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Module 2 Basic Cost Management Concepts-1
Module 2 Basic Cost Management Concepts-1
Cost behavior refers to how a cost will change as the level of activity changes. Managers who understand
how cost behave can predict how costs will change under various alternatives. Conversely, attempting to
make decisions without thorough understanding of cost behavior patterns can lead to disaster. 1
Cost – (1) The monetary measure of the amount of resources given up or used for some purpose. (2) The
monetary value of goods and services expanded to obtain current or future benefits. 2
A. As to Type
2. Period Cost – the non-manufacturing costs that include selling, administrative, and research and
development costs. These costs are expensed in the period of incurrence and do not become part
of the cost of inventory.
B. As to Function
1. Manufacturing Costs – all the costs incurred in the factory to convert raw materials into finished
goods.
a. Direct Manufacturing Costs- materials and labor
b. Indirect Manufacturing Costs – the manufacturing overhead or factory overhead costs.
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Management advisory services (Roque 2016 Edition)
2. Non-Manufacturing Costs – all costs which are not incurred in transforming materials to finished
goods.
a. Research and Development – incurred in designing and bringing new products to the market.
b. Marketing Costs – advertising and promotional expenses.
c. Distribution Costs – costs incurred in delivering the products to the customers.
d. Selling Costs – salaries and commission of sales staff and other selling expenses
e. After-sales Costs – costs incurred in dealing with customers after sales.
f. General and Administrative Costs – all the non-manufacturing costs that do not fall under
categories (a) to (e).
D. For Decision-Making
1. Relevant Cost – future costs that will differ under alternative courses of action.
2. Differential Costs – difference is costs between any two alternative courses of action.
a. Incremental Cost – increase in cost from one alternative to another.
b. Decremental Cost – decrease in cost from one alternative to another.
3. Opportunity costs – income or benefit given up when one alternative is selected over another.
4. Sunk/Past or Historical Cost – already incurred and cannot be changed by any decision made now
or to be made in the future.
E. As to Behavior
1. Variable Cost – within the relevant range and time period under consideration, the total amount
varies directly to the change in activity level or cost driver, and the per unit amount is constant.
2. Fixed Cost – within the relevant range and time period under consideration, the total amount
remains unchanged, and the per unit amount varies inversely or indirectly with the change in the
cost driver.
a. Committed Fixed Costs – long term in nature and cannot be eliminated even for short period
of time without affecting the profitability or long-term goals of the firm.
b. Discretionary Fixed Costs – usually arise from periodic decisions by management to spend in
certain fixed costs area such as research, advertising, maintenance contracts. Discretionary
fixed cost may be changed by management from period to period or even during the period,
if circumstances demand such change.
3. Mixed Cost – this cost has both variable and fixed component.
4. Step Cost – when activity changes, a step cost shifts upward or downward by a certain interval or
step.
Analysis of Mixed Costs5
Mixed Costs or Total Costs – have variable and fixed costs component.
TC = FC + VC
The variable cost varies directly with the activity level or cost driver.
Since the total cost is linearly related to the activity level or cost driver, the cost function maybe express
as:
Y = a + bx
1. High-low Method
2. Scattergraph Method
3. Least Square Regression Method
Sample Quiz
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