Tarlac State University

COLLEGE OF BUSINESS AND ACCOUNTANCY

Midyear Semester A.Y. 2024-2025

TOPIC:

COST CONCEPTS AND COST

BEHAVIOR

A WRITTEN REPORT

IN PARTIAL FULLFILMENT OF THE REQUIREMENT OF

COST ACCOUNTING AND CONTROL AND STRATEGIC COST MANAGEMENT (AFAR

REPORTERS:

Ramos, Arianne Princess A.

Tamesa, Thea Princess

Tolentino, Mark Angelo M.

To be Submitted To:

MR. JEROME MENDIOLA, CPA

AFAR 1 – INSTRUCTOR

June 2025
💫AFAR 1 - COST ACCOUNTING AND CONTROL AND STRATEGIC COST MANAGEMENT
COST CONCEPTS AND COST BEHAVIOR | LECTURE HANDOUT

I. MANAGEMENT, THE CONTROLLER AND accepts the obligation to perform, and creates their
own responsibility; closely related to authority.
COST ACCOUNTING
Accountability – the obligation of individuals or teams
Management - are the person that sets objectives to be to be answerable for their actions, decisions, and
achieved by integrating its knowledge and skills with the performance, and to accept the consequences, both
abilities of the employees. positive and negative, that result from them
- the processes and techniques used to plan,
Organization Chart - shows an entity’s principal
control, and reduce costs within an
management positions, helps to define authority,
organization. It involves analyzing costs, setting
responsibility, and accountability , and is essential in
budgets, tracking expenses, and making
informed decisions to improve efficiency and developing a cost accounting system capable of
profitability. reporting the responsibilities of individuals.

Management is composed of 3 Groups: Controller - is the executive manager responsible for

the accounting function.
Operating Management - composed of Supervisors
● coordinates management’s participation in
Middle Management - represented by department planning and controlling the attainment of
heads, division managers, and branch managers. objectives, in determining the effectiveness of
policies, and in creating organizational
Executive Management - consisting of the president, structures and processes.
executive vice-presidents, and executives in charge of
marketing, finance, accounting, etc. The Cost Department - under the direction of the
controller,
Several Key Activities of Management ● is responsible for gathering, compiling, and
communicating information regarding a
● Making decisions, planning company’s activities.
● Giving orders and establishing policies
● Providing work and rewards Financial Accounting - an accounting system that
● Hiring people to carry out policies focuses on the recording, summarizing, and reporting
of a company’s financial transactions over a specific
6 Basic Functions of a Management period—typically quarterly or annually.

● Planning ● its main goal is to provide accurate and

● Organizing standardized financial information to external
● Control users, such as: investors, creditors, regulatory
agencies, tax authorities
● Authority
● Responsibility
Managerial Accounting - an accounting system that
● Accountability focuses on providing financial and non-financial
information to a company’s internal management for
Planning - is the process of sensing external decision-making, planning, and performance
opportunities and threats, determining desirable evaluation.
objectives, and employing resources to accomplish
these objectives. Cost Accounting - an accounting system that focuses
on recording, analyzing, and controlling costs related
3 Kinds of Plans to the production of goods or services. Its primary goal
is to help internal management make better decisions
Strategic Plans - formulated to the highest levels of to improve efficiency and profitability.
management

Short-range plans - often called budgets II. COST CONCEPT AND CLASSIFICATION OF
COSTS
Long-range plans - intermediate step between short-
range and strategic plans Cost- Measurement in monetary terms of the amount of
resources used for the purpose of production of goods
Organizing - is the establishment of the framework or rendering services.
within which activities are to be performed.
Classification of cost
Control - is management’s systematic effort to achieve
objectives. ● As to product
Manufacturing cost or Product cost- All costs
associated with production of goods.
Authority - is the power to direct others to perform or
not perform activities. 3 components of Manufacturing cost
Responsibility - originates principally in the superior- Materials- All raw materials used in the Manufacturing
subordinate relationship, in which the subordinate Process. ( Direct Materials and Indirect MAterials )

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💫AFAR 1 - COST ACCOUNTING AND CONTROL AND STRATEGIC COST MANAGEMENT
COST CONCEPTS AND COST BEHAVIOR | LECTURE HANDOUT

Labor- Salaries and other benefits provided to all as they occur simuitaneously with the manufacturing
workers ( Direct labor and Indirect Labor ) operation but the total of these costs is known only after
Factory Overhead- All indirect cost necessary for the operation has been completed. An actual cost
product conversion that are not direct materials and system collects the actual amounts of direct material,
direct labor direct labor and factory overhead that are incurred for
each product.
Direct Materals + Direct labor= Prime cost
Direct labor + Factory overhead= Conversion cost Standard cost system- Under this system, costs are
determined in advance from analysis and forecasts
Prime cost + Overhead= Manufacturing cost made before the actual production begins. In a
Direct material+ Concersion= Total Manufacturing cost standard cost system, standard unit costs are
computed for the direct materials, direct labor and
● As to behavior factory overhead; these amounts, rather than the
Variable Cost- These are the items of cost which vary actual costs, are carried to Finished Goods inventory.
directly, in total, in relation to volume of production. If
activity increases by 20 percent, total variable cost Normal cost system- This system is a combination of the
increases by 20, total variable cost increases by 20 also. actual cost system and the standard cost system. This
Cost per unit remains constant as volume changes system accumulates only the actual amounts of direct
within a relevant range. material and direct labor costs. Factory overhead costs
are accumulated on the basis of a predetermined rate.
Fixed Cost- item of cost which remain constant in total,
irrespective of the volume of production. Fixed cost are ● Other terminologies
not related to activity within the relevant range. If activity Opportunity cost- Benefits foregone in
increases or decreases by 20 percent, total fixed cost choosing one action over another.
remains the same.
Sunk cost- cost incurred that will not affect a
Mixed Cost- Items of cost with fixed and variable future decision.
components. Mixed costs vary with the level of
production, though not in direct relation to it. Two types Committed cost- Cost resulting from
of mixed costs exist, semi-variable costs and step costs. organizational structure or use of facilities

Two types of Mixed costs Discretionary cost- Cost arising from

Semi-variable costs- have both fixed and variable managerial decision
components. The fixed portion represents a minimum
fee to make an item or service available, while the
variable portion changes with the level of activity or Controllable cost -Cost that are able to
production influenced on how much shall be spent

Step costs- Costs that are constant on a certain level of Non-controllable cost- Cost that cannot be
activity but increases on another certain level of activity. controlled or influenced

● As to Manufacturing department or other

segments III. SEPARATING FIXED AND VARIABLE COSTS
Producing department- The department directly Phases in Analyzing Mixed Cost
involved in the production of the product, performing
manual or machine operations necessary to create it ● Cost Behavior - identifying whether a particular
cost is fixed, variable, or mixed.
Service Department- A department that does not
● Cost Estimation - determining the variable (per
directly work on the product but supports the producing
unit) and fixed (total) components.
departments to help them complete their tasks.
● Cost Prediction - forecasting the cost to be
Direct Department Charge- Costs that can be easily incurred in connection with the expected
traced to a specific department that used or benefited activity level.
from them.
Cost Equation
Indirect department- Costs that cannot be directly
traced to a single department because they are shared y = a + bx
among multiple departments.
where:
y = total cost
● As to accounting period
a = total fixed cost
b = variable cost per unit
Capital Expenditure-Expenditure intended to benefit
x = volume of activity
more than one accounting period and is recorded as an
asset.
Limitations of the Cost Function
Revenue Expenditure- Expenditure that will benefit
current period only and is recorded as an expense ● Relevant Range Assumptions
○ refers to a specific activity level that is
● As to system of cost accumulation bounded by a minimum and maximum
Actual cost system- under this system, direct materials, amount.
direct labor and factory overhead costs are determined

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💫AFAR 1 - COST ACCOUNTING AND CONTROL AND STRATEGIC COST MANAGEMENT
COST CONCEPTS AND COST BEHAVIOR | LECTURE HANDOUT

○ within the designated boundaries, variable cost and fixed cost behaviors
certain revenue or expense levels can are valid.
be expected to occur.
● Time Period Assumption Formula:
○ the cost behavior patterns identified
are valid only over a specific period of uVC = High Level Cost - Low Level Cost/Highest Activity
time. - Lowest Activity
○ beyond the period, the cost may show
a different cost behavior pattern. FC = Total Cost - (VC per unit x Units of production)

Methods of Separating Mixed Cost Steps in solving using High-Low Method:

Qualitative Analysis: 1. Determine the highest and lowest activity and

the costs associated thereunto.
1. Account Analysis Method 2. Obtain the variable cost per unit by dividing the
● Estimated cost function by classifying change in cost over the change in activity.
cost accounts as variable, fixed or 3. Obtain the total fixed cost by removing the
mixed based on qualitative analysis. variable cost component in the total cost.
● Each account is classified as either
variable or fixed based on the analyst's NOTE: Data may include outliers. In cost accounting, an
knowledge of how the account outlier is a cost or its related level of activity that is out of
behaves. line with other observations.

Advantage of using Account Analysis Method Advantages of using High-Low Method

● Managers and accountants are familiar with ● Objective

the company operation and the way costs react ● Quick
to changes in activity level. ● Inexpensive
● Easily communicated to others
Disadvantages of using Account Analysis Method
DIsadvantages of using High-Low Method
● May be biased.
● Decisions often have major consequences for
● Potential misinterpretation of data
managers and accountants
● Only work in a linear relationship
2. Industrial Engineering Method ● Ignore inflation and step cost
● Oversimplification
● Also called the work-measurement
method. 2. Least Square Regression Method
● Estimate cost function by analyzing the
relationship between inputs and ● Statistical technique in which it is determined by
outputs in physical terms. solving two simultaneous linear equations
● Estimates are based on an evaluation which are based on the condition that the sum
of production methods, and material, of the deviations above the line equals the sum
labor, and overhead requirements. of deviations below the line.

Advantages of using Industrial Engineering Method Formula:

● Determine exactly what the estimate includes y = a + bx

and whether anything was overlooked.
● Good insight into major cost contributors. Equation (1): ∑y = Na + b∑x
● Cost for totally new activities can be estimated a = ȳ - bx̄
without prior data.
Equation (2): ∑xy = ∑Xa + b∑x^2
Disadvantages of using Industrial Engineering Method b = ∑xy - n (x̄)(ȳ)/∑x^2 - n (x)^2
● It can be expensive to implement and it is time where:
consuming.
● It is a vague approach. n = number of observation;
∑y = sum of the total costs of all data pairs
Quantitative Analysis
∑x = sum of units of all data pairs
1. High-Low Method ∑xy = sum of the products of cost and units of all data
● The fixed and variable elements of a pairs; and
cost are computed from two data ∑x = sum of squares of units of all data pairs
points, the high and the low levels of
activity within the relevant range. Steps in solving using Least Square Regression Method
● Relevant Range is a range of activity
within which assumption relative to

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💫AFAR 1 - COST ACCOUNTING AND CONTROL AND STRATEGIC COST MANAGEMENT
COST CONCEPTS AND COST BEHAVIOR | LECTURE HANDOUT

1. Prepare a table calculating x (activity), y (cost), xy and x^2.

2. Substitute the computed amounts in the following equation to get the VC/unit.
3. Substitute b to any equation to get fixed cost.

Advantages of using Least Square Regression Method

● Objective
● Accuracy

Disadvantages of using Least Square Regression Method

● Outlier may be included in computation

● More complex mathematical calculation