1.

Differentiate financial from management

accounting.
2. Discuss the relationships between goals,
planning and controls.
3. Discuss the relevance of Cost Accounting
4. Differentiate job order costing from process
costing
5. What are the elements of production costs?
 Financial Accounting – use accounting
information for reporting to external parties
 Managerial Accounting – focuses on the needs
of parties within the organization
 Cost Accounting –accounting information is
needed and used both in financial and
managerial accounting
▪ External – stockholders, creditors and regulatory bodies for
credit and investment decision
▪ Internal – provide product cost information to internal
parties for planning and controlling
 Uses of Cost Accounting Data:
1. Determining product costs
2. Planning and Control
 Planning – process of establishing objectives or
goals for the firm and determining the means by
which the firm will attain them.
 Control – process of monitoring the company’s
operations and determining whether the
objectives identified in the planning process are
being accomplished
 Basic Product-Costing Systems:
1.Job order costing – system of allocating
costs to groups of unique product
2.Process costing - system applicable to a
continuous process of production of the
same similar goods
 Elements of production costs:
1.Materials
2.Labor
3.Manufacturing overhead
1. Reports prepared in financial accounting are
general-purpose whereas reports prepared in
managerial accounting are usually special-
purpose reports.
2. Managerial accounting internal reports are
prepared more frequently than are classified
financial statements.
3. Determining the unit cost of manufacturing a
product is an output of financial accounting.
4. Management accounting applies to all forms of
business organizations.
5. Controlling is the process of determining
whether planned goals are being met.
6. Managerial accounting information genrally
pertains to an entity as a whole and is highly
aggregated.
7. Job Order costing system is for allocating
costs to group of unique product and is
applicable to the production of customer
specified products such as the manufacture
of special machine.
8. Process costing is used by companies making
one-of-a-kind products.
9. Operation costing is a hybrid costing system
often used in repetitive manufacturing where
finished products have common as well as
distinguished characteristics.
10. Cost accounting procedures help management
in gathering the data needed to determine
product costs and thus generate meaningful
fianancial statements and other reports.
 Cost – is the cash or cash equivalent value sacrificed
for goods and services that are expected to bring a
current or future benefit to the organization.
 Costs - incurred to produce future benefits (revenue)
in a profit making firm.
 Expired costs (expenses) - expenses are deducted
from revenues in the income statement to determine
the period’s profit in each period
 Loss – is a cost that expires without producing any
benefit
 Cost Accounting focuses on costs, not expenses.
I. As to relation to a product
A. Manufacturing costs/ product costs
1. Direct materials
2. Direct labor
3. Factory overhead
B. Non-manufacturing costs/ fixed costs
1. Marketing or selling expenses
2. General or administrative expenses
II. As to variability
A. Variable costs
B. Fixed costs
C. Mixed costs

III. As to relation to manufacturing

departments
A. Direct departmental charges
B. Indirect departmental charges
IV. As to nature
A. Common costs
B. Joint costs

V. As to relation to an accounting period

A. Capital expenditures
B. Revenue expenditures
VI. Cost for planning, control and analytical
process
A. Standard costs
B. Opportunity costs
C. Differential cost
D. Relevant cost
E. Out-of-pocket cost
F. Sunk cost
G. Controllable cost
 Manufacturing costs – product costs or
inventoriable costs
1. Direct materials – materials that become
part of a finished product and can be
conveniently and economically traced to
specific product units
2. Direct Labor – labor services of employees
working in the factory or labor costs
associated with manufacturing
3. Manufacturing (Factory) Overhead –
manufacturing costs that cannot be
classified as direct materials or direct labor
 Indirect materials - materials and other production
supplies.
Eg: nails in furniture, bolts in automobiles and rivets in
airplanes
 Indirect labor - labor costs for production related activities
that cannot be conveniently and economically traced to
end products.
Eg: machine helpers, supervisors and other support
personnel in the factory
 Prime Costs = Direct materials + Direct
Labor
 Direct Materials = Prime Costs – Direct Labor
 Direct Labor = Prime Costs - Direct Materials

 Conversion Costs = Direct Labor + Factory

Overhead
 Direct Labor = Conversion Costs- Factory Overhead
 Factory Overhead = Conversion Costs - Direct Labor
 Non-manufacturing costs – period costs
1. Marketing or selling expenses – costs necessary to
secure customer orders and get finished product or
service into the hands of the customer
 Eg: advertising, shipping, sales travel, sales commissions, sales
salaries, and expenses associated with finished goods warehouses
2. Administrative or general expenses – include all
executive, organizational, and clerical expenses that
cannot logically be included under either production
or marketing.
 Eg: executive compensation, general accounting, secretarial,
public relations and similar general admin expenses
1. Fixed cost– items of cost which remain in total,
irrespective of the volume of production. Ex:
salaries of production executives, depreciation
of equipment, rent payments and insurance
a. Committed fixed costs – cost that represent relatively long
term commitments on the part of management as a result
of past decision. Ex. Depreciation
b. Managed fixed costs (discretionary, programmed or
planned fixed costs) – costs that are incurred on a short-
term bases and can be more easily modified in response to
changes in management objectives. Ex. Advertising,
research & development, employee trainings
 1600
Total fixed cost

1400
1200
1000
800
600
400
200
0
Activity 1 2 5 10 20 30
FC/Unit 1500 750 300 150 75 50
Total FC 1500 1500 1500 1500 1500 1500
 3500
Total variable cost

3000
2500
2000
1500
1000
500
0
Activity 1 10 20 30
VC/Unit 100 100 100 100
Total FC 100 1000 2000 3000
 Semi –variable cost - The fixed portion of a
semi-variable cost usually represents a
minimum fee for making a particular item or
service available. Ex: telephone bill or
electricity with a minimum fee
 Step costs – fixed part of step costs changes
abruptly at various activity levels because
these costs are acquired in indivisible
portions. Ex: supervisors salary in a factory
 Methods of separating mixed
1. Scatter graph
2. High-low point method
3. Least square
1. Common cost – cost of facilities or services
employed in two or more accounting
periods, operations, commodities or
services.
2. Joint cost – cost of materials, labor and
overhead incurred in the manufacture of
two or more products at the same time.
1. Direct departmental charges– cost
identified or associated with department (s)
that benefited the said costs
2. Indirect departmental charges– allocated
or transferred to another department (s)
that indirectly benefited from said costs
1. Capital expenditure– expenditure intended
to benefit more than one accounting period
and is recorded as asset
2. Revenue expenditure– expenditure that
will benefit current period only and is
recorded as an expenses
1. Standard costs – predetermined costs for
direct materials, direct labor, and factory
overhead
2. Opportunity cost – benefit given up when
one alternative is chosen over another (not
recorded in accounting)
3. Differential cost – cost that is present in
one alternative but is absent in whole or in
part under another alternative.
  Incremental cost – increase in cost from one
alternative to another
 Decremental cost - decrease in cost from one
alternative to another
 Marginal revenue – revenue that can be obtained from
selling one more unit of product
 Marginal cost – cost involved in producing one more
unit of product
4. Relevant cost – future cost that change
across the alternatives
5. Out-of-pocket cost – cost that requires the
payment of money (or other assets) as a
result of their incurrence
6. Sunk cost – cost for which an outlay has
already been made and it cannot be
changed by present or future decisions
7. Controllable cost – management has power
to authorize the cost
 Classify the following items as direct or
indirect materials
1. Gold to make jewelry
2. Sandpaper used in furniture making
3. Paper used in printing books
4. Milk to make ice cream
5. Water to make ice
6. Seats to be installed in a car
7. Leather to make gloves
8. Tape measure used by tailors
9. Flour used in making bread
10. Pineapple in a fruit cocktail
 Classify the following as manufacturing,
selling or administrative
1. Factory supplies
2. Advertising
3. Rent on factory building
4. Freight-out
5. President’s salary
6. Cost of machine breakdown
7. Legal expenses
8. Samples
9. Bad debts
10. Travel expenses of salesmen
 Classify the following selected costs by completing the
table below. Variable or fixed, Product or Period costs
and Direct or indirect in relation to units of product.
1. Wood is used the manufacture of tables, at a cost of
P100 per table
2. The tables are assembled by workers, at a cost of P40
per table.
3. Workers assembling the tables are supervised by a
factory supervisor who is P25,000 per month
4. Electrical costs of P20 per machine hour are incurred in
the factory in the manufacture of the tables. (4
machines hours per table)
5. The depreciation cost of the machines used in the
manufacture of the tables is P40,000 a year
 Classify the following selected costs by completing
the table below. Variable or fixed, Product or
Period costs and Direct or indirect in relation to
units of product.
6. The salary of the president of the company is
P100,000 a month.
7. The company spends P250,000 per year to advertise
its products
8. Salespersons are paid a commission of P300 for each
table sold.
9. Rent paid for the factory building is P20,000 a
month.
10. Insurance premiums paid for the general office is
P15,000 a year.
 Variable or Product or Direct or
Fixed Period Indirect
1 Wood
2 Salary –workers
3 Supervisor’s salary
4 Electrical costs
5 Depreciation – machines
6 President’ salary
7 Advertising expense
8 Sales commission
9 Rent expense
10 Insurance premiums