Introduction to Cost Accounting

Financial Accounting

provides information to stockholders, creditors and other who are outside the organization.

• conforms to GAAP

• Historical

• Highly aggregated

uses cost accounting information for external reporting

Management Accounting

provides information for managers of an organization who direct and control its operations.

• Relevant for specific purpose

• Focus on future

• Segmented

uses cost accounting information for internal purposes - planning, controlling, decision making, and performance evaluation.

Cost Accounting

provides on a company’s cost and may be useful for both external and internal purpose.

Merchandisers

buy products that are ready for resale to customers.

Manufacturers

buy raw materials and convert it to finished products.

Raw Materials Inventory

materials purchased to make a product.

Work in Process Inventory

partially complete products

Finished Goods Inventory

completed products awaiting sale.

• Direct Materials

• Direct Labor

• Factory or manufacturing overhead

Manufacturing Costs:

Direct Materials

those materials that become an integral part of the product and that can be conveniently traced directly to it.

Direct Labor

represents compensation and benefits paid to those who physically work on the conversion of materials into a finished product and are easily traceable to specific process or job order.

Manufacturing or Factory Overhead

these represents all indirect costs of manufacturing.

Indirect Materials

materials used to support the production process operations but are not directly included in or not significant part of the product.

examples:

• cleaning supplies used in the assembly plant

Indirect Labor

wages paid to employees who are not directly involved in production work.

examples:

• salaries of plant supervisor

• maintenance workers,

• janitors

• security guards in the factory premises.

Other Indirect Manufacturing Costs

other indirect costs incurred in the factory premises.

examples:

• insurance

• taxes

• utilities

• repairs

• depreciation related to factory operations.

Selling Expenses

costs necessary to sell the products.

General or Administrative Expenses

costs necessary to operate the business.

Product Costs

also known as inventoriable cost, since the product is stored as inventory until sold.

Period Costs

these are operating expenses or non-inventoriable cost that are immediately matched against revenues in the time period in which they are incurred.

Direct Costs

costs that can be obviously and physically traced to a manufacturing process, job order, business unit, segment or department.

Indirect Costs

costs that are related to a particular cost object but cannot be traced to that cost object in an economically feasible way.

Cost Behavior

it is the way a cost changes in relation to changes in the activity of the organization.

Activity

refers to the measure of the organization’s output of product or services.

Relevant Range

the band of activity within which the identified cost behavior patterns are valid.

Variable Costs

these are costs which vary directly, in total, in relation to volume of production. While the cost per unit remains constant as volume changes within a relevant range.

Fixed Costs

these are costs which remain constant in total, irrespective of the volume of production. While the cost per unit changes as the level of activity changes.

Mixed Costs

these are costs that have both fixed and variable components.

High-Low Method

the fixed and variable elements of the mixed costs are computed from two data points (periods)