Cost Concepts, Terminologies and Behavior Other Terminologies

Cost – a sacrifice of resources. 1. Opportunity cost - the value of the next best
alternative forgone.
2. Sunk Cost - Costs already incurred that cannot be
Two Types of Manufacturing costs/ Cost recovered (should not affect future decisions).
3. Committed Cost – These are long-term, fixed costs
Classification Based on Function
that a company is obligated to pay, regardless of
Period Cost Product Cost business activity.
Cost related to Non-manufacturing cost related 4. Discretionary Cost – costs that management can
inventory. to the firm. adjust or eliminate in the short term without major
Unsold units – Asset Fully expensed in the period impact on operations.
(as Inventory) incurred, regardless of sales. 5. Controllable Cost – Costs that a manager has the
Sold units – Expense authority to influence within a given period.
(COGS) 6. Non-Controllable Cost – costs that cannot be
Includes all raw a. Marketing & Advertising influenced by a specific manager because they are
materials used, labor – expenses incurred in determined by external factors or higher
cost incurred, and all promoting the entity’s
management.
other indirect cost. product and services.
7. Relevant Cost - Costs that affect decision-making
b. Selling and
Administrative 67(e.g., differential or avoidable costs)
– include salaries of sales 8. Irrelevant Cost - Costs that do not impact decisions
personnel and delivery (e.g., past expenses)
expenses. 9. Marginal Cost - The additional cost of producing
c. Administrative expenses one more unit
– includes all office
utilities depreciation of
office PPE, repair and Cost Classification Based on Traceability
maintenance of office
• Direct Costs – Costs that can be directly traced to a
PPE, and all other
product, department, or project (e.g., direct
expenses in the office.
materials, direct labor).

Components of Product Cost • Indirect Costs – Costs that cannot be directly

traced and are allocated (e.g., factory rent,
supervisor salaries).

Details of manufacturing Cost Flow

• Product costs are recorded in inventory when costs
are incurred.
• A manufacturing company has three inventory
accounts:
TMC
1. Raw Materials Inventory: Materials
Non-Manufacturing Costs purchased to make a product.
2. Work-in-Process Inventory: Products
➢ Recognized as expense when the cost are incurred. currently in the production process, but
not yet completed.
3. Finished Goods Inventory: Completed
products that have not yet been sold.
Inventory Accounts – The Balance Sheet ABC Co.
Cost of Goods Manufactured Statement
For the year end December 31, 2000x(P000)

Beg. WIP Inventory, Jan. 1

Manufacturing cost during year:
DM:
Beg. Inventory, Jan. 1
Add: Purchases
DM available
Cost Flow through the Statement Less: End. Inventory, Dec. 31
ABC Co. DM used
Income Statement DL
For the Year Ending December 31, 200x Manufacturing Overhead
Sales Total manufacturing cost
Less: COGS Beg. WIP
Gross Margin Less: End. WIP Inventory, Dec. 31
Less: Marketing & Administrative Expenses COGM
Operating Profit

Cost Classifications Based on Behavior

➢ Fixed Costs – Costs that remain constant
regardless of production levels (e.g., rent, salaries).

ABC Co. ➢ Variable Costs – Costs that change in proportion to

production (e.g., raw materials, direct labor).
Cost of Goods Sold Statement
➢ Mixed Costs – Costs that have both fixed and
For the year end December 31, 2000x(P000) variable components (e.g., utility bills with a base
charge plus usage fees).
Beg. FGI, Jan. 1
➢ Step cost -- cost that remains constant within a
COGM certain level of activity but increases (or "steps
up") when production or business activity
FGAS
surpasses a specific threshold.
Less: End. FIG, Dec. 31

COGS
 Cost Equation Methods of Separating Mixed Cost:

Y = a + bx
1. High-Low Method -- a simple way to separate fixed
and variable costs from a mixed cost. It uses the
Where:
highest and lowest activity levels to estimate the
y = Total cost - overall cost incurred for production. variable cost per unit and fixed cost.
a = Total fixed cost - Costs that do not change with the Formulas:
level of production
b = VC per unit - cost incurred for each additional unit
produced
x = Volume of activity/ # of production - total quantity of
goods produced. FC = Total Cost – (VC/unit x Activity Level)

Sample Problem:
How much is the total cost to manufacture products with
variable manufacturing cost per unit of ₱25 and total cost 2. Least Squares Regression Method -- a statistical
manufacturing fixed cost of ₱40,000 at the following approach used to estimate the relationship
production levels: between total costs and activity levels. It helps
separate fixed and variable costs more accurately
a. 2,000 units than the high-low method by considering all data
b. 4,500 units points, not just the highest and lowest values.
c. 7,250 units
Formula:
Solutions:
a)
y = a + bx
y = 40,000 + 25 (2,000 units)
y = 40,000 + 50,000 High Low Method

y = ₱90,000 Sample Problem #1

Jimin Corporation builds tabletop replicas of some of the

most famous tourist attractions in Seoul. The company is
b)
highly automated where maintenance cost shows as a
y = a + bx significant expense. The owner decided to use machine
hours as the basis of predicting maintenance cost and has
y = 40,000 + 25 (4,500 units)
gathered the following data for the following eight(8)
y = 40,000 + 112,500 weekly operations:
y = ₱152,500 Week Machine Hours (x) Maintenance Cost (y)
1 3,000 9,800
2 4,500 12,900
c) 3 8,000 18,100
4 6,000 13,500
y = a + bx
5 9,000 24,800
y = 40,000 + 25 (7,250 units) 6 3,500 10,400
7 5,500 13,000.
y = 40,000 + 181,250
8 7,000 16,000
y = ₱221,250
Using the high-low method, determine the following: Using the High-Low Method:

a. Variable cost per unit Using Low Cost and Activity Using High Cost and
b. Total fixed cost Activity
c. Total expected maintenance cost on 8,100
y = a + bx y = a + bx
machine hours.
9,800 = a + 2.5 (3,000) 24,800 = a + 2.5 (9,000)
Step 1. Determine the highest and lowest activity and the 9,800 = a + 7,500 24,800 = a + 22,500
costs associated there unto:
a = 9,800 – 7,500 a = 24,800 – 22,500
Highest Activity = 9,000mh
a = ₱2,300 a = ₱2,300
Cost at Highest Activity = ₱24,800

Lowest Activity = 3,000mh

c.)
Cost at Lowest Activity = ₱9,800
y = a + bx

y = 2,300 + 2.5 (8,200)

Step 2: Obtain the variable cost per unit by dividing the
change in cost over the change in activity: y = 2,300 + 20,500

a.) y = ₱22,800

Answers:

1. Variable cost per unit = ₱2.5 per machine hour

2. Total Fixed Cost = ₱2,300
3. Total Maintenance cost at 8,200 machine hours =
₱22, 80

Least Square Regression Method

Step 3: Obtain the total fixed cost by removing the

variable cost component in the total costs:

b.)
Step 1: Prepare a table calculating x (activity), y (total
Highest Activity Lowest Activity cost), xy and x.
Total Costs ₱24,800 ₱9,800
Week Machine Maintenance xy 𝐗𝟐
Less: Variable Hours (x) Cost (y)
costs 1 3,000 9,800 29,400,000 9,000,000
High 9,000mh x ₱22,500 2 4,500 12,900 58,050,000 20,250,000
₱2.50 per mh 3 8,000 18,100 144,800,000 64,000,000
4 6,000 13,500 81,000,000 36,000,000
5 9,000 24,800 223,200,000 81,000,000
Low 3,000mh x ₱7,500 6 3,500 10,400 36,400,000 12,250,000
₱2.50 per mh 7 5,500 13,000. 71,500,000 30,250,000
Fixed cost ₱2,300 ₱2,300 8 7,000 16,000 112,000,000 49,000,000
TOTAL ∑x = ∑y = ∑xy = ∑𝐱 𝟐 =
46,500 118,500 756,350,000 301,750,000
Step 2: Substitute the computed amounts in the Let’s Compare:
following equation to get variable per unit (b):
High-Low Least Square
Method Regression Method
Variable cost per unit (b) 2.50 2.15
Total Fixed Cost (a) 2,300 2,315.63

Cost Volume Profit Analysis

Shortcut:
- Is useful for profit planning by way of systematic
level of activities.
- a financial analysis tool used to determine how
changes in costs, sales volume, and price affect
a company's profit. It helps businesses make
decisions related to pricing, production levels,
and cost control.

Components of CVP Analysis

1. Selling Price (SP) – The price at which a product is
sold.

2. Variable Costs (VC) – Costs that change in direct

proportion to the level of production (e.g., raw
materials, direct labor).

3. Fixed Costs (FC) – Costs that remain constant

regardless of production levels (e.g., rent, salaries).

4. Contribution Margin (CM) – The amount

remaining from sales revenue after deducting
Step 3: Substitute b to any equation to get the a (fixed variable costs.
cost)
CM = Sales Revenue – Total Variable Costs
Y = a + bx

118,500 = 8a + 46,500 (2.15)

118,500 = 8a + 99,975
Sales 100% 100% 200,000 100,000
118,500 – 99,975 = 8a
− VC (20%) (20,000)
18,525 = 8a
CM 80% 80,000 160,000 80,000
8 = 8
− FC
a = 2,315.63
Profit

Cost Equation:

Y = 2,315.63 + 2.15x CM Ratio = CM / Sales

80,000 / 100,000 = 80%
5. Break Even Point (BEP) - a level of act in units (break- Questions:
even volume) or in pesos (break-even sales) at which total 1. Break-even point in units
revenues equal to total cost. At the break-even point, there 2. Break-even point in pesos
3. Required sales in units to earn a target profit of
is neither point nor a loss. ₱90,000
4. Margin of safety in units if the company
- The level of sales where total revenue equals total costs expects to sell 600 units.
(zero profit or loss). 5. Required sales revenue (in pesos) to achieve a
15% return on sales.
▪ In units:
Solutions:
BEP = Total Fixed Cost / CMU
Step 1: Compute CM per unit
▪ In sales revenue: CMU = Selling Price per Unit – Variable Cost per Unit
BEP = Total Fixed Costs / CMR
CMU = ₱500−₱200

CMU = ₱300
▪ Contribution Margin Ratio (CMR):
CMR = CM / Sales revenue
Step 2: Break-even Point in Units

BEP = Total Fixed Cost / CMU

6. Target Profit Analysis - Determines the sales volume BEP = ₱150,000 / ₱300
required to achieve a specific profit.
BEP = 500 units

Step 3: Break-even Point in Pesos

BEP in Pesos = BEP in Units x Selling Price per Unit

BEP in Pesos = 500 x ₱500

BEP in Pesos = ₱250,000

Step 4: Unit Sales with Target Profit

Uses of CVP Analysis A. Without Tax
• Setting selling prices for products/services.
• Determining the minimum sales volume needed to
avoid losses.
• Evaluating the impact of cost changes on
profitability.
• Making production and sales mix decisions. Unit Sales with Target Profit = 800 units

Sample Problem of CVP Analysis b. With Tax

ABC Company sells a product for ₱500 per unit. The
variable cost per unit is ₱200, and the fixed costs amount
to ₱150,000 per month. The company is subject to a 30%
income tax rate.
Now, use the target Profit Formula: Step 7: Sales Revenue for 15% After Tax ROS

Unit Sales with Target Profit = 929 units

Before Tax ROS = 21.43%

Step 5: Margin of Safety (MOS) in units
Now, Compute the requires sales revenue using the
MOS = expected Sales – Break-even Sales
formula:
MOS = 600 – 500

MOS = 100 units

Step 6: Sales Revenue for 15% ROS

Step 6.1: Compute for CMR

CMR = CMU / Selling Price per Unit

CMR = ₱300 / ₱500 Total Sales Revenue = ₱388,843.52

CMR = 0.6 or 60% Final Answers:

1. Break-even point in units = 500 units

Step 6.2: Compute Required Sales Revenue
2. Break-even point in pesos = ₱250,000
3. Required sales to earn ₱90,000 after-tax profit =
929 units
4. Margin of safety in units = 100 units
5. Required sales revenue to achieve 15% after-tax
ROS = ₱388,843.52

Peso Sales with Target ROS = ₱333,333.33

Sales Mix
– two or more products.

Example:

Chair Table Total

Unit Sales 60 units 15 units 75 units
Sales (1200/60) 20 1200 12.5 187.50 1387.50
Variable Cost (VC) (17.5) (1050) (7.5) (1125.50) (1162.50)
Contribution Margin (CM) 2.5 150 5 75 225
Fixed Cost (FC) (90)
Profit 135

Chair Table Total How:

CMU 2.50 5.00 7.50 80% = 60 units / 75 units
SM 80% 20% 40% 20% = 15 units / 75 Units
WACM 2 1 3 40% = 3 / 75 units

BEP Units = Fixed Cost / CMU

BEP units = 90 / 3
BEP Units = 30 units

30 units of 2/3 = 20 (30 units x 80%) = 24 CHAIR

30 units of 1/3 = 10 (30 units x 20%) = 6 TABLE

Chair Table Total

Sales 20 x 24 480 10 x 7.5 75 555
VC 17.50 x 24 420 6 x 7.5 45 465
CM 60 30 90
FC 90
Profit 0