Basic Cost Concepts and

Treatment of Overheads

Gourav Vallabh
XLRI
Jamshedpur
 Introduction

 The accounting information system in an

organization has two major subsystem
1 Financial Accounting System
2 Cost Management Accounting System

 Financialaccounting is devoted to provide

information for external users.
 Introduction
 Costing: The process or the techniques adopted for
ascertainment of cost.
 Cost Accounting: Recording, Classification and Analysis
of cost by adapting various methods of costing and
preparation of books of accounts.
 The technique used for cost control and cost reduction
for the benefit of management. The techniques, which
help the management in decision-making process, is
Cost Accountancy.
 The costing and cost accountancy assumes a greater
importance in today’s global competitive market because
of stiff competition there is rarely any scope for
maximization of revenues by increasing the sales.
 Cont’d
 Cost Management produces information for internal users
especially, it identifies, collects, measures, classifies and
report information i.e useful to managers for determining
the planning, controlling, continuous improvement and
decision making.

 Cost Management encompasses both the cost accounting

and management accounting system.

 When cost accounting is used to comply with a financial

accounting objective, it measures and assign costs in
accordance with GAAP.

 Management accounting is concerned specifically with how

cost information and other financial and non financial
information should be used for planning, controlling,
continuous improvement and decision making.
 Cost Control and Cost Reduction
 Control always presupposes some yardsticks of
performance. In cost control the
standards/targets/goals/objectives are fixed well
in advance and management efforts are made to
achieve those standards (actual performance). If
the standards have not been achieved then
deviation or the variances are calculated and
corrective actions are taken so that adverse past
is not repeated.
 Cost reduction: may be defined as the
achievement of real and permanent reduction in
the unit cost of goods manufactured or services
rendered without impairing their suitability for the
use intended or diminution in the quality of the
product.
Relationship to other operational system and
functions -
Production
Design & Development System
System

Cost Management
System

Marketing & Distribution Customer Servicing

System System
 Role of Cost & Management
Accounting

The role is of support and team work.

They assist those who are responsible
for carrying out an organizational
objectives.
 President
Line Function Staff Function

Production Vice President Financial Vice President

Production Supervisor
Controller Treasurer

Machinery Assembly
Foreman Foreman
 Internal
The controller, the CAO, Cost
supervises Financial
all accounts Systems
departments. Tax
Audit
 The treasurer is responsible for finance function specifically, the treasurer
raises capital and manages cash, investments and investors relation.
 Cost, Expenses and Loss
 Cost is the cash or cash equivalent
value sacrificed for goods and services
that are expected to bring a current or
future benefit to organization.

 Expired costs are called expenses.

A loss is a cost that expires without

producing any revenue benefit.
 Cost Centre / Cost Object
 Itis the place where the different cost are
collected for the purpose of ascertainment
of the cost unit. The cost centre may be
any item such as products, customers,
departments, projects, activities and so
on.
 Assigning cost accurately to cost centre is
crucial. Distorted cost assignment can
produce erroneous decisions and poor
evaluations
 Cost Centre / Objects
 Costs are directly or indirectly associated with
cost objects or cost centre. Indirect costs are
costs that cannot be traced easily and
accurately to a cost object whereas direct
cost are those costs that can be traced easily
and accurately.
 Here, easily means in a economically feasible
way and accurately means that the costs are
assigned using a causal relationship.
 Cost Unit

 Cost Unit : It is the object for which the

cost is calculated. It may be unit of
product or job or batch.
 Responsibility Accounting
 It is a technique of cost control in which the
whole organization is divided in various
responsibility centers and each centre is under
the control of the particular manager. In this
technique every centre is responsible to control
the activities, which are incurred under its
control or authority. Responsibility Centres are
generally classified as follows:
 Cost Centre
 Profit Centre
 Investment Centre
 Revenue Centre
 COST CLASSIFICATION & ANALYSIS
COST CLASSIFICATION

ACCORDING TO ACCORDING TO FUNCTION ACCRDING TO ACCORDING TO ACCORDING TO

ELEMENTS OR OPERATIONS NATURE CONTROLLABILITY NORMALITY

NORMAL ABNORMAL
OVERHEAD FIXED VARIABLE SEMI CONTROLLABLE UNCONTROLLABLE
MATERIAL VARIABLE

LABOUR

COMMITTED FIXED COST DISCREATIONEY FIXED COST

PRODUCTION ADMINISTRATIVE SELLING DISTRIBUTION RESEARCH DEVELOPMENT PRE PRODUCTION

COST COST COST COST COST
COST COST
 Cost Classification
 According to element:
 Direct Material Direct
 Direct Labour Cost
 Direct Expense
Direct Cost: The cost element which can directly be
identified or attributable to the cost unit is called as
the direct cost.

 Overheads Indirect Costs

Indirect Cost: Conveniently it cannot be identified or
attributable to the cost unit but which can be included
in the cost unit through the cost centre only by the
process of the apportionment and absorption.
 Cost Classification
 According to Functions:

 Production Cost: It means the cost which begins with supply of

material and ends with primary packing of product.
 Administration Cost: This cost is not directly related to
production but it is related to formulation of policy, directing
organisation, controlling operations of undertaking etc.
 Selling Cost: These costs which are incurred to create and
increase the demand of product and to secure the orders.
 Distribution Cost: It means the cost which is related to the
operations of distribution of the product ready for dispatch.
 Research Cost: It means the cost of searching new or improved
products, new application of material, new or improved method
of production.
 Development Cost: This cost starts from the point when the
research work ends and decision is taken for the implementation
of the result of the research. It ends at the point when the formal
production of the product or application of new method
commences.
 Pre Production Cost: These cost are incurred on making trial
product run prior to formal production.
 Cost Classification
 According to Nature:
 Fixed Cost: It is a period cost. Fixed Cost means the
cost which is incurred or spent with a fixed amount in
the relevant range. It is further classified as:
• Committed Fixed Cost: These fixed cost are those cost
which arises because of the possession or creation of fixed
assets or which are the basis of an organisation.
• Discretionary Fixed Cost: These cost are incurred as a result
of management decisions.
 Variable Cost: It means those cost which varies
proportionate with the volume of activity. Such cost is
also termed as product cost.
 Semi Variable Cost: These costs have the element of
both fixed and variable cost. Such cost neither remain
constant for all levels nor varies proportionately with
the change in level of activity.
 Cost Classification
 According to Controllability:
 Controllable Cost: It means the cost which
can be controlled or influenced by the action
the action of the specific executive or the
head of the centre.
 Uncontrollable Cost: The cost which cannot
be controlled or influenced by any executive
of the business. For e.g. Expenses incurred in
the tool room department is controlled by the
foremen but the apportionment of the fixed
expenditure for the tool room department is
not controlled by the foremen.
 Cost Classification
 According to Normality:
 Normal Cost: The cost which is normally
incurred for achieving a particular level of
output at a given condition of working.
 Abnormal Cost: The extra cost in addition to
normal cost is the abnormal cost. This is not
normally incurred for achieving a particular
level of output at a given working condition
such abnormal cost is transferred to P & L
A/c.
 Prime and Conversion Cost
 Primecost is sum of Direct Material Cost
and Direct Labour Cost

 Conversion cost is sum of direct labour

cost and overhead cost.

 For
a manufacturing firm, conversion cost
can be interpreted as the cost of
converting raw material into a final product
 Cost of Goods Manufactured and
Cost of Goods Sold
 The Cost of Goods Manufactured (COGM)
represents total manufacturing cost of goods
completed during the current period. The only
cost assigned to goods completed are the
manufacturing cost of direct material, direct
labour and overhead.

 Once the COGM is calculated, the cost of

goods sold can be computed by adjusting both
opening and closing stocks.
 Overheads
 The indirect costs is called as overheads.
Indirect cost means that part of total cost
which cannot directly be recognized or
attributed in the final product or service
(i.e. to cost unit).
 At the same time it is also necessary that
to calculate cost of a cost unit all the
elements of cost should be included.
Therefore, the overheads are added in the
cost of final product through cost centre.
 Stages of Overhead Absorption
1. Collection of Overheads.
2. Allocation and Apportionment of
Overhead.
 Primary Distribution of Overheads: Allocation or
apportionment in all departments, service or
production.
 Secondary Distribution of Overheads: Service
Department further distributed in Production
department.
3. Absorption of Overheads: The charging
or recovering of overheads on the
product and job is called as absorption of
overheads or recovery of overheads.
 Stages of Overhead Absorption
1. Collection of Overheads: All the items of manufacturing
overheads of the business are collected at one sheet
and it is called collection of overheads.
2. (a) Allocation and Apportionment of Overheads:
Allocation of Overheads: Overheads directly related to
particular cost centre, transfer to department
concerned.
Apportionment of Overheads: If overheads incurred for
the business as a whole and not directly attributed to a
particular department or cost centre, then in this case
the amount of such item of overhead will be distributed
amongst the various departments on suitable basis.

Primary Distribution of Overheads: On the basis of

the allocation & apportionment the overheads are
first distributed amongst all the department whether
Production department or Service department. This
summary will be called as the summary of primary
distribution of overhead.
 Stages of Overhead Absorption
2. (b) Secondary Distribution of Overhead:
Under the secondary distribution of
overhead, the overhead of service
department as obtained form primary
distribution are further distributed
amongst the production department
on some suitable basis.
 Inter Service Transfers
 When one service department provides
services to other service department and also
takes services of the other service
departments this will be case of inter service
transfers.
 In this situation the secondary distribution of
overhead will be made by adopting any of
following methods depending upon the
situation.
 Simultaneous Equation Method.
 Repeated Distribution Method / Cycle Method.
 Step Ladder Method / Non-Reciprocal Method.
 3. Absorption of Overheads
 The charging or recovering of overhead
on the product & job is called as
absorption of overhead or recovery of
overhead.
 This absorption or recovery is made on the
basis of predetermined recovery rate. The
predetermined recovery rate may be
calculated by adopting any of the following
methods or basis as per the policy of the
management or nature of the business.
 Absorption of Overheads
 METHODS OF ABSORPTION OF OVERHEAD
(1) On the basis of % of material cost.
Overhead to be absorbed
Overhead Recovery/Absorption Rate = ---------------------------------------  100
Material Cost

(2) On the basis of % of Direct Wages.

(3) On the basis of prime Cost.
(4) On the basis of Direct Labor Hour.
(5) On the basis of Machine hour rate.
(6) On the basis of Units produced in the department.
Suitability
(1) If most work on machines -------- MHR Method
(2) If most work by same grades of workers -------- DLHR Method
(3) If most work by different grades of workers -------- % on Wage Method
 Problem on Secondary Distribution of Overheads
Deccan Manufacturing Ltd. has three department which are regarded as production
departments. Service departments cost are distributed to these production department using
the “Step Ladder Method “ of distribution. Estimates of factor overhead costs incurred by each
department in the forthcoming year are as follows. Data required for distribution is also shown
against each department :-

DEPARTMENT FACTORY DIRECT NO. OF AREA

OVERHEAD LABOUR HRS EMPLOYEES IN SQ. MT

PRODUCTION:-
X 1,93,000 4,000 100 3,000
Y 64,000 3,000 125 1,500
Z 83,000 4,000 85 1,500

SERVICE:-
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000

The overhead cost of the four service departments are distribution in the same
order VIZ P,Q,R & S respectively on the following basis:-
DEPARTMENT BASIS
P :- NO. OF EMPLOYEES
Q :- DIRECT LABOUR HOURS.
R :- AREA IN SQUARE METER.
S :- DIRECT LABOUR HOURS
You are required to prepare :-
1. A Schecule showing the distribution of overhead costs of the four service
departments to the three production departments.
2. Calculate the overhead recovery rate per direct labour hour for each of the three
production department.
 A Problem on Apportionment and Absorption of Overheads
A Company has two production departments and two service departments. The data relating to a period are as under:

Production Deptts Production Deptts Service Deptts Service Deptts (SD2)

(PD1) (PD2) (SD1)

Direct Materials Rs. 80000 40000 10000 20000

Direct Wages Rs. 95000 50000 20000 10000
Overhead Rs. 80000 50000 30000 20000
Power Requirement at Normal Capacity Kwh 20000 35000 12500 17500
Operations
Actual Power Consumption during the period Kwh 13000 23000 10250 10000

The power requirements of those departments are met by a power generation

plant. The said plant incurred an expenditure, which is not included above, of Rs
121875 out of which a sum of Rs 84372 was variable and the rest fixed. After
apportionment of power generation plant cost to the four departments, the service
department overheads are to be redistributed on the following bases
PD1 PD2 SD1 SD2

SD 1 50% 40% ---- 10%

SD2 60% 20% 20% ----

Required:
1. Apportion the power generation plant cost to the four departments.
2. Reapportion service deptt. cost to production deptts.
3. Calculate the overheads rates per direct labour hour of production departments, given
that the direct wages rates of PD 1 and PD 2 are Rs 5 and Rs 4 per hour respectively.
 Calculation of Machine Hour Rate Two Type

Simple MHR Composite / Comprehensive MHR

OR OR
MHR FOR OVERHEADS MHR FOR CONVERSION COST

Total overheads on Machine Total overheads on Machine + Direct Wages

= ----------------------------------------------- -----------------------------------------------------
Effective Working Hours of Machine Effective Working Hours of Machine.
Calculation of Effective Working Hours.
Example Gross Running Hours 2400

(A) (B) (C)

Setting up Hours Repairs & maintenance Hours
Working on 200 200
production
2000

Power consumed during Setting up time No power Power No power

consumed 200  0 200  0
(non productive)
200  0 =0 =0
=0

Productive Non or less Productive

UNDER ABSORPTION & OVER ABSORPTION OF
OVERHEADS
 If the overhead incurred and overhead applied or absorbed differ to
each other them there will be the case of under or over absorption.
DISPOSAL OF UNDER & OVER ABBSPTION OF OVERHEADS

THREE WAYS OF DISPOSAL

(1)
CAUSED DUE TO NORMAL
CAUSED DUE TO ABNORMAL
REASONS
TRANSFER TO COSTING
P&L A/C

SEASONAL (2)
NON SEASONAL (3)
MAY BE CARRIED FORWARD TO THE
SUBSEQUENT YEAR WITH THE VIEW SUPPLEMENTARY RATE
THAT SAME MAY BE SET OFF MAY BE CALCULATED
i.e. APPORTIONED IN THE
COST OF SALES,
CLOSING STOCK OF
FINISHERD & CLOSING
STOCK OF W.I.P IN THEIR
RESPECTIVE RATIOS.
A Problem showing treatment of under and
over absorption of Overheads
In a manufacturing concern, the predetermined rate of
overheads recovery is Rs 40 per machine hour. During
the year, total factory overhead amounted to Rs
88,96,000 and machine hour actually worked were
1,86,500 only.
Actual production and sale during the year were
1,20,000 units and 1,05,000 units respectively. The
production shop had 36,000 unfinished units and based
on technical estimates these were considered as 50%
complete.
Analysis of data revealed that 37.5% of the unabsorbed
overheads were attributable to initial inaccuracies in the
planning and the balance was due to rising price levels.
Show the treatment of unabsorbed overheads in cost
accounts.
 Cost Behavior (CB)
Cost Behavior (CB)
 CB is the general term for describing
whether a cost changes when the level
of output changes.

Fixed Cost (FC)

 FC are costs that in total are constant
within the relevant range as the level of
the activity driver varies.
 Variable Cost (VC)

Variable Cost (VC)

 VC are defined as costs that in total
vary in direct proportion to changes in
driver.

Linearity Assumption
 If the relationship is assumed, then the
main concern is how well this
assumption approximates the
underlying cost function
 Variable Cost (VC)
As with fixed cost, we can define the
relevant range as the range of activity for
which the assumed cost relationships are
valid.
Validity in context of VC refers to how
closely the linear cost function
approximates the underlying cost
function.
Cost
Large
Error
Region

Error

Relevant Range

0 Units X
Mixed Cost (MC) : are costs that have both
fixed and variable component.
Y = Fixed Cost + Total Variable Cost
Time Horizon : Determining whether a cost is
fixed or variable depends on time horizon.
According to economics, in the long run, all
costs are variable; in the short run at least one
cost is fixed.
The length of the short run period depends on
management judgement and the purpose for
which cost behavior is estimated.
 Recently, there have been some new
insights. These insights relate to activities
and the resources needed to enable an
activity to be performed.

 Inother words, the relationship between

resource spending and resource usage
can be used to define variable and fixed
cost behavior.
 Activity Based Resource Usage
Model
Flexible Resources : Cost of flexible resources
equals the cost of resources used. Thus, we
generally can treat the cost of flexible resources
as a variable cost.

Committed Resources
 Unused capacity is possible
 The annual expense is independent of
actual usage of the resource. (Committed
Fixed Expense)
 Activity Based Resource Usage
Model
 If organisation acquires resource in advance
through implicit contracts - usually with their
employees it is discretionary fixed expenses.

Activity Availability = Activity Output

+ Unused Capacity

Cost of activity supplied = Cost of activity used

+ Cost of unused activity
 Step Cost Behavior

 Step-variable costs : If the width of step is

narrow, it is called as step-variable costs.
 Step Fixed Cost : If the width of step is
wide, then it is called as step fixed cost.
 Methods for Separating Mixed
Costs into Fixed & Variable
Component
A. The high and low method
Change in Cost
V = -----------------------
Change in Activity

F = Total Mixed Cost - Variable Cost

 Methods for Separating Mixed
Costs into Fixed & Variable
Component

B.Scatterplot Method

C.The method of least squares (Best –

fittings)

D.Using Regression Programmes

(goodness of fit measures, confidence
intervals)
The learning curve and non linear cost
behavior.
 Cumulative Average time learning curve
 Incremental unit time learning curve

Managerial Judgement
Methods
Methods for
for Separating
Separating Mixed
Mixed Costs
Costs
 The High-Low Method
 The Scatterplot Method
 The Method of Least Squares

Variable
Component
Fixed
Component
Methods
Methods for
for Separating
Separating Mixed
Mixed Costs
Costs

Y = F + VX

TotalFixed cost
Variable
Measure of
activitycomponent
cost cost activity
per unit
of activity
output
 The
The High-Low
High-Low Method
Method
Month Material Handling Costs No. of Moves
January $2,000 100
February 3,090 125
March 2,780 175
April 1,990 200
May 7,500 500
June 5,300 300
July 4,300 250
August 6,300 400
September 5,600 475
October 6,240 425

Step
Step 1:
1: Solve
Solve for
for variable
variable cost
cost (V)
(V)
 The
The High-Low
High-Low Method
Method
Month Material Handling Costs No. of Moves
January $2,000 100
February 3,090 125
March 2,780 175
April 1,990 200
May 7,500 500
June 5,300 300
July 4,300 250
August 6,300 400
September 5,600 475
October 6,240 425
High Cost – Low Cost
V=
High Units – Low Units
 The
The High-Low
High-Low Method
Method
Month Material Handling Costs No. of Moves
January $2,000 100
February 3,090 125
March 2,780 175
April 1,990 200
May 7,500 500
June 5,300 300
July 4,300 250
August 6,300 400
September 5,600 475
October 6,240 425
$7,500 – Low Cost
V=
500 – Low Units
 The
The High-Low
High-Low Method
Method
Month Material Handling Costs No. of Moves
January $2,000 100
February 3,090 125
March 2,780 175
April 1,990 200
May 7,500 500
June 5,300 300
July 4,300 250
August 6,300 400
September 5,600 475
October 6,240 425
$7,500 – $2,000
V=
500 – 100
 The
The High-Low
High-Low Method
Method
$7,500 – $2,000
V=
500 – 100

V
V == $13.75
$13.75

Step
Step 2:
2: Using
Using either
either the
the high
high cost
cost or
or low
low cost,
cost,
solve
solve for
for the
the total
total fixed
fixed cost
cost (F).
(F).
 The
The High-Low
High-Low Method
Method
Y = F + V(X) High
High
$7,500 = F + $13.75(500) End
End
$625 = F
Y = F + V(X) Low
Low
$2,000 = F + $13.75(100) End
End
$625 = F
The cost formula using the high-low method is:
Total cost = $625 + ($13.75 x # of moves)
 The
The Scatterplot
Scatterplot Method
Method
Graph A--Anderson Company
Material
Handling Cost
$9,000 –
8,000 –
5
7,000 – 8
6,000 – 10
6 9
5,000 –
7
4,000 –
3,000 – 2 3
2,000 – 4
1
1,000 –
| | | | |
100 200 300 400 500
Number of Moves
 The
The Scatterplot
Scatterplot Method
Method
Graph B--High-Low Line
Material
Handling Cost
$9,000 –
8,000 –
5
7,000 – 8
6,000 – 10
6 9
5,000 –
7
4,000 –
3,000 – 2 3
2,000 – 4
1
1,000 –
| | | | |
100 200 300 400 500
Number of Moves
 The
The Scatterplot
Scatterplot Method
Method
Graph C—One Possible
Material
Handling Cost Scattergraph Line
$9,000 –
8,000 –
5
7,000 – 8
6,000 – 10
6 9
5,000 –
7
4,000 –
3,000 – 2 3
2,000 – 4
1
1,000 –
| | | | |
100 200 300 400 500
Number of Moves
 The
The Scatterplot
Scatterplot Method
Method
Activity Graph A--Nonlinear Relationship
Cost

0
Activity Output
 The
The Scatterplot
Scatterplot Method
Method
Graph B--Upward Shift in Cost Relationship
Activity
Cost

0
Activity Output
 The
The Scatterplot
Scatterplot Method
Method
Graph C--Presence of Outliers
Activity
Cost

Outlier
Outlier

Outlier Activity Output

Outlier
 The
The Method
Method of
of Least
Least Squares
Squares
Annual Cost Predicted Cost Deviation Deviation Squared
$2,000 $2,000 0 0
3,090 2,300 790 624,100
2,780 2,900 -120 14,400
1,990 3,200 -1,10 1,464,100
7,500 6,800 700 790 x 790
490,000
$3,090
5,300 4,400 900
- 2,300 810,000
4,300 3,800 500 250,000
6,300 5,600 700 490,000
5,600 6,500 -900 810,000
6,240 5,900 340 115,600
Total measure of closeness 5,068,200
 The
The Method
Method of
of Least
Least Squares
Squares
Material Line Deviations
Handling Cost
$9,000 –
8,000 –
5
7,000 – 8

6,000 – 10
6 9
5,000 –
7
4,000 – 2

3,000 – 3
1
2,000 – 4

1,000 –
| | | | |
0 100 200 300 400 500
Number of Moves
 The
The Method
Method of
of Least
Least Squares
Squares
Month Costs # Moves
January $2,000 100
February 3,090 125
March 2,780 175
April 1,990 200
May 7,500 500
June 5,300 300
July 4,300 250
August 6,300 400
September 5,600 475
October 6,240 425

Spreadsheet Data for

Anderson Company
 The
The Method
Method of
of Least
Least Squares
Squares
SUMMARY OUTPUT
Regression Statistics
Multiple R 0.92894908
R. Square 0.862946394
Adjusted R 0.845814693

Square
Regression Output for
Regression Output forAnderson
AndersonCompany
Company
Standard Error 770.4987038
Observations 10

ANOVA
df SS MS F
Regression 1 29903853.98 29903853.98 50.37132077
Residual 8 4749346.021 593668.2526
Total 9 34653200

Coefficient Standard Error t-Stat P-value

Intercept 854.4993582 569.7810263 1.49967811 0.172079925
X Variable 1 12.3915276 1.745955536 7.097275588 0.000102268
 The
The Method
Method of
of Least
Least Squares
Squares
The results give rise to the following equation:
Material
handling = $854.50 + ($12.39 x number of items)
cost
 Coefficient
Coefficient of
of Correlation
Correlation
Positive Correlation

r approaches +1

Machine Utilities Machine Utilities

Hours Costs Hours Costs
 Coefficient
Coefficient of
of Correlation
Correlation
Negative Correlation

r approaches –1

Hours of Industrial Hours of Industrial

Safety Accidents Safety Accidents
Training Training
 Coefficient
Coefficient of
of Correlation
Correlation
No Correlation

r~0

Hair Accounting Hair Accounting

Length Grade Length Grade
 Multiple
Multiple Regression
Regression

Y = F + V1 X1 + V 2 X2

X1 = Number of moves
X2 = The total distance
 Multiple
Multiple Regression
Regression
Material Handling Number Pounds
Month Cost of Moves Moved
January $2,000 100 6,000
February 3,090 125 15,000
March 2,780 175 7,800
April 1,990 200 600
May 7,500 500 29,000
June 5,300 300 23,000
July 4,300 250 17,000
August 6,300 400 25,000
September 5,600 475 12,000
October 6,240 425 22,400
 Multiple
Multiple Regression
Regression

Y = $507 + $7.84X 1 + $0.11X2

= $507 + $7.84(350) + $0.11(17,000)
= $507 + $2.744 + $1,870
= $5,121
 Managerial
Managerial Judgment
Judgment

Managerial judgment is critically

important in determining cost
behavior and is by far the most
widely used method in practice.