DON HONORIO VENTURA STATE UNIVERSITY

Cabambangan, Villa de Bacolor 2001, Pampanga, Philippines ISO 9001: 2015

QMS-Certified
Tel. No. (6345) 458 0021; Fax (6345) 458 0021 Local 211
URL: http://dhvsu.edu.ph

Course: STRATEGIC BUSINESS

Module No: 1
Module Title: Chapter 3: Cost Concepts and Behavior
Intended Learning Outcome:
At the end of the session, the students will be able to:
1. Differentiate cost, expenses and losses;
2. Explain and differentiate direct and indirect costs;
3. Define and identify three integral components of a product;
4. Differentiate prime and conversion costs;
5. Define variable and fixed costs and explain their behavior based on changes in activity;
6. Define and describe mixed and step costs.
7. Separate mixed costs into their fixed and variable components using the high-low method, the
scatter graph method, and the method of least squares

Discussion

I. Cost vs Expenses vs Loss

Cost – amount incurred to produce future benefits in a profit-making firm with future benefits
usually mean revenue. (De Leon, 2019)

The monetary amount (or cash equivalent) given up for an asset is referred to as cost. All
expenditures associated with putting an asset in place and getting it ready to use are included
in the cost. (Accounting Coach, 2022)

Cost is the monetary measure (cash) that has been given up buying an asset. (Corporate
Financial Institute, 2022)

Costs are sacrifices made to achieve the objectives. (Guia, 2015)

An expense is a cost that has expired or has been consumed by revenue-generating activity.
Therefore, all expenses are costs, but not all costs are expenses. (Corporate Financial Institute,
2022).

A loss is a decrease in value that is unrelated to income generation. The primary distinction
between expenses and losses is that expenses are incurred to create revenues, whereas losses
can be associated with almost any other activity. Another distinction is that expenses occur far
more frequently than losses, and in a significantly higher volume of transactions. (Accounting
Tools, 2022)
 DON HONORIO VENTURA STATE UNIVERSITY
Cabambangan, Villa de Bacolor 2001, Pampanga, Philippines ISO 9001: 2015
QMS-Certified
Tel. No. (6345) 458 0021; Fax (6345) 458 0021 Local 211
URL: http://dhvsu.edu.ph

II. Cost Classification

A. As to Financial Statement Presentation

1. Cost of Sales
a. Merchandising – Merchandising Inventory – units produced with the intention of
reselling with little or no alteration. The cost includes the Purchase Price plus Other
Directly Attributable Costs
b. Manufacturing/Product Costs
i. Direct Materials – includes those items that become an integral part of a finished
product and can be conveniently traced into. The cost includes Purchase Price + Other
Directly Attributable Costs
ii. Direct Labor – consists of those labor costs that can be easily traced to the creation of
the product. Also called tough labor. Cost includes Salary and other benefits given
like SSS, Philhealth, etc.
iii. Factory/Manufacturing Overhead/Factory Burden – all other product costs not
classified as Direct Materials not Direct Labor
• Indirect Material – materials used to support the production process. They are too
costly and inconvenient to trace.
• Indirect Labor – Wages paid to employees who are not directly involved in
production.
• Other Manufacturing Costs
c. Special Classifications
i. Prime Costs = DM + DL
ii. Conversion Costs = DL + MOH

2. Operating Expenses (Costs to Sell)

a. Selling and Marketing Expenses – costs incurred from the time the product is being offered
for sale to the time the product is delivered including post-sale services.
b. General and Administrative – general administration and management of the company

3. Financing Costs

B. As to Purpose (depending on Costing Method: Throughput, Variable and Absorption)

1. Product (Inventoriable) – are matched with units of product and are recognized as an
expense on the income statement ONLY when units are sold. Until that time, product costs
are assets and are recognized as inventory.
2. Period (Non-Inventoriable) – are expensed on the income statement in the period they were
incurred.

C. As to Traceability
1. Direct Costs - physically and easily traceable to the cost object under consideration and
material in costs
a. Cost Tracing – the process of identifying direct costs
2. Indirect Costs – is a cost that cannot be conveniently traced to the cost object.
 DON HONORIO VENTURA STATE UNIVERSITY
Cabambangan, Villa de Bacolor 2001, Pampanga, Philippines ISO 9001: 2015
QMS-Certified
Tel. No. (6345) 458 0021; Fax (6345) 458 0021 Local 211
URL: http://dhvsu.edu.ph

D. As to Behavior
1. Variable Costs – fixed per unit, variable per total
a. Pure or Real – directly proportionate to the level of activity based
b. Step – increase in small steps (small chunks)
2. Fixed Costs – variable per unit; fixed per total
a. Discretionary – the result of a management decision to spend a particular amount of
money for some purpose
b. Committed – cannot be significantly reduced even for short period of time without
making fundamental changes
3. Mixed Costs – combination of VC and FC; expressed in terms of a cost function y = a + bx
a. Semi-variable
b. Step-up Costs

Phases in Analyzing Mixed Costs

• Cost behavior – identifying whether a particular cost is variable, fixed or mixed
• Cost estimation – determining the variable and fixed components
• Cost prediction – forecasting the cost to be incurred in connection with the expected
activity level

Methods to Analyzing Mixed Costs

• Qualitative Approach – uses human judgement
o Account Analysis
o Engineering Approach
• Quantitative Approach – uses quantitative data
o High Low
o Scatter graph or Visual Fit
o Least-square Regression Analysis

E. As to Controllability (depending on Decision Maker)

1. Controllable – costs that can be influenced by a decision
2. Non-Controllable – costs that are influenced by another part’s decision

F. As to Role in Decision Making

1. Differential Costs – costs that differs between alternatives
2. Opportunity Costs – benefits forgone by choosing one alternative over another
3. Sunk Costs – costs that are already incurred and paid for and cannot be returned

References:
• Strategic Cost Management by Ma. Elenita B. Cabrera, CPA, MBA, CMA
• https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounts-expenses/
• https://www.accountingcoach.com/terms/C/cost
 DON HONORIO VENTURA STATE UNIVERSITY
Cabambangan, Villa de Bacolor 2001, Pampanga, Philippines ISO 9001: 2015
QMS-Certified
Tel. No. (6345) 458 0021; Fax (6345) 458 0021 Local 211
URL: http://dhvsu.edu.ph

• https://www.accountingtools.com/articles/the-difference-between-expenses-and-
losses#:~:text=The%20main%20difference%20between%20expenses,in%20much%20more%20t
ransactional%20volume.
• Review Materials by Prof Mark Benedict Guia

Assessment:

Problem 1: The following data (in thousands) are taken from the accounting records of Dararj Corporation
for the current year

Sales 2,980
Selling Expenses 1,280
Manufacturing Overhead 1,460
Direct Labor 1,400
Administrative Expenses 1,300
Purchases of Raw Materials 1,240
Finished Goods, beginning 1,240
Finished Goods, ending 1,320
Raw Materials, beginning 1,080
Raw Materials, ending 1,140
Work in Process, beginning 1,140
Work in Process, ending 1,100

Requirement: Prepare the following

1. Income Statement
2. Statement of Cost of Goods Manufactured
3. Statement of Cost of Goods Sold

Problem 2: EXO Corp has the following information:

Increase (decrease)
Raw Materials 110,000
Work in Process (105,000)
Finished Goods 108,000

Other information:
Direct Materials purchased 140,000
Direct Labor 40% of total prime cost
Manufacturing Overhead 20% of total conversion cost

Requirement: Compute for the following:

1. Total Manufacturing Costs
2. Total Cost of Goods Manufactured
3. Total Cost of Goods Sold
 DON HONORIO VENTURA STATE UNIVERSITY
Cabambangan, Villa de Bacolor 2001, Pampanga, Philippines ISO 9001: 2015
QMS-Certified
Tel. No. (6345) 458 0021; Fax (6345) 458 0021 Local 211
URL: http://dhvsu.edu.ph

Problem 3: Complete the following table:

1,000 units 2,000 units 3,000 units

Variable Costs per unit 20.00
Fixed Cost per unit
Total Cost per unit

Total Variable Cost

Total Fixed Cost 15,000.00
Total Cost

Problem 4: Classify each cost item as to Product or Period, Direct or Indirect, and Fixed or Variable

Pr or Pd D or I F or V
Wages of workers assembling mobile phones.
Yarn used in t-shirt production.
Wall Street Journal subscription, factory lunchroom
Boxes used in packaging cereals produced by the
company.
Supervisor’s salary, Assembly Depot
Executive life insurance
Fringe Benefits, factory workers
Lubricants and oil for machines
Thread in a garment factory
Real Property Taxes, factory
Public Relations
Ink used in printing magazine by a publishing house
Insurance, finished goods warehouse
Chips in producing alarm systems
AR collection costs
Depreciation, delivery trucks
Shipping Out Costs
Salesman’s commission
Wage of front desk officer
Electricity for factory lighting

Prepared by:

REMAR ALLEN M. BAUTISTA, CPA, CTT, MRITax, MBA

Lecturer