cost accounting-chap 1

• financial accounting is concerned with the preparation of financial statements for external reporting
• external users include investors, creditors,, suppliers and government agencies
• management accounting is designed to provide useful information to the internal users, particularly, the management
• cost accounting provides the same information, most especially about product cost, to both financial accounting and management accounting
• the main difference between cost accounting and management accounting lies on their focus
• product cost information is important to the management in its desire to remain competitive in the market
• the basic information provided by cost accounting is about the cost of the product
• product costing is concerned with with cost identification, cost measurement and product cost assignment
• cost management system refers to methods, procedures, and communication framework of the business intended to control its cost-generating activities in producing goods and delivering services
• through cost management system, managers and those involve in value chain activities are properly informed about the product cost, product profitability, and management performance
• cost accounting exists whenever inputs or resources are converted into output or finished products
• the amount of product costs vary based on the degree of conversion— differs from that of service company or merchandising business
• when the degree of conversion is low, companies only add small amount of labor like that of retailing companies where products are displayed for the convenience of customers
• when the conversion process is moderate, companies add a small number if materials and labor before the sale or delivery of the product
• in a high degree conversion process, companies like manufacturing and firms of professionals convert direct materials, labor and overhead into finished products
• the management whether top, middle or lower level, plans, organizes, direct and controls the different operating and administrative activities of the business
• the common denominator among these management function is decision making
• management should make sound decisions based on both qualitative and quantitative information
• the highest officer in the cost department is the controller
• cost refers to the amount foregone to achieve future benefits; has broader dimension than expense
• a cost that is expected to lose the expected benefits that may be derived in the future becomes an expense
• cost are classified in relation to cost object, changes in activity level, product, FS presentation and decision making
• cost object is any object or item that is used to collect and assign cost—can be a customer, department or unit of product or services
• production process or product is used as the cost object
• when a company used a product as its cost object, it can measure and accumulate through a batch of like units, customer orders, product line
• when it uses the production process as cost object, it can accumulate through department, project or division
• cost object defines whether a particular cost can be directly or indirectly traceable to the product or service
• classification of costs according to their association or traceability are direct and indirect cost
• direct costs can be traced directly to the cost object; usually form part of the cost object
• the wages of the laborers who produce the table are considered direct costs
• common examples of direct cost are direct materials and labor with consideration of the concept of materiality
• indirect cost cannot be traced directly to the cost object; allocated to the cost object
• indirect cost include indirect labor, materials and factory overhead
• maintenance cost of a manufacturing plant cannot be traced directly to the product but have to be rationally allocated to cost objects
• depreciation of manufacturing plant might be either direct or indirect
• depreciation is direct cost when the cost object is processing unit
• plant depreciation is an indirect cost that must be assigned to the product or service when the cost object is the product line
• classification of cost based on their changes in activity level: variable, fixed and mixed
• variable cost vary in total amount based on the changes in production volume within the relevant range
• when the activity level increases, the variable cost increases