Cost Accounting Concepts (PDF)

**Cost** -- cash or cash equivalent value sacrificed for goods and services that are expected to bring current or future benefit to the organization (Revenue) **Different Types of Cost** I. **Cost Related to Product** 1. **Inventoriable Cost/Product Cost/Manufacturing Costs** a. **Direct Mate...

**Cost** -- cash or cash equivalent value sacrificed for goods and services that are expected to bring current or future benefit to the organization (Revenue) **Different Types of Cost** I. **Cost Related to Product** 1. **Inventoriable Cost/Product Cost/Manufacturing Costs** a. **Direct Material** -- materials that become part of a finished product and can be traced conveniently and economically to specific product units b. **Direct Labor** -- amount paid as wages to those working directly on the product. Can be traced to specific product units just like direct materials c. **Factory Overhead** -- catchall for manufacturing costs that does not fit direct material or labor. Cannot be practically traced to specific product units 2. **Period Cost/Non-Manufacturing Cost** a. **Marketing or Selling Expense** -- cost necessary to secure customer orders or deliver product or service to the hands of the customer b. **General or Administrative Expenses** -- executive, organizational and clerical expenses having to do with the overall operation of the organization. II. **Costs Classified as to Variability** - **Activity** -- measure the organization's output of products or services - **Relevant range** -- limits the description to a specific range of activity a. **Fixed Cost** -- remain constant in total, not related to activity within the relevant range - **Committed Fixed Cost** -- cost that represent relatively long-term commitments on the part of the management as a result of past decisions - **Managed Fixed Cost** -- cost incurred on a short-term basis, can be more easily modified in response to changes in management objectives b. **Variable Cost** -- item of cost which vary directly in total, in relation to volume of production. Cost per unit remain constant as volume changes c. **Mixed Cost** -- cost vary with the level of production though not in direct relation to it. Part of the cost is fixed - Semi-Variable Cost - Step Cost III. **Cost classified as to relation to Manufacturing departments** a. **Direct Departmental Charges** -- charged to particular manufacturing departments b. **Indirect Departmental Charges** -- charged to some other manufacturing department IV. **Cost classified to their nature as common or joint** (both are subject to allocation) a. **Common Cost** -- cost of facilities or service employed in two or more accounting periods, operations, commodities or services. Includes all costs that keep the business running. (Ex. depreciation of building shared by two departments) b. **Joint Cost** -- cost of materials, labor, overhead incurred in the manufacture of two or more product at the same time. They are invisible and not specifically identifiable with any of the products. This emerged when multiple product emerged from the incurred expense. (Product costs incurred to manufacture two products up to the point of split-off) V. **Cost classified as to relation to an accounting period** a. **Capital Expenditures** -- intended to benefit more than one accounting period, recorded as an asset. b. **Revenue Expenditures** -- will benefit current period only, recorded as an expense VI. **Cost for planning, control, and analytical processes** a. **Standard Cost** -- predetermined cost for product cost, established from using information from past experience and data from research. Budget for production of one unit or service. Serves as a benchmark for budgetary control system. b. **Opportunity Cost** -- benefit given up when one alternative is chosen over another. Not usually recorded in the accounting system, they should be considered when evaluating alternatives for decision-making. c. **Differential Cost** -- cost that is present under one alternative but is absent in the whole or in part of another alternative. - **Incremental Cost** -- increase in cost of one alternative - **Decremental Cos**t -- decrease in cost d. **Relevant Cost** -- future cost that changes across alternatives. (eg. COGS, advertising, commissions, warehouse depreciation) e. **Out-of-Pocket Cost** -- cost the requires the payment of money or other asset as a result of their incurrence f. **Sunk Cost** -- cost for which an outlay (spent) has already been made and it cannot be change by present or future decision because of that they are not differential costs and they are independent of any event and should not be considered when making investment or project decisions. Considered as fixed cost g. **Controllable Cost**      **Financial Management** (aka. Managerial finance, corporate finance, and business finance) **Nature** - A decision making process concerned with planning, acquiring and utilizing funds in a manner that achieves the firm's desired goals. - Process and analysis of making financial decisions in the business context. **Goal** - Make money and add value for the owners/shareholders (Maximizing shareholder's wealth) - Financial manager must make decision for the owners of the firm. They must act according to the shareholder's best interest by making decision that increase the value of the firm or stock. - Shareholders: residual owners, they are only paid when all the expenses and legitimate claim are paid their due **Scope** - Acquisition, financing and management of assets of business concern in order to maximize the wealth of the firm for its owner's - Acquire funds needed by the firm and investing those funds in profitable ventures that will maximize firm's wealth and generate returns to business concerns - Procurement of short and long term funds from financial institutions - Mobilize funds through financial instruments (eg. Equity shares, preference share, debentures, bonds, notes, etc.) - Compliance with legal and regulatory provisions relating to funds procurement, use and distribution as well as coordination of the finance function with the accounting function. - Globalization has also changed Financial management, it cause national economy to integrate with global economy which created a new financial environment bringing new opportunities and challenges to the businesses. Evolved in order to promote more diversified, efficient and competitive financial system in the country Modern view approach, financial manager is expected to analyze the business firm and determine the ff; - Total funds requirements of the firm - Assets or resources to be acquired - Best pattern of financing the assets **Three major types of decisions** (all aim to maximize shareholders' wealth through maximization of the firm's wealth) - **Investment decisions** - Firm should select capital investment proposals whose net present value is positive and rate of return exceeds the marginal cost of capital - Consider profitability of each individual project proposal and its contribution to the overall profitability of the firm that leads to creation of wealth - **Financing Decisions** - Mix of debt and equity chosen to finance investments should maximize the value of the investments made - Finance decision should consider the cost of finance available in different forms and the risks attached to it - Whether the firm should choose debt-equity mix or capital structure decision? - **Dividend Decisions** - Concerned with the determination of quantum of profits to be distributed to the owners - The frequency of such payments and the amount to be retained by the firm **Philippine Stock Exchange (PSE)** - The only stock exchange in the Philippines - Serve and regulate the Philippines equities market with the objective of maintaining efficiency, fairness, and transparency - Offers comprehensive end-to-end roster of services which include listing, trading, market data, clearing and settlement - **Listing** - Viable destination for companies seeking to go public - Offer a solid platform for equity financing and long-term growth - Home to wide spectrum of firms -- ranging from big conglomerates to emerging enterprises -- which successfully tapped the equities market for their funding requirements **Trading** - Investing the Philippines stock market is possible through a diverse pool of global and domestic trading participants - Provides smooth and transparent trading experience to its investors **Market Data** - Provides extensive range of real-time and historical market data available to empower investors in developing and maximizing trading strategies, as well as to provide quality basis for the conduct of academic research **Post- Trade** - Offers clearing, settlement, and collateral management services that meet global standards - Enables the prudent mitigation and management of counterparty risks, and ensure transparency and uphold the integrity of the Philippine market **Types of Financial Market** 1. **Money Market** - Deals with short-term securities - Life: 1 year or less - Commercial paper, Time deposit of less than one year 2. **Capital Markets** - Deals with long-term securities - Life: more than one year - Intermediate Markets: 1 -- 10 years - Long-term Markets: greater than 10 years 3. **Derivative Market** - Financial market where derivative instruments are traded whose value is derived from an underlying asset or set of assets - Function of derivative market - **Price discovery** -- reflects market sentiment and expectations regarding future asset price. Provides valuable insight into market trends and investor sentiments - **Risk Management** -- one of the primary function of derivatives is Risk Mitigation. Investors utilize them to hedge against adverse price movements in the underlying assets -- safeguarding their portfolios from potential losses. - **Operational Advantages** -- offer operational efficiencies by enabling investors to gain exposure to various asset classes without need for direct ownership - **Capital Efficiency** -- often required lower initial capital outlay. This aspect attract diverse range of investors Types of Derivative Instruments 1. **Futures Contract** - Agreement between two parties for purchase of delivery of an asset at an agreed-upon price at a future date - Standardized contracts that trade on an exchange - Trader uses futures to hedge their risk or speculate on the price of an underlying asset - Parties involves are OBLIGATED to fulfill a commitment to buy or sell the underlying asset 2. **Forwards Contract** - Similar to futures, but they DO NOT trade on an exchange - These contracts only TRADE OVER THE COUNTER - Buyer and seller may customize the terms, size, and settlement process - Forwards carry a greater degree of counterparty risk, type of credit risk 3. **Options Contract** - Similar to futures - Key difference is that buyer is NOT OBLIED to exercise their agreement to buy or sell - An opportunity ONLY, not an obligation - Options may be used to speculate on the price of the underlying asset - Type of Options - Put-Option -- seller (Long) use its right to disregard the contract by paying you the buyer (short) a premium - Call-Option -- buyer (Long) use its right to buy the underlying asset at the maturity date by paying the seller (Short) a premium. **Underlying** -- Asset being bough/sold **Maturity** -- predetermined date **Strike** -- predetermined price of asset bring sold/bought of **Difference of Exchange-traded and Over-the-Counter derivatives** 1. **Exchange-Traded derivatives** - Standardize contracts traded on organized exchanges 2. **OTC derivatives** - Customized contracts negotiated between two parties directly without the involvement of an exchange