Chapter 1: Introduction to Cost Accounting
1. financial accounting
- Financial accounting is the use of accounting information for reporting to external parties, including
investors and creditor. It is based on historical transaction data. The information provided by
financial accounting is usually presented in the form of financial statements, tax returns and other
formal reports distributed to various external users
2. Define management accounting
- Managerial accounting focuses on the needs of parties within the organization, rather than interested
parties outside the organization. It commonly addresses individual or divisional concerns rather than
those of the enterprise as a whole. The information may be current or forecasted, quantitative or
qualitative, monetary or non-monetary and most of all timely.
3. How does management accounting serve both external users and internal user?
- Management accounting serves both internal and external control by means of reporting financial
information whenever a need arises. For the reason that management accounting involves timely
and well-detailed information that is easy to provide by specific area in the firm.
4. What are the differences between financial accounting and managerial accounting?
- Financial accounting focuses on providing reports for external use. The financial reports that is
carefully made intends to help the external users to take investment decisions by presenting the
disclosure of end results of the firm. It is usually prepared monthly, quarterly or annually.
Whereby, management accounting focuses on providing information to the internal management.
The report made is more detailed and specific compared to reports made through financial accounting.
Further, management accounting also focuses on present and forecast future trends. It is usually
prepared when the need arises.
5. 6. Goals refers to objectives of the firm, meaning it is setting the desired result or outcome of the
business. Planning is the process of acting and step-by-step procedure to attain the goals of the
firm. Lastly, controlling pertains to monitoring the business operations and if the objective is
being met by performing the planned actions.
6. The three levels of planning are strategic planning, tactical planning and operational planning.
Strategic planning is designed to set long-term goals. Therefore, it determines the overall direction of
the company. Tactical planning is designed to short-term goals. Itis then the specific plan to attain the
strategic goals. Operational planning pertains to day to-day implementation of tactical plans. It is a
highly detailed plan that contributes to achievement of firm’s goals.
7. Differentiate job -order costing from process costing
- Job order costing is a product costing system that is used to special-order products. The costs are
accumulated by individual job. The unit costs are then computed by dividing the total costs on the job
sheet to the number of units produced on the job. On the other hand, process costing system is a
product costing system that issued by firms that make a large volume of similar products. The costs are
accumulated by processing department. The unit costs are then computed by dividing the
individual departments’ costs by the equivalent product.
8. Some of the main characteristics of job order costing system is it collects all
manufacturing costs and assigns them to specific job or batches of product. Moreover, it measures the
costs from each completed job. Therefore, it uses just one work in process inventory control account in
the general ledger that is supported by subsidiary ledger of job cost sheets for each job in process at
specific time.
The main characteristics of
process costing system are:
manufacturing costs are
grouped
by department with
little concern with
specific job orders, it
emphasizes weekly or
monthly time period and it
uses several works in
process inventory accounts
that is one
for each department in the
manufacturing process
The main characteristics of
process costing system are:
manufacturing costs are
grouped
by department with
little concern with
specific job orders, it
emphasizes weekly or
monthly time period and it
uses several works in
process inventory accounts
that is one
for each department in the
manufacturing process
9. The main characteristics of process costing system are: manufacturing costs are grouped by
department with little concern with specific job orders, it emphasizes weekly or monthly
time period and it uses several works in process inventory accounts that is one for each department in
the manufacturing process
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1. Distinguish between direct and indirect costs
- Direct costs are easily traceable to a specific product, project, or activity. These costs are incurred
directly and exclusively for the production of goods or services. While, Indirect costs cannot be easily
attributed to a specific product, project, or activity. Indirect costs are incurred for the overall operation
of a business or organization.
2. Define the three integral components of a product.
- Direct materials are those materials that can be directly traced to the manufacturing of the product.
Direct labor is the total cost of wages, payroll taxes, payroll benefits, and similar expenses for the
individuals who work directly. Factory overhead is the costs incurred during the manufacturing
process, not including the costs of direct labor and direct materials.
3. Define variable, fixed, and mixed costs and discuss the effects of changes in volume on these costs.
- Variable costs are the costs that vary in direct proportion to changes in the level of activity. This type
of cost increases or decreases depending on a company’s production or sales volume. Fixed costs are
the opposite of variable costs because they don’t vary with changes in the level of activity. They are
incurred regularly and are unlikely to fluctuate over time. Mixed costs, they contain both fixed and
variable components and are hard to evaluate because they change in response to fluctuations in
volume.
4. What are the formulas to be used in using the high low method in separating mixed costs into fixed
and variable components?
5. What are the formulas to be used in using the least square method in separating mixed costs into fixed
and variable components?
6. Distinguish between common costs and joint costs.
- Joint costs occur when one process or element results in outputting several goods. Cannot be easily
traced to individual cost objects because they are incurred jointly to support multiple outputs or
functions. On the other hand, Common costs arise when a firm output several products. However,
these expenses can't be attributed to any of these products directly. Arise from a common production
process where multiple products are produced simultaneously or from the same raw materials.
