COSTS – CONCEPTS AND

CLASSIFICATION –PART 2

PROF. ROCINANTE D. CERVANTES, CPA, MBA

 Prayer

Mary our Lady of the Star, pray for us

Saint John Baptist de La Salle, pray for us.

Saint Benilde Romancon, pray for us

Live Jesus in Our Hearts!

Forever!
Learning Objectives
▪ Distinguish between cost, expenses, and
losses.
▪ Distinguish between direct and indirect
costs.
▪ Define the three integral components of a
product.
▪ Define prime costs and conversion costs.
▪ Define variable, fixed, and mixed costs and
discuss the effects of changes in volume on
these costs.
▪ Distinguish between common costs and
joint costs.
▪ Distinguish between capital expenditures
and revenue expenditures.
▪ Identify the costs for planning, control and
analytical processes.
Method of Lease Square

Equation 1 Y = a + bx
Equation 2 ΣY= na + bΣx
Equation 3 ΣXY= Σxa + bΣx2

Where in Y = Total Cost

a = Total Fixed Cost

b = Variable Cost/Unit
x = Activity level
n = no. of samples
Method of Least Square
Illustration:
Summary of electricity cost and direct labor hours
Month Direct Labor hrs (x) Cost of Electricity (Y)
January 28 625
February 24 565
March 30 630
April 33 640
May 38 685
June 34 640
July 35 655
August 40 700
September 42 715
October 47 726
November 43 700
December 32 630
Method of Least Square
Step 1: Prepare the table. n is equal to the number of samples. Multiply
the table. First column - activity level (X), Second column – total cost (Y),
3rd column = XY and 4th column X2
Method of Least Square
Step 2: Substitute the equation 2 and equation 3
Method of Least Square
Step 3: Cancel out the a variable by multiplying equation 2 with the
quotient a variable of equation 3 and equation 2.
Method of Least Square
Step 4: Solve for the b variable using equation 2 and 3
Method of Least Square
Step 5: Substitute the value of b to equation 2.
Common Cost

Cost of facilities or services employed in two or more accounting

periods, operations, commodities, or services. Just like indirect
costs, these costs are subject to allocation.

Example: if 2 departments are occupying the same building , the

depreciation of the building in a common cost subject to allocation
based on floor area occupied.
Joint Cost

Cost of materials, labor, and overhead incurred in the manufacture

of two or more products at the same time. They are indivisible costs
and not specifically identifiable with any product being
simultaneously produced. These costs are subject to allocation.

Example: DM, DL and FO incurred to manufacture two or more

products up to the point of split-off.
Standard Cost

Predetermined costs of direct materials, direct labor, and factory

overhead. They are established by using information accumulated
from past experience and data secured from research studies.

It is a budget for the production of one unit of product or services.

Opportunity Cost

The potential benefit that is given up when one alternative is

selected over another.

Example: If you were

not attending college,
you could be earning
$15,000 per year.
Your opportunity cost
of attending college for
one year is $15,000.
Differential Cost

Cost that is present in one alternative but is absent in whole or in

part under another alternative.

An increase in cost from one alternative to another is known as

incremental cost, while a decrease in cost is known as
decremental cost.
Other Costs Concept

Relevant Cost
A future cost that changes across the alternatives. Costs that
changes from one alternative over the other.

Out-of-pocket cost
Cost the requires payment of money (or other assets) as a result of
their incurrence.

Sunk cost

A cost for which an outlay has already been made and it cannot be
changed by present or future decision.
Controllable and Non-controllable costs

Controllable Costs – if the cost can be avoided or controlled at a

particular level of management.

Non- Controllable - these are committed costs and cannot be

avoided.
Exercise
Please answer the following:

Chapter 2 – Multiple Choice Problems pages 50 to 54.

LIVE JESUS IN OUR HEARTS FOREVER

SEE YOU ALL NEXT WEEK!