Introduction to

Cost Accounting,
Cost Concepts,
Terms and
Behavior
Learning Objectives
LO1 Explain the uses of cost accounting information
LO2 Describe the relationship of cost accounting to financial and
management accounting.
LO3 Define what is cost and cost object
LO4 Explain how cost is presented in the financial statements
LO5 Enumerate cost classifications
LO6 Explain cost function and its behaviour
LO7 Analysis of the mixed costs
LO8 Introduce the different cost accounting systems
USES OF COST ACCOUNTING

Cost accounting is the art and science of recording, classifying,

summarizing, and analyzing costs with the objective of cost control,
cost calculations and projections, and cost reduction, thereby helping
management make prudent business decisions.
USES OF COST ACCOUNTING
(Determining Product Costs and Pricing)
Unit cost information is also useful in making important marketing
decisions such as:
1. Determining the selling price of a product
2. Meeting competition
3. Bidding on contracts
4. Analyzing profitability
PLANNING AND CONTROL

Planning is the process of establishing objectives or goals for the firm

and determining the means by which they will be met. Effective
planning is facilitated by the following:
1. Clearly defined objectives of the manufacturing operation
2. A production plan that will assist and guide the company in
reaching is objectives
PLANNING AND CONTROL

Control is the process of monitoring the company’s operations and

determining whether the objectives identified in the planning
process are being accomplished. Effective control is achieved as
follows:
1. Assigning Responsibility
2. Periodically Measuring and Comparing Results
3. Taking Necessary Corrective Actions
Relationship of Cost Accounting to
Financial and Management Accounting

Financial Accounting focuses on gathering historical financial

information to be used in preparing financial statements that meet
the needs of investors, creditors, and other external users of financial
information.
Management Accounting focuses on historical and estimated data
that management needs to conduct ongoing operations and do long-
range planning.
Cost Accounting includes those parts of financial and management
accounting that collect and analyze cost information.
 Relationship of Cost Accounting to
Financial and Management Accounting

Financial Management
Cost
Accounting Accounting
(For Inventory costing
Accounting (For special reports to
purposes in the FS) (Product Cost Information) management for decision-
making purposes)
What is a cost?

– Cost is a sacrifice of resources.

– The monetary measure of the amount of
resources given up or used for some purpose.
– The monetary value of goods and services
expended to obtain current or future benefits.
Cost Terms used in Management
Accounting
• Cost object
- anything for each a 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 in 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
▪ Non-value-adding Activities
Presentation of cost in the
Financial Statements
Presentation of cost in the
Financial Statements
Presentation of cost in the
Financial Statements
Presentation of cost in the
Financial Statements
Practice

Cost of goods sold is a component of the income statement. In a

merchandising establishment, this refers to purchases adjusted for
changes in inventory. In a manufacturing company, what replaces
purchases to arrive at cost of goods sold.
a. Fixed mfg. overhead.
b. Work In Process
c. Finished Goods
d. Cost of Goods Manufactured
Distinguished Costs with Expense
and Loss

Cost Expense Loss

Cost is a sacrifice An expired cost A cost that expires
of resources. that has given a without producing
Outlay Cost: Past, benefit. any revenue or
present, or future Cost charged benefit.
cash outflow or against revenue in
Opportunity Costs: an accounting
Forgone benefit period.
from the best
alternative course
of action
Practice

An opportunity cost is
a. The difference in total costs which results from selecting one
choice instead of another.
b. A cost that may be shifted to the future with little or no effect on
current operations
c. A cost that may be saved by not adopting an alternative
d. The profit foregone by selecting one choice instead of another.
Classification of Costs

According to when cost is charged against income

Product costs: (Matching principle)
– Costs that are recorded as an asset in inventory when
incurred and expensed as Cost of Goods Sold when sold
Period costs: (Accrual method)
– Costs recognized for financial reporting when incurred
Product Costs Versus Period Costs

Product costs include direct Period costs include all selling

materials, direct labor, and costs and administrative
manufacturing overhead. costs.
Expense
Inventory Cost of Good
Sold

Sale

Balance Income Income

Sheet Statement Statement

2-
 Classification of Costs

According to traceability of cost to cost object

Direct costs:
– Costs that, for a reasonable cost, can be directly traced to the product.
Direct materials: Materials directly traceable to the product
Direct labor: Work directly traceable to transforming materials into the
finished product
Indirect costs:
– Costs that cannot reasonably be directly traced to the product.
Manufacturing overhead: All production costs except direct materials and
direct labor.
Indirect materials, Indirect labor, and Other indirect costs.
Classification of Costs

According to production
Prime costs:
– The “primary” costs of the product
– Direct materials, Direct labor
Conversion costs:
– Costs necessary to “convert” materials into a product
– Direct labor and Manufacturing overhead
Classification of Costs

According to functional classification

– Non-manufacturing Costs: Recognized as expenses when the costs
are incurred
– Marketing and/or Advertising: Costs necessary to sell the products
– Administrative: Costs necessary to operate the business
– Sales commissions
– Shipping costs - Data processing
– Executive salaries - Legal costs
 Practice

Classification of Costs. Place a check mark in the appropriate column to indicate

the proper classification of each of the following costs.
      Other    
      Indirect   Administ
  Indirect Indirect Factory Marketing rative
Item Materials Labor Costs Expenses Expenses
Factory heat, light, and power /
Advertising /
Wages of stockroom clerk /
Freight out /
Oil for machines /
Salary of vice president of human relations /
Legal expenses /
Salary of the factory manager /
Employer payroll taxes on controller's salary /
Idle time due to assembly line   /      
breakdown
Practice
Determination of per Unit Total Costs. The estimated unit costs for
Hoteling Industries, when operating at a production and sales level of
10,000 units, are as follows:
  Cost Item Estimated Unit Cost
Direct materials P15
Direct labor 10
Variable factory overhead 8
Fixed factory overhead 5
Variable marketing 4
Fixed marketing 3
Required:
(1) Identify the estimated conversion cost per unit. DL + FOH = 23
(2) Identify the estimated prime cost per unit. DM + DL = 25
(3) Compute the Product Cost. DM + DL + FOH = 38
(4) Compute the Period Cost. 4 + 3 = 7
Practice

Components of Manufacturing Cost. Myerson Inc. produces video cameras. The

direct labor cost of one camera is P200, and the total manufacturing cost is P650.
The overhead cost of one camera is two-thirds as large as its conversion cost.
  Required: Solution:
DM ?
 (1) Compute the conversion cost per unit. 600
DL (1/3 of CC) 200
(2) Determine the factory overhead cost per unit. 400
FOH (2/3 of CC) ?
(3) Determine the direct materials cost per unit. 50 TMC 650
Cost Accounting Process

1. Cost Accumulation
2. Cost Allocation or Cost Assignment
– It is the process of assigning indirect costs to products,
services, business units, etc.
Methods of cost assignment to cost object
a. Direct tracing
b. Driver tracing
c. Allocation
Cost Behavior

– Cost behavior: How costs respond to a change in

activity level within the relevant range.
– Relevant range: Activity levels within which a given
total fixed cost or unit variable cost will be unchanged.

Note: Cost behavior is assumed to be on short-run

because over the long run all costs will change.
The Activity Base (also called a cost driver)

Units Machine
produced hours

A measure of what
causes the
incurrence of a
variable cost

Miles Labor
driven hours
Cost Behavior
Variable Cost

Your total texting bill is based on how many

texts you send.
Total Texting Bill

Number of Texts Sent

Variable Cost Per Unit
The cost per text sent is constant at
P1 per text.

Cost Per Text Sent

Number of Texts Sent
Fixed Cost
Your monthly contract fee for your cell phone is fixed for the number of
monthly minutes in your contract. The monthly contract fee does not change
Monthly Cell Phone based on the number of calls you make.
Contract Fee

Number of Minutes Used

Within Monthly Plan
2-
 Fixed Cost Per Unit
Within the monthly contract allotment, the average fixed cost
per cell phone call made decreases as more calls are made.

Monthly Cell Phone

Contract Fee
Number of Minutes Used
Within Monthly Plan
Analysis of Mixed Costs

Cost classified by behavior

Variable cost – cost that changes in total in direct proportion to changes in activity
level throughout the relevant range. Variable cost is constant per unit.
Fixed cost – constant in total amount regardless of the change in activity level
throughout the relevant range. This cost vary indirectly with changes in activity on
a per unit basis.
Semi-variable costs or mixed costs – costs that have both variable and fixed
components
Step cost is a type of cost that shifts upward or downward when activity changes
by a certain interval or “step”. Step variable costs have small steps; while step fixed
costs have large steps
The Cost Function

– It refers to the functional relationship between costs and activity.

y = a + bx
y – total cost or the mixed cost
a – fixed cost
b – rate of variable cost
x – level of activity
bx = total variable cost
Practice

As a result of analyzing the relationship of total factory overhead to

changes in machine hours, the following relationship was found:
 y = 1,000 + 2x

a. The y in the equation is an estimate of:

b. The x in the equation is an estimate of:
c. The P2 in the equation is an estimate of:
Analysis of Mixed Costs

Cost structure is the relative proportion of

fixed, variable, and mixed costs found within
an organization.
.
Analysis of Mixed Costs

Types of fixed cost

Committed fixed costs – those cost that are difficult to adjust and
that relate to investment in facilities, equipment, and the basic
organization structure of the firm. These cost cannot be reduced
within a short period of time.
Discretionary fixed cost – also programmed or managed fixed costs,
are cost that managers can elect to spend or not to spend. Examples
are advertising, research, and management development programs.
Analysis of Mixed Costs

Splitting Mixed Costs

1. High-Low point method
2. Least squares regression method
3. Scatter diagram/scatter graph/visual fit
 Sample Problem
y=a+bx
  Indirect Labor Indirect Labor
Hours Cost
January 500 P 9,500
February 400 9,000
March 600 10,000
April 800 12,000
May 700 11,000
June 650 10,500

1. Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels of production
using the high-low method. y=6,000+7.5x y=6,000+7.5(750)
b=(Y2-Y1)/(X2-X1)
b=(12,000-9,000)/(800-400)
b=7.5 per ILH
y=a+bx
12,000=a+7.5(800)
12,000=a+6,000
a=12,000-6,000
a=6,000
Analysis of Mixed Costs

Cost classified by behavior

Variable cost – cost that changes in total in direct proportion to changes in activity
level throughout the relevant range. Variable cost is constant per unit.
Fixed cost – constant in total amount regardless of the change in activity level
throughout the relevant range. This cost vary indirectly with changes in activity on
a per unit basis.
Semi-variable costs or mixed costs – costs that have both variable and fixed
components
Step cost is a type of cost that shifts upward or downward when activity changes
by a certain interval or “step”. Step variable costs have small steps; while step fixed
costs have large steps
Cost Accounting Systems

– Job Order Costing

– Process Costing
– Hybrid Product Costing
– Standard Costing
– Back flush Costing
– Activity Based Costing
Thank you!

Romans 8:35,37
Who shall separate us from the love of Christ?
35 

Shall tribulation, or distress, or persecution, or

famine, or nakedness, or danger, or sword? 
No, in all these things we are more
37 

than conquerors through HIM who loved us.