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CHAPTER ONE:
Introduction to Cost Accounting
The main and primary objective of accounting is to provide financial information about economic entity
to different types of users. The primary users are:
Characteristics
Financial Accounting
Users:
-External Parties
(Shareholders,
Government)
-Managers
Focus:
-Entire Business
Uses
of
Information:
Managerial Accounting
-Internal Parties
Creditors, (managers)
Cost
-Product Costs for calculating Cost of
Goods Sold and Finished Goods,
Work in Process, And Raw Materials
Inventories using historical costs and
Generally
Accepted
Accounting
Principles
What is Cost?
Cost is the cash and cash equivalent value sacrificed for goods and services that are expected to
bring a current or future benefit to the organization. We say cash equivalent because non-cash assets can
be exchanged for the desired goods or services. Expired Costs are called expenses. In each period,
expenses are deducted from revenues in the income statement to determine the period, expenses. A loss
is a cost that expires without producing any revenue benefit. The focus of cost accounting is on costs, not
expenses.
CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
a. Manufacturing Costs/Product Costs
1.
Direct Materials
2.
Direct Labor
3.
Manufacturing Overhead
II.
1.
Marketing/Selling Expense
2.
III.
IV.
Sunk Cost
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DIRECT LABOR
Ang sweldo ng mga employees na gumagawa directly sa product na minamanufacture ng kumpanya
ay tinatawag na Labor Costs. Sa isang factory na gumagawa ng mga furnitures, ang salary ng mga
naglalagari, nagkikiskis ng mga kahoy at nagaassemble ng parts into finished furnitures ay halimbawa ng
direct labor.
Ang mga employees na nagtatrabaho sa factory na hindi nagtatrabaho directly sa minamanufacture
na product ay tinatawag na indirect labor. Ang halimbawa nito ay ang supervisor, department heads,
inspectors, material handlers, at maintenance personnel.
FACTORY/MANUFACTURING OVERHEAD
Ito ay ang lahat ng costs related sa pagmamanufacture ng products except Direct Materials at
Direct Labor. Ang halimbawa nito ay ang indirect materials, indirect labor, plus other manufacturing
expenses katulad ng depreciation on factory building and machinery, heat, light, power,
maintenance, insurance and taxes.
Prime Cost it is the term for the sum of direct materials and direct labor. It reflects the primary sources
of costs for units in production.
Conversion Cost it is the total of direct labor and manufacturing overhead. It indicates the costs
required to convert the raw materials into finished products.
Period costs are all the costs that are not product costs. All selling and administrative expenses
are treated as period costs. For example, sales commissions, advertising, executive salaries, public
relations, and the rental costs of administrative offices are all period costs. Period costs are not included
as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the
income statement in the period in which they are incurred using the usual rules of accrual accounting.
Keep in mind that the period in which a cost is incurred is not necessarily the period in which cash
changes hands.
Marketing or Selling Expenses include all costs necessary to secure customer orders and get the
finished product or service into the hands of the customer. Examples of marketing expenses include
advertising, shipping, sales travel; sales commissions, sales salaries, and expenses associated
with finished goods warehouses. All organizations are marketing costs, regardless of whether the
organizations are manufacturing, merchandising, or service in nature.
Administrative or General Expenses include all executive, organizational, and clerical expenses
that cannot logically included under either production or marketing. Examples of such expenses include
executive commission, general accounting, secretarial, public relations, and similar expenses having
to do with the overall, general administration of the organization as a whole. As with marketing expenses, all
organization have administrative expenses.
-Items of cost which vary directly, in total, in relation to volume of production. If activity increases by 20
percent, total variable cost increases by 20 percent also.
-Cost per unit remains in constant as volume changes within a relevant range.
-Examples are direct materials, direct labor, royalties, and commission of salesmen.
ILLUSTRATION
Activity
1
2
5
10
20
40
MIXED COST
-Items of cost with fixed and variable components. Mixed costs vary with the level of production,
though not in direct relation to it, probably because part of the cost is fixed while the rest is variable. Two
types of mixed costs exit semi-variable and step costs.
a. Semi-variable cost the fixed portion of a semi-variable cost usually represents a minimum fee
for making a particular item or service available. The variable portion is the cost charged for actually using
the service.
b. Step cost the fixed part of step costs changes abruptly at various activity levels because these
costs are acquired in indivisible portions. A step cost is similar to a fixed cost within a very small relevant
range.
JOINT COST VS COMMON COST
Joint Costs are cost of materials, labor, and overhead incurred in the manufacture of two or more
products at the same time. A major difficulty inherent to joint costs is that they are not specifically
identifiable with any of the products being simultaneously produced. These costs are also subject to
allocation.
Common Costs are 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
COSTS FOR PLANNING, CONTROL, AND ANALYTICAL PROCESSES
Standard Cost is a budget for the production of ones unit of product or service. It is the cost chosen
by the managerial accountant to serve as the benchmark in the budgetary control system.
Opportunity Cost is the benefit given up when alternative is chosen over another. Opportunity costs
are not usually recorded in the accounting system. However, opportunity costs should be considered
when evaluating alternatives for decision-making.
Differential Cost is the cost that is present under one alternative but is absent in whole or in part
under another alternative.
Relevant Cost is the future cost that change across alternatives.
Out-of-pocket Cost cost that requires the payment of money as a result of their incurrence.
Sunk Cost it is a cost for which an outlay has already been made and it cannot be changed by
present or future decision, they are not differential costs, and therefore they should be used in analyzing
future courses.
TWO MAIN TYPES OF COST SYSTEMS
Job Order Cost System it accumulates costs applicable to each specified job order or lot of
similar goods manufactured on a specific order for stock or for a customer. When production on a job
begins, the job is assigned a number, and a form called job cost sheet is set up.
The job order cost system is often used by manufacturers, such as furniture manufacturer, who
produce a variety of products, because such producers need to keep track of each specific order to
ensure correct assignment of costs.
Process Cost System it accumulates costs without attempting to allocate them during the
accounting period to specific units of goods being manufactured. At the end of the fiscal period, the
average cost per unit is determined by dividing the total number of units produced into the total cost
accumulated. The goods must be similar in nature when this cost system is used so that an average cost
will be meaningful.
COST OF GOODS SOLD: MERCHANDISING VS. MANUFACTURING
Computation of Cost Of Goods Sold (COGS) in a Merchandising Concern:
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Because a manufacturer makes, rather than buys, the product it has available for sale, the term finished
goods inventory replaces merchandise inventory, and the term
replaces net purchases in determining cost of goods sold. The cost of goods manufactured amount is
supported by a schedule detailing the costs of material and labor and the expenses of maintaining and
operating a factory.
COST OF GOODS MANUFACTURED
The computation of Cost of Goods Manufactured is as follows:
Direct Materials
Direct Labor
Manufacturing Overhead
Total Manufacturing Cost
Add: Work In Process, Beginning
Work In Process Available for Use
Less: Work In Process, Ending
Cost of Goods Sold (COGS)
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