Introduction to - examines the cost structure of a business.

It does so by
Cost Accounting
An Introduction to Cost Terms
Cost
- the value of money that has been used up to
produce something or deliver a service
Cost Object
- a managerial term for a product, process,
department, or customer that costs originate from or are
associated with. In other words, it’s something that costs
can be identified with and traced back to.
Direct Cost
- a cost which is related to a particular cost objective and can
be traced to it in an economically feasible way.
Indirect Cost
- a cost which is related to a particular cost objective and
cannot be traced to it in an economically feasible way.
Variable Cost
- are corporate expenses that vary in direct proportion to the
quantity of output.
Fixed Cost
- are costs that do not change when the quantity of output
changes.
Total Cost
- an economic measure that sums all expenses paid to produce
a product, purchase an investment, or acquire a piece of equipment
including not only the initial cash outlay.
Unit Cost or Average Cost
- the per unit cost of production obtained by dividing the total
cost (TC) by the total output (Q).
What is Cost Accounting?
collecting information about the costs incurred by a company's
activities, assigning selected costs to products and services and other
cost objects, and evaluating the efficiency of cost usage.
- mostly concerned with developing an understanding of where
a company earns and loses money, and providing input into decisions
to generate profits in the future.
Objective of Cost Accounting
 To ascertain the cost per unit of the different products
manufactured by a business concern;
 To provide a correct analysis of cost both by process or
operations and by different elements of cost;
 To disclose sources of wastage whether of material, time or
expense or in the use of machinery and tools.
 To provide requisite data and serve as a guide for fixing prices of
products manufactured or services rendered;
 To help in the preparation of budgets and implementation of
budgetary control;
 To guide management in the formulation and implementation of
incentive bonus plans based on productivity and cost savings;
 To organize the cost reduction programmers with the help of
different departmental managers;
 To find out costing profit or loss by identifying with revenues the
cost of those products or services by selling which the revenues
have resulted.
Comparison of Financial,
Management and
Cost Accounting
Financial Accounting
Management Accounting
Cost Accounting
the use of accounting information for reporting to external parties,
including investors and creditors. Financial accounting is primarily
concerned with financial statements for external use by those who
supply funds to the entity and other person who may have vested in the
financial operations of the firm.
focuses on the needs of parties within the organization, rather than
interested parties outside the organization. Managerial accounting
information commonly addresses individual or divisional concerns
rather than those of the enterprises as a whole.
the intersection between financial and managerial accounting. Cost
accounting information is needed and used by both financial and
managerial accounting. It provides product cost information to
external parties, such as stockholders, creditors and various regulatory
boards for credit and investment decisions and also provides product
cost information to internal parties such as managers for planning and
controlling.
Elements of Cost
Direct Material
- those materials and supplies that are consumed during the
manufacture of a product, and which are directly identified with that
product. Items designated as direct materials are usually listed in the
bill of materials file for a product.
Direct Labor
- the amount of effort exerted by employees to convert raw
materials into finished goods.
Overheads
- those costs required to run a business, but which cannot be
directly attributed to any specific business activity, product, or service.
Organizational Strategy
is a plan to evolve from a current situation to a future desired
status through actions in different business dimensions
Developing Strategy
- In response to globalization challenges,
managers must consider the underlying strategy that identifies how a
company intends to achieve its mission.
- After preparing its mission statement, a
company develops a strategy to achieve a competitive advantage.
- Most companies employ either a ‘cost
leadership” or “product differentiation” strategy.
- Deciding on a strategy is a difficult and often
controversial process that should reflect the organization’s core
competencies.
Value Chain
- a set of value-adding functions or process that
converts inputs into products and service for company customers.
Balanced Scorecard
- a performance metric used in strategic
management to identify and improve various internal functions of a
business and their resulting external outcomes. It is used to measure
and provide feedback to organizations
Competing in a global environment
Most businesses participate in the global economy,
which encompasses the international trade of goods and services,
movements of labor, and flows of capital and information.
Organizational Structure
a system that outlines how certain activities are directed
in order to achieve the goals of an organization. These activities can
include rules, roles, and responsibilities. The organizational structure
also determines how information flows between levels within the
company.
Professional Ethics
Cost Accounting Standards
Cost Accounting Standards Board (CASB) is a U.S. federal
government body with a mandate of promoting consistency and
uniformity in cost accounting activities involving government grants
and contracts.
CASB standards do not constitute a comprehensive set of rules, but
compliance is required for companies bidding on or pricing-cost
related contracts to the federal government.
Uses of Cost Accounting Data
Determining Product Cost
- Cost accounting procedures help management
in gathering the data needed to determine product costs and thus
generate meaningful financial statements and other report.
Planning and Control
- One of the most important functions of cost
accounting is the development of information which can be used by
management in planning and controlling operations.
 COST TERMINOLOGY AND d. PRIME COST
COST BEHAVIOR the total direct materials and direct labor costs.
A. BY NATURE
Nature of Cost 2. NONMANUFACTURING COST- include costs relating to
COST- is the value forgone or sacrifice of resources for the purpose of selling and other activities not related to manufacturing of
achieving some economic benefit which will promote the profit- goods.
making ability of the firm. a. Marketing Costs - include expenses incurred to change the
Classifications of Costs title of goods, promotion of goods, etc.
A. By Nature b. General Administrative Costs - are cost that contribute
B. By Variability to the overall operations of a company.
C. By Types of Inventory
D. According to Traceability to Cost Objective A. BY NATURE
E. According to Managerial Influence
F. According to Generally Accepted Accounting Treatment 3. COMMON COSTS- costs that benefit two or more operations,
G. Cost Terminologies Used for Planning and Control product or services.
H. According to Time-frame Perspective
I. According to Time Period for which the Cost is Incurred -a shared expense of creating a product or providing
J. For Other Analytical Purposes services that can’t be attributed to a single department or user.
A. BY NATURE B. By Variability
1. MANUFACTURING COST- are frequently classified as direct 1. VARIABLE COSTS – cost that change directly in proportion to
materials, direct labor and factory overhead. changes in activity (volume).
a. Direct Materials 2. FIXED COSTS – costs remain unchanged for a given time period
b. Direct Labor regardless of the changes in activity (volume).
c. Factory Overhead 3. SEMIVARIABLE COSTS – costs contain both variable and fixed
 Indirect Materials costs.
 Indirect Labor C. By Types of Inventory
d. Prime Costs 1. RAW MATERIALS INVENTORY – the cost of all raw materials
e. Conversion Costs and production supplies that have been purchased but not used at
the end of the period.
a. Direct Materials 2. WORK-IN-PROCESS INVENTORY – the cost allocated with
All raw material costs that become an integral part of the finished goods partially completed at the end of the period.
product and that can be conveniently and economically assigned to 3. FINISHED GOOD INVENTORY – cost of completed goods that
specific units manufactured. have not been sold at the end of the period.
c. Factory Overhead D. According to Traceability to Cost Objective
Indirect Materials - include materials and supplies used 1. DIRECT COSTS – cost that can be economically traced to a single
in the manufacturing operation that do not become part cost object.
of the product. 2. INDIRECT COSTS – cost that are not traceable to a single cost
Indirect Labor - are labor costs that cannot be identified object.
or traced to specific unit manufactured.
COST OBJECT – any item for which costs are assigned
E. According to Managerial Influence
• CONTROLLABLE COSTS – are costs that is subject to
significant influence by a particular manager within a
period of time under consideration.
2. NONCONTROLLABLE COSTS – are costs over which a
given manager does not have a significant influence.
F. According to Generally Accepted Accounting Treatment
1. PRODUCT COSTS – all costs that “attach” or “cling” to the
units that are produced.
- include all costs that are involved in acquiring or making a
product.
2. PERIOD COSTS – are expensed in the Income Statement in
the period in which they are incurred.
Cost Terminologies used for planning and control
• Standard Cost – A predetermined cost estimate that should be
attained.
• Budgeted Cost – Used to represent the expected/planned cost
for a given period.
• Absorption Costing – A costing method that includes all
manufacturing costs – direct materials, direct labor, and both
variable and fixed manufacturing overhead – in the cost of a
unit of product.
• Direct Costing – A type of product costing where fixed costs
are charged against revenue as incurred and are not assigned to
specific units of product manufactured. (Variable costing)
• Information Costs – Costs of obtaining information.
• Ordering Costs – Costs that increased with the number of
orders placed for inventory.
• Out-of-pocket Costs – Costs that must be met with a current
expenditure or cash outlay.
Cost Classification According to a Time-frame perspective
• Committed Costs – Cost that is inevitable consequence of a
previous commitment.
• Discretionary Costs – Cost for which the size or the time of
incurrence is a matter of choice. (programmed; managed costs)
Cost Classified According to time period for which the cost is incurred
• Historical Costs (Past Cost) – Cost that were incurred in a
past period
• Future Costs – Budgeted cost that are expected to be incurred
in a future period.
Cost Classifications For another Analytical purposes
• Relevant Costs – Future costs that are different under one
decision alternative than under another decision alternative.
• Incremental Costs – The difference in cost between two or
more alternatives. **
• Sunk Costs – Past cost that have been incurred and are
irrelevant to a future decision.
• Opportunity Costs – The value of the best alternative
foregone as the result of selecting a different use of resource or
by choosing a particular strategy.
• Marginal Costs – Cost associated with the next unit or the
next project or incremental cost associated with an additional
project as opposed to the next discrete unit.
• Value Added Costs – Cost that are added value to the product.
Cost
Behavior
Definition of cost behavior
Cost Behavior means how a cost will react a changes take place in the
level of business activity. Managers who understand how cost behave
are better able to predict what cost will be under various operating
circumstances. An understanding of cost behavior under varying
conditions are essential to adequate decision making in the planning
and control of firm activity.
Importance of understanding Cost behavior
Planning requires that management make decisions based in
part on expectations as to the future. These expectations should be
based on the data relevant to the decision objectives, gathered and
analyzed in competent, unbiased fashion. Failure in this activity could
mean displacement costs due to unexpected events. Control is the
 process of using feedback information for comparison with ACCOUNT ANALYSIS
expectations and the implementation of actions on the basis of that METHOD
comparison. INDUSTRIAL ENGINEERING
Cost Analysis is an integral part of the planning and control METHOD
functions. The key to effective costs prediction lies in an INDUSTRIAL ENGINEERING METHOD
understanding of cost behavior patterns. Estimates cost functions by analyzing the relationship between inputs
Types of and outputs in physical forms.
Cost Behavior patterns
Physical way of examining the relationship between the cost drivers
Variable Cost and costs by analyzing the inputs coming into the company, the
Are those cost that change in total as the level of activity changes in the outputs that are created, and the work that goes into the process.
short run and within the relevant range ADVANTAGES OF INDUSTRIAL ENGINEERING METHOD
Fixed Cost
Is a cost that remains constant in total regardless of changes in the level of It can detail each step required to perform an operation.
activity within the relevant range.
Sample Problem: Variable and fixed cost It can be used to estimate costs for totally new activities.
NDesign Company provides the following costs structure in product: EXAMPLE:
Total Fixed Cost P 200,000 Cara is the CFO of a large business that manufactures curtains.
Unit Variable Cost P 20 The inputs for these curtains include wood, dye, thread, machine
hours, and labor. The output, of course, is the finished curtain. Her
What will happen to fixed cost and variable costs, per total and per business uses the industrial engineering method to help estimate costs.
unit, if production levels are zero, 5,000 units, 10,000 units, Why is this a good choice for Cara’s organization? What information
and15,000 units. might it give her?
Mixed Cost CONFERENCE
Is one that contains both variable and fixed cost elements. METHOD
Step cost THE HIGH-LOW METHOD
COST THE HIGH-LOW METHOD
ESTIMATION The high-low method involves taking the highest level of activity and
the lowest level of activity and comparing the total costs at each level.
Cost Segregation Techniques
Mixed costs should be segregated as to their fixed and variable It is the traditional method of costs segregation. In statistics, it is called
components. the "range analysis".
There are three (3) popular methods used in separating fixed FORMULA:
from variable costs. All of them have their technical origin from the VCR = ∆ in Costs / ∆ in Units
field of statistics. They are:
OR
High-Low Method
Scattergraph Method Variable cost rate or per unit = Cost at highest activity - Cost at
Least-squares Method lowest activity / Highest activity - Lowest Activity
 TFC = TC – TVC
Required:
Fixed Cost = Total Cost at highest activity - [Variable cost per unit
× Highest activity stated in units] OR Determine the variable cost rate hour and the fixed cost portion
Fixed Cost = Total Cost at lowest activity - [Variable cost per unit using the High-Low Method.
× Lowest activity stated in units]
SOLUTION:
VCR = 150-60/60-10
The total maintenance costs of Silver Company in the last four months = 90/50
are presented as follows: = 1.80
Month Machine hours Maintenance Costs at 60-hour level at 10-hour level
January 7,200 450,000 FC = 150 - (1.80 × 60) FC = 60 - (1.80 × 10)
February 6,800 422,000 = 150 – 108 = 60 - 18
March 7,000 440,000 = 42 = 42
April 6,400 418,000
The company expects to use 7,400 machine hours in May. What happens when High-Low Method ends up with a negative
SOLUTION: amount?
Highest 7,200 450,000 REGRESSION ANALYSIS
Lowest 6,400 418,000 METHOD
Difference 800 32,000 LEAST-SQUARES METHOD
LEAST-SQUARES METHOD
REQUIREMENT #1 The least-squares method of cost estimation involves using
mathematical regression techniques to calculate the slope and intercept
32,000/800 machine hours of the best-fit line for the costs used in estimation. In order to
= 40 per MH determine these estimates, a manager will assemble cost data by cost
and level of production.
A statistical technique which is often used in separating mixed costs
into their fixed and variable components.
Take note that the total fixed costs remains the same regardless
of level of activity. The least-squares method is usually credited to Carl Friedrich Gauss
EXAMPLE: (1795), but it was first published by Adrien-Marie Legendre.
Data for the past 10 months were collected for Predictors, Inc. to
estimate the variable and fixed manufacturing overhead. The equation for the determination of a straight line is:

The following data on supplies cost and direct labor hours from Y = a + bX
January to October are available.
The two linear equations that are used to solve for a and b are:

Equation (1) ∑Y = Na + b∑X


Equation (2) ∑XY = ∑Xa + b∑�𝑿�𝟐�
Determine the variable cost rate and the fixed cost under the Least-
squares regression method.
Where:
Y = total monthly manufacturing overhead cost
L = labor hours
M = machine hours
The measure of goodness of fit are good and no evidence of
multicolinearity exists. The company will use 10,000 labor hours and
3,000 machine hours next month.

Equation (1) 1,000 = 10a + 350b Required:

1. Determine the total manufacturing overhead costs that Aloha should
Equation (2) 39,600 = 350a + 14,500b incur next month.
2. Aloha makes a product that has 60.75 in material costs. It requires
To eliminate one unknown (a), and solve for b, multiply four hours of labor time and 45 minutes of machine time. Laborers
Equation 1 by 35 (least common denominator) and subtract the new earn 20 per hour. What is the product's per unit variable manufacturing
Equation 3 from Equation 2. cost?
Problem #13
M. Munda Company produces and sells rattan baskets. The number of
Equation (2) 39,600 = 350a + 14,500b units produced and the corresponding total production costs for six
Equation (3) months, which are representatives for the year, are as follows:
[Equation 1 × 35] 35 000 = 350a + 12,250b
4,600 = 2,250b
Variable cost rate or b = 2.04
y = total manufacturing production costs
Strengths and Weaknesses of Cost Estimation Methods x = number of units produced per month
HIGH-LOW a = fixed production cost per month
METHOD b = variable production per unit
PROBLEMS n = number of months
Relevant Range ∑ = summation
A specific activity level that is bounded by a minimum and maximum Problem 13a.
amount. The cost function derived by the simple least squares method
High-Low Method a. is linear.
1. Choose the representative highest and lowest activity levels with b. is curvilinear.
their corresponding costs. c. is parabolic.
2. Get the differences (or changes) between the highest and lowest cost d. must be tested for minimum and maximum points.
and direct labor hours. Problem 13b.
3. Determine the rate of cost variability with activity level. Using the least squares method, the variable production cost per unit is
4. Determine the total amount at fixed cost. approximately
Problem #12 a. 5
b. 10
c. 0.27 Problem
d. 3.74 The Mix Company uses the high-low method to estimate the cost
Problem 13c. function. The information for 2012 is provided below:
Using the least squares method, the monthly fixed production cost is
approximately
a. 1,500
b. 18,000
c. 4,350
d. 52,200
Problem 13d What is the total cost for 400 hours?
If the high-low method is used, the results when compared with those
under the method of least squares, are Solution
Variable Cost Per Unit Total Fixed Costs
a. Equal Equal
b. Higher by 1.26 Lower by 2,850
c. Lower by 1.26 Higher by 2,850
d. Higher by 5 Lower by 1,500
The following data have been collected for four different cost items. 400 hrs. x 30 = 12,000
The following data were collected from the records of the shipping 1. Malabon Industries has developed two new products but has only
department of a company. enough plant capacity to introduce one product during the coming
Kleencar operates a car spa. Incoming cars are put on an automatic year. The following data will assist management in deciding which
conveyor belt. Cars are washed as the conveyor belt carries the car product should be selected.
from the start station to the finish station. After the car moves off the
conveyor belt, the card is dried manually. Workers then clean and Malabon’s fixed overhead includes rent and utilities, equipment
vacuum the inside of the car. Carl serviced 80,000 cars in 2011. He depreciation and supervisory salaries. Selling and administrative
reports the following costs for 2011:
expenses are not allocated to products.
The estimated unit costs for CNR Inc., when it is operating at a
production and sales level of 12,000 are as follows:
Problem
Raw Materials
An analysis of past janitorial costs indicates that average janitorial cost
Machining @ P12 per hour
is P1.50 per machine hour at an activity level of 40,000 machine hours
Assembly @ P10 per hour
and P1.20 per machine hour at an activity level of 50,000 machine
Variable overhead @ P8 per hour
hours. Assuming that this activity is within the relevant range, what is
Fixed overhead @ P4 per hour
the total expected janitorial cost if the activity level is 45,000 machine
Total Cost
hours?
Suggested selling price
Solution
Actual R & D costs
Proposed advertising and promotion costs
A. For Malabon’s Product A, the unit costs for raw materials,
machining and assembly represents
c. Mixed Cost

a. Conversion Costs
b. Separable Costs * Mixed costs is a cost that contains both a fixed cost component and a
c. Prime Costs variable cost component.
D. Research and Development Costs for the two new products are
d. Common Costs
Answer:
a. Conversion Costs
b. Sunk Costs
c. Prime Costs c. Relevant Costs
d. Avoidable Costs
Answer:
*Prime Costs are the direct cost of a commodity in terms of the
materials and labor involved in its production, excluding fixed costs.
B. The difference between the P99.98 suggested selling price for
Product B and its total unit cost of P88.00 represent the unit’s b. Sunk Costs

a. Contribution Margin Ratio

b. Gross Profit *Sunk Costs is a cost that has already been incurred and cannot be
c. Contribution recovered.
d. Gross Profit Margin Ratio E. The advertising and promotion costs for the product selected by
Malabon will be
Answer:

a. Discretionary Cost
b. Gross Profit b. Opportunity Costs
C. The total overhead cost of P27.00 for Product B is a c. Prime Costs
d. Incremental Costs
Answer:
a. Carrying Cost
b. Sunk Cost
c. Mixed Cost
d. Committed Cost a. Discretionary Cost
Answer:
*Discretionary Costs is a cost that a business or household can get by Fixed factory overhead 6
without, if necessary. Variable distribution and administrative 3
F. The costs included in the fixed overhead are Fixed distribution and administration 4

Required:

a. Joint Costs 1. Identify the estimated conversion cost per unit.

b. Discretionary Costs 2. Identify the estimated prime cost per unit.
c. Opportunity Costs 3. Determine the estimated total variable cost per unit.
d. Prime Costs 4. Compute the total cost that would be incurred during a month
Answer: with a production level of 12,000 units and a sales level of 8,000
units.

b. Discretionary Costs
2. The following cost data were taken from the records of a
manufacturing company:
Required:
The manufacturing cost incurred during the year.
Answer:

Depreciation on factory equipment P1,000

Wages of production workers 28,000
Raw materials used 47,000
Factory rent 2,000
Factory insurance 500
Materials handling 1,500
P80,000

*Manufacturing costs is the sum of costs of all resources consumed in

the process of making a product.
The estimated unit costs for CNR Inc., when it is operating at a
production and sales level of 12,000 units, are as follows:
Expense item Estimated Unit Cost
Direct Materials P 32
Direct Labor 10
Variable factory overhead 15