COST AS TO PRODUCT

PRODUCT COST
Are cost identified and incurred by an entity to manufacture a product.
Materials- all raw materials and other supplies used in manufacturing process
Direct Materials- visible upon finished product
Indrect Materials- invisible upon finished product
Labor- salaries and other benefits provided to all workers
Direct Labor-major contributor/worker to create the product
Indirect Labor-minor contributor/worker to create the product
Overhead- all indirect cost necessary for product conversion that are not direct materials and labor
 Indirect materials
 Indirect labor
 Depreciation of factory equipment
 Insurance of factory plant
 Factory utilities

DIRECT MATERIALS xxx

Prime cost
DIRECT LABOR xxx Conversion cost
OVER HEAD xxx
Total Manufacturing cost xxx

PERIOD COST
The entity’s operating expense. They are called as such since they are much more associated with the
time periods rather than manufacturing process. They are all other expenses not related to
manufacturing.
Marketing and advertising-expenses incurred in promoting the entity’s products and services
Selling and distribution-they include salaries of sales personnel, and delivery expenses
Administrative expenses-they include office utilities, depreciation of office PPE, and all other expenses in
- the office
COST AS TO BEHAVIORS
VARIABLE COST
They are cost that changes as the quantity of the goods produced changes. Total amount of variable cost
is dependent to the level of production.
 Constant on per- unit basis  Cost of materials
 Varies when presented as a total  Cost of direct labor computed
per piece.
FIXED COST
At whatever level of production within the relevant range, this cost does not change. It is independent of
the level of production
 Constant when presented as a total  Rent of facilities
 Varies on per unit basis  Depreciation of equipment
(straight line basis)

SEMI-VARIABLE COST/MIXED COST

The fixed portion of a semi-variable cost usually represents a minimum fee for making a particular item
or service available. The variable portion is the cost charged for actually using the service
 Electricity

STEP COST
Cost that are constant on a certain level of activity but increases on another certain level of activity. This
is like fixed cost within a very small relevant range
 Salaries and commission

COST EQUATION

Y=A+BX BX=Y-A A=Y-BX

Y= total cost Y= total cost Y= total cost
A= total fixed cost A= total fixed cost A= total fixed cost
B=variable cost per unit B=variable cost per unit B=variable cost per unit
X= volume of activity B= volume of activity B= volume of activity
METHODS of SEPARATING MIXED COST
1. High-Low Point Method
Step 1 determine the highest and lowest activity and the cost associated thereunto
Step 2 obtain the variable cost per unit by dividing the change in cost over the change in activity
Cost of highest activity-cost of lowest activity
Highest activity-lowest activity
Step 3 deduct the variable cost component in the total cost to obtain fixed cost

Highest activity Lowest activity

Total Xxx Xxx
Less: variable portion
VC/U x highest activity Xxx
VC/U x lowest activity Xxx
Monthly fixed cost Xxx Xxx

THEN WE CAN NOW APPLY THE COST ACCOUNTING EQUATION

2. METHOD OF LEAST SQUARE

Step 1 prepare a table calculating the x(activity), y (total cost), xy and x( squared)
n=#of sample
Step 2 substitute the computed amounts in the following equation to get VC/U

Step 3substitute the value computed in step 2 to equation 2(any of the two) to get the fixed cost

THEN WE CAN NOW APPLY THE COST ACCOUNTING EQUATION