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• Accounting


  The process of identifying, measuring, recording, and communicating economic information to permit informed judgments and decisions by users of the information
• Objectives of accounting


  • To provide financial information about an economic entity to different types of users
  • Internal users: managers for planning, controlling and decision making
  • External users: government, fund providers, those with various interests in the operations of the entity
• Cost Accounting


  An expanded phase of general or financial accounting which informs management promptly with the cost of rendering a particular service, buying and selling a product, and producing a product
• Cost accounting measures, records, and reports information about costs
• All types of business entities - manufacturing, merchandising, and service businesses - require information systems which provide the necessary financial data
• Because of the nature of the manufacturing process, the information systems of manufacturing entities must be designed to accumulate detailed cost data relating to the production process
• It is common today for small, medium, and large manufacturing companies to have structured costs accounting systems
• Cost accounting systems should show what costs were incurred and where and how these costs were utilized
• Cost accounting today is recognized as being essential to efficient cooperation of business and industry
• Manufacturing process


  • Conversion of raw materials into finished goods through the application of labor and the incurrence of various factory expenses
  • Manufacturer must make a major investment in physical facilities, such as factory buildings and warehouses, and acquire many specialized types of machinery and equipment
  • Manufacturer must purchase appropriate quantities of raw materials, Supplies and parts, and build up a work force to convert these resources into finished goods
• Once the goods are completed and are ready for sale, the manufacturer performs basically the same functions as the merchandiser in storing and marketing the goods
• Cost accounting information is useful for all types of activities in all types of organizations, not just profit-seeking entities but also for not-for-profit organizations such as governmental agencies, churches, and charities
• Financial accounting


  The use of accounting information for reporting to external parties, including investors and creditors
• Financial accounting


  • Primarily concerned with financial statements for external use by those who supply funds to the entity and other persons who may have vested interest in the financial operations of the firm
  • The information may be historical, quantitative, monetary and verifiable
  • The data are historical and are supported by documents (evidence)
  • The information provided is usually presented in the form of financial statements, tax returns, and other formal reports distributed to various external users
• Managerial accounting


  Focuses on the needs of parties within the organization, rather than interested parties outside the organization
• Managerial accounting


  • The information may be current or forecasted, quantitative or qualitative, monetary or non-monetary and most of all timely
  • The data are futuristic and some of the costs are not recorded on the accounting books of the organization
  • There is no requirement or legislation that mandates the format or use of managerial accounting
  • Managerial accounting methods are tools that are available for use to management
• Financial accounting attempts to present some degree of precision in reporting historical information while at the same time emphasizing verifiability and freedom from bias in the information, relevance to the general user and some degree of timeliness in reporting which is not as critical in managerial accounting
• The timing of information and its relevance to the decision on hand has greater significance to the internal decision-maker in managerial accounting
• Cost accounting


  • The intersection between financial and managerial accounting
  • Cost accounting provides product cost information to external parties, such as stockholders, creditors and various regulatory boards for credit and investment decisions
  • Cost accounting provides product cost information also to internal parties such as managers for planning and controlling
• Merchandising company


  • Normally buys a product that is ready for resale when it is received
  • Nothing needs to be done to the product to make it salable except possibly to prepare a special package or display
• Manufacturing company


  • Maintains Three inventory accounts: Materials Inventory, Work in Process Inventory, and Finished Goods Inventory
  • Purchased materials unused during the production process make up the ending Materials Inventory balance
  • The cost of materials used plus the costs of labor services and factory overhead are transferred to the Work in Process Inventory account
  • When a batch or order is completed, all manufacturing costs assigned to the completed units are moved to the Finished Goods Inventory account
  • Costs remaining in the Work in Process Inventory account belong to partly completed units
• Determining product costs


  Cost accounting procedures help management in gathering the data needed to determine product costs and thus generate meaningful financial statements and other reports
• Uses of unit cost information

  • Determining the selling price of a product
  • Meeting competition
  • Bidding on contracts
  • Analyzing profitability
• Costs are said to be used for managerial accounting purposes when costs are used inside the organization by managers to evaluate the performance of operations or personnel, or as a basis for decision making
• When costs are used by outsiders, such as stockholders, creditors, and regulatory agencies, they are considered to be used for financial accounting purposes
• Purposes of cost accounting

  • Selling price must be reduced
  • Manufacturing costs must be reduced
  • The product must be eliminated
• Bidding on contracts


  • Analysis of unit costs is important to determine bid price
  • Bid price must cover costs and provide profit
  • Bid price must be competitive
• Analyzing profitability


  • Unit cost information enables management to determine profit per product
  • Least profitable products can be eliminated
• Managerial accounting


  Costs used inside the organization by managers to evaluate performance or as a basis for decision making
• Financial accounting


  Costs used by outsiders to evaluate top management and make decisions about the organization
• Planning


  1. Establishing objectives and determining means to attain them

  2. Provides a means of coordinating operations

  3. Provides historical costs as a basis for projecting data
• Components of planning


  • Strategic planning
  • Tactical planning
  • Operations planning
• Control


  The process of monitoring operations and determining if objectives are being accomplished
• Cost accounting is experiencing dramatic changes due to reduced manual bookkeeping, changes in production methods, and increasing emphasis on cost control
• The traditional role of cost accounting is to record full product cost data for external reporting, but the use of accounting data for decision making and performance evaluation has gained importance
• Fields related to cost accounting

  • Financial accounting
  • Managerial accounting
  • Microeconomics
  • Finance
  • Operations management
  • Marketing
  • Motivation and behavior
  • Statistics
  • Mathematics
  • Computer science
• Job order costing


  A system for allocating costs to groups of unique products, with a subsidiary record (job cost sheet) to track unfinished and finished jobs
• Process costing


  A system applicable to continuous production of the same or similar goods, with each processing department as a cost center
• Characteristics of job order costing

  • Collects and assigns all manufacturing costs to specific jobs or batches
  • Measures costs for each completed job, not set time periods
  • Uses one Work in Process Inventory Control account
• Characteristics of process costing

  • Groups manufacturing costs by department/work center, not specific job orders
  • Emphasizes weekly/monthly time periods, not time to complete a specific order
  • Uses multiple Works in Process Inventory accounts, one per department/work center