ACCOUNTANCY PROBLEMS

CHAPTER ONE:
Introduction to Cost Accounting
The main and primary objective of accounting is to provide financial information about economic entity
to different types of users. The primary users are:

1. Internal Users Managers for planning, controlling, and decision making.

2. External Users The government, those who provide funds and those who have various interests
in the operations of the entity.
Cost Accounting is an expanded phase of general or financial accounting which informs
management promptly with the cost of rendering a particular service, buying and selling a product and
producing a product. It is the field of accounting that measures, records, and reports information about
costs.
Ang cost accounting ay nakapagbibigay ng detailed cost information na kinakailangan ng
management upang macontrol ang kasalukuyang operasyon at makapagplano para sa hinaharap.
Lahat ng klase ng business entities manufacturing, merchandising, and service businesses ay
kinakailangan ng Cost Accounting Information Systems na nakapagbibigay ng necessary financial
data upang matrack ang costs na kanilang ginagastos. Ang system na ito ay magpapakita kung anong
costs ang naincurred at kung saan at kung paano ito nagamit.
Merchandisers purchased finished products for resale. Service Businesses sell services rather
than products. Manufacturers purchased raw materials into finished goods by using labor, technology,
and facilities. In many ways, the activities of a manufacturing organization are similar to those of a
merchandising business. Both are concerned with purchasing, storing, and selling goods; both must
have efficient management and adequate sources of capital. Both may employ hundreds or thousands of
workers. But the manufacturing process itself highlights the differences between the two. Once
merchandiser has acquired goods, it can perform the marketing function. The purchase of raw materials
by a manufacturer, however, is only the beginning of a long and sometimes complex chain of events that
results in a finished product for sale.
The manufacturing process requires the conversion of raw materials into finished goods through
the use of labor and various other factory resources. A manufacturer must make a major investment in
physical assets, such as property, plant and equipment. To produce finished goods, a manufacturer must
purchase appropriate quantities of raw materials and supplies, and develop a workforce. In addition to the
cost of materials and labor, the manufacturer incurs other expenses in the production process. Once the
goods are completed and ready for sale, the manufacturer performs basically the same functions as the
merchandiser in storing and marketing the goods. Ang methods of accounting for sales, cost of goods
sold, and administrative expenses ay parehas lamang sa merchandising operation.

USE OF COST ACCOUNTING INFORMATION

1. Determining Product Costs and Pricing
2. Planning and Controlling
RELATIONSHIP OF COST ACCOUNTING TO FINANCIAL ACCOUNTING AND MANAGEMENT
ACCOUNTING
Financial Accounting is 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 persons who may have vested interest in the
financial operations of the firm. The Financial Statements are the output from an accounting system. The
reports prepared under financial accounting focus on the enterprise as a whole. Financial Accounting is
based on Historical transaction data. The information may be historical, quantitative, monetary and
verifiable. It is supported by Documents (evidence).
Managerial Accounting 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 enterprise as a whole. The information may be
current or forecasted, quantitative or qualitative, monetary or non-monetary and most of all, timely
the data are futuristic and some of the costs are not recorded on the accounting books of the
organization.
Managerial accounting is not separate and distinct from financial accounting. Financial accounting
data are used in the managerial accounting system. Management decisions are made today will affect the
financial statements of future periods. Managerial Accounting methods are tools that are available for use
to management.
Financial Accounting attempts to present some degree of precision in reporting historical information
while at the same time emphasizing verifiability and freedom from bias in the information (Neutrality),
relevance to the general user and some degree of timeliness in reporting which is not critical in
managerial accounting. Management is more concerned on the timeliness of information so management
cannot wait until tomorrow for the information that is required today's decision.
Cost Accounting is the intersection between financial accounting and managerial accounting. Cost
accounting information is needed and used by both financial and managerial accounting. Cost accounting
provides product cost information to external parties, such as shareholders, creditors and various
regulatory boards for credit and investment decisions. It also provides product cost information also to
internal parties such as managers for planning and controlling.

Characteristics

Financial Accounting

Users:

-External Parties
(Shareholders,
Government)
-Managers

Focus:

-Entire Business

Uses
of
Information:

Managerial Accounting

-Internal Parties
Creditors, (managers)

Cost
-Product Costs for calculating Cost of
Goods Sold and Finished Goods,
Work in Process, And Raw Materials
Inventories using historical costs and
Generally
Accepted
Accounting
Principles

-Segments of the Business

-Budgeting
-Special Decisions such as make
or buy a component, keep or
replace a facility, and sell a product
at a special price.

What is Cost?
Cost is the cash and cash equivalent value sacrificed for goods and services that are expected to
bring a current or future benefit to the organization. We say cash equivalent because non-cash assets can
be exchanged for the desired goods or services. Expired Costs are called expenses. In each period,
expenses are deducted from revenues in the income statement to determine the period, expenses. A loss
is a cost that expires without producing any revenue benefit. The focus of cost accounting is on costs, not
expenses.
CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
a. Manufacturing Costs/Product Costs
1.

Direct Materials

2.

Direct Labor

3.

Manufacturing Overhead

b. Non-manufacturing Costs/Period Costs

II.

1.

Marketing/Selling Expense

2.

General or Administrative Expense

Costs classified as to variability

a. Variable Costs
b. Fixed Costs
c.Mixed/Semi-variable Costs

III.

Costs Classified to their nature as common or joint

a. Common Costs
b. Joint Costs

IV.

Costs for planning, control, and analytical processes

a. Standard Cost
b. Opportunity Cost
c. Differential Cost
d. Relevant Cost
e. Out-of-pocket cost
f.

Sunk Cost

PRODUCT COSTS/MANUFACTURING COSTS

Manufacturing is the process of converting materials into finished goods using labor and incurring
other costs, generally manufacturing overhead. Overhead Costs include utilities, supplies, taxes,
insurance, and depreciation. One of the functions of a cost accounting system is to classify and record all
costs according to category. The Manufacturing or Production Costs are classified into three basic
elements Direct Materials, Direct Labor, and Manufacturing Overhead.
DIRECT MATERIALS
It is also called as Raw Materials. Ito ay ang mga materyales na ginamit sa manufacturing process na
naging isang significant part ng finished goods. Ang halimbawa nito ay ang kahoy na ginagamit sa
paggawa ng furniture. Kaylangang tandaan na hindi lahat ng materyales na ginagamit sa paggawa ng
goods ay classified as Direct Materials. Ang halimbawa nito ay ang sand paper, pako, glue at iba pang
kagamitan na naging part ng finished product na ang costs ay insignificant, making it not cost effective
to trace them to specific products. Malaki kase ang magagastos ng isang kompanya sa pagttrace ng mga
materials na ito. Ang tawag sa materials na ito ay indirect materials.

Computation of Direct Materials (Raw Materials Used):

Raw Materials Inventory, Beginning
Add: Net Purchases
Raw Materials Available for Sale (RMAS)
Less: Raw Materials Inventory, Ending
Direct Materials Used

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DIRECT LABOR
Ang sweldo ng mga employees na gumagawa directly sa product na minamanufacture ng kumpanya
ay tinatawag na Labor Costs. Sa isang factory na gumagawa ng mga furnitures, ang salary ng mga
naglalagari, nagkikiskis ng mga kahoy at nagaassemble ng parts into finished furnitures ay halimbawa ng
direct labor.
Ang mga employees na nagtatrabaho sa factory na hindi nagtatrabaho directly sa minamanufacture
na product ay tinatawag na indirect labor. Ang halimbawa nito ay ang supervisor, department heads,
inspectors, material handlers, at maintenance personnel.
FACTORY/MANUFACTURING OVERHEAD
Ito ay ang lahat ng costs related sa pagmamanufacture ng products except Direct Materials at
Direct Labor. Ang halimbawa nito ay ang indirect materials, indirect labor, plus other manufacturing
expenses katulad ng depreciation on factory building and machinery, heat, light, power,
maintenance, insurance and taxes.
Prime Cost it is the term for the sum of direct materials and direct labor. It reflects the primary sources
of costs for units in production.
Conversion Cost it is the total of direct labor and manufacturing overhead. It indicates the costs
required to convert the raw materials into finished products.

PERIOD COSTS/NON-MANUFACTURING COSTS

Period costs are all the costs that are not product costs. All selling and administrative expenses
are treated as period costs. For example, sales commissions, advertising, executive salaries, public
relations, and the rental costs of administrative offices are all period costs. Period costs are not included
as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the
income statement in the period in which they are incurred using the usual rules of accrual accounting.
Keep in mind that the period in which a cost is incurred is not necessarily the period in which cash
changes hands.
Marketing or Selling Expenses include all costs necessary to secure customer orders and get the
finished product or service into the hands of the customer. Examples of marketing expenses include
advertising, shipping, sales travel; sales commissions, sales salaries, and expenses associated
with finished goods warehouses. All organizations are marketing costs, regardless of whether the
organizations are manufacturing, merchandising, or service in nature.
Administrative or General Expenses include all executive, organizational, and clerical expenses
that cannot logically included under either production or marketing. Examples of such expenses include
executive commission, general accounting, secretarial, public relations, and similar expenses having
to do with the overall, general administration of the organization as a whole. As with marketing expenses, all
organization have administrative expenses.

COSTS CLASSIFIED AS TO VARIABILITY

One of the most important cost classifications involves the way a cost changes in relation to changes
in the activity of the organization. Activity refers to a measure of the organizations output of products or
services. In specifying cost behavior, the managerial accountant often limits the description to a specific
range of activity. This is called relevant range.
FIXED COST
-It is the item of cost which remain constant in total, irrespective of the volume of production. Fixed
costs are not related to activity within the relevant range. If activity increases or decreases by 20 percent,
total fixed cost remains the same.
-Cost per unit decreases as volume increases.
-Cost per unit increases as volume decreases.
-Examples are salaries of production executives, depreciation of equipment computed on a straightline basis, periodic rent payments, and insurance.
-Fixed costs may be classified into two categories, depending on the ability of management to
influence the levels of these costs in the short-term.
a. Committed Fixed Costs costs that represent relatively long term commitments on the part of

management as a result of a past decision. Examples are depreciation on equipment.

b. Managed Fixed Costs costs that are incurred in a short-term basis and can be more easily
modified in response to changes in management objectives. Examples are advertising, research and
development and costs of employee training program.
ILLUSTRATION
Activity
1
2
5
10
20
40
VARIABLE COSTS

Fixed cost per unit

5,000
2,500
1,000
500
250
125

Total Fixed Cost

5,000
5,000
5,000
5,000
5,000
5,000

-Items of cost which vary directly, in total, in relation to volume of production. If activity increases by 20
percent, total variable cost increases by 20 percent also.
-Cost per unit remains in constant as volume changes within a relevant range.
-Examples are direct materials, direct labor, royalties, and commission of salesmen.
ILLUSTRATION
Activity
1
2
5
10
20
40

Variable cost per unit

1,000
2,000
5,000
10,000
20,000
40,000

Total Variable Cost

1,000
2,000
5,000
10,000
20,000
40,000

MIXED COST
-Items of cost with fixed and variable components. Mixed costs vary with the level of production,
though not in direct relation to it, probably because part of the cost is fixed while the rest is variable. Two
types of mixed costs exit semi-variable and step costs.
a. Semi-variable cost the fixed portion of a semi-variable cost usually represents a minimum fee
for making a particular item or service available. The variable portion is the cost charged for actually using
the service.
b. Step cost the fixed part of step costs changes abruptly at various activity levels because these
costs are acquired in indivisible portions. A step cost is similar to a fixed cost within a very small relevant
range.
JOINT COST VS COMMON COST

Joint Costs are cost of materials, labor, and overhead incurred in the manufacture of two or more
products at the same time. A major difficulty inherent to joint costs is that they are not specifically
identifiable with any of the products being simultaneously produced. These costs are also subject to
allocation.
Common Costs are costs of facilities or services employed in two or more accounting periods,
operations, commodities, or services. Just like indirect costs, these costs are subject to allocation
COSTS FOR PLANNING, CONTROL, AND ANALYTICAL PROCESSES
Standard Cost is a budget for the production of ones unit of product or service. It is the cost chosen
by the managerial accountant to serve as the benchmark in the budgetary control system.
Opportunity Cost is the benefit given up when alternative is chosen over another. Opportunity costs
are not usually recorded in the accounting system. However, opportunity costs should be considered
when evaluating alternatives for decision-making.
Differential Cost is the cost that is present under one alternative but is absent in whole or in part
under another alternative.
Relevant Cost is the future cost that change across alternatives.
Out-of-pocket Cost cost that requires the payment of money as a result of their incurrence.
Sunk Cost it is a cost for which an outlay has already been made and it cannot be changed by
present or future decision, they are not differential costs, and therefore they should be used in analyzing
future courses.
TWO MAIN TYPES OF COST SYSTEMS
Job Order Cost System it accumulates costs applicable to each specified job order or lot of
similar goods manufactured on a specific order for stock or for a customer. When production on a job
begins, the job is assigned a number, and a form called job cost sheet is set up.
The job order cost system is often used by manufacturers, such as furniture manufacturer, who
produce a variety of products, because such producers need to keep track of each specific order to
ensure correct assignment of costs.
Process Cost System it accumulates costs without attempting to allocate them during the
accounting period to specific units of goods being manufactured. At the end of the fiscal period, the
average cost per unit is determined by dividing the total number of units produced into the total cost
accumulated. The goods must be similar in nature when this cost system is used so that an average cost
will be meaningful.
COST OF GOODS SOLD: MERCHANDISING VS. MANUFACTURING
Computation of Cost Of Goods Sold (COGS) in a Merchandising Concern:

Merchandise Inventory, Beginning

Add: Net Purchases
Cost of Goods Available for Sale (TGAS)
Less: Merchandise Inventory, Ending
Cost of Goods Sold (COGS)

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Computation of COGS in a Manufacturing Concern:

Finished Goods Inventory, Beginning
Add: Cost of Goods Manufactured
Finished Goods Available for Sale
Less: Finished Goods Inventory, Ending
Cost of Goods Sold (COGS)

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Because a manufacturer makes, rather than buys, the product it has available for sale, the term finished
goods inventory replaces merchandise inventory, and the term

cost of goods manufactured

replaces net purchases in determining cost of goods sold. The cost of goods manufactured amount is
supported by a schedule detailing the costs of material and labor and the expenses of maintaining and
operating a factory.
COST OF GOODS MANUFACTURED
The computation of Cost of Goods Manufactured is as follows:
Direct Materials
Direct Labor
Manufacturing Overhead
Total Manufacturing Cost
Add: Work In Process, Beginning
Work In Process Available for Use
Less: Work In Process, Ending
Cost of Goods Sold (COGS)

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