COST CONCEPTS,

CLASSIFICATIONs,
and
COST BEHAVIOR
Presentation -Group 1
COST ACCOUNTING
is a managerial accounting process
that involves recording, analyzing, and
reporting a company's costs.
is an internal process used only by a
company to identify ways to reduce
spending.
involves assigning costs to cost
objects that can include a company's
products, services, and any business
activities.
HOW COST ACCOUNTING IS
USED?

Plan your budget
Making a detailed
project plan will result in
lower cost variances—or
fewer differences between
your initial budget and
actual spending.
COST CONTROL
Monitor all expenses
Means monitoring all your
expenditures so you have a clear
and detailed understanding of your
budget. This is typically done for a
certain project or over a certain
period, so you can stay on budget
and make any necessary
adjustments.
Use change
control systems
is a set of steps that
manage any changes that come
through from stakeholders while
a project is in progress.This
helps prevent scope creep
because you can be prepared for
changes as they occur and adjust
the project accordingly.
Manage your time
is an important cost control
method because when the total
time of a project increases, the
total cost of the project also
increases. Staying within your
estimated project schedule is one
of the best ways to stay within
project budget.
 internal costs
are costs that a business bases its price on. They include costs like materials, energy,
labour, plant, equipment and overheads.
 EXPANSION PLANS
Companies looking to expand their product line need to understand their cost
structure. Cost accounting helps management plan for future capital expenditures,
which are large plant and equipment purchases.
 Financial statements
Cost accounting can contribute to preparing required financial statements, an area
otherwise reserved for financial accounting. The prices and information developed and
studied through cost accounting will likely make it easier to gather information for financial
accounting purposes.
CLASSIFICATION OF COSTs
 Manufacturing Costs
AS TO FUNCTION:

DIRECT MATERIAL DIRECT LABOR MANUFACTURING

OVERHEAD

Prime Costs Conversion Costs

 DIRECT MATERIAL
Raw materials that become an integral part of the product and that can
be conveniently traced directly to it.

EXAMPLE: A Central Processing Unit (CPU) installed on the motherboard.

 direct labor
The cost of salaries, wages, and fringe benefits for personnel who work
directly on the manufactured products.

EXAMPLE: Wages of personnels who assemble computers.

 manufacturing overhead
Manufacturing costs that cannot be traced directly to specific units produced.
Indirect Materials
Materials used to support the
production process but do not become
integral part of the finished product.
Examples: lubricants and cleaning
supplies used in the desktop assembly.
Indirect labor
Wages paid to employees who are not
directly involved in production work but whose
services are necessary for the manufacturing
process.
Examples: production supervisor, maintena-
nce-workers, security guards.
 oTHER MANUFACTURING COSTS
Overtime Premium
Is the extra compensation paid to an employee who works beyond the time normally
scheduled. The overtime premiums for all factory workers are usually considered to be part of
manufacturing overhead. Product specific overtime premiums are part of direct labour.

Example: Suppose an electronics

Centralized technician Data who assembles radios earns $16.00 per hour. The
technician works 48 hours during Processinga week instead of the scheduled time of 40 hours. The
overtime pay scale is time and a
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150 percent of the regular wage. The technician's
compensation for the week isincididunt
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Direct-labor cost ($16 x 40)...................................................$640
Overhead (overtime premium: 1/2 x $16 x 8)........................ 64
Total compensation paid.............................................................$740
idle time
breakdowns or new setups of production runs. Such idle time is an unavoidable feature
of most manufacturing processes.

Example:
Suppose that during one 40- hour shift, a machine breakdown resulted in idle time of
1½ hours and a power failure idled workers for an additional ½ hour. If an employee earns
$14 per hour, the employee's wages for the week will be classified as follows:

Direct-labor cost ($14 x 38)........................................ $532

Overhead (idle time: $14x2)....................................................... 28
Total compensation paid....................................................... $560
 NON-MANUFACTURING COSTS
all costs which are not incurred in transforming materials to finished goods

Administrative
Selling Costs
Costs

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all costs associated with marketing or

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selling a product. magna aliqua.
Example: advertising and promotion
All executive, organizational, and
clerical costs.
Example: salaries of top management
As to Traceability to Cost Object:

direct cost indirect cost

a cost that can be traced to a cost that is not directly
a particular department. traceadled to the production of
a good or service.
Example:
The salary of an IT
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Example:
Technician is a direct cost of Computers, electricity, and
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the desktop service department. magna aliqua.

rent,
As to Managerial Influence:

controllable costs uncontrollable costs

costs that are subject to costs over which a given
significant influence by a particular manager does not have significant
manager within the time period under influence.
consideration.

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As to Time-Frame Perspective:

committed costs discretionary costs

results from an arises as a results of a

organization's ownership management decision to
or use of facilities and its spend a particular amount
basic organization structure of money for some purpose.

Example: Lorem ipsum dolor sit amet, Example:

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Property Taxes,
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amount spent on
depreciation on buildings
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advertising, promotion, etc.
 product costs versus period costs
As to timing recognization as expense:

Product Cost Period Cost

costs that “attach” or cling to the units that are costs that are recognized as expense in the income
produced and are reported as assets until the statement on the period in which the cost was
goods are sold. include direct materials, direct incurred. It include all selling costs and
labour, and manufacturing. administrative costs.

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distinguishing costs on financial statements
Services Merchandisers Manufacturers
Buy finished goods. Buy raw materials.
Provides a service
Sell finished goods. Produce and sell
finished goods.

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 balance sheet

MERCHANDISER MANUFACTURER

CURRENT ASSETS CURRENT ASSETS

 CASH CASH
RECEIVABLES PREPAID EXPENSES
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 RECEIVABLES consectetur adipiscing elit,
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 PREPAID EXPENSES magna aliqua.
incididunt ut labore et dolore INVENTORIES
MERCHANDISE INVENTORY RAW MATERIALS
WORK IN PROCESS
FINISHED GOODS
 income statement
Services Merchandisers Manufacturers
schedule cost of goods sold schedule cost of goods sold
manufactured

a detailed listing of is a detailed schedule

the manufacturing costs showing the costs of goods
incurred during an sold and change in finished-
accounting period and goods inventory during an
showing the changes inLorem ipsum dolor sit amet,
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work-in-progress inventory.
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Flow of Product Costs through Balance Sheet and
Income Statement Accounts
COST CLASSIFICATION AS TO BEHAVIOR

VARIABLE COSTS
1
STEP-VARIABLE COSTS

FIXED COSTS
2
STEP-FIXED COSTS

MIXED COSTS
3
CURVILLINEAR COSTS
4
 variable costs STEP-variable costs
changes in total in direct propor are the cost of a inventory. resource
tion to a change in the level of activity (or that is obtainable only in large chunks and
cost driver). that increases or decreases only in response
to fairly wide changes in activity.
 fixed cost
remains unchanged in total as the level
of activity (or cost driver) varies.
STEP-fixed cost
some costs remain fixed over a wide range of
activity but jumps to a different amount for activity
levels outside that range.. A step fixed cost take
a"step up" if certain things happen.
 mixed costs
also know as semi-variable cost, are business expenses that have a both
fixed and a variable component
FORMULA:

MIXED COST = FIXED COST + ((VARIABLE COST PER UNIT)( NUMBER OF UNITS))
MIXED COST = FIXED COST + TOTAL VARIABLE COST
 curvillinear costs
also called a "nonlinear cost", is an expenses which increases with an increase
in the production level of activities.
 relevant range
is the range of activity within which the assumptions about the variable and
fixed costs are valid.

Example:
A Curvillinear with a Relevant Range
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SEPARATION OF MIXED COSTS

HIGH-LOW METHOD
1
SCATTERGRAPH PLOT METHOD
2
LEAST-SQUARES REGRESSION
3
MULTIPLE REGRESSION
4
 high-low method
is a cost estimation method in which a cost line is fit using exactly two data
points- the high and the low activity levels.

Cost and Hours of Operation, Larson’s Company

 high-low method
Variable cost per rate = Difference between the costs corresponding to the highest - Lowest Activity Levels
Difference between the High Activity Level - Lowest Activity Levels
Fixed cost = Total Cost at High Activity Level – (Variable cost per Rate x High Output)
Fixed cost = Total Cost at Low Activity Level – (Variable cost per Rate x Low Output)
Total cost = Fixed cost + (Variable rate x Forecasted Activity Level)

VARIABLE RATE = (3750 – 1000) / (500 – 100) = 2750/400

= 6.875
FIXED COST = 3750 – (6.875 X 500)
= ipsum
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JUNE COST = 312.50 + (6.875 X 350)

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= 2718.75
magna aliqua.
 scattergraph plot method
taking into account all data sets available and plotting them in a scattergraph.

Cost and Hours of Operation, Larson’s Company

scattergraph plot method formula
VARIABLE RATE = (2250 – 1000) / (300 – 100) = 1250/200
= 6.25
FIXED COST = 2250 – (6.25X 300)
= 375
JUNE COST = 375 + (6.25 X 350)
=Lorem
2562.50
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 multiple regression
estimates a linear (straight-time) relationship betwwen a dependent
variable and two or more independent variables.

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 least-squares regression method
mini mizes the sum of the squared deviations between the cost line and the
date points.
COST CLASSIFICATIONS FOR DECISION MAKING

OPPORTUNITY COSTS
1
SUNK COSTS
2
DIFFERENTIAL COSTS
3
MARGINAL AND AVERAGE COSTS
4
 opportunity costs
is defined as the benefit that is sacrificed when the choice of one action
precludes taking an alternatives course action.
 sunk costs
are costs that have been incurred in the past. They do not affect future
costs and cannot be changed by any current or future action.
 differential costs
is the amount by which the cost differ under two alternative actions.

Example:
A Country government is considering two competing sites for a new landfill.
If the northern site is chosen the annual cost of transporting refuse to the site is
projected at $85,000. If the Southern site is selected, annuall transportation charges
are expected to $70,000. The annual differential cost of transporting refure is
calculated as follows.
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Annual cost of transporting refuse to northern site.......................................... $85,000
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Annual cost of transporting refuse to southern site......................................... $70,000

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magna aliqua.

Annual differential cost.............................................................................................. $15,000

 marginal costs
which is the extra cost incurred when one additional unit is produced.

Example:
Producing an additional teak desk. The marginal cost of the second desk is
₱1,900. However, the average cost per unit when two desks are manufactured is
₱3,900.

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Change in quantity = 2 desk - 1 desk = 1 teak desk
Change in total cost = 3,900 - 1,900 = 2,000

Marginal Cost = 2,000 / 1

Marginal Cost =. 2,000

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 average cost
The cost per unit manufactured in a production run. This amount vary,
deoending on the number of units produced.

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Average Total Cost = Total Cost of Production / Quantity of Units Produced
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= 3,900 / 2
magna aliqua.

= 1,950
THANK
YOU!