Cost Accounting Concepts

by: Merly V. Tabo

Cost Accounting
 a branch of accounting dealing with the

classification, recording, allocation, summarization and reporting of current and prospective costs and analyzing their behaviors.  Cost accounting is frequently used to facilitate internal decision making and provides tools with which management can appraise performance and control costs of doing business.
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Cost vs Expense
 Cost
-the amount of cash or cash equivalent sacrificed for goods and/ services that are expected to bring a current or future benefit to the organization E.g.: Materials, Motor Vehicle

 Expense

Costs that are used up ( expired ) in the production of revenue E.g. : Office rent for July; Sales Commission; Depreciation for Motor Vehicle

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General Cost Classifications

 Manufacturing Cost  Non-manufacturing Cost

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Manufacturing Costs
Direct Materials Direct Labor Manufacturing Overhead

The Product

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Direct Materials
Those materials that become an integral part of the product and that can be conveniently traced directly to it.

Example: A tire used in an automobile

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Direct Labor
Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workers

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Manufacturing Overhead
Manufacturing costs that cannot be traced directly to specific units produced.
Examples: Indirect labor and indirect materials Wages paid to employees who are not directly involved in production work.
Examples: maintenance workers, janitors and security guards.
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Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile assembly plant.

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Classifications of Manufacturing Costs

Manufacturing costs are often classified as follows:
Direct Material Direct Labor Manufacturing Overhead

Prime Cost
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Conversion Cost
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Nonmanufacturing Costs
Marketing and selling costs . . .
 Costs necessary to get the order and deliver the

product.
Examples: advertising, shipping, sales travel, sales commission, sales salaries

Administrative costs . . .
 All executive, organizational, and clerical costs.
Examples: executive compensation General acctg., secretarial, Public relations and similar cost involved in the general administration of the oganization
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Product Costs Versus Period Costs

Product costs include direct materials, direct labor, and manufacturing overhead.
Inventory Sale
Cost of Good Sold

Period costs are not included in product costs. They are expensed on the income statement.
Expense

Balance Sheet
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Income Statement
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Income Statement
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Presentations in the Financial Statements

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Balance Sheet
Merchandiser
Current assets
 Cash  Receivables  Prepaid expenses  Merchandise inventory Partially complete

Manufacturer
Current Assets
 Cash  Receivables Materials waiting to

be processed.  Prepaid Expenses

 Inventories Raw Materials Work in Process Finished Goods

products some material, labor, or overhead has been added.

Completed products awaiting sale.

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The Income Statement

Cost of goods sold for manufacturers differs only slightly from cost of goods sold for merchandisers.
Merchandising Company
Cost of goods sold: Beg. merchandise inventory $ 14,200 + Purchases 234,150 Goods available for sale $ 248,350 - Ending merchandise inventory (12,100) = Cost of goods sold $ 236,250

Manufacturing Company
Cost of goods sold: Beg. finished goods inv. + Cost of goods manufactured Goods available for sale - Ending finished goods inventory = Cost of goods sold

$ 14,200 234,150 $248,350

(12,100) $236,250

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Manufacturing Cost Flows

Costs
Material Purchases Direct Labor Manufacturing Overhead

Balance Sheet Inventories

Raw Materials Work in Process

Income Statement Expenses

Finished Goods

Cost of Goods Sold Selling and Administrative

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Selling and Administrative

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Period Costs
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Raw Materials
Raw Materials
Beginning raw materials inventory

Manufacturing Costs

Work In Process

Beginning inventory is the inventory carried over from the prior period.

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Direct Materials Used

Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials

Work In Process

+ =

As items are removed from raw materials inventory and placed into the production process, they are called direct materials.
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Exercise:
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still present. What is the cost of direct material used? A. $276,000 B. $272,000 C. $280,000 D. $ 2,000
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Computation:
Beginning raw materials inventory was $32,000. During the month, $276,000 of raw material was purchased. A count at the end of the month revealed that $28,000 of raw material was still Beg. raw materials $ present. What is the cost of direct material 32,000 + Raw materials used? purchased 276,000 A. $276,000 = Raw materials available for use in production $ 308,000 B. $272,000 Ending raw materials inventory 28,000 C. $280,000 = Raw materials used in production $ 280,000 D. $ 2,000
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Manufacturing Costs
Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process

+ =

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Manufacturing Cost
Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process

+ =

Conversion costs are costs incurred to convert the direct material into a finished product.

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Exercise
Direct materials used in production totaled $280,000. Direct labor was $375,000 and factory overhead was $180,000. What were total manufacturing costs incurred for the month? A. $555,000 B. $835,000 C. $655,000 D. Cannot be determined.
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Computation
Direct materials used in production totaled $280,000. Direct labor was $375,000 and $ 280,000 factory overhead wasDirect MaterialsWhat were $180,000. Labor total manufacturing + Directincurred for the 375,000 costs Overhead + Mfg. 180,000 month? = Mfg. Costs Incurred for the Month $ 835,000 A. $555,000 B. $835,000 C. $655,000 D. Cannot be determined.
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Cost of Goods Manufactured

Raw Materials
Beginning raw materials inventory Raw materials purchased Raw materials available for use in production Ending raw materials inventory Raw materials used in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory + Total manufacturing costs = Total work in process for the period

+ =

All manufacturing costs incurred during the period are added to the beginning balance of work in process.
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Cost of Goods Manufactured

Raw Materials
Beginning raw materials inventory + Raw materials purchased = Raw materials available for use in production

Manufacturing Costs
Direct materials + Direct labor + Mfg. overhead = Total manufacturing costs

Work In Process
Beginning work in process inventory Total manufacturing costs Total work in process for the period Ending work in process inventory Cost of goods manufactured.

+ =

Costs associated with the goods that are completed during the period are transferred to finished goods inventory.
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Exercise:
Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at the end of the month. What was the cost of goods manufactured during the month? A. $1,160,000 B. $ 910,000 C. $ 760,000 D. Cannot be determined.
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Computation:
Beginning work in process was $125,000. Manufacturing costs incurred for the month were $835,000. There were $200,000 of partially finished goods remaining in work in process inventory at theBeginning work inmonth. end of the process inventory $ 125,000 What was the cost of goods manufactured + Mfg. costs incurred for the period 835,000 during the month? = Total work in process A. $1,160,000 during the period $ 960,000 B. $ 910,000 Ending work in process inventory 200,000 C. $ 760,000 = Cost of goods manufactured $ 760,000 D. Cannot be determined.
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Cost of Goods Sold

Work In Process
Beginning work in process inventory Manufacturing costs for the period Total work in process for the period Ending work in process inventory Cost of goods manufactured

Finished Goods
Beginning finished goods inventory + Cost of goods manufactured = Cost of goods available for sale - Ending finished goods inventory Cost of goods sold

+ = =

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Exercise: COGS
Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold for the month? A. $ 20,000. B. $740,000. C. $780,000. D. $760,000.
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Computation:
Beginning finished goods inventory was $130,000. The cost of goods manufactured for the month was $760,000. And the ending finished goods inventory was $150,000. What was the cost of goods sold$760,000 = $890,000 $130,000 + for the month? A. $ 20,000. $890,000 - $150,000 = $740,000 B. $740,000. C. $780,000. D. $760,000.
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Cost Classifications for Predicting Cost Behavior

How a cost will react to changes in the level of business activity.
 Total variable costs

change when activity changes.

 Total fixed costs

remain unchanged when activity changes.

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Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)
Cost Variable In Total Total variable cost changes as activity level changes. Total fixed cost remains the same even when the activity level changes. Per Unit Variable cost per unit remains the same over wide ranges of activity. Fixed cost per unit goes down as activity level goes up.

Fixed

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Direct Costs and Indirect Costs

Direct costs
 Costs that can be

Indirect costs
 Costs cannot be easily

easily and conveniently traced to a unit of product or other cost objective. material and direct labor

and conveniently traced to a unit of product or other cost object. manufacturing overhead

 Examples: direct

 Example:

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Differential Costs and Revenues

Costs and revenues that differ among alternatives.
Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Differential revenue is: $2,000 $1,500 = $500 Differential cost is: $300
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Exercise:
Suppose you are trying to decide whether to drive or take the train to UST to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to UST? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant.
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Answer:
Suppose you are trying to decide whether to drive or take the train to UST to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the pizza you ate last night relevant in this decision? In other words, should the cost of the pizza affect the decision of whether you drive or take the train to UST? A. Yes, the cost of the pizza is relevant. B. No, the cost of the pizza is not relevant.
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Exercise:
Suppose you are trying to decide whether to drive or take the train to UST to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to UST? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
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Answer
Suppose you are trying to decide whether to drive or take the train to UST to attend a concert. You have ample cash to do either, but you dont want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to UST? A. Yes, the cost of the train ticket is relevant. B. No, the cost of the train ticket is not relevant.
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Note
 Every decision involves a choice from

among at least two alternatives.  Only those costs and benefits that differ between alternatives (i.E., Differential costs and benefits) are relevant in a decision.

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Opportunity Costs
The potential benefit that is given up when one alternative is selected over another.

Example: If you were not attending college, you could be earning P120,000 per year. Your opportunity cost of attending college for one year is P 120,000.
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Sunk Costs
Sunk costs cannot be changed by any decision. They are not differential costs and should be ignored when making decisions. Example: You bought an automobile that cost P600,000 two years ago. The P600,000 cost is sunk because whether you drive it, park it, trade it, or sell it, you cannot change the P600,000 cost.

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Question:
Suppose that your car could be sold now for P 300,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

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Answer:
Suppose that your car could be sold now for P 300,000. Is this a sunk cost? A. Yes, it is a sunk cost. B. No, it is not a sunk cost.

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Thank you for Listening

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