COST and COST BEHAVIORS

COST - incurred to produce a good or render service

COST CLASSIFICATIONS:
1. based on function/group of activities involved and GAAP
Manufacturing (PRODUCT) cost - inventoriable
Operating (PERIOD) cost
2. based on traceability to products and/or departments
DIRECT
INDIRECT
3. based on behavior/variability
VARIABLE
FIXED
MIXED
4. based on accounting period benefited
CAPITAL EXPENDITURE (Unexpired)
REVENUE EXPENDITURE (Expired)
5. cost for planning and control
BUDGETED
STANDARD
6. based on making managerial decisions
opportunity, imputed, controllable, marginal, sunk, out-of-pocket, discretionary, relevant/differential,
committed, avoidable, replacement, standby
7. based on managerial influence
CONTROLLABLE
UNCONTROLLABLE
8. based on significance in decision making
RELEVANT
IRRELEVANT
9. based on time period for which cost is incurred
HISTORICAL
FUTURE

Reaction to Change in Activity (assumption: WITHIN RELEVANT RANGE)

per unit

in total

variable

constant

direct

fixed

inverse

constant

STEP COST - could be variable or fixed; changes by a step when activity levels change
COST DRIVER - has absolute cause-and-effect relationship to a cost
PRODUCT COSTS IN MANUFACTURING:
1. Direct Material - readily identifiable part; can be easily traced to a product
2. Direct Labor - wages/salaries of direct labor personnel (e.g. basic compensation, productivity
bonuses, share on premiums, taxes, etc)
3. Overhead - VARIABLE + FIXED
indirect materials - not economically traced to products
indirect labor - fringe benefits, overtime pay (unless specific to job)
DM+DL=PrimeCosts

DL+OH=ConversionCosts

Production Center - present in manufacturing; conversion of input resources to output

3 INVENTORY ACCOUNTS:
1. RAW MATERIAL INVENTORY (work not started)
2. WORK IN PROCESS INVENTORY (work started, not completed)
3. FINISHED GOODS INVENTORY (work completed)
COST ALLOCATION - assignment of indirect cost using a reasonable allocation base or driver
ACCUMULATION AND ALLOCATION OF OVERHEAD
to determine full cost of cost object
to motivate managers to manage cost object efficiently
for management planning, controlling and decision making
COST SYSTEMS:
Actual Cost System
Normal Cost System

DM
Actual
Actual

DL
Actual
Actual

SCHEDULE OF COGM and COGS:

RMI, beg
Purchases
RM available for use
RM, end
RM used
Indirect Materials used
Direct Materials used
Direct Labor
Overhead
Total Manufacturing Cost
WIP, beg
Total Cost to account for
WIP, end
Cost of Goods Manufactured
FG, beg
Goods Available for sale
FG, end
Cost of Goods Sold

P xxxx
xxxx
P xxxx
(xxxx)
P xxxx
(xxxx)
P xxxx
xxxx
xxxx
P xxxx
xxxx
P xxxx
(xxxx)
P xxxx
xxxx
P xxxx
(xxxx)
P xxxx

OH
Actual
Predetermined

PREDETERMINED OVERHEAD RATES

to improve timeliness of information
to adjust for variations not due to fluctuations in activity
to eliminate variations in per-unit fixed overhead cost
to allow managers to be more aware of individual product or product line profitability
PREDETERMINED OH RATE =

Budgeted Overhead Cost

Budgeted Activity Level

APPLIED OH = (Predetermined OH Rate) x (Actual Activity Level)

MOH Control
ACTUAL OH APPLIED OH

If Actual > Applied = UNDERapplied OH

Actual < Applied = OVERapplied OH

Entry for Actual OH:

MOH Control
xxx
Various accounts

xxx

Entry for Applied OH:

WIP Inventory
xxx
MOH Control

xxx

****underapplied and overapplied OH must be closed

at year-end
****if immaterial, close to COGS
****if material, prorate among WIP, FG, and COGS

CAPACITY MEASURES:
1. theoretical
2. practical
3. normal - required under GAAP
4. expected
HIGH-LOW METHOD (for mixed costs)
b = change in total cost
change in activity level

LEAST SQUARES REGRESSION ANALYSIS

b = xy - n(x)(y)
x2 - n(x)2

ABSORPTION (full) vs VARIABLE COSTING (direct)

- the only difference is treatment of fixed manufacturing overhead cost
- in full costing, FMOH is a product cost
- in direct costing, FMOH is a period cost
- also, absorption costing is required for external reporting while variable costing is intended only for
internal purposes