Unit 12

COST ACCOUNTING

Overview
In this unit, students will be learned about terms related to cost accounting

Learning objectives
After this unit, students should be able to:
>> Define cost accounting and understand its characteristic
>> Understand the importance of cost accounting

Think and discuss

1. What is cost accounting?
2. In what way does cost accounting help the business determine the selling price of a
product?

1. SPECIAL TERMS

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 1. SPECIAL TERMS

Match the words or expressions in column A with their definition in column B.

You can look it up for more detailed explanations in the specialist dictionary.

Column A Column B
1. cost accounting A. costs that do not change according to the
production value
B. a unit of activity in an organization for
2. fixed costs
which costs are calculated separately
C. involves the determination of the unit cost
3. variable costs
of a particular product made by a company
D. an expense that rises and falls with the
4. direct costs
volume of production
E. those that can be directly related to the
5. indirect costs
production of particular units of a product
F. cost and expenses that cannot be identified
6. overhead with particular manufacturing processes or
units of production.
G. sales volume at which a company covers
7. breakeven point
its costs
H. the various expenses of operating a
8. cost driver business that can’t be charged to anyone
product, process or department
9. job-order cost I. determine the cost of continuously
accounting processed products, over a given time period
J. determine the cost of an individual item or
10. process cost accounting
batch or job lot of assembled goods.

2. READING

READING 1

Reading text 1: Cost accounting and do exercises 2.1, 2.2 below

COST ACCOUNTING
Cost accounting is an essential specialty within the accounting field. One of the main
objectives of industry is to determine the selling price of the products or the cost of services
that are furnished by a company. To establish a selling price that ensures a profit, it is first

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necessary to determine the cost of making a product or providing the service. This is the
purpose of cost accounting, and many of the procedures of other branches of accounting
have been adapted to achieve this end.
At its simplest cost accounting is a method of evaluating the overall costs, both actual
and notional, which are attributable to conducting business. This could be a per-unit cost
on goods produced, or a per hour cost for services provided. Generally, based on standard
accounting practices, it is one of the tools that managers use to determine what type of and
how much expense is involved in maintaining the current business model. Unlike financial
accounting, cost accounting can also be utilized to project changes to these costs in the
event of specific changes being implemented, and analyze the effects of these changes on
the company and the bottom line.
Basically, there are two kinds of manufacturing. First, raw materials are shaped and
assembled into a product. It is called the assembly type of manufacturing. Many consumer
goods including automobiles, appliances, furniture are manufactured in this way. In the
second, a continuous process changes a raw material into some other kinds of product. It
is called the continuous process type of manufacturing. Metals are refined from their ores
by means of the continuous process. Some agricultural products - like sugar - are also
refined in this way. Petroleum products, paper, flour, and cement are other examples of
continuous-process manufacturing.
Because of this difference in manufacturing techniques, there are two principal
methods of determining costs. The first method, job-order cost accounting, is best suited
to those situations where goods and services are produced upon receipt of a customer order,
according to the customer's specifications. It is suitable for the assembly type of
manufacturing. It is used to determine the cost of an individual item or of a batch of
identical items. The other method, process cost accounting, is suitable for the continuous
process type of manufacturing. It differs from job-order costing because it is based on a
time period that is usually determined by the nature of the process. In job-order cost
accounting, the accountant must first determine the prime cost of a product. The prime cost
is the sum of direct material costs and direct labor costs.
Direct material cost data are obtained through the analysis of three perpetual
inventories. The first is a record of the raw materials on hand; the second is a record of the
work- in process; and the third is a record of the finished goods.
Direct labor and material costs can be relatively easily identified in making one unit
of a product (one book) or a batch of the finished product (a thousand identical books).
When the overhead is added to the prime cost, the resulting figure is called the factory cost.
Factory cost = Overhead + Prime cost
The term overhead covers many different expenses, including miscellaneous
expenses of operating the plant. Depreciation and property taxes for the manufacturing plant,
for example, are both accounted for as overhead costs, as is the plant foremen's salary. Costs

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are subdivided into fixed, variable, and semi-variable categories for the purpose of record-
keeping. Direct costs often change, affecting the cost of production and consequently the
manufacturer's selling price. A new union contract, for example, may increase labor cost; or
a price increase for basic steel products may require a manufacturer to pay more for his raw
materials. Many indirect costs are also variable. The salaries of supervisory personnel may
rise, or people may be added to the office staff, or more storage space may be necessary.
Some indirect costs, however, such as depreciation, are generally fixed.
Job-order costing and process costing are methods for finding addition, there are
two systems that analyze these results in detail for the convenience of management. One
of these is called fixed costing. This system provides an average fixed cost for a product.
Fixed costs are those that do not change in the short-term, even if the production level
changes, such as rent and interest payments. The second system is known as variable
costing. It is based on the concept that the cost varies according to the volume of the
product that is manufactured, so that an increase in volume will bring about an increase in
variable costs. In words, this system provides an average variable cost for a product.
Components, raw materials, and overtime payments are examples of variable costs.
Cost accounting provides a systematic and logical process by which the cost of a
product can be determined. This cost can then be used as a basis for determining the best
selling price for a product. It also provides management with an extremely valuable decision-
making tool. One way in which this control can be exercised is through the concept of the
standard cost. In this system, management establishes a predetermined standard for
producing a product. Detailed records are then maintained, establishing different accounts
for various areas where the actual cost differs from the predetermined standard.
(Source: http://www.wattpad.com/953346-english-for-accounting)

2.1 According to text 1 which of the following sentences are true (T) or false
(F)

1. To achieve the purpose of cost accounting, many of the procedures of

other accounting branches have been adapted.
2. Automobiles and sugar are produced in the same way.
3. Steel is produced by means of the continuous process.
4. Raw material is purchased from a supplier and placed in the finished
goods inventory.
5. The manufacturer's selling price will be affected when direct costs change.
6. A rise in the salaries of supervisory personnel, an addition to office staff,
or more storage space are some examples to demonstrate that many indirect
costs are also variable.
7. Depreciation cost is generally unchanged.

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 2.2 Answer the following questions

1. What is one of the main objectives of industry?

2. How many basic types of manufacturing are there? What are they? Give an
example for each type?
3. What kinds of manufacturing is job-order cost accounting suitable for?
4. What kinds of manufacturing is process cost accounting suitable for?
5. How do job-order cost accounting and process cost accounting differ from each
other?
6. How are data on direct material costs obtained?
7. What figure is obtained by adding the overhead to the prime cost?
8. Into what categories are costs divided? Give examples.

READING 2

Reading text 2: The characteristics of a full cost accounting system and do

exercise 2.3 below
THE CHARACTERISTICS OF A FULL COST ACCOUNTING SYSTEM
A full cost accounting system is designed to measure the complete, true costs of
goods and services. While standard cash flow accounting practices focus on direct, current
costs and expenditures, full cost accounting systems incorporate a wider range of costs.
Full cost accounting's advantage, when compared to cash flow accounting, is that it
provides more cost factors to be considered for planning and decision-making purposes.
Non-Direct Costs
Full cost accounting principles ensure that overhead and indirect costs, and past and
future costs, are counted in a way that they are not in cash flow accounting. For example,
the adoption of a new product typically requires overhead and indirect costs related to
support services, such as legal counsel or technical training. Cash flow accounting would
not measure those as costs for the new product, but full cost accounting would. In full cost
accounting, past and future costs require the measurement of the expenditures required to
either prepare the groundwork for a cost, such as purchasing land before building
something on that land, or to pay for an initial cost further down the road, such as paying
property taxes on the building ultimately constructed on that land.
Environmental and Social Costs
Environmental and social costs are types of indirect costs often associated with full
cost accounting. In standard accounting, the costs that are projected to accrue, because of
new pollution or depleted natural resources, would not be part of the analysis. However,
full cost accounting principles call for considering and including those costs. In a similar

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way, social costs, such as how a proposed project would impact local school classes and
the need for a larger school budget, also would be counted.
Transaction Costs
Standard cash flow accounting differs from full cost accounting in that the latter
counts the cost of a transaction beyond the initial expenditure. For example, the cost
measurement in the purchase of an item is not simply viewed as the amount that was paid
for the item. Instead, the cost compasses the purchase price as well as the cost of owning
that item in subsequent years, according to an explanation of full cost accounting from the
Environmental Protection Agency. This approach allows planners and others to see how a
transaction could affect not only the current future ones.
Opportunity Cost
Full cost accounting integrates opportunity cost into its structure of calculation,
according to a recent paper published by the University Florida Extension Agency. This
form of accounting not only notes the direct cost of a product or service, but the cost of not
spending that wealth on a different opportunity. It also requires a measurement of products
or services that cannot be accomplished because of a choice that is made. For example, if
a local government elects to conserve a piece of public land, full cost accounting would
calculate the possible revenue losses of not choosing a more lucrative path for the land.
Breakeven analysis
When deciding whether it would be profitable to produce a product, or offer a
service, companies do a breakeven analysis. This compares expected sales of the new
product with expected costs - both direct and indirect - at various production levels. The
breakeven point is the sales volume - the number of units sold - at which the company
covers its costs - pays all its expenses. To make a profit, it is necessary to sell more than
this. Although cost accounting allows companies to calculate production costs, pricing
decisions also depend on:
 The level of demand
 The prices of competitors’ products
 the company’s financial situation
 the company’s objectives - the goals or aims it wants to accomplish
 the company’s marketing policies - whether it is interested in maximizing
sales or maximizing profit.
(Source: http://smallbusiness.chron.com.
By Tom Gresham, Demand Media)

2.3 Answer the following questions

1. What is a full cost accounting system designed for?

2. What is the advantage of full cost accounting over cash flow accounting?

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 3. What do full cost accounting principles ensure?
4. What are environmental and social costs?
5. What do full cost accounting principles call for?
6. How does standard cash flow accounting differ from full cost accounting?
7. What does full cost accounting do to opportunity cost?
8. What does opportunity cost note?
9. What does opportunity cost require?
10. What would full cost accounting do if a local government elects to conserve a
piece of public land?

3. LISTENING

3.1 You are going to listen to the accounting for costs article. Listen
carefully and fill in the gaps.

Accounting for Costs

Some costs are easy to account for. Direct costs, which are also called (1)
………. costs, are easily attributed to a specific product or activity. For example, a
company that makes pens has to buy plastic and ink and pay its employees to
manufacture the pens. These are obviously direct costs. But businesses also incur (2)
………. costs, or fixed costs, which remain constant and are not tied to specific
products or services. Take, for example, a manufacturing company.
Manufacturing firms have both direct and indirect costs.
Direct costs include:
• Raw materials, often called direct (3) ……….
• Direct (4) ………. - the wages paid to production-line employees
• Variable (5) ………. - other costs that increase or decrease with production (For
example, if production requires water, the water bill will fluctuate with the volume of
production.)
Indirect (6) ………. costs include:
• Fixed overhead - (7) ………., insurance, rents.
So how should indirect costs be accounted for? One popular method is called
(8)
………. costing (ABC). In this method, cost drivers are created for each product.
Then indirect costs are allocated according to those cost (9) ………. For example, in a
manufacturing plant, an indirect cost like (10) ………. could be allocated to each piece
of machinery based on how much space it occupies.

3.2 Listen again and mark the following statements are as true (T) or
false (F)

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 1. …… The ABC method can account for fixed costs.
2. …… Variable overhead is directly tied to production.
3. …… Cost drivers are used to allocate direct costs.

4. VOCABULARY EXERCISES

4.1 Sort the following into direct, indirect, fixed and variable costs.

Cost Direct Indirect Fixed Variable

Advertising expenses
Electricity to run machines
Electricity for heating
Equipment repairs
Overtime pay
Raw material
Property tax
Rent

4.2 Complete the paragraph with the corret words from the box. You will
not use all the words

charge overheads materials salaries

profitable indirect directly administrative

Cost accounting involves calculating the costs of different products or services, so

that company managers can know what price to (1) …………… for particular products and
services and which are the most (2) ……………. Direct costs - those that can be (3)
…………… related to the production of particular units of a product - are quite easy to
calculate. Examples include manufacturing (4) …………… and manufacturing wages. But
there are also (5) …………… costs or (6) …………… - costs and expenses that cannot be
identified with particular manufacturing processes or units of production. Examples
include rent or (7) …………… taxes for the company’s offices and factories, electricity for
lighting and heating, the maintenance department, the factory canteen or restaurant,
managers’ salaries, and so on. Costs such as these are often grouped together on the profit
and loss account or income statement as Selling, General and (8) …………… Expenses.

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 4.3 Match the phrase on the left with the statement on the right

1. cost accounting a. a cost system that provides an average of the costs that may vary
or change in the manufacture of a product.

2. direct costing b. the price at which the product is sold.

3. prime cost c. calculating and controlling the cost of a unit - a single item or a
group of items - of a product, service, or operation of a business.

4. overhead d. a record of goods on hand that is maintained by a business.

5. fixed costing e. a cost system that provides an average fixed cost for a product or
process.

6. process cost f. the sum of direct material costs and direct labor accounting costs.
7. factory cost g. prime cost plus overhead
8.variable costing h. operating expenses of a business, such as property taxes, foremen's
salaries that are not chargeable to any one department or product.

9. selling price
10. inventory
11. standard cost

12. raw materials

4.4 Complete the following sentences with the correct form of the word in
parentheses.

1. Various schedules are submitted to the management in order to show detailed

costs and to provide .................... when necessary. (EXPLAIN)
2. The cheque is the traditional mode of payment for a ............. account.
(TRANSACTION)
3. There are also different accounting methods for inventory. They are ..................
known by the strange names of FIFO and LIFO. (COMMON)
4. Recently the US government instituted an ........ 15 percent tax on tax preference
items. (ADD)
5. Cost accounting provides management with an extremely............. decision-
making tool. (VALUE)
6. These problems result from differences in the amount of taxable income and the

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amount of income .................. on the income statement. (REPORT)
7. Direct labor and material costs can be .......... identified in making one unit of a
product. (EASY)
8. The stockholders, .... ........ of shares in the ownership of a corporation, are also
taxed at the individual rates on the dividends they receive. (OWN)
9. Business success or failure depends on the .................. and complete execution of
a purchasing budget. (PREPARE)
10. Cost accounting provides a ........ and logical process by which the cost of a
product can be determined. (SYSTEM)

4.5 Choose the best answer given to the sentence

1. ………. or cost accounting systems are part of a company's information
system and are used for tracking costs and allocations to judge operational efficiency.
a. Corporate b. Domestic
c. Management d. Monitoring
2. This is an ………. accounting system, rather than one for outside reporting.
a. inner b. inside
c. interior d. internal
3. There are no ………. rules governing how a company should keep track of cash
flows for cost accounting purposes.
a. amended b. fixed
c. required d. restricted
4. ………. budgeting is a form of forecasted cost accounting for long-term projects
or expenditures.
a. Capital b. Major
c. Overhead d. Terminal
5. Cost accounting applications are major financial ………. in everyday corporate
decision-making.
a. distractors b. driver
c. fetters d. operators
6. Cost accounting is important for estimating the ………. of current and future
activities.
a. foreseeability b. profitability
c. sensibility d. variability
7. When good cost accounting procedures are ………., the company may find out
that they have been producing a non-profitable product or service.

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 a. contracted b. discarded
c. implemented d. suggested
8. Cost accounting ………. managers toward company goals.
a. aggravates b. gravitates
c. insulates d. motivates
9. It also measures the ………. of managers and departments in the company.
a. accelaration b. doings
c. performance d. seniority
10. ………. costs change in proportion to the level of production activity, while
fixed costs remain unchanged.
a. Varicose b. Various
c. variable d. versatile

5. SPEAKING

5.1 Individual work

Based on the information in the two texts above, answer the following
questions with your own words
1. What is cost accounting?
2. What categories are costs divided? Give examples

5.2 Pair work or group work

Ask and answer these questions above with a partner. Then choose one type of
costs and prepare to give a one-minute presentation about it to the group.
Focus on delivering the presentation very clearly and accurately. Record your
presentations and discuss your performance with a partner afterwards.

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. is/cost accounting/important/for/the profitability/ estimating/ of/current
/activities/ and/future.
………………………………………………………………………………………
2. direct material/the prime/of/cost/is/the sum/costs/and/costs/direct labor/.
………………………………………………………………………………………

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 3. Some/generally/such as/indirect costs/depreciation/fixed/are.
………………………………………………………………………………………
4. In/the accountant/job-order/cost accounting,/must/determine/the prime
cost/a/first/product/of.
………………………………………………………………………………………
5. an/cost/accounting/speciality/is/field/essential/within/the accounting/.
………………………………………………………………………………………
Complete the following sentences using the given words.
6.2

1. Direct labor/material/costs/can/easy/identified/making/one unit/of product/a

batch/the finished product/.
………………………………………………………………………………………
2. The term/ overhead/ cover/ many/ different/ expense/, including/ miscellaneous/
expense/ operating/ plant/.
………………………………………………………………………………………
3. Cost accounting/ provide/ systematic/ logical/ process/ by which/ cost product/
can/ determined/.
………………………………………………………………………………………
4. Costs/subdivided/ fixed, /variable, /semi-variable/categories/the purpose/ record
keeping/.
………………………………………………………………………………………
5. The cost/product/can/used/basis/determining/best selling/price/product/.
………………………………………………………………………………………

6.3 Translate the following sentences into Vietnamese

1. The key issues for external users of accounting information are consistency and
a reasonably accurate allocation of costs between the income statement and the balance sheet.
………………………………………………………………………………………
……………………….……………………………………………………………………..
2. The structure of cost accounting system has reflected the need to determine
product cost for external financial statements.
………………………………………………………………………………………
……………………….……………………………………………………………………..
3. When developing costs for external reporting, accounting systems usually
classify costs by type and function.
………………………………………………………………………………………
……………………….……………………………………………………………………..

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 4. The type of cost are product and period cost, and the broad functional cost
classifications are manufacturing and nonmanufacturing costs.
………………………………………………………………………………………
……………………….……………………………………………………………………..
5. Generally Accepted Accounting Principles (GAAP) defines cost as the monetary
value of goods and services expended to obtain current or future benefits.
………………………………………………………………………………………
……………………….……………………………………………………………………..

6.4 Translate the following sentences into English

1. Kế toán chi phí có vai trò đặc biệt quan trọng trong việc đo lường giá vốn của
những nguồn lực đã được đầu tư để sản xuất ra sản phẩm, dựa vào đó nhà quản trị có căn
cứ để tính giá thành sản phẩm bán ra hợp lý so với những chi phí bỏ ra.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Những thông tin, số liệu mà kế toán chi phí cung cấp mang tính lâu dài, phản ánh
được thực trạng hiện tại doanh nghiệp nhờ đó nhà quản trị có những kế hoạch lâu dài trong
việc hoạch định chi phí lâu dài.
………………………………………………………………………………………
……………………………………………………………………………………………..
3. Kế toán chi phí được sử dụng để giúp các nhà quản lý hiểu được chi phí vận hành
của doanh nghiệp. Bên cạnh đó, kế toán chi phí còn giúp cung cấp các thông tin chi tiết để
quản lý có thể kiểm soát các hoạt động hiện tại và lập kế hoạch cho tương lai.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Chi phí nhân công trực tiếp là chi phí sử dụng lao động, cho các công việc được
thực hiện trên các sản phẩm cụ thể, có thể được ghi nhận một cách thuận tiện và kinh tế
cho các sản phẩm đơn vị. Tiền lương của nhân viên trực tiếp vận hành máy móc sản xuất
là một ví dụ.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Chi phí sản xuất chung bao gồm chi phí vật liệu gián tiếp, chi phí nhân công gián
tiếp. và chi phí sản xuất chung khác: khấu hao tài sản cố định dùng vào sản xuất, dịch vụ
mua ngoài (điện thoại, intemet…) dùng vào sản xuất.
………………………………………………………………………………………
……………………………………………………………………………………………...

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