COST STRUCTURE

INTENDED LEARNING
OUTCOMES (ILOS)
At the end of the week, students are
expected to be able to:

1. Identify the types of cost structure

according to function and according to
bahavior;
2. Differentiate between Product cost and
Period cost;
3. Differentiate between of Fixed costs and
Variable costs;
4. Calculate a Cost structure.
COST STRUCTURE

A new business will have two types

of cost:
1. Start-up cost
2. Running cost

In running a business, there are

two types of costs:
3. According to Function
4. According to Behavior
START-UP COST

Startup costs are the expenses

incurred during the process of
creating a new business.

Pre-opening startup costs include

 a business plan,
 research expenses,
 borrowing costs (bank loans),
 and expenses for technology.
 Imagine your sample product is a
Wooden House.
ACCORDING TO Let us first determine the Cost
FUNCTION structure according to function

1. Product cost – the cost incurred

to produce a certain product.
• Direct materials,
• Direct labor,
• Overhead.

2. Period cost – the selling and

administrative cost of an entity for
a certain period.
 Imagine your sample product is a
Wooden House.
DIRECT MATERIALS Let us first determine the Cost
structure according to function

These are materials that can be

traced directly or conveniently to
the product.
However, this should be an integral
part of the product and is
significant in value.

Example: Lumber to build a

wooden house
 Imagine your sample product is a
Wooden House.
DIRECT LABOR Let us first determine the Cost
structure according to function

The salaries and wages of

employees who work directly for
the product.

Example: The wages of the

carpenter to construct a wooden
house.
 Imagine your sample product is a
Wooden House.
OVERHEAD Let us first determine the Cost
structure according to function

It includes
• indirect materials,
• indirect labor,
• and other production costs
needed to produce the product.

Example: The rent of the

warehouse and other production
facility to construct a wooden
house.
 Imagine your sample product is a
Wooden House.
PERIOD COST Let us first determine the Cost
structure according to function

Again, these are the selling and

administrative cost of an entity for
a certain period.

Example: The rent of the head

office of a construction company
who construct a wooden house.
QUESTION 1

We understand the components of

the product cost and period cost.
Now, let us review.
Question 1: The cost of the nails to
construct a wooden house, is it a
Direct material or Overhead, and
why?
Clue: Focus on the relationship of
the nails to the wooden house and
its value.
QUESTION 2 AND 3

Question 2: The salary cost of the

security guards at the head office
of a construction company, is it a
product or a period cost?
Question 3: The salary cost of the
security guards at the construction
site, is it a product or a period
cost?

Clue: Focus on the area or the

related function of a cost.
 Let us determine the Cost structure
according to behavior and relate it
ACCORDING TO according to function.
BEHAVIOR

1. Variable cost – the total

variable cost varies directly
proportional to the
activity/operation level of an
entity.
2. Fixed cost - total fixed cost is
constant regardless of the
activity/operation level of an
entity
 Imagine your sample product is a
Wooden House.
DIRECT MATERIALS Let us first determine the Cost
structure according to function

The lumber used to construct a

building, is it a fixed or a variable
cost?

Clue: Will the cost to purchase

lumber increase if the company
constructs a more wooden house?
 Imagine your sample product is a
Wooden House.
DIRECT LABOR Let us first determine the Cost
structure according to function

The total wages of the carpenters,

is it a fixed or a variable cost?

Clue: Will the total wages of

carpenters increase if the company
constructs more wooden house?
 Imagine your sample product is a
Wooden House.
OVERHEAD Let us first determine the Cost
structure according to function

The rent expense of the

construction site, is it a fixed or a
variable cost?

Clue: Will the rent expense of the

construction site increase if the
company constructs a more
wooden house?
NAILS

The nails used to construct a

building, is it a fixed or a variable
cost?

Clue: Will the cost to purchase

nails increase if the company
constructs a more wooden house?
MIXED COST

Also known as semi variable cost.

There are costs that are partly fixed
and partly variable. But the
company should separate the fixed
portion and the variable portion
for sound decision-making.

Example: Taxi fare – the P40 fixed

portion is the fixed cost and the
excess is the variable portion
depending on the miles run by the
taxi.
SUNK COST

A cost that has already been

incurred and cannot be recovered.

Examples of these are:

 Research and development
cost
 Acquisition of machinery but
due to sudden change in
technology become obsolete
PROBLEM-SOLVING

V Company, a small tailoring shop incurred the following

cost for the month (in Pesos):
Cost of cloths used in the production 50,000
Wages of the tailors 70,000
Salaries of the Admin and selling officers 30,000
Utilities expense of the production area 5,000
Rent expense of the production area 10,000
Depreciation of the machineries in the
production area 3,000
PROBLEM-SOLVING
(CONTINUATION)

Utilities expense of the administrative

and selling area 1,000
Rent expense of the of the administrative
and selling area 2,500
Depreciation expense of the machineries
in the administrative and selling area 500
PROBLEM-SOLVING
(CONTINUATION)
Requirements:
Calculate the Cost structure of V Company by solving the
following:
1. How much is the total product cost?
2. How much is the total period cost?
3. How much is the total fixed cost?
4. How much is the total variable cost?
5. How much is the total cost?
PROBLEM-SOLVING
(ANSWER KEY)

1. How much is the total product cost? P138,000

2. How much is the total period cost? P34,000
3. How much is the total fixed cost? P46,000
4. How much is the total variable cost? P126,000
5. How much is the total cost? P172,000
BY: RAFAEL R. VELOSO III AND FLORENCE DAGLE