Cost Accounting Reviewer RELATIONSHIP OF COST ACCOUNTING TO

COST ACCOUNTING FUNDAMENTALS OTHER FIELDS OF ACCOUNTING

WHAT IS COST?
 COST can be defined as “an exchange price” or
“anything of value forgone or sacrificed to attain an
objective”.
 Costs are normally referred to as
expenses. However, there are expenditures that are
classified initially as assets and then later charge to
expenses once used or expired.
 Every expense is a cost but not every cost is an
expense.
WHAT IS COST ACCOUNTING
COST ACCOUNTING is a rational procedure to
accumulate costs and relate such costs to specific
products or services and departments to effectively
develop, implement and evaluate a strategy.
 Accumulating costs is the way that costs are COST ACCOUNTING SYSTEMS
measured and recorded. Accumulating costs
tells the company what was spent. A cost accounting system (also called product costing
 Assigning costs is the way that cost is linked system or costing system) is a framework used by
to some cost object. Assigning costs tells the firms to estimate the cost of their products for
company why the money was spent. profitability analysis, inventory valuation and cost
 Allocating costs means that an indirect cost control.
is assigned to a cost object by using a  Job Order Costing
reasonable and convenient method.  Process Costing
 Just In Time (JIT) Costing
IMPORTANCE OF COST ACCOUNTING  Back Flush Costing
 Activity Based Costing
Aids in price determination
 Helps in cost reduction
 Helps in inventory control Job Order Costing
 Facilitate elimination of wastage ➭is a cost accounting system that accumulates
 Assist in determination of responsibility manufacturing costs separately for each job. It is
 Aids in estimation and projection appropriate for firms that are engaged in production of
 Enables determining of break-even point unique products and special orders. For example, it is
 Assist in choosing among alternatives the costing accounting system most appropriate for an
event management company, a niche furniture
FINANCIAL AND MANAGEMENT producer, a producer of very high-cost air surveillance
ACCOUNTING system, etc.

Process Costing
➭is a cost accounting system that accumulates
manufacturing costs separately for each process. It is
appropriate for products whose production is a process
involving different departments and costs flow from
one department to another. For example, it is the cost
accounting system used by oil refineries, chemical
producers, etc.

Just In Time (JIT) Costing

➭is an inventory management method in which goods
are received from suppliers only as they are needed.
The main objective of this method is to reduce
inventory holding costs and increase inventory
turnover.

Backflush Costing
➭is a product costing approach, used in just-in-time
(JIT) operating environments, in which costing is
delayed until goods are finished.
Activity Based Costing (ABC)
➭involves the calculation of activity rate and application
of overhead costs to products based on their respective
activity usage.
COST TERMS, CONCEPTS AND CLASSIFICATIONS
COST TERMS USED IN MANAGERIAL
ACCOUNTING
• Cost Object
Anything for which cost is computed.
• Cost Driver
Any variable such as level of activity or volume
that usually affects costs over a period of time.
• Cost Pool
 A grouping of individual cost items, an account at
which a variety of similar costs are accumulated.
Activity
- An event, action, transaction, task, or unit of work
with a specified purpose.
• Value Adding Activities – activities necessary to
produce the products.
• Non-value Adding Activities – activities that do not
make the product or service more valuable to the
customer.
CLASSIFICATIONS AS TO TYPE OR TIMING OF
CHARGE AGAINST REVENUE
• Product Cost
 Cost incurred to manufacture a product.
• Period Cost
 The manufacturing cost that includes selling,
administrative, and research and development.
COST CLASSIFICATIONS AS TO FUNCTION
• Manufacturing Cost
 incurred in the factory to convert raw materials into
finished goods. It includes.
Direct Materials
Direct Labor
Factory Overhead
 Direct Materials + Direct Labor= Prime cost
 Direct Labor + Factory Overhead= Conversion cost
 Direct Material + Direct Labor + Factory Overhead
= Total Manufacturing cost
• Non-Manufacturing Cost
 Not incurred in transforming materials to finished
goods. These include selling expenses (such as
advertising costs, delivery expense, and
commission of salesmen) and administrative
expenses (such as salaries of executives and legal
expenses).
COST CLASSIFICATIONS AS TO
TRACEABILITY
• Direct Cost
 are those costs that can be easily and accurately
traced to a cost object.
• Indirect Cost
 are costs that cannot be easily and accurately
traced to a cost object.
COST CLASSIFICATIONS AS TO BEHAVIOR
• Variable Cost - are costs that change with a change
in the level of activity. Vary in total in
proportion to changes in activity.
• Fixed Cost - are costs that remain constant within a
certain level of output or sales. This certain limit
where fixed costs remain constant regardless of
the level of activity is called the relevant range.
• Mixed Cost - are costs that vary in total but not in
proportion to changes in activity. It basically
includes a fixed cost portion plus additional
variable cost.
CLASSIFICATIONS AS TO RELEVANCE TO
DECISION MAKING
• Relevant cost - cost that will differ under alternative
courses of action. In other words, these costs
refer to those that will affect a decision.
• Standard cost - predetermined cost based on some
reasonable basis such as past experiences,
budgeted amounts, industry standards, etc. The
actual costs incurred are compared to standard
costs.
• Opportunity costs - which are costs of a potential
benefit foregone in rejecting an alternative. For
example, the opportunity cost of going on a
picnic rather than working is the money that you
would have earned in working that time.
CLASSIFICATIONS AS TO RELEVANCE TO
DECISION MAKING
• Sunk costs - are those costs that have been
irreversibly incurred or committed; they may
also be termed unrecoverable costs.
• Differential costs - are cost items that vary in two or
more alternative choices which may be
incremental or decremental.
• Controllable costs - refer to costs that can be
influenced or controlled by the manager.
Segment managers should be evaluated based on
costs that they can control.
• Out-of-pocket costs - refer to costs requiring cash
outlay or disbursements.
COST BEHAVIOR: ANALYSIS AND USE MIXED COST
COST BEHAVIOR • A cost that has both variable and fixed components.
• Step variable costs have small steps and fixed costs
Cost behavior is the manner expenses are impacted by
have large steps
changes in business activity
• a mixed cost does not fluctuate in direct proportion to
It is an indicator of how a cost will change in total
changes in activity nor does it remain constant with
when there is a change in some activity
changes in activity.
COST BEHAVIOR AS TO CLASSIFICATION
 Cost behavior is valid within the relevant range.
• Relevant range - It is the assumed range of
activity that reflects the company’s normal
operating range.
• The two most common cost behavior are
variable and fixed.
VARIABLE COST

• A cost that varies in total in direct proportion to

changes in activity.
• Unit variable cost is constant.

METHODS OF SEPARATING MIXED COST

Cost Formula

FIXED COST

• A cost that remains constant within the relevant range

of activity.
• Unit fixed cost is inversely proportional to changes in
activity.
Scatter Graph Method

• is a visual representation of the cost and activity data

associated with an expense.
• Uses a graphical solution in separating mixed costs
• It is used to determine the relationship between 2
variables
 X variable is the independent variable
 Y variable is the dependent variable
• Illustration
• Process of Computing Using Scatter Graph
1. Plot the data point in the graph
2. Plot in the graph the regression line
3. Determine the presence of fixed cost (the one
that intercept with Y axis is the assumed fixed
cost)
4. Compute for the slope of the line which is the
assumed unit variable cost

5. Use the y-intercept formula to check the answer.

 High Low Method
 Analyzes the mixed cost by first selecting 2
observation points in a data set: highest and lowest
level of activity, if these points are within the relevant
range.
 Outliers which those nonrepresentative or abnormal
observations are considered outside the relevant
range.

Regression Method

• Also called the “Least Squares Regression Method.”

• Fixed costs and variable costs are determined
mathematically through a series of computations.
• The most accurate method in segregating mixed
costs.
• Follows the cost function: y = a + bx
 Illustration
• Process of Computing Using Regression Least
Squares
1. Compute the slope (b) or the variable cost per
unit

2. Solve for the fixed cost