Parts of Cost Accounting

System
“A Diagrammatical Presentation”
 Cost Accounting System

Costing Cost Cost Flow Inventory

Costing Method
Technique Accumulation Assumption System

Actual or Specific
Full Costing Job Order Perpetual
historical Identification

Standard Variable Costing Process FIFO Periodic

Normal Uniform Costing Backflush LIFO

Activity Based
Throughput Average
Costing
Ref. Integrated Cost Accounting by Flores
Understanding and Classifying costs
• Pre – requisite to “Profit Modelling”
• Essential in achieving the goal (maximize wealth) of the business.
• Reach the objective (reduce cost and increase profit) of the business.
• What is cost?
• Product cost vs. period cost
• Direct product cost vs. Indirect products costs
• Relevant cost vs. Irrelevant costs
• Manufacturing vs. Non – manufacturing costs
• Variable cost vs. Fixed costs
Understanding and Classifying costs
• Direct segment costs vs. Indirect segment costs
• Avoidable cost vs. Unavoidable cost
• Controllable vs. Uncontrollable cost
• Planned cost vs. Actual costs
• Budgeted costs vs. Standard costs
• Out-of-pocket costs vs. Non-cash costs
• Sunk costs vs. Future costs
• Explicit costs vs. Implicit costs
• Opportunity costs vs. Imputed costs
• Incremental costs vs. Marginal costs
 Profit Modelling
Variable & Absorption Costing
(A costing technique)
Our Concern . . .
• To achieve the company’s objective
• Increase in profit is increase in wealth…

How. . . ?
• Management
• Management techniques…
• Profit modelling is a pre-requisite…
• Absorption (Full) costing vs. Variable (Direct or CM approach) Costing
Absorption Costing – the proforma
Sales P xx
Less: Cost of goods sold xx
Gross profit P xx
Less: Expenses xx
Profit P xx
Variable Costing – the proforma

Sales P xx
Less: Variable COGS xx
Manufacturing margin P xx
Less: Fixed FOH xx
Variable S & A xx
Fixed S & A xx
Profit P xx
Variable Costing vs. Absorption Costing
COST AND EXPENSES ABSORPTION COSTING VARIABLE COSTING
Direct materials Product cost Product cost
Direct labor Product cost Product cost
Variable overhead Product cost Product cost
Fixed overhead Product cost Period cost
Variable expenses Period cost Period cost
Fixed expenses Period cost Period cost
Product cost vs. Period cost
 Product costs follow the units while the period costs
are expensed outright;
There will be difference in the cost of goods sold and
the inventory cost;
Formulas
Sales = Quantity sold x Unit sales price
Variable cost of goods sold = Quantity sold x Unit variable cost
Variable cost of goods manufactured = Quantity produced x Unit variable cost
Variable expenses = Quantity sold x Unit variable expenses
Standard fixed overhead rate = Budgeted fixed overhead*
Normal Capacity
Standard fixed expenses rate = Budgeted fixed expenses*
Normal Capacity

* If actual cost is given, then it must be used instead of budgeted costs.

Simplified Rules:

If production = sales, then AC = VC;

If production > sales, then AC > VC;
If production < sales, then AC < VC.
Normal Capacity vs. Actual Production
• It refers to “volume variance”;
• Either Unfavorable (UF) or favorable (F);
• Applicable only to absorption (full) costing;
• UF is added to COGS while F is deducted from COGS;
• Normal Capacity – means the average level of production over a long
range of time.
Advantages
• Enabling CVP Analysis
• Explaining changes in net operating income
• Supporting decision making
• Pricing decisions
• Assess segment performance
Segmented Income Statements - proforma
Segment sales P xxx
Segment variable costs (xxx)
Segment CM P xxx
Traceable fixed cost (xxx)
Segment margin P xxx

Note: Common fixed cost is not allocated.

Things to remember
• Test whether traceable or common: disappearance of cost when
segment is disappeared.

• Segment margin is the best gauge of the long run profitability of a

segment.

• Segment may either be a division, a product line, or sales channels

References
• Management Services, 2014 Edition, Franklin Agamata