Understanding

Expenses
MAC 302 Management Reporting
PRE-QUIZ
General Direction:
Choose your answer from the given options.
Any form of erasures is considered wrong.
Controlling
Expenses
Understanding Expenses
• Management accounting is about profit management. It considers
expenses as a vital component it should be understood and
intelligently managed.
• Profit increases when sales increase and expenses decrease, or both.
• Reducing expenses require a thorough understanding of it in line with
the planning and controlling functions of the management.
• To manage cost means to control or reduce it or justify its priority of
occurrence.
Cost Concepts
Cost Concepts

• The term “costs” here includes cost and expenses.

• Managing costs means knowing their nature, behavior, and other
characteristics.
• Costs may differently to different people.
• Costs differ in the perspectives of accountants, managers, and
economists.
Accountant’s Perspective

Capital expenditures – “puhunan” investing outlays normally requiring a

large amount of funds and resources having a long-term impact to
business profitability and growth

Operating expenditures - “gastos” outlays or consumption used to

directly support the normal operating activities of the business
Accountant’s Perspective
Costs – traditionally classified in relation to the functional activities of
the business

Expenses – incurred in distributing the goods and managing a business

Distribution Expenses – marketing, promotions, and shipping activities
Administration Expenses – systems and control, government compliance, and
other corporate costs

Losses – reduction in the value of assets without benefit to the

business
Accountant’s Perspective
Product costs
• inventoriable and deferred as assets while unsold.
• once sold, the cost of inventory is transferred to cost of goods sold.
• Direct materials (DM), Direct labor (DL), and Factory Overhead (FOH)
• DM and DL are Prime Costs; DL and FOH are Conversion Costs
Accountant’s Perspective
Period costs
• Incurred outside of the production activities
• Incurred to administer a business, sell, or distribute a product,
conduct researches, or attend to a customer needs which are not
directly related to the production activities
• Expensed once incurred
Accountant’s Perspective
Direct product cost vs. Indirect product cist
• Directly identified with the finished goods or services or those that
are directly attributable in the process of making them.
• DM and DL are direct product cost
• FOH is an indirect product cost
Manager’s Perspective
Relevant cost vs. Irrelevant - According to their use in decision-making
process

Direct segment cost vs Indirect segment cost – Classified as to their

relation to the business of segment unit

Avoidable vs. Unavoidable costs – in relation to the occurrence of an

activity
Manager’s Perspective
Controllable or uncontrollable – in relation to the authority of a given
manager

Planned cost vs. Actual Cost – in relation to its incurrence in future

undertaking

Budgeted vs. Standard Cost – in relation to the level of activity being

considered for estimation
Manager’s Perspective
Out-of-pocket cost vs. Non-cash costs

Sunk cost vs Future cost – according to their period of incurrence

Economist’s Perspective
Explicit vs. Implicit cost – according to the manner on how they are
stipulated

Opportunity Cost – given up in favor of another

Imputed Cost – not incurred but implied in a given decision

Incremental vs. Marginal costs – in relation to a particular product or

activity
Economist’s Perspective
Variable Cost - change in total in direct proportion to changes in the
level of production and sales but is constant in a per unit basis

Fixed Cost – those that remain constant in total but inversely changes
on a per unit basis in relation to the changes in the level of quantity,
volume, or activity
Cost Sensitivity

Norway Company provides the following costs structure on its product

Bigwigs:

Total Fixed Costs P 200,000.00

Unit Variable Cost P 20.00

What will happen to fixed costs and variable costs, per total and per unit, if
production levels are zero, 5,000 units, 10,000 units, and 15,000 units?
Cost Behavior and Control Drivers
Costs Fixed Costs Variable Costs

Changes, in direct proportion to

Constant, regardless of
Total Costs the change in the volume of
production level and sales
activity level
Changes, decreases as
Constant, regardless of levels of
Unit Costs production increases and vice
production and sales
versa

Reduce variable cost rate to

Increase production to reduce
reduce total variable costs, that
How to control unit fixed costs, that is why, fixed
is why, variable cost is related to
cost is related to volume
rate or spending
Mixed Costs

These are costs which could not be perfectly classified as pure fixed costs neither pure variable
costs.
Semi-variable costs – change in total but not in direct proportion to changes in the level of
production and sales
Semi- fixed costs – constant in a given level of activity but changes, not in a constant way, when
a new level of activity is reached
Step costs – are constant within a given range of activity and vertically shoots up as it reaches a
given level of activity
Relevant Range

• The behavior of costs is predictable within a

relevant range.
• A band of activity (or stretch of activities)
where the behavior of costs, expenses, and
revenues is valid.
The Learning Curve Theory

• “Experience Curve”
• Based on the simple idea that the time
required to perform a task decreases as the
same person keeps on repeating the same
task twice
Expense Segregation Technique

1. High-low Method
2. Scattergraph Method
3. Least-squares Method
Expense Segregation Technique
High-Low Method

• Traditional method of costs segregation

• In statistics, also called as “range analysis”.
Steps:
1. Compute the Variable Cost Rate (VCR).
VCR = Δ in Costs / Δ in Units Where:
VCR = Variable Cost Rate
Δ = Change
Units = represents direct labor hours,
machine hours, units produced, direct
labor costs, set-up hours, etc,
Expense Segregation Technique
High-Low Method
2. Compute the total fixed costs

TFC = TC - TVC Where:

TFC = Total Fixed Costs
TC = Total Costs
TVC = Total Variable Cost

3. Estimate the costs of a given level of activity

TC = TFC + UVC (in units) Where:

TC = Total Costs
TFC = Total Fixed Costs
UVC = Unit Variable Cost
Expense Segregation Technique
Scattergraph Method

• “Visual Fit Analysis”

• Shows the observation on a graph, gives a chance to make an analysis on the plotted
observation, and draws conclusion on the relationships between the “Y” (cost) and the “X”
base variables.
Expense Segregation Technique
Scattergraph Method

• Used the principles found in regression line

Y = a + bx Where:
Y = dependent variable, the value to be determined
a = constant, or point of intercept
b = variable coefficient of x, or the slope
x = independent variable, the normally given value

TC = FC + VC Where:
Y = Total Cost
TC = FC + UCM a = Fixed Cost
(Units Sold) b = variable cost rate
x = no. of units sold
Expense Segregation Technique
Least-squares method

• Extends the regression line to the other quadrants in the holistic quadrant analysis

Least Squares Equation Direct Formula

Equation 1: Y = a + bx a = ȳ - bx̄

Equation 2: ΣY = na + bΣx b = Σxy – n(x̄)(y) / Σx 2 - n(x̄ 2 )

Equation 3: ΣXY = Σxa + bΣx 2

Expense Segregation Technique
Sample Problem
High-Low Method

The total maintenance costs of Silver Company in the last four months are presented as follows:

Month Machine Hours Maintenance Costs

(Php)
January 7,200 450,000
February 6,800 422,000
March 7,000 440,000
The Company expects to use 7,400 machine hours in May.
April 6,400 418,000
Required:

1. Variable Cost Rate

2. Total Fixed Costs

3. Budgeted Maintenance cost in the month of May

Expense Segregation Technique
Sample Problem
Scattergraph Method

Frances Company is analyzing the fixed and variable components of its materials handling cost in relation to number of shipments received. The
following date were taken from the historical records of the Company.
Months No. of Materials Months No. of Materials
shipments handling costs shipments handling costs
received (Php) received
January 50 45,000 July 45 45,000
February 60 52,000 August 55 54,000
March 90 70,000 September 65 50,000
April 70 55,000 October 80 60,000
May 40 37,000 November 75 58,000
June 60 58,000 December 70 60,000
Using the scattergraph method, (1) compute the fixed costs and the variable cost rate, and, (2) express the regression line equation.
Expense Segregation Technique
Sample Problem
Least-Squares Method

The Chief Finance Officer of Frank Dean Corporation is analyzing the relationship of its electricity costs and the number of batches produced. The
following data are assembled for this purpose:

Month No. of Electricity Month No. of Electricity

Batches Cost (Php) Batches Cost (Php)
January 4 22,000 May 3 21,500
February 7 30,000 June 6 29,000
March 5 25,000 July 8 36,000
April 2 15,000

Determine the total fixed cost and variable costs rate of electricity using the least-squares method by using the:

1. Equation method

2. Direct Formula Method

Questions?
SEATWORK # 2
Thank you