5.

PRODUCT COSTING
1. The cost benefit approach is essential in designing and choosing costing systems.

2. Costing systems should be tailored to the underlying operations; the operations should not be
tailored to fit the costing systems.

3. Costing systems accumulate costs to facilitate decisions.

4. Costing systems are only one source of information for managers.

(1) The cost accumulation method – job order costing or process costing
(2) The cost measurement method – actual, normal or standard costing
(3) The overhead assignment method – volume-based or activity-based
Ajop mans aowa

ELEMENTS OF PRODUCT COST IN JOB ORDER COSTING

1. DIRECT MATERIALS
2. DIRECT LABOR
3. FACTORY OVERHEAD
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
1. JOB ORDER COST SHEET
a. These records accumulate product costs of specific units or small batches of units for both product
costing and control purposes.
b. The file of job-order cost sheets for uncompleted jobs serves as a perpetual book inventory and the
subsidiary ledger for work in process control
2. MATERIALS STOCK CARD
a. These records are the perpetual book inventory of costs and quantities of materials on hand
b. The file of materials stock cards for unused materials is the subsidiary ledger for Materials Control.
3. FINISHED GOODS STOCK CARD
a. These records are the perpetual book inventory of costs and quantities of completed goods held
for sale
b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of Finished goods
control
4. FACTORY OVERHEAD CONTROL COST RECORD
a. These records accumulate detailed manufacturing overhead costs by department
b. The file of these records for the accounting period is the subsidiary ledger for Factory Overhead
control
5. MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD
a. As the source documents for charging costs to jobs and department.
b. To aid in fixing responsibility for control and usage of materials and labor

Jocs, masc, figsc, foccr,mr.ttc

 4. COST VOLUME PROFIT ANALYSIS
COST BEHAVIOR
Cost behavior patterns
Fixed costs Y= a
Variable cost Y= bx
Mixed costs Y= a+ bx
Semi-variable costs
Semi-fixed costs
COST BEHAVIOR ASSUMPTIONS
RELEVANT RANGE ASSUMPTION
Refers to the band of activity within which the identified cost behavior patterns are valid
TIME ASSUMPTION
Cost behavior patterns identified are true only over a specific period of time
VARIABLE COSTING INCOME STATEMENT
Sales
Variable Cost
Contribution Margin
Fixed Cost
Profit
BREAK-EVEN ANALYSIS
Break even sales – that point of activity level where total revenues equal total cost, therefore there is no profit
or loss

BES units = Fixed cost

Contribution margin per unit
BES pesos = Fixed cost
Contribution margin ratio
Variable cost ratio = Variable cost
Sales
Contribution margin ratio = Contribution margin with sales as base to find %
Sales
Contribution margin = Sales – Variable cost
TARGET ANALYSIS – is concerned with estimating the level of sales required to attain a specified target profit
Sales in units = Fixed cost + Profit
Contribution margin per unit
Sales in pesos = Fixed cost + Profit
Contribution margin ratio

Sales in units = Fixed cost + Profit after tax

100% - tax rate
Contribution margin per unit

Sales in pesos = Fixed cost + Profit after tax

100% - tax rate
Contribution margin ratio

Desired profit as a certain %

Sales in pesos Fixed cost
CMR – PR

Sales in units Fixed cost

CM/u – P/u
Break Even Chart - highlights the CPV relationships over a wide range of activity and gives managers a
perspective that can be obtained in no other way. It also clearly shows the break-even point on the graph
1. Plot the sales line
2. Plot the cost line
3. The intersection between the cost line and the sales line is the break even point

Profit Volume Graph - focuses on profitability. This highlights only the difference between total sales
revenues and total costs and enables the manager to more easily determine the operating profit/loss for
various levels of operation
MARGIN OF SAFETY
Indicates the amount by which actual or planned sales may be reduced without incurring a loss
Margin of safety = Actual or planned sales - Breakeven sales
Margin of safety ratio = Margin of safety
Actual or planned sales

MSR + BESR = 100%

MSR = 1 – BESR
BESR = 1 – MSR
PR = CMR x MSR
FACTORS AFFECTING PROFIT
1. Selling price per unit
2. Variable cost per unit
3. Volume or number of units
4. Fixed cost
5. Sales mix
SV.VFS
OPERATING LEVERAGE
is a principle by which management in a high fixed industry with a relatively high contribution margin
can increase profits substantially with a small increase in sales volume.

DOL = Contribution margin

Net income

DOL = Percentage change in operating income

Percentage change in sales

DOL = 1/ MSR

DOL x Percentage change in sales = Percentage change in net income

1. Cost concepts and classification

Cost
Expense
USES OF COST DATA

1. Planning profit by means of a budget

2. Controlling costs via responsibility accounting
3. Measuring annual or periodic profit, including inventory costing
4. Assisting in establishing selling prices and a pricing policy
5. Furnishing relevant cost data for analytical processes for decision making

Operating cost – manufacturing cost + commercial expense

Cost in relation to manufacturing dept.
Producing dept , service dept
In relation to their nature
Common cost, joint cost
In relation to decision, action, or evaluation
1. Differential cost – cost relevant to a choice or course of action among several alternatives
2. Out of pocket cost – require cash payment in current period
3. Opportunity cost – amount of revenue that will be missed or lost if a particular alternative is
adopted
4. Sunk cost – cost that has already been incurred and is therefore irrelevant to a decision
COST ATCCOUNTING – area of accounting concerned with cost determination and cost control
COST DETERMINATION – accumulation of cost data by products, processes, or services to be able to arrive at
unit cost or cost per work unit
COST CONTROL – standards are set for costs per unit and per work unit and are subsequently compared with
the figures per actual operations so that remedial measures may be adopted

AVOIDABLE COSTS
– costs that will be eliminated if a specific segment is eliminated (Direct departmental
costs)
POSTPONABLE COSTS
– costs which incurrence may be deferred to the future
COMMITTED COSTS –
costs which have been committed by the management. It can not be eliminated in the
short run
DISCRETIONARY COSTS –
costs that may or may not bring benefits to the company hence its incurrence is in the
discretion of the company. It can be changed quickly by the management (advertising
costs)
VALUE-ADDED COSTS
– costs that add value to the product. Effort should be made to eliminate those costs
that do not add value to the product such as storage and materials handling
RELEVANT COSTS
– cost that change in value as different alternatives are compared. It has two
characteristics: 1) future cost and 2) differential cost
PERIOD COSTS
– are costs that can be directly identified with measured time interval like month,
quarter, semester or year. These are charged against income in the period incurred and
cannot be inventoried. Normally, fixed costs are period costs
PRODUCT COSTS
– are costs that can be directly identified with the unit of product. These cling to the unit
produced and are reported as assets until the units are sold (inventoriable cost)
IMPUTED COSTS
– are cost that do not involve at any time actual cash outlay and which do not, as a
consequence, appear in the financial records, nevertheless, such costs involve a
foregoing on the part of the person whose costs are being calculated
CONTROLLABLE COSTS
– costs that are authorized to be incurred in a level of management, in department, or
by a manager, (can be heavily influenced by a manager)