Cost Accounting

Comparison of Financial
Accounting & Cost Accounting

Financial Accounting Cost Accounting
Users of the information External Internal
(decision makers (investors,creditors) (management)
Important criteria Comparability, decision Decision relevance (for
relevance (for investors) managers ) timeliness
Who establishes or defines External Standard Setting Managers
the system? Group
How to determine Standards (rules) Relevance for decision

accounting treatment making
Financial Accounting – field of accounting that
reports financial position and income
according to accounting rules
Cost Accounting- field of accounting that

measures, records and reports information
about costs
Cost Concepts and Classification
A. Costs Classified by Nature or
Management Function
1. Manufacturing Costs – associated with
production of goods
a. Direct Materials
b. Direct Labor
c. Factory overhead- Indirect materials
- indirect labor
- other manufacturing
overhead
2. Nonmanufacturing Costs
a. Marketing or selling costs
b. General and administrative costs
B. Timing of Recognition as Expense
1. Product ( Inventoriable ) costs
2. Period costs
a. Selling
b. Administrative
C. Costs Classification on Financial
Statements
1. Statement of Financial Position –
Inventory Costs
2. Income Statement – Cost of Sales
D. Traceability to Cost Objective
1. Direct Costs
2. Indirect Costs
E. Cost Behavior ( reaction to changes in
activity)
1. Variable Costs
2. Fixed Costs
3. Semivariable ( Mixed)-part variable,part fixed
electricity
4. Step costs-increases at certain activity level
Water
F.Costs Classified by Types of Inventory
1. Raw Materials Inventory

2. Work in Process Inventory
3. Finished Goods Inventory
G. According to Managerial Influence
1. Controllable costs
2. Noncontrollable costs
H. Costs Terminologies used for Planning and
Control
1. Standard Costs
2. Budgeted Costs
3. Absorption Costing/Full costing
4. Direct Costing/Variable costing
5. Information costs
6. Ordering costs
7. Out-of pocket costs
I. Time-frame perspective
1. Committed Costs
2. Discretionary costs
J. Period of Incurrence
3. Historical Costs
4. Future Costs
K. For Decision-making and other Analytical
Purposes
1. Relevant Costs – future costs that are
different under one decision alternative
than under another alternative
2. Incremental Costs – difference between two
or more alternatives
3. Sunk Costs - past costs that have been
incurred and irrelevant to a future decision
4. Opportunity costs- the value of the best
alternative foregone as a result of selecting
a different use of resources or by choosing
a particular strategy
5. Marginal Costs- cost associated with an
additional unit
6. Value Added Costs
Activity
Exercise 1
For each of the following costs incurred in a
manufacturing operation, indicate whether the
costs would be Fixed or Variable (F or V) and
Whether they would be Period costs or
Product costs (P or R)
a.Transportation-in cost on materials purchased
b.Assembly-line worker’s wages
c. Property taxes on work in process inventories
d. Salaries of top executives in the company
e. Overtime premium for assembly workers
f. Sales commissions
g. Sales personnel office rental
h. Production supervisory salaries
i. Controller’s office supplies
j. Executive office air conditioning
k. Executive office security personnel
l. Supplies used in assembly work
m. Factory heat and air conditioning
n. Power to operate factory equipment
o. Depreciation on furniture for sales staff
p. Varnish used for finishing product
Exercise 2
Red Ship Inc. Assembles custom sailboats from
components supplied by various manufacturers.
The company is very small and its assembly shop
and retail sales store are housed in a boathouse.
Below are some of the costs incurred by the
company. For each cost, indicate whether it
would be classified as Direct Labor, Direct
Materials,Factory Overhead, Selling or
Administrative cost.
1. Wages of employees who build the sailboats
2. Cost of advertising in the local newspapers
3. Cost of an aluminum mast installed in a
sailboat
4. Wages of the assembly shop’s supervisor
5. Rent on the boathouse
6. Wages of the company’s bookkeeper
7. Depreciation on power tools

Cost Accounting

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Comparison of Financial

Accounting & Cost Accounting

How to determine Standards (rules) Relevance for decision

Cost Accounting- field of accounting that

1. Raw Materials Inventory

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