Lesson 2 Cost Accounting and Controlling Flashcards
➢ Cost that can be traced to a particular plant or department.
It is obviously or physically traced to the particular segment
under consideration.
Direct Cost
➢ Cost that is not directly traceable to a particular
department or sub-unit. As mentioned above, the
salary of the production supervisor needs to be
allocated to the product lines as this is classified as
indirect cost with respect to the product lines, but
direct cost as to production department. But for
example, the depreciation expense of the entire
building where both office and production are
located is an indirect cost of the production
department and an indirect cost also of the product
lines.
Indirect Cost
Cost classified as to _______ or __________ is useful to cost management system. The
objective of a Cost Management System is to trace as many costs as possible
directly to the activities to which costs are incurred. This is sometimes called
“Activity Accounting”. This process is vital to management’s objective of
eliminating “non-value added costs”.
direct or indirect
___-______ _____ _____ are costs of activities
that can be eliminated without deterioration of
service quality, performance or perceived
value. This concept is achieved by the so-called
Activity-Based Costing (ABC).
Non-Value Added Costs
➢Cost that the manager can significantly or heavily influence the level of incurrence of
such cost. A cost is considered to be controllable if the manager has the power to
authorize the incurrence of such cost. The manager can decide on the price, quantity,
quality, and from whom they are being going to buy the materials or services his
department needs.
Controllable Cost
➢Cost that the manager cannot significantly influence
its incurrence. Normally, these are costs that are
allocated to his department by the higher authority.
But in most cases, these are direct costs incurred
by his area but decisions to incur such costs are
made by higher authority.
Uncontrollable Cost
Cost classified in relation to decision-making:
- Opportunity cost
- Differential cost
- Relevant cost
- Marginal cost
- Average cost per unit
- Sunk cost
- Out-of-pocket cost
➢The benefit sacrificed when the choice of one action precludes taking an
alternative course of action. In other words, these are benefits foregone in
choosing one alternative over the competing alternative.
Opportunity Cost
➢The amount by which the cost differs under
two alternative actions. This is also known as
incremental costs.
➢ Technically, incremental costs mean increase
in cost from one alternative to another;
decreases in cost should be referred to as
decremental costs.
Differential Cost
➢Cost incurred in one alternative but will not be incurred in another
alternative. As costs incurred in both alternatives, such costs would be
irrelevant in making a decision.
Relevant Cost
➢ Extra cost incurred when one additional unit
is produced. Marginal costs typically differ
across different ranges of production
quantities because the efficiency of production
process changes. This could determine the
quantity that would be most efficient to
produce.
Marginal Cost
➢The result if the total cost to produce the products is divided by the number
of units manufactured or produced.
Average Cost Per Unit
➢ Cost that has been paid or incurred. They do not
affect future costs and cannot be changed by any
current or future action, such as historical costs or
future committed costs. Though committed costs
will be incurred in the future, it is considered a sunk
cost as management is already committed to such
costs and a decision not to incur such may be more
costly.
Sunk Cost
➢Cost that requires the payment of cash or other assets in the future as a
result of their incurrence.
Out-of-pocket cost
Cost can be classified as either:
1) Fixed
2) Variable
is a general term denoting anything that the company does;
examples of activity include units of product sold or produced, hours
worked, invoices prepared, and parts inspected.
Activity
is virtually synonymous with activity, and both terms shall be
used throughout the discussions.
Volume
➢ Costs that change directly and proportionately with the level of activity.
➢ Total variable cost increases as the activity level increases and the total
variable cost decreases as the activity level decreases but the variable cost
per activity level remains constant.
Variable Costs
➢ Costs that do not change with changing levels of activity. In other words, they remain constant regardless of
the change in activity level.
Fixed Costs
Some costs cannot be described by a single cost behavior pattern. These are called mixed costs which possess both fixed and variable components.
Mixed Costs
the total labor cost varies directly with production. When production increased from 3,000 to 3,800 units total labor cost increased from Php 1,600 to Php 1,760. When production decreased to 2,600 units, total labor cost likewise decreased to Php 1,520. Note that this is one of the characteristics of variable costs.
Total Costs
per unit labor cost varies inversely with production. When production increased from 3,000 to 3,800 units, labor cost per unit decreased from Php 0.53 (1,600/3,000) to Php 0.46 (1,760/3,800). When production decreased to 2,600 units, labor cost per unit increased to Php 0.58 (1,520/2,600). Note that this is one of the characteristics of fixed costs.
Cost Per Unit
➢ Some accountants use the term semivariable cost interchangeably with
mixed cost. However, for lecture purposes, semivariable cost will be regarded
separately.
➢ In some cases, we encounter cost items which vary directly with the change
in activity level. However, unlike in purely variable cost, the rate of change in
these cost items with the change in activity level is not constant. These costs
are called semi-variable costs.
➢ Instead of increasing at a constant rate, semivariable costs tend to either
increase at an increasing rate or increase at a decreasing rate.
Semi-variable Costs
➢ Example is the cost of electricity.
➢ Our electric bills are computed based on a graduated bracket, which means
that as we consume more kilowatt-hours of electricity, we graduate from a
lower bracket to a higher one, and as this happens, we pay higher power
charge per kilowatt-hour.
Semi-variable Costs that increase
at an increasing rate
➢ Example is the learning curve cost.
➢ This results from improving labor efficiency as employees become more familiar
with a new job.
➢ For instance, it may require 8 hours to make a chair for the first production run of a
new model of chair. On the next production run, however, employees may produce the
same model of chair in only 6 hours, and perhaps 5 hours only in the 3
rd run. If these
employees were paid in an hourly basis, note that the labor cost to produce the chairs
in this example will tend to increase at a decreasing rate as more chairs are
produced. This is so because as the employees become familiar with the production
process, they require less hours (and costs) to produce more units.
Semi-variable Costs that increase
at an decreasing rate
➢ Often called as step function costs or step costs. They possess some
characteristics of both variable and fixed costs. Like variable costs,
semifixed costs increase with the activity level, although not
proportionately, and like fixed costs, they remain constant for stretches
of activity levels, although not for all levels of activity.
Semi-fixed costs
Cost Behavior Assumptions
- Relevant Range Assumption
- Time Assumption
➢ Relevant range refers to the band of activity within which the identified cost behavior pattern are valid. Any level of activity outside this range may have different cost behavior patterns.
Relevant Range Assumption
➢ States that the cost behavior patterns identified are true only over a specified period of
time. Beyond this, the cost may show a different behavior.
➢ Some costs classified as fixed may no longer be fixed in the long run. A directly/purely
variable cost may show a semi-variable cost behavior pattern beyond a period of time under consideration. Variable cost may even shift to be a fixed cost or vice-versa at a time, due to some circumstances that may occur in the business.
➢ For example, a worker paid on a per output basis during his 6-month probationary period may eventually be paid on a semi-monthly fixed salary basis upon successful completion of his probation – a shift from variable to fixed cost.
➢ Similarly, payments for lease on a building may be fixed during the period covered by the lease contract, but the amount may change upon expiration or renewal of the
contract - achange in the amount of total fixed cost.
The Time Assumption
The highest and lowest activity levels usually (although not necessarily) correspond with the highest and lowest
costs during the period under review. However, should there be cases where the highest or lowest activity levels do
not correspond with the highest or lowest costs, the activity level should govern in selecting the highest and lowest
points. Moreover, periods with extraordinarily high or low activity levels and costs should not be included in the
selection process, for these points may have been caused by abnormal or unusual situations.
High-Low Method
