COST

CONCEPTS,
BEHAVIORS AND
MEASUREMENTS
WHAT IS COST?

The monetary measure of the

amount of resources given up or
used for some goods or services.
COST OBJECT
• Anything for which cost is computed

Example
 a product
 a product line
 a segment of production
COST DRIVERS
Any variable, such as a level of
activity or volume that usually
affects costs over a period of
time

Example
 machine hours, direct labor hours
 no. of parts, no. of setups, no. of
test
COST POOL
a grouping of individual cost
items
an account in which a variety of
similar costs are accumulated

Example
 factory overhead control
 work in process
ACTIVITY
an event, action, transaction,
task, or unit of work with
specified purpose

Types of Activities

VALUE-ADDING ACTIVITIES
• Activities that are necessary
(non- eliminable) to produce the
products.
Example

• assembling the different

component parts of the product

NON-VALUE ADDING ACTIVITIES

• Activities that do not make the
product or service more valuable
to the customers.
Example

Moving materials and equipment

parts from the stockroom to the
warehouse

COST BEHAVIORS
• refers to the way costs change
with respect to a change in the
level of activity.
TYPES OF COST
Cost may be categorized according
to their:
 Management Functions
 Ease of Traceability
 Timing of Charge Against Revenue
 Relevance to Decision Making
 Behavior in Accordance with
Activity
Type of Cost as to
Function
Manufacturing Cost
• The cost incurred during the
production of a product

Example
DIRECT MATERIAL
• the cost of raw materials used in
the production of a product
DIRECT LABOR

the portion of the labor cost in

the production process of a
product

MANUFACTURING OVERHEAD
• any charges that provide support
to the production of the product
Example of Manufacturing
Overhead
Indirect Materials
 materials used in the production
process but are not directly traceable
to the product

Example :
 Factory supplies, lubricants, grease,
oils
Indirect Labor

the labor of those who are not

directly involved in the
production process of the product

Example:
 Plant supervisors, security
guards, quality assurance
workers
Other Overhead Cost

any expenses related to the

operation of the plant/factory

Example:
 Rent, Depreciation, Insurance,
Real Property Taxes, Repairs,
Utilities of Factory Assets

TMC = DM + DL + FOH
Sample Case
Company A produced 1,000 tables.
To produce these tables, the
company incurred the following
cost:
• 12,000 on wood
• 2,000 on wages of carpenters
• 500 on wages of security guards
• 100 bag of nails
• 500 for factory rent and utilities
Determine the Following

Direct Materials
Direct Labor
Manufacturing Overhead
Total Production Cost
Non-Manufacturing
Cost
Costthat are not incurred to
manufacture a product and therefore
cannot be assigned to the product

Example
 Research & Development, Marketing,
Selling, Distribution, After-Sales Cost
 General & Administrative Costs
COST AS TO TRACEABILITY
DIRECT COSTS
• those that can be traced directly to a
particular object of costing such as a
particular product, department, or
branch

Example
 Direct Material
 Direct Labor
INDIRECT COST
those that cannot be traced to a
particular object of costing. They are
also called common costs or joint
costs.

Example:
 Manufacturing Overhead
Cost as to Timing
PRODUCT COST
• Cost incurred to manufacture the
product
• Product costs of the units sold during
the period are recognized as expense
(cost of goods sold) in the income
statement
• Product costs of the unsold units
become the cost of inventory and
treated as asset in the balance sheet
PERIOD COST

these are non-manufacturing costs

and are expensed in the period of
incurrence and do not become part of
the cost of inventory
Cost for Decision Making
RELEVANT COST
• These are future costs that will differ
under alternative course of action

DIFFERENTIAL COST
• Difference in costs between any two
alternative courses of action
 Incremental Cost – increase in cost from one
alternative to another
 Decremental Cost – decrease in cost from one
alternative to another
OPPORTUNITY COST
benefit forgone or given up when an
alternative is chosen over the other/s

Example:
If a business chooses to use its building for
production rather than rent it out to tenants,
the opportunity cost would be the rent
income that would be earned had the
business chose to rent out.
SUNK/PAST OR HISTORICAL
COST
Costthat are already incurred and
cannot be changed by any decision
made now or to be made in the future

Example
Cost in conducting market study, research
and development, training, hiring bonuses
Type of Cost as to
Behavior
Fixed Cost
• are costs that do not change with
changing levels of activity.

• The cost per unit varies inversely

with changes in the level of activity.

• Example: Rent, Advertising

Expense, Property Taxes, Insurance,
Depreciation using straight line
method, Salaries of some personnel
Sample Problem for Fixed Cost

If a company has a monthly rental of

25,000 for its factory building.
Determine the fixed cost per unit with
theProduction
followingIn
data:
Total Fixed Fixed Cost Per
Units Cost Unit
10,000 25,000 2.50
25,000 25,000 1.00
26,000 25,000 0.96
Variable Cost
• Are costs that change directly and
proportionately with the level of
activity.
• The cost per unit remains constant,
regardless of the level of activity.

• Example: direct materials, direct labor,

variable manufacturing overhead.
Sample Problem for Variable Cost

If the cost of material per unit of a

certain product is P5.00 and each
product requires one unit of each
material determine the total cost of the
product given
Units of the following
Materials Cost data.
Total Material
Materials per Unit Cost
800 5 4,000
1,000 5 5,000
1,500 5 7,500
Mixed Cost
• Possess both fixed and variable components

• Both the total cost and the unit cost

will vary with changes in the level of
activity.
• y = a + bx
Sample Problem for Mixed Cost

ABC Corporation pays its factory

workers with a basic monthly salary of
P1,000.00 plus incentive pay of P0.20
per unit of production. Assume that the
company’s records showed the
following data for Employee A for the
first quarter of Production
2019: in Total Labor Cost
Units
January 3,000 1,600
February 3,800 1,760
March 2,600 1,520
Step Cost
• when activity changes, a step cost
shift upward or downward by a
certain interval or step.

• Step variable cost and Step fixed cost.

GRAPHICAL PRESENTATIONS

Total
Cost

VARIABLE COST FIXED COST

GRAPHICAL
PRESENTATIONS

MIXED COST STEP COST

Cost Classifications on Financial
Statements

Merchandising vs Manufacturing

Less complex More complex

Only ONE (1) THREE (3)
class of inventory classes of
* Merchandise Inventory inventory
* Raw Materials

* Work In Process

* Finished Goods
 DEFINITION OF TERMS

Merchandise Inventory
cost of goods on hand and available for
sale at any given time.

Raw Materials
Materials that are used to make a product.
 DEFINITION OF TERMS
Work In Process

Consists of units of product that are only

partially complete and will require
further work before they are ready for
sale to a customer.

Finished Goods
Consist of completed units of product that
have not yet been sold to customers.
MERCHANDISING
MANUFACTURING
EXERCISE (Merchandising)
The inventory account of Reston
Bookstore shows the following balances:
Beginning - 100,000
Ending - 150,000
During the current year, the company
purchased 650,000 from its suppliers.
Compute the (1) cost of goods available
for sale and the (2) cost of goods sold.
 100,000
650,000
750,000
(150,000)
600,000
 EXERCISE (Manufacturing)
These data relate to Zakar Co.’s July
2019 operations:

Requirement:
Cost of material purchased, Cost of goods manufactured, and
Cost of goods Sold.
 7,000
48,800
55,800
(9,000) 46,800
8,000
6,400
61,200
7,500
(3,500)
65,200
10,000
75,200
(12,000)
63,200
 ANSWERS
Cost of Materials Purchased:

48,800
Cost of Goods Manufactured:

65,200

Cost of Goods Sold

63,200