Activity Cost Analysis

MODULE 3 7. A cost that remains constant on a per unit basis in a given period despite changes in the level
ACTIVITY COST AND COST ANALYSIS of activity should be considered a(an):
A. variable cost. C. fixed cost.
THEORIES: B. prime cost. D. overhead cost. Bobadilla

1. Cost behavior analysis is a study of how a firm's costs 8. Malayan Company’s average cost per unit is the same at all levels of volume. Which of the
A. relate to competitors' costs. following is true?
B. relate to general price level changes. A. MALAYAN must have only variable costs.
C. respond to changes in activity levels within the company. B. MALAYAN must have only fixed costs.
D. respond to changes in the gross national product. Bobadilla C. MALAYAN must have some fixed costs and some variable costs.
D. MALAYAN’s cost structure cannot be determined from this information. Bobadilla
2. The term “relevant range” as used in cost accounting means the range over which
A. costs may fluctuate C. production may vary 9. Depreciation expense based on the number of units produced is classified as what type of
B. cost relationships are valid D. relevant costs are incurred Bobadilla cost?
A. Out-of-pocket cost. C. Variable cost.
3. Most operating decisions by management focus on a narrow range of activity which is called B. Marginal cost. D. Fixed cost. Bobadilla
the:
A. relevant range of production. C. optimal level of production. Bobadilla 10. When production increases, variable manufacturing costs react in which of the
B. strategic level of production. D. tactical operating level of production. following ways?
Bobadilla A. B. C. D.
4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is Unit variable cost decreases remains same remains same increases
called a Total variable cost decreases Increases decreases Increases
A. mixed cost. C. direct cost.
B. predictor. D. cost driver. Bobadilla
11. When the number of units manufactured increases, the most significant change in unit cost will
be reflected as a(n)
5. If a predetermined overhead rate is not employed and the volume of production is increased
A. increase in the fixed element. C. increase in the mixed element.
over the level planned, the cost per unit would be expected to
B. decrease in the variable element. D. decrease in the fixed element. Bobadilla
A. Decrease for fixed costs and remain unchanged for variable costs.
B. Remain unchanged for fixed costs and increase for variable costs.
12. As volume increases,
C. Decrease for fixed costs and increase for variable costs.
A. total fixed costs remain constant and per-unit fixed costs increase.
D. Increase for fixed costs and increase for variable costs. Bobadilla
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.
6. Which of the following describes the behavior of the variable cost per unit? Variable cost:
D. total fixed costs increase and per-unit fixed costs increase. Bobadilla
A. Varies in increasing proportion with changes in the activity level.
B. Varies in increasing proportion with changes in the activity level.
13. Which of the following best describes a fixed cost?
C. Remains constant with changes in the activity level.
A. It may change in total when such change is unrelated to changes in production.
D. Varies in direct proportion with the activity level. Bobadilla
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.

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 Activity Cost Analysis

D. It may change in total when such change depends on production within the relevant 20. Management is considering replacing its existing sales commission compensation plan with a
range. Bobadilla fixed salary plan. If the change is adopted, the company’s
A. Breakeven point must increase. C. Operating leverage must increase.
14. If activity increases, which of the following statements about cost behavior is true? Bobadilla B. Margin of safety must decrease. D. Profit must increase. 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 21. The indifference point is the level of volume at which a company
A. earns the same profit under different operating scheme.
15. An increase in the activity level within the relevant range results in: B. earns no profit.
A. an increase in fixed cost per unit. C. earns its target profit.
B. a proportionate increase in total fixed costs. D. any of the above. Bobadilla
C. an unchanged fixed cost per unit.
D. a decrease in fixed cost per unit. Bobadilla 22. Operating leverage is the relative mix of
A. revenues earned and manufacturing costs
16. A cost that remains constant in total but varies on a per-unit basis with changes in activity is B. fixed and variable costs.
called a(n) C. high-volume and low-volume products.
A. expired cost. C. variable cost. D. manufacturing costs and period costs. Bobadilla
B. fixed cost. D. mixed cost. Bobadilla
23. The increased use of automation and less use of the work force in companies has caused a
17. Which of the following statements regarding fixed costs is incorrect? trend towards an increase in
A. Expressing fixed costs on a per unit basis usually is the best approach for decision- A. both variable and fixed costs.
making process. B. fixed costs and a decrease in variable costs.
B. Fixed costs expressed on a per unit basis will react inversely with changes in activity. C. variable costs and a decrease in fixed costs.
C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the D. variable costs and no change in fixed costs. Bobadilla
concept of the relevant range. Bobadilla
D. Fixed costs frequently represent long-term investments in property, plant, and equipment. 24. If fixed costs decrease while variable cost per unit remains constant, the contribution margin
will be
18. Lamang Company changed its cost structure by increasing fixed costs and decreasing its per- A. Unchanged C. Higher
unit variable costs. The change: B. Lower D. Indeterminate Bobadilla
A. Increases risk and increases potential profit.
B. Increases risk and decreases potential profit. 25. Costs that increase as the volume of activity decreases within the relevant range are
C. Decreases risk and decreases potential profit. A. Average cost per unit. C. Total fixed costs.
D. Decreases risk and increases potential profit. Bobadilla B. Average variable cost per unit. D. Total variable costs. Bobadilla

19. A management’s preference for a very low degree of operating leverage might indicate that: 26. Which costs will change with an increase in activity within the relevant range?
A. an increase in sales volume is expected. A. Total fixed costs and total variable cost.
B. a decrease in sales volume is expected. B. Per unit fixed costs and total variable cost.
C. the firm is very unprofitable. C. Per unit variable cost and per unit fixed cost.
D. the firm has very high fixed costs. Bobadilla D. Per unit fixed cost and total fixed cost. Bobadilla

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 Activity Cost Analysis

27. Which of the following best describes the relationship between fixed costs per unit and B. volume of activity is heavy. D. volume of activity is light. Bobadilla
variable costs per unit, as total volume increases?
A. Fixed cost per unit stays the same and variable cost per unit stays the same. 35. The equation(s) required for applying the least squares method in the computation of fixed and
B. Fixed cost per unit stays the same and variable cost per unit increases. variable production costs could be expressed as
C. Fixed cost per unit increases and variable cost per unit increases. A. xy = ax + b x2 C.  y = na + b x
D. Fixed cost per unit decreases and variable cost per unit stays the same. Bobadilla B. y = a + bx2 D. xy = ax + b x2
xy = na + b x y = na + bx Bobadilla
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. 36. Weaknesses of the high-low method include all of the following except
B. variable cost per unit is constant and fixed cost per unit fluctuates. A. Only two observations are used to develop the cost function.
C. both total variable cost and total fixed cost are constant. B. The high and low activity levels may not be representative.
D. both total variable cost and total fixed cost fluctuate. Bobadilla C. the method does not detect if the cost behavior is nonlinear.
D. the mathematical calculations are relatively complex. Bobadilla
29. The learning curve in cost estimation is a good example of:
A. non-linear cost behavior. C. simple regression. 37. Which of the following methods estimates costs by identifying costs as variable or fixed based
B. machine-intensive production. D. a random variable. Bobadilla on qualitative analysis?
A. Regression analysis C. Engineering method
30. Cost estimation is the process of B. Account analysis D. High-low method Bobadilla
A. estimating the relationship between costs and the cost drivers that cause those costs.
B. documenting costs in terms of direct and indirect costs. 38. Account analysis as compared to the engineering method
C. summarizing past costs into fixed and variable components. A. relies on past data.
D. all of the above. Bobadilla B. relies on present and future data.
C. measures the work involved in the activities that go into a product.
31. Which of the following methods is used to estimate costs? D. a and c. Bobadilla
A. Account analysis C. Engineering method
B. High-low method D. All of the above Bobadilla 39. Which of the following methods may be used to estimate costs by using time-and-motion
studies to approximate labor time?
32. For analysis purposes, the high-low method usually produces a(n) A. Regression analysis C. Engineering method
A. reasonable estimate. C. overstated estimate. B. Account analysis D. High-low method Bobadilla
B. precise estimate. D. understated estimate. Bobadilla
40. The cost estimation method that gives the most mathematically precise cost prediction
33. The high-low method is criticized because it equation is
A. is not a graphical method. A. the high-low method C. the scatter-diagram method
B. is a mathematical method. B. the contribution margin method D. regression analysis Bobadilla
C. ignores much of the available data by concentrating on only the extreme points.
D. does not provide reasonable estimates. Bobadilla 41. Regression analysis is better than the high-low method of cost estimation because regression
analysis:
34. The high-low method may give unsatisfactory results if A. is more mathematical. C. fits its data into a mathematical equation.
A. the data points all fall on a line. C. the points are not representative. B. uses all the data points, not just two. D. takes more time to do. Bobadilla
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 Activity Cost Analysis

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. Bobadilla
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. Bobadilla
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. Bobadilla
50. The correlation coefficient or R-squared (R2) is interpreted as:
A. the minimum distance between the regression line and a single data point.
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. Bobadilla

44. Regression shows 51. The closeness of the relationship between the cost and the activity is called
A. the proportion of the variation of dependent variable explained by dependent variables. A. correlation C. spurious
B. the proportion of the variation of independent variable explained by the independent B. regression analysis D. manufacturing overhead Bobadilla
variables.
C. the proportion of the variation of dependent variable explained by the independent 52. R-squared is a measure of
variables. A. the spurious relationship between cost and activity
D. none of the above. Bobadilla B. the fixed cost component
C. the variable cost per unit of activity Bobadilla
45. In the method of least squares, the deviation is the difference between the D. how well the regression line accounts for the changes in the dependent variable
A. predicted and estimated costs. C. predicted and average costs.
B. predicted and actual costs. D. average and actual costs. Bobadilla 53. The principal advantage of the scatter-diagram method over the high-low method of cost
estimation is that the scatter-diagram method
46. A cost-predicting equation determined through regression analysis A. includes cost outside the relevant range.
A. always gives close predictions. B. considers more than two points.
B. will not work any better than one obtained using the high-low method. C. can be used with more types of costs than the high-low method.
C. can be used only for costs that vary with sales of production. D. gives a precise mathematical fit of the points to the line. Bobadilla
D. could be severely affected by outliers. Bobadilla
54. The major objective of preparing a scatter-diagram is to
47. In the cost equation TC = F + VX, the X term is: A. develop an equation to predict future costs.
A. total fixed costs. C. unit variable cost. B. perform regression analysis on the results.
B. total variable costs. D. activity units. Bobadilla C. determine the relevant range. Bobadilla
D. find the high and low points to use for the high-low method of estimating costs.
48. Which of the following methods would be best for estimating costs for totally new activities?
A. Engineering method C. Scattergraph method 55. Advantages of the method of least squares over the high-low method include all of the
B. Account analysis method D. High-Low method Bobadilla following except

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 Activity Cost Analysis

4
A. a statistical method is used to mathematically derive the cost function . Deakin Company is preparing a flexible budget for the coming year and the following
B. only two points are used to develop the cost function maximum capacity estimates for Department OZ are available:
C. the squared differences between actual observations and the line (cost function) are Direct labor hours 60,000
minimized Variable factory overhead P150,000
D. all the observations have an effect on the cost function Bobadilla Fixed factory overhead P240,000
Assume that Deakin’s normal capacity is 80% of maximum capacity. What would be the total
56. The scatter diagram method of cost estimation factory overhead rate, based on direct labors, in a flexible budget at normal capacity?
A. is influenced by extreme observations A. P6.00 C. P6.50
B. requires the use of judgment B. P7.50 D. P8.13 Bobadilla
C. uses the least-squares method
5
D. is superior to other methods in its ability to distinguish between discretionary and . Irma Company manufactures office furniture. During the most productive month of the year,
committed fixed costs Bobadilla 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:
PROBLEMS: A. P56,000 C. P17,600
B. P28,400 D. P38,400 Bobadilla
1
. Nite Corporation has developed the following flexible budget formula for annual indirect labor
6
costs: . Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70
Total Cost = P480,000 + P5.00 per machine hour percent of the rooms are occupied each day. The company’s operating cost is P21 per
Operating budgets for the current month are based upon 20,000 machine hours of planned occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure
machine time. Indirect labor costs included in this planning budget are: contains both variable and fixed cost elements. During October, the occupancy dropped to
A. P 48,333 C. P580,000 only 45 percent. A total of P792,000 in operating costs were incurred during the month.
B. P100,000 D. P140,000 Bobadilla
What would be the expected operating costs, assuming that the occupancy rate increases to
2
. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct 60 percent during November?
labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each A. P1,056,000 C. P 756,000
unit requires five minutes of direct labor. Harem Company’s budgeted overhead for the month B. P 846,000 D. P 829,500 Bobadilla
is
A. P 12,800 C. P 84,800 7
. The controller of Jema Company has requested a quick estimate of the
B. P 18,800 D. P774,000 Bobadilla manufacturing supplies that it needs for the month of July when the expected
3
production are 470,000 units. Below are the actual data from the prior three
. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 months of operations.
and 60,000 units of budgeted output, respectively. Because of the need for additional facilities,
Production in units Manufacturing supplies
budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for
March 450,000 P723,060
50,000 units. How much is Jordan’s budgeted variable cost per unit of output?
April 540,000 853,560
A. P 7.50 C. P30.00
May 480,000 766,560
B. P16.00 D. P62.50 Bobadilla

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 Activity Cost Analysis

Using these data and the high-low method, what is the reasonable estimate of the cost of Direct Labor Hours Maintenance Costs
manufacturing supplies that would be needed for July? (Assume that this activity is within the January 34,000 P61,000
relevant range.) February 31,000 58,500
A. P 805,284 C. P 755,196 March 34,000 61,000
B. P1,188,756 D. P 752,060 Bobadilla What is the fixed portion of Almond Company’s maintenance expense, rounded to the nearest
8
pesos?
. The following activity and cost data that were provided by Hoist Corporation would help in A. P28,330 C. P37,200
estimating its future maintenance costs: B. P32,677 D. P40,800 Bobadilla
Units Maintenance Cost
3 P450 . Clone Machinery had the following experience regarding power costs:
12
7 P530
Month Machine hours Power cost
11 P640
Jan. 300 P680
15 P700
Feb. 600 720
Using the least-squares regression method to estimate the cost formula, the expected total
Mar. 400 695
cost for an activity level of 10 units would be closest to:
Apr. 200 640
A. P612.50. C. P595.84.
B. P581.82. D. P601.50. Bobadilla 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.
9
. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500? A. P 700 C. P 710
A. 10,625 units. C. 6,250 units. B. P 705 D. P1,320 Bobadilla
B. 4,375 units. D. 5,250 units. Bobadilla 13
. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is
10
. Balsy Company has provided the following data for maintenance cost: direct labor hours. According to this equation, a 100-hour change in total direct labor hours will
change the cost of workers compensation insurance by
Prior Year Current Year
A. P4,000. C. P4,300.
Machine hours 12,500 15,000 B. P 300. D. none of the above amounts. Bobadilla
Maintenance cost P27,000 P31,000
The best estimate of the cost formula for maintenance would be: 14
. Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units,
A. P21,625 per year plus P0.625 per machine hour. P1,000 of product level costs for 40 products, and P3,500 of customer-level costs for ten
B. P 7,000 per year plus P0.625 per machine hour. customers. The cost of Job 002 which used 800 unit level activities, 4 product level activities,
C. P 7,000 per year plus P1.60 per machine hour. and one customer-level activities amounts to
D. P27,000 per year plus P1.60 per machine hour. Bobadilla A. P3,650 C. P3,050
B. P3,250 D. P2,950 Bobadilla
11
. Almond Company wishes to determine the fixed portion of its maintenance
expense (a semi-variable expense), as measured against direct labor hours for 15
. It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production
the first Malayan three months of the year. The inspection costs are fixed; doubles, the average time (per unit) needed to make 8 units would be
however, the adjustments necessitated by errors found during inspection A. 4.90 minutes C. 3.33 minutes
account for the variable portion of the maintenance costs. Information for the B. 3.43 minutes D. 3.23 minutes Bobadilla
first Malayan quarter is as follows:

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 Activity Cost Analysis

16
. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for October 7,250 1,600
P6,000. Assuming a cumulative learning curve of 90% as production doubles, the incremental Using the high-low method, what is the best equation?
cost of the third and fourth items will be A. Y = P 750 + P5.00X C. Y = P 750 + P3.50X
A. P 0 C. P2,160 B. Y = P1,500 + P3.50X D. Y = P1,500 + P5.00X Bobadilla
B. P 600 D. P1,250 Bobadilla
21
. During the month of June, Behold Corporation produced 12,000 units and sold them for P20
17
. At a sales level of P300,000, Jamaica Company's gross margin is P15,000 less than its per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000.
contribution margin, its net income is P50,000, and its selling and administrative expenses Based on the foregoing information, the variable cost per unit for the month of June was
total P120,000. At this sales level, its contribution margin would be: A. P4.50 C. P6.00
A. P250,000. C. P170,000. B. P5.00 D. P7.17 Bobadilla
B. P155,000. D. P185,000. Bobadilla
22
. Data to be used in applying the high-low method shows the highest cost of P69,000 and the
. The Shepherd Company’s president would like to know the estimated fixed
18
lowest cost of P52,000. The data shows P148,000 as the highest level of sales and P97,000
and variable components of a particular cost. Actual data for this cost for four as the lowest level. What is the variable cost per peso sales?
recent periods appear below. A. P0.33. C. P0.54.
Activity Cost B. P0.47. D. P3.00 Bobadilla
Period 1 24 P174
Period 2 25 179 . The following information is available for maintenance costs:
23

Period 3 20 165 Month Production Volume Maintenance Costs

Period 4 22 169 June 150,000 P500,000
Using the least-squares regression method, what is the cost formula for this cost? July 230,000 620,000
A. Y = P 0.00 + P7.55X C. Y = P103.38 + P3.00X August 380,000 800,000
B. Y = P110.44 + P2.70X D. Y = P113.35 + P0.89X Bobadilla September 120,000 480,000
October 270,000 710,000
19
. Sams Company. wants to develop a single predetermined overhead rate. The company's Using the least squares, the estimate of the fixed portion of maintenance costs (rounded to
expected annual fixed overhead is P340,000 and its variable overhead cost per machine hour thousand pesos) is
is P2. The company's relevant range is from 200,000 to 600,000 machine hours. Sams A. P131,000 C. P332,000
Company expects to operate at 425,000 machine hours for the coming year. The plant's B. P321,000 D. P115,000 Bobadilla
theoretical capacity is 850,000. The predetermined overhead rate per machine hour should be
A. P2.40. C. P2.80. . Tomas Ocampo has just been appointed chairperson of the Accountancy
24

B. P2.57. D. P2.85. Bobadilla Department of ADEB College. In reviewing the department’s cost records,
Tomas has found the following total cost associated with MAS Part 2 subject
. The Overland Company wants to develop a cost estimating equation for its
20
over the last several terms:
monthly cost of electricity. It has the following data: Semester/Term Number of Subjects Offered Total Cost
Month Electricity Cost Direct Labor Hours AY2004, First Semester 4 P10,000
January P6,750 1,500 AY2004, Second Semester 6 14,000
April 7,500 1,700 AY2004, Summer 2 7,000
July 8,500 2,000 AY2005, First Semester 5 13,000

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 Activity Cost Analysis

27
AY2005, Second Semester 3 9,500 . What total factory overhead costs would you expect the company to incur at an operating level
Tomas knows that there are some variable costs, such as amounts paid to student assistants, of 70,000 direct labor hours?
associated with the course. He would like to have variable and fixed cost components A. P16,950,000 C. P13,000,000
separated for planning purposes. B. P13,950,000 D. P10,950,000 Bobadilla
Using the least-squares method, what is the variable cost per section of MAS?
A. P1,750 C. P1,200 Question Nos. 28 and 29 will be answered using the following data:
B. P1,500 D. P 900 Bobadilla The Bora Hotel’s guest-days of occupancy and custodial supplies expense over
the last seven months were:
25
. At a sales level of P300,000, Java Company's gross margin is P15,000 less than its Month Guest-Days of Occupancy Custodial Supplies Expense
contribution margin, its net income is P50,000, and its selling and administrative expenses March 40,000 P 75,000
total P120,000. At this sales level, its contribution margin would be: April 65,000 82,500
A. P250,000. C. P170,000. May 80,000 105,000
B. P155,000. D. P185,000. Bobadilla June 105,000 120,000
July 120,000 135,000
Question Nos. 26 and 27 are based on the following information: August 90,000 107,500
SERAL Company is a manufacturing entity whose total factory overhead costs September 75,000 97,500
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 28
. Using the high-low method, what is the estimated monthly fixed cost for custodial supplies?
at high and low levels of activity for recent years follow: A. P67,500 C. P42,500
Low High B. P45,000 D. P40,000 Bobadilla
Direct labor hours 50,000 75,000
29
Total factory overhead costs P14,250,000 P17,625,000 . 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?
The factory overhead costs above consist of indirect materials, rent, and maintenance. The A. P 92,500 C. P110,000
company has analyzed these costs at the 50,000-hour level of activity as follows: B. P 98,750 D. P127,500 Bobadilla
Indirect materials (V) P 5,000,000
Rent (F) 6,000,000 Question Nos. 30 through 32 are based on the following:
Maintenance (M) 3,250,000 St John Hospital contains 450 beds. The average occupancy rate is 80 percent per month. In other
Total factory overhead costs P14,250,000 words, on average, 80 percent of the hospital’s beds are occupied by patients. At this level of
occupancy, the hospital’s operating costs are P32 per occupied bed per day, assuming a 30-day
V = variable; F = fixed; M = mixed month. This P32 figure contains both variable and fixed cost components.

26
. How much of the P17,625,000 factory overhead cost at the high level of activity consist of During the month of June, the hospital’s occupancy rate was only 60 percent. A total of P326,700 in
maintenance cost? operating cost was incurred during that month.
A. P4,125,000 C. P4,450,000 30
B. P4,220,000 D. P4,525,000 Bobadilla . Using the high-low method, the amount of variable cost per occupied bed per cay is
A. P 7.00 C. P12.00
B. P 9.00 D. P15.00 Bobadilla

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 Activity Cost Analysis

Using the high-low method, what is the fixed cost element (to the nearest peso)?
31
. Using the variable cost as determined in number 36, the total fixed operating costs per month A. P225 C. P411
are: B. P138 D. P364 Bobadilla
A. P240,000 C. P290,000
37
B. P270,000 D. P300,000 Bobadilla . The following information was taken from a computer printout generated with the least squares
method for use in estimating overhead costs:
32
. Assuming an occupancy rate of 75 percent in a particular month, what amount of total Slope 90
operating costs would you expect the hospital to incur? Intercept 11400
A. P310,000 C. P340,875 Correlation coefficient 0.6
B. P315,500 D. P375,500 Bobadilla Activity variable Direct labor hours
The cost formula is
Question Nos. 33 through 35 are based on the following: A. Overhead = P11,400 – P90X C. Overhead = P11,400 + P90X
In the Omara Manufacturing Company, at an activity level of 80,000 machine hours, total overhead B. Overhead = P11,400 + (P45 x .6) D. Overhead = P11,400 x .6 Bobadilla
costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was
38
P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At . The following information pertains to data that have been gathered in the process of estimating
100,000 machine hours, maintenance costs were P130,000. a simple least squares regression:
Mean value of the dependent variable 30
Assume that all of the activity levels mentioned in this problem are within the relevant range. Mean value of the independent variable 10
Coefficient of the independent variable 3
33
. The variable cost for maintenance per machine hour is: Number of observations 12
A. P1.30. C. P0.75. What is the "a" value for the least squares regression model?
B. P1.44. D. P1.35. Bobadilla A. 20
B. 6
34
. The total fixed overhead cost for Omara is: C. 0
A. P115,000. C. P 60,000. D. The intercept term cannot be computed from the information given. Bobadilla
B. P130,000. D. P 55,000. Bobadilla
39
. TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined
35
. If 110,000 machine hours of activity are projected for the next period, total expected overhead that if a truck is driven 105,000 kilometers during a year, the average operating cost is P11.40
cost would be: per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating
A. P256,000. C. P306,625. cost increases to P13.40 per kilometer. Assuming that in a given year, a truck were driven
B. P263,500. D. P242,500. Bobadilla 80,000 kilometers, what total cost would you expect to be incurred?
A. P1,012,000 C. P1,225,143
. The following data were compiled from the records of Cabral Company:
36
B. P1,407,000 D. P1,072,000 Bobadilla
Month Usage Cost
Jan. 600 P750 Question Nos. 40 through 41 are based on the following:
Feb. 650 775 The House of TROPS Company is a large retailer of sports equipment. An income statement for
Mar. 420 550 the company’s Ski Department for a recent quarter is presented as follows:
Apr. 500 650
May 450 570 The House of TROPS Company

59
 Activity Cost Analysis

Income Statement A. Hall rental. C. Caller salary.

For the Quarter Ended March 31 B. Cost of supplies. D. Prize money. Bobadilla
44
Sales P1,500,000 . If the church conducts 12 sessions and 1,000 people attend each session, the average cost
Less cost of goods sold 900,000 per session is?
Gross margin 600,000 A. P 9,600. C. P15,200.
Less operating expenses: B. P14,700. D. P16,200. Bobadilla
Selling expenses P300,000
45
Administrative expenses 100,000 400,000 . The church is thinking of holding 2 Bingo sessions per day with 1,000 people attending each
Net income P 200,000 session. If they hold the 2 sessions, the average cost per session is?
A. P 9,600. C. P15,200.
Skis sell, on the average, for P7,500. Variable selling expenses are P500 per pair of skis sold. The B. P14,700. D. P16,200. Bobadilla
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 Use the following Information to answer Question Nos. 46 through 51.
for P4,500 per pair. Units Sold @ P60/each
1,000 2,000 3,000
40
. What is the variable cost per pair of skis? Salary P20,000 P30,000 P40,000
A. P 900,000 C. P1,000,000 Cost of Goods Sold 15,000 30,000 45,000
B. P 920,000 D. P1,020,000 Bobadilla Cost/Unit of Depreciation 300 150 100
Rent 20,000 20,000 20,000
41
. Given the cost formula Y = P30,000 + P5X, total cost at an activity level of 16,000 units would
be: 46
. Which of the above costs behaves as a Variable Cost?
A. P 30,000. C. P 80,000. A. Rent. C. Cost of Goods sold.
B. P 46,000. D. P110,000. Bobadilla B. Salary. D. Depreciation. Bobadilla

Question Nos. 42 through 45 are based on the following: 47

. Which of the above costs behaves as a Mixed Cost?
A local church wants to rent a hall for P3,000 a day to hold a Bingo fundraiser. Every session of A. Rent. C. Cost of Goods sold.
bingo requires a caller for P200. There are supplies that are needed that cost P3 per person B. Salary. D. Depreciation. Bobadilla
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. 48
. Which one does not contain any fixed cost behavior?
A. Rent. C. Cost of goods sold.
. Total costs for 1 session can be classified as:
42
B. Salary. D. Depreciation. Bobadilla
Bobadilla A. B. C. D.
49
Fixed Costs P13,200 P 3,000 P13,200 P10,000 . If 3,000 units are sold what is the contribution margin?
Variable Costs P3 P13,200 P 3,000 P 3,200 A. P 75,000. C. P135,000.
B. P105,000. D. P180,000.
43
. The church conducts 1 Bingo session per month. Over the course of the year, which cost 50
would not act as a variable cost based on just holding one more session? . What is total fixed cost?
A. P50,000. C. P60,100.
60
 Activity Cost Analysis

B. P60,000. D. P90,000.
51
. 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
52
. What percentage of the variation in maintenance costs is explained by the independent
variable?
A. 85.6% C. 47.3%
B. 95.2% D. 73.3%
53
. What is the total maintenance cost for an estimated activity level of 20,000 machine hours?
A. P73,500 C. P82,300
B. P78,400 D. P84,750

61
1
. Answer: D
Monthly fixed costs 480,000 / 12 P 40,000
Variable 20,000 x 5 100,000
Total P140,000
2
. Answer: B
Monthly budgeted fixed cost (72,000/12) P 6,000
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 12,800
Budgeted overhead cost P18,800
3
. Answer: C
The 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
4
. Answer: B
Variable factory overhead (150,000/60,000) P2.50
Fixed overhead [240,000/(60,000 x 0.80) 5.00
Total rate P7.50

Note: Variable rate per activity unit is constant. Fixed overhead per unit behaves inversely with the activity-unit level.
5
. Answer: B
Variable 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
6
. Answer: B
Days Occupancy:
70% -- 2,000 x 30 days x 0.7 42,000
45% -- 2,000 x 30 days x 0.45 27,000

Variable cost per Room Day:

(42,000 x 21) - 792,000
P6.00
42,000 - 27,000

Fixed costs: 792,000 – (27,000 x 6) P630,000

Cost at 60% rate:

Variable:
2,000 x 30 x 0.6 x P6 P216,000
Fixed 630,000
 Total P846,000
7
. Answer: D
b = (853.560 – 723,060) ÷ (540,000 – 450,000)
130,500 ÷ 90,000 P 1.45

a = 853,560 – (540,000 x 1.45) P 70,560

Y = 70,560 + 1.45b
= 70,560 + (470,000 x 1.45) P752,060
8
. Answer: D
∑X = 36
∑Y = 2,320
∑XY = 22,600
∑X2 = 404

∑Y = na + b∑X
∑XY = as + b∑X2

2,320 = 4a + 36b
22,600 = 36a + 404b
20,880 = 36a + 324b
1,720 = 80b
b = 21.50

2,320 = 4a + (36 x 21.50)

2,320 = 4a + 774
4a = 1,546
a = 386.50

Y = 386.50 + 21.50 X
Y = 386.50 + (10 x 21.50)
Y = 601.50
9
. Answer: C
4X = 42,500 – 17,500
4X = 25,000

X = 6,250
10
. Answer: C
b = (31,000 – 27,000) ÷ (15,000 – 12,500)
4,000 ÷ 2,500
b = 1.6

a = 31,000 - (15,000 x 1.60)

a = 7,000

Y = 7,000 + 1.60X
11
. Answer: B
 61,000 - 58,500
Variable Rate =
3,000
= 0.8333

Fixed : 61,000 – (34,000 x .8333)= 32,677

12
. Answer: A
b = (720 – 640) ÷ (600 - 200)
80 ÷ 400 P0.20

a = 720 – (600 x .2)

720 – 120 P600

Total Cost for month of May

Y = 600 + (500 x 0.2) P700
13
. Answer: B
∆Y = 100 x 3 P300

Within a relevant range, the amount of total fixed cost remains constant at P4,000. The only cost that will change in
total is variable cost because every additional hour will add P3 to total costs.
14
. Answer: A
Unit level costs: P12000 ÷ 3000 x 800 P3,200
Product level costs: P1,000 ÷ 40 x 4 100
Customer level costs: P3,500 ÷ 10 350
Cost of Job 002 P3,650

Within a relevant range, the amount of fixed cost remain constant at P4,000. The only cost that will charge in total is
variable cost between every additional hour will be accompanied by an increase of P3.
15
. Answer: B
Total number of minutes used after completing 8 units:
(10 × .7 × .7 × .7) 3.43
16
. Answer: C
Cumulative average after completing 4 units:
1,500 × .9 × .9 P1,215

Total costs of 4 units 4 x P1,215 P4,860

Less total costs of first 2 units 1,500 x 0.9 x 2 2,700

Additional costs P2,160

17
. Answer: D
Net income P 50,000
Add: selling and admin. Expense 120,000
Gross Margin 170,000
Add: excess of contribution margin over gross margin 15,000
Contribution Margin P185,000
18
. Answer: B
 ∑X = 91
∑Y = 687
∑XY = 15,669
∑X2 = 2,085

687 = 4a + 91b
15,669 = 91a + 2,085b
15,629.25 = 91a + 2,070.25b
39.75 = 14.75b

b = P2.70

687 = 4a + (91 X 2.695)

687 = 4a + 245.25
4a = 441.75
a = P110.44

Y = P110.44 + P2.70X
19
. Answer: C
Variable OH rate P 2.00
Fixed OH rate (340,000 ÷ 425,000) 0.80
Total OH rate P 2.80
20
. Answer: B
b = (8,500 – 6,750) ÷ ( 2,000 – 1,500)
= 1,750 ÷ 500
b = 3.50
a = 8,500 – (2,000 x 3.5)
a = 1,500
y = 1,500 + 3.50X
21
. Answer: A
Change in cost  Change in sales = Variable cost per peso sale
(P69,000 – P52,000) ÷ (P148,000 – P97,000)
P17,000  P51,000 = P0.333.
22
. Answer: B
Contribution margin per unit:
(P154,000 + P26,000) ÷ 12,000 units P15.00
Variable cost per unit: P20.00 – P15.00 P 5.00
23
. Answer: B
∑X = 1,150,000
∑Y = 3,110,000
∑XY = 770,900 Million
∑X2 = 307, 100 Million

The least-squares method is based on the cost model

Y = a + bX

I. Since all the observations are included, all the values are summed up:
∑Y = na + b∑X
 II. To minimize distortion, the first equation is made bigger by multiplying it by ∑X.
∑XY = a∑X + b∑X2

III. Solve for values of b and a

Eq. 1: 3.11 = .000005 + 1.15b
Eq. 2: 770,900 = 1.15a + 307,100b
715,300 = 1.15a + 264,500b
55, 600 = 42, 600b
b = P1.305164

770,900 = 1.15a + ( 307,100 x 1.31)

1.15a = 370,085
a = P320, 520
24
. Answer: A
∑X = 20
∑Y = 53,500
∑XY = 231,500
∑X2 = 90

53,500 = 5a + 20b
231,500 = 20 + 90b
214,000 = 20a + 80b
17,500 = 10b

b = P1,750
25
. Answer: D
Net incomeP 50,000Add Fixed Costs:ManufacturingP 15,000Selling and administrative 120,000 135,000Total
Contribution MarginP185,000
26
. Answer: A
Maintenance cost at high level:
Total factory overhead P17,625,000
Less: Indirect materials (variable) 75,000 x P100 ( 7,500,000)
Rent (fixed) ( 6,000,000)
Amount of maintenance cost P 4,125,000
27
. Answer: A
Analysis of maintenance cost
b = (P4,125,000 – P3,250,000) ÷ (75,000 – 50,000)
b = 875,000 ÷ 25,000
b = P35

a = P3,250,000 – (50,000 x P35)

a = P1,500,000

Indirect materials 70,000 x 100 P 7,000,000

Rent 6,000,000
Maintenance 500,000 + (70,000 x 35) 3,950,000
Total Overhead costs P16,950,000
28
. Answer: B
 b = (135,000 – 75,000) ÷ (120,000 – 40,000) 60,000 ÷ 80,000 P0.75
a = P75,000 – (40,000 x 0.75) P45,000
29
Answer: D
Y = P45,000 + P0.75X
Y = P45,000 + (110,000 x P0.75) P127,500
30
. Answer: A
Number of bed days based on occupancy rate of:
80% = 450 x 30 x 0.8 10,800
60% = 450 x 30 x 0.6 8,100

(10,800 x 32) - 326,700

b=
10,800 - 8,100

18,900 ÷ 2,700 P7
31
. Answer: B
a = P326,700 – (8,100 x P7) P270,000
32
. Answer: C
Number of bed days at 75% occupancy rate
0.75 x 30 x 450 = 10,125
Y = P270,000 + (10,125 x P7) P340,875
33
. Answer: C
b = (P130,000 – P115,000) ÷ (100,000 – 80,000)
P15,000 ÷ 20,000 P0.75
34
. Answer: A
a = P130,000 – (10,000 x P0.75)
a = P55,000

Total fixed overhead:

Maintenance Cost P 55,000
Depreciation 60,000
Total P115,000
35
. Answer: B
Utilities 110,000 x P0.6 P 66,000
Maintenance P55,000 + (110,000 x P0.75) 137,500
Depreciation 60,000
Total P263,500
36
. Answer: B
b = (P775 - P550) ÷ (650 - 420)
P225 ÷ 230

b= P0.98

a = P775 - (650 x 0.98)

= P775 - 637
 a = P138.00
37
. Answer: C
Slope represents the variable rate.
Intercept represents total fixed cost
38
. Answer: C
Y = 12 x 30
= P360

a = P360 – (12 x 3 x 10)

=0
39
. Answer: A
(105,000 x P11.40) - (70,000 x P13.40)
b=
105,000 - 70,000

b = (P1,197,000 – P938,000) ÷ 35,000

b = P7.40

a = P938,000 – (70,000 x P7.40)

a = P420,000

Y = P420,000 + P7.40X
Y = P420,000 + (80,000 x 7.40)
= P1,012,000
40
. Answer: D
Number of units sold = 1,500,000 ÷ 7,500 200

Costs of goods sold = P200 x 4,500 P900,000

Variable selling expenses 200 x 500 P100,000
Variable administrative expenses 0.20 x 100000 20,000
Total P1,020,000
41
. Answer: D
The total cost at an activity level of 16,000 units is determined as follows:
Total cost = P30,000 + (16,000 units x P5.00 per unit) P110,000
42
. Answer: C
Total Fixed Costs include:
Rental P 3,000
Cost of the caller 200
Prize money P10,000
Total P13,200

Total Variable costs are:

P3 per person for the 1,000 people attending P 3,000
43
. Answer: B
The cost of supplies varies based upon the number of players that attend each session not just the number of sessions
44
. Answer: D
Total costs: (P3,000 + P13,200) P16,200

If the number of people attending each session is the same, all of the costs act like variable costs and the average cost
per session equals the total cost per session.
45
. Answer: B
If they hold 2 sessions per day:
Hall Rental P 3,000
Caller salary (2 x P200) 400
Total prize money 20,000
Total cost of supplies 6,000
Total P29,400
Average cost per session P29,400 ÷ 2 sessions P14,700

The hall Rental is fixed per day and not per session. The prize money and cost of the caller varies per session and the
cost of supplies varies per person attending.
46
. Answer: C
Cost of Goods sold is P15 per unit. A variable cost is one which is constant per unit.
Unit salesUnit Variable Cost1,00015,000 ÷ 1,000P152,00030,000 ÷ 2,000P153,00045,000 ÷ 3,000P15
47
. Answer: B
The salary is a mixed cost. Notice that the cost per unit and in total for each volume level are not the same. There is a
variable cost component of P10 per unit and a fixed cost component of P10,000. Within a relevant range, unit variable
cost as well as total fixed cost are constant.

Variable cost (30,000 – 20,000) ÷ (2,000 – 1,000) P 10

Fixed cost 20,000 – (1,000 x 10) P10,000
48
. Answer: C
Cost of Goods Sold is a variable cost. Rent and Depreciation are fixed costs. Salary is a mixed cost that has some fixed
cost behavior.
49
. Answer: B
Sales P60 * 3000 units P180,000
Total Variable Cost 75,000
Contribution Margin P105,000

Total variable cost:

Cost of goods sold P45,000
Variable salary cost 30,000
Total P75,000
50
. Answer: B
Rent P20,000
Depreciation 30,000
Fixed salary cost 10,000
Total fixed costs P60,000
51
. Answer: C
 To analyze mixed cost using high-low method, the analyst always identifies and uses the lowest and the highest levels
of activities. The reason is that the activity presumably causes costs, so the analyst would like to use data that reflects
the greatest possible variation in activity.
52
. Answer: D
The question does not require a computation. R 2 (goodness of fit) indicates the percentage of the variation in the
dependent variable (cost) that is explained by variation in the independent variable (activity). The adjusted R 2 varies
from zero to 100%, and the higher the percentage, the better.
53
. Answer: A
Variable cost 20,000 x 3.5 P70,000
Fixed cost 3,500
Total cost P73,500