COST IN

MANAGEMENT
ACCOUNTING

CHAPTER 3
PROFIT MANAGEMENT
MANAGEMENT ACCOUNTING
 “COSTS”
COSTS & EXPENSES

To manage cost means to control or reduce it or justify

its priority of occurrence.
Costs The monetary measure of the amount of resources given up or used for some purposes.
The monetary value of the goods and services expended to obtain current or future benefits.

Anything for which the cost is computed.

Cost Object
Any variable, such as level of activity or volume, that usually affects costs over the period of time.
Cost Driver

A grouping of individual cost items; an account in which a variety of similar costs are accumulated.

Cost Pool
An event, action, transaction, task or or unit of work with specified purpose.
• Value-Adding Activities
• Non-Value-Adding Activities
Activity
 • Capital Expenditures vs Operating Expenses
ACCOUNTANT’S
• Costs vs Expenses vs Losses
PERSPECTIVE • Production Cost vs Period Cost; Prime Cost vs Conversion Cost
• Direct Product Cost vs Indirect Product Cost

• Relevant Cost vs Irrelevant Cost

MANAGER’S • Direct Segment Cost vs Indirect Segment Cost

PERSPECTIVE • Avoidable Cost vs Unavoidable Cost

• Controllable Cost vs Uncontrollable Cost
• Planned Cost vs Actual Cost
• Budgeted Cost vs Standard Cost
• Out-of-Pocket Cost vs Non-Cash Cost
• Sunk Cost vs Future Cost
 • Explicit Cost vs Implicit Cost
ECONOMIST’S
• Opportunity Cost vs Imputed Cost
PERSPECTIVE • Incremental Cost vs Marginal Cost
• Variable Cost vs Fixed Cost
• Mixed Cost – Semi-variable Cost; Semi-Fixed Cost; Step Cost
RELEVANT RANGE

BAND OF ACTIVITY (OR STRETCH OF APPLICABLE ONLY FOR SHORT TERM

ACTIVITIES) WHERE THE BEHAVIOR OF ANALYSIS.
COSTS, EXPENSES AND REVENUES IS
VALID.
THE LEARNING CURVE THEORY

• “Experience Curve”
• Based on the simple idea that the time required to perform a task decreases as
the same person keeps on repeating the same task twice by an average of 20%.
(Pareto Law / 80-20 Rule)
 High-Low Method
SEPARATION
OF FIXED & Scattergraph Method
VARIABLE
COMPONENTS Least Squares Regression Method
HIGH-LOW METHOD

VC TFC TC
△ IN COST
TC - TVC TFC + UVC
△ IN UNITS
SCATTERGRAPH METHOD

VCY = a + bx TFC TC
b = △Y / △X
LEAST-SQUARE EQUATIONS

EQUATION METHOD DIRECT FORMULA

Y = a + bx a =  ȳ - bx̄

VC
∑Y = na + b∑x
∑Y = na + b∑x
∑XY = ∑xa + b∑x2
TFC TC
∑XY = ∑xa + b∑x2
COEFFICIENT OF CORRELATION

• Measure
  of the relationship or co-variation between dependent and independent
variables.
•
• Range values: -1 to 1 (r = -1 ≤ 0 ≤ 1)
 r = 0: No correlation
 r is positive: There is a positive/direct relationship between variables. (↑x, ↑y)
 r is negative: There is a negative/inverse/indirect relationship between variables. (↑x, ↓y)
COEFFICIENT OF DETERMINATION

• Computed by squaring the value of r (r2)

• Represents the percentage of the total variation in the dependent variable y that
is explained or accounted for by the regression equation.
• A very high r2 means that the values in the regression equation explain virtually
the entire amount of the total cost. Variables are highly correlated.
STANDARD ERROR OF ESTIMATE

• Determines the acceptable variance from the regression line.

• Indicates how much the estimated value is likely to be affected by random factors.

VC TFC
• A small value indicates a good fit between X and Y values.
• S’ = ∑ (Y – Y’)2 / n-2
TC
Prediction errors or Errors of Estimate - Differences between the estimated values
computed using the regression equation and the actual costs.