PAMANTASAN NG LUNGSOD NG MAYNILA COST ACCOUNTING LECTURES REFERENCE COST ACCOUNTING 2013 EDITION BY GLORIA ARDANIEL RANTE CHAPTER 1 COST CONCEPTS, CLASSIFICATIONS AND COST ACCOUNTING CYCLE DEFINITION OF COST ACCOUNTING Cost accounting is a discipline that focuses on technique or method for determining the cost of a project, process or services for the purpose of planning and controlling activities, improving quality and efficiency, and for making decisions. According to Horngren, Cost Accounting measures and reports financial and non-financial information relating to the cost of acquiring or consuming resources in an organization. Rayburn states that Cost Accounting identifies, defines, measures, reports, and analyzes the various elements of direct and indirect costs associated with producing and marketing goods and services. It also measures the performance, product quality and productivity. USES OF COST DATA Cost accounting information is very useful in determining product and service costs and in setting prices for the product and the service. Knowing the costs of a product or service helps the management set the selling price enough to recover the cost of production, cost of performing a function, distribution, administration and to provide allowance for reasonable profit. These costs information also help the management in deciding whether to maintain,
to reduce or to increase the selling price in order to have a fair competition in the market. The accumulated costs information are summarized and reported to the management for effective planning to attain the company’s goal and objectives. CLASSIFICATION OF COSTS I.
Product Cost/Inventoriable Cost
This cost is also call the manufacturing cost. This is the sum of the inputs or resources used in the conversion of raw materials into finished product. They include costs of direct materials, direct labor and factory overhead. Work in Process Account This is the summarized accumulated cost of direct materials, direct labor and factory overhead, and is reported also in the Balance Sheet as current asset if still unfinished at the end of the accounting period. Finished Goods Inventory Account This is the transferred cost from work in process account of the completed goods, and is reported at the Balance Sheet if unsold. Cost of Goods Sold This is the finished goods already sold and is reported as an expense in the Income Statement. Manufacturing Company normally maintains three (3) inventory accounts: Finished Goods Inventory, Work in Process Inventory and Raw Materials Inventory that represent the unused portion of direct and indirect materials. Retailing or Merchandising Company product costs include the purchase price of goods bought for resale
plus the transportation costs and incurred in bringing the goods to the
other direct costs place of the buyer.
Construction Company Their product costs include the cost of construction, labor of carpenters and overhead incurred in constructions like cost of power, light and water, insurance, hospitalization and other health benefits for workers, maintenance of construction equipments, compensation of foreman, cost of constructing temporary house for the workers and for construction materials, depreciation of equipments, rentals and other expenses incurred in the construction site. For service organizations, its product costs are classified either as direct or indirect costs. Their inventory accounts are usually for supplies like office supplies for accounting firm or law firms, medical supplies for hospitals and medical clinics, cleaning supplies for utility firms and food supplies for restaurants and bars. ELEMENTS OF PRODUCT COST: 1. MATERIALS factory operation, classified as:
include the raw materials and other supplies used in manufacturing
Direct Materials are those materials traceable to the product being produced. Indirect Materials are materials necessary in manufacturing operations but are not directly included in or not a significant part of the product. 2. LABOR represents the compensation and other benefits paid to the workers in the factory, classified as:
Direct Labor represents compensation and benefits paid to those who physically work on the conversion of raw materials into finished product and are easily traceable to a specific process or job order. Indirect Labor represents wages of personnel other than the direct laborers, which are necessary to the manufacturing process or service but are not directly related to the actual conversion of raw materials into a finished product. They include supervisor’s fee, wages to other workers like janitor, employees benefits such as the employer’s share in the mandatory deductions, bonuses, etc. PRIME COSTS is the sum of direct materials and direct labor. 3. Manufacturing Overhead is an indirect product cost and it includes productions costs other direct materials and direct labor that include: Factory supplies such as oil and other cleaning materials used in the factory. Wages of supervisors, factory maintenance personnel, raw materials handlers and security officers stationed in the factory premises. Depreciation of factory plant and equipment. Insurance and property taxes on factory plant and equipment.
Maintenance and repairs on factory plant and equipment. Power light and water. Telephone and mailing costs. Cost of regulatory compliance such as meeting factory safety requirements and disposal of waste materials. Idle time by factory workers due to machine breakdown or new set ups which are unavoidable in production process. CONVERSION COSTS is the sum of direct labor and factory overhead. II.
PERIOD COSTS
Period costs are operating expenses that are associated with time periods, rather than with the production of goods and services. They are charged directly to expense accounts on the assumption that their benefit is recognized entirely in the period when the cost is incurred. They are not manufacturing costs and inventoriable costs. They include: Marketing and Selling Costs They include the costs of getting and filing orders such as cost customer service, cost of documentation, salaries and commissions of sales personnel, advertising costs and other expenses associated with the sale of goods and services.
Distribution Costs They are costs of warehousing, transporting and delivering a product or service. Administrative Costs These are costs association with the general administration of the organization that cannot be reasonably assigned to either marketing or production such as the salaries of the administrative officers and employees, power and water consumption, transportation and representation expenses, maintenance cost of office equipments, depreciation, taxes and licenses, gas and oil and other expenses in he administrative expenses.
III
DIRECT COSTS AND INDIRECT COSTS
Direct Costs are costs that can obviously and physically trace to a manufacturing process, job or order, business unit, segment or department. These costs are often described as those that would be saved if the segment or business unit would be discontinued or if the product would not be manufactured. Direct costs are not direct materials and direct labor but it also includes the cost to a run a business unit, like a. Salary of auto mechanic in automotive servicing company. b. Salary of a binder in a printing company. c. Oil and lubricants in a trucking business. d. Steel bars by Construction Company. e. Bond papers and telephone expenses in a law office. f. Cost of detergents in a laundry shop. g. Cost of x-ray, doctor’s fee, laboratory fee and medicine in a hospital.
Indirect Costs are costs related to a particular cost object but cannot be traced to that cost object in an economically feasible way. They are normally incurred for the benefit of several segments within the organization. In a manufacturing company, these are the overhead costs incurred in the process of production. IV
COMMON COST AND JOINT COSTS
Common Costs are costs mutually beneficial costs, which occur when the same resources is used in the output of two or more services or products, or simply the costs of facilities or services shared by two or more departments or operations. Example: a. building repairs and maintenance costs b. rent of a building occupied by different departments c. power and utilities costs d. salaries and wages of personnel serving two or more departments e. real estate taxes for land and building f. permits and licenses. Joint Costs are costs incurred in a single process that yields two or more products. They are production costs (direct materials, direct labor and factory overhead) incurred up to the point where products are separately identified. Example: the cost of dough, labor of baker and overhead incurred by a bakeshop. V.
OPPORTUNITY COSTS AND SUNK COSTS
Opportunity Costs represents the benefits foregone because one course of action is chosen over another, as
rent revenue forgone if a company decides to use a part of a building rather than lease it. Sunk Costs are costs that have already been incurred and will be changed or avoided by any future decision. They are past costs that are unavoidable because they cannot be changed no matter what action is taken by the management. VI.
COMMITTED COSTS AND DISCRETIONARY COST
Committed Costs are costs resulting from an organization’s structure or use of facilities and its basic organization structure. Examples are: property taxes, depreciation on buildings and equipments, salaries of management personnel and cost renting facilities. Discretionary Costs are costs resulting from management decision to spend a particular amount of money for a specific purpose. Example: a. amount of money to spend on research and development b. management development program and contributions to charitable institutions. c. advertising and promotions. VII. COSTS
CONTROLLABLE AND NON-CONTROLLABLE
Controllable costs are costs that are primarily subject to the influence of a given responsibility center manager for a given period of time, cost of raw materials used in the manufacturing leather products. The production manager has the ability to control the materials to be used in the production by
selecting materials with high quality, thus rejecting waste and spoilage. Non-controllable costs are cost that cannot be controlled or influenced by a responsibility city manager, like cost of renting equipment. The owner of the equipment has the control over the amount of rent nor the production manager. VIII. OUT OF POCKET COSTS AND BUDGETED COSTS Out of Pocket Costs are costs refer to the cash outlay required to complete a proposed project or to extend an activity undertaken. Budgeted Costs refer to planned or predetermined costs. IX. CAPITAL EXPENDITURES
EXPENDITURES
AND
REVENUE
Capital Expenditures are expenditures intended to benefit future periods and are reported as asset in the balance sheet, like cost of overhauling heavy equipments and cost of replacing worn out wall of a building. Revenue Expenditures are that benefit only the current period and are reported as expense. X.
FIXED, VARIABLE AND MIXED COSTS
Fixed Costs are costs that are constant in total within the relevant range of activity but variable on a per unit basis. As the activity level increases or decreases, total
fixed cost remains constant but unit cost goes up.
declines
or
Variable Costs are costs that vary in total in direct proportion to changes in the volume of production. Variable cost is a constant amount on a per unit basis as activity changes within a relevant range. As activity changes, total variable costs increases or decreases proportionally with the activity change but unit variable costs remain the same. Mixed costs or semi-variable costs are costs that have both fixed and variable component like heat, light and water expense. Relevant range is a limited range of activity within which expenditures can be accurately classified as fixed cost or variable or the range over which an assumed cost relationship is valid for the normal operations of a firm. SEPARATING MIXED COST One of the methods of separating mixed cost is called the high-low method, which it starts from selecting the highest and lowest levels of activity in a given set of data within the relevant range. Then subtract the lowest range from the highest range then multiply by the activity level to get the total variable cost from the mixed cost at either high or low level. Then subtract the variable cost from the mixed cost to get the fixed cost portion. FORMULA: Cost of high –cost at lowest level (within relevant range) Highest activity –lowest activity OR:
