¢ Dritgpes2s t207) ss aghyes oo pen as No Sei699d Inel: x9 Of iD CLAS Hi slqmszs 107 CONCEPTS AND CLASSIFICATIONS cuit sauborq of barman? os eeoD sad vet ». Distinguish between aetna andilossés; «21! © Distinguish between direct and indirecticosts:: 191: ,4i209 no @ MuUOI9B 109 ¢ Define the three integral components of a product. © Define prime costs and conversion costs. 27209 10 MOITADIUe2AID * Define variable, fixed, and mixed costs and discuss the effects of changes in volume on these costs. : i between common G9s!s a nd {joint ¢ Distinguish between capitat expenditures and r Tel « Identify the costs for planning, control and anal} I processes" ” redsl tostiG Costs are associated with all types of, organizat ions : iness, 5 fon ‘business, service, retail, and manufacturing. ° Génétally! ‘the kinds “of cost s"that ‘are incurred and the way in which these costs ate ¢lassified'“will ‘depend on: the’ type of organization involved. a2 OQY Our initial focus will be on a reer bi aware that, in a conceptual sense, manufacturing are fi firms | in the industrial sector of our economy. studios and fast!food! ‘outlets:""’ Organizations “Sud manufacturing in the sense that they create’a’disti patrons, As we proceed with our discussion; therefore)’ wé'shduld keep in nes that manufacturing is a broad term, /and that the»costs:included under thé:manufactiring! heading have application to a wide range of organizations. — many:of which\may be involved in service-type activities. An understanding of the:costrstructure of a manufacturing company therefore provides a broad, general understanding of costing that can be very helpful in understanding the cost structures of other types of organizations.2 Cost Accounting Before cost terminology can be discussed the term cost itself must be defined Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to bring @ current or future benefit to the organization. We say cash equivalent because non-cash assets can be exchanged for the desired yoods or services. For example, it may be possible to exchange land for some needed equipment. ‘Costs are incurred to produce future benefits in a profit making firm, future benefits usually mean revenue. As costs are used up in the production of revenues, they are said to expire. Expired cosis are caileu expenses. In each period, expenses are deducted from revenues in the income statement to determine the period’s profit. A loss is.a cost that expires w producing any revenue benefit. The focus of cost accounting is on costs, not expenses: CLASSIFICATION OF COSTS 1. Costs classified as to relation to a product A. Manufacturing costs/product costs 1. Direct materials 2. Direct labor 3. Factory overhead B. Non-manufacturing costs/period costs 1., Marketing or selling expense 2. General or administrative expense 11. Costs classified as to variability A. Variable costs B. Fixed costs C, Mixed costs INL. Costs classified as to relation to manufacturing departments A. Direct departmental charges B. Indirect departmental charges JV, Costs classified to their nnture as cunowon or joint A, Common costs B. Joint costChapier 2 -- Cost Concepts and Classifications 23 V. Costs classified as to relation to an accounting period A, Capital expenditures B. Revenue expenditures YI. Costs for planning, control, end analytical processes A. Standard costs B. Opportunity costs C. Differential cost D. Relevant cost E. Out-of-pocket cost F. G Sunk cost - Controllable cost MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS Direct materials ' Direct materials are the bas ts that are transformed into finished products. through the use of labor and factory overhead in the production process. Direct materials are those that can be traced ¢o the finished product can they form part of the preduct. All manufactured products are made trom basic direct materials. The, basic material may be itan ore for steci, sheet ster for automobiles, flour for bread wood tables and chairs... Theses exampics sho “ig Sirk between a basic raw material and a final product. The way a company buys. stores, and uses sneterials is important. Timely purchasing is important because if the company runs out of materials, the manufacturing process will be forced to shut down. Shutting down production results in no products. unhappy customers, ard toss of sales and profits. Buying too many direct materials, on the othe: bref, cen leod to high storage costs. Proper storage of materials will avo' space and orderly storage proé Matevals uvust be handled and stored properly to guarantee their satisfactory use in production. Propet records, the materials stockcars, make it- possible to find goods easily. Such records reduce problems caused by lost or misplaced items. Large enough storagea ennitnaiivent) bas eiqevio + iGost Account, Direct materials are imaienjals ithatobecome partivfi.a finished ‘productiant caivhe conveniently.and economically traced to specific productunits» The.costs,oF these materials are direct costs, In some cases, however, even théiigh'’ thikveridl becomes part of a finished product, the expense of actually tracing the cost of a specific material is too great. “Soni Gaafiples Gr this ihelude” nails Fariituré? bolts tn automobiles, and rivets in airplanes. These minor matetials!ad étHter production supplies that cannot be conveniently or economically”traced't6'Spedttie préducts are accounted for as indirect materials. Indirect materials’ ‘cost apa or factory overhead costs. oe Direct labor 207 lo product. .Labor services are, in essence, purchased from ¢ ‘employees working i in the amy In addition, other types of labor are purchased from people and ions, putside: theygompany: + The; dabarzcosts usually; associated; vith a factunn include machine operators; maintenance workers; managers and supervisors; Support personnel; and people who handle, inspect. and. store, materials. Because these people are, call connected i in some way with the pro volved jn actually;shaping the product are classified'as direct:Jabor. costs..-Direet r;costs iniclude,all Jabor costs:for specific work performed on-products:that can be conveniently and economically traced to end products. Labor costs;for iti be conveniently and economically traced to These costs include the W Sages “and ‘factiry Overhead! COR. Pafrall related costs, siuch as payroll taxe: ‘broup tsi, sick pay, vacation‘and holiday pay, and other fringe benefits an’ be considered opartof direct Jabot costs, bat are usually included.as § factory swverteads 5 " “overhead eS costs. Prime costs atid € nversi as shown on the next page ine Total manufacturing cost = direct materials, + direct labor + factory overhead+ Chapter 2. Cost — Concepts and Classification 25 Direct Direct Factory Materials Labor Overhead Conversion Costs Factory Overhead The third manufacturing cost element is a catchall for manufacturing costs that cannot be classified as direct materials or direct labor costs. Factory overhead costs are a varied collection of production-related costs that cannot be practically _or conveniently traced directly to end products. This collection of costs is also caliéd manufacturing overhead, factory burden. and indirect manufacturing costs. Examples of the major classifications of factory overhead costs are: Indirect materials and supplies: nails, rivets, lubricants, and small tools. Indirect labor costs: lift-truck driver's wages, maintenance and inspection fabor, engineering labor, machine helpers, and supervisors. Other indirect factory costs; building maintenance, machinery and tool maintenance, property taxes, property insurance, pension costs, depreciation on plant and equipment, rent expense, and utility expense. NON-MANUFACTURING COSTS/PERIOD COSTS Marketing or selling expenses Marketing or selling expenses include all costs necessary to secure customer orders and,get the finished product or service into the hands of the customer. Since marketing expenses relate to contacting customers and providing for their needs, these expenses are often referred to as order-getting and order-filling costs. Examples of marketing expenses include advertising, shipping, sales travel;’ sales commissions, sales salaries, and expenses associated with finished, goods warehouses. All organizations have marketing costs, regardless of whether the organizations are manufacturing, merchandising, or service in nature.26 Cost Accounting + Administrative or general expenses Administrative expenses include all executive, organizational, and clerical expenses that cannot logically be included under either production or marketing. Examples of such expenses include executive compensation, general accounting, secretarial, public relations, and similar expenses having to do with the overall, general administration of the organization as a whole. As with marketing expenses, all organizations have administrative expenses COSTS CLASSIFIED AS TO VARIABILITY Fixed, Variable, and mixed One of the most important cost classifications involves the Way a cost changes in relation to changes in the activity of the organization. Activity refers to a measure of the organization's output of products or services, In specifying cost behavior. the managerial accountant ofien limits the description to a specific range of activity, This is called the relevant range. Fixed cost Items of cost which remain constant in total, irrespective of the volume of production. Fixed cost are not related to activity within the relevant range. If activity increases or decreases by 20 percent. total fixed cost remains the same. Cost per unit decreases as volume increases, and increases as volume decreases, Fixed costs are assignable to departments based on difference allocation methods. Examples are salaries of production executives. depreciation of equipment computed ona straight-line basis, periodic rent payments, and insurance. Fixed costs may classified into two categories, depending on the ability of management to influence the levels of these costs in the short-term. 1) Committed fixed costs - costs that represent relatively long term commitments on the part of management as a result of a past decision. Example ~depreciation on equipment. Managed fixed costs (also known as discretionary, programmed. or plarined fixed costs) ~ costs that are incurred on a short-term basis and can be more easily modified in response to changes in management objectives. Examples ~ advertising, research and development and costs of training + of employees 2Chapter 2 Cost ~ Concepts and Classification 27 Shown on below is a graph of fixed cost. It is clearly shown that total fixed cost remains unchanged as activity changes. When activity triples, from 10 to 30 units, total fixed cost remains constant at P1,500. If activity level.is only 1 unit, then the fixed cost per unit is P1,500. If the activity level is 10 units, then the fixed cost per unit declines to P150 per unit. So we can conclude that fixed: cost per unit will decrease as we increase the volume or units of production and fixed cost per unit will increase as we decrease the volume of production. Total fixed cost Graph of total fixed cost Activity Fixed cost per unit Total Fixed Cost 1 P 1,500 1,500 2 750 1,500 i 300 1,500 10 1350 1,500 aa 5 : 1,500 30 50 1,500 Variable costs ‘These are the items of cost which vary directly. in total, in relation to volume of production. If activity increases by 20 percent, total variable cost increases by 20 percent also. Cost per unit remains constant as volume changes within a relevant range. Examples are: direct materials, direct labor, royalties, and commission of salesmen. Shown on the next page is a graph of total variable cost. As this graph shows total variable cost increases proportionately with activity. When activity doubles from 10 to 20 units. total variable cost doubles, trom P1, 000 to P2, 000. However, the variable cost per unit remains the same as activity changes. The28 Cost Accounting variable cast associated with each unit of activity is P100, whether it is the first unit. the fourth, or the tenth, To summarize, as activity changes, total variable cost increases or decreases, proportionately with the activity change, but unit variable cost remains the same. Total Variable Cost 3,000 2,000 1.000 Activity 10 20 30 Graph of total variable cost TABULATION OF VARIABLE COST Activity Variable Cost per Unit Total Variable Cost 1 P 100 P 100 10 100 1,000 20 100 2,000 30 100 3,000 Mixed cost Stems of cost with fixed and variable components. Mixed costs. vary with the level of production, though not in direct relation to it, probably because part of the cost is fixed while the rest is variable, Two types of mixed costs exist: semi-variable costs and step costs Semi-variable cost. The fixed portion of a semi-variable cost usually represents a minimum fee for making a particular item or service available, The variable portion is the cost charged for actually using the service. The cost of electricity where there is a basic minimum charge plus a specified cost per kilowatt hour above theChapter 2 Cost — Concepts and Classification 29 mininum is an example of such a semi-variable cost. The cost charged for using a cell phone under a plan is also an example of a semi-variatle cost... ‘The cost of the plan is fixed and’it is for a-specified time used. however if the user exceeds the time allowed. then charges will be made on a per minute basis. Semi-variable cost 35,000 Semi-variable costs 30,000 Variable 25,000 (P" 15.000) 20,000 15,000 10,000 Fixed 5,000 (20.000) 0 5,000 KILOMETERS 1,000 Assume thiit a company rents a delivery truck at a flat rate of P 20,000 per month plus P 1.50/km.driven, The fixed portion is the P20,000 monthly rental fee; the variable portion is the P1.50/km driven. If 10,000 km. are driven during the month, the total monthly cost of the delivery truck is P 35.000, computed as follows: Flat fee (fixed portion) P 20,000 Variable portion — 10,000 km. x P 1.50 15,000 Total cost P.35,000 Step costs - the fixed part of step costs changes abruptly at various activity levels because these costs are acquired in indivisible portions. A step cost is similar to a fixied cost within a very small relevant range. 180,000 . ne 150,000 ‘ 120,000 90,000 60,000 “30,000 030 Cost Accounting ‘The supervisor's salary is an example of step cost. Assume that one supervisor with a salary of P 30,000 is needed for every 10 workers, then if 15 workers are used, 2 supervisors (with salaries of P60,000) will be needed. If 18 workers are used, still 2 supervisors would be needed. If the number of workers increases to 22, three supervisors would be needed. Ideally, for both planning purposes and for making certain types of decisions, all costs would be classified as either fixed or variable, with semi-variable costs being separated into their fixed and variable components. One of the most important steps in estimating the variable and fixed components of a mixed cost is to examine the cause-and-effect relationship between activities that affect costs. There are different methods of separating mixed costs into fixed and variable components: (1) scatter graph, (2) high-low point, (3) method:of least square. We will illustrate the use of high-low point method and method of least square (1) HIGH-LOW POINT METHOD Summary of electricity costs and direct labor hours Month Direct labor hrs. Cost of electricity January 28 P 625 February 24 565 March 30 630 April 33 640 May 38 685 June 34 640 July 35 655 August 40 700 September 42 5 October 47 126 November 43 700 December 32 630" Direct labor hrs. Cost Highest month (Oct.) 47 P 726 Lowest month (Feb.) 24 565 Difference 3B . P 16t Variable rate per direct labor hour = P_16) 23 hours. = P Tdivect labor hourChapter 2 Cost - Concepts and Classification 31 Fixed cost can be computed from either the high or low data. High Low Total cost of electricity P 726 P 565° Less: variable proportion (P-7x 47) 329 (P 7x 24) Monthly fixed cost P___397 The formula for projecting the total monthly cost of electricity based on these data would be P 397 plus P7 multiplied by the direct-labor hours expected to be worked during the period ( Y = FC + VC or Y = FC + VX) where Y = Total cost VC = Total variable cost V = Variable cost per unit FC = Fixed cost X= Activity level (2) METHOD OF LEAST SQUARE! ‘The three formulas to be used in least-square method are: Equation 1 Y = atbx Equation 2 na+b=x Equation 3 xa + DEX? Using the same data as in the high-low method the following have been computed i DLHrs. Electricity Cost —x Z 2 » 635 565 13,560 630 18.900 640 21120 685 26,030 640 21,760 635 22.923 700 28,000 NS 30,030 726 34.122, 700 630 TON32 Cost Accounting By substitution: Equation 2 ky = na+bx (7,911 = 12a + b426) 35.5 (426/12) Equation 3 Zxy = Exa +bEx? 284,207 426a + b15,620 Equation2x35.5 280.840.5 426a + 615,123 3,366.5 = 0. bi -497 b = 3,366.5/497 b = 6.77 Substituting the value for Equation 2, we can compute for a as follows 7,911 = 12a + (6.77)(426) 7,911 = 12a +2,884 1a TIN1-2,884 a = 5,027/12 = 418.92 Formula using high-low method Y=a ‘+ bx =397 + 7x Formula using least square method, WIIG Ge (8 = 419 +6.77x In most cases the amounts derived using high/low point and method of least square are not the same, Common cost ys. Joint cost Common cost Costs of facilities or services employed in two or more accounting periods, operations, commodities, or services. Just like indirect costs, these costs are subject to allocation. Example — if two departments are occupying the same building, the depreciation of the building id a common cost subject to allocation based on floor area occupied. :Chapter 2 Cost - Concepts and Classification 33 Joint cost Costs of materials, labor, and overhead incurred in the manufacture of two or more products at the same time. A major difficulty inherent to joint costs is that they are indivisible and they are not specifically identifiable with any of the products being simultancously produced. These costs are also subject to allocation. Example — direct materials, direct:labor, and' factory overhead cost incurred to manufacture two or more products‘up to the point of split-off (or where they will go separate ways) Capital expenditure vs. Revenue expenditure Capital expenditure Expenditure intended to benefit more than one accounting periods and is recorded as an asset. The allocation of the cost to the different periods is - depreciation for fixed tangible assets, amortization for intangible assets and depletion for wasting assets. Revenue expenditure Expenditure that will benefit current period only and is recorded as an expense. Direct vs. Indirect departmental charges Direct departmental charges Costs that are immediately charged to the particular manufacturing department(s) that incurred the costs since the costs can be conveniently identified or associated with the department(s) that benefited from said costs. Indirect departmental charges Costs that are originally charged to some other manufacturing department(s) or account(s) but are later allocated or transferred to another department(s) -that indirectly benefited from said costs. Costs for Planning, control and analytical processes Standard costs : Predetermined costs for direct materials, direct labor, and factory overhead. They are established by using information accumulated from past experience and data secured from research studies. In essence, a standard cost is a budget for the production of one unit of product or service. It is the cost chosen by the managerial accountant to serve as the benchmark in the budgetary contro! system.MM Cost Accounting ‘Opportunity cost The benefit given up when one alternative is chosen over another. Opportunity costs ‘re not usually recorded in the accounting system. However, opportunity costs should be considered when evaluating alternatives for decision-making. If an asset can be used to perform only one function and cannot be sold or used in other ways, the opportunity cost of that asset is zero, Example 1 Michelle has a part-time job that pays her P!, 000 per week. She would like to spend a week in Boracay during summer vacation from school, but she has no vacation time available. If she takes the trip anyway, the P!, 000 in lost-wages will be an opportunity cost of doing so. Example 2 Marco is employed with a company that pays him a salary of P20, 000 a month. He is thinking about leaving the company and returning to school, Since returning to school would require that he give up his P240, 000 salaries, the forgone salary would be an opportunity cost of seeking further education. Differential cost . Cost that is present under one alternative but is absent in whole or in part under another alternative. An increase in cost from one alternative to another is known as, incremental cost, while a decrease in cost is known as decremental cost, Differential cost is a broader term, encompassing. both cost increases (incremental cost) and cost decreases (decremental costs) between alternatives. The accountamt’s differential-cost concept is basically the same as the economist's marginal cost concept. In speaking of changes in cost and revenue, the economist employs the terms marginal cost and marginal revenue. The revenue that can be obtained from selling one more unit of product is called marginal revenue, and the cost involved in producing one more unit of product is called marginal cust. Differential costs can be either fixed or variable. To illustrate. assume that Avon Corp. is thinking about changing its marketing method from distribution through retailers to distribution by direct sale. Present costs and revenues are compared to projected costs and revenues in the table on the next page.Chapter 2 Cost — Concepts and Classification 35 Retailer Direct sale Differential Distribution Distribution Cost and : (present) (proposed) Revenues Revenues (V) _P 900,000 P1,200,000 | P 300,000 Cost of goods sold (V) 450,000 | 600,000 150,000 ‘Advertising (F) 80,000 45,000 (35,000) Commission (V) : 40,000 40,000 Warehouse depreciation (F) — 50,000 80,000 30.000 Other expenses (F) i 60.000 - 60.000 ae | Total 640,000 825,000 | 185,000 Net Income ‘ 260,000 P_375,000 | P_115,000 V= Variable F = Fixed ‘The differential revenue is P 300,000, and the differential costs total P 185.000, leaving a positive differential net income of P 115,000 under the proposed marketing plan. As noted earlier, those differential costs representing cost increases could have been referred to more specifically as incremental costs, and those representing cost decreases could have been referred to more specifically as decremental costs. Relevant cost A future cost that changes across the alternatives. In the example above. ‘the relevant costs are cost of goods sold, advertising, commissions, and warehouse depreciation. Out-of-pocket cost Cost that requires the payment of money (or other assets) as a result of ‘their incurrence, Sunk cost A cost for which an outlay has already been made and it cannot be changed by present or future decision. Since sunk costs caniot be changed by any present or36 Cost Accounting future decision, they are not differential costs, und therefore they should be.used in analyzing future courses of action. To illustrate the notion of a sunk cost, assume that a firm has just paid P 250,000 for a special purpose machine. Since the cost outlay has-been made, the P250,000 investment in the machine is a sunk cost. Even though the purchase may have been unwise, no amount of regret can relieve the company of its decision, nor can any future decision cause the-cost to be avoided. Controllable and Non-controllable Costs A cost is considered to be a controllable cost at a particular level of management if that level has power to authorize the-cost. For example. entertainment expense would be controllable by a sales manager if he or she had power to authorize the amount and type of entertainment for customers. On the other hand, depreciation of warehouse facilities would not be controllable by the sales manager, since he or she ‘would have no power to authorize warehouse construction. In some situations, there is a time dimension to controllability. Costs that are controllable over the long run may not be controllable over the short tun. A good example is advertising. Once an advertising program has been set and a contract signed, management has no power to change the amount of spending. But the contract expires, advertising costs can be renegotiated, and thus management can exercise control aver the long run. COST FLOW - MANUFACTURING FIRMS Cost incurrence Expense Category Direct materials } Direct labor -— _,Work in _, Finished __, Cost of goods sold : }, process goods Factory overhead Selling and Administrative ._________+ Operating expenses,Chapter 2 7 Cost ~ Concepts and Classification 37 Work in process consists of goods that are started but not completed. Finished goods are goods that are’complet and ready tor sale. COST FLOW - MERCHANDISING FIRM Cost incurrence Expense category Finished goods ——~~-——————+_ Cost of goods sold Selling and Administrative —————————+ Operating expense COST FLOW - SERVICE FIRM Cost incurrence Expense category Direct materials ~ }———— Coss of services } } Direct labor - Factory overhead Selling and Administrative Operating expense The essential purpose of any organization is to transform inputs into outputs. The activity for merchandising, manufacturing, and service organizations are shown in the previous and current page . These organizations have many similarities, all require labor and capital as inputs, and‘all transform them into a product or service for the market. These organizations also differ from one another in many respects. ‘The differences between these organizations are reflected in their accounting systems. : A merchandising organization starts with a finished product and markets it. Because inventory is acquired in finished form, its cost is easily ascertained. The accounting system for a manufacturing organization is more complex because direct materials are first acquired and then converted to finished products. A manufacturer's accounting system focuses on work in process, which is the account that reflects the costs involved in transforming input materials into finished goods.38 Cost Accounting Service organizations are different from manufacturing and merchandising because they have no inventory of goods for sale. Costs are charged to responsibility centers for performance evaluation. In a public accounting firm, for example, costs are charged to the audit department, the tax department, and so forth. Costs are also charged to jobs. The assignment of costs facilitates performance evaluation. The manager of each department is held responsible for the costs of the department, the manager of each job is held responsible for the cost of that job .Of the three kinds of operations, manufacturers require the most complex and comprehensive cost accounting system. All three uses cost information for decision making and performance evaluation. But in addition, manufacturers need product costing for inventory valuation and to measure cost of goods sold reported on external financial statements. Many manufacturers also have service and merchandising activities, costs of which must be recorded. SUMMARY OF IMPORTANT FORMULAS |. Total variable costs = Variable cost per unit x total output 2. Total cost = Total variable COSt iit fixed con 3. Variable rate = highest point cost_- lowest point cost Highest output - lowest output 4, Fixed cost = Total cost at highest ~ (variable rate x output at highest point) or 5. Fixed cost = Total cost at lowest — (variable rate x output at lowest point )Chapter 2 Cost — Concepts and Classification 39 QUESTIONS . In what way does a typical manufacturing business differ from a merchandising concen? In what ways are they similar? . What are the basic elements of production cost? ne . Define the following costs a. direct materials b, indirect materials c. direct labor d. indirect labor e. factory overhead y 4, Define prime cost and conversion cost. . Does prime cost plus conversion cost equal to the total manufacturing cost? In what way does the accounting treatment of factory overhead differ from that of direct materials and direct labor costs? a ~ . Explain why the fixed cost per unit declines as volume increases. Give an example 8. Give examples of variable overhead costs and fixed overhead costs. 9. How would you classify the monthly bill (plan) for a Smart/Globe cellphone? 10. Consider education as a product. What are the direct costs and the indirect costs toa university in educating a student?40 Cost Accounting Problem 1 Presented below is a list of costs and expenses usually incurred by Ram Cosporation, a manufacturer of furniture, in its factory. 1, Metal used in manufacturing tables 2. Insurance on factory machines 3. Leather used in manufacturing furniture 4, Wages paid to machine operators 5. Depreciation of factory machinery 6, Salaries of factory supervisors 7. Wood used in manufacturing furniture 8. Sandpaper, bolts and nails 9. Property taxes on factory building 10, Rent of factory building Instructions Classify the above items into the following categories (a) direct materials, (b) direct labor and (c) manufacturing overhead, Problem 2 Classify the following as to fixed, variable or mixed . Factory rent 2. Wages for workers paid based on units produced 3. Equipment maintenance 4. Cost accountant’s salary 5. Depreciation based on output 6. Salary of factory supervisor 7. 8 9. 1. Telephone (monthly) : . Paper in the manufacture of books . Wages of machine operators 10. Commission of salesmen Problem 3 Classify the following as either manufacturing (M), selling (S), or administrative (A) 1. Metal for the manufacture of golf clubs 2. Wages of drivers of delivery trucks 3. Rent on factory building 4. Freight-in of materials purchased 5. President's salaryChapter 2 Cost — Concepts and Classification 41 Problem 4 Classify each of the following costs of Bug Company in two ways: (a) as variable {V) fixed costs (F); (b) as inventoriable costs ({) or period costs (P): (a) V or F (b) Lor P Example: Direct labor v. 1 1. Wood used in bookcases : . Machine depreciation based on mach. Hrs. . Fire insurance on factory equipment . Wiring used in radios . Indirect materials . Sales commissions 7. Bottles used to package liquid 8, Gasoline for a delivery truck 9. Straight-line depreciation of trucks used for delivery of sales to customers 10, Machine operator's hourly wages Anew LTT Problem 5 Sportsman, Inc. produces different sizes of basketballs, The following costs were incurred during the year for PBA-sized basketball production, : Materials P81,250 (23% is indirect) “Labor 87,500 (27% is indirect) Actual Factory overhead 70,000 (including indirect materials ‘and indirect labor) Selling expenses 3,250 General and Administrative expenses 23,250 Sportsman applies overhead to production at 100% of direct labor cost. There were no work in process at the end of the year and there were no finished goods inventory at the beginning. 5,000 units were produced, and 90% of the units produced were sold. Required: 1. Compute the prime costs 2. Compute the conversion costs 3. Compute the total product costs 4. Compute the total period costs 5. Calculate the overhead variance and explain why it is favorable or unfavorablea Cost Accounting Problem 6 The financial statements of Silvina Company included these items: Marketing costs P 160,000 Direct labor cost 245,000 Administrative costs 145,000 Direct materials used 285,000 Fixed factory overhead costs 175,000 Variable factory overhead costs 155,000 Compute for the following 1. Prime cost 2. Conversion cost 3. Total inventoriable/product cost 4. Total period cost Problem 7 Given below are financial information for Saint Martin Company Sales price P 200 per unit Fixed costs: Marketing and administrative 24,000 per period Manufacturing overhead 30,000 per period Variable costs: : Marketing and administrative 6 per unit Manufacturing overhead 9 per unit Direct labor 30 per unit Direct materials 60 per unit Units produced and sold 1,200 per period Required: Compute for the following 1. Variable manufacturing’cost per unit 2. Variable cost per unit 3. Full manufacturing cost per unit 4, Full cost to make and sell per unit Problem 8 San Agustin Company manufactures major appliances. Because of growing interests in its product, it just had its most successtul year, In preparing the budget for next year, its controller compiled these data, "Chapter 2 Costs - Concepts and Classifications 43 MONTH VOLUME IN MACH. HRS. ELECTRICITY COST JULY 7,500, P_75,000 AUGUST. 6,250 "66,250, SEPTEMBER. 5,625 61,875 OCTOBER 5,000 57,500 NOVEMBER 4,375 53,125 DECEMBER 3,750 48,750, 6-MONTH TOTAL 32,500. P362,500. Using the high-low method compute The variable cost per machine hour The monthly fixed electricity costs The total electricity costs if 4,800 machine hours are projected to be used next month eee Problem 9 . Jerm 7 Corporation is preparing a flexible budget and desires to. separate its electricity expense, which is semi-variable and fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2022 is as follows: Machine Hours Electricity Expense January 4,375 P 39.375 February 2,500 25,000 March 5,000 44.500 Requirements: 1. Compute the variable rate per machine hour. 2. Compute the fixed portion of Jem 7’s electricity expense. 3. Compute the total manufacturing costs if Jem 7’s actual machine hours used is 4,500. Problem 10 Solville Motors Co. makes motorcycles. Management wants to — estimate overhead costs to plan its operations. A recent trade publication revealed that overhead casts tend to vary with machine hours. To check this, they collected the following data for the past 12 months.Cost Accounting 44 Month No. Machine Hours Overhead Costs | 175 P 4,500 2 170 4.225 3 160 4321 4 190 5.250 5 175 4,800 6 200 5,100 q 160 4,450 8 150 4.200 9 210 5,475 10 180 4,760 nt 170 4,325 12 145, 3,975 Requirements 1, Use the high-low method to estimate the fixed and variable portion of overhead costs based on machine hours: 2. If the plant is planning to operate at a level of 200 machine hours next period, what would be the estimated overhead costs? 3. Use the method of least square to estimate the fixed and variable portion of overhead costs based on machine hours.Chapter 2. Costs — Concepts and Classifications 45 TRUE-FALSE QUESTIONS Indicate whether the following statement: space provided a capital “T” for true or re true or false by inserting in the blank for false. 1, The materials, labor. and overhead costs incurred to produce a — product are called period costs. __.2. Marketing, Selling. and Administrative Costs are the three broad classifications of costs incurred by a manufacturing company. 3. Lumber can be both a finished product and a material. 4, Product cost consists of the sum of prime cost and conversion cost. 5. Total fixed costs decrease with inercase in the number of units produced 6. Period costs aré found in both merchandising and manufacturing firms. 7. The three cost elements of a manufactured:good are direct materials, direct labor, and marketing costs. 8. A cost.that is present under one alternative but absent in whole or part under another alternative is known as a differential cost. 9, Like product costs, period costs are not necessarily treated as expenses in the period in which they are incurred. __.10. Variable costs are costs that change, in total, in direct proportion to changes in the level of activity. 11. The salary paid to the manager in charge of a warehouse is probably a variable cost. 12. Indirect materials/factory supplies are classified as administrative expense. 13. The salary paid to a factory foreman is classified as factory overhead. 14. Ina manufacturing setting, prime costs are fixed, ___|5. Fixed cost remains constant if expressed on a unit basis. =~ 16. Differential costs can be either fixed or variable 17. A fixed cost is constant per unit of product. 18. A decrease in production will ordinarily result.in an increase in fixed production cost per unit. ___19. A factory supervisor’s salary would be classified as a direct cost of a unit of product. ____20. Factory rent is included in manufacturing overhead, but office rent is a period cost. . 21. Product costs are also known as manufacturing costs. 22 Prime costs are always variable ——23. Cost accounting is not needed by a merchandising entity ——24 The statement of financial position of a service business is the sarhe as that of a manufacturing business 25. Selling and administrative expenses are sometimes called non- manufacturing costs46 Cost Accounting MULTIPLE CHOICE. : 1, Indirect material cost isia Conversion cost Prime cost a. No No b. No Yes c. Yes Yes d. Yes No 2. Direct labor cost is a ‘ Conversion cost Prime cost a. No : No. b. No Yes c. Yes Yes d. Yes No . Indirect labor is a a, Prime cost. b. Conversion cost. C. Period cost. d. Non-manufacturing cost. we 4. Ina job cost system, manufacturing overhead is An indirect costofjobs A nccessary element of production a No Yes b. No No c. Yes Yes d. Yes No Prime cost and conversion cost share what common element of total cost? a. Variable overhead. b, Fixed overhead. C. Direct materials. d. Direct labor, wvChapter 2 Costs — Concepts and Classification 47 6. Which of the following is an element of prime cost? Direct materials Direct labor a. Yes Yes b. Yes No ©. No Yes d. No No 7. Wages paid to factory machine operators of a manufacturing plant are an clement of Prime cost Conversion cost a. No No b. No “Yes c. Yes No. d. Yes “Yes 8. Costs that vary inversely with changes in volume include a. Total variable costs. b.. Total variable costs divided by volume. C. Total fixed costs. d. Total tixed costs divided by volume. 9, When a unit of product is the cost object. factory overhead generally is: a. A direct manufacturing cost. b. An indirect manufacturing cost C. Both of the above. d. None of the above. 10, Factory rent is a. A prime cost and an inventoriable cost. b. A prime cost and a period cost ¢. Aconversion cost and an inventoriable cost. d. Acconversion cost and a period cost.48 Cost Accounting 11. Examples of factory overhead costs are a. Lubricants for factory machinery, b. Depreciation of factory machinery. C. Both of the above. d. None of the above. 12. In general, the cost that could usually be most reliably predicted is: a. Variable cost per unit. b. Fixed cost per unit c. Total variable cost. d. Total fixed cost. 13. Factory supplies used would be an example of which of the following? Prime cost Conversion cost a ies Yes b. Yes No .c. No Yes d. No No 14. For a'manufacturing company, which of the following is an example of a period rather than a product cost? a. Depreciation of factory equipment. b. Wages of a salesperson. Cc. Wages of machine operators. d. Insurance on factory equipment. 15. The variable portion of the semi-variable cost of electricity fora manufacturing plant is a: Conversion cost Period cost a. Yes No. b. Yes Yes c. No Yes d. No NoChapter 2 Costs — Concepts and Classifications 49 16. Indirect costs are also known as: ey 20. &. Differential, costs b. Common costs C. Opportunity costs d. Sunk costs |. Variable cost a. increases on a per unit basis as the number of units produced increases. b. is constant if expressed on a per unit basis. C. remains the same in total as production increases. ~ d. is not affected by changes in activity from period to period. . All of the following are examples of product costs except: a. depreciation on the company’s retail outlets. b. salary of the plant manager. . insurance on the factory equipment d._ rental costs of the factory facility. . The distinction between indirect and direct costs depends on a. whether a cost is controllable or non-controllable. b. whether a cost is variable.or fixed. . whether a cost is a product or a period cost. d. whether a cost can be “conveniently and physically traced to a unit under consideration. Which of the following should not be included as manufacturing overhead in the manufacture of a wooden chair? a. Glue in the chair b, The amount paid to the individual who stains the chair c. The workman’s compensation insurance of the supervisor who oversees production d. The factory utilities of the department in which production takes place50 Cost Accounting MULTIPLE CHOICE - PROBL The following costs relate to Antonio Industries for the last quarter: Conversion cost P-435,000 Direct materials 215.600 Factory overhead is applied at 60% of direct labor cost. Selling and administrative expense 185,000 1. What is Antonio’s prime cost for last quarter? a. P 460,000 b. P-410.000 e. P405,000 d. 487.475 2. Antonio's total manufacturing cost is a. P 460,000 b. P645,000 ce P6S0,000 d. P.650.600 3. Antonio's total period cost is a. —P 620,000" b. _ P275,000 ce. P-400,000 d. P'185,000. Milktopia, Inc. produces and sells milk flavored: bubble gum. Over the last five months Milktopia had the following productioi costs and production volume... Month Cost Volume (in cases March P6.000 12 April 6,659 4 May 8,370 18 June 8.800 19 July 8.050 7 4.. Using the high-low method. what is the fixed cost per month for bubble gum production? a. P 400 c. P4800 b. P1200 d. P 7,600 5., The variable cost per case is a P 400 c. P1200 bP 600 d, P2800Chapter 2. Costs - Concepts and Classifications 51 ‘St Martin Company produced 5,500 outdoor chairs for Job Order No. 610. Total material cost was P 64,625. Each chair required 2.2 hours of direct labor at P8.90/per hour. A total of P67,306.25 of factory overhead was traced to Order 610. 6. What is the prime cost per unit ef this order? a, P 19.586 c. P 31.330 b. P 28.980 d. P 38,778 7. What is the conversion cost per unit of this order? a. P19.S813 c. P 29,3700 b. P 28.9846 d, P 31.8175 8. What is the unit cost of this order? a, P 43.5675 c. P 28.0998 b. P 38.7700 d. P 48.4625 During the month of August, Baesa Corporation produced 12,000 units and sold them for P20 per unit. Total fixed cost for the period were P 154,000, and the operating profit was P 26,000.. 9. Based on the foregoing information, the variable cost per unit is a. P 4,50 c. P 6.00 b. P5.00 d. P 6.25 Data to be used in applying the high-low method shows the highest cost of P69,000 and the lowest cost of P52,000. The data show P148,000 as the highest level of sales and P97,000 as the lowest level. 10. What is the variable cost per peso sales? a: P 0.33 ©. P0.54 b. P.0.47 d. P3.00 Ravena Company manutactures office furniture. During the most productive month of the year, 3.500 desks were manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost of P46,000. 1], Using the high-low method of cost estimation, the total fixed cost are a. P56,000 c, PL7,600 b. P28.400 d, P38,400 12, The variaole cost per unit is a. P 16.00 c. P 14.00 b. P 15.00 di: P17.00“$2 Cost Accounting In 2022. Sauyo Company incurred the following costs Direct materials Direct labor Factory overhead Selling expense Administrative expense P 62.500 25,000 162,500 50,000 45,000 Units produced and sold: 10.000 units sold at a price of P38.75 each 13. Prime cost per unit is a. P 7.00 b.P15.00 14. Conversion cost per unit is a.P 7.00 b.P.15.00 15. Cost of goods sold per unit is a.P 7.00 b. P.25.00 16. Gross profit per unit is a. P 11.00 b. P.15.00 17. Operating income is a,P 34,000 b. P.110.000 c. P20.00 d, PL8.75 cc, P 13.75 d..P 24.00 c. P 42,500 d, P110,000 Gulod Company Company produced 1,000-units of a product which was sold ata price of P95.00 each. Total selling and administrative expenses incurred, P30,000 Direct materials Direct labor Factory overhead 18. Conversion cost per unit is a. P 41.00 b. P.44.00 19. Cost of goods sold per unit is a. P 41,00 b, P44.00 P 25.000 16.000 19.000 c. P35.00 d. P45.0 c. P35,00 d. P60.00Chapter 2. Costs — Concepts and Classifications 53 20. Net profit per unit is a. P 5.00 c. P60.00 b. P51.00 4. P35.00 San Bartolome Company had the following inventories at the beginning and end of March, 2022: 3/01/22 3/31/22 Direct Materials P 36,000 P 30.000 Work-in-process 18,000 12,000 Finished goods 54,000 72,000 The following additional manufacturing cost data were available for the month of March, 2022: Direct materials purchased P 84,000 Direct labor payroll 60,000 Direct labor rate per hour 7.50 . Factory overhead rate per direct labor hour 10.00 21. During March, 2022, how much direct materials cost was added to production? a. P 90,000 b. P140,000 c. P144,000 d. P150,000 22. During March, 2022, how much manufacturing overhead cost was applied to production? a. P60,000 b. P80,000 c. P140,000 d. ‘150,00054 Financia) data for two (2) months are shown below Sales Cost A Cost B Cost C Cost D Cost E March 3,200 6,400 5,600 * 7.100 4,480 3,950 Cost Accounting April P4,500 9,000 5,600 7,100 6,300 5,250 23. Which of the following classifications describes cost B? a. b. G d. .- Variable . Curvilinear Fixed Mixed 24, Which of the following classifications describes Cost D? a. Variable b. Curvilinear c d. Fixed Mixed 25, Which of the following classifications describes Cost E? a. b. G d, Variable Curvilinear Fixed Mixed