Saturday, January 03, 2026 12:27 AM

WHAT IS COST?
Cost is the monetary valuation of resources consumed in producing goods or delivering services. It represents the cash or cash-equivalent sacrificed to acquire
inputs that are expected to yield benefits for the organization now or in the future.

WHAT IS ACCOUNTING?
Accounting is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be
useful in making economic decisions, and in making reasoned choices among alternative courses of action. (Accounting Standards Council)

Accounting involves the systematic process of recording, classifying, and summarizing financial transactions and events in monetary terms. It is primarily
concerned with those transactions that possess a financial component, and it provides interpretation of the results. Accounting encompasses various branches,
including financial accounting, managerial accounting, cost accounting, auditing, and taxation.

WHAT IS FINANCIAL ACCOUNTING?

Financial accounting is the use of accounting information for reporting primarily to external parties, including investors and creditors. Financial accounting is
primarily concerned with recording of a company's transactions and preparation of financial statements: statement of financial position, statement of
comprehensive income,
statement of cash flows, statement of changes in equity. Financial accounting provides historical, monetary, and verifiable information to the company. This
information is used by external users.

WHAT IS MANAGERIAL ACCOUNTING?

Managerial accounting is the practice of identifying, measuring, analyzing, interpreting and communicating financial and non-financial information for the use of
management to make decisions that will be beneficial to the company.

WHAT IS COST ACCOUNTING?

Cost accounting is an expended 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. It is the field of accounting that measures, records,and reports information about costs.

RELATIONSHIP OF COST ACCOUNTING TO FINANCIAL

AND MANAGERIAL ACCOUNTING

OBJECTIVES OF COST ACCOUNTING

The main objective of cost accounting is the determination of the production cost (materials, labor, and factory overhead) for inventory valuation and income
determination.
1. Cost estimation and Price setting
2. Decision Making
3. Cost Control

FIVE PARTS OF A COST ACCOUNTING SYSTEM

1. An input measurement basis (Systems of Accumulating Costs)
2. An inventory valuation method
3. Methods of Accumulating Costs
4. A cost flow assumption
5. A capability of recording costs flows at certain intervals (Accounting System for
Inventories)
INPUT MEASUREMENT BASIS
HISTORICAL COSTING
Under this system, the product costs (materials, labor, and factory overhead) are determined as they occur simultaneously with the manufacturing operation,
but the total of product costs is only known as the operation has been completed. It collects actual amount of product costs that is why it is also known as
actual costing.

COST NOTES 1 Page 1

STANDARD COSTING
Under this system, the product costs are determined in advance from analysis and forecasts made before the actual production begins. All product costs are
applied to the inventory using predetermined costs and quantities. The difference between the actual costs and predetermined costs (standard costs) are
charged to variance account.

NORMAL COSTING
It is a combination of actual costing and standard costing; wherein direct materials and direct labor are accumulated using actual costing and factory overhead
is accumulated using standard costing. The overhead is determined using the predetermined factory overhead rate per activity measure, and the it is multiplied
to the actual quantity of activity measured. The difference between the applied factory overhead cost and the actual overhead costs is called variance.

INVENTORY VALUATION METHODS

THROUGHPUT COSTING
Under this method, only direct materials are recorded as part of the inventory while direct labor and factory overhead costs are charged as an expense during
the period. The total sales less the costs of direct materials are known as throughput. The throughput costing does not provide proper matching of cost and
revenue because direct labor and factory overhead costs are expensed as they are incurred rather than capitalizing it in the [Link] method is not
acceptable for external reporting, but can be used internally.

DIRECT (VARIABLE) COSTING

Under this method, the costs are divided into two parts; variable and fixed costs. This method treats all variable costs as part of the inventory and all fixed
costs as period costs. This method does not provide proper matching of cost and revenue because the fixed factory overhead costs are charged to expense
regardless of whether the inventory is sold during the period. This method is not acceptable for external reporting, but can be used internally.

FULL ABSORPTION COSTING

Under this method, all product costs are capitalized in the inventory once incurred and will be charged as an expense when the inventory is sold to the
customer. This method provides proper matching of cost and revenue. It is also used by the companies for external reporting purposes.

ACTIVITY BASED COSTING

COST NOTES 1 Page 2

ACTIVITY BASED COSTING
The ABC method identifies a company's activities and assigns costs to product produced based on the number of activities used by each product. It first
determines the cost and purpose of each activity performed by the company and assigns costs to each individual product based on its use of those activities.

COST ACCUMULATION METHODS

JOB ORDER COSTING
The job order costing keeps the costs of different jobs, orders, contracts separate during their manufacture. This is applicable to companies producing
heterogenous products. Under job order costing, each job has different costs. It is applicable for work done based on customer's specification (made to order
products).

PROCESS COSTING
This method is used when units are not separately distinguishable from one another during the manufacturing process. The cost under this method is
accumulated by departments, operations, processes. This is applicable to companies producing large quantities of homogenous products.

BACKFLUSH COSTING
This method is simplified cost accumulation method that is usually used by companies that adopts just-in-time (JIT) inventory system. This method delays the
costing process until the production of goods is actually completed. The costs are the flushed back at the end of the production and assigned to the goods. One
of the objectives of this system is to zero out or minimize inventory on hand.

HYRBRID COSTING
This method is a combination of job order and process costing method, wherein direct materials are accounted using job order costing while conversion cost
(labor and factory overhead) are accounted using process costing.

COST FLOW ASSUMPTION

SPECIFIC IDENTIFICATION
Under this cost flow assumption, the actual cost of the item sold is determined and charged as cost of goods sold. The cost of inventory is determined by
simply multiplying the inventory units by their corresponding unit cost.

FIRST IN, FIRST OUT (FIFO)

Under this cost flow assumption, the goods first purchased are first sold. The goods purchased at the end of the accounting period remain in ending inventory.
Thus, the inventory costs are recorded at recent or new prices while the inventory sold is recorded at older prices.

LAST IN, FIRST OUT (LIFO)

Under this cost flow assumption, the goods last purchased are first sold. In this assumption the goods at the beginning of the period is assumed to remain in
the ending inventory. Thus, the inventory is recorded in terms of older prices and the cost of goods sold is recorded at recent prices.

WEIGHTED AVERAGE
Under this cost flow assumption, the beginning inventory units lose their separate identity because they are combined with the newly purchased inventories.
The cost of goods available for sale is divided by the number of units purchased in the period to arrive at an average cost per unit. The average unit cost is
then multiplied to units sold to determine the cost of goods sold and unit on hand to determine the ending inventory.

RECORDING INTERVAL CAPABILITY (ACCOUNTING

SYSTEM FOR INVENTORIES)
PERPETUAL SYSTEM
The perpetual system requires maintenance of records called stock cards. This stock card updates the inventory accounts after each purchase or sale of the
company. The perpetual inventory system has the advantage of providing an up-to-date inventory balance and a reduced level of physical inventory counts. This
system works best when combined with a computer database inventory and bin locations.

PERIODIC SYSTEM
The periodic system requires the physical counting of inventories on hand at the end of accounting period to determine the total inventories. It is generally
used by retailers whose inventory items have small peso investment.

COST ACCOUNTING VS FINANCIAL ACCOUNTING

COST NOTES 1 Page 3

 COST ACCOUNTING VS FINANCIAL ACCOUNTING

COST ACCOUNTING CYCLE

MERCHANDISING COMPANY
A company that buys merchandise (finished goods) from other businesses with the intent of reselling it to a customer at a higher price. Merchandise business is
also known as trading business. The primary product of this kind of business is known as "merchandise inventory".

MANUFACTURING COMPANY
A company that buys raw materials, converts them into finished products, and then sells the
products to customers.

MANUFACTURING COMPANY
MANUFACTURING COSTS
These are costs that a company incurs in producing the product
1. Direct materials – Are raw materials that become and integral part of the finished goods.
2. Direct labor - Are costs of labor paid to workers who are directly involved in the production of goods or services (a.k.a. touched labor)
3. Factory overhead – All costs of manufacturing, except direct materials and direct labor. It includes items such as indirect materials, indirect labor, factory
utilities expense, depreciation of factory properties, property taxes, and insurance on factory.

NON-MANUFACTURING COSTS
Non-production costs are divided into two categories: marketing (selling) costs and administrative costs. Marketing and administrative costs are not inventoried

COST NOTES 1 Page 4

Non-production costs are divided into two categories: marketing (selling) costs and administrative costs. Marketing and administrative costs are not inventoried
and are called period costs. Period costs are expensed in the period in which they are incurred.

PRODUCTION CYCLE

MANUFACTURING COSTS
PRIME COSTS - The sum of DIRECT MATERIAL cost and DIRECT LABOR costs (DM+DL)
CONVERSION COSTS - The sum of DIRECT LABOR and OVERHEAD cost (DL+OH)

INVENTORIES IN A MANUFACTURING COMPANY

RAW MATERIALS INVENTORY
➢ It represents items that the company has purchased from other companies to use in manufacturing a product. It can be classifi ed as direct and indirect
materials. Direct materials are raw materials that become an integral part and can be physically traced to finished products and its cost can be measured
reliably. Whereas, indirect materials are raw materials that are not conveniently traced to finished products or its costs is relatively insignificant and its
association with the final product is too small to be easily traced.

Tres Lang Po Corporation purchased on account P2,000 of nails, P5,000 of paint, and P50,000 of wood to produce tables during the month of January.

➢ As the company uses raw materials in the production process, the Raw Materials Inventory account is credit and Work -in-process Inventory account (for
direct materials) and Factory Overhead Control Account (for indirect materials) is debited.

Tres Lang Po Corporation used P1,000 nails, P3,000 of paint and P30,000 of wood in the manufacturing process.

➢ The Raw Materials Inventory account includes the following information:

1. Amount of raw materials at the beginning of the period (debit)
2. Cost of materials purchased during the period (debit)
3. Cost of materials requisitioned (used) in the production process (credit)
4. Unused raw materials at the end of the period. The unused raw materials at the end of
the period becomes the beginning balance in the following period.

WORK IN PROCESS INVENTORY

It represents all manufacturing costs (direct materials, direct labor, and factory overhead) incurred and assigned to product s that are partially completed.

• Direct Labor
Tres Lang Po Corporation incurred the following salary: carpenters P12,000; foreman P3,000 to produce tables during the month . The deductions are as

COST NOTES 1 Page 5

 - Tres Lang Po Corporation incurred the following salary: carpenters P12,000; foreman P3,000 to produce tables during the month . The deductions are as
follows: SSS P500, Medicare P300, Pag-ibig P200, and withholding taxes of P700.

- As the company charged the labor costs in the production process, the Payroll account is credited and Work in Process account (for direct labor) and
Factory Overhead ControL account (for indirect labor) is debited.

- Direct Labor
- Line and Staff Position

• Factory Overhead
When the company incurred factory overhead, it is initially recorded on the Factory Overhead Control account and then transferred to the Work in Process
Inventory account at the end of the period.

Tres Lang Po Corporation incurred, in addition to indirect materials and indirect labor, factory utilities amounting to P2,000, factory property taxes P1,000.

As the company applied the factory overhead costs in the production process, the Factory Overhead Control Account is credited and Work in Process account
is debited.

The Work In Process Inventory account includes the following information:

1. The work in process beginning balance (debit). It represents the total manufacturing cost of unfinished production in the prior period.
2. The total manufacturing costs (the sum of direct materials, direct labor, and factory overhead costs charged to production)
3. The cost of goods manufactured. It represents the goods which are finished during the period. The manufacturing costs which were transferred to Finished
Goods Inventory account.
4. The ending balance of work in process inventory. It represents the manufacturing costs of the unfinished production at the end of the period.

FINISHED GOODS INVENTORY

It represents completed products that the company has produced or ready for sale to
customers.
When the products are already finished and transferred out to Finished Goods Inventory account, the Work in Process Inventory account is credited, which
represents the cost of goods manufactured during the period and the Finished Goods Inventory account is credited for the cost of goods sold during the
period.

On August 5, Tres Lang Po completed products amounting to P30,000.

COST NOTES 1 Page 6

The Finished Goods Inventory account includes the following information:
1. The finished goods inventory beginning balance (debit). It represents the finished goods inventory unsold in the prior period.
2. The Cost of Goods Manufactured. The manufacturing costs, which were transferred to Finished Goods Inventory account during the period. (debit)
3. The ending balance of finished goods inventory. It represents the unsold finished products at the end of the period. (debit)
4. Cost of goods sold. (credit)

COST OF GOODS SOLD MANUFACTURING COMPANY

KNOWLEDGE CHECK
Babagsak Company inventory balances on August 1, 2024, the start of the fiscal year were as follows:

During the month, the following transactions were completed:

1. Raw materials were purchased on account, P850,000
2. Raw materials were issued from the storeroom for use in production, P900,000 (80% direct and 20% indirect)
3. Raw materials returned to storeroom P10,000 (80% direct and 20% indirect)
4. Salaries and wages of factory employees were incurred as follows: P1,000,000 direct labor; indirect labor P450,000. The deductions were as follows:
SSS premium P25,000; Medicare contribution P10,000; Pag-ibig contribution P8,000 and withholding taxes of P50,000
5. Selling and administrative salaries, P500,000. The deductions were as follows: SSS premium P12,000, Medicare contribution P8,000, Pag-ibig
contribution P5,000 and withholding taxes of P22,000
6. Total salaries and wages paid amounted to P1,810,000
7. Utility costs were incurred in the factory, P100,000
8. Advertising costs paid, P500,000
9. Prepaid insurance expired during the year, P100,000 (60% related to factory operations and 40% related to selling and administrative expenses)
10. Depreciation was recorded P200,000 (90% related to factory assets, and 10% related to selling and administrative expenses)
11. Factory overhead was applied to production at the rate of 120% of direct labor cost
12. Goods completed amounting to P2,000,000 were transferred to the finished goods warehouse.

COST NOTES 1 Page 7

12. Goods completed amounting to P2,000,000 were transferred to the finished goods warehouse.
13. Sales for the year totaled P3,500,000 and were all on account. The total cost to manufacture these goods was P2,100,000
14. Collection of Accounts Receivable amounting P2,800,000
15. What is the entry to close the over or under-applied factory overhead.

COST NOTES 1 Page 8