Introduction to Cost Accounting FINANCIAL ACCOUNTING VS.

MANAGEMENT
ACCOUNTING
Learning Objectives:
Comparison of Financial & Managerial Accounting
1. To understand the relationships between cost
accounting, financial accounting, and managerial Financial Accounting Managerial
accounting Accounting
2. Distinguish between merchandising and Definition Accounting is an Accounting system by
manufacturing operations. information system which information are
3. Identify the uses of cost accounting data. that identifies presented and
records and supplied to
Topics for Discussion communicates the management in
economic events of appropriate manner to
a. Cost Accounting definition
an organization to operate business
b. Comparison of Financial, Managerial and Cost interested user smoothly and
Accounting efficiently
c. Difference between Merchandising and User External persons Managers who plan
Manufacturing operations who make financial for and control and
d. Uses of Cost Accounting Data decision organization
e. Job Order VS Process Costing Time Focus Historical Perspective Future emphasis
Verifiability Emphasis on Emphasis on relevance
Notes from: Sir Chua’s Accounting Lessons PH vs. verifiability for planning and
LECTURE 01 Relevance control
Precision vs. Emphasis on Emphasis on
INTRODUCTION TO COST ACCOUNTING Timeliness precision timeliness
Subject Primary focus is on Focuses on segments
You should be able to: the whole of an organization
1. Define what cost accounting is, its nature and organization
purpose. GAAP Must follow GAAP Need not follow GAAP
and prescribed and prescribed
2. Differentiate financial accounting from
formats formats
management accounting.
Requirement Mandatory for Not mandatory
3. Explain the relationships between financial, cost,
external reports
and management accounting.
Definition
4. Explain the relationship of organizational
strategies and cost information. Financial Accounting – record keeping and then we’ll
5. Explain value chain activities. communicate the results of operations to interested users
of accounting information.
Definition of Cost Accounting
Managerial Accounting – the information is presented to
Cost Accounting  a branch of accounting that deals with
the management primarily for decision making.
the process of recording and summarizing the amount of
cost that is spent on the company’s activities. It includes all Para saan ang decision making?
costs of process, product, or service used, provided, and
 To operate the business smoothly and efficiently
sold.
User
(Magkano ang ginastos ng isang kompanya para mabuo
ang isang produkto – cost accounting) Financial Accounting - External persons who make
financial decision.
Labor Intensive Company/Operations– mas madaming
ginagamit na skilled laborers; talagang mga tao ang External users of Accounting Information
gumagawa ng product.
1. Government
Capital Intensive Company/Operations – more on 2. General Public
machines. 3. Owners and Prospective owners
4. Creditors and Lenders
5. Employees and their Unions
6. Customers
Managerial Accounting - Managers who plan for and
control and organization.
In order for an entity to operate well, we need managerial
accounting information; primarily managers and owners.
Time Focus
Financial Accounting – Historical; lahat ng business
transactions ay nirerecord. Ang lahat na narecord na
business transactions ay ittransform sa financial
statements (historical informations – kasi mga nangyari
iyon dati at sinummarized lang into financial statements)
Managerial Accounting – Future; kasi pin-plano, more on
planning and organizing things. Kaya ang emphasis ay
‘what would happen to the company in the future?’
Verifiability vs. Relevance
Financial Accounting – Verifiability – by using financial
statements you can verify the transactions that has
happened in the past or the financial statements that the
company has produced.
Managerial Accounting – Relevance – we’re using
managerial accounting for planning and control of future
business operations.
Precision vs. Timeliness
Financial Accounting – Precision on the recording – dapat
tama lahat ng nirerecord natin
Managerial Accounting – Timeliness – information that is
not timely anymore is not relevant in itself.
Subject
Financial Accounting – whole organization; we report
amounts and accounts in financial accounting aggregately
the company as whole the totality of the company.
Managerial Accounting – since managerial accounting is
being used by the owners and managers for decision
making for planning and control, they need to see the
details so that they can plan well. That’s why they focus on
the segment of the organization.
Generally Accepted Accounting Principles (GAAP)
Financial Accounting – must follow the GAAP.
Managerial Accounting – walang accounting standards na
sinusunod, walang prescribed formats. Basta
makakatulong ang informations sa company’s decision
making. But we shouldn’t violate GAAP, we are more
flexible on the format.
Requirement
Financial Accounting – requirement for external reports.
Managerial Accounting – hindi kailangan sa external
reports kasi ang managerial accounting information ay
parang ‘company’s secrets’
The Venn Diagram Overlap
Cost Accounting is the overlap in the financial accounting
and management accounting. Although financial
accounting and management accounting has differences
there is one similarity between them and that is the cost of
the product and service which is Cost Accounting.
ORGANIZATION STRATEGY AND COST INFORMATION
o A company formulates a mission statement – the
reason for the company’s existence.
o The development of the organization’s strategy
roots from its mission statement.
Organizational Strategy
 Is the plan of action on how the entity will attain
and realize its goals and objectives with the use
of their own resources that will be able to
contribute to the creation of VALUE both to
customers and shareholders.
o One of the ways an entity can attain competitive
advantage is through cost leadership – the ability
of an entity to provide the lowest prices in the
market through proper management of costs.
o Cost leadership differs from product
differentiation in the perspective of providing
unique products to be offered to the market
where prices can be allowed to be relatively
higher.
o To become a cost leader. Costs shall be managed
well.
o In order for costs to be managed well, COST
ACCOUNTING information is now of paramount
importance – the entity’s cost accountants now
play a vital role in the value creation process of
the entity.
 o Properly managed costs > lowers costs of COST TERMINOLOGIES
production > lower prices > cost leader > more
As to classification in the Financial Statement:
people will buy > added value to the entity.
 Product Costs
What about value?
- Materials
o A value chain is a set of activities an entity - Labor
applies to be able to deliver a valuable - Overhead
product to customers.  Period Costs
o Value chain is a set of activities or functions
As to behavior:
that allows the conversion of inputs into
useful products and services.  Variable cost
 Fixed cost
 Mixed cost
 Step cost

Other terminologies:

 Opportunity cost
1. Research and Development – analysis, testing,
 Sunk cost
and studying of different methodologies of cost
 Committed cost
reduction or quality improvement.
 Discretionary cost
2. Design – creation and development of product
 Controllable cost
and service design fit for the market.
 Noncontrollable cost
3. Supply - proper management of raw materials
inventory coming from suppliers. Methods of separating mixed costs:
4. Production - the process of acquisition and
construction of company resources to create  High-low method
products and services.  Least squares regression method
5. Marketing – promotions made by an entity to Definition of Cost
make the product or service attractive in the
market. A cost reflects the amount of resources sacrificed in order
6. Distribution – process of delivery of products and for the company to achieve a certain objective such as
services to customers. creation of goods or rendering of services in order to earn
7. Customer Service – after-sales support for revenues.
customers. FINANCIAL STATEMENT CLASSIFICATION

Product Costs are costs identified and incurred by an

LECTURE 02 entity to manufacture a product. It includes all raw
materials used, labor costs incurred, and all other indirect
COST CONCEPTS, TERMINOLOGIES, AND BEHAVIOR costs.
You should be able to: It has three components.
1. Differentiate product costs from period costs. 1. Materials – all raw materials and other supplies
2. Enumerate and explain the components of used in the manufacturing process.
product costs.  Direct materials – (yung mismong materials na
3. Differentiate direct costs and indirect costs. doon gawa yung product)
4. Explain the different kinds of costs according to e.g., lightbulb manufacturing, gagastos para
their behavior. bumili ng glass. So ang cost of direct material is
5. Separate mixed costs using the high-low method. yung pinambili ng glass.
6. Separate mixed costs using the least square  Indirect materials – (those you cannot really trace
regression method. it into the product, but it’s still needed in order
7. Define other cost terminologies. for you to finish the processing of the product.
e.g., glue, oils, nails, screws, and the like.
 2. Labor – salaries and other benefits provided to all COST BEHAVIORS
workers. (lahat ng ginagastos para magpasahod
1. Variable Costs
ng trabahador)
They are costs that change as the quantity of the
 Direct Labor – cost of salaries paid to laborers of
goods produced changes. Total amount of
furniture associated directly in the process.
variable costs is dependent to the level of
 Indirect Labor – salaries paid to all other factory
production.
personnel necessary in the manufacturing
(Mataas kapag mataas ang production, Mababa
process but is not directly related in the
kapag mababa ang production)
conversion process.
3. Overhead – all indirect costs necessary to Examples:
product conversion that are not direct materials
and direct labor.  Cost of materials
 Indirect materials  Cost of direct labor computed per piece.
 Indirect labor 2. Fixed Costs
 Depreciation of equipment in the factory At whatever level of production within the
 Insurance of factory plant relevant range, this cost does not change. It is
 Maintenance and repairs of equipment independent of the level of production.
 Factory utilities (Mataas kapag mababa ang production, Mababa
kapag mataas ang production)
Components of Product Costs
Examples:
1. Direct materials
2. Direct labor  Rent of facilities
3. Overhead  Depreciation of equipment

Prime Cost – Direct Materials and Direct Labor (sila ang Variable Costs Fixed Costs
Constant on a per-unit Constant when presented
pinaka-kailangan para mabuo ang isang produkto)
basis as a total
Conversion Cost – Direct Labor and Overhead (kailangan Varies when presented as Varies on a per unit basis
ang labor para maconvert ang produkto at kailangan ang a total
all other indirect costs para mabuo rin ang isang
produkto)
Example
Prime Cost + Overhead = TOTAL MANUFACTURING COST
Assume an entity’s normal manufacturing process with a
Direct Materials + Conversion Cost = TOTAL range of 5,000 to 7,000 units of goods with a variable cost
MANUFACTURING COST per unit of P20 and P15,000 fixed costs.

BUT NEVER EVER SAY THAT PRIME COST + CONVERSION VC/unit Total Variable Costs
COST = TOTAL MANUFACTURING COST. (kasi madodoble At 5,000 units P 20 P 100,000
ang amount ng labor) At 6,000 units P 20 P 120,000
At 7,000 units P 20 P 140,000
Direct Materials + Direct Labor + Manufacturing
Overhead = Total Manufacturing Cost
Fixed Costs FC/unit
Period Costs the entity’s operating expenses. They are At 5,000 units P 15,000 P 3.00
called as such since they are much more associated with At 6,000 units P 15,000 P 2.50
time periods rather than the manufacturing process. They At 7,000 units P 15,000 P 2.14
are all other expenses not related to manufacturing.

 Marketing and Advertising – expenses incurred

in promoting the entity’s products and services.
 Selling and Distribution – they include salaries of
sales personnel, and delivery expenses.
 Administrative Expenses – they include office
utilities, depreciation of office PPE, repairs and
maintenance of office PPE, and all other
expenses in the office.
 COST EQUATION SEPARATING MIXED COSTS

y = a + bx In separating mixed costs, there can be two methods to

be used:
y = total cost
 High-low method
a = total fixed cost
 Least squares regression method
b = variable cost per unit

x = volume of activity
HIGH-LOW METHOD
Example:
Jimin Corporation builds tabletop replicas of some of the
How much is the total cost to manufacture products with most famous tourist attractions in Seoul. The company is
a variable manufacturing cost per unit of P25 and total highly automated where maintenance costs shows as a
manufacturing fixed cost of P40,000 at the following significant expense. The owner decided to use the
production levels: machine hours as the basis of predicting maintenance
costs and has gathered the following data for the
a. 2,000 units following weekly operations.

y = a +bx Week Machine hours Maintenance cost

y = 40,000 + (25) (2,000) 1 3,000 9,800
y = 40,000 + 50,000 2 4,500 12,900
y = 90,000 3 8,000 18,100
4 6,000 13,500
b. 4,500 units 5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
y = a +bx
8 7,000 16,000
y = 40,000 + (25) (4,500)
y = 40,000 + 112,500
y = 152,500 Using the high-low method, determine the following:

c. 7,250 units a. Variable cost per unit

b. Total fixed cost
y = a +bx c. Total expected maintenance cost on 8,200
y = 40,000 + (25) (7,250) machine hours.
y = 40,000 + 181,250
y = 221,250
Step 1: Determine the highest and lowest activity and the
COST BEHAVIOR costs associated thereunto.
1. Mixed Costs – refers to costs that has both Week Machine hours Maintenance cost
variable and fixed components. 1 3,000 9,800
Examples: utilities since these are charged with a 2 4,500 12,900
base amount and goes higher with any usage 3 8,000 18,100
over the base amount. 4 6,000 13,500
2. Step Costs – costs that are constant on a certain 5 9,000 24,800
level of activity but increases on another certain 6 3,500 10,400
level of activity. 7 5,500 13,000
Examples: 8 7,000 16,000
 Salaries and commission of agents that goes
higher with different ranges of activity e.g.
people served.
Step 2: Obtain the variable cost per unit by dividing the LEAST SQUARES REGRESSION METHOD
change in cost over the change in activity.
Jimin Corporation builds tabletop replicas of some of the
most famous tourist attractions in Seoul. The company is
highly automated where maintenance costs shows as a
significant expense. The owner decided to use the
machine hours as the basis of predicting maintenance
costs and has gathered the following data for the
following weekly operations.

Week Machine hours Maintenance cost

1 3,000 9,800
2 4,500 12,900
3 8,000 18,100
4 6,000 13,500
5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
Step 3: Obtain the total fixed costs by removing the
8 7,000 16,000
variable cost component in the total costs.

Using the least squares regression method, determine the

following:

a. Variable cost per unit

b. Total fixed cost

Step 1: Prepare a table calculating x (activity), y (total cost),

xy, and x2.

How much is the total maintenance cost at 8,200 machine

hours?

y = a + bx

y = 2,300 + (2.50) (8,200)

y = 2,300 + 20,500

y = 22,800

Step 2: Substitute the computed amounts in the following

equation to get VC/unit.
Step 3: Substitute b to any equation to get a (fixed cost)

Let’s Compare

HLM LSRM
Variable Cost per unit P 2.50 P 2.15
Total fixed cost P 2,300.00 P 2,315.63

Masasabi raw na tama ang computation kapag malapit

naman yung amount ng results nung dalawang method.

OTHER COST TERMINOLOGIES

 Opportunity Cost – benefits foregone in choosing

one action over another.
 Sunk Cost – cost incurred that will not affect a
future decision.
 Committed Cost – costs resulting from
organizational structure or use of facilities.
 Discretionary Cost – costs arising from
managerial decisions.
 Controllable Cost – costs that are able to be
influenced on how much shall be spent.
 Noncontrollable Cost – costs that cannot be
controlled or influenced.