COST ACCOUNTING and CONTROL

(Acctg 107 * M-F * 5:00-6:10)

Ms. Myra Magpile Ombao-CPA

Subject Instructor
Chapter 1
INTRODUCTION TO COST ACCOUNTING
Learning Objectives:

a. Distinguish between financial, managerial, and cost accounting;

b. Distinguish between merchandising and manufacturing operations;
c. Identify the uses of cost accounting data;
d. Distinguish between job order costing and process costing;
 A Review

Main & Primary Objective of Accounting

 To provide financial information about an economic entity to different types of users.

 Internal Users – managers for planning controlling and decision making
 External Users – the government, those who provide funds (like banks & other lending
institutions), and those who have various interests in the operations of the entity
(suppliers, investors, customers, etc.)
 COST ACCOUNTING

 An expanded phase of general or financial accounting which informs management

promptly with the cost of rendering a particular service, buying and selling a product, and
producing a product.
 It is the field of accounting that measures, records, and reports information about…
COSTS!
 COST ACCOUNTING

 All types of business entities – merchandising, service, and manufacturing businesses

requires information system which provide necessary financial data.
 Nature of manufacturing process, its information system must be designed to accumulate
detailed cost data relating to the “production process”.
 Cost accounting today is recognized as being essential to efficient cooperation of business
and industry.
 FINANCIAL, MANAGERIAL, and COST
ACCOUNTING
 Financial Accounting –
 Is the use of accounting information for reporting to external parties, including
investors and creditors.
 The reports prepared under financial accounting focus on the enterprise as a whole.
 It is based on historical transaction data as supported by documents as evidence.
 This is presented in the form of financial statements, tax returns, and other formal
reports distributed to various external users—just the same, the information may also
be used internally for management purposes.
 Financial Accounting is required for many firms as required by SEC, BIR and other
government entities.
 FINANCIAL, MANAGERIAL, and COST
ACCOUNTING
 Managerial Accounting –
 Focuses on the needs of parties within the organization rather that interested parties
outside the organization.
 Information commonly addresses individual or divisional concerns rather than those of
the enterprise as a whole. (Current or forecasted, quantitative or qualitative, monetary
or non-monetary, most of all timely.
 Data is futuristic and some of the costs are not recorded on the accounting books of the
organization.
 Tools that are available for use to management
 FINANCIAL, MANAGERIAL, and COST
ACCOUNTING
 Cost Accounting –
 Is the intersection between financial and managerial accounting.
 Information is needed and used by both financial and managerial accounting.
 It provides product cost information to external parties (stockholders, creditors, and
various regulatory boards for credit and investment decision.
 It provides product cost information also to internal users. (managers for planning and
controlling)
Relationship of Financial, Management,
and Cost Accounting
Merchandising
VS
Manufacturing
Operations
Merchandising VS Manufacturing
Operations
Merchandising:
> Normally buys a product that is ready for resale
> No addition needed except for a new packaging or display.
> As shown in this figure the sum of beginning inventory plus
purchases is equal to “Cost available for sale” and become
the basis in computing the Cost of Goods Sold and the
ending inventory. Computation follows:

Beginning merchandise inventory P5,000

Plus: Total Purchases 24,000
Cost of goods available for sale 29,000
Less: Ending merchandise inventory 6,500
Cost of goods sold P22,500
Merchandising VS Manufacturing
Operations
Manufacturing:
> Computation of cost of goods sold is more complex
> As shown in this figure there are 3 inventory accounts:
Materials, Work-in-process, Finished goods Inventories.
>Cost of Materials + Labor Services + Overhead items = WIP inventory when used
in production process. These 3 types of costs are often called Direct Materials
(DM), Direct Labor (DL) and Factory Overhead (FO),--(Indirect Materials & Labor,
utility costs, depreciation of factory machineries & Building.)
These are also called Manufacturing Costs assigned in completed units which are
moved to Finished Goods Inventory Account. Remaining costs in the WIP
inventory belongs to partly completed units.
> FG inventory is set up same with merchandising-Unsold belong to ending
inventory and the units sold is transferred o Cost of Goods Sold and reported on
the income statement.
 Uses of Cost Accounting Data

The information produced Determining Product Costs:

by a cost accounting
system provides a basis > Cost procedures must designed to
for determining product permit the computation of Unit Costs
cost and aids as well as total product Costs.
management in planning
and controlling >For example: A P10,000 spent for
operations labor must have a corresponding units
produced to make it significant, say it
produces 5,000units giving a P2 per
unit cost.
 Uses of Cost Accounting Data
(Unit Cost information)
Important marketing decisions:
1. Determining the selling price of a product knowing the cost of manufacturing a
unit of product helps in setting the selling prices which should be good high
enough to cover the cost of production plus other administrative expenses and a
percentage of profit.
2. Meeting competition  to compete with others whose selling price is low
detailed information regarding per unit cost is necessary to decide whether the
selling price is to be reduced , manufacturing costs must be reduced, or the
product must be eliminated.
 Uses of Cost Accounting Data
(Unit Cost information)
Important marketing decisions:
3. Bidding on contracts – An analysis of the unit costs relating to the
manufacture of a particular product is of great importance in
determining the bid price to be submitted. It must not be set on high so
a to be able to compete with other bidders.
4. Analyzing profitability – Unit cost information enables management
to determine the amount of profit that each product earns and possibly
eliminate those that are least profitable, thereby concentrating those
items that are most profitable.
 Planning and Control

Planning: 3 components of Planning:

◦ Is the process of establishing objectives or goals 1. Strategic Planning – concerned with the setting long
for the firm and determining the means by which range goals and objectives to determine the overall
the firm will attain them
◦ Cost accounting plays vital role in the direction of the company.
development of plans by providing them 2. Tactical Planning – concerned with plans
historical costs that serve as basis for projecting for a shorter range and emphasizes plans
data for planning. Management thru
analyzation of trends and relationship among to achieve plans to achieve the strategic
such data, can estimate future costs and goals.
operating results; make decision whether to buy 3. Operations Planning – relates to the day to day
or not to buy additional facilities; changes in
marketing strategies, and obtaining additional implementation of tactical plans. Emphasizes the
capital. coordination of the major factors of production(materials,
labor and facilities)
Control:
◦ Is the process of monitoring of company’s
operations and determining whether the
objectives identified in the planning process ia
being accomplished.
Basic Product-Costing System
1. JOB ORDER COSTING:
•A system fo allocating costs to groups of
unique product.
•Applicable to the production of customer
specified products like special machines.
•Each job becomes a cost center for which
Costs are accumulated.
•A subsidiary is needed (job cost sheet) to
keep track of all unfinished jobs (WIP) and
finished jobs (FG)
 Basic Product-Costing System
2. PROCESS COSTING:
•Applicable to a continuous process of
production of similar goods like:
> oil refining and chemical production
•No need to determine the costs of
different groups of products because
the product is uniform, each processing
department becomes the cost center.
 Characteristics of Job Order Costing
> This is a product costing system used by companies making one-of-a kind or
special-order products.
> DM, DL, FO costs are assigned to specific job orders or batches of
production.
> Unit cost is computed : Total Manufacturing Cost / total number of good
units
> Industries using JOC: Making ships, airplanes, large machines, and special
orders. Can also be used when producing a set quantity of a product for
inventory replenishments like producing lawn mowers, etc.
> Used also by service industries like accounting firms where costs are
assigned to audit engagement (even no WIP and FG).. Same with consulting
and architectural firms (contracts), universities (research projects)
 Primary characteristics of a Job Order Costing
system
1. It collects all manufacturing costs and assigns them to specific job or
batches of product.
2. It measures costs for each completed job, rather than for set time
periods.
3. It uses just one WIP Inventory Control account in general ledger.
This account is supported by a subsidiary ledger of job order cost cards
or sheets for each job in process at any point of time.
Process Costing
 Basic Product-Costing System
1. JOB ORDER COSTING:
•A system for allocating costs to groups of
unique product.
•Applicable to the production of customer
specified products like special machines.
•Each job becomes a cost center for which
Costs are accumulated.
•A subsidiary is needed (job cost sheet) to
keep track of all unfinished jobs (WIP) and
finished jobs (FG)
 Characteristics of Job Order Costing
> This is a product costing system used by companies making one-of-a kind or
special-order products.
> DM, DL, FO costs are assigned to specific job orders or batches of
production.
> Unit cost is computed : Total Manufacturing Cost / total number of good
units
> Industries using JOC: Making ships, airplanes, large machines, and special
orders. Can also be used when producing a set quantity of a product for
inventory replenishments like producing lawn mowers, etc.
> Used also by service industries like accounting firms where costs are
assigned to audit engagement (even no WIP and FG).. Same with consulting
and architectural firms (contracts), universities (research projects)
 Primary characteristics of a Job Order Costing
system
1. It collects all manufacturing costs and assigns them to specific job or
batches of product.
2. It measures costs for each completed job, rather than for set time
periods.
3. It uses just one WIP Inventory Control account in general ledger.
This account is supported by a subsidiary ledger of job order cost cards
or sheets for each job in process at any point of time.
JOB ORDER COSTING:
 Basic Product-Costing System
2. PROCESS COSTING:
•Applicable to a continuous process of
production of similar goods like:
> oil refining and chemical production
•No need to determine the costs of
different groups of products because
the product is uniform, each processing
department becomes the cost center.
Characteristics of Process Costing
Example-Process costing flow (Shoe Mfg.)
Reference:

Cost Accounting and Control 2019 Edition

Norma D. DeLeon
Ellery D. De Leon
Guillermo M. De Leon Jr.