INTRODUCTION TO COST

ACCOUNTING
 MAJOR AREAS OF ACCOUNTING

Financial accounting focuses on the

measurement and recording of business
transactions as well as the preparation of
general-purpose financial reports that are
based on general accepted accounting
principles for external parties.
 MAJOR AREAS OF ACCOUNTING

Management accounting measures and reports

financial and non-financial information that
helps managers make decisions to fulfill the
goals of an organization.
DIFFERENCE BETWEEN FINANCIAL AND
MANAGEMENT ACCOUNTING
 COST ACCOUNTING

Cost accounting is a system that records,

summarizes, analyzes, and interprets the
details of the cost, materials, labor, and
overhead necessary to produce and sell an
article.
SIMILARITIES BETWEEN FINANCIAL AND
COST ACCOUNTING

Uses the same set of financial information.

Same set of rules are equally relevant under
financial and cost accounting.
RELATIONSHIP BETWEEN FINANCIAL,
MANAGEMENT AND COST ACCOUNTING
COST OF GOODS SOLD FOR
MERCHANDISING
COST OF GOODS SOLD FOR
MANUFACTURING
COST OF GOODS SOLD
 USES OF COST ACCOUNTING DATA

Product cost determination – cost accounting is

important for inventory valuation, product
pricing and managerial decision making
Planning and control – thru cost accounting the
different plans / budgets are evaluated in
relation to cost and benefits
 PRODUCT COST DETERMINATION

Selling price – the cost should be enough to

cover cost of production, expenses and profit.
Meeting competition – the price and cost may
be reduced, or product may be eliminated.
Bidding on contracts – the price must not be set
too high enough to cover cost plus profit
Analysing profitability – helps determine the
amount of profit and concentrate efforts on
more profitable items.
 PLANNING AND CONTROLLING

Planning is the process of establishing

objectives and goals and determining the means
by which the firm will attain them.
Controlling is the process of monitoring the
company’s operations and determining whether
the objectives identified under planning are
being achieved.
 MANUFACTURING COSTS

Direct materials are raw materials used in the

manufacturing process that become a significant
part of the finished goods.
Direct labor are costs of employees’ wages who
directly work with the raw materials in
converting them into finished goods.
Factory overhead are those other costs that are
incurred in the manufacturing of a product that
cannot be classified as either direct materials or
direct labor.
PRIME COST AND CONVERSION COST
 INVENTORIES IN MANUFACTURING
COMPANIES

Raw materials inventory – cost of unused or

unissued direct materials or supplies.
Work in process inventory – cost of direct
materials used, direct labor and factory
overhead that has begun but not yet completed
at the end of a period.
Finished goods inventory – reflects the cost of
goods that have been completed and are ready
for sale.
COST ACCUMULATION
 COST SYSTEMS

Job order cost system – applicable to the

production of customer specified products or
groups of unique products.
Process cost system – applicable to a
continuous process of production of the same or
homogenous goods.