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Terms and definitions

1. Cost - is a monetary measure of the amount of resources given up or used for some purpose; the monetary value
of goods and services expended to obtain current or future benefits.

2. Cost object – anything of which cost is computed.

E.g. a product, product line, segment, department

3. Cost driver – any variable that affects costs over a period of time.
E.g. production, sales, number of hours

4. Cost pool – a grouping of individual cost items; an account in which a variety of similar costs are accumulated.
E.g. work in process, factory overhead control

5. Activity – an event, action, transaction, task, or unit of work with a specified purpose.

Value-adding activities – activities that are necessary to produce the products

E.g. assembling the different component parts of the product

Non-value adding activities – activities that do not make the product or service more valuable to the customer.
E.g. moving materials and equipment parts from/to the stockroom or a workstation

Costs Classifications
As to type
1. Product costs – costs incurred to manufacture the product
- Product costs of the units sold during the period are recognized as expense.
- Product costs of the unsold units become the costs of inventory and treated as asset.

2. Period costs – the non-manufacturing costs that include selling, administrative, and research and
development costs.
- These costs are expensed in the period of incurrence and do not become part of the cost of inventory.

As to function
1. Manufacturing costs – all the costs incurred in the factory to convert raw materials into finished goods.

Direct manufacturing costs

a. Direct materials – integral part of the finished product and can be conveniently traced into it.
b. Direct labor – includes those labor costs that can be easily traced to particular products.

Indirect manufacturing costs (Manufacturing overhead)

a. Indirect materials – generally small items of materials such as glue and nails. They may become an
integral part of a finished product but are traceable into the product only at great cost or inconvenience.
b. Indirect labor – labor costs incurred to support production, but the workers involved do not directly work
on the product as it passes through work centers.

2. Non-manufacturing overhead – all costs which are not incurred in transforming materials to finished goods.
a. Research and development – incurred in designing and bringing new products to the market.
b. Marketing costs – advertising and promotion expenses.
c. Distribution costs – costs incurred in delivering the products to the customers.
d. Selling costs – salaries and commission of sales staff and other selling expenses.
e. After-sales costs – costs incurred in dealing with customers after sales.
f. General and administrative costs – all the non-manufacturing costs that do not fall under categories (a)
and (e).

As to traceability/assignment to cost object

1. Direct costs – costs that are related to a particular cost object and can be economically and effectively be
traced to that cost object.

2. Indirect costs – costs that are related to a cost object, but cannot be practically, economically, and effectively
be traced to such cost object. Cost assignment is done by allocating the indirect cost to the related cost objects.
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For decision making
1. Relevant costs – future costs that will differ under alternative courses of action.

2. Differential costs – difference in costs between any two alternative courses of action.
a. Incremental cost – increase in cost from one alternative to another
b. Decremental cost – decrease in cost from one alternative to another

3. Opportunity costs – income or benefit given up when one alternative is selected over another.

4. Sunk costs – already incurred and cannot be changed by any decision made now or to be made in the future.

As to behavior
Cost behavior – refers to how a cost will react or respond to changes in the level of business activity.

1. Variable cost – within the relevant range and time period under consideration, the total amount varies directly
to the change in activity level or cost driver, and the per unit amount is constant.

2. Fixed cost – within the relevant range and time period under consideration, the total amount remains
unchanged, and the per unit amount varies inversely or indirectly with the change in the cost driver.
a. Committed fixed costs – long term in nature and cannot be eliminated even for short period of time without
affecting the profitability or long-term goals of the firm.
b. Discretionary or managed fixed costs – usually arise from periodic decisions by management to spend in
certain fixed costs area. These costs may be changed by management from period to period or even during
(within) the period, if circumstances demand such change.

3. Mixed cost – this cost has both a variable and a fixed component.

4. Step cost – when activity changes, a step cost shifts upward or downward by a certain interval or step.

Relevant range – a range of activity that reflects the company’s normal operating range.

Contribution Format Income Statement

Sales xx
Variable costs xx
Contribution margin xx
Fixed costs xx
Operating income xx

Analysis of Mixed Costs

The major objective of cost analysis if to provide internal management with proper and necessary information so that
intelligent decisions can be made regarding planning, coordinating and controlling operations.

Linearity assumption – within the relevant range, there is a strict linear relationship between the cost and cost driver.
Since total cost is linearly related to the activity level or cost driver, the cost function (cost formula) may be expressed
as:

Cost formula: y = a + bx
where: y = Total costs
b = Variable rate per unit
a = Total fixed costs
x = Level of activity

Separation of the Fixed and Variable Components of Mixed Costs

1. High-low method
- The fixed and variable elements of a cost are computed from two data points.
- The data points selected from the historical data are the periods of highest and lowest activity. These
periods usually, but not always, have the highest and lowest figures for the cost being analyzed.
- If the periods of highest or lowest activity levels are not the same as those having the highest or lowest
level of cost, the activity level should govern the selection, because activity is presumed to drive the cost.
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- The high and low points method is simple, but it has disadvantage of using only two data points to
determine cost behavior. The result in estimates of fixed and variable costs may be biased.
- The estimates of total cost based on fixed and variable costs computed in high and low method points
often are less accurate.

2. Scattergraph method
- The cost being analyzed is called the dependent variable and is plotted on a vertical line called the y-axis.
The associated activity is called the independent variable and is plotted along a horizontal line called the
x-axis.
- This method is an improvement over the high and low points method because it utilizes all available data,
not just two data points.
- The method makes it possible to inspect the data visually to determine whether or not the cost appears to
be related to the activity and whether or not such a relationship is approximately linear.

3. Least squares regression method

- This method is considered to be the most accurate, since it derives the fixed and variable elements of a
mixed cost by means of statistical analysis.
- This method determined mathematically a line of best fit, or linear regression line, through a set of points.
The regression line minimizes the sum of the squares of the deviations of each actual plotted point from
the point directly above or below it on the regression line.

Problem 1: Cost Behavior Analysis

The data presented below are taken from B Company’s record for the preceding year.
B Company
Electricity Cost and Labor Hour Data
Month Electricity Cost Direct Labor Hours
January P 640 34,000
February 620 30,000
March 620 34,000
April 590 39,000
May 500 42,000
June 530 32,000
July 500 26,000
August 500 26,000
September 530 31,000
October 550 35,000
November 580 43,000
December 680 48,000
Total P 6,840 420,000
Monthly Average P570 35,000

Requirements: Compute the variable and fixed elements of the using

1. High-Low Method
2. Scattergraph Method
3. Least Square Method

Solutions:
1. High-Low Method
a. Determine the highest and lowest activity level
Cost Activity Level
High P 680 48,000 hours
Low 500 26,000 hours
Difference 180 22,000 hours

b. Compute the variable rate per unit (b)

Difference between highest and lowest costs
Variable rate per unit (b) =
Difference between highest and lowest activity levels

180
Variable rate per unit (b) =
22,000
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Variable rate per unit (b) = P 0.00818

c. Determine the amount of fixed costs

Highest Activity Level Lowest Activity Level
Total Cost (y) 680 Total Cost (y) 500
Total variable costs Total variable costs
(0.00818x48,000) 393 (0.00818x26,000) 213
Fixed Costs 287 287

2. Scattergraph method
 The data are plotted in the Cartesian plane
 The x-axis represents the direct labor hours per month
 The y-axis represents the electricity costs per month
 Line B is plotted by visual inspection. This line represents the trend shown by the majority of data
points. Generally, there should be as many data points above as below the line.
 Line A is drawn parallel to the base line from the point at which line B intersects with the y-axis,
which read from the Scattergraph as P440. This line represents the fixed element of all activity
levels within the relevant range.

Dec
Jan
Feb Apr
Line B Mar
Nov Variable
Oct element
Sept Jun
Jul Aug May
440

Line A

Fixed
element

a. Compute the variable cost per unit.

Average cost per month – Fixed element = Average monthly element of cost
570 – 440 = 130

130
Variable rate per unit (b) =
35,000 (mo. ave.)

Variable rate per unit (b) = P 0.0037

3. Least square method

a. Compute the variable cost per unit using the formula and table provided.
Σ(x1 – x)(y1 – y)
Variable rate per unit (b) =
Σ(x1 – x)2

2,270,000
Variable rate per unit (b) =
512,000,000
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Variable rate per unit (b) = P 0.0044

Electricity Diff. from Direct Diff. from the

cost ave. cost Labor ave. DLH (x1 - x)2 (x1 - x)2 (y1 – y) (y1 - y)2
(y1) P570 Hours 35,000
(y1 - y) (x1) (x1 - x)

January 640 70 34,000 - 1,000 1,000,000 - 70,000 4,900

February 620 50 30,000 - 5,000 25,000,000 - 250,000 2,500
March 620 50 34,000 - 1,000 1,000,000 - 50,000 2,500
April 590 20 39,000 4,000 16,000,000 80,000 400
May 500 - 70 42,000 7,000 49,000,000 - 490,000 4,900
June 530 - 40 32,000 - 3,000 9,000,000 120,000 1,600
July 500 - 70 26,000 - 9,000 81,000,000 630,000 4,900
August 500 - 70 26,000 - 9,000 81,000,000 630,000 4,900
September 530 - 40 31,000 - 4,000 16,000,000 160,000 1,600
October 550 - 20 35,000 - - - 400
November 580 10 43,000 8,000 64,000,000 80,000 100
December 680 110 48,000 13,000 169,000,000 1,430,000 12,100
Total 6,840 - 420,000 - 512,000,000 2,270,000 40,800

b. Compute the fixed element (a)

Y = a + bx
P570 = a + (P0.0044 x 35,000)
P570 = a + P154
a = P416

Multiple Regression Analysis

- This is used when the dependent variable is caused by more than one factor.

Correlation analysis
i. Correlation – measure the co-variation between the dependent and independent variable.
ii. Coefficient of correlation (r) – measure of the extent of the linear relationship between two variables.
When:
r = 0, there is no correlation
r = positive, there is a positive or direct relationship between the dependent (y) and independent (x)
variables.
r = negative, there is a negative or inverse relationship between the variables.

Coefficient of determination (r2)

- It represents the percentage of the total variation in the dependent variable (y) that is explained or
accounted for by the regression equation.
- A very high r2 means that the values in the regression equation explain virtually the entire amount of the
total cost. The variables are highly correlated.

Standard error of the estimate

- The standard deviation about the regression line.
- Estimated values computed using the regression equation may differ from the actual costs. The
differences are called prediction errors or errors of estimate.

Multiple Choice. Write only the letter of your choice.

1. Which of the following statements is true when referring to fixed costs?

a. Fixed costs increase in total throughout the relevant range.
b. Discretionary fixed costs can often be reduced to zero for short periods of time without seriously impairing
the long-run goals of the firm.
c. Committed fixed costs arise from the annual decisions by management.
d. As volume increases, unit fixed cost and total fixed cost will change.
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2. An example of a committed fixed cost for a manufacturing firm is

a. Property taxes on the factory building
b. A development program of the foreman
c. New product research and development
d. Factory clerical salaries with no annual salary or time guarantee

3. Within a relevant range, the amount of variable cost per unit

a. Decreases as production increases c. Remains constant at each production level
b. Differs at each production level d. Increases as production increases

4. Contribution margin means

a. What remains from total sales after deducting fixed expenses
b. What remains from total sales after deducting all variable expenses
c. The sum of cost of goods sold and variable expenses
d. What remains after deducting cost of goods sold to cover fixed and variable expenses

5. Which costs will change with a decrease in volume?

a. Unit fixed cost and total fixed cost c. Unit fixed cost and total variable cost
b. Total fixed cost and total variable cost d. Unit variable cost and unit fixed cost

6. Which of the following costs is not always considered to be expired immediately upon being recognized?
a. Depreciation expense for factory equipment c. Salary of the company president
b. Cost of goods sold d. Salesmen’s commission

7. It refers to anything for which cost is computed

a. Cost driver c. Cost variance
b. Cost control d. Cost object

8. It is an event, action, transaction task or unit of work that consumes resources and with a specified purpose.
a. Cost object c. Activity
b. Cost driver d. Direct labor

9. Which of the following is not a product cost?

a. Wages paid to truck loaders who load finished goods onto outgoing delivery trucks.
b. Wages paid to workers for idle time due to machine breakdown in a production department.
c. Wages paid to workers for rework on defective products.
d. Fringe benefits paid to factory workers.

10. A fixed cost that would be considered a direct cost is

a. Salary of the controller when the cost object is a unit or product.
b. Salary of sales manager when the cost object is the sales department.
c. The rental cost of the finished goods warehouse when the cost object is the accounting department.
d. Fees of the board of directors when the cost object is the production department.

Use the following information to answer numbers 11-14.

Management accountants are frequently asked to analyze various decision situations including the following.
(1) Alternative uses of plant space, to be considered in a make or buy decision.
(2) Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.
(3) Research and development costs incurred in prior months, to be considered in a product-introduction decision.
(4) The cost of a special device that is necessary if a special order is accepted.
(5) The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal
decision.

11. The costs described in situations 1 and 4 above are

a. Relevant costs c. Sunk costs
b. Prime costs d. Discretionary costs

12. The cost described in situations 2, 3, and 5 above are

a. Discretionary costs c. Sunk costs
b. Relevant costs d. Prime costs
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13. Simple regression analysis provides the means to evaluate a line of regression which is fitted to a plot of data and
represents
a. The variability of expense with pesos of production.
b. The way costs change in respect to the dependent variable.
c. The way costs change in respect to the independent variable.
d. The way costs change in respect to both independent and dependent variables.

14. The slope of the regression is

a. The level of fixed costs
b. The level of total variable costs
c. The rate at which the independent variable varies
d. The rate at which the dependent variable varies

15. Distribution costs are

a. Manufacturing costs incurred to produce units of output.
b. The sum of direct labor costs and all factory overhead costs.
c. Costs associated with marketing, shipping, warehousing, and billing activities.
d. All costs associated with manufacturing other than direct labor costs and raw material costs.

16. Which of the following is a direct product cost?

a. Salesman’s commission
b. Wood in a furniture factory
c. Depreciation of factory equipment
d. Salary of the foreman in the assembly division of an automobile company

17. For decision making purposes, relevant costs are

a. Variable past costs
b. All fixed and variable costs
c. Costs incurred within the relevant range of production
d. Anticipated future costs that will differ among various alternatives

18. Which of the following costs would be considered relevant in short-term decision making?
a. Variable costs
b. Incremental fixed costs
c. Production costs of goods available for sale
d. Acquisition cost of idle asset to be used in a proposed project

19. Which of the following statements about cost behavior is correct?

a. Within the relevant range, total variable costs may vary directly with activity, while total fixed costs remain
unchanged for a given period despite fluctuations in activity.
b. Within the relevant range, total variable costs may vary inversely with activity, while total fixed costs remain
unchanged for a given period despite fluctuations in activity.
c. Within the relevant range, fixed cost per unit varies directly with activity, while variable cost per unit remains
unchanged for a given period despite fluctuations in activity.
d. Within the relevant range, variable cost per unit varies directly with activity, while fixed cost per unit remains
unchanged for a given period despite fluctuations in activity.

20. When production (units) decreases, the average cost per unit of product increases. This increase in the average
cost per unit is due to the
a. Increase in total fixed costs c. Increase in fixed cost per unit
b. Increase in total variable costs d. Increase in variable cost per unit

21. The term factory overhead refers to

a. the sum of direct labor and all factory overhead costs.
b. Manufacturing costs incurred to produce units of output.
c. Costs associated with marketing, shipping, warehousing, and billing activities.
d. All costs associated with manufacturing other than direct labor costs and raw material costs.

22. These costs referred to as capacity costs are

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a. Cost of providing the capability to operate at a particular volume for such activities as manufacturing, sales
and research.
b. Costs that are likely to respond to the amount of attention devoted to them by specified manager.
c. Costs that fluctuate in total response to small changes in the rate of utilization of capacity.
d. Costs that management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customer.

23. A sunk cost is

a. a cost that may be saved by not adopting an alternative
b. a cost that cannot be avoided because it has already been incurred
c. a cost that may be shifted to the future with little or no effect on current operations
d. a cost that does not entail any peso outlay but is relevant to the decision-making process

24. Those costs referred to as controllable costs are

a. Costs which fluctuate in total in response to small changes in the rate of utilization of capacity.
b. Costs which are likely to respond to the amount of attention devoted to them by a specified manager.
c. Costs which management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customers.
d. Cost which are governed mainly by past decisions that established the present levels of operating and
organizational capacity and which only change slowly in response to small changes in capacity.

25. The term discretionary costs refer to those

a. Amortization of costs which were capitalized in previous periods.
b. Costs which are likely to respond to the amount of attention devoted to them by a specified manager.
c. Costs which management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customers.
d. Costs which are governed mainly by past decisions that established the present levels of operating and
organizational capacity and which only change slowly in response to small changes in capacity.

26. This type of fixed costs usually arises from periodic decisions by management to spend in certain fixed costs area.
They may be changed by management from period to period or even within the period if circumstances demand
such change.
a. Period costs c. Committed fixed costs
b. Variable costs d. Discretionary fixed costs

27. In cost behavior analysis, the linearity assumption states that

a. Within the relevant range, there is a strict linear relationship between the cost and cost driver.
b. Within the relevant range, there is a strict relationship between cost and the cost driver.
c. Within the relevant range, all costs are fixed and may be drawn graphically as straight lines.
d. In all cases, there is a strict linear relationship between the cost and cost driver.

28. The fixed and variable components of mixed costs may be separated by using any of the following methods, except
a. High-low method c. Weighted-average method
b. Least squares method d. Scattergraph method

29. Correlation is a term frequently used in conjunction with regression analysis and is measured by the value of the
coefficient of correlation (r). The value of r
a. Always positive
b. Always negative
c. Ranges in size from negative one to zero
d. A measure of the relative relationship between two variables

30. A scatter diagram is a tool which may be used to demonstrate correlations. The scatter diagram’s objective is to
a. Indicate the critical path
b. Display a population of items for analysis
c. Show frequency distribution in graphic form
d. Divide a universe of data into homogenous groups
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Use the following information to answers numbers 31 – 34.
Selected data concerning the past fiscal year’s operations of TL Manufacturing Company are presented below:
Inventories
Beginning Ending
Raw materials P 75 P 85
Work in process 80 30
Finished goods 90 110
Other data
Raw materials used 326
Total manufacturing costs charged to production during the
year (includes raw materials, direct labor, and factory
overhead applied at a rate of 60% of direct labor cost) 686
Cost of goods available for sale 826
Selling and general expenses 25

31. The cost of raw materials purchased during the year amounted to
a. P316 c. P360
b. P336 d. P411

RM used 326
Add: RM, end. 85
RM available for use 411
Less: RM, beg 75
Purchases 336

32. Direct labor costs charged to production during the year amounted to
a. P135 c. P225
b. P216 d. P360

Total manufacturing costs 686

Less: RM used 326
Conversion costs 360
÷ %Factory overhead 1.6
Direct labor costs 225

33. The cost of goods manufactured during the year was

a. P736 c. P716
b. P363 d. P766

Total manufacturing costs 686

Add: WIP, beg. 80
Total costs placed in process 766
Less: WIP, end 30
Cost of goods manufactured 736

34. The cost of goods sold during the year was

a. P691 c. P736
b. P716 d. P801

Cost of goods manufactured 736

Add: FG, beg 90
Goods available for sale 826
Less: FG, end 110
Cost of goods sold 716

Use the following information to answers numbers 35 – 39.

As part of a cost study, the cost accountant of SH Corporation has recorded the cost of operations at seven different
levels of materials usage. The records show the following:
Kilos of Materials Costs of Operation
80 P 800
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60 480
20 320

Kilos of Materials Costs of Operation

120 1,200
140 1,280
40 480
100 1,040

Sum of the kilos (Σx) 560

Sum of the costs (Σy) P5,600
Sum of the kilos multiplied by the costs (Σxy) P545,600
Sum of the kilos squared (Σx2) 56,000

35. Using the high-low points method, the variable cost of operations per kilo of materials used is
a. P8.00 c. P10.00
b. P9.14 d. P16.00

Cost Activity
Highest activity level 1,280 140
Lowest activity level 320 20
Difference 960 120

Variable rate (b) = 960 ÷ 120

= 8

36. Using the same high-low points method, the fixed cost of operations is
a. P103 c. P206
b. P160 d. P320

y = a + bx
Using highest activity level
1280 = a + 140(8)
a= 1,280 - 1,120
a= 160

37. Using the least squares method, the average rate of variability per kilo of materials used is
a. P0.11 c. P8.71
b. P8.00 d. P10.00

Σx Σy Σxy Σx2
80 800 64,000 6,400
60 480 28,800 3,600
20 320 6,400 400
120 1,200 144,000 14,400
140 1,280 179,200 19,600
40 480 19,200 1,600
100 1,040 104,000 10,000
Total 560 5,600 545,600 56,000
Average 80
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Equation 1: Σ y = na + bΣx
5,600 = 7a + 560b

Equation 2: Σx y = aΣx + bΣx 2

545,600 = 560a + 5,600b

Multiply Equation 1 with

80 (5,600 = 7a + 560b)
ave. activity level
Equation 3: 448,000 = 560a + 44,800

Deduct Eq. 2 from Eq.3 545,600 = 560a + 5,600b

to compute b 448,000 = 560a + 44,800
97,600 = 0 + 11,200b
11200 = 11,200

b = 8.71

38. Using the least squares method, the fixed portion of the cost is
a. P103 c. P206
b. P160 d. P320

Equation 1: Σ y = na + bΣx
5,600 = 7a + 560b

Substitute the value of b to the equation

5,600 = 7a + 560 (8.71)
7a = 5600 - 4,877.60
7a= 722
7= 7

a = 103.2

39. The projected cost of operations for 90 kilos of materials is

a. P880.00 regardless of the method used c. P886.90 if the method of least squares is used
b. P880.00 if the method of least squares is used d. P886.90 if the high-low points method is used

Cost formula for high-low method y = 160 + 8x

y = 160 + 8 (90)
y = 880

Cost formula for least-square method y = 103+ 8.71x

y = 103 + 8.71 (90)
y = 886.90

Use the following information to answers numbers 40 and 41

Month Meals served Utilities costs (P)
December 55 401.00
January 30 360.00
February 25 347.50
March 40 385.50
April 60 414.00

40. Using the method of least squares, the variable rate for utilities costs per meal served is
a. P1.80 c. P2.00
b. P1.90 d. P3.00
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Σx Σy Σxy Σx 2
55 401.00 22,055.00 3,025
30 360.00 10,800.00 900
25 347.50 8,687.50 625
40 385.50 15,420.00 1,600
60 414.00 24,840.00 3,600
Total 210 1,908 81,802.50 9,750
Average 42

Equation 1: Σ y = na + bΣx
1,908= 5a + 210b

Equation 2: Σx y = aΣx + bΣx 2

81,802.50 = 210a + 9,750b

Multiply Equation 1 with

42 (1,908= 5a + 210b)
ave. activity level
Equation 3: 80,136 = 210a + 8,820b

Deduct Eq. 2 from Eq.3 81,802.50 = 210a + 9,750b

to compute b 80,136 = 210a + 8,820b
1666.50 = 0 + 930b
930 = 930

b = 1.79 = 1.80

41. Using the method of least squares, the fixed costs is

a. P303 c. P300
b. P306 d. P331

Substitute the value of b to the equation

1,908 = 5a + 210 (1.80)
5a = 1,908 - 378
5a= 1,530
5= 5

a = 306

42. JF Imports determines that its shipping expense is P18,000 for 16,000 pounds shipped and P22,500 for 22,000
pounds shipped. If the company shipped 18,000 pounds during the current month, projected shipping cost should
be
a. P24,000 c. P19,500
b. P20,400 d. P18,500

Cost Activity
Highest activity level 22,500 22,000
Lowest activity level 18,000 16,000
Difference 4,500 6000

Variable rate (b) = 4,500 ÷ 6000

= 0.75

y = a + bx
Using highest activity level
22500 = a + 22,000 (0.75)
a= 22,500 - 16,500
a= 6000

y = 6,000 + 18,000 (0.75)

= 19,500
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43. The variable cost of goods sold in the MR Company totaled P325,000. Fixed selling and administrative expenses
totaled P115,000 and variable selling and administrative expenses were P210,000. If MR’s contribution margin
totaled P590,000, then sales must have been
a. P1,125,000 c. P915,000
b. P1,030,000 d. P650,000

Sales 1,125,000
Variable manufacturing cost 325,000
Variable selling and administrative cost 210,000
Contribution margin 590,000

Use the following information to answers numbers 44 and 45

CS Inc. has accumulated the following data for the cost of maintenance on its machinery for the last four months of
20x1:
Month Maintenance costs (P) Machine hours
September 26,020 21,000
October 24,600 18,500
November 22,300 15,000
December 25,100 19,000

44. Assuming CS Inc. uses the high-low method of analysis, the fixed cost maintenance would be
a. P5,020 c. P13,000
b. P12,320 d. P14,500

Cost Activity
Highest activity level 26,020 21,000
Lowest activity level 22,300 15,000
Difference 3,720 6000

Variable rate (b) = 3,720 ÷ 6000

= 0.62

y = a + bx
Using highest activity level
26,020 = a + 21,000 (0.62)
a= 26,020- 13,020
a= 13,000

45. If machine hours are budgeted to be 20,000 hours during January 20x2, the budgeted total maintenance cost would
be
a. P25,560 c. P24,720
b. P25,400 d. P23,700

Cost formula for high-low method y = 13,000 + 0.62x

y = 13,000 + 20,000 (0.62)
y = 25,400

Use the following information to answers numbers 46 and 51

MO Corporation’s Research and Development Department was able to develop a new product – a flashlight powered
by solar energy. After reviewing the data prepared by the company’s controller, MO’s management is confident that
the new product will contribute profit to the company.

The data prepared by the controller are as follows:

Suggested selling price P 200
Costs: Materials P 60
Parts fabrication (P10 per hour) 40
Assembly (P6 per hour) 18
Variable overhead (P4 per hour) 28
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Fixed overhead (P3 per hour) 21
Total cost P 167
The total research and development costs incurred to develop the new product amounted to P200,000. The company
is planning to spend half of this amount for promotion and advertising.

The company’s fixed overhead includes rent, equipment, depreciation, and salaries of factory supervisors.

46. For MO’s new flashlight, total prime costs amounted to

a. P107 c. P146
b. P118 d. P167

Materials 60
Parts fabrication 40
Assembly 18
Total prime costs 118

47. The difference between the flashlight’s suggested selling price of P200 and the total cost of P167 represents each
flashlight’s
a. Net profit c. Operating income
b. Gross profit d. Contribution margin

48. The total overhead cost of P49 per unit is a

a. Fixed cost c. Prime cost
b. Mixed cost d. Variable cost

49. The total research and development costs of P200,000 incurred to develop the new product is a(n)
a. Sunk cost c. Avoidable cost
b. Relevant cost d. Postponable cost

50. The costs included in MO’s fixed overhead are

a. Prime costs c. Discretionary costs
b. Variable costs d. Committed costs

51. The planned spending on promotion and advertising for the flashlight is a
a. Discretionary cost c. Past cost
b. Variable cost d. Sunk cost

Use the following information to answers numbers 52 and 55

The School Store Inc. is the major supplier of books for the four area colleges. A statement of profit or loss for the
first quarter of 20x1 is presented below:
School Store Incorporated
Statement of Profit or Loss
For the Quarter Ended March 31, 20x1
Sales P 800,000
Cost of Goods Sold 560,000
Gross Margin 240,000
Less: Operating expenses
Selling P 105,000
Administrative 105,000 210,000
Net income P 30,000

On average, a book sells for P40. Variable selling expenses are P3 per book; the remaining selling expenses are fixed.
The variable administrative expenses are 5% of sales; the remainder is fixed.

52. The contribution margin for the School Store for the first quarter of 20x1 is
a. P140,000 c. P660,000
b. P180,000 d. P700,000
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SESSION #2
Sales 800,000
Variable manufacturing cost (560,000/20,000 = 28 per unit) 560,000
Variable selling and administrative cost (a) 100,000
Contribution margin 140,000

Variable selling: (P800,000 /P40) 20,000 units x 3 60,000

Variable admin.: P800,000 x 5% 40,000
Total 100,000

53. The net income computed using the contribution margin approach for the first quarter of 20x1 is
a. P180,000 c. P30,000
b. P140,000 d. P0

54. The cost formula for operating expenses with “x” equal to the number of books sold is
a. Y = P110,000 + P33x c. Y = P105,000 + P5x
b. Y = P110,000 + P5x d. Y = P105,000 + P3x

Variable selling: (P800,000 /P40) 20,000 units x 3 60,000

Variable admin.: P800,000 x 5% 40,000
Total 100,000
Divided by total units: P800,000÷ 40 20,000
Variable selling and admin per unit 5

Fixed selling: 105,000 - 60,000 45,000

Fixed admin: 105,000 - 40,000 65,000
Total fixed costs 110,000

Cost formula: y = 110,000 + 5x

55. If 25,000 books are sold during the second quarter of 20x1, the company’s contribution margin would equal
a. P875,000 c. P175,000
b. P300,000 d. P65,000

Sales (25,000 x 40) 1,000,000

Var. manufactuirng cost (25,000 x 28) 700,000
Variable selling and administrative cost (a) 125,000
Contribution margin 175,000

Variable selling: (P800,000 /P40) 25,000 units x 3 75,000

Variable admin.: P1,000,000 x 5% 50,000
Total 125,000