Introduction To Cost Accounting

Chapter 1:
Introduction to Cost
Accounting
Cost Accounting:
Foundations and Evolutions, 8e
Kinney ● Raiborn
The Need for Cost Accounting
 Cost accounting provides the detailed cost data

that management needs to control current
operations and plan for the future.
 Companies must control costs in order to keep
prices competitive.
 In today’s global environment, cost information is
more crucial than ever in remaining competitive.
Types of Businesses That Use
Cost Accounting
 Manufacturers (Ford, General Motors)
 Merchandisers (WalMart, Kmart)
 Wholesalers (Beverage Distributors)
 For-profit Service Businesses (CPAs,
Attorneys)
 Not-for-profit Service Agencies (United Way,
Red Cross)
The Manufacturing Process
 This process involves the conversion of

direct (raw) materials, direct labor, and
factory overhead into finished goods.
 Product quality is an important competitive
weapon in manufacturing.
 Many companies require their suppliers to
be ISO 9000 certified.
Accountants
 Financial accountants provide information to
external parties
 Investors
 Creditors
 Regulators
 Managerial accountants provide information to
internal users
 Managers
 Cost accountants provide information to both
internal and external users
 Product cost information
Accounting is the language of business.

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Relationship of Financial,
Management, and Cost Accounting
Product
Costs
FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTIN ACCOUNTING
G
Types of Accounting
Financial Management
 Meet external  Meet internal
information needs information needs
 Comply with GAAP  Does not have to
comply with GAAP
Financial versus Managerial
Financial Managerial
 External focus  Internal focus
 Whole organization  Segments or divisions
 Historical  Current/projected
 Quantitative  Quantitative/qualitative
 Monetary  Monetary and nonmonetary
 Verifiable  Timely/reasonable estimate
 GAAP  Benefits exceed costs
 Formal recordkeeping  Formal and informal
recordkeeping
Product Cost Information
 External parties—stockholders, creditors, and
regulators
 For investment and credit decisions
 Complies with GAAP
 Enterprise focus
 Internal parties
 Planning, controlling, and decision making
 Evaluating performance
 Includes upstream and downstream costs
 Disaggregated
Cost of Goods Sold
Merchandiser Manufacturer
Beginning merchandise Beginning finished goods

inventory inventory
Plus purchases Plus cost of goods

manufactured
Merchandise available for sale
Finished goods available for
Less ending merchandise sale
inventory Less ending finished goods
Cost of good sold inventory
Cost of good sold
Inventories
 Most manufacturers maintain a perpetual

inventory system that uses FIFO, LIFO, or
moving average methods of costing.
 An inventory ledger is maintained to provide
support for the control accounts.
 Some manufacturers may use a factory
ledger, which contain all of the accounts
relating to manufacturing.
Inventories
Merchandiser Manufacturer
Current assets:
Current assets:
Cash
Cash Accounts receivable
Accounts receivable Inventories:
Finished goods
Merchandise Work in process
inventory
Materials
Elements of Manufacturing Costs
 Direct materials
 Materials that become part of the finished good and
can be readily identified.
 Direct labor
 Labor of employees who work directly on the product
manufactured.
 Factory overhead
 Includes all costs related to production other than
direct materials and direct labor.
Flow of Manufacturing Costs
Direct Materials
Work in Process Finished Goods Cost of Goods Sold
Direct Labor
(Assets) (Assets) (Expenses)
Factory Overhead
Determining Product Costs and
Pricing
 Cost accounting is used to determine
products costs and help with marketing
decisions.
1. Determining the selling price of a product.
2. Meeting competition.
3. Bidding on contracts.
4. Analyzing profitability.
Planning and Control
 Planning is the process of establishing
objectives or goals for the firm and determining
the means by which the firm will attain them.
Effective planning is facilitated by the following:
1. Clearly defined objectives of the manufacturing
operation.
2. A production plan that will assist and guide the
company in reaching its objectives.
Planning and Control (cont.)
 Control is the process of monitoring the

company’s operations and determining
whether the objectives identified in the
planning process are being accomplished.
Effective control is achieved through the
following:
1. Assigning responsibility.
2. Periodically measuring and comparing results.
3. Taking necessary corrective action.
Cost Accounting Systems
 Job Order Cost System
 Output consists of special or custom-made
products.
 Provides a separate record for the cost of each
quantity of these special or custom-made
products.
 Process Cost System
 Accumulates costs for each department or
process in the factory.
Job Order Cost System
Process Cost System
END

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Chapter 1:

 Cost accounting provides the detailed cost data

 This process involves the conversion of

Accounting is the language of business.

FINANCIAL COST MANAGEMENT

Beginning merchandise Beginning finished goods

Plus purchases Plus cost of goods

 Most manufacturers maintain a perpetual

 Control is the process of monitoring the

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