o Raw Materials Inventory, which shows the cost

of raw materials on hand.

MANAGEMENT ACCOUNTING
COST AND COST CONCEPTS
• Manufacturing costs are classified as (1) direct materials,
(2) direct labor, or (3) manufacturing overhead.
o Direct materials are raw materials that can be physically
and directly associated with the finished product during
the manufacturing process.
• Indirect materials:
✓ Do not physically become part of the
finished product.
✓ Cannot be traced because their
physical association with the finished
product is too small in terms of cost.
✓ Companies account for indirect
materials as part of manufacturing
overhead.
o Direct labor is the work of factory employees that can
be physically and directly associated with converting raw
materials into finished goods.
• Indirect labor has no physical association with
the finished product, or it is impractical to trace
the costs to the goods produced. Companies
classify indirect labor as manufacturing
overhead.
o Manufacturing overhead consists of costs that are
indirectly associated with the manufacture of the
finished product.
• Manufacturing overhead includes indirect
materials, indirect labor, depreciation on factory
buildings and machines, insurance, taxes and
maintenance on factory facilities.
Manufacturing Costs in Financial Statements
Cost Terms:
Cost – the monetary amount of the resources given up or
sacrificed to attain some objective such as acquiring goods and
services.
Cost behavior – describes how a cost behaves or changes as
the amount of cost driver changes.
Cost pool – an account in which a variety of similar costs are
accumulated prior to allocation to cost objects. It is a group of
costs associated with an activity. Example: overhead control
account.
Cost object – the intermediate and final disposition of cost
pools. Example: product, job, process.
Cost driver – a factor that causes a change in the cost pool for
a particular activity. It is used as a basis for cost allocation; any
factor or activity that has a direct cause-effect relationship.
Activity – any event, action, transaction or work sequence that
incurs costs when producing a product or providing a service.
Cost Behavior Analysis
o Cost behavior analysis is the study of how specific
costs respond to changes in the level of business
activity.
o The activity index identifies the activity that causes
changes in the behavior of costs. With an appropriate
activity index, companies can classify the behavior of
costs into three categories: variable, fixed, or mixed.
o Variable costs are costs that vary in total directly and
proportionately with changes in the activity level. A
variable cost remains the same per unit at every level
of activity.

• The principal differences in a manufacturer’s financial
statements occur in the cost of goods sold section in the
income statement and the current assets section in the
balance sheet.
• Manufacturers compute cost of goods sold by adding the
beginning finished goods inventory to the cost of goods
manufactured and subtracting the ending finished goods
inventory.
• To determine the cost of goods manufactured, companies
add the cost of the beginning work in process to the total
manufacturing costs for the current year to find the total
cost of work in process for the year. Companies then
subtract the ending work in process from the total cost of
work in process to find the cost of goods manufactured.
• The balance sheet for a manufacturing company may have
three inventory accounts:
o Fixed costs are costs that remain the same in total
regardless of changes in the activity level.
▪ Because total fixed costs remain constant
as activity changes, it follows that fixed costs
per unit vary inversely with activity.
▪ Examples of fixed costs include property
taxes, insurance, rent, supervisory salaries,
and depreciation on buildings and
equipment.
o Mixed costs are costs that contain both a variable and
a fixed element.
▪ Mixed costs change in total but not
proportionately with changes in the activity
level.

o Finished Goods Inventory, which shows the cost of

completed goods on hand.
o Work in Process Inventory, which shows the cost
applicable to units that have been started into
production but are only partially completed.
 o The relevant range is the range of activity over which a
company expects to operate during the year. “a” is an estimate of the fixed cost.

▪ It is important in CVP analysis because the “b” is an estimate of the variable cost per unit of activity.
behavior of costs is assumed to be linear
(straight-line) throughout the relevant
range. Correlation Analysis

▪ Although the linear relationship may not be
completely realistic, the linear assumption
produces useful data for CVP analysis as long
as the level of activity remains within the
relevant range.
• Used to measure the strength of linear relationship
between two or more variables.
• The correlation between two variables can be seen by
drawing a scatter diagram:

✓ If the points seem to form a straight line,

In summary: there is a high correlation.

Costs Total Amount Per Unit ✓ If the points form a random pattern,
1. Fixed Constant Decreases as there is a low correlation or no
production correlation at all.
increases
(inverse Coefficient of Correlation (r)
relationship)
Increases as • Measures the relative strength of linear relationship
2. Variable production increases Constant between two (2) variables. Its value ranges from – 1.0
(direct relationship) to + 1.0:
3. Mixed or Increases as Decreases as
Semi- production increases production ✓ If r = - 1.0, there is perfect inverse linear
variable (direct relationship increases relationship between x and y.
(inverse
relationship ✓ If r = 0, no linear relationship.

✓ If r = + 1.0, there is perfect direct

SEGREGATION OF FIXED AND VARIABLE ELMENTS OF MIXED relationship between x and y.
COSTS:

a. High-Low Method – the fixed and variable elements
of the mixed costs are computed from two data
points – the high and low periods as to activity level
or cost driver.
b. Scattergraph Method – various costs (the dependent
variable) are plotted on a vertical line (y-axis) and
measurement figures (cost drivers or activity levels)
are plotted on a horizontal line (x-axis). A straight line
is drawn through the points and, using this line, the
rate of variability and the fixed cost are computed.
Coefficient of Determination (r2)
• The proportion of the total variation in Y that is
accounted for by the regression equation, regardless
of whether the relationship between x and y is direct
or inverse.
• It is a measure of ‘goodness of fit’ in the regression.
• The higher the r2, the more confidence one can have
in the estimated cost formula.

c. Least Squares (Regression Analysis) Method – Is a

statistical technique that investigates the association
between dependent and independent variables. This
method determines the line of best fit for a set of
observations by minimizing the sum of the squared
deviations between cost line and the data points.

This method uses the following equations in

computing for the values of unit variable cost and
fixed cost:

COST FORMULA: y = a + bx

Equation 1: ∑Y = na + b∑x

Equation 2: ∑xy = a∑x + b∑x²

Where:

“y” denotes total cost. It is called the dependent variable

because it is dependent on the value of another variable, the
activity level x.
 COST CONCEPTS

THEORY

1. The kind of accounting concerned with providing information to management in making decisions about the
operations of the business
a. Responsibility accounting c. Management accounting
b. Cost accounting d. None of the above

2. Which of the following is not a characteristic of Management Advisory Services?

a. MAS is broad in scope
b. MAS involves problem-solving affecting the future operations of the client
c. Beneficiary of service is management
d. MAS is repetitive as far as the same client is concerned

3. A person who is qualified by education, experience, technical ability, and temperament to advise or assist
businessmen on a professional basis in identifying, defining, and solving specific management problems involving the
organization, planning, direction, control, and operation of a firm is called a
a. Management Consultant c. Accounting Technician
b. Certified Public Accountant d. Management Accountant

4. Management accounting is considered successful when it

a. Helps managers improve their decision c. Is relevant
b. Is in accordance with GAAP d. Is accurate

5. The major difference(s) between financial and management accounting is that

a. Financial accounting reports are prepared primarily for users external to the company
b. Management accounting is not under the jurisdiction of the Securities and Exchange Commission
c. Government regulations do not apply to management accounting
d. All of the above are differences between financial and management accounting

6. The following characteristics refer to Financial Accounting except

a. Provides information to external users
b. Emphasizes on objective data
c. Has no externally imposed standards
d. Generates general purpose financial statements

7. Managerial accounting information is generally prepared for

a. Stockholders c. Managers
b. Creditors d. Regulatory agencies

8. Which of the following is not an internal user?

a. Creditor c. Controller
b. Department manager d. Treasurer
9. The major reporting standard for presenting managerial accounting information is
a. Relevance c. The cost principle
b. Generally accepted accounting principles d. The current tax law

10. The term "prime costs" refers to

a. The sum of direct labor costs and all factory overhead costs
b. The sum of direct materials costs and direct labor costs
c. Manufacturing costs incurred to produce units of output
d. All costs associated with manufacturing other than direct labor and direct materials costs

11. The term "conversion costs" refers to

a. Costs that are associated with marketing, shipping, warehousing, and billing activities
b. The sum of direct labor costs and all factory overhead costs
c. The sum of direct materials costs and direct labor costs
d. Manufacturing costs incurred to produce units of output

12. The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred in the current
year is the
a. Cost of goods manufactured c. Total cost of work in process
b. Cost of goods available for sale d. Total manufacturing cost

13. Which one of the following does not appear on the balance sheet of a manufacturing company?
a. Finished goods inventory c. Cost of goods manufactured
b. Work in process inventory d. Raw materials inventory
14. Cost of goods manufactured is calculated as follows
a. Beginning WIP + direct materials used + direct labor + manufacturing overhead + ending WIP
b. Direct materials used + direct labor + manufacturing overhead – beginning WIP + ending WIP
c. Beginning WIP + direct materials used + direct labor + manufacturing overhead – ending WIP
d. Direct materials used + direct labor + manufacturing overhead – ending WIP – beginning WIP

15. Which one of the following would not be classified as manufacturing overhead?
a. Indirect labor c. Insurance on factory building
b. Direct materials d. Indirect materials

16. The wages of a timekeeper in the factory would be classified as

a. A prime cost c. Indirect labor
b. Direct labor d. Compliance costs

17. The product cost that is most difficult to associate with a product is
a. Direct materials c. Manufacturing overhead
b. Direct labor d. Advertising

18. Product costs consist of

a. Conversion costs and unexpired expense c. Selling and administrative expenses
b. Prime costs and manufacturing overhead d. Period costs

19. Costs that are expensed when incurred are called

a. Product costs c. Inventoriable costs
b. Direct costs d. Period costs

20. Which of the following are period costs?

a. Raw materials c. Conversion costs
b. Prime costs d. Selling expenses

21. Costs that can be easily traced to a specific department are called
a. Direct costs c. Product costs
b. Indirect costs d. Manufacturing costs

22. Indirect costs

a. Can be traced to a cost object c. Are not important
b. Cannot be traced to a particular cost object d. Are always variable costs

23. Variable costs are those costs that

a. Vary inversely with changes in activity c. Decrease on a per-unit basis as activity increases
b. Vary directly with changes in activity d. Increase on a per-unit basis as activity increases

24. As activity decreases, unit variable cost

a. Increases proportionately with activity c. Remains constant
b. Decreases proportionately with activity d. Increases by a fixed amount

25. Fixed costs are those costs that

a. Vary directly with changes in activity c. Increase on a per-unit basis as activity increases
b. Vary inversely with changes in activity d. Remain constant as activity changes

26. The fixed cost per unit

a. Will increase as activity increases c. Will decrease as activity increases
b. Will increase as activity decreases d. Will exhibit the behavior described in choices "b"
and "c"

27. Which of the following statements is false?

a. At zero production level, fixed costs are also zero
b. At zero production level, fixed costs are usually positive
c. At zero production level, variable costs are usually zero
d. At zero production level, total costs equal total fixed costs

28. The term "relevant range" as used in cost accounting means the range over which
a. Cost relationships are valid c. Relevant costs are incurred
b. Production may vary d. Costs may fluctuate

29. The salaries you could be earning by working rather than attending college are an example of
a. Misplaced Cost c. Sunk Cost
b. Opportunity Cost d. Outlay Cost
 30. Sunk costs
a. Are relevant to long-term decisions but not to short-term decisions
b. Are relevant to decision making
c. Are subtitles for opportunity costs
d. In themselves are not relevant to decision making

31. If the total cost of alternative A is P50,000 and the total cost of alternative B is P34,000, then P16,000 is termed
the:
a. Opportunity cost c. Out-of-pocket cost
b. Sunk cost d. Differential cost

32. The term incremental cost refers to

a. The profit foregone by selecting one choice instead of another
b. The additional cost of producing or selling another product or service
c. A cost that continues to be incurred in the absence of activity
d. A cost common to all choices in question and not clearly or feasibly allocable to any of them

33. These are among the methods of segregating fixed cost and variable costs except
a. Simple regression analysis c. Breakeven method
b. Scattergraph d. High-low method

34. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the
scatter-diagram method
a. Includes costs outside the relevant range.
b. Considers more than two points.
c. Can be used with more types of costs than the high-low method.
d. Gives a precise mathematical fit of the points to the line.

35. Which of the following statements is true when referring to the high-low method of cost analysis?
a. The high-low method has no major weaknesses
b. The high-low method is very hard to apply
c. In essence, the high-low method draws a straight line through two data points
d. None of the above is true

36. The quantitative method that will separate a semi-variable cost into its fixed and variable components with the
highest degree of precision is
a. Simplex method c. Scattergraph method
b. Least squares method/Regression Analysis d. High-low method

37. Simple regression analysis involves the use of

Dependent variables Independent variables
a. One None
b. One One
c. One Two
d. None Two

38. A measure of the extent to which two variables are related linearly is referred to as
a. Sensitivity analysis c. Coefficient of correlation
b. Input-output analysis d. Cause-effect ratio

39. In regression analysis, which of the following correlation coefficients represents the strongest relationship
between the independent and dependent variable?
a. 1.03 c. - .89
b. - .02 d. .75

40. In regression analysis, coefficient of determination is a measure of

a. The amount of variation in the dependent variable explained by the independent variables
b. The amount of variation in the dependent variable unexplained by the independent variables
c. The slope of the regression line
d. The predicted value of the independent variable

CLASSIFICATION

Managerial accounting and financial accounting information have a number of distinguishing characteristics. For each
of the characteristics listed below, write M” for managerial accounting or “F” for financial accounting.
1. General-purpose reports
2. Reports are only used internally
3. Prepared in accordance with generally accepted accounting principles
4. Special purpose reports
5. Limited to historical cost data
 6. Reporting standard is relevance to the decision to be made
7. Financial statements
8. Reports generally pertain to the business as a whole
9. Reports generally pertain to subunits
10. Reports issued quarterly or annually

For each item listed below, indicate in the space to the left whether the item would be considered an inventoriable
cost or a period cost for a manufacturing company. Use the following:
I = Inventoriable cost P = Period cost

1. Factory supervisory salaries 6. Office salaries expense

2. Sales commissions 7. Property taxes on factory building
3. Income tax expense 8. Sales manager's salary
4. Indirect materials used 9. Factory wages expense
5. Indirect labor 10. Direct materials used

Presented below is a list of costs and expenses incurred in the factory by Vanessa Corporation, a manufacturer of
vehicles. Classify the above items into the following categories:
DM — Direct Materials DL — Direct Labor OH — Overhead

1. Property taxes on the factory land 5. Factory supervisors’ salaries

2. Metal used in manufacturing 6. Depreciation on factory machines
3. Cabinet maker's wages 7. Carpeting for the recreational vehicles
4. Nails and glue used in production 8. Insurance on factory equipment

TRUE OR FALSE

1. Reports prepared in financial accounting are general-purpose reports, whereas reports prepared in
managerial accounting are usually special-purpose reports.
2. Managerial accounting is primarily concerned with managers and external users.
3. Managerial accounting places less emphasis on precision and more emphasis on flexibility and relevance
than financial accounting.
4. Managerial accounting is not governed by generally accepted accounting principles (GAAP).
5. Financial accounting and managerial accounting reports must be prepared in accordance with generally
accepted accounting principles (GAAP).
6. Both direct labor cost and indirect labor cost are product costs.
7. Manufacturing costs that cannot be classified as direct material or direct labor are classified as
manufacturing overhead.
8. Direct material costs and indirect material costs are prime costs.
9. Indirect materials and indirect labor are both inventoriable costs.
10. Period costs are not inventoriable costs.

PROBLEMS

1. The accounting records of Romel Company revealed the following costs: direct materials used, P170,000; direct
labor, P350,000; manufacturing overhead, P400,000; and selling and administrative expenses, P220,000. The
product costs total:
a. P 520,000 c. P 920,000
b. P 750,000 d. P 1,140,000

2. The accounting records of Harris Corporation revealed the following selected costs: Sales commissions, P40,000;
plant supervision, P94,000; and administrative expenses, P185,000. The period costs total:
a. P 40,000 c. P 185,000
b. P 94,000 d. P 225,000

3. Total costs are P120,000 when 10,000 units are produced; of this amount, variable costs are P48,000. What are
the total costs when 12,000 units are produced?
a. P 57,600 c. P 120,000
b. P 72,000 d. P 129,600

4. Prime costs of a company are P3,000,000, manufacturing overhead is P1,500,000 and direct labor is P750,000.
What is the amount of direct materials?
a. P 1,500,000 c. P 2,250,000
b. P 750,000 d. Cannot be determined from the
information provided.
5. Joseph Company has a beginning inventory of direct materials on March 1 of P30,000 and an ending inventory
on March 31 of P36,000. The following additional manufacturing cost data were available for the month of
March:

Direct materials purchased ........................................................................... P84,000

Direct labor ...................................................................................................... 60,000
Factory overhead ............................................................................................ 80,000

During March, prime cost added to production was:

a. P 140,000 c. P 144,000
b. P 138,000 d. P 150,000

6. Sherina Company has a beginning inventory of direct materials on March 1 of P30,000 and an ending inventory
on March 31 of P36,000. The following additional manufacturing cost data were available for the month of
March:
Direct materials purchased ................................................................ P84,000
Direct labor ........................................................................................... 60,000
Factory overhead.................................................................................. 80,000

During March, conversion cost added to production was:

a. P 80,000 c. P 140,000
b. P 144,000 d. P 138,000

Use the following information for the next two (2) questions:
7. Sarah Company's accounting records reflect the following inventories:
Dec. 31, 2020 Dec. 31, 2021
Raw materials inventory P260,000 P310,000
Work in process inventory 160,000 300,000
Finished goods inventory 150,000 190,000

During 2021, P500,000 of raw materials were purchased, direct labor costs amounted to P600,000, and
manufacturing overhead incurred was P480,000.

Question 1: The total manufacturing costs incurred in 2021 amounted to

a. P 1,530,000 c. P 1,390,000
b. P 1,490,000 d. P 1,580,000

Question 2: The cost of goods sold for the year is

a. P 1,500,000 c. P 1,350,000
b. P 1,250,000 d. P 1,430,000

8. Abigail Company reported the following year-end information:

Beginning work in process inventory P 46,000

Beginning raw materials inventory 24,000
Ending work in process inventory 50,000
Ending raw materials inventory 20,000
Raw materials purchased 680,000
Direct labor 240,000
Manufacturing overhead 100,000

How much is the cost of goods manufactured for the year?

a. P 684,000 c. P 1,020,000
b. P 1,024,000 d. P 1,028,000
9. Erin Company gathered the following information on power costs and factory machine usage for the last six
months:
Month Power Cost Factory Machine Hours
January P24,400 13,900
February 30,300 17,600
March 29,000 16,800
April 22,340 13,200
May 19,900 11,600
June 14,900 6,600

Using the high-low method of analyzing costs, answer the following questions:
a. What is the estimated variable portion of power costs per factory machine hour?
b. What is the estimated fixed power cost each month?
c. If it is estimated that 10,000 factory machine hours will be run in July, what is the expected total power
cost for July?

10. The management of Joyce Company would like to separate the fixed and variable components of electricity as
measured against machine hours in one of its plants. Data collected over the most recent six months follow:
Electricity Machine
Month Cost Hours
January ....................................................................... P1,100 4,500
February ..................................................................... 1,110 4,700
March ......................................................................... 1,050 4,100
April ............................................................................ 1,200 5,000
May ............................................................................ 1,060 4,000
June ............................................................................ 1,120 4,600

Using the method of least squares, compute the fixed cost and the variable cost rate for electricity expense.