TOPIC 2: Cost terms, concepts, and behavior

1. Nature and classification of costs

2. Analysis of cost behavior (variable, fixed, semi- variable/mixed, step-cost)
3. Splitting mixed cost (high-low, scatter graph, least-squares regressions)

TOPIC OUTLINE:
1. Cost – any sacrifice to achieve an objective.
2. Types of Costs
a. As to Purpose (Product vs Period)
b. As to Traceability (Direct vs Indirect)
c. As to Behavior (Variable vs Fixed)
d. As to Control (Controllable vs Non-Controllable)
e. As to Relevance (Differential vs Opportunity vs Sunk vs Committed)
f. As to Quality (Conformance; Preventive and Appraisal vs Non-Conformance; Internal
and External Failure)
3. Cost of Goods Manufactured and Cost of Goods Sold
4. Cost Behavior
a. Variable (Pure and Step)
b. Fixed (Discretionary and Committed)
c. Mixed Costs and Cost Formula
5. Cost Analysis
a. Qualitative (Account Analysis and Engineering Approach)
b. Quantitative (High-Low, Scatter Graph, and Simple Regression)

PRACTICE PROBLEMS
Problem 1(Cost Classification)
1.Depreciation of salespersons' cars.
2.Rent on equipment used in the factory.
3.Lubricants used for machine maintenance
4.Salaries of personnel who work in the finished goods warehouse.
5.Soap and paper towels used by factory workers at the end of a shift.
6.Factory supervisors’ salaries.
7.Heat, water, and power consumed in the factory.
8.Materials used for boxing products for shipment overseas.
9.Advertising costs.
10. Workers’ compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company’s executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the company’s product.

Required: For each cost item, indicate whether it would be variable or fixed with respect to the
number of units produced and sold; and then whether it would be a selling cost, an administrative
cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be
treated as a direct cost or an indirect cost with respect to units of product.

Problem 2: (COGM & COGS) Loboc Corporation a variety of products in its factory. Data for the
most recent month’s operations appear below:
Beginning raw materials inventory P 60,000
 Ending raw materials inventory 45,000
Direct labor 135,000
Purchases of raw materials 690,000
Manufacturing overhead 370,000
Beginning work in process inventory 120,000
Ending work in process inventory 130,000
Beginning Finished Goods 200,000
Ending Finished Goods 220,000
Required: Compute the company’s cost of goods manufactured and cost of goods sold.

Problem 3: (COGM & COGS) Guimaras Corporation has the following information:
Increase (Decrease)
Raw materials P 10,000
Work-In Process (5,000)
Finished Goods 8,000
Other information:
Direct materials purchased P 50,000
Direct labor 40,000
Manufacturing Overhead 60% of total conversion cost
Required:
1. How much is the total manufacturing cost for the period?
2. How much were the total goods manufactured?
3. How much were the total cost of goods sold?

Problem 4: (COGM & COGS) The following selected information was extracted from the 2011
accounting records of Midina Products Inc.
Raw Materials Used* P 284,000 Building Depreciation** 330,000
Direct Labor 178,000 Advertising Expense 80,000
Indirect Labor 35,000 Factory Supervisor Salary 120,000
Sales Commissions 150,000 Factory Maintenance 400,000
Executive Officers’ 100,000 Plant manager’s salary 100,000
Salaries
*Includes indirect materials amounting to P 4,000.
**Seventy percent of the company's building was devoted to production activities; the remaining 30%
was used for selling and administrative functions. Midina's beginning and ending work-in-process
inventories amounted to P 306,000 and P 245,000, respectively. Factory maintenance
cost includes P100,000 that were spent in maintaining the factory worker’s lounge room.
Required: Determine the following:

Problem 5: (Cost Behavior): Complete the following table:

500 units 1,000 units 2,000 units
Variable cost per unit P20.00 _______ _______
Fixed cost per unit _______ _______ _______
Total cost per unit _______ _______ _______

Total Variable Costs _______ _______ _______

Total Fixed Costs P 10,000 _______ _______
Total Costs _______ _______ _______

Problem 6: (Cost Behavior) The following data were taken from the income statement of Batangas
Corporation.
Units Produced 10,000 12,000 14,000
Utilities 20,000 24,000 28,000
Salaries and Wages 70,000 80,000 90,000
Depreciation 40,000 40,000 40,000
Repairs and Maintenance 30,000 36,000 42,000
Indirect Materials 45,000 53,000 61,000
Required: Identify each of the company’s expenses as either variable, fixed, or mixed costs.
Problem 7: (High-Low & Least Square) Pampanga Corporation provides a personalized training
program that is popular with many companies. The number of programs offered over the last five
months, and the costs of offering programs are as follows:
Month Programs Cost Month Programs Cost
Offered Incurred Offered Incurred
June 55 P 154 September 50 P 147
July 45 P 140 October 75 P 190
August 50 P 147

Required:
1. Using the high-low method, compute the variable cost and total fixed cost per program
2. Using the least-square regression method, compute the variable cost per and total fixed cost
of the program.

Problem 8: (High-Low Method) At the activity level of 5,000 direct labor hours, average unit cost
amount to P2.00.
Required: The following are independent of each other:
1. How much is the total cost at 6,000 direct labor hours if the average unit cost at the activity
level of 4,000 direct labor hours amount to P2.50?
2. How much is the total cost at 6,000 direct labor hours if the average unit cost at the activity
level of 4,000 direct labor hours amount to P2.00?
3. How much is the total cost at 6,000 direct labor hours if the average unit cost at the activity
level of 4,000 direct labor hours amount to P2.25?
4. How much is the total cost at 6,000 direct labor hours if the average unit cost at the activity
level of 4,000 direct labor hours amount to P1.75 when total fixed cost increased by P1,500
when it reach 5,000 direct labor hours?
5. How much is the total cost at 6,000 direct labor hours if the average unit cost at the activity
level of 4,000 direct labor hours amount to P1.70 when variable cost per unit increased by
P.40 when it reach 5,000 direct labor hours?

Problem 9: (Visual Fit) The following graph pertains to the total maintenance cost of Tarlac
Corporation:
5000
Total Maintenance Cost

4000

3000

2000

1000
0 100 200 300 400 500 600
Machine Hours
Required:
1. The cost function of the total maintenance cost would be?
2. How much would be the total variable maintenance cost if the activity level would be 300?
3. How much would be the total maintenance cost if the activity level would be at 600?

Problem 10: (Least – Square) Company B, a manufacturer in the textile industry, has the following
data for its etching costs and the no. of units produced.
Week Units (X) Total Etching Cost (Y)
1 4 18
2 3 17
3 8 25
4 6 20
5 7 24
 6 2 16
Required: Using the least-square method, estimate the variable cost per units produced and the fixed
cost per week, and estimate the total etching cost if the company will be able to produced 5 units.

Problem 11: (High-Low & Least Square) As part of a cost study, the cost accountant of Rizal
Corporation has recorded the cost of operations at seven different levels of material usage. This
information is shown as follows:
Kilos of Materials Cost of Operations
100 P 1,000
75 600
25 400
150 1,500
175 1,600
50 600
125 1,300

Additional Information:
● Sum of the Kilos (X)700

● Sum of the costs (Y)P 7,000

● Sum of the kilos multiplied by costs (XY)P 852,500

● Sum of the kilos squared (X2)87,500

Required: (RP-CPA Adapted)

1. Using the high-low method, the variable cost of operations per kilo of materials used is?
2. Using the same high-low method, the fixed cost of operation is?
3. Using the least square method, the average rate of variability per kilo of materials used is?
4. Using the least square method, the fixed cost portion of the cost is?

Problem 12: (Indifference Point) CDO Corporation is currently paying its five salespersons a
monthly salary of P 20,000 each and P10 sales commission for every unit sold. CDO is evaluating
changing its scheme with a P 8,000 monthly salary for the four salespersons and a P20 sales
commission for every unit sold while the remaining salesperson, acting as a team leader, will receive a
monthly salary of P 20,000
Required: What sales level would the two payment scheme be indifferent?

Problem 13: (Cost of Quality) Eames Company's quality cost report is to be based on the following
data:
Technical support provided to suppliers P 20,000
Test and inspection of in-process goods P 67,000
Depreciation of test equipment P 68,000
Quality data gathering, analysis, and reporting P 46,000
Warranty repairs and replacements P 97,000
Debugging software errors P 22,000
Downtime caused by quality problems P 95,000
Returns arising from quality problems P 12,000
Supervision of testing and inspection activities P 24,000

Required: Compute the amount to be presented as Preventive Costs, Appraisal Costs, Internal Failure
Costs and External Failure Costs.

Problem 14: (Cost of Quality) Fado Company's quality cost report is to be based on the following
data:
Net cost of scrap P 18,000
Quality circles P 84,000
Depreciation of test equipment P 32,000
 Returns arising from quality problems P 59,000
Systems development P 45,000
Supplies used in testing and inspection P 68,000
Product recalls P 34,000
Disposal of defective products P 62,000
Debugging software errors P 56,000

Required: Compute the amount to be presented as Preventive Costs, Appraisal Costs, Internal Failure
Costs and External Failure Costs.