COST CONCEPTS

AND COST BEHAVIOR

JOHN G. PAGADDUT, CPA, LPT, MSA
Learning Outcomes
1. To classify costs

2. To explain how costs behave

3. To apply the methods in segregating costs

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 are assets relinquished in order to acquire
Cost resources from which future value can be
extracted

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Cost Classifications
does not change in
change in total
total

Variable Fixed
Costs Costs
does not change per
change per unit
unit

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Cost Classifications Table

Direct Materials
change in total

Variable 4 legs x P250 = P1,000

Costs
does not change per
unit 6 legs x P250 = P1,500

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 Cost Classifications Tables

Depreciation
does not change in
total P20,000
Fixed 100
P20,000 / = P200
Costs tables

change per unit 125

P20,000 / = P160
tables

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Cost Classifications
Relevant Costs - costs that are useful in
decision making

Irrelevant Costs - costs that do are not useful in

decision-making
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Cost Classifications
Sunk Costs - costs that are already incurred
and cannot be recovered

* costs can be relevant in one decision but may be

irrelevant in another decision
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Cost Classifications
Opportunity Costs

are value forgone in favour of a chosen option

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Cost Classifications
Opportunity Costs

A firm has 2 choices either to sell product 1 that earns

130,000 or to sell product 2 that earns 150,000 pesos.

If the firm chooses to sell product 1, it incur an

opportunity cost of 150,000 because product 2 can
potentially benefit the firm for 150,000, however is forgone.

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Cost Classifications
Direct Costs - costs that are directly traceable
to the product

Indirect Costs - costs that do are not directly

traceable to the product
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Cost Classifications
Direct Costs - woods in wooden tables

Indirect Costs - commission paid for the

person who sold the wooden
tables
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Cost Classifications
Product Costs - costs that are attributable to
the product

Period Costs - costs that are not

attributable to the product

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Cost Classifications
Product Costs - direct materials,
direct labor,
overhead

Period Costs - administrative expenses

marketing expenses
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 Total Manufacturing Costs

Direct Direct
Overhead
Materials Labor

Prime Conversion
Cost Cost Pagaddut,2020
Cost Objects
are items
- in which costs are measured and
- to which costs are assigned.

may refer to product, service, segment, activity

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Cost Objects
examples:
product - table
activity - procuring
cutting
designing
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Cost Drivers
are indicators that measure the costs attributed to
cost objects

are activities by which costs are identified with cost

objects

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Cost Drivers
example: number of materials used
number of hours spent

number of set up
number of inspection
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Cost Measurement and Assignment
Cost Measurement
refers to calculating the costs incurred

Cost Assignment
refers to allocating the incurred costs to cost objects
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Cost Management
pertains to
accurately identifying the cost objects,
correctly computing cost,
properly allocate incurred costs to costs objects,

in order to arrive at the correct costing of the resulting

product for better decision-making.
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Cost Behaviour
pertains to the variations in costs resulting from the
variations in the level of activities

refers to the increase, decrease or no effect on costs

because the number of outputs changes

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Cost Behaviour
according to its behaviour, cost can be classified into

a. fixed cost
b. variable cost
c. mixed cost
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fixed costs
costs that do not change in total
but change per unit

example printing machine rental

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fixed costs – illustration

Machine Number of
Rental (TOTAL) Shirt Prints Unit Cost

P50,000 0 n/a
P50,000 1,000 P50
P50,000 5,000 P10
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fixed costs – illustration

no matter how many outputs are produced,

the fixed costs in total remain unchanged.

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fixed costs – illustration

depending on how many outputs are produced,

the fixed cost per unit increases or decreases

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variable costs

costs that change in total

but do not change per unit

example direct materials

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variable costs – illustration

Unit Cost Number of

Material Shirts Total Cost

P50 0 n/a
P50 1,000 50,000
P50 5,000 250,000
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variable costs – illustration

no matter how many outputs are produced,

the variable costs per unit remain unchanged.

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variable costs – illustration

depending on how many outputs are produced,

the variable cost in total increases or decreases

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mixed costs

costs that are partly fixed and

partly variable

example commission

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mixed costs – illustration

A salesman is paid P15,000 monthly plus

additional pay of P500 for every P100,000 sales
he makes.

Hence, if the salesman makes P1,000,000 sales for

the month, he is paid P15,000 plus, P5,000.
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mixed costs – illustration

fixed costs P10,000

variable costs
P500 for every P100,000 sales
(P1,000,000/P100,000)*P500
= P5,000

Total Mixed Costs P20,000

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Relevant Range

the scope within which the relationship

between the cost and outputs are valid.

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Relevant Range
example

one printing machine can undertake only up to

5,000 shirt prints.

hence, the relevant range is 0 to 5,000 within which

the P50,000 monthly rental is validly fixed cost.
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Cost Segregation

To facilitate better decision-making,

mixed costs are to be separated into fixed costs
and into variable costs.

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Cost Segregation

methods high-low method

scatter graph method

least square method

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High-Low Method

applies the cost behaviour by which a change is

attributed to the variable costs since fixed costs
remain unchanged.

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High-Low Method

to compute for the variable costs, multiply the

variable cost rate by the number of activity

hence, to compute for the fixed costs, subtract

the computed variable cost from the total costs
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High-Low Method - Illustration
Number of Total
Machine Run Costs
10 10,000
50 30,000
100 55,000

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High-Low Method - Illustration
firstly, compute for the variable cost rate

Highest Cost – Lowest Cost

Highest Activity Number – Lowest Activity Number

P55,000 – P10,000
100 – 10

variable cost rate = P500

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High-Low Method - Illustration
secondly, compute for the variable cost

variable cost = highest or lowest activity * variable cost rate

= (for the highest activity level) 100 * P500 = P50,000

= (for the lowest activity level) 10 * P500 = P5,000

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High-Low Method - Illustration
thirdly, compute for the fixed cost

fixed cost = highest or lowest cost – variable cost

= (for the highest activity level) P55,000 – 50,000 = P5,000

= (for the lowest activity level) P10,000 – 5,000 = P5,000

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Scatter Graph Method

In doing scatter graph method, one has to plot in the graph

the given number of activity and the corresponding cost.

Afterwards, one has to draw line at the centre of all plotted

points in order to show the trend indicated therein.

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Scatter Graph Method
Such line is to be identified as
Y = a + bX

where Y = total cost

a = fixed cost
b = number of activity
x = variable cost rate
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Least Square Method
One uses two or more equations to solve for the values “a”
and “b”

The two equations, derived from the Y = a + bX

ΣY = na + bΣx

2
Σ XY = aΣx + bΣx
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Thank you.

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Assessment Tasks
1.1. Define what is cost.

1.2. Differentiate the following costs.

a. variable costs from fixed costs

b. relevant costs from irrelevant costs
c. direct costs from indirect costs
d. product costs from period costs
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Assessment Tasks
1.3. Explain opportunity costs.

2.1. Discuss the behaviour of costs.

3.1. Enumerate the methods in segregating costs.

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