CHAPTER 1: Accounting: The main goal of accounting is to provide financial information about an economic entity (like a business) to different

types of users.
COST ACCOUNTING - is an extension of general or financial accounting that specifically focuses on the costs associated with producing goods or services to help
management make informed decisions control their costs. It measures, records, and reports on these costs.
 Purpose: It provides management with detailed information on the costs involved in every type of business.

Manufacturing Focus: Manufacturing companies, in particular, need detailed cost data due to the complexity of their production processes.
 What Costs Were Incurred: For example, the cost of raw materials, labor, and overhead (like electricity or rent).
 Where and How Costs Were Utilized: This refers to tracking costs at different stages of production.
 Why It's Important: It helps companies manage their resources by providing insights into costs, leading to better pricing, budgeting, and financial planning.
Remember: Cost accounting is essential not only for profit-seeking entities but also for not-for-profit organizations such as governmental agencies, churches, & charities.

TWO MAJOR AREAS OF ACCOUNTING: FINANCIAL AND MANAGERIAL

Financial Accounting: provide information to external Managerial Accounting: provide information to internal users (people within the organization, such as managers,
parties (people or entities outside the organization), such who use accounting information for planning, controlling, and decision-making)
as investors, creditors, regulators, and others who are  Focus: specific departments or divisions within the company.
interested in the financial health of the company.  Nature of Information:
 Focus: whole entity, and financial statements o Current and Future-Oriented: not just what has happened, but also about what is expected to happen.
 Nature of Information: Historical Data, Quantitative o Qualitative and Quantitative: it can include numerical and descriptive infos (e.g., customer satisfaction
and Monetary, and Verifiable ratings).
 Compliance: Financial accounting is often required o Timely: info must be available when managers need it, even if it’s not perfectly precise.
by law, especially for public companies, to ensure
 Flexibility: There are no strict regulations or formats for managerial accounting reports. The information is
transparency and accountability. Follows GAAP.
tailored to the needs of the company.
Cost Accounting: The Intersection of Financial and Managerial Accounting
 Purpose: Cost accounting provides detailed information about the costs of producing goods or services, used by both financial and managerial accounting.
 Use in Financial Accounting: Cost accounting helps determine COGS, reported in the income statement for external users.
 Use in Managerial Accounting: helps managers (internal users) control costs, set prices, and make decisions about which products to produce or discontinue.
 Information Provided: Cost accounting tracks all costs associated with production, including: DM, DL, FO
 Determining Product Costs: Cost accounting helps calculate both the total cost to produce all units of a product and unit cost to produce each individual unit.
Unit Costs is essential for: Setting Prices (covers costs and makes a profit), offer competitive prices, accurately price bids for contracts, and profit analysis.

DISTINGUISHING BETWEEN MERCHANDISING AND MANUFACTURING OPERATIONS

Merchandising Operations: buy finished goods and sell them Manufacturing Operations: Maintains three distinct inventory accounts:
without altering them. Their main focus is on purchasing, storing, 1. Materials Inventory - cost of raw materials purchased but not yet used
and selling goods. 2. Work in Process (WIP) Inventory - costs that are currently in production but are not yet finished goods.
- The calculation of COGS is straightforward: The only It includes Manufacturing costs:
expenditure occurs when salable items are purchased. Any - Direct Materials (DM): raw material directly used in production process (wood used to make a chair)
item unsold at year end is the inventory ending. - Direct Labor (DL): wages of workers directly involved in manufacturing the product (carpenters)
- Factory Overhead (FO): Indirect costs related to manufacturing, such as:
Example: A retail store buys shoes for resale. If they started with  Indirect Materials: Supplies not directly used in the product but necessary for production, like
100 pairs, bought 200 more, and had 50 left at the end of the glue or screws.
year.  Indirect Labor: Wages of workers who support production process but don't work directly on the
product, like maintenance staff.
Beginning Merchandise Inventory 100  Utilities: Costs of electricity, water, and other utilities used factory.
+ Total purchases (during the period) 200  Depreciation: cost allocation of machinery and building over time.
Cost of goods available for sale 300  Supplies: General items like cleaning materials or office supplies used in the factory.
Less: Ending Merchandise Inventory 50 3. Finished Goods Inventory - costs of completed products but have not yet been sold.
COGS 250 pairs

Flow of Costs in Manufacturing

Process: As materials are used and labor and overhead costs are incurred, these costs are transferred from the Materials Inventory to the WIP Inventory account. When a
batch of products is fully completed, the total cost accumulated in the WIP Inventory account is moved to the Finished Goods Inventory account.
 Example:
The furniture company buys wood for ₱10,000 and records this in Materials Inventory. ₱5,000 worth of wood is used to start making chairs. This amount is
transferred to WIP Inventory, along with related labor and overhead costs. The total cost in WIP Inventory might be ₱8,000 (₱5,000 for materials, ₱2,000 for labor,
and ₱1,000 for factory overhead). After the chairs are completed, the ₱8,000 is moved to Finished Goods Inventory. If half of the chairs are sold, the associated
costs, say ₱4,000, are moved from Finished Goods Inventory to COGS.

Reporting on the Income Statement

 COGS: The total COGS during the period is reported on the income statement. It is subtracted from sales revenue to determine the gross profit.
 Ending Inventories: The remaining balances in Materials, WIP, and Finished Goods Inventory are reported on the balance sheet as current assets.
METHODS OF PRODUCT COSTING
Cost Accounting Non-Cost System Cost System
System  Flow of Costs: In this system, the flow of costs is not tracked in  Flow of Costs: In the Cost System, the flow of costs is tracked in detail.
detail. The business doesn’t keep a close eye on where every Every cost—whether for raw materials, labor, or overhead—is
Which System to Use? dollar is spent in real-time. carefully recorded and monitored as it happens.
In This Course: The  Inventory Tracking: The Periodic Inventory Method is used,  Inventory Tracking: The Perpetual Inventory Method is used, which
focus will be on the meaning that inventory levels (like raw materials, work in means that inventory levels are constantly updated in real-time. Every
Cost System, it process, and finished goods) are only checked and updated time materials are used, products are made, or goods are sold, the
provides more periodically, usually at the end of an accounting period. inventory records are adjusted immediately.
detailed and accurate Cost Calculation: Because inventory levels are only updated Cost Calculation: Because costs are tracked so closely and inventory is
way to track costs, periodically, the Cost of Goods Manufactured and Sold can only be updated in real-time, businesses can quickly determine unit costs (the cost
essential for effective calculated after a physical count of inventory has been done. This to make one item) and inventory costs at any point. This system provides a
management and might happen monthly, quarterly, or even annually, depending on more accurate and timely picture of a business’s financial status.
decision-making in the business.
business.
Valuation method is a Actual Cost System - the actual costs of DM, Normal Cost System - actual costs are used for Standard Cost System - costs are assigned to
systematic approach DL, and FO incurred during a period are used direct materials and direct labor, but overhead products based on predetermined standards
used to determine the to determine the cost of a product. In this is applied based on a predetermined overhead for direct materials, direct labor, and overhead.
current or projected system, the exact amount spent on resources rate. This rate is established at the beginning of These standards are set based on historical
worth of an asset is known after the production process is the period based on estimated overhead costs data, industry averages, or management’s
complete. and expected activity levels. expectations.
Advantages: Advantages: Advantages:
- Provides a precise reflection of costs. - Provides timely cost information during - Facilitates cost control and variance
- No estimation or approximation is the production process. analysis, helping to identify inefficiencies.
involved. - Helps in budgeting and controlling costs
- Simplifies accounting and provides
Disadvantages: more effectively.
consistent cost data.
- Costs are only known after the Disadvantages:
Disadvantages:
production process, which may delay - Overhead costs may not reflect the true
financial reporting. costs if estimates are inaccurate. - May not reflect actual costs, leading to
- It may be difficult to control costs since - Requires adjustments at the end of the variances that need investigation.
they are recorded after being incurred. period to reconcile applied overhead with - Requires regular updates to maintain
actual overhead. accuracy.

Cost Accumulation Job Order Costing is used when products are made based on specific Process Costing is used in industries where products are mass-
Systems - are methods customer orders or for distinct projects. Each job is unique, so costs need to produced and identical to the others with numerous stages. This
used by businesses to be tracked separately for each one. system is suitable for operations where production is continuous,
collect and assign How It Works: such as in oil refining, food processing, or chemical production.
costs to products or  Job Cost Sheet: For each job, a job cost sheet is created. This sheet How It Works:
jobs. tracks all the costs associated with that particular job, including direct  Cost Accumulation by Department or Process: accumulates
materials, direct labor, and factory overhead. costs by department or process. Each department or process in
 Cost Accumulation: As the job progresses, all related costs are added the factory has its own cost records.
to the job cost sheet. This sheet acts like a mini-accounting record for  Homogeneous Products: Since all units produced are identical,
that specific job, showing how much it costs to complete it. the costs are averaged over all units. For example, in a factory
 Work in Process (WIP) Account: The job cost sheets collectively serve producing identical bottles of soda, the total costs of materials,
as a subsidiary ledger to WIP account in the general ledger. This labor, and overhead are divided by the number of bottles
means they provide detailed support for the amounts recorded in the produced to determine the cost per bottle.
WIP account, helping to track how much work has been done and  Continuous Production: As the production is ongoing, costs are
how much it has cost so far. accumulated and assigned to each process regularly.

Key Characteristics: Key Characteristics:

1. It collects all manufacturing costs and assigns them to specific job or  Cost Accumulation by Department or Work Center:
batches of product:  Emphasis on Time Periods:
All costs related to a specific job or batch (DM, DL, FO) are tracked focuses on accumulating costs over a specific time period. Costs are
separately. Each job has its own records to monitor these costs. grouped and averaged over a set period to determine the unit cost
2. It measures costs for each completed job, rather than for set time of products processed during that time.
periods:  Multiple Work in Process Inventory Accounts:
Costs are tracked per job, not over fixed time periods. Once a job is
completed, total costs are divided by the number of units produced to Step 1: analyze the cost flow model
determine the cost per unit. 2. determine equivalent unit of production (EUP)
3. It uses just one WIP Inventory Control account in the general ledger. 3. Calculate all applicable direct costs and indirect costs
This account is supported by a subsidiary ledger of job order cost 4. Calculate cost per EUP = applicable cost in production process
cards or sheets for each job in process at any point of time: 5. Allocate all relevant costs to all products completed and still in
The general ledger has one WIP Inventory Control account, supported by process
detailed job cost sheets for each job in progress. These sheets track costs as
each job moves through production.

Hybrid Costing Systems

Some production processes don't fit neatly into job order or process costing and require a blend of both systems. This is known as hybrid costing.
Operation Costing: Operation costing is a hybrid system used in industries where products have both standard and varying features. It combines elements of both job order
and process costing.
 Example: In clothing manufacturing, basic suits might be produced in bulk (process costing) and then customized with deluxe linings (job order costing). Costs are
tracked by batch or production run, blending both costing methods.
Batch Production: A large order of identical units is processed through the same production steps. Each batch is treated like a job, with costs allocated to each batch. When
production changes, a new batch is created.
 Example: A furniture manufacturer might produce a batch of chairs, followed by a batch of tables. Costs are assigned to each batch, and each batch is tracked
 similarly to a job in job order costing.

Major Differences Between Process Costing and Job Order Costing

Process Costing:
1. Homogeneous units pass through a series of similar processes - Process costing is used for products that are identical and produced in a continuous flow, such as
chemicals or beverages. Each unit goes through the same set of processes, and costs are tracked for each stage of production.
2. Costs are accumulated by processing department - In process costing, costs are tracked and collected for each department or process. For example, a factory might
have separate cost accounts for mixing, refining, and packaging departments. Costs are then averaged over all units produced in that department.
3. Unit costs are computed by dividing the individual departments' costs by the equivalent production - To determine the cost per unit, you divide the total costs of a
department by the total number of units produced during a period. This gives a per-unit cost that reflects the average cost of producing each unit in that department.
4. The cost of production report provides the details for the Work in Process account for each department - This report summarizes the costs incurred in each
department and the number of units produced, providing a detailed view of costs accumulated throughout the production process in each department.

Job Order Costing:

1. Unique jobs are worked on during a time period - Job order costing is used for unique or custom orders where each job is different, such as custom-made machinery or
special-order furniture. Costs are tracked separately for each job or batch, rather than for a continuous process.
2. Costs are accumulated by individual job - In job order costing, all costs related to a specific job (materials, labor, and overhead) are accumulated and tracked separately.
3. Unit costs are determined by dividing the total costs on the job cost sheet by the number of units on the job
4. The job cost sheet provides the details for the Work in Process account - Each job has a job cost sheet that tracks all costs associated with that job. This sheet provides
detailed information on the costs incurred and is used to update the Work in Process account for each job.

USES OF COST ACCOUNTING DATA

Determining Product Costs: Cost acc. helps management know how much it costs to produce a single unit of a product, and the total cost for all units produced.
 Example: If a company spends ₱10,000 on labor in one month, that amount by itself isn't very informative. But if those ₱10,000 in labor costs were used to
produce 5,000 units, it’s significant to know that each unit costs ₱2 in labor. This allows the company to compare the cost per unit over different periods to
analyze trends, such as whether labor costs are increasing or decreasing.

Uses of Unit Cost Information in Decision-Making

 Determining Selling Prices: Knowing the cost to produce each unit helps in setting a selling price that covers production costs and expenses that provides profit.
 Meeting Competition: Detailed cost information helps the company decide how to respond if a competitor is selling a similar product at a lower price.
 Bidding on Contracts: When competing for government or private contracts, companies need to set a bid price that covers costs and provides a profit, but isn’t so
high that it loses out to competitors.
 Analyzing Profitability: Unit cost information allows management to see which products are most and least profitable, helping them decide whether to continue,
modify, or discontinue a product.

Planning in Cost Accounting - refers to the process where management sets goals for the company and determines the steps necessary to achieve them. It helps
coordinate all parts of the organization towards a common direction, ensuring that resources are effectively utilized and goals are met efficiently. Cost accounting supports
this by providing historical data, which management uses to forecast future costs and make informed decisions.
Components of Planning:
 Strategic Planning: Focuses on setting long-term goals and determining the overall direction of the company.
 Tactical Planning: Involves creating shorter-term plans that align with the strategic goals.
 Operational Planning: Deals with the day-to-day execution of tactical plans, ensuring that resources like materials, labor, and facilities are used efficiently.
Control involves monitoring operations to ensure that the company meets its objectives. This process checks whether the plans are being followed and if the goals are
being achieved. Effective control requires: Responsibility, Measurement, and Corrective Action.

Recent Developments in Cost Accounting

 Technological Advancements: The rise of computers has greatly reduced manual bookkeeping, making data more accessible and analysis faster.
 Changes in Production Methods: New production techniques have made traditional cost accounting methods less effective, requiring updates in practices.
 Emphasis on Cost Control: Organizations, like hospital and industries facing global competition, are increasingly focusing on cost control to remain competitive.
Cost Accounting's Evolving Role
Traditionally, cost accounting was mainly used to record full product costs for external reporting. However, its role has expanded:
 Decision Making: Cost data is now crucial for making strategic business decisions, such as whether to continue or discontinue a product line.
 Performance Evaluation: Cost data is also used to evaluate how well different parts of the company are performing.
Cost Accounting And Other Fields Of Study
Cost accounting links to several fields: in financial accounting, it records costs and values inventory for external reports. In managerial accounting, it helps in decision-
making between alternatives, with differential cost analysis being similar to applied microeconomics. Cost accounting also supports finance, operations management, and
marketing decisions. Additionally, it connects to motivation and behavior through its role in planning and performance evaluation. To analyze costs effectively, it utilizes
mathematics and computer science.

CHAPTER 2: COSTS - CONCEPTS AND CLASSIFICATIONS

What Is Cost?
 Cost - cash or cash-equivalent value sacrificed to acquire goods and services that are expected to bring current or future benefit (REVENUE) to the organization.
 Cash Equivalent: This means that even if cash isn't directly used, other assets like land can be exchanged for goods or services. For example, a company might trade
land to acquire needed equipment.
 As these costs are consumed in generating revenue, they are said to expire and become expenses.
 Expenses are deducted from revenue on income statement to calculate profit. If a cost expires without generating any revenue, it is considered a loss.
 The focus of cost accounting is on costs, not expenses.

CLASSIFICATION OF COSTS
I. Costs Classified by Relation to a Product
1. Manufacturing Costs (Product Costs):
o Direct Materials: Raw materials directly used in the production of a product.
 o Direct Labor: Wages paid to workers who directly manufacture the product.
o Factory Overhead: Indirect costs associated with production, such as utilities, maintenance, and depreciation of equipment.
2. Non-Manufacturing Costs (Period Costs):
o Marketing or Selling Expenses: Costs associated with selling the product, like advertising and sales commissions.
o General or Administrative Expenses: Costs related to the overall management of the company, such as office salaries and utilities.
II. Costs Classified by Variability
1. Variable Costs: Costs that change in direct proportion to production volume.
2. Fixed Costs: Costs that remain constant regardless of production volume, like rent or salaries.
3. Mixed Costs: Costs that have both fixed and variable components, such as a utility bill that has a base charge plus a variable charge based on usage.
III. Costs Classified by Relation to Manufacturing Departments
1. Direct Departmental Charges: Costs that can be directly traced to a specific department within the manufacturing process.
2. Indirect Departmental Charges: Costs that cannot be directly traced to a specific department and are allocated across departments, like factory overhead.
IV. Costs Classified by Nature as Common or Joint
1. Common Costs: Costs that benefit more than one product, service, or department and cannot be directly traced to any one of them.
2. Joint Costs: Costs incurred during a joint production process that yields multiple products. For example, processing crude oil results in multiple products like
gasoline, diesel, and jet fuel.
V. Costs Classified by Relation to an Accounting Period
1. Capital Expenditures: Costs incurred to acquire or improve long-term assets like buildings or equipment. These costs are capitalized, meaning they are recorded
as an asset and expensed over time through depreciation.
2. Revenue Expenditures: Costs that are expensed in the period they are incurred, such as routine maintenance or office supplies.
VI. Costs for Planning, Control, and Analytical Processes
1. Standard Costs: Predetermined costs based on historical data or industry benchmarks, used for budgeting and performance evaluation.
2. Opportunity Costs: The potential benefit lost when one alternative is chosen over another. For example, choosing to use a factory to produce product A instead
of product B means the opportunity cost is the profit foregone from not producing product B.
3. Differential Cost: difference in total cost between two alternatives. For example, cost difference between producing 1,000 units versus 2,000 units of a product.
4. Relevant Cost: Costs that are directly affected by a specific business decision. These costs should be considered when making decisions.
5. Out-of-Pocket Cost: Actual cash outlays required for a specific decision, such as purchasing materials or paying wages.
6. Sunk Cost: Costs that have already been incurred and cannot be recovered, so they should not influence future decisions. For example, money spent on
research for a product that was later canceled.
7. Controllable Cost: Costs that a manager has the power to influence or change, like deciding how much to spend on marketing.

MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS

Direct materials are the essential raw materials that are transformed into Direct labor refers to the wages paid to Factory overhead - all manufacturing costs that
finished products during the manufacturing process. These materials are workers who are directly involved in are not direct materials or direct labor. These
directly traceable to the final product and form a significant part of it. manufacturing the product. are costs that are necessary for production but
Examples: Examples: cannot be easily or directly traced to specific
o Iron ore for making steel. o Machine operators shaping the products.
o Sheet steel for manufacturing automobiles. product. Examples:
o Flour for baking bread. o Maintenance workers ensuring o Indirect Materials and Supplies: Some
o Wood for producing tables and chairs. machinery functions properly. materials, although part of the final
Key Points: product, are too minor or too expensive
Key Points:
 Direct Labor Costs: Include wages for to trace individually (e.g., nails in
 The management of direct materials is crucial for efficient furniture, bolts in cars).
production. workers whose tasks can be directly
and economically traced to the o Indirect Labor Costs: Wages for workers
 Timely Purchasing: Ensures that materials are available when
production of specific products. For who support the production process but
needed, preventing production delays and customer
instance, the wages of a machine cannot be directly traced to specific
dissatisfaction. For example, a car manufacturer running out of
operator working on a specific product products. EX: lift-truck drivers,
sheet steel can halt production, leading to losses in sales and profits.
line. maintenance staff, and supervisors.
 Overstocking: Buying too many materials can lead to high storage o Other Indirect Factory Costs: Expenses
Payroll-Related Costs:
costs and potential waste.
 Proper Storage: Ensures that materials remain in good condition and  Costs like payroll taxes, insurance, and related to maintaining the production
employee benefits can be considered facility, such as building maintenance,
are easily accessible. This includes maintaining proper records (like
part of direct labor costs but are machinery maintenance, property taxes,
materials stockcards) to track inventory and avoid losses.
typically included in factory overhead. insurance, depreciation on plant and
equipment, rent, and utilities.

Direct labor + direct materials = prime costs

Direct labor + factory overhead = conversion costs
Total manufacturing cost = direct materials + direct labor + factory overhead

NON-MANUFACTURING COSTS/PERIOD COSTS - are expenses that are not directly tied to the production of goods. These costs are incurred during a specific period and
are essential for running the business but do not contribute directly to manufacturing. They are categorized into two main types:
Marketing or selling expenses cover all costs necessary to secure customer orders and deliver Administrative expenses include all costs related to the overall
the finished product or service to the customer. These expenses are often divided into two management and administration of the organization. These expenses are
main categories: not directly linked to production or marketing but are essential for the
Order-Getting Costs: Expenses related to contacting potential customers and persuading them general functioning of the business.
to purchase the product or service. Examples of Administrative Expenses:
Order-Filling Costs: Expenses involved in ensuring that the customer's order is fulfilled and the  Executive Compensation: Salaries and benefits paid to top executives
product or service is delivered. and managers.
Examples of Marketing Expenses:  General Accounting: Costs related to maintaining financial records
 Advertising: Costs incurred to promote the product or service to potential customers. and preparing financial statements.
 Shipping: Costs to deliver products to customers.  Secretarial: Salaries and benefits for clerical staff who support the
 Sales Travel: Expenses for sales staff to travel and meet with potential clients. administrative functions.
 Sales Commissions: Payments made to sales staff based on their sales performance.  Public Relations: Expenses involved in managing the company’s image
 Sales Salaries: Regular wages paid to sales employees. and communication with the public.
 Finished Goods Warehousing: Costs associated with storing the finished products before  Office Supplies: Costs for general office materials used in day-to-day
they are sold. administrative tasks.
 COSTS CLASSIFIED AS TO VARIABILITY/BEHAVIOR
Fixed Costs - expenses that remain constant in total, Variable Costs - change directly in proportion to Mixed costs are costs that have both fixed and variable
regardless of changes in the volume of production or changes in volume of production. components. They have a fixed base that remains constant, and
level of activity. - Dependent on level of production a variable component that fluctuates with the level of activity.
 Total Fixed Cost: Remains unchanged as activity  Total Variable Cost: Increases or
level changes. For example, whether a company decreases in direct proportion to activity 1. Semi-variable Costs - has a fixed portion that represents a
produces 10 units or 30 units, the total fixed cost levels. For instance, if production basic minimum fee, and a variable portion that increases with
stays the same. doubles, total variable cost also doubles. the level of activity.
 Cost Per Unit: Decreases as the volume of  Cost Per Unit: Remains constant Example: Delivery Truck Rental
production increases because the fixed cost is The delivery truck rental has fixed cost of P20,000 per month,
regardless of changes in the activity
spread over more units. Conversely, it increases regardless of how much it's used. Also, there's a variable cost of
level. For example, if the variable cost
as the volume decreases. For example, if a total P1.50 for every kilometer driven. For example, if the truck is
per unit is P100, this cost stays the same
fixed cost is P1,500, the cost per unit is P150 if 10 driven 10,000 kilometers in a month, the total cost would be
whether the company produces 10 or 20
units are produced but increases to P1,500 per P35,000. This includes the fixed cost of P20,000 and the variable
units.
unit if only 1 unit is produced. cost of P15,000 (10,000 km × P1.50/km).
 Examples: Direct materials, direct labor,
 Examples: Salaries of production executives, royalties, and sales commissions.
straight-line depreciation of equipment, rent, 2. Step Costs – fixed part of step costs that change abruptly at
Graphical Representation:
and insurance. certain levels of activity because they are acquired in indivisible
 Fixed Costs: A horizontal line on a graph portions.
Types of Fixed Costs: indicating that total fixed costs do not
 Committed Fixed Costs: Long-term costs arising Example: Supervisor Salaries
change with activity. However, fixed cost A company needs 1 supervisor for every 10 workers, with a
from past decisions, like equipment depreciation. per unit decreases as activity increases. salary of P30,000. However, if the company increases to 11
 Managed Fixed Costs  Variable Costs: A line that slopes upward, workers, it now needs 2 supervisors, raising the total cost to
(Discretionary/Programmed/Planned): Short- showing that total variable costs increase P60,000.
term costs that can be adjusted by management, with activity, but the slope of the line In this example, the supervisor cost increases in steps, not
like advertising and employee training. (cost per unit) remains constant. gradually, as the number of workers crosses certain thresholds
(e.g., from 10 to 11 workers).

ANALYZING MIXED COSTS/ SEPARATING MIXED COSTS

To plan effectively, it is often necessary to separate the fixed and variable components of mixed costs. Methods for doing this include:
 Scattergraph Method: Plotting costs against activity levels on a graph to visually estimate the fixed and variable components.
 High-Low Point Method: Calculating the variable cost per unit by using the difference in total costs at the highest and lowest levels of activity.
 Method of Least Squares: A more precise statistical method that fits a line through the data points to determine the fixed and variable co st components.

Common Costs vs. Joint Costs

o Common Costs are the costs of facilities or services used in two or more accounting periods, operations, commodities, or services. These costs, like indirect costs,
need to be allocated because they are shared among different departments or activities. For example, if two departments share the same building, the depreciation
of the building is a common cost. This depreciation cost must be allocated between the departments based on a reasonable method, such as the floor area each
department occupies.
o Joint Costs refer to the costs of materials, labor, and overhead that are incurred in the production of two
or more products simultaneously. A key challenge with joint costs is that they are indivisible and cannot
be easily attributed to any one of the products produced. Like common costs, joint costs are also subject
to allocation. For instance, when a company processes raw materials into multiple products, such as in oil
refining where crude oil is turned into gasoline, diesel, and other products, the costs incurred up to the
point where the products can be separately identified (known as the split-off point) are joint costs.

Capital Expenditure vs. Revenue Expenditure

o Capital Expenditure is an outlay of funds that is intended to benefit more than one accounting period
and is recorded as an asset. The cost is then allocated to different periods as depreciation for tangible
assets, amortization for intangible assets, or depletion for natural resources. For example, purchasing a machine that will be used for several years in production is a
capital expenditure.
o Revenue Expenditure is an expense that benefits only the current accounting period and is recorded as an expense on the income statement. This includes routine
costs like repairs, maintenance, or utilities. For example, the cost of repairing a machine is considered a revenue expenditure.

Direct vs. Indirect Departmental Charges

o Direct Departmental Charges are costs that can be immediately and conveniently charged to the specific department that incurred them. These costs are directly
associated with the activities or operations of a particular department. For example, the cost of raw materials used exclusively by the manufacturing department is a
direct departmental charge.
o Indirect Departmental Charges are costs that are initially charged to one department but later allocated to other departments that indirectly benefit from them.
These costs are not directly traceable to a single department. For example, the salary of a supervisor who oversees multiple departments may be initially charged to
the administration department but later allocated to the departments under their supervision.

Costs for Planning, Control, and Analytical Processes

 Standard Costs - are the pre-determined expenses for direct materials, direct labor, and factory overhead based on past experiences and research. They serve as a
budget for producing one unit of a product or service and act as a benchmark in budgetary control. For example, if past data shows that producing one unit of a
product typically costs P100 in materials, P50 in labor, and P20 in overhead, these amounts would be set as the standard costs for each unit.
 Opportunity Cost - represents the benefits you give up when choosing one alternative over another. It isn’t recorded in accounting systems but is vital for decision-
making. For instance, if Michele skips a week of work to vacation in Boracay, the P1,000 in lost wages is her opportunity cost. Similarly, if Marco leaves a job paying
P240,000 annually to return to school, that forgone salary is his opportunity cost.
 Differential Cost - are the changes in costs between alternatives. If one option leads to higher costs, this increase is called an incremental cost; if it leads to lower
costs, it’s called a decremental cost. For example, Avon Corp. compares current retail distribution costs with a proposed direct sales method. The table shows that
switching to direct sales would increase revenue by P300,000 but also increase costs by P185,000, leading to a net gain of P115,000.
 Relevant Cost - are future expenses that vary depending on the chosen alternative. In the Avon example, costs like goods sold, advertising, commissions, and
warehouse depreciation are relevant because they change between the retail and direct sales methods.
 Out-of-Pocket Cost - require a cash payment as they occur. For example, if a company decides to buy new office supplies, the money spent is an out-of-pocket cost.
 Sunk Cost - are past expenses that cannot be recovered and should not influence future decisions. For instance, if a company spends P250,000 on a specialized
machine, this expense is a sunk cost. Even if the purchase turns out to be a poor decision, the company cannot get this money back, so it should not affect future
planning.

Controllable and Non-controllable Costs

A cost is controllable at a particular management level if that level has the authority to approve or manage the cost. For example, a sales manager can control
entertainment expenses if they have the power to authorize spending on customer entertainment. However, the depreciation of warehouse facilities is a non-controllable
cost for the sales manager because they do not have the authority to influence or decide on warehouse construction.
Sometimes, controllability depends on the time frame. For instance, advertising costs may be non-controllable in the short term once a contract is signed, as management
cannot change the spending amount. However, in the long run, when the contract expires, these costs become controllable again, allowing management to renegotiate
and adjust spending.

Cost Flow in Different Types of Firms

1. Manufacturing Firms:
o Cost Incurrence: Direct materials, direct labor, and factory overhead are used in production. Costs flow through accounts like work in process (goods in
production) and finished goods (completed products ready for sale).
o Expense Category: Costs are categorized into the cost of goods sold (COGS) and operating expenses (selling and administrative costs).
2. Merchandising Firms:
o Cost Incurrence: Merchandising firms purchase finished goods to sell directly. Costs are mainly associated with acquiring these goods and operating expenses.
o Expense Category: Similar to manufacturing firms, costs are divided into COGS and operating expenses.
3. Service Firms:
o Cost Incurrence: Service firms primarily incur costs for direct labor and overhead, as they do not have physical inventory.
o Expense Category: Costs are categorized into the cost of services provided and operating expenses.
The primary goal of any organization, whether manufacturing, merchandising, or service-oriented, is to transform inputs (like labor and materials) into outputs (products
or services). Each type of organization requires labor and capital and applies them to produce marketable goods or services. Their accounting systems reflect these
differences. For example, a manufacturing firm's accounting system tracks the transformation of raw materials into finished goods, while service firms focus on charging
costs to departments or specific jobs for performance evaluation.

Important Formulas Summary:

1. Total Variable Costs = Variable Cost per Unit × Total Output
2. Total Cost = Total Variable Cost + Total Fixed Cost
3. Variable Rate = (Highest Point Cost - Lowest Point Cost) ÷ (Highest Output - Lowest Output)
4. Fixed Cost = Total Cost at Highest Point - (Variable Rate × Output at Highest Point)
5. Fixed Cost = Total Cost at Lowest Point - (Variable Rate × Output at Lowest Point)