COST ACCOUNTING & CONTROL

Chapter 2: Cost Terms, Concepts and Classifications

Chapter 1: Cost Accounting Fundamentals

Accounting System Cost

- value foregone or sacrifice of resources for the purpose of achieving some
Financial Accounting Management Accounting
economic benefit which will promote the profit-making ability of the firm.
- External users - Internal users
- Standard basis (IFRS) - No standard - Incurred when a resource is used for some purpose
- Focuses on the past - Focuses on the future - outlay or expenditure of money to acquire goods and services that assist in
performing operations
* Reports such as balance sheets, income statements, and statements of cash
flow are common to both financial accounting and management accounting. Costing System (2 basic steps)
a. Cost Accumulation - overall cost
Cost Accounting b. Cost Assignment - assigning specific product
- subfield of accounting that records, measures, and reports information about
Cost Pools
costs
- Cost collected into meaningful groups
- sacrifice of resources and generally represented in the accounting system by
- cost pools may be classified
outlay of cash or promises to pay cash in the future or the expectation of the
(1) by type (material, labor, overhead)
value of an asset
(2) by source (departments)
- Provides information to management accounting and financial accounting
(3) by responsibility (managers)
- measures and reports financial and other information related to the
organization’s acquisition and consumption of resources Cost Object
. - any product, service or organizational unit to which costs are assigned for
Costing System (2 basic stages) some management purpose.
a. Cost Accumulation > product and service = cost object
- involves collection of cost data (example: a book publisher that > manufacturing departments = cost object / coast pools
purchases rolls of newsprint for printing books accumulates the - examples: program, activity, product, service, etc.
cost individual rolls bought n any one month to obtain the total
Cost Driver
monthly cost of a paper)
- any factor that has the effect of changing the level of total cost.

b. Cost Assignment
Cost Accumulation and Cost Assignment
- traces direct costs and allocates indirect costs to designed cost
● Cost assignment is the process of assigning costs to cost pools or from cost
objects (such as the different books the publisher publishes)
pools to cost objects
- this process enables the managers to calculate total costs unit costs
● Cost accumulation is the assignment of indirect costs to cost pools. Allocation
of products and service and use this information for pricing,
bases are cost drivers used to allocate costs.
product mix and cost management decisions

* Cost Accounting is no longer restricted to manufacturing companies. It is

now used in virtually every organization, including banks, schools, fast food outlets,
professional organizations, hospitals and government agencies.
 - expensed on the income statement in the period in which
Classification of Cost they are incurred
1. Nature or Management Function - not included as part of the cost of either purchased or
a. Manufacturing Cost manufactured goods
- “Inventoriable or Product cost”
- all the costs associated with production of goods 3. Cost on Financial Statements
➢ Statement of Financial Position
i. Direct Materials - all raw material costs that become an integral
● Merchandising
part of the finished product and that can be conveniently and
- Merchandise inventory - these are goods
economically assigned to specific units manufactured.
purchased from suppliers that are awaiting resale
ii. Direct Labor - labor costs related to time spent on products that
to customers.
can be conveniently and economically assigned to specific units
● Manufacturing
manufactured.
- Raw materials - used to make a product
iii. Manufacturing Overhead - all costs of manufacturing except
- Work in process - units of product that are only
direct material and direct labor
partially complete and will require further work
● Indirect materials
before they are ready for sale to a customer
● Indirect labor
- Finished goods - units of product that have been
● Other Manufacturing Overhead
completed but have not yet been sold to
* Direct Material + Direct Labor = Prime cost customers
* Direct labor + manufacturing overhead = conversion costs ➢ Income Statement
● Selling
b. Non- Manufacturing Cost ● Administrative
- “Non- inventoriable or Period Cost”
i. Marketing / Selling / Distribution Cost- all costs necessary to Income Statement
secure customer orders and get the finished product or service into Sales P xxx
the hands of the customer. Less: Sales Returns & Allowances P xxx
- also called order getting and order-filling costs Sales Discount xxx (xxx)
Examples: advertising, shipping, sales commissions and Net Sales P xxx
storage costs. Less: Cost of Sales (xxx)
Gross Profit P xxx
ii. Administrative Cost - for general purposes of the company
- includes all executive, organizational and clerical costs Less: Operating Expenses
Selling P xxx
Administrative xxx
Other xxx (xxx)
2. Timing of Recognition as Expense Net Income Pxxx
a. Product Cost - “inventoriable cost”
- assigned to an inventory account on the SFP
- Inventory - (once sold )- Cost of Sales (COGS)
b. Period Cost Cost of Sales
 business activity
Merchandise Inventory, beg. P xxx
Add: Net of Cost Purchases a. Variable Costs
Purchases P xxx - cost that change directly in proportion to changes in
Less: Purchases Returns and Allowances (xxx) activity (volume)
Purchases Discount (xxx) - Examples : direct material and direct labor
Net Purchases P xxx b. Fixed Costs
Add: Freight In xxx xxx - costs that remain unchanged for a given time period
Cost of Goods Available for Sale P xxx regardless of change in activity (volume).
Less: Merchandise Inventory, end (xxx) - Examples: rent, insurance on property, maintenance, and
Cost of Sales P xxx repairs of buildings, and depreciation of factory
equipment
c. Semivariable Costs or Mixed Costs
- costs that contain both fixed and variable elements
Cost of Goods Sold - Examples: social security taxes, materials handling,
Direct Materials, beg. P xxx personnel services, heat, light and power.
Add: Net of Cost Purchases
Purchases P xxx 5. Types of Inventory
Less: Purchases Returns and Allowances (xxx) a. Raw Materials Inventory
Purchases Discount (xxx) - cost of all raw material and production supplies that have
Net Purchases P xxx been purchased but not used at the end of the accounting
Add: Freight In xxx xxx period.
Direct Materials available for use P xxx b. Work-in-process Inventory
Less: Direct materials, end (xxx) - cost associated with goods partially completed at the end
Direct material used P xxx of the accounting period.
Add: Direct labor xxx c. Finished Good Inventory
Factory overload xxx 0 - cost of completed goods that have not been sold at the end
Total Manufacturing Cost P xxx of the accounting period
Add: Work in process, beg. xxx d. Merchandise Inventory
Cost of goods put into process P xxx - cost of purchased merchandise by retailers/ wholesalers
Less: Work in process, end. (xxx) that have not been sold at the end of the accounting
Cost of goods manufactured P xxxqa period.
Add: Finished good, beg. xxx
Cost of goods available for sale P xxx 6. Traceability to Cost Objective
Less: Finished good, end (xxx) a. Direct Costs ( traceable; separable)
Cost of Goods Sold P xxx - cost that can be economically traced to a single cost object
(i.e. product, department, or unit)
b. Indirect Costs
- cost that are not directly or easily traceable to the cost
object

7. Managerial Influence
a. Controllable Cost
- subject to significant influence by a particular manager
4. Cost Behavior - refers to how a cost will react or respond to changes in the within the time period under consideration
 b. Noncontrollable Cost 11. Decision Making and Other Analytical Purposes
- manager does not have a significant influence a. Relevant Costs
- impact in decision making
8. Planning and Control - future cost
a. Standard Cost (per unit) b. Incremental Costs
- predetermined cost estimate that should be attained - additional cost to determine the feasibility of this
- usually expressed in terms of costs per unit particular alternative
b. Budgeted Cost (total) - cost must be future cost and be different under various
- represent the expected/planned cost for a given period alternatives
c. Absorption Costing c. Sunk Costs
- includes all manufacturing costs (direct materials, direct - always irrelevant in decision making
labor, and both variable and fixed manufacturing - past costs
overhead) in the cost of a unit of product. d. Opportunity Costs
- also referred to as the full cost method. - sacrifice
d. Direct Costing / (Variable) e. Marginal Costs
- type of product costing where fixed costs are charged - same with incremental cost
against revenue as incurred and are not assigned to f. Value-Added Costs
specific units of product manufactures - production process
- also referred to as variable costing
e. Information Cost Chapter 3
- costs of obtaining information
f. Ordering Cost Cost Estimation
- increase with the number of orders placed for inventory The Analysis of Mixed Costs
g. Out-of-pocket Costs
❖ Account Analysis Method
- costs that must be met with a current expenditure or cash
- subjective
outlay.
- Accountant and Managers

9. Time Frame / Commitment to Cost

❖ Industrial Engineering Method or Work Measurement Method
a. Committed Cost (as is/ di na pede baguhin)
- subjective
- cost that is the inevitable consequence of a previous
- Industrial engineer
commitment
- step by step process
b. Discretionary Cost (programmed; managed cost) * pede pababain or
pataasin
❖ Conference Method
- the size or the time of incurrence is a matter of choice (not
- subjective
yet committed)
- various department of an organization
10. Period of Incurrence
a. Historical Cost (past costs) ❖ Quantitative Analysis of Current and Past Costs Relationships
- were incurred in a past period a. High- Low Method
- Financial accounting b. Regression Analysis Method
b. Future Cost i. Scattergraph or Visual fit Method
- budgeted costs that are expected to be incurred in a future ii. The Least Square Regression Method
period
- Cost Accounting