Cost accounting provides managers with financial and non-financial information to help plan, control costs, and make decisions. It measures and reports on the costs of resources used in an organization. There are different ways to classify costs, such as by behavior (fixed or variable), traceability (direct or indirect), and relevance (sunk or out-of-pocket). Management accounting focuses on internal reporting to managers, while financial accounting provides external reporting. Cost accounting is concerned with properly recording, classifying, and reporting costs to determine product costs, control costs, and provide information for management decision making.

2. • Definition of Cost accounting and Managements
Accounting
Accounting is a major means of helping managers
 To administer each of the activity or functional areas which they
are responsible, and
 To coordinate those functions within the framework of the
organization as a whole.

3. Accounting provides information for three major
purposes:
 Routine internal reporting for the decisions of
managers.
 Non routine internal reporting for decisions of
managers.
 External reporting to investors, government
authorities, and other outside parties on the
organization’s financial position, operations,
and related activities

4. Management Accounting
Measures and reports financial and non financial
information that helps managers to fulfil the goals of
the organization.
Concerned with providing information to mangers,
i.e. people inside the organization who direct and
control itsoperations.
Focuses on internal reporting.

5. Financial Accounting
Concerned with providing information to
stockholders, creditors and other who are outside the
organization
Focuses on reporting to external parties.
It measures and records business transactions and
provides financial statements that are based on
GAAPs.

6. Managers are responsible for the financial
statements issued to investors, government
regulators, and other outside parties.
Therefore, managers are interested inboth
management accounting and financial
accounting.

7. Since planning is such an important part of the
manager’s job, managerial accounting has a
strong future orientation. But financial
accounting primarily provides summaries of
past financial transaction. The difficulty with
summaries of the past is that the future is not
simply a reflection of what has happened in the
past. Changes are constantly taking place in
economic conditions, customer needs and so on.

8. FAdata are expected to be objective and
verifiable. However, for internal uses the
manger wants information that is relevant even if
it is not completely objective or verifiable. By
relevant, we mean appropriate for the problem
on hand.

9. Timeliness is often more important than
precision to managers. If decision must be
made, a manager wouldmuch rather has a good
estimate now than wait for a week for a more
precise answer. In addition, MA places
considerable weight on non monetary data. For
example, information about customer
satisfaction is more important even though it is
difficult to express in monetary value.

10. FAis primarily concerned with reporting for the
company as a whole. But MA primary focuses
much more on the parts, or segments of a
company. These segments maybe product lines,
sales territories, divisions, departments or any
other categorization of the company’s activities
that management finds useful..

11. FAstatements prepared for external users must
be prepared in accordance with GAAPs.
External users must have some assurance that
the reports have been prepared in accordance
with some set of ground rules. MA is not bound
by GAAPs. Managers set their own ground rules
concerning the content and form of internal
reports. The only constraint is that the expected
benefits from using the information should
outweigh the cost of collecting, analyzing, and
summarizing the data.

12. The field of managerial accounting is less
sharply defined. That is to say that managerial
accounting makes heavier use of economics,
decision sciences, and behavioural sciences.
The field of financial accounting, in contrast, is
more sharply defined. This means thatFAmakes
lighter use of related disciplines.

13. ManagerialAccounting
 Factual information that is
characterized byobjectivity,
reliability, consistency, and
accuracy.
 Detailed information onsubunits
within the organization
 Economic and physical data as
well as financialdata
 Unregulated, limited only by the
value-addedprinciple.
FinancialAccounting
 Factual information that is
characterized byobjectivity,
reliability, consistency, and
accuracy.
 Summarized information on the
company as a whole
 Financial data
 Regulated byGAAP.

14. Managerial Accounting
 Estimates that promote
relevance and enable
timeliness.
 Past, present, and future.
 Continuous reporting.
 The organization’s basic
accounting system plus
various other sources
 Field is less sharply defined
 Not mandatory
Financial Accounting
 Interested parties outside the
organization and managers.
 Past only, historically based.
 Delayed with emphasis on
annual reports.
 The organization’s basic
accounting system.
 Field is more sharply
defined
 Mandatory for external
reports

15. Cost Accounting is an essential part of accounting, which
has been developed to meet the managerial needs of
business. Starting off as a branch of financial accounting,
cost accounting has developed so fast that it is difficult to
give suitable definition, which fully covers its scope.
Further cost accountancy is regarded as the science, art and
practice of cost accountant.
It is a science in the sense it is body of systematic
knowledge having certain principles, which a cost
accountant should follow for the proper discharge of his
duties.
It is an art, as it requires the ability and skill on the part of a
cost accountant in applying the principles of cost
accountancy to various managerial problems

16.  Cost Accounting primarily deals with
collection, analysis of relevant cost data for
interpretation and presentation for various
problems of management.
 Cost accounting is a management
information system, which analyses past,
present, and future data to provide thebasis
for managerial decision making.

17.  According to Charles T. Horngren Cost
Accounting is “a Quantitative method that
accumulates, classifies, summarizes, and
interprets information for three majorpurposes:
 (i) Operational planning and control
 (ii) Special decisions and
 (iii) product decisions.

18.  In general, cost accounting is thus
concerned with recording, classifyingand
summarizing costs for determination of
costs of products or services, planning,
controlling and reducing such costs and
furnishing of information tomanagement
for decision making.

19.  CostAccounting
 Provides information for both management
accounting and financial accounting.
 It measures and reports financial and nonfinancial
information that relates to the cost of acquiring or
consuming resources by an organization.
 Includes those parts of both management
accounting and financial accounting where cost
information is collected or analyzed

20. Thus Cost Accounting is concerned with
 Accounting the costs
 Controlling the costs
 Reducing the cost

21. Classification of Costs
An organization incurs many different types of
costs that are classified differently, depending on
the needs of management (different costs for
different purpose). Specially, we can classify
costs on the basis of their
1. Behavior
2. Traceability
3. Controllability
4. Relevance
5. Function

22. Classification by Behavior
At a basic level, a cost can be classified as
fixed or variable.
A fixed cost does not change with changes in
the volume of activity (within a range of
activity known as an activity’s relevant range).
For example, straight –line depreciation on
equipment is fixed cost.
Example: Rent for Rocky mountain bikes’
building is $22,000, and doesn’t change with
the number of bikes produced.

23. Classification by Behavior
A variable cost changes in proportion to
changes in the volume of activity. Sales
commissions computed as percent of
sales revenue are variable costs.
tires is
Example : Cost of bicycles
variable with the number of bikes
produced- this cost is $15 per pair.

24. Classification by Traceable
A cost is often traced to a cost object,
which is a product, process, department ,
or customer to which costs are assigned.
When a cost is traceable to a cost object,
it is classified as a Direct costs are
incurred for the benefit of one specific
cost object. For example, if a product is
cost object, then material and labor costs
are usually directly traceable.

25. Classification by Traceable
Examples of Direct Costs
Salaries of maintenance department
employees.
Equipment purchased bymaintenance
department.
Materials purchased by maintenance
department.
Maintenance department equipment
depreciation.

26. Classification by Traceable
Indirect costs are incurred for the benefit
of more than one cost object. An example
of indirect traceable cost is a maintenance
plan that benefits two or more
departments.
Example:
Factory accounting
Factory administration
Factory rent
Factory manager’s salary

27. Classification by Controllability
A cost can be defined as controllable or
controllable or not depends
not controllable. Whether a cost is
on the
employee’s responsibilities.
Example:
Senior Manager controls costs of
and
investment in land, buildings
equipments.
Supervisor controls daily expenses such
as supplies, maintenance, and overtime.

28. Classification by Controllability
This referred to as hierarchical levels in
management, or pecking order. For
example investments in machinery are
controllable by upper-level managers.
Many daily operating expenses such as
overtime often are controllable by lower-
level mangers. Classification of costs by
controllability is specially useful for
assigning responsibility to and evaluating
managers.

29. Classification by Relevance
A cost can be classified by relevance by
identifying it as either a sunk cost or an
out-of-pocket cost. A
already been incurred
sunk cost has
and cannot be
avoided or changed. It is irrelevant to
future decisions. Example, cost of office
equipment previously purchased by a
company. An out-of-pocket cost requires
a future outlay of cash and is relevant for
decision making. Future purchases of
equipment involves out of pocketcosts.

30. Classification by Function
Another classification of costs (for
manufacturers) is one of capitalization as
inventory or to expense as incurred. Costs
capitalized as inventory are called product
costs, which refer to expenditures that are
necessary and integral to finished
products. They include direct materials,
direct labor, and overhead costs. Costs
expensed are called period costs, which
refer to expenditure identified more with
a time period than with finished products.

31. Matching Cost Flow with WorkFlow
After identifying the different workflows
of manufacturing firm, efforts will be
made to match cost incurred in each of
the respective workflows.

32. 1. Procurement
Accounts must be providedto record
the purchase of materials labor and
overheads. These costs will later be
charged to production.
Typical general ledger account titles
used for this purpose are rawmaterials,
factory payroll clearing, and
manufacturing overhead control
respectively.

33. 2. Production
An account is required to gather
procurement costs as they become
chargeable to manufacturing operations.
This account is known as work in
process.

34. 3.Ware housing
An account must be set up to record
the cost of goods that have been
completely manufactured. This
account is referred as finished
goods.

35. 4. Selling
The cost of completed goods that have
been sold must be recorded. An account
termed as cost of goods sold is provided
in the general ledger for this purpose.
Other general ledger accounts such as
Accounts receivable and sales are used
for recording the sale to the customer
and the credit to income at selling price.

36. Recording the Cost Flow at Each Stage of Work Flow
Assume that on October 1,2020 these balances in
the following accounts were available:-
Raw materials
Work in process
Finished goods
$ 40,000
30,000
24,000
1.Additional raw materials were purchased during
the month of October at a cost of $60,000
Raw materials
Vouchers payable (accounts payable)
60,000
60,000

37. 2.During the month raw material costing $70,000 were used as
follows:-
Direct materials charged to the work in process $68, 000
Indirect materials charged to the manufacturing overhead
control was $2,000
Work inprocess
Manufacturing overhead control
Raw materials
68,000
2,000
70,000
3.During the month wages and salaries totaling $84,000 were
earned by the factory employees and charged from the factory
payroll register.
Factory payroll clearing 84,000
Salaries and wages payable 84,000

38. 4.An analysis of records indicates that labor costs of $84,000
is allocated as follows:-
Direct labor chargeable to the work in process
60,000
Indirect labor chargeable to manufacturing over head
control 24,000
Work in process
Manufacturing over head control
Factory payroll clearing
60,000
24,000
84,000
5. In addition to indirect materials and indirect labors other
manufacturing overhead costs totaling $14,000 incurred
during the month were charged form variousjournals.
Manufacturing overhead control
Vouchers payable (accounts payable)
14,000
14,000

39. 6.It is estimated that over head costs totaling $38,000
are applied or charged to jobs worked on during the
month.
Work in process 38,000
Manufacturing overhead control 38,000
7.During the month, some jobs were completed and
transferred to the finished goods ware house. The jobs
cost were $180, 000
Finished goods 80,000
Work in process 180,000
8.During the month, finished goods costing $170, 000
were sold to various customers.
Cost of goods sold
Finished goods
170,000
170,000

40. Financial Statement in a Manufacturing Industry
Cost of Goods Manufactured Schedule
Duncan ManufacturingCorporation
Statement of Cost of Goods Manufacturing
Yearended December 31, 2019
Raw Material
Raw material inventory,Jan-1 XXX
XXX
xxx
xxx (XXX)
Material Purchase
Less: purchase return and allowance
Purchase discount
Net Purchase
Total MaterialAvailable
Less: Raw Materials Inventory Dec31
Raw materialused
Directlabor
ManufacturingOverhead
Totalcurrent manufacturingcosts
Add: Work in process Jan1
Sub-total
Less: Work in process Dec 31
Cost of Goods Manufactured
XXX
XXX
(XXX)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

41. Duncan Manufacturing Corporation
Income statement
Year ended December 31, 2019
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
Revenue
Sales
Less: Sales Return andAllowance
Net Sales
Costof goods sold:
Finished Goods Inventory Jan-1
Add: Costof goods manufactured
Total Goods available for sale
Less: Finished Goodsinventory Dec 31
Cost of goodssold
Gross profit on sale
Less operating andadmin. Expenses
Net Income from operations
Add: OtherIncome
Subtotal
Less: Other Expenses
Net Income Before Tax
Less: Provision for Tax
Net IncomeAfter Income Tax
XXX
XXX
(XXX)
XXX
XXX
XXX
(XXX)
XXX
(XXX)
XXX

42. Identifying the Cost Accounting
System
The primary objectives of cost accounting
system are ascertainment of cost, fixation of
price, proper recording and presentation of cost
data to the management for measuring efficiency
and for cost control. In cost accounting system
terms such as cost, costing, cost accounting,
expenses, losses has to be clarified clearly.

43. Some of the definitions of cost are
presented below.
1. A cost is the value of economic resources
used as a result of producing or doing the
thing. In other words, cost is the amount of
expenditure related to a specific thing or
activity.
2.A cost is the amount of resources given up in
exchange for some goods or services. Cost is an
exchange price or a sacrifice made to secure
benefit.

44. Definition.
The term cost has been defined as "the
cash or cash equivalent value required
to attain an objective such as acquiring
the goods and services used,
completing with a contract, performing
a function, or producing and
distributing a product.“

45. Cost, Expenses and losses
Cost is defined as the monetary value of
goods and services expended to obtaincurrent
or future benefits.
Expenses are expired costs for which
benefits have already been received in the
current fiscal period. Expenses aredeductible
from revenue.
Losses sacrifices without any benefit. Loss
can be defined as the excess of all expenses
over revenues for a period.

46. Costs on Financial Statements.
Financial statements of a Manufacturing company are
more complex as compared to financial statements
companies.
of Merchandising and Service
sheet, and Income
statement of
Particularly, the Balance
a Manufacturing Enterprise are
somewhat different from their Merchandising and
Service counterpart. All costs mentioned above
should be properly accounted for and reported in the
financial statements of a manufacturing firm, which
is more complex than that of the Merchandising and
Service complements.

47. The Balance Sheet
The balance sheet or statement of financial
position, of a manufacturing company is
similar to that of a merchandising company.
However there are differences in the inventory
accounts.
A merchandising company has only one class
of inventory- goods purchased from suppliers
that are awaiting resale to customers. By
contrast, manufacturing companies havethree
classes of inventories:

48. Raw materials: shows the cost of raw
materials on hand and intended for use
in the manufacturing process.
Work in process: shows the cost of
goods in the manufacturing process, but
not completed at the end of the
accounting period.
Finished goods: shows the cost of the
goods completed and ready for sale.

49. Inventory of Direct Material represents
the costs of materials that are not yet
entered into a manufacturing process.
Such materials may be purely raw
materials that have not received any
processing before, such as agricultural
outputs, or they may be semi processed
or fully processed products of another
firm like wheat flour directly going into
Biscuit in Food Complex Industries.
:

50. Inventories of Work-In-Process
represent all goods that are undergoing
some manufacturing process but yet not
finished to be dispatched for use by
customers. The costs of work in process
inventory include all the manufacturing
costs incurred so far in the
manufacturing process; the cost of direct
materials, the costs of labour, and
applied manufacturing overhead.

51. The Finished Good Inventory
embodies the final product that is not yet
sold. The cost of finished good inventory
includes all manufacturing costs, direct
material, direct labour, and
incurred to
manufacturing overhead
produce that product.
.

52. The Income Statement
Income statement of a manufacturing firm differs from
income statement of a merchandising firm by the Cost
of Goods Manufactured caption. A merchandising
firm sells goods after buying it from a manufacturing
firm. But a manufacturing firm sells goods that are
internally produced. Hence, the costs of goods sold
caption contains cost of goods manufactured instead of
purchase. The amount of purchase can easily be found
from the ledger, but cost of goods manufactured
cannot. Cost of goods manufactured must first be
computed before the income statement is prepared.

53. Merchandising Company
Sales xxx
Cost of goods sold
Beginning merchandise inventory xxx
Add Purchases xxx
Goods available for sale xxx
Deduct: Ending merchandise inventory xxx xxx
Gross Margin xxx
Less: Operating Expenses
Selling Expenses xxx
Administrative Expenses xxx xxx
Net Income xxx

54. xxx
Manufacturing Company
Sales
Cost of goods sold
Beginning finished goods inventory xxx
Add: Cost of goods manufactured xxx
Goods availablefor sale xxx
Deduct: Ending finished goods inventory xxx xxx
Gross Margin xxx
Less operating expenses:
Selling Expenses xxx
Administrative Expenses xxx xxx
Net income xxx

55. Schedule of Cost of Goods Manufactured
Direct Materials
Beginning raw materialsinventory xxx
Add: Purchases of rawmaterials xxx
Raw materials available for use xxx
Deduct: Ending raw materials inventory xxx
Raw materials used inproduction
Direct Labour
Manufacturing overhead
xxx xxx
xxx
Insurance, factory
Indirect labour
Machine rental
Utilities, factory
xxx
xxx
xxx
xxx

56. Supplies xxx
Depreciation, factory xxx
Property taxes, factory xxx
Total manufacturing costs xxx
Add: Beginning work in process inventory
Total goods in production
Deduct: Ending work in process inventory
Cost of goods manufactured
xxx
xxx
xxx
xxx
Cost of goods manufactured = beginning work in
process inventory + (direct material used + direct labor
incurred + manufacturing overhead) – ending work in
process inventory

57. Assume the following information is available for the
HH Company for February 2021
Beginning inventories:
Direct materials $15,000
Work-in-process 38,000
Finished goods 26,000
Ending inventories:
Direct Materials 20,000
Work-in-process 40,000
Finished goods 28,000
Direct materials purchased 90,000
Direct labor used 100,000

58. Indirect manufacturing costs:
Indirect materials 15,000
Indirect labor 40,000
Depreciation 50,000
Electric power 60,000
Property taxes & insurance 5,500
Repair & maintenance 25,000
Miscellaneous 8,500
Selling & administration Exp. 45,000
Sales
Required:
625,000
assume full absorption costing is used
prepare an income statement and separate schedule of
cost of goods manufactured for the HH company for
February.

59. HH Company
Income Statement
February 2021
$625,000
$26,000
387,000
$413,000
28,000
385,000
$240,000
45,000
195,000
Sales
Less: Cost of Goods Sold:
Beginning Finished Goods
Cost of Goods Manufactured*
Cost of Goods Available for Sale
Less: Ending Finished Goods
Cost of Goods Sold
Gross Profit
Less: Selling & Administrative expense:
Net Income
*see schedule below

60. HH Company
Schedule of Cost of Goods Manufactured
February 2021
Direct materials:
Beginning inventory $15,000
Purchase of direct materials 90,000
Cost of direct material available $105,000
Less: Ending inventory 20,000
Direct materials used $85,000
Direct labour 100,000

61. Manufacturing Overhead:
Indirect materials $15,000
Indirect labor 40,000
Depreciation 50,000
Electric power 60,000
Property, taxes & insurance 5,500
Repair and maintenance 25,000
Miscellaneous 8,500
Total manufacturing overhead costs 204,000
Total manufacturing cost 389,000
Add: Beg. WIP inventory 38,000
Total manufacturing costs to accountfor 427,000
Less: End WIP inventory 40,000
Cost of goods manufactured 387,000

62. Assume the following information is available for the JJ
Company for December 2020
Beginning inventories:
Direct materials $17,000
Work-in-process 40,000
Finished goods 28,000
Ending inventories:
Direct Materials 80,000
Work-in-process 38,000
Finished goods 30,000
Direct materials purchased
Direct labor used
80,000
100,000

63. Indirect manufacturing costs:
Indirect materials 18,000
Indirect labor 38,000
Depreciation 45,000
Electric power 56,000
Property taxes & insurance 6000
Repair & maintenance 28,000
Miscellaneous 4000
Selling & administration Exp. 51,000
Sales 800,000
Required: Prepare an income statement and separate
schedule of cost of goods manufactured for the JJ
company for December.Income tax provision is made
30%