Financial Accounting Problem Set Review

FINANCIAL ACCOUNTING
PROBLEM SET (Review)
(1.) Truman Unlimited (Truman), distributor of heavy equipment and machinery, was
organized on April 1, 1992. After one year of operations, the balance sheet for Truman is
shown below:
TRUMAN UNLIMITED
Balance Sheet
As of 1 April 1993
Current Assets: Current Liabilities:
Cash P 600,000 Notes Payable P 5,000
Inventory 300,000 Bank Loans Payable 200,000
Total P 900,000 Total P 205,000
Fixed Assets: Owners’ Equity:

Office Equipment P 250,000 Paid-In Capital P 945,000
Less: Acc’d Dep’n. 5,000 Retained Earnings (5,000)
Net Office Eqpt. P 245,000 Total Owners’ Equity P 940,000
TOTAL ASSETS P1,145,000 TOTAL LIAB. & OE P1,145,000

*Monthly depreciation charges of P416.67 a month.
Transactions for April and May 1993 are listed below:

(a) Makes a cash disbursement for the rental of their new stockroom and office. Monthly rental
is at P15,000 per month. Truman pays six months in advance.
(b) Purchased imported heavy equipment and generators (all intended for sale). The list price
on the imports were P25,000 but Truman was able to negotiate for a discount of 2,000. In
addition on this, Truman paid P3,000 in taxes to have the imported goods cleared at
customs. Of the total amount of the goods that were entered in the accounting records, 50%
were paid for in cash, and the rest were on credit.
(c) Goods worth P270,000 were removed from inventory, delivered to customers, and were sold
for P600,000. Of this amount, 75% were on credit while the rest were on cash basis. It was
estimated that 10% of those sales on credit would never be collected.
(d) Issues a check for P13,000 to pay off part of the principal of the Bank Loan obtained.
(e) A customer pays Truman P500 for a machine part worth P200. The customer requests that
the part be delivered after 100 days.
(f) Cash Disbursements: Utilities, P30,000; Salaries, P5,000; Interest, P9,000,
(g) Takes P135,000 from the business to give as donation to a home for street children.
(h) Income tax rates are as follows: 35% for the first 25,000; 45% for any amount above 25,000.
Assume that Truman pays all taxes on January 1994.
Required: (1) Journalize all relevant transactions.

(2) Prepare the income statement for the two months and the balance sheet as of
May, 1993, in proper format.
IECOSAC Handouts page 1

(2.) The cost department of Lancer Corporation made the following data and costs available for
the year 1997:
January 1 December 31
Raw materials P 34,200 P 49,300
Work-in-process 81,500 42,350
Finished goods 48,600 ?
Depreciation – factory equipment 21,350
Raw materials purchased 364,000
Direct labor 162,500
Indirect labor 83,400
Freight-in 8,600
Miscellaneous factory overhead 47,900
Finished goods inventory Jan. 1: 300 units; Dec. 31: 420 units, all from current years of
production. Sold during 1997: 3,880 units at PhP 220 per unit. The company uses FIFO method
in costing its inventory.
Required: (1) The unit cost of the finished goods inventory on December 31.
(2) The cost of goods manufactured and sold statement.
(3.) The Mason Manufacturing Company had the following data in its ledger for the six months
ended December 31, 19X6.
Raw materials purchased P 74,000
Factory supplies purchased 2,600
Direct labor 60,000
Indirect labor 3,800
Supervision 6,400
Fire insurance 400
Worker’s compensation on insurance 1,800
Power, heat and light 2,200
Depreciation, machinery 2,800
Depreciation, factory building 1,300
Inventories: Finished goods, June 30: P 63,000, December 31: P 73,000
Work-in-process, June 30: P 12,000, December 31: P 18,000
Raw materials, June 30 P 57,000, December 31: P 17,000
Factory supplies, June 30: P 250, December 31: P 350
Required:
Prepare a Statement of Cost of Goods Manufactured and Sold for the six-month period.

INTRODUCTION TO
COST ACCOUNTING
Major Purposes of Accounting Systems:

1. Formulating overall strategies and long-range plans. This includes new product
development and investment in both tangible (equipment) and intangible (brands, patents,
or people) assets, and frequently involves special purpose reports.
2. Resource allocation decisions such as product and customer emphasis and pricing. This
frequently involves reports on the profitability of products or services, brand categories,
customers, distribution channels, and so on.
3. Cost planning and cost control of operations and activities. This involves reports on
revenues, costs, assets, and the liabilities of divisions, plants, and other areas of
responsibility.
4. Performance measurement and evaluation of people. This includes comparisons of actual
results with planned results. It can be based on financial or nonfinancial measures.
5. Meeting external regulatory and legal reporting requirements. Regulations and statutes
typically prescribe the accounting methods to be followed. Financial reports must follow
generally accepted accounting principles.
Management Accounting, Financial Accounting, and Cost Accounting

Management accounting measures and reports financial information as well as other
types of information that assist managers in fulfilling the goals of the organization. It is thus
concerned with purposes 1-4. Financial accounting focuses on external reporting that is guided
by generally accepted accounting principles. It is thus concerned with purpose 5. Cost
accounting measures and reports financial and other information related to the organization’s
acquisition or consumption of resources. It provides information for both management
accounting and financial accounting.
Elements of Management Control (Role of Accounting Information):

1. Planning
– Involves choosing goals, predicting results under various ways of achieving those goals,
and then deciding how to attain the desired goals.
– Includes budget planning (budget – the quantitative expression of a plan of action and an
aid to the coordination and implementation of the plan)
2. Controlling
– Covers both the action that implements the planning decision and the performance
evaluation of the personnel and operations.
– Process of determining whether goals are being met, and if they are not, what can be done
either to modify goals or to achieve existing ones.
3. Evaluating
– Part of the control process wherein we evaluate the past performance.
– Done by comparing plans and actual accomplishments.

Value Chain of Business Functions:
Value Chain is the sequence of business functions in which utility (or usefulness) is
added to the products or services of an organization. Accounting is a major means of helping
managers to administer each of the business functions and to coordinate their activities within
the framework of the organization as a whole.
1. Research and Development (R&D) – the generation of, and experimentation with, ideas
related to new products, services or processes.
2. Design of products, services, or processes – the detailed planning and engineering of
products, services or processes.
3. Production – the coordination and assembly of resources to produce a product or deliver a
service.
4. Marketing – the manner by which individuals or groups (a) learn about and value the
attributes of products or services, and (b) purchase those products or services.
5. Distribution – the mechanism by which products or services are delivered to the customer.
6. Customer service – the support activities provided to customers.
Cost Accounting is defined as

– the process of measuring, analyzing, computing, and reporting the cost, profitability and
performance of operations.
– a subfield of accounting that records, measures, and reports information about costs.
Cost information are used for decision making and performance evaluation. This is done by
managers and is one of the uses of modern cost accounting.
Basic Cost Accounting Concepts:

1. Cost – the amount measured in money, of cash expended or other property transferred,
capital stock issued, services performed, or a liability incurred, in consideration of goods
or services received or to be received. It is also defined as a resource sacrificed or
foregone to achieve a specific objective (acquire goods and services).
2. Expense – all expired costs that are deductible from revenues.
3. Loss – the excess of expenses, in the broad sense of that word, over revenues for a
period. It is also the excess of all or the appropriate portion of the cost of assets over
related proceeds, if any, when the items are sold, abandoned, or either wholly or
partially destroyed by casualty or otherwise written off.
4. Cost Object – anything for which a separate measurement of costs is desired (such as a
new product, a machine, a service, or a process).
5. Cost Accumulation - the collection of cost data in some organized way through an
accounting system.
6. Cost Assignment – a general term that encompasses both tracing accumulated costs to a
cost object and allocating accumulated costs to a cost object.

Classification of Costs:
1. Behavior in relation to fluctuations in volume or activity or level of production
a. Variable costs – increases in total proportionately with an increase in activity and
decreases proportionately with a decrease in activity (e.g. yards of cloth  number of
shirts produced)
b. Fixed costs – does not change in total as business activity increases or decreases (e.g.
factory rental)
c. Semivariable costs – vary with volume but not in direct proportion, displays both
fixed and variable characteristics (e.g. factory heat, light, and power)
2. Degree of averaging
a. Total – cumulative costing
b. Unit – unit costing, total cost/number of units
3. Time of charges against revenue
a. Inventoriable/Product costs – those allotted to inventory when incurred
(manufacturing, merchandising, service). Costs associated with the purchase of
goods for resale, with acquisition and conversion of materials, and all other
manufacturing inputs into goods for sale.
b. Period costs – expended in the same period that they are incurred and do not go
through an inventory stage
4. Ease of traceability
a. Direct costs – are costs that are related to the particular cost object and that can be
traced to it in an economically feasible (cost-effective) way
b. Indirect costs – are costs that are related to the particular cost object but cannot be
traced to it in an economically feasible (cost-effective) way. Indirect costs are
allocated to the cost object using a cost allocation method.
5. Time when computed
a. Historical – costs are accumulated as they occur
b. Predicted – costs are determined before production
6. Management function
a. Manufacturing – applied to producing a product
b. Marketing – costs in selling the product
c. Administrative – costs in policy–making activities
d. Financial – costs related to financial activities
7. Period applicable/incurred
a. Capital expenditure (asset) – capitalized costs, are first recorded as an asset when
they are incurred
b. Expense (revenue expenditure) – non-capitalized costs, are recorded as expenses of
the accounting period
8. Relation to product
a. Prime cost – all direct manufacturing costs (direct material and direct labor)
b. Conversion cost – all manufacturing costs other than direct material costs or costs of
transforming direct materials into finished goods (direct labor and factory overhead)

Cost of Goods Manufactured and Sold Statement
▪ Traces the costs involved in manufacturing the company’s products
▪ It incorporates and summarizes the information from previous schedules
Cost Accounting Cycle
Input Entered Into Production Completed Sold

Direct materials
Direct labor WIP FG CGS
Factory overhead
Work in Process (WIP)

▪ Accumulated costs on goods that are in the production area but not have been
completed
▪ Work that has been started but will be completed at a later time period; these are not
available for sale
Finished Goods (FG)

▪ Covers the products on which all factory work has been completed
▪ Items are now removed from the production area and are placed in the finished
goods storage; these are available for sale

INTRODUCTION TO COST ACCOUNTING
PROBLEM SET
Classification of Costs:
(1.) For each of the following costs incurred in a manufacturing operation, indicate whether the
costs would be fixed, variable, or semi-variable (F, V, or S) and whether they would be
period or product costs (P or R, respectively) under full-absorption costing:
a. Transportation-in costs on materials purchased
b. Assembly line workers’ wages
c. Property taxes
d. Salaries of top executives in the company
e. Overtime premium for assembly workers
f. Sales commissions
g. Sales personnel office rental
h. Production supervisory salaries
i. Controller’s office supplies
j. Executive office heat and air conditioning
k. Executive office security personnel
l. Supplies used in assembly work
m. Factory heat and air conditioning
n. Power to operate factory equipment
o. Depreciation on furniture for sales staff
p. Varnish used for finishing product
q. Marketing personnel health insurance
r. Packaging materials for finished product
s. Salary of the quality control manager who checks work on the assembly line
t. Assembly line workers’ dental insurance
(2.) Can Dynamics Corporations manufactured 1,000 units of product last year and identified
the following costs associated with the manufacturing activity:
Direct materials used (V) P 25,200
Direct labor (V) 46,500
Supervisory salaries (F) 11,100
Indirect materials and supplies (V) 8,000
Plant utilities (other than power to run plant equipment) (F) 9,600
Power to run plant equipment (V) 7,100
Depreciation on plant and equipment (SL basis only) 4,800
Property taxes on building (F) 6,500
Unit variable costs and total fixed costs are expected to remain unchanged next year.
Required:
Calculate the unit cost and total cost if 1,200 units are produced next year.

(3) The Sta. Rosa, Laguna plant of Toyota Motors Philippines, Inc. assembles two types of cars
(Vios and Altis). Separate assembly lines are used for each type of car.
Required: Classify each of the following cost items as:
(i) Direct or indirect (D or I) costs with respect to the type of car assembled.
(ii) Fixed, variable, or semi-variable (F, V, or S) costs with respect to how the total costs of
the plant change as the number of cars assembled changes.
(a) Cost of tires used for Altis

(b) Salary of public relations manager for Sta. Rosa plant
(c) Annual awards dinner for Vios suppliers
(d) Salary of engineer who monitors design changes on Altis
(e) Freight costs of Vios engines shipped from Toyota City, Japan to Laguna, Philippines.
(f) Electricity costs for Sta. Rosa plant (single bill covers the entire plant)
(g) Wages paid to temporary assembly-line workers hired in periods of high production (paid
on an hourly basis)
(h) Annual fire insurance policy cost for Sta. Rosa plant
(4) Home Entertainment Center (HEC) operates a large store in Ortigas. The store has both a
video section and a musical (CDs and tapes) section. HEC reports revenues for the video
section separately from the musical section.
Required: Classify each of the following cost items as:
(i) Direct or indirect (D or I) costs with respect to the video section.
(ii) Fixed, variable, or semi-variable (F, V, or S) costs with respect to how the total costs of
the video section change as the number of videos sold changes.
(a) Annual retainer paid to a video distributor.

(b) Electricity costs of HEC store (single bill covers entire store)
(c) Costs of videos purchased for sale to customers
(d) Subscription to Video Times magazine
(e) Leasing of computer software used for financial budgeting at HEC store
(f) Cost of popcorn provided free to all customers of HEC
(g) Earthquake insurance policy for HEC store
(h) Freight-in costs of videos purchased by HEC

COST-VOLUME-PROFIT
ANALYSIS
COST-VOLUME-PROFIT (CVP) ANALYSIS:

- examines the behavior of total revenues, total costs, and operating income as changes occur in
the output level, selling price, variable costs, or fixed costs.
– the analysis pertaining to the determination of the effects of changes in volume on revenue,
costs, and profit. It provides management with a desired tool in the performance of its
planning function since estimates of revenue, cost and profit (or loss) can be readily made at
different levels of activity.
THE CVP ANALYSIS IS BASED ON THE FOLLOWING ASSUMPTIONS:

1. Total costs can be divided into a fixed component and a component that is variable with
respect to the level of output.
2. The behavior of total revenues and total costs is linear in relation to output units within the
relevant range.
3. The unit selling price, unit variable costs, and fixed costs are known.
4. The analysis either covers a single product or assumes that a given revenue mix of products
will remain constant as the level of total units sold changes.
5. All revenues and costs can be added and compared without taking into account the time
value of money.
THE BREAKEVEN POINT

The breakeven point is the quantity of output where total revenues and total costs are
equal, that is, where the operating income is zero. There is no profit nor loss recognized or
experienced.
1. Equation Method (Algebraic Approach)
Operating Income = Total Revenue – Total Costs
Operating Income = Total Revenue – Total Variable Costs - Total Fixed Costs
but Total Revenue = (USP x Q)
and Total Variable Costs = (UVC x Q)
OI = (USP x Q) – (UVC x Q) - TFC
At the breakeven point, operating income is, by definition, zero. Setting OI = 0, we obtain
Breakeven number of units = QBE = TFC / (USP-UVC)
2. Contribution Margin Method

Operating Income = Total Revenue – Total Variable Costs – Total Fixed Costs
OI = (USP x Q) - (UVC x Q) - TFC
OI + TFC = (USP - UVC) x Q
OI + TFC = UCM x Q
Q = (OI + FC) / UCM

At the breakeven point, OI=0:
QBE = TFC / UCM
Note: USP = Unit Selling Price

UVC = Unit Variable Cost
UCM = Unit Contribution Margin (or USP – UVC)
TFC = Total Fixed Costs
OI = Operating Income
Q = Quantity of output units sold (or manufactured)
TOI = Target Operating Income
3. Graph Method
The breakeven point is the intersection between the total costs (total variable and fixed
costs) line and the total revenue line.
Illustrative Problem #1:
Given: Total Fixed Costs = $6,000 per month;

Unit Selling Price = $0.50/unit; Unit Variable Costs = $0.40/unit
Required: Compute for the breakeven point in units and in sales.
IF TARGET OPERATING INCOME IS SPECIFIED:

Let QT = Number of units sold to earn target operating income
Target Operating Income = Total Revenue – Total Variable Costs – Total Fixed Costs
QT = Total Fixed Costs + Target Operating Income
Unit Contribution Margin
QT = (TFC + TOI) / UCM
IF TARGET NET INCOME IS SPECIFIED:

Target Net Income After Tax = Operating Income – Operating Income (Tax Rate)
Target Net Income After Tax = Operating Income (1 – Tax Rate)
Target Operating Income = Target Net Income After Tax / (1 – Tax Rate)
Given: Total Fixed Costs = P100,000 per year;

Selling Price/Ticket = P50; Variable Costs/Ticket = P30
Required:
(a) Find the breakeven point in units and in sales.
(b) It was suggested that selling price is increased by 10%, total fixed costs lowered by 20%, and
variable costs increased by 15%, find the new breakeven point in units and in sales.
(c) Find the required number of units to be sold if
(c1) a target profit of 10% of sales should be realized, and
(c2) a net income after tax of P100 is desired. Assume 40% tax rate.

SENSITIVITY ANALYSIS AND UNCERTAINTY
Margin of Safety (M/S) - excess of budgeted revenues over the breakeven revenues. It answers
the what-if question: If budgeted revenues are above breakeven and drop, how far can they
fall below budget before the breakeven point is reached?
M/S = (Sales Revenue - Breakeven Point in Sales)/Sales Revenue
= (Units Sold - Breakeven Point in Units)/Units Sold
EFFECT OF REVENUE MIX ON INCOME/MULTI-PRODUCT BREAKEVEN ANALYSIS
For a multi-product situation:

Using Weighted Contribution Margin (WCM):
WCM = CM1 (% SV1) + CM2 (% SV2) + CM3 (% SV3) + … + CMn (% SVn)
where: CM = contribution margin
SV = sales volume (in units)
n = number of products
BEP (units) = TFC / WCM
or
Using Weighted Contribution Margin Ratio (WCMR):

WCMR = CMR1 (% SR1) + CMR2 (% SR2) + CMR3 (% SR3) + … + CMRn (% SRn)
where: CMR = contribution margin ratio
SR = sales revenue (in $ or P)
n = number of products
BEP ($ or P) = TFC / WCMR
Product X Y Z Total
Selling Price (PhP) 10 / unit 6 / unit 5 / unit
Variable Cost (PhP) 6 / unit 4 / unit 2 / unit
Fixed Cost (PhP) 500,000
Sales Volume (units) 100,000 200,000 300,000 600,000
Required: Compute for the breakeven point in units for products X, Y, and Z.
NON–LINEAR BREAK-EVEN ANALYSIS:

- when demand becomes a function of selling price;
- D = dependent variable, p = independent variable
p = a-bD
where p = selling price , D = demand volume , a & b are constants

To compute for demand that will maximize sales revenue :
D* = a / 2b where: D* = optimal demand
To compute for demand that will maximize total profit :

a - cv
D* =
2b
where : cv is the unit variable cost
To compute for the breakeven demand ( 2 values ) :
D’ = -(a - cv )  [(a-cv)2 -4(-b)(-CF)]1/2

2 (-b)
where : CF is the fixed cost
Sample Problems:
1. A company produces and sells a consumer product, and thus far has been able to control the
volume of the product by varying the selling price. The company is seeking to maximize its
net profit. It has been concluded that the relationship between price and demand per month
is approximately D = 500-5p, where p is the price per unit in dollars. The fixed cost is $1,000
per month, and the variable cost is $20 per unit.
a. What is the optimal no. of units that should be produced and sold per month?
b. What is the maximum profit per month?
c. What are the breakeven sales quantities (or range of profitable demand)?
2. A company produces an electronic timing switch that is used in consumer and commercial
products made by several other manufacturing firms. The fixed cost is $73,000 per month,
and the variable cost is $83 per unit. The selling price per unit is p=$180-0.02D. Determine
(a) the optimal volume for this product and confirm that a profit occurs at this demand, and
(b) find the volumes at which breakeven occurs.
3. A municipal solid waste site must be located outside Anytown or Yourtown. After sorting,
some of the solid refuse will be transported to an electric power plant where it will be used as
fuel. Data for the hauling of refuse from each town to the power plant is shown below:
Anytown Yourtown
Average hauling distance 4 miles 3 miles
Annual rental fee for solid waste site $ 5,000 $ 100,000
Hauling cost $ 1.50 / cu. yd. - mile $ 1.50 / cu. yd - mile
a. If the power plant will pay $ 8.00 per cubic yard of sorted solid waste delivered to the
plant, where should the solid waste site be located? Use the town’s viewpoint and
assume that 200,000 cubic yards of refuse will be hauled to the plant for one year only.
One site must be selected.
b. Referring to the electric power plant above, the cost Y in dollars per hour to produce
electricity is Y = 12 + 0.2X + 0.27X2 , where X is in megawatts. Revenue in dollars per
hour from the sale of electricity is 16X - 0.2X2. Find the value of X that gives the
maximum profit.

COST-VOLUME-PROFIT ANALYSIS
PROBLEM SET
(1.) The Taylor Radio Company manufactures and sells ultrasonic radios at P650 each. The
variable manufacturing costs per unit are: direct materials = P200, direct labor = P150, FOH
= P50, and selling & administrative expenses = P50. The fixed FOH is about P500,000 and
fixed selling & administrative expenses P500,000.
(a) What is the annual BEP in units and sales?
(b) What profit will Taylor earn at 10,000 units?
(c) How much will Taylor’s profit increase/decrease (compared to b) if there is a:
(c1) 15% reduction in selling price, and
(c2) 10% increase in direct labor cost?
(d) Taylor anticipates sales of 15,000 units during the coming year, what would be the
margin of safety?
(e) What unit sales volume is necessary to earn P500,000?
(2.) A firm producing garbage waste disposal units sell it for P30,000 each. Variable costs are
P20,000 per unit and fixed costs are P600,000. The plant can produce a maximum of 80 units
per year. It is currently operating at 60% capacity. The firm is contemplating the effects of
reducing the selling price by P2,000 per unit, adding a feature to each unit which will
increase variable costs by P1,000 per unit, and allocating an extra of P100,000 per year for
advertising. What effects will these measures have on the BEP and annual profit if together
they cause the plant utilization to climb to 90%?
(3.)
Product A B C
Selling price/unit P8 P5 P4
Contribution margin/unit 6 3 3
Fixed costs P 4,000 P 7,000 P 1,000
Sales (units) 600 4,000 400
Required: (a) BEP in units and sales, and (b) total profit given sales mix in the table.
(4.) A person wants to sell centennial pins at the EXPO Fair. Booth rental is P4,000. The unit
selling price is P9.00 and the unit variable cost is P0.50. How many pins must be sold to
attain a target pretax net income of P4,500?

(5.) The Best Buy Grocers Corporation owns and operates six supermarkets in and around
Boston. You are given the following corporate budget data for next year:
Sales P10,000,000
Fixed expenses 1,700,000
Variable expenses 8,200,000
Required:
Compute expected income for each of the following deviations from budgeted data.
(Note: Consider each case independently.)
a. 10% increase in total contribution margin, holding sales constant.
b. 10% decrease in total contribution margin, holding sales constant.
c. 5% increase in fixed costs.
d. 5% decrease in fixed costs.
e. 8% increase in sales volume.
f. 8% decrease in sales volume.
g. 10% increase in fixed costs and 10% increase in sales volume.
h. 5% increase in fixed costs and 5% decrease in variable costs.
(6.) The Walk Rite Shoe Company operates a chain of rented shoe stores. The stores sell ten
different styles of relatively inexpensive men’s shoes with identical purchase costs and
selling price. Walk Rite is trying to determine the desirability of opening another store,
which would have the following expense and revenue relationships:
Variable Data: Per Pair
Selling price P300.00
Cost of shoes 195.00
Sales commissions 50.00
Total variable expenses P245.00
Annual fixed expenses:
Rent P 60,000
Salaries 200,000
Advertising 80,000
Other fixed expenses 20,000
Total P360,000
Required: (Note: Consider each question independently)

(a) What is the annual breakeven point in peso sales and in unit sales?
(b) If 35,000 pairs of shoes are sold, what would be the store’s net income (loss)?
(c) If the store manager were paid 1.00 per pair as commission, what would be the annual
breakeven point in peso sales an in unit sales?
(d) Refer to the original data. If sales commissions were discontinued in favor of an P81,000
increase in fixed salaries, what would be the annual breakeven point in peso and in unit
sales?
(e) Refer to the original data. If the store manager were paid P1.00 per pair as commission on
each pair sold in excess of the breakeven point, what would be the store’s net income if
50,000 pairs were sold?

(7.) Suppose that the Blanton Company has the following budget data for 19xx.
Product
X Y Total
Selling price P3 P6
Variable expenses 1 2
Contribution margin P2 P4
Total fixed expenses 100,000 120,000
No. of units sold to breakeven ? ? ?
No. of units expected to be sold 30,000 50,000 80,000
Required:
a) Compute the breakeven point for each product.
b) Suppose that Products X and Y were made in the same plant. Assume a prolonged
strike at the factory of the sole supplier of raw materials prevented the production of X
for all of 19xx. Assume also that the Blanton fixed costs were unaffected.
b1) What is the breakeven point for the company as a whole, assuming that no X is
produced?
b2) Suppose instead that the shortage applied so that only X and no Y could be
produced. Then what is the breakeven point for the company as a whole?
c) Draw a breakeven chart for the company as a whole, using an average selling price and
an average variable expense per unit. What is the breakeven point under this aggregate
approach? What is the breakeven point if you add together the individual breakeven
points that you computed in requirement 1? Why is the aggregate breakeven point
different from the sum of the individual breakeven points?
(8.) Tighaw Bottling Company produces a variety of bottled drinks. The company has classified
its products into these categories.
Brand Name Selling price per bottle Variable cost per bottle
Mango P1.50 P1.40
Guyabano 1.20 1.00
Grape 1.00 0.40
The fixed cost of the company is P36,240 annually and does not change with any change in
product mix or with total volume changes of less than 50%. During 19A, sales of Mango
accounted for 50% of the company’s total sales in bottles. Sales of Guyabano were four times
that of Grape. Total sales revenue for the year was P500,000.
Required:
The breakeven sales in pesos and units of each product group for 19A, based on the
actually experienced sales mix.

(9.) The Duling Company manufactures two products, baubles and trinkets. The following are
projections for the coming year:
BAUBLES TRINKETS
Totals
Units Amount Units Amount
Sales 10,000 P10,000 7,500 P 10,000 P20,000
Costs
Fixed P 2,000 P 5,600 P 7,600
Variable P 6,000 P 3,000 P 9,000
P 8,000 P 8,600 P16,600
Income Before Taxes P 2,000 P 1,400 P 3,400
Required:
a) Assuming that the facilities are not jointly used, what is the break-even output (in
units) for baubles?
b) What is the break-even volume (and pesos) for trinkets?
c) Assuming that the consumers purchase composite units of four baubles and three
trinkets, what is the composite unit contribution margin?
d) If consumers purchase composite units of four baubles and three trinkets, what is the
break-even output for the two products?
e) If baubles and trinkets become one-to-one complements and there is no change in
the Duling Company’s cost function, what is the break-even point?
(10.) Given the following information for Leonard Co. for April:
Sales P 180,000
Fixed Manufacturing Costs 22,000
Fixed Administrative Costs 14,000
Total Fixed Costs 36,000
Total Variable Costs 120,000
Unit Price 9.00
Unit Variable Manufacturing Costs 5.00
Unit Variable Marketing Costs 1.00
Compute the following:

a. Operating profit when sales are P180,000
b. Break-even quantity.
c. Quantity that would produce an operating profit of P30,000.
d. Quantity that would produce an operating profit of 20% of peso sales.
e. Break-even sales quantity if unit variable costs are reduced by 10% per product unit,
assuming no changes in total fixed costs.
f. Sales (in pesos) required to generate an operating profit of P20,000.
g. Percentage reduction in the current selling price if present profit and sales volume are to be
maintained and unit variable cost is to decrease by 20% and total fixed cost is to decrease by
10%.
h. Reduction in unit variable cost if the present profit and sales volume are to be retained but
price is to decrease by 10%.
i. Number of units sold in April.

(11.) Freedom, Inc. management has performed cost studies and projected the following
annual costs based on 40,000 units of production and sales:
Total Annual Percentage of
Costs Total Annual Costs
that is variable
Direct Material P400,000 100%
Direct Labor 360,000 75
Manufacturing FOH 300,000 40
Selling and
Administrative Expenses 200,000 25
(a) Compute Freedom’s unit selling price that will yield a projected 10% profit if sales are 40,000
units.
(b) Assume that management selects a selling price of P30.00 per unit. Compute Freedom’s peso
sales that will yield a projected 10% profit on sales, assuming the above variable-fixed costs
relationship are valid.
(12.) Multi-product Co. produces these products with the following characteristics:
Product Sr1 Tp2 Pq4
Price / unit P5 P6 P7
Unit Variable Cost 3 2 4
Expected Sales 100,000 150,000 250,000
Total Fixed costs for the company are P1,240,000. Assuming that the product mix would
be the same at the break-even point, compute the break-even point in:
(a) Units (total and by product line), and
(b) Sales in pesos (total and by product line).

RELEVANT COSTING
COST CONCEPTS:
1. DIFFERENTIAL COSTS. These are costs which change from one level of activity to another
or it might refer to the continued effect of these individual cost changes, that is, (a) the
difference in the total cost at one volume, and (b) total cost at another volume. If an increase
in activity is being studied, they may be referred to as incremental cost; if a decrease in
activity is being studied, they may be referred to as avoidable cost. Most often in cost
analysis, these are referred to as relevant costs. In other words, this is the difference in total
cost between two alternatives or net relevant cost. (RELEVANT COSTS - refer to those
expected future costs that differ among alternative courses of action.)
2. TRACEABLE COSTS. The costs which are directly traceable to a job or product, a cost
center, department, or operating division of a firm.
3. REPLACEMENT COSTS. These are costs that would be incurred in a market transaction
either now or in the future.
4. OPPORTUNITY COSTS. These represent the measurable advantage from one foregone
action or that may be sacrificed as a result of rejection of alternative uses of material, labor,
or facilities.
5. SUNK COSTS. These are irrecoverable costs and refer to the amount invested in a tangible
productive asset, an intangible right, or some extended contract for service, which can only
be recovered by use of the asset over its service life, or the use of service over the term of the
contract.
6. OUT-OF-POCKET COSTS. These are elements of costs which have required or will require
cash disbursement in the period under consideration.
PROBLEMS INVOLVING PROBLEMS INVOLVING
COSTS COSTS AND REVENUE
1. Method Change 1. Supply/Demand/Price Analysis
2. Operations Planning 2. Contribution Pricing
3. Make or Buy Decisions 3. Discontinuing a Product
4. Order Quantity 4. Adding Services
5. Sell or Process Further
6. Other Marketing Tactics
GENERAL STEPS IN PROBLEM ANALYSIS:

1. Define the problem. Determine the impact on the firm in terms of functions affected,
time commitment, and its relationship to other management plans.
2. Select the possible alternative solutions.
3. Measure the weigh consequences of each alternative, expressed in quantitative terms.
4. Identify consequences that cannot be expressed in quantitative terms and weigh them
against each other and against the measured consequences.
5. Reach a decision.

RELEVANT COSTING ILLUSTRATIVE PROBLEMS:
A. ACCEPTANCE OF ADDITIONAL ORDERS

The plant is not operating at full capacity. Presently, 80% of capacity is used and
volume of production is 240,000 units. The fixed overhead cost is P180,000 under the present
operating conditions. The costs per unit are as follows:
Item Cost
Direct Materials P 1.50
Direct Labor 2.00
Variable Overhead Costs 0.50
Total Variable Costs 4.00
Fixed Overhead Per Unit 0.75
Total Costs Per Unit 4.75
An offer is received from a foreigner importer to buy 60,000 units at P4.30 per unit.
Management hesitates to accept this offer because this price is less than the total cost per unit as
computed under the usual costing method, and also because the current selling price is P5.25. It
is assumed that the fixed overhead costs will not increase even though the production of the
firm will be expanded to 100% capacity. Fixed selling and administrative costs under the
present schedule production total to P82,000, and this will not be affected by the additional
production.
a. Should the management accept the offer?
b. If all prices have to be reduced to P4.30 per unit, what action should you recommend?
c. What minimum price would be acceptable to obtain the increased volume if all prices
were to be reduced?
B. OPERATIONAL VS. PLANT SHUTDOWN

The American Electronics Company has had a successful product for many years but in
recent years, competition with foreign products manufactured at lower labor costs has caused it
to operate at a loss. The firm has been trying to diversify its manufacturing operations and is
seeking new products since it foresees no change in the competitive market. The firm is now
faced with the problem of shutting down completely until new products and plant facilities can
be developed or continuing to operate at a loss, thus keeping its skilled labor force. Data
obtained from the records and from management estimates are:
Normal capacity of plant 120,000 machines/yr
Fixed costs when plant is operating P 150,000
Variable costs per machine
(direct labor, direct materials, & variable overhead) P 40
Estimated selling price to meet foreign competition P 46
Estimated sales volume at new selling price 10,000 machines
Fixed costs when plant is shutdown P 100,000

C. KEEP OR REPLACE AN OLD EQUIPMENT
Assume that there is a machine, with a cost of P120,000, 2/3 depreciated on a straight-line
basis, with a book value of P40,000 and with a remaining useful life of 4 years. The old machine
has a P4,000 disposal value now; in 4 years its disposal value will be zero. A new machine is
available that will dramatically reduce operating costs. Annual revenue of P100,000 will not
change regardless of the decision. The new machine will cost P60,000 have zero disposal value
at the end of its 4-year life. The new machine promises to slash variable operating costs from
P80,000 per year to P56,000 per year. What should you recommend?
Notes:
1. Book value of old equipment. Irrelevant, because it is a past (historical cost).
2. Disposal value of old equipment. Relevant, because it is an expected future inflow which
usually differs between alternatives.
3. Gain or loss on disposal. Algebraic difference between (1) & (2). Combination of
irrelevant book value and relevant disposal value. Best to think of each separately.
4. Cost of new equipment. Relevant, because it is an expected future outflow that will
differ between alternatives.
D. PRICING PRODUCTS FOR SALE

Consider the situation of a merchandising company where net income is generally a very
small percentage of revenues, and the bulk of the expenses of doing business are in the form of
costs of merchandise for sale. A condensed income statement for such an organization may
appear as follows:
Sales P 400,000
Cost of Goods Sold P 280,000
Variable selling and
administrative expenses 40,000
Fixed selling and
Total Costs 380,000
Net Income before Taxes P 20,000
However, the replacement cost of the merchandise that had been sold was 10% greater
than the historical cost of the goods sold.
Sales P 400,000
Cost of Goods Sold P 308,000
Variable selling and
Fixed selling and
Total Costs 408,000
Net Income before Taxes (P 8,000)
The firm was able to sell 40,000 units of the product. If the company wants to maintain
the profit of P20,000, at what price should they sell the product?

E. CONTRIBUTION PER UNIT OF CONSTRAINING FACTOR
Assume that a company has two products:
Product A B
Selling Price P10 P15
Variable Expense 7 9
Contribution Margin 3 6
Contribution Margin Ratio 30% 40%
If the division manager had 1,000 hours of capacity available, and outputs are 3 units of A
per hour and only 1 unit of B per hour. What product will you choose to produce?
F. DROPPING A PRODUCT LINE

Assume that a company has three product lines. Management is considering of
dropping Product C which has consistently shown a net loss. The present income picture
follows:
Product A (‘000) B (‘000) C (‘000) Total (‘000)
Sales P500 P400 P100 P1,000
Variable Expense 295 280 75 650
Contribution Margin 205 120 25 350
Fixed Expense 165 90 45* 300
Net Income 40 30 (20) 50
*Includes product line supervisory salaries of P10,000.
Should management keep or drop Product C?
G. SELL OR PROCESS FURTHER

A refiner has on hand 20,000 gallons of fuel oil. He must decide whether to sell it as fuel oil
or crack it into gasoline and residual fuel. The following facts are available.
Current Prices
Fuel Oil P0.40 / gallon
Gasoline P0.56 / gallon
Cracking Analysis Budget
Differential cost = P0.10 per input gallon
Cracking Yield = 75% gasoline, 15% residual fuel oil, 10% loss
Should the company sell the fuel oil as it is or process them further?

RELEVANT COSTING
PROBLEM SET
(1.) ACCEPTANCE OF ADDITIONAL ORDERS.

Grips and Turns Corp. manufactures door knobs and cabinet handles. It has enough
capacity to accept a special order of 10,000 cabinet handles at P8.00 per handle. A predicted
income statement for the year without this special order is as follows:
Account Per Unit Total
Sales revenue P 12.50 P 1,250,000
Manufacturing costs
Fixed 1.75 175,000
Variable 6.25 625,000
Total manufacturing cost 8.00 800,000
Gross profit 4.50 450,000
Marketing costs
Variable 1.80 180,000
Fixed 1.45 145,000
Total marketing costs 3.25 325,000
Operating profit 1.25 125,000
If an order is accepted, variable selling costs on the special order would be reduced by 25%
because all of the handles would be packed and shipped in one lot. However, if the offer is
accepted, management estimates that it will lose the sale of 2,000 handles at regular prices.
Should management accept the offer?
(2.) DROPPING A PRODUCT. The most recent income statement for Department C of
Landmark Department Store is given below:
Sales P500,000
Less: Variable Expense 200,000
Contribution Margin 300,000
Less: Fixed Expenses
Salaries & Wages 150,000
Insurance on inventories 10,000
Depreciation of equipment 65,000*
Advertising 100,000 325,000
Net Income P(25,000)
*Six years remaining useful life with no resale value.
Management is thinking about dropping the department due to its poor showing. If the
department is dropped, one employee will be retained. Her salary is P20,000. The equipment
has no current resale value. Prepare an analysis to determine whether or not the department
should be dropped.

(3.) JOINT PRODUCTS. Machintosh Company produces two products from a common input.
Data relating to the joint products are given below:
Product A Product B
Sales value at the split-off point P60,000 P120,000
Sales value after further processing 90,000 200,000
Cost of further processing 20,000 85,000
Note: Split-off point is the juncture in the process when the products become separately
identifiable.
Determine which of the products should be sold at the split-off point and which should
be processed further before sale.
(4.) MAKE-OR-BUY DECISIONS. Cornet Company is now producing a small part that is used
in the production of one of its product lines. The company’s accounting department reports
the following costs of producing the part internally:
Per Part
Direct Material P15
Direct Labor 10
Variable Overhead 2
Fixed Overhead, direct 4
Fixed Overhead 5
Total Cost P36
The direct fixed overhead costs consist of 75% depreciation of special equipment and
25% supervisory salaries. The special equipment has no resale value. An outside supplier has
offered to sell the parts to Comet Company for P30 each based on an order of 5,000 parts per
year. Determine whether Comet should accept this offer, or continue to make the parts
internally.

PROCESS COSTING
Two Basic Cost Systems:

1. Process Costing – average cost per unit per product is obtained due to little variation in
the unit produced, It is a cost system whereby the cost of production of homogeneous
products placed in a continuous and sequential basis are recorded and summarized
through cost centers, processes or department.
Ex: soap, toothpaste, etc.
2. Job Order Costing – cost is accumulated per job, batches or customer order due to
variation in styles, finish and units produced from other batches.
Ex: construction companies, auto repair shop, etc.
Process Costing Job Order Costing

1. Costs accumulated by processes, 1. Costs accumulated by lots, customer orders,
departments or cost centers cost sheets.
2. Manufacturing operation starts with 2. Manufacturing operation is started after
information on previous orders by customer. orders from customers are received.
3. Uniform cost to all products completed 3. Unit cost of one job differs from another.
from same process and in same period.
4. Homogeneous 4. Not homogeneous in nature
5. Mass Production. Marketability is assured 5. Production is usually on a small scale and
even without orders. dependent on orders
6. Material and labor costs are classified into 6. Generally, no distinction of cost
direct and indirect costs. Indirect portion is classification. All material costs are charged
charged to overhead. to Material Control and labor costs to
Payroll.
7. Unit cost is computed at the end of the 7. Unit cost is computed upon completion of
month/period on a departmental basis. job order.
Process Costing:
Process A
Direct Material
Direct Labor Process B

Factory
Overhead Finished Cost of
Process C Goods Goods Sold
WIP, Dept.A WIP, Dept.B WIP, Dept.C FG CGS

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

Cost of Production Report (COPR)
▪ Is a financial report of a particular department (or a group of departments) showing in
quantity and costs how the operations were conducted during the month.
▪ This report shows details of how the cost in units were processed together with its related
cost change.
Equivalent Production (EP)

▪ Represents the number of units which could have been completed if only the elements
(material, labor and overhead) were applied to units that can be completed during the
period.
▪ A completion of theoretically completed units applied particularly to “in-process” units by
determining its stage of completion.
▪ This quantity is the base or denominator upon which the unit cost of a department is
computed.
Contents of COPR:
1. Any cost transferred to it from a preceding department.
2. Cost of material, labor and factory overhead incurred by the department.
3. Unit cost added by the department.
4. Cumulative costs, unit and total, to the end of operation in the department.
5. The value of opening and ending work-in-process inventory.
6. Cost of transfer to succeeding department or to the finished goods stockroom.
Essential Parts of COPR:

1. Quantity Schedule – shows the total number of units for which a department is held
accountable and the work accomplished in units.
2. Cost Analysis
Steps in Process Costing:

1. Summarize the flow of physical units.
2. Compute output in terms of equivalent units.
3. Summarize the total costs to account for, which are the total debits in Work-in-Process.
4. Compute unit costs.
5. Apply total costs to units completed and to units in ending Work-in-process.
Ways for Computing Equivalent Production:

1. First In – First Out (FIFO) Method
– work done is accumulated for the current period only.
− regards the beginning inventory as if it were a batch of goods separate and distinct from
the goods started and completed by a process during the current period.
2. Weighted Average Method (WAM)
– work done to date is accounted for.
− focuses on the total work done to date regardless of whether that work done was before or
during the current period.

Cost Application:
1. Even Application of Cost Elements - assumption is made that materials, labor, and overhead
costs are applied evenly and proportionately from the start to the end of the process. Under
this assumption, only one equivalent production is applicable to all cost elements.
2. Uneven Application of Cost Elements - this is a more realistic approach in connection with a
realistic production. Under this case, the material cost is applied differently from conversion
costs and as such, a separate equivalent production for material is necessary and an
equivalent production for conversion costs shall be shown separately.
XYZ Company
Cost of Production Report
For the month ended ______________
Department ______
Quantity Schedule Physical Units

WIP, beg XXX
Started to process (or rec'd from preceding dept.) XXX
Total Units to be Accounted for XXX
Finished and transferred to the next department: Units WDM EPM WDC EPC
WIP, beg XXX XXX XXX XXX XXX
Started to process (or rec'd from preceding dept.) XXX XXX XXX XXX XXX
Total Units Transferred XXX XXX XXX
WIP, ending XXX XXX XXX XXX XXX
Total Units as Accounted for XXX XXX XXX
Cost Analysis Amount Unit Cost

Cost WIP beg P XXX
Cost from previous department XXX P XXX
Cost incurred during the month
Material XXX P XXX
Labor XXX XXX
Overhead XXX XXX
Total Cost to be Accounted for P XXX P XXX
Finished and transferred to the next department: Amount

WIP, beg
Cost last month P XXX
Cost this month XXX P XXX
Started to process (or rec'd from preceding dept.)
Cost from previous department XXX
Cost this month XXX XXX
Total Cost of Transfer XXX
WIP, ending
Cost from previous department XXX
Cost this month XXX XXX
Total Cost as Accounted for P XXX

The following information was taken from the books and records of Genius Co. for the
month of January, 1997:
Units
In Process, Jan 1 8,000 (3/8 complete)
Started to Process 40,000
Transferred to storeroom 43,000
In Process, Jan 31 5,000 (2/5 complete)
Costs
In Process, Jan 1 P6,000
Costs incurred during the month:
Materials 38,000
Labor 32,000
Factory Overhead 14,000
Required:
Prepare the cost of production report (COPR) for January 1997 using
(a) FIFO Method – even application of costs, and
(b) FIFO Method – uneven application of material costs assuming that 50% of the materials are
added at the start of the process; 30% when the process is 1/2 completed; and, the balance
when the process is 3/4 completed. Conversion costs are applied evenly/uniformly.

The Jasmine Manufacturing Co. manufactures a product in ten days. Production data
for February is presented below:
Units
In Process, Feb 1 7,000 (2 days complete)
Started in Process 43,000
In Process, Feb 28 10,000 (5 days complete)
Costs
In Process, Feb 1
Materials P10,300
Labor 8,200
Costs added in February:
Materials 47,300
Labor 41,300
Required:
Prepare a COPR for February using
(a) Weighted Average Method – even application of costs, and
(b) Weighted Average Method – uneven application of material costs assuming that the
company adds 1/2 of materials at the start of the process, 30% at the end of three days, and
the balance of 1/5 at the end of six days. The company applies labor and factory overhead
costs evenly/uniformly.

PROCESS COSTING
PROBLEM SET
(1.) The Maya Manufacturing Company uses average costing. Production data for December
are as follows:
Units Quantity Remarks
In process, Dec. 1 8,000 1/2 complete
Started to process 40,000
In process, Dec. 31 12,000 1/3 complete
Amount
Costs, WIP in Dec. 1
Materials P 20,000
Labor 10,000
Costs Added in December
Materials 60,000
Labor 70,000
Required: Prepare COPR using
(a) Weighted Average Method - assuming all costs are applied evenly/uniformly.
(b) Weighted Average Method - assuming the company adds 40% of the materials at the start of
the process, 30% when 1/3 complete, and the balance when the process is 1/2 complete.
Conversion costs are applied evenly.
(2.) The Kawilihan Manufacturing Inc. uses a process cost accounting system. The production
data for the month of May show the following:
Dept. 2 Dept. 3
Physical Units
In process, May 1 8,000 4,000
Stage of completion 1/4 3/4
Received from preceding department 42,000 ?
Finished and transferred to next dept. ? ?
In process, May 31 5,000 1,000
Stage of completion 75% 40%
In Dept. 2, materials are applied as follows: 40% at the start of the process; 20% when the
process reaches midpoint; and the balance at the end of the process.
In Dept. 3, 25% of the materials is applied at the start of the process; 45% when the
process reaches 3/4 completion; and the balance at the end. Both departments apply
conversion costs uniformly throughout the process.

Dept. 2 Dept. 3
Costs Data Amount Amount
Cost, In Process, May 1 P 4,000 P 2,000
Cost from preceding department 10,500 ?
Cost incurred this month:
Materials 13,440 9,090
Conversion 18,700 6,810
Required:
Prepare a cost of production report for Dept. 2 and 3 for the month of May using FIFO method.
Show supporting computations for the missing items.
(3.) TIP Inc. operates two departments in the process of its products. The following data for
two months were made available for departments A and B:
JULY Dept. A Dept. B
Units:
In Process, July 1 2,000 5,000
Stage of completion 3/4 40%
Placed in Process ? ?
Transferred to next dept. 25,000 25,000
In Process, July 31 5,000 ?
Costs: Amount Amount
Costs, In Process, July 1 P 3,250 P 7,500
Cost incurred in July:
Materials 8,750 26,500
Labor 2,500 52,000
Factory Overhead 1,250 26,000
AUGUST
Units:
Placed in Process 35,000 ?
Transferred to next dept. ? ?
In Process, August 31 10,000 10,000
Costs: Amount Amount
Cost incurred in August:
Materials P 10,500 P 25,000
Labor 3,000 52,000
Factory Overhead 1,500 39,000
Department A applies all costs uniformly.
Department B applies 30% of the materials at the beginning of the process, 30% when
the process is 1/2 completed and 40% at the end of the process. It applies labor and overhead
uniformly throughout the production.
Required: Prepare a cost of production report for each month and for each department using
FIFO method.

(4.) Consider the following:
Dept. 1: Adds 60% of Materials at the start of the process and 40% of Materials when
process is 80% complete; applies conversion costs uniformly throughout production.
Dept. 2: Adds all Materials at the end of processing; applies conversion costs uniformly.
Dept. 3: Adds 30% of Materials at the start, 30% when process is ½ complete and the
balance at the end of processing; applies conversion costs uniformly.
Production Data for December Dept.1 Dept. 2 Dept. 3
Units:
In Process, December 1 20,000 16,000 12,000
Stage of Completion 3/4 4/5 1/3
Transferred to Next Dept. 84,000 88,000 92,000
Stage of Completion 2/5 2/3 3/4
Costs: Amount (PhP) Amount (PhP) Amount (PhP)
Added in December
Materials 40,800 22,000 69,900
Labor 37,700 41,600 47,000
Overhead 18,850 20,800 23,500
Required: Prepare a COPR for each department using FIFO method.
(5.) Consider the following data for May:

Physical Units
Started in May 50,000
Completed in May 46,000
Ending inventory, Work in Process 12,000
Beginning inventory, Work in Process 8,000
The beginning inventory was 90% complete regarding direct materials and 40%
complete regarding conversion costs. The ending inventory was 60% complete regarding direct
materials and 20% complete regarding conversion costs.
Required: Prepare a single schedule of equivalent units for the work done to date and the work
done for May only.
(6.) The Gagliano Company had computed a portion of the physical units for Department A for
the month of April as follows:
Units Completed: Quantity
From Work in Process on April 1 10,000
From April production 30,000
Total 40,000
Direct materials are added at the beginning of the process. Units of work-in-process on
April 30 were 8,000. The work-in-process on April 1 was 80% complete as to conversion costs,
and the work-in-process on April 30 was 60% complete as to conversion costs. What are the
equivalent units of production for the month of April using the FIFO method? Choose one of
the following combinations:

Combination Direct Materials Conversion Costs
A 38,000 38,000
B 48,000 44,800
C 48,000 48,000
D 38,000 36,800
(7.) Given the following:

Department A
Computation of Output in Equivalent Units
For the Month Ended March 31, 1991
FIFO Method
Flow of Production Physical Units Direct Conversion
Materials Costs
Work in Process 10,000 (40%)
Started in March 40,000
To account for 50,000
Completed and Transferred out 48,000 48,000 48,000
during the current period
Work in Process, End 2,000 (50%)*
Direct Materials: 2,000 x 100% 2,000
Conversion Costs: 2,000 x 50% 1,000
Accounted for: 50,000
Work Done to Date 50,000 49,000
Less: equivalent units for work
done on beg. inventory in previous
periods
Direct Materials: 10,000 x 100% 10,000
Conversion Costs: 10,000 x 40% 4,000
Remainder, work done during 40,000 45,000
current period only
*Note: Degrees of completion for conversion costs of this department only, at the dates of the
work-in-process inventories.
Required:
Prepare a single schedule of equivalent units for the work done to date for the Weighted
Average method.

JOINT AND BY-PRODUCT
COSTING
Definition of Terms:
Cost of a single process that yields multiple products simultaneously.
Joint Cost The products are not identifiable as different individual products until after a
certain stage of production known as the split-off point.
The juncture in the process when the products become separately or
Split-Off Point
individually identifiable.
Costs incurred beyond the split-off point and can be identified with
Separable Cost
individual products.
Have relatively high sales value and are not separately identifiable as
Joint Products
individual products until the split-off point.
Main Products Products that have high sales value.
Product that has a low sales (or minor sales) value compared to joint or main
By-Product
product.
Scrap Has a minimal or zero value compared to main or joint products.
Example:
Gasoline
Joint Cost
P 1,000,000
Crude Oil Diesel Oil
Separable
Cost Aviation Fuel
Split-Off Point P 50,000
Reasons for Allocating Joint Costs:

1. Inventory Cost and Cost of Goods Sold computation for external financial statement.
2. Inventory Cost and Cost of Goods Sold computation for internal financial reporting.
3. Cost reimbursement when only a portion of the separate products or services is sold or
delivered to single customer.
4. Rate regulation when one or more of the jointly produced products or services are subject to
price regulation.

Methods of Allocating Joint Costs:
1. Allocate costs using market selling-price data
 Sales Revenue at split-off point method
 Net Realizable Value (NRV) method
2. Allocate costs using physical measure
Illustrative Example #1:

Joint Products A, B, and C are processed together in Departments 1 & 2. After this,
Product A is ready to be sold at P400/kg. Product B is processed further in Dept. 3 and then
sold for P600/kg. Lastly, Product C is processed further in Departments 4 & 5 and then sold for
P300/kg.
It is also known that at the split-off point, Products A, B, and C and can be sold in the
market without further processing for P400/kg, P300/kg, and P150/kg, respectively.
Additional information are given in the diagram shown below.
Required:
Determine the joint costs to be allocated to each product using
(a) Physical Units Method,
(b) Sales Revenue at SOP Method, and
(c) Net Realizable Value (NRV) Method.
20 kg
A at P400/kg
Dept. 1 Dept. 2 30 kg Dept. 3 B at P600/kg

100 kg P1,000 P2,000 P1,500
Dept. 4 Dept. 5 C at P300/kg

50 kg P500
P200
Steps in Joint Cost Allocation with Multiple Split-off Points:

1. Draw a diagram of the production process.
2. Determine the total ultimate sales value of the final product and work backwards, starting
from the last split-off point, subtracting separable and additional joint costs to determine the
Net Realizable Values (NRV’s) and the relative NRV’s of joint products at each split-off
point.
3. Work forward, starting from the first split-off points, allocating the joint costs at each split-
off point on the basis of relative NRV's. As you work forward, be sure to add previously
allocated costs to those costs incurred subsequently.

Required: Determine the total costs for products A, B and C using NRV method.
5,000 units
A at $6
D1 10,000 units
D3 B at $5
$40,000 D2
$10,000
C at $3
$60,000 10,000 units
Accounting Methods for By-Products:

1. Addition to Revenue*
(a) Sales Revenue
(b) Other Income
2. Deduction from Main (Joint) Product Costs
(a) Deduction from CGS of the main/joint products
(b) Deduction from the total production cost of the main/joint products
*Revenue from sales of by-products less the cost of placing the by-products on the market
(marketing and administrative expenses) and less any additional processing costs.
3. The reversal cost method or the market value method – considers by–products as joint
products; therefore, allocating cost as joint products.

Total production cost 54,000 units at P1.75/unit
Sales for main product 45,000 units at P2.50/unit
By-product gross revenue P6,825
Marketing and administrative expenses for by-product P2,400
Additional processing cost for by-product P400
Selling and administrative expenses for main product P9,750
Required:
Income statement employing the four different methods of accounting for by-products.

JOINT AND BY-PRODUCT COSTING
PROBLEM SET
(1.) The Los Alamos Chemical Company manufactures two products, X1 and X2, from a single
input X. During a recent month, 100,000 units of X were processed into 60,000 units of X1
and 40,000 units of unfinished X2 at a cost of $180,000. All units of X2 were completed at an
additional cost of $20,000. The unit selling price of X1 and X2 are $2.00 and $3.50,
respectively.
(a) Determine the final unit cost of X1 and X2 when joint costs are allocated on the basis of
net realizable value?
(b) If X2 can be sold for $1.75 at the split-off point, should the management sell it then or
process it further?
(2.) Charlie's Longhorn Restaurant purchases bulk sirloin on the hook. After the meat is aged
an appropriate time, a meat cutter divides the bulk sirloin into several portions and styles
of meat served in the restaurant. During a recent week, 2,000 lbs. of meat, costing $2.10 per
pound, were cut into 2865 servings. Information about these servings is a s follows:
Item Servings Unit Sales Value Total Sales Value
6 oz Sirloin 10 $1.50 $ 15.00
8 oz Sirloin 1,550 1.70 2,635.00
12 oz Sirloin 800 2.00 1,600.00
16 oz Sirloin 60 3.00 180.00
Hamburger (8 oz) 140 1.00 140.00
Kabob (8 oz) 125 3.44 430.00
Total 2,685 $5,000.00
Determine the joint cost allocation of each joint product using:

a. Physical units (based on weight, 16 oz. = 1 lb.)
b. Net realizable value
(3.) The Harrison Corporation produces three products---Alpha, Beta, and Gamma. Alpha and
Gamma are joint products, and Beta is a by-product of Alpha. No joint costs are to be
allocated to the by-product. The production data for a year is given year is as follows:
 In department 1, 110,000 pounds of direct material, Rho, are processed at a total cost
of 120,000. After processing department 1, 60% of the units are transferred to
department 2, and 40% of the units (now Gamma) are transferred to department 3.
 In department 2, the material is further processed at a total additional cost if P38,000.
70% of the units (now Alpha) are transferred to department 4 and 30% emerge as
Beta, the by-product, to be sold at P1.20 per pound. Separable marketing costs for
Beta are P8,100.

 In department 4, Alpha is processed at a total additional cost of P23,660. After this
processing, Alpha is ready for sale at P5 per pound.
 In department 3, Gamma is processed at a total additional cost of P165,000. In this
department, a normal loss of units of Gamma occurs, which equals 10% of the good
output of Gamma. The remaining good output of Gamma is then sold for P12 per
pound.
Required:
Prepare a schedule showing the allocation of the P120,000 joint costs between Alpha and
Gamma using the estimated net realizable value method. The estimate net realizable value of
Beta should be treated as an addition to the sales value of Alpha.
(4.) In Department 1, Capex Company produces 2 joint products R and E from a single input G.
Each unit of G yields 2 units of R and 1 unit of E, and product R must be processed further
in department 2. From department 2, main product I and by-product N emerged in the
ratio 3:1. I can be sold immediately but N is processed further in department 4. In
department 3, each unit of E is processed into 1 unit of A and 1 unit of J. 200 units of G
were processed during October.
Fixed Cost Variable Cost
Department 1 P20,000 P 50/unit of G
Department 2 None 115/unit of R
Department 3 P10,000 100/unit of E
Department 4 None 10/unit of N
Product Selling Price

I P250/unit
A 200/unit
J 300/unit
N 20/unit
The estimated NRV of N is treated as an addition to the sales value of I.
Required:
a. Find the unit cost of I, A, and J
b. Assume that A can be processed further at an additional cost of P50/unit. Unit selling
price can be increased to P240, should A be processed further?
c. How many units of G must be processed to provide a total profit of P20,000?
(5.) The Alden Oil Company buys crude vegetable oil. The refining of this oil results in four
products, A, B and C, which are liquids and D, which is heavy grease. The cost of the oil
refined in 19_9 was P27,600 and the refining department had total processing costs of
P70,000. The output sales for the four products in 19_9 were as follows:
Product Output (gal.) Sales Additional Processing Cost
A 500,000 P 115,000 P 30,000
B 10,000 10,000 6,000
C 5,000 4,000 0
D 9,000 30,000 10,000

Required:
a) Assume that the net realizable value of allocating joint costs is used. What is the net income
for Products A, B, C and D? Joint costs total P97,600.
b) The company had been tempted to sell at split-off directly to the other processors. If that
alternative had been selected, sales per gallon would have been: A, P0.15; B, P0.50; C, P0.80;
and D, P3.00. What would the net income be for each product under this alternative?
c) The company expects to operate at the same level of production and sales in the
forthcoming year. Could the company increase net income by altering its processing
decisions? If so, what would be the expected overall net income? Which products should
be processed further and which should be sold at split-off point? Assume that all costs
incurred after split-off are variable.
(6.) Caldwell Company processes an ore in Department 1, out of which comes three products L,
W and X. Product L is processed further through Department 2; Product W is sold without
further processing. X is considered a by-product and is processed further through
Department 3. Costs in Department 1 are P800,000 in total; Department 2 costs are P100,000;
Department 3 costs are P50,000. Processing 600,000 pounds in Department 1 results in
50,000 pounds of Product L being produced, with 300,000 pounds of Product W and 100,000
pounds of Product X.
Product L sells for P10 per pound; Product W sells for P2 per pound; Product X sells P3
per pound if considered as a joint product.
If X is treated as a by-product, it is desired to make a profit of 10 percent of sales on
Product X and also allow 25 percent for selling and administrative expenses. Use the net
realizable value method in handling the product credit for Product X.
Required:
a) Compute unit costs per pound for Product L, W and X, using X as a by-product. Use the
net realizable value method for allocating joint costs. Deduct the estimated NRV of the
by-product produced from the joint costs of products L & W.
b) Compute unit costs per pound for Products L, W and X using all three as joint products
and allocating costs by the net realizable value method.
(7.) The Green Mountain Supply Company manufactures 3 final products F, G and H and one
intermediate product, R. During a recent month, the joint cost of producing 1,000 units of F
and 2,000 units of R was $15,000. Product R was processed further into 1,000 units of G and
1,000 units of H at a cost of $12,000. Additional costs to complete G and H were $5,000 and
$10,000, respectively. The unit selling prices of F, G and H are $17, $10 and $20
respectively.
Determine the total production cost of each final product when joint costs are allocated
on the basis of relative net realizable value.

JOB ORDER COSTING
 Used in manufacturing activities characterized by the production of certain items to the

unique specifications of the customer or by the performance of some specified activity
under a negotiated contract.
 Examples include manufacture of machine tools, construction contractors, commercial
printers, machine shops, among others.
Job Order Costing:
Job 100
Direct Material
Direct Labor Finished Cost of

Job 101 Goods Goods Sold
Factory
Overhead
Job 102
WIP FG CGS
XXX XXX XXX XXX XXX XXX
Job Order
• Suits the needs of the custom-made item or the stipulations of a special contract.
Job Order System

• Jobs are accumulated per job order and involves the following principal forms:
(1) Job Cost Sheet

When an order for goods is received from a customer or when goods are needed for
stock, an order for production is sent to the production foreman. This is called a production
order. The cost incurred for every production order is compiled in a form called the JOB
COST SHEET.
(2) Stores Requisition

Form prepared to accompany the issuance of materials from the store room. It is
entered in the Direct Material Section of the Job Cost Sheet. Indirect Materials are entered in
the Factory Overhead subsidiary ledger for indirect materials.
(3) Daily Time Report

The Daily Time Report is the form wherein the details of the laborers’ work are shown.

JOB ORDER COST SHEET
Company X Job No.
For stock Customer
Product Date Started Date Completed
Department A - Machining
Direct Material Direct Labor Overhead

Date Reference Amount Date Reference Amount Date Amount
(Materials (Time
Requisition Ticket
Number) Number)
Department B - Assembly
Direct Material Direct Labor Overhead

Date Reference Amount Date Reference Amount Date Amount
Summary of Costs
Department A Department B Total

Direct Material XXX XXX XXX
Direct Labor XXX XXX XXX
Factory Overhead XXX XXX XXX
Total XXX XXX XXX

Examples of Transactions:
1. Direct and indirect materials purchased on account, P99,000.
Materials Control 99,000

Account Payable 99,000
2. Requisitions of direct materials, P91,000, and indirect materials, P4,000.
WIP 91,000
FOH Control (IM) 4,000
Materials Control 95,000
3. Labor costs incurred, direct (P39,000) and other (P5,000).
WIP 39,000
FOH Control (IL) 5,000
Payroll Liability 44,000
4. Payment of total payroll for the month.
Payroll Liability 44,000

Cash 44,000
5. Additional factory department overhead costs incurred for the month, P75,000. These consist
of utilities and repairs, P23,000; depreciation on equipment, P50,000; and insurance expired,
P2,000.
FOH Control 75,000

Accounts Payable 23,000
Accumulated Depreciation 50,000
Prepaid Insurance 2,000
6. Application of factory overhead to products, P80,000.
WIP 80,000
FOH Applied 80,000
7. Completion and transfer to finished goods of Job Nos. 101-108, P198,800
FG Control 198,800
WIP 198,800
8. Cost of Goods Sold, P190,000
CGS 190,000
FG Control 190,000

Applying Factory Overhead to Products
1. Select a cost application base that serves as a common denominator for all products. This
may include direct labor hours, direct labor costs, and machine hours.
2. Prepare a factory overhead budget for the planning period, ordinarily a year. The two items
that need your attention are budgeted total overhead and budgeted total volume of the
application base.
3. Compute the budgeted factory overhead rate by dividing the budgeted total overhead by the
budgeted total volume of the application base.
4. Obtain the actual application base data (such as machine hours) as the year unfolds.
5. Apply the overhead to the jobs by multiplying the budgeted rate times the actual application
base data.
6. At the end of the year, account any differences between the amount of overhead actually
incurred and overhead applied to products.
PRORATION - the spreading of overapplied or underapplied overhead among various

inventory and cost of goods sold.
Two Methods of Proration:

(1) Prorate to CGS
(2) Prorate to WIP, CGS, and FG
FOH Control - FOH Applied
positive + underapplied overhead

negative - overapplied overhead

Given the following ending balances: Work-In-Process, P125,000; Cost of Goods Sold, P625,000;
and, Finished Goods, P500,000.
Case A: FOH Applied P550,000
FOH Control P600,000
Case B: FOH Applied P640,000
FOH Control P600,000
Required:
Determine whether under- or overapplied overhead. Prorate using the two methods.

JOB ORDER COSTING
PROBLEM SET
(1.) The University of Chicago Press is wholly owned by the university. A job order system is
used for printing. The bulk of work is done for other university departments, which pay as
though the Press were an outside business enterprise. The Press also publishes and
maintains a stock of books for general sale.
The following data pertain to 19_2 (in thousands):
Direct materials and supplies purchased on account $800
Direct materials issued to the production departments 710
Supplies issued to various production departments 100
Labor used directly in production 1,300
Indirect labor incurred by various departments 900
Depreciation, buildings and factory equipment 400
Misc. factory overhead incurred by various departments
(ordinarily would be detailed as repairs, photocopying, utilities,
etc.) 550
Factory overhead applied at 160% of direct labor cost ?
Cost of goods manufactured 4,120
Sales 8,000
Cost of goods sold 4,020
Inventories, December 31, 19_1:
Materials Control 100
Work-in-process control 60
Finished goods control 500
Required:
(a) Prepare general journal entries to summarize 19_2 transactions. As your final entry, dispose
of the year-end overapplied or underapplied factory overhead as direct adjustment to cost of
goods sold.
(b) Show posted T-accounts for all inventories, cost of goods sold, factory department overhead
control, and factory overhead applied.
(2.) The following data relate to the operations of the Donnell Printing Company for the year
19_5 (in millions):
Materials control, December 31, 19_4 $12
Work-in-process control, December 31, 19_4 2
Finished goods control, December 31, 19_4 6
Materials and supplies purchased on account 150
Direct materials issued to the production department 145
Indirect materials (supplies) issued to various production
departments 10
Labor used directly in production 90

Indirect labor incurred by various departments 30
Depreciation - plant and factory equipment 19
Misc. factory overhead incurred by various departments 9
Factory overhead applied, 2,100,000 machine hours at $30 per
hour ?
Cost of goods manufactured 294
Sales 400
Cost of goods sold 292
Required:
(a) Prepare journal entries.
(b) Post to T-accounts. What is the ending balance of Work-In-Process Control?
(c) Show the journal entry for disposing of overapplied or underapplied overhead directly as a
year-end adjustment to Cost of Goods Sold. Post the entry to T-accounts.
(3.) The Solomon Company uses a budgeted overhead rate for applying factory overhead to job
orders on a machine hour basis for the machining department and on a direct labor cost
basis for the finishing department. The company budgeted the following for 19_1:
Machining Finishing
Factory overhead $10,000,000 $8,000,000
Machine hours 200,000 33,000
Direct labor hours 30,000 160,000
Direct labor cost $900,000 $4,000,000
Required:
(a) What is the budgeted overhead rate that should be used in the machining department? In
the finishing department?
(b) During the month of January, the cost record for job order No. 431 shows the following:
Machining Finishing
Direct Materials $14,000 $3,000
requisitioned
Direct labor cost $600 $1,250
Direct labor hours 30 50
Machine hours 130 10
What is the total overhead applied to Job 431?
(c) Assuming that Job 431 consisted of 200 units of product, what is the unit cost of Job 431?
(d) Balances at the end of 19_1:
Machining Finishing
Factory overhead $11,200,000 $7,900,000
incurred
Direct labor cost $950,000 $4,100,000
Machine hours 220,000 32,000
Compute for the underapplied or overapplied overhead for each department and for the
factory as a whole.

(4.) Octopussy Company uses a predetermined overhead rate in applying overhead to
production orders on a labor-cost basis for Dept. A and on a machine-hour basis for Dept.
B. At the beginning of 1982, the company made the following predictions:
Dept. A Dept. B
Direct-labor cost P128,000 P 35,000
Factory overhead 144,000 150,000
Direct-labor hours 16,000 5,000
Machine-hours 1,000 20,000
(a) What is the predetermined overhead rate that should be used in each department?
(b) During the month of March, the cost sheet for production order No. 007 shows the
following:
Dept. A Dept. B
Materials P20 P40
requisitioned
Direct-labor cost 32 21
Direct-labor hours 4 3
Machine-hours 1 13
What is the total overhead cost of production order No. 007?
(c) Assuming that Job No. 007 consisted of 20 units of product, what is the unit cost of Job.
No. 007?
(d) At the end of 1992, it was found that actual factory overhead costs were P160,000 in
Dept. A and P138,000 in Dept. B. Compute for the over- or underapplied overhead for
each department, assuming that the machine-hours were 18,000 in Dept. B and the
actual direct labor cost in Dept. A was P148,000.
(5.) The following information regarding the operations for March of the Goodfield Products
Company are available:
The book show these account balances as of March 1:
Raw materials and supplies P 65,000
Work in process 292,621
Finished goods 78,830
The work in process account is supported by these job order cost sheets:
Direct Direct Factory
Job. No. Item Materials Labor Overhead
204 80,000 balloons P 15,230 P 21,430 P 13,800
205 5,000 life rafts 40,450 55,240 22,370
206 10,000 life belts 60,875 43,860 19,366
P116,555 P120,530 P 55,536
During March, these transactions occurred:
(a) Purchase of raw materials and supplies, P42,300.
(b) Purchase of special materials for new Job No. 207, P5,800.
(c) Job No. 207 calls for 4,000 life jackets.

(d) Payroll data for March:
Job No. Amount Hours
204 P 13,422 6,711
205 14,630 6,500
206 14,075 7,230
207 12,948 5,820
Indirect labor cost, P9,480.
Factory superintendence, P1,500.
(e) Raw materials issued:
Job No.
204 P 9,480
205 11,320
206 10,490
207 16,640
(excluding special
purchases of P5,800 of
which P4,100 was
consumed)
(f) Indirect materials (supplies) used, P1,910.
(g) Ending inventory of indirect materials/supplies, March 31, P2,000.
(h) Other factory overhead incurred:
Insurance on factory P 830 Power P3,390
Depreciation--- 4,780 Repairs & 2,240
machinery maintenance
Depreciation--- 2,840 Others 1,910
factory building
Light 1,260
(i) Factory overhead is applied at the rate of P1.15 per direct labor hour for March.
(j) Shipped and billed Job. No. 204 at a contract price of P97,500.
(k) Job. No. 206 unfinished as of March 31, others are completed.
Required:
(a) Journal entries to record transactions during March.
(b) Job Order Cost Sheet for the completed jobs.
(c) Detailed summary of the schedule of inventories.
(d) The amount of over- or underapplied overhead for March.
(6.) The Greco Globe Garments uses the job order costing system for inventory valuation and
product pricing. The beginning inventory schedule as of December 31, 1991 is as follows (in
thousands of pesos):
Direct materials P200
Supplies 125

The Finished Goods inventory consisted of two jobs: IR 22 and IR 23 with job cost sheets
shown below:
Job No. Item Direct Labor Direct Materials Factory Overhead
IR 22 Calypso P20,000 P40,000 P15,000
IR 23 Vulcan 3,000 14,750 2,250
The Work-In-Process inventory consisted of three jobs with current job cost sheets shown
below:
Job No. Item Direct Labor Direct Materials Factory Overhead
IR 24 Hermes P25,000 P40,250 P18,750
IR 25 Apollo 5,000 20,250 3,750
IR 26 Zeus 55,750 39,437 41,813
The following transactions pertain to 1992 (in P000):
(a) Direct materials purchased on account, terms 5/15, n/30: 500
(b) Supplies purchased in cash: 75
(c) Direct materials requisitioned by the production department: 400
(d) Supplies used in various production departments: 100
(e) Labor directly used in production (25% still unpaid as of the end of 1992): 600
Jobs IR 27 (June) and IR 28 (Ceres) were started during 1992. The breakdown of direct
materials requisitioned by and direct labor used in the production department is as follows
(in P000):
Job No. Direct Labor Direct Materials
IR 24 20 5
IR 25 155 105
IR 26 125 25
IR 27 125 100
IR 28 175 165
Total 600 400
(f) Indirect labor incurred by production: 200
(g) Indirect labor incurred by office: 450
(h) Depreciation, factory and equipment: 50
(i) Miscellaneous factory overhead (utilities, repairs, etc.): 150
(j) Factory overhead applied is based on a rate of P0.75 per direct labor cost
(k) Goods manufactured and transferred to finished goods inventory: IR 24, 25, 27
(l) Goods sold: IR 22, 25, 27 at a 20% gross profit margin.
Required:
(a) Journal entries for the transactions, posted on respective T-accounts.
(b) Ending balances of inventories, DM, WIP, and FG.
(c) Prorated amount on CGS, WIP, and FG inventories based on the weighted percentage of
ending balances of accounts.
(d) Income statement for 1992.

STANDARD COSTING
STANDARD COSTS – are carefully predetermined costs; they are target costs, costs that should
be attained under efficient operations. Standard costs provide a framework for gauging
performance, for building useful budgets, for guiding pricing, for meaningful product costing,
and for bookkeeping economy.
Purpose of Standard Costs:

1. Establishing budgets
2. Controlling costs and measuring inefficiencies
3. Promoting possible cost reduction
4. Simplifying costing procedures and expediting cost reports
5. Assigning costs to materials, work in process and finished goods inventories
6. Forming the basis for establishing bids and contracts and for setting selling prices
BUDGET – refers to quantitative plan of action and an aid to coordination and control. Budgets
basically are forecasted financial statement, formal expressions of managerial plans. They are
targets that encompass all phases of operations – sales, production, distribution and financing.
Types of Budget:
1. Static Budget – fixed or period budgets, considered adequate for control purposes as long as
ensuing activity does not deviate greatly from the activity level assumed in its preparation.
2. Flexible Budget – variable budgets, permits more meaningful comparisons, because of the
level of activity underlying the comparison is the same.
Variance is the difference between the standard costs and the actual costs incurred.
1. Favorable variance (F) is a variance that increases operating income relative to the budgeted
amount. (-)
2. Unfavorable variance (U) is a variance that decreases operating income relative to the
budgeted amount. (+)
Direct Material Variances:

1. Material Price Variance – the difference between actual material price and budgeted material
price multiplied by the actual quantity of input.
2. Material Efficiency (or Usage) Variance – the difference between the actual quantity of input
used and the budgeted quantity of input that should have been used, multiplied by the
budgeted price.
(a) Material Mix Variance – the difference between the actual relative proportion of the
various inputs to produce a quantity of finished output and the budgeted amount.
(b) Material Yield Variance – the difference between the actual quantity of finished output
units from a standard mix of inputs and the budgeted amount.

Direct Labor Variances:
1. Labor Rate Variance – the difference between actual labor rate and budgeted labor rate
multiplied by the actual labor hours.
2. Labor Efficiency (or Usage) Variance – the difference between the actual labor hours used
and the budgeted labor hours that should have been used, multiplied by the budgeted rate.
Factory Overhead Variances:

1. FOH Spending Variance – the difference between actual expenses incurred and the budget
allowance based on actual hours worked.
2. FOH Efficiency Variance – the difference between actual hours worked and the standard
hours that should have been worked, multiplied by the standard overhead rate.
3. FOH Production Volume Variance – indicates the cost of capacity available but not utilized.
Illustrative Problem #1: Illustrative Problem #2:
Given: Given:
Standard material quantity = 4 ft2/unit Standard labor hours = 20 hours/unit
Standard cost of material = Php 0.65/ft2 Standard cost of labor = $ 2.00 per hour
Actual production = 1,000 units Actual production = 1,000 units
Actual material used = 4,300 ft2 Actual labor hours = 20,526 hours
Actual cost of material = Php 0.70/ft2 Actual labor rate = $ 1.90 per hour
Find: Find:
(a) Material Price Variance, and (a) Labor Rate Variance, and
(b) Material Efficiency Variance. (b) Labor Efficiency Variance.

Consider the following data:
Flexible Budget
Department 3
For the month of 19xx
Standard Production 1,000 units @ 4 hours/unit
Direct labor hours 4,000 hours
Variable FOH P 4,800 @ P1.20 / DLH
Fixed FOH P 3,200
Total FOH P 8,000 @ P2.00 / DLH
At the end of the month, the actual OH for Department 3 amounted to P7,384 and
standard hours for work performed total 3,400 hours, while actual hours used were 3,475 hours.
Required: Determine the total overhead variance and prepare a variance analysis of overhead
using (a) two variance method, and (b) three variance method.

The Chicleros Co., Inc. manufacturer of chewing gum, uses a standard cost system.
Standard product and cost specifications for 1,000 lbs of chewing gum are as follows:
Quantity Price Cost
Gumbase 800 lbs P0.25/lb P200
Corn syrup 200 lbs 0.40/lb 80
Sugar 200 lbs 0.10/lb 20
Input 1,200 lbs P300 P0.25/lb
Output 1,000 lbs P300 P0.30/lb
Materials records indicate:
Opening Purchases Ending
Inventory In January Inventory
Gumbase 10,000 lbs 162,000 lbs @ P0.24 15,000 lbs
Corn syrup 12,000 lbs 30,000 lbs @ P0.42 4,000 lbs
Sugar 15,000 lbs 32,000 lbs @ P0.11 11,000 lbs
To convert 1,200 lbs of raw materials into 1,000 lbs of finished product requires 20 hours
at P3/hour, or P0.6/lb. Actual direct labor hours and cost for January are 3,800 hours at
P11,552.
Factory overhead is applied on a direct labor hour basis at a rate of P5/hour (P3 fixed,
P2 variable), or P0.10/lb. Normal overhead is P20,000 with 4,000 direct labor hours. Actual
overhead for the month is P22,000. Actual finished production for the month of January is
200,000 lbs.
The standard cost per pound of finished chewing gum is:
Materials P0.30/lb
Labor 0.06/lb
Factory Overhead 0.10/lb
Total P0.46/lb
The materials price variance is assumed to be realized at the time of purchase.
Determine (a) material price, mix, and yield variances; (b) labor rate and efficiency
variances; and (c) factory overhead variance using (c1) two-variance method, and (c2) three-
variance method.

STANDARD COSTING
PROBLEM SET
(1.) Consider the following data regarding the manufacture of a line of tables:
Direct Materials Direct Labor
Actual price per unit of input
(board feet and hours) $14 $9
Standard price per unit of input $12 $10
Standard inputs allowed per
unit of output 5 2
Actual units of input 48,000 22,000
Actual units of output (product) 10,000 10,000
Required:
(a) Compute for the price, efficiency, and flexible-budget variances for direct materials and
direct labor. Use U or F to indicate whether the variances are unfavorable or favorable.
(b) What type of data would the production manager probably watch most closely on a day-to-
day basis?
(2.) Below are the standard material and labor costs for a glotto:
Material 3 pounds of lotto @ $1 per pound P 3.00
Labor 2 hours of gluing labor @ $6 per hour 12.00
Actual results in March were as follows:
Production 1,000 glottos
Materials purchased and used 3,200 pounds for $3,250
Hours of gluing labor worked 1,900 hours
Cost of labor $11,875
Required:
(a) Compute for the price, efficiency, and flexible-budget variances for direct materials and
direct labor. Use U or F to indicate whether the variances are unfavorable or favorable.
(b) What type of data would the production manager probably watch most closely on a day-to-
day basis?
(3.) Consider some data for the Cobb Company, a manufacturer of raincoats:
Units Produced 10,700
Budgeted or standard amount per unit
Direct materials (4 square yards @ $5.00) $20
Direct labor (2 hours @ $8.00) 16
Actual data:
Direct material costs $270,000 Direct labor costs $171,600
Square yards of input
purchased and used 50,000 Hours of input 22,000
Price per square yard $5.40 Labor price per hour $7.80

Required:
(a) Compute for price and efficiency variances for direct materials and price and efficiency
variances for direct labor.
(b) Suppose that the Cobb Company control system were designed to isolate material price
variances upon purchase rather than upon usage of materials. Suppose further that 60,000
square yards of material were purchased during April and that only 50,000 square yards
were issued to production. Compute the purchase-price variance that would be reported by
the control system.
Material Purchase-Price Variance = (Quantity Purchased x Actual Price) –
(Quantity Purchased x Standard Price)
(c) What type of data would the production manager probably watch most on a day-to-day
basis?
(4.) A company’s cost department prepared the following flexible monthly factory overhead
budget:
Direct Labor Hours Budgeted Total FOH
10,400 P 21,600
9,600 20,400
8,800 19,200
8,000 18,000
(normal capacity)
7,200 16,800
The actual factory overhead for the month was PhP 21,120. The company operated at
125% of normal capacity. Allowed or standard hours for actual production was 10,150 hours.
Required:
An analysis of factory overhead by the (a) Two variance method, and (b) Three variance
method.
(5.) The Alpha Manufacturing Company employs a standard cost accounting system. The
standard factory overhead rate was computed based on normal capacity:
Budgeted variable expenses P 12,000
Budgeted fixed expenses 8,000
TOTAL P 20,000
FOH Rate (P 20,000/ 20,000 hours) P 1.00 per DLH
Two labor hours are required to manufacture each finished unit. During the month,
9,000 units were completed. There were no opening or closing work-in-process inventories.
18,400 labor hours were worked and actual factory overhead was P18,200.
Required:
An analysis of FOH using (a) two variance method, and (b) three variance method and
indicating whether each of the variances is favorable or unfavorable.

(6.) The Filipinas Cement Manufacturing Company uses a standard cost system for its
production of cement. Cement is produced by mixing two major raw materials
components, A (lime) and B (clay), with water and by adding a third raw materials
component C, quantitatively insignificant.
Materials standards and cost for the production of 100 tons of output are:
Components Tons Cost Percent of Input Amount
Quantity
Material A 55 P43.00 50% P 2,365
Material B 44 35.00 40% 1,540
Material C 11 25.00 10% 275
Input 110 100% P4,180 @ P38.00/ton
Output 100 P4,180 @ P41.80/ton
The monthly factory overhead budget for a normal capacity level of 16,500 direct labor
hours is as follows:
Variable Overhead P 8,250
Fixed Overhead 12,375
Total P20,625
To convert 110 tons of raw materials into 100 tons of finished cement requires 500 direct
labor hours at P2.50 per direct labor hour or P12.50 per ton. Factory overhead is applied on
a direct labor hour basis.
Actual data for the month of April:
Production of 3,234 tons of finished cement, with costs as follows:
Direct labor 15,800 hours @ P2.65 per hour
Fixed factory overhead P11,075
Variable factory overhead P8,490
Materials Purchased Materials Requisitioned
Quantity Price per Ton Quantity
Material A 2,000 tons P44 1,870 tons
Material B 1,200 tons 37 1,100 tons
Material C 500 tons 24 440 tons
No inventories of raw materials or work-in-process at the beginning of the month of
April existed. The materials price variance is assumed to be realized at the time of purchase.
Required:
(a) materials price, mix, and yield variances,
(b) direct labor variances, and
(c) factory overhead variance using
(c1) two-variance method, and
(c2) three-variance method.

STANDARD COSTING FORMULA SHEET
A. Material/Labor Variances:
Actual Costs Flexible Flexible
Incurred: Budget: Budget:
Standard Input
Allowed for
Actual Input x Actual Output x
Actual Input x Standard Standard
Actual Price/Rate Price/Rate Price/Rate
Price/Rate Variance Efficiency Variance
Flexible Budget Variance
B. Factory Overhead Variances:

Flexible Flexible Budget: Applied:
Budget: Standard Input Standard Input
Allowed for Allowed for
Actual Actual
Actual Costs Actual Input x Output x Output x
Incurred Standard Rate Standard Rate Standard Rate
Spending Variance Efficiency Variance Production Volume

Variance
Flexible Budget Variance Production Volume

Variance
Total Overhead Variance
C. Material/Labor Efficiency (Mix and Yield) Variances

Material Mix Variance = [(Actual Individual Quantity Used x Individual Standard
Price)] - (Actual Total Quantity Used x Weighted Standard
Input Price)
Material Yield Variance = (Actual Total Quantity Used - Standard Input for Actual
Total Output) x Weighted Standard Input Price
Labor Mix Variance = [(Actual Individual Hours Used x Individual Standard
Rate)] - (Actual Total Hours Used x Weighted Standard
Rate)
Labor Yield Variance = (Actual Input Hours - Standard Hours for Actual Output) x
Weighted Standard Rate

ACTIVITY-BASED COSTING (ABC)
SYSTEMS
Activity-based cost management systems track hidden overhead costs to the specific activities
that cause them and thus provide a more reliable product cost.
Four key concepts differentiate activity-based costing from traditional costing systems:
I. Activity accounting. In an activity-based system, the cost of the product is the sum of all
costs required to manufacture and deliver the product. Activity accounting decomposes an
organization into an activity structure that provides a cause-and-effect rationale for how
fundamental objectives and their associated activities create costs and result in outputs.
According to Brimson, an effective activity accounting system uses the following approach:
A. Determine the fundamental activities that must be accomplished to satisfy the firm’s
objectives.
B. Determine the causal relationships that permit outputs (performance) to be
attributed to inputs (resources).
C. Ascertain the output of an activity in terms of a measure of activity volume through
which costs of a business process vary most directly (e.g. number of machine set-ups
required for a complex design).
D. Trace activities to products and determine how much of each activity’s output is
dedicated to them. A cost structure, known as bill of activities, is used to describe
each product’s pattern of activity consumption.
E. Determine critical success factors by which activities of the enterprise can be aligned
with stated strategic objectives. This step indicates how effectively desired
performance is being accomplished through activities undertaken by a firm.
F. Take action, using a continuous improvement philosophy, on the productivity
opportunities identified in Steps A-E. Because activity cost is the ratio of resources
consumed by an activity to the measured output of the activity, a means for
evaluating effectiveness and efficiency (i.e. productivity) is available to managers.
II. Cost drivers. A cost driver is an event that affects the cost/performance of a group of
related activities. Familiar cost drivers include number of machine set-ups, number of
engineering changes notices, and number of purchase orders. Cost drivers reflect the demands
placed on activities at both the activity and product levels. By controlling the cost driver,
unnecessary costs can be eliminated, resulting in improved product cost.
III. Direct traceability. Direct traceability involves attributing costs to those products or
processes that consume resources. Many hidden overhead costs can be effectively traced to
products, thus providing a more accurate product cost.

IV. Non-value-added costs. In manufacturing processes, customers may perceive that certain
activities add no value to the product. Through identification of cost drivers, a firm can
pinpoint these unnecessary costs. Activity-based cost systems identify and place a cost on the
activities performed (value-adding and non-value-adding) so that management can determine
desired changes in resource requirements for each activity. In contrast, traditional cost systems
accumulate costs by budgetary line items and by functions.
These four basic concepts are embodied in activity-based costing systems and lead to more
accurate costing information. In addition to product costing, ABC costs figures can be applied
in making various special decisions, including inventory valuation, budgeting/forecasting,
product line analysis, make/buy decisions, and design to cost.
Examples of Activity-Based Costing
In general terms, an ABC system identifies and then classifies the major activities of a facility’s
production process into four main “base” groups:
• Unit-level activities
• Batch-level activities
• Product-level activities
• Facility-level activities
The ABC approach assumes that not all overhead resources are consumed in proportion to the
number of units produced. ABC introduces these hierarchical levels to ensure that the final
estimate of product cost mirrors the manufacturing process as closely as possible.
Unit-level costs are those costs that can be directly apportioned to volume. These costs may
include such activities as direct labor hour costs, directly attributable material costs, and costs
per machine operating hour.
Batch-level costs are those costs that can be directly apportioned to the particular batch run. For
this type of cost, certain activities are consumed in direct proportion to the number of batch
runs for each product. These batch-level costs may include set-up, ordering, material handling,
and transportation costs.
Product-level costs are those costs that can be directly apportioned to the product, which
assumes that certain activities are consumed to develop or permit production of different
products. These product-level costs may include such activities as research and development
(R&D), parts and material acquisition and inventory costs, technical administration, and
specialized pre-production safety and manufacturing training.
Facility-level costs cause problems in an ABC environment because these costs are associated
with the sustainment of a general manufacturing process. These facility-level costs may include
such activities as travel costs, directors’ fees, and general administration and can include a large
segment of the estimated product cost.

CASE 1
Consider the XYZ Company which makes pagers for the telecommunications industry.
Currently, the company is making two models of pagers with equal annual production volume
of 50,000 each. Ever since its inception, the company has been using a volume-based absorption
(traditional) costing system for product costing. Thus, the company uses direct labor hours as
the allocation base for all its manufacturing overhead costs. The total manufacturing overhead
costs of the company as well as the total direct material and direct labor costs of both products
for the current year are shown in Table 1.
Table 1. Manufacturing Costs for Model A and Model B (Current Year)
Category
Model A
Direct material cost P 2,800,600
Direct labor cost P 350,000
Direct labor hours 35,000
Model B
Direct material cost P 1,500,000
Direct labor cost P 250,000
Direct labor hours 25,000
Total Manufacturing Overhead Costs P 12,000,000
Recently, the company installed an activity-based costing system and subsequently identified
six main activities to be responsible for most of the manufacturing overhead costs. The
overhead costs were distributed to these six activities through activity accounting. Also, six
corresponding cost drivers and their budget consequences for the current year were established.
The activities, their cost drivers, resultant overhead costs, and budgeted rates are shown in
Table 2.
Table 2. Activity-Based Costing Data
Activity Costs (pesos) Cost Driver Budgeted Rate

Production 8,000,000 no. of machine hours 200,000 hours
Engineering 1,000,000 no. of engineering change orders 40,000 orders
(ECO)
Material handling 1,000,000 no. of material moves 60,000 moves
Receiving 800,000 no. of batches 500 batches
Quality assurance 800,000 no. of inspections 20,000 inspections
Packing & shipping 400,000 no. of products 100,000 products
Besides establishing the data in Table 2, the activity-based costing system also measured the
levels of each activity (or cost driver rate) required by two products. These data are shown in
Table 3.

Table 3. Cost Driver Rates for Model A and Model B
Activity Model A Model B

Production 50,000 hours 150,000 hours
Engineering 15,000 hours 25,000 hours
Material handling 20,000 hours 40,000 hours
Receiving 150 batches 350 batches
Quality assurance 6,000 inspections 14,000 inspections
Pack & ship 50,000 products 50,000 products
For post-audit purposes, XYZ Company ran a cost comparison between the two costing
systems. To arrive at product costs for Model A and Model B, the following two sections show
the computations involved in the traditional (volume-based absorption) costing system and the
activity-based costing system, respectively.
COST COMPUTATIONS USING THE TRADITIONAL COSTING METHOD
1. Obtain the overall manufacturing overhead cost rate:

Cost Rate = Total Overhead Costs / Total Direct Labor Hours
= 12,000,000 / 60,000 hours
= P200 per direct labor hour
2. Compute total cost per unit for each model as shown in Table 4.
Table 4. Product Costing Using Traditional Costing
(in pesos) Model A Model B

Direct material cost P 2,800,600 P 1,500,000
Direct labor cost 350,000 250,000
Allocated overhead 7,000,000 5,000,000
(35,000 hours x P200/hr) (25,000 hours x P200/hr)
Total costs P 10,150,600 P 6,750,000
Cost per unit P 203 P 135
(based on 50,000 units)
COST COMPUTATIONS USING ACTIVITY-BASED COSTING
1. Establish an applied activity rate of the six activities:

Applied activity rate = Activity Cost in Table 2 / Budgeted Cost Driver Rate in Table 2
2. Determine the activity cost to be traced to each pager model:

Cost traced to each pager model = Cost Driver Rate (from Table 3) x
Applied Activity Rate (from Step 1)
3. Compute the total cost per unit for each model as shown in Table 5.

Table 5. Product Costing Using ABC
Activity Applied Activity Model A Model B

Rate (pesos) (pesos)
Production P40/machine hour  2,000,000 ⧫ 6,000,000
Engineering P25/ECO 375,000 625,000
Material handling P16.67/move 333,400 666,600
Receiving P1,600/batch 240,000 560,000
Quality assurance P40/inspection 240,000 560,000
Pack & ship P4/product 200,000 200,000
Total overhead costs Total P12,000,000 3,388,400 8,611,600
Direct material cost 2,800,600 1,500,000
Direct labor cost 350,000 250,000
Total costs 6,539,000 10,361,000
Cost per unit 130.78 207.23
 P40/machine hour = P8,000,000 / 200,000 machine hours

⧫ P2,000,000 = P40/machine hour x 50,000 hours
SUMMARY
In summary, the two costing systems produced different cost estimates, as summarized in Table
6. Using volume-based absorption (traditional) costing, Model A costs more to make than
Model B. However, based on activity-based costing, Model A is less expensive to make than
Model B. Traditional costing bases its cost estimates on the assumption that Model A is
responsible for more overhead costs than Model B, using direct labor hours as an allocation
base. However, because of differences in the number of transactions that affect indirect
(overhead) costs, the reality is that Model B actual incurs more overhead costs than Model A.
Consequently, this example demonstrates how a traditional costing method generates distorted
product costs that do not accurately reflect the actual amount of overhead costs incurred by the
product. Companies making decisions based on distorted costs may unknowingly price some
of their products out of the market while selling others at a loss.
Table 6. Product Cost Comparison (Traditional vs. ABC)
Model A Model B
Traditional costing P203.00 P135.00
Activity-based costing P130.78 P207.23

CASE 2
Exhibit A shows the basic business scenario. It gives the detailed production budgets, volumes,
and costs. The bottom half of the page shows the ABC “cost driver” calculations and the
traditional volume-based absorption costing (VBC) overhead allocation based on direct labor
hour.
Exhibit A. Business Scenario for a Small Firm
Production Data for the Year

Baseball Glove Bat Pitching Totals
Machine
Budget units of 20,000 10,000 5,000 200 35,200
production
Materials cost per unit P0.45 P5.00 P0.75 P2,000 N/a
Direct labor hours per 0.05 2.00 0.10 50 N/a
unit
Direct labor cost per hour P5.00 P5.00 P5.00 P5.00 P5.00
Machine hours per unit 0.1 0.1 0.2 100.0 24,000
Moves required per unit 3 4 1 250 N/a
Production orders (total 500 25 100 100 725
budgeted)
Production set-ups (total 1,000 100 100 100 1,300
budgeted)
Number of shipments 400 250 25 100 775
Activity Conversion Costs

Cost- Driver
Cost Driver Costs Total Units Rate
Material handling No. of moves P50,000 155,000 ?
Production planning No. of prod. Orders 40,000 725 ?
dept.
Set-up indirect labor No. of set-ups 25,000 1,300 ?
Depreciation on Machine hours 725,000 24,000 ?
machinery
Quality & finishing Direct labor hours 150,000 31,500 ?
Shipping department No. of shipments 100,000 775 ?
Total indirect costs P1,090,000
Indirect costs per direct labor hour ? (Traditional Volume-
Based Costing)
Note that the model shows a capital intensive business. Depreciation represents about 67% of
total indirect costs.

The model has only four products. The products are very different in terms of production and
market. The pitching machine requires more machine time, whereas the other products use
hardly any. Direct labor is an insignificant factor for the ball and bat but very significant for the
glove.
Requirement:
1. Compute the total cost per unit of each product using the VBC Method.
2. Compute the total cost per unit of each product using the ABC Method.
3. If the selling prices of the products are:
Baseball P4.45
Glove P57.00
Bat P10.00
Pitching Machine P5,000.00
Would you consider dropping any of the products considering the unit costs computed with
(a) VBC, and
(b) ABC Method?
Is there any difference in your decision? Explain.

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FINANCIAL ACCOUNTING

PROBLEM SET (Review)

Fixed Assets: Owners’ Equity:

TOTAL ASSETS P1,145,000 TOTAL LIAB. & OE P1,145,000

Transactions for April and May 1993 are listed below:

Required: (1) Journalize all relevant transactions.

IECOSAC Handouts page 1

IECOSAC Handouts page 2

Major Purposes of Accounting Systems:

Management Accounting, Financial Accounting, and Cost Accounting

Elements of Management Control (Role of Accounting Information):

IECOSAC Handouts page 3

Cost Accounting is defined as

Basic Cost Accounting Concepts:

IECOSAC Handouts page 4

IECOSAC Handouts page 5

Cost Accounting Cycle

Input Entered Into Production Completed Sold

Work in Process (WIP)

Finished Goods (FG)

IECOSAC Handouts page 6

IECOSAC Handouts page 7

(a) Cost of tires used for Altis

(a) Annual retainer paid to a video distributor.

IECOSAC Handouts page 8

COST-VOLUME-PROFIT (CVP) ANALYSIS:

THE CVP ANALYSIS IS BASED ON THE FOLLOWING ASSUMPTIONS:

THE BREAKEVEN POINT

2. Contribution Margin Method

IECOSAC Handouts page 9

Note: USP = Unit Selling Price

Illustrative Problem #1:

Given: Total Fixed Costs = $6,000 per month;

Required: Compute for the breakeven point in units and in sales.

IF TARGET OPERATING INCOME IS SPECIFIED:

IF TARGET NET INCOME IS SPECIFIED:

Illustrative Problem #2:

Given: Total Fixed Costs = P100,000 per year;

IECOSAC Handouts page 10

EFFECT OF REVENUE MIX ON INCOME/MULTI-PRODUCT BREAKEVEN ANALYSIS

For a multi-product situation:

Using Weighted Contribution Margin Ratio (WCMR):

Illustrative Problem #3:

NON–LINEAR BREAK-EVEN ANALYSIS:

where p = selling price , D = demand volume , a & b are constants

IECOSAC Handouts page 11

To compute for demand that will maximize total profit :

To compute for the breakeven demand ( 2 values ) :

D’ = -(a - cv )  [(a-cv)2 -4(-b)(-CF)]1/2

where : CF is the fixed cost

IECOSAC Handouts page 12

IECOSAC Handouts page 13

Required: (Note: Consider each question independently)

IECOSAC Handouts page 14

IECOSAC Handouts page 15

Compute the following:

IECOSAC Handouts page 16

IECOSAC Handouts page 17

GENERAL STEPS IN PROBLEM ANALYSIS:

IECOSAC Handouts page 18

A. ACCEPTANCE OF ADDITIONAL ORDERS

B. OPERATIONAL VS. PLANT SHUTDOWN