faculty: Elizabeth B. Boneo 1 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

It is clear, therefore, that cost accounting furnishes management with the

necessary accounting tools for planning and controlling activities, and help
management find the answers to such questions as:
- Is our plant operating efficiently?
- Which of our costs are out of line or excessive; how can they be
controlled?
- Are our sales prices realistic in relation to our product costs?
- What is the unit cost of each product manufactured?
Through modern systems of cost accounting, it is possible to determine the
costs to manufacture goods or to render services in order to help management
evaluate results better and ultimately arrive at sound decisions.
The cost accounting system also provides vital information to plan future
operations, prepare a budget, and control operations. (Guerrero 2018)

Lesson 2 – Manufacturing Costs

One of the functions of a cost accounting system is to classify and record all
costs according to category. The three manufacturing costs are:

1. Direct materials - also called raw materials, are those materials used in the
manufacturing process that become a significant part of the finished product.
It is to be remembered that what is a raw material to one manufacturer may be a
finished product of another manufacturer. Can you cite some examples?

2. Direct labor - wages paid to workers who spend their time working and
converting the raw materials into finished goods. Would you know who these
workers are?

3. Manufacturing overhead (also called factory overhead or factory burden) – all

costs incurred in the factory that cannot be properly classified or considered as
direct materials or direct labor. This cost is subdivided into three categories:
indirect materials, indirect labor and other manufacturing overhead.

Indirect materials are materials used in small amounts in the manufacturing

process or that cannot be easily traced to specific products. Another type of
indirect material, sometimes called factory supplies or operating supplies,
consist of items that are used in the manufacturing process but do not become
part of the finished product.
Indirect labor represents the wages of factory workers who do not work directly
on the product.
Other manufacturing overhead includes such costs as payroll taxes, depreciation
of the machinery, equipment and building of the factory, rent, taxes and
insurance of factory building and machinery, factory utilities.

In cost accounting, the sum of direct materials and direct labor is called prime
cost, while the sum of direct labor and manufacturing overhead is called
conversion cost. (Guerrero 2018)

Types of Cost as to Variability

1) Fixed Cost – items of cost which remain constant in total, irrespective of the
volume of production.
a) Committed Fixed cost – relatively long term commitments. Ex.
Depreciation

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 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

b) Managed Fixed Cost – short term basis and can be modified in response
to changes in management objectives . Ex. Advertising
2) Variable Cost – items of cost which vary directly, in total, in relation to
volume production. Ex. Direct materials
3) Mixed Cost – Items of cost with fixed and variable components.
a) Semi-variable cost. The fixed portion usually represents a minimum fee
for making a particular item. Ex. Electricity
b) Step-cost – the fixed part changes abruptly at various activity levels
because these costs are acquired in indivisible portions. Ex, supervisor’s
salary.

Purposes of Identifying the unit cost of the product:

1. Determine the selling prices of a product

2. Meeting competition
3. Bidding contracts
4. Analyzing profitability

Lesson 3 – Inventories of a Manufacturing Concern

1. Raw Materials Inventory – This account reflects the cost of raw materials and
factory supplies that will be used in the manufacturing process. Once the direct
materials are put into production or used in the production process, their costs
are removed from Raw Materials Inventory, and transferred to another account,
Work in Process. In the same manner, when factory supplies are used in the
manufacturing process, the corresponding cost is removed from the Raw
Materials Inventory account, and transferred to Manufacturing Overhead. A
separate account for Supplies Inventory may be maintained if the costs or
quantities of these supplies are significant enough to justify the separate
account. (Guerrero 2018)

2. Work in Process Inventory – This account reflects the cost of raw materials
used, direct labor and manufacturing overhead costs incurred on the goods
which have been put into production, but which have not yet completely
undergone the production process at the end of the accounting period.

3. Finished Goods Inventory – This account reflects the cost of the goods which
have been completed and are now finished products, ready and available for
sale.

Lesson 4 – Systems of Cost Accumulation

The main objective of cost accounting is to determine the cost of a finished product
for inventory valuation and income determination. In accumulating the cost of a
product, the following systems may be used:

1. Actual cost system (Historical) – Under this system, direct materials, direct
labor, and factory overhead costs are determined as they occur simultaneously
with the manufacturing operations, but the total of these costs can be
determined only after the operation has been completed. This system collects
the actual amounts of direct materials, direct labor and factory overhead
incurred for each product.

Faculty: Elizabeth B. Boneo 3 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

2. Standard cost system (Predetermined) – Costs are determined from analysis

and forecasts made even before the actual production begins. Standard unit
costs are computed for direct materials, direct labor and factory overhead. It is
these predetermined amounts, not the actual costs incurred, that are transferred
to the Finished Goods Inventory account.

3. Normal cost system – This is a combination of the actual and standard cost
systems. This system accumulates the actual amounts of direct materials and
direct labor costs only. Factory overhead costs are accumulated using a
predetermined rate. (Guerrero 2018)

Lesson 5 – Types of Cost Systems

1. Job order cost system – accumulates costs applicable to each specific job order
or lot of similar goods manufactured on a specific order for stock or for a
customer. When production on a job begins, the job is assigned a number, and a
form called job cost sheet is set up. As direct materials are used and direct labor
costs are incurred, their costs are entered on the job cost sheet. Factory
overhead costs applicable to the job are estimated and entered on the job cost
sheet. When completed, the job cost sheet shows the total cost of the completed
job. The cost per unit may be obtained by dividing the total cost of the job by the
number of units completed. This system is often used by manufacturers who
produce a variety of products, because they have to keep track of each specific
job order to ensure proper and correct assignment of costs. Also, the actual costs
shown on the job cost sheet may be compared with the estimated
costs on which the sales prices were based.

2. Process cost system – accumulates costs without attempting to allocate them

during the accounting period to specific units of goods being manufactured. At
the end of the accounting period, the average cost per unit is determined by
dividing the total accumulated costs by the total number of units produced.
Because of this technique, the process costing is often referred to as average
costing. If the process cost system is used, the goods manufactured must be
similar in nature, so that an average cost will be meaningful. The process cost
system is commonly used in manufacturing operations in which the production
process is standardized and continuous, and the product remains essentially the
same from day to day. In many types of businesses that use process costing,
manufacturing consists of a progressive series of distinct operations or
processes. Usually, each process is carried out in a different department. A unit
cost may be computed for each process or department. This departmental unit
cost may be a useful tool in measuring and controlling efficiency. The total cost
of production is determined by adding up the departmental costs.

3. Dual systems – Some manufacturers use both the job order and process cost
systems. This system is often used when a company makes standard parts or
subassemblies continuously, and then incorporates them into finished goods
built to customer specifications. The cost of the parts is accumulated and
determined under a process cost system, and the cost of each customer’s order
for finished goods is computed under a job order cost system. (Guerrero 2018)

I. Assessment of Learning/ Progress Check

Faculty: Elizabeth B. Boneo 4 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

a) Discuss briefly the three manufacturing costs and the inventory accounts of a
manufacturing firm.
b) Cite and explain the three cost accumulation systems and the two cost systems.
c) Identify the type of manufacturing cost of the following factory expenses (Quizziz)
1. Leather for Bag
2. Oil for machineries
3. Electricity
4. Cocoa for Chocolates
5. Wages of Workers
6. Salary of Supervisor
7. Rugby in making bags
8. Needles in making bags
9. Sugar for Chocolates
10. Repair cost on machine breakdown

J. References
Guerrero, Pedro P., (2018) Cost Accounting: Principles and Procedural Application,
2018 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

De Leon, Norma D., De Leon, Ellery D., & De Leon, Guillermo M, Jr., (2019) Cost
Accounting and Control 2019 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

Vanderbeck, Edward J. & Mitchell, Maria R., Principles of Cost Accounting 17 th Edition,
Taguig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).

Modules prepared by : Sisina T. Quizon

Reviewed/updated by : Elizabeth B. Boneo

Faculty: Elizabeth B. Boneo 5 | Page