LM 2: MAS- COST ESTIMATION

Costs - expenditures incurred by the business to carry on its investing, operating and financing
activities
- includes cost and expenses
● Capital Expenditures (puhunan) - for long-term impact to business profitability
● Operating Expenses (gastos) - used to directly support normal operating activities

Cost behavioral assumptions

Relevant Range Assumption

Relevant range 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 pattern.

Time assumption
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.

Linearity Assumption
The cost is assumed to manifest a linear relationship over a relevant range despite its
tendency to show otherwise over the long run.

Product Cost - incurred in the process of producing the product

a. Inventoriable and deferred as assets while the units are sold
b. Once sold, cost is transferred from asset to cost of goods sold
● Direct materials
● Direct labor
● Factory Overhead
Period Cost- incurred outside of the production activities, incurred to administer business, sell
or distribute

Relevant cost- useful in decision making

a. Differential- varies from one alternative to another
b. Future - prospective expenditures

Sunk Cost– incurred in the past and can no longer be changed

Avoidable cost- thoses that are not incurred once activity is not performed

Unavoidable cost- remain to be incurred regardless of option a manager chooses

Opportunity cost- benefits foregone for choosing another alternative

The main point in cost estimation is the segregation of mixed costs into fixed and variable in
order to determine the cs behavior for each product in relation to total cost.

Linear formula
Y= a+bX; where Y= Total cost; a= Total Fixed Cost; b= variable cost per unit;
x= number of activity/ units
 LM 2: MAS- COST ESTIMATION

Variable Costs- total VC vary directly in proportion to the change in the level of production and
sales, but is constant on a per-unit basis
Fixed Costs- remain constant in total regardless of change in the level of production but
inversely changes on a per unit basis.

1. HIGH-LOW METHOD
- Change in cost is attributed to the change in variable cost, fixed cost assumed to
be constant
- fixed and variable elements of the mixed costs are computed from two sampled
data points which are the highest and lowest points as to activity level or cost
driver.
Variable Cost per unit= Change∈Cost ÷Change∈ Activity

2. SCATTER- GRAPH METHOD- all observed costs at various activity levels are plotted on
a graph. Based on sound judgment, a regression line is fitted to the plotted points to
represent the line function.

3. Least square regression Method- statistical technique that investigates the association
between dependent and independent variables.
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b=∑ xy −n ¿ ¿ ¿
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