BSA 3102 MANAGEMENT ACCOUNTING Prof Maria Teresa B.

De Jesus
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Definition of Costs
Costs are sacrifices of resources for the purpose of achieving some economic benefits which will
promote the profit making ability of the firm. Cost also refer to the outlay or expenditure of money to
acquire the goods and services that assist in performing business operations.

Exercise 1 : Classification of costs

A. According to management function
1. ______________costs are those incurred in the production of goods like direct materials, direct labor , and
manufacturing overhead.
2. ______________costs are those associated with marketing and selling the product from the time the
production process is completed until the product is delivered to the customer.
3. ______________costs are those costs associated with the management of the company.

B. According to Time period

4. ______________costs are those incurred in the past.
5. ______________costs are budgeted costs that are expected to be incurred in a future period.

C. According to traceability to products

6. ______________costs are those that can be directly identified or traceable to a product or department
7. ______________costs are those that cannot be directly identified or traceable to a product or department

D. According to Generally accepted accounting treatment

8. _______________costs are inventoriable costs.
9. _______________costs are those which are expensed in the period in which they are incurred.

E. According to managerial influence

10. _____________costs are those which are subject to significant influence by a particular manager .
11. _____________costs are those in which a particular manager has no significant influence.

F. According to commitment to Cost expenditure

12. _____________ costs are those that resulted from a previous commitment.
13. ______________costs are those in which the size or the time of incurrence is a matter of choice.

G. According to significance in decision making

14. _____________costs are those that varies or differ between two or more alternatives.
15. ______________costs are those that would not change regardless of the alternative to be chosen.

H. According to behavior or relation to volume

16. ______________costs are those that changes in direct proportion with the changes in volume but remains
constant per unit.
17. ______________costs are those that do not change regardless of the changes in volume but cost per unit
vary inversely with volume. These include capacity and discretionary costs.
19. _____________ costs are those that vary in total amount but not in direct proportion with volume.
20. _____________ is a cost model whereby the amount of time spent decreases every time the unit doubles
by a constant percentage.

I. Other cost Classifications

21. ____________cost is the sum of direct materials and direct labor.
22. ____________cost is the sum of direct labor and manufacturing overhead
23. ____________costs are those costs of obtaining information.
24. ____________costs are those incremental costs associated with an additional unit of item sold.
25. ____________costs are those which are foregone or rejected in favor of another alternative.
26. ____________costs are those costs which were incurred in the past and is irrelevant in decision making
27 ____________ costs that require cash outlay or disbursements.
MAS : Cost Concepts / Cost Volume Profit Analysis Prof. Ma. Teresa B. De Jesus

Exercise 2

A. Classify each cost as (V) variable, (F) fixed, or (SV) semivariable.

Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The
company's controller compiled the following information by analyzing the accounting records:
______1. Meat costs the company P 5.25 per pound of sausage produced.
______2. Compensation of production employees is P 4.25 per pound of sausage produced.
______3. Supervisory salaries total P 25,000 per month.
______4. The company incurs utility costs of P10,000 per month plus P0.50 per pound of sausage produced.
______5. Insurance and property taxes average P 9,500 per month.
Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX,
where X denotes the quantity of sausage produced.)

B. The following is a list of various costs of producing sweatshirts. Classify each cost as either a (V) variable (F)
fixed, or (M) mixed cost for units produced and sold.

_________ 1. Lubricants used to oil machinery.

_________ 2. Warehouse rent of P6,000 per month plus P0.50 per square foot of storage used.
_________ 3. Thread.
_________ 4. Electricity costs of P0.025 per kilowatt-hour.
_________ 5. Janitorial costs of P2,000 per month
_________ 6. Advertising costs of P10,000 per month.
_________ 7. Color dyes for producing different colors of sweatshirts.
_________ 8. Salary of the production supervisor.
_________ 9. Straight-line depreciation on sewing machines.
_________10. Patterns for different designs. Patterns typically last many years before being replaced.
_________11. Hourly wages of sewing machine operators.
_________12. Cotton and polyester cloth.
_________13. Maintenance costs with sewing machine company. The cost is P2,000 per year plus P0.001
for each machine hour of use.
Exercise 3 : Cost Behavior Patterns

Consider the graphs that follow (Horizontal axis represents activity; Vertical axis represents total pesos).

A B C

D E F

G H I

For items 1- 8 that follow, choose the graph that best represents the cost behavior pattern
described. Note: Graphs can be used more than once.

____1. Straight-line depreciation on machinery.

____2. The cost of chartering a private airplane. The cost is P 800 per hour for the first 6 hours of a
flight; it then drops to P 600 per hour.
____3. The wages of table service personnel in a restaurant. The employees are part- time workers
who can be called upon for as little as 4 hours at a time.
____4. Weekly wages of store clerks who work 40 hours each week. One clerk is hired for every
125 sales made during the month.
____5. The cost of tires used in the production of trucks.
____6. Outbound shipping charges that increase at a decreasing rate as sales rise because the firm
can use more efficient modes of transportation (e.g., full trailer loads, full rail cars, etc.).
Gradually, however, at high levels of sales, freight costs start to increase at an increasing
rate, which reflects more transactions made to customers in far-away locations.
____7. Equipment leasing costs that are computed at P2 per machine hour worked. The company
pays a maximum of P 120,000 per month.
____ 8. The monthly cost of a franchise fee for a fast-food restaurant. The franchisee must pay
P20,000 plus 5% of gross dollar sales.
____9. The cost of electricity during peak demand periods, which is based on the following schedule:
Up to 20,000 kilowatt hours (KWH): P4,000
Above 20,000 kilowatt hours: P4,000 + P0.02 per KWH
Exercise 4:

PETER Company reported the following:

Month 1 Month 2
Units sold...... 6,000 8,000
Cost A........... P35,000 36,000
Cost B............ 16,000 16,000
Cost C............ 1,500 2,000
Cost D........... 12,000 16,000
Cost E............ 6,000 8,000
Cost F............ 2,000 2,000
Cost G........... 4,200 8,400
Cost H........... 37,300 44,600
Cost I............. 13,000 13,500
Cost J............. 10,000 12,200

Required:

Indicate whether each of the costs above is probably a variable, mixed or fixed cost.

Cost A _______________
Cost B _______________
Cost C _______________
Cost D _______________
Cost E _______________
Cost F _______________
Cost G _______________
Cost H _______________
Cost I _______________
Cost J _______________
Exercise 5

The accounting department of Archer Company, a merchandising company, has prepared the following
analysis:

Cost Formula
Cost of goods sold.......................... P56 per unit
Sales commissions......................... 12% of sales
Advertising expense....................... P300,000 per month
Administrative salaries................... P160,000 per month
Billing expense............................... ?
Depreciation expense..................... P62,000 per month

The accounting department feels that billing expense is a mixed cost, containing both fixed and
variable cost elements. The billing expenses and sales in units over the last several months
follow:

Units Sold Billing

(000) Expense
January................... 9 P30,000
February................. 11 33,000
March..................... 14 36,000
April....................... 17 42,000
May........................ 15 39,000
June........................ 12 35,000

The accounting department now plans to develop a cost formula for billing expense so that a
contribution format income statement can be prepared for management's use.

Required:

a. Using the least-squares method, estimate the cost formula for billing expense.
b. Assume that the company plans to sell 30,000 units during July at a selling price of $100
per unit. Prepare a budgeted income statement for the month, using the contribution format.
Exercise 6 : Segregation of Semi variable Costs

The management of Noy Sports Stadium believes that the number of sporting events
each month is a measure of activity for total clean up cost. Shown below are event
figures and total clean up costs for
Number of Sporting Events Total Clean-up Cost

July 28 P 30,900
August 34 34,200
September 16 20,700
October 22 28,200

Required:

a.Estimate Noy's cost formula for monthly clean up cost using the high-low method.
b.Estimate Noy's cost formula for monthly clean up cost using the least-squares regression
method.

SOLUTION

a. High Low Point

MONTH NO. OF TOtAL

SPORTING CLEAN-UP
EVENTS COSTS

July 28 30,900
August 34 34,200
September 16 20,700
October 22 28,200