This document provides an introduction to accounting concepts related to cost. It defines cost accounting as recording and summarizing financial transactions and events in terms of money. It also discusses the different types of accounting, including financial accounting which publishes reports for external users, and management accounting which provides information to managers for decision making. Finally, it outlines the key steps in calculating cost of goods manufactured and cost of goods sold.

1. An Introduction to Cost
terms and purpose
Chapter 2

2. Accounting
The art of recording, classifying and
summarizing in a significant manner
and in terms of money, transactions and
events which are, in part at least of
financial character and interpreting the
results thereof.

3. Types of Accounting
 Financial Accounting is the process of
summarizing financial data taken from an
organization’s accounting records and
publishing in the form of annual reports for
the benefit of people outside the
organization.

4. Types of Accounting
 Management Accounting is concerned
with the provisions and use of
accounting information to managers
within an organizations, to provide them
with the basis to make informed
business decisions.

5. Cost
 Cost defined as resource sacrificed (used)
or forgone to achieve a specific objective.
 A cost Object
 Actual cost
 Budgeted cost

6. Stages of costs
 Cost Accumulation is the collection of
cost data in some organized way by
means of accounting system
 Cost Assignment is a term that
encompass both
i. Tracing accumulated costs that have a
direct relationship to a cost object
ii. Allocating accumulated costs that have
an indirect relationship to cost object

7. Types of Cost an its Behavior
$ Fixed Costs: costs that remain
constant regardless of the quantity
of product produced.
Output
Variable Costs: costs that
$ increase linearly and
proportionately as production
volume increases.
Output
Profit = (Sales Revenue-Variable Cost) - Fixed Cost

8. Types of Cost and its Behavior
 Cost Driver: Any activity or event that causes costs to be incurred.
Direct material (DM), direct labor (DL), and
 Manufacturing Cost:
manufacturing overhead (MOH).
 Sales and General
All costs associated with running the business,
Administrative Costs:
excluding production costs.
 Direct and Indirect Costs: Costs that can either be traced (direct) or not traced
(indirect) to a specific department in the organization.
 Controllable and Costs used to describe the extent of a manager’s
Uncontrollable Costs: influence on cost.
 Product/Period Cost: Refers to the timing which costs become expenses.

9. Economic Terms
• Opportunity Benefit lost because the choice of one
Cost: action precludes another action.
• Sunk Cost: Costs that have already been incurred and
can not be altered by current or future
decisions.
• Differential and Difference in the costs incurred under two
Incremental alternative actions.
Cost:
Cost associated with producing one
• Marginal Cost:
additional unit.
• Average Cost Total cost for the quantity produced, divided
per Unit: by the number of units produced.

10. Industry Differentiation on the basis
of Cost
 Manufacturing sector companies
 Merchandising sector companies
 Service sector companies

11. Industry Differentiation on the basis
of Cost
 Types of Inventories (manufacturing)
 Direct material inventory
 Work in process inventory
 Finished goods inventory

12. Elements of Manufacturing Cost
 Direct Material
 Direct Labor
 Manufacturing Overhead
 Indirect Material
 Indirect Labor
 All other cost related to manufacturing

13. Elements of Manufacturing Cost
 Primecost
Prime cost = Direct material + Direct labor
 Conversion cost
Conversion cost = Direct labor + Manufacturing
overhead cost

14. Cost Distinction according to GAAP
 Product Costs
I. Direct material
II. Direct labor
III. Manufacturing overheads
 Period Costs
I. Selling Expense
II. General & Administrative Expense

15. Types of Cost System
 Job Order System
The job order cost system is used when
products are made based on specific
customer orders. Each product produced is
considered a job. Costs are tracked by job.
Services rendered can also be considered a
job.

16. Types of Cost System
 Process Cost System
Process costing is used when products are
manufactured under conditions of
continuous processing or under mass
production methods. In fact, process costing
procedures are often termed "continuous
or mass production cost accounting
procedures".

17. CALCULATING COST OF GOODS
MANUFACTURED
 Step1: Calculation of direct material
cost
 Step 2: Total manufacturing costs
 Step 3: Cost of goods manufactured

18. STEP 1: CALCULATING DIRECT
MATERIAL COST
Direct material $
Beginning inventory ****
Add: Raw material purchased ****
Raw material available for use ****
Less: Ending inventory (****)
Direct material used *****

19. STEP 2: TOTAL MANUFACTURING
COST
Total manufacturing cost $
Direct material used ***
Add: Direct labor cost ***
Add: Manufacturing overhead cost ***
Total manufacturing cost ****

20. STEP 3: COST OF GOODS
MANUFACTURED
Cost of goods manufactured $
Total manufacturing cost ****
Add: Beginning W-I-P ****
Cost of goods to be accounted for ****
Less: Ending W-I-P (***)
Cost of goods manufactured ****

21. CALCULATION OF COST OF GOODS
SOLD
Cost of goods sold $
Cost of goods manufactured ****
Add: Beginning Finished goods ****
Cost of goods available for sale ****
Less: Ending Finished goods (****)
Cost of goods sold *****

22. Manufacturing Facility
Direct Material
Purchased
Direct Material Storage
Raw Materials
It’s a Warehouse!
Direct Material Used
Finished Goods W-I-P :
Direct Material
Direct Labor
Inventory
Manufacturing Overhead Costs