COST CONCEPTS, CLASSIFICATION, AND SEGREGATION

COST
 The monetary measure of the peso value of resources given up or used for some
purpose;
 The monetary value of goods and services expended to obtain current or future
benefits.

SOME COST TERMS USED IN COST ACCOUNTING

 COST OBJECT – anything for which cost is computed

 COST DRIVER – any variable, such as a level of activity or volume that usually
affects costs over a period of time.

 COST POOL – a grouping of individual cost items; an account in which a variety

of similar costs is accumulated.

 ACTIVITY – an event, action, transaction, task, or unit of work with a specified

purpose.

DIFFERENT COSTS FOR DIFFERENT PURPOSES

A. AS TO TYPE

1. PRODUCT COSTS – costs incurred to manufacture the product.

2. PERIOD COSTS – the non-manufacturing costs that include selling,

administrative, and research and development costs. These costs are
expensed in the period of incurrence and do not become part of the cost of
inventory.

B. AS TO FUNCTION

1. MANUFACTURING COSTS – all costs incurred in the factory to convert raw

materials into finished goods.

2. NON-MANUFACTURING COSTS – all costs which are not incurred in

transforming materials into finished goods.

C. AS TO TRACEABILITY / ASSIGNMENT TO COST OBJECT

1. DIRECT COSTS – costs that are related to a particular cost object and can
economically and effectively be traced to that cost object.
 2. INDIRECT COSTS – costs that are related to a cost object, but cannot
practically, economically, and effectively be traced to the such cost object.
Cost assignment is done by allocating the indirect cost to the related cost
objects.

D. FOR DECISION MAKING

1. RELEVANT COSTS – future costs that will differ under alternative courses of
action.

2. DIFFERENTIAL COSTS – the difference in costs between any two

alternative courses of action.

3. OPPORTUNITY COSTS – income or benefit given up when one alternative is

selected over another.

4. SUNK COST – already incurred and cannot be changed by any decision

made now or to be made in the future.

E. AS TO BEHAVIOR

1. VARIABLE COST – within the relevant range and time period under
consideration, the total amount varies directly to the change in the level of
activity level or cost driver, and the per unit amount is constant.

2. FIXED COST – within the relevant range and time period under
consideration, the total amount remains unchanged, and the per-unit amount
varies inversely or indirectly with the change in cost driver.
 a. Committed Fixed Costs - long-term in nature and cannot be
eliminated even for a short period of time without affecting the
profitability or long-term goals of the firm.

b. Discretionary of Managed Fixed Costs – usually arise from periodic

decisions by management to spend in certain fixed costs areas such
as research, advertising, and maintenance contracts. Discretionary
fixed costs may be changed by the management from period to period
or even during the period if circumstances demand such change.

3. MIXED COSTS – this cost has both a variable and fixed component.
a. Semi-variable
b. Semi-fixed

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS

THE COST FUNCTION. Since total cost is linearly related to the activity level or cost
driver, the cost function (cost formula) may be expressed as:
Y = a + bX where : Y = Total cost ; a = Total fixed cost ;
b = variable cost per unit; x = level of activity
1. HIGH-LOW METHOD. A simple and widely used technique of segregating mixed
costs components is the high-low method. This technique can be best explained
through an illustrative example. Consider, for instance, the following monthly cost
data for a period of six.

Month Cost Labor Hours

January P 4,400 1,200
February 4,700 1,350
March 4,200 1,100
April 3,800 900
May 40,000 10,000
June 4,800 1,400
ILLUSTRATION

PROBLEM 1: Presented below is a list of costs and expenses usually incurred by Ram
Corporation, a manufacturer of furniture, in its factory.

1. Metal used in manufacturing tables

2. Insurance on factory machines
3. Leather used in manufacturing furniture
4. Wages paid to machine operators
5. Depreciation of factory machinery
6. Salaries of factory supervisors
7. Wood used in manufacturing furniture
8. Sandpaper, bolts, and nails
9. Property taxes on factory building
10. Rent of factory building

PROBLEM 2: Classify the following as either manufacturing, selling, or administrative

1. Metal for the manufacture of golf clubs

2. Wages of drivers delivering goods to customers
3. Rent on factory building
4. Freight-in materials purchased
5. President’s salary
6. Cost of machine breakdown
7. Power to operate factory equipment
8. Advertising
9. Commission paid to sales personnel
10. Travel expenses of salesmen

PROBLEM 3: Classify each of the following costs of Bug Company in two ways:

A – Variable or Fixed
B – Inventoriable Costs or Period Costs

V or F I or P
Example: Direct Labor V I

1. Wood used in bookcases

2. Machine depreciation based on machine hours
3. Fire insurance on factory equipment
4. Wiring used in radios
5. Indirect materials
6. Sales commissions
7. Bottles used to package liquid
8. Gasoline for a delivery truck
 9. Straight-line depreciation of trucks used for
delivery of sales to customers
10. Machine operator’s hourly wages

PROBLEM 5: Mighty Muffler, Inc. operates an automobile service facility, which

specializes in replacing mufflers on cars. The following table shows the costs incurred
during a month when 750 mufflers were replaced.

Number of Muffler Replacements

400 500 800

TOTAL COSTS
Fixed costs 50,000
Variable 60,000
Total Costs 110,000

COST PER MUFFLER

REPLACEMENT
Fixed costs
Variable
Cost per Unit

PROBLEM 6: The following is related to Antonio Industries for the last quarter:

Conversion cost P 435,000

Direct Materials 215,000
Manufacturing overhead 190,000
Selling and administrative expense 185,000

1. What is Antonio’s prime cost for last quarter?

2. Antonio’s total manufacturing cost is
3. Antonio’s total period cost is

PROBLEM 7: Westing Company major appliances. Because of growing interest in its

product, it just had its most successful year. In preparing the budget year for next year,
its controller compiled these data.

MONTH VOLUME IN MACHINE ELECTRICITY COST

HOURS
JULY 6,000 60,000
AUGUST 5,000 53,000
SEPTEMBER 4,500 49,500
OCTOBER 4,000 46,000
NOVEMBER 3,500 42,500
DECEMBER 3,000 39,000
 TOTAL 26,000 290,000

Using the high-low method, compute:

1. The variable costs per machine hour
2. The monthly fixed electricity costs
3. The total electricity costs if 4,800 machine hours are projected to be used in the
next month.

PROBLEM 8: The following data were collected from the records of the Receiving
department of a company:

Number of Items Received Receiving and Handling

Costs
January 2,800 17,500
February 2,000 12,500
March 1,190 7,437.50
April 5,200 32,500
May 4,410 27,562.50
June 4,016 25,100

Using the high-low method, determine the cost function.