Objectives, Role and Scope of Cost Accounting

What is it?
It is an approach to managerial decision making based on the scientific method, makes extensive use
of quantitative analysis. or The application of the scientific method to the analysis and solution of
managerial decision problems.

Basic Management Functions and Concepts

Managers carry out three major activities in an organization: PLANNING, DIRECTING AND MOTIVATING, and
CONTROLLING.

1. Planning – involves establishing a basic strategy, selecting a course of action, and specifying how the
action will be implemented. It includes the following acts:
 Setting immediate (short-term) and long-term objectives
 Determining the resources and tactics needed to achieve the plan
 Deciding which alternative is best suited to attain the set objectives
2. Directing and Motivating – involves mobilizing people to carry out plans and run routine operations.
It includes the following acts:
 Take action to implement the plan
 Motivate others to achieve results
3. Controlling – involves ensuring the plan is actually carried out and is appropriately modified as
circumstances change. It includes, among others, the following acts:
 Comparing actual performance with set plans or standards
 Monitoring results to determine if the plan is being achieved
 Deciding what corrective actions to take should there be any deviation (variance) between
actual and planned performance
 Adjusting future plans, if necessary

Distinctions Among Management Accounting, Cost Accounting and Financial Accounting

The primary goal of accounting is to provide information for decision making. The main difference
between financial accounting and managerial accounting is the intended user of the information. Because of
this, several factors are affected:

Managerial Accounting Financial Accounting

Internal users: officers and External users: stockholders,
Users of Report managers creditors, concerned government
agencies
To provide internal users with To provide external users with
information that may be used by information about the
managers in carrying out the organization’s financial position
Purpose
functions of planning, controlling, and results of operations.
decision-making and performance
evaluation.
Monetary and non-monetary Primarily financial statements and
reports such as budgets, the accompanying notes to such
Types of Reports
performance evaluation and cost statements.
reports.
What management wants and Generally Accepted Accounting
Standards of Presentation
needs Principles (GAAP)
Focus of reports is on the Focus mainly on business as a
Reporting entity/ level of
company’s value chain: extensive whole
details
and detailed
Reports may cover any time Reports usually cover a year,
Period Covered period. It may be required as quarter, or month.
frequently as needed.

How about cost accounting?

Cost accounting is a subset of BOTH management and financial accounting. Cost accounting system
is utilized for internal reporting for use in management planning and control, AND external reporting to the
extent its product-costing function satisfies external reporting requirements.

Role and Activities of Controller and Treasurer

The Controller: The Chief Management Accounting
 Controllership – The process by which management assures itself that company resources are
obtained and utilized according to plans that are in line with the company’s SET OBJECTIVES. This is
the practice of the established science of control.
  Controller – an officer of an organization who has responsibility for the accounting aspect of
management control. The chief management accounting of an organization.

Controller vs. Treasurer

Controller Treasurer
Planning and control Provision of capital
Reporting and interpreting Investor relations
Evaluating and consulting Short-term financing
Tax administration Banking and custody
Government reporting Credit and collections
Economic appraisal Investments
Insurance

Other factors
Management by Objectives vs. Management by Exception
 Management by Objectives – a procedure in which a subordinate and a supervisor agree on goals
and methods of achieving them and develop a plan in accordance with that agreement.
 Management by Exception – a technique of highlighting those which vary significantly from plans
and standards in line with the management principle that executive time should be spent on the items
that are not-routine and are identified as top priority.
Line function vs. Staff function
 Line function – the authority to command or give orders to subordinates. It exercises direct
downward authority over line departments. Managers are directly involved in the provision of goods
and services.
 Staff function – the authority to advise but not to command others; the function of providing line and
staff managers with specialized service and technical advice for support. It is exercised laterally or
upward. Managers supervise activities that support the organization’s overall mission, but they are only
indirectly involved in operational activities.

SELF-CHECK TEST:
Multiple Choice Questions:
1. The discipline of accounting concerned with providing information to management in making decisions
about business operations.
a. Cost accounting
b. Financial accounting
c. Government accounting
d. Management accounting
2. What is the primary objective of managerial accounting?
a. To provide internal revenue services with information about taxable income.
b. To provide management with information useful for planning and control of operations.
c. To provide banks and other creditors with information useful in making credit decisions.
d. To provide stockholders and potential investors with useful information for decision making.
3. Managerial accounting is
a. Governed by GAAP
b. Focuses on historical data
c. Provides information for parties external to the organization.
d. Focuses primarily on the needs of personnel within the organization.
4. Which of the following managerial functions involves detailed financial and operational descriptions of
anticipated operations?
a. Planning
b. Controlling
c. Decision making
d. Directing operational activities
5. Which of the following functions is best described as choosing among available alternatives?
a. Planning
b. Controlling
c. Decision making
d. All of the choices are correct.
6. Which of the following statements is true?
a. Financial accounting is a subset of cost accounting.
b. Management accounting is a subset of cost accounting.
c. Cost accounting is a subset of both management and financial accounting.
d. Management accounting is a subset of both cost and financial accounting.
7. Management accounting differs from financial accounting in that financial accounting is
a. More oriented toward the future.
 b. Primarily concerned with external financial reporting.
c. Primarily concerned with non-quantitative information.
d. Heavily involved with decision analysis and implementation of decisions.
8. A controller is normally involved with
a. Raising capital
b. Safeguarding assets
c. Managing investments
d. Preparing financial statements
9. A practice in which a subordinate and a supervisor agree on goals and the methods of achieving them
a. Management by objectives
b. Management by exception
c. Management by subjectivity
d. Management by example
10. The controller of the company is
a. A staff manager
b. A natural manager
c. An operating manager
d. An accountant, not a manager

Costs in Managerial Accounting: Concepts, Classifications, Behavior and

Accumulation

NATURE AND CLASSIFICATION OF COSTS

Cost is the monetary amount of the resources given up to attain some objective such as acquiring goods and
services. When notified by a term that defines the purpose, cost becomes operational.

Cost Terms
1. Out-of-pocket costs - involve an actual outlay of cash.
2. Marginal costs – the sum of costs necessary to effect a one-unit increase in the activity level.
3. Opportunity cost- the foregone benefit or lost opportunity of the path not taken.
4. Cost Pool- an account which variety of similar costs are accumulated prior to allocation to cost
objects.
5. Cost object – the intermediate and final disposition of cost pools.
6. Cost driver (CD) – a measure of activity that is a causal factor in the incurrence of cost to an entity.
It is a basis used to assign costs to cost objects.
7. Direct vs. Indirect costs
 Direct costs can be easily and conveniently traced to a unit of product or other cost object.
 Indirect costs cannot be easily and conveniently traced to a unit of product or other cost object.
8. Common costs – a cost incurred for the benefit of more than one cost object. It is synonymous to
joint cost.
9. Controllable costs- costs that are likely to respond to the amount of attention devoted to them by a
specified manager.
10.Committed vs. Discretionary costs
 Committed costs are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to small changes in
capacity.
 Discretionary costs are costs that management decides to incur in the current period to enable
the company to achieve objectives other than the filling of orders placed by the customers.
11.Manufacturing vs. Nonmanufacturing costs
 Manufacturing costs include all costs incurred to produce the physical product. Ex: direct
materials, direct labor and manufacturing overhead
 Nonmanufacturing costs are all other costs incurred not related to the production of the physical
product. Ex: Selling or marketing costs and general and administrative expenses.
12.Product Cost-direct cost involved in producing a product (DM, DL, DOH)
13.Period cost-all cost not included in the product cost. (marketing exp., dep.,IOH)
14.Relevant cost vs. Irrelevant cost
 Relevant cost has the potential to influence a decision. The requisites are:
 It must differ between decision alternatives.
 It must be incurred in the future rather than the past.
 Irrelevant costs are costs that will not influence a decision.

ANALYSIS OF COST BEHAVIOR

Cost Behavior describes how a cost behaves or changes as the amount of cost driver changes.

Types of Costs as to Behavior:

1. FIXED COSTS – the costs that do not change in total regardless of the activity level, at least with
some reasonable range of activity.
 Total Fixed Costs remains constant as Production increases
 Unit Fixed cost decreases as Production increases.
2. VARIABLE COSTS – the costs that change, in total, in direct proportion to changes in activity level.
 Total Variable Costs increases as Production increases
 Unit Variable Cost is constant regardless of Production.
3. MIXED COSTS – has both fixed and variable components.

Cost Behavior Assumptions:

1. Relevant Range Assumption
- This refers to the range of activity within which the cost behavior patterns are valid.
2. Time Period Assumption
- The cost behavior patterns identified are true only over a specified period of time.
3. Linearity Assumption
- The cost is assumed to manifest a linear relationship over a relevant range despite its tendency to
show otherwise over the long run.

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS

Take note of the slope or cost formula to be used in linear approaches to analyze mixed costs:
Y = a + bX

Where: Y = Total cost

a = Total fixed cost
b = Variable cost per unit
X = Number of activity/ units or the cost driver

1. High-Low Method
- The fixed and variable elements of the mixed costs are computed from two data points (periods) –
the highest and lowest points as to activity level or cost driver.
Formula:
Difference∈costs
Variable cost per unit =
Difference∈activity∨cost driver

Sample Problem:
Summer Condotel would like to come up with a cost formula that admitting department costs to the
number of guests admitted during a month. The admitting department’s cost and the number of guests
admitted during the past nine months follows:

Month NO. of guests Admitting Dept.

admitted Cost
January 36 P 37,440
February 38 36,480
March 34 32,880
April 30 35,040
May 30 34,320
June 22 31,680
July 20 30,720
August 25 34,000
September 32 33,600

Required: Determine the following:

1. Variable cost per activity.
2. Fixed cost.
3. Monthly cost function.
4. Estimated cost if the number of guests admitted for October is 42 guests.
Activity
1. A Company doing business in the city of Makati, reports the following total costs at two levels of production:
Cost Item 1,000 units 4,000 units
Materials P10,000 P20,000
Rent 50,000 50,000
Assembly line workers 6,000 24,000
Factory supplies 5,000 12,000
Factory supervisors’ salaries 20,000 20,000
Depreciation 8,000 8,000
Maintenance 4,000 8,000
Insurance 15,000 15,000
Electricity 6,000 21,000

REQUIRED: Classify each cost as variable, fixed or mixed.

2. Following are costs incurred by MM Manufacturing Corporation during the previous month:

Direct materials P5,000

Indirect materials 2,000
Direct labor 6,000
Indirect labor 1,000
Factory utilities 4,000
Advertising costs 8,000
Sales commissions 12,000
Depreciation on administration building 3,000
Salaries of administrative personnel 20,000
Depreciation- delivery equipment 2,000
Overtime pay- factory workers 1,500
Rework cost on defective products
Discovered during quality inspection 2,500

Required: Compute for the total product costs and period costs.