ReSA THE Review SCHOOL OF ACCOUNTANCY @ MANAGEMENT SERVICES (A. LEE) MS-A: MANAGEMENT ACCOUNTING MANAGEMENT ~ the process of planning, organizing, and controlling a certain task to realize the objectives of the organization BASIC FUNCTIONS OF MANAGEMENT Planning involves: setting up immediate and long-term goals. + deciding which alternative means would be best sulted to attain the set goals. LANNING i Organizing involves: ~ deciding hovs to utilize available resources as plans are being carried out. + tackling activities such as staffing, subordirating, directing, motivating, etc. ORGANIZING Controlting involves: = comparing actual performance with set plans or standards. ~ deciding what corrective actions to take should there be any deviation (variance) between actual and planned performance. CONTROLLING Jade NOTE: decision-making is an inherent function of management; all management functions would require a certain amount of decision-making. MANAGEMENT BY OBJECTIVES vs. MANAGEMENT BY EXCEPTION Management by Objectives is a procedure in which a subordinate and a supervisor agree on goals and the methods of achieving them and develop a pian in accordance with that agreement, The subordinate Is then evaluated with reference to the agreed plsn at the end of the period. Management by Exception Is a technique of highlighting those which vary significantly from plans and standards in fine with the management principle that executive time should be spent on items that are non-routine and are identified as top priority. MANAGEMENT ACCOUNTING - an application of appropriate techniques and concepts in processing historical and projected economic data of an entity to assist management in establishing plan to . meet economic objectives and in making rational decisions with a view toward achieving the objectives. (American Association of Accountants) MANAGEMENT ACCOUNTING vs, FINANCIAL ACCOUNTING TRrGutel, Melee, FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING 1. User of information —Primarity for external users Exclusively for internal users (management) 2, Guiding principles Generally Accepted Accounting Principle Management wants and needs 3. Optional/Mandatory — Mandatory (especially for public entities) Discretionary or optional 4, Type of information Primarily monetary (financial) in nature Monetary and non-monetary 5, Emphasis of reports Reliability (precision of data) Relevance (timeliness of data) 6. Purpose/End result Financial reporting and compliance Decision-making 7. Source of data From company's (internal) info system From internal and external sources 8. Amount of detail Compressed and simplified Extensive and detailed 9. Focus of information Focus mainly on business as a whole ‘Focus on segments and business as a whole 10. Frequency Periodic (annually, quarterly) [As frequent as need arises 11, Time orientation 12. Unifying model PUAKS: Chat BA Oe Mainly historical (past) date Assets = Liabilities + Equity Page 4 of 4 pages Future-oriented using current and past data No unifying model or equationReSA - The Review School of Accountancy MS-A~ NS? MANAGEMENT ACCOUNTING THE CONTROLLER: CHIEF MANAGEMENT ACCOUNTANT CONTROLLERSHIP - the practice of the established science of control, which Is the process by which management assures itself that company resources are obtained and utilized according to plans that are in line with the company’s set objectives. CONTROLLER ~ an officer of an organizetion who has responsibility for the accounting aspect of management control, It is a title given to a person hexding the position of a chief management accounting ‘executive of a business. enterprise. In many accounting texts and business iiterature, the controller is often referred to as the ‘chief accountant.’ CONTROLLER FINANCIAL ACCOUNTING COST & MANAGEMENT ‘ACCOUNTING ACCOUNTING SYSTEMS & PROCEDURES FINANCIAL ANALYSIS & SPECIAL STUDIES GOVERNMENT & TAX REPORTING LINE FUNCTION vs. STAFF FUNCTION Line function — the authority to give command or orders to subordinates. It exercises direct downward authority aver line departments (e.g., VP for operations over operations manager). Staff function - the authority to advise but not to command others; the function or responsibility of providing line and staff managers with specialized service and technical advice for Support. It is exercised laterally or upward. The controiler primarily exercises a staff function as the controller's office gives advice and service to other departments and to entire organization as a whole; however, in the accounting department that is usually headed by the controller, the controller has a line authority over subordinates. CONTROLLER vs. TREASURER To avoid incompatible duties being assigned to a single officer, a controller, who is primarily concerned with accounting, must not hold at the same time the position of @ treasurer, who Is primarily concerned with custody of funds. Consider the following: CONTROLLER (001501) TREASURER + 004i 1. Planning and control 1. Provision of capital wot 2. Reporting and interpreting 2. Investor relations 5 Yoo °3, Evaluating and consulting 3. Short-term financing cus ee {uo 4. Tax administration 4, Banking and custody phe ka arrows 5. Government reporting 5, Credit and collections (cio sousrs Gaul tic © Protection of assets 6. Investments ae aie 7. Economic appraisal 7. Insurance : STANDARDS OF ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS According to the Standards of Ethical Conduct set by the Institute of Management Accountants (IMA), management accountants have a responsibility to, ‘maintain an appropriate level of professional competence by ongomna | [eceeee of their knowiedge and skills _ | refrain from disclosing confidential information acquired in the course of their Work, except when authorized and/or unless legally obligated to do so_ 3 |x fran fom ehgening in any acivty that would prejudice their ability to | | carry out their duties ethically communicate information fairly: and objectively and disciose fully ail relevant informati lati 5‘ need. | eee | i Ia [ Page 2 of 4 pages E>ReSA - The Review Schoo! of Accountancy MS-A MS: MANAGEMENT ACCOUNTING MULTIPLE-CHOICE QUESTIONS (Sources: CMA/CIA/RPCPA/AICPA/Various test banks) a 1. The discipline of accounting concerned with providing information to management in making decisions about business operations. a. Cost accounting b. Financial accounting ¢. Government accounting d, Management accounting 2. The primary purpose of managemient accounting is to provide information ‘a, Toexternal users b. To internal users c. To both internal and external users d. To management and government = é 3. Which of these information characteristics is deemed most important to management accounting? a, Verffiability and accuracy b. Comparability and full disclosure ¢. Relevance, flexibility and timeliness d. Conservatism and substarice over form 4. Managerial accounting 2. Is governed by Generally Accepted Accounting Principles (GAAP). b. Is concerned only with monetary information. +. ISdiscretionary rather than mandatory. d. Is focused on business as a whole rather than on segments of the business. t 5. Managerial accounting is similar to financial accounting in that E a. Both are governed by Generally Accepted Accounting Principles , Both classify reported information in the same way. ¢, Both concentrate with historical costs. 4. Goth dea! with economic events. 6. Which of the following statements is false? ‘a. Management accounting Is synonymous to managerial accounting. b. Management accounting has no externally imposed standards while financial accounting has to follow the Generally Accepted Accounting Principles. . Financial accounting deals with information that is primarily reported to 1 outside the organization. d, Cost accounting reports refer to accounting for the annual cost of operating a business. dividuals C 7. Which of the following statements is true? @. Financial accounting is @ subset of cost accounting. b. Management accounting is a subset of cost accounting. ©. Cost accounting is @ subset of both management and financial accounting. d, Management accounting is a subset of both cost and financial accounting. &Y 8. Cost accounting system is usually utilized for ‘a. Internal and external reporting that may be used in making nonroutine decisions and in developing plans and policies b. External reporting to government, various outside parties, and shareholders ¢. Internal reporting for use in management planning and control, and external reporting to the extent its product-costing function satisfies external reporting requirements 4. Internal reporting for use in planning and controlling routine operations a 9. The basic management process does not include a. Rationalizing b. Controlling lets, ©. Subordinating eS d. Planning ‘ 10. The function of management that compares planned results against actual results is known as s a. Planning b. Directing and motivating c. Controtling d. Decision making Page 3 of 4 pages ®at RgSA - The Review School of Accountancy MS-A iis: HANAGEMENT ACCOUNTING 11, The management control process contains the following four sequential steps, including ‘A) Implementing a program of corrective action. 8) Comparing actual performance with standards, C) Establishing standards of performance. D) Measuring actual performance. The proper sequence of these activities ist 2 C,0,4,B b. 0,CB,A c DB,CA dc. CD,B,A 12. A practice in which @ subordinate and a supervisor agree on goals and the methods of achieving them. a. Management by objectives b. Management by subjective ¢, Management by exceptior d. Management by example 13, The controller primarily a. Occupies a staff position b. Occupies 2 tine position ¢. Occupies a non- managerial rank-and-file position d. Has little influence in the decision-making process 14, Which is a characteristic of a tine function rather than a staff function? 2. It isa function that gives support, advice and service to line managers. b. itis the euthority to command action or give orders to subordinates. c. It is exercised laterally or upward. d. Its a support function by provision of services to a co-department, 15. Which of the following statement is true? ‘a, The controller, as the title implies, exercises direct control aver business operations. b. The controiler performs primarily a line function. c. The treasurer performs primarily a line function. d. The primary functions of a controller are the basically the same as those of a treasurer. 16. Management accounting is used by an organization's management for a multitude of purposes that do not include a. Marketing b. Control c. Evaluation dd. Reporting 17. Controllers are ordinarily not concerned with’ a. Preparation of tax returns b. Reporting to government c. Protection of assets d. Investor relations 18, The treasury function is usually not concerned with: a. Financial reporting b. Short-term financing ¢. Cash custody and banking d. Credit extension and collection of bad debts 19. The professional certification most relevant for managerial accountants is the a. CPA b. CMA CIA d. CFA 20. Which item is not an IMA Standard of Ethical Conduct for Management Accountants? 2. Competence b. Integrity Loyalty d. Objectivity Page 4 of 4 pages2) ReSA Tit Revew Sooo: or Accouvrancy © MANAGEMENT Services (A. LEE ij MS-01: COST BEHAVIOR ANALYSIS COST - the monetary amount of the resources given up to attain some objective such as acquiring goods and services. When notified by a term that defines the purpose, cost becomes operational (2.9., ‘acquisition cost; production cost; cost of goods sold). COST BEHAVIOR s Costs are usually classified acccrding to thelr reaction to changes in activity like production. This classification of costs Is proven to be useful and relevant in management decision-makiag. —~ eS s ‘Total amount Per unit amount a FIED. ‘Constant [Decreases as production increases 2. VARIABLE Increases os production increases 3. MIXED ly (vs. total ots) as production Increases, vs. VARIABLE COST ae > True Variable = aes Committed Fixed <———t Step Variable MIXED COST (Semi-Variable Cost) Y=a+bx Where: [ ¥ }- the total costs (dependent variable) [a | - the total fixed costs (y-intercept/vertical axis-intercept) [b 1- the variable cost per unit (slope of the line) [UX ]- the activity or cost driver (independent variable) tionately (vs. fixed | costs per unit) as production increases COST BEHAVIOR ASSUMPTIONS. Relevant Range Assumption Relevant range refers to the range of activity within which the cost behavior patterns are valid. Any level of activity outside this range may show a different cost behavior pattern. Time Assumption The cost behavior patterns identified are true only over a specified petiod of time. Beyond this, the cost may show a different cost behavior pattern. Linearity Assumption ‘The cost is assumed to manifest a linear relationship over a relevant range despite its tendency to show otherwise over the long run. COST ESTIMATION: SEGREGATION OF MIXED COSTS INTO FIXED AND VARIABLE COSTS High-Low Points Method ‘The fixed and variable elements of the mixed costs are camputed from two sampled data points ~ the highest and lowest points as to activity fevel or cast driver, Change in Costs (Yu ~ Yo) Change in Activity (Xn ~ Xi) ‘Scattergraph (Scatter Diagram) Method All observed costs at various activity levels are plotted on a graph. Based on sound judgment, 2 regression line is then fitted to the plotted points to represent the line function. Least-Squares Regression Method Least-squares method is a statistical technique that investigates the association between dependent and independent variables. This method determines the line of best fit for a set of observations by minimizing the sum of the squares of the vertical deviations between actual points and the regression line. =~ If there is only one independent variable, the analysis is known as SIMPLE REGRESSION. ® Ifthe analysis involves multiple independent variables, it is known as MULTIPLE REGRESSION. Other Cost-Estimation Methods A) Industrial Engineering Method ~ based on the relationship between Inputs and outputs in physical forms; engineering estimates indicate what and how much costs should by 8) Account Anaiysis Method - each account is classified as either fixed or variable based on experience and judgment of accounting and other qualified personnel in the organization. ) Conference Method ~ costs are ciassified based on opinions from various company departments such as purchasing, process engineering, manufacturing, employee relations arid so on Variable cost per unit (b) Page 1 of 4 pagesReSA - The Review School of Accountancy atte ilieeiaaaanl Ms: COST BEHAVIOR ANALYSIS CORRELATION ANALYSIS Correlation analysis is used to measure the strength of linear relationship between two or more variables. The correlation between two variables can be seen by drawing a scatter diagram: '* Ifthe points seem to form a straight line, there is a high correlation, + If the points form a random pattern, there is @ low correlation or no carrelation at atl. Coefficient of Correlation (r) ~ measures the relative strength of linear relationship between 2 variables, ‘The range of the coefficient ‘r’ is fom - 1.0 to + 1.0: «Ife = -1.0, there is perfect inverse linear relationship between X and Y. = Ifr = 0, no tinear relationship. > Ifr= +1.0, there is perfect direct relationship between X and Y. Coefficient of Determination (r*) Tt is the proportion of the total variation in ¥ that is explained or accounted for by the regression equation, regardless of whether the relationship between X and Y is direct or inverse. It is a measure of ‘goodness of fit’ in the regression, The higher the r?, the more confidence one can have in the estimated cost formula. EXERCISES: COST. BEHAVIOR ANALYSIS 4. Variable vs. Fixed Rafael Company manufactures and sells a single product. A partially completed schedule of the company’s total and per unit costs over a relevant range of 60 to 100 units produced and soid each year is given below: Units Produced and Sold any 60 80 100 TOTAL COSTS: t (A) Variable costs P 120 (B) Fixed costs (©) Total costs COSTS PER UNIT: (D) Variable costs Cigas Wopptend) (©) Fixes costs REQUIRED: Based on the above data, Complete the schedule on total and unit costs (Fill-in the blanks). RE NEY Identify two (2) specific costs that remain constant over the relevant range. AN eho Identify two (2) specific costs that are directly related with production a Identify the specific cost that is inversely related with production Express the cost formula based on the lire equation form ‘Y = a + bX.’ If the company produces 90 units, then how much is the expected total costs? (Adapted: Managerial Accounting by Garrison & Noreen) 2. High-Low Method The controller of SUREDEAD Hospital would like to come up with a cost formula that links admitting department cost to the number of patients admitted during a month. The admitting department's costs and the number of patients admitted during the past nine months are given in the following table: Month umber of Paints Admited ‘Admitting Departinent’s Cost F April P 15,600 4 May. 19 P 15,200 june wv 13,700 July 15 P 14,600 August 15 P 14,300 September it P 13,200 t October Mi P 12,800 Rey November 48 72,500 December 16 P 14,000 REQUIRED: Using the high-low method, determine: /JB2~ 1. The variable cost per unit 400) 2. The annual fixed costs. \stibos 40% 3, The admitting department's monthly cost function, rqeo 4. Total estimated costs, if number of patients admitted for the month is 20. (Adapted: Managerial Accounting by Garrison & Noreen) Page 2 of 4 pages ® eeReSA - The Review School of Accountancy — M9-07 MS: COST BERAVIOR ANALYSIS. SS Correlation & Regression Analysis A). The closeness of the linear relationship between the cost and the activity is the pe a. Correlation . Deviation b. Variation d. Standard error b B) Looking at the following scatter diagrams, we can conclude that Ce | re | Hetivity Cost A a, Cost A will be easier to predict than cost 8, b. Cost B wili be easier to predict than cost A. Gost A is out-of-control. d. Cost 6 has no variable component. c C) Ana Company is interested in the relationship between sales (dependent variable) and occurrence of rain (independent variable), Using the proper formula, the coefficient of correlation (r) is computed 6 - 0,99, What conclusion about the sales and rain occurrence could one make? 2, An increase in sales causes an increase in rain occurrence b, An increase in sales causes a decrease in rain occurrence. © An increase in rain occurrence causes a decrease in sales. + An inerease in rain occurrence causes an increase in sales. tb D) Which of these correlation coefficients represents strongest relationship between two variables? 2. +0.50 c +0.05 b. -0.80 a. + 1.02 € £) What Is the appropriate range for the coefficient of determination (7)? a -lm+l ct Oto+L b. 4 t00 d. 0 to infinity k F) Multiple regression analysis 2, establishes and proves cause and effect relationship. 'b. does not produce measures of probable error. © measures the change in one variable associated with the change in another variable, d. measures the change in one variable related to a change in two or more other variables, A (Adzpted: Managerial Accounting by Louderback) 4, Least-Squares Regression Method Green Company's total overhead costs at various levels of activity are presented below: Be = 7000 Month Machine Hours Total Overhead! Casts’ | a ‘i ih March P970 "60 . ~ Ale z fee April 200 P51 10 ave May 600 P 1,089 mo *00 m June 700 P 1,208 ey 460 ac ‘The breakdown of the overhead costs in April at 400 machine-houir level of activity is as follows: nba th a Supplies (Variable) P 260 : oe 5 Salaties (Fixed) 300 Shae Utilities (Mixed) _P. 291 welds Total 2651 : REQUIRED: 48 “L. Determine how much of June's overhead cost of P 1,208 consisted of utilities cost, saci 2+ Using high-tow method, determine the cost function for utilities cnst./ Wameil > 3. Using high-low method, determine the cost function for total overhead cost. Uses NG 4. Using least-squares method, determine the cost function for total overhead costs. ‘ajoxt 5. What would be the total overhead costs if operating level is at 450 machine hours? (Adapted: Managerial Accounting by Garrison & Noreen) Page 3 of 4 pagesRgSA - The Review School of Accountancy MS-UT MS: COST BEHAVIOR ANALYSIS SOLUTION GUIDE (item no. 4) April(400 brs) June (700 hrs) Supplies (Variable) P 260 Salaries (Fixed) “300 Utilities (Mixed) 291. Total Overhead Costs P85) Month Hours (X)_ Total_Costs (Y) x March 500 970 ; aan April 400 P 854 May 600 P 1,089 June 700 P1208 SUM ay ¢ ‘ed. Unit variable costs are costs that change in direct proportion to changes in the activity level. 2, Unit variable cost is constant while unit fixed cost is variable. h 3, In cost analysis using the line equation Y = 2 + bX, total cost (¥) is regarded as the independent variable. 1 4. Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas (e.g., research). c 5. Advertising expense that can be quickly altered by managerial decisions is appropriately classified as a ©" Committed fixed cost. 6. A company has developed a production cost equation for its lone product: Y = 20 + 5X, where X is based on the number of labor hours. Assuming a relevant range of 10 to 20 iabor hours, what is the estimated production cost at zero (0) labor hour? a PS b. P20 c P25 d. An amount that cannot bé determined from the given information 7. The term ‘high-low’ in. cost segregation appropriately refers to the highest cost and lowest cost among the sample data points. z 8: If one variable drastically increases and another variable does not at all react, then correlation : coefficient between these two Variables Is sald to be close to -1.0. will 9. The cost equation "Y= a + bX’ is:indicative of a muttiple regression analysis. 10. Using statistical normal relationships, the least-squares method devises which of the following f ‘equation(s)? a. Dey = ax + Boe b. 2y=na+ bEx G ysadt bx By = na + bEx d. Shy = ax 4+ 6) Ey = na + bx 11. The cost estimation that gives the most mathematically precise cost prediction equation is the a. high-low method b. least-squares method c._ scatter-diagram method d.__ calendar method - 12. Knowledge on cost behavior is critical to profit panning, particularly in the cost-volume-proft analysis. Page 4 of 4 pages @ReSA Review School, Inc. ‘7359807 & 09104391320 / 09239124121 M4 resareview@hotmail.com MANAGEMENT SERVICES ae = A. Lee Quizzer: MS-01 COST BEHAVIOR ANALYSIS ‘Sources. CMAICIA'RPCPAIAICPA/Various test banks 1. ABC Company hes estimated the folowing cost formulas for overhead Cost Formula i Lubricants P'-500 plus P 0.50 per m: nou Utilities P 2,000 plus P 0.80 per machine-our Depreciation 1.000 Maintenance P 200 plus P 0.10 per machine-hour Machine setup P 0.30 per machine-hour Based on these cost formulas, the total overhead cost expected at e level of 300 machine hours is D a. P4700 e P5000 bd. P 4.950 d P5160 2, Which of the following statements is true? The higher is the oroduction within the relevant range, the higher is the fixed cost per unit The higher is the production within the relevant range, the higher is the variabie cost per unit ¢. The lower is the production within the relevant range, the lower is the total fixed cost d._ The lower is the production within the relavant range, the lower is the total variable cost 3. As volume increases, Total fixed costs remain constant and per-unit fixed costs increase b. Total fixed costs remain constant and per-unit fixed costs decrease 6. Total fixed costs remain constant and per-unit fixed costs remain constant d. Total fixed costs increase and per-unit fixed costs increase 2 » 4. Which cost is not subtracted from selling price to calculate contribution margin per unit? D a. Variable manufacturing overhead ©. Direct labor b. Variable selling expenses d Fixed manufacturing overhead & Within the relevant range, the amount of variable cost per unit D 2, Differs at each production level ¢, Decteases as production increases b, Increases as production increases 0. Remains constant at each production level Which of the following best describes a fixed cost? ._{ttmay change in total when such change is unrelated to changes in production. b,_Itmay change in total when such change is related to changes in production. ¢._Itis-conetant per unit of changes in production. dit may change in total when such change depends upon production or within the relevant range. 7. Sales for a retail shop were P 260,000. Income for the period totaled P 30,000 and cost of goods sold was P 110,000. If the contribution margin was P 100,000, total variable selling and administrative ‘expenses must have been (Note: cost of goods sold is purely variable for a retail shop.) A ‘a. P40,000 e. P 100,000 b, 70,000 @ P150,000 8 fan Company's'gross margin exceeded its contribution margin by P 25,000, If sales equeled P 120,000 when income equaled P 20,000 and total selling and administrative expenses equaled P 55,000, then the contribution margin equaled B a, 30,000 ©. P 75,000 b. 50,000 4 P80,000 ©. Fixed costs that cannot be reduced within a short period of time are A 2. Committed c. Avoidable b. Variable d Unnecessary Page 1 of 4 pagesReSA - The Review School of Accountancy MSQ-01 MS: COST BEHAVIOR ANALYSIS 40. An example of a discretionary fixed cost would be a. Depreciation on equipment ©. Salaries of top management b. Renton factory building d. Research and development 11. Which of the following best desoribes a step cost? ‘a. _Itvaries less than proportionately with volume ._Itvaries more than proportionately with volume c._Itis partly variable and partly fixed d. It increases abruptly outsicle the relevant range 12. In describing the cost formula equation, Y = a + bX, which of the following statements is correct? D a, 'Y'is the independent variable ©, ‘a'is the variable rate & ‘a’and'b’ are valid for all lavels of activity d._ In the high-low method, 'b’ equals the change in cost divided by the change in activity 19. The fixed cost of a semi-variable cost is comparable to the mathematical concept of A a. Y-intarcept Dependent variable b. Slope of the line d. Independent variable 14. Which of the following is not a method of splitting @ semi-variable cost? o a. - High and tow point c. Scatter chart Method of least squares Linear programming 45. James Mail Order Co. applied the high-low method of cost estimation to customer order data for the first 4 months of 2007. Whatis the estimated variable filing cost component per order? Month Orders Cost (P) vanuary 1,200 3,120 February 1,300 3,185. March 1,800 4,320 Api 1.700 3,895 ‘What is the estimated variable filing cost component per order? A a P20 c P2.48 b P2482 d P250 16. Bond Company estimated its materials handling cost at two activity tevels as follows: Kilos Handled Cost 80,000 160,000 60,000 132,000 : ‘What is Bond's estimated cost for handling 75,000 kilos? 8, a P160,000 ©. 167,500 b. P 153,000 dP 165,000 47. In March, Quantum Express had electrical costs of P 225.00 when the total volume was 4,500 cups of coffee served. in Apri, electrical costs were P 227.60 for 4,750 cups of coffee. Using the high-low method, what is the estimated fixed cost of electricity per year? a P200 co P225 bP 180 d, P2,160 18. Royale Inc. used the highow method to derive the cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is P 3 per machine hour. Total electrical power cost at the high level of activity was P 7,600 and the low level of activity was P 7.200. Ifthe high level of activity was 1,200 machine-hours, then the low level of the activity was: a. 800 machine-hours ¢. 1,000 machine-hours b. 900 machine-hours d. 4,00 machine-hours 19, Craig Co. has an average unit cost of P 45 at 10,000 units and P 25 at 30,000 units. What is the Veriable cost per unit? a, P1000 b. P 15.00 c, P20.00 d_ An amount that cannot be determined without more information, D Page 2 of 4 pages GReSA - The Review School of Accountancy MSQ-01 MS: COST BEHAVIOR ANALYSIS 20. 24 22, 23 24. 25. 26. 27. Total production costs of prior periods for a company are listed below. Assume that the same cost behavior paitems can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each product is the number of units produced Production per month (units) _ 3,000 9.000 16,000 35,000 Product X P 23,700 P52.680 P 86,490 P 176,260 2 Product Y 47.280 141,840 252,160 851,600 What is the average cost per unit at a production level of 8,000 units for product X? a P5.98 c P7.90 b F585 a P4a3 When unit production decreases, the average product cost per unit increases. This increase in the average cost per unit is due to the ‘a. Increase in the total variable costs ©. Increase in the unit variable cost b. Increase in the total fixed costs dd. Increase in the unit fixed cost White Manufacturers provided you with the following flexible budget of factory overhead at three different capacity levels: Capacity Factory Overhead 60% P 58,000, 70% 108,000 85% 118,000 What will be the flexible budget of factory overhead at 90% capacity? a. P 112,000 c. P 130,000 b. P122,000 d. P 132,000 ‘The major objective of preparing a scatter diagram is to Derive an equation to predict future costs b. Perform regression analysis on the results ©. Determine the relevant range d__ Find the high and tow points to use for the high-low method of estimating costs The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram method ‘@. Includes cost outside the relevant range b. Considers more than two points Can be used with more types of costs than the high-low method d. Gives a precise mathematical ft of the points to the line Which is an equation required for applying feast square method of computing fixed and variabie costs? a. By=aEx+ boxe ©. By=na+ box b. Sxy=na+ bax a Exy=na+bex ‘An analysis of maintenance cost at four levels of plant operations is shown below Hours Gost.» Hours xcost’ Hours Squared 40 P'1,000 40,000 1,600 30 900 27,000 900 60 4,300 78,000 3,600 501,150 _ 57,500 _ 2,500_ 7 60 202,500 0 ‘The company uses the ‘method of least square’ for spitting a semi-variable cost How much is the fixed cost of the maintenance? a P480 ce P20 b. F500 a. P600 The following cost data for different hours of operations are made available to you by Florida Manufacturing Company for your analysis: Number of Months 10 ‘Sum of Hours, 360 Sum of Costs 1,000 Sum of Hours x Costs 39,200 Sum of Hours Squared 14,250 How much is'the fixed cost per year? a P2650 c P318,00 b. P35.00 d. P4200 Page 3 of 4 pagesReSA - The Review School of Accountancy MSQ-01 MS: COST BEHAVIOR ANALYSIS 28 29, 30. 34 32, 33, 34, 35, ° In determining cost behavier, the cost function is offen expressed as Y = at bX. Which of the following cost estimation methods should not be used in estimating fixed and variable costs for the equation? a. Graphic method High and low point b. Simple regression d. Multiple regression Multinle regression analysis is used when’ a. There is more than one cost category to analyze b. Alf the points on a scatter graph fall exactly on a regression {ine ©. There is more than one activity that drives the variable component of a mixed cost 4. Thehigh-low method cannot be used because there is only one observation In regression analysis, which of the following correlation coefficients (f) represents the strongest relationship between dependent and independent variables? a -1.05 e -003 b 189 d 078 If the coefficient of correlation (7) between two variables is zero, how might a scatter diagram of these variables appear? ‘a. Random points b, Aleast squares fine that slopes up to the right ¢. Aleast squares line that slopes down to the right d. Under this condition, a scatter diagram could not be plotted on a graph. R-squared (7) is 2 measure of ‘a. The spunous relationship between cost and activity b. The fixed cost component c. The variable cost per unit of activity d. How well the regression line accounts for the changes in the dependent variable After constructing a scatter chart, the internal auditor of Madagascar Company provided you with the following information: Independent variable: 1,000,000 Slope of the line: 0.25 Y-axis intercept: 7,500 Based on the above data, what is the estimated cost? a. P250,500 cP 4,000,000 bP 257,500 dP 4,007,500 Bahamas Co. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on @ computer using one of the standard regression programs, with the following resuits: Coefficient Coefficient Machine hours Direct materials weight Y-intercept 2,500 Y-intercept 4,600 B 50 8 26 P=0.70 P=050 What regression equation should be used? a. Y=2,500+5.0X c. Y= 4,600 +2.6x b. Y=2,500+3.5X d -¥-54,600+ 1.x ‘The statistician of Madame M hes developed the following cost-prediction equation, using observations from 12,000 to 30,000 machine hours: © Y=P 236,837 + 3,7625X squared = 0.81 ‘Standard error = P 24,363 ‘Several ‘outliers’ noted within tolerable timits Y = total maintenance cost X = machine hours. Compute the estimated maintenance cost at 20,000 machine hours a, P236,837 c P312,087 b. P:252,790 d. P.336,450 Page 4 of 4 pagesGrew | Y= deus LEGGED Wen Sue re oe dOe =e ¥ ue oak of Qréds OCW) Cro med) | Vewinbte Gud usc bret st tydscor | Codi thin tinge qoute Coven) | Pa oat = 630000) Jupnase poten | ons Swot Yeu 2 Cts 4 {fo,euo = [w.0eD 7 zoe @ pt funeke 1 > GTR 14x Saeco ties: g+ HEV I-A Chow) be Cig t HK 00) ] Casto -¥i80) = got ithe! a ot sal 1D col ca} por veenth Kowal Weal teat © 1 ot = 1 (A) 3.0 An = 100, ign. ba nvn-Bains barre TBA Weg aoe Lt = Lo@ Bao Manta “lal ¢ ‘ 1o.cee = A Ge,o00 1 aoe Syozery = CHE L 20 (0, eutfuu @) Sy. Sou 4 53x. Sorrow Ye ave Vesey eee ne a oe Feat ted Gaourhs Wo] SUE yraely CG = RS = CUI eD- Fat ery] Ta GT) se - teal et iO co a 80% saya c,tho-s soem au) W600 Cb) ees Aaa a os ee pete ee a sii gt Se 5 eerie 9s ate RE eet Aw = 4a 4 tou Fon St a4 Suueole Pa ae on 1 Grtab i ag a 3y veotar et phe Lar as Way, perl twat (0) a ea eee ee 7000 = a 4 Hob Jeo + ayo _4 ttre a Pa + Day Sa a at Site bo = Bh esicatts eh 4s wid OB Fad woe yp wate = eur) = ne 443 Ge Arata ()ReSA\ The Review Scrioo. oF AccoUNTANcY © MANAGEMENT Services (A. LEE) MS-02: COST-VOLUME-PROFIT ANALYSIS CVP analysis - a useful management tuol that heips managers in planning for profit by way of a systematic examination of the interrelationship among costs, volume (activity leve!) and proftt. FACTORS AFFECTING PROFIT aa ae ee ene ee ea Selling Price Unit Variable Cost Volume (units) Fixed Cost Sales Mix Underlying CVP assumptions (limitations): 1. Relevant range, time and snearity assumptions in MS - 01 are likewise assumed, 2. Selling price does not change as sales volume changes. 3. There is no change in the inventory levels during the period. 4. In case of a multi-product company, the proportions (sales mix) of units sold will not change. 5. Labor productivity, production technology and market conditions remain constant and stabie. CVP-RELATED TERMINOLOGIES Contribution Margin (CM) ~ is the difference between sales and variable cost. It is otherwise known {as marginal income, profit contribution, contribution to fixed cost or incremental contributicn. * CM Ratio. = CM + Sales = Unit CM + Unit Setting Price ‘+ CM Ratio = ACM +4 Sates NOTE: The sign ‘A’ denotes ‘change’ or ‘difference’ Given the underlying CVP assumptions, CM ratio is constant regardless of the number of units sold or produced. Break-Even Point (BEP) ~ a level of activity, in units (break-even volume) or in pesos (break-even sales), at which total revenues equal total costs. At the break-even point, there is neither a profit nor a loss. + BEP units = Fixed Costs + CM per unit * BEP peso sales = Fixed Costs + CM Ratio ‘+ Unit Sales with Target Profit = (Fixed Costs + Profit*) + CM per unit Fixed Costs ‘EM Ratio - Return on Sales ~ Profit must be expressed before tax: Profit after tax + (100% - tax rate) Margin of Safety - the difference between actual sales volume and break-even sales. It indicates the maximum amount by which sales could decline without incurring 2 loss. ‘+ Margin of Safety = Sates - Breakeven Sales + Margin of Safety Ratio = Margin of Safety + Sales + Peso Sales with Target Return on Sales = Indifference Point ~ the level of volume at which two alternatives being analyzed would yield equal ‘amount of total costs or profits. Alternative A Alternative 6 ‘+ (Unit CM x Q) ~ Fixed Cost (Unit CM x Q) - Fixed Cost ‘ + Fixed Cost + (Unit VC x Q) Fixed Cost + (Unit VC x Q) NOTE: Q ~ number of units (indifference point) Sales Mix - the relative combination of quantities of sales of various products that make up the total sales of'a company. + BEP units = Fixed Costs + Weighted Average CM per unit ‘+ BEP peso sales = Fixed Costs + Weighted Average CM Ratio Degree of Operating Leverage (DOL) - measures how a percentage change in sales from the current level will affect company profits. It indicates how sensitive the company is to sales volume increases and decreases. It Is also known as operating leverage factor. © DOL = Contribution Margin + Profit before tax * A%sales x DOL = A % profit before tax $ Page 1 of 3 pagesReSA - The Review School of Accountancy MS-02 MS: COST-VOLUME-PROFIT ANALYSIS: EXERCISES: COST-VOLUME-PROFIT ANALYSIS: 1. Clay Company manufactures and sells a single product. The company’s sales and expenses for a recent month follows: Sales (15,000 units) —_P 600,000 Less: Variable Costs ___420,000_ ee Cortribution Margin i) P 180,000 se Less: Fixed Costs _150,000_ ; Prot 30,000 REQUIRED: ‘L. Determine the following: oe a) Selling price per unit {i\b) Variable cost per unit(‘h4.) “ c) CM Ratio 6.) 2. What is the monthly break-even point in units sold and ify Sales pesos? fey, 11.004 wep, Slyocds Z 3. Without resorting to computations, what isthe total contribution margin atthe break-even point? SRE Oe 3 x 7 2. Nadal Company sells its only product at 32 per unit. Varlable costs are P 24 per unit and fixed costs amounted to P 100,000 per month. ti REQUIRED: \ 1dho8 If Nadal can sell 15,000 units in a particular month, what will be its profit? ‘What is the break-even point in units? in sales pesos? ‘What unit sales are required to earn P 40,000 for the month? What sales, in pesos, are required to earn after-20% tax profit of P 32,000 for the month? Suppose that Nadal is currently selling 10,000 units per month, The marketing manager believes that sales would increase if advertising were increased by P 5,000. By how much would unit sales, have to increase to give Nadal the Same income or loss that it is currently earning? (Although you * know how many units are now being sold, you do not need this fact to solve the problem.) Famer’ 6. If Nadal is selling 20,000 units per month at P 32, what is its margin of safety? 7. Nadal currently pays its salespeople salaries for a total of P 40,000 per month, but no commissions. The sales department is considering a pian whereby the salespeople would receive a 5% commission, but thelr salaries would fall to a total of P 25,000 per month. At what sales level Is the company indifferent between the two compensation plans? 1 Dawn Howe ie ple (Adapted: Managerial Accounting by Louderback, et.al.) — uotGia | SOLUTION GUIDE (item_no. 2) sim @15.000umis: @12SD0uns: @.17,S0numis, 10,009 unt: “my Sales 442040 nib Less: Variable Costs aes Contribution Margin 1 Wore F iio ess: Fined. Costs fa 2 Profit (Loss) * 00 Requirement 7: x ¥ Monthly fixed cost decreases by P 15,000 under the proposal (P 40,000 > P 25,000). Y Unit variable cost increases by P 1.60 (5% of P 32) Based on "Y =a + bx” Costs (old) = Costs (new) 15,000 = 1.6 100,000 + 24 X = 85,000 + 25.6 X X = 9,375 units 3. PROVING: Contribution margin ratio x margin of safety ratio = net profit ratio | um ce ine Sales Ne : Where: Contribution margin ratio = Contribution margin Margin of safety ratio = Margin of safety > Sales Net profit ratio = Profit + Sales ae tm, Ge 4. Barack( Company's break-even sales are P.528,000. The variable cost ratio to Sales Is 60%, while the profit ratio is 8%. REQUIRED: Determine the following: Fixed Costs (47 n9- 2/1 Actual Sales C-\\ 90 fon Profit Margin of Safety Margin of Safety Ratio (2 oy faju er) ¥ vaene ne fA = Cot nr Page 2 of 3 pages.Ve ReSA - The Review School of Accountancy MS-02 MS: COST-VOLUME-PROFIT ANALYSIS 5. Mahjong Company produces and selis two products, tables and chairs. Following is next month's income budget: hairs ©”) Tables (2) ~ Total Saies in Units 600u 1500. 750u ies oats Sales P 1,200.00 P 187.50 P1,387.50 WV bx OM ox Variable Costs: 1,050.00 (112.50 1,162.50 he 5 b Ite Contribution Margin P'150.00(0%) P 75.00 fo) P'225.00 ie nanee oon Fixed Costs 20.00 Income PA3500 uth, Oo Ue REQUIRED: ; 1. How many units of chalrs and tables should be sold next month to break-even? “kb us v 2. How many units of chairs and tables should be sold to earn a profit of P 150? ious ao (Adapted: Managerial Accounting by Gerrison, etal.) SOLUTION, GUIDE {item ne. 5) Chairs Tables Contribution Margin (CM) per unit -P.0.25P.0.50 Sales Mix (4:1 - 80%:20%) 80% __ 20% Weighted Average CM per unit: 6. Ms, Rita has recently opened UBE Slimmers Gym for malnourished individuals. Actual operating results for the shop's first year of operations are presented as follows: os (YK Sales 250,000 ax .a0 qperene Variable Costs 100,000; ets). | ADM ta cran wt {dane 9 ois fad} Contribution Margin uciP 150,000 ieee | Cpe coe Fixed Costs (120,000) (vo.e«) SS me Sa eee P.30,000 (ee Inco Ms. Rita is unhappy about the results of his shop's first year of operations. She observed that despite the very high contribution margin, income was stili low because of the very high fixed costs. She feels that an increase In sales would not yield a satisfactory increase In profit. REQUIRED: “L. Explain to Ms. Rita that what he feels is not right by computing the operating leverage factor. 2. If sales increase by 10%, then how many percent would income increase, ceteris paribus? (Determine the percentage A by using the operating leverage factor.) (Adapted: Managerial Accounting by Garrison, et.at.) WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE:CHOICE) b 1. At the break-even point, total contribution margin is a. Zero . Equal to total costs B._ Equal to total fxed costs 4. Equal to total variable costs < 2. Anincrease in contribution margin percentage reduces the break-even point. Given a positive contribution margin, a company with no fixed costs has a break-even point of zero. If the tax rate increases, then the break-even point also increases. SSP "S._ An increase in the income tax rate Raises the break-even point * | Lowers the break-even point ei oulerraly ated Decreases sales required to earn a particular after-tax profit | He 4, Increases sales required to earn a particular after-tax profit : \ 6. Acompany that has a negative margin of safety necessarily operates at a loss. 7. Under CVP analysis, which of the following is not acsumed to be constant? 3, Sales mix c. Unit variable cost b. Unit selling price d. Unit fixed cost 8. The operating leverage factor is equal to A ‘a. Gross margin + profit after tax Contribution margin + profit after tax c b. Gross margin + profit before tax 4. _ Contribution margin ‘+ 9. If the degree of operating leverage is 3, then a 2% change in quanti change in profit before tax. 10. If inventories are expected to change, the type of costing that provides the best information for breakeven analysis is profit before tax sold should result in a 5% a, Job-order costing c. Joint costing qi b. Variable costing d. Absorption costing wy Whee s tee =tls aot A= TID: Tp Page 3 of 3 pagesCc ReSA Review School, Inc. ‘@ 7359807 @ 0910491320 / 09239124121 5 resareview@hotmail.com MANAGEMENT SERVICES A. Lee wizzer: MS-02 COST-VOLUME-PROFIT ANALYSIS Sources: CNAICIAIRPCPA/AIGPA/Various test banks, 4. Allelse constant, ifthe selfing price falls, a. Total variable costs will be lower than expected b. Contribution margin percentage will be higher than expected c. Total contribution margin wil be higher than expected d. Perunit contribution margin will be lower than expected 2, Which of the following is a characteristic of a contribution income statement? a. Fixed and variable expenses are combined as one line b._ Fixed expenses are listed separately from variable expenses . Fixed and variable manufacturing costs are combined as one line item, but fixed operating expenses ate shown separately from variable operating expenses d, Fixed and variable operating expenses are combined “as one line item, but fixed manufacturing expenses are shown separetely from variable manufacturing expenses 3. Which of the following would decrease unit contribution margin the most? 2. A 15% decrease in selling price ‘ b, A 15% increase in variable expenses ©. A 18% decrease in variable expenses d. A 15% increase in fxed expenses 4, At the breakeven point, the contriaution margin equais total ‘a. Variable costs c Selling and administrative costs Sales revenues d. Fixed costs 5. Abst Company plans to market anew praduct. Based on its market studies, Abst estimates thet it can sell 5,500 units in 2009. The seting price will be P 2 per unit Variable cost is estimated to be 40% of the selling price. Fixed cost is estimated to be P 6,00. What is the break-even point? a, 3,750 units ©. 5,500 units b, 6,000 units d. 7,500 units 6. Once the breakeven point has been reached, operating income will increase by the a. Gross margin per unit for each additional unit sold ©, Coniribution margin per unit for each additional unit sold ©. Fixed costs per unit for each additional unit sold 4. Variable costs per unit for each additional unit sold 7.) The folowing data refer to cost-volumo:proft relationship of Albert Co. Break-even point in units 1,000 Veriabie cost per unit P 250 Total fixed cost 75,000 How much willbe contributed to operating income by the 1,007" unit sold? a, P250 6 P75 b. P3256 4d. Zero 8. Jo Company seils its only product for P 60 per unit and incurs the following variable costs per unit: Direct material P16 Direct lator ‘Manufacturing overhead Total variable manufacturing overhead Selling expenses: Total variable costs Jo's annual fixed costs are P 880,000, and Jo is subject to a 30% income tax rate. if prime costs Increased by 20% and all other values remained the same, Jo Company's contribution margin (to the nearest whole percent) would be a 075 © 024 b 030 é 020 Page 4 of 8 pagesReSA - The Review School of Accountancy MOVs MS: COST-VOLUME-PROFIT ANALYSIS. 9. In planning its operations for 2002 based on 2 sales forecast of P 6,000,000, Candy, inc. prepared the following estimated data Cost and Expenses __ Fred Direct materiais Direct labor Factory overhead 200,000 Selling expenses 360,000 Administrative expenses 140,000 E.4,400,000 What would be the amount of sales in pasos at the break-even point? a. 2,250,000 ¢ P'4,000,000 b. P-3,500,000 d. P-5,300.000 \ 40. For the period just ended, Lorna Gompany generated the following operating results in percentages: Revenues 100% Cost of sales: 4s Variable 50% a Fixed 10% Total 50% Gross profit 40% Operating expenses: Variable 20% Fixed 15% ‘Total 35% 5 Operating income oh Total sales amounted to P 3 milion, How rhuch was the break-even sales? a. P 1,875,000 &. P2,850,000 b. P.2,500,000 d. P3,750,000 11, The present break-even sale of inday Company is P 650,000 per year. It is computed that it fixed expense will go up by P 60,000, the sales required to break-even will also increase to P 700,000, without any change in the selling price per unit and on the variable expenses. Before the increase of P 60,000, the total fixed expense of Inday Company is: . 2, P 200,000 cP 280,000 b. 220,000 4. P 330,000 12. A company manufactures a single product “Estimated cost data regarding this product and other information for the product and the company are as follows: < Sales price per unit P40 Total variable production cost par unit 2 Sales commission (on sales) per unit 5% Fixed costs and expenses: ‘Manufacturing overhead P 5,598,720 General and administrative P 3,732,480 Effective inoome tax rate 40% ‘The number of units the company must sell in the coming year in order to reach its breakeven point is o a. 388,800 units c. 583,200 units b. 518,400 units ¢. 972,000 units 43. The most likely strategy to reduce the breskeven point, would be to c a. increase both the fixed cost and the contribution margin b. Decrease both the fixed costs and the contribution margin ©, Decrease the fixed costs and increase the contribution margin 4. Increase the fixed costs and decrease the contribution mergin 44, One of the mejor assumptions limiting the reliability of breakeven analysis is that ¢ ‘a, Efficiency and productivity will continually increase ». Total variable costs will remain unchanged over the relevant range . Total fixed costs will remain unchanged over the relevant range d, The cost of production factors varies with changes in technology Page 2 of 8 pagesReSA - The Review School of Accountancy MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS 18. Which of the following would cause the break-even point to change? D a, Sales increased b. Total production decreasud ‘c. Totel variable costs increased as a function of higher production 1. Fixed costs increased owing to additional equipment in phys plant 16. A fixed cost is the same percentege of sales in three different months, Which of the following is true? ‘The company had the saine sales in each of thase months, ‘The cost is both fixed anc variable, The company is operating at its break-even point ‘The company is achieving its targat level of profit. aoce +17. How much will income change if a company makes an advertising campaign given tne following data? ‘Cost of adverising campaign P 25,000 Varlable expense as a percentage of sales 42% Increase in seles 60,000 B @, F200 increase ©. P15,000 increase b. P9,800 increase d, P 25,200 increase 18. Francis Company is planning to sell 100,000 units of Product A for P 12 a unit The fixed cost amounted to P 280,000, In order to realize a profit of P 200,000, what would the variable cost be? 8 a. P480,000 c P300,000 bP 720,000 d, P 220,000 19. Yolly Company is planning tc sell 200,000 units of Product F, The fixed cost is P 400,000 and the variable cost is 60% of the selling price. !n order to realize a profit of P 100,000, the selling price per unit would have te be D a P375 © P6.00 b. PatT d, P626 20. Dalen Company prepared the following preliminary forecast conceming Product D for 2008 assuming no expenditure for advertising: Selling orice per unit P10 Unit sales 160,000, Variable costs P 600,000 Fixed costs P 300,000 Based on a market study in December 2008, Dalen estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if P 100,000 was spent in advertising. Assuming that Oalen incorporates these changes in its 2009 forecast, what should be the operating income for Product O? c a. P 176,000 ¢. P-205,000 b. P 190,000 d. P.365,000 24, August Company sells Product SM for P 5 per unit. The fixed cost is P 210,000 and the variable cost is 80% of the selling price. What would be the amount of sales if August Company is to realize a profit of 10% of sales? a P 700,000 c. P472,500 b. P525,000 @. P 420,000 22. Alice Corp. aims to eam a 25% return on its P 500,000 investment in equipment used in the manufacture of Product Y. Based on estimated sales of 10,000 units of Product ¥ next year, the cost er unit were estimated as follows: Variable manufacturing cost 2s Fixed selling and administrative cost. 10 Fixed manufacturing cost 5 Product Y should be priced at ci a. P4500 ce P5250 bP 50.00 ad P 55.00 23. Tetry Company has fixed costs of P 100,000 and breakeven sales of P'800,000. What is its projected profit at P 1,200,000 sales? (Hint: compute the constant contribution margin ratio) A a. P.50,000 P200,900 bP 150,000 3. P-400.000 Page 3 of & pagesReSA - The Review School of Accountancy . MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS 24. Jemy Boy Company sells a product to retailers for P 200. The unit variable cost is P 40 plus a selling, commission of 10%. Fixed mariufacturing cost totals P 1,000,000 per month, while fixed selling and administrative cost equals P 420,000. The income tax rate is 30%. The target sales assuming after tax income of P 123,200 would be: a. 19,950 units 18,750 units b. 15,640 units 4,114,400 units 25. Heth Electronics Company is developing 3 new product, surge protectors for high-voltage electrical flows. The cost information for this product is as follows: materiats 3.25 Direct labor P 4.00 Distribution PO7S ‘The company will also be absorbing P 120,000 of additional fixed costs associated with this new product. A corporate fixed charge of P 20,000 currently absorbed by other products will be allocated to this new product. Heth Electronics’ effective income tax rate is 40%, How many surge protectors (rounded to nearest hundred) must Heth Electronics sell at a selling price of P 44 per unit to increase after-tax income by P 30,000? (Hint: consider only additional fixed cost) D a 10,700 units ‘¢. 20,000 units b. 12,100 units 4, 28,300 units 26. A company has just completed tne final development of its only product, general recombinant bacteria, which cain be programmed to kill most insects before dying themselves, ‘The product has taken 3 years + and P 6,000,000 to develop, The following costs are expected to be incurred on a monthly basis for the normal production level of 1,000,900 pounds of the new product 4,000,000 ibs. P 300,000, 4,250,000 Variable factory overhead “450,000 Fixed factory overhead 2,000,000 Variable selling, general and administrative expenses ‘900,000, Fixed selling, general and administrative expenses _1,500,000_ Total Be ‘At a sales price of P 5.90 per pound, the sales in pounds necessary to ensure a P 3,000,000 profit in the first year would be ¢ ‘a. 19,017,000 pounds © 18,000,000 pounds b. 14,000,000 pounds d. 25,600,000 pounds 27. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only D a. Fixed and semi-variable costs ©. Relevant variable costs b. Relevant fixed costs 4, Relevant range of volume 28. Delphi Company has developed a new project that will be marketed for the first time during the next fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at P 36 per unit, Delphi's management has allocated only enough manufacturing capcity to produce a maximum of 25,000 units of the new product annually. ‘The fixed costs associated with the new product are budgeted at P 450,000 for the year, which includes P 60,000 for depreciation on new manufacturing equipment. Data associated with each unit of product are presented below. Delphi is subject to @ 40% income tax rate, Variable Costs Direct material P7.00 Direct labor 3.50 Manufacturing overhead 4.00 Total variable manufacturing cost P 14.50 Selling expenses hae 50 Total variable cost Big.00 Delphi Company's mehagament has stipulated that it wil not approve the continued manufacture of the new product after the next fiscal year unless the after-tax profit is at least P 75,000 the first year. ‘The unit seling price to achieve this target profit must be at least D a P3460 © P37.00 b. P3660 dP 3.00 Page 4 of 8 pages GaReSA - The Review School of Accountancy MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS > 8 29. Julie Company, which is subject tc 40% income tax rate, had the following operating data for the period just ended: Selling price per unit P60 ‘Variable cost per unit P22 Fixed costs 604,000 Management plans fo improve the quality of its sole product by way of implementing the following changes: (1) Replacing a component that custs P 3.50 with a higher-grade unit that costs P 6.60, and (2) Acquiring a P 180,000 packaging machine. vulie will depreciate the machine over a 10-year period with no estimated salvage value by the straight-line method of depreciation ifthe company wants to eam after-tax of P 172,800 in the coming year. it must sei a. 10,300 units ¢. 22,500 units 6 21,346 units d. 27,000 units 20. Danilyn, Inc. is planning fo produce two products, A and B. Oanilyn is planning to sell 100,000 units of Aat P 4 a unit and 200,000 units of B at P 3 a unit’ Vanable cost is 70% of sales for A and 80% of Sales for B. In order to realize a total profit of P 160,000, what must the total fixed cost be? a. P 80,000 c, P 240,000 b. P90,000 Wi d. P600,000 1. The following dats pertain to the two products manufactured by Glory , Inc. Per Unit Products “Selling Price — Variable Cost ~ A P 240 Pi40 B P 4,000 P400 Fixed cost fotals P 600,000 annually. The expected sales mixin units is 60% for Product A and 40% for Product B. How many units of the two products together must Glory sell fo break-even? a 857 6. 2,000 pb. 4414 3. 2,488 22. If the sales mix shifis toward higher contribution margin products, the break-even point a, Decreases c. Remains constant b. Increases d. ts zero 33. Dary! Company sells Products S, T and D. Daryl sells three units of S for each unit of D and two units of T for each unit of S. The contribution margins are P 1 per unit of S, P 1.50 per unit of T, and P 3 per Unit of D. Fixed costs are P 600,000. How many units of S would Daryl sell at the break-even point? a, 40,000 units 240,000 units . 120,000 units d. 400,000 units 34, There are so many assumptions inherent in CVP analysis, Which of the following is not ane of these assumptions? ‘2, Cost and revenues are predictable and are linear over the relevant range b. Varlabie costs fluctuate proportionately with volume ©. Changes in the beginning and ending inventory are insignificant in amount 4. Seles mix will change as fixed costs increase beyond the relevant range 35. A company sells two products, X and Y, The sales mix consists of 2 composite unit of two units of X for every five units of ¥ (2:5). Fixed costs are P 49,500. The unit contribution margins for X and Y are, respectively, P 2.50 and P 1.20 Considering the company as a whole, the number of composile units to break even is. a 4,500 9,900 b. 6,250 4 31,500 NOTE: Usual mistake is letter D. The requirement is to compute “the number of composite units to break-even” so 31,500 units should be divided by 7 units since "a composite unit is composed of wo Units of X for every five units of ¥ (2:5)." Consider the following: > The number of composite units to break-even: 4.500 units > The number of units to break-even! 31,500 units 36. Assuming same data in No. 35, if the company had a profit of P 22,000, the unit sales must have been a. Product X; 6,000; Product: 12,500 ¢. Product X: 23,800; Product Y: 59,500 b. Product X: 13,000; Product ¥: 32,500 d. Product X. 28,600; Product Y: 71,500 ay Page § of 8 pagesReSA - The Review School of Accountancy: MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS 37, Employee, Inc. had the following sales results for 2008: Ivsets CO plaver i Peso sales component ratio 0.30 0.30 0.40 Contribution margin ratio 9.40 0.40 0.60 Employee, Inc. had fixed costs of P 2,400,000. The break even sales in pesos for Employee, Inc. are TVsets CO player Radios Tvsets CDolayer Radios c a PieM P1gM P36M c P15M PIS P2M b. P18M P18M P16M d. P4,531,915 P1,534,915 2,042,553 38. For a profitable company, the amount by which sales can decline before losses occur is known as the: D a. Sales volume variance ©. Variable sales ratio b. Hurdle rate Margin of safety 38, The margin of safety is a key concept of CVP analysis. The margin of safety is c ‘a. The contribution margin rate b. The difference between budgeted contribution margin and breakeven contribution margin c The difference between budgeted sales and breakeven sales 4d. The difference between the breakeven point in sales and cash flow breakeven 40, trish Company has saies of P 100,000, fixed costs of P 60,000, and a profit of P 10,000. What is Irish Company's margin of safety? B a. P 10,000 ©. °P99,333 b, P 16.667 d Pag 333 41. Vivian Corporation sells sets of encyclopedias. Vivian sold 4,000 sets fast year at P 250 a set. If the variable cost per set was P 175, and the fixed costs for Vivian were P 100,000, what is the Vivian's degree of operating leverage (D01.)? c a 067 ce 15 b. 0.75 a 30 42, The percentage change in earnings before interests and taxes associated with the percentage change in sales volume is the degree of A ‘a. Operating teverage © Breakeven leverage b. Financial leverage ¢. Combined leverage 43. A higher degree of operating leverage compared with industry average implies that the firm 8 a. Has higher variable costs b. Has profits that are more sensitive to changes in sales volume ¢_ Is more profitable d._ Isless risky ‘44, Operating leverage is greatest in companies that have: 8 ‘2, Low fixed cost and low per unit variable cost b. High fixed cost and fow per unit variable cost c. _Low fixed cost and high per unit variable cost d. High fixed cost and high per unit variable cost 45. Tirey Company's variable costs are 70% of sales. At @ P 300,000 sales ievel, the degree of operating 5 EvOr#0B|S 10, feales increase by P60,000, the deprée of operating leverage willbe a 12 6 b. 10 a4 46. Ubi Company's variable costs are 75% of sales, Ata sales level of P 400,000, the company's degree of ‘operating leverage is 8, At this level, fixed costs equal A a P 87,500 & P-50,000 bP 100,000 d. P75,000 47. {f Used in cost-volume-profit analysis, sensitivity analysis c Determines the most profitable mix of products to be sold , Allows the decision maker to use probabilities in the evaluation of decision altematives ©. Is done through various possibie scenarios and computes the impact on profit of various predictions of future events 4. Is limited because in cost-volume-proft analysis, costs ere not seperated into fixed and variable components Page 6 of 8 pagesReSA - The Review School of Accountancy MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS 48. The indifference point is the level of volume at which a company A a. Eams the same profit under different operating schemes b. Eams no profit c, Ears its target profit 4 Eams large amount of proit 49. Machine X has fixed costs of P 225,000 and a variable cost of P20. Machine Y has fixed costs of P 300,000 and a variable cost of P 14. Whats the indifference point, in units? 8 a. P 14,250 bP 12,500 c P21,429 d. An amount that cannot be determined withouit more information, 50. A point of indifference is reached when B a, The savings in fixed cost is equal to the decrease in variable cost b. The savings in variable cost is equal to the increase in fixed cost ¢. The savings in fixed cost is. more than the increase in variable cost d. The savings in variable cont is less than the increase in fixed cost 51. Two companies are expected to have annual sales of 1,000,000 decks of playing cards next year. Estimates for next year are presented below: Company 1 Company 2 Selling price per deck P 3.00 3.00 Cost of paper per deck 062 065 6 Printing ink per deck 0.13 045 Labor ner deck 075 4.25 Variable overhead per deck 0.30 0.35 Fixed costs P 960,000 252,000 Breakeven point for Breakeven point for Volume at which Co.1 mpany 4 Company 2 and 2 profits are equal A a. ‘800,000 420,000 1,180,000 b 800,000 420,000 7,000,000 c 533,334 105,000 41,000,000 d 533,334 105,000 4,180,000 ‘52. Bona Motors, inc. employs 40 saies personnel to market its line of economy automobiles. The average cat sells for P 1,200,000 and a 6% commission is paid to the salesperson. Bona Motors is considering a change to a commission arrangement that would pay each salesperson a salary of P 24,000 per month plus a commission of 2% of the sales made by that salesperson ‘The amount of total car sales at which Bona Motors would be indifferent as to which pian to select is. B a. P-30,000,000 c. P-22,500,000 b. P 24,000,000 dé. P12,000,000 SOLUTION: 16% commission: 1.2M (6%) = 72,000 vs. _2% commission: 1 2M (2%) = 24,000 72,000 X = 24,000 X + 24,000 (40) __X = 960,000 + 48,000 = 20 units Indifference Point 20 units x P 1,200,000 per unit 53. Jon Corporation submitted to you the following condensed income statement Sales (80% capacity) P 300,000 Variable costs P 180,000 Fixed costs, 82.500 __262,500 Retains “P.37,500 What is the break-even point as a percentage of capacity? 8 a 45% 67.85% b. 55% 4 68.75% SOLUTION: ‘100% capacity: 300,000 +80% = P 375,000 Variable cost ratio: 180,000 + 300,000 = 60% (CMR = 40%) Breakeven sales: 62,500 + 40% = P 206,250 Breakeven point (based on 100% capacity): 206,250 +375,000 Page 7 of 8 pagesReSA - The Review Schoo! of Accountancy MSQ-02 MS: COST-VOLUME-PROFIT ANALYSIS 54, The following is Tams Company's cost behavior: ad §,000.unlts orless More than 5,000 units Fixed costs: P 35,000 P 45,000 Contribution margin retio 20% 12.5% Selling price, P 40 How many units must be sold to realize a net income of P 25,0007 a, 7,500 ©. 11,000 b. 14,000 @ 12,500 55. Contribution margin ratio miiplied by the margin of safety ratio equals ° 2, Variable cost ratio ©. Break even sales ratio b, Fixed cost ratio d._ Net profit ratio lems 56 to 59 are based on ing in n vy Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for P 7.50 each, and the variable cost to manufacture them was P 2.25 per unit. The company needed to sell 20,000 shirts to break even. The net after-tax income last year was P 5,040. lw's expectations for the coming year inolude the following ‘The sales price of the T-shirts will be P 9 * Variable costs to manufacture will increase by one-third, Fixed costs will increase by 10% © The income tax rate of 40% will be unchanged. 56. The seling price that would maintain the same contribution margin rate as last year Is A a. P 10.00 c. P9.00 b P9765 ad P825 57. The number of T-shirts Ivy Corporation must sel! to break even in the coming year is 8 a. 17,500 ©, 20,000 b. 19,250 d. 22,000 58. Sales for the coming year are expected to exceed fast year's by 1,000 units. if this occurs, Ivy's sales volume in the coming year will be B @. 23,400 units 21,960 units b. 22,600 units 21,000 units 59, If {vy Corporation wishes to earri P 22,500 in net income for the coming year, the company’s sales volume in pesos must be a. 207,000 sc. P229,500 b. P213,750 dP 267,625 80. The management of Rhea Company performed cost studies and projected the following annual costs based on 40,000 units of productions and sales. \o ne “Total annual costs % of variable costs to total costs Direct materials 400,000, 100% Direct labor 360,000 75% Factory overhead 300,000, 40% Selling and administrative expense 200,000 25% ‘What unit-selling price will yield @ 10% profit from sales of 40,000 units? a P33.50 + c P40.00 b. P3500 4 P5000 SOLUTION GUIDE: Total Costs Variable Costs Fixed Costs Direct materials P 400,000 Direct labor 360,000 Factory overhead 300,000 Selling and administrative expense 200,000 Sapo Total 1,260,000 Page 8 of 8 pages8b ug.\a falas CBr ley Tm Wry to WG why SALES Cy Guewd “EO GUL aly Thy = Atenace are he cg loa { tere steceofr2 tees Vf Arete [Gene nb oemde= aaa pera 314 wilt tees Ganssie Woe OS Tyree Aoney T9069) OY Wes = FC [OT { Choot coe AND 4110.09 es : 2) ES Woy 10.0007 = ‘ = AUTOueeo (A0-fedos Artor WI} sans = N88, / BRO UGANS = WET O6E + AYE.at0 |) twash hu BREET ae z. Youd Ce Hy&. Und Nad 4 Wenge, FGsate yet et wt 2 Oa) v (a) otOhoMy = af a Eines CO Gomte tant) Shae ent wa Ege ae f= ib uli we i ee — Wee (omoloy 323 iian ts EPMO cay Re mv) A re Hoy = auf ts Easq 6 © ReSA THE ReViEW SCHOOL OF ACCOUNTANCY © MANAGEMENT SERVICES (A. LEE) Practice Set (A) COST BEHAVIOR & COST-VOLUME-PROFIT ANALYSIS ‘Sources: RPCPA/AICFAJCMACIA/Various Texts and Test Banksilonlee items { to 3 are based on the following information Archie Co. had the following materials handling cost at three months of activity levels: Mom t Month 2 P 132,000 ie Month 3 70,000 P 130,000 What is the value of the slope of the tine at 80,000-kilo level? a 14 ©. LAccnumber of kilos b 1s d, 112,000 What is the valne of the y-intercept at 60,000-kilo level? a 0.80 © 48,000 per month b, P-48,000 per kilo 4. P-48,000 per year What is the estimated cost Por handing 500,000 kilos for the next operating year? 2. B 700,000 . P1,276,000 b. P 748,000 a. P8,976,000 The statement “factory overhicad is a function of machine houts with coefficient of determination (F) percent” is correctly interpreted as a. 70 percent of total variation of factory overhead is explained by the regression equation or the change in machine hours while the remaining 30 percent is accounted for by something, other than machine hours, b. Anr-squared of 0.70 with a regression equation means that predictions will be acc of the time: ©. 30 percent of total variation of factory overhead is explained by the regression equation or the change in machine hours while 70 percent is accounted for by something other than machine hours. d. 30% percent of overhead cost prediction might show results outside confidence interval determined by the standard deviation. rate 70% ‘A retail company determines selling price by marking up variable costs 60%. In addition, the company uuses frequent selling price markdowns to stimulate sales. If the markdowns average 10%, what is the company’s contribution margin rario? a. 215% c. 375% b. 30.6% a 41% ‘The total production cost far 20,000 units was P 21,000 and the total production cost for making, 50,000 Units was P 34,000. Once produetion exceeds 25,000 units, additional fixed costs of P 4,000 were incurred ‘The full production cost per unit for making 30,000 units is a P03 6. P O84 b, P06 dd. P0.93 {fa company’s variable vost ratio is 60%, which formula represents the computation of peso sales that will yield a profit equal to 20% ef the contribution margin when S = sales in pesos and FC ~ fixed cost? a S=F/12 ce. SEF/02 b. S=F/032 d. S=F/012 Total production costs for Dan Company are budgeted at P 230,000 for 50,000 units of budgeted output and at P 280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,0000 units are 25% more than budgeted fixed costs for 50,000 tinits. How much is Dan's budgeted variable cost per unit of output? a, P1.60 ce. P3.00 b. P67 a 5.00ReSA 3. 14, - The Review School of Accountancy WS: PRACTICE SET- Batch 18 (PageNo.7) Resort Inns, Ine. has @ total of 2,(00 rooms in its nationwide chain of motels. On average, 70% of the rooms are occupied each day. Ths company’s operating costs are P 21 per occupied room per day at this occupancy level, assuming a 30-lay month. This P 21 figure contains both variable and fixed cost elements. During October, the occupancy rate dropped to only 45%. A total of P 792,000 in operating cost ‘was incurred during October. What is the estimated the variable cost per occupied room per day? a Poe3 ©. P6.00 b. P4.50 d P8.00 |. Ralph Company is expecting an increase of fixed costs by P 78,750 upon moving their place of business to the downtown aréa, Likewise, 1 thatthe selling price per unit and the variable expenses will not change. At present scenario, the sales volume necessary to breakeven is P 750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven would go up to P 975,000. Based ‘on these projections, what would be the total fixed costs after the increase of P 78,750? a. 7 341,250 ec. P183,750 b. P 262,500 dP 300,000 Heather Company has a contribution margin ratio of 20%, a margin of safety ratio of 33 1/3% and an income of P 5,000. Heather Company's break-even peso sales was a, P 15,000 c. P60,000 b. P5000 4. P-75,000 . The controller of Hany Co. prepared the following income statements: November December Sales 420,000 P 450,000 Cost of sales 226,000 _ 235,000 Gross margin 194,000 P215,000 Selling and administrative expenses 105,000 __108,000 Income before taxes 289.000 P107,000 If Harry Co, produces a single product, how much peso sales should it generate to break-even? a, P271,667 ©. P407,500 b. P228.260 d, Cannot he determined from given information ‘At 40,000 units of sales, Roger Corporation had an operating loss of P 3.00 per unit. When sales were 70.000 units, the company had a profit of P 1.20 per unit, The number of units to breakeven is a. 35,000 ©. $2,500 b. 45,000 d. 57.647 USB Company has fixed costs of P 300,000. it produces two products, X and Y. Product X has a variable cost percentage equal to 60% of fis P 10 per unit selling price. Product ¥ has a variable cost percentage equal to 70% of its P 30 selling price, For the past several years, sales of product X have averaged 66.67% of the sales of product ¥. That ratio is not expected to change. What is USB’s breakeven point in pesos? a, P 300,000 e. P 857,142 b. P-750,000 6 942,857 ales level reaches P 100,000, reiurn on sales is 10%. How mich is the margin of safety if the ig leverage at this sates level is 4x? P 2,500 c. 25% of sales 25,000 units 4d, Cannot be determined from the given information Ronald Company sells $0,000 units of a state-of-the-art mobile gadget. These were taken from the company’s records: + Accounts receivable, P 129,000 + Days sale outstanding, 15 days + Contribution margin ratio, 49% + Profit for the period was P 485,040 ‘The ending receivables balance is the average balunce during the year. Using a 360-day year and assuming that all sales are made on eredit, what is the company’s even point? a. P 1,032,000 c. P2.061,122 b, PL320,000 dd. P2,106,122i A WS: PRACTICE SET - Batch 18 (Page No. ReSA - The Review School of Accountancy SET (A) 17. Jutie Company, which is subject { 40% income tax rate, had the following operating data for the period Just ended: Selling price per unit P60 Variable cost per unit P22 Fixed costs P 504.000 Management plans to improve the quality of its sole product by way of implementing the following changes (1) Replacing a component that costs P 3.50 with a higher-grade unit that costs P 5.50, and 2) Acquiring a’P 180,000 packaying machine. Julie will depreciate the machine over a 10-year period with no estimated salvage vains by the straight-line method of depreciation Ifthe company wants to earn after-tax of P 172,800 in the coming year, it must sell a, 10,300 units c. 22,500 units b, 21,316 units d. 27,000 units on the following informati Ginger Co. is involved in selling an exclusive toy in the market. It sold 1,800 units of toys during the current yyeat, The manufacturing capacity of Ginger’s facilities is 3,000 units of toys. The operating results of Ginger ‘Co. dusing the current year show the following: Sales P.990,000 Variable costs Manufacturing P 315,000 Selling 180,000 Contribution margin Fixed costs: Manufacturing P 90,000 Selling 112,500 Administration __45,000 Net income before taxes Income tax (40%) Net income after taxes 18. The break-even volume in units of toys for the year is a. 420 «550 b, 495 d t,100 19. If the sales volume is estimated to be 2,100 units in the next year, and if the prices and costs stay at the same levels and amounts next year, the after-tax income that Ginger ean expect fer next year is a. P110,250 cP 184,500 b. P 135,000 a. 283,500 20. Ginger has a potential foreign customer that has offered to buy 1.500 units at P 450 per unit. Assume that all of Ginger’s costs would be at the same levels and rates as last year. What net income after taxes would Ginger expect if it took this order and rejected some business from regular customers so a8 not 10 exceed. capacity? a. P211,500 fe. P-256,500 b, P252,000 4. P-297,500 21. Ginger plans to market its product in a new territory. It estimates that an advertising and promotion program costing P 61,500 annually would need to be undertaken for the next two to three years. In addition, a P 25 per unit sales commission over and above the current commission to the sales force in the new territory would be required. How many units would have to he sold in the new territory to maintain Ginger’s current after-tax income of P 94,500? a 27330 ©. 1,095.00 b. 307.50 a 1,545.00 22. Assuming Ginger is expecting that per unit selfing price will decline 10% next year. Variable costs will increase P 40 per togand the fixed costs will not change. What sales volume in pesos will be required (0 eam an after-tax income of P 94,500 next year? a. P825,000 ©. P 1,350,000 b. P,140,000 a, P 1,500,000= ReSA- The Review School of Accountancy SET (A) ey “Sid Compas revenly Crianed ts awit: malty ne We orodiomeop in, 00 pairs of cross-country skis of either the Mountaineering model o Touring model. ‘The sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of either product this year. Because the models are very similar, Orange Ski will produce only one of the two models. The information below was compiled by the accounting department. Mountaineering Touring Selling price per unit P 88.00 P 80.00 Variable cos: per unit P 52.80 P 52.80 Fixed costs will total P 369,600 if the mountaineering model is produced but will be only P 316,800 if the touring model is produced. Orange Ski Company is subject to a 40% income tax rate. 23. If Orange Ski Company desires an after-tax net income of P 24,000, how many pairs of Touring model skis will the company have to sell? a. 13,853 fe. 12,529 b. 13,118 4. 4,460 24. The total sales revenne at which Orange Ski Company would make the same profit or loss regardless of the ski model it decided to produce is a. P924,000 cP 686,400 b. P880,000 d. P-422,400 25. How much, would the variable cost per unit of tho Touring model have to change before it had the same breakeven point in units as the Mountaineering model? a. P'S.03 decrease c. P2.97 decrease b. P4.53 increase d. P2.68 increase 26. If the variable cost per unit of Touring skis decreases by 10%, and the total fixed cost of Touring skis increases by 10%, the new breakeven point will be a. 10,730 pairs b. 12,812 pairs c. 13,007 pairs d, Unchanged from 11,648 pairs because the cost changes are equal and therefore somewhat offsetting If the Orange Ski Company sales department could guarantee the annual sale of 12.000 skis of either model, Orange would ‘a, Produce Touring skis because they have a lower fixed cost b. Produce only Mountaineering skis because they have a lower breakeven point ©. Produce Mountaineering skis hecause they are more profitable d. Be indifferent as to which is sold because each model has the same unit variable cost 28. A mail-order confectioner sells fine candy in one-pound boxes. It has the capacity to produce 600,000 boxes annually but forecasts that it wil! produce and sell only 500,000 boxes in the coming year. The costs to manufacture and distribute the candy are detailed below. ‘The organization has invested capital of P 6.75 million, Variable costs per pound Manufact Packaging Distribution Total Annual fixed costs ‘Manufacturing overhead ——_-P 810,000 Marketing and distribution 270,000 P 4.85 ‘The selling price per pound that the confectioner should charge for a one-pound box of candy to obtain a 20% rate of return on invested capital is a P9.70 ©. PISO b. PILOs a. P1186 &i i iii mma Wes _pctety/ Vans 39 eer TE ge re —_Mareomaar Ptr reno dite em ee xan Tn, = SS ea Tee Gap Wane Fas Cts) 10-500ie con aie © mai OCD? Tene, © Satay = Grtsionnytra ond /A>u fo = 12b uaih Hen Qiyptare) sco) = tuto uns GO) el Graeme) FHI ae mie aA yt Ve asc) 2 Ongtn (H) ax AwDia Ulagg soa Chet yo), tee Aural C10 “tro, ay >Naettyd Condes) Sota Tiubitulion Goad Fae Ay, Veoh toi Oi Fruxto Seok A) i © Woubifahon Load gua va (yas bi) Cheat ool Yinka Gali Wn ovis ey ae mS Gab * Carter) Oe i an ~~ Senn A dotom- ~ SRS oats war nopotas is AGH SS ae se GAO FAG cco snc] Aaf= Bate) So 5 NRE mt sa \ ds = ev ONS 8 Mest aa AAA, (- AE 6 OD. © = 340.80 TF WG Mandtiniinn, > He Pun orn) paaly i TS a HADALY Avie (Ray Lot, Hab Ce sen) & Aisa y : 1 Ose @ Cegenfe) * FUPO 6+ 4 42.04] er." $ 00,66) ¥ “ab ath LAU 669 =(esx ww; ReSA The Review ScHooL oF ACCOUNTANCY © MANAGEMENT SERVICES (A. LEE) MS-03: ABSORPTION & VARIABLE COSTING ABSORPTION COSTING - is a costing method that includes all manufacturing costs ~ direct materials, direct labor, variable and fixed manufacturing overhead - in the cost of a unit of product. It treats fixed manufacturing overhead (FFOH) as a product cost. Absorption costing Is also known as full costing. VARIABLE COSTING - is 2 costing method that Includes only variable manufacturing costs - direct materials, direct labor, and variable manufacturing overhead - in the cost of a unit ‘of product. It treats FFOH as a period cost. Variable costing is also called direct costing. PRODUCT vs, PERIOD COST A product cost is an inventoriable cost that is subject to allocation between sold and unsold units. Current income is reduced only by the amount allocated to the sold units. _-— UNSOLD UNITS > Asset (as Inventory) PRODUCT COST [_propucr ost J SOLD UNITS > Expense (as Cost of Goods Sold) A period cost is a cost that is charged as expense against income, regardless of the sales performance No allocation is necessary so current income is reduced by the fulf amount of the period cost. PERIOD COST _|—————» FULLY EXPENSED in the period incurred ABSORPTION vs. VARIABLE COSTING Inventories Under variable costing, FFOH Is treated as a period cost; white under absorption costing, itis treated as a product cast. Because of this, the peso amount of inventories under variable costing is always smaller than inventories under absorption costing. Rationale (jo...) E Advocates of Variable costing argue that fixed manufacturing costs are incurred in order to have the capacity to produce output in a given period. These costs are incurred whether or not the capacity is actually used to make output. Thus, FFOH, having no future: service potential, should be charged ‘against the period and not included in the product cost. Advocates of absorption costing believe that all manufacturing costs — variable and fixed — are essential to the production process and should nat be ignored when determining product costs Acceptability ‘Since treating FFOH as an inventoriable cost is consistent with accounting standards, oniy absorption costing is acceptable for financial reporting and tax purposes, Variable costing, which violates the “matching principle,’ is not acceptable for financial reporting and tax purposes. NOTE: Matching principle is an accounting principle that calls for the recognition of expense by matching it with the related revenue in the same accounting period, It supports the treatment of cost of sales as expense only when related units have been already sold. Income statement ‘An income statement prepared under absorption costing distinguishes between production and other costs. Appropnate production costs are first deducted from sales to arrive at gross profit, and then other costs are deducted to obtain income. Under variable costing, the income statement distinguishes between variable and fixed costs. All variable costs are first deducted from revenue to arrive at the contribution margin, and then fixed costs are deducted to obtain income. : Income Computation Income computed by variable costing may differ from income computed by absorption costing because of the difference in the amount of FFOH recognized as expense during an accounting period. This is also caused by the difference between production and sales volume. In the long run, however, both methods would yield the same results since sales cannot continuously exceed production, nor production can continuously exceed sales. Page 1 of 4 pagesReSA - The Review School of Accountancy Mo-vl” MS: ABSORPTION & VARIABLE COSTING RECONCILIATION OF INCOME UNDER ABSORPTION and VARIABLE COSTING + The cause of the difference between the income computed under absorption and variable costing is primarily @ timing difference -- when to recognize the FFOH as an. expense. + In-varlable costing, it Is expensed when FFOH Is incurred, while in absorption costing, it 's expensed in the period when the units to which such FFOH relates are sold. ‘© The relationship between production and sales generally Indicate the following income patterns: 1, When production is equal to sales, there Is no change in inventory. FFOH expensed under absorption costing equals FFOH expensed under variable costing. ‘PRODUCTION = SALES => income (Absorption) = Income (Variable) 2. When production is greater than sales, there Is an increase in inventory. FFOH expensed under absorption costing is less than FFOH expensed under variable costing. Therefore, absorption income is greater than variable income. PRODUCTION > SALES => Income (Absorption) > Income (Variable) 3. When production is less than sales, there is a decrease in inventory. FFOH expensed under absorption costing Is greater than FFOH expensed under variable costing, Therefore, absorption Income Is less than variable income, PRODUCTION < SALES ==> _Income (Absorption) < Income (Vanable) * POINT OF RECONCILIATION: Income, Absorption costing Pex + Add: FFOH in beginning inventory wx Total i P xxx OR | A Income = A Inventory x FFOH/u Less: FFOH in ending inventory Good 7 Income, Variable costing Px fegraie, Eid. Hoy ~ heya) ADVANTAGES OF USING VARIABLE COSTING Variable costing reports are simpler and more understandable, ‘The problems involved in allocating fixed costs are eliminated. Data needed for break-even and cost-volume-profit analyses are readily available. Variable costing is more compatible with the standard cost accounting system. Variable costing reports provide useful information for pricing decisions and other decision-making problems encountered by management. yl Meded yee DISADVANTAGES OF USING VARIABLE COSTING 1. This costing Is not in accordance with GAAP; hence, it is not acceptable for external reporting. 2. Segregation of costs into fixed and variable might be difficult. 3. The matching principie is violated by using variable costing, which excludes FFOH from product costs and charges the same as period costs regardless of production and sales. 4. With variable costing, inventory costs and other related accounts, such as working capital, current ratio, and acid-test ratio are understated because of the exclusion of FFOH in the computation of product cost, EXERCISES: ABSORPTION and VARIABLE COSTING Pree in {= = D00 1, Coal Company operated at a normal capacity of 1,000 units in the year 2009. The company sold 80% of these units at a price of P 12 per unit. Manufacturing costs incurred during the year are as follows: Manufacturing: Yo ous Materials 1,000 \.t0 Labor 1/500 © Variable Factory Overhead ‘500° = oxy Fixed Factory Overhead 2,000. 15 Selling and Administrative Variable P 1,500 2 : Fixed ‘800 ‘ a5 1. Thyentory cost per unit under absorption and variable costing. 2. Cost of ending inventory under absorption and variable costing, Page 2 of 4 pagesReSA - The Review School of Accountancy MS: ABSORPTION & VARIABLE COSTING 2, Sa-Raily Company makes state-o*the-art underwear. 2009's operations are as follows: MS-03 Each underwear sells for P 2,000 each. Data for Units: Beginning Inventory 5 Production 80 lowits wf © ax Ending Inventory 15? Variable Costs: Mau Direct Nateriais 24,000 5, HD Direst Labor 16,000 * “ suit Factory Overhead 8,000 to : sJ- Selling and Administrative 4/000 Fixed Costs: a aa ort < Factory Overhead P 20,000 ro [0 Ty BH Selling and Administrative 2,000 REQUIRED: © 1. Prepare income statemenis under both absorpti 2, Provide computations expiaining the differences jon and variable costing. income between the two costing methods. (Adapted: Managerial Accounting by Garrison, et.al.) ‘SOLUTION GUIDE to item no. 2 SA-RALLY COMPANY Income Statement For the period of 2009 ABSORPTION COSTING VARIABLE COSTING Sales P Wo,ce0 Sales P Wo ,e00 zCost of sales 2 = Variable cost \Gevac) yin _Ctern00).- Gross profit P % Contribution margin Picco = Expenses Cuneo = Fixed cost Net Income ADO 5 Profit Cait ee 3. The following Information are taken from the books of So-In Company, which assumes first-in, first-out (FIFO) for inventory cost flow: Inventory (in units) 2008 2009 Beginning inventory = fone - 22 Production 10,000 units 9,000 units Ending inventory 3,500 units 1,000 units: Sales (P 2/unit) 277 72 Variable manufacturing costs (P 0.75/unit) P 7,500 P6,750 Fixed manufacturing costs P 5,000 5,400 Selling and administrative costs (50% variable) P4,500 7,500 REQUIRED: 1 2. Reconcile the two income figures in No. 1. 3. Determine 2009 profit under variable and absorption costing. 4, Reconcile the two income figures in No. 3. Determine 2008 profit under variable and absorption costing. (Adapted: Cost Accounting by Horngren, et.al.) jon P 43,000 Sales Sales P13,000 Sales 23,000 Sales P- 23,000 ces (8125) ve) (7,425) 65. _(45,175) VC __(42,375)_ GP 4,875 CM 5,875 GP 27,825 CM P 10,625 Expense (4,500) FxC —_(7,250) Expense __(7,500)_ Fx 9,150) Income 2325. Loss (Pi,325) income P325 Prot — PLdze 2008: CGS = 6,500 xP 1.25 = PB,125 VC = (6,500 x P 0.75) + (4,500 x 50%) = P 7,125 FAC = 5,000 + (4,500 x 50%) = P 7,250 Reconciliation: A Income = (3,500 ~ 0) P 0.50 = P £,750 > 375 ~ (-1,375) (3,500 x P 1.25) + (8,000 x P 1.35) = P 15,175 (using FIFO) (411,500 x 0.75) + (7,500 x 50%) = P12,375 -FXC = 5,400 + (7,500 x 50%) = P9,150 Reconciliation: Income = A Inventory x FFOH/u 2008 (beginning inventory): 3,500 x P 0.5 2009 (ending inventory): 1,000 xP 9,60 = 2009: P 4,750 (600) P1150 > 1,475 - 325 Page 3 of 4 pages ©ReSA - The Review School of Accountancy MS-03 ‘MS* ABSORDTION & VARIABLE COSTING WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE) 4 1. Using absorption costing, fixed manufacturing overhead costs are best described as a, Direct period costs b. Indirect period costs © Direct product costs d, Indirect product costs ‘ 2. Under variable costing, all variable expenses are treated as product costs. 3. White Co. manufactures a single product, Unit variable production costs are P 20 and fixed production costs are P 150,000. White uses a normal activity of 10,000 units. White began the year with no inventory, produced 12,000 units, and sold 7,500 units. 3A) Determine the product cost under variable costing ‘a. P20,00 c P35.00 b. P 32.50 d. 40.00 Oc 38) Determine the praduct cost under absorption costing “a ‘a, 20.00 c P35.00 : b. P32.50 d. P.40.00 a 3C) Determine the capacity or volume variance under absorption costing ‘2, P 24,000 unfavorable b. P24,000 favorable cP 30,000 unfavorable d. 30,000 favorable NOTE: capacity/volume variance = (actual production ~ normal production) x FFOH/u % 4, If production is higher than sales, then absorption costing income is expected to ly x ‘a. Higher than variabie costing income b. Equal to the variable costing income c. Lower than variable casting income d. Erratic under variable costing ‘ 5. Black Company produced 10,000 units and sold 9,000 units. Fixed manufacturing overhead costs were as P 20,000, and variable manufacturing overhead costs were P 3 per unit. For the period, ene would expect nét income under the absorption costing method to be a. P 2,000 more than nat income under variable costing method b. P.5,000 more than net income under variable costing method . P 2,000 less than net Income under variable costing method d. P 5,000 less than net income under variable costing method 6, Green Company has operating Income of P 50,000 using direct costing for a given period. Beginning and ending Inventories for that period were 13,000 units and 18,000 units, respectively. If the fixed factory overhead application rate is P 2 per unit, the operating income using the absorption costing ist a. 40,000 b. P50,000 © P60,000 d. 70,000 o 7. Violet Company had 16,000 units in its beginning inventory. During the year, the company’s variabie production costs were P 6 per unit and its fixed manufacturing overhead costs were P 4 per unit. The ‘company’s net income for the year was P 24,000 lower under absorption costing than it was under variable costing. Given these facts, the number of units in the ending inventory must have been a. 22,000 units b, 10,000 units ©. 6,000 units d. 4,000 units Pink Co. had a net income of F 85,500 using variable costing and net income of P 90,000 using x absorption costing. Total fixed manufacturing overhead cost was P 150,000, and production was 100,000 units. Between the beginning and end of the year, the inventory level a. Increased by 4,500 units b. Decreased by 4,500 units Increased by 3,900 units d. Decteased by 3,000 units T. % Under a just-in-time (IT) production environment, come under absorption costing tends to be equal with income under variable costing. + \ 10. Variable costing income fluctuates with pradction and does not react to changes in Géles 7 = Ii. Variable costing violates the matching grinciple. © «12, Variable costing is unacceptable for 2, Cost-volume-profit analysis b. Financial reporting c. Transfer pricing 4. Short-term decision-making Page 4 of 4 pages & mo