Cost Accounting And Control - Chapter 1 to 2

Chapter 1 - 2 as of 09/06

Originally developed in manufacturing business to satisfy management’s need for product cost information.

Cost Accounting

The field of accounting that measures, records, and reports information about costs

Cost Accounting

1\. Manufacturing

2\. Merchandising

3\. Service

3 Types of Business Entities (According to the nature of business)

1\. Sole Proprietorship

2\. Partnership

3\. Corporation

3 Types of Business Entities (According to the number owners)

Involves the conversion of raw materials into finished goods through the application of labor and the incurrence of various factory expenses.

Manufacturing

Buy items in marketable form to be resold to their customers

Merchandising

Accounting and Audit, Legal and Medical Services.

Service

Equity is “Owner’s Equity

Sole Proprietorship

Equity is “Shareholders’ Equity”

Corporation

Equity is “Partner’s Capital”

Partnership

Cost accounting procedures help management in gathering the data needed to determine product costs and thus generate meaningful financial statements and other reports.

Determining Product Cost

4 Unit cost information that is also useful in making a

variety of important marketing decisions

a. Determining the selling price of a product

b. Meeting competition

c. Bidding on contracts

d. Analyzing profitability

Said to be used for managerial accounting purposes when costs are used inside the organization by managers to evaluate the performance of operations or personnel, or as a basis for decision making.

Cost

When costs are used by outsiders, such as stockholders or creditors, to evaluate the performance of top management and make decision about the organization, we say costs are used for what?

Financial Accounting Purposes

One of the most important functions of cost accounting is the development of information which can be used by management in planning and controlling operations.

Planning and Control

Process of monitoring the company’s operations and determining whether the objective identified in the planning process are being accomplished.

Controlling

Process of establishing objectives or goals for the firm and determining the means by which the firm will attain them; this is done by using historical costs that serve as basis for projecting data for planning.

Planning

Basic types of Product Costing System

1. Job Order System
2. Process Costing
3. Hybrid Costing

A system for allocating costs to groups of unique product; it is applicable to the production of customer specified products such as the manufacture of special machines, ships, airplanes.

Job Order System

Each job becomes the cost center for which cost is accumulated.

Job Order System

A system applicable to a continuous process of production of the same or similar goods 

Process Costing

Each processing department becomes a cost center.

Process Costing

Costing system which incorporates ideas from both Job Order Costing and Process Costing

Hybrid Costing

Cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization

Cost

Incurred to produce future benefits in a profit making firm, future benefits usually mean revenue

Cost

I. Costs classified as to relation to a product

II. Costs classified as to variability

III. Costs classified as to relation to manufacturing

departments

IV. Costs classified as to their nature as common or

joint

V. Costs classified as to relation to an accounting

period

VI. Costs for planning, control, and analytical

processes

Classification of Costs

Cost of materials that become part of a finished product and can be conveniently and economically traced to specific product units

Direct Materials

Labor costs for specific work performed on products that can be conveniently and economically traced to end products

Direct Labor

Manufacturing costs that cannot be classified as direct materials or direct labor

Factory Overhead

Includes indirect materials, indirect labor and other indirect factory costs

Factory Overhead

Direct Materials + Direct Labor

Prime Costs

Direct Labor + Factory Overhead

Conversion Costs

Costs necessary to secure customer orders and get finished product or service into the hands of the customer like advertising, shipping, sales travel, sales commissions and sales salaries

Marketing or Selling Expenses

Include all executive, organizational and clerical expenses that cannot logically be included under either production and marketing like Executive compensation, general accounting,

secretarial, public relations and general administration

General or Administrative Expenses

Items of cost which vary directly in total in relation to volume of production

Variable Costs

Items of costs which remain constant in total irrespective of the volume of production

Fixed Costs

Items of costs with fixed and variable components

Mixed Costs

Costs that are immediately charged to the particular manufacturing department(s) that incurred the costs since the costs can be conveniently identified or associated with the department(s) that benefited from said costs

Direct Departmental Charges

Costs that are originally charged to some other manufacturing department (s) or account(s) but are later allocated or transferred to another department(s) that indirectly benefited from said costs

Indirect Departmental Charges

Costs of facilities or services employed in two or more accounting periods, operations, commodities or services. Just like indirect costs, these costs are subject to allocation

Common Costs

Costs of materials, labor and overhead incurred in the manufacture of two or more products at the same time. They are indivisible and are not specifically identifiable with any of the products being simultaneously produced. These costs are also subject to allocation

Joint Costs

Expenditure intended to benefit more than one accounting periods and is recorded as an asset. Examples are tangible fixed assets, intangible assets and wasting asset

Capital Expenditures

Expenditure that will benefit current period only and is recorded as an expense

Revenue Expenditures

Predetermined costs for direct materials, direct labor and factory overhead based on established information accumulated from past experiences and data secured from research studies

Standard Costs

The benefit given up when one alternative is chosen over another. Not recorded in the accounting books but is considered when evaluating alternatives for decision-making

Opportunity Costs

Cost that is present under one alternative but is absent in whole or in part under another alternative. An increase in cost from one alternative to another is known as incremental cost, while a decrease in cost is known as decremental cost

Differential Costs

Future cost that change across alternatives

Relevant Costs

Cost that requires payment of money (or other assets) as a result of their incurrence

Out-of-pocket Costs

Cost for which an outlay has already been made and it cannot be changed by present or future decision

Sunk Costs

Controllable Costs

Cost where a level of management has power to authorize the cost

\- (Direct Materials + Direct Labor + Factory Overhead) goes into Work in Process

\- Work in Process goes into Finished Goods

\- Finished Goods goes into Cost of Goods Sold

\- Selling and Administrative goes into Operating Expenses

Cost Flow for Manufacturing Firm

\- Finished Goods goes into Cost of Goods Sold

\- Selling and Administrative goes into Operating Expenses

Cost Flow for Merchandising Firm

\- (Direct Materials + Direct Labor + Factory Overhead) goes into Cost of Services

\- Selling and Administrative goes into Operating Expenses

Cost Flow for Service Firm

Name of the Prof

ANTONIO CORTEZ