 COST - Per unit: changes

- monetary measure of resources MIXED - “semi-variable

given up or used for a purpose cost”
- expenditures incurred to obtain
assets, goods and services  COST OBJECT
- Anything for which costs is
COST CLASSIFICATION computed
Inventoriability - Cost – gastos
PRODUCT - manufacturing - Object – bagay
costs - Mga bagay na gusto mong malaman
- inventoriable mga ginastos mo sa kanila
costs
- used in products  COST DRIVER
- unsold: inventory - Nagdadrive sa mga costs, either to
- sold: COGS increase or decrease
DIRECT - integral part of - Activity levels
MATERIALS finished goods - Reason why costs change
DIRECT - paid to workers
LABOR who directly  COST POOL
contribute - Pinagsama-samang gastos sa isang
OVERHEAD - indirect materials title
- indirect labor - Groupings of costs
- indirect costs na
naincur while at  COST BEHAVIOR
the factory - How costs respond to changes in
PERIOD - expensed on the activity level or cost drivers
period they were
incurred Cost behavior pattern
Traceability VARIABL  Total: varies
DIRECT COST - Can be traced to a E  Unit: constant
single cost object  Total: constant
FIXED
INDIRECT COST - Cannot be traced  Unit: varies
to a cost object  Total: varies
MIXED
Time Frame  Unit: varies
COMMITTED COST - Inevitable
consequence of
Cost Behavior - effect
previous
commitment Cost Pool Direct Labor
- Required by:
Cost Driver per unit -
 Law cause Labor hours
 Contract Cost Driver
 Policy
- Fixed cost w/in a Cost Object Chair
specific time
Cost Behavior Pattern
frame
- Non-controllable
DISCRETIONARY - “Programmed
cost”  RELEVANT RANGE
- “Managed cost” - Where the relationship of costs and
- Size or time of cost formula is:
incurrence is a  Valid
matter of choice  Predictable
- Can be decided at  Linear
your own - “Cost equation is linear in nature”
Controllability  Total cost is linearly related
CONTROLLABLE - Depends on to cost drivers
decision of the  It changes in direct
specific manager proportion with the changes
NON- - Do NOT depend in activity level
CONTROLLABLE on the specific  if you double the activity
manager level, the total cost will also
Behavior double
VARIABLE - Total: changes  if you halve the activity
- Per unit: constant level, the total cost will be
halved
FIXED - Total: constant
 - Can be applied on new businesses
with no historical experience

 SCATTERGRAPH METHOD (VISUAL FIT)

- Graphical technique
- Plotting activity level along x-axis
and corresponding total costs on y-
Y = a + bX axis
Total Cost ($) (YCOST = XUNITS)
|  Regression line
| *  Linearity assumption –
| * relationship of total costs with
| * cost drivers within the relevant
| * range
| *  Yung may straight line lang
| * yung tama
| *
|_________________________
Activity Level (Units)
 The line starts at the fixed cost ($10,000) when
the activity level is 0.
 As the activity level increases, the total cost
increases in a straight-line fashion, reflecting
the linear relationship.

STATISTICAL
 HIGH-LOW METHOD
- Two extreme points:
 Highest activity level
 Lowest activity level
- Least accurate

Cost of high act−Cost of low act

b=
Highest Act lvl−Lowest Act lvl

a= y−bX
METHODS – SEGRAGATION OF MIXED
COSTS
 LEAST SQAURES METHOD
NON-STATISTICAL – subjective (judgement) - “Linear regression analysis”
 ACCOUNT ANALYSIS METHOD - Mathematical analysis method
- Review of accounts by experienced - Relationship between all data
employees / management points/pairs in a simulation
- Applicable ONLY when the company
has been running already Σy=na+bΣx
Σxy=aΣx+ bΣx 2
 CONFERENCE METHOD
- Analysis and opinions of various
Σxy−n ( x ) ( y )
departments b= 2 2
- Variation of account analysis method Σ x −n ( x )

 INDUSTRIAL ENGINEERING METHOD a= y−b x

- Examines the relationship between
cost drivers and costs
- Analyze inputs comping into the  CORRELATION ANALYSIS
company, outputs created and the - Relationship between dependent
works that go into the process and independent variable
- Evaluations and opinions of  Co-variation
industrial engineers  Strength of relationship
 Direction of relationship
  When all plotted points fall on the
regression line = perfect
correlation
 NO impact on problem solving
 ONLY when it is required to choose
the appropriate COST DRIVER

 r – coefficient of correlation
(direction of relationship
between variables)
 positive – direct
relationship
 negative – inverse
 zero – no relationship

 r2 – coefficient of determination
(% of total variation in
dependent variable)
 the closer to +1, the
closer the relationship to
the dependent variable

 MULTIPLE REGRESSION ANALYSIS

- When dependent variable is affected
by two or more independent
variable
- Cost is affected by various kinds of
cost drivers

y=a+ ( b 1 x 1 ) + ( b 2 x 2 ) …
  Breakeven point – intersection of total revenue
line and total cost line
 When there are same amounts of revenue
and cost, there is no profit or loss

 COST-VOLUME-PROFIT (CVP) ANALYSIS

- Relationship among cost, volume
(cost driver), and profit
- How changes in cost driver can
affect costs (variable and fixed), and
how changes in these costs can
affect profits
- Used in PLANNING  Profit-volume chart – relationship between
- maximize profitability profit and volume (activity level – sales)
 direct relationship between cost,
volume, and profit CVP INCOME STATEMENT
Units Total %
ASSUMPTIONS: Sales XX XXX 100
1) Costs  variable or fixed %
2) Linearity assumption: (linear and Less: Variable costs (XX) (XXX) (xx
%)
predictable)
Contribution Margin XX XXX xx%
 cost and revenue (cost driver – sales)
Less: Fixed Costs (XXX) (xx
 cost and cost driver (activity level) %)
Note: they can be drawn as straight lines Operating Income XXX xx%
3) Cost behavior (NIBT)
Less: Tax expense (XXX)
4) Selling price: CONSTANT
Net Income XXX
 Changes in total sales is due to
 Constant – with same information, to be carried forward
change in units sold (volume), and
NOT due to change in selling price  Contribution margin
 Revenue and volume: direct - how a particular product contributes to
relationship the overall profit
5) Inventory levels: CONSTANT - remaining amount of revenue available
to pcover fixed expenses
 Units produced = Units sold
6) Productive efficiency: CONSTANT
 Learning curve is NOT USED
BREAKEVEN POINT
7) Sales mix: CONSTANT
- useful in knowing how much is needed
8) Time value of money: IGNORED
to sell to make profit
- sales or units required to cover the
total costs (variable and fixed)
- revenue = costs
- contribution margin = fixed costs
- operating income: 0 (zero)

¿Costs
BEP ( units )=
UCM

¿ Costs
BEP ( sales )=
CM %
 CPV Chart – linearity of total cost and revenue
over relevant range
 “Breakeven chart” PROFIT PLANNING
 Y-intercept – starting point of total cost line - taken to achieve a target profit
 Represents total fixed costs
- aims to set a profit objective for a
 Even though there is no activity, there will
budgeting period
always be fixed costs, hence even at 0
units, total cost line does NOT start at the
origin ¿ Costs+Target Profit
 Origin (0,0) – starting point of total revenue line Req ( units ) =
UCM
 Direct relationship of revenue with sales
volume
 There is no revenue when there are no ¿ Costs+ Target Profit
units sold Req( sales)=
CM %
 CM 36
Less: FC (20)
OI 16 13+3

SENSITIVITY (WHAT-IF OR SIMULATION)

ANALYSIS
- predicting outcomes of a situation after
MARGIN OF SAFETY
considering the effects of the changes
- Maximum amount of peso sales or
in variables affecting the outcome of
number of units which actual or
the situation
budgeted sales may be decreased
- shows how CVP model changes with
without resulting into a loss
the change in any of its variable
 “What if baguhin yung assumptions?”
MOS=Actual Sales=BEP
OPERATING LEVERAGE
- Extent to which a company uses fixed 1
costs in its cost structure
MOS=
DOL
- Percentage of total costs are attributed
to fixed and variable costs OI
- Measures sensitivity of operating MOS %=
CM
income to its sales
 “How effectively the company is using fixed POINT OF INDIFFERENCE
costs in generating profits?”
- Point where two ALTERNATIVES will
 “How operating income changes after a
percentage change in its sales” produce the same results
 “How a change in sales will affect the
operating income” ∆ total FC
POI ( units )=
∆ UCM
I. Assess cost structure
Degree of FIXED to
∆ total FC
Operating VARIABLE
POI ( sales )=
Leverage costs
∆ CM %
Higher amount of sales is
HIGH HIGH needed to cover fixed
costs
LOW LOW

Contribution Margin
DOL=
Operating Income
Contribution Margin: ALT. 1 ALT. 2
 ↑Sales Sales 50x 100% 50x 100%
Less: VC (24x) (20x)
↑ numerator  ↓Variable costs 52% 60%
CM 26x 30x
↑ quotient
↓denominator Operating Income: Less: FC (52,000) (72,000)
 ↓CM OI

 ↑Fixed Costs Alterntive 1= Alternative 2

Contribution Margin:
 ↓Sales 26 x−52,000=30 x−72,000
↓ numerator  ↑Variable costs
↓ quotient 72,000−52,000=30 x−26 x
↑denominator Operating Income:
20,000 4 x
 ↑CM =
 ↓Fixed Costs
4 4
5,000=x(POI )
II. Predict Changes in Profit
MULTIPLE PRODUCTS
Sales 100
PRODUCT 1 PRODUCT 2
 SP = 10 Less: VC (70) % %
Unit Total Unit Total TOTAL
 VC/unit = 7 CM 30 DOL = CM/OI
s s
 Units sold = 10 Less: FC (20) = 30/10 100 100
Sales XX XXX XX XXX XXX
OI 10 =3 % %
Less: Variable (XX) (XXX) (xx (XX) (XXX) (xx (XXX)
costs %) %)

Sales 110 CM XX XXX xx% XX XXX xx% XXX

 Units sold = 11 Less: VC (77) Less: Fixed Costs (XXX)
 10% increase in CM 33 OI (NIBT) XXX
sales volume Less: FC (20) Less: Tax (XXX)
OI 13 10+3 expense
Net Income XXX
 Units sold = 12
 20% increase in Sales 120
sales volume Less: VC (84) COMPOSITE BREAKEVEN POINT
 PRODUCT 1 PRODUCT 2 TOTAL
2) Inventory valuation
Sales XX + XXX XXX - Establishing standard cost per
Less: Variable (XX) + (XXX) (XXX) unit Organizin
costs
- Total production cost: standard g
CM XX + XXX XXX
cost * units produced Planning
Less: Fixed Costs (XXX)
- Ending inventory:
OI (NIBT) XXX
UCM / * Composite Units standard cost * unsold units
Less: Tax (XXX)
expense 3) Measurement of performance Controllin
Net Income XXX g
4) Price setting
- Setting selling price before
CM per Composite
Planning
selling
COMPOSITE units ACTUAL units sold
- Standard (targeted) + markup
P1 XX XXX
5) Instrument of coordination
P2 XX XXX
- Cooperation of employees XX Directing
XXX
needed to achieve standards Organizin
- Atmosphere of “cost g
consciousness”
6) Motivating employees
- Employees should be
motivated so they could work
Directing
efficiently
Organizin
- Variances and responsibility
g
can be identified (who did not
work efficiently hence the
cause of the variance)
7) Budget preparation
- Budget is composed of
standard cost (hindi mo pa
naman alam yung actual costs
Planning
mo at the beg.)
- Flexible budgeting
 STANDARD - Budget prepared for various
- Measure of acceptable performance levels of activity
 Whether an amount or   Standard costs
performance is acceptable - specific cost per unit
- Benchmark - estimates applied to actual
- Point of reference cost drivers
- Basis of comparison  Budgeted costs
- total cost for a certain
activity level
 STANDARD COSTS
estimated based on
- Predetermined projected capacity
- Planned cost
- Required to produce one unit
- “SHOULD BE COSTS”
- Target unit cost of production that  MANAGEMENT BY EXCEPTION
“SHOULD BE” attained under - Examining and investigating
efficient conditions differences (variances) from
standard amounts which are
 STANDARD COSTING considered MATERIAL (SIGNIFICANT)
- Used in recording the following in - Regardless if un/favorable, if it is a
the Balance Sheet: large difference from the expected
 Raw Materials amount, such would be employed
 Work-in-Process
 Finished Goods
 These accounts are initially presented
@standard cost USERS OF STANDARD COSTS:
 At the end of the period (closing): we
 Manufacturing
revise them so they could be presented
 Service
@actual costs
 Non-profit organization
USES
*NOTE: usually ginagamit talaga for PLANNING and
ORGANIZING
1) Planning and controlling costs TYPES OF STANDARDS:
- Planning: standards are  BASIC STANDARDS
established at the beginning of - Inherent
Planning
the year - Given
Controllin
- Controlling: used for - Andyan na
g
performance evaluation
- Unaltered for an indefinite period
(comparing actual costs with
- Unchanged
standard costs)
 - Seldomly revised

 IDEAL STANDARDS
- “Perfect standards”
- “Theoretical standards”
- Represent highest performance
- Do NOT provide for waste and
inefficiency
- NO ROOM FOR ERRORS
- Tend to demotivate employees

 CURRENTLY ATTAINABLE & NORMAL

STANDARDS
- Represent efficient level of
performance
- Attainable under expected operating
conditions
- Allow TORRABLE errors
- There are ALLOWANCES for certain
circumstances
- Currently attainable standards: use
over a short period of time
- Normal standards: represents
average performance over the long-
term

STANDARD SETTING:
Establish…
(1) Standard COST
(2) Standard QUANTITY

 STANDARD PRICE / RATE

- “Price Standard”
- “Cost Standard”
- “Standard Material Price per unit”
- Amount that should be paid for one
unit
 STANDARD QUANTITY
- “Quantity Standards”
- “Standard Material Quantity”
- Amount of input factor that should
be used to make a unit
 Business is making Profits will be less than
more profit than expected since there
expected since actual are more costs actually
costs incurred is less incurred than what was
than the expected targeted
(targeted) standard
Upon disposal: Upon disposal:
DEDUCTED from COGS ADDED to COGS

RESPONSIBILITIES OF VARIANCES:
Purchasing
Material Price
(Procuremen Prices of materials
Variance
t)
Details of production
Material
in terms of
Quantity Production
materials, labor, and
Variance
overhead
Human
Labor Rate Wage and salary
Resource
Variance rates
(HR)
Labor Efficiency
Production
Variance Details of production
Variable OH in terms of
Production
Variance materials, labor, and
Fixed OH overhead
Production
Variance

VARIANCE ANALYSIS – quantitative

investigation of the difference (variance)
 Maintain control
 Management by exception

 VARIANCE
- Difference between standard costs
and actual costs

FAVORABLE UNFAVORABLE
“Credit Variance” “Debit Variance”
“Positive Variance” “Negative Variance”
Actual Costs < Standard Actual Costs > Standard
Costs Costs
 MIX
- Relative proportion of various
ingredients of input
 MIX (BLEND) VARIANCE
- Difference in overall material/labor
usage or inputs based on standard
prices
 YIELD
- Measure of productivity
 YIELD VARIANCE
- Difference in actual and standard
output
 PRODUCT COSTING METHODS

PRODUCT COST: 
PERIOD COST: 

VARIABLE ABSORP THROUGH

DM   
DL   
VOH   
FOH   

 VARIABLE COSTING
- “Marginal costing”
- “Direct costing”
- “Contribution margin costing”
- Focused on internal reporting
- Income statement format: CVP format
- NO volume variance
(volume variance is the difference between the
budgeted fixed OH and applied fixed OH, eh hindi
naman cinoconsider yung fixed OH under variable
costing)
- Reports LOWER ENDING INVENTORY than
absorption
(mas konti yung costs na associated sa
kanya)
- Follows the trend is SALES
 ABSORPTION COSTING
- “Conventional costing”
- “Traditional costing”
- “GAAP/PFRS costing”
- “Full costing”
- Focused on external reporting
- Income statement format: traditional format
- Volume variance may appear
 Volume variance – “capacity variance”;
difference between actual capacity or
production and normal capacity
- Conforms with GAAP
(inventories must be measured @COST: lahat ng
costs cinonsider naman sa absorption)
- Follows the trend with PRODUCTION
 THROUGHPUT COSTING
- “Supervariable costing”
- LOWER amount of ENDING INVENTORY

STANDARD COSTING APPLICATION

- Inventories and COGS are INITIALLY measured
@STANDARD
- Where variances are discovered

PRODUCT COSTING
- Assigning costs to a manufactured product
- To accurately determine the cost of a unit

PRODUCT COST PERIOD COST

Inventoriable Costs
NOT inventoriable
(Capitalized upon
(Expensed outright)
incurrence)
Expensed (Income Full amount is
Statement) through expensed regardless of
units sold units sold
Denominator for unit cost
Denominator for unit cost computation:
computation: SALES
PRODUCTION  Period costs kase is hindi
 Eto yung ginagamit para naman nakasalalay sa
malaman yung costs na production, like for
icacapitalize nila (yung selling and admin sila so
pwede nilang iassociate parang nakasalalay pa
dun sa mga product) dito yung selling
situation
 BUDGET – detailed and realistic plan, in
quantitative terms, that outlines the acquisition
and utilization of financial resources; (financial
plan)
 To forecast financial results and position
 Better decision-making
 BUDGETARY CONTROL – use of budgets to
control the actual activities

ADVANTAGES
(1) Planning and communication tool
- Planning for the future
- Sets direction
- Communicating management plans
throughout the organization
 Communication – ensures that the vision,
mission, goals, and objectives are clearly
articulated
- execution of budget
- get the members more involved and
committed
(2) Helps in directing and organizing resources
- Saan mo ididirect or papapuntahin yung
“cash” mo?
- Ensuring that everyone and everything is
pulling in the same direction
(3) Control mechanism
- Budgets define goals and objectives,
therefore serving as “benchmarks”
 Budget reports – comparison of actual
amounts and budgeted amounts
(4) Performance evaluation
- Highlight areas that are performing
according to plans and those that need
improvement by comparing the actual to the
budgeted
 Budget revision – necessary changes to an
existing budget
(5) Management and employee motivation
- Bonuses and other incentives
 Monetary consideration – one of the best
drivers for employee motivation
(6) Intelligent use of budget = proper
allocation of resources and effective
prevention of waste
- Means:
 Does NOT spend the money it does
not have
 Prevent overspending
 Effective utilization
 Resource allocation – distribution of
financial resources to different levels of
organization where they can be most
effectively utilized

DISADVANTAGES
(1) NOT an exact science
- Assumptions and estimations
- Based on judgements which can be
subjective
(2) Time consuming
(3) Depends on the cooperation and
participation
- People dependent
- Communicated on every management level
(4) Mechanically and rigidly applied
 - Strategy during the budget formulation is - Used to achieve optimal financial
based on the current market condition on performance
that period - Control mechanism
- Problem arises when there is a fundamental - Evaluating the performance of fixed costs
shift in the market just after the budget has - Lack flexibility to adjust to unexpected
been completed changes
- Budget is merely a guide, NOT a substitution  Non-profit, educational, and government whose
for management allocations are usually fixed or specific
(5) Excessive emphasis may motivate  For companies whose sales and costs are
PREDICTABLE and STABLE
managers too much, and motivate them to
 FLEXIBLE
provide inaccurate information
- Useful in cost control
- Non-reporting of unfavorable variances
 Budget slack / padding / shaving –
- Geared towards a range of activity
intentional manipulation of budget estimates - Set of altern active budgets at different
to favor certain departments expected activity levels
 Overstating expenses - Budget is adjusted TO CONFORM ACTUAL
 Understating revenues ACTIVITY LEVEL
(6) Primarily concerned with financial  Concepts of cost behavior and determination cost
outcomes equation is applicable
- Qualitative and subjective information may (1) Estimate range of expected activity
be overlooked (2) Analyze cost behavior
(3) Formulate cost equation

APPROACHES IN BUDGETING:
 BUDGET VARIANCE – difference between
 TOP-DOWN budgeted amount and actual amount
- “Imposed budgeting”
- “Authoritarian budgeting”
- Top management: preparation
BUDGET METHODOLOGIES:
- Departments: NO participation
 Budget slack is NOT present in top-down since
 CONTINUOUS (ROLLING)
the top management creates the budget - Budget is maintained for a particular time
 BOTTOM-UP frame (i.e. 12 months)
- “Participative budgeting” - Revised on a regular and continuous basis to
- Top management: review and approve keep the time frame
- Departments: prepare their own budget - As one month elapses, it is dropped from the
budget frame and a new month is added
NOTE: Either way, the Budget Committee is the - Estimations made are modified based on
one who approves and monitor the budgeting current numbers or amounts
process. They do NOT, in any case, prepare the  INCREMENTAL
budget. - “incremental” (change)
- Adjusted to allow for changes planned for
the coming period
Board of
- Basis: current period results
Directors (based on slight changes from the prior
period’s budgeted results)
- Assumption: prior year data and activities
are essential
Management  LIFE-CYCLE
- Projected over the entire life cycle of a
certain product
- Compliments: target costing and pricing
Administrative
Sales Dep't
Dep't
Plant Dep't - Costs at all stages of value chain
 Value chain – chain of business activities
that needs to be carry out to create value
(products) to its customers
BUDGET VS. COST  ZERO-BASED
- Basis: none
BUDGET COST
- Assumption: company prepares its budget
Income
Costs for the first time
Costs
- Highly effective
Per total Per unit
- Prioritization of activities or programs
Cost accounting - Budget deliberation: justification of
NOT journalized
systems expenses
 Cost control  ACTIVITY-BASED
 Performance evaluation - Activity-based costing
 Reported periodically - Focuses on volume of activities involved
 Compared to actual - Analysis of impact of activities on the
 Predetermined (planned) cost estimated amounts projected
- Every activity that incurs cost is analyzed for
potential ways that result to efficiencies
- For those with complex operations and
increase in cost drivers is expected
 KAIZEN
TYPES OF BUDGETS: - “Continuous improvement”
 FIXED (STATIC) - Gradual improvements over a long period of
- Unchanged regardless of fluctuations in time
actual activity - Goal: Sales %; Expenses %