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Details are from Sir Chua's Accounting Lesson.

What is Cost Accoun­ting?

Cost Accounting is a branch of accounting that deals with the process of recording and summar­izing the amount of cost that is spent on the company's activi­ties. It includes all cost of process, product or service used, provided, and sold.
Labor Intensive
Refers to a process or industry that requires a large amount of labor to produce its goods or services.
Capital Intensive
Refers to business processes or industries that require large amounts of investment to produce a good or service and thus have a high percentage of fixed assets, such as property, plant, and equipment.

Financial Accounting vs Management Accounting

 
Financial Accounting
Management Accounting
Definition
Accounting is an inform­ation system that identifies records and commun­icate s the economic events of an organi­zation to interested users.
Accounting system by which inform­ation are presented and supplied to management in approp­riate manner to operate business smoothly an effici­ently/
User
External persons who make financial decision
Managers who plan for and control an organi­zation
Time Focus
Historical Perspe­ctive
Future Emphasis
Verifi­ability vs Relevance
Emphasis on verifi­ability
Emphasis on relevance for planning and control
Precision vs Timeliness
Emphasis on precision
Emphasis on timeliness
Subject
Primary focus on the whole organi­zation
Focuses on segments of an organi­zation
GAAP
Must follow GAAP and prescribed formats
No need to follow GAAP and prescribed formats
Requir­ement
Mondatory for external reports
Not mandatory

Organi­zat­ional Strategy and Cost Inform­ation

A company formulates a mission statement - the reason for company's existence.
ex.: Jollibee - "To serve great tasting food, bringing the joy of eating for everyo­ne"
The develo­pment of the organi­zat­ion's 8strategy* roots from its mission statement.
Organi­zat­ional strategy is the plan of action on how the entity will attain and realize its goals and objectives with the use of their own resource that will be able to contribute to the creation of value both to customers and shareh­olders.
One of the ways an entity can attain compet­itive advantage is through cost leadership - the ability of an entity to provide the lowest prices in the market through proper management of cost.
Cost leadership differs from product differ­ent­iation in the perspe­ctive of providing unique products to be offered to the market where prices are allowed to be relatively higher .
To become a cost leader, cost should be managed well.
In order for cost to be managed well, Cost Accounting inform­ation is now on paramount importance - the entity's cost accoun­tants now play a vital role in the value creation process of the entity.
Properly managed cost>Lower costs of produc­tio­n> Lower prices> Cost leader > More people will buy> Added value to the entity.

What is Value Chain?

A value chain is a set of activities an entity applies to be able to deliver a valuable product to the customer.
Value chain is a set of activities or functions that allows the conversion of inputs into useful products and services.

Activities within the Value Chain

Research and Develo­pment
Analysing, testing, and studying of different method­ologies of cost reduction or quality improv­ement.
Design
Creation and develo­pment of product and service design fit for the market.
Supply
Proper management of raw materials from suppliers.
Production
The process of acquis­ition and constr­uction of company resources to create products and services.
Marketing
Promotions made by an entity to make the product attractive to the market.
Distri­bution
Process of delivery of products and services to customers.
Customer Service
After-sale support for customers.

FS Classi­fic­ation of Cost

Product Cost
Product cost are cost identified and incurred by an entity to manufa­cture a product.
Material
All raw materials and other supplies used in the manufa­cturing process.
     
Direct Materials: e.g Cost of glass in lightbulb manufacturing.
Indirect Materials: Cost of glue, lubric­ating oils, nails, screws, and the like.
   
Labor
Salaries and other benefits provided to all workers.
     
Direct Labor: e.g Cost of salaries paid to laborers of furniture associated directly in the process.
Indirect Labor: Salaries paid to all other factory personell necessary in the manufa­cturing process but not directly related in the conversion process.
   
Overhead
All indirect cost necessary for product conversion that are not direct materials and direct labor.
     
examples: Indirect materials, Indirect labor, Deprec­iation of equipment in the factory, Insurance of factory plant, Mainte­nance and repairs of equipment, Factory utilities.
Period Cost
The entity's operating expenses. They are called as such since they are much more associated with time periods rather than the manufa­cturing process.
Marketing and Advert­ising Expenses incurred in promoting the entity's products and services.
   
Selling and Distri­bution
They include salaries of sale personnel, and delivery expenses.
   
Admini­str­ative Expenses
They include office utilities, deprec­iation of office PPE, repairs and mainte­nance of office PPE, and all other expenses in the office.

Components of Product Cost

Equation of Manufa­cturing Cost

Cost Behaviors

Variable Cost
They are cost that change as the quantity of the goods produced changes. Total amount of variable costs is dependent on the level of production.
Examples:
Cost of materials
Cost of direct labor computed per piece.
Fixed Cost
At whatever level of production within the relevant range, this cost does not change. It is indepe­ndent on the level of production.
Examples:
Rent of facilities
Deprec­iation of equipment.
Mixed Cost
Refers to cost that has both variable and fixed components.
Example: Utilities, since these are charged with a base amount and goes higher with any usage over the base amount.
Step Cost
Costs that are constant on a certain level of activity but increases on another certain level of activity.
Example: Salaries and commission of agents that goes higher with different ranges of activity.

Concepts of Variable and Fixed Cost

Cost Equation

Sample Problem

Separating Mixed Cost

In separating mixed cost, there can be two methods to be used.
High-Low Method
Least Squares Regression Method

Other Cost Termin­ologies

Opport­unity Cost
Benefits forgone in choosing one action over another.
Sunk Cost
Cost incurred that will not affect a future decision.
Committed Cost
Cost resulting from organi­zat­ional structure or use of facili­ties.
Discre­tionary Cost
Cost arising from managerial decision.
Conrto­llable Cost
Cost that are able to be influenced on how much shall be spent.
Noncon­tro­llable Cost
Cost that cannot be controlled or influe­nced,

What is Cost?

Cost reflects the amout of resources sacrificed in order for the company to achieve a certain objective such as creation of goods or rendering of services in order to earn revenues.
 

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  • Published: 13th August, 2023

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