I.

Cost Terminology

A. Two fundamental cost classifications exist within a manufacturing organization:

1. Product Costs (Value-Adding Costs)

2. Period Costs (Non-Value-Adding Costs)

B. Division of Costs in the Income Statement

PRODUCT COSTS

PERIOD COSTS

ELEMENT

Direct Material (DM)

Direct Labor (DL)
Manufacturing Overhead (MOH)
Selling, General and Administrative Expenses (SG&A)

ELEMENT

Direct Material (DM)

Direct Labor (DL)
Manufacturing Overhead (MOH)

II. Manufacturing (or Inventoriable) Costs

A. Direct Material

B. Direct Labor

C. Manufacturing Overhead (Insurance, Utilities, Supervision, Depreciation, Etc.)

ELEMENT

Direct Material (DM)

 Direct Labor (DL)
Manufacturing Overhead (MOH)
Selling, General and Administrative Expenses (SG&A)

Fixed - The total cost remains the same regardless of the quantity produced.
Variable - The total cost changes with the quantity produced.

QUANTITY COST PER UNIT

A B=D/A

FIXED

A 100 5,000.00

B 50 10,000.00

PRACTICE QUESTION #1

Indirect labor is a

A. Prime Cost
B. Conversion Cost
C. Period Cost
D. Non-Manufacturing Cost

PRACTICE QUESTION #2

Which of the following is assigned to goods that were either purchased or manufactured for resale?

A. Relevant Cost
B. Period Cost
C. Opportunity Cost
D. Product Cost

III. Overhead Allocation

A. Pre-Determined Overhead Application Rate

Overhead Application Rate = Estimated Total Overhead Costs / Estimated Activit

B. Applied Overhead

Estimated Total Overhead Cost Based on Estimated Activity V

Estimated Activity Volume
Pre-Determined Overhead Application Rate
Actual Activity Volume
Actual Total Overhead Cost - If NOT Over or Under
Actual Total Overhead Cost - If Over-Applied
Actual Total Overhead Cost - If Under-Applied

Work-In-Process
Factory Overhead Applied

Manufacturing Overhead Control

- Accounts Payable

Factory Overhead Applied

Manufacturing Overhead Control

Over-Applied Factory Overhead

Factory Overhead Applied

Manufactoring Overhead Control
Cost of Goods Sold

Under-Applied Factory Overhead

Factory Overhead Applied

Cost of Goods Sold
Manufacturing Overhead Control
a manufacturing organization: product costs and period costs.

+ Net Sales
- Cost of Goods Sold
= Gross Profit
- Selling and Administrative Expenses
= Net Profit (Loss)

ELEMENT PRODUCT

P
P
P
ative Expenses (SG&A)

ELEMENT PRIME

P
P

DIRECT COST

DIRECT COST

ervision, Depreciation, Etc.) INDIRECT COST

ELEMENT VARIABLE

P
 P
P
ative Expenses (SG&A) P

of the quantity produced.

y produced.

COST PER UNIT TOTAL COST

C D

VARIABLE FIXED

6,000.00 500,000.00

6,000.00 500,000.00

ufactured for resale?

head Costs / Estimated Activity Volume

Based on Estimated Activity Volume

lication Rate

NOT Over or Under

Over-Applied
Under-Applied

xx

xx

xx

xx

xx
xx
 PERIOD

CONVERSION

P
P

FIXED
 P
P

TOTAL COST
E=A*C

VARIABLE

600,000.00

300,000.00
 1,000,000.00 A
100,000.00 B
10.00 C
90,000.00 D
900,000.00 E
800,000.00 F
1,200,000.00 G

H=C*D 900,000.00
xx H=C*D

I=E 900,000.00
xx I=E

xx

H=C*D 900,000.00
xx J=F
xx K=H-J

H=C*D 900,000.00
L=H-M 300,000.00
xx M=G
 900,000.00

900,000.00

800,000.00
100,000.00

1,200,000.00
I. Inventory Flow and Cost

A. Wholesale and Retail Organizations

B. Manufacturing Organizations

1.
2.
3.

Cost of Goods Sold / Manufactured Statement Format

1.

requisitioned

2.

3.

3.
PRACTICE QUESTION #1

Based on the following data, what is the gross profit of the Company?

BEGINNING ENDING

WIP 500,000.00 400,000.00

FG 100,000.00 500,000.00

Sales 1,000,000.00
Net Purchases of Raw Material 600,000.00
COGM 800,000.00
Marketing and administrative expenses 250,000.00
Indirect manufacturing costs 500,000.00

A. 20,000.00
B. 400,000.00
C. 600,000.00
D. 900,000.00
PRACTICE QUESTION #2

Kingman Enterprises produces custom period furniture for Victorian homes. The following information is avai

BEGINNING ENDING

DM 120,000.00 100,000.00
WIP 180,000.00 120,000.00
FG 250,000.00 350,000.00

Additional information:

Kingman purchased 800,000 of direct materials during the period.

Direct labor for the period was 120,000.
Overhead applied to work-in-process was 700,000.

Given this information, what is the Cost of Goods Manufactured and the Cost of Goods Sold?

COGM COGS

A. 1,700,000.00 1,800,000.00
B. 1,200,000.00 1,600,000.00
C. 1,800,000.00 1,500,000.00
D. 1,700,000.00 1,600,000.00

II. Scrap, Spoilage, and Rework

SCRAP

Normal: Uncontrollable ; unavoidable ; expected

Abnormal: Not expected ; sometimes avoidable

Accounting Treatment

IS THE SCRAP SALABLE? IF YES:

Scrap value is recognized at the time of production.
Cost of the main product is reduced by the NRV of the scrap, ev
NRV of the scrap is kept in ending inventory until sold.
At sale of scrap, ending inventory is reduced; there is no gain/lo

IS THE SCRAP SALABLE? IF MAYBE:

Scrap value is recognized at the time of the sale.
Cost of the main product is not reduced by the NRV of the scrap
No need to keep NRV of the scrap in ending inventory until sold
At sale of scrap, either Other Income is recorded or Cost of Goo

SPOILAGE

Normal: Uncontrollable ; unavoidable ; expected

Abnormal: Not expected ; sometimes avoidable

Accounting Treatment

TYPE

Normal spoilage arising from requirements of specific product

Normal spoilage occuring periodically as regular part of all manufacturing
Abnormal spoilage

Normal Spoilage

Cost per Unit

Cost of Good Units Alone

Cost to Rework the products

Cost of Good Units Completed

Spoilage Rate
Abnormal Spoilage Cost

REWORK

TYPE

Rework for defects arising from requirements of specific product

Rework for defects occuring periodically during normal production
Rework for abnormal defects
ale and Retail Organizations

+ Beginning Inventory
+ Purchases
= Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold

cturing Organizations

Direct Materials / Raw Materials

Work-In-Process
Finished Goods

Goods Sold / Manufactured Statement Format

+ Beginning Direct Materials 120,000

+ Direct Materials Purchased 50,000
= Direct Materials Available 170,000
- Ending Direct Materials 40,000
= Direct Materials Used 130,000

+ Direct Materials Used 130,000.00

+ Direct Labor 30,000.00
+ Manufacturing Overhead 50,000.00
= Total Manufactoring Costs 210,000.00

+ Beginning Work-In-Process 60,000.00

+ Total Manufacturing Costs 210,000.00
= Work-In-Process Available 270,000.00
- Ending Work-In-Process 50,000.00
= Cost of Goods Manufactured 220,000.00

+ Beginning Finished Goods 70,000.00

+ Cost of Goods Manufactured 220,000.00
= Goods Available for Sale 290,000.00
 - Ending Finished Goods 80,000.00
= Cost of Goods Sold 210,000.00

DIRECT MATERIAL (DM)

Beginning DM
DM Purchased
DM Used
Ending DM

f the Company?

Sales
COGS
Gross Profit

DIRECT MATERIAL (DM)

e for Victorian homes. The following information is available concerning Kingman's production activities during the past quarte

the period.

ufactured and the Cost of Goods Sold?

DIRECT MATERIAL (DM)

120,000.00
800,000.00
820,000.00
100,000.00
ollable ; unavoidable ; expected
ected ; sometimes avoidable

lue is recognized at the time of production.

the main product is reduced by the NRV of the scrap, even if the scrap is not yet sold.
he scrap is kept in ending inventory until sold.
of scrap, ending inventory is reduced; there is no gain/loss on sale.

lue is recognized at the time of the sale.

the main product is not reduced by the NRV of the scrap.
d to keep NRV of the scrap in ending inventory until sold.
of scrap, either Other Income is recorded or Cost of Goods Sold is reduced.

ollable ; unavoidable ; expected

ected ; sometimes avoidable

TYPE TREATMENT

quirements of specific product Charge to individual product

ically as regular part of all manufacturing Charge to overhead
Charge to separate loss account

615,000.00 20,500.00

600,000.00 20,000.00
12,000.00 400.00
612,000.00 20,400.00

612,000.00 20,000.00
 3,000.00 100.00

615,000.00

TYPE TREATMENT

requirements of specific product Charge to individual product

iodically during normal production Charge to overhead
Charge to separate loss account
 WORK-IN-PROCESS (WIP)
Beginning WIP
DM Used
DL
MOH Applied
COGM
Ending WIP

1,000,000.00
(400,000.00)
600,000.00

WORK-IN-PROCESS (WIP)
tivities during the past quarter.

WORK-IN-PROCESS (WIP)
180,000.00
820,000.00
120,000.00
700,000.00
1,700,000.00
120,000.00
Finished Goods
Scraps

Finished Goods

30.00

30.00
30.00

30.60
30.00
 FINISHED GOODS (FG)
Beginning FG
COGM
COGS
Ending FG

FINISHED GOODS (FG)

100,000.00
800,000.00
 400,000.00
500,000.00

FINISHED GOODS (FG)

250,000.00
1,700,000.00
1,600,000.00
350,000.00
 I Costs

A relevant range is a range of production volumes where:

1. The range of activity for which the assumptions of cost behavior reasonably hold true; and
2. The range of activity over which the company plans to operate.
3. If (1) is true but (2) is not, then the analysis will not be relevant to the company. If (2) is true but
invalid.

A span of activity for a given cost object where total fixed costs remain constant and variable cost p

All cost behavior patterns are valid only within a relevant range.

Month
January
February
March
April
May
June

II. Fixed vs. Variable Costs

Fixed - The total cost remains the same regardless of the quantity produced.
Variable - The total cost changes with the quantity produced.

Behavior When Production Volume Changes

COST BEHAVIOR PATTERN

Fixed Costs
Variable Costs
Total Costs

QUANTITY
 A

A 100

B 50

PRACTICE QUESTION #1

Ate Joy Ganda Company planned production of 180,000 units this year. Fixed costs were estimated to be PHP
production was 150,000. How would you expect the total fixed costs and total variable costs to change becau
variable costs?

QUANTITY
A

Planned Production 180000

Actual Production 150000

III. Other Cost Classifications

A. Step-Variable Costs

Remain constant in total over a small range of production levels, but vary with la
shipping costs often behave in this fashion.

B. Mixed Costs (Also Known as Semi-Variable Costs)

Have a fixed component and a variable component. The variable component cau
prevents them from varying in direct proportion to the change in volume.

Example:
 Carpenter Corporation leases a copier from a local office supply company. Unde
additional $0.015 for each copy over 50,000 per month. This is a mixed cost with

IV. Predicting Cost

A. The Cost Function

When predicting the behavior of a total cost, especially a mixed cost, a cost func
common version of a linear expression looks like this: Y = b + m(x) where:

Y
B
M
X

Applying the linear expression to a cost function for a mixed cost, we can say tha

A. Total cost depends on the amount of fixed cost and the amount of variable co
B. The y-intercept is the level of cost that occurs if units are zero or units are som
amount of fixed cost doesn’t change with a change in units.
C. The slope of the cost line, or rise/run, represents the variable cost per unit. As
per unit.
D. The independent variable, x, is the number of units, or the value of the cost d
E. As such, the cost function is written: Total cost = Fixed cost + VC per unit (unit

B. High-Low Method

To identify fixed and variable cost components using the high-low method:
1. From the range of production volumes presented, select the period with the h
2. Note—Do not use highest and lowest costs. Always use production volume.
3. Calculate the difference in units produced at the highest and the lowest level
4. Calculate the difference in costs at the highest and the lowest levels of produ
5. Divide the difference in costs by the difference in units—This is your estimate
6. Find total variable costs by multiplying the estimated variable cost per unit b
production.
7. Subtract the total variable costs from the total cost to determine fixed costs.
8. You can now estimate total costs at any production level by multiplying the pr
costs.
PRACTICE QUESTION #2

Joanna Industries reported the following production volumes and costs:

Production in Units

150,000
225,000

75,000

V. Complicating Issue

A. Outlier

PRACTICE QUESTION #3

Production in Units

100
380
400

280
 :

behavior reasonably hold true; and

operate.
relevant to the company. If (2) is true but (1) is not, then the assumptions of the model are not satisfied making the analysis

d costs remain constant and variable cost per unit of activity remain constant.

Production In Units Total Cost

200.00 150,000.00
350.00 225,000.00
100.00 100,000.00
300.00 200,000.00
150.00 125,000.00
250.00 175,000.00

e regardless of the quantity produced.

the quantity produced.

UNIT COST TOTAL COST

VARY CONSTANT
CONSTANT VARY
VARY VARY

COST PER UNIT TOTAL COST

 B=D/A C D

FIXED VARIABLE FIXED

5,000.00 6,000.00 500,000.00

10,000.00 6,000.00 500,000.00

ear. Fixed costs were estimated to be PHP 220,000; total variable costs were estimated to be PHP 540,000. Actual
s and total variable costs to change because of the change in production volume? What about the unit fixed costs and unit

COST PER UNIT TOTAL COST

B=D/A C D

FIXED VARIABLE FIXED

1.22 3.00 220,000.00

1.47 3.00 220,000.00

range of production levels, but vary with larger changes in production volume. Supervisory salaries, utility costs, and
hion.

able Costs)

e component. The variable component causes them to vary in total with changes in volume. The fixed component, however,
proportion to the change in volume.
 from a local office supply company. Under the contract, Carpenter pays a base fee of $800 per month for the copier and an
0,000 per month. This is a mixed cost with an $800 fixed cost and a variable cost of $0.015 for the additional copies.

al cost, especially a mixed cost, a cost function can be a useful tool. A cost function is a version of a linear expression. A
n looks like this: Y = b + m(x) where:

= Dependent Variable
= Y - Intercept
= Slope or Rise / Run
= Independent Variable

t function for a mixed cost, we can say that:

of fixed cost and the amount of variable cost per unit and the volume of units so total cost is the dependent variable.
hat occurs if units are zero or units are some other number. The value of the y-intercept represents fixed costs, because the
with a change in units.
n, represents the variable cost per unit. As more units are added, the total cost will increase by the value of the variable cost
number of units, or the value of the cost driver.
: Total cost = Fixed cost + VC per unit (units).

ponents using the high-low method:

mes presented, select the period with the highest production and the period with the lowest production.
st costs. Always use production volume.
oduced at the highest and the lowest levels of production.
the highest and the lowest levels of production.
e difference in units—This is your estimated variable cost per unit.
ng the estimated variable cost per unit by the actual number of units produced at either the high or the low level of

m the total cost to determine fixed costs.

any production level by multiplying the production in units times the variable cost per unit and adding it to the total fixed
osts:

Cost Total Variable Cost Total Fixed Cost

375,000.00 300,000 75,000.00

525,000.00 450,000 75,000.00

150,000.00 2

Cost Total Variable Cost Total Fixed Cost

1,200.00 1,000.00 200.00

4,000.00 3,800.00 200.00
6,000.00 4,000.00

2,800.00 10.00
el are not satisfied making the analysis

TOTAL COST

CONSTANT
VARY
VARY

TOTAL COST
 E=A*C

VARIABLE

600,000.00

300,000.00

d to be PHP 540,000. Actual

at about the unit fixed costs and unit

TOTAL COST
E=A*C

VARIABLE

540,000.00 760,000.00

450,000.00 670,000.00

sory salaries, utility costs, and

lume. The fixed component, however,

$800 per month for the copier and an
.015 for the additional copies.

a version of a linear expression. A

cost is the dependent variable.

pt represents fixed costs, because the

crease by the value of the variable cost

owest production.

ther the high or the low level of

unit and adding it to the total fixed

 I. Cost-Volume-Profit (Break-Even) Analysis

Break-even is defined as the sales level at which sales revenues exactly offset total cos
(manufacturing) costs. The break-even point is usually expressed in sales units.

A. Basic Formula

(Quantity x Selling Price Per Unit) = Fixed Costs +

Revenue = Total Costs

II. Using the Contribution Margin per Unit Approach to Calculate Break-Even in Units

The contribution margin represents the portion of revenues which are available to co

Sales Revenue - Variable Costs = Contribution Ma

Selling Price Per Unit - Variable Costs Per Unit = C

Break-Even Point in Units = Total Fixed Costs / Co

PRACTICE QUESTION #1

Consider an item with a unit selling price of PHP 150.00 and a variable cost per unit of PHP 100.00. The unit c
sell 10,000 units in order to cover fixed costs and break even (PHP 500,000.00 / PHP 50.00)

+ Sales Revenue 1,500,000.00

- Variable Cost (1,000,000.00)
= Contribution Margin 500,000.00
- Fixed Cost (500,000.00)
= Net Income -

PRACTICE QUESTION #2

Kim Ethel Corporation posted sales of PHP 2,000,000.00 on a sales volume of 50,000 units. Total costs were P
 Break-Even Point in Units = Total Fixed Costs / Co

Selling Price Per Unit - Variable Costs Per Unit = C

900,000.00 18.00
40.00
22.00

36,364

III. Using the Contribution Margin per Unit Approach to Calculate Break-Even in Sales

Break-Even Point in Sales = Break-Even Point in Units x Selling Price Per Unit

PRACTICE QUESTION #3

Jonathan Corporation sells a product for PHP 15.00. Variable costs per unit are PHP 5.00. Fixed costs are PHP

Selling Price Per Unit - Variable Costs Per Unit = C

Break-Even Point in Units = Total Fixed Costs / Co

Break-Even Point in Sales = Break-Even Point in U

Contribution Margin Ratio = Contribution Margin

Break-Even Point in Sales = Total Fixed Costs / Co

IV. Using the Contribution Margin Ratio Approach to Calculate Break-Even in Sales

Contribution Margin Ratio = Contribution Margin / Sales Revenue

Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio

+ Sales Revenue 100.00%

- Variable Cost
= Contribution Margin
- Fixed Cost
= Net Income 0.00%
 V. Multiple Product Analysis

Composite Contribution Margin = Sum of Contribution Margin of the Products Based

Composite Break-Even Point in Units = Total Fixed Costs / Composite Contribution M

PRACTICE QUESTION #4

Consider a company that has two products A and B. We assume that the sales mix of these two products is co
other facts are as follows:

Product A

Selling Price Per Unit 10.00

Variable Cost Per Unit 5.00
Contribution Margin Per Unit 5.00

Total fixed costs are PHP 600,000.00 and the total number of products of all types that the company intends t

What is the break-even point in units for each of products A and B?

Product A

Selling Price Per Unit 10.00

Variable Cost Per Unit 5.00
Contribution Margin Per Unit 5.00

Composite Contribution Margin = Sum of Contribution Margin of the Products Based

Composite Contribution Margin 10.00

Composite Break-Even Point in Units = Total Fixed Costs / Composite Contribution M

20,000.00 40,000.00

200,000.00
 VI. Complicating Issues

A. Margin of Safety

Margin of Safety = Actual Units Sold - Break-Even

B. Targeted Pre-Tax Profit

Sales in Unit = (Fixed Costs + Targeted Pre-Tax Pr

PRACTICE QUESTION #5

Kyla Enterprises sells a piece of equipment for PHP 1,000.00 per unit. Variable costs per unit are PHP 500.00.
reach this targeted pre-tax profit?

+ Sales Revenue
- Variable Cost
= Contribution Margin
- Fixed Cost
= Pre-Tax Profit
- Taxes
= After-Tax Profit

PRACTICE QUESTION #6

Bee Co. sells a product with a $2 per unit contribution margin. Fixed costs are $70,000 and the tax rate is 20%

+ Sales Revenue 268,750.00

- Variable Cost (161,250.00)
= Contribution Margin 107,500.00
- Fixed Cost 70,000.00
= Pre-Tax Profit 37,500.00
- Taxes (7,500.00)
= After-Tax Profit 30,000.00

Sales in Unit = (Fixed Costs + Targeted Pre-Tax Pr

53,750.00
40.00%

Break-Even Point in Sales = Total Fixed Costs / Contribution Margin Ratio

268,750.00
s exactly offset total costs, both fixed and variable. Note that total costs include period costs (selling and administrative costs) a
ed in sales units.

er Unit) = Fixed Costs + (Quantity x Variable Costs Per Unit)

e Break-Even in Units

hich are available to cover fixed costs.

Costs = Contribution Margin

iable Costs Per Unit = Contribution Margin Per Unit

= Total Fixed Costs / Contribution Margin Per Unit

PHP 100.00. The unit contribution margin is PHP 50.00 per unit (PHP 150.00 − PHP 100.00). If fixed costs are PHP 500,000.00, t
0.00)

1,500,150.00
(1,000,100.00)
500,050.00
(500,000.00)
50.00

units. Total costs were PHP 1,700,000.00, of which PHP 800,000.00 were fixed costs. What is the break-even point in units?
 = Total Fixed Costs / Contribution Margin Per Unit

iable Costs Per Unit = Contribution Margin Per Unit

e Break-Even in Sales

Price Per Unit

00. Fixed costs are PHP 700,000.00. What is Jonathan’s break-even point in sales?

iable Costs Per Unit = Contribution Margin Per Unit

= Total Fixed Costs / Contribution Margin Per Unit

= Break-Even Point in Units x Selling Price Per Unit

o = Contribution Margin / Sales Revenue

= Total Fixed Costs / Contribution Margin Ratio

eak-Even in Sales

Margin Ratio
n of the Products Based on their Sales Mix

mposite Contribution Margin

hese two products is constant. Let’s say that the company sells twice as many products of product A as product B and

Product B

30.00
10.00
20.00

t the company intends to sell is 36,000.

Product B

30.00
10.00
20.00

n of the Products Based on their Sales Mix

20.00 30.00

mposite Contribution Margin

20,000.00

400,000.00 600,000.00
600,000.00
Units Sold - Break-Even Point in Units

s + Targeted Pre-Tax Profit) / Contribution Margin Per Unit

er unit are PHP 500.00. If total fixed costs are PHP 10,000.00 and Kyla wants to earn a pre-tax profit of PHP 200,000.00, what am

100.00%

0 and the tax rate is 20%. What amount of revenue is needed to obtain an after-tax profit of $30,000 if the unit selling price is $

100.00% 53,750.00
60.00%
40.00%
 107,500.00

s + Targeted Pre-Tax Profit) / Contribution Margin Per Unit

Margin Ratio
lude period costs (selling and administrative costs) as well as product

0 − PHP 100.00). If fixed costs are PHP 500,000.00, then we know that we have to

ed costs. What is the break-even point in units?

sales?

10.00

70,000.00

1,050,000.00

0.666666666666667

1,050,000.00
any products of product A as product B and
s to earn a pre-tax profit of PHP 200,000.00, what amount of unit sales is needed to

fter-tax profit of $30,000 if the unit selling price is $5?