MAS Review PROF: JOHN BO S.

CAYETANO, CPA, MBA

24 University of Batangas 2022

Handout 01 and 02: Overview of MAS and Cost Concept

1) What is Management Accounting?

Answer:
• Involves the application of appropriate techniques and concepts to economic data so as to assist management
in establishing plans for reasonable economic objectives in the making of rational decisions with a view toward
achieving these objectives. [Cabrera, 2014]

• Refers to that area of accounting work concerned with providing advice and technical assistance to help clients
improve the use of their resources to achieve their goals. [Roque, 2019]

• Is the process of identifying, measuring, analyzing, interpreting, and communicating information in pursuit of an
organization’s goals. [Horgren, et.al, 12 th edition]

Financial Accounting VS. Management Accounting

Areas of Comparison Financial Accounting Management Accounting

Primarily for external users Primarily for internal users

1. User of report
(i.e., investors and creditors) (i.e., management)

2. Reporting guidelines PFRS / PAS None

Periodically (e.g., annually,

3. Frequency of report Whenever needed
monthly)
Mandatory (e.g., submission of
4. Necessity Optional
report is required by SEC, BIR)

5. Content of report Historical data Future–oriented (Forecasts)

Business as a whole, summarized Particular segment, extensive and

6. Coverage of repot
report detailed report
Internal information (past Internal and external (Forecasts
7. Source of data
transaction of the company) includes industry trends)

8. Emphasis of report Reliability Relevance

Cost Accounting – is a subset of both financial accounting & management accounting. Cost accounting system
is utilized for internal reporting for use in management planning and control of costs, and for external reporting to
the extent its product – costing function satisfies external reporting requirements.

2) What are the functions of Management Accounting?

Answer: As a support or function, the management accountant provide analysis and advice to management,
particularly:

1. Planning – helping the management to:

a. To develop strategies
b. Improve process
c. Prepare budget
d. Setting immediate (short term) and long term objectives
e. Determine the resources and tactics needed to achieve the plan
f. Deciding which alternative is best suited to attain the set objectives

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 2. Directing – helping the management in their day to day or routine activities such as:
a. Choosing between different alternatives in a short term decision making
b. Preparing a budget and variance analysis
c. Directing management on material or specific areas that needs more attention
d. Providing information about management performance
e. Motivating the management in the pursuit of achieving organizational goals

3. Controlling – planning and controlling are linked together by a feedback. Controlling is about ensuring that the
organization operates in the intended manner and achieves it goals. Feedback includes:
a. Comparing actual performance with set plans
b. Monitor results to determine if the plan is being achieved
c. Deciding what corrective actions to take
d. Adjust future plans

3) What are the two types of cost as to Financial Statement Presentation?

Answer:

1. Product Cost (a.k.a. Manufacturing Cost, Inventoriable Cost).

These are the cost incurred to produce a physical product of the company or the inventory. Usually product cost is
incurred inside the factory where the physical product is being made or produced. Product cost has three (3) major
components:

a. Direct Materials – Cost of materials that can conveniently traceable to the product, job, or process. Direct
material is the main material or ingredients or a major part of the product, such as:

1. Metal used in manufacturing table

2. Wood used in manufacturing furniture

b. Direct Labor – Cost of labor that can conveniently traced to the product, job, or process. Direct labor is the
cost of effort spent by an employee who is mainly or directly involve in producing the product, such as:

1. Salary of employee who paints the table

2. Salary of employee who cuts the wood in manufacturing a furniture

c. Manufacturing Overhead – These includes all other manufacturing cost aside from direct material and direct
labor, such as:

1. Cost of the nails used in manufacturing table

2. Cost of the glue used in manufacturing table Indirect materials
3. Cost of the sandpapers used in manufacturing table
4. Salary of factory supervisor
5. Salary of factory janitor or maintenance Indirect labor
6. Salary of factory security guard
7. Depreciation of factory building
8. Depreciation of factory machinery
9. Rent for the factory building
Other overhead cost
10. Insurance for the factory building
11. Property taxes of the factory building
12. Factory utilities (heat, light and power)

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 2. Period Cost (a.k.a. Non-Manufacturing Cost).

These are the cost incurred not related to the production of the physical product. These costs are divided into two
major categories:

a. Selling or distribution cost – costs necessary to increase sales or make the sales. These costs are usually
incurred outside the office and outside of the factory, such as:
1. Salary of store employees
2. Salary of employee who delivers the goods to customers
3. Salary of salesman (commission)
4. Depreciation of the delivery van
5. Depreciation of the store building
6. Rent of store building
7. Advertising and promotion expense

b. General and administrative cost – all executive, organizational and clerical costs. These costs are usually
incurred inside the office premise, such as:

1. Salary of president
2. Office supplies
3. Rent of office space
4. Audit or accounting fee
5. Legal expenses
6. Salaries of the office staff
7. Depreciation of the office equipment
8. Depreciation of the office building

4) What are the two types of costs as to behavior?

Answer:

1. Variable Cost.

These are the costs that change in total, in direct proportion to changes in activity level. There are two necessary
characteristics of a variable cost such as:

a. Total variable cost changes as production (activity) changes (increase/decrease), for example:

In the month of January, the company produced 100 units of table costing them a total of P120,000 for
the woods used.
In the month of February, the company produced 150 units of table costing them a total of P180,000 for
the woods used.

Conclusion – When the production increases from 100 units to 150 units, the total cost also increases
from P100,000 to P180,000.

b. The variable cost per unit is constant regardless of the production (activity) level, for example:

In the month of January, the company produced 100 units of table costing them a total of P120,000 for
the woods used. The cost of woods per table is:

P120,000
= P1,200 per unit
100 units
In the month of February, the company produced 150 units of table costing them a total of P180,000 for
the woods used. The cost of woods per table is:
P180,000
= P1,200 per unit
150 units

Conclusion – When the production changes from 100 units to 150 units, the variable cost per unit remains
at P1,000 per unit.

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2. Fixed Cost.

These costs that do not change in total regardless of the production (activity) level. There are two (2) necessary
characteristics of a fixed cost, namely:

a. Total fixed cost remains constant as production increases or decreases, for example:

In the month of January, the company produced 100 units of table. During the month, the company paid
a factory rent amounting to P60,000.

In the month of February, the company produced 150 units of table. During the month, the company paid
a factory rent amounting to P60,000.

Conclusion – When the production increases from 100 units to 150 units, the total cost remains the same
at P150,000 for both months.

b. Fixed cost per unit changes when production (activity) changes, for example:

In the month of January, the company produced 100 units of table. During the month, the company paid
a factory rent amounting to P60,000. The factory rent per unit of table is:
P60,000
= P600 per unit
100 units

In the month of February, the company produced 150 units of table. During the month, the company paid
a factory rent amounting to P60,000. The factory rent per unit of table is:

P60,000
= P400 per unit
150 units

Conclusion – When the production changes from 100 units to 150 units, the fixed cost per unit also
changes from P600 per unit to P400 per unit.

Graphical Illustration:

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3. Mixed Cost.

These cost has both fixed and variable components. Mixed cost possesses two characteristics such as:

a. The total cost changes as the production (activity) changes, for example:

The company purchased materials from supplier, Supplier AAA and Supplier BBB. To transport the
materials purchased from suppliers the company used taxi cab. In which the plug down rate is P40 and
P13 for every one kilometer.

In January, the company purchased from Supplier AAA which is located five (5) kilometers away from the
company. The taxi fare is [P40 + (P13 x 5)] = P105

In February, the company purchased from Supplier which is BBB located eight (8) kilometers away from
the company. The taxi fare is [P40 + (P13 x 8)] = P144

Conclusion – When the activity changes from 5 kilometers to 8 kilometers, the total cost also changes
from P105 to P144.

b. The cost per unit changes as the production (activity) changes, for example:

The company purchased materials from supplier, Supplier AAA and Supplier BBB. To transport the
materials purchased from suppliers the company used taxi cab. In which the plug down rate is P40 and
P13 for every one kilometer.

In January, the company purchased from Supplier AAA which is located five (5) kilometers away from the
company. The taxi fare is [P40 + (P13 x 5)] = P105. The transportation cost per kilometer is:
P105
= P21 per kilometer
5 KM

In February, the company purchased from Supplier which is BBB located eight (8) kilometers away from
the company. The taxi fare is [P40 + (P13 x 8)] = P144. The transportation cost per kilometer is:
P144
= P18 per kilometer
8 KM

Conclusion – When the activity changes from 5 kilometers to 8 kilometers, the cost per unit also changes
from P21 per kilometer to P18 per kilometer.

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 Other relevant terminologies.

a. Relevant cost – has the potential to influence a decision. It must differ between the decision alternative.
Costs that differ between the alternatives are also called differential cost.

b. Irrelevant cost – costs that will not influence a decision because this cost will remain the same between
alternative.
c. Out of pocket cost – involve an actual outlay of cash.

d. Opportunity cost – the foregone benefit or lost opportunity of the path not taken. Anytime you choose not
to do one thing instead of another because of a limit on your time or money, you incur an opportunity cost.

e. Discretionary fixed cost – an expenditure for a period-specific cost or a cost which can be eliminated or
reduced without having an immediate impact on the reported profitability of a business.
f. Committed fixed cost – an investment that a business entity has already made and connect recover by any
means, as well as obligations already made that the business cannot get out of. It varies from a discretionary
fixed cost, in that a committed fixed cost obligates a business to continue making payments over a certain
period of time (e.g., lease payments on office space).

5) How can the cost be estimated?

The main point in cost estimation is the segregation of mixed costs into fixed and variable in order to determine
the cost behavior for each product in relation to total cost. To estimate the cost, a cost formula should be used:

COST FORMULA: y = a + bx

y = denotes total cost. It is called the dependent variable because it is dependent on the value of another
variable, the activity level x.

x = is the activity level (e.g., products produced, number of labor hours).

a = is an estimate of the fixed cost.

b = is an estimate of the variable cost per unit of activity.

There are different methods in estimating the fixed and variable component of a cost, namely:

a) High-low 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.

First – Compute the (b) variable cost per unit by:

Highest cost (in peso) – Lowest cost (in peso)
= Variable cost per unit (b)
Highest activity – Lowest activity

Second – Compute the total fixed cost by:

Number of activity at the highest level X

Times: Variable cost per unit (Step 1) X
Total variable cost X

Total cost at highest activity X

Less: Total variable cost at highest activity X
Total fixed cost of the highest activity (a) X

Third – Estimate the cost using the cost formula:

y = a + bx

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b) Least Squares Method (a.k.a. Regression Method)

This is a statistical technique that investigates the association between dependent and independent variables.
This method determines the line of best fit for a set of observation by minimizing the sum of the squares of the
vertical deviations between actual points and the regression line.

First – Compute the (b) variable cost per unit by:

n(xy) – (x)( y)

= Variable cost per unit (b)
n(x2) – (x)2

Legends:
n = the number of pairs
y = the sum of total costs of all data pairs
x = the sum of activities of all data pairs
xy = the sum of the products and activities of all data pairs
x 2 =
the sum of squares of activities of all data pairs

Second – Compute the total fixed cost by:

y – b(x)
= Total fixed cost (a)
n

Third – Compute the total estimated cost using the cost formula and the estimated variable and fixed cost:

y = a + bx

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DISCUSSION QUESTIONS: STATEMENT OF COST OF GOODS SOLD
1) Compute the amount of direct materials used during August if P25,000 of raw materials were purchased during the
month and the inventories were as follows:

Inventories Balance August 1 Balance August 31

Raw materials P 5,000 P 3,000
Work in process 13,000 16,000
Finished goods 25,000 27,000

A. 16,000
B. 19,000 25,000+5,000=30,000 - 3,000 = 27000
C. 23,000
D. 27,000

2) The following information were taken from the accounting records of YANNI MUSIC Co. for 2021:
Increase in raw materials inventory P 45,000
Decrease in finished goods inventory 150,000
Raw materials purchases 1,290,000
Direct labor payroll 600,000
Factory overhead 900,000
Freight out 135,000

The cost of raw materials used during the period amounted to

A. 1,245,000
B. 1,290,000 1,290,000+45,000=1,335,000
C. 1,335,000
D. 1,380,000

3) Assume the following information:

Direct materials used P 180,000
Direct labor 260,000
Factory overhead 300,000
Beginning work-in-process inventory 30,000
Beginning finished goods inventory 40,000
Ending work-in-process inventory 84,000
Selling and administrative expenses 75,000
What was the cost of goods manufactured during the year?
A. 794,000 180k+260k+300k=740k+30k=770k-84k=686,000
B. 706,000
C. 686,000
D. 690,000

4) Assume the following data for Rourick Company for December:

Beginning finished goods inventory P30,000
Beginning work-in-process inventory 20,000
Ending work-in-process inventory 40,000
Ending finished goods inventory 25,000
Actual factory overhead costs 100,000
Direct materials used 80,000
Direct labor 50,000
What is the cost of goods manufactured for December?
A. 235,000
B. 210,000 100k+80k+50k=230k+20k=250k-40k=210,000
C. 250,000
D. 215,000

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5) Information from the records of the Heitz Company for July 2021 is as follows:

Sales P205,000
Direct labor 50,000
Selling and administrative expenses 35,000
Direct materials purchases 30,000
Factory overhead 67,500

Inventories
July 1 July 31
Direct materials P6,000 P7,000
Work-in-process 12,500 14,000
Finished goods 11,500 9,500

Heitz Company’s cost of goods manufactured in July is

A. 146,500
B. 148,500 6k+30k-7k=29,000+50k+67,5000= 146,500+12,500=159,000-14k= 145,000
C. 145,000
D. 147,500

6) Flamer Company, a manufacturer, had inventories at the beginning and end of its current year as follows:

Beginning Ending
Raw materials 11,000 15,000
Work in process 20,000 24,000
Finished goods 12,500 9,000
During the year, the following costs and expenses were incurred:

Raw materials purchased 150,000

Direct labor cost 60,000
Indirect factory labor 30,000
Taxes and depreciation on factory building 10,000
Taxes and depreciation on sales room and office 7,500
Sales salaries 20,000
Office salaries 12,000
Utilities (60% applicable to factory, 20% to sales room, and 20% to office) 25,000
Flamer’s cost of goods sold for the year is
A. 257,000
B. 260,500
C. 261,000
D. 269,500

7) Compel Company’s records for the year ended December 31, 2021 included the following information:

Raw materials purchases 860,000

Work in progress inventory decrease 10,000
Finished goods inventory increase 70,000
Raw materials inventory decrease 30,000
Manufacturing overhead 600,000
Freight-out 90,000
Direct labor 400,000
Compel Company’s cost of sales for the year 2021 is
A. 1,910,000
B. 1,830,000
C. 1,770,000
D. 1,750,000

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Use the following information for the next two (3) questions:
Following cost data for September, 2021 are from the books of Iloilo Manufacturing Co.

Aug. 31, 2021 Sept. 30, 2021

Opening and closing inventories
Raw materials P20,000 P25,000
Work in process 30,000 36,000
Finished goods 40,000 45,000
Direct labor cost, P60,000
Factory overhead, 60% of direct labor cost.
Cost of goods sold, P125,000
Selling and administrative expenses, P37,000
Sales for September, 2021, P185,000
8) The cost of materials purchased during the month was
A. 65,000
B. 45,000
C. 25,000
D. 55,000

9) The cost of goods manufactured during the month was

A. 136,000
B. 130,000
C. 125,000
D. 55,000

10) The net income of the company for the month was
A. 185,000
B. 60,000
C. 23,000
D. 43,000

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DISCUSSION QUESTIONS: OVERHEAD APPLICATION
1) Carlo Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead
to jobs. The company estimated manufacturing overhead at P255,000 for the year and direct labor-hours at 100,000
hours. Actual manufacturing overhead costs incurred during the year totaled P270,000.
Actual direct labor hours were 105,000. What was the overapplied or underapplied overhead for the year?
A. 2,250 overapplied B. 2,250 underapplied C. 15,000 overapplied D. 15,000 underapplied

2) Freeman Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing
overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be P150,000
and direct labor hours would be 10,000.
The actual figures for the year were P186,000 for manufacturing overhead and 12,000 direct labor hours. The cost
records for the year will show:
A. 30,000 over B. 30,000 under C. 6,000 under D. 6,000 over

3) Sawyer Manufacturing Company uses a predetermined overhead rate based on direct labor hours to apply
manufacturing overhead to jobs. Last year, the company worked 57,000 actual direct labor hours and incurred
P345,000 of actual manufacturing overhead cost. The Company had estimated that it would work 55,000 direct labor
hours during the year and incur P330,000 of manufacturing overhead cost.
The company's manufacturing overhead cost for the year was:
A. 15,000 over B. 15,000 under C. 3,000 over D. 3,000 under

4) Precision Company used a predetermined overhead rate last year of P3 per direct labor hour, based on an estimate
of 24,000 direct labor hours to be worked during the year. Actual costs and activity during the year were:
Actual manufacturing overhead cost incurred P84,000
Actual direct labor hours worked 27,000

The over or under applied overhead is:

A. 3,000 underapplied B. 3,000 overapplied C. 12,000 underapplied D. 12,000 overapplied

Use the following information for the next two (2) questions:
Rolling company revealed the following data for 2022:
Work in process P 73,150
Finished goods 115,000
Cost of goods sold 133,650
Direct labor 111,600
Direct material 84,200
5) Assume actual overhead is P98,700 and applied overhead is P93,250. Manufacturing overhead is
A. Over 12,900 B. Under 18,350 C. Over 5,450 D. Under 5,450

6) Assume that Rolling has underapplied overhead of P37,200 for 2022 and that this amount is material. What journal
entry is needed to close the overhead account?
A. Dr. Work in process 8,456
Dr. Finished goods 13,294
Dr. Cost of goods sold 15,450
Cr. Overhead 37,200

B. Cr. Overhead 37,200

Dr. Work in process 8,456
Dr. Finished goods 13,294
Dr. Cost of goods sold 15,450

C. Dr. Work in process 37,200

Cr. Overhead 37,200
D. Dr. Cost of goods sold 37,200
Cr. Overhead 37,200

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