B259 UROT, DESY JOY C.

MANAGERIAL ACCOUNTING MODULE 2 ACTIVITY

SELF TEST QUESTIONS 3.1 (ENABLING ACTIVITY)

I. CLASSIFICATION OF COST: (BEHAVIOR)

Classify the following costs as either: (V) variable, (F) fixed or (M) mixed cost.

V F M
1. Fuel and lubricants for factory machinery
2. Light and heat for the factory.
3. Factory superintendent’s salary.
4. Sales manager’s salary.
5. Inspection salaries.
6. Salaries of stockroom personnel.
7. Salaries of finished goods warehouse personnel.
8. Payroll taxes on factory workers’ salaries.
9. Night watchmen’s salaries for factory building.
10. Telephone for factory.
11. Factory computer maintenance.
12. Rental of delivery truck of a yearly charge of P3,000 plus
10 per cents per kilometer.
13. Power.
14. Small tools-hammers, screwdrivers, etc.
15. Bookkeeping salaries to maintain customers ‘accounts
receivable.
16. Repair and maintenance of factory machinery.
17. Photocopying machine rental. The monthly charge is P300
per month plus 3 cents per copy made.
18. Salaries of management accountants.
19. Administration computer maintenance
20. Audio system for a Passenger Aircraft-Cebu Pacific
II. BEP: (SINGLE PRODUCT)

In planning its operations for 2021 based on sales forecast of P6 million at P1,000 per unit,

BSBA Corporation prepared the following estimated data:

COST

VARIABLE FIXED
Direct materials P1,600,000
Direct labor 1,400,000
Factory overhead 600,000 900,000
Marketing costs 240,000 360,000
Administrative costs 60,000 140,000
Total P3,900,000 P1,400,000

Required: Compute the following:

a. Variable cost per unit

b. Variable cost ratio/percentage

c. Contribution margin ratio/percentage

d. Contribution margin per unit

e. Contribution margin ratio/percentage

f. Breakeven point using BEP Chart

g. Breakeven point in Pesos

h. Breakeven Point in Units

i. Margin of Safety in pesos

g. Margin of Safety Ratio/Percentage

IV. BEP: (MULTIPLE PRODUCTS)

A) BSBA-FM, Inc. manufactures and sells products A, B, and C with unit selling prices of P20,
P40, and P40, and with unit variable costs of P12, P18, and P26, respectively. They are sold in
the ratio of 4:1:3. Total fixed cost amounted to P960,000. Compute the breakeven point in pesos
and in units.

B) BSBA-FM-SATELLITE, Inc. manufactures and sells products C, D, E, F, and G with unit

contribution margin of P 10, P 20, P30, P40, and P50, respectively. Total fixed costs amounted to
P1,750,000 for the whole year. Sales mix are 5:4:3: 2:1, respectively. Compute the breakeven
point in units and in pesos. Prove your answer assuming unit selling prices are P20, P45, P50,
P65, and P90, respectively.

C) BSBA-MAIN, Inc. manufactures and sells products X, Y, and Z. Other information is given
below:

MAIN TASK QUESTIONS

QUESTION 1

What are the 3 classification of costs according to behavior? Explain each using your own
understanding.

Answer: Cost behaviors break down into three classifications: variable, fixed and mixed costs.
Though you can use these classifications to analyze cost behaviors internally for any business,
they work particularly well when you operate a business that manufactures products for resale.

 Variable costs change as the number of products you produce changes. Imagine your
small business crochets hats. If you need to make more hat, you must purchase more
yarn. In this instance, yarn represents a variable cost because its final total cost
fluctuates depending on many hats you produce.
  Fixed costs include things such as rent, insurance, salaries, and property taxes, which
stay constant in your relative range. In some instances, though, expanding your
inventory can drive up these costs.
 Mixed costs refer to expenses that include both fixed and variable costs. Typically,
mixed costs arise when your small business incurs a fixed flat charge plus an additional
activity based fee. Say your crochet company has a contract with a shipping company to
transport its hats.

QUESTION 2

Write a paragraph in each question below:

a) Why “inspection cost” is treated as direct cost?

b) “Pension and health benefits” are classified as product costs and not period costs.

c) “Benefits” are classified as manufacturing overhead costs rather than direct labor.

QUESTION 3

What is CVP analysis? Describe the relationship between the cost-volume and profit.

Answer: Cost-volume-profit (CVP) analysis is a method of cost accounting that looks at the
impact that varying levels of costs and volume have on operating profit. CVP is a management
accounting tool that expresses relationship among total sales, total cost and profit. Cost
Volume-Profit relationship is one of the important techniques of cost and management
accounting. And it is a powerful tool which furnishes the complete representation of the profit
structure and helps in planning of profits.

What are the advantages and disadvantages of using CVP analysis as a managerial accounting
technique?

The main advantages of CVP analysis are the following:

 The main advantage of CVP analysis is that it aids in decision-making. It helps firms
determine how many units of their product they should be producing, how they should
manage scarce resources to maximize profit and whether they should manufacture a
product themselves or buy them from another company.
 It allows managers to control costs to achieve a target level of profit.
  It allows managers to determine the ideal selling price they should set to achieve a
target level of profit.

QUESTION 4

Explain:

a) Contribution Margin (CM) Ratio

The contribution margin ratio is the difference between a company's sales and variable
expenses, expressed as a percentage. This ratio indicates the percentage of each sales
dollar/peso that is available to cover a company's fixed expenses and profit.

b) Variable cost ratio

Variable costs differ because they can increase and decrease as you make more or less of
your product. The more units you sell, the more money you’ll make, but some of this money
will need to pay for the production of more units. So, you’ll need to produce more units to
actually turn a profit.
c) Break-even point (in pesos or units)

When a business reaches the break-even point, the total sales equal the total expenses.
That means you bring in the same amount of money that you need to run your business. At the
break-even point, your business does not profit or generate a loss. By analyzing your break-
even point numbers, you can figure out whether you need to increase your sales prices, cut
expenses, or both to surpass the break-even point and turn a profit.

d) Margin of safety ratio

From an investment standpoint, margin of safety is a purchase made when the market price
is well below its intrinsic value, or its true worth. The difference between the purchase price
and the intrinsic value, is known as the margin of safety. Knowing the difference helps an
investor to make a purchase with the least amount of risk.
e) What causes changes in net income

There are many factors that affect in net income and these factors effects could make it
increase or decrease accordingly. The primary elements that affect net income are retained
earnings and dividend payments. If the entity makes a lot of profit and subsequently net
income, then the earnings will be increased eventually.

f) The Degree of operating leverage

 g) Explain the basic cost-volume-profit assumptions and limitations

Assumptions of CVP:

 The selling price is constant. The price of a product or service will not change as volume
changes.
 Costs are linear and can be accurately divided into variable and fixed elements. The
variable element is constant per unit, and the fixed element is constant in total over the
entire relevant range.
 In multiproduct companies, the sales mix is constant.
 In manufacturing companies, inventories do not change. The number of units produced
equals the number of units sold.

While these assumptions may be violated in practice, the results of CVP analysis are often
“good enough” to be quite useful. Perhaps the greatest danger lies in relying on simple CVP
analysis when a manager is contemplating a large change in volume that lies outside of the
relevant range.

Limitations of CVP:

Despite being considered as an important tool for decision making and planning the cost-
volume-profit analysis, the technique has the following limitations:

 Problems in identifying fixed and variable costs.

 Fixed costs not always fixed.
 Proportionate relation between variable cost and volume of output not always effective.
 Unit selling price not always constant.
 Not suitable for a multiproduct firm.
 Ignoring the influence of other factors on cost and profit.
 Presence of inventory.

QUESTION 5

Assume that you are preparing a seminar on cost-volume-profit analysis for non-accountants.
Several potential attendees have approached you and have asked why they should be
interested in learning about your topic. The individuals include:

a. A factory worker who serves as her company labor union representative in charge of

contract negotiations.

b. A purchasing agent in charge of ordering raw materials for a large manufacturing

company.

c. A vice president of sales for a large automobile company.

d. A dean of BSU Graduate program.

Instructions: What unique reasons would you give each of these individuals to motivate them
to come to your seminar?

QUESTION 6

Why do French fries from Mcdonald’s taste different than those from Burger King? Somebody
explains that much of the taste difference has to do with the design of the deep fryer. A raw
material for a new job enter the manufacturing process, production machines communicate
with central computer via an Ethernet cable to automatically download a set of specifications
tailored specifically, for the customer order being filled. When a job is finished, the computer
downloads a new set of instructions for the next order in the queue. The technology that
enables companies to efficiently and effectively change design specifications without delay is
called machine-to- machine communications (M2M) as manufacturing companies look to
reduce overhead costs, M2M is certain to play a growing role in many industries.

Instructions: Discuss how M2M can help a manufacturing company reduce manufacturing
overhead and increase profitability.

REFLECT UPON (REFLECTION ACTIVITY)

1. What are the difficulties that you encountered in studying the CVP/BEP analysis?

2. How can you apply CVP/BEP analysis in your own family business/livelihood, i.e.
salaries, farm, retail store, furniture business, buy and sell, etc.?