Definition

COMPARISON OF FINANCIAL, MANAGERIAL, AND COST ACCOUNTING

FINANCIAL ACCOUNTING

Is the use of accounting information for reporting to

external parties, including investors and creditors.
Financial accounting is primarily concerned with financial
statements for external use by those who supply funds to
the entity and other persons who may have vested interest
in the financial operations of the firm.
The suppliers of funds include stockholders (the owners of
the corporation) partners (owners of the partnership) and
sole proprietors.
MANAGERIAL
ACCOUNTING

 focuses on the needs of parties within the organization,

rather than interested parties outside the organization.
Managerial accounting information commonly addresses
individual or divisional concerns rather than those of the
enterprise as a whole. The information may be current or
forecasted, quantitative or qualitative, monetary or non-
monetary and most of all timely the data are futuristic and
some of the costs are not recorded on the accounting
books of the organization.
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.
Relationship of Financial, Managerial, and Cost Accounting

Financial Cost Managerial

Accounting Accounting Accounting
MERCHANDISING VERSUS MANUFACTURING OPERATIONS
Beginning merchandising inventory P 5,000
Plus: Total purchases 24,000
Cost of good available for sale 29,000
Less: Ending merchandise inventory 6,500
Cost of goods sold P 22,500
Figure 1-1. Cost of Goods sold for a Merchandising Company
Balance Sheet Transaction Income Statement
Preparation Preparation
Cash

Purchases

Plus:
Merchandise Inventory
Beginning

Cost of Cost of Goods Available Cost of Cost of Goods

MI End
Unsold Items for sale Sold
Sold Items
Figure 1-2 Cost of Goods Sold for a Manufacturing Company
Balance Sheet Transaction Income Statement
Preparation Preparation
Cash

Purchase of
Materials Labor Factory OH

Unused
Materials Materials
Inventory Storage

Work in When Used

Process Unfinished
Production Process
Inventory

Unsold Products
Finished Products Sold Cost of
Goods Finished Goods Storage Goods
Inventory Sold
 USES OF COST
ACCOUNTING DATA

The information produced by a cost

accouting system provides a basis for
determining product cost and aids
management in planning and controlling
operations.
DETERMINING PRODUCT
COSTS

Cost accounting procedures help

management in gathering the data needed to
determine product costs and thus generate
meaningful financial statements and other
reports.
Cost procedures must be designed to permit
the quotation of unit costs as well as total
product costs.
Unit cost information is also useful in making a variety of
important marketing decisions

1. Determining in selling price of a product

2. Meeting competition
3. Bidding on contracts
4. Analyzing profitability
 DETERMINING THE
SELLING PRICE OF A
PRODUCT

A knowledge of the cost of

manufacturing a unit of product helps in
setting the selling price, which should be
high enough to cover the cost of
production, pay a portion of marketing
and administrative expenses and provide
a profit.
MEETING COMPETITION

If a competitor is selling the product at a low

price, detailed information regarding unit
costs can be used to determine the action to
be taken by the company.
The company would know if selling price must
be reduced, or manufacturing cost must be
reduced, or the product must be eliminated.
BIDDING ON CONTRACTS

Many manufacturing firms must submit

competitive bids in order to be awarded
manufacturing contracts by the government
or private firms.
The bid price must be able to cover cost to be
inccured and at the same provide profit for he
company.
 ANALYZING
PROFITABILITY

Unit cost information enables magement

to determine the amount of profit that
each product earns and possibly
eliminate those that are least profitable,
thereby concentrating efforts on those
items that are most profitable.
 PLANNING AND CONTROL

Planning is the process of establishing

objectives or goals for the firm
Control is the process of monitoring
the company's operations and
determining whether the objectives
idenified in the planning process are
being accomplished.
 PLANNING CAN BE DIVIDED INTO THREE (3)
COMPONENTS:

1. Strategic Planning - concerned with setting long range

goals and objectives to determine the overall direction of the
company.
2. Tactical Planning - concerned with plans for a shorter
range and emphasizes plans to achieve the strategic goals.
3. Operations Planning - relates to the day to day
implementation of tactical plans. It emphasizes the coordination
of the major factors of production (materials, labor, and
facilities).
 RECENT DEVELOPMENTS IN COST ACCOUNTING

Cost accounting is experiencing dramatic

changes. Manual bookkeeping has been
reduced because of the use of computers.
Changes in production methods have made
traditional applcations of cost accounting
obsolete in some cases.
The traditional role of cost accounting is to
record full product cost data for external
reporting.
 COST ACCOUNTING AND OTHER FIELDS OF STUDY

The recording of the costs of a product or a service

is part of financial accounting.
The use of cost for valuation of inventory and cost
of goods sold for external reporting is also financial
accounting.
The use of cost data in choosing between two or
more alternatives is part of managerial accounting.
Cost accounting provides data for use in decision
models for finance, operation management, and
marketing.
 TWO BASIC PRODUCT-COSTING SYSTEMS

1. Job order costing

a system for allocating costs to groups of unique
product. It is applicable to the production of
customer specified products such as the
manufacturer of special machines.
a subsidiary record (job cost sheet) is needed to
keep track of all unfinished jobs (work in
process) and finished jobs (finished goods)
2. Process costing
a system applicable to a 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 o products because the product is uniform, each
processing department becomes a cost center.
 JOB ORDER VERSUS PROCESS COSTING
Job order costing and process costing are the two traditional
basis approaches to product cost accounting systems.
The objective of the two systems is the same.
They both provide product unit cost information for pricing,
cost control, inventory valuation, and income statement
preparation.
End-of-period values for the Cost of Goods Sold, Work in
Process Inventory, and Finished Goods Inventory accounts are
computed using product unit cost data.
 CHARACTERISTICS OF JOB ORDER COSTING

A job order cost accounting system is a product

costing system used by companies making one-of-a-
kind or special-order products.
In such a system, direct materials, direct labor, and
factory overhead costs are assigned to specific job
orders or batches of production.
Job order costing may also be used when producing
a set quantity of a product for inventory
replenishment.
 THE PRIMARY CHARACTERISTICS OF A JOB
ORDER COST SYSTEM ARE AS FOLLOWS:

1. It collects all manufacturing costs and assigns them to

specific job or batches of product.
2. It measures cots for each completed job, rather than for set
time periods.
3. It uses just one Work in Process Inventory Control account in
the general ledger. This account is supported by a subsidiary
ledger of job order cost cards or sheets for each job in
process at any point of time.
 CHARACTERISTICS OF PROCESS COSTING

A process cost accounting system is a product

costing system used by companies that make a large
number of similar products or maintain a
continuous production flow.
Unit costs are computed by dividing total
manufacturing cost assigned to a particular
department or work center during a period by the
equivalent unit of production.
If a product is routed through four departments,
then four units cost amounts are added to find the
product's total unit cost.
 THE MAIN CHARACTERISTICS OF A PROCESS
COST ACCOUNTING SYSTEM ARE AS FOLLOWS:

1. Manufacturing costs are grouped by department or

work center, with little concern for specific job
orders.
2. It emphasizes a weekly or monthly time period rather
than the time taken to complete a specific order.
3. It uses several Works in Process Inventory accounts -
one for each department or work center in the
manufacturing process.
 Many manufacturing firms have production systems which are not
suited for strictly job-order costing or process costing, but instead require
a costing system which incorporates ideas from both. This blending of
ideas is known as hybrid costing.

Job Order Costing Hybrid Costing Process Costing

System System System
OPERATION COSTING

Is a hybrid costing system often used in

repetitive manufacturing where finished
products have common, as well as distinguish
characteristics.
MAJOR DIFFERENCES BETWEEN PROCESS & JOB ORDER
COSTING
PROCESS COSTING
1. Homogeneous units pass
through a series of similar
processes.
2. Cost are accumulated by
processing department.
3. Unit costs are computed by
dividing the individual
departments' costs by the
equivalent production.
4. The cost of production report
provides the detail for the Work in
Process account for each
department.
JOB ORDER COSTING
1. Unique jobs are worked on
during a time period.
2. Costs are accumulated by
individual job.
3. Unit costs are determined by
dividing the total costs on the job
cost sheet by the number of units
on the job.
4. The job cost sheet provides the
detail for the work in Process
account.
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