FINANCIAL ACCOUNTING

 FA is the use of accounting information for reporting to external parties, including investors and
creditors
 FA is primarily concerned with financial statements for external use by those who supply funds to
the entity and other persons who may have vested interest in the financial operations of the firm.
 Reports prepared under FA focus on the enterprise as a whole
 FA is based on historical transaction data
 Information provided by FA is usually presented in the form of financial statements, tax returns,
and other formal reports distributed to various External Tax

MANAGERIAL ACCOUNTING
 MA focuses on the needs of parties within the organization rather than interested parties outside
the organization
 MA information commonly addresses individual or divisional concerns rather than those of the
enterprise as a whole
 Information may be current or forecasted, quantitative or qualitative, monetary or non-
monetary
 There is no requirement or legislation that mandates the format or use of MA
 Management are concerned on the timeliness of information that is required for today’s decision

COST ACCOUNTING
 CA is the intersection between financial and managerial accounting
 CA information is needed and used by both financial and managerial accounting
 CA provides cost information to external parties, such as stockholders, creditors and various
regulatory boards for credit and investment decisions.
 CA provides product cost information also to internal parties such as managers for planning and
controlling
 CA is an expanded phase of FA 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
MANUFACTURING OPERATION
MERCHANDISING OPERATION Direct Materials used
Beg. MI xx
Beg MI xx
Plus: Total Purchases xx
Add: Purchases xx
COGAFS xx
Total available for use xx
Less: End MI xx
Less: End MI xx XX
Cost of Goods Sold xx
Direct Labor XX
Factory Overhead XX
Total manufacturing Costs XX
Add: Beg. Work in Process XX
COG put in Process XX
Less: End WIP XX
COGM XX
Add: Beg. FG Inventory XX
COGAFS XX
Less: End FGI XX
Cost of goods sold XX
USES OF ACCOUNTING DATA
Determining product costs
 Cost procedures must be designed to permit the computation of unit costs as well as total product
costs. Unit cost information is also useful in making a variety of important marketing decisions
1. Determining the Selling price – helps in setting the Selling price, which should be high enough to
cover the cost of production, marketing and administrative and provide a profit
2. Meeting Competition – if competitor is selling the product at a low price detailed information
regarding unit costs can be used to determine the action to be taken by the company
3. Bidding on contracts – Bid price must not be set so high so as to be able to compete with other
bidders
4. Analyzing profitability – enables management to determine profit in each product

PLANNING AND CONTROL

Planning is the process of establishing objectives or goals and determining the means by
which the firm will attain them
3 COMPONENTS OF PLANNING
1. Strategic Planning – Concerned with setting long range goals and objectives to determine the
overall direction of the company
2. Tactical planning – concerned with plans for a shorter range (or time period) and emphasizes
plans to achieve the strategic goals
3. Operational planning – relates to the day to day implementation of tactical plans. It emphasizes
the coordination of the major factors of production (materials, labor and facilities)
Control is the process of monitoring the company’s operations and determining whether the
objectives identified in the planning process are being accomplished

TWO BASIC PRODUCT-COSTING SYSTEMS

1. Job order costing – system for allocating costs to groups of unique product
 Production of customer specified products such as the manufacture of special machines
 Job cost sheet is needed to keep track of all finished and unfinished jobs
 Making one of a kind or special order products
 Industries that use a job order cost accounting system include those that make ships, airplanes,
large machines and special orders
Characteristics of JO
1. It collects all manufacturing costs assigns them to specific job or batches of product
2. It measures cost for each completed job, rather than for set time periods
3. It uses just one Work in process inventory control account in the GL.

2. Process Costing – a system applicable to a continuous process of production of the same or

similar goods eg., oil refining and chemical production
 Unit costs are computed by dividing total manufacturing costs assigned to a particular department
or work center during a period by the equivalent unit of production.
Characteristics
1. Manufacturing costs are grouped by department or work center, with little concern for specific JO
2. It emphasizes a weekly or monthly time period rather than time taken to complete a specific order
3. It uses several WIP inventory accounts – one for each department or work center in the
manufacturing process

Hybrid costing-blending of ideas that demonstrates the relationship between these costing system.

Cost Concept and Classification

Cost, expenses and losses
 Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to
bring a current or future benefit to the organization.
 Cost are incurred to produce future benefits in a profit making firm, future benefits usually mean
revenue
 Expenses are the expired costs. Expenses are deducted from revenues in the income statement
to determine the period’s profit.
 Loss is a cost that expired without producing any revenue benefit.

Classification of Costs
I. Costs classified as to relation to a product
A. Manufacturing Costs/Product Costs
 Direct Materials
 Direct Labor
 Factory Overhead
B. Non- Manufacturing Costs/Period Costs
 Marketing or selling expenses
 General or administrative expenses

DIRECT/INDIRECT MATERIALS
Direct Materials are the basic ingredients that are transformed into finished products through the use
of labor and factory overhead in the production process
 Direct materials are those that can be traced to the finished product can they form part of the
product.
 Cost of direct materials are direct costs

Indirect Materials are those minor materials and other production supplies that cannot be
conveniently or economically traced to specific products
 Indirect materials costs are part of factory overhead costs

THREE INTEGRAL COMPONENTS OF PRODUCT

1. Direct Materials are materials that become part of a finished product and can be conveniently
and economically traced to specific product units.
2. Direct Labor represent the amount paid as wages to those working directly on the product.
Includes all labor costs for specific work performed on products that can be conveniently and
economically traced to end products.
3. Factory Overhead are a varied collection of production-related costs that cannot be practically or
conveniently traced to end products. This collection of costs is also called manufacturing
overhead, factory burden, and indirect manufacturing costs.
Examples: indirect materials and supplies – nails, rivets, lubricants, small tools
indirect labor costs- lift truck driver wages, maintenance and inspection labor
other indirect labor costs – building maintenance, machinery and tool
maintenance, property taxes and insurance, depreciation on plant and equipment
 Rent expenses, utility expense

Compute for the Prime cost and total manufacturing cost

Prime Cost=Direct Material + Direct Labor
Conversion cost=Direct labor +Manufacturing Overhead
Total Manufacturing Cost=Prime Cost +Manufacturing Overhead
Total Manufacturing Cost=Conversion cost+Direct Materials
Total Manufacturing Cost=Direct Materials+Direct labor+Manufacturing Overhead

NON-MANUFACTURING COSTS
1. Marketing or selling expenses includes all costs necessary to secure customer orders and get
the finished product or service into the hands of the customer.
Examples : advertising, shipping, sales travel, sales commissions, sales salaries, expenses
associated with finished goods warehouses
2. Administrative or general expenses include all executive, organizational and clerical expenses
that cannot logically be included under either production or marketing.
Examples:

II. COSTS CLASSIFIED AS TO VARIABILITY

A. Fixed Costs – Items of costs which remain constant in total, irrespective of the volume of
production. If activity increases or decreases by 20 percent, total fixed cost remain the same.
 Activity refers to a measure of the organization’s output of product or services.

Cost per unit decreases as volume increases, and increases as volume decreases.
Categories:
1. Committed fixed costs – costs that represent relatively long term commitments on the part of
management as a result of a past decision
Example : depreciation on equipment
2. Managed fixed costs (Also known as discretionary, programmed, or planned fixed costs.) costs
that are incurred on a short term basis and can be more easily modified in response to changes in
management objectives
Example: advertising, research and development and costs of training of employees

B. Variable Costs – these are items of cost which vary directly, in total, in relation to volume of
production. If activity increases by 2o percent, total variable cost increases by 20 percent also. Cost
per units remains constant as volume changes within the relevant range.
Example: Direct materials, Direct labor, royalties, commission of salesman
C. Mixed Cost – Items of costs with fixed and variable components. Mixed costs vary with level of
production, though not direct relation to it, probably because part of the cost is fixed while the rest is
variable.
Types:
Semivariable cost – the fixed portion of a semi-variable costs usually represents fee for making a
particular item or service available
Example : Cost of electricity, planned cell phone
Step costs – the fixed part of a step costs changes abruptly at various activity levels because these
costs are acquired in indivisible

Methods on separating MC into VC and FC

1. Scattergraph – rough guide for cost estimation in which plot the cost against past activity levels.
2. High – Low Method – analyzing mixed costs is based on costs observed at both the high and low
level of activity within the relevant range
3. Least Square Regression – determined by solving two simultaneous linear equations which are
based on the condition that the sum of deviations above the line equals the sum of deviations below
the line

Common cost vs joint cost

1.Common Cost – cost of facilities or services employed in two or more accounting periods,
operations, commodities or services.
 Subject to allocation
2.Joint cost – cost of materials labor and overhead incurred in the manufacture of two or more
products at the same time
 Indivisible and not specifically identifiable with any of the products being simultaneously produced
 Subject to allocation

Capital vs revenue expenditure

1.Capital expenditure – intended to benefit more than one accounting periods and is recorded as an
asset
2.Revenue expenditure – will benefit current period only and is recorded as an expense

Direct vs indirect departmental charges

1.Direct DC – costs that are immediately charged to the particular manufacturing departments(s) that
incurred the costs since the cost can be conveniently identified or associated with the departments(s)
that benefited from said costs.
2.Indirect DC – costs that are originally charged to some other manufacturing dept or account but are
later allocated or transferred to another depart that indirectly benefited from said costs.

COST FOR PLANNING, CONTROL AND ANALYTICAL PROCESSES

Standard costs –predetermined costs for direct materials, direct labor and factory overhead. It is a
budget for the production of one unit of product or service.
Opportunity costs – the benefit given up when one alternative is chosen over another.
Differential cost – cost that is present under one alternative but is absent in whole or in part under
alternative.
 Incremental – increase in cost from one alternative to another
 Decremental – decrease in cost from one alternative to another
 Marginal revenue – revenue that can be obtained from selling one more unit of product
 Marginal cost – cost involved in producing one more unit of product
Relevant Cost – future cost that changes across the alternatives.
Out-of-pocket cost – cost that requires the payment of money (or other assets) as a result of their
incurrence.
Sunk cost – refers to cost that has already spent but cannot be recovered

CHAPTER 3- COST ACCOUNTING CYCLE

MANUFACTURING INVENTORY ACCOUNTS
• Most manufacturing companies use the perpetual inventory approach.
• Perpetual Inventory system, the inventory account is continuously updated. When a company
uses perpetual inventory system, the ending inventory should reconcile with the actual physical count.
•Three manufacturing inventory accounts – Material Inventory, Work in process inventory and
finished goods inventory.

MATERIAL INVENTORY
•Also called Material inventory control account, is made up of the balances of materials and supplies
on hand.
•Merchandising
• Goods are taken out in inventory are items that have been sold
• When a sale is made, an entry to debit COGS and credit to MI for the cost of the items
Manufacturing
• Materials are not purchased for resale but for use in manufacturing a product
• Item taken out of MI and requisitioned into production is transferred to Work in process inventory
account ( not COGS)

WORK IN PROCESS INVENTORY

• All manufacturing costs incurred and assigned to products being produced.
• The issuance of materials, production begins the production process.
• Direct Labor costs are assigned to those products by including the labor peso earned as part of the
WIP.
• Overhead Cost are product costs and must be assigned to specific products. To reduce the amount
needed to assign many overhead costs to products, they are accumulated and accounted for under
one account title ( FACTORY OVERHEAD CONTROL). These costs are assigned to products by
using an overhead rate (Predetermined overhead rate). These costs are charged to WIP inventory
account

WORK IN PROCESS INVENTORY

•As products are completed, they are put into finished goods storage area. These products now have
materials, direct labor, and factory overhead costs assigned to them. Costs are transferred from the
WIP to Finished Goods Inventory
•The balance remaining in the WIP account represents the costs that were assigned to products
partly complete and still in process at the end of the period

FINISHED GOODS INVENTORY

• Finished goods inventory account has same characteristics of merchandise inventory account.
•However, the accounting procedures affecting the debit side of the FGI accounts differ from those
for the merchandise inventory accounts.
•All costs debited to the finished goods inventory account represent transfer from the WIP inventory
accounts.
•At the end of an accounting period, the balance in FG inventory account is made up of cost of
products completed but unsold as of that date.

ELEMENTS OF MANUFACTURING COST

•Direct Materials - the cost of material which become part of the product being manufactured and
which can be readily identified with a certain product
•Indirect materials – materials that cannot be readily identified with any particular items
manufactured.
Materials that actually become parts of finished product but whose costs are relatively insignificant.

•Direct labor – cost of labor for those employees who work directly on the product manufactured
•Indirect Labor – the wages and salaries of employees who are required for manufacturing process
but who do not work directly on the units being manufactured
•Factory overhead – All costs related to manufacturing of product except for direct materials and
direct labor

COST VOLUME PROFIT ANALYSIS

COST – VOLUME PROFIT ANALYSIS-estimates how changes in cost (variable and fixed) sales
volume and price affect a company’s profit)
*Managers used CVP for planning and controlling.
*used by the company to determine break-even points
*At Break-even point, total revenue equal total cost
*used as point of reference

•It one of the most powerful tools that managers have at their command. It helps them understand the
interrelationship between cost volume and profit in an organization by focusing on interactions
between the following five elements:
1. Prices of products
2. Volume or level of activity within the relevant range
3. variable cost per unit
4. Total Fixed costs
5. Mix of products sold

CVP analysis helps managers answer several questions such as

1. No. Of units to be sold to break-even
2. The effects of changes in the fixed cost on the break even point
3. The effects of changes in the sale price on the break even point

Variable cost are all cost that increase as more units are produced and sold
1. Direct materials
2. Direct labor
3. Variable overhead
4. Variable selling

Variable administrative cost per unit remain constant or a fixed cost remains fixed in total
Relevant range- the range of activity over which a variable cost per unit remain constant or a fixed
cost remains fixed in total
Revenue- revenue per unit is assumed to remain constant. Total revenue fluctuates in direct
proportion to volume
Variable cost- Variable are assumed to remain constant on a per unit basis.Fluctuate in proportion to
volume
Fixed cost- total fixed cost assumed to remain constant regardless of changes in volume and
because of this fixed cost on a per unit basis increases as volume decreases and decreases as
volume increases
Mixed cost-before

BREAK EVEN POINT

•Break even point is where total revenue equals total cost.
•At this point there is no loss and also no profit
*to determine break even points, contribution margin are used
The formula to use is based on the objective

BREAK EVEN POINT (UNITS)= Total Fixed Cost

Sales price – Variable cost per unit

BREAK EVEN POINT (UNITS)=Total Fixed Cost

Contribution Margin per unit

BREAK EVEN POINT (PESOS)=Total Fixed Cost

Contribution margin ratio
If there are 2 or more CM
BREAK EVEN POINT (Units)=Total Fixed Cost
Weighted Contribution margin

BREAK EVEN POINT (UNITS)=BEP in units x Selling price per units

CONTRIBUTION MARGIN
•It is the amount remaining after deducting the variable cost per unit from the selling price per unit
•Contribution per unit is the amount contributed by each unit to the recovery of the fixed.

•Contribution margin per unit = Selling price – Variable cost

•Contribution margin Ratio = CM per unit

Selling price per unit

Break even sales

Sales
Add: variable cost
Contribution margin
Less;Fixed cost
Net income

*AT break-even sale contribution margin =fixed cost

*it excess is called net income

Contribution margin statement

-statement of comprehensive income that is based on the separation of costs into fixed and variable
-used under direct costing and variable costing

CVP analysis allows managers to do sensitivity analysis by examining the effect of various price or
cost levels on profit. It shows how revenues, expenses and profits behave as volume changes.

NET INCOME=revenue-total variable cost-total fixed cost

MARGIN OF SAFETY
•It is the units sold or revenue earned above the BEP volume. In simple words, it represents the
number of units or amount of sales revenue that the company can absorb before incurring a loss.

Margin of safety (units) = Current Sales (units) – BEP (units)

MOS (pesos) = MOS (units) x Selling price
MOS (ratio) = MOS (pesos) / Total Sales

CVP ANALYSIS IN A MULTIPRODUCT

•Two or more products are produced
•Convert multiple product problem to single product problem
•The Sales mix is the combination of products being marketed by the company
•Sales mix is measured in terms of units sold

• BeP (units) = Total Fixed cost

Weighted average Contribution margin

• Weighted average CM = Total Contribution Margin

 total expected sales

Expected net income

Add : Total fixed cost
Total contribution margin

SALES AND UNITS WITH DESIRED PROFITS

•Sales = total fixed cost + desired profit
Contribution Margin per unit
3 factors that affect break-even points
1. Selling price
2. Variable cost
3. Volume of sales

OPERATING LEVERAGE
•It is the use of fixed cost to get higher percentage changes in profit as sales changes.
•It is concerned with the relative mix of fixed cost and variable cost in an organization
•As variable cost is decreased, Contribution margin increases making the contribution of each unit to
recovery of fixed cost increase.
•The greater the degree of operating leverage , the more that change in sales will affect operating
income.
FORMULA
•Degree of Operating Leverage = Contribution Margin
Net income