Cost Accounting- Basic Concepts

and the Job Order Cost Cycle

Prepared by: Harris R. Egliane
Basic Concepts

Accounting
System
 Accounting System provides information
for:
• Internal reporting to managers for use in
planning and controlling manager operations
(Management Accounting).
• Internal reporting to managers, for use in
formulating plans and policies (Management
Accounting).
• External reporting to stockholders,
government and other outside parties
(Financial Accounting).
Where does “cost accounting” fit
within the framework above?
 Where does “cost accounting” fit
within the framework above?
• Cost accounting fit in all framework above because it has the same three
major purposes.

 External reporting which third purpose simultaneously deals w/

costing of products for inventory valuation and income
determination.
 Therefore, fulfills the demands of outsiders and those of
management.
 When viewed this way, cost accounting is management accounting,
plus a small part of financial accounting to the extent that its product
costing function satisfies the needs of external reporting.
 COST ACCOUNTING DEFINED
 system that records, summarizes, analyzes,
and interprets the details of costs of
materials, labor, and overhead necessary to
produce and sell an article.
 refers to recording, classifying and reporting
all costs aspects of company performance
during a particular period of time.
 Cost Accounting applies to:

a. Manufacturing Operation

b. Service organizations
 Cost Accounting helps answer the ff
questions:
 Is our plant operating efficiently and
economically?
 Which of our costs are out of line, and how
can they be controlled?
 Are our sales prices set realistically in relation
to costs?
 What is the unit cost of each type of product
being manufactured?
Examples of how cost accounting concepts
are used in business:
• Estimating and Bidding
• Planning, Budgets and Control
 • Estimating and Bidding

“Knowledge of the costs of doing business is

needed to estimate a job or to bid for jobs or
contracts.”
Because attempting to bid w/o detailed
cost information can mean….
Because attempting to bid w/o detailed
cost information can mean….

..Losing the job, or it can

mean winning the job but
having to perform the work
at loss
 • Planning, Budgets and Control
“ cost accounting system also provides vital
information needed to plan future
operations”
 So cost data help resolve questions
relating to proposed projects or policies:
Should we build a new plant or modernize
the old one?
 How far can we go in lowering prices to
increase our volume of sales?
 What will be the effect on costs of
automating part of our factory?
… Other used of cost accounting:
• Preparing a company’s budget
• Standard cost procedure are helpful in
evaluating the results of operation
From this brief discussion,
 From this brief discussion,

We can see that cost accounting

is...
“one of the most valuable management tools
to control operations”
“ cost of making and selling the firm’s products or services helps
management weigh courses of action before any final
commitments”
“reveals how efficiently the work is done, where the strong
and weak spots are and how to improve performance”
Remember cost of making a product or providing a service is one
of the most critical factors in a firm’s ability to meet the
competition therefore…
It needs to classify manufacturing costs.
• Manufacturing is the process of converting
materials into finished goods by using labor
and incurring other costs, generally called
manufacturing overhead.
 The three major manufacturing cost
classifications are:
• Direct Materials
• Direct Labor
• Manufacturing overhead
 Direct materials
 Also called raw materials, are those materials
used in the manufacturing process.
Eg. lumber
 Direct Labor
 Employees who work directly with the raw
materials in converting them to finished
goods.
Eg. salaries of workers
 Manufacturing Overhead
• All costs incurred in the factory that cannot be
considered direct materials or direct
labor(sometimes called factory overhead,
manufacturing expenses, or factory burden)
 Three categories of Manufacturing
Overhead
1. Indirect Materials
2. Indirect Labor
3. Other manufacturing overhead
 1. Indirect Materials
 used in small amounts in the manufacturing
process or that cannot easily be traced to
specific products (sometimes called factory
supplies or operating supplies).
Eg. glue used in manufacturing chairs
 2. Indirect Labor
 wages of factory personnel who do not work
directly on raw materials.
Eg. Janitor
3. Other Manufacturing Overhead
• Includes such cost as payroll taxes on factory
wage, depreciation ,taxes, and insurance on
factory building and machinery; heat, light and
power repairs and maintenance of machinery
& equipment. (Relate to physical plant)
Prime and Conversion Costs
 INVENTORIES FOR A MANUFACTURING
COMPANY
I. Raw materials Inventory
II. Work in Process Inventory
III. Finished Goods Inventory
 I. Raw Materials Inventory
• Reflects the cost of raw materials and factory
supplies that will be used in the
manufacturing process.

storeroom
 I. Work in Process Inventory
• Reflects the cost of raw materials, direct labor,
and manufacturing overhead of goods on
which manufacturing has begun but has not
been completed at the end of the fiscal
period.
 Finished Goods Inventory
• Reflects the cost of goods that have been
completed and are ready for sale.
 System of Cost Accumulation
1. Actual Cost System ( Historical)
2. Standard Cost System (Predetermined)
3. Normal Cost System
 1.Actual Cost System ( Historical)
• Collects the actual amounts of direct material,
direct labor and factory overhead that are
incurred for each product.
 2. Standard Cost System (Predetermined)

• costs are determined in advance from

analysis and forecasts made before the actual
production begins.
 3. Normal Cost System
• Combination of the actual cost system and
the standard cost system.
Comparison of alternative product costing
system
 TYPES OF COST SYSTEMS
I. Job Order Cost System
II. Process Cost System
III. Dual System
 I. Job Order Cost System
• Accumulates costs applicable to each specified
job order or lot of similar goods manufactured
on a specific order.
 II. Process Cost System
• Accumulates cost without attempting to
allocate them during the accounting period to
specific units of goods being manufactured.
 III. Dual Systems
• Manufacturers use both the job order cost
system and the process cost system.
 INTRODUCTION TO THE JOB ORDER COST
CYCLE- NORMAL COSTING
WORK FLOW
1. PROCUREMENT
2. PRODUCTION
3. WAREHOUSING
4. SELLING
RECORDING COSTS AS INCURRED

Operating cycle flow chart

Matching Cost Flow and Work flow
Chart of Accounts
 Raw Materials Purchased

Additional raw materials were purchased during the

month of June at a cost of P 86, 000.00
 Raw Materials Purchased

Additional raw materials were purchased during the

month of June at a cost of P 86, 000.00
 Raw Materials Used
During the month, raw materials costing
P90,400 were used as follows:
 Factory Wages Earned
• During the month, wages and salaries totaling
P102,300 were earned by the factory
employees
 Labor charged to Production
Analysis of records indicates that labor costs of
P102,300 should be allocated as follows:
 Manufacturing Overhead Costs
In addition to indirect materials (B) and indirect
labor (D), other overhead costs, such as
utilities, insurance, and depreciation, totaling
P23,500 were incurred during the month.
 Manufacturing Overhead Applied to
Products
Estimated that 80% of the direct labor is
chargeable to jobs worked on during the
month of June
 Transfer of Finished Goods
Some jobs were completed and transferred to
the finished goods warehouse. These jobs cost
P225,100.
 Sale of Finished Goods
Finished goods costing P221,500 were sold to
various customers.
THANK YOU VERY MUCH 