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Concepts of Costs in Managerial Accounting

The document discusses various concepts of costs in managerial accounting including definitions of cost, cost objects, cost drivers, and cost pools. It also classifies costs according to type, function, traceability, purpose for decision making, and behavior. Examples are provided to illustrate cost behavior analysis and calculations related to contribution margin, break-even point, sales levels needed to achieve profit targets, and the effect of price changes on break-even point.

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Jon Nell Laguador Bernardo
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40 views

Concepts of Costs in Managerial Accounting

The document discusses various concepts of costs in managerial accounting including definitions of cost, cost objects, cost drivers, and cost pools. It also classifies costs according to type, function, traceability, purpose for decision making, and behavior. Examples are provided to illustrate cost behavior analysis and calculations related to contribution margin, break-even point, sales levels needed to achieve profit targets, and the effect of price changes on break-even point.

Uploaded by

Jon Nell Laguador Bernardo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CONCEPTS OF COSTS IN MANAGERIAL ACCOUNTING

Cost – the monetary measure of the amount of resources given up or used for some purpose; the monetary
value of goods and services expended to obtain current or future benefits.

Terminologies:
 Cost Object – anything for which cost is computed (e.g. a product, product line, a segment of the
organization)
 Cost Driver – any variable, such as a level of activity or volume, that usually affects costs over a period of
time (e.g. production, sales, number of hours)
 Cost pool – a grouping of individual cost items; an account in which a variety of similar costs are
accumulated (e.g. work-in-process, factory overhead control)
 Activity – an event, action, transaction, task, or unit of work with a specified purpose.
 Value-adding activities – activities that are necessary (non-eliminable) to produce the products (e.g.
assembling the different component parts of the product)
 Non-Value adding activities – activities that do not make the product or service more valuable to the
customer (e.g. moving materials and equipment parts from/to stockroom or a workstation)

DIFFERENT COSTS FOR DIFFERENT PURPOSES (Classification of Costs)


A. As to type
1. Product costs – costs incurred to manufacture the product
 Product costs of the units sold during the period are recognized as expense (cost of goods sold)
in the income statement
 Product costs of the unsold units become the costs of inventory and treated as asset in the
balance sheet
2. Period costs – the non-manufacturing costs that include selling, administrative, and research and
development costs. These costs are expensed in the period of incurrence and do not become part of
the cost of inventory.

B. As to function
1. Manufacturing costs – all the costs incurred in the factory to convert raw materials into finished
goods
a. Direct manufacturing costs – materials and labor
b. Indirect manufacturing costs – the manufacturing overhead or factory overhead costs
2. Non-manufacturing costs – all costs which are not incurred in transforming materials to finished
goods
a. Research and development
b. Marketing costs
c. Distribution costs
d. Selling costs
e. After-sales costs
f. General and administrative costs

C. As to traceability/assignment to cost object


1. Direct costs – costs that are related to a particular cost object and can economically and effectively
be traced to that cost object
2. Indirect costs – costs that are related to a cost object, but cannot practically, economically, and
effectively be traced to such cost objects. Cost assignment is done by allocating the indirect cost to
the related cost objects

D. For decision-making*
1. Relevant costs – future costs that will differ under alternative courses of action
2. Differential costs – difference in costs between any two alternative courses of action
a. Incremental costs – increase in cost from one alternative to another
b. Decremental costs – decrease in cost from one alternative to another
3. Opportunity costs – income or benefit given up when one alternative is selected over another
4. Sunk, Past, or Historical costs – already incurred and cannot be changed by any decision made now
or to be made in the future

E. As to behavior (Reaction to changes in cost driver)


1. Variable cost – within the relevant range and time period under consideration, the total amount
varies directly to the change in activity level or cost driver, and the per unit amount is constant
 RELEVANT RANGE- refers to the range of activity within which the cost behavior patterns are valid.
Any level of activity outside this range may show a different cost behavior pattern
2. Fixed cost – within the relevant range and time period under consideration, the total amount remain
unchanged, and the per unit amount varies inversely or indirectly with the change in the cost driver
a. Committed fixed costs – long term in nature and cannot be eliminated even for short period of
time without affecting the profitability or long-term goals of the firm (e.g. depreciation of
buildings and equipment)
b. Discretionary or managed fixed costs – usually arise from periodic (may be annual, etc.) by
management to spend in certain fixed costs area such as research, advertising, maintenance
contracts. It may be changed by management from period to period or even during (within) the
period, if circumstances demand such change.
c. Mixed costs – this cost has both a variable and a fixed component
Cost Behavior Analysis

Judas Company manufactures and sells a single product. A partially completed schedule of the company’s
total and per unit costs over a relevant range of 60 to 100 units produced each year is given below:

Units produced
I. 60 units II. 80 units III. 100 units
TOTAL COSTS
A. VARIABLE COSTS P 120 P ? P ?
B. FIXED COSTS ? ? 600
C. TOTAL COSTS P ? P ? P ?
COSTS PER UNIT:
D. VARIABLE COSTS P ? P ? P ?
E. FIXED COSTS P ? P ? P ?

Question: If the company produces 90 units, then how much is the expected total costs?

Solo Corp. produces and sells a single product. The selling is P25 and variable costs is P15 per unit. The fixed
costs is P100,000 per month. Average monthly sales is 11,000 units.

1. The corporation’s contribution margin per unit and contribution margin ratio is
A. P10; 40%
B. P40; 160%
C. 10 units; 40%
D. P10; 60%
2. The corporation’s break-even point is
A. P10,000
B. 250,000 units
C. 10,000 units or P250,000
D. 250,000 units or P10,000
3. If the corporation desires to earn profit of P20,000 before tax, it must generate sales of
A. P12,000
B. 300,000 units
C. 10,000 units or P250,000
D. 12,000 units or P300,000
4. If the corporation pays corporate income tax at the rate of 32%, and it desires to earn after-tax profit of
P20,400, it must generate sales of
A. P325,000 or 13,000 units
B. P13,000 or 325,000
C. 12,040 units or P301,000
D. 16,375 units or P409,375
5. If selling price increase to P30, the break-even point in units will
A. Remain unchanged
B. Decrease by P166,666.75
C. Decrease to 6,666.67
D. Decrease by 6,666.67

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