CHAPTER 2

TYPES OF COST DATA

AND COST ANALYSIS

KRISTOFFER JEM N. SALVA, MBA

After studying this chapter you will be able to:
• Identify the importance of cost data.

• Understand and define different types of costs.

• Recognize costs and their allocation.

Types of Costs

Costs are classified according to:

1. Function
2. Ease of traceability
3. Timing of charges against revenue
4. Behavior
5. Averaging
6. Controllability
Costs by Function
1. Manufacturing costs include any costs to produce a product consisting of direct material, direct
labor, and factory overhead.

Direct material becomes an integral part of the finished product

Direct labor is labor directly involved in making the product
Factory overhead includes all costs of manufacturing except direct material and direct labor

2. Nonmanufacturing costs (operating expenses) are expenses related to operating the business
rather than producing the product. These costs include selling and general and administrative expenses.

Selling (marketing) expenses include the cost of obtaining the sales and distributing the
product to the customer. Selling expenses may be analyzed for reasonableness by product,
territory, customer class, distribution outlet, and method of sale. Marketing expenses should be
evaluated based on the success of distribution methods.
General and administrative expenses include the costs incurred for administrative activities.
Costs by Ease of Traceability
Direct costs are business expenses that can be directly applied to producing a specific cost object, like
a good or service. A cost object is something for which cost is measured such as a specific product, a
specific department or a specific branch.

Indirect (common) costs are difficult to trace directly to a specific cost object. These costs are
commonly shared by multiple products, different departments, or branches; hence, such costs cannot
practically be traced to a cost object.
Costs by Timing of Charges Against Revenue
Period costs are related to time rather than to producing the product. They are charged against
revenue in full in the year incurred.

Product costs are related to manufacturing a product. They are charged to inventory first and then to
cost of sales when sales are made.
 PRODUCT COSTS PERIOD COSTS

Always related to the manufacturing process Not affected by production levels

Related to volume, such as units produced or labor

Related to overhead and indirect costs
hours

Always variable, depending on production levels Usually fixed, but can also be semi-variable

Include labor, materials, supplies, and factory

Includes administrative, sales, and distribution costs
overhead

Are recorded on a balance sheet Are recorded on an income statement

Costs by Behavior

Fixed costs include the costs that remain constant regardless of activity. As sales increase, fixed
costs do not increase; therefore, profits can increase rapidly during good times. However, during bad
times fixed costs do not decline, which causes profits to fall rapidly.

Variable costs include the costs that vary directly with changes in activity (e.g., direct material, direct
labor). Thus, a 20 percent increase in variable cost accompanies a 20 percent increase in sales.

Costs by Averaging
Average costs are the total costs divided by total units. For example, if total cost is $10,000 for the
production of 1,000 units, the average cost is $10 per unit.
Costs by Controllability

Controllable costs are those costs over which a manager has direct control.

Uncontrollable costs are those costs over which a manager has no control.

How Do Your Costs Behave?

Definition of Cost Behavior
Cost behavior is an indicator of how a cost will change in total when there is a change in some
activity. In cost accounting and managerial accounting, three types of cost behavior are usually
discussed:

•Variable costs. The total amount of a variable cost increases in proportion to the increase in an
activity. The total amount of a variable cost will also decrease in proportion to the decrease in an
activity.
•Fixed costs. The total amount of a fixed cost will not change when an activity increases or
decreases.

Understanding how costs behave is important for management's planning and controlling of its
organization's costs.
Assuming your total variable cost are $100, $500 and $1,000 per period.
Assuming your total variable cost are $100, $500 and $1,000 per period.
FORMULAS:

1. Total Costs = Total Fixed Costs + Total Variable Costs

2. Variable Cost per unit = Total Variable Costs / Volume in Units

3. Volume in units = Total Variable Costs / Variable Cost per unit

4. Total Variable Costs = Volume in units x Variable Cost per unit

5. Fixed Cost per unit = Total Fixed Costs / Volume in units

6. Total Fixed Costs = Volume in units x Fixed Cost per unit

7. Unit Average Cost = Total Costs / Volume in units

or
= Variable Cost per unit + Fixed Cost per unit
Example 1: Your company is operating at idle capacity.
Current production is 100,000 units. Total fixed cost is
$100,000, and variable cost per unit is $3. If production
increases to 110,000 units, how much is your:

1. Total fixed cost

2. Fixed cost per unit
3. Total variable cost
4. Variable cost per unit
5. Unit Average Cost
6. Total Cost
Example 1: Your company is operating at idle capacity. Current production is 100,000 units. Total
fixed cost is $100,000, and variable cost per unit is $3. If production increases to 110,000 units,
how much is your:

1. Total fixed cost = $100,000

2. Fixed cost per unit
3. Total variable cost
4. Variable cost per unit
5. Unit Average Cost
6. Total Cost
= $.91 ($100,000/110,000 units)
= $330,000 (110,000 units x $3 per unit)
= $3
= $3.91 ($3 + $.91) or ($430,000 / 110,000 units)
= $430,000 ($100,000 + $330,000)
Example 2: There are 100 estimated units for product line X. The fixed cost is $600, and the
variable cost is $2.25 per unit. The total cost is:
Example 2: There are 100 estimated units for product line X. The fixed cost is $600, and the
variable cost is $2.25 per unit. The total cost is:

Fixed Cost $600

Variable Cost 225 (100 units x $2.25 per unit)
Total Costs $825
Example 3: Your company reached its sales volume high in May. The lowest volume occurred in
February.

Total Cost
Unit Volume
High Point (May) $4,000
32,000
Minus Low Point (February) 2,800
20,000
Solve the following:
Change due to volume $1,200
1. Variable cost per unit
12,000
2. Total fixed cost using either the lowest or
highest volume level
3. Fixed cost per unit
4. Unit Average Cost
Example 3: Your company reached its sales volume high in May. The lowest volume occurred in
February.

Total Cost
Unit Volume
High Point (May) $4,000
32,000
Minus Low Point (February) 2,800
20,000
Solve the following:
Change due to volume $1,200
1. Variable cost per unit = $.10 ($1,200 / $12,000
12,000
units)
2. Total fixed cost using either the lowest or = $800 {$2,800 – ($.10 x 20,000 units)
highest volume level = $800 {$4,000 – ($.10 x 32,000
units)
3. Fixed cost per unit = .067 ($800 / 12,000 units)
4. Unit Average Cost = .167 ($.10 + $.067)
Example 4: Your company is operating at idle capacity. Current production is 150,000 units. Total
fixed cost is $130,000, and variable cost per unit is $5. If production increases to 190,000 units, how
much is your:

1. Total fixed cost

2. Fixed cost per unit
3. Total variable cost
4. Variable cost per unit
5. Unit Average Cost
6. Total Cost