MANAGERIAL

ECONOMICS
Aaron Silva
COST TERMINOLOGY AND COST
BEHAVIORS
COST TERMINOLOGY AND COST BEHAVIORS

• Cost – reflects the monetary measure of resources

consumed to attain an objective such as making a good
or performing a service.
- the monetary value of expenditures for raw materials,
equipment, supplies, services, labor, products, and more.
COST TERMINOLOGY AND COST BEHAVIORS

• Unexpired Cost – is the balance sheet value of an asset.

- is any cost that has not yet been charged to expense
because it still represents some residual value (asset yet
to be converted to revenue).
• Expired Cost – portion of an asset’s value consumed,
converted, or sacrificed during a period for production or
service which is an expense.
- cost that has been recognized as an expense. Total
loss in value of an asset.
COST TERMINOLOGY AND COST BEHAVIORS
COST MANAGEMENT SYSTEM
COST MANAGEMENT SYSTEM

• Cost Management System – a set of formal

methods developed for planning and controlling
an organization’s cost-generating activities
relative to its strategy, goals, and objectives.
- Cost concepts and terminologies has been
developed to facilitate this communication process
of Cost management system.
COST MANAGEMENT SYSTEM

• Cost Management System – a set of formal

methods developed for planning and controlling
an organization’s cost-generating activities
relative to its strategy, goals, and objectives.
- Cost concepts and terminologies has been
developed to facilitate this communication process
of Cost management system.
ASSOCIATION WITH COST OBJECT
ASSOCIATION WITH COST OBJECT

• Cost Object – anything for which management

wants to collect or accumulate cost.
- Common examples are: product lines, service
lines, geographic territories, customers,
departments or anything else for which
management wants to quantify cost.
ASSOCIATION WITH COST OBJECT

• Direct Cost – are conveniently and economically

traceable to the cost object.
ASSOCIATION WITH COST OBJECT

• Indirect Cost – cannot be economically traced to

the cost object but instead are allocated to the
cost object.
REACTION TO CHANGES IN ACTIVITY
REACTION TO CHANGES IN ACTIVITY

• Relevant Range – activity that reflects a

company’s normal operating range.
- within the relevant range, the two primary
cost behaviors are variable and fixed.
REACTION TO CHANGES IN ACTIVITY
REACTION TO CHANGES IN ACTIVITY

• Variable Cost - cost that

changes as the quantity of
the good or service that a
business produces changes.
- rises as production
increases and falls as
production decreases.
REACTION TO CHANGES IN ACTIVITY

• Fixed Cost - cost does not

change when sales or
production volume
increase or decrease.
- cost that remains
constant in total within
relevant range of activity.
REACTION TO CHANGES IN ACTIVITY

• Mixed Cost – combination of both variable and fixed cost

components.
- On a per unit basis, mixed cost does not fluctuate
proportionately with changes in activity nor does it remain
constant with changes in activity.
- An example of mixed cost is an electric bill. Fixed
component of an electric bill is the flat charge for
services. While the variable component is the kilowatt per
hour usage.
REACTION TO CHANGES IN ACTIVITY
REACTION TO CHANGES IN ACTIVITY

• Step Cost – which

shifts upward or
downward when
activity changes by a
certain interval or
“step”.
REACTION TO CHANGES IN ACTIVITY

• Predictor – is an
activity that, when
changed, is
accompanied by a
consistent, observable
change in a cost item.
REACTION TO CHANGES IN ACTIVITY

• Cost driver – is a
predictor that has an
absolute cause and
effect relationship to a
cost.
- Determinant of whether
there will be continuity
or discontinuity for cost.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Product Cost – are

related to making a
product or providing
the services that
directly generate
revenue for an entity.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Direct material – any

material that can be
easily and
economically traced to
a product.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Direct labor – refers to

the time spent by
individuals who work
specifically on
manufacturing a
product or performing
a service.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Conversion cost –
the sum of direct
labor and overhead
costs.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Prime cost – the

sum of direct
material and direct
labor.
CLASSIFICATION ON THE FINANCIAL
STATEMENTS

• Distribution cost –
any cost incurred to
warehouse,
transport, or deliver
a product or service.
COST MANAGEMENT SYSTEM
SUMMARY
COST MANAGEMENT SYSTEM SUMMARY

Association with • Direct

cost object • Indirect

• Variable
Reaction to • Fixed
changes in activity • Mixed
• Step

Classification on • Unexpired (balance sheet)

• Expired (income statement)
the financial • Product (inventoriable)
Statement • Period (expensed)
Sources

• https://en.wikipedia.org/wiki/Main_Page
• Cost Accounting Philippine edition
• https://corporatefinanceinstitute.com/resource
s/knowledge/accounting/cost-driver/
• https://saylordotorg.github.io/text_managerial-
accounting/s05-07-how-product-costs-flow-thro
ugh
.html
Asynchronous