1/22/22, 1:24 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?

lesson_id=1448606…
Home

Code 359 - Cost Accounting and Control

Prelim: Week 1 and 2

Introduction to Cost Accounting

Introduction
Congratulations on making it out of your first semester in the BS Accountancy program alive! You just passed both your ACCT 1013 and ACCT 1026, which
gives you the fundamental knowledge and skills you need to continue understanding the entire field of Accounting. How wide could the Accounting field be?

To achieve your dream of being a Certified Public Accountant in the near future, you need to pass the licensure examination for CPAs, which consists of 6
subjects, namely:

Financial Accounting and Reporting (FAR)

Advanced Financial Accounting and Reporting (AFAR)
Management Advisory Services (MAS)
Auditing (AUD)
Taxation (TAX)
Regulatory Framework for Business Transactions (RFBT)

The major courses you have just finished last semester both fall under Financial Accounting and Reporting (FAR). It is in here where we follow accounting
standards to be able to faithfully represent all business transactions and events and transform them into accounting information, and report the same to
interested users, like the government, investors, suppliers, customers, among others.

In this course, Cost Accounting and Control, we shall be moving on momentarily to another field of accounting which is significantly different as compared to
financial accounting, which you were accustomed to in the previous semester.
 
Lesson Proper

Managers of business entities also use accounting information in its decision making. However, the accounting information used for external reporting
purposes might be used differently by different managers.

For example, let’s focus on sales. As presented in the financial statements, sales is a peso figure that shows how much revenue a business entity has
obtained by selling products or services. A sales manager might be interested in the same figure, but for a different purpose, say determination of sales
commissions to be paid to sales agents. A distribution manager might be interested not on the peso amount, but on sales volume, and broken down into
sales per region, to determine which regions to focus on when it comes to deliveries and distribution. An advertising manager might also be interested in the
sales volume, but for the purpose of determining which regions least avail of the products and services of the business entity, so that he can focus on
advertising to those areas. A production manager might be interested in the sales volume per product to determine which products sell quickly, to be able to
make a production schedule to cater to the demand of certain products.

In making these decisions, we use Management Accounting, which measures, analyzes, and reports financial and nonfinancial information, but for a specific
purpose other than external reporting.
Managers use management accounting information to develop, communicate, and implement strategy. They also use management accounting information
to coordinate product design, production, and marketing decisions and to evaluate performance. Management accounting information and reports do not
have to follow set principles or rules.
The key questions are always:

1. How will this information help managers do their jobs better, and
2. Do the benefits of producing this information exceed the costs?

The differences between Financial Accounting and Management Accounting are as follows:

  FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING

Communicate organization’s financial position to

investors, banks, regulators, Help managers make decisions to fulfill an
Purpose of information
organization’s goals
and other outside parties

External users such as investors, banks, regulators,

Primary users Managers of the organization
and suppliers

Focus and emphasis Past-oriented Future-oriented

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?lesson_id=14486069&section_id=53317680 1/3
1/22/22, 1:24 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?lesson_id=1448606…
Rules of measurement and reporting Financial statements must be prepared in accordance Internal measures and reports do not have to follow
with GAAP and be certified by external, independent GAAP but are based on cost-benefit analysis
auditors

Varies from hourly information to 15 to 20 years, with

Annual and quarterly financial reports primarily on the
Time span and type of reports financial and nonfinancial reports on products,
company as a whole
departments, territories, and strategies

Primarily reports economic events but also influences

behavior because
Designed to influence the behavior of managers and
Behavioral implications
manager’s compensation is often based other employees

on reported financial result

These differences shall be explained to you in a discussion by the instructors via YouTube live and/or Facebook live.

Cost accounting provides information for management accounting and financial accounting. Cost accounting measures, analyzes, and reports financial and
nonfinancial information relating to the costs of acquiring or using resources in an organization. For example, calculating the cost of a product is a cost
accounting function that answers financial accounting’s inventory-valuation needs and management accounting’s decision-making needs (such as deciding
how to price products and choosing which products to promote).

Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. In other words,
strategy describes how an organization will compete and the opportunities its managers should seek and pursue. In the short term, you will be enrolled in a
course called Strategic Cost Management, which describes cost management that specifically focuses on strategic issues.
 
Decision Making, Planning, and Control

Key Management Accounting Guidelines

Cost-Benefit Approach
Behavioral and Technical Considerations
Different Costs for Different Purposes 

 
Organization Structure and the Management Accountant

Line management - directly responsible for attaining the goals of the organization.
Examples: production, marketing, and distribution managers

Staff management - provides advice, support, and assistance to line management.

Examples: management accountants, IT, and human resource managers,

 
CFO and Controller

Chief Financial Officer - the executive responsible for overseeing the financial operations of an organization
 

Responsibilities of a CFO:

Controllership—includes providing financial information for reports to managers and shareholders, and overseeing the overall operations of the
accounting system
Treasury—includes banking and short- and long-term financing, investments, and cash management
Risk management—includes managing the financial risk of interest-rate and exchange-rate changes and derivatives management
Taxation—includes income taxes, sales taxes, and international tax planning
Investor relations—includes communicating with, responding to, and interacting with shareholders
Internal audit—includes reviewing and analyzing financial and other records to attest to the integrity of the organization’s financial reports and to
adherence to its policies and procedures

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?lesson_id=14486069&section_id=53317680 2/3
1/22/22, 1:24 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?lesson_id=1448606…
Controller - financial executive primarily responsible for management accounting and financial accounting
 

Professional ethics
Practitioners of management accounting and financial management have an obligation to the public, their profession, the organizations they serve, and
themselves to maintain the highest standards of ethical conduct. In recognition of this obligation, the Institute of Management Accountants (IMA) has
promulgated the following standards of ethical professional practice. Adherence to these standards, both domestically and internationally, is integral to
achieving the Objectives of Management Accounting. Practitioners of management accounting and financial management shall not commit acts contrary to
these standards nor shall they condone the commission of such acts by others within their organizations
 
 IMA STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
Practitioners of management accounting and financial management shall behave ethically. A commitment to ethical professional practice includes
overarching principles that express our values and standards that guide our conduct.

 
PRINCIPLES

IMA’s overarching ethical principles include: Honesty, Fairness, Objectivity, and Responsibility. Practitioners shall act in accordance with these principles and
shall encourage others within their organizations to adhere to them.

 
STANDARDS
A practitioner’s failure to comply with the following standards may result in disciplinary action.

 
COMPETENCE

Each practitioner has a responsibility to:

1. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
2. Perform professional duties in accordance with relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an
activity.

CONFIDENTIALITY

Each practitioner has a responsibility to:

1. Keep information confidential except when disclosure is authorized or legally required.

2. Inform all relevant parties regarding appropriate use of confidential information. Monitor subordinates’ activities to ensure compliance.
3. Refrain from using confidential information for unethical or illegal advantage.

INTEGRITY
Each practitioner has a responsibility to:

1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts.
2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that might discredit the profession.

 
CREDIBILITY

Each practitioner has a responsibility to:

1. Communicate information fairly and objectively.

2. Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or
recommendations.
3. Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organization policy and/or applicable law.

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?lesson_id=14486069&section_id=53317680 3/3
2/5/22, 2:55 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_q…
Home

Code 359 - Cost Accounting and Control

Prelim: Week 1 and 2

Topic 2 - Cost Terms, Concepts, and Classifications

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. A
measurement, in monetary terms, of the amount of resources used for some purpose. When notified by a term that defines the purpose, cost becomes
operational

Cost Activity – any event, action, transaction or work sequence that incur costs when producing a product or providing a service

Cost Driver – a factor that cause a change in the cost pool for a particular activity.

Cost pool – an account in which a variety of similar costs are accumulated prior to allocation to cost objects. It is a group of costs associated with an activity

Cost object – the intermediate and final destination of cost pools

COST VS EXPENSES VS LOSSES

Costs are incurred to produce future benefits in a profit - making firm, future benefits usually mean revenue. As costs are used up in production of revenues,
they are said to expire. Expired costs are called 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 without producing any revenue benefit.

The focus of accounting is on costs, not expenses.

CLASSIFICATION OF COSTS

1. Costs Classified as to relation to a product

A. Manufacturing/Product cost/Inventoriable costs
i. Direct Materials
ii. Direct Labor
iii. A3. Factory Overhead
B. Non -Manufacturing costs/Period cost
i. B1. Marketing or selling expenses
ii. B2. General or Administrative expense
2. Cost classified as to variability
A. Variable cost
B. Fixed Cost
C. Mixed Cost
3. Cost classified as to relation to manufacturing departments
A. Direct departmental charges
B. Indirect departmental charges 
4. Cost classified to their nature as common or joint
A. Common Cost
B. Joint Cost
5. Cost classified as to relation to an accounting period
A. Capital Expenditure
B. Revenue Expenditure 
6. Cost for planning, control, and analytical processes
A. Standard costs
B. Opportunity cost
C. Differential cost
D. Relevant cost
E. Out of pocket cost
F. Sunk cost
G. Controllable cost

Manufacturing Costs/Product costs/Inventoriable costs

Direct Materials – are materials that become part of a finished product and can be conveniently and economically traced to specific product units. The costs
of these materials are direct cost.

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_quiz_assignment%2Fshow%2F29769387&lesson_id=14486069… 1/3
2/5/22, 2:55 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_q…
Direct Labor – include all labor costs for specific work performed on products that can be conveniently traced to end products. 

Direct materials plus direct labor = prime costs, while direct labor plus factory overhead = conversion cost

Factory Overhead

This 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
costs are also called manufacturing overhead, factory burden or indirect manufacturing costs

Non – manufacturing costs/Period costs

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 are often referred to as order – getting and order - filling costs.

Administrative or  general expenses – include all executive, organizational, and clerical expenses that cannot logically be included under production or
marketing.

Cost classified as to variability

Cost behavior -  describes how a cost behaves or changes as the amount of cost driver changes

Types of Cost as to behavior

1. Fixed cost - in total ; constant within the relevant range as activity output changes, per  changes as activity level changes
2. Variable cost - in total; varies in direct proportion to changes in activity output; per unit: remains constant
3. Mixed cost – has both fixed and variable components

Cost classified as to relation to manufacturing departments

Direct departmental charges – costs that are immediately charge to the particular manufacturing department that incurred the costs since the costs can be
conveniently identified or associated with the department that benefited from said cost

Indirect departmental charges – costs that are originally charged to some other manufacturing department or account but are later allocated or transferred
to other departments that indirectly benefited from said costs.

Cost classified to their nature as common or joint

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

Joint cost – costs of materials, labor, and overhead incurred in the manufacturing 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 simultaneously produced. These costs are also
subject to allocation

Cost classified as to relation to an accounting period

Capital expenditure – expenditure intended to benefit more than one accounting periods and is recorded as an asset. The allocation of the cost to different
periods  - depreciation for fixed tangible assets ; amortization of intangible assets and depletion of wasting assets

Revenue Expenditure – expenditure that will benefit current period only and is recorded as an expenses outright

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 of product or service. It is the cost
choses by the managerial accountant to serve as the benchmark in the budgetary control system.

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_quiz_assignment%2Fshow%2F29769387&lesson_id=14486069… 2/3
2/5/22, 2:55 PM Code 359 - Cost Accounting and Control - https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_q…
Opportunity cost – the benefit given up when one alternative is chosen over another. Opportunity costs are not usually recorded in the accounting system.
However, opportunity costs should be considered when evaluating alternatives for decision – making.

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 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
incremental and decremental cost.

Relevant cost – a future cost that change across alternatives

Out of pocket cost – cost that requires payment of money as a result of their incurrence

Sunk cost – a cost for which an outlay has already had been and it cannot be changed by present or future decisions. Since sunk costs cannot be changed
by any present or future decision, they are not differential costs, and therefore they should be used in analyzing future courses of action

Controllable cost – a cost is considered to be controllable at a particular level of management if that level has power to authorize the cost.

https://usl-tuguegarao.neolms.com/student_lesson/show/3145316?from=%2Fstudent_quiz_assignment%2Fshow%2F29769387&lesson_id=14486069… 3/3
 UNIVERSITY OF SAINT LOUIS
Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Second Semester
A.Y. 2021-2022

ONLINE LEARNING MODULE

ACCT 1033- Cost Accounting and Control

Lesson 3: Cost Behavior, Analysis, and Use

For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish.
Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE 😊

Date Topics Activities or Tasks

February 22, Cost Behavior: Read Lessons from books and handouts
23 a. Variable Cost
February 24 b. Fixed Cost Online discussion
February 25 c. Separation Accomplish the drills and exercises
February 26 Submission of Assessments
Participate in the scheduled Quiz

Learning After reading this chapter you should be able to:

Outcomes: ⚫ Describe and apply the concept of fixed and variable costs.
⚫ Apply methods in segregation of cost.

LEARNING CONTENT

INTRODUCTION
Companies must earn profit to stay in business. Managers want to increase profitability and therefore need to
predict how their actions will affect profit.

Classifying cost according to behavior is distinctive to managerial use of accounting information. In financial
accounting reports prepared for external use, costs are normally grouped according to the functional areas of
business: production (cost of goods sold), marketing (selling expense), administration (general and
administrative expenses), and financing ( interest expense). A functional classification does not provide
necessary information to predict what is likely to happen to cost and profits if circumstances change, and a
manager must plan for a change and take actions to make changes

COST BEHAVIOR

A cost is classified as either fixed cost or variable, according to whether the total amount of the cost changes
as activity changes. Activity, is a general term denoting anything that the company does; example of activity
include units of product sold or produced, hour worked, invoices prepared, and parts inspected. Volume is
commonly measure of activity.

ACTIVITY BASE

ACCT 1033 – Cost Accounting and Control | 1

Activity base is a measure of the event that causes the incurrence of a variable cost- a cost driver

Example:

Unit Produced
Labor Hours
Machine Hours
Miles Driven

TOTAL Variable Cost and TOTAL Fixed Cost

Variable cost - cost that varies with the level of output

-variable cost change, in total, in direct proportion to change in volume (meaning, if the volume
of the product increases the total variable cost also increases)

Fixed cost - constant whatever the quantity of goods or services produced.

- remain the same in total over a wide range of volume

Let’s say for example you are studying here in University of Saint Louis - Tuguegarao. Because you are from
Calayan, an island between Appari and Batanes, you decided to rent an apartment for Php 2,000 monthly.
Let’s say you go to school everyday and paying a total of Php 50 ( Php 25 from apartment to school and Php
25 from school to your apartment). For the month of February, you went to school for 19 days because
February 25 is a holiday. For the month of February you incurred a total of Php 950 ( Php 50 x 19 days) for
transportation and Php 2,000 monthly rental. For the month of March you went to school for 23 days, therefore
you incurred Php 1,150 (Php 50 x 23 days) for transportation and Php 2,000 monthly rental.

As observed in the illustration you paid more on transportation expense in March than in February because
you went to school for 23 days in March as compared to 19 days in February. Your transportation therefore is a
variable cost. Of course you should have realized that your monthly rental in February is equal to your rental in
March. Your rental, therefore, is a fixed cost.

Let’s have another example, but this time it would be in a business setting.

Ballad Company, a wholesaler of backpack. The following schedule shows data for Ballad Company.

ACCT 1033 – Cost Accounting and Control | 2

The Activity base would be the unit purchased.

For 2020 the total variable cost is Php 720,000 ( 5,000 units x 12 months x Php 12 total unit variable cost)
For 2021 the total variable cost is Php 576,000 ( 4,000 units x 12 months x Php 12 total unit variable cost)

For 2020 the total fixed cost is Php 480,000 ( Php 40,000 x 12 months)
For 2021 the total fixed cost is Php 480,000 ( Php 40,000 x 12 months)

Notice that the total variable cost vary in each year while total fixed cost is the same.

Variable Cost PER UNIT and Fixed Cost PER UNIT

Variable cost per unit- remains the same over wide range of activity
Fixed cost per unit -goes down as activity level goes up.

Cost per unit means the cost of a single unit of a product

Let’s use Ballad Company again as example:

The variable cost per unit of backpack is Php 12. We can also get the variable cost per unit by dividing the
TOTAL variable cost by the TOTAL units purchase.

For 2020:

If the variable cost per unit is not given you can use the solution above in getting the variable cost per unit.

For 2021: try to compute it by yourself. Let’s see if you can arrive at Php 12 variable cost per unit

ACCT 1033 – Cost Accounting and Control | 3

The fixed cost per unit of backpack is computed by dividing the TOTAL fixed cost by the TOTAL units
purchased (just like the variable cost per unit)

For 2020:

For 2021:

Notice that the variable cost per unit is the same in 2020 and 2021 (that is 12 per unit). While the fixed cost
vary in each year (that is Php 8 for 2020 and Php for 2021), this is because the total units produced in 2020 is
not the same with the total units produced in 2021.

Notice also that for variable cost, as the TOTAL units purchase/produce increases the TOTAL Variable cost
increases, while the the Variable Cost PER UNIT remains constant, and as the TOTAL units purchased/
produce decreases the TOTAL Variable cost also decreases while the Variable Cost PER UNIT remains
constant.

For Fixed Cost, as the TOTAL units purchased/ produce increases the TOTAL Fixed Cost remains the same,
while the FIxed Cost PER UNIT decreases, and as the TOTAL units purchased or produce decreases the
TOTAL Fixed Cost will be constant while the Fixed Cost PER UNIT increases.

Summary:

Formula Summary:

TOTAL VARIABLE COST = Variable Cost per unit x Activity Level or Volume
VARIABLE COST PER UNIT = Total Variable Cost ÷ Activity Level or Volume
FIXED COST PER UNIT = Total Fixed Cost ÷ Activity Level or Volume

MIXED COST

ACCT 1033 – Cost Accounting and Control | 4

A mixed cost has both fixed and variable components.

TOTAL COST= Total variable cost + Total fixed cost

If we get the sum of total variable cost and total fixed cost we get the total cost which is a mixed cost

What if Total Cost is given, how can we segregate the variable cost from fixed cost?

In our example Ballad Company, what if the only given data is as follows:

How can we get the total variable cost, the variable cost per unit, the total fixed cost, and the fixed cost per
unit?

Cost Segregation Methods

1. Account Analysis
- Each is account is classified as either variable or fixed based on the analyst’s knowledge of how the
account behaves

2. Engineering Estimate
- Cost estimate are based on an evaluation of production methods, material labor and overhead
requirements.

For Account Analysis and Engineering Estimate the amount of variable cost and fixed cost will be based on
their report.

3. The High Low method

4. Scattergraph Plot

5. Least Square Regression Method

HIGH LOW METHOD

- considers the highest and lowest point of activity

Steps:
ACCT 1033 – Cost Accounting and Control | 5
 1. Determine the lowest point of activity and the corresponding cost, and the highest
point of activity and its corresponding cost.
2. Get the change in cost and divide it by the change in activity level.

Formula:

3. The answer in step two would be the variable cost per unit. Multiply the variable cost
per unit by the number of units at the highest level to get the total variable cost

Formula:
Total Variable Cost= Variable cost per unit x Number of units at the
highest level

4. Subtract the total Variable cost from the Cost of the highest activity to get the total
FIxed cost

Formula:
Total Fixed Cost = Cost of highest activity - total variable cost

For step 3 you may also multiply the variable cost per unit (computed in step 2) by the
number of units at the lowest level but make sure that for step 4 you should use the cost
of lowest activity.

So for Ballad Company, since there are only two levels of activity presented we will use the 2020 as highest
activity level and 2021 as the lowest.

Step 1: Highest level:

Number of units: 60,000 (5,000 units per month x 12 months)
Cost- Highest level: Php 1,200,000

Lowest level:
Number of units: 48,000 ( 4,000 x 12)
Cost- Lowest level: Php 1,056,000

Step 2:

Solution:

Step 3:
Solution:
Variable cost per unit x number of units at highest level= Total Variable cost

Php 12 x 60,000 units = Php 720,000

ACCT 1033 – Cost Accounting and Control | 6

Step 4:
Solution:
Cost of highest activity - total variable cost = Total Fixed Cost
Php 1,200,000- Php 720,000 = Php 480,000

Answer:
Variable Cost per unit = 12
Fixed Cost= 480,000

Getting the highest level and lowest level (another example)

Answer:
Remember that when figuring out the highest and lowest data points, we should
not look at cost, but rather at unit volumes, as they are the driver behind the cost.

Highest level is 60,000 and corresponding cost is Php 1,200,000

Lowest level is 47,000 and corresponding cost is Php 1,044, 000

Outlier
In cost accounting, an outlier could be a cost or its related level of activity that is out of line with other
observations.

Example:

The activity in 2023 is an outlier so it should be ignored in getting the highest and lowest value.
The highest activity level is 60,000 units and lowest activity level is 47,000 units.

ACCT 1033 – Cost Accounting and Control | 7

SCATTERGRAPH METHOD
-is a visual technique used in accounting for separating the fixed and variable elements of a mixed cost
in order to estimate and budget for future costs. A semi-variable expense is more complicated to analyze since
it is made up of both fixed and variable factors.

Example:

Step 1
Plot the data points on a graph

Step 2
Draw line through the data points with about an equal numbers of points above and below the line.

Step 4
The slope is the estimated cost per unit.
Slope = Change in cost ÷ Change in units

ACCT 1033 – Cost Accounting and Control | 8

LEAST-SQUARE REGRESSION METHOD

Linear regression is basically a mathematical analysis method which considers the relationship between all the
data points in a simulation. All these points are based upon two unknown variables – one independent and one
dependent. The dependent variable will be plotted on the y-axis and the independent variable will be plotted to
the x-axis on the graph of regression analysis. In literal manner, least square method of regression minimizes
the sum of squares of errors that could be made based upon the relevant equation.

The least squares regression method follows the same cost function as the other methods used to segregate a
mixed or semi variable cost into its fixed and variable components. Let’s assume that the activity level varies
along x-axis and the cost varies along y-axis. The following equation should represent the the required cost
line:

y = a + bx

Where,
y = total cost
a = total fixed cost
b = fixed cost
x = number of units

The values of ‘a’ and ‘b’ may be found using the following formulas.

Example:

Banera Chemicals produces bottles of a cleaning lubricant. The activity levels and the attached costs are
shown below:

ACCT 1033 – Cost Accounting and Control | 9

On the basis of above data, let’s determine the cost function using the least squares regression method and
calculate the total cost at activity levels of 6,000 and 10,000 bottles.

Solution:

In our example:
n=7
∑x = 17,310
∑y = 306,080
x2 = 53,368,900
xy = 881,240,300
We can find the values of ‘a’ and ‘b’ by putting this information in the above formulas:

ACCT 1033 – Cost Accounting and Control | 10

 *** END of LESSON 1***

REFERENCES

Textbooks

1. Louderback, J. (2003). Managerial Accounting. Thompsom Learning

Online Reference

1 https://www.assignmentpoint.com/business/accounting/cost-behavior-analysis-and-use.html
2 https://www.accountingformanagement.org/least-squares-regression-method/

ACCT 1033 – Cost Accounting and Control | 11

 UNIVERSITY OF SAINT LOUIS
Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Second Semester
A.Y. 2021-2021

ONLINE LEARNING MODULE

ACCT 1033- Cost Accounting and Control

Lesson 4: Accounting For Cost Flow

For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish.
Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE 😊

Date Topics Activities or Tasks

Organizational Cost Flow: Read Lessons from books and handouts
a. The Conversion Process Online discussion
Accomplish the drills and exercises
b. Stages of Production Submission of Assessments
Participate in the scheduled Quiz
c. Valuing raw material used

d. Applied Overhead

Learning After completing this lesson, you should be able to answer the following questions:
Outcomes: 1. How does conversion process occur in manufacturing companies
2. Why and how overhead costs allocated to products and services
3. What causes underapplied or overapplied overhead and how is it treated at the end of
a period

LEARNING CONTENT

Flow of Cost

Flow of costs refers to the manner or path in which costs move through a firm. Typically, the flow of costs is
relevant with manufacturing companies whereby accountants must quantify what costs are in raw materials,
work in process, finished goods inventory, and cost of goods sold.

The Conversion Process

In general, product costs are incurred in the production or conversion area and period costs are incurred in all
nonproduction or nonconversion areas. To some extent, all organizations convert inputs into outputs.

Input- typically consist of material, labor and overhead.

Output-- usually either product or service

Conversion Process
Input Output

MACT 1043 – Performance Management System | 1

Low Degree of Conversion
- adding only the convenience of having merchandise when, where, and in the assortment
needed by costumers.

Moderate Degree of Conversion

- washing, testing, packaging, labeling, etc.

High Degree of Conversion

-causing major transformation from input to output

Stages of Production

The production or conversion of process of raw material can be viewed in three stages:

Work not Started (raw materials)

Work in Process Costs are associated with
Finished Work each processing stage

MACT 1043 – Performance Management System | 2

Note: For the incurrence of overhead, costs are pooled to Factory Overhead account then Factory overhead
account will be subsequently closed to Work in Process account. The pooling of cost into Factory overhead
account is for allocation purposes. For example product A and product B uses electricity during the production,
the electricity bill for the month amounted to 100,000. The cost of electricity is entered in the factory overhead
account and subsequently allocated to product A and B. Let’s say the entity uses 60:40 ratio (60% for A and
40% for B) to allocate the cost. The entry would be as follows:

Valuing the Raw Materials Used

The process of the flow of costs begins with valuing the raw materials used in manufacturing.

For example a company acquired 5 units of raw material for 5 pesos each. 3 units of raw material were issued
to manufacturing department. The cost of material issued for manufacturing is 15 pesos (5 pesos x 3 units).

The example is very simple, what if there are 100, 000 units of raw material, purchased by batch with different
cost (selling price of raw material) per batch. Imagine if this thousands of raw material units were mixed up in a
warehouse. How can we value the raw material issued for manufacturing? How do we account for the flow of
cost?

The cost of raw materials issued for manufacturing are easy to determine if purchase prices and other costs
never change, but price fluctuations may force a company to make certain assumptions about which items
have been issued to the manufacturing department.

There are several methods for accounting for the flow of costs:
MACT 1043 – Performance Management System | 3
1. Specific Identification
2. FIFO (First in, first out)
3. LIFO (Last in, first out)
4. Weighted-average cost

Specific Identification

Companies can use the specific identification method only when the purchase date and cost of each unit in
inventory is identifiable. For the most part, companies that use this method sell a small number of expensive
items, such as automobiles or appliances.

First-in, First-out

The first‐in, first‐out (FIFO) method assumes the first units purchased are the first to be issued

Example:

Last-in, First out

The last‐in, first‐out (LIFO) method assumes the last units purchased are the first to be issued

Weighted Average cost

When using the weighted average method, you divide the cost of raw material available for production by
the number of units available for production, which yields the weighted-average cost per unit.

Example:

MACT 1043 – Performance Management System | 4

Accumulation and Allocation of Overhead

Direct material and Direct labor are easily traced to a product or services. Overhead on the other hand, must
be accumulated over a period and allocated to the products manufactured or services rendered during that
time.

Cost allocation- refers to the assignment of an indirect cost to one or more cost objects using some reasonable
basis.

Why Overhead cost are allocated?

1. To determine a full cost of the cost object

2. To motivate manager in charge of the cost object to manage efficiently
3. To compare alternative courses of action for management planning, controlling and decision making

Predetermined Overhead Rates

In an actual cost system, actual direct material and direct labor costs are accumulated in Work in Process
Inventory as the cost are incurred. Actual production overhead costs are accumulated separately in an
Overhead Control account and assigned to Work in Process Inventory at the end of a period or at completion
of production.

The use of an actual cost system is generally considered to be less desirable because all production overhead
information must be available before any cost allocation can be made to product or services. For example, the
cost of products and services produced in May could not be calculated until the May electricity bill is received
in June.

Normal Cost Sytem- uses actual direct material and direct labor costs and predetermined overhead rates

Predetermined overhead rates- overhead application rate

- is a budgeted and constant charge price per unit of activity that is used
to assign overhead cost from an Overhead Control Account to Work
in Process inventory for the period’s production or services

Formula:

MACT 1043 – Performance Management System | 5

Applying overhead to production

Applied Overhead- is the amount of overhead assigned to Work in Process Inventory as a result of incurring
the activity that was used to develop the application rate.

For 5,000 units of completed units, the applied overhead is Php 25,000 ( 5,000 units X Php 5 predetermined
rate)

Actual overhead- the true cost incurred for overhead

Accounting for Applied and Actual overhead

1. Separated accounts for Applied and Actual and for Variable and Fixed

2. Combined Accounts for Applied and Actual, Separated Accounts for Variable and Fixed

3. Combined Account for Applied and Actual and for Variable and Fixed

MACT 1043 – Performance Management System | 6

Proforma Entries:

Underapplied and Overapplied Overhead

Under and over application of overhead arise when the applied overhead is not equal to the actual overhead.

For example, you have a 5,000 units order of your product in May. You were not able to compute the full cost
of the product because electricity bill for May has not been received. Should you wait for the electricity bill
before billing your customer and deliver the goods to him? What if he needs it before the end of May. He might
cancel the order if you cannot deliver it on time. So, you decided to use predetermined rate of 5 peso per unit.
The applied overhead is 25,000 (5,000 units X 5). Assuming you received the electricity bill in June 8, and you
found out that the actual electricity expense is P 27,000. How are you going to account for the difference
(27,000 - 25, 000 = 2,000)?

You should account for the under or over application.

Underapplied overhead - Actual overhead > Applied overhead

- Unfavorable (because you paid more than the budget)
-Debit balance

Overapplied overhead -Actual overhead < Applied overhead

-Favorable (you paid less than the budgeted; you saved)
-Credit balance

So in our example, 27,000 actual overhead is greater than the 25,000 applied. The difference of 2,000 is
underapplied overhead.

Disposition of Underapplied and Overapplied Overhead

Disposition of underapplied and overapplied overhead depends on the significance of the amount involved:
-if immaterial, it is closed to Cost of Goods Sold.
-if material or significant, it should be allocated among the accounts containing applied overhead: Work in
Process Inventory, Finished Goods Inventory, Cost of Goods sold
Example:

MACT 1043 – Performance Management System | 7

Proforma Entries

MACT 1043 – Performance Management System | 8

 *** END of LESSON 1***

REFERENCES

Textbooks

1. Barfield, J., Raiborn, C., & Kinney, M. (2003). Cost Accounting: Traditions and Innovations. South-Western.
2. Agamata, F. (2012). Management Advisory Services.GIC Enterprises & Co. Inc.

Online Reference
1. https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/inventory/cost-flow-
methods
2. https://www.unleashedsoftware.com/blog/weighted-average-cost-method-inventory-
valuation#:~:text=When%20using%20the%20weighted%20average,beginning%20inventory%20and%20
net%20purchases.

ASSESSMENTS

PARTICIPATION (for recitation purposes)

DRILLS/ ACTIVITIES/ APPLICATION

Practice Problems:

Problem 1

Raiborn Company had the following account balances as of March 1, 2021:

Raw Material (direct and indirect) Inventory P 9,300

Work in Process Inventory 14,000
Finished Goods Inventory 18,000

During March, the company incurred the following factory costs:

⚫ Purchased P 82,000 of raw materials on account.

⚫ Issued P 90,000 of raw materials, of which P 67,000 were direct to the product
⚫ Factory payroll of P 44,000 was accrued; P 31,000 was for direct labor and the rest was for supervisors.
⚫ Utility Costs were accrued at P 3,500; of these costs, P 800 were fixed.
⚫ Property taxes on the factory were accrued in the amount of P 1,000
⚫ Prepaid insurance of P 800 on factory equipment expired in March.
⚫ Staright-line depreciation on factory equipment was P 20,000.
⚫ Predetermined overhead of P 62,500 (P 28,000 variable and 34,500 fixed) was applied to Work in Process Inventory.
⚫ Goods costing P 170,000 were transfered to Finished Goods Inventory.
⚫ Sales on account totaled 350,000.
⚫ Cost of goods sold was 175,000.
⚫ Selling and administrative cost were P 140,000 (credit “Various Accounts”)
⚫ Ending Work in Process Inventory is P 3,300.

Required:
A. Journalized the transaction for March.

Problem 2
MACT 1043 – Performance Management System | 9
Kinney and Associates applies overhead at a combined rate for fixed and variable overhead of 175 percent of professional labor costs.
During the second quarter of 2020, the following professional labor cost and actual overhead costs were incurred

Required:
a. How much overhead was applied to the services provided each month by the firm?
b. What was underapplied or overapplied overhead for each of the three months and for the quarter?

EVALUATION / QUIZ

ASSIGNMENT

MACT 1043 – Performance Management System | 10