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MODULE 3

ACTIVITY COST AND COST ANALYSIS


THEORIES:
1. Cost behavior analysis is a study of how a firm's costs
A. relate to competitors' costs.
B. relate to general price level changes.
C. respond to changes in activity levels within the company.
D. respond to changes in the gross national product.

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2. The term relevant range as used in cost accounting means the range over which
A. costs may fluctuate
C. production may vary
B. cost relationships are valid
D. relevant costs are incurred

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3. Most operating decisions by management focus on a narrow range of activity which is called the:
A. relevant range of production.
C. optimal level of production.
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B. strategic level of production.
D. tactical operating level of production.
4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a
A. mixed cost.
C. direct cost.
B. predictor.
D. cost driver.
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5. If a predetermined overhead rate is not employed and the volume of production is increased over the level planned, the
cost per unit would be expected to
A. Decrease for fixed costs and remain unchanged for variable costs.
B. Remain unchanged for fixed costs and increase for variable costs.
C. Decrease for fixed costs and increase for variable costs.
D. Increase for fixed costs and increase for variable costs.
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6. Which of the following describes the behavior of the variable cost per unit? Variable cost:
A. Varies in increasing proportion with changes in the activity level.
B. Varies in increasing proportion with changes in the activity level.
C. Remains constant with changes in the activity level.
D. Varies in direct proportion with the activity level.
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7. A cost that remains constant on a per unit basis in a given period despite changes in the level of activity should be
considered a(an):
A. variable cost.
C. fixed cost.
B. prime cost.
D. overhead cost.
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8. Malayan Companys average cost per unit is the same at all levels of volume. Which of the following is true?
A. MALAYAN must have only variable costs.
B. MALAYAN must have only fixed costs.
C. MALAYAN must have some fixed costs and some variable costs.
D. MALAYANs cost structure cannot be determined from this information.
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9. Depreciation expense based on the number of units produced is classified as what type of cost?
A. Out-of-pocket cost.
C. Variable cost.
B. Marginal cost.
D. Fixed cost.
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10. When production increases, variable manufacturing costs react in which of the following ways?
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A.
B.
C.
D.

Unit variable cost


Total variable cost

decreases
decreases

remains same
Increases

remains same
decreases

increases
Increases

11. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n)
A. increase in the fixed element.
C. increase in the mixed element.
B. decrease in the variable element.
D. decrease in the fixed element. Bobadilla
12. As volume increases,
A. total fixed costs remain constant and per-unit fixed costs increase.
B. total fixed costs remain constant and per-unit fixed costs decrease.
C. total fixed costs remain constant and per-unit fixed costs remain constant.
D. total fixed costs increase and per-unit fixed costs increase.

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13. Which of the following best describes a fixed cost?


A. It may change in total when such change is unrelated to changes in production.
B. It may change in total when such change is related to changes in production.
C. It is constant per unit of change in production.
D. It may change in total when such change depends on production within the relevant range.

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14. If activity increases, which of the following statements about cost behavior is true? Bobadilla
A. Fixed cost per unit will increase
C. Fixed cost per unit will decrease
B. Variable cost per unit will increase
D. Variable cost per unit will decrease
15. An increase in the activity level within the relevant range results in:
A. an increase in fixed cost per unit.
B. a proportionate increase in total fixed costs.
C. an unchanged fixed cost per unit.
D. a decrease in fixed cost per unit.

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16. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n)
A. expired cost.
C. variable cost.
B. fixed cost.
D. mixed cost.
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17. Which of the following statements regarding fixed costs is incorrect?
A. Expressing fixed costs on a per unit basis usually is the best approach for decision-making process.
B. Fixed costs expressed on a per unit basis will react inversely with changes in activity.
C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of the relevant range.
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D. Fixed costs frequently represent long-term investments in property, plant, and equipment.
18. Lamang Company changed its cost structure by increasing fixed costs and decreasing its per-unit variable costs. The
change:
A. Increases risk and increases potential profit.
B. Increases risk and decreases potential profit.
C. Decreases risk and decreases potential profit.
D. Decreases risk and increases potential profit.
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19. A managements preference for a very low degree of operating leverage might indicate that:
A. an increase in sales volume is expected.
B. a decrease in sales volume is expected.
C. the firm is very unprofitable.
D. the firm has very high fixed costs.
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20. Management is considering replacing its existing sales commission compensation plan with a fixed salary plan. If the
change is adopted, the companys
A. Breakeven point must increase.
C. Operating leverage must increase.
B. Margin of safety must decrease.
D. Profit must increase.
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21. The indifference point is the level of volume at which a company
A. earns the same profit under different operating scheme.
B. earns no profit.
C. earns its target profit.
D. any of the above.

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22. Operating leverage is the relative mix of


A. revenues earned and manufacturing costs
B. fixed and variable costs.
C. high-volume and low-volume products.
D. manufacturing costs and period costs.

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23. The increased use of automation and less use of the work force in companies has caused a trend towards an increase
in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.
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24. If fixed costs decrease while variable cost per unit remains constant, the contribution margin will be
A. Unchanged
C. Higher
B. Lower
D. Indeterminate
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25. Costs that increase as the volume of activity decreases within the relevant range are
A. Average cost per unit.
C. Total fixed costs.
B. Average variable cost per unit.
D. Total variable costs.
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26. Which costs will change with an increase in activity within the relevant range?
A. Total fixed costs and total variable cost.
B. Per unit fixed costs and total variable cost.
C. Per unit variable cost and per unit fixed cost.
D. Per unit fixed cost and total fixed cost.

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27. Which of the following best describes the relationship between fixed costs per unit and variable costs per unit, as total
volume increases?
A. Fixed cost per unit stays the same and variable cost per unit stays the same.
B. Fixed cost per unit stays the same and variable cost per unit increases.
C. Fixed cost per unit increases and variable cost per unit increases.
D. Fixed cost per unit decreases and variable cost per unit stays the same.
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28. Within the relevant range, the difference between variable costs and fixed costs is:
A. variable costs per unit fluctuate and fixed cost per unit remains constant.
B. variable cost per unit is constant and fixed cost per unit fluctuates.
C. both total variable cost and total fixed cost are constant.
D. both total variable cost and total fixed cost fluctuate.
29. The learning curve in cost estimation is a good example of:
A. non-linear cost behavior.
C. simple regression.

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B. machine-intensive production.

D. a random variable.

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30. Cost estimation is the process of


A. estimating the relationship between costs and the cost drivers that cause those costs.
B. documenting costs in terms of direct and indirect costs.
C. summarizing past costs into fixed and variable components.
D. all of the above.
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31. Which of the following methods is used to estimate costs?
A. Account analysis
C. Engineering method
B. High-low method
D. All of the above

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32. For analysis purposes, the high-low method usually produces a(n)
A. reasonable estimate.
C. overstated estimate.
B. precise estimate.
D. understated estimate.

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33. The high-low method is criticized because it


A. is not a graphical method.
B. is a mathematical method.
C. ignores much of the available data by concentrating on only the extreme points.
D. does not provide reasonable estimates.
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34. The high-low method may give unsatisfactory results if
A. the data points all fall on a line.
C. the points are not representative.
B. volume of activity is heavy.
D. volume of activity is light.
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35. The equation(s) required for applying the least squares method in the computation of fixed and variable production costs
could be expressed as
A. xy = ax + b x2
C. y = na + b x
2
B. y = a + bx
D. xy = ax + b x2
xy = na + b x
y = na + bx
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36. Weaknesses of the high-low method include all of the following except
A. Only two observations are used to develop the cost function.
B. The high and low activity levels may not be representative.
C. the method does not detect if the cost behavior is nonlinear.
D. the mathematical calculations are relatively complex.

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37. Which of the following methods estimates costs by identifying costs as variable or fixed based on qualitative analysis?
A. Regression analysis
C. Engineering method
B. Account analysis
D. High-low method
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38. Account analysis as compared to the engineering method
A. relies on past data.
B. relies on present and future data.
C. measures the work involved in the activities that go into a product.
D. a and c.

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39. Which of the following methods may be used to estimate costs by using time-and-motion studies to approximate labor
time?
A. Regression analysis
C. Engineering method
B. Account analysis
D. High-low method
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40. The cost estimation method that gives the most mathematically precise cost prediction equation is
A. the high-low method
C. the scatter-diagram method
B. the contribution margin method
D. regression analysis
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41. Regression analysis is better than the high-low method of cost estimation because regression analysis:
A. is more mathematical.
C. fits its data into a mathematical equation.
B. uses all the data points, not just two.
D. takes more time to do.
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42. In regression analysis, what does the variable "X" stand for in the model Y = a + bX + e?
A. The amount of the dependent variable, the cost to be estimated.
B. The regression error, which is the distance between the regression line and the data point.
C. The value for the independent variable, the cost driver for the cost to be estimated; there may be one or more cost
drivers.
D. The unit variable cost, also called the coefficient of the independent variable.
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43. Simple regression is
A. a regression equation with more than one independent variable.
B. a regression equation with more than one dependent variable.
C. a regression equation with more than one independent and dependent variables.
D. a regression that considers all unknown factors.
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44. Regression shows
A. the proportion of the variation of dependent variable explained by dependent variables.
B. the proportion of the variation of independent variable explained by the independent variables.
C. the proportion of the variation of dependent variable explained by the independent variables.
D. none of the above.
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45. In the method of least squares, the deviation is the difference between the
A. predicted and estimated costs.
C. predicted and average costs.
B. predicted and actual costs.
D. average and actual costs.

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46. A cost-predicting equation determined through regression analysis


A. always gives close predictions.
B. will not work any better than one obtained using the high-low method.
C. can be used only for costs that vary with sales of production.
D. could be severely affected by outliers.

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47. In the cost equation TC = F + VX, the X term is:


A. total fixed costs.
C. unit variable cost.
B. total variable costs.
D. activity units.

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48. Which of the following methods would be best for estimating costs for totally new activities?
A. Engineering method
C. Scattergraph method
B. Account analysis method
D. High-Low method
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49. The engineering method of estimating costs:
A. can be used to estimate costs for totally new activities.
B. can detail each step required to perform an operation.
C. sometimes can be quite expensive to use.
D. all of the above are true.
50. The correlation coefficient or R-squared (R2) is interpreted as:
A. the minimum distance between the regression line and a single data point.

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B. the measure of the linear relationship between two or more variables.


C. a determination of whether the data point is considered to be an "outlier."
D. the proportion of the variation in the dependent variable explained by the independent variable.
51. The closeness of the relationship between the cost and the activity is called
A. correlation
C. spurious
B. regression analysis
D. manufacturing overhead

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52. R-squared is a measure of


A. the spurious relationship between cost and activity
B. the fixed cost component
C. the variable cost per unit of activity
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D. how well the regression line accounts for the changes in the dependent variable
53. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatterdiagram method
A. includes cost outside the relevant range.
B. considers more than two points.
C. can be used with more types of costs than the high-low method.
D. gives a precise mathematical fit of the points to the line.
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54. The major objective of preparing a scatter-diagram is to
A. develop an equation to predict future costs.
B. perform regression analysis on the results.
C. determine the relevant range.
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D. find the high and low points to use for the high-low method of estimating costs.
55. Advantages of the method of least squares over the high-low method include all of the following except
A. a statistical method is used to mathematically derive the cost function
B. only two points are used to develop the cost function
C. the squared differences between actual observations and the line (cost function) are minimized
D. all the observations have an effect on the cost function
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56. The scatter diagram method of cost estimation
A. is influenced by extreme observations
B. requires the use of judgment
C. uses the least-squares method
D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs
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PROBLEMS:
i

Nite Corporation has developed the following flexible budget formula for annual indirect labor costs:
Total Cost = P480,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 20,000 machine hours of planned machine time. Indirect labor
costs included in this planning budget are:
A. P 48,333
C. P580,000
B. P100,000
D. P140,000
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ii

Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For
the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Harem
Companys budgeted overhead for the month is

A. P 12,800
B. P 18,800

C. P 84,800
D. P774,000

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iii

. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000 units of
budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25
percent more than budgeted fixed costs for 50,000 units. How much is Jordans budgeted variable cost per unit of
output?
A. P 7.50
C. P30.00
B. P16.00
D. P62.50
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iv

. Deakin Company is preparing a flexible budget for the coming year and the following maximum capacity estimates for
Department OZ are available:
Direct labor hours
60,000
Variable factory overhead
P150,000
Fixed factory overhead
P240,000
Assume that Deakins normal capacity is 80% of maximum capacity. What would be the total factory overhead rate,
based on direct labors, in a flexible budget at normal capacity?
A. P6.00
C. P6.50
B. P7.50
D. P8.13
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Irma Company manufactures office furniture. During the most productive month of the year, 3,500 desks were
manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost of P46,000.
Using the high-low method of cost estimation, total fixed costs in August are:
A. P56,000
C. P17,600
B. P28,400
D. P38,400
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vi

. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms are
occupied each day. The companys operating cost is P21 per occupied room per day at this occupancy level, assuming
a 30-day month. This P21 figure contains both variable and fixed cost elements. During October, the occupancy dropped
to only 45 percent. A total of P792,000 in operating costs were incurred during the month.
What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during
November?
A. P1,056,000
C. P 756,000
B. P 846,000
D. P 829,500
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vii

. The controller of Jema Company has requested a quick estimate of the manufacturing supplies that it needs for
the month of July when the expected production are 470,000 units. Below are the actual data from the prior
three months of operations.
Production in units
Manufacturing supplies
March
450,000
P723,060
April
540,000
853,560
May
480,000
766,560
Using these data and the high-low method, what is the reasonable estimate of the cost of manufacturing supplies that
would be needed for July? (Assume that this activity is within the relevant range.)
A. P 805,284
C. P 755,196
B. P1,188,756
D. P 752,060
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viii

.The following activity and cost data that were provided by Hoist Corporation would help in estimating its future
maintenance costs:Units
Maintenance Cost
3
P450
7
P530

11
P640
15
P700
Using the least-squares regression method to estimate the cost formula, the expected total cost for an activity level of 10
units would be closest to:
A. P612.50.
C. P595.84.
B. P581.82.
D. P601.50.
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ix

.Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?A.
C. 6,250 units.
B. 4,375 units.
D. 5,250 units.
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Prior Year
.Balsy Company has
provided the following data
for maintenance cost:
Machine hours
12,500
Maintenance cost
P27,000
The best estimate of the cost formula for maintenance would be:
A. P21,625 per year plus P0.625 per machine hour.
B. P 7,000 per year plus P0.625 per machine hour.
C. P 7,000 per year plus P1.60 per machine hour.
D. P27,000 per year plus P1.60 per machine hour.
x

Current Year
15,000
P31,000

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Direct Labor Hours


Maintenance Costs
.Almond
Company
wishes to determine the
fixed portion of its
maintenance expense (a
semi-variable expense), as
measured against direct
labor hours for the first
Malayan three months of
the year. The inspection
costs are fixed; however,
the
adjustments
necessitated by errors
found during inspection
account for the variable
portion of the maintenance
costs. Information for the
first Malayan quarter is as
follows:
January
34,000
P61,000
February
31,000
58,500
March
34,000
61,000
What is the fixed portion of Almond Companys maintenance expense, rounded to the nearest pesos?
A. P28,330
C. P37,200
B. P32,677
D. P40,800
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xii

.Clone Machinery had


the following experience
regarding power
costs:Month
Jan.

Machine hours

Power cost

300

P680

10,625

units.

Feb.
600
720
Mar.
400
695
Apr.
200
640
Assume that management expects 500 machine hours in May. Using the high-low method, calculate Clone's power cost
using machine hours as the basis for prediction.
A. P 700
C. P 710
B. P 705
D. P1,320
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xiii

.In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is direct labor hours.
According to this equation, a 100-hour change in total direct labor hours will change the cost of workers
compensation insurance byA.
P4,000. C.
P4,300.
B. P 300.
D. none of the above amounts.
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xiv

.Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units, P1,000 of product level
costs for 40 products, and P3,500 of customer-level costs for ten customers. The cost of Job 002 which used 800
unit level activities, 4 product level activities, and one customer-level activities amounts toA.
P3,650 C.
P3,050
B. P3,250
D. P2,950
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xv

.It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production doubles, the average time
(per unit) needed to make 8 units would beA. 4.90 minutes C.
3.33 minutes
B. 3.43 minutes
D. 3.23 minutes
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xvi

.The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for P6,000. Assuming a
cumulative learning curve of 90% as production doubles, the incremental cost of the third and fourth items will beA.
P 0 C.
P2,160
B. P 600
D. P1,250
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xvii

.At a sales level of P300,000, Jamaica Company's gross margin is P15,000 less than its contribution margin, its net
income is P50,000, and its selling and administrative expenses total P120,000. At this sales level, its contribution
margin would be:A.
P250,000. C.
P170,000.
B. P155,000.
D. P185,000.
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Activity
Cost
.The Shepherd
Companys president
would like to know the
estimated fixed and
variable components of a
particular cost. Actual data
for this cost for four recent
periods appear below.
Period 1
24
P174
Period 2
25
179
Period 3
20
165
Period 4
22
169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X
C. Y = P103.38 + P3.00X
B. Y = P110.44 + P2.70X
D. Y = P113.35 + P0.89X
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xix

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.Sams Company. wants to develop a single predetermined overhead rate. The company's expected annual fixed
overhead is P340,000 and its variable overhead cost per machine hour is P2. The company's relevant range is from
200,000 to 600,000 machine hours. Sams Company expects to operate at 425,000 machine hours for the coming

year. The plant's theoretical capacity is 850,000. The predetermined overhead rate per machine hour should beA.
P2.40.
C.
P2.80.
B. P2.57.
D. P2.85.
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Electricity Cost
Direct Labor Hours
.The Overland Company
wants to develop a cost
estimating equation for its
monthly cost of electricity.
It has the following
data:Month
January
P6,750
1,500
April
7,500
1,700
July
8,500
2,000
October
7,250
1,600
Using the high-low method, what is the best equation?
A. Y = P 750 + P5.00X
C. Y = P 750 + P3.50X
B. Y = P1,500 + P3.50X
D. Y = P1,500 + P5.00X
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xxi

.During the month of June, Behold Corporation produced 12,000 units and sold them for P20 per unit. Total fixed costs
for the period were P154,000, and the operating profit was P26,000. Based on the foregoing information, the variable
cost per unit for the month of June was
A. P4.50
C. P6.00
B. P5.00
D. P7.17
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xxii

.Data to be used in applying the high-low method shows the highest cost of P69,000 and the lowest cost of P52,000.
The data shows P148,000 as the highest level of sales and P97,000 as the lowest level. What is the variable cost
per peso sales?A.
P0.33.
C.
P0.54.
B. P0.47.
D. P3.00
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Production Volume
Maintenance Costs
.The following
information is available for
maintenance costs:Month
June
150,000
P500,000
July
230,000
620,000
August
380,000
800,000
September
120,000
480,000
October
270,000
710,000
Using the least squares, the estimate of the fixed portion of maintenance costs (rounded to thousand pesos) is
A. P131,000
C. P332,000
B. P321,000
D. P115,000
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xxiv

.Tomas Ocampo has


just been appointed
chairperson of the
Accountancy
Department of ADEB
College. In reviewing
the departments cost
records, Tomas has
found the following
total cost associated
with MAS Part 2

Number of Subjects Offered

Total Cost

subject over the last


several
terms:Semester/Term
AY2004, First Semester
4
P10,000
AY2004, Second Semester
6
14,000
AY2004, Summer
2
7,000
AY2005, First Semester
5
13,000
AY2005, Second Semester
3
9,500
Tomas knows that there are some variable costs, such as amounts paid to student assistants, associated with the
course. He would like to have variable and fixed cost components separated for planning purposes.
Using the least-squares method, what is the variable cost per section of MAS?
A. P1,750
C. P1,200
B. P1,500
D. P 900
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xxv

.At a sales level of P300,000, Java Company's gross margin is P15,000 less than its contribution margin, its net
income is P50,000, and its selling and administrative expenses total P120,000. At this sales level, its contribution
margin would be:A.
P250,000. C.
P170,000.
B. P155,000.
D. P185,000.
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Question Nos. 26 and 27 are based on the following information:
SERAL Company is a manufacturing entity whose total factory overhead costs fluctuate considerably from year to year
according to increases and decrease in the number of direct labor hours worked in the plant. Total factory overhead costs at
high and low levels of activity for recent years follow:
Low
High
Direct labor hours
50,000
75,000
Total factory overhead costs
P14,250,000
P17,625,000
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these
costs at the 50,000-hour level of activity as follows:
Indirect materials (V)
P 5,000,000
Rent (F)
6,000,000
Maintenance (M)
3,250,000
Total factory overhead costs
P14,250,000
V = variable; F = fixed; M = mixed
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.How much of the P17,625,000 factory overhead cost at the high level of activity consist of maintenance cost?A.
P4,125,000
C.
P4,450,000
B. P4,220,000
D. P4,525,000
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xxvii

.What total factory overhead costs would you expect the company to incur at an operating level of 70,000 direct labor
hours?A.
P16,950,000
C.
P13,000,000
B. P13,950,000
D. P10,950,000
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Question Nos. 28 and 29 will be answered using the following data:
The Bora Hotels guest-days of occupancy and custodial supplies expense over the last seven months were:
Month
Guest-Days of Occupancy
Custodial Supplies Expense
March
40,000
P 75,000
April
65,000
82,500
May
80,000
105,000
June
105,000
120,000
July
120,000
135,000

August
September

90,000
75,000

107,500
97,500

xxviii

.Using the high-low method, what is the estimated monthly fixed cost for custodial supplies?A.
P42,500
B. P45,000
D. P40,000
Bobadilla

P67,500 C.

xxix

.Using the high-low method in calculating the cost formula for custodial supplies, what amount of this expense would
you expect to be incurred at an occupancy level of 110,000 guests?A. P 92,500C.
P110,000
B. P 98,750
D. P127,500
Bobadilla
Question Nos. 30 through 32 are based on the following:
St John Hospital contains 450 beds. The average occupancy rate is 80 percent per month. In other words, on average, 80
percent of the hospitals beds are occupied by patients. At this level of occupancy, the hospitals operating costs are P32 per
occupied bed per day, assuming a 30-day month. This P32 figure contains both variable and fixed cost components.
During the month of June, the hospitals occupancy rate was only 60 percent. A total of P326,700 in operating cost was
incurred during that month.
xxx

.Using the high-low method, the amount of variable cost per occupied bed per cay isA.
P 7.00 C.
B. P 9.00
D. P15.00
Bobadilla

P12.00

xxxi

.Using the variable cost as determined in number 36, the total fixed operating costs per month are:A. P240,000
C. P290,000
B. P270,000
D. P300,000
Bobadilla
xxxii

.Assuming an occupancy rate of 75 percent in a particular month, what amount of total operating costs would you
expect the hospital to incur?A.
P310,000 C.
P340,875
B. P315,500
D. P375,500
Bobadilla
Question Nos. 33 through 35 are based on the following:
In the Omara Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of
this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost
consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000.
Assume that all of the activity levels mentioned in this problem are within the relevant range.
xxxiii

.The variable cost for maintenance per machine hour is:A.


B. P1.44.
D. P1.35.

P1.30. C.

xxxiv

C.

.The total fixed overhead cost for Omara is:A. P115,000.


B. P130,000.
D. P 55,000.

P0.75.
Bobadilla

P 60,000.
Bobadilla

xxxv

.If 110,000 machine hours of activity are projected for the next period, total expected overhead cost would be:A.
P256,000. C.
P306,625.
B. P263,500.
D. P242,500.
Bobadilla
xxxvi

.The following data


were compiled from the
records of Cabral
Company:Month
Jan.

Usage

Cost

600

P750

Feb.
650
775
Mar.
420
550
Apr.
500
650
May
450
570
Using the high-low method, what is the fixed cost element (to the nearest peso)?
A. P225
C. P411
B. P138
D. P364

Bobadilla

xxxvii

.The following information was taken from a computer printout generated with the least squares method for use
in estimating overhead costs:Slope
90
Intercept
11400
Correlation coefficient
0.6
Activity variable
Direct labor hours
The cost formula is
A. Overhead = P11,400 P90X
C. Overhead = P11,400 + P90X
B. Overhead = P11,400 + (P45 x .6)
D. Overhead = P11,400 x .6
Bobadilla
xxxviii

.The following information pertains to data that have been gathered in the process of estimating a simple least
squares regression:Mean value of the dependent variable
30
Mean value of the independent variable
10
Coefficient of the independent variable
3
Number of observations
12
What is the "a" value for the least squares regression model?
A. 20
B. 6
C. 0
D. The intercept term cannot be computed from the information given.
Bobadilla
xxxix

.TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined that if a truck is driven
105,000 kilometers during a year, the average operating cost is P11.40 per kilometer. If a truck is driven only 70,000
kilometers during a year, the average operating cost increases to P13.40 per kilometer. Assuming that in a given
year, a truck were driven 80,000 kilometers, what total cost would you expect to be incurred?A.
P1,012,000
C. P1,225,143
B. P1,407,000
D. P1,072,000
Bobadilla
Question Nos. 40 through 41 are based on the following:
The House of TROPS Company is a large retailer of sports equipment. An income statement for the companys Ski
Department for a recent quarter is presented as follows:
The House of TROPS Company
Income Statement
For the Quarter Ended March 31
Sales
Less cost of goods sold
Gross margin
Less operating expenses:
Selling expenses
Administrative expenses
Net income

P1,500,000
900,000
600,000
P300,000
100,000

400,000
P 200,000

Skis sell, on the average, for P7,500. Variable selling expenses are P500 per pair of skis sold. The remaining selling
expenses are fixed. The administrative expenses are 20 percent variable and 80 percent fixed. The company does not
manufacture its own skis; it purchases them from a supplier for P4,500 per pair.
xl

.What is the variable cost per pair of skis?A. P 900,000 C.


B. P 920,000
D. P1,020,000

P1,000,000
Bobadilla

xli

.Given the cost formula Y = P30,000 + P5X, total cost at an activity level of 16,000 units would be:A. P
C. P 80,000.
B. P 46,000.
D. P110,000.
Bobadilla

30,000.

Question Nos. 42 through 45 are based on the following:


A local church wants to rent a hall for P3,000 a day to hold a Bingo fundraiser. Every session of bingo requires a caller for
P200. There are supplies that are needed that cost P3 per person playing bingo. On an average each bingo player spends
P20 and 1,000 people attend each session. P10,000 in prizes are awarded each session.
xlii

.Total costs
for 1 session
can be
classified
as:Bobadilla
Fixed Costs
Variable Costs

A.

B.

C.

D.

P13,200
P3

P 3,000
P13,200

P13,200
P 3,000

P10,000
P 3,200

xliii

.The church conducts 1 Bingo session per month. Over the course of the year, which cost would not act as a variable
cost based on just holding one more session?A.
Hall rental.
C.
Caller salary.
B. Cost of supplies.
D. Prize money.
Bobadilla
xliv

.If the church conducts 12 sessions and 1,000 people attend each session, the average cost per session is?A.P
9,600.
C. P15,200.
B. P14,700.
D. P16,200.
Bobadilla
xlv

.The church is thinking of holding 2 Bingo sessions per day with 1,000 people attending each session. If they hold the
2 sessions, the average cost per session is?A. P 9,600.
C.
P15,200.
B. P14,700.
D. P16,200.
Bobadilla
Use the following Information to answer Question Nos. 46 through 51.
Units Sold @ P60/each
1,000
2,000
Salary
P20,000
P30,000
Cost of Goods Sold
15,000
30,000
Cost/Unit of Depreciation
300
150
Rent
20,000
20,000

3,000
P40,000
45,000
100
20,000

xlvi

.Which of the above costs behaves as a Variable Cost?A.


Rent.
B. Salary.
D. Depreciation.

C.

xlvii

.Which of the above costs behaves as a Mixed Cost?A.Rent. C.


B. Salary.
D. Depreciation.

Cost of Goods sold.


Bobadilla

xlviii

C.

.Which one does not contain any fixed cost behavior?A.


Rent.
B. Salary.
D. Depreciation.

Cost of Goods sold.


Bobadilla

Cost of goods sold.


Bobadilla

xlix

.If 3,000 units are sold what is the contribution margin?A.


B. P105,000.
D. P180,000.

P 75,000.

P60,100.

.What is total fixed cost?A.


B. P60,000.

P50,000. C.
D. P90,000.

C.

P135,000.

li

.Given the following information, choose the cost and activity that would be used as the high data point in high-low
cost estimation: Costs
Activity (hours)
P51,000
40,000
P50,000
41,000
P58,000
42,000
P56,000
43,000
A. P58,000 and 42,000 hours
C. P56,000 and 43,000 hours
B. P58,000 and 43,000 hours
D. P56,000 and 42,000 hours
Use the following simple regression results based on the data from the Madrigal Corporation to answer Question Nos. 52
and 53.
Dependent variable Machine maintenance costs
Independent variable Machine hours
Computed values
Intercept
P3,500
Coefficient on independent variable
P 3.50
Coefficient of correlation
0.856
R2
0.733
lii

.What percentage of the variation in maintenance costs is explained by the independent variable?A.
47.3%
B. 95.2%
D. 73.3%

85.6% C.

liii

P73,500 C.

.What is the total maintenance cost for an estimated activity level of 20,000 machine hours?A.
P82,300
B. P78,400
D. P84,750

.Answer: DMonthly fixed costs 480,000 / 12


Variable 20,000 x 5
Total

P 40,000
100,000
P140,000

ii

P 6,000

.Answer: BMonthly budgeted fixed cost (72,000/12)


Variable cost based on actual units:
Number of hours allowed
(96,000 x 5/60)= 8,000 hours
Variable cost: 8,000 x 1.60
Budgeted overhead cost

12,800
P18,800

iii .Answer: CThe solution can be made using an equation approach:


a = y bX
(P2,300,000 50,000X)1.25 = P2,800,000 60,000X
2,875,000 62,500X = 2,800,000 60,000X
2,500X = 75,000
X = P30

iv .Answer: BVariable factory overhead (150,000/60,000)


Fixed overhead [240,000/(60,000 x 0.80)
Total rate

P2.50
5.00
P7.50

Note: Variable rate per activity unit is constant. Fixed overhead per unit behaves inversely with the activity-unit level.

.Answer: BVariable rate = ( in activity cost)/( in activity level)


= (P84,000 P46,000)/(3,500 1,100)
= P16.00
Fixed cost a = y bx
a = P46,000 (1,100 x 16)
a = P28,400

vi .Answer: BDays Occupancy:


70% -- 2,000 x 30 days x 0.7
45% -- 2,000 x 30 days x 0.45

42,000
27,000

Variable cost per Room Day:


P6.00
Fixed costs: 792,000 (27,000 x 6)
Cost at 60% rate:

P630,000

Variable:
2,000 x 30 x 0.6 x P6
Fixed
Total

P216,000
630,000
P846,000

vii .Answer: Db = (853.560 723,060) (540,000 450,000)


130,500 90,000

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P 1.45

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