Exercise 1

10. One of your colleagues commented, “I want to be a CPA. Why should I take cost accounting?”
Indeed, why should a potential CPA study cost accounting?

Quite simply, cost accounting is an integral part of the accountancy profession. Thus, it needs to
be studied and understood as much as (say) commercial law and auditing. Cost accounting is helpful
because it can identify where a company is spending its money, how much it earns, and where money is
being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost
controls and efficiency.

Exercise 2

The Philippine sports management group (PSMG) manages promotes sporting events and sporting
personalities. It managers are currently examining the following reports and accounting statements:

a. Five-year projections for expanding into managing sports television networks for cable television.
b. Income statement to be included in a six-month interim report to be sent to investors and filed with
the Securities & Exchange Commission.
c. Profitability comparison of golf tournaments directed by different managers, each of whom receives
a percentage of that tournament’s profits.
d. Monthly reports of office costs for each of the 14 PSMG offices nationwide.
e. Statement showing the revenues PSMG earns from different types of sporting events (for example,
golf, motor racing, and tennis).

Required: Classify the reports in part a-e into one of the three major purposes of accounting systems on
Page 8

a. Formulating Overall Strategies: this is a long-range plan of expansion which forecasts managing of
sports television networks for cable television for five-years.
b. Meeting External Regulatory: this is legal reporting requirements where income statement is sent
to investors and filed with the Securities & Exchange Commission.
c. Performance Measurement: this is an evaluation of people which profitability comparison of golf
tournaments directed by different managers and each will receive a percentage of golf tournaments.
d. Cost Planning and Cost Control: the operations and activities of office costs for each of the 14 PSMG
offices nationwide are monthly reported.
e. Product/Customer Emphasis Decisions: it involves in the statement that showing the revenues
PSMG earns from different types of sporting events. It reports the profitability of products or
services like golf, motor racing, and tennis.
Exercise 3

You are considering whether to purchase a new car to replace your present car. Being strictly rational in
an economic sense, which of the following costs would you include in making your decision?

a. Cost of the present car.

 Not relevant (sunk cost)
b. Trade-in value of your present car.
 Relevant (incremental cash flow)
c. Maintenance costs on the present car.
 Relevant (avoidable cost)
d. Fuel consumption of the present car.
 Relevant (Avoidable cost)
e. Fuel consumption on the new car.
 Relevant (incremental cost)
f. Cost of parking permits, garage rental, and similar “storage costs”.
 Irrelevant (non-differential)
g. Liability insurance on the present car.
 Relevant (avoidable)
h. Liability insurance on the new car.
 Relevant (incremental)
i. Property and collision insurance on the present car.
 Not relevant (premium paid, sunk cost)
j. Changes in the relative frequency of your friends saying: “Let’s use your car since its newer”, and the
related costs of using the new car.
 Common/Friend – Irrelevant
 Cost of using new car - Relevant

You should be able to give reasons why each element should or should not be included in your analysis.
(Hint: which costs will be differential, that is, will be different if the new car is purchased?)

*Relevant Getting to know the price of the old car is important as it helps in getting to know as to how
much the old car would be sold, so that the funds that would be required for the new car could be
estimated.