Mr. Marlon M.

Ladesma
Cost

- the monetary amount of the resources given up to

attain some objective such as acquiring goods and
services. When notified by a term that defines the
purpose, cost becomes operational (eg. Acquisition
cost; production cost; cost of good sold).
Cost Behavior

- It is the relationship between the cost and activity.

Cost can be classified according to their behavior as
to how they react to change in activity like
production. Behavior classification of costs is proven
to be useful and relevant in management planning
and control.
Cost Behavior
Total Amount Per Unit Amount
Decreases as
1. FIXED Constant production
increases
Increases as
2. VARIABLLE production Constant
increases

Increases less
Decreases less
proportionately (vs
proportionately (vs
total variable
3. MIXED fixed cost per unit)
costs) as
as production
production
increases
increases
Cost Behavior
FIXED COST VARIABLE COST
-discretionary fixed -True Variable
-Committed Fixed -Step Variable

MIXED COST
(Semi Variable)
Y = a + bX
Cost Behavior
MIXED COST
(Semi Variable)
Y = a + bX

Where: [Y] – the total cost (dependent variable)

[a] – the total fixed cost (y-intercept)
[b] – the variable cost per unit (slope of the line)
[X] – the activity or cost driver (independent
variable)
Cost Behavior Assumptions
Relevant Range Assumption – refers to the range of
activity within which the cost behavior patterns are valid.
Any level of activity outside this range may show a different
cost behavior pattern.

Time Assumption – cost behavior patterns identified are

truly only over a specified period of time. Beyond this, the
cost may show a different cost behavior pattern.

Linearity Assumption – the cost is assumed to manifest a

linear relationship over a relevant range despite its tendency
to show otherwise over the long run.
Cost Estimation: Segregation of Mixed
Cost into Fixed and Variable Costs
1. High-Low Points Method
2. Scattered Graph Method
3. Least Squares Regression Method
4. Industrial Engineering Method
5. Account Analysis Method
6. Conference Method
High-Low Points Method
The fixed and variable components of the mixed costs
are computed from two samples data points (the
highest and lowest points as to activity level or cost
driver).

Variable cost per unit (b) = Change in costs (YH-YL)____

Change in Activity (XH-XL)
Scattergraph Method

All observed costs at various levels are plotted on a

graph. Based on sound judgment, a regression line is
then fitted to the plotted points as to represent the
line function.
Least-Square Regression Method
It is a statistical technique that investigates the
association between dependent and independent
variables. This method determines the line of best fit for
a set of observations by minimizing the sum of the
squared deviations between cost line and data points.
-If there is only one independent variable, the analysis is
known as Simple Regression.
- If analysis involves multiple independent variables, the
analysis is known as Multiple Regression.
Industrial Engineering Method

-Based on the relationship between inputs and

outputs in physical forms; engineering estimates
indicate what and how much cost should be.
Account Analysis Method

-Each account is classified as either fixed or

variable based on experience and judgment of
accounting ad other qualified personnel in the
organization.
Conference Method

-Costs are classified based on opinions from

various company departments such as
purchasing, process engineering, manufacturing,
employee relations and so on.
Correlation Analysis
- It is used to measure the strength of linear
relationship between two or more variables. The
correlation between two variables can be seen by
drawing a scatter diagram:

- If the points seem to form a straight line, there is a

high correlation.

- If the points form a random pattern, there is a low

correlation or no correlation at all.
Coefficient of Correlation (r)
- Measures the relative strength of linear relationship
between 2 variables. The range of the coefficient “r”
is from -1.0 to +1.0.
- If r = -1.0, there is a perfect inverse linear relationship
between 2 variables.
- If r = 0, no linear relationship.
- If r = +1.0, there is a perfect direct relationship
between X and Y.
Coefficient of Determination (r2)
- It is the proportion of the total variation in Y that is
explained or accounted for by the regression
equation, regardless of whether the relationship
between X and Y is direct or inverse. It is the measure
of “goodness of fit” in the regression. The higher the
r2, the more confidence one can have in the
estimated cost formula.
Balance Scorecard
- It is an approach to performance measurement that
combines traditional financial measures with non-
financial measures.

There are four (4) perspective of balance scorecard.

1. FINANCIAL perspective
2. CUSTOMER perspective
3. LEARNING & GROWTH perspective
4. INTERNAL BUSINESS PROCESSES perspective
Financial Perspective

- Measures reflecting financial performance.

Examples: profit, return on investment (RoI),
revenue growth
Customer Perspective

- Measures having a direct impact on customers.

Examples: customer satisfaction, customer retention,
market share, customer complaints
Learning & Growth Perspective

- Measures describing the company employee’s

learning curve. Examples: employee satisfaction,
employee turnover, training and recreation.
Internal Business Processes
Perspective

- Measures showing key business processes

performance. Examples: manufacturing cycle
efficiency, product quality, productivity measures,
throughput
Components of Balanced Scorecard
Strategic Objectives – a statement of what strategy
must achieve and what is critical to its success.
Strategic Initiatives – key action programs required to
achieve strategic objectives.
Performance Measures – describe how success in
achieving the strategy will be measured.
Baseline Performance – the current level of
performance measure.
Targets – the level of performance or rate of
improvement needed in the performance measure.
-end-