Acctg. 6: Republic Of The Philippines Sorsogon State College Castilla Campus

Republic of the Philippines Sorsogon State College Castilla Campus

Acctg. 6

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Maribel A. Nolla Instructor

Introduction

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COST Cost means the amount of expenditure ( actual or notional) incurred on, or attributable to, a given thing. 3

COST ACCOUNTING  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.  Collecting, analyzing, summarizing and evaluating various alternative courses of action. 4

COST ACCOUNTING Purpose: Provide quantitative information which will

be used by management in planning, controlling, evaluating and decision-making. Provides relevant information for the preparation of general purpose financial statements such as inventory valuation for external reporting. 5

Goal of Cost Accounting  To advise the management on the most appropriate course of

action based on the cost efficiency and capability .  Provides the detailed cost information that management needs to control current operations and plan for the future.

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OBJECTIVES OF COST ACCOUNTING  Ascertainment of costs  Estimation of costs  Cost control  Cost reduction  Determining selling price

 Facilitating preparation of financial and

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other statement  Providing basis for operating policy

COST TERMINOLOGY

 COST: Cost means the amount of expenditure incurred on a particular

thing.  COSTING: Costing means the process of ascertainment of costs.  COST ACCOUNTING: The application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.  COST CONTROL: Cost control means the control of costs by management. Following are the aspects or stages of cost control.  JOB COSTING: It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss made out on its execution. The management can judge the profitability of each job and decide its future courses of action.  BATCH COSTING: Batch costing production is done in batches and each batch consists of a number of units, the determination of optimum quantity to constitute an economical batch is all the more important. 8

Cost Accounting Attempt to satisfy the costing objectives for both

financial an management accounting, because when the accounting information is for internal purpose, such as those which relate to products, customers, services, processes, activities, project and such other details of interest to management. Encompasses the collection, presentation and analysis of cost data to help management in its tasks of creating, and executing plans and budget. Rapidly changing production method and more types of products calling for continuous improvement that 9 emphasizes on quality, productivity and environment.

Cost Management Produces information for external users since the

cost of activities, process, projects do not appear in the general purpose financial statement. Knowing these costs helps managers in such tasks as continuous improvement, total quality management, productivity enhancement, environmental management and strategic management. Refers to the actions of managers to be able to satisfy customers while continuously reducing and controlling cost. Customer satisfaction is the 10 primary goal in the production of goods and service.

Elements of Cost Accounting  Labor

 Raw materials  Indirect overhead

Management Accounting  The process of identification, measurement,

accumulation, analysis, preparation, interpretation and communication of financial information used by management to plan, evaluate and control within a organization and to assure appropriate use of accountability for its resources.  A technique or method for determining the cost of a project, process or thing. 12

Elements of Management Accounting  To serve the core needs of internal business managers,

 To improve decision support objectives, internal business

processes, resource application, customer value, and capacity utilization needed,  To achieve corporate goals in an optimal manner.

Financial Accounting vs. Management Accounting Financial Accounting (Cost Accounting)

Management Accounting

- Focus on providing information for external users.

- Focus on providing information for internal users.

- Comply with the generally accepted accounting principles as well as rules and regulations of SEC and other regulatory bodies.

- Does not have to follow generally accepted accounting principles as well as rules and regulations of regulatory bodies.

- Provides objective and verified financial information.

- Information are either financial or nonfinancial and could be subjective in nature.

- Records reports events that have already happened (historical).

- Records and reports not only events that have occurred but future events as well.

- Presents the financial condition and results - Provides internal reports for use in the of14operations of the business enterprise as a evaluation of a department, product line, whole and according to a prescribed format. and managers and therefore are detailed

ELEMENTS OF COST Element of cost

Materials

Direct

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Indirect

Labor

Direct

Expenses

Indirect Direct

Indirect

MATERIAL: The substance from which the

finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc. (b) INDIRECT MATERIAL: one which cannot be

easily identified in the product. 16

EXAMPLES OF INDIRECT MATERIAL At factory level consumables, etc.

–

lubricants,

oil,

At office level – Printing & stationery, Brooms, Dusters, etc. At selling & dist. level – Packing materials, printing & stationery, etc. 17

The human effort required to convert the materials into finished product is called labor. is one which can be conveniently identified or attributed wholly to a particular job, product or process. Eg: wages paid to carpenter, fees paid to tailor,etc. (a)

DIRECT

LABOR:

is one which cannot be conveniently identified or attributed wholly to a particular job, product or process. (b) INDIRECT LABOR:

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EXAMPLES OF INDIRECT LABOR At factory level – foremen’s salary, works manager’s salary, gate keeper’s salary,etc At office level – Accountant’s salary, GM’s salary, Manager’s salary, etc. At selling and dist.level – salesmen salaries, Logistics manager salary, etc. 19

OTHER EXPENSES: are those expenses other than

materials

and

labor.

DIRECT EXPENSES: are those expenses which can

be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc. INDIRECT EXPENSES: are those expenses which

cannot be directly allocated to particular job, process or product.

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Examples of other expenses At factory level : factory rent, factory insurance, lighting, etc.

At office level : office rent, office insurance, office lighting, etc.

At sales & dist.level : advertising, show room expenses like rent, insurance, etc. 21

Ethical behavior  Honesty

 Integrity  Promise keeping  Fidelity

 Fairness  Caring for others  Respect for others  Responsible citizenship  Pursuit for excellence 22

 Accountability

Basic Cost Concept and Terms 23

COST CLASSIFICATION Classification On basis of :  Nature  Function  Direct & indirect  Variability  Controllability  Normality  Financial accounting classification  Time  Planning and control  Managerial decision making 24

ON THE BASIS OF NATURE  Materials

 Labor  Expenses

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ON THE BASIS OF FUNCTION  Manufacturing costs  Commercial costs – ADM and S&D Costs

ON THE BASIS OF DIRECT AND INDIRECT  Direct costs  Indirect costs 26

ON THE BASIS OF VARIABILITY  Fixed costs

 Variable costs  Semi variable costs

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ON THE BASIS OF CONTROLLABILITY  Controllable costs  Uncontrollable costs

ON THE BASIS OF NORMALITY  Normal costs  Abnormal costs 28

ON THE BASIS OF FINANCIAL ACCOUNTS: 

Capital costs

 Revenue costs  Deferred revenue costs

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ON THE BASIS OF TIME:  Historical costs  Pre determined costs

ON THE BASIS OF PLANNING AND CONTROL:  Budgeted costs  Standard costs 30

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ON THE BASIS OF MANAGERIAL DECISION MAKING Marginal costs Out of pocket costs Sunk costs Imputed costs Opportunity costs Replacement costs Avoidable costs Unavoidable costs Relevant and irrelevant costs Differential costs

TERMS IN COST ACCOUNTING  Cost unit

 Cost centre  Cost estimation

 Cost ascertainment  Cost allocation  Cost apportionment  Cost reduction  Cost control 32

METHODS OF COSTING  Job costing  Contract costing  Batch costing

 Process costing  Unit costing  Operating costing  Operation costing  Multiple costing 33

TYPES OF COSTING Uniform costing Marginal costing

Standard costing Historical costing

Direct costing Absorption costing 34

Fixed cost vs. Variable cost Fixed cost Cost of business which does not vary with output or sales overheads

Variable cost Cost that changes with the change in the volume of activity of an organization.

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Total cost vs. Average cost Total cost The total economic cost of production and is made up of variable cost which vary according to the quantity of a good produced and include inputs such as labor and raw materials plus fixed cost. Average cost Average cost/ unit cost is equal to total cost divided by the number of goods produced.

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Product cost vs. Period cost Product cost Include all cost involved in acquiring or making a product in the case of manufactured goods these costs consist of direct material, direct labor and manufacturing overhead. Period cost The cost that are not product costs for example sales commissions and the rental cost of administrative offices are period.

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Inventoriable cost vs. Noninventoriable cost Inventoriable cost The cost that is considered to be part of the cost of merchandise for a retailer, the inventorable cost is the cost from the supplier plus all cost necessary to get the item into inventory and ready for sale. Noninventoriable cost Is not inventoriable it is charged against sales revenue in the period in which the revenue is earned also called period expense.

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Prime cost vs. Conversion cost Prime cost Direct materials + Direct Labor Conversion cost Direct Labor + Factory Overhead ( which includes indirect materials, indirect labor and other indirect cost.

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Cost Determination and Flow Operation Budgeting

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Financial Study  Capital Requirement  Budgeted Income Statement  Budgeted Cash Flow Statement  Budgeted Balance Sheet

Job Order and Process Costing Job Order costing System where the cost of product or service is obtained by assigning cost to a particular and distinct product or service. Costs are accumulated by job or specific order. This method physically identifies the jobs produced and charging each job with its own costs.

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Process Costing Refers to a system where cost of a product or service is obtained by assigning materials, labor and overhead to masses of similar units and then computing unit cost on an average basis. System of cost accumulation by department or by process. This determine the cost incurred in one intermediate process after another so as to obtain the accumulated total cost of products completed in the final process. Identical items are produced for general sale and not for any specific customer. 42

Basic information found in cost sheet are the following:  Job number  Name of customer  Description of job  Quantity of Items

 Dates started and completed  Computation of estimated profit 43

Midterm Examination

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