Scribd
Upload
43 views17 pages

Prelim Week2

The document discusses different types of costs including variable, fixed, and semi-variable costs. It provides examples and illustrations of each type of cost. The document also discusses product costs which are inventoriable costs involved in making a product, and period costs which are expenses that are not considered product costs.

Uploaded by

John Paul Morales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
43 views17 pages

Prelim Week2

The document discusses different types of costs including variable, fixed, and semi-variable costs. It provides examples and illustrations of each type of cost. The document also discusses product costs which are inventoriable costs involved in making a product, and period costs which are expenses that are not considered product costs.

Uploaded by

John Paul Morales
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 17

FINANCIAL

MANAGEMENT
ACG016
VARIABLE & FIXED COST
AND
PRODUCT & PERIOD COST
LECTURE WEEK NO.
2
COST CLASSIFICATION
• COST BEHAVIOR – REFERS TO HOW A COST
WILL REACT OR RESPOND TO CHANGES IN
THE BUSINESS ACTIVITY. AS THE ACTIVITY
LEVEL RISES AND FALLS, A PARTICULAR COST
MAY RISES AND FALLS AS WELL – OR IT MAY
REMAIN CONSTANT. TO DISTINGUISH IS
DISTINCTION, COSTS ARE OFTEN
RECOGNIZED AS VARIABLE, FIXED AND SEMI
VARIABLE.
VARIABLE COST
COSTS CHANGES DIRECTLY IN PROPORTION TO ACTIVITY.
EXAMPLS ARE DIRECT MATERIALS AND DIRECT LABOR.
VARIABLE COST = QUANTITY X COST PER UNIT

SAMPLE ILLUSTRATION
PURCHASE OF 100 YARDS OF FABRIC AT A COST OF P50
PER YARD.
VC = 100 YARDS X P50
VC = P5,000
FIXED COST
FIXED COST IS CONSTANT WITHIN THE RELEVANT RANGE
OF PRODUCTION OR WITHIN REASONABLE PERIOD OF TIME.

SAMPLE ILLUSTRATION
MONTHLY RENTAL FOR BUILDING = P50,000 PER MONTH
THE AMOUNT WILL REMAIN THE SAME EVERY MONTH
BECAUSE IT IS WITHIN THE RELEVANT RANGE.
SAMPLE PROBLEM:
Amy has already committed to paying for one year of rent, electricity,
and employee salaries. Therefore, even if the business were to shut
down, Amy would still incur these costs until the year-end. In January,
the business reported revenues of P3,000 but incurred total costs of
P3,800, for a net loss of P800. Amy estimates that February should
experience revenues similar to that of January. Amy’s list of costs for
the bakery is as follows:
• Rent: P1,000
• Employee salaries: P500
• Cost of flour, butter, sugar, and milk: P1,800
• Total cost of labor: P500
Compute the total Variable and Fixed Costs

COSTS VARIABLE FIXED

RENT   1,000.00

EMPLOYEE SALARIES (OFFICE)   500.00

COST OF MATERIALS 1,800.00  

TOTAL COST OF LABOR (PRODUCTION) 500.00  

TOTAL 2,300.00 1,500.00


SEMI VARIABLE COSTS
COSTS THAT CONTAIN FIXED AND VARIABLE ELEMENTS.
EXAMPLES ARE SALARY WITH COMMISSION, WATER AND
TELEPHONE EXPENSE.
SEMI VARIABLE COST = FIXED COST + VARIABLE COST
SAMPLE ILLUSTRATION
SALARY OF A SALES AGENT. THE FIXED PORTION IS THE
BASIC SALARY AND THE VARIABLE IS BASED ON THE
COMMISSION.
A REAL ESTATE BROKER HAS A MONTHLY BASIC SALARY OF
P50,000 AND P10,000 PER EVERY SALES OF HOUSE AND LOT
IN A PRIVATE SUBDIVISION. COMPUTE HIS TOTAL SALARY IF
SHE SOLD 8 UNITS FOR THE MONTH.
SEMI VARIABLE COST = FC + VC
TOTAL SALARY = BASIC SALARY + TOTAL COMMISSION
TOTAL SALARY = P50,000 + 8(P10,000)
TOTAL SALARY = P130,000
COST CLASSIFICATION
• ACCOUNTING TREATMENT – COST IS TREATED
AS EXPENSE DEPENDING ON ITS PURPOSE AND
TIMING. AN EXPENSE IS DEFINED AS THE COST
INCURRED WHEN AN ASSET IS USED UP OR SOLD
FOR THE PURPOSE OF GENERATING REVENUE. THE
TERM PRODUCT COST AND PERIOD COST ARE
USED TO DESCRIBED THE TIMING WITH WHICH
VARIOUS EXPENSES ARE RECOGNIZED.
PRODUCT COSTS
• ASLO CALLED INVENTORIABLE COSTS. INCLUDE ALL THE
COSTS THAT ARE INVOLVED IN ACQUIRING OR MAKING A
PRODUCT. WHEN THE PRODUCT OR THE GOODS ARE SOLD
THE COST ARE RELEASED FROM INVENTORY TO COST OF
GOOD SOLD AND MATCHES AGAINST SALES REVENUE.

EXAMPLE OF PRODUCT COST ARE DIRECT MATERIALS,


DIRECT LABOR AND FACTORY OVERHEAD.
PERIOD COSTS
• ARE ALL COSTS THAT NOT CONSIDERED AS PRODUCT
COSTS. THESE COSTS ARE EXPENSED ON THE INCOME
STATEMENT THE YEAR THEY ARE INCURRED.

EXAMPLE OF PERIOD COSTS ARE SELLING, GENERAL AND


ADMINISTRATIVE EXPENSES.
SAMPLE ILLUSTRATION
Cloud Glasses Company sells glasses that protect the wearer from supposedly dangerous ultra-
blue rays emitted by clouds. The company has the following information:
• Indirect materials used in products: P6,400
• Depreciation on delivery equipment: P10,200
• Gas and oil for delivery trucks: P2,200
• President’s salary: P92,000
• Materials used in products: P120,000
• Labor costs of assembly line workers: P110,000
• Factory supplies used: P24,000
• Advertising expense: P25,000
• Property taxes on the factory: P45,000
• Repairs on office equipment: P1,800
• Factory utilities: P39,000
How Much is the Product Costs and Period Costs?
ITEMS PRODUCT PERIOD
INDIRECT MATERIALS USED IN PRODUCTS P6,400
DEPRECIATION ON DELIVERY EQUIPMENT P10,200
GAS AND OIL ON DELIVERY EQUIPMENT 2,200
PRESIDENT’S SALARY 92,000
MATERIALS USED IN PRODUCTS 120,000
LABOR COST ON ASSEMBLY WORKERS 110,000
FACTORY SUPPLIES 24,000
ADVERTISING EXPENSE 25,000
PROPERTY TAXES ON THE FACTORY 45,000
REPAIRS ON OFFICE EQUIPMENT 1,800
FACTORY UTILITIES 39,000
TOTAL P344,400 P131,200
REFERENCE
• Cabrera, M.E. & Cabrera, G.A. (2017). Management Accounting
(2017 Edition). GIC Enterprises & Co., Inc.

You might also like