CHAPTER 4:

COST IN MANAGERIAL ACCOUNTING :

Concepts, Classifications, Accumulation

Presented by : Angel Sacpa Paulino
Presented to : Maam Glyn Fabros

COST
the monetary measure of the amount of
resources given up or used for some
purposes.

the monetary value of goods and services
expended to obtain current or future
benefits.
Cost
object
- anything for which cost is computed.
- ex: a product, product line, segment of the organization
Cost driver - any variable, such as a level of activity or
volume that usually affects costs over a
period of time.
- ex: production, sales, number of hours
Cost pool - a grouping of individual cost items; an
account in which a variety of similar
costs are accumulated.
- ex: work in process, factory overhead control
Activity - an event, action, transaction, task, or unit
of work with a specified purpose.





are necessary (non-eliminable) to produce the product.

ex: assembling the different component parts of the product.



that do not make the product or service more valuable to
the customer.

ex: moving materials and equipment parts from/to the stockroom or a
workstation


Value-adding activities
Non-value-adding activities
Contd
DIFFERENT COSTS FOR DIFFERENT PURPOSES




1. Product costs incurred to manufacture the product.

Units sold during the period are recognized as
expense in the income statement.
Unsold units become the costs of inventory and
treated as asset in balance sheet.

2. Period costs the non-manufacturing costs that include
selling, administrative, and research and development
costs.
A. as to type:



1. Manufacturing costs all costs incurred in the factory to
convert raw materials into finished goods.

a. Direct manufacturing costs
b. Indirect manufacturing costs

2. Non-manufacturing cost all costs which are not
incurred in transforming materials to finished goods.

a. Research and development
b. Marketing costs
c. Distribution costs
d. Selling costs
e. After-sales costs
f. General and administrative costs

B. as to function:



1. Direct costs are related to particular cost object and
can economically and effectively be traced to that
cost object.

2. Indirect costs are related to a cost object, but
cannot practically, economically, and effectively
be traced to such cost object. Cost assignment is
done by allocating the indirect cost to the related
cost objects.
C. as to traceability/assignment to cost object


1. Relevant costs future cost that will differ under
alternative courses of action.

2. Differential costs difference in costs between any two
alternative courses of action.

a. Incremental cost increase in cost
b. Decremental cost decrease in cost

3. Opportunity costs income or benefit given up when
one alternative is selected over another.

4. Sunk/past or historical costs already incurred and
cannot be changed by any decision made now or to
be made in the future.
D. for decision-making
E. as to behavior (reaction to changes in cost driver)
1. Variable cost the total amount varies directly to the change
in activity level o cost driver, and the per unit amount is
constant.

2. Fixed cost the total amount remains unchanged, and the
per-unit amount varies inversely or indirectly with the change
in the cost driver.

Committed fixed costs long term in nature and cannot be eliminated
even for a short period of time.
Discretionary or managed fixed costs usually arise from periodic
decisions by management.

3. Mixed cost this cost has both a variable and a fixed
component.

4. Step cost when activity changes, a step cost shifts upward
or downward b a certain interval or step.







Relevant range activity that reflects the companys
normal operating range. Within this relevant range, the
aforementioned cost behavior is valid, i. e.:


Total amount Per cost driver
Variable cost Varies directly w/
cost driver
Constant
Fixed cost Constant Varies inversely
w/ cost driver
ANALYSIS OF MIXED COST
Mixed cost or total cost - variable and fixed cost components.



Total variable cost varies directly with the activity level
or cost driver.






TC = FC + VC
VC = variable cost per cost driver x cost driver or VC = bx
ex : if the cost driver is number of units and variable cost per
unit is P5, then VC = 5x

The total or mixed cost function ,ay expressed as:

TC = FC + bx
Linearity assumption within the relevant range, there
is a strict linear relationship between the cost and
cost driver. Cost shown graphically as straight lines.


The cost function since total cost is linearly related to the
activity level or cost driver, the cost function (cost formula)
may be expressed as:


Y = a + bx
where: Y = total cost

a = total fixed cost
b = variable cost per cost drive
x = activity level or cost driver

SEPARATION OF THE FIXED AND VARIABLE COMPONENTS OF
MIXED COST
1. High-low method

2. Scattergraph method

3. Least squares regression method

Multiple-regression analysis used when the dependent
variable is caused by more than one factor. In
other words, the dependent variable is related to
more than one independent variable.
CORRELATION ANALYSIS

Correlation measure of the co-variation between the
dependent and independent variables.

If all plotted points fall on the regression line, there is
perfect correlation.

If correlation between the cost and cost driver is high and
the past relationship between such variables will continue
in the future, then the cost driver chosen will be useful for
predicting future levels of the costs being analyzed.


Coefficient of correlation (denoted by r) measure of the
extent of the linear relationship between two variables.
range of values of r: from -1 to 1



when r = 0, there is no correlation

when r = +, there is positive or direct relationship
between the dependent (y) and independent
(x) variables. The value of y increases when
the value of x increases.

when r = -, there is negative or inverse, indirect
relationship between the variables. The value of y
decreases as the value of x increases.
r = -1 0 1
Contd


Coefficient of determination (denoted by r) computed
by squaring the value of r. A very high r means
that the values in the regression equation explain
virtually the entire amount of the total cost.

Standard error of the estimate the standard deviation
about the regression line. This calculated to serve
as a confidence interval range of tolerance, for
use in exercising control over the costs.




If r = 1, the standard error = 0
A small value of the standard error indicates a good fit.
Contd
COST ACCOUNTING SYSTEMS
Cost accounting a part of the accounting system that
measures costs for decision-making and financial
reporting purposes.

Cost accounting processes

1. Cost accumulation collecting costs by natural c
classification, such as materials or labor.

2. Cost allocation or cost assignment tracing and
assigning costs to cost objects, such as departments
or products.
COST ACCOUNTING SYSTEMS

Job-order costing used by firms that provide limited
quantities of products or services unique to a customer s
needs or specifications.



Process costing used by firms that produce many units
of a single product for long periods at a time.


Hybrid product-costing system incorporate features
from two or more alternative product costing systems,
such as job-order and process costing.














ex. Automobile repair shoes, tailoring/dressmaking business
ex: soft drinks company, toy manufactures
ex: clothing and food processing operations


Standard costing uses predetermined factors to
compute the standard cost of materials, labor and
factory overhead.

Backflush costing is a streamlined cost accounting
method that simplifies, speed up, and reduces
accounting effort/procedures in accumulating
product costs.

Activity-based costing system is a two stage
procedures that uses multiple drivers to predict
and allocate costs to products and services


Contd
DIFFERENCES BETWEEN ABC AND TRADITIONAL COSTING
SYSTEM
Activity-based costing Traditional costing
Assume that cost objects
consume activities
Assume that cost objects
consume resources
Uses drivers at various
levels
Uses volume-related
allocation bases
Process-oriented Structure-oriented
TYPE OF ACTIVITY LEVELS
1. Unit level activity that must be done for each unit of
production.

2. Batch level performed for each batch of product
produced, rather than each unit.


3. Production level activities that are needed to support
the entire product line regardless of the umber of units
and batches produced.


4. Facility level performed in order for the entire
production process to occur.

ex: setup, receiving and inspection, material handling, packaging,
shipping and quality assurance
Ex: engineering costs, product development costs
Ex: plant maintenance, plant management, property taxes
EXAMPLE NO. 1:
Annabelle companys production and inventories for the
month of June are as follows:


Purchases direct materials P 143, 440

Freight in 5, 000
Purchase returns and allowances 2, 440
Direct labor 175, 000
Actual factory overhead 120, 000
Inventories June 1 June 30
finished goods P 68, 000 P 56, 000
work in process 110, 000 135, 000
direct materials 52, 000 44, 000

Annabelle company applies factory overhead to production at
80% of direct labor cost. Over under applied overhead is
closed to cost of good sold at year-end. The companys
accounting period is on the calendar year basis.
Annabelle companys prime cost for June was..

DM inv., June 1 P 52, 000
Add: purchases P 143, 440
freight in 5, 000
total P 148, 440
Less: purchase returns & allowances 2, 440 146, 000
Total materials available for use P198, 000
Less: DM inv., June 30 44, 000
DM used 154, 000
DL 175, 000
Total prime cost P 329, 000

Annabelle companys conversion cost for June was

Direct labor P175, 000
Applied factory overhead (175, 000 x 805) 140, 000
Conversion cost P315, 000
Annabelle companys total manufacturing cost was...

Materials P 154, 000
Direct labor 175, 000
Applied factory overhead 140, 000
Total manufacturing costs 469, 000
Annabelle companys cost of goods transferred to the
finished goods inventory account was
Total manufacturing costs P 469, 000
Add: WIP inv., June 1 110, 000
Total WIP 579, 000
Less: WIP inv., June 30 135, 000
COGs manufactured P 444, 000
Annabelle companys cost of good sold for June was

COGs manufactured P 444, 000
Add: FG inv., June 1 68, 000
COGs available for sale 512, 000
Less: FG inv., June 30 56, 000
COGS 456, 000
The amount of over/ under applied overhead factory for the
month of June was

Actual FOH P 120, 000
Applied FOH 140, 000
Over applied FOH 20, 000
The cost of good sold for the month of June should be
increased (decreased) by the amount of over/ under applied
factory overhead of.

Over/ under applied factory overhead is closed to the cost of goods
sold at year-end.
EXAMPLE NO. 2:
Frances Corporation conducted a regression analysis of
its factory overhead costs. The analysis yielded the
following cost relationship:

Total factory overhead cost = P 50, 000 per month + 5H*

*H = no. of direct labor hours, the selected cost driver for
overhead cost.
Each unit of product requires 6 direct labor hours. The
companys normal production is 20, 000 units of product per
year.


The total overhead cost for a months production of 2, 000 units
is
Variable cost (2, 000 units x 6hrs. x P 5/hr.) P 60, 000
Fixed cost 50, 000
Total overhead cost P110, 000
The predetermined fixed overhead rate per hour is

Annual fixed overhead (50, 000 x 12) P 600, 000
normal hours for one year (20, 000 units x 6 hrs.) 120, 000
Fixed overhead rate per hour P 5
The total predetermined factory overhead rate per hour is....

Variable rate per hour P 5
Fixed rate (from no. 67) 5
Total predetermined factory overhead rate per hour P10




THE END !!!!