COST CONCEPTS, CLASSIFICATIONS, AND  Operating expenses like marketing and

COST BEHAVIOR advertisement, administrative and selling

expenses.
COST
 A cost reflects the amount of resources sacrificed in  What can we do to eliminate other operating
order for the company to achieve a certain objective
such as creation of goods or rendering of services in
expenses that does not ad value to the company?
order to earn revenues.  Are there other expenses we need to consider
 A service provider needs to purchase supplies and that could help in our operation?
materials, and pay salaries to employees in order to  Our office rent increased this month as compared
render service and earn revenues. last month, what is the reason?
 A merchandiser has to first purchase the goods that
they need to sell in order to earn revenues. Cost based on timing of matching w/ revenues
 A manufacturer spends for materials, labor payroll,
and other factory burden to transform raw materials PRODUCT COST
to finished goods and eventually sells those goods to Cost assigned to products until they are sold.
earn revenue.  Goods not yet completed – WIP inventory
 Goods completed – FG inventory
Cost on managerial emphasis
 Goods sold – Cost of goods sold
Cost information coming from cost accounting is a
vital tool in order for managers to plan and control
 What are the cost that we include as product
operations effectively. This stresses the need for
costs that, in turn, becomes an inventoriable cost,
timely and relevant cost information.
and becomes cost of goods sold when sold to
 Cost analysis and management should come after
customers?
making cost information available.
 Techniques like budgeting and forecasting helps
PERIOD COST
the entity to plan the future and subsequently
Cost incurred and recognized based on time periods.
control operations through performance
 Operating expenses like rent, salaries, and other
evaluation and variance analysis when actual
administrative and general expenses.
data becomes available.
 Generally, manager would have to think ways in
 Is there a proper segregation of payroll as to
order to reduce costs and other expenses on the
laborers and payroll as to office staff?
standpoint of increasing profits. Strategically
 Is there a proper segregation of factory facility
however, increases or decreases in cost should
rent and office rent?
support the strategic positioning set by the entity.
 What cost shall be reviewed that should be
 On strategic management position, management
included as product costs rather than as period
functions, cost management, planning, and
cost and vice-versa?
decision making should be in line with the
entity’s vision, mission, goals, and objectives.
Cost Traceability
 Cost management and control is a highly
important factor in achieving, maintaining, and
DIRECT COST
growing the entity’s profitability.
Cost that are traceable to a particular product line,
 When an entity is continuously profitable, value
segment, department, division, or branch.
continuously increases, which goes back to the
 Assuming an entity reviews all costs incurred in
importance of the alignment of cost control with
a specific department, all materials and labor
the entity’s vision and mission. A manager
costs identified in that department are direct costs.
should always put cost management in mind on a
Salaries of supervisor in that department is still
strategic standpoint.
direct cost in that department (because its
traceable there).
Cost based on functional areas
INDIRECT COST
MANUFACTURING COST
Cost that are not directly traceable to a particular
Cost that is incurred in the entity’s operations on
product line, segment, department, division, or
producing products and services.
branch.
 Direct materials
 If all product lines has only one production head,
 Direct labor
the salary of the production head will be
 Manufacturing overhead
allocated to the different product lines, which
make it indirect. However, the salary of the
 How can we lower down our cost of production?
production head is still a direct cost if we will be
 What is the standard labor hours in the
talking about the whole production department.
production of Product A?
 How many units of Material X shall we purchase
Cost Controllability
next period to avoid production delays?
CONTROLLABLE COST
NONMANUFACTURING COST
Cost that can be influenced by the manager on how it
Cost that is incurred in the entity’s operations on
will be incurred and can be altered in the short run.
making the product known, selling them, and other
 Power or authority incurs costs.
administrative expenses.
 Manager has freedom to set levels and decide for • P40,000 is irrelevant since both alternatives will
price, quality, and quantity, and even the supplier incur the same fixed cost.
of the materials and other inputs.
MARGINAL COST
 Direct materials and direct labor Extra cost incurred when additional unit is produced.
 Donations and other contributions It determines the quantity most efficient to produce.
 Training costs
 Bonuses  Marginal cost of production is an important
concept in managerial accounting, as it can help
UNCONTROLLABLE COST an organization optimize their production.
Costs that cannot be influenced by the manager on  Fixed costs are constant regardless of production
how it will be incurred. It can be altered in the long levels, so higher production leads to a lower
run. fixed cost peer unit as the total is allocated over
 Allocated to the department under his leadership more units.
 Costs incurred traceable to the specific  Variable cost change based on production levels,
department but is incurred because it is decided so producing more units will add more variable
by the higher authority or management. costs.

 Depreciation
 Insurance
 Allocated overhead
 Allocated rent

Cost as to decision making

OPPORTUNITY COST
These are the benefits forgone in choosing one
alternatives over the other course of action.
 Spending for a cheeseburger for P50 per day for
the next 10 years would have accumulated to
P182,500 worth of saving if you chose to save.
 An entity has chosen to rent a facility. The
payment for the rent could have been spent on
other aspects of the operations of the business.

DIFFERENTIAL COST
Differences of costs under alternative actions or
decisions.
 Incremental or decremental costs or profits
(losses) in deciding whether to make or buy, shut
down or continue, sell as is or process further,
and drop a product line or not.

SUNK COST
Cost that has been already incurred that will not
affect future costs since they are already paid for or
incurred and cannot be changed by any future action.
RELEVANT COST  A company spends $5 million on building an
Cost incurred in one alternative that will not be airplane. Prior to completion, the managers
encountered in the other alternative. realize that there is no demand for the airplane.
The aviation industry has evolved, and airlines
 Choosing a production cycle A involves P56/unit demand different types of planes. The company
of materials. Production cycle B involves has a choice: finish the plane for another $1
P60/unit of materials. However, whatever million or build the new in-demand airplane for
production cycle, fixed cost will amount to $4 million. In this scenario, the $5 million
P40,000 already spent on the old plane is a sunk cost. It
 P56/unit of materials is relevant in production should not affect the decision and the only
cycle A. relevant cost is the $4 million.
 P60/unit of materials is relevant in production
cycle B.
OUT-OF-POCKET COST
Costs or expenses that require a cash payment in the
current period or during a project.
 Medical expenses: If a medical bill is $100 and
your insurance covers $80, your out-of pocket
cost is $20
 Business expenses: Paying for a flight that your
employer reimburses
 Personal expenses: Paying for gasoline, parking
fees, and tolls while driving
 Repairs and maintenance: Paying for repairs and
maintenance on a church
 Wages: Paying for the wages of someone who
sets up a machine for a new production run

RELEVANT RANGE
 The range of production activity that presents
the entity’s normal operating levels where
relationships of cost behaviors deemed
acceptable.
 With variable costs then, the relevant range will
be the range where the cost of adding one more,
will be the same as the last. In this example,
from 0-100 widgets, each additional widget will
add P1 in cost to our direct materials. Once we
go above 100, we are outside of the relevant
range. SEPARATION OF MIXED COSTS
It might be difficult for managers to be able to plan,
Cost Behaviors control, or make a decision when the set of cost
information has mixed costs. Therefore, it will be
VARIABLE COST helpful in managerial decision making to be able to
They are costs that can change as the quantity of the see both the variable cost and fixed cost component
goods produced changes. Total amount of variable in a set of observations. Therefore, there are three
costs is dependent to the level of production. methods to be employed in separating mixed costs:
Examples:
 Cost of materials  High-low Method
 Cost of direct labor computed per hour  Least Squares Regression Method
 Scatter Diagram
FIXED COST
At whatever level of production within relevant range
this cost does not change. It is independent of the
level of production.
Examples:
 Rent
 Depreciation of equipment
SCATTER DIAGRAM METHOD
 SDM is a graphical technique of separating fixed
and variable components of mixed cost by
plotting activity level along x-axis and
corresponding total cost along y axis.
 A regression line is drawn on the graph by visual
inspection
 The line thus drawn is used to estimate total
fixed cost and variable cost/unit
 The point where the line intercepts y-axis is the
estimated fixed costs and the slope of the line is
the average variable cost per unit.