Chapter 2

Managerial Accounting, Cost terminologies

and classifications
 Introduction

• Cost Accounting is accounting for cost aimed at providing cost data,

statement and reports for the purpose of managerial decision making.

• Costing involves classifying, recording and appropriate allocation of

expenditure for the determination of costs of products or services
 Objectives of cost Accounting

• Determining selling price

• Controlling cost
• Providing information for decision-making
• Ascertaining costing profit
• Helps in estimates
• Facilitating preparation of financial and other statements
Financial and Managerial Accounting
Areas of Comparison Financial Accounting Managerial Accounting
Users of information External Internal
Type of accounting system Double entry No restriction
Guideline GAAP/IFRS No formal guideline
Unit of measurement Historical Monetary unit Any useful monetary (historical and
future) or physical measure
Focal point for analysis Business entity as a whole Various segments of the business entity.

Report Summarized report; concerned primarily Detailed report; concerned about details of
with the entity as a whole parts of the entity’s products, departments,
territories

Frequency of reporting Periodical on a regular basis When ever needed; may not be on a
regular basis
 Cost Terminologies
⇗Cost
⇗Expense
⇗Loss
⇗Cost object
⇗Cost driver
⇗Cost accumulation
⇗Cost allocation
⇗Cost management
Importance of knowledge of cost terms

Preparation of financial statement

 Cost classification

.
•. Past Period
Time Accounting
period Treatment Product
Future

Capital
Manufacturing
Managemen Selling Traceabil Direct
t function ity
Administration Indirect
 Cost classification

.
•. Controllable
Fixed Managerial
Cost behavior influence
Variable Non controllable

Relevant
Committed
Decision Commitment
significance Programmed
Irrelevant
Financial Statement for a Manufacturing Organization

In balance sheet preparation, there is no difference between

manufacturing and merchandising business enterprises except
inventory section

Income statement preparation of manufacturing companies,

however, is different from merchandising business
Terms used in income statement preparation

• Prime costs
• Conversion costs
• Direct material used
• Cost of goods manufactured
• Cost of goods sold
• Income statement
 Schedule of Direct Materials Used in Production

Beginning direct material inventory XX

Add: Purchase in the period XX
Direct material available for use XX
Less: Ending direct material inventory (XX)
Cost of direct material used XX
 Cost of Goods Manufactured

Work in process at the beginning----------------------- XX

Add: Cost of direct material used -------------XX
Direct labor cost --------------------------XX
Manufacturing over head cost -----------XX
Cost incurred in current period ----------------------- (XX)
Total cost incurred to date ------------------------------ XX
Less: Work in process ending ---------------------------XX
Cost of goods manufactured ----------------------------XX
 Cost of Goods Sold

Finished goods beginning --------------------- XX

Add: Cost of goods manufactured ------------XX
Cost of goods available for sale -------------- XX
Less: Finished goods ending ---------------- (XX)
Cost of Goods Sold -----------------------------XX
 Income Statement

Revenues XX
Cost of goods sold XX
Gross profit XX
Operating expenses (XX)
Operating income XX
 Illustration

Assume that the direct material inventory of ABC furniture factory amounts to Br.
248, 000 at the beginning of the year i.e., as of June 1, 2019. Purchase of direct
material amounting Br. 440,000 was made and freight cost of Br.3, 200 is incurred
during the year, and the amount of direct materials inventory at the end of the
year is Br. 234, 900. Further, assume that the factory has beginning work in
process of Br. 220,000 and ending work in process of Br. 263,200.
The direct labor cost incurred in the year is Br.875, 000 and the different manufacturing
overhead costs incurred during the year are given below:

Indirect labor Br.98, 600

Depreciation on factory equipment 44,600
Light and power 43,600
Depreciation of factory building 12,000
Insurance expense on factory properties 9,500
Property tax 19,500
Factory supplies 9,900
Total manufacturing overhead cost Br.237, 700

Assume also that the finished goods inventory at the beginning of the year was Br. 314,000 and
the ending inventory of finished goods is Br.364, 000 for the factory. If the sales amount for
the factory is Br.3, 600,800 and the operating expense is Br.1, 500,000, prepare income
statement of the factory as of June, 2019.
 Raw Materials used Schedule

Beginning direct materials Inventory   Br.248,000

Add: Total cost of direct material purchased    

Direct Materials purchased Br.440,000  

Freight in 3,200 443,200

Direct material available for use   Br.691,200

Deduct: Ending direct material inventory   234,900

Cost of Direct materials used   Br.456,300

 Cost of goods Manufactured

Beginning Work in process   Br.220,000

Add: Cost of direct material used Br.456,300  

Direct labor cost 875, 000  

Manufacturing overhead cost 237, 700  

Cost incurred in current period   Br.1,569,000

Total cost incurred to date   Br.1,789,000

Ending work in process   (263,200)

Cost of goods manufactured   Br. 1,525,800

 Cost of goods sold

Finished Goods Beginning Br.314,000

Add: Cost of goods manufactured 1,525,800

Cost of goods available for sale 1,839,800

Finished Goods Ending 364, 000

Cost of Goods sold Br. 1,475,800

 Income statement

ABC Furniture Factory

Income Statement
For the year ended June 30, 2019

Sales revenue Br.3,600,800

Cost of Goods sold ( 1,475,800)
Gross profit 2,125,000
Operating expenses (1, 500,000)
Operating Income Br.625,000
Example 2 : The following information has been taken from the accounting records of ABC Corporation
for last year

• Selling expenses ................................................... 140,000

• Raw materials inventory, January 1 .......................90,000
• Raw materials inventory, December 31 ................60,000
• Direct labor cost .....................................................150,000
• Purchases of raw materials ...................................750,000
• Sales ...................................................................... 2,500,000
• Administrative expenses ........................................270,000
• Manufacturing overhead ........................................640,000
• Work in process inventory, January 1 .................... 180,000
• Work in process inventory, December 31 .............. 100,000
• Finished goods inventory, January 1 ..................... ..260,000
• Finished goods inventory, December 31 ............... ..210,000
 Required

1. Direct material schedule

2. Cost of goods manufactured schedule

3. Cost of goods sold schedule

4. Income statement schedule

 Product costing methods

1. Job order Costing

2. Process Costing
Similarities & Difference between Process & Job order Costing
Similarities between job order costing & process costing

• The same basic purposes exist in both systems, which are to assign
material, Labor, and overhead cost to products and to provide a
mechanism for computing unit cost
• Both systems maintain and use the same basic manufacturing account
including manufacturing overhead, raw material, work in process and
finished goods.
• The flow of costs through the manufacturing accounts is basically the
same in both systems
 Questions and/or Comments?
.