FULL COST

ACCOUNTING
DELA CRUZ, ROMA ELAINE
AGUILA, JEAN IRA
BUCAD, ROCELO
COST
• Cash or cash equivalent necessary to attain an
objective such as acquiring goods or services,
performing a function or producing and distributing a
product.

• Value forgone, given up, or sacrifice of resources for

the purpose of achieving some economic benefit which
will promote the profit-making ability of the firm.
COST POOLS/COST CENTER
• Can be classified as:
• By type of cost (labor costs, materials costs)
• By source (department 1, department 2)
COST POOL/COST CENTER (TYPE OF
COST)
COST POOL/COST CENTER (SOURCE)
COST OBJECTS AND COST DRIVERS
• COST OBJECTS
• Product, service/organizational unit to which costs are assigned for
some management purpose.

• COST DRIVERS
• Any factor that has the effect of changing the level of total cost.
• Examples: Procedures in handling, displaying and storing
merchandise
CLASSIFICATIONS OF COSTS
1. NATURE/MANAGEMENT FUNCTION
2. TIMING OF RECOGNITION AS EXPENSE
3. FINANCIAL STATEMENTS
4. COST BEHAVIOR
5. TYPES OF INVENTORY
6. TRACEABILITY TO COST OBJECTIVE
7. MANAGERIAL INFLUENCE
8. TIME FRAME/COMMITMENT TO COST EXPENDITURE
9. PERIOD OF INCURRENCE
10. DECISION MAKING & OTHER ANALYTICAL PURPOSES
CLASSIFICATIONS OF COSTS
1. NATURE/MANAGEMENT FUNCTION
• MANUFACTURING COSTS
o Direct Materials
o Direct Labor
o Factory Overhead
o Indirect materials
o Indirect labor

• NON MANUFACTURING COSTS

o Marketing and Selling costs
o General and Administrative costs
PETRON CORPORATION
GARDENIA PHILIPPINES
CLASSIFICATIONS OF COSTS
2. TIMING OF RECOGNITION AS EXPENSE
• PRODUCT COSTS (INVENTORIABLE COSTS)
o Direct Materials
o Direct Labor
o Factory Overhead

• PERIOD COSTS
o Marketing and Selling expenses
o General and Administrative expenses
CLASSIFICATIONS OF COSTS
3. FINANCIAL STATEMENTS
• STATEMENT OF FINANCIAL POSITION
• INCOME STATEMENT
STATEMENT OF FINANCIAL
POSITION
• MERCHANDISING COMPANY
STATEMENT OF FINANCIAL
POSITION
• MANUFACTURING COMPANY
STATEMENT OF FINANCIAL
POSITION
• SERVICE COMPANY
INCOME STATEMENT
• MERCHANDISING COMPANY
INCOME STATEMENT
• MANUFACTURING COMPANY
INCOME STATEMENT
• MANUFACTURING COMPANY
INCOME STATEMENT
• SERVICE COMPANY
CLASSIFICATIONS OF COSTS
4. COST BEHAVIOR
• VARIABLE COSTS
• FIXED COSTS
• MIXED COSTS (SEMIVARIABLE COSTS)
MIXED COSTS (SEMIVARIABLE
COSTS)
CLASSIFICATIONS OF COSTS
5. TYPES OF INVENTORY
• RAW MATERIALS INVENTORY
• WORK IN PROCESS INVENTORY
• FINISHED GOODS INVENTORY
CLASSIFICATIONS OF COSTS
6. TRACEABILITY TO COST OBJECTIVE
• DIRECT COSTS
• INDIRECT COSTS
CLASSIFICATIONS OF COSTS
7. MANAGERIAL INFLUENCE

• CONTROLLABLE COSTS
o Advertising or marketing costs
o Supplies required for offices

• NONCONTROLLABLE COSTS
o Rent expense
o Depreciation expense
CLASSIFICATIONS OF COSTS
8. TIME FRAME/COMMITMENT TO COST EXPENDITURE
• COMMITTED COSTS
• DISCRETIONARY COSTS
CLASSIFICATIONS OF COSTS
9. PERIOD OF INCURRENCE
• HISTORICAL COSTS
• FUTURE COSTS
CLASSIFICATIONS OF COSTS
10. DECISION MAKING & OTHER ANALYTICAL PURPOSES
• RELEVANT COSTS
o DIFFERENTIAL COSTS
o OPPORTUNITY COSTS
o AVOIDABLE COSTS
• IRRELEVANT COSTS
o SUNK COSTS
COST CLASSIFICATION (SAMPLE)
• A decision needs to be made about the type of clothing material or
fabric to be used to make a shirt. The fabric that has been used in the
previous production cost P40 per yard but it is not available currently.
Similar material from another supplier will cost P50 per yard.
COST CLASSIFICATION (SAMPLE)
• A decision needs to be made about the type of clothing material or
fabric to be used to make a shirt. The fabric that has been used in the
previous production cost P40 per yard but it is not available currently.
Similar material from another supplier will cost P50 per yard.
• Fabric:
• As to management function - Manufacturing cost
• As to traceability - Direct cost
• As to cost behavior – Variable cost
• As to decision significance: Relevant (Differential cost)
• As to managerial influence: Controllable
• As to time period: P50: future, P40 historical
COST BEHAVIOR
COST BEHAVIOR
• COST BEHAVIOR - HOW COST WILL REACT AS CHANGES TAKES PLACE IN THE
LEVEL OF BUSINESS ACTIVITY.

• VARIABLE COST - REACTS DIRECTLY PROPORTIONAL WITH THE CHANGE IN

ACTIVITY.
• FIXED COST - REACTS CONSTANT/ THE SAME WITH CHANGE IN ACTIVITY
• MIXED COST - COMBINATION OF VARIABLE AND FIXED. (also called
SEMIVARIABLE COST)

• NOTE: FIXED COST PER UNIT (NOT FIXED COST) REACTS INVERSELY
PROPORTIONAL WITH CHANGE IN ACTIVITY.
COST BEHAVIOR
• IMPORTANCE OF UNDERSTANDING COST BEHAVIOR

• PLANNING - REQUIRES MANAGEMENT DECISIONS BASED IN PART

ON EXPECTATION IN THE FUTURE.

• CONTROL - IS THE PROCESS OF USING FEEDBACK INFORMATION

FOR COMPARISON WITH EXPECTATIONS AND THE
IMPLEMENTATION OF ACTION ON THE BASIS OF THE
COMPARISON.
COST BEHAVIOR
• VARIABLE COST
COST BEHAVIOR
• FIXED COST
COST BEHAVIOR
• FIXED COST PER UNIT
COST ESTIMATION
• ACCOUNT ANALYSIS
• HIGH-LOW METHOD
• SCATTERGRAPH METHOD
• LEAST-SQUARES REGRESSION
METHOD
COST ESTIMATION
• ACCOUNT ANALYSIS (2 STEPS)

• REVIEW OF EACH COST ACCOUNT USED TO RECORD THE COSTS THAT ARE OF
INTEREST. EACH COST IS IDENTIFIED AS EITHER FIXED OR VARIABLE
DEPENDING ON THE RELATIONSHIP BETWEEN COST AND SOME ACTIVITY.

• EACH MAJOR CLASS OF MANUFACTURING OVERHEAD OR OTHER MIXED COST

IS ITEMIZED. EACH COST IS THEN DIVIDED INTO ITS ESTIMATED VARIABLE AND
FIXED COMPONENTS. THIS IS DONE ON THE BASIS OF THE EXPERIENCE AND
JUDGEMENT OF ACCOUNTING AND OTHER PERSONNEL.
COST ESTIMATION
• HIGH-LOW METHOD
COST EST.
• HIGH-LOW METHOD
COST EST.
• HIGH-LOW METHOD
COST ESTIMATION
• SCATTERGRAPH METHOD
COST ESTIMATION
• LEAST-SQUARES REGRESSION
METHOD
COST ESTIMATION
• LEAST-SQUARES REGRESSION
METHOD
COST ESTIMATION
• LEAST-SQUARES REGRESSION
METHOD
COST ESTIMATION
• LEAST-SQUARES REGRESSION
METHOD
COST ESTIMATION (LEAST SQUARE)
COST ESTIMATION STRENGTHS AND
WEAKNESSES
STRENGTHS WEAKNESS
ACCOUNT ANALYSIS • PROVIDES A DETAILED EXPERT • SUBJECTIVE
ANALYSIS OF COST BEHAVIOR IN
EACH ACCOUNT
HIGH-LOW METHOD • SIMPLE TO APPLY • USES ONLY TWO DATA POINTS
WHICH MAY NOT PRODUCE
ACCURATE RESULTS
SCATTERGRAPH METHOD • USES ALL OBSERVATIONS OF • FITTING OF THE LINE IS
COST DATA. SUBJECTIVE.
• EASY TO UNDERSTAND & APPLY • DIFFICULT TO DO WHERE
SEVERAL INDEPENDENT
VARIABLES ARE TO USED
LEAST-SQUARES REGRESSION • USES ALL OF THE • REGRESSION MODEL REQUIRES
METHOD OBSERVATIONS OF COST DATA. SEVERAL RELATIVELY STRICT
• THE LINE IS STATISTICALLY FIT TO ASSUMPTIONS BE SATISFIED
THE OBSERVATIONS. FOR RESULTS TO BE VALID.
LEARNING CURVE THEORY
• Speed, Inc. manufactures complex units of motorboats. Fabricating these
units require a high degree of technical skill. However, employees have an
opportunity to learn how to produce the units more effectively. In
estimating direct labor hours, a 70% learning curve can be used. Completing
one prototype unit required 1200 labor hours at a cost of 18,000.

• The cumulative average worker-hours per unit for a total of 2 units is:
• The cumulative average worker-hours per unit for a total of 8 units is:
• The estimated direct labor cost for an order of seven additional units, after
completing one unit is:
LEARNING CURVE THEORY
• Speed, Inc. manufactures complex units of
motorboats. Fabricating these units require a high
degree of technical skill. However, employees have
an opportunity to learn how to produce the units
more effectively. In estimating direct labor hours, a
70% learning curve can be used. Completing one
prototype unit required 1200 labor hours at a cost of
18,000.

• The cumulative average worker-hours per unit for a

total of 2 units is: 840 average worker hours
• The cumulative average worker-hours per unit for a
total of 8 units is: 411.60 average worker hours
• The estimated direct labor cost for an order of seven
additional units, after completing one unit is:
P31,392.00
FULL COSTING
FULL COSTING
• Also called as ABSORPTION COSTING
• Treats all costs of production as product costs regardless of whether
they are variable or fixed.
• Product Costs
• Direct Materials
• Direct Labor
• Factory Overhead
• In other words the manufacturing costs are expensed only in the year
of sale.
USES OF FULL COSTING
1. Determines the cost of the inventory at the end of an accounting period.

Inventory cost per unit computation under

FULL COSTING
Direct Materials XXX
Direct Labor XXX
Factory Overhead XXX
Total inventoriable cost XXX
÷ Units Produced XXX
Inventory Cost per unit XXX
USES OF FULL COSTING
2. Helps to determine the cost of goods sold.

Cost of Goods Sold Example

USES OF FULL COSTING
• It helps in determining the appropriate selling price of manufactured
products.
• Can be used for external reporting.
• it complies with GAAP and more accurately tracks profits than
variable costing.
VARIABLE COSTING
• Also called direct costing
• Treats only those cost of production which vary
with output as product costs.
• This analysis is compatible with contribution
approach income statement
• Supports Cost-Volume-Profit analysis
• Not in accordance with GAAP
 UNSOLD UNITS -> Asset (as inventory)

PRODUCT COST
SOLD UNITS -> Expense (as COGS)

PERIOD COST FULLY EXPENSE (Whether sold or unsold)

Difference between ABSORPTION and
VARIABLE Costing

Inventoriable Cost / Product Cost

Full / Absorption Costing
Direct Materials
Direct Labor
Variable Factory Overhead
Fixed Factory Overhead
Direct / Variable Costing
Direct Materials
Direct Labor
Variable Factory Overhead
Illustration
Warriors Corporation produces a single product. The following is a cost
structure applied to its first year of operation.
Selling Price P 15 per unit
Variable Selling and Administrative costs P 2 per unit
Direct Materials P 2 per unit
Direct Labor P 1.50 per unit
Variable FOH P 0.50 per unit
Fixed Selling and Administrative costs P 14,000
Fixed FOH P 20,000

During the first year, Warriors Corporation manufactured 5,000 units and
sold 3,800. There was no beginning or ending work-in-process inventory.
Required:
1. Compute for product costs per unit under absorption costing.
2. Prepare an income statement using absorption costing.
Required:
1. Compute for product costs per unit under
absorption costing.
Direct Materials P 2.00
Direct Labor P 1.50 Total Fixed FOH : 20,000
Factory Overhead ÷ Units Manufactured: 5,000
Variable P 0.50 =Fixed FOH per unit P 4
Fixed P 4.00
Product Cost per unit P 8.00
 Ending Inventory
Units manufactured 5,000
-Units Sold 3,800
1,200
x 8
9,600

Net Sales P 57,000 Units Sold 3,800

Less: Cost of goods sold X Selling Price 15
Beginning Inventory P0
Add: Net Purchases/ Total production Cost P 40,000 Units manufactured 5,000
Total Goods Available for Sale P 40,000 X Product Cost Per unit 8
Less: Ending Inventory P 9,600
P 30,400
Gross Profit P 26,600 FSAC 14,000
VSAC 7,600
Less: Operating Expenses P 21,600
Units Sold 3,800
Profit P 5,000 X VSAC x2
7,600