COSMAN 1

Topic 2: Cost Classification &

Cost Behaviour
August 14, 2023
Objectives:
● Cost Terminologies
● Cost Classification
● Cost Behavior
● Cost Behavior Analysis
● Cost Estimation
● Correlation Analysis
 1. COST
TERMINOLOGIES
1. Cost Terminologies
● Cost - amount of resources sacrificed (given up or used) in order to obtain some
present or future economic benefit which will promote the profit-making ability of the
enterprise.
● Cost Object - anything for which cost is computed or assigned. (product,
service, customers, department, plant, project, etc.)
● Cost Drivers - anything for which cost is computed or assigned.
● Cost Pool - a grouping of similar cost items.
● Activity - an event, action, transaction, task or unit of work with a specified
purpose.

○ Value Adding Activities

○ Non Value Adding Activities

Cost Pool with Cost Drivers
Example: Coca-Cola
COST POOL COST DRIVER
Ordering & Receiving Materials Number of Purchase Orders
Machine Setup Costs No. of machine hours needed to setup
Assembling Costs No. of Parts
Machining Costs Number of Operating Machine Hours
Personnel No. of labor hours worked
Office Expense Business rent and utilities
Inspecting and Testing Costs Number of Tests
 2. COST
CLASSIFICATION
I. As to Function
1. Manufacturing Costs - all costs incurred in the factory to convert raw
materials into finished goods.
a) Direct Materials- raw materials cost that becomes integral part of the
finished product.
b) Direct Labor- all labor costs related to time spent on products.
c) Overhead- all other costs incurred in the factory aside from direct
materials and direct labor.
2. Non-Manufacturing Costs - all costs which are not incurred in
transforming materials to finished goods.
a) Selling Costs - all costs associated with marketing or selling a product.
b) General and Administrative Costs - all executive, organizational and
clerical costs associated with the general management of the
organization rather than with manufacturing, marketing or selling.
II. As to Timing of Recognition as Expense
1. Product Costs- costs that “attach” or cling to the units that are produced
and are reported as ASSETS until the goods are sold.
a) Direct Materials
PRIME COSTS
b) Direct Labor
CONVERSION COSTS
c) Overhead

2. Period Costs- costs that are recognized as expense in the income

statement on the period in which the cost was incurred.
a) Selling Costs
b) General and Administrative Costs
TEST YOUR KNOWLEDGE – Classify the following costs for an auto manufacturer as
either direct materials (DM), direct labor (DL) , manufacturing overhead (OH) , or period costs (PC).

COST OBJECT COST CLASSIFICATION

Steel used in automobiles DM
Assembly department employee wages DL
Utility costs used in executive building PC
Travel costs used by sales personnel PC
Cost of shipping goods to customers PC
Cost of shipping goods from suppliers DM
Property taxes on assembly plant OH
Glass used in automobiles DM
Maintenance supplies OH
Depreciation on assembly plant OH
Plant manager's salary OH
TEST YOUR KNOWLEDGE – Classify the following costs for an auto manufacturer as
either direct materials (DM), direct labor (DL) , manufacturing overhead (OH) , or period costs (PC).

COST OBJECT COST CLASSIFICATION

CEO’s salary PC
Depreciation on executive building PC
Salary of marketing executive PC
Tires installed on automobiles DM
Advertising PC
 III. As to Traceability to Cost Object.
1. Direct Costs- costs that are related to a particular cost object and can
economically and effectively be traced to the cost object
2. Indirect Costs- costs that are related to a cost object, but cannot
practically, economically, and effectively be traced to that cost object.

Note: Classification of a cost as direct or indirect depends on the cost object specification.

Example: Depreciation Expense in the Coca-Cola company

Cost Object: Coca-Cola Zamboanga City plant
Cost Classification: Direct Costs
Cost Object: Coke Mismo
Cost Classification: Indirect Cost
IV. As to Managerial Influence
1. Controllable Costs - costs that are subject to significant influence by a
particular manager within the time period under consideration.
2. Noncontrollable Costs- costs over which a given manager does not have
significant influence.

V. For Decision Making

1. Relevant Costs - future costs that will differ under alternative courses of action.
2. Differential Costs- difference in costs between any two alternative courses of
action.

3. Opportunity Costs- income or benefit given up when one alternative is selected

over another.
4. Sunk Costs- costs already incurred and cannot be changed by any decision
made now or to be made in the future.
 3. COST
BEHAVIOR
Management Accounting vs Financial
Accounting:
INCOME STATEMENT PRESENTATION:

Financial Accounting Management Accounting

(by function) (by behavior)
Cost Behavior- involves understanding how costs change in response
to changes in an activity like production or sales.

V. As to Cost Behavior
1. Variable Costs– total cost increases as production increases but remains
constant on a per unit basis. (raw materials, hourly wages, sales commission)
2. Fixed Costs- total cost remains constant throughout production but changes
inversely to the change in activity level on a per unit basis. (salaries,
depreciation using straight line method, insurance)
3. Mixed/Total Costs- composed of both variable and fixed costs.

COST EQUATION : TC = FC + VC
Cost Behavior Pattern Summarized (assume activity is based on
production):

TOTAL COST PER UNIT COST

FIXED Decreases as production increases
Constant
(indicating INVERSE relationship)
Increases as production increases
VARIABLE Constant
(indicating DIRECT relationship)
Increases (less proportionately vs Decreases (less proportionately vs
MIXED total variable costs) as production unit fixed costs) as production
increases increases
 COSMAN 1
Topic 2: Cost Classification &
Cost Behaviour Continuation
August 23, 2023
Objectives:
● Activity
● Reminders / Important points
● Least Squares Regression Analysis
● Long Exam
1. ACTIVITY
Exercise
1. Which of the following costs is most likely a variable cost?:
a) P 4 per unit at 10 units; P 4 per unit at 20 units; P 4 per unit at 30 units
b) P 12 per unit at 10 units; P 6 per unit at 20 units; P 4 per unit at 30 unit
c) P 3 per unit at 10 units; P 2.5 per unit at 20 units; P 2.33 per unit at 30 units
d) P 4 per unit at 10 units; P 3 per unit at 20 units; P 2.67 per unit at 30 units
ANSWER: A
2. In cost analysis using the line equation Y = a + bX, "a" (total
fixed cost) is regarded as the:
a) Dependent Variable
b) Independent Variable
c) Slope of the line
d) Y-axis intercept
ANSWER: D
Exercise
3. Which of the following statements is true?
a) The higher is the production within the relevant range, the higher is the variable cost per unit
b) The higher is the production within the relevant range, the higher is the fixed cost per unit
c) The lower is the production within the relevant range, the lower is the total fixed cost
d) The lower is the production within the relevant range, the lower is the total variable cost
ANSWER: D

4. Determine the TRUE statement about managerial accounting:

a) It complies with external reportorial requirements
b) It is concerned with reporting to external users of accounting information
c) Reports are often based on estimates and are seldom useful for everything other than
the purpose for which they are prepared
d) It specifically covers various cost accumulation procedures such as job order costing,
process costing, standard costing, backflush costing and activity-based costing (ABC)
ANSWER: C
Exercise
5. Which of the following is the best example of a variable cost?
a) Property Taxes
b) Interest Charges
c) Cost of Raw Materials
d) Corporate President’s Salary
ANSWER: C

6. OhmyV33nus Company’s average cost per unit is the same at

all levels of volume. Which of the following is true?
a) OhmyV33nus must have only variable costs.
b) OhmyV33nus must have only fixed costs.
c) OhmyV33nus must have some fixed costs and some variable costs.
d) OhmyV33nus cost structure cannot be determined from this information.
ANSWER: A
Exercise
7. An item or event that has a cause-effect relationship with the
incurrence of a variable cost is called a:
a) Mixed Cost.
b) Predictor
c) Direct Cost.
d) Cost driver.
ANSWER: D
8. The increased use of automation and less use of the work
force in companies has cause a trend towards an increase in:
a) Both variable and fixed costs.
b) Fixed costs and a decrease in variable costs.
c) Variable costs and a decrease in fixed costs.
d) Variable costs and no change in fixed costs.
ANSWER: B
Exercise
9. Cost estimation is the process of:
a) Estimating the relationship between costs and the cost drivers that cause those costs.
b) Documenting costs in terms of direct and indirect costs
c) Summarizing past costs into fixed and variable components.
d) All of the given choices.
ANSWER: A

10. Within the relevant range, the difference between variable

costs and fixed costs is:
a) Variable costs per unit fluctuate and fixed cost per unit remains constant.
b) Variable cost per unit is constant and fixed cost per unit fluctuates.
c) Both total variable cost and total fixed cost are constant.
d) Both variable cost and total fixed cost fluctuate.
ANSWER: B
Exercise
11. For analysis purposes, the high-low method usually produces
a(n):
a) Reasonable estimate
b) Precise estimate
c) Overstated estimate
d) Understated estimate
ANSWER: A
Exercise
12. Irene Company has the following cost components for 100,000
units of product for the year:
Direct Materials P 200,000
Direct Labor 100,000
Manufacturing Overhead 200,000
Selling and administrative expenses 150,000
All costs are variable, except for P 100,000 of manufacturing
overhead and P 100,000 of selling and administrative expenses.
The total costs to produce and sell 110,000 units for the year are:
a) P715,000
b) P695,000
c) P650,000
d) P540,000
ANSWER: B
Exercise
13. Jungwon Company estimated its materials handling cost at two
activity levels as follows:
Kilos Handled Cost
80,000 P 160,000
60,000 132,000

What is Jungwon’s estimated cost for handling 75,000 kilos?

a) P150,000
b) P157,000
c) P153,000
d) P165,000
ANSWER: C
Exercise
14. Soobin Corporation has developed the following flexible budget
formula for annual indirect labor costs:
Total Cost = P480,000 + P5.00 per machine hour

Based from the data, operating budgets for the current month are
based on 20,000 machine hours of planned machine time. Indirect
labor costs included in this planning budget are:
a) P 48,333
b) P 100,000
c) P 580,000
d) P 140,000
ANSWER: D
Exercise
15. Using statistical normal relationships, the least-squares
method uses which of the following equations?

ANSWER: D
Exercise
2. REMINDERS
Points to highlight:
● Correlation Analysis
○ Coefficient of correlation (r) = measures the relative strength of linear
relationship between two (2) variables. Its value ranges from – 1.0 to + 1.0:
“r” Linear relationship Scatter diagram /
graphical
representation
+1.0 Direct / Positive Upward Sloping Line
0 None No apparent pattern
-1.0 Inverse / Negative Downward Sloping
Line

○ Coefficient of determination (r2) = indicates the degree to which the behavior

of independent variable predicts the dependent variable. The closer r2 is to 1.0,
the better (i.e., more confidence) the independent variable predicts the
behavior of the dependent variable.
Points to highlight:
● Pros and Cons of high-low method
○ Pros: Simple and Easy to Use

○ Cons: Disregards other data because you only use two points. May not be
representative of the entire data set.
 3. LEAST
SQUARES
REGRESSION
METHOD
● Least Squares Regression Method- is a method of cost estimation. A statistical
technique that determines the "line of best fit" for all the data points by
minimizing the sum of the squared deviations between line and the data points.
Regression analysis is classified as:

● In layman’s term: It is a method that considers all the data points observed and
draws a line that best represents the data points.
● Formula:
● How was the formula derived? Considers all the data points. Hence equation 1
simply adds all these data points:
y = a + bx
y = a + bx
y = a + bx

● Equation 2: multiply the cost function (y = a + bx) by ∑x

 X Y

Low
High

Analysis: Total Overhead Costs will now

Use the PIA Method be mixed + mixed
Question: What constitutes the FC of
Total Overhead cost? What about VC?
Using Least Squares Regression Method
Will high low method always equal to least squares regression
method?
1. Not all the time. The problem just happens to show the same cost
formula. It just simply shows that least squares regression method is a
very accurate method.

Pros and Cons of Least Squares Regression method?

1. Pros- very accurate method. Considers all points. Covers the cons of high
low method
2. Cons- very long. More prone to error when solving
What’s next:
● First Long exam
 COSMAN 1
Topic 1: Intro to Cost
Management & Accounting
August 9, 2023
Objectives:
● MS in the CPALE Board Exam
● Management Accounting
● Management Accounting vs Financial Accounting
● Management Decision-Making
● Controller vs Treasurer
● Management Accounting vs Financial
Management
1. MS in the CPALE Board Exam:
OCTOBER 2022 and MAY 2023 CPALE SYLLABUS:
Part 1: Management Accounting (40 items or 57%)
Part 2: Financial Management (25 items or 36%)
Part 3: Economics (5 items or 7%)

TOTAL: 70 items
1. MS in the CPALE Board Exam:
Part 1: Management Accounting (40 items or 57%)
● Cost Concepts & Behaviour
● Cost-Volume-Profit Analysis
● Standard Costing & Variance Analysis
● Variable Costing vs Absorption Costing
● Financial Planning & Budgets
● Responsibility Accounting & Transfer Pricing
● Balanced Scorecard
● Relevant Costing & Differential Analysis
1. MS in the CPALE Board Exam:
Part 2: Financial Management (25 items or 36%)
● Financial Statement Analysis
● Working Capital Management
● Capital Budgeting
● Risks & Leverage
● Capital Structure & Long-term Financing Decision
● Financial Markets
Part 3: Economics (5 items of 7%)
● Macroeconomics
● Microeconomics
2. Management Accounting:
MANAGEMENT ACCOUNTING – the use of accounting
information by company management to make rational
economic decisions in performing its function of planning,
organizing, and controlling business operations.

Financial Reports
ACCOUNTING
INFORMATION
Management
 3. Management Accounting vs Financial
Accounting:
FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING
1. User of information Primarily for external users Exclusively for internal users
2. Information Source Internal data Internal data and external users
3. Purpose/End Result Financial reporting & compliance Management decision making
4. Guiding Principles Accounting Standards (PFRS) Management wants and needs
5. Type of Information Primarily monetary in nature Monetary and non-monetary
6. Time Orientation Historical Future-oriented using past data
7. Emphasis of Reports Reliability (precision, verifiability) Relevance (timeliness)
8. Amount of details Aggregated and simplified Detailed and expensive
9. Focus of Information Business as a whole Mainly various segments
10. Frequency of Reports Periodic (annually, quarterly) Whenever needed
11. Optional vs. Mandatory Mandatory (public entities) Discretionary & optional
12. Unifying Model Assets = Liabilities + Equity No unifying model or equation
3. Management Accounting vs Financial
Accounting:
INCOME STATEMENT PRESENTATION:

Financial Accounting Management Accounting

(by function) (by behavior)
3. Management Accounting vs Financial
Accounting:
How does Cost Accounting come into the equation?

Cost Accounting, while a separate discipline, is a subset of both

management and financial accounting.
4. Management Decision Making:
Managers are usually responsible for making decisions based on these basic
MANAGEMENT FUNCTIONS:
deciding on company goals & objectives and figures out how to achieve them.
PLANNING
(Associated terms: Road mapping ; goal setting)
deciding on how to use company resources to put plans into action.
ORGANIZING
(Associated terms: Directing & motivating ; staffing & subordinating)
deciding on what corrective actions to do should there be any difference
CONTROLLING between actual results and planned results
(Associated terms: Monitoring ; feedback mechanism)

Decision-making is an inherent function of management as all management

functions would require a certain level of decision-making; this makes
management accounting information useful in all stages of management.
4. Management Decision Making:
CONTROLLER- the chief management accounting executive who is
responsible for the accounting aspect of management control and whose job
normally covers financial reporting, cost and management accounting,
accounting information system, financial analysis, special studies, among
others.

is the authority to give orders (e.g. VP-operations over operations manager)

LINE FUNCTION exercises direct downward authority over line departments
NOTE: line managers are directly involved in achieving company objectives.
is the authority to advise but not to command others
Is commonly exercised laterally or upward in an organization
STAFF FUNCTION
NOTE: staff managers provide support via advice and assistance to other
managers.
4. Management Decision Making:
QUESTION:
How do you classify a controller in the following scenarios:

○ In relation the entire organization

○ In relation to the controller’s own department

LINE STAFF

VP - Operations VP - Finance

Controller Treasurer
Operations Manager
Accounting Treasury
Department Department
5. Controller vs Treasurer
To avoid incompatible duties being assigned to a single officer, a controller
(recording function) must not hold at the same time the position of a treasurer
(custody function). Consider the following distinction:

Planning and control, Financial Reporting, Evaluating and consulting, Tax

CONTROLLER
administration, Government reporting, Protection of assets, Economic appraisal
Provision of capital, Investor relations, Short-term financing, Banking and
TREASURER custody, Credit and collections, Investments, Insurance
6. Financial Management
FINANCIAL MANAGEMENT- concerns the duties of the financial manager, who
is responsible for making significant corporate investment and financing
decisions.

GOAL OF FINANCIAL MANAGEMENT:

Modern managerial finance theory works under the premise that the primary
goal of the firm is to maximize shareholders’ wealth, rather than just to
maximize profit. The financial manager acts in the shareholders’ best interests
by making decisions that maximize the market value of the company stocks
(i.e., wealth creation).
6. Financial Management

ROLE OF FINANCIAL MANAGERS:

The role of a financial manager may include financial analysis and planning,
investment decisions, financing and capital structure decisions, management
of financial resources and risk management. No single person is tasked for all
the responsibilities of a financial manager. These tasks are dispersed
throughout the firm. In large firms, financial responsibilities are usually carried
out by the treasurer and/or the controller while the chief financial officer (CFO)
usually oversees their work.
6. Financial Management
BASIC PRINCIPLES IN FINANCIAL MANAGEMENT:
● Risk-return trade-off: a company does not take additional risks unless it
expects to be compensated with additional returns.
● Time value of money : a peso received today is worth more than a peso
received in the future.
● Cash – not profit – is king.
● Incremental cash flows : it’s only what changes that counts.
● Tax consideration : virtually all financial decisions are influenced by the
effect of taxes.
● Ethical behavior – doing the right thing – is always relevant.
Exercise
1. The main purpose of management accounting is to:
a) Assess past performance
b) Project future transactions
c) Help managers make decisions
d) Help investors & creditors make decisions
ANSWER: C
2. The main purpose of management accounting is to:
a) Is primarily concerned with providing information to external users
b) Tends to summarize information more than financial accounting
c) Is more concerned with precision than timeliness
d) Is more future oriented than financial accounting
ANSWER: D
Exercise
3. Management accounting is similar to financial accounting in that:
a) Both are concerned with monetary information only
b) Both classify reported information in the same way
c) Both focus on business as a whole
d) Both deal with economic events
ANSWER: D

4. Determine the TRUE statement about managerial accounting.

a) It complies with external reportorial requirements
b) It is concerned with reporting to external users of accounting information
c) Reports are often based on estimates and are seldom useful for everything other than
the purpose for which they are prepared
d) It specifically covers various cost accumulation procedures such as job order costing,
process costing, standard costing, backflush costing and activity-based costing (ABC)
ANSWER: C
Exercise
5. What is the most accurate statement:
a) Financial accounting is a subset of cost accounting
b) Management accounting is a subset of cost accounting
c) Cost accounting is a subset of both management & financial accounting
d) Management accounting is a subset of both cost and financial accounting
ANSWER: C

6. Decision-making is required in which of the following

management function(s)?
a) Planning
b) Planning and control
c) Planning and organizing
d) Planning, organizing, and control
ANSWER: D
Exercise
7. Directing and motivating refers to:
a) The setting of objectives and the identification of methods to achieve those objectives
b) The function of management that compares planned results against actual results
c) The management function that involves overseeing day-to-day activities
d) None of the choices
ANSWER: C

8. “Budgets” and “performance reports” respectively correspond

to these management functions.
a) Planning and controlling
b) Planning and organizing
c) Controlling and planning
d) Organizing and controlling
ANSWER: A
Exercise
9. The management control process contains the following four
sequential steps, including:
A) Measuring actual performance
B) Establishing standards of performance
C) Implementing a program of corrective action
D) Comparing actual performance with standards
What is the proper sequence of these activities?
a) A, B, C, D
b) A, B, D, C
c) B, A, C, D
d) B, A, D, C
ANSWER: D
Exercise
10. The controller primarily occupies a:
a) Line position
b) Staff position
c) Non-supervisory rank-and-file position
d) Position with very little influence in management decision-making
ANSWER: B

11. A staff position is:

a) Not essential in a business organization
b) Exercised through giving orders to subordinates
c) Directly involved in achieving the basic objectives of the organization
d) Supportive in nature since it provides assistance to other company segments
ANSWER: D
Exercise
12. Which of the following statements is FALSE concerning line and
staff functions?
a) Both line and staff functions are depicted on the organizational chart.
b) Line functions are directly related to the basic objectives of an organization.
c) Staff managers always have authorities over persons occupying line functions.
d) Line units or departments tend to have more employees than staff units or departments
ANSWER: C

13. For a hospital, what type of position (line vs. staff) is each of
the following?
a) Emergency room manager (staff); Human resources manager (staff)
b) Emergency room manager (staff); Human resources manager (line)
c) Emergency room manager (line); Human resources manager (staff)
d) Emergency room manager (line); Human resources manager (line)
ANSWER: C
Exercise
14. Which of the following is most likely a LINE position?
a) VP for Research of a conglomerate firm
b) Store manager of a retail convenience outlet
c) Chief financial officer of a merchandising company
d) Human resources manager for an educational institution
ANSWER: B

15. CONTROLLERS are usually not concerned with:

a) Government reporting
b) Tax administration
c) Investor relations
d) Data processing
ANSWER: C
Exercise
16. TREASURERS are usually not concerned with:
a) Tax planning
b) Short-term financing
c) Cash custody and banking
d) Credit extension and collection of bad debts
ANSWER: A

17. Which of the following is not a function of financial management?

a) Financing
b) Internal control
c) Capital budgeting
d) Risk management
ANSWER: B
Exercise
18. The primary goal of financial management is to:
Tax planning
a) To maximize profit
b) To minimize the risk
c) To maximize the return
d) To maximize shareholders' wealth
ANSWER: D
19. Profit maximization does not take into consideration:
a) Risk and EPS
b) Risk and cash flow
c) EPS and stock price
d) Cash flow and stock price
ANSWER: B
Exercise
20. The long-run objective of financial management is to:
Tax planning
a) Maximize market share
b) Maximize earnings per share
c) Maximize return on investment
d) Maximize the value of the firm’s common stock
ANSWER: D
Topic for Next Week
● Cost terminologies
● Cost Classification according to:
○ Function
○ Timing of Recognition as Expense
○ Managerial Influence
○ Time frame perspective
○ For decision making
● Cost behavior
○ Total Cost Function
○ Fixed, Variable, and Mixed Cost
● Cost behavior Analysis
● Cost Estimation: Segregating Variable & Fixed Cost
● Correlation Analysis