Introduction to

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?
- examines the cost structure of a business. It does so by 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
COST BEHAVIOR
Nature of Cost
COST- is the value forgone or sacrifice of resources for the purpose of
achieving some economic benefit which will promote the profit-making
ability of the firm.
Classifications of Costs
A. By Nature
B. By Variability
C. By Types of Inventory
D. According to Traceability to Cost Objective
E. According to Managerial Influence
F. According to Generally Accepted Accounting Treatment
G. Cost Terminologies Used for Planning and Control
H. According to Time-frame Perspective
I. According to Time Period for which the Cost is Incurred
J. For Other Analytical Purposes
A. BY NATURE
1. MANUFACTURING COST- are frequently classified as
direct materials, direct labor and factory overhead.
a. Direct Materials
b. Direct Labor
c. Factory Overhead
 Indirect Materials
 Indirect Labor

d. Prime Costs
e. Conversion Costs
a. Direct Materials
All raw material costs that become an integral part of the
finished product and that can be conveniently and economically
assigned to specific units manufactured.
c. Factory Overhead
Indirect Materials - include materials and supplies used in the manufacturing
operation that do not become part of the product.
Indirect Labor - are labor costs that cannot be identified or traced to specific unit
manufactured.
d. PRIME COST
the total direct materials and direct labor costs.
A. BY NATURE
2. NONMANUFACTURING COST- include costs relating to
selling and other activities not related to manufacturing
of goods.
a. Marketing Costs - include expenses incurred to
change the title of goods, promotion of goods, etc.
b. General Administrative Costs - are cost that
contribute to the overall operations of a company.
 A. BY NATURE
3. COMMON COSTS- costs that benefit two or more
operations, product or services.
-a shared expense of creating a product or providing
services that can’t be attributed to a single department or user.
B. By Variability
1. VARIABLE COSTS – cost that change directly in proportion to changes in activity (volume).
2. FIXED COSTS – costs remain unchanged for a given time period regardless of the changes in activity
(volume).
3. SEMIVARIABLE COSTS – costs contain both variable and fixed costs.
C. By Types of Inventory
1. RAW MATERIALS INVENTORY – the cost of all raw
materials and production supplies that have been
purchased but not used at the end of the period.
2. WORK-IN-PROCESS INVENTORY – the cost allocated
with goods partially completed at the end of the period.
3. FINISHED GOOD INVENTORY – cost of completed goods
that have not been sold at the end of the period.
D. According to Traceability to Cost Objective
1. DIRECT COSTS – cost that can be economically traced to a single cost object.
2. INDIRECT COSTS – cost that are not traceable to a single cost object.

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.