Learning Objectives

LO1- Define Cost

LO2- Distinguish between Financial & Managerial Accounting
LO3-State the goals of Managerial Accounting.
LO4- Define cost terms used in planning, control, and decision making.
LO5-Identify the cost components of a product made by a manufacturing company: the cost
of materials, labor & overhead
LO6-Explain the effects on the financial statements of product costs versus period costs.
LO7-Distinguish product costs from upstream & downstream costs
LO8-Explain how product costing differs in service, merchandising & manufacturing
companies
LO9-: Describe how direct material, direct labor, and manufacturing overhead are assigned to
jobs.
LO10-Explain the role of a predetermined overhead rate in applying overhead to jobs

Cost & Cost

Accounting
Cost is a resource sacrificed or forgone to achieve
a specific objective.
Actual cost a cost that has occurred
Budgeted cost a predicted cost
Cost object anything of interest for which a cost is
desired
Cost accounting is concerned with recording, classifying and
summarizing costs for determination of costs of products or
services, planning, controlling and reducing such costs and
furnishing of information to management for decision making

Comparing Managerial Accounting &

Financial Accounting
Is meant primarily for internal users while financial accounting is meant for
external users.
Is more flexible / more detailed
Does not focus on generally accepted accounting principles (GAAP)
Has a future rather than past focus
Is more timely
Emphasizes parts of a company (the details), rather than the whole
company
Emphasizes both qualitative and quantitative information

Cost & Profit as a percentage of total income

( Rs. In crores)

Cost Terms
The term cost appears in many contexts and
carries a number of meanings.
Different categories of cost terms are merely
different ways to look at costs or to slice and dice
cost information. They are not necessarily
complementary to or mutually exclusive of other
cost categories.

Cost Classification

Elements
Direct Material
Direct Labour
Direct Expense
Overhead

Behaviour Pattern
Fixed Cost
Variable Cost
Semi Variable Cost

Function Wise
Product Cost
Administrative Cost
Selling Cost
Distribution Cost
Research & Development Cost

 Normality
Normal Cost
Abnormal Cost

Financial accounting classification

Capitalized Cost
Production Cost
Period Costs

Managerial decision making

Marginal Cost
Sunk Cost
Committed Costs
Opportunity Cost
Incremental Cost
Avoidable & Unavoidable Cost
Controllable & Non Controllable Costs

Variable & Fixed Cost

Variable costs: costs that increase or decrease
(in total) relative to increases or decreases in
the level of business activity.
Fixed costs: costs that do not change (in total)
relative to changes in business activity.

Sunk Cost
Sometimes called past costs. These costs are
NOT relevant to the decision making process.

Opportunity Cost
These are the values of potential
benefits foregone when a decision is
made.

Direct & Indirect Cost

Direct costs: costs that are directly traceable to
some object such as a product, activity or
department.
Indirect costs: costs that are NOT directly
traceable to a product, activity or department.

Controllable and Non-controllable

Costs
Yet another way to slice and dice costs. This time it has
to do with the degree of influence a manager has over
the cost.
If a management decision can impact the cost in the
short term, it is considered controllable.
Conversely, if a manager cannot influence (control) the
cost in the short term, then it is non controllable.
A managers performance should NOT include an
assessment of non controllable costs.

Types of Product Costs

Also known as Inventoriable Costs
Direct Materials
Direct Labor
Indirect Manufacturing factory costs
that are not traceable to the product.
Other common names for this type of
cost include Manufacturing Overhead
costs or Factory Overhead costs.

Accounting Distinction
Between Costs
Inventoriable costs product
manufacturing costs. These costs
are capitalized as assets (inventory)
until they are sold and transferred to
Cost of Goods Sold.
Period costs have no future value
and are expensed as incurred.

Basic Costing
Terminology
Several key points from prior
chapters:
Cost Objects - including responsibility
centers, departments, customers,
products, etc.
Direct costs and tracing materials and
labor
Indirect costs and allocation - overhead

logically extended
Cost Pool any logical grouping of related
cost objects
Cost-allocation base a cost driver is used
as a basis upon which to build a systematic
method of distributing indirect costs.
For example, lets say that direct labor hours cause
indirect costs to change. Accordingly, direct labor
hours will be used to distribute or allocate costs
among objects based on their usage of that cost
driver

Costing Systems
Costing Systems/Methods are used to
determine cost per unit of output for
inventory valuation.
Job-Costing: system accounting for distinct
cost objects called Jobs. Each job may be
different from the next, and consumes
different resources
Wedding announcements, aircraft, advertising

Process-Costing: system accounting for mass

production of identical or similar products
Oil refining, orange juice, soda pop

Seven-step Job
Costing
1. Identify the Job that is the Chosen
Cost Object
2. Identify the Direct Costs of the Job
3. Select the Cost-Allocation base(s) to
use for allocating Indirect Costs to
the Job
4. Match Indirect Costs to their
respective Cost-Allocation base(s)

Seven-step Job Costing

(continued)
5. Calculate an Overhead Allocation Rate:
Actual OH Costs Actual OH Allocation
Base

6. Allocate Overhead Costs to the Job:

OH Allocation Rate x Actual Base Activity For the Job

7. Compute Total Job Costs by adding all

direct and indirect costs together

Flow of Costs
Illustrated