COST CONCEPTS, classification, AND SEGREGATION PART I

COST CONCEPTS AND CLASSIFICATION

a. Functional classification -Ex. Cost of sales & operating expenses b. Behavioral classification i. Fixed costs - are costs that do not change with changing levels of activity.
Change in activity Increase Decrease TOTAL Constant Constant FIXED COSTS COST PER UNIT Decrease Increase

ii.

Variable costs - change directly & proportionately with the level of activity.
Change in activity Increase Decrease VARIABLE COSTS TOTAL COST PER UNIT Increase Constant Decrease Constant

iii. iv. v.

Mixed costs - this cost has both a variable and a fixed cost. Semivariable costs Semifixed costs

OTHER COST CONCEPTS

1. Relevant and Irrelevant costs RELEVANT COSTS - are those that are used in decision making. IRRELEVANT COSTS - are those that are not used in decision making. 2. Controllable and Noncontrollable costs CONTROLLABLE COSTS - are those which incurrence or non-incurrence depends on the decision, influence or control of a specific manager. NONCONTROLLABLE COSTS - are those which incurrence or non-incurrence is not based on decisions, influence or control of a specific manager. 3. Direct product costs and Indirect product costs DIRECT PRODUCT COSTS - are those that can be directly traceable to a product either in its physical existence or in the process in which it is being made. INDIRECT PRODUCT COSTS - are those incurred in the production process however cannot be directly traced to the product being produced, either in its physical existence or in the process in which it is being made. 4. Direct departmental and Indirect departmental costs DIRECT DEPARTAMENTAL COSTS - are those that are directly traceable in a particular department. INDIRECT DEPARTAMENTAL COSTS - are those that are not directly traceable in a particular department. 5. Opportunity and Imputed costs OPPORTUNITY COSTS - income or benefit given up when one alternative is selected over another. IMPUTED COSTS - are those that have been avoided because the company had chosen a different alternative. 6. Out-of-pocket costs and Non-cash costs OUT-OF-POCKET COSTS - are those that paid in cash NON-CASH COSTS - are those not paid in cash. 7. Sunk and Future costs SUNK COSTS - are past, historical, incurred, and irrelevant costs. FUTURE COSTS - are estimated, predicted, planned, budgeted, or applied costs. 8. Incremental, Marginal and Decremental Costs INCREMENTAL COSTS - increase in cost from one alternative to another. MARGINAL COSTS - refer to the increase in cost per unit from one activity level to another. DECREMENTAL COSTS - are those that decrease in total from one activity level to another.

COST BEHAVIOR ASSUMPTIONS

a. Relevant range assumption b. Time assumption
Prepared by: ALNIRAH H.G DAKSLA NORHAYA BATABOR

COST CONCEPTS, classification, AND SEGREGATION PART II METHODS OF SEGREGATING MIXED COSTS

High-Low Method
VC/u = Highest Cost Lowest Cost Highest Activity Level Lowest AL FC = TC - TVC

1-Illustration: The total maintenance costs of Silver Company: Month Machine Hours Maintenance Costs January 7,200 P450,000 February 6,800 422,000 March 7,000 440,000 April 6,400 418,000 Required: using the high-low method, compute the following: a. Variable cost rate b. Total fixed costs c. If the company expects to use 6, 000 machine hours next month, how much is the estimated maintenance costs. 2-Illustration: AT Company is preparing a flexible budget for next year and requires a breakdown of the factory maintenance cost into the fixed and variable elements. The maintenance costs and machine hours (the selected cost driver) for the past six months are as follows: Month Maintenance Costs Machine Hours January 15,500 1,800 February 10,720 1,230 March 15,100 1,740 April 15,840 2,190 May 14,800 1,602 June 10,600 1,590 A. The estimated variable rate of maintenance cost per machine hours is? B. The average annual fixed maintenance cost amounts to? C. What is the average rate per hour at level of P1,500 machine hours? Scattergraph Method plots the observation on a graph and draws conclusion on the relationships depicted by such observations. This method uses the principles found in a regression line. Y = a + bx Y dependent variable, the value of which is to be determined a constant , or point of intercept b variable coefficient of x, or the slope x Independent variable, the value of which is normally available 3-Illustration: MAR-CHEAL Delivers, Inc. manufactures screens for residential and commercial operations. The firm has encountered a problem in budgeting utilities expense. The expense is apparently a mixed cost and varies most directly with machine hours. The following data have been gathered from recent operations and may help you describe the relationship. MACHINE UTILITIES MACHINE UTILITIES MONTH MONTH HOURS EXPENSE HOURS EXPENSE January 1,500 P 9,000 June 1,000 P 7,000 February 1,750 9,500 July 2,000 13,000 March 2,000 11,000 August 2,500 12,000 April 1,500 10,000 September 2,000 10,000 May 2,500 14,000 October 2,250 12,000
Prepared by: ALNIRAH H.G DAKSLA NORHAYA BATABOR

COST CONCEPTS, classification, AND SEGREGATION Required: using the scatter graph method: a. Plot the observations on the graph where the vertical line denotes the costs and the horizontal line denotes the units. Draw the regression line at the middle of the points plotted on the graph depicting the relationship of utilities expense and machine hours. Determine the total fixed costs. Calculate the variable cost per unit using the P8, 000 and P12, 000 levels of utilities expense. b. If the company expects the number of machine hours to reach 2,200 next month, what are the estimated total utilities costs? 4- Illustration: The management of a hotel is interested in the relationship between room cleaning costs and guest-days in its hotel. Using regression analysis on room cleaning costs and guest-days collected over 12 months, the relationship was shown graphically as follows:

a. b. c. d.

The estimated monthly fixed room cleaning cost is? The estimated increase in the room cleaning cost for each additional guest-day is? The cost formula for the room cleaning costs may be expressed as? If the relevant range is from 0-2,000 guest-days, how much is the total room cleaning cost for 2,200 guestdays?

Least-squares method
EQUATIONAL DERIVATION Equation 1: Y = a + bx Equation 2: Y = na + bx Equation 3: xa = xa + bx2 DIRECT FORMULA a = y bx b = xy - n(x)(y) x2 n(x)2

5-Illustration: One of the products of Camilla Corporation goes through a glazing process. For the last six quarters, the cost of the glazing process was observed in relation with the number of units produced as tabulated below: Quarters unit produced total Cost Quarters unit produced total Cost 1 800 27,000 4 400 21,500 2 500 20,000 5 600 29,000 3 1,000 31,000 6 900 36,000 Required: a. using the least-squares method, calculate the variable cost rate and the total fixed cost elements of the glazing process. b. express the cost data in a above in the form Y=a+bx. c. assume, the company processes 1,120 units in the next quarter, how much is the expected glazing cost?
Prepared by: ALNIRAH H.G DAKSLA NORHAYA BATABOR

COST CONCEPTS, classification, AND SEGREGATION 6-Illustration: ADEEB Company produces and sells rattan baskets. The number of units produced and the corresponding total production costs for six months, which are representatives for the year, are as follows: Month units produced production costs Month units produced production cost April 500 4,000 July 600 7,500 May 700 8,000 August 800 8,500 June 900 6,000 September 550 7,250 Required: A-using the least squares method, the variable production cost per unit is approximately? B-the monthly fixed production cost is approximately? C- If the high-low points method is used, the results when compared with those under the method of least squares, are? 7-Illustration: Harem Company uses an annual cost formula for overhead of P72, 000 + P1.60 for each direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Harem Companys budgeted overhead for the month is? 8-Illustration: Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000 units of budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordans budgeted variable cost per unit of output? 9-Illustration: Irma Company manufactures office furniture. During the most productive month of the year, 3,500 desks were manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost of P46,000. Using the high-low method of cost estimation, total fixed costs in August are? 10-Illustration: Almond Company wishes to determine the fixed portion of its maintenance expense (a semi-variable expense), as measured against direct labor hours for the first Malayan three months of the year. The inspection costs are fixed; however, the adjustments necessitated by errors found during inspection account for the variable portion of the maintenance costs. Information for the first Malayan quarter is as follows: Direct Labor Hours Maintenance Costs January 34,000 P61, 000 February 31,000 58,500 March 34,000 61,000 What is the fixed portion of Almond Companys maintenance? PART III 1. The controller of Jemaah Company has requested a quick estimate of the manufacturing supplies that it needs for the month of July when the expected production are 470,000 units. Below are the actual data from the prior three months of operations. Production in units manufacturing supplies March 450,000 P723,060 April 540,000 853,560 May 480,000 766,560 Using these data and the high-low method, what is the reasonable estimate of the cost of manufacturing supplies that would be needed for July? (Assume that this activity is within the relevant range). Answer: P752,060

Prepared by: ALNIRAH H.G DAKSLA NORHAYA BATABOR

COST CONCEPTS, classification, AND SEGREGATION 2. The following activity and cost data that were provided by Hoist Corporation would help in estimating its future maintenance costs: Units Maintenance Cost 3 P450 7 P530 11 P640 15 P700 Using the least-squares regression method to estimate the cost formula, the expected total cost for an activity level of 10 units would be closest to? Answer: P601.50 3. Use the following simple regression results based on the data from the Madrigal Corporation. Dependent variable Machine maintenance costs Independent variable Machine hours Computed values Intercept P3,500 Coefficient on independent variable P 3.50 Coefficient of correlation 0.856 R2 0.733 A. What percentage of the variation in maintenance costs is explained by the independent variable? Answer: 73.3% B. What is the total maintenance cost for an estimated activity level of 20,000 machine hours? Answer: P73,500 4. Nite Corporation has developed the following flexible budget formula for annual indirect labor costs: Total Cost = P480,000 + P5.00 per machine hour Operating budgets for the current month are based upon 20,000 machine hours of planned machine time. Indirect labor costs included in this planning budget are: Answer: P140,000 5. Nora Delivers, Inc. manufactures screens for residential and commercial operations. The firm has encountered a problem in budgeting utilities expense. The expense is apparently a mixed cost and varies most directly with machine hours. The following data have been gathered from recent operations and may help you describe the relationship. MONTH MACHINE UTILITIES MONTH MACHINE UTILITIES HOURS EXPENSE HOURS EXPENSE January 1,500 P 9,000 June 1,000 P 7,000 February 1,750 9,500 July 2,000 13,000 March 2,000 11,000 August 2,500 12,000 April 1,500 10,000 September 2,000 10,000 May 2,500 14,000 October 2,250 12,000 Required: using the scattergraph method: a. Plot the observations on the graph where the vertical line denotes the costs and the horizontal line denotes the units. Draw the regression line at the middle of the points plotted on the graph depicting the relationship of utilities expense and machine hours. Determine the total fixed costs. Calculate the variable cost per unit using the P8, 000 and P12, 000 levels of utilities expense. b. If the company expects the number of machine hours to reach 2,000 next month, what are the estimated total utilities costs?

Prepared by: ALNIRAH H.G DAKSLA NORHAYA BATABOR