COST ACCOUNTING AND CONTROL

REVIEWER NOTES
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.
o Is directly concerned with the determination and use of product or service costs.
o Is the intersection between financial and managerial accounting.

Management Accounting – is concerned with providing information to parties INSIDE an

organization so that they can plan, control operations, make decisions, and evaluate
performance.
o Is the process of measuring, analysing, and reporting financial and non-financial
information that helps managers make decisions to fulfil the goals of the organization.
DIFFERENT ROLES FOR ACCOUNTANTS – FINANCIAL ACCOUNTANTS
Financial accountants provide information to external parties:

 Investors (ex. Shareholders)

 Creditors
 Regulators
 Donors
Managerial Accountants – provide information to internal users (managers)
Cost Accountants – provide information to both internal and external users (product and
service cost information)
FINANCIAL VERSUS MANAGEMENT ACCOUNTING
Financial: External focus, whole organization, historical, quantitative, monetary, verifiable,
GAAP, formal recordkeeping
Management: Internal focus, segments or divisions, current/projected, quantitative/qualitative,
monetary and nonmonetary, timely/reasonable estimate, benefits exceed costs, formal and
informal recordkeeping.
Internal Parties – planning, controlling, and decision making
o Evaluating performance
o Disaggregated (broken down into smaller parts)
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Merchandising Company normally buys a product that is ready for resale when it is received.
Formula:
Beginning merchandise inventory
Plus: total purchase
Cost of goods sold available for sale
Less: Ending merchandise inventory
Cost of Goods sold
The three inventory accounts of MANUFACTURING COMPANY:

 Materials Inventory
 Work in Process inventory
 Finished goods inventory
Factory Overhead includes such items as indirect materials, indirect labour, utility costs,
depreciation of factory machinery, depreciation of factory building, and supplies.
THREE TYPES OF COSTS

 Direct Labour
 Direct Materials
 Factory Overhead
DETERMINING PRODUCT COSTS
 Determining the selling of a product
 Meeting competition
 Bidding on contracts
 Analyzing profitability
Planning is the process of establishing objectives or goals for the firm and determining the
means by which the firm will attain them.
THREE COMPONENTS OF PLANNING
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 (or time period) and
emphasizes plans to achieve the strategic goals.
3. Operations planning – relates to the day to day implementation of tactical plan. It
emphasizes the coordination of the major factors of production (materials, labour and
facilities).
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TWO BASIC PRODUCT-COSTING SYSTEMS

1. Job order costing – a system for allocating costs to group of unique product. 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.
A job order cost accounting system is a product costing system used by companies making one-
of-a-kind or special-orders products.
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 costs 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.
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.
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 Work in Process Inventory accounts – one for each department or work
center in the manufacturing process.
Hybrid Costing – a costing system which incorporates ideas from both job and process cost
accounting system.
Operation costing is a hybrid costing system often used in repetitive manufacturing where
finished products have common, as well as distinguishing characteristics.
MAJOR DIFFERENCES BETWEEN PROCESS & JOB ORDER COSTING
PROCESS COSTING

 Homogeneous units pass through a series of similar process.

 Costs are accumulated by processing department.
 Unit costs are computed by dividing the individual departments’ costs by the equivalent
production.
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 The cost of production report provides the detail for the Work in Process account for
each department.
JOB ORDER COSTING

 Unique jobs are worked on during a time period.

 Costs are accumulated by individual job.
 Unit costs are determined by dividing the total costs on the job cost sheet by the
number of units on the job.
 The job cost sheet provides the detail for the Work in Process in account.
In job costing, costs are accumulated for each job or batch produced. In process costing, cost
are accumulated by department for an accounting period (for example, a month).
CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
A. Manufacturing costs/product costs
1. Direct Materials
2. Direct Labour
3. Factory Overhead
B. Non-manufacturing costs/period costs
1. Marketing or selling expense
2. General or administrative expense
II. Costs classified as to variability
A. Variable costs
B. Fixed costs
C. Mixed costs
III. Costs classified as to relation to manufacturing departments
A. Direct departmental charges
B. Indirect departmental charges
IV. Costs classified to their nature as common or joint
A. Common costs
B. Joint costs
V. Costs classified as to relation to an accounting period
A. Capital expenditures
B. Revenue expenditures
VI. Costs for planning, control, and analytical processes
A. Standard costs
B. Opportunity costs
C. Differential costs
D. Relevant costs
E. Out-of-pocket costs
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F. Sunk costs
G. Controllable costs
MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS
Direct Materials are materials that become part of finished product and can be conveniently
and economically traced to specific product units. The costs of these materials are direct costs.
These minors’ materials and other production supplies that cannot be conveniently or
economically traced to specific products are accounted for as indirect materials.
Indirect materials costs are part of factory overhead costs.
Direct labour are labour services, in essence, purchased from employees working in the factory.
Direct labour costs include all labour costs for specific work performed on products that can be
conveniently and economically traced to en products.
Labour costs for production related activities that cannot be conveniently and economically
traced to end products are called indirect labour costs.
Direct labour plus direct materials = PRIME COSTS
Direct labour plus factory overhead = CONVERSION COSTS
Factory Overhead costs are a varied collection of production-related costs that cannot be
practically or conveniently traced directly to end products.
Indirect materials and supplies: nails, rivets, lubricants, and small tools.
Indirect labour costs: lift-truck driver’s wages, maintenance and inspection labour,
engineering labour, machine helpers, and supervisors.
Other indirect factory costs: building maintenance, machinery and too maintenance, property
taxes, property insurance, pension costs, etc.
NON-MANUFACTURING COSTS/PERIOD COSTS
Marketing or selling expenses include all costs necessary to secure customer orders and get
the finished product or service into the hands of the customer. Ex. Sales travel, sales salaries,
shipping, etc.
Administrative expenses include all executive, organizational, and clerical expenses that cannot
logically be included under either production or marketing. Ex. Executive compensation, general
accounting, secretarial, etc.
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COSTS CLASSIFIED AS TO VARIABILITY

Fixed costs – items costs which remain constant in total, irrespective of the volume of
production.

 Committed fixed costs – costs that represents relatively long term commitments on the
part of management as a result of a past decision. Ex. Depreciation on equipment
 Managed fixed costs – costs that are incurred on a short-term basis and can be more
easily modified in response to changes in management objectives. Ex. Advertising
Variable costs – items costs which vary directly, in total, in relation to volume of production.
Mixed costs – items costs with fixed and variable components.
Semi-variable costs – the fixed portion of a semi-variable cost usually represents a minimum
fee for making a particular item or service available.
Step costs – the fixed part of step costs changes abruptly at various activity levels because
these costs are acquired in indivisible portions.
Common costs – costs of facilities or services employed in two or more accounting periods,
operations, commodities, or services.
Join costs – costs of materials, labour, and overhead incurred in the manufacture of two or
more products at the same time.