Cost terms, concepts and behavior PDF

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COST TERMS, CONCEPTS, AND BEHAVIORCost Accounting and Cost Control /RCROQUECOST TERMSCOST – is commonly defined as a measurement, in monetary terms, of the amount of resources used for some purpose. When notified by a long term that defines the purpose, it becomes operational, e., selling cost, acqu...

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COST TERMS, CONCEPTS, AND BEHAVIOR Cost Accounting and Cost Control /RCROQUE COST TERMS COST – is commonly defined as a measurement, in monetary terms, of the amount of resources used for some purpose. When notified by a long term that defines the purpose, it becomes operational, e.g., selling cost, acquisition cost, variable cost, etc. COST OBJECT – is often a product or department for which costs are accumulated or measured. For example, a product is the cost object for direct materials, direct labor, and manufacturing overhead. The factory maintenance department is a cost object for the cost of the maintenance employees and the maintenance supplies. COST POOL – is a grouping of individual costs, typically by department or service center. Cost allocations are then made from a cost pool. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those departments using its services. Cost pools are commonly used for the allocation of production overhead to units of production, as required by several accounting frameworks. They are also used in activity-based costing to allocate costs to activities, e.g., overhead account. COST DRIVER – is the unit of an activity that causes the change in activity's cost. Cost driver is any factor which causes a change in the cost of an activity. ACTIVITY – refers to any event, action, transaction or work sequence that incurs costs when producing a product or providing a service.

COST CONCEPTS AND BEHAVIOR COST BEHAVIOR CHARACTERISTICS Compare and contrast the following types of costs: (1) variable and step-variable and (2) fixed and step-fixed. (1) A variable cost changes in direct proportion to a change in an activity level or cost driver, with a typical example being direct material. A step-variable cost is nearly variable, but it increases in small steps rather than continuously (e.g., additional direct labor). (2) A fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a step-fixed cost remains fixed over a sizable range of activity, but jumps to a different amount for activities outside that range (e.g., the salaries of new employees who are needed because of volume changes). THE RELEVANT RANGE The relevant range is the range of activity within which management expects a company to operate. This can be based on past experience and/or sales projections.

This concept is important because management need not concern itself with extremely high or low levels of activity that are unlikely to occur. Also, observed cost relationships are typically valid within the relevant range and can therefore be used for purposes of estimation at other levels within that range. COMMITTED COSTS AND DISCRETIONARY COSTS A committed cost is a fixed amount that stems from an organization's ownership or use of facilities, and its basic organizational structure. Property taxes, rent, and salaries of top management are examples of committed costs. A discretionary cost, also a fixed amount, occurs as a result of a management decision to spend a particular amount of money for some purpose. Examples are advertising, training, promotion, and contributions to charitable organizations. The distinction between committed and discretionary costs is that committed costs can be changed only by major decisions with long-term implications. Discretionary costs can be changed in the short run and, thus, are cost-cutting targets should an organization encounter financial difficulties. METHODS OF SPLITTING MIXED COSTS 1. High-Low Points Method – In this method, the fixed and variable elements of the mixed costs are computed from two data points (periods) – the high and low periods as to activity level or cost driver.

2. Statistical Scattergraph Method – Various costs (the dependent variable) are plotted on a vertical line (y-axis) and measurement figures (cost drivers or activity levels) are plotted on a horizontal line (x-axis). A straight line is drawn through the points and, using this line, the rate of variability and the fixed cost are computed. 3. Method of Least Squares (Regression Analysis) – This method mathematically determines a line of best fit or a linear regression line through a set of plotted points so that the sum of the squared deviations of each actual plotted point from the point directly above or below it on the regression line is at minimum. This method uses the following equations in computing for the values of unit variable cost and fixed cost: Equation 1:∑Y=na+b∑x Equation 2: ∑xy=a∑x+b∑x^2 Deficiencies of the Visual-Fit and High-Low Methods The visual-fit method suffers from a lack of objectivity. Given that the cost line is created by visual approximation or "eyeballing," different cost analysts will likely produce different lines. The high-low method, on the other hand, is objective. However, it uses only two data points and ignores the rest, thus, generalizing about cost behavior by relying on only a very small percentage of possible data observations. Least-Squares Regression and Multiple Regression In the least-squares regression (LSR) method, the cost line is positioned to minimize the sum of the squared deviations between the cost line and the data points. The cost line fit to the data using LSR is called a regression line. The statistical equation for this line is represented by the formula: Y = a + bX, with X denoting activity level (independent variable) and Y denoting the total cost (dependent variable). The multiple-regression line has all the same properties of the simple LSR line, but more than one independent variable is taken into consideration. The use of more independent variables can better explain accompanying changes in cost. Problems Problem 1. High Low Method (HLM) The following information is available about supplies cost for the first 6 months: Month January February March April May June

Production (Units) 14,000 11,400 10,400 8,800 9,400 5,400

1. What is the variable cost per unit? 2. Total fixed cost? 3. Determine total cost if the company produced 6,500 units.

Supplies Cost ₱ 104,430 88,718 81,098 68,906 73,478 41,478 ___________________ ___________________ ___________________

If relevant range is from 6,000 units to 13,000 units, 4. What is the total fixed cost? 5. Determine total cost if the company produced 12,000 units.

___________________ ___________________

Problem 2. High Low Method (HLM) An organization has the following total costs at two activity levels P150,000 @ 20,000 units;

P200,000 @ 36,000 units

Variable costs per unit is constant in this range of activity and there is an increase of P30,000 in the total fixed costs when activity exceeds 30,000 units. 1. What is the total cost at an activity level of 25,000 units? ___________________ 2. What is the total cost at an activity level of 34,000 units? ___________________...