STRATEGIC COST MANAGEMENT

Quiz No. 1

1. To distinguish between management accounting and financial accounting, the following statements are correct, except:
A. Management accounting in view of its various integrated recipients should have a separate data recording and retrieval
system from financial accounting.
B. Financial accounting is bound by generally accepted accounting principles (GAAP) and management accounting need
not be in conformity with GAAP.
C. Financial accounting can be regarded as the process while management accounting can be regarded as the product of
that process.
D. Management accounting output must be released on time so as not to erode its usefulness, while financial accounting
output can still be useful even when delayed.

2. The field of accounting that depends on generally accepted accounting principles (GAAP) is called 
A. cost accounting C. managerial accounting
B. financial accounting D. responsibility accounting

3. Which of the following accounts would be a period cost rather than a product cost? 
A. Depreciation on manufacturing machinery C. Freight-out
B. Direct labor D. Production manager’s salary

4. The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be considered a direct
cost of a manufacturing department but an indirect cost of the product produced in the manufacturing department.
Classifying a cost as either direct or indirect depends upon 
A. whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.
B. whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.
C. the behavior of the cost in response to volume changes.
D. the cost object to which the cost is being related.

5. Which of the following statements is false?

A. At zero production level, fixed costs are also zero C. At zero production level, variable costs are usually zero.
B. At zero production level, fixed costs are positive D. At zero production level, total costs equal total fixed costs.

6. RST Company’s average cost per unit is the same at all levels of volume. Which of the following is true?
A. RST must have only fixed costs.
B. RST must have only variable costs.
C. RST must have some fixed costs and some variable costs.
D. RST’s cost structure cannot be determined from this information.

7. Weaknesses of the high-low method include all of the following except

A. the mathematical calculations are relatively complex.
B. the high and low activity levels may not be representative.
C. only two observations are used to develop the cost function.
D. the method does not detect if the cost behavior is nonlinear.

8. NTQ, Inc.’s net sales in 2021 were 15% below the 2020 level. NTQ’s semi-variable costs would
A. Increase in total and increase as a percentage of net sales.
B. Increase in total, but decrease as a percentage of net sales.
C. Decrease in total, but increase as a percentage of net sales.
D. Decrease in total and decrease as a percentage of net sales.

9. Cost-volume-profit analysis is most important for the determination of the

A. Volume of operation necessary to break-even.
B. Sales revenue necessary to equal variable costs.
C. Variable revenues necessary to equal fixed costs.
D. Relationship between revenues and costs at various levels of operations.
10. The relevant range is
A. a relatively wide range of sales where all costs remain the same
B. a relatively wide range of sales where total variable costs remain the same
C. a relatively narrow range of production where total variable costs remain the same
D. a relatively wide span of production where total fixed costs are expected to remain the same

11. Which of the following assumptions does NOT pertain to cost-volume-profit analysis?
A. Inventories are constant C. All costs are classified as fixed or variable
B. The total revenues function is linear D. Sales mix may vary during the related period

12. The sum of the costs necessary to affect a one-unit increase in the activity level is a(n)
A. Incremental cost. C. Marginal cost.
B. Margin of safety. D. Opportunity cost.

13. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products,
marketing strategy, and utilization of productive facilities. A calculation used in CVP analysis is the break-even point. Once
the break-even point has been reached operating income will increase by the
A. Fixed cost per unit for each additional unit sold C. Gross margin per unit for each additional unit sold.
B. Sales price per unit for each additional unit sold D. Contribution margin per unit for each additional unit sold.

14. When used in cost-volume-profit analysis, sensitivity analysis

A. Determines the most profitable mix of products to be sold.
B. Allows the decision maker to introduce probabilities in the evaluation of decision alternatives.
C. Is limited because in cost-volume-profit analysis, costs are not separated into fixed and variable components.
D. Is done through various possible scenarios and computes the impact on profit of various predictions of future events.

15. A company’s breakeven point in sales dollars may be affected by equal percentage increases in both selling price and
variable costs per unit (assume all other factors are constant within the relevant range.) The equal percentage changes in
selling price and variable cost per unit will cause the breakeven point in sales dollars to
A. Remain unchanged.
B. Increase by the percentage change in variable cost per unit.
C. Decrease by less than the percentage increase in selling price.
D. Decrease by more than the percentage increase in the selling price.

16. Which of the following is NOT an advantage of using variable costing for internal reporting purposes?
A. The impact of fixed costs on profits is emphasized.
B. Total costs may be overlooked when evaluating profits.
C. Profits are directly influenced by changes in sales volume.
D. Fixed costs are reported at incurred values, not absorbed values, thus improving control over those costs.

17. A criticism of variable costing for managerial accounting purposes is that it

A. overstates inventories.
B. does not reflect cost-volume-profit relationships.
C. is not acceptable for product line segmented reporting.
D. might encourage managers to emphasize the short term at the expense of the long term.

18. The change in period-to-period operating income when using variable costing can be explained by the change in the
A. Unit sales level multiplied by the unit sales price.
B. Unit sales level multiplied by a constant unit contribution margin.
C. Finished goods inventory level multiplied by the unit sales price.
D. Finished goods inventory level multiplied by a constant unit contribution margin.

19. When comparing absorption costing with variable costing, which of the following statements is not true?
A. When sales volume is more than production volume, variable costing will result in higher operating profit.
B. Under absorption costing, operating profit is a function of both sales volume and production volume.
C. Absorption costing enables managers to increase operating profits in the short run by increasing inventories.
 D. A manager who is evaluated based on variable costing operating profit would be tempted to increase production at the
end of a period in order to get a more favorable review.

20. Both Company Y and Company Z produce similar products that need negligible distribution costs. Their assets operation
and accounting are very similar in all respects except that Company Y uses direct costing and Company Z uses absorption
costing.
A. Co. Z would report a higher net income than Co. Y for the years in which production equals sales
B. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds sales
C. Co. Z would report a higher inventory value than Co. Y for the years in which production exceeds sales
D. Co. Y would report a higher inventory value than Co. Z for the years in which production exceeds the normal or practical
capacity

21. Bradley Co. budgets its total production costs at P220,000 for 75,000 units of output and P275,000 for 100,000 units of
output. Since additional facilities are needed to produce 100,000 units, fixed costs are budgeted at 20% more than for
75,000 units. What is Bradley's budgeted fixed cost at 100,000 units?
A. 16,500 B. 66,000 C. 156,000 D. 165,000

22. Matias Corporation wishes to market a new product for P12.00 a unit. Fixed costs to manufacture this product are
P800,000 for less than 500,000 units and P1,200,000 for 500,000 or more units. Contribution margin is 20%. How many
units must be sold to realize a net income from this product of P500,000?
A. 433,333 B. 500,000 C. 666,667 D. 708,333

23. Total production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns
can be extended linearly over the range of 3,000 to 35,000 units and that the cost driver for each cost is the number of units
produced.
Production in units per month 3,000 9,000 16,000 35,000
Cost X P23,700 P52,680 P86,490 P178,260
Cost Y 47,280 141,840 252,160 551,600
What is the average cost per unit at a production level of 8,000 units for cost X?
A. P4.83 B. P5.85 C. P5.98 D. P7.90

24. A retail company determines its selling price by marking up variable costs 60%. In addition, the company uses frequent
selling price markdowns to stimulate sales. If the markdowns average 10%, what is the company’s contribution margin
ratio?
A. 27.5% B. 30.6% C. 37.5% D. 41.7%

25. Tony Company is contemplating of marketing a new product. Fixed costs will be P800,000 for production of 75,000 units or
less and P1,200,000 if production exceeds 75,000 units. The variable cost ratio is 60% for the first 75,000. Contribution
margin percentage will increase to 50% for units in excess of 75,000. If the product is expected to sell for P25 per unit, how
many units must Tony sell to breakeven?
A. 80,000 B. 96,000 C. 111,000 D. 120,000

26. 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 per unit P22
Sales commission (on sales) 5%
Fixed costs and expenses
Manufacturing overhead P5,598,720
General and administrative P3,732,480
Effective income tax rate 40%
The number of units the company must sell in the coming year in order to reach its breakeven point is
A. 388,800 units B. 518,400 units C. 583,200 units D. 972,000 units
27. A company is concerned about its operating performance, as summarized below:
Sales (P12.50 per unit) P300,000
Variable costs 180,000
Net operating loss (40,000)
How many additional units should have been sold in order for the company to break even?
A. 8,000 B. 12,800 C. 16,000 D. 32,000

28. Sari-Sari Grocery is currently open only on Monday to Saturday. It is considering opening on Sundays. The annual
incremental costs of Sunday opening are estimated at P124,800. Its gross margin is 20%. It estimates that 60% of Sunday
sales to customers would be on other days if its stores were not open on Sundays. The Sunday sales that would be
necessary for Sari-sari to attain the same weekly operating income is
A. P19,500. B. P20,000 C. P29,250 D. P30,000

29. A company has sales of P500,000, variable costs of P300,000, and pretax profit of P150,000. If the company increased the
sales price per unit by 10%, reduced fixed costs by 20%, and left variable cost per unit unchanged, what would be the new
breakeven point in sales dollars?
A. P88,000 B. P100,000 C. P110,000 D. P125,000

Questions 30 and 31 are based on the following information:

A company sells two products, X and Y. The sales mix consists of a composite unit of two units of X for every five units of Y
(2:5). Fixed costs are P49,500. The unit contribution margins for X and Y are P2.50 and P1.20, respectively.

30. Considering the company as a whole, the number of composite units to break even is
A. 1,650 B. 4,500 C. 8,250 D. 22,500

31. If the company had a profit of P22,000, the unit sales must have been
A. B. C. D.
Product X 5,000 13,000 23,800 32,500
Product Y 12,500 32,500 59,500 13,000

32. Wheels Corp. employs 45 sales personnel to market its sedan cars. The average car sells for P690,000 and a 6%
commission is paid to the sales person. It is considering changing the scheme to a commission arrangement that would
pay each person a package of P30,000 plus a commission of 2% of the sales made by the person. The amount of total
monthly car sales at which Wheels Corp. would be indifferent (answer may be rounded off) as to which plan to select is
A. P22,500,000 B. P33,750,000 C. P36,500,000 D. P45,000,000

33. Product Cott has sales of P200,000, a contribution margin of 20%, and a margin of safety of P80,000. What is Cott’s fixed
cost?
A. P16,000 B. P24,000 C. P80,000 D. P96,000

34. LY & Company completed its first year of operations during which time the following information were generated:
Total units produced 100,000
Total units sold @ P100 per unit 80,000
Work in process ending inventory 20,000

Costs Variable Cost per Unit Fixed Costs

Raw materials P 20.00
Direct labor 12.50
Factory overhead 7.50 P 1.2 million
Selling and administrative 10.00 0.7 million

If the company used variable (direct) costing method, the operating income would be
 A. P2,100,000 B. P2,480,000 C. P3,040,000 D. P4,000,000

35. The total production cost for 20,000 units was P21,000 and the total production cost for making 50,000 units was P34,000.
Once production exceeds 25,000 units, additional fixed costs of P4,000 were incurred. The full production cost per unit for
making 30,000 units is:
A. P0.30 B. P0.68 C. P0.84 D. P0.93

36. West Co.’s manufacturing costs were as follows:

Direct materials and direct labor P700,000
Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing overhead 18,000

What amount should be considered product cost for external reporting purposes?
A. P700,000 B. P800,000 C. P880,000 D. P898,000

37. In the ABC Company, sales are P800,000, cost of goods under absorption costing is P600,000, and total operating
expenses are P120,000. If cost of goods sold is 70% variable and total operating expenses are 60% fixed, what is the
contribution margin under variable costing?
A. P260,000 B. P308,000 C. P332,000 D. P380,000

38. A company has the following cost data:

Fixed manufacturing costs P2,000
Fixed selling, general, and administrative costs 1,000
Variable selling costs per unit sold 1
Variable manufacturing costs per unit 2

Beginning inventory 0 units

Production
Sales
Variable and absorption-cost net incomes are:
A. P320 variable, P520 absorption
B. P330 variable, P530 absorption
100 units
90 units at P40 per unit
C. P520 variable, P320 absorption
D. P530 variable, P330 absorption

39. A company manufactures 50,000 units of a product and sells 40,000 units. Total manufacturing cost per unit is P50
(variable manufacturing cost, P10; fixed manufacturing cost, P40). Assuming no beginning inventory, the effect on net
income if absorption costing is used instead of variable costing is that:
A. net income is the same C. net income is P400,000 lower
B. net income is P200,000 higher D. net income is P400,000 higher

40. During its first year of operations, a company produced 275,000 units and sold 250,000 units. The following costs were
incurred during the year:
Variable Cost per Unit Fixed Costs
Direct materials P15.00
Direct labor 10.00
Manufacturing overhead 12.50 P2,200,000
Selling and administrative 2.50 1,375,000
The difference between operating income calculated on the absorption-costing basis and on the variable costing basis is
that absorption-costing operating income is
A. P62,500 lesser C. P220,000 greater
B. P200,000 greater D. P325,000 greater