Chapter 15
Introduction to Cost Accounting
Cost accounting is essential for the measurement, recording, and reporting of product costs.
Accuracy in product cost data is critical for business success.
Companies leverage this data to:
Decide on the products to manufacture.
Set appropriate pricing strategies.
Determine production quantities.
Structure of Cost Accounting Systems
Cost accounting systems consist of various accounts for different manufacturing costs.
These accounts integrate into the company’s general ledger.
A perpetual inventory system provides real-time data on product costs.
Types of Cost Accounting Systems
Process Cost System
Used for mass production of similar items (e.g., soft drink manufacturing).
Cost accumulation is for time periods (weekly/monthly) rather than specific items.
Costs assigned to departments involved in the production process.
Example: A manufacturing plant producing 100,000 bottles of soda in a month.
Job Order Cost System
Costs are assigned to individual jobs or batches, each having unique characteristics.
Measured per job rather than over a time period.
Examples:
Manufacturing a custom jet by Boeing.
Printing 225 wedding invitations by a print shop.
Applications of Job Order Cost System
Objective: Calculate cost per job.
Measured costs for completed jobs.
Examples include film production companies working on animated versus action films.
Flow of Costs in Job Order Cost Accounting
Cost flow follows the physical movement of materials to finished goods:
Work in Process Inventory (WIP): Accumulate manufacturing costs.
Finished Goods Inventory: Transfer cost of completed jobs.
Cost of Goods Sold (COGS): Transfer costs to COGS once goods are sold.
Method of cost assignment to jobs occurs during the work performed on them:
Debits added to WIP as costs accrue.
Complete jobs move to Finished Goods Inventory until sold.
Accumulation of Manufacturing Costs
Costs recorded in the period they are incurred.
Raw Materials Purchases:
Increases raw materials inventory account with a debit;
Example: Wallace Company purchases raw materials totaling $42,000.
Factory Labor Costs:
Includes gross earnings, payroll taxes, and fringe benefits.
Increased in factory labor account upon incurring costs;
Example: Debiting $32,000 in factory labor costs for Wallace Company.
Manufacturing Overhead:
Includes expenses like property taxes, insurance, and repairs relating to the manufacturing process.
Summarized entries reflect total overhead costs incurred in the period.
Examples of Cost Assignments
Debits during transactions:
Raw materials inventory debited for raw materials purchases.
Factory labor debited for labor costs incurred.
Manufacturing overhead debited for indirect costs used.
Specific Transaction Examples
Raw Materials Purchase (e.g., $4,200):
Debit Raw Materials Inventory, Credit Accounts Payable.
Factory Labor (e.g., $18,000):
Debit Factory Labor, Credit Payroll Liabilities.
Total Manufacturing Overhead:
Debit Manufacturing Overhead, Credit accounts for utilities, insurance, and depreciation.
Conclusion
Understanding both process and job order cost systems is crucial for effective cost accounting.
Continuous monitoring and accurate assignment of costs help in strategic decision-making for companies.