COURSE FINANCIAL MANAGEMENT

DEVELOPER This module is prepared by Mr. Val Lawrence V. Flores. He is a Certified Public
AND THEIR Accountant. He teaches basic accounting, financial accounting courses and
BACKGROUND advanced financial accounting courses. Mr. Flores is currently a Member of
Philippine Institute of Certified Public Accountants (PICPA).
COURSE This course is a dynamic discipline constantly responding to the needs of
DESCRIPTION managers in a highly competitive and global business world. Managers need cost
accounting measurements to determine product costs for internal management
and external financial reporting.
COURSE 1. Cost concepts and cost behavior
OUTLINE 2. Activity based and variable costing
3. Job order costing
4. Accounting for materials (with JIT and backflush costing)
5. Accounting for labor
6. Accounting for factory overhead
7. Standard costing and variance analysis
8. Process costing
9. Joint product and by-product costing
CHAPTER NO. 1
TITLE Cost Concepts and Cost Behavior
I. RATIONALE

This module covers the introduction to cost accounting and the topics covered under cost concepts
and behavior. This module covers the management, the controller and cost accounting, cost
concepts and classification of costs, classifying costs, and separation of mixed costs. This module
provides business students with knowledge and understanding of the cost systems and cost
accumulation.
.
INSTRUCTION TO THE USERS

This module covers cost concepts and cost behavior, the first topic of Advanced Financial
Accounting and Reporting 1 course. In its developmental activities section, it provides substantial
discussions of the topics. It discusses the concepts, nature, scope and principles of the topics.
Ample examples, illustrations and word problems with suggested solutions are provided for the
application of concepts and practical exercises. To evaluate what the students have learned, this
module provides work exercises at the closure activities section. To ensure that learning objectives
are attained at the end of the semester, the learner / students are evaluated based on attendance,
portfolio journal, formative assessment and summative assessment. See evaluation section for the
details. For further readings, see assignment / agreement section.

II. LEARNING OBJECTIVES

1. Define and explain the term cost object and give examples of cost objects relevant to
different types of decisions.
2. Describe several degrees of cost traceability implied by the terms direct cost and indirect
cost.
3. Classify an expenditure as fixed, variable, or semi-variable.
4. List reasons for separating fixed and variable costs.
5. Compute the fixed and variable components of costs by the use of high-low and least
squares method.

III. CONTENT
A. PREPARATORY ACTIVITIES

Page | 1
 This module covers the cost concepts and cost behavior. With this, learners / students must:
1. Since this chapter is a new chapter and has nothing to do with past accounting
subjects already taken, read in advance the topic on the suggested books given in the
syllabus of the subject.
B. DEVELOPMENTAL ACTIVITIES

Please refer to the discussion below

COST CONCEPTS AND COST BEHAVIOR

Cost accounting is an expanded phase of general or financial accounting which informs

management promptly with the cost of rendering a particular service, buying and selling a product
and producing a product. It is the field of accounting that measures, records, and reports
information about costs.

Manufacturing, merchandising and even service businesses require information systems which
provide necessary financial data. Because of the complexity and nature of the manufacturing
process, the information systems of manufacturing entities must be designed to accumulate
detailed cost data relating to production process.

In the past, cost accounting was widely regarded as the calculation of the inventory cost presented
in the balance sheet and cost of goods sold figure in the income statement. This view limits the
broad range of information that managers need for decision making to nothing more than the
product cost data that satisfy external reporting rules. Such a restrictive definition is inappropriate
today and is certainly an inaccurate description of the uses of cost information. Cost accounting
furnishes management with necessary tools for planning and controlling activities, improving
quality and efficiency, and making both routine and strategic decisions (e.g. budgeting,
controlling costs, pricing, determining profits, choosing among alternatives, etc.)

Comparison of Financial, Managerial and Cost Accounting

Financial Accounting is the use of accounting information for reporting to external parties,
including investors and creditors and is primarily concerned with the financial statements for
external use by those who supply funds (owners and creditors) to the entity and other persons who
may have vested interest in the financial operations of the firm. The financial statements are the
output from an accounting system. The reports prepared under financial accounting records focus
on the enterprise as a whole. Financial accounting is based on historical transaction data. The
information may be historical, quantitative, monetary, and verifiable. The data are historical and
are supported by documents (evidence). The information provided by financial accounting is
usually presented in the form of financial statements, tax returns, and other formal reports
distributed to various external users. The same information may also be used internally to provide
for financial analysis by management.

Managerial Accounting on the other hand, refers to reports designed to meet the needs of
internal users, particularly the managers. The American Accounting Association Committee on
Management Accounting defined it as “the application of appropriate techniques and concepts in
processing the historical and projected economic data of an entity to assist management in
establishing a plan for reasonable economic objectives and in making of rational decisions with a
view towards achieving these objectives”.

Managerial accounting aims to fill the information needs of managers with respect to specific
problems, decisions or situations, to enable them to make informed judgments and sound
decisions to achieve the goals of the organization.

Page | 2
Cost Accounting is the intersection between financial and managerial accounting. Cost
accounting information is needed and used by both financial and managerial accounting. Cost
accounting provides product cost information to external parties such as stockholders, creditors
and various regulatory boards for credit and investment decisions. Cost accounting provides
product cost information also to internal parties such as managers for planning and controlling.

Page | 3
Merchandising versus Manufacturing Operations

Merchandising companies normally buys a product that is ready for resale when it is received.
Nothing needs to be done to the product to make it salable except possibly to prepare a special
package or display. As shown below, total beginning merchandise inventory plus purchases is the
basis for computing both the cost of goods sold and ending merchandise inventory balances. Costs
assign to unsold items make up the ending inventory balance. The difference between cost of goods
available for sale and the ending inventory amount is the cost of goods sold during the period. The
following example shows the computation.

Beginning merchandise inventory 5,000.00

Plus: Total purchases 24,000.00
Cost of goods available for sale 29,000.00
Less: Ending inventory 6,500.00
Cost of goods sold 22,500.00

Page | 4
 Figure 1. Cost of goods sold for a Merchandising Company

Balance sheet preparation Income Statement Preparation

Cash

Purchases

Plus: Merchandise Inventory

Merchandise Inventory, End Cost of Goods Sold

Cost of goods available for sale

Figure 2. Cost of goods sold for a Merchandising Company

Balance sheet preparation Income Statement Preparation

Cash

Purchases of:
Materials Labor Overhead

Unused
Materials Inventory
Materials Storage

When used
Unfinished
Work In Prcoess Inventory
Production Process

Unsold Products
Merchandise Inventory, End Cost of Goods Sold
Finished Goods

*The illustration assumes that there are no beginning balances in the three inventory accounts

Computing the cost of goods sold for a manufacturing company is more complex. As shown in figure
2, instead of one inventory account, a manufacturer maintains three inventory accounts. Materials
Inventory, Work in Process Inventory and Finished Good Inventory. Purchased materials unused
during the production process make up the ending Materials inventory balance. The cost of materials
used plus the costs of labor services and factory overhead (also known as total manufacturing costs)
are transferred to the Work in Process Inventory account when the said items are used in production
process. (Factory overhead includes such items as indirect materials, indirect labor, utility costs,
depreciation of factory machinery, depreciation of factory building and supplies). When a batch or
order is completed, all manufacturing costs assigned to the completed units (also known as cost of
goods manufactured) are moved to the Finished Goods Inventory account. The Finished Goods

Page | 5
 Inventory account is set up in the same way as the Merchandise Inventory account under
merchandising. Then costs attached to unsold items at year end make up the ending balance in the
Finished Goods Inventory account. All costs related to units sold are transferred to the Cost of Goods
Sold account and reported on the income statement.

Cost of Goods Sold formula

Merchandising Manufacturing

Beginning MI x Beginning Materials Inventory xx

x
Add: Purchases x Add: Purchases xx
x
Total Goods Available for sale x Total Materials available for use xx
x
Less: Ending MI x Less: Ending Materials Inventory xx
x
Cost of goods sold x Materials Used in Production xx
x
Add: Direct Labor xx
Factory Overhead (Applied) xx
Total Manufacturing Costs xx
Add: Beginning WIP xx
Total cost of goods placed in process xx
Less: Ending WIP xx
Total cost of goods manufactured xx
Add: Beginning FG xx
Total Goods Available for Sale xx
Less: Ending FG xx
Cost of Goods Sold (normal) xx
Add/Less: Underapplied/(Overapplied)FOH xx
Cost of Goods Sold (actual) xx

Two Basic Product-Costing Systems

1. Job Order costing – a system for allocating costs to groups of unique product. It is applicable to
the production of customer specified products such as the manufacture of special machines (other
examples include aircraft manufacturing companies, clothing factories etc.). Each job becomes a cost
center for which Costs are accumulated. A subsidiary record (job cost sheet) is needed to keep track
of all unfinished jobs (work in process) and finished jobs (finished goods).

2. Process Costing – a system applicable to a continuous process of production of the same or similar
goods. E.g. oil refining, paint, paper, and chemical production. There is no need to determine the costs
of different groups of products because the product is uniform each processing department becomes a
cost center.

PROCESS COSTING JOB ORDER COSTING

1. Homogeneous units pass through a series of 1. Unique jobs are worked on during a time
similar processes. period.
2. Costs are accumulated by processing 2. Costs are accumulated by individual job.

Page | 6
department.
3. Unit costs are computed by dividing the
individual departments’ costs by the equivalent
production.
4. The cost of production report provides the
detail for the Work in Process account for each
department.
3. Unit costs are determined by dividing the total
costs on the job cost sheet by the number of units
on the job.
4. The job cost sheet provides the detail for the
Work in Process account.

Illustration of Cost Accounting Cycle

Razer Products Company is a small, newly organized company that manufactures dining tables and
chairs. The company’s products are sold to jobbers or wholesale distributors, who in turn sell them to
retailers. The basic steps in the company’s manufacturing process are as follows:
1. Lumber is cut to size for table tops, legs, seats, arms and backs.
2. The individual pieces of cut lumber are painted in various bright colors.
3. The pieces are assembled into tables and chairs.

The beginning balance sheet for the company on January 1 of the current year is presented below.

Razer Products Company

Balance Sheet
As of January 1, 2014
Assets Liabilities and Stockholders' Equity
Cash 80,000 Liabilities -
Building 750,000 Capital Stock 980,000
Machinery & equipment 150,000

Total Assets 980,000 Total Liabilities and Stockholders' Equity 980,000

To make things easy, let us assume that the company for the month of January makes only one style
of table and no chairs. The following transactions are completed for January and recorded, in
summary form as follows:

1. Materials (lumber, paint, screws, lubricants and solvents are purchased on account at a cost of
P50,000.

Materials 50,000
Accounts Payable 50,000

This procedure differs in two ways from the recording of purchases for a merchandising firm. First,
the debit is to a Material Inventory account instead of Purchases account because the inventory system
is perpetual. Second, the inventory account used is a control account. Some companies have hundreds
of items in inventory. To keep a separate account for each item in the general ledger would crowd the
ledger and make it hard to work with. At the time that entry #1 is posted to the general ledger, the
individual stock cards are also updated.

2. During the month, direct materials (lumber and paint) costing P40,000 and indirect materials
(screws, lubricants for machine, and solvents for cleaning) costing P1,900 are issued to the factory.

Work in Process 40,000

Factory Overhead Control 1,900

Page | 7
 Materials 41,900

This entry shows that P40,000 of direct materials and P1,900 of indirect materials were issued. The
debit to Work in Process account records the cost of direct materials issued to production. Such costs
can be directly traced to specific job orders. As the direct materials costs are charged to work in
process, the amounts for individual jobs are entered on the job order cost sheets. Indirect materials are
debited to the Factory Overhead Control account.

3. Total payroll for the month amounted to P36,000, consisting of P20,000 earned by laborers
working on the product; P7,000 for factory supervision; P9,000 for sales and administrative
employees. The entry to record the payroll and the payment to employees (ignoring payroll
deductions) would be:
Payroll 36,000
Accrued Payroll 36,000

Accrued Payroll 36,000

Cash 36,000

Recording labor costs for a manufacturing company requires three journal entries. The first labor cost
entry records the total payroll liability of the company. The second entry records the payment of the
payroll liability established in the first entry. The third entry (No. 4) is now needed to account
properly for labor cost. The P36,000 debited to the Payroll account must be moved to the production
accounts. Gross direct labor costs are debited to Work in Process account, and total indirect labor
costs (factory supervision) are debited to Factory Overhead Control. Payroll is credited to show that
the total account has been distributed to the production accounts.

4. The entry to record the distribution or classification of the payroll would be:

Work in Process 20,000

Factory Overhead Control 7,000
Selling and Administrative Expense Control 9,000
Payroll 36,000

The wages earned by the laborers working directly on the product are to Work in Process, while the
salaries and wages of the factory supervisor, who do no work directly on the product, are charged to
Factory Overhead Control. Sales salaries and administrative salaries are charged to Selling and
Administrative Expense Control.

5. Depreciation expense for the building is 6% per year. The office occupies one-tenth of the total
building, and the factory operation is in the other nine-tenths. The depreciation expense for one month
is recorded as follows:

Factory Overhead Control 3,375

Selling and Administrative Expense Control 375
Accumulated Depreciation – Building 3,750

6. Depreciation expense for machinery and equipment is 20% per year. All machinery and equipment
is used in the factory for production purposes, so the depreciation expense is charged to Factory
Overhead Control.

Factory Overhead Control 2,500

Accumulated Depreciation – M.& E. 2,500

7. The cost of heat, light, and power for the month was P3,000.

Page | 8
 Factory Overhead Control 2,700
Selling and Administrative Expense Control 300
Accounts Payable 3,000

8. Miscellaneous expenses for telephone, office supplies, travel, and rental of office furniture and
equipment totaled P1,500.

Selling and Administrative Expense Control 1,500

Accounts Payable 1,500

Many other expenses may be incurred by a manufacturing organization, but for purposes of
simplicity, it is assumed there are no other expenses during the month. After posting the journal
entries to the appropriate ledger accounts, the factory overhead account will reflect the following
debits.

Transaction Description Amount

(2) Indirect materials P 1,900

(4) Indirect labor 7,000
(5) Depreciation of building 3,375
(6) Depreciation of machinery and eqpt. 2,500
(7) Heat, light, and power 2,700
Total P17,475

9. Factor overhead is charged to production at 85% of direct labor cost.

Work in Process 17,000

Factory Overhead Applied 17,000

The three elements of manufacturing cost – direct materials, direct labor, and factory overhead – are
now accumulated in Work in Process, and the debits in the account are as follows:

Transaction Description Amount

(2) Direct materials P 1,900

(4) Direct labor 7,000
(9) Factory overhead 17,000
Total P 77,000

10. Assuming that all goods started in process have been finished, the following entry is recorded:

Finished Goods 77,000

Work in Process 77,000

Assuming that 1,000 tables were produced during the month, the unit cost is P77. The unit cost for
each element of manufacturing cost is calculated as in the computation below:

Total Units Produced Unit Cost

Direct Materials P 40,000 1,000 P 40
Direct Labor 20,000 1,000 20
Factory Overhead 17,000 1,000 17

Page | 9
 P77,000 P 77

If the same type of table is produced in future periods, the unit costs of those periods can be compared
with the unit costs determined above, and any difference can be analyzed so that management might
take appropriate action. The unit cost also serves as a basis for establishing the selling price of the
tables. After considering the anticipated selling and administrative expenses, a selling price can be
established that should provide a reasonable profit. If management determines that a 40% gross profit
percentage is necessary to cover the product’s share of selling and administrative expenses and earn a
satisfactory profit, the selling price per unit, rounded to the nearest centavo, would be computed as
follows:

Manufacturing Cost P 77.00

Gross Profit (40%) 30.80
Selling Price P107.80

To continue with the example, assume that the following transactions take place in January in addition
to those already recorded.

11. Cost of materials, utilities and selling and administrative expenses paid amounted to P34,000.

Accounts Payable 34,000

Cash 34,000

12. 800 tables are sold to jobbers at a net price of P86,240.

Accounts Receivable 86,240

Sales 86,240
Cost of Goods Sold 61,600
Finished Goods 61,600

13. Cash totaling P55,000 is collected on accounts receivable.

Cash 55,000
Accounts Receivable 55,000

At the end of the period, we compare the total of the Factory Overhead Control account and the
Factory Overhead Applied account. In our example, the FOH-C (P17,475) is greater than the FOH-A
(P17,000), that is why we have an under-applied factory overhead which is considered unfavorable
because the tendency is to increase the cost of goods sold. An increase in the COGS will lead to a
decrease in the gross profit. However, if the FOH-C is less than the FOH-A, then what we have is
over-applied factory overhead which is considered favorable because the effect is a decrease in the
cost of goods sold thereby increasing the gross profit. We assume, in our example, that the company
is closing its under-applied/over-applied account at the end of the year, so no entry is made at the end
of the month. If the company is closing the FOH-C and the FOH-A at the end of each month, the
following entry will be made at the end of the month.

Factory overhead applied 17,000

Under-applied factory overhead 475
Factory overhead control 17,475

At the end of the year, the total under-applied/over-applied factory overhead account is closed to Cost
of Goods Sold account if the amount is immaterial. If the amount of the under-applied/over-applied
factory overhead is significant, then the amount is prorated to the Cost of Goods Sold account,

Page | 10
Finished Goods account, and Work in Process account according to the balances at the end of the
period.

Cost Definition – the sacrifices made in order to achieve the company’s objectives.

Types of Costs

As to financial statement presentation

1. Cost of Sales
a. Merchandising – Merchandise Inventory – units purchased with the intention of re-
selling with little or no alteration. The cost includes the Purchase Price + Other
Directly Attributable Costs
b. Manufacturing
i. Direct Materials – include those items that become an integral part of a
finished product, and can be conveniently traced into it. The cost includes
Purchase Price + Other Directly Attributable Costs
ii. Direct Labor – consists of those labor costs that can be easily traced to the
creation of product. Also called touch labor. Cost includes Salary and other
benefits given like SSS, PhilHealth, etc.
iii. Manufacturing/Factory Overhead – all other product costs not classified as
Direct Materials or Direct Labor.
1. Indirect Materials – Materials used to support the production process.
They are too costly and inconvenient to trace to the individual units
that are produced. Examples: lubricants and cleaning supplies used in
the automobile assembly plant.
2. Indirect Labor – Wages paid to employees who are not directly
involved in production work. Examples: maintenance workers,
janitors and security guards.
c. Special Classifications:
i. Prime Costs = Direct Materials + Direct Labor
ii. Conversion Cost = Direct Labor + Manufacturing/Factory Overhead

2. Operating Expenses (Cost to Sell)

a. Selling Expenses – form the time the product is being offered for sale up to the time
the product is delivered including post-sale services.
b. General and Administrative – general administration and management of the
company.

3. Financing Costs

As to Purpose: Product versus Period depending on the costing method (Throughput, Variable and
Absorption Costing)

1. Product (Inventoriable) – are matched with units of product and are recognized as expense on
the income statement only when the units are sold. Until that time, product costs are
considered to be assets and are recognized on the balance sheet as inventory.
2. Period (Non-Inventoriable) – are expensed on the income statement in the period in which
they are incurred.

As to Traceability: Direct or Indirect depending on the Cost Object – anything that will be the focus
of cost information.

1. Direct Costs – physically and easily traceable to the cost object under consideration and
material in costs.

Page | 11
 a. Cost Tracing – the process of identifying direct cost.
2. Indirect Costs – is a cost that cannot be conveniently traced to the cost object.
a. Cost Allocation (Traditional, Departmentalized and Activity-Based) – the process of
incorporating (including/adding) indirect costs to the cost object.

As to Behavior: Variable or Fixed depending on the cost driver and relevant range.
Cost Driver (activity based) – those that causes the incurrence of costs
Relevant Range – the level of activity wherein the classification of costs is valid

1. Variable Cost – changes in total, in direct proportion to changes in the level of activity.
(Constant per unit)
2. Fixed Cost – total cost does not change with changes in the volume of activity. (Constant in
total)
a. Discretionary – the result of a management decision to spend a particular amount of
money for some purpose
b. Committed – cannot be significantly reduced even for short period of time without
making fundamental changes
3. Mixed Costs
a. Contains both variable and fixed cost elements
b. Expressed in terms of a cost function: y = a + bx
c. Must be analyzed and segregated into its variable and fixed component.

As to role in decision making

1. Differential Costs – costs that differs between alternatives

2. Opportunity Costs – benefits that are forgone by choosing another alternative
3. Sunk Costs – costs that are already incurred and paid for and cannot be returned

As to Quality – costs associated with non-achievement of product/service quality.

 Cost of achieving good quality
o Prevention costs – costs incurred before any defect has occurred.
o Appraisal costs – costs of measuring, testing and analyzing whether a defect has
occurred.
 Cost of poor quality
o Internal failure costs – defects detected inside the company’s premises include scrap,
rework, process failure, downtime, and price reductions
o External failure costs – defects were detected outside or by a customer include
complaints, returns, warranty claims, liability, and lost sales

Phases in Analyzing Mixed Costs

1. Cost Behavior – identifying whether a particular cost is variable, fixed or mixed.

2. Cost Estimation – determining the variable (per unit costs) and fixed (total) components.
3. Cost Prediction – forecasting the cost to be incurred in connection with the expected activity
level.

HIGH-LOW METHOD
a. Choosing the highest and lowest activity level within the relevant range
Y2-Y1
b=
b. Slope of the line (variable cost/unit): X2-X1

c. Y-intercept (fixed cost): a = Y – bX

n(∑xy) - (∑x)(∑y)
b=
n(∑x2) - (∑x)2 Page | 12
LEAST SQUARE REGRESSION ANALYSIS – an averaging method that is an expansion of the
expression y= a + bx
a. Formula to get the variable cost per unit:
∑y - b(∑x)
b. Formula to get the fixed cost: a=
n
Sample Problem: Separation of Mixed Cost

Summary of electricity costs and direct labor hours

Cost of
Month Direct Labor Hours electricity

January 28 625
February 24 565
March 30 630
April 33 640
May 38 685
June 34 640
July 35 655
August 40 700
Septembe
r 42 715
October 47 726
November 43 700
December 32 630

Using the high-low method:

Direct Labor Hours Cost of Electricity
Highest month (Oct.) 47 726
Lowest month (Feb.) 24 565

First, compute the variable cost per unit

Y2-Y1
b=
X2-X1
where:
b = variable cost per unit
Y2 = cost associated with the highest activity level
Y1 = cost associated with the lowest activity level
X2 = highest activity level
X1 = lowest activity level

b = 726-565/ 47-24
b = P7 per direct labor hour

Next step would be to compute for the total fixed cost:

a = Y – bX

Page | 13
where:
a = monthly fixed cost
Y = Total Cost (fixed + variable)
b = variable cost per unit
X = activity level

Note: there are two ways to compute for the total fixed cost. Either we incorporate in the formula the
figures we have in the highest or lowest activity level.

Highest activity level:

a = 726 – 7(47)
a = 397

Lowest activity level:

a = 565 – 7(24)
a = 397

Since variable cost per unit and monthly fixed costs are already known, we can easily predict the cost
of electricity on the following month. Assuming the direct labor hours on the following month
amounted to 35 hours, we can easily compute how much will be the total electricity cost by applying
the cost function : y = a + bx.

y = 397 + 7(35hrs)
y = 642

Using Least Square Method:

Using the same data, the following were computed:

DL Hrs Electricity Cost
X Y XY X2
28 625 17,500 784
24 565 13,560 576
30 630 18,900 900
33 640 21,120 1,089
38 685 26,030 1,444
34 640 21,760 1,156
35 655 22,925 1,225
40 700 28,000 1,600
42 715 30,030 1,764
47 726 34,122 2,209
43 700 30,100 1,849
32 630 20,160 1,024
∑= 426 7,911 284,207 15,620

First, compute for the variable cost per unit:

b= n(∑xy) - (∑x)(∑y)

Page | 14
 n(∑x2) - (∑x)2

12(284,207) - (426)(7,911)
b=
12(15,620) - (426)2

40,398
b=
5,964

b= 6.77

Next step would be to compute for the total fixed cost:

∑y - b(∑x)
a=
n

7,911 – 6.77(426)
a=
12

a= 419

Since variable cost per unit and monthly fixed costs are already known, we can easily predict the cost
of electricity on the following month. Assuming the direct labor hours on the following month
amounted to 35 hours, we can easily compute how much will be the total electricity cost by applying
the cost function : y = a + bx.

y = 419 + 6.77(35)
y = 656

Cost function using high-low method: y = 397 + 7x

Cost function using least square method: y = 419 + 6.77x

EXERCISES

Problem 1

Cost Item Product or Direct or Fixed or

Period Indirect Variable
1. Depreciation on salespersons' cars
2. Rent on equipment used in the factory
3. Lubricants used for machine maintenance
4. Salaries of personnel who work in the finished goods
warehouse

Page | 15
5. Soap and paper towels used by factory workers at the
end of a shift
6. Factory supervisors' salaries
7. Heat, water, and power consumed in the factory
8. Materials used for boxing products for shipment
overseas
9. Advertising costs
10. Workers' compensation insurance for factory
employees
11. Depreciation on chairs and tables in the factory
lunchroom
12. The wages of the receptionist in the administrative
offices
13. Cost of leasing the corporate jet used by the
company's executives
14. The cost of renting rooms at a Florida resort for the
annual sales conference
15. The cost of packaging the company's product

Required: For each cost item, indicate whether it would be variable or fixed with respect to the
number of units produced and sold; and then whether it would be a selling cost, an administrative
cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be
treated as a direct cost or an indirect cost with respect to units of product.

Problem 2: (Cost of Quality) James Company’s quality cost report is to be based on the following
data:

Technical support provided to suppliers 20,000

Test and inspection of in-process goods 67,000
Depreciation of test equipment 68,000
Quality data gathering, analysis, and reporting 46,000
Warranty repairs and replacements 97,000
Debugging software errors 22,000
Downtime caused by quality problems 95,000
Returns arising from quality problems 12,000
Supervision of testing and inspection activities 24,000

Required: Compute the amount to be presented as Preventive Costs, Appraisal Costs, Internal Failure
Costs, and External Failure Costs.

Problem 3: (COGM and COGS) Loboc Corporation manufactures a variety of products in its
factory. Data for the most recent month’s operations appear below:

Beginning raw materials inventory 60,000

Ending raw materials inventory 45,000
Direct labor 135,000
Purchases of raw materials 690,000
Manufacturing overhead 370,000
Beginning work in process inventory 120,000

Page | 16
Ending work in process inventory 130,000
Beginning finished goods inventory 200,000
Ending finished goods inventory 220,000

Required: Compute the company’s cost of goods manufactured and cost of goods sold.

Problem 4 (Cost Behavior): Complete the following table:

500 units 1,000 units 2,000 units

Variable cost per unit 20  D.  I.

Fixed cost per unit  A.  E.  J.

Total variable cost  B.  F.  K.

10,
Total fixed costs 000  G.  L.
Total costs  C.  H.  M.

Problem 5: (Cost Behavior) The following data were taken from the income statement of Batangas
Corporation.

Units Produced 10,000 12,000 14,000

Utilities 20,000 24,000 28,000
Salaries and Wages 70,000 80,000 90,000
Depreciation 40,000 40,000 40,000
Repairs and Maintenance 30,000 36,000 42,000
Indirect Materials 45,000 53,000 61,000

Required: Identify each of the company’s expenses as either variable, fixed, or mixed costs.

Problem 6 (High-Low & Least Square) Pampanga Corporation provides a personalized training
program that is popular with many companies. The number of programs offered over the last five
months, and the costs of offering programs are as follows:
X Y
Month Programs Offered Cost Incurred (Php)

June 55 154
July 45 140
August 50 147
September 50 147
October 75 190

Required:
1. Using the high-low method, compute the variable cost and total fixed cost per program.
2. Using the least square method, compute the variable cost per unit and total fixed cost of the
program.

Page | 17
Problem 7: (High-Low and Least Square) As a part of a cost study, the cost accountant of Rizal
Corporation has recorded the cost of operations at seven different levels of material usage. This
information is shown as follows:

Kilos of Materials Cost of Operations

100 P1,000
75 600
25 400
150 1,500
175 1,600
50 600
125 1,300

Additional information:
 Sum of the kilos ( ∑X ) 700
 Sum of the costs ( ∑Y ) P 7,000
 Sum of the kilos multiplied by costs ( ∑XY ) P 852,500
 Sum of the kilos squared ( ∑X2 ) 87,500

Required: (RP-CPA Adapted)

1. Using the high-low method, the variable cost of operations per kilo of materials used is?
2. Using the high-low method, the fixed cost of operation is?
3. Using the least square method, the average rate of variability per kilo of materials used is?

IV. SYNTHESIS / GENERALIZATION

No product can be produced without the incurrence of costs for material, labor, and overhead. At a
minimum, no service can be produced without the incurrence of costs for labor and overhead.
Understanding the difference among various types of costs, how those costs are computed, and
how those costs are used will enable accountants to effectively communicate financial
information.
V. EVALUATION

The student / learner’s performance in this module is evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises

20% Portfolio Journal for work exercises
20 % Formative Examination
40% Summative Examination (This topic is included in the Online / Offline Written Midterm
Examination)

VI. ASSIGNMENT / AGREEMENT

The next topic is Activity-Based Costing and Variable Costing. Learner / student is advised to read in
advance the topic in the book of Rodelio S. Roque, Management Advisory Services/Pedro P.
Guerrero, Cost Accounting Principles and Procedural Application/Norma D. De Leon, Ellery D. De
Leon, Guillermo M. De Leon Jr., Cost Accounting and Control/Carter, Cost Accounting 14th edition.
Thomson Asian Edition/Cost Accounting- Kinney, Raiborn and Carter (Compilation Version) 2013.
REFERENCES
Carter, Cost Accounting 14th edition. Thomson Asian Edition
Cost Accounting- Kinney, Raiborn and Carter (Compilation Version) 2013
Rodelio S. Roque, Management Advisory Services
Pedro P. Guerrero, Cost Accounting Principles and Procedural Application

Page | 18
Norma D. De Leon, Ellery D. De Leon, Guillermo M. De Leon Jr., Cost Accounting and Control
Roque, R.S. Management Advisory Services. 16th Edition

Page | 19