Introduc)on to Cost Accoun)ng

Management Accoun)ng is concerned with providing informa3on to par$es inside an

organiza$on so they can plan, control opera3ons, make decisions, and evaluate performance. It
does not require compliance to GAAP.
Cost Accoun)ng is directly concerned with the determina3on and use of product or service costs.
Financial Accoun)ng is concerned with providing useful informa3on to external par3es and
requires compliance with GAAP.

Financial Accoun3ng Management Accoun3ng

Primary Users
Primary Organiza3onal Focus
Informa3on characteris3cs
Overriding criteria
Recordkeeping
External Internal
Whole/ Aggregated Part/ Segmented
Must be historical, May be current or forecasted,
qualita3ve, monetary, and quan3ta3ve or qualita3ve,
verifiable monetary or nonmonetary,
3mely and at a minimum,
reasonable es3mated
GAAP, consistency, Situa3onal relevance,
verifiability benefits > costs, flexible
Formal Combina3on of both formal
and informal

*****
Cost Terminologies
Cost object is anything management wants to collect or accumulate costs.
Cost driver is any variable that affects cost over a period of 3me.
Cost pool is a grouping of individual cost item.
Ac)vity is an event, ac3on, or task of work with a specified purpose.

*****
Different Costs
A. As to type
1. Product costs – incurred to manufacture a product (direct material, direct labor, and
overhead)
2. Period costs – non-manufacturing costs
B. As to func3on
1. Manufacturing costs – all costs incurred to convert raw material to finished goods
1.1 Direct manufacturing costs – materials and labor
1.2 Indirect manufacturing costs – manufacturing overhead or factory overhead costs
2. Non-manufacturing costs – all costs not incurred to convert raw materials to finished
goods such as research and development, marke3ng costs, distribu3on costs, etc.
C. As to traceability
1. Direct costs – costs that are related to a par3cular cost object and can be effec3vely
traced (Direct material and direct labor or Prime Cost)
2. Indirect costs – costs that are related to a cost object but cannot be effec3vely traced
D. For decision making
 1. Relevant costs – future costs that will differ under alterna3ve course of ac3on
2. Opportunity costs – income or benefit given up when one alterna3ve is selected over
another
3. Sunk/Past/Historical costs – costs already incurred and cannot be changed by any
decision
E. As to behaviour
1. Variable – total amount varies directly to change in ac3vity level

Total Cost = (variable cost per cost driver)(cost driver)

2. Fixed – total amount remains unchanged

3. Mixed cost – has both variable and fixed

Total Cost = Fixed Cost + Variable Cost

4. Step cost – step cost shib upward or downward by a certain interval or step

Cost Func)on
Total Cost = Total fixed cost + (variable cost per cost driver)(ac3vity level)
Y = A + Bx

Separa)on of fixed and variable component of mixed cost

1. High-low method

Cost@High – Cost@Low / Ac3vity@High – Ac3vity@Low

2. Scafergraph method
3. Least square regression method
Multiple Choice

Choose the letter of the best answer.

1. In comparing financial and management accoun3ng, which of the following more accurately
describes management accoun3ng informa3on?
A. historical, precise, useful
B. required, es3mated, internal
C. budgeted, informa3ve, adaptable
D. comparable, verifiable, monetary
2. Management and financial accoun3ng are used for which of the following purposes?

Management accoun3ng Financial accoun3ng

A. internal external
B. external internal
C. internal internal
D. external external
3. One major difference between financial and management accoun3ng is that
a. financial accoun3ng reports are prepared primarily for users external to the company.
b. management accoun3ng is not under the jurisdic3on of the Securi3es and Exchange
Commission.
c. government regula3ons do not apply to management accoun3ng.
d. all of the above are true.
4. Which of the following statements about management or financial accoun3ng is false?
a. Financial accoun3ng must follow GAAP.
b. Management accoun3ng is not subject to regulatory repor3ng standards.
c. Both management and financial accoun3ng are subject to mandatory recordkeeping
requirements.
d. Management accoun3ng should be flexible.

5. Management accoun3ng
a. is more concerned with the future than is financial accoun3ng.
b. is less concerned with segments of a company than is financial accoun3ng.
c. is more constrained by rules and regula3ons than is financial accoun3ng.
d. all of the above are true.

6. Modern management accoun3ng can be characterized by its

a. flexibility.
b. standardiza3on.
c. complexity.
d. precision.

7. Broadly speaking, cost accoun3ng can be defined as a(n)

a. external repor3ng system that is based on ac3vity-based costs.
b. system used for providing the government and creditors with informa3on about a company's
internal opera3ons.
c. internal repor3ng system that provides product cos3ng and other informa3on used by
managers in performing their func3ons.
d. internal repor3ng system needed by manufacturers to be in compliance with Cost Accoun3ng
Standards Board pronouncements.

8. Cost accoun3ng is directed toward the needs of

a. regulatory agencies.
b. external users.
c. internal users.
d. stockholders.

9. Cost accoun3ng is necessitated by

a. the high degree of conversion found in certain businesses.
b. regulatory requirements for manufacturing companies.
c. management's need to be aware of all produc3on ac3vi3es.
d. management's need for informa3on to be used for planning and controlling ac3vi3es.

10. The process of ___________ causes the need for cost accoun3ng.
a. conversion
b. sales
c. controlling
d. alloca3ng

11. Financial accoun3ng

a. is primarily concerned with internal repor3ng.
b. is more concerned with verifiable, historical informa3on than is cost accoun3ng.
c. focuses on the parts of the organiza3on rather than the whole.
d. is specifically directed at management decision-making needs.

12. Financial accoun3ng and cost accoun3ng are both highly concerned with
a. preparing budgets.
b. determining product cost.
c. providing managers with informa3on necessary for control purposes.
d. determining performance standards.

13. Which of the following topics is of more concern to management accoun3ng than to cost
accoun3ng?
a. generally accepted accoun3ng principles
b. inventory valua3on
c. cost of goods sold valua3on
d. impact of economic condi3ons on company opera3ons

14. Cost and management accoun3ng

a. require an en3rely separate group of accounts than financial accoun3ng uses.
b. focus solely on determining how much it costs to manufacture a product or provide a service.
c. provide product/service cost informa3on as well as informa3on for internal decision making.
d. are required for business recordkeeping as are financial and tax accoun3ng.
*****
1. Cost behavior analysis is a study of how a firm's costs
A. relate to compe3tors' costs.
B. relate to general price level changes.
C. respond to changes in ac3vity levels within the
company.
D. respond to changes in the gross na3onal product.

2. The term “relevant range” as used in cost accoun3ng means the range over which
A. costs may fluctuate
B. cost rela3onships are valid
C. produc3on may vary
D. relevant costs are incurred

3. An item or event that has a cause-effect rela3onship with the incurrence of a variable
cost is called a
A. mixed
cost.
B. predictor.
C. direct
cost.
D. cost driver.

4. Which of the following describes the behavior of the variable cost per unit? Variable
cost:
A. Varies in increasing propor3on with changes in the ac3vity level.
B. Varies in increasing propor3on with changes in the ac3vity level.
C. Remains constant with changes in the ac3vity level.
D. Varies in direct propor3on with the ac3vity level.

5. A cost that remains constant on a per unit basis in a given period despite
changes in the level of ac3vity should be considered a(an):
A. variable
cost.
B. prime cost.
C. fixed cost.
D. overhead cost.

6. When the number of units manufactured increases, the most significant change in unit
cost will be reflected as a(n)
A. increase in the fixed element.
B. decrease in the variable
element.
C. increase in the mixed element.
D. decrease in the fixed element
7.If ac3vity increases, which of the following statements about cost behavior is true?
A. Fixed cost per unit will increase
B. Variable cost per unit will increase
C. Fixed cost per unit will decrease
D. Variable cost per unit will decrease

8. Which of the following statements regarding fixed costs is incorrect?

A. Expressing fixed costs on a per unit basis usually is the best approach for
decision- making process.
B. Fixed costs expressed on a per unit basis will react inversely with changes
in ac3vity.
C. Assump3ons by accountants regarding the behavior of fixed costs rest heavily
on the concept of the relevant range.
D. Fixed costs frequently represent long-term investments in property, plant,
and equipment.

9. The increased use of automa3on and less use of the work force in companies has caused a
trend towards an increase in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.

10. Costs that increase as the volume of ac3vity decreases within the relevant range are
A. Average cost per unit.
B. Average variable cost per
unit.
C. Total fixed costs.
D. Total variable costs.

11. Which costs will change with an increase in ac3vity within the relevant range?
A. Total fixed costs and total variable cost.
B. Per unit fixed costs and total variable cost.
C. Per unit variable cost and per unit fixed
cost.
D. Per unit fixed cost and total fixed cost.

12. Which of the following best describes the rela3onship between fixed costs per
unit and variable costs per unit, as total volume increases?
A. Fixed cost per unit stays the same and variable cost per unit stays the
same.
B. Fixed cost per unit stays the same and variable cost per unit increases.
C. Fixed cost per unit increases and variable cost per unit increases.
D. Fixed cost per unit decreases and variable cost per unit stays the same.
13. Within the relevant range, the difference between variable costs and fixed
costs is:
A. variable costs per unit fluctuate and fixed cost per unit remains
constant.
B. variable cost per unit is constant and fixed cost per unit
fluctuates.
C. both total variable cost and total fixed cost are constant.
D. both total variable cost and total fixed cost fluctuate.
Problem I
Birmingham Machine Works had the following data regarding monthly power costs:

Month Machine hours Power cost

Jun 300 P680
Jul 600 720
Aug 400 695
Sept. 200 640

1. Assume that management expects 500 machine hours in October. Using the
high-low method, calculate October’s power cost using machine hours as the
basis for predic$on.

Problem II
Walton Corpora3on wishes to develop a single predetermined overhead rate. The
company's expected annual fixed overhead is P340,000 and its variable overhead cost
per machine hour is P 2. The company's relevant range is from 200,000 to 600,000
machine hours. Walton expects to operate at 425,000 machine hours for the coming
year. The plant's theore3cal capacity is 850,000. The predetermined overhead rate per
machine hour should be?

Problem III
Burke Corpora3on has the following data for use of its machinery

Month Usage Cost

Jun 600 P750
Jul 650 775
Aug 420 550
Sept 500 650
Oct 450 570

1. Using the high-low method, compute the variable cost element.

2. Using the high-low method, compute the fixed cost element (to the nearest
whole peso).

Problem IV
Hume Corpora3on has the following data for the current year:

Direct Labor P220,000

Direct Material 137,800
Actual Overhead 320,000
Applied Overhead 395,000
Raw Material 51,394
Work in Process 101,926
Finished Goods 111,192
Cost of Goods Sold 250,182

Any amount of under (over-)applied overhead is considered material. Sales revenue for
the current year amounted to P 390,000.

1. What is the amount of under- or overapplied overhead? (indicate

wheter under- or overapplied)
2. What is the balance of work in process aKer disposing the under- or overapplied
overhead?
3. What is the adjusted gross profit for the current year?

Problem V
Carlson charges manufacturing overhead to products by using a predetermined
applica3on rate, computed on the basis of labor hours. The following data pertain
to the current year:

Budgeted manufacturing overhead: P1,600,000

Actual manufacturing overhead: P1,632,000
Budgeted labor hours: 50,000
Actual labor hours: 48,000

1. Overhead is over- or underapplied by how much?

Problem VI
Athens Corpora3on applies manufacturing overhead to products on the basis of
machine hours.
The company's accountant es3mated that overhead and machine hours would
total
P800,000 and 50,000, respec3vely, for 2001. Actual costs incurred follow.

Direct material used P250,000

Direct labor 300,000
Manufacturing overhead 816,000

The manufacturing overhead figure presented above excludes

P27,000 of sales commissions incurred by the firm. An examina3on
of job-cost records revealed that 18 jobs were sold during the year
at a total cost of P2,960,000. These goods were sold to customers
for P3,720,000. Actual machine hours worked totaled 51,500, and
Athens adjusts under- or overapplied overhead at year-end to Cost
of Goods Sold.

1. Determine the company's predetermined overhead applica$on rate.

 2. Determine the amount of under- or overapplied overhead at year-end.
3. Compute the company's actual gross margin

Problem VII

Following are costs incurred by Ab3na Manufacturing Corpora3on during the previous month:
Direct materials P 5,000
Indirect materials 2,000
Direct labor 6,000
Indirect labor 1,000
Factory u3li3es 4,000
Adver3sing costs 8,000
Sales commissions 12,000
Deprecia3on on administra3on building 3,000
Salaries of administra3ve personnel 20,000
Deprecia3on - delivery equipment 2,000
Over3me pay - factory workers 1,500
Rework cost on defec3ve products discovered 2,500
during quality inspec3on
Iden3fy the following:

1. Total product cost

2. Total period cost

Problem VIII
Frances Corpora3on conducted a regression analysis of its factory overhead costs. The
analysis yielded the following cost rela3onship:
Total factory overhead cost = P50,000 per month + 5H*
*H= number of direct labor hours, the selected cost driver for overhead costs.

Each unit of product requires 6 direct labor hours.

The company's normal produc3on is 20,000 units of product per year.

Iden3fy the following:

1.The total overhead cost: for a month's produc3on of 2,000 units is?
2. The predetermined fixed overhead rate per hour is?