• Cost – the amount measured in money, of cash expended or other

property transferred, capital stock issued, services performed, or a

liability incurred, in consideration of goods or services received or to be
received.

• Expense – all expired costs that are deductible from revenues

• Loss – the excess of expenses over revenues for a period. It is also the
excess of all or the appropriate portion of the cost of assets over related
proceeds, if any, when the items are sold, abandoned, or either wholly or
partially destroyed by casualty or otherwise written off
• Cost Object – anything for which a separate measurement of costs
is desired

• Cost Accumulation - the collection of cost data in some organized

way through an accounting system.

• Cost Assignment – a general term that encompasses both tracing

accumulated costs to a cost object and allocating accumulated
costs to a cost object
A. The assignment of direct costs to the chosen cost
object.

B. A function of cost allocation.

C. The process of tracking both direct and indirect

costs associated with a cost object.

D. The process of determining the actual cost of the

cost object.
A. The assignment of direct costs to the chosen cost
object.

B. A function of cost allocation.

C. The process of tracking both direct and indirect

costs associated with a cost object.

D. The process of determining the actual cost of the

cost object.
• Time of charges against revenue
Product (DM, DL and OH) vs Period (GAE, SME)

• Ease of traceability
Direct vs Indirect

• Management function
a. Manufacturing – applied to producing a product
b. Marketing – costs in selling the product
c. Administrative – costs in policy–making activities
d. Financial – costs related to financial activities
 Cost Classifications for Preparing
Financial Statements
Product costs include direct Period costs include all selling
materials, direct labor, and costs and administrative
manufacturing overhead. costs.

Inventory Cost of Good Sold Expense

Sale

Balance Income Income

Sheet Statement Statement
Classifications of Manufacturing Costs

Direct Direct Manufacturing

Materials Labor Overhead

The Product
 Assigning Costs to Cost Objects
Direct costs Indirect costs
• Costs that can be • Costs that cannot be
easily and conveniently easily and conveniently
traced to a unit of product traced to a unit of product
or other cost object. or other cost object.
• Examples: direct • Example: manufacturing
material and direct labor overhead

Common costs
Indirect costs incurred to support a number of
cost objects. These costs cannot be traced to
any individual cost object.
 Nonmanufacturing Costs

Selling Administrative
Costs Costs

Costs necessary to secure the All executive, organizational,

order and deliver the product. and clerical costs.
Selling costs can be either Administrative costs can be
direct or indirect costs. either direct or indirect costs.
 Quick Check ✓
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
 Quick Check ✓
Which of the following costs would be
considered a period rather than a product
cost in a manufacturing company?
A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production
facility.
E. Sales commissions.
• Degree of averaging
Total vs Unit

• Time when computed

Historical vs Predicted

• Relation to product
Prime vs Conversion

• Behavior in relation to fluctuations in volume or activity or

level of production
Variable, Fixed and Mixed
 Prime Costs and Conversion Costs
Manufacturing costs are often
classified as follows:
Direct Direct Manufacturing
Material Labor Overhead

Prime Conversion
Cost Cost
Cost Classifications for Predicting Cost
Behavior
Cost behavior refers
to how a cost will
react to changes in
the level of activity.
The most common
classifications are:
▫ Variable costs.
▫ Fixed costs.
▫ Mixed costs.
 Variable Cost
A cost that varies, in total, in direct proportion to
changes in the level of activity. Your total texting bill
may be based on how many texts you send.

Total Texting Bill

Number of Texts Sent

 Variable Cost Per Unit

However, variable cost per unit is constant. The cost per text
sent may be constant at 5 cents per text message.

Cost Per Text Sent

Number of Texts Sent
 The Activity Base (Cost Driver)
Units Machine
produced hours

A measure of what
causes the
incurrence of a
variable cost

Miles Labor
driven hours
 Fixed Cost
A cost that remains constant, in total, regardless of changes in
the level of the activity. Your monthly contract fee for your cell
phone may be fixed for the number of monthly minutes in
your contract.
Monthly Cell Phone
Contract Fee

Number of Minutes Used

Within Monthly Plan
 Fixed Cost Per Unit
However, if expressed on a per unit basis, the average fixed cost per unit varies
inversely with changes in activity. The average fixed cost per cell phone call
made decreases as more calls are made.

Monthly Cell Phone

Contract Fee
Number of Minutes Used
Within Monthly Plan
 Types of Fixed Costs

Committed Discretionary
Long-term, cannot be May be altered in the
significantly reduced in short term by current
the short term. managerial decisions

Examples Examples
• Depreciation on • Advertising
Buildings Equipment • Research and
• Real Estate Taxes Development
 The Linearity Assumption and the
Relevant Range
Economist’s A straight line
closely
Curvilinear Cost approximates a
Function curvilinear
variable cost
line within the
Relevant
relevant range.
Total Cost

Range
Accountant’s Straight-Line
Approximation (constant
unit variable cost)

Activity
 Cost Classifications for Predicting Cost
Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost Increase Variable cost per unit

and decrease in proportion remains constant.
to changes in the activity level.
Fixed Total fixed cost is not affected Fixed cost per unit decreases
by changes in the activity as the activity level rises and
level within the relevant range. increases as the activity level falls.
 Cost Classifications for Predicting Cost
Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Direct relationship Constant

Fixed Constant Inverse relationship

 Quick Check ✓

Which of the following costs would be

variable with respect to the number of cones
sold at Hernz Ice Cream Shop?

A. The cost of lighting the store.

B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
 Quick Check ✓

Which of the following costs would be

variable with respect to the number of cones
sold at Hernz Ice Cream Shop?

A. The cost of lighting the store.

B. The wages of the store manager.
C. The cost of ice cream.
D. The cost of napkins for customers.
 Mixed Costs
A mixed cost contains both variable and fixed elements.
Consider the example of utility cost.
Y
Total Utility Cost

Variable
Cost per KW

X Fixed Monthly
Activity (Kilowatt Hours) Utility Charge
 Summary of the Types of Cost
Classifications

Predicting Cost
Financial Reporting
Behavior

Assigning Costs to
Cost Objects
 TRUE or FALSE

1. Costs incurred in one year are

always meaningful in the following
year.

FALSE
 TRUE or FALSE

2. Manufacturing overhead includes

all direct material, direct labor, and
other indirect costs.

FALSE
 TRUE or FALSE

3. Discretionary fixed costs are not

necessary to successful operation
of the business.

FALSE
 TRUE or FALSE

4. Discretionary costs should be the

first ones cut in a cost-reduction
program.

FALSE
 TRUE or FALSE

5. Direct costs are often difficult to

trace to the specific cost object
under consideration.

FALSE
 TRUE or FALSE

6. When the physical association of

raw materials with the finished
product is too small to trace in
terms of cost, they are usually
classified as indirect materials.
TRUE
 TRUE or FALSE

7. Thread used in the production of

mattresses is classified as direct
material.

FALSE
 TRUE or FALSE

8. The cost of goods sold of a

manufacturing company equals beginning
finished goods inventory + cost of goods
available for sale - ending finished goods
inventory.
FALSE
 TRUE or FALSE

9. Product costs are deducted from

revenue when the production process is
completed.

FALSE
 TRUE or FALSE

10. Product costs appear on financial

statements only when products are sold.

FALSE
 TRUE or FALSE

11.All of the following are examples of

opportunity costs:
–salary given up to start a business;
–rental income given up when you live in a
house you own;
–interest expense that could be incurred when
you purchased your car on a cash basis.
FALSE
 TRUE or FALSE

12. A variable cost is constant if expressed

on a per unit basis but the total peso
amount changes as the number of units
increases or decreases.

TRUE
 TRUE or FALSE

13. High-low, scatter diagram, and

regression analysis are methods of
developing formulas to predict mixed costs.

TRUE
 TRUE or FALSE

14. The first step in high-low method is to

choose the highest and lowest costs
incurred.

FALSE
 TRUE or FALSE

15. A multiple regression equation uses

more than one driver to predict costs.

TRUE
 Problem 1

During the month of April, direct labor cost

totaled P13,000 and direct labor cost was
20% of prime cost. During August the total
manufacturing costs were P88,000.

1. Calculate the total prime cost.

2. The manufacturing overhead was?
 Problem 2

The accounting records of 7RS Company revealed the

following costs:
Direct material used P50,000
Factory utilities 35,000
Wages of assembly-line personnel 170,000
Customer entertainment 45,000
Indirect materials used 19,000
Depreciation on salespersons' cars 51,000
Production equipment rental costs 110,000

1. Calculate the total direct costs?

2. Calculate the total manufacturing overhead costs?
3. What is the total cost conversion costs?
 Problem 3
The management of PMSO Corporation has asked your help as an intern
in preparing some key reports for September. The beginning balance in
the raw materials inventory account was P40,000. During the month, the
company made raw materials purchases amounting to P89,000 and used
P77,000 out of the total materials available to use in production. At the
end of the month, the balance in the raw materials inventory account was
P52,000. Direct labor cost was P44,000 and manufacturing overhead was
P91,000.

The beginning balance in the work in process account was P44,000 and
the ending balance was P39,000. The beginning balance in the finished
goods account was P73,000 and the ending balance was P78,000. Selling
expense was P40,000 and administrative expense was P55,000.
1. Calculate the total prime cost for September.
2. The conversion cost for September was?
3. How much is the total cost of inventory to be presented in the
financial position of the Company?
 Problem 4

Some selected sales and cost data for RCR Company are given
below:

Direct materials used (variable cost) P200,000

Indirect materials used (variable cost) 70,000
Direct labor cost incurred (variable cost) 300,000
Indirect labor cost incurred (80% fixed) 80,000
Other factory overhead cost (40% variable) 150,000
Selling and administrative expenses (60% variable) 240,000

1. Total variable cost.

2. Total fixed cost
 Problem 5

Below are the amounts gathered in order to calculate the

total product cost incurred by Madison Company:

Materials used (including P70,000 of indirect materials) P780,000

Labor cost (including P80,000 maintenance salaries) 720,000
Supervisor salaries - plant 510,000
Heat, light and power - plant 135,000
Sales salaries 327,000
Advertising expenses 304,000
Insurance and property taxes - plant 143,000
Insurance and property taxes - corporate offices 208,000
Equipment depreciation – plant 119,000
Equipment depreciation - corporate offices 92,000
1. Total manufacturing overhead cost.
2. Selling expenses.
3. Administrative expenses.
 Diagnosing Cost Behavior with a
Scattergraph Plot/ Scatter Diagram
Assume the following hours of maintenance work and the total maintenance costs for six months.

Month Hours of Total Maintenance Cost

Maintenance
January 625 $ 7,950
February 450 7,400
March 700 8,275
April 550 7,625
May 775 9,100
June 850 9,800
 Scattergraph Plot/Scatter Diagram
Plot the data points on a graph (Total Cost Y “dependent
variable” vs. Activity X “independent variable”).
Y Scattergraph Method
$10,000
Total Maintenance Cost

$9,500

$9,000

$8,500

$8,000

$7,500

$7,000 X
400 500 600 700 800 900
Hours of Maintenance