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# MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 19
RELEVANT COSTS FOR DECISION MAKING
I.

Questions
1. Quantitative factors are those which may more easily be reduced in terms
of pesos such as projected costs of materials, labor and overhead.
Qualitative factors are those whose measurement in pesos is difficult and
imprecise; yet a qualitative factor may be easily given more weight than
the measurable cost savings. It can be seen that the accountant’s role in
making decisions deals with the quantitative factors.
2. Relevant costs are expected future costs that will differ between
alternatives. In view of the definition of relevant costs, historical costs are
always irrelevant because they are not future costs. They may be helpful
in predicting relevant costs but they are always irrelevant costs per se.
3. The differential costs in any given situation is commonly defined as the
change in total cost under each alternative. It is not relevant cost, but it is
the algebraic difference between the relevant costs for the alternatives
under consideration.
4. Analysis:
Future costs:
New Truck
Less: Proceeds from
disposal, net

Replace
P10,200

Rebuild

1,000
P 9,200

P8,500
P700

The original cost of the old truck is irrelevant but its disposal value is
relevant. It is recommended that the truck should be rebuilt because it
will involve lesser cash outlay.

II. Exercises
Exercise 1 (Identifying Relevant Costs)
19-1

................................ P0... d.. c. X Fixed selling expense.. Item Relevant Sales revenue........500* ÷ 10................. However................................................. X Variable manufacturing overhead.43 * Depreciation. Market value – Model F5000 machine (cost).......... X Direct labor........................... X Case 2 Not Relevant Relevant X Not Relevant X X X X X X X X X X X X X X X Exercise 2 (Identification of Relevant Costs) Requirement 1 Fixed cost per mile (P3................................................................................................................................................................................. h...... 60 Total................................................................................35 Variable operating cost per mile................................................................. f.............................................08 Average cost per mile... k..................... Disposal value – Model E7000 machine......................................... i...............................500 Requirement 2 The variable operating costs would be relevant in this situation... Variable selling expense............... 960 Garage rent.......... P3............ The automobile tax and license costs would be incurred whether Ingrid decides to drive her own car or rent a car for the trip during summer break and are 19-2 . j............... l............ P2.........Chapter 19 Relevant Costs for Decision Making Case 1 a................ The depreciation would not be relevant since it relates to a sunk cost...................................................... X Book value – Model E7000 machine.................. any decrease in the resale value of the car due to its use would be relevant............................ 480 Automobile tax and license........................................................................................................... Depreciation – Model E7000 machine...... b.......000 miles). X Direct materials.......................................................... e......... g.................................. X Fixed manufacturing overhead............................. X General administrative overhead..........000 Insurance....................................................... P0........... 0.................................................................................

...........550..000.000 Difference in favor of continuing to make the parts P30 P450.200...000 P3. The remaining book value of the special equipment is a sunk cost.000 0 0 0 P200 P2........ This requirement helps to dispel that notion..000...) Exercise 3 (Make or Buy a Component) Requirement 1 Cost of purchasing Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead... The variable operating costs would be the same and therefore are irrelevant........ Based on these data. P3.... hence. the relevant costs would be the purchase price of the new car (net of the resale value of the old car) and the increases in the fixed costs of insurance and automobile tax and license... the P3 per unit depreciation expense is not relevant to this decision....... common Per Unit Differential Costs 15........ It is unlikely that her insurance costs would increase as a result of the trip..000 P 60 P 900. (Students are inclined to think that variable costs are always relevant and fixed costs are always irrelevant in decisions....000 19-3 .Relevant Costs for Decision Making Chapter 19 therefore irrelevant. so they are irrelevant as well.000 20 0 P170 Total costs 300. traceable1 Fixed manufacturing overhead...000 units Make Buy Make Buy P200 P3....000.000 10 150. The original purchase price of the old car is a sunk cost and is therefore irrelevant......... the company should reject the offer and should continue to produce the parts internally.................... Requirement 3 When figuring the incremental cost of the more expensive car....000 1 Only the supervisory salaries can be avoided if the parts are purchased. The garage rent is relevant only if she could avoid paying part of it if she drives her own car.. Requirement 2 Make Buy Cost of purchasing (part 1)...000 80 1......

00 Special filigree 60.430......00 600...............00 Total variable cost P2. P3............00 Total incremental cost 28..................300......600..650.........850............................................ In particular.................00 Fixed costs: Purchase of special tool 4........00 Direct labor 860..00 700.. This conclusion would not necessarily follow if the special order affected the regular selling price of bracelets or if it required the use of a constrained resource...............145.......................................000 Opportunity cost—segment margin forgone on a potential new product line............ 650........... Per Unit P3...........420......................000 Total cost.... The other manufacturing overhead costs are fixed and are not affected by the decision.00 Incremental revenue Incremental costs: Variable costs: Direct materials 1....200.......................00 8.......... Exercise 4 (Evaluating Special Order) Only the incremental costs and benefits are relevant............. Exercise 5 (Utilization of a Constrained Resource) Requirement 1 X 19-4 Y Z .....00 Even though the price for the special order is below the company’s regular price for such an item........000 Thus..............50 Total 10 bracelets P34.....................00 Variable manufacturing overhead 70.......995............ P200.......499.................000..................000 Difference in favor of purchasing from the outside supplier.000 P3....... only the variable manufacturing overhead and the cost of the special tool are relevant overhead costs in this situation....00 24.... the special order would add to the company’s net operating income and should be accepted.. P2......Chapter 19 Relevant Costs for Decision Making Cost of making (part 1).00 Incremental net operating income P 6....550..............................00 14...... the company should accept the offer and purchase the parts from the outside supplier.200.............

..000 P36.............Relevant Costs for Decision Making Chapter 19 (1) (2) (3) (4) Contribution margin per unit...000 Although product X has the lowest contribution margin per unit and the second lowest contribution margin ratio...................................000 Y P9 × 3....... In that case.. Since labor time seems to be the company’s constraint.........................0 Contribution margin per direct labor-hour (1) ÷ (4)................ it has the highest contribution margin per direct labor-hour..... this measure should guide management in its production decisions....... if all the demand for both products X and Z has been satisfied............................. If there are unfilled orders for all of the products......................... Jaycee would presumably use the additional time to make more of product X.. P12 P 9 P10 Requirement 2 The company should concentrate its labor time on producing product X: X Contribution margin per direct labor-hour Direct labor-hours available Total contribution margin P12 × 3................. The upper limit of P20 per direct labor hour signals to managers how valuable additional labor hours are to the company. 8 8 8 Direct labor-hours required per unit (2) ÷ (3)............................................... but would of course prefer to pay far less.... Therefore..........000 P30..... Requirement 3 The amount Jaycee Company should be willing to pay in overtime wages for additional direct labor time depends on how the time would be used............5 4...0 2....000 Z P10 × 3. the company should be willing to pay up to P18 per hour (the P8 usual wage plus the P10 contribution margin per hour for product Z) to manufacture more product Z. If all the demand for product X has been satisfied... P12 P32 P16 Direct labor rate per hour...................... In that case........ Likewise.................. Jaycee Company would then use any additional direct labor-hours to manufacture product Z.......... the company should be willing to pay up to P17 per hour to manufacture more 19-5 .................. Jaycee should be willing to pay up to P20 per hour (the P8 usual wage plus the contribution margin per hour of P12) for additional labor time..................................................... additional labor hours would be used to make product Y............... P18 P36 P20 Direct labor cost per unit..............000 P27.... Each hour of direct labor time generates P12 of contribution margin over and above the usual direct labor cost........ 1..............

III.000 units P9.000) Product B P150..08 P0......000 90.000 15.... but not Product A........50 0.....000 35..70 0..000 P(33..000 Product C P75......20 0....000 50.......000 30.80 P0....40 0...000 units P8.000 40..........000 60............ Problems Problem 1 (Accept or Reject an Order) Selling price per unit Less Variable costs/unit: Materials Labor Factory overhead (25%) Contribution margin/unit Multiplied by number of units to be sold Total contribution margin Product A P1..... Less fixed costs that can be avoided: Advertising – traceable.....000 47.24 0... 19-6 P(80..400 0........000 3.000 P(5.... Computations to support this answer follow: Contribution margin lost if the round trampolines are discontinued..000) P41. Problem 2 (Eliminate or Retain a Product Line) Requirement 1 No.Chapter 19 Relevant Costs for Decision Making product Y.. Exercise 6 (Sell or Process Further) Sales value after further processing Sales value at split-off point Incremental revenue Cost of further processing Incremental profit (loss) Product A P80.20 Product B P1...........000 6................000 12.....000 20....600 Product B should be accepted because its total contribution margin is higher than that of Product A. Line supervisors’ salaries...000 Products B and C should be processed further...... Decrease in net operating income for the company as a whole.......... production and sale of the round trampolines should not be discontinued....000) ......32 30..40 21.14 1...000 60..10 0.

..........000 300.... 330.........000 Less common fixed expenses....000 35..000 P 13...5 4 hrs...25 D P8 4 P4 1 hr..000 Depreciation of special equipment............ 19......000 7......000 60... P1....000 210......... It is a common cost and therefore should be deducted from the total product-line segment margin.........000 Less variable expenses......000 157.000 80..000 Contribution margin. P1 19-7 Product Line B C P25 P10 10 5 P15 P 5 10 hrs.000 Total traceable fixed expenses..000 20..Relevant Costs for Decision Making Chapter 19 The depreciation of the special equipment represents a sunk cost..000 Net operating income (loss).000 Product-line segment margin............000 P104.......000 P500.... 410.000 150..000 P143.. 590...... it is not relevant............000 106...000 110... thus.... the general factory overhead should not be allocated..000 Octagonal P360............. 216... 95............000... 260...... P 60..... and therefore it is not relevant to the decision. The general factory overhead is allocated and will presumably continue regardless of whether or not the round trampolines are discontinued....000 200...... of hours required for each unit Contribution per hour A P30 25 P5 5 hrs....000 Less fixed expenses: Advertising – traceable...000 Problem 3 (Product Mix) Requirement 1 Selling price per unit Variable cost per unit Contribution margin / unit Divided by no........000 65.... P1.. P1... A more useful income statement format would be as follows: Total Sales...........000 67.... 200....000 40.000 Line supervisors’ salaries..000 6.000 Trampoline Round Rectangular P140.. P4 ....... Requirement 2 If management wants a clear picture of the profitability of the segments.....000 41....000 6.......

200 units of Product B.000 Problem 4 (Accept or Reject a Special Order) Requirement 1 The company should accept the special order of 4. the best product combination is 4.000 @ P10 each because this selling price is still higher than the additional variable cost to be incurred.200 units of Product B.Chapter 19 Relevant Costs for Decision Making Product ranking: 1.200 x P15. C 4. The remaining 92. first priority should be given to Product D. excess over profit in combination (1) P 16.000 P230. B 3.000 hours in producing 96.000 units of product D only. should be used to produce 9.000 P154. Whether or not variable marketing expenses will be incurred.000 x P 4. the company should use all the available 96.000 138.000 x P4) Difference. Hence.000 out of the available 96. The difference in profit between the two alternatives is computed as follows: Contribution margin of combination (1) Product D (4.000 hrs. D 2. the decision is still to accept the order. 19-8 .00) Product B (9.000 units of Product D and 9. The company should use 4. Requirement 2 If there were no market limitations on any of the products.00) Total contribution margin of D and B Less contribution margin of D only (96.000 hrs. A Based on the above analysis. to produce 4.000 units of product D. Supporting computations: (a) Assume no additional variable marketing cost will be incurred.000 384.

000 No.00 0.00 3.00 3.000 units P5.00 P 1.00 0.75 8.000 units x (P15 .P9)] Less proposed contribution margin [(P14 .000 (b) Assume additional variable marketing cost will be incurred.75 + P0.000 Requirement 2 P8.75 P8. the total variable manufacturing cost. of months 6 19-9 Probability 20% .000 55.000 The company should not reduce the selling price from P15 to P14 even if volume will go up because total contribution margin will decrease.P9) x 11.00 9.000 P 5.25 4.75.000 units P4.00 P5.75 P 1. Problem 5 (CVP Analysis used for Decision Making) Requirement (a) Units sold per month 4.25) Contribution margin / unit Multiplied by number of units of order Total increase in contribution margin P10.Relevant Costs for Decision Making Chapter 19 Selling price per unit Less variable manufacturing costs: Direct materials Direct labor Variable overhead Contribution margin/unit Multiplied by number of units of order Total increase in profit P10.00 4. Requirement 3 Direct materials Direct labor Variable factory overhead Total cost of inventory under direct costing P5. Selling price per unit Less variable costs (P8.000 units] Decrease in contribution margin P60.75 Requirement 4 Present contribution margin [10.

30 Expected Value P 7.000 6.000 6.000 100.000 6.000 P 55.000 P170.000 15 9 30 50% 30% 100% Requirement (b) 4.000 Sales (6.000 P125.000 P150.000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 Total Contribution margin P240.000 100.000 units P160.000 P 60.000 Production 5.000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 Requirement (c) Sales Order Contribution Margin 4.000 Sales (4.000 P190.000 - 150.000 37.000 5.20 0.000 units P160.000 70.000 75.000 45.000 P 10.000 P200.000 - 150.000 P 50.000 P150.000 P125.000 100.000 45.500 21.000 - Total Contribution margin P100.000 P 75.000 P200.000 P35.000 P 90.000 P65.000 125.000 150.000 125.000 Average Contribution Margin Problem 6 (Pricing) 19-10 Probability 0.Chapter 19 Relevant Costs for Decision Making 5.000 - Total Contribution margin P145.50 0.000 x P40) Less variable costs Production cost @ P25 Purchase cost @ P45 P200.000 P 50.000 P240.000 P 70.000 90.000 Sales (5.000 P240.000 units P160.000 - 125.500 .000 P 35.000 0 P150.

000 30. Requirement B: P60. 6. the higher the loss will be. 23.000 Therefore. D A D A D C A 21.000) Operating Result at Full Capacity P 480.000 = P15.000 P70.000 520. 32.000 15. 7.Relevant Costs for Decision Making Chapter 19 Requirement A: Sales Less Variable cost Contribution margin Less Fixed cost Net income (loss) 2005 P 100.000 (P160.000 (P 70.000 (P184. 17. 24. Multiple Choice Questions 1.000) The company had been operating at a loss because the product had been selling with a negative contribution margin.000 P15.000) 2006 P 400. 26.29 Requirement D: P56.000 624. the more units are sold.000 P90.000 (P 30.000 10. 12.000) 40. 15.000 * 1/3 x P45.000) 40. Hence. the annual advantage to make the parts is P20. 27. 5. 2. 34.000 (P144. 4. C C B B A B C 11.58 Problem 7 (Make or Buy) Cost of Making Outside purchase Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead* Total cost Cost of Buying P90.14 Requirement C: P74. 35.000 (P120.000 130. A D C A C . 33. 16. 14.000. 22. IV. 19-11 D A D E B D D 31. 13. 3.000) 40. 25.

000 P 35.000) S (P 8 x 10.000 P300.000 P205.50) Net increase in income 20.000 x P24) Purchase cost Less: Savings in manufacturing cost Avoidable fixed overhead Net purchase price Difference in favor of “buy” alternative P240. 16 . 29.000 T P240.000 P120.000 120.000 80.000) R P240.000 40.000 P270.000 x P20) Less: Variable costs R (P12 x 10.000 270.000 Sales (P16 x 15. 19-12 .00 x 120%)] Less: Variable costs (P300. A 10.000 21. 19.000 17.29: 16.000 P120.000 x 90%) x (P5. Relevant cost to make (10.000 150.000 P160. Sales [(100.000 x 90%) Contribution margin Less: Fixed costs Operating income P540.000) R P200. C A A Supporting computations for nos.000 50. C B C 28. 20.000 T P200.000) T (P 4 x 10.000 S P200. B 18.000 x P3) Less: Increase in variable cost (60.000 19. B 9.000 Contribution margin P 80.Chapter 19 Relevant Costs for Decision Making 8.000 P180.000 150.000 95. Increase in sales (60.000 P 30.000 S P240. Direct materials Direct labor Overhead Selling cost Minimum selling price per unit P 4 5 2 3 P14 18. Sales (10.000 P45.000 x P2. 30.

200.000 20.000 New operating income Difference .000 P120.000 10.000 P1.000 50.000 70.000) 180.000) T (P 4 x 15.000 40.000 40. Old operating income: Contribution margin Less: Fixed cost P180.000 80.000 P 20.decrease 23.000 P275.000 P80.000 P300.000 P 50.000 20.000 60.000 80.000 375.000 P 60.000 900.000 30.000 19-13 .000 P 40. Sales Less: Variable costs Direct materials Direct labor Factory overhead Marketing expenses Administrative expenses Contribution margin Less: Fixed costs Factory overhead Marketing expenses Administrative expenses Increase in fixed costs Profit 24.000 P20.000 120. Sales Less: Variable costs Direct materials Direct labor Factory overhead Marketing expenses P1.000 120.000 22.000) S (P 8 x 15.000 110.Relevant Costs for Decision Making Chapter 19 Less: Variable costs R (P12 x 15.000 Contribution margin Less: Fixed costs Operating income P 60.000 P 300.000 P40.000 400.000 P 190.000 70.200.000 80.

Budgeted operating income: Contribution margin (P2.000]  20.500 10.000 40.000 20.000  4) Profit 50.000 x 30%) Less fixed costs 19-14 850. Selling price per unit Less: Variable costs of goods sold per unit ([P320.000 (6.000 P10.000 P840.000 400.000 P 50.500 P17 12 P 5 2.000 .Chapter 19 Relevant Costs for Decision Making Administrative expenses Contribution margin Less: Fixed costs Factory overhead Marketing expenses Administrative expenses Decrease in fixed costs (P25.000 units) Contribution margin per unit Multiplied by units to be sold under Special Order Increase in operating income 29.000) Variable overhead (P4 x 5.000 P12.000) Variable costs to make Savings of making the blade 28.000 P 350.250 P10.750 P 256.000 P80.25 x 10.000 P600.000) Direct labor (P8 x 5. Direct materials (P2 x 5.000 10.000) Total variable costs Add: Avoidable fixed overhead Total 26.000 93. Avoidable fixed overhead Direct materials Direct labor Variable overhead Total Multiplied by: Number of units to be produced Total relevant costs to make the part 27.000 . Purchase cost (P1.000 P 2.000 P 4 4 16 18 P42 20.P80.000.000 20.250) 25.000 P70.000 30.

000 Less Variable costs ([70% x P2.000 Contribution margin P 880.000 360.000 Increase in budgeted operating profit 19-15 P200.000 P160.000 Less fixed costs 520.000] x 80%) 1.000 .Relevant Costs for Decision Making Chapter 19 Net operating income Operating income under the proposal: Sales P2.120.000.000.