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BUSINESS START UP

Advertising and promotion


Borrowing costs
Professional fees
Staffing and employee expenses
Equipment and supplies costs
Insurance, license and permit fees
Research expenses
Technological expenses
Premises Cost
ADVERTISING & PROMOTION
MARKETING
• everything a company does in order to attract clients to the
business
• refers to messages you send to the public via newspaper and
magazine displays, billboards, TV and radio commercials and
website banners.
• method of announcing your product or service using more
dynamic means you can more easily modify or change.

Example: free samples, catalogs, celebrity endorsements etc.


BORROWING COSTS
• interest and other costs incurred in relation to the borrowing of
funds.

• expense of taking out loan expenses like interest payments


incurred from a loan or any other kind of borrowing.

• Example: loans from the bank


PROFESSIONAL FEES
• cost of hiring an accountant, solicitor, lawyer, or other expert
professional to deal with the legal aspects of starting a
business such as company formation, copyright protection,
drafting partnership agreements or other fees you may need to
pay to the Government for certificates and inspections for
health and safety or food hygiene, for instance.
STAFFING & EMPLOYEE
EXPENSES
• also known as cost of labor
• planning to hire employees must plan for wages, salaries and
benefits
• In terms of recruitment, there will also be fees payable to
agencies if you source new talent through these channels as
opposed to fielding direct applications.
• Advertising job vacancies also come at a price if advertising
externally as well as internally on own website.
INSURANCE, LICENSE &
PERMIT FEES
• costs for policy that will protect business if anything go wrong,
ensuring compensation and covering legal costs.
• costs for health inspections and authorizations and to obtain
certain business licenses and permits.
EQUIPMENT & SUPPLIES
COSTS
• costs in leasing or buying of equipment
• includes purchase cost, sales tax, transportation cost (or
freight charges) to bring the equipment to company's storage
yard or construction site and cost of assembly and installation
of the equipment.
• start – up office costs like telephony, internet connection,
computers/laptops, office supplies, etc.
RESEARCH EXPENSES
• Costs for research of the industry and consumer makeup must
be conducted before starting a business
• Expenses in hiring market research firms to aid them in the
assessment process
TECHNOLOGICAL EXPENSES
• the cost of a website, information systems and software
(including accounting and payroll software) for a business.

• includes software licenses, IT support, data storage, email


accounts, any third-party integrations or services, etc.
PREMISES COSTS
• Renting or leasing commercial property will include monthly
costs that you should factor into your regular outgoings.

• Service charges and connection of utilities, followed by utility


bills (electricity, gas, water, telephone) will also ned to be
considered.
COST
ESTIMATION
ACCOUNT ANALYSIS
HIGH-LOW METHOD
SCATTERGRAPH METHOD
REGRESSION ANALYSIS
1. ACCOUNT ANALYSIS
• Determine whether the costs in each account are fixed or
variable.
• Estimate of total fixed costs: Total of all costs identified as fixed
• Estimate of variable cost per unit: Total of all costs identified as
variable and divided by the measure of activity (units
produced)
• The goal of this method is to describe estimate values in the
form of
Y = f + vX
Total mixed cost = Total fixed cost + (Unit variable cost × Number
of units)
Total Fixed Cost: $30,000
Per unit variable cost: = $260,000/5000units = $52
Total mixed cost(Y = f + vX) = $30,000 + ($52x5000units) = $290,000
2. HIGH-LOW METHOD
• A quick and easy way to estimate costs
• The high-low method uses historical information from several
reporting periods to estimate costs.
MONTHLY PRODUCTION COSTS
FOR ABC BIKES
Reporting Period (Month) Total Production Costs Level of Activity (Units Produced)
July $230,000 3,500
August 250,000 3,750
September 260,000 3,800
October 220,000 3,400
November 340,000 5,800
December 330,000 5,500
January 200,000 2,900
February 210,000 3,300
March 240,000 3,600
April 380,000 5,900
May 350,000 5,600
June 290,000 5,000
HI-LOW COST ESTIMATION
Variable cost per unit (V) =
(Cost at highest activity level – Cost at lowest activity level)
(Highest activity level – Lowest activity level)

Fixed cost (F) =


Total cost at
– (Variable cost × Highest activity level)
highest activity
or
Total cost at
– (Variable cost × Lowest activity level)
lowest activity

5 - 18
HI-LOW COST ESTIMATION
Variable cost per unit (V) =
(Cost at highest activity level – Cost at lowest activity level)
(Highest activity level – Lowest activity level)

($380,000-$200,000)
(5,900 units – 2,900 units)

= $60/unit
HI-LOW COST ESTIMATION
Fixed cost (F) =
Total cost at
Highest/lowest activity
– (Variable cost × Highest/Lowest activity level)

$380,000 – ($60 × $5900) = $26,000

$200,000 – ($60 × $2900) = $26,000


4. SCATTERGRAPH METHOD
Steps:
1. Draw scatter graph
2. Draw regression line
3. Find total fixed cost
• Given by the y-intercept of the line
4. Find variable cost per unit
• Variable Cost per Unit = Slope of Regression Line

= y2 − y1
x2 − x1
Month Units FOH

1 1,520 $36,375

2 1,250 38,000

3 1,750 41,750

4 1,600 42,360

5 2,350 55,080

6 2,100 48,100

7 3,000 59,000

8 2,750 56,800
$68,000
Fixed Cost
= y-intercept
= $18,000

Variable Cost per


Unit
= Slope of
Regression Line

To calculate slop
we will take two
points on line:
(0,18000) and
$18,000 (3500,68000)

Variable Cost per


Unit
= (68000 − 18000) ÷
(3500 − 0)
= $14.286
4. REGRESSION ANALYSIS
• Both regression analysis & scattergraph approach in fit a
straight line to a set of data points to estimate fixed and
variable costs.
• Difference is, regression analysis uses a series of
mathematical equations to find the best possible fitting line to
the data points and thus tends to provide more accurate results
than the scattergraph approach.
• Rather than running these computations by hand, most
companies use computer software, such as Excel, to perform
regression analysis.
MONTHLY PRODUCTION COSTS
FOR ABC BIKES
Reporting Period (Month) Total Production Costs Level of Activity (Units Produced)
July $230,000 3,500
August 250,000 3,750
September 260,000 3,800
October 220,000 3,400
November 340,000 5,800
December 330,000 5,500
January 200,000 2,900
February 210,000 3,300
March 240,000 3,600
April 380,000 5,900
May 350,000 5,600
June 290,000 5,000
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.98125306
R Square 0.962857567
Adjusted R Square 0.959143324
Standard Error 12355.37931
Observations 12

ANOVA
df SS MS F Significance F
Regression 1 39573446022 39573446022 259.2338469 1.76719E-08
Residual 10 1526553978 152655397.8
Total 11 41100000000

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 43275.63669 14827.52257 2.918601978 0.015337142 10237.85758 76313.4158 10237.85758 76313.4158
X Variable 1 53.42348434 3.318076215 16.10074057 1.76719E-08 46.03034981 60.81661887 46.03034981 60.81661887

Intercept = fixed costs = 43,275.63669


X Variable 1 = variable costs = 53.42348434

Y = $43,276 + $53.42x
Produces 500 units
Y = $43,276 + $53.42(500)
Y = $43,276 + $26710
Y = $113,262
COST
CATEGORIZATION
COST CATEGORIZATION
• DIRECT COST
• Is a price that can be completely attributed to the
production of specific goods/services
COST CATEGORIZATION
• INDIRECT COST
• Costs that are but not necessarily not directly accountable
to cost object
• Costs that are not directly related to production
• Some may be overhead
• May either be fixed or variable
• EX: Administration Personnel, Security Costs, Rent and
Utilities, General and Administrative expenses (officer’s
salaries, accounting department costs and personnel
department costs)
COST CATEGORIZATION
• PRODUCT COSTS
• Costs used to create a product
• Include direct labor, direct materials, consumable
production supplies & factory overhead
• Can also be considered the cost of the labor required to
deliver a service to a customer, should include all costs
related to a service such as compensation, payroll taxes
and employee benefits
COST CATEGORIZATION
• INCREMENTAL COSTS ( or DIFFERENTIAL COST)
• The increase in total costs resulting from an increase in
production or other activity
• EX:
• If a company’s total costs increases from $320,000 to
$360,000 as the result of increasing its machine hours
from 8,000 to 10,000, the incremental cost of the 2,000
machine hours is $40,000
COST CATEGORIZATION
• OPPORTUNITY COSTS
• The cost of choosing one alternative over another and
missing the benefit offered by the forgone opportunity
• An alternative given up when a decision is made

• EX: You have $100 and you can either buy a laptop or go
to a concert. You chose to go to a concert therefore your
opportunity cost is the laptop.
COST CATEGORIZATION
• SUNK COSTS
• A cost for which an outlay has already been made and it
cannot be changed by present or future decision.

• Ex: A firm has just paid $250,000 for a special purpose


machine. Since the cost outlay has been made, the
$250,000 investment in the machine is a sunk cost.
• Even though the purchase may have been unwise, no
amount of regret can relieve the company of its decision,
nor can any future decision cause the cost to be avoided
COST CATEGORIZATION
• CONTROLLABE COSTS
• Cost that is subject to significant influence by a particular
manager within the time period under consideration
• Ex: Entertainment expense would be controllable by a
sales manager if he/she had power to authorize the
amount & type of entertainment for customers
• UNCONTROLLABLE COSTS
• Cost over which a given manager does not have a
significant influence
• Ex: Depreciation of warehouse facilities would not be
controllable by the sales manager since he or she would
have no power to authorize warehouse construction
COST CATEGORIZATION

• RELEVANT COSTS
• A cost that only relates to a specific management decision,
and which will change in the future as a result of that
decision. Extremely useful for eliminating irrelevant costs
from a decision
• Ex: ABC is considering purchasing a printing press for its
medieval book division. If ABC buys the press, it will
eliminate 10 scribes who have been copying the books by
hand. The wages of the scribes are relevant costs, since
they will be eliminated in the future if management buys
the printing press.
MAJOR COST
STRUCTURES
MAJOR COST STRUCTURES
• DIRECT/PRIMARY COSTS
• A cost that can be completely attributed to the production
of specific goods or services
• Ex: The materials used to produce an automobile are a
direct cost
• FACTORY OVERHEAD COSTS
• Are a varied collection of production-related costs that
cannot be practically traced directly
• Ex: indirect Materials: nails, rivets, lubricants, small tools
• Indirect labor: lift-truck driver’s wages, supervisors
• Other: Property taxes, Building maintenance, Depreciation,
Rent, Utility
MAJOR COST STRUCTURES
• ADMINISTRATIVE COSTS
• Include all executive, organizational and clerical expenses
that cannot logically be included under either production or
marketing
• Ex: Accounting staff wages & benefits, secretarial, public
relations
• COSTS OF SALES and DISTRIBUTION
• Refers to the direct costs attributable to the production of
the goods/supply of services by an entity. Commonly
known as the COGS
EXAMPLE PROBLEMS
Mikitopia, Inc. produces and sells milk flavored bubble gum.
Over the last 5 months Milktopia had the following
production costs and production volume.
Month Cost Volume (in cases)
March 6,000 12
April 6,659 14
May 8,370 18
June 8,800 19
July 8,050 17

1. Using the high-low method, what is the fixed cost per month for bubble gum
production?
2. The variable cost per case is?
Justine Co. produced 5,500 outdoor chairs for Job Order
No.610. Total material cost was P 51,700. Each chair required
2.2 hours of direct labor at P8.90/hour. A total of P53,845 of
factory overhead was traced to Order 610.

1. What is the Prime cost per unit for this order?


2. What is the conversion cost per unit of this order?
3. What is the unit cost of this order?
During the month of August, Amer Co. produced 12,000 units
and sold them for P20 per unit. Total fixed cost for the period
were P154,000 and the operating profit was P26,000

1. Based on the foregoing information, the variable cost per


unit is?
Data to be used in applying the high-low method shows the
highest cost of P69,000 and the lowest cost of P52,000. The
data show P148,000 as the highest level of sales and P97,000
as the lowest level?

1. What is the variable cost per peso sales?


Ravena Company manufactures office furniture. During the
most productive month of the year 3,500 desks were
manufactured at a total cost of P84,400. In its slowest month,
the company made 1,100 desks at a cost of P46,000.

1. Using the high-low method of cost estimation, the total


fixed cost are:
2. The variable cost per unit is:
PRODUCT UNIT COST

(Total direct labor + Total Direct Materials + Consumable


Supplies + Total Allocated Overhead)

Total Number of Units

= Product Unit Cost


UNIT PRODUCT
COST FOR
FINANCIAL
REPORTING
1.) DIRECT LABOR + DIRECT
MATERIALS + MANUFACTURING
OVERHEAD

2.) DIVIDE THE TOTAL BY THE


NUMBER OF UNITS MANUFACTURED

For example, if the sum of direct labor, direct


materials and manufacturing overhead is
$100,000 and the business manufactured
50,000 units, the unit product cost is $2.
UNIT PRODUCT COST
FOR MANAGERIAL
ACCOUNTING
1.) DIRECT LABOR + DIRECT MATERIALS +
MANUFACTURING OVERHEAD

2.) SUBTRACT FIXED MANUFACTURING


OVERHEAD COSTS

3.) DIVIDE THE TOTAL BY THE NUMBER OF


UNITS MANUFACTURED
For example, say that direct material, direct labor and
manufacturing overhead amounted to $100,000 and
50,000 units were produced but $20,000 of that cost
was fixed manufacturing overhead. The unit product
cost for managerial accounting would be $80,000
divided by 50,000 units or $1.60.
PRODUCT
PRICING &
COST
RECOVERY
PRODUCT COSTING AND
COST RECOVERY
Product costing

-the accounting process of determining all


business expenses pertaining the creation of
company products.
-
-Use to find ways to streamline production costs to
maximize profits. For example, choosing raw
materials that are more cost-effective can allow a
company to increase profit from retail sales by
lowering its product creation costs.
EXAMPLE:
Cost of materials $50.00
Cost of labor $30.00
Overhead $40.00
= Total cost $120.00
+ Desired profit (20% on sales) $30.00
= Required sale price $150.00
Cost recovery

-a method you can use in financial accounting to


account for the sale of goods.
-a method that is often used in risky financial
transactions when there is a fear that the person or
business making the purchase will not pay the amount
owed.
-transactions are recorded on a company balance
sheet using a special methodology that recognizes the
revenue only when it exceeds a minimum required
amount.
Example:

As an example, assume that you sold $100,000 worth


of a products to a company that agreed to pay the debt off in four
annual installments of $25,000, with annual interest payments that
totaled an additional $10,000. If the products you sold cost you $80,000
to begin with, you would not realize gross profit until you recovered the
full $80,000. With no down payment, the company in this example paid
$35,000 each of the first two years, totaling $70,000 in payments.
During the third year, gross profit would be realized, because the third
payment would take you over the $80,000 recovery mark.
PROBLEM
The total factory costs of Marco Company for the month of May
showed the following among others:

Dep’t 1 Dep’t 2 Determine the ff for each


Direct Materials 400,000 700,000 dept:
Direct Labor 350,000 600,000 1. Direct Variable Costs
Depreciation (M&E) 100,000 180,000 2. Total controllable
Factory supplies 10,000 24,000 direct fixed costs
3. Total non-controllable
Allocated costs from 120,000 180,000 fixed costs
corporate headquarter 4. Total direct fixed costs
Supervisor’s salary 45,000 55,000 5. Total direct costs
Repairs & maintenance (allocated on the basis of 6. Total indirect costs
number of hours spent to maintain machines (50 7. Total unavoidable
hrs for Dept 1 & 100 hrs for Dept 2) P120,000 costs in case of
production stoppages
Factory Rent – buildings (allocated on the basis of
floor space, 30% to Dept 1 & 70% to Dept 2)
P200,000
Plant Executive’s Salaries (allocated on the Basis
of hours spent by each dept 40% to Dept 1 & 60%
to Dept 2) P350,000

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