Cost Concepts in Cost Accounting

Hello everybody, welcome to Sertuas Accounting Lessons PH and this is Lecture 2, Cost Concepts, Terminologies, and Behaviors. So we're still on Cost Accounting and Control, and at the end of the video, you should be able to differentiate product cost from period cost, enumerate and explain the components of product cost, differentiate direct cost and indirect cost, explain the different kinds of cost according to their behavior, separate mixed costs using the HILO method, Separate mixed costs using the least square regression method and define other cost terminologies. Okay, so this will be quite integrated, but I hope that you can bear with me until the end of the video. Before anything else, please like, share, and subscribe to SirChuAsAccountingLessons.ph and please hit the notification bell button to alert you of the latest video lessons. And for all of your questions, comments, and suggestions, please put them down in the comment section below and message me at kevin troy that's 1994 at gmail.com okay thank you for your outmost support for search was accounting lessons ph and may these videos continue to help students in their online learning and academic development and may these videos continue to help teachers in enhancing their lesson plans and teaching methodologies okay we're ready to start let's have the following cost terminologies at a glance so in the last lesson I've introduced you to cost accounting and how cost accounting helps in decision making. It's now the time to introduce you to the different cost terminologies that we need to understand in studying cost accounting. Okay, first of all, as to the classification, in the financial statements, we have product cost and period cost. And under product costs, we have cost as to materials, cost as to labor, and cost as to overhead. Okay, as to behavior, cost can be variable, it could also be fixed or mixed and step cost. And we will also be learning some other terminologies like opportunity cost, sunk cost, committed cost, discretionary cost, controllable cost, and non-controllable cost. And we will also be learning the different methods of separating mixed cost into variable and fixed cost, which is the high-low method and the least squares regression method before anything else let's define what a cost is what is the cost okay remember that cost reflects the amount of resources sacrificed in order for the company to achieve a certain objective such as creation of goods or rendering of services in order to earn revenues well as we all know a business is formed to earn revenues and in order for a company to earn revenues kung service company ka gagastusan mo ng salaries yung mga trabahador mo ikaw din mismo gagastos ka ng utilities for your own office or for your own office space or for kunsan ka man nagre-render ng service diba for merchandising company bago ka makapagbenta ng products bibiliin mo muna yung mga products na yun and merong cost associated with that and in And if you are a manufacturing entity, then there are really costs of production that you need to incur. So basically, as we can see, cost is actually a sacrifice. Because we sacrifice resources, we use resources, we spend in order for us to attain the objectives of the company. And in cost accounting, that's what we will be computing and that's what we will be talking about. Okay? Remember, cost is a sacrifice, right? Kahit sa love, diba ganon? Pag nagmamahal tayo, ginagastusan natin. Joke lang po, okay? But remember that cost is a sacrifice of an entity in order for them to achieve the goals and objectives of the company. And better yet, we can say that cost is a sacrifice in order for a company to attain revenue. Okay? Now, the different costs. according to FS classification would be as follows. The first one is product cost. Ano po ang tinatawag nating product cost? Product costs are costs identified and incurred by an entity to manufacture a product. So lahat po ng ginagastos na isang company para makabuo ng product, ang tawag po doon product cost. It includes all raw materials used, yung ginagamit po nating mga materials sa production. and then all the labor costs, the salary we pay to the worker, and all other indirect costs that we are spending, although it is not directly affecting the product, but we are still spending necessary in order to create the product. Okay? Now, product cost has... three components. The first component is materials. Yun nga po, yung sinasabi ko kanina sa inyo na materials na ginagamit sa production. Also includes the costs of labor and yung tinatawag po natin all other costs na hindi naman related directly to the product but still needed in the production process. That's what we call overhead. Okay, so let's discuss them deeper one by one. Formally, materials are all raw materials and other supplies used in the manufacturing process. So, materials has two kinds. Meron po tayong tinatawag na direct materials at saka indirect materials. Pag sinabi pong direct materials, ito po yung mismong materials na talagang dun gawa yung product. For example, in light bulb manufacturing, ang direct material niya is yung mismong glass. And then, syempre, the cost of direct materials, ng light bulb is syempre yung ginastos natin para bilhin yung glass na yon. Okay, ulitin natin. In light bulb manufacturing, syempre gagastos tayo para bumili ng glass. So, ang cost of direct materials natin, yung mismong pinambili natin ng glass. Okay? In the manufacture of tables and chairs, ano kaya ang direct material nun? Pwedeng kahoy, diba? or in the manufacture of teddy bears, yung cotton. and the fabric used to make the teddy bear. What you will really earn from the materials in the product is called direct material. Now we have another kind of material which is an indirect material. Indirect materials are those that you cannot really trace it into the product but it's still needed in order for you to finish the processing of the product. Glue, oils, nails, screws. yung mga ganon okay hindi mo naman matitrace mismo yung glue na ginamit para magawa yung table or yung mga pako na para magawa yung mga upuan hindi mo talaga siya matitrace directly but it is still needed in the manufacturing process in order for you to finish the product but it's not directly seen okay so ang tawag po dun sa mga yun indirect material okay so that's the first component the second one is what we call Labor are salaries and other benefits provided to all workers. Lahat po ng ginagastos natin para magpasahod ng ating mga trabahador. Yun po ang nire-record natin as cost of labor. Like materials, meron din po tayong direct labor at saka indirect labor. Pag direct labor, for example, the cost of salaries paid to the laborers of furniture associated directly in the So if you are a manufacturing company that makes furniture, our employees that make furniture, our employees that work there all day and all night, and our employees that make designs of our furniture, what we pay them is cost of labor. Since they need their labor, directly in order for us to do the product, e di direct labor cost po iyon. Ngayon, meron po tayong mga pinapasahod na related sa manufacturing process, but they are not actually part of the product itself. Okay? Salaries paid to all other factory personnel necessary in the manufacturing process, but is not directly related in the conversion process of the product is what we call indirect labor. For example, In a factory, we have a factory supervisor who checks all the operations. The factory supervisor is not directly related to making ice cream. It's not directly related to making furniture. But he still needs to check the operations of the factory. And we pay the factory supervisor. So, even though the factory supervisor is not the one who's making pokpok of all of that furniture, we still pay him. And although he is not the one who makes the product, he is still related to the production. What is called there is indirect labor. Okay, now, if you already have your materials and labor, then it's time for you to check the overhead. Now, overhead are all indirect costs necessary for product conversion that are not direct materials and direct labor. Ibig sabihin po, lahat po ng cost na kailangan pa rin sa production. pero hindi directly traceable sa product. Doon po natin ila-lodge lahat sa overhead. For example, lahat po nang nabanggit natin na indirect materials and indirect labor syempre yung equipment po natin sa factory may cost of depreciation kasama po yun syempre yung factory plant natin baka pina-insure natin may insurance cost po yun yung equipment natin sa factory syempre ginagasto sa natin ng repairs and maintenance cost and syempre yung utilities na binabayaran natin related sa factory Okay, so ang overhead po ay usually since hindi po siya directly related sa product, ina-allocate natin siya sa products. And we have, in the succeeding lessons, pag-uusapan po natin how to properly allocate overhead. And we have different techniques in allocating overhead. Okay? So now, tatanggalin na natin ngayon yung indirect materials and indirect labor as part of materials and labor. Lalagyan na natin siya ngayon sa overhead. So ang mangyayari, the three components of product costs now will be Direct materials, direct labor, and overhead or our manufacturing overhead. Okay, now direct materials and direct labor, the total cost of materials and labor na direct, ang tawag po dyan ay prime cost. Bakit po siya tinawag na prime cost? Sila yung kailangan para mismo magkaroon tayo ng produkto. You cannot make a teddy bear without the cotton and the tela. and you cannot make a teddy bear without the person who will make the teddy bear right? so they are the one who need the most to make the product okay? that's why they are called prime cost the prime cost to make the product now on another perspective we have what we call direct labor and overhead these two, when we add them together they are called conversion cost kasi kailangan mo po yung labor para ma-convert yung product at kailangan mo po yung all other indirect cost para mabuo din po yung product kasi kung wala kang equipment kung hindi ka gumagastos for maintenance no equipment kung hindi ka gumagastos para sa rent ng factory facility hindi rin naman po talaga magagawa yung product diba so direct labor and overhead is called conversion cost now always remember prime cost plus overhead is the total manufacturing cost. And also, direct materials plus conversion cost is our total manufacturing cost. But never ever say that prime cost plus conversion cost is the total manufacturing cost kasi magdodoble yung amount natin ng labor. And now that we're talking about that equation already, ganito po ngayon yung total manufacturing cost. Direct materials plus direct labor. plus manufacturing overhead is equals to the total manufacturing cost. In the next lesson, we will talk about the manufacturing of cost of goods manufactured and sold. And this is one of the components of the calculation that we need to remember. But for now, in manufacturing a product, always remember, there are three things that we need. Direct materials, direct labor, and all other indirect costs that we call manufacturing overhead. Yun po ang tinatawag nating mga product cost. Now, another FS classification of cost is the other one is period cost. Pag sinabi naman pong period cost, it is the entity's operating expenses. Bakit po sila tinawag na period cost? They are called as such since they are much more associated with time periods rather than the manufacturing process. Time periods kasi, o naka isang buwan na tayo, magkano rent natin for the month. O naka isang buwan na tayo, magpapasahod na ulit tayo ng mga office workers natin. Ganun sya, okay? They are all other expenses that is not related to manufacturing. So basically, yung product cost po kasi, yung makikita natin sa cost of goods sold, and then yung makikita naman natin sa operating expenses, yun po yung mga period cost, okay? We can categorize them with the following examples. Pwede pong sila ay marketing and advertising cost, selling and distribution cost, at saka administrative cost or administrative expenses. Let's talk about them one by one. Marketing and advertising costs are costs or expenses incurred in promoting the entity's products and services. Gagastos ka for advertising, gagastos ka for promotion, gagastos ka for marketing expenses. So dyan mo siya ilalodge. Yan yung mga operating expenses natin na advertising expense marketing expense promotions that in you know okay and then for selling and distribution they include salaries of sales personnel sales agent and a beventa no more product omos alabas and also so distribute yung mga delivery expenses natin kung tayo yung sumasagot ng delivery ng mga umuorder sa atin. And those are not already related to the manufacturing process of the product anymore. That's already an expense of the company itself. It's already an operating expense. Okay? And then for administrative expenses, ito naman po yung mga lahat ng makikita mong expenses sa opisina. Okay? Hindi sa factory, ha? Of course, because you have a factory to make all your products. But you still have an office, right? So all the expenses you spend in the office, those are the administrative expenses. Office utilities, depreciation of office property, plant and equipment, repairs and maintenance of office property, plant and equipment, and all other expenses in the office. So this is how we're going to look at it. If the utilities are spent in the factory, that's manufacturing overhead. Pero pag yung utilities ginastos para sa opisina, administrative expenses yun. So, yung utilities na ginastos para sa factory, dahil manufacturing overhead yun, nagiging part sya ng product cost. Pero yung utilities na ginastos natin sa opisina, eh ginastos natin sa opisina, diba? Nagiging part sya ng operating expenses. Isa pa, depreciation ng equipment sa opisina, operating expense yun. But the depreciation ng equipment natin sa factory, part po yun ng manufacturing overhead. Sana naiintindihan nyo na yung gusto kong sabihin. Isa pa, pag pinarepair mo yung equipment mo sa opisina, operating expense yun. Pero pag pinarepair mo yung equipment mo sa factory, part yun ng manufacturing overhead. Okay, so now I hope that you are now able to differentiate what a product cost is and what a period cost is. Awesome! Okay, now let's talk about different cost behaviors and the two main cost behaviors is variable cost and fixed cost. Okay, let's define them one by one. Variable costs are costs that change as the quantity of the goods produced changes. Total amount of variable cost is dependent to the level of production. Ibig sabihin po, ito yung mga cost na mataas Pag mataas ang production, mababa. Pag mababa ang production. Because they are dependent on the level of activity that the manufacturing company is doing. Okay? For example, cost of materials at saka cost of direct labor computed per piece. Okay, bakit po ganyan yung example? If the company has decided to produce 100 chairs, How many materials do we need? Of course, for 100 chairs. And if the company will manufacture 200 chairs, How many materials do we need? Then 200 chairs as well. That's how it works. How about the cost of direct labor? Of course, if you will do 100 chairs, you will also be able to pay the people who work in the factory. For 100 chairs. If they make 200 chairs, what will you do? you will also be able to pay them for 200 shares. That's why it's called computed per piece. Especially in the 250 pieces. Parang gano'n. Okay? Pag sinabing variable cost, it is dependent on the level of production. So if you produce zero, then wala kang cost ng variable cost. You won't spend anything for your materials because you won't do anything. But if you manufacture 1,000 units, the materials that you need to use is for 1,000 units. Unlike the fixed cost, at whatever level of production within the relevant range, this cost does not change. It is independent in the level of production. We will make 1,000 units, we will make 2,000 units, or we will make none. Fixed cost is still incurred. For example, kung yung factory facility natin nirerentahan lang natin, gumawa tayo ng zero o gumawa tayo ng 10,000 units, magbabayad tayo ng renta with the same amount. Okay? Ano pa example? Depreciation of equipment, lalo na kung yung depreciation method mo naka straight line method. Diba? Gumawa ka ng zero o gumawa ka ng 10,000, yun pa rin ang depreciation mo. Okay, so pag sinabi pong fixed cost at whatever level of production we will just incur the same amount Okay, so for you to better understand how variable cost and fixed cost differ with each other, let's have the following concepts. Variable cost is constant on a per unit basis, but it varies when presented as a total. Kumbaga daw, pag per unit mo pinresent ang variable cost, constant sya, kasi yun yung amount nya per unit. Pero it will vary na kapag pinresent mo na sya as a total, which is ang kabalik na rin naman nya sa fixed cost. It's constant when presented as a total, but it varies on a per-unit basis. So to further elaborate, assume that an entity's normal manufacturing process with a range of 5,000 to 7,000 units of goods with a variable cost per unit of 20 pesos and then a fixed cost of 15,000. Now, look carefully. We will manufacture between 5,000 to 7,000 units. Ang variable cost na ginagastos natin per unit, 20 pesos. Pero, at whatever level of production, 5,000, 6,000, 7,000 units, ang fixed cost natin na mai-incur, 15,000 pa din. O ngayon, tingnan natin sa variable cost. Ang sabi sa variable cost, it is constant on a per unit basis. Now, at 5,000 units, at 6,000 units, at 7,000 units, your variable cost per unit is still 20 pesos per unit. But you try now to multiply 5,000 units to 20 pesos per unit, the total variable cost is now 100,000. If you try to multiply 6,000 units by 20 pesos per unit, the total variable cost now is 120,000. But if you now try to multiply 7,000 units by 20 pesos per unit, the variable cost is now 140,000. Sabi nga sa inyo, variable cost is dependent on the level of production. So, when the number of units increases, total variable cost will increase. And when the number of units produced goes down, then the total variable cost will also go down. And as you can see, it varies when it is presented as a total. Now, with fixed cost, this is how it looks. At 5,000 units, at 6,000 units, at 7,000 units, we will still incur the same fixed cost, P15,000. But look closely when it is expressed per unit. It now varies on a per unit basis. P15,000 fixed cost divided by 5,000 units. Ang fixed cost per unit, P3 per unit. P15,000 divided by 6,000, P2.5 per unit. Pero pag P15,000 divided by 7,000, P2.14. point fourteen so Fixed cost varies on a per unit basis but it is constant when presented as a total. And then, titignan nyo mabuti. Kapag ka dumadami yung ginagawa natin sa production, pag yung minamanufacture nating units, mas dumadami. Yung fixed cost per unit natin, mas bumababa. Bakit? Mas maraming units yung kumakain ngayon ng fixed cost. So, ganito ang lagi nyong iisipin. When it's low, production, the fixed cost per unit is high. But if the number of units that we will do is high, expect that your fixed cost per unit will be low. So, we can see that variable cost is directly related with each other. Because while the number of units produced is increasing, the total variable cost is also increasing. And when the number of units produced is low, the total variable cost will also be low. But when it comes to fixed cost, they are inversely related with each other. Because when the number of units increases, the fixed cost per unit will decrease. But when the units that we are producing decrease, the fixed cost per unit will increase. Okay? But remember, variable cost is dependent on the level of production. Fixed cost is independent in the level of production. When you produce zero or 10,000, it is... just the same. Pero remember within the relevant range. Pag sinabing relevant range, yun yung usual na capacity ng company na mag-produce. Okay? Kasi there are times na kunyari, the relevant range or the normal capacity of a company is to produce 10,000 units. So, kapag 12,000 yung iniisip nilang i-produce, baka hindi na kaya nung kanilang current na capacity or current equipment so nangyayari yung fixed cost natin na dadagdagan or baka kailangan natin mag-expand ng panibagong ng panibagong factory parang ganun yun nangyayari so basically variable cost and fixed cost remain the same lalo na sa fixed cost it remains the same pero dapat within the relevant range or the normal the capacity of the company. Okay? Because usually, when the capacity expands, your fixed cost will change. Because you have more equipment, you have more new facilities, so the fixed cost will change. What we are talking about in this cost behavior is within the company's relevant range. Awesome. Okay. We also have this cost equation. Okay? So the cost equation that we will be talking about here in this video is y is equals to a plus bx okay where y is represented or represents rather total cost of the product and then a is the total fixed cost of the product b is the variable cost per unit and x represents the volume of activity Paano natin i-express to? Para mas maintindihan nyo, let's try the following example. How much is the total cost to manufacture products with a variable manufacturing cost per unit of 25 pesos and total manufacturing fixed cost of 40,000 at the following production levels? 2,000 units, 4,500 units, and 7,250 units. Let's just use the cost equation to compute for the total cost of manufacturing these units. Okay? So, at 2,000 units, this will be our equation. Y is equal to A plus BX. Y is equals to A is your fixed cost of 40,000 plus B which is your variable cost of 25 times 2,000 units. So 2,000 times 25 is 50,000 plus fixed cost of 40,000. Total cost is 90,000. What is 50,000? Total variable cost. What is 40,000? Total fixed cost. How about for 4,500 units? So we will just replace X with 4,500 units. Since it represents the activity. So again, Y is equal to A plus BX. Y is equal to fixed cost of 40,000 plus 25 variable cost per unit multiplied by the level of activity of 4,500. 4,500 times 25 is 112,500. And that is your variable cost plus 40,000 gives you total cost of 152,500. Sige nga po, itry nyo po sa letter C. Pause the video and when you're ready. Play the video again for the solution. Okay, assuming that you have already computed for the total amount for 7,250 units, the correct answer is 221,250. Okay, I've introduced you to this equation kasi gagamitin po natin siya mamaya. Okay, awesome. Let's have more cost behaviors. We also have mixed cost and step cost. Pag mixed cost po, pareho syang more variable and fixed component. Next example po natin yung utilities. Kunyali, electricity. These are charged with a base amount, which is at whatever level may base amount ka nababayaran. So that's the fixed component. And then, it goes higher with any usage over the base amount. Okay? So, it has a fixed component and a variable component. And we will talk about it later in order for a company to properly classify and to analyze their cost. The mixed cost, we should separate or segregate its variable cost component and its fixed cost component. Later, we will discuss how to do that. As for step cost, Costs that are constant on a certain level of activity but increases or it actually can decrease depending on another level of activity. For example, salaries and commission of agents that goes higher with different ranges of activity. For example, people served. For example, what are you? We are in the service industry. Airline operations. If you served 1,000 guests, you will have... 2,000 pesos commission but if you serve 2,000 to 3,000 guests, ang commission mo na ay 4,500 and if you serve 10,000 guests, you will have 5,000 pesos commission. Ganun siya. Okay? So, depending on the level of activity, nagbabago yung cost niya. Okay? It goes up or it goes down depending on the range of activity. Okay? That's it. Now, Let's now try to separate mixed cost with the following problem. Ah, sorry, wala pa pala yan. Okay, in separating mixed cost, there can be two methods. So we will be discussing two methods here. In this video, we have the high-low method and the least square regression method. Okay, so let's try. to discuss high-low method using this problem credits to the textbook management advisory services by professor flan franklin t agamata the 2013 edition of the book okay jimin corporation builds tabletop replicas of some of the most famous tourist attractions in seoul the company is highly automated where maintenance cost shows as a significant expense The owner decided to use machine hours as the basis of predicting maintenance cost and has gathered the following data for the following eight weekly operations. Sir, you are given there weeks one to eight and then the number of machine hours na ginagamit po para magawa yung tabletop replicas and then the total maintenance cost na nagastos kada linggo. total na yung cost kasi na available information na nakukuha ng company kasi mixed cost siya eh. Now, we will be using the HILO method in order to determine kung ano yung variable cost per unit, the total fixed cost, and magkano po kaya yung total maintenance cost natin kung ang number ng machine hours for a certain week is 8,200. Okay? So you can maybe screenshot the problem first. so that you can follow it step by step. Okay, so if you're ready, then let's start. The first step is to determine the highest and lowest activity and the cost associated thereunto. Let's go back to the table. Which of these machine hours is the highest activity? Or you can just use what you learned in elementary. ascending and descending order of numbers. Alin po kaya dito yung highest activity natin? Okay? Our highest activity, as you can see, is ito pong 9,000 machine hours. And the cost associated with the highest activity is the maintenance cost of 24,800. Ano naman po yung lowest? So kita naman po natin, meron tayong 5,500. May mas mababa pa ba sa 5,500? Merong 4,500. May mas mababa pa sa 4,500? 3,500. May mas mababa pa sa 3,500? 3,000. So yun po yung lowest activity natin with a maintenance cost of 9,800. So that's the first step. Determine the highest and lowest activity and ano po yung cost nakasama dun sa highest and lowest activity. Now, step 2, obtain the variable cost per unit by dividing the change in cost over the change in activity. Okay, so this is what we did earlier, right? We got the highest activity and the lowest activity. So, our first step is to use this equation. Variable cost per unit is equals to the cost at highest activity minus the cost at lowest activity over highest activity less lowest activity. Or you can simply say, change in cost over change in activity. That's it, okay? Change in cost over change in activity. so if a plot po natin sa equation yung ating pong mga numbers. Cost at highest activity is 9,000. Ah, sorry. Mali. Cost at highest activity is our highest activity is 9,000 which is 24,800. Sorry, nalito. So, ito po, 24,800. And then, cost at lowest activity is the lowest activity of 3,000, 9,800. Ito po yun. Highest activity, is 9 000 machine hours lowest activity is 3 000 machine hours okay get the difference of the numerator and the denominator so 24 800 minus 9 800 gives you 15 000 pesos and then 9 000 machine hours minus 3 000 machine hours is 6 000 machine hours perform the calculation and your variable cost per unit is 2.5 per machine hour. We got the variable cost per unit. Step 3, obtain the total fixed cost by removing the variable cost component in the total cost. And it will be computed like this. So what we will do is we will tabulate the total cost of our highest activity and lowest activity. Going back to the table earlier, the total cost... po natin at highest activity is 24,800 and the total cost naman po natin sa lowest activity is 9,800. Ang sabi po we will be removing the variable cost component kasi nga naman po So, if total cost, you will remove the cost. variable cost component, then of course you will get the fixed cost. At high activity, which is 9,000 machine hours, multiply that with variable cost per unit of 2.5. So 9,000 times 2.5 is 22,500. At low, 3,000 machine hours times 2.5 is 7,500. So 24,800 minus variable cost of 22,500 is our fixed cost component. is 2,300. Sa lowest activity naman po, 9,800 minus 7,500, 2,300. Pero pansinin nyo mabuti, paano nyo malalaman kung tama yung sagot nyo? Dapat, at whatever level of activity, it is just the same. Parehong 2,300, 2,300, kasi nga hindi dapat magbago dahil siya ay fixed cost. Awesome! Okay, I hope you understand that. Okay, and then we have another requirement. So, magkano naman po ang total maintenance cost at 8,200 machine hours? So, nakuha na po natin yung variable cost per unit na 2.5 at nakuha na rin po natin yung total fixed cost na 2,300. So, let's just perform the Y is equals to A plus BX. So, Y is equals to fixed cost of 2,300 plus The product between the variable cost per unit of 2.5 and the activity which is 8,200 machine hours. 2,300 fixed cost plus total variable cost of 20,500. The total maintenance cost for 8,200 machine hours is 22,800 pesos. Ganun lang po. Pag nakuha na po natin, so kahit anong machine hours ang tanungin sa inyo sa problem, basta nakuha nyo na po yung fixed cost na total tsaka variable cost per unit. you can simply use y is equal to a plus bx. Awesome. Now, let's move on to least squares regression method. So, medyo mathematical po ito. And pangungunahan ko na po. Sorry po sa mga math teachers na makakanood po ng videong ito. So, I don't know the proper terminologies to use in mathematics in these equations. But I hope that you can forgive me. with the step-by-step procedure. So, sorry po, hindi po kasi ako mathematician, but I will do my best to explain this very well to the students. Okay, so let's use po the same problem, and then using the least squares regression method, determine the variable cost per unit and the total fixed cost. Okay, so let's do it like this. Step 1, prepare a table calculating x, which represents the activity, why rich which represents your total cost and then x y and x squared. Ayan po. Okay. Paano po yan? Remember that x is your activity. So ito po yung mga machine hours natin from week 1, week 2, week 3, week 4, 5, 6, 7, 8. Nilista ko lang po. Okay. And then sa y naman po, ito po yung total cost natin. So kukunin nyo lang din po, lilista nyo lang din po. 9,800, 12,900 and so on. ang xy naman po is syempre you will be multiplying x to y so i suggest po you can use microsoft excel para mas bumilis po kayo dito okay so for example at week one three thousand times nine thousand eight hundred gives you twenty nine million four hundred thousand okay four thousand five hundred times twelve thousand nine hundred gives you fifty eight million fifty thousand and do the same until the weak 8 next naman po is x squared okay So, x squared lang po. So, 3,000 times 3,000, 9,000. 4,500 times 4,500, 20,250 and perform everything. Now, the last thing you should do is sum. Okay? So, kukunin niyo po yung summation or yung totals po nila. Total of x is this one, 46,500. Total of y is this one, 118,500. And then this is the total for xy and the total for x squared. Ito po yung mga kakailanganin natin mamaya sa equation. And then remember, n is equals to 8. Saan po galing yung 8? Week 1, 2, 3, 4, 5, 6, 7, 8. So the total number of observations po natin is 8. So n is equals to 8. Okay, sorry po ha, medyo mathematical. Okay, so ganun po siya. So after you have prepared the table calculating x, y, x, y, and x squared, we are now ready to substitute the computed amounts in the following equation to get the variable cost per unit. Okay, so remember that we came from y is equals to a plus bx. Okay, so transforming it in the model for least square regression, the first equation would now be the summation of y is equal to the number of observations n multiplied by a plus b multiplied by the summation of x. And another equation would be the summation of xy is equal to the summation of x multiplied by a plus b multiplied by the summation of x squared. Teachers, isn't summation like a face? It looks like letter e but it's not letter e. I think this is a Greek alphabet. But for the other teachers, for the students to understand this least square regression, the letter E, although it's not letter E, they use letter E to memorize the equation that's used in least square regression. So what we're going to do is, Yabex A na bex, xcx sa bex squared. Again, Yabex A na bex, xcx sa bex squared. Last one. Yeah, BEX A na BEX XCX sa BEX squared. Yan po ay gagawin nyo lang para lang maintindihan or makabisado po yung formula. Pero wag nyo po itong tatawaging letter E kasi hindi po letter E yan. Okay? Hindi po yan letter E yan. The proper way to read it is the summation of Y is equals to N multiplied by A plus B multiplied by A. by the summation of x and the summation of xy is equals to the summation of x multiplied by a plus B multiplied by the summation of x squared that's how you should read it. I just taught you the easy way to remember it but don't say E in front of the math teacher let's be honest, maybe I should say what Sir Chua is teaching you okay so ganun po siya now Using these equations, eto po, babalik po tayo dun sa table natin kanina, kinuha ko na lang po yung sum where n is equals to 8. Okay, so let's now try. First equation, summation of y, bedyo dadandahanin ko ah. Summation of y, so eto yun, 118,500 is equals to n, which is 8, a plus b. multiplied by the summation of x. The summation of x is 46,500 and then b. Okay? Unayin nyo po yung number bago yung letter. Diba? Coefficient sila sa math. Tama ba ko? Coefficient? Okay. And then, the next equation is the summation of xy, sorry, so this one, 756,350,000 is equals to the summation of x, which is 46,500, multiplied to a, plus B, so this is B, summation of x squared, 301,750. 301,750,000, this one. That's your second equation. Ngayon, ang meron po tayo ay, if I remember it correctly, the system of equation in two unknowns. Ano po yung two unknowns natin? A tsaka B. Okay? So, dahil po, nasa system of equation in two unknowns tayo, gagamitin po natin yung method. So that we can use the elimination method. So, what we want to eliminate is A. So that we can get B. Because remember, B represents the variable cost per unit. So, what we are going to do is this next one. How is that? The first equation will be multiplied by negative 46,500. And the next equation will be multiplied by positive 8. okay so if i perform you lang negative 46 500 multiplied here and here and here and then 8 multiplied by here and here and here so you will get another equation like this so this one multiplied by this one is this this one multiplied by this one is this this one multiplied by this one is this okay then you do the same for the next equation okay then do it mathematically. So as you can see, pwede na tayo mag-eliminate ng A kasi yung A natin here is 372,000 and then this one naman is negative 372,000. Okay? Then ipaperform nyo yung calculation dito at saka dito. So mau-uwi kayo sa summarized equation na ganito. Ayan. 540,550,000 is equals to 251,750,000 B. Okay? then To solve for B, divide both sides by 251,750,000 and you will get the variable cost per unit of 2.15. Okay? So, I suggest po, wag nyo lang siyang titigan. sa video, gawin nyo po siya sa paper. I-rewrite nyo po. Kasi hindi nyo siya magigets ng pinapanood nyo lang sa video. Okay? You can pause the video, you can take a screenshot of this para maintindihan nyo po. And I suggest, kung medyo mahirap pong intindihan ito sa inyo dahil malalaki yung number, balikan nyo po yung mathematics nyo regarding sa system of linear equation in two unknowns. Yun po kasi yung lesson yan sa mathematics na ginagamitan natin ng elimination method. Okay? So, balik po kayo sa junior high math. Nandun po yan. Okay? So, nakuha na po natin yung variable cost per unit. It's time for us now to get the fixed cost. Okay? Substitute B. Meron na kasi tayong B eh, which is your variable cost, to any equation to get A, which is your total fixed cost. Remember that our B is 2.15 and then we have the following system of equations Gamitin na lang natin yung mas maikli para mas madali. Okay? So, 118,500 is equals to 8A plus 46,500B. 118,500 is equals to 8A plus 46,500 multiplied by the variable cost per unit of 2.15. Perform the multiplication. We have 118,500 is equals to 8A plus 99,975. Then, transfer transpose item or, what is it? Sorry. Transpose to the other side. Sorry. I just did mathematics again. Okay. So, it will be we will transpose 8a to the other side. So, it will be negative 8a. Then, this will be entered to the other side. So, negative 118,500 plus 99,975. Perform the mathematics. So, we have negative 8a is equal to negative 18,525. Divide both sides by negative 8 to get A. So, magiging negative 18,525 divided by 8. So, we will get A is equals to 2,315.63. Yan po yung ating total fixed cost. Ngayon, i-compare po natin yung nakuha nating variable cost per unit at saka total fixed cost under high-low method and least square regression method. Let's take a closer look. Variable cost per unit is 2.5 under Hilo method and under least square regression 2.15. Total fixed cost under Hilo method is 2,300 and then under least square regression method is 2,315.63. Now, you can say that you did it correctly if they are not far apart. So pareho po tayo nasa range ng... 2.5, 2.15, 2,300, 2,315.63. Hindi po siya nagkakalayo, ibig sabihin our calculations are correct or our estimates are correct. Okay? Awesome. Let's discuss some more other cost terminologies that are important for your learning. So first po is opportunity cost. Opportunity costs are the benefits for GAN in choosing one action over another. Example. If you have excess office space, instead of renting it, you just used it. So what was the opportunity cost there? What was the benefit for gone? You would earn additional rental income if you didn't use your idle capacity of office space. But usually, opportunity cost is more only on decision making. But actually, remember, purple. Opportunity cost is not accounted for in accounting. In economics, yes. But opportunity cost in accounting, we don't really account for that. Especially in financial accounting, you will never see that. In management accounting and here in cost accounting, it is only used for decision making. For example, if we use our idle space, we will use it in production or in the office. But, Sayang yung kikitain sana natin kung ipaparenta natin yung space na yun. Ayan, ganun yung opportunity cost. It's more of a decision making, okay, rather than reporting it in financial accounting. Okay? Sang cost. Cost incurred that will not affect a future decision. Wala na, nagastos na, hindi natin mababalik yun. For example, if you're deciding to buy a new equipment, the cost of an old equipment would not matter anymore. You bought it, you spent it, right? So the things you spent on your exes, what's the cost of that? Right? You spent on your exes, you can't return it. And it will not affect a future decision because you already spent it. You get it? Okay. That's the cost, right? The company has future decisions that we can't consider those costs anymore because we already spent it. Okay? I hope you understand that. Committed cost. Cost resulting from organizational structure or use of facility. So, because... yung mga facilities na ito, ginagamit natin, kinukomit natin magbayad ng ganito ng ganyan. For example, wala tayong sariling factory or wala tayong sariling office space. Nagre-renta lang tayo. So we commit to pay the rent. Okay? Ganon. Discretionary cost. Cost arising from managerial decision. Sila ang may discretion. Sila ang may decision na gastusin yan. Best example, research and development expenses. Pwedeng mag-decide ang company na huwag namang mag-research and development. Okay? Pero it's their discretion to do it. So it became a discretionary cost. Controllable cost naman po yung mga cost na available to be influenced on how much shall be spent. For example, materials. Ilang grams ba ng materials yung kailangan natin dito? Pwede nyong kontrolin, pwede nyong bawasan, pwede nyong dagdagan. Nakokontrol siya. Okay? Kunyari, naisip nyo na... Naku, parang di naman pala kailangan masyadong paint yung ginagamit natin para makabawas sa ating production process. Bawasan natin ng konti yung paint na ginagamit natin. Pareho lang pala ng itsura pagkatapos ng production. Eh, masyado tayong maraming gumastos ng paint. O yung mga ganon, diba? Nakokontrol nyo siya. Okay? Non-controllable naman po, yung mga hindi na pwedeng kontrolin or hindi pwedeng ma-influence. Like depreciation. Di naman natin makokontrol yun, diba? Ayan. Okay? So... or usually the cost allocated to a department we will not be able to stop that okay so those are the other cost terminologies that you need to understand and we're done with our discussion awesome okay so our next lesson would be the manufacturing accounting cycle so we will be discussing the journal entries the new account titles that you need to know and then the T accounts And we will also be doing the statement of cost of goods manufactured and sold in the next lesson. Awesome. Okay, so please again like, share, and subscribe to Sir Chua's Accounting Lessons PH and hit the notification bell button to alert you of the latest video lessons. For all of your questions, comments, and suggestions, please put them down in the comments section below. And for webinar and speakership invites, please send me a message at kevintroy.chua1994 at gmail.com. This has been Sir Chua's Accounting Lessons, Ph.D., College Edition, and this is Cost Accounting and Control. To God be all the glory, honor, and praise. Thank you, Lord, for the wonderful discussion. Thank you, students, and have a great day. All together, it's good. I just wonder if you like me. I can show you my love, here it is. Don't be shy again.

Before anything else, please like, share, and subscribe to SirChuAsAccountingLessons.ph and please hit the notification bell button to alert you of the latest video lessons. And for all of your questions, comments, and suggestions, please put them down in the comment section below and message me at kevin troy that's 1994 at gmail.com okay thank you for your outmost support for search was accounting lessons ph and may these videos continue to help students in their online learning and academic development and may these videos continue to help teachers in enhancing their lesson plans and teaching methodologies okay we're ready to start let's have the following cost terminologies at a glance so in the last lesson I've introduced you to cost accounting and how cost accounting helps in decision making. It's now the time to introduce you to the different cost terminologies that we need to understand in studying cost accounting.

Okay, first of all, as to the classification, in the financial statements, we have product cost and period cost. And under product costs, we have cost as to materials, cost as to labor, and cost as to overhead. Okay, as to behavior, cost can be variable, it could also be fixed or mixed and step cost.

And we will also be learning some other terminologies like opportunity cost, sunk cost, committed cost, discretionary cost, controllable cost, and non-controllable cost. And we will also be learning the different methods of separating mixed cost into variable and fixed cost, which is the high-low method and the least squares regression method before anything else let's define what a cost is what is the cost okay remember that cost reflects the amount of resources sacrificed in order for the company to achieve a certain objective such as creation of goods or rendering of services in order to earn revenues well as we all know a business is formed to earn revenues and in order for a company to earn revenues kung service company ka gagastusan mo ng salaries yung mga trabahador mo ikaw din mismo gagastos ka ng utilities for your own office or for your own office space or for kunsan ka man nagre-render ng service diba for merchandising company bago ka makapagbenta ng products bibiliin mo muna yung mga products na yun and merong cost associated with that and in And if you are a manufacturing entity, then there are really costs of production that you need to incur. So basically, as we can see, cost is actually a sacrifice. Because we sacrifice resources, we use resources, we spend in order for us to attain the objectives of the company.

And in cost accounting, that's what we will be computing and that's what we will be talking about. Okay? Remember, cost is a sacrifice, right? Kahit sa love, diba ganon? Pag nagmamahal tayo, ginagastusan natin.

Joke lang po, okay? But remember that cost is a sacrifice of an entity in order for them to achieve the goals and objectives of the company. And better yet, we can say that cost is a sacrifice in order for a company to attain revenue.

Okay? Now, the different costs. according to FS classification would be as follows. The first one is product cost.

Ano po ang tinatawag nating product cost? Product costs are costs identified and incurred by an entity to manufacture a product. So lahat po ng ginagastos na isang company para makabuo ng product, ang tawag po doon product cost. It includes all raw materials used, yung ginagamit po nating mga materials sa production.

and then all the labor costs, the salary we pay to the worker, and all other indirect costs that we are spending, although it is not directly affecting the product, but we are still spending necessary in order to create the product. Okay? Now, product cost has... three components.

The first component is materials. Yun nga po, yung sinasabi ko kanina sa inyo na materials na ginagamit sa production. Also includes the costs of labor and yung tinatawag po natin all other costs na hindi naman related directly to the product but still needed in the production process.

That's what we call overhead. Okay, so let's discuss them deeper one by one. Formally, materials are all raw materials and other supplies used in the manufacturing process.

So, materials has two kinds. Meron po tayong tinatawag na direct materials at saka indirect materials. Pag sinabi pong direct materials, ito po yung mismong materials na talagang dun gawa yung product. For example, in light bulb manufacturing, ang direct material niya is yung mismong glass. And then, syempre, the cost of direct materials, ng light bulb is syempre yung ginastos natin para bilhin yung glass na yon.

Okay, ulitin natin. In light bulb manufacturing, syempre gagastos tayo para bumili ng glass. So, ang cost of direct materials natin, yung mismong pinambili natin ng glass.

Okay? In the manufacture of tables and chairs, ano kaya ang direct material nun? Pwedeng kahoy, diba?

or in the manufacture of teddy bears, yung cotton. and the fabric used to make the teddy bear. What you will really earn from the materials in the product is called direct material. Now we have another kind of material which is an indirect material. Indirect materials are those that you cannot really trace it into the product but it's still needed in order for you to finish the processing of the product.

Glue, oils, nails, screws. yung mga ganon okay hindi mo naman matitrace mismo yung glue na ginamit para magawa yung table or yung mga pako na para magawa yung mga upuan hindi mo talaga siya matitrace directly but it is still needed in the manufacturing process in order for you to finish the product but it's not directly seen okay so ang tawag po dun sa mga yun indirect material okay so that's the first component the second one is what we call Labor are salaries and other benefits provided to all workers. Lahat po ng ginagastos natin para magpasahod ng ating mga trabahador.

Yun po ang nire-record natin as cost of labor. Like materials, meron din po tayong direct labor at saka indirect labor. Pag direct labor, for example, the cost of salaries paid to the laborers of furniture associated directly in the So if you are a manufacturing company that makes furniture, our employees that make furniture, our employees that work there all day and all night, and our employees that make designs of our furniture, what we pay them is cost of labor.

Since they need their labor, directly in order for us to do the product, e di direct labor cost po iyon. Ngayon, meron po tayong mga pinapasahod na related sa manufacturing process, but they are not actually part of the product itself. Okay? Salaries paid to all other factory personnel necessary in the manufacturing process, but is not directly related in the conversion process of the product is what we call indirect labor.

For example, In a factory, we have a factory supervisor who checks all the operations. The factory supervisor is not directly related to making ice cream. It's not directly related to making furniture.

But he still needs to check the operations of the factory. And we pay the factory supervisor. So, even though the factory supervisor is not the one who's making pokpok of all of that furniture, we still pay him. And although he is not the one who makes the product, he is still related to the production.

What is called there is indirect labor. Okay, now, if you already have your materials and labor, then it's time for you to check the overhead. Now, overhead are all indirect costs necessary for product conversion that are not direct materials and direct labor. Ibig sabihin po, lahat po ng cost na kailangan pa rin sa production. pero hindi directly traceable sa product.

Doon po natin ila-lodge lahat sa overhead. For example, lahat po nang nabanggit natin na indirect materials and indirect labor syempre yung equipment po natin sa factory may cost of depreciation kasama po yun syempre yung factory plant natin baka pina-insure natin may insurance cost po yun yung equipment natin sa factory syempre ginagasto sa natin ng repairs and maintenance cost and syempre yung utilities na binabayaran natin related sa factory Okay, so ang overhead po ay usually since hindi po siya directly related sa product, ina-allocate natin siya sa products. And we have, in the succeeding lessons, pag-uusapan po natin how to properly allocate overhead.

And we have different techniques in allocating overhead. Okay? So now, tatanggalin na natin ngayon yung indirect materials and indirect labor as part of materials and labor.

Lalagyan na natin siya ngayon sa overhead. So ang mangyayari, the three components of product costs now will be Direct materials, direct labor, and overhead or our manufacturing overhead. Okay, now direct materials and direct labor, the total cost of materials and labor na direct, ang tawag po dyan ay prime cost.

Bakit po siya tinawag na prime cost? Sila yung kailangan para mismo magkaroon tayo ng produkto. You cannot make a teddy bear without the cotton and the tela.

and you cannot make a teddy bear without the person who will make the teddy bear right? so they are the one who need the most to make the product okay? that's why they are called prime cost the prime cost to make the product now on another perspective we have what we call direct labor and overhead these two, when we add them together they are called conversion cost kasi kailangan mo po yung labor para ma-convert yung product at kailangan mo po yung all other indirect cost para mabuo din po yung product kasi kung wala kang equipment kung hindi ka gumagastos for maintenance no equipment kung hindi ka gumagastos para sa rent ng factory facility hindi rin naman po talaga magagawa yung product diba so direct labor and overhead is called conversion cost now always remember prime cost plus overhead is the total manufacturing cost. And also, direct materials plus conversion cost is our total manufacturing cost. But never ever say that prime cost plus conversion cost is the total manufacturing cost kasi magdodoble yung amount natin ng labor.

And now that we're talking about that equation already, ganito po ngayon yung total manufacturing cost. Direct materials plus direct labor. plus manufacturing overhead is equals to the total manufacturing cost.

In the next lesson, we will talk about the manufacturing of cost of goods manufactured and sold. And this is one of the components of the calculation that we need to remember. But for now, in manufacturing a product, always remember, there are three things that we need.

Direct materials, direct labor, and all other indirect costs that we call manufacturing overhead. Yun po ang tinatawag nating mga product cost. Now, another FS classification of cost is the other one is period cost. Pag sinabi naman pong period cost, it is the entity's operating expenses.

Bakit po sila tinawag na period cost? They are called as such since they are much more associated with time periods rather than the manufacturing process. Time periods kasi, o naka isang buwan na tayo, magkano rent natin for the month.

O naka isang buwan na tayo, magpapasahod na ulit tayo ng mga office workers natin. Ganun sya, okay? They are all other expenses that is not related to manufacturing.

So basically, yung product cost po kasi, yung makikita natin sa cost of goods sold, and then yung makikita naman natin sa operating expenses, yun po yung mga period cost, okay? We can categorize them with the following examples. Pwede pong sila ay marketing and advertising cost, selling and distribution cost, at saka administrative cost or administrative expenses.

Let's talk about them one by one. Marketing and advertising costs are costs or expenses incurred in promoting the entity's products and services. Gagastos ka for advertising, gagastos ka for promotion, gagastos ka for marketing expenses. So dyan mo siya ilalodge. Yan yung mga operating expenses natin na advertising expense marketing expense promotions that in you know okay and then for selling and distribution they include salaries of sales personnel sales agent and a beventa no more product omos alabas and also so distribute yung mga delivery expenses natin kung tayo yung sumasagot ng delivery ng mga umuorder sa atin.

And those are not already related to the manufacturing process of the product anymore. That's already an expense of the company itself. It's already an operating expense. Okay?

And then for administrative expenses, ito naman po yung mga lahat ng makikita mong expenses sa opisina. Okay? Hindi sa factory, ha?

Of course, because you have a factory to make all your products. But you still have an office, right? So all the expenses you spend in the office, those are the administrative expenses. Office utilities, depreciation of office property, plant and equipment, repairs and maintenance of office property, plant and equipment, and all other expenses in the office.

So this is how we're going to look at it. If the utilities are spent in the factory, that's manufacturing overhead. Pero pag yung utilities ginastos para sa opisina, administrative expenses yun. So, yung utilities na ginastos para sa factory, dahil manufacturing overhead yun, nagiging part sya ng product cost. Pero yung utilities na ginastos natin sa opisina, eh ginastos natin sa opisina, diba?

Nagiging part sya ng operating expenses. Isa pa, depreciation ng equipment sa opisina, operating expense yun. But the depreciation ng equipment natin sa factory, part po yun ng manufacturing overhead.

Sana naiintindihan nyo na yung gusto kong sabihin. Isa pa, pag pinarepair mo yung equipment mo sa opisina, operating expense yun. Pero pag pinarepair mo yung equipment mo sa factory, part yun ng manufacturing overhead.

Okay, so now I hope that you are now able to differentiate what a product cost is and what a period cost is. Awesome! Okay, now let's talk about different cost behaviors and the two main cost behaviors is variable cost and fixed cost.

Okay, let's define them one by one. Variable costs are costs that change as the quantity of the goods produced changes. Total amount of variable cost is dependent to the level of production.

Ibig sabihin po, ito yung mga cost na mataas Pag mataas ang production, mababa. Pag mababa ang production. Because they are dependent on the level of activity that the manufacturing company is doing. Okay? For example, cost of materials at saka cost of direct labor computed per piece.

Okay, bakit po ganyan yung example? If the company has decided to produce 100 chairs, How many materials do we need? Of course, for 100 chairs. And if the company will manufacture 200 chairs, How many materials do we need?

Then 200 chairs as well. That's how it works. How about the cost of direct labor?

Of course, if you will do 100 chairs, you will also be able to pay the people who work in the factory. For 100 chairs. If they make 200 chairs, what will you do? you will also be able to pay them for 200 shares.

That's why it's called computed per piece. Especially in the 250 pieces. Parang gano'n. Okay?

Pag sinabing variable cost, it is dependent on the level of production. So if you produce zero, then wala kang cost ng variable cost. You won't spend anything for your materials because you won't do anything.

But if you manufacture 1,000 units, the materials that you need to use is for 1,000 units. Unlike the fixed cost, at whatever level of production within the relevant range, this cost does not change. It is independent in the level of production. We will make 1,000 units, we will make 2,000 units, or we will make none. Fixed cost is still incurred.

For example, kung yung factory facility natin nirerentahan lang natin, gumawa tayo ng zero o gumawa tayo ng 10,000 units, magbabayad tayo ng renta with the same amount. Okay? Ano pa example? Depreciation of equipment, lalo na kung yung depreciation method mo naka straight line method.

Diba? Gumawa ka ng zero o gumawa ka ng 10,000, yun pa rin ang depreciation mo. Okay, so pag sinabi pong fixed cost at whatever level of production we will just incur the same amount Okay, so for you to better understand how variable cost and fixed cost differ with each other, let's have the following concepts.

Variable cost is constant on a per unit basis, but it varies when presented as a total. Kumbaga daw, pag per unit mo pinresent ang variable cost, constant sya, kasi yun yung amount nya per unit. Pero it will vary na kapag pinresent mo na sya as a total, which is ang kabalik na rin naman nya sa fixed cost. It's constant when presented as a total, but it varies on a per-unit basis. So to further elaborate, assume that an entity's normal manufacturing process with a range of 5,000 to 7,000 units of goods with a variable cost per unit of 20 pesos and then a fixed cost of 15,000.

Now, look carefully. We will manufacture between 5,000 to 7,000 units. Ang variable cost na ginagastos natin per unit, 20 pesos.

Pero, at whatever level of production, 5,000, 6,000, 7,000 units, ang fixed cost natin na mai-incur, 15,000 pa din. O ngayon, tingnan natin sa variable cost. Ang sabi sa variable cost, it is constant on a per unit basis. Now, at 5,000 units, at 6,000 units, at 7,000 units, your variable cost per unit is still 20 pesos per unit.

But you try now to multiply 5,000 units to 20 pesos per unit, the total variable cost is now 100,000. If you try to multiply 6,000 units by 20 pesos per unit, the total variable cost now is 120,000. But if you now try to multiply 7,000 units by 20 pesos per unit, the variable cost is now 140,000. Sabi nga sa inyo, variable cost is dependent on the level of production. So, when the number of units increases, total variable cost will increase.

And when the number of units produced goes down, then the total variable cost will also go down. And as you can see, it varies when it is presented as a total. Now, with fixed cost, this is how it looks. At 5,000 units, at 6,000 units, at 7,000 units, we will still incur the same fixed cost, P15,000. But look closely when it is expressed per unit.

It now varies on a per unit basis. P15,000 fixed cost divided by 5,000 units. Ang fixed cost per unit, P3 per unit.

P15,000 divided by 6,000, P2.5 per unit. Pero pag P15,000 divided by 7,000, P2.14. point fourteen so Fixed cost varies on a per unit basis but it is constant when presented as a total. And then, titignan nyo mabuti.

Kapag ka dumadami yung ginagawa natin sa production, pag yung minamanufacture nating units, mas dumadami. Yung fixed cost per unit natin, mas bumababa. Bakit? Mas maraming units yung kumakain ngayon ng fixed cost.

So, ganito ang lagi nyong iisipin. When it's low, production, the fixed cost per unit is high. But if the number of units that we will do is high, expect that your fixed cost per unit will be low. So, we can see that variable cost is directly related with each other. Because while the number of units produced is increasing, the total variable cost is also increasing.

And when the number of units produced is low, the total variable cost will also be low. But when it comes to fixed cost, they are inversely related with each other. Because when the number of units increases, the fixed cost per unit will decrease.

But when the units that we are producing decrease, the fixed cost per unit will increase. Okay? But remember, variable cost is dependent on the level of production. Fixed cost is independent in the level of production. When you produce zero or 10,000, it is...

just the same. Pero remember within the relevant range. Pag sinabing relevant range, yun yung usual na capacity ng company na mag-produce.

Okay? Kasi there are times na kunyari, the relevant range or the normal capacity of a company is to produce 10,000 units. So, kapag 12,000 yung iniisip nilang i-produce, baka hindi na kaya nung kanilang current na capacity or current equipment so nangyayari yung fixed cost natin na dadagdagan or baka kailangan natin mag-expand ng panibagong ng panibagong factory parang ganun yun nangyayari so basically variable cost and fixed cost remain the same lalo na sa fixed cost it remains the same pero dapat within the relevant range or the normal the capacity of the company.

Okay? Because usually, when the capacity expands, your fixed cost will change. Because you have more equipment, you have more new facilities, so the fixed cost will change. What we are talking about in this cost behavior is within the company's relevant range.

Awesome. Okay. We also have this cost equation.

Okay? So the cost equation that we will be talking about here in this video is y is equals to a plus bx okay where y is represented or represents rather total cost of the product and then a is the total fixed cost of the product b is the variable cost per unit and x represents the volume of activity Paano natin i-express to? Para mas maintindihan nyo, let's try the following example. How much is the total cost to manufacture products with a variable manufacturing cost per unit of 25 pesos and total manufacturing fixed cost of 40,000 at the following production levels? 2,000 units, 4,500 units, and 7,250 units.

Let's just use the cost equation to compute for the total cost of manufacturing these units. Okay? So, at 2,000 units, this will be our equation. Y is equal to A plus BX. Y is equals to A is your fixed cost of 40,000 plus B which is your variable cost of 25 times 2,000 units.

So 2,000 times 25 is 50,000 plus fixed cost of 40,000. Total cost is 90,000. What is 50,000? Total variable cost.

What is 40,000? Total fixed cost. How about for 4,500 units?

So we will just replace X with 4,500 units. Since it represents the activity. So again, Y is equal to A plus BX. Y is equal to fixed cost of 40,000 plus 25 variable cost per unit multiplied by the level of activity of 4,500. 4,500 times 25 is 112,500.

And that is your variable cost plus 40,000 gives you total cost of 152,500. Sige nga po, itry nyo po sa letter C. Pause the video and when you're ready. Play the video again for the solution. Okay, assuming that you have already computed for the total amount for 7,250 units, the correct answer is 221,250.

Okay, I've introduced you to this equation kasi gagamitin po natin siya mamaya. Okay, awesome. Let's have more cost behaviors. We also have mixed cost and step cost. Pag mixed cost po, pareho syang more variable and fixed component.

Next example po natin yung utilities. Kunyali, electricity. These are charged with a base amount, which is at whatever level may base amount ka nababayaran. So that's the fixed component. And then, it goes higher with any usage over the base amount.

Okay? So, it has a fixed component and a variable component. And we will talk about it later in order for a company to properly classify and to analyze their cost. The mixed cost, we should separate or segregate its variable cost component and its fixed cost component.

Later, we will discuss how to do that. As for step cost, Costs that are constant on a certain level of activity but increases or it actually can decrease depending on another level of activity. For example, salaries and commission of agents that goes higher with different ranges of activity. For example, people served. For example, what are you?

We are in the service industry. Airline operations. If you served 1,000 guests, you will have...

2,000 pesos commission but if you serve 2,000 to 3,000 guests, ang commission mo na ay 4,500 and if you serve 10,000 guests, you will have 5,000 pesos commission. Ganun siya. Okay? So, depending on the level of activity, nagbabago yung cost niya.

Okay? It goes up or it goes down depending on the range of activity. Okay?

That's it. Now, Let's now try to separate mixed cost with the following problem. Ah, sorry, wala pa pala yan. Okay, in separating mixed cost, there can be two methods.

So we will be discussing two methods here. In this video, we have the high-low method and the least square regression method. Okay, so let's try.

to discuss high-low method using this problem credits to the textbook management advisory services by professor flan franklin t agamata the 2013 edition of the book okay jimin corporation builds tabletop replicas of some of the most famous tourist attractions in seoul the company is highly automated where maintenance cost shows as a significant expense The owner decided to use machine hours as the basis of predicting maintenance cost and has gathered the following data for the following eight weekly operations. Sir, you are given there weeks one to eight and then the number of machine hours na ginagamit po para magawa yung tabletop replicas and then the total maintenance cost na nagastos kada linggo. total na yung cost kasi na available information na nakukuha ng company kasi mixed cost siya eh.

Now, we will be using the HILO method in order to determine kung ano yung variable cost per unit, the total fixed cost, and magkano po kaya yung total maintenance cost natin kung ang number ng machine hours for a certain week is 8,200. Okay? So you can maybe screenshot the problem first.

so that you can follow it step by step. Okay, so if you're ready, then let's start. The first step is to determine the highest and lowest activity and the cost associated thereunto.

Let's go back to the table. Which of these machine hours is the highest activity? Or you can just use what you learned in elementary.

ascending and descending order of numbers. Alin po kaya dito yung highest activity natin? Okay?

Our highest activity, as you can see, is ito pong 9,000 machine hours. And the cost associated with the highest activity is the maintenance cost of 24,800. Ano naman po yung lowest? So kita naman po natin, meron tayong 5,500. May mas mababa pa ba sa 5,500?

Merong 4,500. May mas mababa pa sa 4,500? 3,500.

May mas mababa pa sa 3,500? 3,000. So yun po yung lowest activity natin with a maintenance cost of 9,800. So that's the first step. Determine the highest and lowest activity and ano po yung cost nakasama dun sa highest and lowest activity.

Now, step 2, obtain the variable cost per unit by dividing the change in cost over the change in activity. Okay, so this is what we did earlier, right? We got the highest activity and the lowest activity.

So, our first step is to use this equation. Variable cost per unit is equals to the cost at highest activity minus the cost at lowest activity over highest activity less lowest activity. Or you can simply say, change in cost over change in activity. That's it, okay? Change in cost over change in activity.

so if a plot po natin sa equation yung ating pong mga numbers. Cost at highest activity is 9,000. Ah, sorry.

Mali. Cost at highest activity is our highest activity is 9,000 which is 24,800. Sorry, nalito. So, ito po, 24,800. And then, cost at lowest activity is the lowest activity of 3,000, 9,800.

Ito po yun. Highest activity, is 9 000 machine hours lowest activity is 3 000 machine hours okay get the difference of the numerator and the denominator so 24 800 minus 9 800 gives you 15 000 pesos and then 9 000 machine hours minus 3 000 machine hours is 6 000 machine hours perform the calculation and your variable cost per unit is 2.5 per machine hour. We got the variable cost per unit.

Step 3, obtain the total fixed cost by removing the variable cost component in the total cost. And it will be computed like this. So what we will do is we will tabulate the total cost of our highest activity and lowest activity.

Going back to the table earlier, the total cost... po natin at highest activity is 24,800 and the total cost naman po natin sa lowest activity is 9,800. Ang sabi po we will be removing the variable cost component kasi nga naman po So, if total cost, you will remove the cost.

variable cost component, then of course you will get the fixed cost. At high activity, which is 9,000 machine hours, multiply that with variable cost per unit of 2.5. So 9,000 times 2.5 is 22,500. At low, 3,000 machine hours times 2.5 is 7,500.

So 24,800 minus variable cost of 22,500 is our fixed cost component. is 2,300. Sa lowest activity naman po, 9,800 minus 7,500, 2,300.

Pero pansinin nyo mabuti, paano nyo malalaman kung tama yung sagot nyo? Dapat, at whatever level of activity, it is just the same. Parehong 2,300, 2,300, kasi nga hindi dapat magbago dahil siya ay fixed cost.

Awesome! Okay, I hope you understand that. Okay, and then we have another requirement. So, magkano naman po ang total maintenance cost at 8,200 machine hours? So, nakuha na po natin yung variable cost per unit na 2.5 at nakuha na rin po natin yung total fixed cost na 2,300.

So, let's just perform the Y is equals to A plus BX. So, Y is equals to fixed cost of 2,300 plus The product between the variable cost per unit of 2.5 and the activity which is 8,200 machine hours. 2,300 fixed cost plus total variable cost of 20,500. The total maintenance cost for 8,200 machine hours is 22,800 pesos. Ganun lang po.

Pag nakuha na po natin, so kahit anong machine hours ang tanungin sa inyo sa problem, basta nakuha nyo na po yung fixed cost na total tsaka variable cost per unit. you can simply use y is equal to a plus bx. Awesome. Now, let's move on to least squares regression method.

So, medyo mathematical po ito. And pangungunahan ko na po. Sorry po sa mga math teachers na makakanood po ng videong ito.

So, I don't know the proper terminologies to use in mathematics in these equations. But I hope that you can forgive me. with the step-by-step procedure. So, sorry po, hindi po kasi ako mathematician, but I will do my best to explain this very well to the students.

Okay, so let's use po the same problem, and then using the least squares regression method, determine the variable cost per unit and the total fixed cost. Okay, so let's do it like this. Step 1, prepare a table calculating x, which represents the activity, why rich which represents your total cost and then x y and x squared. Ayan po. Okay.

Paano po yan? Remember that x is your activity. So ito po yung mga machine hours natin from week 1, week 2, week 3, week 4, 5, 6, 7, 8. Nilista ko lang po.

Okay. And then sa y naman po, ito po yung total cost natin. So kukunin nyo lang din po, lilista nyo lang din po.

9,800, 12,900 and so on. ang xy naman po is syempre you will be multiplying x to y so i suggest po you can use microsoft excel para mas bumilis po kayo dito okay so for example at week one three thousand times nine thousand eight hundred gives you twenty nine million four hundred thousand okay four thousand five hundred times twelve thousand nine hundred gives you fifty eight million fifty thousand and do the same until the weak 8 next naman po is x squared okay So, x squared lang po. So, 3,000 times 3,000, 9,000.

4,500 times 4,500, 20,250 and perform everything. Now, the last thing you should do is sum. Okay?

So, kukunin niyo po yung summation or yung totals po nila. Total of x is this one, 46,500. Total of y is this one, 118,500.

And then this is the total for xy and the total for x squared. Ito po yung mga kakailanganin natin mamaya sa equation. And then remember, n is equals to 8. Saan po galing yung 8? Week 1, 2, 3, 4, 5, 6, 7, 8. So the total number of observations po natin is 8. So n is equals to 8. Okay, sorry po ha, medyo mathematical. Okay, so ganun po siya.

So after you have prepared the table calculating x, y, x, y, and x squared, we are now ready to substitute the computed amounts in the following equation to get the variable cost per unit. Okay, so remember that we came from y is equals to a plus bx. Okay, so transforming it in the model for least square regression, the first equation would now be the summation of y is equal to the number of observations n multiplied by a plus b multiplied by the summation of x.

And another equation would be the summation of xy is equal to the summation of x multiplied by a plus b multiplied by the summation of x squared. Teachers, isn't summation like a face? It looks like letter e but it's not letter e. I think this is a Greek alphabet.

But for the other teachers, for the students to understand this least square regression, the letter E, although it's not letter E, they use letter E to memorize the equation that's used in least square regression. So what we're going to do is, Yabex A na bex, xcx sa bex squared. Again, Yabex A na bex, xcx sa bex squared. Last one.

Yeah, BEX A na BEX XCX sa BEX squared. Yan po ay gagawin nyo lang para lang maintindihan or makabisado po yung formula. Pero wag nyo po itong tatawaging letter E kasi hindi po letter E yan. Okay?

Hindi po yan letter E yan. The proper way to read it is the summation of Y is equals to N multiplied by A plus B multiplied by A. by the summation of x and the summation of xy is equals to the summation of x multiplied by a plus B multiplied by the summation of x squared that's how you should read it. I just taught you the easy way to remember it but don't say E in front of the math teacher let's be honest, maybe I should say what Sir Chua is teaching you okay so ganun po siya now Using these equations, eto po, babalik po tayo dun sa table natin kanina, kinuha ko na lang po yung sum where n is equals to 8. Okay, so let's now try.

First equation, summation of y, bedyo dadandahanin ko ah. Summation of y, so eto yun, 118,500 is equals to n, which is 8, a plus b. multiplied by the summation of x. The summation of x is 46,500 and then b. Okay?

Unayin nyo po yung number bago yung letter. Diba? Coefficient sila sa math.

Tama ba ko? Coefficient? Okay.

And then, the next equation is the summation of xy, sorry, so this one, 756,350,000 is equals to the summation of x, which is 46,500, multiplied to a, plus B, so this is B, summation of x squared, 301,750. 301,750,000, this one. That's your second equation.

Ngayon, ang meron po tayo ay, if I remember it correctly, the system of equation in two unknowns. Ano po yung two unknowns natin? A tsaka B. Okay? So, dahil po, nasa system of equation in two unknowns tayo, gagamitin po natin yung method.

So that we can use the elimination method. So, what we want to eliminate is A. So that we can get B. Because remember, B represents the variable cost per unit. So, what we are going to do is this next one.

How is that? The first equation will be multiplied by negative 46,500. And the next equation will be multiplied by positive 8. okay so if i perform you lang negative 46 500 multiplied here and here and here and then 8 multiplied by here and here and here so you will get another equation like this so this one multiplied by this one is this this one multiplied by this one is this this one multiplied by this one is this okay then you do the same for the next equation okay then do it mathematically. So as you can see, pwede na tayo mag-eliminate ng A kasi yung A natin here is 372,000 and then this one naman is negative 372,000. Okay?

Then ipaperform nyo yung calculation dito at saka dito. So mau-uwi kayo sa summarized equation na ganito. Ayan.

540,550,000 is equals to 251,750,000 B. Okay? then To solve for B, divide both sides by 251,750,000 and you will get the variable cost per unit of 2.15.

Okay? So, I suggest po, wag nyo lang siyang titigan. sa video, gawin nyo po siya sa paper.

I-rewrite nyo po. Kasi hindi nyo siya magigets ng pinapanood nyo lang sa video. Okay?

You can pause the video, you can take a screenshot of this para maintindihan nyo po. And I suggest, kung medyo mahirap pong intindihan ito sa inyo dahil malalaki yung number, balikan nyo po yung mathematics nyo regarding sa system of linear equation in two unknowns. Yun po kasi yung lesson yan sa mathematics na ginagamitan natin ng elimination method.

Okay? So, balik po kayo sa junior high math. Nandun po yan.

Okay? So, nakuha na po natin yung variable cost per unit. It's time for us now to get the fixed cost. Okay? Substitute B. Meron na kasi tayong B eh, which is your variable cost, to any equation to get A, which is your total fixed cost.

Remember that our B is 2.15 and then we have the following system of equations Gamitin na lang natin yung mas maikli para mas madali. Okay? So, 118,500 is equals to 8A plus 46,500B.

118,500 is equals to 8A plus 46,500 multiplied by the variable cost per unit of 2.15. Perform the multiplication. We have 118,500 is equals to 8A plus 99,975.

Then, transfer transpose item or, what is it? Sorry. Transpose to the other side. Sorry. I just did mathematics again.

Okay. So, it will be we will transpose 8a to the other side. So, it will be negative 8a.

Then, this will be entered to the other side. So, negative 118,500 plus 99,975. Perform the mathematics. So, we have negative 8a is equal to negative 18,525. Divide both sides by negative 8 to get A.

So, magiging negative 18,525 divided by 8. So, we will get A is equals to 2,315.63. Yan po yung ating total fixed cost. Ngayon, i-compare po natin yung nakuha nating variable cost per unit at saka total fixed cost under high-low method and least square regression method. Let's take a closer look. Variable cost per unit is 2.5 under Hilo method and under least square regression 2.15.

Total fixed cost under Hilo method is 2,300 and then under least square regression method is 2,315.63. Now, you can say that you did it correctly if they are not far apart. So pareho po tayo nasa range ng... 2.5, 2.15, 2,300, 2,315.63.

Hindi po siya nagkakalayo, ibig sabihin our calculations are correct or our estimates are correct. Okay? Awesome.

Let's discuss some more other cost terminologies that are important for your learning. So first po is opportunity cost. Opportunity costs are the benefits for GAN in choosing one action over another. Example. If you have excess office space, instead of renting it, you just used it.

So what was the opportunity cost there? What was the benefit for gone? You would earn additional rental income if you didn't use your idle capacity of office space.

But usually, opportunity cost is more only on decision making. But actually, remember, purple. Opportunity cost is not accounted for in accounting. In economics, yes.

But opportunity cost in accounting, we don't really account for that. Especially in financial accounting, you will never see that. In management accounting and here in cost accounting, it is only used for decision making. For example, if we use our idle space, we will use it in production or in the office. But, Sayang yung kikitain sana natin kung ipaparenta natin yung space na yun.

Ayan, ganun yung opportunity cost. It's more of a decision making, okay, rather than reporting it in financial accounting. Okay? Sang cost. Cost incurred that will not affect a future decision.

Wala na, nagastos na, hindi natin mababalik yun. For example, if you're deciding to buy a new equipment, the cost of an old equipment would not matter anymore. You bought it, you spent it, right? So the things you spent on your exes, what's the cost of that? Right?

You spent on your exes, you can't return it. And it will not affect a future decision because you already spent it. You get it? Okay.

That's the cost, right? The company has future decisions that we can't consider those costs anymore because we already spent it. Okay?

I hope you understand that. Committed cost. Cost resulting from organizational structure or use of facility.

So, because... yung mga facilities na ito, ginagamit natin, kinukomit natin magbayad ng ganito ng ganyan. For example, wala tayong sariling factory or wala tayong sariling office space.

Nagre-renta lang tayo. So we commit to pay the rent. Okay? Ganon.

Discretionary cost. Cost arising from managerial decision. Sila ang may discretion. Sila ang may decision na gastusin yan. Best example, research and development expenses.

Pwedeng mag-decide ang company na huwag namang mag-research and development. Okay? Pero it's their discretion to do it.

So it became a discretionary cost. Controllable cost naman po yung mga cost na available to be influenced on how much shall be spent. For example, materials.

Ilang grams ba ng materials yung kailangan natin dito? Pwede nyong kontrolin, pwede nyong bawasan, pwede nyong dagdagan. Nakokontrol siya.

Okay? Kunyari, naisip nyo na... Naku, parang di naman pala kailangan masyadong paint yung ginagamit natin para makabawas sa ating production process. Bawasan natin ng konti yung paint na ginagamit natin. Pareho lang pala ng itsura pagkatapos ng production.

Eh, masyado tayong maraming gumastos ng paint. O yung mga ganon, diba? Nakokontrol nyo siya.

Okay? Non-controllable naman po, yung mga hindi na pwedeng kontrolin or hindi pwedeng ma-influence. Like depreciation.

Di naman natin makokontrol yun, diba? Ayan. Okay?

So... or usually the cost allocated to a department we will not be able to stop that okay so those are the other cost terminologies that you need to understand and we're done with our discussion awesome okay so our next lesson would be the manufacturing accounting cycle so we will be discussing the journal entries the new account titles that you need to know and then the T accounts And we will also be doing the statement of cost of goods manufactured and sold in the next lesson. Awesome. Okay, so please again like, share, and subscribe to Sir Chua's Accounting Lessons PH and hit the notification bell button to alert you of the latest video lessons. For all of your questions, comments, and suggestions, please put them down in the comments section below.

And for webinar and speakership invites, please send me a message at kevintroy.chua1994 at gmail.com. This has been Sir Chua's Accounting Lessons, Ph.D., College Edition, and this is Cost Accounting and Control. To God be all the glory, honor, and praise.

Thank you, Lord, for the wonderful discussion. Thank you, students, and have a great day. All together, it's good. I just wonder if you like me. I can show you my love, here it is.

Don't be shy again.

Transcript for:Cost Concepts in Cost Accounting

Transcript for:
Cost Concepts in Cost Accounting