REVIEWER IN COST ACCOUNTING

Cost Concepts and Cost Flow

Manufacturing Costs (Production Costs)
-sum of three cost elements
-direct materials, PLUS direct labor, PLUS manufacturing/factory overhead EQUALS
finished goods
Direct Materials
-All materials that form an integral part of the finished product during the manufacturing
process and can be physically and directly associated with the product.
-resources in-stock and available for use
Direct Labor
-Work of factory employees that can be physically and directly associated with
converting raw materials into finished goods.
Manufacturing/Factory Overhead
-Costs that is indirectly associated with manufacturing the finished product.
-Variable Overhead PLUS Fixed Overhead
Indirect Materials
-Not physically part of the finished product.
-Insignificant part of finished product in terms of cost.
-Not classified as direct materials but needed for its completion.
Indirect Labor
-Costs that cannot be economically traced to the cost of the product, but must be
allocated to the finished goods.
Prime Costs
-Direct material PLUS Direct Labor
Conversion Costs
-Direct Labor PLUS Manufacturing Overhead
Variable Costs
-Direct Material PLUS Direct Labor PLUS Variable Overhead
-increases in total proportionately with an increase in activity and decreases
proportionately with a decrease in activity.
-In total cost: Varies in direct proportion to changes in activity
-change in proportion with output (more output=higher cost)
-In unit cost: Remains constant throughout the relevant range
-unchanged in relation to output
Fixed Costs
-Fixed Overhead
-Cost that remains constant in total within a relevant range of activity. It does not
change in total as business activity increases or decreases.
-In total cost: Remains constant throughout the relevant range
-unchanged in relation to output
-In unit cost: Varies inversely with changes in activity throughout the relevant range
-change inversely with output (more output=lower cost/unit)
Direct Costs
-can be conveniently and distinctly traced (tracked) to a particular cost object.\
Indirect Costs
-cannot be traced (tracked) explicitly or conveniently to a particular cost object. Instead
of being traced, these costs are allocated to a cost object in a rational and systematic
manner.
Inventoriable Costs
-DM + DL+ MO/FO
-Product manufacturing costs. These costs are capitalized as assets (inventory) until
they are sold and transferred to Cost of Goods Sold.
Period Costs
-Administrative Expenses + Selling Expenses
-have no future value and are expensed in the period incurred.
Work in Process
-The stage in the production process where work has been started but not yet
completed.
Finished Goods
-the stage in the production process where the products are fully completed and ready
for sale
Formulas
Raw Materials Used
RM Inventory-Beginning
Add: Purchases-RM
RM Available for Use
Less: RM Inventory-Ending
Cost of Goods Manufactured
WIP-Beginning:
RM Used
DL
Variable OH
Fixed OH
Less: WIP-Ending
Cost of Goods Sold
Finished Goods-Beginning
Add: COGM
Less: Finished Goods-Ending
Cost of Goods Available for Sale
Finished Goods-Beginning
Add: COGM
Net Income
Sales
Less: COGS
Less: Operating Expenses
Absorption Costing
Sales
Less: COGS (DM, DL, Fixed and Variable OH, and Manufacturing OH)
=Gross Profit
Less: Operating Expenses (Selling/Marketing, Administrative, and General Expenses)
Net Income
Variable Costing
Sales
Less: Variable COGS (DM, DL and Variable Manufacturing OH)
Less: Variable Operating Expenses (Variable Selling and General Administrative)
=Contribution Margin
Less: Fixed Manufacturing OH
Less: Fixed Operating Expenses (Fixed Selling and General Administrative)
Net Income
Note:
No change in inventory level
: Absorption=Variable
Increase in inventory level
: Absorption is higher than Variable
Decrease in inventory level
: Variable is higher than Absorption
High-low Method
- widely used method of estimating the components of a mixed cost.
- Uses two past levels of activity and the amounts of the cost incurred at those levels;
more specifically, the highest and lowest levels of activity.
-Variable per unit: (Highest Activity Cost-Lowest Activity Cost) / (Highest Activity Unit-
Lowest Activity Unit)
-Fixed Cost: Highest Activity Cost- (Variable cost per unit*Highest Activity units)
Cost Volume Profit Analysis
- Method for analyzing the relationships among costs, volume, and profits.
-A critical factor in setting selling prices, determining product mix, and maximizing use of
production facilities
-Use to calculate the level of sales necessary to achieve a target profit
Breakeven Points
-In Units: Fixed Cost/Contribution Margin per Unit
-In Pesos: Fixed Cost/Contribution Margin Ratio
Margin of Safety
- How far the company is operating from its break-even point
-The amount that sales can drop before reaching the break- even point
-Measure of the amount of “cushion” against losses
-Indication of risk
-In Units: Expected Sales-Breakeven Sales
-In Pesos: Margin of Safety in Units* Sales Price per Unit
-In Ratio: Margin of Safety in Units/ Expected Sales in Units