,Maria Gómez – IBE Cost Accounting I 2022/2023
TOPIC 1
INTRODUCTION TO COST ACCOUNTING
Comparison between Financial, Management and Cost Accounting
To start with, we will make a distinction between 3 different concepts.
o Financial Accounting
It measures and records business transactions and provides financial statements. It is mainly
used by external users (such as investors), so cross-firm comparability is key. It is constrained
by law and standardized ruled and the scope of the information is highly aggregate. It tends to
manage mainly financial and historical data.
o Management Accounting
Measures and reports financial and non-financial information that helps managers (internal
users) make decisions to fulfill the goals of an organization. It has no regulation constraints at
all and one of its main goals is to inform local decisions and actions ( disaggregate scope). It
uses financial and nonfinancial data and also projections about the future.
o Cost Accounting
It supports both the management and financial accounting by providing information related to
the cost of acquiring/consuming resources by an organization (collection and analysis of cost
data).
Expense
It is a financial accounting term. An expense implies a decrease in owners’ equity but also a
decrease in assets or an increase in liabilities. It is normally included in the income statement.
1
,Maria Gómez – IBE Cost Accounting I 2022/2023
Cost
A managerial accounting term. What is it? It can be understood as a sacrifice of a resource
measured by the price paid or to be paid to acquire/produce goods/services. Includes
opportunity costs.
Example: an owner is using his warehouse for his firm. It is a cost because he could
just rent the warehouse to another firm and earn an extra money.
Payment
It is a cash outflow, which implies a reduction in cash
Investment
Refers to assets (=unexpired costs).
EXERCISE 1.5
Items Expense Cost Payment
Dividends paid to shareholders x
Wages of workers in the production department x x x
Warehouse owned by shareholders used by the company x
(free of charge)
Theft of products from the warehouse x
Corporate taxes x x
Discount from a contract due to the acceptance of a x
client's special order
Materials incorporated into production x
Use of owners’ equity to finance the activities of a x
company
Value Added Tax included in suppliers' invoices x
Cost terminology and classification of costs
We can classify the different types of costs in different ways. If our objective is to calculate
costs, we can classify them as follows:
o Costs by nature: it is basically to define what our costs is. For instance, if our
object is wood, then it is a material cost.
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, Maria Gómez – IBE Cost Accounting I 2022/2023
o Costs by function: to classify them according to their business function.
o Direct versus Indirect costs
The classification depends on the cost object. The cost object is anything for which a separate
measurement of costs is desired.
Direct cost: when the cost can be directly identified with the cost
object
Indirect cost: when the cost is not directly identified with the object
For example, “marketing costs” can be both things. If the advertising campaign is only for one
specific product, then this cost will be direct. But, if it is a general campaign for the whole firm,
the cost is indirect.
o Product versus Period costs
Product cost: Sum of costs assigned to the cost object (product)
For external reporting (financial accounting)
o Manufacturing costs
For internal reporting (management accounting)
o Will depend on purpose for which cost information is
needed
Period cost: costs that are not assigned to the cost object (product) but
treated as costs of the period in which they are incurred
For external reporting (financial accounting)
o Non-manufacturing costs
For internal reporting (management accounting)
o All costs not assigned to specific cost objects
If unsold: it is recorded as an
asset (inventory) in the BS
and becomes an expense in
the profit and loss account
when the product is sold
Manufacturing cost Product cost
If sold it is recorded as an
expense in the profit and
loss account in the current
accounting period
Non-manufacturing cost Period cost
3
TOPIC 1
INTRODUCTION TO COST ACCOUNTING
Comparison between Financial, Management and Cost Accounting
To start with, we will make a distinction between 3 different concepts.
o Financial Accounting
It measures and records business transactions and provides financial statements. It is mainly
used by external users (such as investors), so cross-firm comparability is key. It is constrained
by law and standardized ruled and the scope of the information is highly aggregate. It tends to
manage mainly financial and historical data.
o Management Accounting
Measures and reports financial and non-financial information that helps managers (internal
users) make decisions to fulfill the goals of an organization. It has no regulation constraints at
all and one of its main goals is to inform local decisions and actions ( disaggregate scope). It
uses financial and nonfinancial data and also projections about the future.
o Cost Accounting
It supports both the management and financial accounting by providing information related to
the cost of acquiring/consuming resources by an organization (collection and analysis of cost
data).
Expense
It is a financial accounting term. An expense implies a decrease in owners’ equity but also a
decrease in assets or an increase in liabilities. It is normally included in the income statement.
1
,Maria Gómez – IBE Cost Accounting I 2022/2023
Cost
A managerial accounting term. What is it? It can be understood as a sacrifice of a resource
measured by the price paid or to be paid to acquire/produce goods/services. Includes
opportunity costs.
Example: an owner is using his warehouse for his firm. It is a cost because he could
just rent the warehouse to another firm and earn an extra money.
Payment
It is a cash outflow, which implies a reduction in cash
Investment
Refers to assets (=unexpired costs).
EXERCISE 1.5
Items Expense Cost Payment
Dividends paid to shareholders x
Wages of workers in the production department x x x
Warehouse owned by shareholders used by the company x
(free of charge)
Theft of products from the warehouse x
Corporate taxes x x
Discount from a contract due to the acceptance of a x
client's special order
Materials incorporated into production x
Use of owners’ equity to finance the activities of a x
company
Value Added Tax included in suppliers' invoices x
Cost terminology and classification of costs
We can classify the different types of costs in different ways. If our objective is to calculate
costs, we can classify them as follows:
o Costs by nature: it is basically to define what our costs is. For instance, if our
object is wood, then it is a material cost.
2
, Maria Gómez – IBE Cost Accounting I 2022/2023
o Costs by function: to classify them according to their business function.
o Direct versus Indirect costs
The classification depends on the cost object. The cost object is anything for which a separate
measurement of costs is desired.
Direct cost: when the cost can be directly identified with the cost
object
Indirect cost: when the cost is not directly identified with the object
For example, “marketing costs” can be both things. If the advertising campaign is only for one
specific product, then this cost will be direct. But, if it is a general campaign for the whole firm,
the cost is indirect.
o Product versus Period costs
Product cost: Sum of costs assigned to the cost object (product)
For external reporting (financial accounting)
o Manufacturing costs
For internal reporting (management accounting)
o Will depend on purpose for which cost information is
needed
Period cost: costs that are not assigned to the cost object (product) but
treated as costs of the period in which they are incurred
For external reporting (financial accounting)
o Non-manufacturing costs
For internal reporting (management accounting)
o All costs not assigned to specific cost objects
If unsold: it is recorded as an
asset (inventory) in the BS
and becomes an expense in
the profit and loss account
when the product is sold
Manufacturing cost Product cost
If sold it is recorded as an
expense in the profit and
loss account in the current
accounting period
Non-manufacturing cost Period cost
3
