Management Advisory Services antonio jaramillo dayag

MANAGEMENT ACCOUNTING – Cost Concepts

A ___________________, is broadly defined as the amount of resources given up to obtain a given objective or object or to achieve a
particular purpose. Generally, speaking cost refers to the ________________ (exchange price) attached to the acquisition of goods and
services consumed in an organization’s activities.
The monetary measurement is the _________________________, but occasionally goods and services may be acquired by giving up assets
other than cash, such as securities, receivables or property. In addition, COST is defined as the applicable expenditure and charges that are
directly or indirectly incurred in acquiring a good or service in the condition and location in which it is used or sold.
The _________________ or ____________________ is defined as any purpose for which costs are accumulated. An entity such as a
particular product, service, or department, to which cost is assigned is called a cost object. A cost objective may be for making decisions,
planning, spending levels or evaluating actual performance. It is the “why” of the cost analysis.
Costs are associated with all types of organizations – business, nonbusiness, manufacturing, retail, and service. Generally, the kind of costs
that are incurred and the way in which these costs are classified depends on the type of organization involved.
Cost in many respects, is an elusive term. It has meaning only in a specific of circumstances and for a particular purpose.

Cost is distinguished from:

___________________ - it is the amount at which the seller is willing to part with his goods or services to a buyer who is willing to pay the
amount.
___________________ - these are expired costs deducted from revenue in the measurement of income.
___________ are costs collected into meaningful group. They may be classified as follows:
1. by type of cost (labor cost in one pool, materials costs in another)
2. by source (department 1, department 2 and so on)
3. by responsibility center (manager 1, manager 2, and so on)
_______________________ is the process of assigning costs to cost pools or from cost pools to cost objects.
________________________ are cost drivers used to allocate costs. They are also knows as activity, activity drivers which may be units,
labor hours, machine hours, set-ups or scheduling, etc.

Cost Classification
I. Costs that are Recorded:
A. As to Type:
1. _________________ are the costs themselves. They are usually recorded by natural classification to identify the type of
product or service such as materials, supplies, taxes and depreciation.
2. _________________ are those classified by function that is according to the type of work performed such as manufacturing
or non-manufacturing costs.
2.1. _________________________ are those costs associated with the production activities of the company. It is subdivided
into three elements:
2.1.1. ____________________ are the acquisition costs of all materials that eventually become part of the cost object
(work in process and then finished goods), and can be traced to the cost object in an economically feasible way.
2.1.2. _______________________ includes the compensation of all manufacturing labor that can be traced to the cost
object (work in process and then finished goods) in an economically feasible way.
2.1.3 _______________________ consisting of all manufacturing costs with the exception of direct materials and direct
labor. All manufacturing costs that are related to the cost object (work in process and then finished goods), but
cannot be traced to that cost object in an economically feasible way.
2.2 ____________________________ (or operating /commercial expenses) are subdivided into:
2.2.1 ______________________ - are all the expenses associated with or obtaining sales and the delivery of the
products.
2.2.2. ______________________ - include all the expenses that are incurred in connection with performing general and
administrative activities.
B. As to Timing:
1. __________________ are those incurred to manufacture products and form part of the product costs (inventoriable cost).
They are expense when they are sold. Costs of a product that are considered as assets in the balance sheet when they are
incurred and that become cost of goods sold when the product is sold.
2. __________________ are those identified with time intervals and not with goods or services. Costs in the income statement
other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because
they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists).
Expensing these costs immediately best matches expenses to revenues.
C. As to their Traceability to the Products:
1. ___________________ are those cost that can be specifically identified with or traced to the units under consideration. They
are easily identified with specific departments, product or processes. For example, the cost of paint used in the painting
department of a Mercedez Benz plant is a direct cost of the painting department.
2. __________________ are those that cannot be directly identified with a department, division, or product and are usually
allocated to appropriate activities on a judgmental basis. For example, the costs of national advertising for Mercedez Benz are
indirect costs of each of the departments or the product itself – the Mercedez Benz unit.
A direct cost in one situation may be an indirect cost in another. For example, the salary of a production departmental supervisor is
a direct cost of the plant and that department, but it is an indirect cost with respect to the products produced in that department.
Another example is a chicken factory soup manager’s salary is an indirect cost of manufacturing chicken noodle soup; it is a direct
cost of the manufacturing division. In the first case, the cost object is the chicken noodle soup product. In the second case, the cost
object is the entire manufacturing division.

__________________ is the assignment of indirect costs to cost pools.

D. As to their Behavior in accordance with changes in activities:

1. ___________________ vary in total amount and in direct proportion to productive output (unit/activity) but the variable cost per
output (unit/activity) remains constant. Examples are direct materials and direct labor.
Some costs are nearly variable, but increase in few small steps instead of continuously. Such costs, called

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 ____________________________________, usually include inputs that are purchased and used relatively small increments. It
shows a pattern of cost behavior that fits neither the fixed-variable classification scheme nor the pattern of a typical mixed
cost. It is fixed over a range of volume then jumps to a new level and remains fixed until the next jump. It normally occurs
because of company policy such as having one supervisor for every 20 workers, or one clerk for every 1,000 customer
accounts. Examples are restaurant counter-service personnel and delivery-truck drivers.
3. ___________________ do not change in total amount with changes in volume of output or activity over a relevant range. As
the activity level increases, total fixed costs do not change, but unit fixed cost declines. For this reason, it is preferable in any
cost analysis to work with total fixed costs rather than fixed cost per unit.
_________________ (or step-fixed costs) is a cost that increases in lumps of cost with changes in output or activity. Semi-fixed
costs are predominately fixed but change in peso lumps at some point within the relevant range. It is a cost that increases by a
fixed amount as certain levels of activity are reached. Step costs may have a few large steps and be fixed over broad ranges of
activity (or have many small steps and appear to act like variable costs.)
Fixed costs are classified as:
3.1. _______________________________________ arise from ownership of property, plant and equipment or incurred
in the productive facilities and organization maintained to provide a firm output capacity. These are fixed costs that
cannot be changed so quickly to express the idea that management have made a commitment that can not be readily
changed. Management commits or enters into a contract (which has been signed). It is one over which managers have
lost control in the short run and must incur. Examples are depreciation, property taxes, and property insurance, and
salaries of top management and operating personnel. The two key characteristics of committed fixed costs are:
1. They are long-term in nature, and
2. They can’t be significantly reduced even for short periods of time without seriously impairing the profitability
or long-run goals of the organization. Even if operations are interrupted or cut back, the committed fixed costs
will still continue largely unchanged.

2.2 _______________________(often referred to as Managed or Programmed Fixed Costs) are determined as part of
general management policy that requires appropriation before they can be incurred. They usually arise from annual
decisions by management to spend in certain fixed costs. A cost for which the size or time of incurrence is a matter of
choice. They are expenditures that managers can elect to spend or not to spend. Examples are advertising and
promotions, public relations, health care, employee training, management consulting services and research and
development.
The two key characteristics of committed fixed costs are:
1. They arise from periodic (usually yearly) decisions regarding the maximum outlay to be incurred, and
2. They are not tied up to a clear cause and effect relationship between inputs and outputs.
Other Costs Classification based on Behavior:
A __________________ (perhaps better called as mixed costs) contain both fixed and variable and it vary in total amount but
not in direct proportion to output or activity. An example of semi-variable cost are cost of electricity, taxes, social security
expenses, materials handling, personnel services, and utilities (heat, light and power).
A _______________________ cost behavior pattern has a curved graph.
Cost Behavior Assumptions:
In dealing with variable costs, it is assumed that a strictly linear relationship between cost and volume, except in the case of step-
variable costs. Economists correctly point out that many costs that the accountant classifies as variable actually behave in a
curvilinear fashion. A _______________________ cost behavior pattern has a curved graph. Although many costs are not strictly
linear
______________________ refers to the range or band of activity within which the behavior pattern are valid. Costs are described as
variable or fixed with respect to a particular relevant range. Any level of activity outside this range may have different cost
behavior patterns.
______________________ refers to the cost behavior patterns identified are true only over a specific period of time. Beyond this,
cost may show a different behavior.
E. Costs for Planning and Control Considering Time Horizon
1. Committed costs
2. Programmed/Discretionary/Managed Costs
3. An _______________________________ bears a definitive physical relationship to the activity measure. This relationship result
specifically from a clear-cut measured relationship between inputs and outputs, they are normally observable. Examples of
these inputs include direct materials costs, energy costs, and labor costs. Examples of outputs include cars, computers,
cellphones, and telephones.
II. Costs that are Unrecorded but used in Decision-Making Purposes
A. ___________________________ require a utilization of current resources, usually cash or near-cash, such as materials, labor and
overhead, advertising, salaries, etc. it is usually used to describe relevant cash costs.
________________________ are historical or past costs, usually fixed, and do not require a utilization of current resources. They
have been incurred in the past and cannot be changed by any decision made at the present time or in the future. Any cost incurred in
the past is sunk, gone forever. Examples of such costs include the acquisition cost of equipment previously purchased, regardless of
the current usefulness the costs of acquiring them cannot be changed by any prospective action. Hence, these costs are irrelevant to
all future decisions. Other examples include depreciation, amortization of intangible assets, etc.
B. Controllable Cost vs. Uncontrollable Costs. The concept of controllable is very important because if properly applied will help
avoid confusion in the area of cost control. This cost classification depends upon a point of reference.
A ______________________ is a cost that can be regulated or the responsibility by a given manager. If a manager can control or
heavily influence the level of a cost, then the cost is controllable by that manager. Usually it can be limited by a manager. Such that,
if a manager is responsible for a given cost, that cost is said to be controllable with respect to that person.
An _____________________ is a cost that cannot be regulated or cannot be limited or cannot be influence significantly by a given
manager. Such that, if the manager does not authorized a cost, the costs is said to be uncontrollable with respect to that person.
Almost all costs are controllable at some level of management. Top management including the board of directors has broad authority
over costs and directly or indirectly controls all costs in the firm.
C. Avoidable Cost vs. Unavoidable Costs.
___________________________ are costs that will not be incurred if an activity is suspended. It will be deleted if a specific
segment or activity is eliminated. It is usually those costs that will be saved or those that will not be incurred if certain decision is
made. For decision-making purposes this are usually relevant. Such as cost of materials, labor and overhead of product line will be
discontinued.

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 ___________________________ are cost incurred in any event or costs that cannot be deleted if an segment or activity will be
eliminated such as salaries, etc.
___________________________ are costs that may be deferred or shifted to future date or period without adversely affecting
current operations. Such as, repainting of a building. It should be noted, however, that postponable costs are not
__________________ costs, since the incurrence of cost is merely ___________ and not actually avoided.
D. Other Classification of Costs
_________________________ are those advantages or benefits that are given up or foregone by choosing a course of action among
alternative courses of action.
__________________________ are assumed or hypothetical costs representing the cost or value of resources that is utilized for a
specific purpose. They do no require cash outlay.
A _____________________ extra cost incurred in producing one additional unit of output. The __________________________ is the
total cost, for whatever quantity is produced, divided by the number of units produced.
A difference in cost between one course of action and another is a differential cost (usually referred to as incremental cost in most
cases). It also refers to increase or decrease in total cost between two alternatives.
If the cost is decreased, the differential cost may be referred to as a ________________.
Suppose a rental company owns a small van for pick-up airport passengers. The van needs to be replaced, and two vehicles are
under consideration. The difference in the cost of these alternative vehicles is a differential cost of the vehicle replacement decision.
The cost of performing one additional oil filter job in a given time period is the marginal cost of that type of service. The total cost
of all oil filter jobs in a time period, divided by the number of jobs, is the average cost of an oil filer job.
III. Other Costs Classification
An indirect cost may also be called a ____________ or a ________________ cost.
A ______________________ is incurred to benefit more than one business activity.
A _________________ is applied to situations where multiple outputs are derived from the joint products. For example, a barrel of
crude oil can be processed into literally multiple products like gasoline, diesel, kerosene, etc.
Joint costs and common costs are usually irrelevant for decision making purposes.
____________________ are future costs that are expected to be different under each alternative course of action. There are two
characteristics:
1. They are expected future costs, and
2. They are different between decision alternatives.

Therefore, relevant costs are _____________ and ____________________. A historical cost or past cost is automatically irrelevant.
I – Cost Classification
Selected costs associated with a variety of business situations are shown below:
1. Sales commissions of the marketing staff
2. Salary of plant manager
3. Lubricating oils for machines
4. Metal bar used in making plumbing products
5. Property taxes on a building that includes factory and home office
6. Labor in the repair and maintenance section
7. Salary of the supervisor in the grinding division
8. Crude oil used in the refining process which results in numerous products
9. Depreciation on administrative office furniture
10. Salary of quality assurance personnel who test products during production
11. Salaries of software engineers in a production plant using robots
12. Wages of union auto assembly workers guaranteed 2,000 hours of work per year.

Required: Create columns to classify each item by cost behavior (variable, semivariable, or fixed) with respect to activity; as
a product or period cost; and, if it is a product cost, as a direct or indirect product cost.
II – Cost Classification
James Bond is the manager of Department x007 and has the authority to buy supplies, hire labor, maintain equipment, and
incur telephone and postage charges for the department. Various costs for the month of June 2013 are as follows:
Plant superintendent’s salary P 8,000
Factory heat and light 3,200
Maintenance charges – Department x007 2,600
Telephone and postage – Department x007 1,100
Plant maintenance and repairs 1,700
Supplies used – Department x007 1,400
Salary – Mr. Bond 2,500
Labor cost – Department x007 14,600
Plant depreciation 3,000
Equipment depreciation – Department x007 2,300
Total costs P40,400
Required:
1. Compute the costs that can be directly identified with Department x007.
2. Compute the costs that can be allocated to Department x007
3. Compute the costs that can be controlled by James Bond.
III -
ABC’s Skateboard Company incurs the following cost. Categorize each of the following costs. You may have more than one category for
each item;
Product Costs

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 Direct Direct Manufacturing Period Cost Prime Conversion
Materials Labor Overhead Cost Cost

Production supervisor salary

Cost of fiberglass
Wages of assembly person
Sales commission
Cost of high-grade wheels
Screws
Factory rent
Wages of skateboard painter
Factory utilities
Utilities for corporate office
III – True or False
1. Costs that tend to remain relatively constant per unit of output at different levels are known as variable costs.
2. As volume increases, variable cost per unit increases.
3. As volume increases, fixed cost per unit decreases.
4. As volume increases, fixed costs increases.
5. Indirect costs for example factory overhead are always fixed costs.
6. Direct costs are generally fixed costs.
7. The property taxes paid on a factory are fixed costs.
8. A mixed costs is one that is partially tax deductible and partially nondeductible.
9. When a product is handmade, the manufacturer would probably view direct labor as variable costs.
10. Semivariable costs or mixed costs contain both variable and fixed elements.
11. Fixed costs are costs that do not vary with volume.
12. On a per unit basis, variable costs remain relatively constant with changes in volume.
13. Variable costs vary proportionately with volume.
14. The product costs include direct labor.
15. A sunk cost has relevance to a decision while an opportunity cost does not.
16. A variable costs is one that varies in total amount in direct proportion to changes in activity or output.
17. A committed cost is a variable cost that management obligates itself to incur over an extended period of time.
18. A step-fixed cost is a cost that increases in lumps of cost with changes in output or activity
19. A difference in cost between two alternatives between one course of action and another is an opportunity cost.
20. A sunk cost is a cost that has already been incurred.
21. All sunk costs are irrelevant.
22. All irrelevant costs are past costs.
23. All relevant costs are present or future amounts.
24. All future costs are relevant costs.
25. A cost can be relevant for one decision and irrelevant for another decision.
26. All controllable costs are direct costs.
27. All direct costs are controllable.
28. All fixed costs are noncontrollable costs.
29. All noncontrollable costs are fixed costs.
30. Direct costs is not necessarily a variable costs.
31. Direct costs and controllable costs have the same meaning.
32. Opportunity costs are not entered into accounting records, but they are used in decision-making.
33. If a cost can be specifically identified with or traced to the unit under consideration, it is a direct cost.
34. In planning and control, it is not necessary to distinguish between direct costs of a department and the allocated costs.
35. Almost all costs are controllable at some level of management.
36. Cost that may be authorized by one individual and in that sense are controlled by him or her; other persons within the firm may never
influence the amount of the cost.
37. A common cost is one that is incurred for the benefit of more than one cost objective.
38. A period cost is a cost identified with goods or services rather than measured time intervals.
39. The salary paid to the vice-president of sales is a good example of a product cost.
40. Factory taxes and insurance are fixed costs and are also classified as direct costs to a department.
41. Responsibility comes with authority.
42. A cost controllable is controllable by a person if he can significantly influence the amount or the incurrence of cost through his own
action.
43. The salary of the manager of a responsibility center is usually uncontrollable by such manager.
44. The direct costs of a particular department are always controllable costs.
45. Controllable costs are defined as those that are directly influenced by a manager within a given time span.
46. Relevant costs are future costs that will differ across the alternative courses of action.
47. A differential cost may either be incremental or decremental cost.
48. Postponable costs are costs that may be deferred or shifted to a future date or period of time without adversely affecting the current
operations.
49. Postponable costs are also called avoidable costs.
50. Factory burden are product costs that are not materials or direct labor.
51. Cost per unit that decreases per unit as more units are made during a time period.
52. Relevant range refers to activity levels within which the firm is expected to operate.
53. Period costs are costs that are not inventoried.
54. Committed costs are costs that management obligated itself to incur on the future.
55. Avoidable costs are costs that will go away if an activity is suspended.
56. Joint costs are costs incurred while producing more than one product but cannot be easily traced to each product.
57. Non-controllable direct costs are costs that are traceable to a particular objective but cannot be controlled by the manager responsible
for that cost objective.
58. Average product cost or full cost per unit refers to total product costs divided by total units produced.
IV

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No Clothes manufactures designer jeans. At the end of the current year, one line of jeans was out of style. These jeans were
carried in inventory at P50,000. Pedro De Claro, a product line manager, estimated that, with a little rework costing P8,000,
she could sell the entire lot to a discount clothing outlet for P15,000. Or, Pedro figures it out that the jeans could be sold “as
is” to a clothing store in Northern Batanes for P6,000, although No Clothes would have to pay P750 freight charges. Pedro
could also sell the jeans as waste material to a recycling firm for P3,200.

Required:
1, What is the sunk cost in this situation?
2. What is the best choice? Why?
3. What is the opportunity cost?
4. Pedro could store the jeans for a cost of P200 per month. He says, “I think this style will return in, oh, maybe
eight or ten years.” She guesses that the jeans might be sold for “up to P30,000” then, assuming no storage
damage and no inflation. Does this information affect your analysis?