Basics of Cost Accounting
Management Accounting
by: Gerald de Jesus
MS Management Engineering
September 26, 2020
Financial Accounting
Management Accounting
Cost Accounting
Why is accounting so popular on campus? Why are there so many openings for accounting
jobs? Why is accounting so important to companies? Why do politicians and business leaders
focus on accounting regulations?
Answer: We live in an information age in which accounting information impacts us all. It’s such a key
part of business that business people typically talk about their companies using accounting terms,
which is why they often call it the “language of business.”
Understand the Organization
Every organization needs accountants to assist in reporting financial information for
decision making and to help its owners understand the financial effects of those business
decisions. We can classify organizations into three categories. All of these organizations are
formed for a specific purpose or mission and want to use the available resources in an
efficient manner.
• For Profit – ( Manufacturing Business, Service business, retail business)
• Governmental Entities
• Not-for-Profit Entities – ex. Charitable foundations, universities, hospitals ?.
The Accounting Environment (internal & external users)
Financial Accounting
Management Accounting
Cost Accounting
Financial Accounting
Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions.
Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or
financial statement such as an income statement or a balance sheet.
It's important to point out that the purpose of financial accounting is not to report the value of a company. Rather,
its purpose is to provide enough information for others to assess the value of a company for themselves.
Because external financial statements are used by a variety of people in a variety of ways, financial accounting has
common rules known as accounting standards and as generally accepted accounting principles (GAAP).
Financial accounting is also a foundation for understanding managerial accounting, which uses both
financial and nonfinancial information as a basis for making decisions within an organization
Financial accounting is used to generate information for stakeholders outside of an
organization, such as owners, stockholders, lenders, and governmental entities such as the Securities and
Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). For government institutions , COA
Financial Accounting
Financial accounting measures the activities of an organization in currency unit. Financial accounting is historical
in nature and is prepared using standard conventions, called accounting standards or GAAP. Because nearly
every activity in an organization has a financial implication, financial accounting might be thought of as a
“monetary scorecard.”
Financial accounting is used internally by managers and other decision makers to validate activities that were
done well and to highlight areas that need adjusted in the future. Businesses often use discretion as to how
much and with whom financial accounting information is shared. That is why stock market has internal dealings.
Financial accounting is also provided to those outside the organization. For a publicly traded company, issuing
financial statements is required by the SEC. Sharing financial information for a privately held company is
usually reserved for those instances where the information is required, such as for audits or obtaining loans.
Financial accounting information is mostly historical in nature. It only depends on available data without further
digging into details of the amounts.
Financial Accounting
At the heart of financial accounting is the system known as double entry bookkeeping (or "double entry
accounting"). Each financial transaction that a company makes is recorded by using this system.
The term "double entry" means that every transaction affects at least two accounts.
For example, if a company borrows P50,000 from its bank, the company's Cash account increases, and the
company's Notes Payable account increases. Double entry also means that one of the accounts must have an
amount entered as a debit, and one of the accounts must have an amount entered as a credit. For any given
transaction, the debit amount must equal the credit amount.
Q: What if it’s a foreign exchange transaction?
Financial Accounting
Financial accounting prepares the four main accounting reports referred as financial statement
It is typically prepared in the following order:
1. Income Statement
2. Statement of Retained Earnings
3. Balance Sheet
4. Statement of Cash Flows
Financial statements can be prepared at any time during the year. Some companies are free to choose their
own fiscal year. These financial statements ensure the information is consistent from period to period and
generally comparable between organizations (ratio analysis). The conventions also ensure that the
information provided is both reliable and relevant to the user.
https://edge.pse.com.ph/financialReports/form.do
Financial Accounting
Financial information has limitations, however, as a predictive tool. Business involves a large amount of
uncertainty, and accountants cannot predict how the organization will perform in the future. However, by
observing historical financial information, users of the information can detect patterns or trends that may be
useful for estimating the company’s future financial performance.
Internal users can use financial information as a predictive tool to assess whether the long-term financial
performance of the organization aligns with its long-term strategic goals.
External user such as a potential investor may look at a business’s past financial performance in order to assess
whether or not to invest money in the company. In this scenario, the investor wants to know if the organization
will provide a sufficient and consistent return on the investment.
It is also used by experienced financial analyst to evaluate a company’s performance. SEC, COA assesment if an
institution complies with the law. Ex. GREPA life
Financial Accounting
Concept of financial reporting
Financial Accounting
Management Accounting
Cost Accounting
Management Accounting
Managerial accounting activities are conducted for internal uses and applications, managerial
accounting is not prepared using a comprehensive, prescribed set of conventions similar to those required by
financial accounting. This is because managerial accountants provide managerial accounting information that
is intended to serve the needs of internal, rather than external, users. In fact, managerial accounting
information is rarely shared with those outside of the organization. Since the information often includes
strategic or competitive decisions, managerial accounting information is often closely protected.
Managers and decision makers within organizations need a variety of information in order to view or assess
issues from multiple perspectives. Management accounting must be flexible to produce report anytime.
Management accounting information include whether an organization should repair or replace equipment,
make products internally or purchase the items from outside vendors, and hire additional workers or use
automation.
Management accounting may be simply defined as a body of accounting knowledge primarily consisting of
concepts and techniques (tools) useful to management in making better decisions and evaluating
performance.
Generating accounting reports
Comparison of accounting reports
Use of management accounting
Profession How they use managerial accounting in their field
Engineer Properly track and report the use of resources involved in an engineering project;
measure and communicate costs of a project and its outcomes
Mayor Put together a budget, a planning and control mechanism that plays an important role
in every government
Nurse Track operating or service costing per patient, or per unit
Mechanic Use job costing to figure total costs and overall profitability on each job
Retail Store manager Forecast inventory needs, review profit margins, and track sales margins on individual
products as well as entire stores
Restaurant Owner Calculate the cost of serving a single table by estimating the cost of the food plus time
of server, keep food costs under control through inventory tracking
Architect Track direct and indirect costs for each job; track profitability per job
Farmer Calculate yields per field, analyze fertilizer and seeding rates, and control waste
Tourist , Event Organizer, Hosting family reunion, Sportsfest, Wedding planning, Advertisement, Election campaign…
Management Accounting
Regardless of the type and size of the organization, all managers perform the
same basic functions. They are all guided by financial and non-financial information.
Plan Control
Implement
The purpose of managerial accounting is to provide useful information to aid in three key managerial
tasks:
1. Determining the costs of an organization’s products and services.
2. Planning future activities.
3. Comparing actual results to planned results.
Management Accounting
We’ve described managerial accounting as a process. Management accountants are the individuals who help
management with this information. The accountant in the role of advisor to management must understand
basic management concepts. Conversely, management must understand accounting and the type of
information that the accountant can provide. Without an understanding of some accounting, the manager or
decision‑maker may fail to request information or seek help at a critical time.
Management accountant as a profession: “involves partnering in management decision making, devising
planning and performance management systems, and providing expertise in financial reporting and control to
assist management in the formulation and implementation of an organization’s strategy.”
Management accountant tend to be hands-on in the decision-making process. They need many types of
information to inform the many decisions they must make.
https://cmaphilippines.com/cma-philippines/about-cma-philippines/
Management Accounting
Management accounting information uses both financial and nonfinancial information. In some cases on a
manufacturing business, the elimination of one component may led to customers switching to a different producer
for its peripherals or consumable. In the end, an organization needs to consider both the financial and nonfinancial
aspects of a decision.
Ethical dilemma of Management accountants
Example:
You are about to sign a new client to a very large contract worth over 9.5 million pesos . Your supervisor is under
a lot of pressure to increase sales. He calls you into his office and tells you his future with the company is
in jeopardy, and he asks you to include the revenue for the new contract in the sales figures for the
quarter that ends today. You know the contract is a certainty, but the client is out of town and cannot
possibly sign for at least a week.
Determine how you would react to this situation?
Fraud in Management accounting
Fraud increases a business’s costs and hurts information reliability. Left undetected, inaccurate costs can result in
poor pricing decisions, an improper product mix, and faulty performance evaluations. All of these can
lead to poor results for the company. Managers rely on a reliable internal control system to monitor and control
business activities. An internal control system is the policies and procedures managers use to:
• Ensure reliable accounting.
• Uphold company policies.
• Protect assets.
• Promote efficient operations.
Fraud in Management accounting
Three friends went to a restaurant at greenbelt for their weekend girl’s bonding.
Aida, a self-employed entrepreneur, says, “I’ll pay and deduct it as a business expense.”
Lorna, a sales agent, takes the check and says, “I’ll put this on my company’s credit card. It won’t cost us anything.”
Fe, a manager of architectural firm, laughs and says, “Neither of you understands. I’ll use my
company’s credit card and call it overhead on a cost-plus contract with a client. That way, my company pays for
dinner and makes a profit.”
(A cost-plus contract means the company receives its costs plus a percent of those costs.)
Who should pay the bill? Why?
Answer: All three friends want to pay the bill with someone else’s money. Aida is using money belonging to the tax authorities,
Lorna is taking money from her company, and Fe is defrauding the client. To prevent such practices, companies
have internal controls. Some entertainment expenses are justifiable and even encouraged. For example, the tax law allows
certain deductions for entertainment that has a business purpose. Corporate policies sometimes allow and encourage
reimbursable spending for social activities, and contracts can include entertainment as an allowable cost. Nevertheless, without
further details, this bill should be paid from personal accounts.
BREAK !?
Financial Accounting
Management Accounting
Cost Accounting
Cost Accounting
Cost accounting is involved with the following:
1. Determining the costs of products, processes, projects, etc. in order to report the correct amounts on a
company's financial statements, and
2. Assisting management in the planning and control of the organization
3. Preparing special analyses that assists in making the best decisions
Cost accounting can be defined as the collection, accumulation, classification, coding, analyzing, processing
and recording of cost information to assist management in planning, control and decision making.
According to Chartered Institute of Management Accountant (CIMA), cost accounting is a branch of
management accounting that establishes the budgeted costs, standard costs and the actual costs of
products, processes, operations and departments for the analysis of variance, profitability and social use of
fund.
Cost Accounting Comparison
COST ACCOUNTING FINANCIAL ACCOUNTING
Period Daily, weekly, monthly, quarterly, half yearly or yearly Usually one year
Estimation This is done majorly in cost account because cost Estimation is rare or do not exist
account predict and estimate for cost
Rules and regulation The preparation of cost information does not adhere to the preparation of financial information must be in
any rule or regulations but majorly by the company’s line with GAAP and other governing standards.
guidelines.
Objectives It is usually for planning, control and decision making It is usually for stewardship reporting
Detail Cost report are much detailed because it breaks down Financial reports shows only global figures
costs into different components
Users The report is used by the management i.e. internal users The report is used by both the internal and the
external users
Time focus It is historical, futuristic and predictive in nature It is historical in nature
Cost benefit analysis It is majorly carried out in cost accounting by comparing This is not done in financial accounting
the cost of a decision with it benefits
Double entry concept Does not adhere strictly to the double entry principle Adhere to the double entry principle
Cost Concept
There two methods in identifying the cost.
1. Account Analysis Method: this method of estimating cost requires considerable subjective judgment when
separating cost as accountants looks at the cost and guesses the likely type of cost behaviour. Account analysis
technique is mostly used by accountants who are familiar with the costs within an account. Expenditure will be
classified into fixed, variable and semi variable cost and value will be assigned to each of the items.
2. Engineering Method: this method is more appropriate where there are no historical costs to estimate the
future cost, it is basically used for a new product. In this case, costs are estimated by examining the technological
relationship between input and output. Estimate of materials, labour time and effort required are obtained from
the engineers therefore, prices and rate are then applied to the physical measure to obtain the cost estimate.
However, this technique Is expensive to operate in practice. (Engineering Economy)
Cost Object
A cost object is anything that causes you to incur costs. Think about a cost object as a sponge that absorbs your
money. The object can be a customer, job, product line, or company division. A Cost Object is anything for
which a cost is to be calculated or that makes you incur a cost. It could be anything for which a company plans
to calculate costs separately. A cost object could be a part of the process to come up with the pricing of a
product or service.
A cost object is a managerial term for a product, process, department, or customer that costs originate from or
are associated with. In other words, it’s something that costs can be identified with and traced back to.
Ex: Assume you manage a group of water delivery boys. You’re reviewing the month’s gas expense for your staff
and notice a 20 percent increase from the prior month. Then you start asking questions. As it turns out, the
customer demand for water delivery has increased requiring the delivery boys to drive more kilometers.
In this example, the cost object was the group of customers for the month. Without any customers, you
wouldn’t have paid for all the gas. Defects and rejects also has cost. Fraud is also a cost. No cost object means
no costs incurred.
Direct and Indirect Cost
Costs are assigned to cost objects for a variety of purposes including pricing, preparing profitability studies, and controlling
spending. A cost object is anything for which cost data are desired—including products, customers, and organizational subunits.
Costs are classified as either direct or indirect.
Direct costs are traceable to a single cost object. Specific to that object only.
Indirect costs cannot be easily and cost-beneficially traced to a single cost object.
Types of Cost Object
Product or service that a company
Output offers so that they may know the cost
of its output to set the price.
Operational cost within the company
Operati that may consist of process, machine,
onal departments, employees, utilities, . . .
Business Cost objects outside a company like
Relationshi cost of a supplier, customer,
p renewing license.
Cost Management
Cost management can be defined as the process to identify, allocate, manage, and track resources needed
to meet the stakeholder’s requirements. This integrated, process-centered approach, backed with
quantifiable data and documented processes, provides real and tangible benefits to all stakeholders
throughout the life cycle. Cost management can best be described as an integrated,
process-centered, measurable, and disciplined approach.
Cost management is employed as a means of balancing a project’s
scope and expectations of risk, quality, and technical performance to ensure that the
most cost-effective solution is delivered. It consists of three steps:
1. Define the requirements, level of quality desired, and the budget.
2. Ensure that the risk, scope, and quality are aligned with the budget.
3. Monitor and manage the balance of these four components (scope, risk,
quality, and technical performance) throughout the life of the project by using cost accounting techniques.
Cost Management
Cost management is concerned with the process of finding the right project and carrying out the project the right
way. It includes activities such as planning, estimating, budgeting, financing, funding, managing, controlling, and
benchmarking costs so that the project can be completed within time and the approved budget and the project
performance could be improved in time.
Resource planning -determines the activity’s resource quantities needed Resource
Planning
(hours, tools, materials, etc.)
Cost
Cost estimation - is the predictive process used to quantify, cost, and price Control
the resources required by the scope of an investment option, activity, or
project.
Cost budgeting - This forms the baseline for cost control after allocation the Cost
Estimati
budget of estimate. on
Cost control - are applied to monitor expenditures and performance against
the progress of a project. But too much control has disadvantage. Cost
Ex. A pizza franchise, you cannot just buy ingredients on a local market even if the price is lower Budgeti
ng
than the commissary supplier.
Thank you!
