Introduction to Cost Accounting
What is Cost
Accounting?
Cost Accounting is a facet of management
What is Cost accounting that determines the actual cost
associated with manufacturing a product or
Accounting? providing a services by looking all the
expenses within the supply chain.
Cost Accounting is done for the purpose of
budget preparation and profitability analysis.
The information derived from this process is
What is Cost useful to managers in determining which
products, departments or services are most
Accounting? profitable and which one needs improvement.
It also involves the determination of fixed and
variable costs.
Classification
of Costs
Cost classified 1. Fixed Costs
as to variability 2. Variable Costs
3. Mixed Costs
Fixed Costs are expenses that recur each month
What are Fixed regardless of the level of production which
remain constant in total.
Costs?
Examples include rent, depreciation, interest on
loans and lease expenses.
Fixed Costs are not related to activity within
What are Fixed the relevant range. So let’s say the activity
increases or decreases by 20%, then total fixed
Costs? cost remain the same.
Cost per unit decreases as the volume increases
and increases as volume decreases.
What is
Variable Cost? Variable Costs are expenses that fluctuate with
changes in production level.
Examples include supplies, labor and
maintenance expenses.
Variable Costs vary directly, in total, in relation
What is to volume of production. So let’s say the
activity increases by 20%, total variable cost
Variable Cost? increases by 20% also.
Cost per unit remains constant as volume
changes within a relevant range.
What are Mixed Costs are the items of costs with fixed
and variable components. It varies with the
Mixed Costs? level of production, though not in direct
relation to it, probably because part of the cost
is fixed while the rest is variable.
Costs classified A. Manufacturing Costs/ Product Costs
as to relation to 1. Direct Materials
2. Direct Labor
a product 3. Factory Overhead
B. Non- manufacturing costs/ period costs
1. Marketing or Selling Expense
2. General or administrative expense
Direct Materials are those materials and
Direct Material supplies that are consumed during the
manufacture of a product, and which are
Costs directly identified with that product.
Examples include iron ore for steel, sheet steel
for automobiles , or flour for bread.
Direct Labor cost is wages that are incurred in
order to produce goods or provide services to
customers.
Direct Labor
Costs It also includes the payroll taxes associated
with those wages, plus the cost of company-
paid medical insurance, life insurance, workers
compensation insurance, any company-
matched pension contributions, and other
company benefits.
Factory Factory Overhead is the costs incurred during
Overhead the manufacturing process, not including the
costs of direct labor and direct materials.
• Production supervisor salaries
• Quality assurance salaries
Examples of • Materials management salaries
• Factory rent
Factory • Factory utilities
Overhead • Factory building insurance
• Fringe benefits
• Depreciation
• Factory supplies
• Insurance on production facilities and
equipment
• Property taxes on production facilities
Cost Accounting for
Merchandising and
Manufacturing firms.
A merchandise company normally buys a
product that is ready for resale when it is
received. Nothing needs to be done to the
Cost Accounting product to make it salable except possibly to
prepare a special package or display.
for Total beginning merchandise inventory plus
Merchandising
purchases is the basis for computing both the
cost of goods sold and ending merchandise
inventory balances. Costs assigned to unsold
Firm items make up the ending merchandise
inventory balance. The difference between
the cost of goods available for sale and the
ending inventory amount is the cost of goods
sold during the priod
Pro- forma of Statement of Cost of Goods
Sold under Merchandising Firms
Beginning Merchandise Inventory xxx
Add: Total Purchases xxx
Cost of Goods available for sale xxx
Less: Ending Merchandise Inventory xxx
Cost of Goods Sold xxx
Computing the cost of goods sold for
Cost Accounting a manufacturing company is more
complex. Instead of one inventory
account, a manufacturer maintains
for three inventory accounts:
Manufacturing 1. Materials Inventory
Firms 2. Work in Process Inventory
3. Finished Goods Inventory
Purchased materials unused
Materials during the production process
Inventory make up the ending material
inventory balance.
The cost of materials used
plus the costs of labor
services and factory overhead
Work In Process are transferred to the Work in
Process Inventory account
Inventory when the materials, labor
services and overhead items
are use in the production
process.
The Finished Goods Inventory is set
up in the same way as the
Merchandising Inventory Account
under Merchandising. Costs of
completed goods are entered into
Finished Goods Inventory Account.
Finished Goods Then costs attached to unsold items at
year- end make up the ending balance
Inventory in the Finished Goods Inventory
Account.
All costs related to units sold are
transferred to the Cost of Goods Sold
account and reported on the income
statement.
Pro- forma of Statement of Cost of Goods Sold under
Manufacturing Firms
Raw Materials, Beginning xxx
Add: Raw Materials Purchases xxx
Less: Raw Materials, Ending xxx
Raw Materials Used xxx
Less: Indirect Materials xxx
Direct Materials Used xxx
Add: Direct Labor xxx
Add: Manufacturing Overhead xxx
Total Manufacturing Cost xxx
Add: Work In Process Inventory, Beginning xxx
Less: Work In Process, Ending xxx
Cost of Goods Manufactured xxx
Add: Finished Goods Inventory, Beginning xxx
Total Goods Available for Sale xxx
Less: Finished Goods Inventory, Ending xxx
Cost of Goods Sold xxx
