01.30.2024 COST ACCOUNTING AND CONTROL - Cost Concepts, Terminologies and Behaviors

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REVIEW LAST MEETING
We were able to:
1. Define Cost Accounting;
2. Discuss the nature and purpose of Cost Accounting;
3. Differentiate Financial from Managerial Accounting;
4. Explain the relationship of organizational strategies and cost information; and
5. Explain value chain activities.
ACT120 – COST ACCOUNTING AND CONTROL
Cost Concepts, Terminologies

and Behaviors
2. COST CONCEPTS, TERMINOLOGIES
AND BEHAVIORS
Objectives:
At the end of this topic, you should be able to:
1. Differentiate product costs from period costs;
2. Enumerate and explain the components of product
costs;
3. Differentiate direct costs and indirect costs;
4. Explain the different kinds of costs according to
their behavior;
5. Separate mixed costs using high-low method;
6. Separate mixed costs using the least square
regression method; and
7. Define other costs terminologies.
COST TERMINOLOGIES AT A GLANCE
As to classification in the FS: As to behavior: Other
terminologies:
1. Product Costs - Variable Cost - Opportunity Cost
-Materials - Fixed Cost - Sunk Cost
-Labor - Mixed Cost - Committed Cost
-Overhead - Step Cost - Discretionary Cost
2. Period Costs - Controllable cost
- Noncontrollable cost
Methods of separating mixed costs:
- High-low method
-least squares regression method

WHAT IS A COST?
A cost reflects the amount of resources

sacrificed in order for the company to
achieve a certain objective such as
creation of goods or rendering of services
in order to earn revenues.
FS CLASSIFICATION
Product Costs - are costs identified and

incurred by an entity to manufacture a
product. It includes all raw materials used,
labor costs incurred, and all other indirect
costs.
Materials
Labor
Overhead
PRODUCT COSTS
Materials Labor Overhead
All raw materials and
other supplies used in
the manufacturing
Process.
Direct materials:
E.g. cost of wood for
Furniture making
Indirect materials:
E.g. cost of glue, nails,
Screws, etc.
PRODUCT COSTS
All raw materials and Salaries and other

other supplies used in benefits provided to all
the manufacturing workers.
Process.
Direct materials: Direct labor:
E.g. cost of wood for e.g. salaries paid
Furniture making to laborers of furniture
associated directly in
the process
Indirect materials: Indirect Labor:

E.g. cost of glue, nails, Salaries paid to other
- Screws, etc. Personnel necessary in
the manufacturing process
but not directly related in the
conversion process.
PRODUCT COSTS
All raw materials and Salaries and other All indirect costs
other supplies used in benefits provided to all necessary for
the manufacturing workers. Product conversion
Process.
Direct materials: Direct labor: - Indirect Materials
E.g. cost of wood for e.g. salaries paid - Indirect Labor
Furniture making to laborers of furniture - Depreciation of
associated directly in factory equipment
the process - insurance of factory
- maintenance and
Indirect materials: Indirect Labor: repair of eqp’t
E.g. cost of glue, nails, Salaries paid to other - factory utilities, etc
- Screws, etc. Personnel necessary in
the manufacturing process
but not directly related in the
conversion process.
COMPONENTS OF PRODUCT COSTS
Direct Materials
PRIME COST
Direct Labor
CONVERSION
Overhead COST
COMPONENTS OF PRODUCTS COSTS
Direct Materials
Direct Labor
MOH / OH / FAH
_________________________
TOTAL MANUFACTURING COSTS/PRODUCT
COST/
======================= INVENTORIABLE
COST
FS CLASSIFICATION
PERIOD COSTS – the entity’s operating
expenses.
They are called as such since they are much

more associated with time periods rather
than the manufacturing process.
They are all other expenses not related to

manufacturing.
PERIOD COSTS
Expenses incurred in
Marketing and advertising
promoting the entity’s p/s
Selling and distribution includes salaries of sales

personnel and delivery exp.
Administrative expenses includes office supplies,

depreciation of office PPE,
repairs and maintenance of
office PPE, and all other office
expenses
PRODUCT COSTS VS. PERIOD COSTS
COST BEHAVIORS
Variable Costs Fixed Costs
They are costs that change as the At whatever level of production
quantity of the goods produced within the relevant range, this
changes. Total amount of variable cost does not change. It is
costs is dependent to the level of independent of the level of
production. production.
Examples: Examples:
-Cost of materials - rent of facilities
-Cost of direct labor computed per - depreciation of equipment
Piece
COST BEHAVIORS
-Constant on a per unit basis -constant when presented as a total
-varies when presented as a total -varies on a per unit basis
Assume an entity’s normal manufacturing process with a range of 5,000

to 7,000 units of goods with a variable cost per unit of P20 and P15,000
fixed costs.
VC/unit Total VC Fixed Cost FC/unit
@ 5,000 u @ 5,000 u
@ 6,000 u @ 6,000 u
@ 7,000 u @ 7,000 u
COST BEHAVIORS
-Constant on a per unit basis -constant when presented as a total
-varies when presented as a total -varies on a per unit basis
Assume an entity’s normal manufacturing process with a range of 5,000

to 7,000 units of goods with a variable cost per unit of P20 and P15,000
fixed costs.
VC/unit Total VC FC FC/unit
@ 5,000 u P20 P 100,000 @ 5,000 u P 15,000 P 3.00

@ 6,000 u P20 P 120,000 @ 6,000 u P 15,000 P 2.50
@ 7,000 u P20 P 140,000 @ 7,000 u P 15,000 P 2.14
COST BEHAVIORS
Cost Equation
y = a + bx
Where:
y = total cost
a = total fixed cost
b = variable cost per unit
x = volume of activity
COST BEHAVIORS
How much is the total cost to
Cost Equation manufacture products with a variable
manufacturing unit cost per unit of
y = a + bx P25 and total manufacturing
fixed cost of P40,000 at the following
production levels:
a. 2,000 units
Where: b. 4,500 units
y = total cost c. 7,250 units
a = total fixed cost
b = variable cost per unit
x = volume of activity
COST BEHAVIORS
y = a + bx
How much is the total cost to
manufacture products with a variable
manufacturing unit cost per unit of
P25 and total manufacturing fixed
cost of P40,000 at the following
production levels:
a. 2,000 units
b. 4,500 units
c. 7,250 units
COST BEHAVIORS
y = a + bx
How much is the total cost to y = a + bx
manufacture products with a variable y = 40,000 + (25)(2,000)
manufacturing unit cost per unit of y = 40,000 + 50,000
P25 and total manufacturing fixed y = P90,000
production levels:
a. 2,000 units
b. 4,500 units
c. 7,250 units
COST BEHAVIORS
y = a + bx
How much is the total cost to y = a + bx
manufacture products with a variable y = 40,000 + (25)(2,000)
manufacturing unit cost per unit of y = 40,000 + 50,000
P25 and total manufacturing fixed y = P90,000
production levels: y = a + bx
a. 2,000 units y = 40,000 + (25)(4,500)
b. 4,500 units y = 40,000 + 112,500
c. 7,250 units y = P152,500
COST BEHAVIORS
y = a + bx y = a + bx
How much is the total cost to y = 40,000 +(25)(2,000)
manufacture products with a variable y = 40,000 + 50,000
manufacturing unit cost per unit of y = P90,000
P25 and total manufacturing fixed
cost of P40,000 at the following y = a + bx
production levels: y = 40,000 + (25)(4,500)
a. 2,000 units y = 40,000 + 112,500
b. 4,500 units y = P152,500
c. 7,250 units
y = a + bx
y = 40,000 + (25)(7,250)
y = 40,000 + 181,250
y = P221,250
COST BEHAVIORS
Mixed Costs Step Costs
Refers to costs that has both Costs that are constant on a
Variable and mixed components. Level of activity but increases

on another certain level of
activity.
Example: Example:
Utilities, since these are charged Salaries and commission of
With a base amount and goes agents that goes higher with
Higher with any usage over the different ranges of activity.
Base amount.
SEPARATING MIXED COSTS
In separating mixed costs, there can be two

methods to be used:
1. High-low Method
2. Least Squares Regression Method
HIGH-LOW METHOD
Janaya Corporation builds table top replicas of some of the most famous tourist attractions in Singapore.
The company is highly automated where maintenance costs shows as a significant expense. The owner
decided to use machine hours as the basis of predicting maintenance costs and has gathered the
following data for the following eight weekly operations:
Week Machine Hours Maintenance Cost
1 3,000 P 9,800
2 4,500 12,900
3 8,000 18,100
4 6,000 13,500
5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
8 7,000 16,000
Using the high-low method, determine the ff:

a. Variable Cost per unit
b. Total Fixed Cost
c. Total Expected Maintenance Cost on 8,200 machine hours
HIGH-LOW METHOD
Step 1. Determine the highest and
lowest activity and the cost associated
there unto.
HIGH-LOW METHOD
1 3,000 P 9,800
2 4,500 12,900
3 8,000 18,100
4 6,000 13,500
5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
8 7,000 16,000

b. Total Fixed Cost
HIGH-LOW METHOD
there unto.
Machine hours Maintenance cost
Highest 9,000 P24,800

HIGH-LOW METHOD
1 3,000 P 9,800
2 4,500 12,900
3 8,000 18,100
4 6,000 13,500
5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
8 7,000 16,000

b. Total Fixed Cost
HIGH-LOW METHOD
there unto.
Highest 9,000 P24,800

Lowest 3,000 9,800
HIGH-LOW METHOD
Step 2. Obtain the variable cost per
unit by dividing the change in cost
over the change in activity.
VC/unit = Cost at highest activity – Cost at lowest activity

Highest activity – lowest activity
HIGH-LOW METHOD
there unto.
Highest 9,000 P24,800

Lowest 3,000 9,800
HIGH-LOW METHOD

VC/unit = P24,800 – P9,800
9,000 - 3,000
HIGH-LOW METHOD

VC/unit = P24,800 – P9,800
9,000 - 3,000
HIGH-LOW METHOD

VC/unit = P24,800 – P9,800
9,000 - 3,000
Vc/unit = P15,000/6,000
HIGH-LOW METHOD

VC/unit = P24,800 – P9,800
9,000 - 3,000
Vc/unit = P15,000/6,000 = P2.50 / mh
HIGH-LOW METHOD
Step 3. Obtain the total fixed costs by
removing the variable component in
the total costs
HIGH-LOW METHOD
there unto.
Highest 9,000 P24,800

Lowest 3,000 9,800
HIGH-LOW METHOD
the total costs
Highest activity Lowest activity
Total Costs
Less: VC component
High 9,000 x P2.50
Low 3,000x P2.50
Fixed Cost
================
HIGH-LOW METHOD
the total costs
Total Costs P24,800

Less: VC component
High 9,000 x P2.50 22,500
Low 3,000x P2.50
Fixed Cost
================
HIGH-LOW METHOD
the total costs
Total Costs P24,800

Less: VC component
High 9,000 x P2.50 22,500
Low 3,000x P2.50
Fixed Cost P2,300
================
HIGH-LOW METHOD
the total costs
Total Costs P24,800 P9,800

Less: VC component
High 9,000 x P2.50 22,500
Low 3,000x P2.50 7,500
Fixed Cost P2,300
======================
HIGH-LOW METHOD
the total costs
Total Costs P24,800 P9,800

Less: VC component
High 9,000 x P2.50 22,500
Low 3,000x P2.50 7,500
Fixed Cost P2,300 P2,300
======================
HIGH-LOW METHOD
c. How much is the total maintenance cost at 8,200
machine hours?
HIGH-LOW METHOD
machine hours?
y = a + bx
HIGH-LOW METHOD
machine hours?
y = a + bx
y = 2,300 + (2.50)(8,200)
HIGH-LOW METHOD
machine hours?
y = a + bx
y = 2,300 + (2.50)(8,200)
y = 2,300 + 20,500
y = P22,800
======
LEAST SQUARES REGRESSION METHOD
Janaya Corporation builds table top replicas of some of the most famous tourist attractions in
Singapore. The company is highly automated where maintenance costs shows as a significant
expense. The owner decided to use machine hours as the basis of predicting maintenance costs
and has gathered the following data for the following eight weekly operations:
1 3,000 P 9,800
2 4,500 12,900
3 8,000 18,100
4 6,000 13,500
5 9,000 24,800
6 3,500 10,400
7 5,500 13,000
8 7,000 16,000

b. Total Fixed Cost
STEP 1. Prepare a table calculating x (activity), y (total cost),
xy, and x²
STEP 2. Substitute the computed amounts in the following

equation to get VC/unit.
y = a + bx
∑ y = na + b ∑ x
∑ xy = ∑ xa + b ∑ x²
STEP 3. Substitute b to any equation to get a (fixed cost).
LET’S COMPARE
HLM LSRM
VC/unit P2.50 P2.15
Total Fixed Cost P2,300.00 P2,315.63
OTHER COST TERMINOLOGIES
benefits foregone in choosing one action
overOpportunity Cost another
overOpportunity Cost another.
Sunk Cost Cost incurred that will not affect a future

decision.

decision.
Committed Cost Cost resulting from organizational

structure or use of facilities.

decision.
Cost resulting from organizational

Committed Cost
structure or use of facilities.
Discretionary Cost Cost arising from managerial

decisions
Opportunity Cost
benefits foregone in choosing one action over
another.
Sunk Cost
Cost incurred that will not affect a future decision.
Committed Cost
Cost resulting from organizational structure or use of
facilities.
Discretionary Cost
Cost arising from managerial decisions
Controllable cost
Cost that are able to be influenced on how
much shall be spent.
Opportunity Cost benefits foregone in choosing one action over
another.
Sunk Cost Cost incurred that will not affect a future decision.
Committed Cost Cost resulting from organizational structure or

use of facilities.
Discretionary Cost Cost arising from managerial decisions
Controllable cost Cost that are able to be influenced on how

much shall be spent.
Noncontrollable Cost
Costs that cannot be controlled or
influenced.
Let us have a review of what
you have learned!!!
Let us do these!!!
LET US DO THIS!
1. Direct materials are a:
Product Manufacturing
Period
Cost Overhead Cost
(a) Yes Yes No
(b) Yes No No
(c) Yes Yes Yes
(d) No No No
LET US DO THIS!
2. Which of the following is not an element of

manufacturing overhead?
(a) Sales manager’s salary.

(b) Plant manager’s salary.
(c) Factory repairman’s wages.
(d) Product inspector’s salary.
LET US DO THIS!
3. Indirect labor is a:
(a) nonmanufacturing cost.

(b) raw material cost.
(c) product cost.
(d) period cost.
LET US DO THIS!
4. Which of the following costs are classified as

a period cost?
(a) Wages paid to a factory custodian.
(b) Wages paid to a production department
supervisor.
(c) Wages paid to a cost accounting department
supervisor.
(d) Wages paid to an assembly worker.
LET US DO THIS!
5. A company has space that it uses to make a

component. It could rent the space to another
company. The rent is
a. a sunk cost
b. an opportunity cost
c. a joint cost
d. an avoidable cost
LET US DO THIS!
6. The kind of cost that can be ignored in short-

term decision making is
a. a differential cost.
b. an opportunity cost.
c. a relevant cost.
d. a sunk cost.
LET US DO THIS!
7. The major reporting standard for presenting

managerial accounting information is
a.relevance.
b.generally accepted accounting principles.
c. the cost principle.
d.the current tax law.
LET US DO THIS!
8. The sum of the direct materials costs, direct

labor costs, and manufacturing overhead
incurred is the
a.cost of goods manufactured.
b.total manufacturing overhead.
c. total manufacturing costs.
d.total cost of work in process.
LET US DO THIS!
9. Financial and managerial accounting are

similar in that both
a.have the same primary users.
b.produce general-purpose reports.
c. have reports that are prepared quarterly and
annually.
d. deal with the economic events of an
enterprise.
LET US DO THIS!
10. Penner Company reported total

manufacturing costs of $195,000,
manufacturing overhead totaling $39,000,
and direct materials totaling $48,000. How
much is direct labor cost?
a.Cannot be determined from the information
provided.
b.$282,000
c.$87,000
d.$108,000
LET US DO THIS!
11. The product cost that is most difficult to

associate with a product is
a.direct materials.
b.direct labor.
c. manufacturing overhead.
d.advertising.
LET US DO THIS!
12. Kinney Company applies overhead on the

basis of 150% of direct labor cost. Job No.
176 is charged with $50,000 of direct
materials costs and $60,000 of
manufacturing overhead. The total
manufacturing costs for Job No. 176 is
a.$110,000.
b.$200,000.
c.$150,000.
d.$135,000.
LET US DO THIS!
13. A cost which remains constant per unit at

various levels of activity is a
a.variable cost.
b.fixed cost.
c. mixed cost.
d.manufacturing cost
LET US DO THIS!
14. The increased use of automation and less

use of the work force in companies has caused
a trend towards an increase in
a.both variable and fixed costs.
b.fixed costs and a decrease in variable costs.
c. variable costs and a decrease in fixed costs.
d.variable costs and no change in fixed costs.
LET US DO THIS!
15. Which of the following costs are variable?
Cost 10,000 Units 30,000 Units
1. $100,000 $300,000
2. 40,000 240,000
3. 90,000 90,000
4. 50,000 150,000
a. 1 and 2
b. 1 and 4
c. only 1
d. only 2
LET US DO THIS!
16. Fontain, Inc. collected the following production data for the
past month:
Units Produced Total Cost
1,600 $22,000
1,300 19,000
1,500 22,500
1,100 16,500
If the high-low method is used, what is the monthly total cost
equation?
a. Total cost = $4,400 + $11/unit
b. Total cost = $5,500 + $10/unit
c. Total cost = $0 + $15/unit
d. Total cost = $3,300 + $12/unit
LET US DO THIS!
17. Harry’s Seafood used high-low data from June and July
to determine its variable cost of $15 per unit. Additional
information follows:
Month Units produced Total costs
June 2,000 $40,000
July 1,000 25,000
If Harry’s produces 2,300 units in August, how much is its
total cost expected to be?
a. $10,000
b. $49,500
c. $34,500
d. $44,500
LET US DO THIS!
18. In March direct labor was 60% percent of

conversion cost. If the manufacturing overhead
cost for the month was $38,000 and the direct
materials cost was $32,000, the direct labor
cost was:
A) $21,333
B) $48,000
C) $25,333
D) $57,000
NEXT LESSON
Manufacturing Accounting Cycle
Thank you and see you next meeting!

01.30.2024 COST ACCOUNTING AND CONTROL - Cost Concepts, Terminologies and Behaviors

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Cost Concepts, Terminologies

-least squares regression method

A cost reflects the amount of resources

Product Costs - are costs identified and

All raw materials and Salaries and other

Indirect materials: Indirect Labor:

They are called as such since they are much

They are all other expenses not related to

Selling and distribution includes salaries of sales

Administrative expenses includes office supplies,

Assume an entity’s normal manufacturing process with a range of 5,000

Assume an entity’s normal manufacturing process with a range of 5,000

@ 5,000 u P20 P 100,000 @ 5,000 u P 15,000 P 3.00

Variable and mixed components. Level of activity but increases

In separating mixed costs, there can be two

Using the high-low method, determine the ff:

Using the high-low method, determine the ff:

Highest 9,000 P24,800

Using the high-low method, determine the ff:

Highest 9,000 P24,800

VC/unit = Cost at highest activity – Cost at lowest activity

Highest 9,000 P24,800

VC/unit = Cost at highest activity – Cost at lowest activity

VC/unit = Cost at highest activity – Cost at lowest activity

VC/unit = Cost at highest activity – Cost at lowest activity

VC/unit = Cost at highest activity – Cost at lowest activity

Highest 9,000 P24,800

Total Costs P24,800

Total Costs P24,800

Total Costs P24,800 P9,800

Total Costs P24,800 P9,800

Using the high-low method, determine the ff:

STEP 2. Substitute the computed amounts in the following

Sunk Cost Cost incurred that will not affect a future

Sunk Cost Cost incurred that will not affect a future

Committed Cost Cost resulting from organizational

Sunk Cost Cost incurred that will not affect a future

Cost resulting from organizational

Discretionary Cost Cost arising from managerial

Committed Cost Cost resulting from organizational structure or

Discretionary Cost Cost arising from managerial decisions

Controllable cost Cost that are able to be influenced on how

1. Direct materials are a:

2. Which of the following is not an element of

(a) Sales manager’s salary.

(a) nonmanufacturing cost.

4. Which of the following costs are classified as

5. A company has space that it uses to make a

6. The kind of cost that can be ignored in short-

7. The major reporting standard for presenting

8. The sum of the direct materials costs, direct

9. Financial and managerial accounting are

10. Penner Company reported total

11. The product cost that is most difficult to

12. Kinney Company applies overhead on the

13. A cost which remains constant per unit at

14. The increased use of automation and less

18. In March direct labor was 60% percent of

Manufacturing Accounting Cycle

Thank you and see you next meeting!

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