Review Materials

Prepared by:
Junior Philippine Institute of
Accountants UC-Banilad Chapter
F.Y. 2019-2020
 COST ACCOUNTING
(FIXED AND VARIABLE COSTING)
KEY TERMS AND CONCEPTS TO REMEMBER:

INTRODUCTION

The way a specific cost reacts to changes in activity levels is

called cost behavior. Costs may stay the same or may change
proportionately in response to a change in the level of activity makes it
easier to create a budget, prepare a forecast, determine how much profit
a new product will generate, and determine which two alternatives
should be selected.

Cost are classified as Fixed and Variable with regard to their

behavior in relation to, and the changes in, the activity level of
production and sales.
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KEY TERMS AND CONCEPTS TO REMEMBER:

FIXED COSTS

• Costs that are independent of output.

• On a total basis, it is constant regardless of changes in volume or activity level.

• If sales increases by 10%, total fixed costs remains the same. If sales decreases by 12%,
total fixed costs is unchanged.

• On a per unit cost basis, it varies in inverse proportion to the changes in volume or
activity.

• It is not assignable, with reasonable ease and accuracy to the product or department.

• Many of these costs are beyond the control or influence of lower level managers.

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KEY TERMS AND CONCEPTS TO REMEMBER:

EXAMPLES

 Rental Expenses Straight-line depreciation is an

 Interest Expense example of a fixed cost.
 Insurance Expense
 Executive Salaries It does not matter whether the machine
 Depreciation Expense
is used to produce 1,000 units or
 Property taxes
10,000 units in a month, the
 Salaries of production executives
depreciation expense is the same
 Advertising Expense
 Research and Development Costs
because it is based on the number of

 Executive Training Costs years the machine will be in service.

 Repairs and Maintenance of

Buildings and Grounds

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KEY TERMS AND CONCEPTS TO REMEMBER:

VARIABLE COSTS

• These are costs that vary directly in proportion to the change in the level of production
and sales.

• There is a direct or complete proportion in the changes of variable costs and sales

• On a total basis, it varies in direct proportion to changes in volume or activity level

• If sales increases by 10%, total variable costs also changed by 10%. If sales decreases by
12%, total variable costs also decreases by 12%.

• On a per unit cost basis, it varies in inverse proportion to the changes in volume or
activity.

• It is assignable with reasonable ease and accuracy to the cost object

• It is controllable by a particular department head or manager

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KEY TERMS AND CONCEPTS TO REMEMBER:

EXAMPLES

 Direct Materials Direct materials is an example of

 Factory Supplies
 Direct Labor
 Manufacturing Overhead
 Variable Expenses
 Indirect Materials
 Indirect Labor
 Delivery Expense
 Salesman’s Commissions
 Packaging Cost
 Supplies
 Repairs
variable cost.
If it takes one yard of fabric at a
cost of P200 per yard to make one
chair, the total materials cost for
one chair is P200. The total cost
for 10 chairs is P2,000 (200 x 10)
and the total cost for 100 chairs is
P20,000 (200 x 100).

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EFG Company provides the following costs structure on its production.

Total Fixed Costs: P10,0000 Unit Variable Costs: P5

What will happen to fixed costs and variable costs, per total and per unit, if production levels are zero, 10
units, 20 units, 30 units, and 40 units.

PRODUCTION TOTAL FIXED TOTAL UNIT FIXED UNIT VARIABLE

LEVEL COSTS VARIABLE COST COSTS COSTS

0 10,000 0 N/A 5.00

10 10,000 50 1,000.00 5.00

20 10,000 100 500.00 5.00

30 10,000 150 333.33 5.00

40 10,000 200 250.00 5.00

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Constant, Changes directly, Changes inversely,

regardless of the increases as decreases as
What happened? levels of production production Constant
production increases and vice increases
versa
KEY TERMS AND CONCEPTS TO REMEMBER:

GRAPHICAL REPRESENTATION OF FIXED AND VARIABLE COST

Graphically, the total fixed costs looks like a straight horizontal line while the variable cost line
slopes upward.
TOTAL COSTS

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KEY TERMS AND CONCEPTS TO REMEMBER:

The graphs for the fixed cost per unit and variable cost per unit look exactly opposite. Although
total fixed costs are constant, the fixed cost per unit changes with the number of units while the
variable per unit is constant.
PER UNIT

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KEY TERMS AND CONCEPTS TO REMEMBER

When cost behaviour is discussed, an assumption must be made about operating levels. At certain
levels of activity, new machines might be need, which results in more depreciation, or overtime or
may be required of existing employees, resulting in higher per hour direct labor costs. The
definitions of fixed cost and variable cost assumes the company is operating or selling within the
relevant range (the shaded area in the graphs) so additional costs will not be incurred.

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KEY TERMS AND CONCEPTS TO REMEMBER:

SUMMARY:

COSTS FIXED COSTS VARIABLE COSTS

Constant, regardless of Changes, in direct

TOTAL COSTS production and sales proportion to the change in
the level of production and
sales

Changes, decreases as Constant, regardless of

UNIT COSTS production increases and levels of production and sales
vice-versa

Increases production to Reduce unit variable cost to

reduce unit fixed costs, that is reduce total variable costs,
HOW TO CONTROL? why, fixed cost is related to that is why, variable cost is
volume related to spending.

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 End of Topic
Please see complementary test bank for
practice problems and theories.

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 Dear, you.
Always be in pursuit for
the one you have not yet
become. Keep going!
Love,
Your UCB-JPIA family

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References:
Agmata, F. (2019). Management Services (2019 Ed.). GIC
Enterprises & CO., INC
Ventic, C. (2012). Cost Accounting. n. p.
Cost Behavior. (2020). Retrieved on October 31, 2020 from
https://www.cliffnotes.com/study-
guides/accounting/accounting-principles-ii/cost-volume- 15

profit-relationships/cost-behavior