Cost Accounting and Cost Management PDF

**COST ACCOUNTING AND COST MANAGEMENT** **MODULE 1: INTRODUCTION TO COST ACCOUNTING** **DEFINITION OF COST ACCOUNTING** - 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 costs of...

**COST ACCOUNTING AND COST MANAGEMENT** **MODULE 1: INTRODUCTION TO COST ACCOUNTING** **DEFINITION OF COST ACCOUNTING** - 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 costs of process, product, or service used, provided, and sold **USE OF COST ACCOUNTING DATA** The information produced by cost accounting provides basis for determining product costs and aids management in planning and controlling operations. 1. **Determining Product Costs** a. Determining the selling price of a product b. Meeting Competition c. Bidding on Contracts d. Analyzing Profitability 2. **Planning and Control** e. Planning -- planning is the process of establishing objectives and goals for the firm and determining the means to attain them i. Strategic -- it is concerned with the long term goals and objectives to determine the overall direction of the company ii. Tactical -- concerns with plans that are short range or within a given time period only and emphasizes plans to achieve the strategic goals iii. Operations -- day to day implementation of tactical plans. It emphasizes the coordination of the major factors of production, material-labor-overhead f. Control -- process of monitoring the company's operations and determining the objectives identified in the planning process are being accomplished. 3. **FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING** +-----------------------+-----------------------+-----------------------+ | | **FINANCIAL** | **MANAGEMENT** | +=======================+=======================+=======================+ | **DEFINITION** | Accounting is an | Accounting system by | | | information system | which information are | | | that identifies | presented and | | | records, and | supplied to | | | communicates the | management in | | | economic events of an | appropriate manner to | | | organization to | operate business | | | interested user | smoothly and | | | | efficiently | +-----------------------+-----------------------+-----------------------+ | **USER** | External persons who | Managers who plan for | | | make financial | and control an | | | decision | organization | +-----------------------+-----------------------+-----------------------+ | **TIME FOCUS** | Historical | Future | +-----------------------+-----------------------+-----------------------+ | **EMPHASIS** | Verifiability | Relevance for | | | | planning and control | | | Precision | | | | | Timeliness | +-----------------------+-----------------------+-----------------------+ | **SUBJECT** | Primary focus is on | Focuses on segments | | | the whole | of an organization | | | organization | | +-----------------------+-----------------------+-----------------------+ | **GAAP** | Must follow GAAP and | Need not follow GAAP | | | prescribed formats | and prescribed | | | | formats | +-----------------------+-----------------------+-----------------------+ | **REQUIREMENT** | Mandatory for | Not Mandatory | | | External Reports | | +-----------------------+-----------------------+-----------------------+ **THE VENN DIAGRAM: THE RELATIONSHIP OF FINANCIAL, MANAGEMENT AND COST ACCOUNTING** **MODULE 2: COSTS -- CONCEPTS AND CLASSIFICATIONS** **COSTS -** A cost may be defined as the value forgone or sacrifice of resources for the purpose of achieving some economic benefit which will promote the profit-making ability of the firm. **COST POOL -** Cost pools are costs collected into meaningful groups. - It may be classified as: - By type of costs (labor cost in one pool, material cost in another pool) - By source (department 1, 2, 3, and so on) - By responsibility (manager 1, ,2 , and so on) - Many more **COST OBJECT --** it is any product, service or organizational unit to which costs are assigned for some management purposes. **Cost Object** **Illustration** ----------------- ---------------------------------------------------------------------------------- Program An athletic program of a university Department A department within a DENR that studies air emission standards Activity A test to determine the quality level of television set Brand Category All soft drinks sold by a Pepsi-Cola bottling company with "Pepsi" in their name Customer All products purchased by Landmark (a customer) from Purefoods,Inc. Project A special sportscar assembled by Toyota Motors Service An airline flight from NAIA to Hongkong Product A motorcycle, a Stuffed toy **COST DRIVER -- it** is any factor that has the effect of changing the level of total cost. +-----------------------------------+-----------------------------------+ | **Business Function** | **Cost Drivers** | +===================================+===================================+ | Research and Development | - Number of Research Projects | | | | | | - Manpower hours on a project | | | | | | - Technical difficulties of | | | projects | +-----------------------------------+-----------------------------------+ | Design of products, services, and | - Number of products in design | | process | | | | - Number of part per product | | | | | | - Number of engineering hours | +-----------------------------------+-----------------------------------+ | Production | - Number of units produced | | | | | | - Direct Manufacturing labor | | | costs | | | | | | - Number of setups | | | | | | - Number of engineering change | | | orders | +-----------------------------------+-----------------------------------+ | Marketing | - Number of advertisements run | | | | | | - Number of sales personnel | | | | | | - Peso sales | +-----------------------------------+-----------------------------------+ | Distribution | - Number of items distributed | | | | | | - Number of customers | | | | | | - Weight of items distributed | +-----------------------------------+-----------------------------------+ | Customer Service | - Number of service calls | | | | | | - Number of products serviced | | | | | | - Hours spent servicing | | | products | +-----------------------------------+-----------------------------------+ **Classification of Costs** I. Costs classified as to relation to a Product II. Costs Classified as to Traceability to Cost Object III. Costs classified as to Variability or Cost Behavior IV. Costs classified as to Financial Statements V. Costs classified as to Types of Inventory VI. Costs classified as to Managerial Influence VII. Costs classified as to relation to an accounting period VIII. Costs classified to their nature as Common or Joint IX. Costs for planning, control and analytical process I. **Costs classified as to relation to a Product** A. **Manufacturing Costs/Product Cost/Inventoriable Costs** \- these are all costs associated with the production of goods or services. a. **Direct Materials -** these are all raw materials that become an integral part of the finished product and that can be conveniently and economically assigned to specific units manufactured. b. **Direct Labor** -- these represents the amount paid as wage to employees who work directly with the raw materials in converting them into finished goods. c. **Factory/Manufacturing Overhead --** these are all costs incurred in the factory or production that cannot be considered as direct materials and direct labor. It can be subdivided into three parts, indirect materials, indirect labor, and other manufacturing overhead. Direct Labor plus FOH = Conversion Cost DM + DL + FOH = Total Manufacturing Costs B. **Non-Manufacturing Costs/Period Costs** \- these are costs other than those related to the production of the goods. d. **Marketing or Selling Costs** -- these are costs associated with marketing and selling the product or all costs incurred by the markering division from the time the manufacturing process is completed until the product is delivered to the customer or all costs necessary to secure customer orders and get the finished product or service into the hands of the customer. e. **Administrative and General Costs** -- all executive, organizational, and clerical costs associated with the general management of the organization rather than with manufacturing, marketing and selling. II. **Costs Classified as to Traceability to Cost Object** A. **Direct Cost -** costs that can be economically traced to single cost object (product, department, unit) B. **Indirect Cost -** costs that are not directly or easily traceable to the cost object (product, department, unit) III. **Costs classified as to Variability or Cost Behavior** **-**Cost behavior -- refers to how a cost will react or respond to change in the business activity. **-** Activity -- refers to a measure of the organization's output of products or services. A. **Fixed Cost -** these are items of costs that remain constant in total, irrespective of the volume of production. Under fixed cost, the cost per unit decreases as the volume increases and increases as the volume decreases. **-** fixed costs may be classified into two categories depending on the ability of management to influence the levels of these costs in the short-term: **a. Committed Fixed Cost --** costs that represent relatively long term commitments on the part of management as a result of a past decision. **b.** **Managed Fixed Cost/ Discretionary Fixed Cost --** costs that are incurred on a short-term basis and can be more easily modified in response to changes in management objectives. B. **Variable Cost --** these are items of cost which vary directly in total, in relation to the volume of production. It is directly proportional with the change in production and as ther level of activity increase, so as the total cost. But the unit cost regardless of the level of activity remains constant, within a relevant range. C. **Mixed cost** - these are items of cost that contain both fixed and variable elements. 2 types of mixed cost a. **Semi-variable Cost** -- the fixed portion of a semi-variable cost usually represents a minimum fee for making a particular item or service available. The variable portion is the cost charged for actually using the service. b. **Step cost** -- the fixed part of step costs changes abruptly at various activity levels because these costs are acquired in indivisible portions. A step cost is similar to a fixed cost within a very small relevant range. **Method of Separating Mixed Costs** 1. **High Low Method --** it is a method of analyzing mixed cost based on costs observed at both the high and low levels of activity within the relevant range. 2. **Least-Squares Method** -- it is a statistical technique which is often used in separating mixed costs into their fixed and variable component. IV. **Costs classified as to Financial Statements** A. **Statement of Financial Position (Inventory Cost) -** the SFP of a manufacturing company is similar to that of a merchandising company. However, the inventory accounts differ between the two types of companies. B. **Income Statement (Cost of Sales/Other Operating Costs)** - Income statement of both Merchandising and Manufacturing are very similar. The only apparent difference is in the captions of some of the entries in the computation of COGS V. **Costs classified as to Types of Inventory** A. **Raw Materials Inventory** -- the cost of all raw materials and production supplies that have been purchased but not yet used at the end of the accounting period B. **Work in Process Inventory** - cost associated with goods partially completed at the end of the accounting period C. **Finished Goods Inventory --** cost of completed goods that have not been sold at the end of the accounting period D. **Merchandise inventory --** cost of purchased merchandise by retailers/ wholesalers that have not been sold at the end of the accounting period VI. **Costs classified as to Managerial Influence** A. **Controllable Costs** -- costs that is subject to significant influence by a particular manager within the time period under consideration. B. **Non-Controllable Costs -** cost over which a given manager does not have a significant influence. VII. **Costs classified as to relation to an accounting period** A. **Capital Expenditure --** these are expenditures that are initially recognized as an asset because it is intended to provide benefit over more than one accounting period. B. **Revenue Expenditure** - expenditures that will benefit the current period only and is recorded as an expense. VIII. **Costs classified to their nature as Common or Joint** A. **Common Cost** - cost of facilities or services employed in two or more accounting periods, operations, commodities or services. Just like indirect costs, these costs are subject to allocation. B. **Joint Cost -** these are cost of materials, labor and overhead incurred in the manufacture of two or more products at the same time. A major difficulty inherent to joint costs is that they are invisible and they are not specifically identifiable with any of the products being simultaneously produced. These costs are also subject to allocation. IX. **Costs for planning, control and analytical process** A. **Standard Cost** - these are predetermined costs for direct materials, direct labor, and factory overhead. Standard cost is a budget for the production of one unit of product or service. It serves as benchmark in the budgetary control. B. **Opportunity Cost --** the benefit given up when one alternative is chosen over another. C. **Differential Cost --** cost that is present in one alternative but is absent in whole or in part under another alternative. D. **Relevant Cost --** a future cost that changes across the alternatives. E. **Out-of-pocket Cost -** costs that requires the payment of money (or other assets ) as a result of their incurrence F. **Sunk Cost --** past costs that have been incurred and are irrelevant to a future decision.