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Cost Accounting Notes Autosaved

Cost accounting focuses on recording and summarizing costs associated with a company's activities, crucial for both financial and management accounting. It categorizes costs into product costs, which include direct materials, direct labor, and overhead, and period costs, which are operating expenses not tied to manufacturing. Understanding cost behaviors, such as variable, fixed, and mixed costs, is essential for effective decision-making and financial reporting in manufacturing companies.

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26 views8 pages

Cost Accounting Notes Autosaved

Cost accounting focuses on recording and summarizing costs associated with a company's activities, crucial for both financial and management accounting. It categorizes costs into product costs, which include direct materials, direct labor, and overhead, and period costs, which are operating expenses not tied to manufacturing. Understanding cost behaviors, such as variable, fixed, and mixed costs, is essential for effective decision-making and financial reporting in manufacturing companies.

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bellojade27
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Cost Accounting- Is a branch of accounting that deals with the process of recording and summarizing the amount of cost

that is spent on the company’s activities. It includes all the cost of process, product or service used, provided and sold.

 Information about the cost of a product or service is needed in financial accounting for reporting purposes and
information of the product cost and service cost is needed in management accounting for decision making
purposes.
What is Cost?

 A Cost reflects the amount of resources sacrificed in order for the company to achieve a certain objective such
as creation of goods or rendering of services in order to earn revenues.

The Different Cost according to FS classification

Product cost- Are cost identified and incurred by an entity to manufacture a product. It includes all raw materials
used, labor cost incurred, and all other indirect cost.

Components of product cost

 Materials- All raw materials and other supplies used in the manufacturing process.
- Direct Materials- raw materials or components that are directly used in the manufacturing process to create a
finished product. They are essential and directly traceable to the product's cost
- Indirect Materials- Are the materials that you cannot really trace it into the product but its still needed in order
for you to finish the processing of the product.
 Labor- Salaries and other benefits provided to our workers.
- Direct Labor- the work that employees do to create products or provide services
- Indirect Labor – The work of the employees who support the day to day operations of the business but are not
directly involve in the productions process of goods or services.
 Overhead Cost- All indirect cost necessary for product conversion that are not direct materials and direct labor.
- Example- Indirect materials and labor, depreciation of factory equipment, insurance of factory plant,
maintenance and repairs of equipment and factory utilities.

THE TOTAL DIRECT MATERIALS AND DIRECT LABOR IS CALLED PRIME COST- These are the cost that are really
needed to make a product.

DIRECT LABOR PLUS OVERHEAD IS CALLED CONVERSION COST-

PRIME COST PLUS OVERHEAD COST = TOTAL MANUFACTURING COST

CONVERSION COST PLUS DIRECT MATERIALS = TOTAL MANUFACTURING COST

DIRECT LABOR + DIRECT MATERIALS + OVERHEAD = TOTAL MANUFACTURING COST

Period cost- The entity’s operating expense. They are called such since they are more associated with time periods
rather than the manufacturing process. They are all other expense not related to manufacturing.
Components of Period cost

- Marketing and advertising- expense incurred in promoting the entity’s product and services.
- Selling and Distribution- They include salaries of sales personnel, and delivery expense.
- Administrative expense- They include office utilities, depreciation of the office PPE, repairs and maintenance of
office PPE, and all other expenses in the office.

COST BEHAVIORS

1. Variable cost- They are the cost that change as the quantity of the goods produced changes. The total amount
of variable cost is dependent to the level of production.
- Constant on a per unit basis
- Varies when presented as total.
2. Fixed Cost- At whatever level of production within the relevant range, this cost does not change. It is
independent of the level of production.
- Constant when presented as total
- Varies on a unit basis

COST EQUATION y= a + bx

Y= Total cost

A= Total fixed cost

B= Variable cost per unit

X= Volume of activity

Mixed Cost- Refers to cost that has both variable and fixed components

Example: Utilities, since this is charge with a base amount and goes higher with usage over the base amount.

Step Cost- Cost that are constant on a certain level of activity but increases on another certain level of activity.

Example: Salaries and commission of agents goes higher with different ranges of activities.

How to separate Mixed Cost?

 In separating mixed cost there two methods namely:


1. High-Low method
2. Least square regression method
Accounting Cycle for the manufacturing Company
In a manufacturing perspective inventories are:

 Raw materials inventories are the materials or supplies to be consumed in the production process to be
transformed as completed goods.
 Work in process inventories are items that are currently in the process of production.
 Finished goods inventories are items that are completed the production process and are held for sale in the
ordinary course of business

New Account Titles in manufacturing cost accounting

 Debit Raw Materials inventory in the Beginning balance, Purchase of raw materials and return of excess raw
materials if there is excess in the production.
 Credit it if we have returns from the supplier and Credit it when we issue it in production so that we can put it in
the Work in process inventory.

 Debit it when we recognized the salaries of our workers


 Credit it when we close it to the production and transfer it to the Work in process Inventory.

 Debit Manufacturing overhead cost to all indirect cost


 Credit it when we close it to the production.
 Actual costing is the actual cost incurred in the overhead.
 Normal costing – Here we use predetermined rates because it is impracticable for the company to wait for all of
these manufacturing cost to be incurred, because the company needs the cost information to be used in
decision making in pricing.
 When the Work in process inventory is completed we close it to the Finished Goods Inventory. (Debit FG
Inventory and Credit WIP inventory).

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