Lesson 1:

Introduction to Cost
Accounting

Alfredo M. Ofrecio III Marinduque State College

Lecturer Boac, Marinduque
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Overview
• Definition of cost accounting.
• Uses of cost accounting information.
• Relationship of cost accounting to financial accounting and
management accounting.
• Comparison of service, merchandising, and manufacturing
businesses.

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What is cost accounting?

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Definition of cost accounting
• Cost accounting provides the detailed cost data that
management needs to control current operations and plan for
the future.
• Management uses cost accounting information to decide how to
allocate resources to the most efficient and profitable areas of
the business.
• Cost accounting systems show what costs were incurred and
how they were used.

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Types of Businesses Entities That
Use Cost Accounting
• Manufacturers (Ford, General Motors)
• Merchandisers/Retailers (WalMart, Kmart)
• Wholesalers (Beverage Distributors)
• For-profit Service Businesses (CPAs, Attorneys)
• Not-for-profit Service Agencies (United Way, Red Cross)

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What are the uses of cost accounting?

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Uses of Cost Accounting Information
Determining Product Costs and Pricing
The cost accounting information system must be designed to
permit the determination of unit costs as well as total product
costs. Unit costs are also useful in making a variety of marketing
decisions, such as:
• Determining the selling price of a product.
• Meeting competition.
• Bidding on contracts.
• Analyzing profitability.

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Uses of Cost Accounting Information
Planning
Cost accounting information aids planning by providing historical costs that can
be used to estimate future costs and operating results and to decide whether to
acquire additional facilities, change marketing strategies and obtain capital.

Controlling
Effective control is achieved through the following:
• Assigning responsibility.
• Periodically measuring and comparing results.
• Taking necessary corrective action.

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What is the relationships of Cost
Accounting to Financial Accounting and
Management Accounting?

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How do you distinguish between service,
merchandising, and manufacturing
businesses?

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Computation of Cost of Goods Sold
Merchandiser Manufacturer

Beginning
merchandise inventory
Plus:
Purchases (merchandise)
Merchandise
available for sale
Less:
ending merchandise inventory
Cost of good sold
Beginning
finished goods inventory
Plus:
cost of goods manufactured
Finished goods
available for sale
Less:
ending finished goods inventory
Cost of good sold

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Inventories
Merchandiser Manufacturer
Current assets: Current assets:
Cash Cash
Accounts receivable Accounts receivable
Inventories: Inventories:
Merchandise Finished goods
inventory Work in process
Materials

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End

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