Overview of Cost

Accounting

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 Topics to Discussed
• Definition, scope & objectives of cost
accounting
• Relationships of cost accounting to
financial & management accounting
• Nature, classification & purpose of cost
• Elements of product cost, flow of cost in
service, trading & manufacturing
businesses

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 What is Cost Accounting?

It is a system that records, summarizes,

analyzes, and interprets the details of the
costs of materials, labor, and overhead
necessary to produce and sell a product
(Dayag)
It is an expanded phase of general and
financial accounting which informs
management promptly with the cost of
rendering a particular service, buying and
selling a product, and producing a product
(De Leon)

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 What is Cost Accounting?

It aims at computing cost of

production/service in a scientific
manner and facilitate cost control and
cost reduction
 It is an internal reporting system for
an organization’s own management
for decision making.

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 What is Cost Accounting?

• It involves the techniques

– for determining the costs of products,
processes, projects, etc. in order to
report the correct amounts on the
financial statements, and
– Assist management in making
decisions and in the planning and
control of an organization

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Accounting

The
Language
of
Business

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 Accounting

Provides information to external

parties
– Stockholders, creditors, regulators
Estimates the cost of products
produced and services provided
Provides information to internal
decision makers
– To plan, control, and evaluate
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performance
 Two Types of Accounting

Financial Management
• Meet external • Meet internal
information needs information needs
• Comply with GAAP • Provide product
costing information

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 Financial Accounting
Should

Provide information to
stockholders, creditors, and
various regulatory bodies

Comply with GAAP

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 Management Accounting
Should

Provide product costing information

for external financial statements

Provide information
useful for
making decisions
and controlling
operations
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 Comparison of Financial
and Managerial Accounting

Financial Accounting Managerial Accounting

1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
 Accounting Differences

Financial Managerial
 External  Internal
 Aggregated  Segmented
 Historical  Current/Forecasted
 Quantitative  Quantitative/Qualitative
 Monetary  Monetary/Nonmonetary
 Verifiable  Timely/Reasonable
 GAAP estimate
 Benefits exceed costs 12
 Relationship of Financial,
Management, and Cost
Accounting

FINANCIAL COST MANAGEMENT

ACCOUNTING ACCOUNTING ACCOUNTING
 The Accountant’s Role

• Accountants provide information that is

used to
– make strategic decisions
– measure and evaluate management
– provide appropriate incentives
– provide information about the value chain

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 Cost Management Goals

•Reduce costs
•Improve customer
satisfaction
 Strategy

A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The focal point of a

company’s strategy should
be its target customers.
 Customer Value
Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
 Management

• 3 groups of Management
– Operating
– Middle
– Executive
• Management sets objectives to be
achieved by integrating its knowledge and
skills with the abilities of the employees
• 3 Functions of Management
1. Planning
2. Organizing
3. Controlling
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 Planning & Controlling

• It is the centerpiece of an
organization’s approach to
management!

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 Planning

 The construction of a detailed operating

program
 The process of sensing external opportunities
and threats
 Determining desirable objectives
 Employing resources to accomplish objectives
 It investigates the nature of company’s
business, its major policies, and the timing
of major action steps
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 Organizing

 The establishment of the framework

within which activities are to be
performed
 It means bringing the many functional
units of an enterprise into a
coordinated structure

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 Control

 It is management’s systematic effort

to achieve objectives
 It is designed to work continuously,
to use physical measures as their
information inputs, & to work largely
independently of human decision
making

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 Authority, Responsibility &
Accountability

 Authority – is the power to direct

others to perform or not to perform
 Responsibility – or obligation, or is
closely related to authority
 Accountability – reporting results to
higher authority
 ORGANIZATIONAL CHART – helps to
define authority, responsibility &
accountability
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 Ethics & Management
Accountants
Standards of Ethical Conduct for
Management Accountants
– Competence
– Confidentiality
– Integrity Competence
– Objectivity Confidentiality
Integrity
Objectivity

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 IMA Guidelines for
Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain Follow applicable

professional Competence laws, regulations
competence. and standards.

Provide accurate, clear,

concise, and timely decision
support information.
 IMA Guidelines for
Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
unethical or illegal
advantage.

Ensure that subordinates do

not disclose confidential
information.
 IMA Guidelines for
Ethical Behavior

Mitigate conflicts of interest

and advise others of potential
conflicts.

Refrain from
conduct that
would prejudice Integrity
carrying out
duties ethically.
Abstain from activities that
might discredit the
profession.
 IMA Guidelines for
Ethical Behavior
Communicate information fairly
and objectively.

Disclose delays or
deficiencies in
Credibility information timeliness,
processing, or internal
controls.
Disclose all relevant
information that could
influence a user’s
understanding of reports
and recommendations.
 IMA Guidelines for
Resolution
of an Ethical Conflict
• Follow employer’s established
policies.
• For unresolved ethical conflicts:
– Discuss the conflict with immediate supervisor
or next highest uninvolved manager.
– If immediate supervisor is the CEO, consider
the board of directors or the audit committee.
– Contact with levels above the immediate
supervisor should only be initiated with the
supervisor’s knowledge, assuming the
supervisor is not involved.
 IMA Guidelines for
Resolution
of an Ethical Conflict
• Follow employer’s established policies.
• For unresolved ethical conflicts:
– Except where legally prescribed, maintain
confidentiality.
– Clarify issues in a confidential discussion
with an objective advisor.
– Consult an attorney as to legal obligations.
 Why Have Ethical
Standards?

Ethical standards in business are essential for a

smooth functioning advanced market economy.

Without ethical standards in business, the

economy, and all of us who depend on it for
jobs, goods, and services, would suffer.

Abandoning ethical standards in business would

lead to a lower quality of life with less
desirable goods and services at higher prices.
 Cost Management System
(CMS)

• Formal methods to plan and control an

organization’s cost-generating activities
with major challenges of:
– Achieving profitability in the short run
– Maintaining a competitive position in the long
run

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 Integrated Cost Management
System

Financial
Marketing Accounting

Quality Production
Control Reporting
Cost Accounting

Research and Inventory

Development Production Management
Planning and
Scheduling
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 Cost Management System
Goals
• Develop product costs
• Assess product/service life-cycle
performance
• Improve understanding of processes and
activities
• Control costs
• Measure performance
• Allow pursuit of organizational strategies
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 CMS Elements

• Motivational elements
• Informational elements
• Reporting elements

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 CMS Elements

 Motivational elements
– Performance measurements
– Reward structure
– Support of organizational mission and
competitive strategy

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 CMS Elements
 Informational elements
– Support budgeting process
– Identify cost drivers
– Reduce/eliminate non-value-added activities
– Emphasize product life cycle
– Adapt to changing competitive
conditions
– Relate cost to product/process design
– Focus on capital spending
– Minimize cost distortions 37
 CMS Elements

 Reporting elements
– Prepare financial statements
– Implement responsibility
accounting system

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THE END

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