COST CONCEPTS, CLASSIFICATION, AND COST Pro-forma:

BEHAVIOR

High-Low Method

y= a (fixed cost)+ b(vc/unit) x (volume Sales

Less: Direct Materials
Vc/unit =
Direct Labor
Cost at highest activity - Cost at lowest activity Variable Mfg. OH
Highest Activity - Lowest Activity Variable selling & admin costs
Contribution Margin
PRODUCT COSTING Less: Fixed Costs
Fixed Mfg. OH
Absorption Costing
- known as full costing method Fixed selling & admin cost
-DM, DL, FOH variable and fixed part of cost of Net Income
products
-selling and admin expense “operating
NOTE:
expenses”
*Production = Sales, no ending inventory and
-product costs are split into two- finished goods
there will be equal amounts of net income
when sold and COGS upon selling
under absorption and variable costing.
Pro-forma *Production > Sales, absorption costing net
income is greater than variable costing net
Sales
income. In absorption costing, the fixed MOH
Less: Direct Materials
component of ending inv has been deferred to
Direct Labor
Variable Mfg, OH the charged to revenue in the next period.
Fixed Mfg, OH *Production< Sales, absorption coting net
Gross Profit income is lesser than variable costing net
Less: Selling & Administrative costs income. In absorption costing, fixed OH
Variable component of beg inv is now deducted to
Fixed current period to obtain net income.
Net Income * The main difference between absorption and
variable costing is the treatment of MOH cost
Variable Costing
-aka contribution margin approach
Reconciliation of Absorption and Variable
-DM, DL, FOH variable, and all variable costs are
Costing Income
deducted to sales to determine contribution
margin. Absorption Costing Income
-all fixed cost against CM to determine income
Add: Fixed OH in the beg inv
- inv costs would still amount to the fixed OH
itself even if in reality there’s no reality Total
-whatever the level of production and sale, we Less: Fixed OH in inv end
will still be incurring these fixed overhead costs” Variable Costing Income
-no deferral of fixed OH in relation to inv
 COST VOLUME PROFIT (CVP) ANALYSIS

CVP analysis Desired sales if net income is after income tax

-focuses on how profits are affected by the
TFC + [Desired profit after
following five factors: selling prices, sales in
= tax/(1-Tax rate)]
volume, vc/unit, total fixed costs, and product units
CM per unit
mix.
Break-even in TFC + [Desired profit after
- point where operationally, there is no profit peso = tax/(1-Tax rate)]
and no loss sales CM per unit
-all sales = total variable and total fixed cost

Contribution Margin ACTIVITY-BASED COSTING

-difference between the entity’s sales and total
Activity Based Costing
variable cost
-allocate overhead cost to multiple activity cost
Contribution Margin per unit = Selling price per pools and assigns the activity cost pools to
unit - Variable cost per unit products or services by means of cost drivers
-activities for incurrence of cost and products
Contribution Margin Ratio =
for demand of activities
Contribution Margin -fair allocation of MOH
Sales
Traditional Costing
- aka Peanut butter costing
Margin of Safety = actual or budgeted sales – -under or over allocation of MOH
and break-even sales -based on a single company wide average
predetermined overhead rate
Margin Safety Ratio =
TMC = DM+ DL + FOH
Margin of Safety
Actual or budgeted sales/ profit ratio by CM Activity based Costing

1. Overhead rates per activity based on

BEP in Total Fixed Cost cost drivers
=
units CM per unit 2. Allocate overhead rate based on activity
using the rates calculated
BEP in Total Fixed Cost 3. Compute for total manufacturing cost
=
peso sales CM ratio for each product.
4. Compute for the gross profit
Desired sales if net income is before tax Benefits of Activity Based Costing
TFC + Desired pre- *provides realistic costs
in units = tax *more precisely and offers better
CM per unit understanding
Limitations
TFC + Desired pre- *time-consuming and don’t always conform to
in peso
= tax GAAP
sales
CM ratio *costs more to accumulate and analyze
Service Department Cost

Direct Method
-simplest and ignores interdepartmental
services

Machining Assembly
Estimated Factory STANDARD COSTING AND VARIANCE
xx xx
Overhead ANALYSIS
Quality Control
Machining xx Types of Manufacturing Input Variances
Assembly xx
1. Direct Materials Variance
Maintenance
a. Materials Price Variance
Machining xx
Assembly xx = (AQ X AP) – (AQ X SP)
Total Estimated FOH xx xx b. Materials Quantity Variance
Divide by POHR bases xx xx = SP X AQ) – (SP X SQ)
Overhead Application rate xx xx 2. Direct Labor Variance
a. Labor Rate Variance
= (AH X AR) – (AH X SR)
Step- down/ Sequential Method
b. Labor Efficiency Variance
- start with the service department that
= (SR X AH) – (SR X SH)
provides the greatest number of services to
3. Factory Overhead Variance
other services.

d. 4-way

Algebraic (Reciprocal Method)

- rarely used in practice because of its complex
computation
-also known as simultaneous solution, cross
allocation, matrix
 DIFFERENTIAL COST ANALYSIS 3. Eliminate, Retain, or Add

1. Make or Buy

*Continue or Drop

Note: Whether the entity purchases or

manufactures the part, fixed costs will still be
incurred. Thus, fixed costs are irrelevant

4. Shutdown or Continue Operations

2. Accept or Reject
5. Sell As Is or Process Further RESPONSIBILITY ACCOUNTING, BALANCED
SCORECARD, PERFORMANCE MEASUREMENT

Responsibility Centers

1.Cost Center
-does not directly add to profit but still cost the
organization to operate.
6. Sales Mix at Limited Resources -managers of cost centers, human resource and
accounting department are responsible for
keeping their cost in line or below budget.

2.Revenue and Profit Center

Revenue center is center where a manager
would only be accountable for the generation of
revenues with no control over cost
Profit center is a branch /division of a
company that directly adds to the corporation’s
bottom line profitability. Treated as a separate
business, with revenues accounted for on a
stand-alone basis.

3. Investment Center
-is a business unit in a firm that can utilize
capital to contribute directly to a company’s
7. Keep or Replace an Asset
profitability.
 Transfer Price = Outlay Cost + Opportunity Cost

Balanced Scorecard

Notes:
*Maximum Price – set by buying division;
should be no greater than market price
*Minimum Price- set by selling division; no less
than to sum of selling segment
*Any amount of transfer price set between
these two amounts or limit is appropriate.

Pricing decision

Normal Pricing Computations and their normal

formula

Selling Price = Cost + Mark-up

TRANSFER PRICING AND PRICING Desired Income

Average investment x Desired ROI rate = Target
Transfer Price Profit
- is the price at which products and services are Desired Income +
transferred between two sub-units Mark-up % Excluded
-affects the (internal ) profit of both the buying
division and the selling division. Cost-based
-can be used for performance evaluation of
different responsibility centers through
measurement of internal profitability.