Cost Accounting: An Overview

Course Content: Principles of Cost Accounting

• Chapter 1: Introduction to Cost Accounting
• Chapter 1, Section 1: The Role of Cost Accounting
• Chapter 1, Section 2: The Cost Accounting System
• Chapter 1, Section 3: Cost Concepts
• Chapter 2: Determining Product Cost
• Chapter 2, Section 1: Cycle of Determining Product Cost
• Chapter 2, Section 2: Methods of Determining Product Cost (Total vs. Partial)
• Chapter 3: Accounting for Initial Costs

Origins of Cost Accounting

• Cost accounting emerged with financial accounting alongside commercial businesses. The focus of financial accounting is preparing financial statements for external parties.
• Income Statement: Determines a business’s profit or loss over a specific period.
• Balance Sheet: Aims to define the financial position of a company which includes assets and liabilities at the end of a reporting period.
• Financial accounting offers cumulative data about a business.
• Cost accounting is relatively recent, gaining prominence during the Industrial Revolution due to:
  • The spread of large-scale production units that are complex and technologically advanced.
  • Increases in factors of production and complexity of production processes.
  • Reliance on large-scale production.

Evolution of Cost Accounting Objectives

• Cost accounting originally focused solely on determining a product’s cost.
• Currently, cost accounting intends to achieve three other objectives:
  • Determining product cost for external parties.
  • Providing analytical data for operational purposes like planning and control.
  • Providing analytical data for strategic purposes, such as managerial decision-making.

Determining Product Cost

• Cost accounting's primary purpose is to determine costs within the context of the cost-benefit standard (economics of information).

Cost Object (Cost Accounting Unit)

• It is anything for which a separate cost measurement is desired, such as an activity, product, item, or service, like calculating the cost of a juice pack, paving a kilometer, patient care, banking services, or machine operation time.

Distinctions between Cost Object and Cost Unit

• The cost unit measures the cost, e.g., a table or chair.
• The unit of cost is which the cost of an item is measured, e.g., currency.
• Cost is the economic sacrifices made to achieve an objective, like economic benefits or revenue.

Steps for Determining Product Cost

• Study the production process regarding stages and product attributes.
• List and record cost elements like materials, labor, and services.
• Examine the cost elements to allocate direct and indirect costs to final outputs.
• Communicate cost data on product cost through reports to relevant parties.

Important Notes

• Financial accounting serves external parties, while cost accounting serves both external and internal parties.

Financial vs. Cost Accounting

• Both financial and cost accounting serve external parties.
• Financial accounting gives general information, but cost accounting gives analytical data.

Analytical Information for Planning and Control

• Planning means choosing the best options to achieve goals based on available resources.
• Control involves ensuring actual results match plans, correcting deviations, and assessing performance.
• Planning and control are interrelated, as control relies on standards set during planning.

Analytical Information for Managerial Decision Making

• Decision-making is selecting from alternatives to achieve a goal.
• Decision-making combines science, using models; and art, relying on data.
• Decisions vary in complexity and impact, requiring cost-benefit considerations.
• Managerial decisions should be based on accounting information to reduce uncertainty and improve decision quality.

Applications of Cost Accounting

• Cost accounting expanded beyond industrial activities and the cost of goods to marketing and management activities.
• It now incorporates new service industries like banking, hospitals, and universities, showing a horizontal expansion.