ADAMSON UNIVERSITY

College of Business Administration

Bachelor of Science in Accountancy
Manila, Philippines

MANAGEMENT ADVISORY SERVICES

Special Lecturer: JAY-R G. VILDAC, CPA, MBA

MAS-01: COST CONCEPTS

COST – the monetary amount of the resources given up or sacrificed to attain some
objectives such as acquiring goods and services. When notified by a term that
defines the purpose, cost becomes operational (e.g., acquisition cost;
production cost; cost of goods sold).

COST FUNCTION

1. MANUFACTURING COST
a. Product cost – costs that are inventoriable and are incurred in the
production department.
b. Types of manufacturing costs
i. Direct Material
ii. Direct Labor
iii. Factory Overhead – these are indirect costs because these
are not directly visible in the products or services (e.g., glue;
electricity; compensation of supervisor).
c. Prime Cost = Direct Material + Direct Labor
d. Conversion Cost = Direct Labor + Factory Overhead
e. Classification at the end of the period
i. Cost of Goods sold – Inventory already sold.
ii. Ending Inventory – Inventory not yet sold.

2. OPERATING EXPENSES
a. Period costs – costs that are expensed outright at the time they
were incurred.
b. Types of operating costs
i. Selling Expenses – costs incurred in sales department.
ii. Administrative Expenses – costs incurred in administrative
department.

COMPUTATION OF COST OF GOODS SOLD

Direct Materials at the beginning of the year DMB

+ Direct Materials Purchases DMP
Direct Materials Available for Use DMAFU
- Direct Materials at the end of the year DME
Direct Materials Used DMU
+ Direct Labor DL
+ Factory Overhead FOH
Total Manufacturing Cost TMC
+ Work-in-process at the beginning of the year WIP, beg
Total Cost of Goods Placed in Process TCOGPIP
- Work-in-process at the end of the year WIP, end
Cost of Goods Manufactured COGM
+ Finished Goods Inventory at the beginning of the year FG, beg
Total Goods Available for Sale TGAS
- Finished Goods at the end of the year FG, end
Cost of Goods Sold COGS

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 ADAMSON UNIVERSITY
College of Business Administration
Bachelor of Science in Accountancy
Manila, Philippines

MANAGEMENT ADVISORY SERVICES

Special Lecturer: JAY-R G. VILDAC, CPA, MBA

COST BEHAVIOR

COSTS TOTAL amount PER UNIT amount

Decreases as production
FIXED Constant
increase
Increases as production
VARIABLE Constant
Increases
Increases less proportionately Decreases less proportionately
MIZED (vs. total variable costs) as (vs. unit fixed costs) as
production increases production increases

COST BEHAVIOR ASSUMPTION AND LIMITATIONS

1. RELEVANT RANGE – it refers to the range of activity within which the cost
behavior patterns are valid. Any level of activity outside this range may show a
different cost behavior.
2. TIME PERIOD – the cost behavior patterns identified are true only over a
specified period of time. Beyond this, the cost may show a different cost behavior
pattern.

COST ESTIMATION: SEGREGATING VARIABLE AND FIXED COSTS

1. High Low Method – The fixed and variable portions of the mixed costs are
computed from two sampled data points to represent the line function.
(1)
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡𝑠 (𝑌𝐻 − 𝑌𝐿)
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 (𝑏) =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐶𝑜𝑠𝑡𝑠 (𝑋𝐻 − 𝑋𝐿)

(2)
𝑎 = 𝑦 − 𝑏(𝑥)

2. Scattergraph Method – all observed costs at various activity levels are plotted on
a graph. Based on sound judgement, a regression line is then fitted to the
plotted points to represent the line function.

3. Least Square Method / Regressions – statistical technique that investigates the

association between dependent and independent variables. This method
determines the line of the best fit for a set of observations by minimizing the sum
of the squared deviations between cost line and data points.
(3)
Ʃ𝑥𝑦 − (𝑛)(𝑥̅ )(𝑦̅)
𝑏=
Ʃ𝑥 2 − (𝑛)(𝑥̅ )2

(4)
𝑎 = 𝑦̅ − 𝑏(𝑥̅ )

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 ADAMSON UNIVERSITY
College of Business Administration
Bachelor of Science in Accountancy
Manila, Philippines

MANAGEMENT ADVISORY SERVICES

Special Lecturer: JAY-R G. VILDAC, CPA, MBA
Illustrative Problem No. 1 (Variable and Fixed Costs)
Adriel Company manufactures and sells a single product. A partially completed
schedule of the company’s total and per unit costs over a relevant range og 60 to 100
units produced each year is given below:

Units Produced
(I) 60 (II) 80 (III) 1000
Total Costs:
a. Variable Costs P 120 P_____ P_____
b. Fixed Costs P_____ P_____ 600
c. Total Costs P_____ P_____
Per Unit Costs
a. Variable Costs P_____ P_____ P_____
b. Fixed Costs P_____ P_____ P_____

Required:
1. Complete the schedule by writing the missing amounts.
2. Which two (2) specific costs remain constant over the relevant range?
3. Which two (2) specific costs are directly related with production?
4. Which specific cost is inversely related with production?
5. Express the cost formula based on the line equation from ‘Y = a + bX’.
6. If the company produces 75 units, then how much is expected total costs?

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 ADAMSON UNIVERSITY
College of Business Administration
Bachelor of Science in Accountancy
Manila, Philippines

MANAGEMENT ADVISORY SERVICES

Special Lecturer: JAY-R G. VILDAC, CPA, MBA
Illustrative Problem No. 2 (High-low Method)
The controller of sure dead Hospital would like to come up with a cost formula that
links emergency department cost to the number of patients admitted during a month.
The emergency department’s costs and the number of patients admitted during the past
nine months follow:

Month Number of Patients Emergency Department’s Cost

April 18 P 15,600
May 19 P 15,200
June 17 P 13,700
July 15 P 14,600
August 15 P 14,300
September 11 P 13,200
.October 11 P 12,800
November 48 P 72,500
December 16 P 14,000

Required: using the high-low method, determine:

1. The variable Cost per unit
2. The annual Fixed Costs
3. The emergency department’s monthly cost function
4. The department’s estimated cost if 20 patients are expected to be admitted next
month?

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 ADAMSON UNIVERSITY
College of Business Administration
Bachelor of Science in Accountancy
Manila, Philippines

MANAGEMENT ADVISORY SERVICES

Special Lecturer: JAY-R G. VILDAC, CPA, MBA
Illustration Problem No. 3 (Least-Square Regression Model)
Syd Company’s total overhead costs at various level of activity are presented
below:

Month Machine Hours Total Overhead Costs

March 500 P 970
April 400 P 851
May 600 P 1,089
June 700 P 1,208

The breakdown of the overhead costs in April at 400 machine-hour level of activity
is as follows:
Supplies (Variable) P 260
Salaries (Fixed) P 300
Utilities (Mixed) P 291
Total P 851

Required:
1. How much of June’s overhead cost of P 1,208 consisted of utilities cost?
2. Using high-low method, determine the cost function for utilities.
3. Using high-low method, determine the cost function for total overhead costs
4. Using least-square method, determine the cost function for total overhead costs.
5. What would be the total overhead costs if operating level is at 200 machine
hours?

Solution Guide (requirement 1)

April (400 hours) June (700 hours)
Supplies (Variable) P 260
Salaries (Fixed) P 300
Utilities (Mixed) P 291
Total Overhead Costs P 851 P 1,208

Solution Guide (requirement 4 – Least Square methods)

Month Hours (x) Total Costs (y) (x)(y) 𝑥2

March 500 P 970
April 400 P 851
May 600 P 1,089
June 700 P 1,208
SUM _____