UNIVERSITY OF BOHOL

PROFESSIONAL STUDIES

ANSWERS TO QUESTIONS REGARDING

THE REPORT IN MANAGERIAL ACCOUNTING
MAY 11, 2015

Report Submitted To:

DR. AMMON DENIS R. TIROL, DM, CPA
As Partial Fulfillment of the Requirements in
BA200: Managerial Accounting

Submitted by:
FRANCIS PAUL J. BUTAL
MSBA
FROM ROQUE A. VILLAMOR

1. What are the methods for separating mixed costs into fixed and variable?

I know of three methods for separating mixed costs into their fixed and variable cost
components:

a. Prepare a scattergraph by plotting points onto a graph.

b. High-low method.
c. Regression analysis.

It is wise to prepare the scattergraph even if you use the high-low method or regression
analysis. The benefit of the scattergraph is that it allows you to see if some of the plotted
points are simply out of line. These points are referred to as outliers and will need to be
reviewed and possibly adjusted or eliminated. In other words, you don't want incorrect
data to distort your calculations under any of the three methods.

Let's assume that a company uses only one type of equipment and it wants to know how
much of the monthly electricity bill is a constant amount and how much the electricity bill
will increase when its equipment runs for an additional hour. The scattergraph's vertical or
y-axis will indicate the dollars of total monthly electricity cost. Its horizontal or x-axis will
indicate the number of equipment hours. For each monthly electricity bill, a point will be
entered on the graph at the intersection of the dollar amount of the total electricity bill and
the equipment hours occurring between the meter reading dates shown on the electricity
bill. If you plot this information for the most recent 12 months, you may see some type of
pattern, such as a line that rises as the number of equipment hours increase.

If you draw a line through the plotted points and extend the line through the y-axis, the
amount where the line crosses the y-axis is the approximate amount of fixed costs for each
month. The slope of the line indicates the variable cost per equipment hour. The slope or
variable rate is the increase in the total monthly electricity cost divided by the change in
the total number of equipment hours.

The high-low calculation is similar but it uses only two of the plotted points: the highest
point and the lowest point.

Regression analysis uses all of the monthly electricity bill amounts along with their related
number of equipment hours in order to calculate the monthly fixed cost of electricity and
the variable rate for each equipment hour. Software can be used for regression analysis and
it will also provide statistical insights.
If  a scattergraph of data shows no clear pattern, you should not place much confidence in
the calculated amount of  the fixed cost and variable rate regardless of the method used.

2. What is the difference between break-even point and payback period?

Break-point point indicates whether an industry or business s is operating at a loss.

If it goes below the break-even point, then the enterprise is operating at a loss, while
if it is at the break-even point, then the business has neither incurred a loss or has
earned any profit at all. If the business is perpetually below or at the break-even
point, then it is no longer feasible to continue with the business at that price level.

On the other hand, payback period in capital budgeting refers to the period of time

required to recoup or get back the funds expended or used in an investment, or to
reach the break-even point. For example, a 10,000 peso investment which returned
5,000 pesos per year would have a two-year payback period. The time value of
money is not taken into account. Payback period intuitively measures how long
something takes to "pay for itself." All else being equal, shorter payback periods are
preferable to longer payback periods. Payback period is popular due to its ease of
use despite the recognized limitations described below.

The payback period is considered a method of analysis with serious limitations and
qualifications for its use, because it does not account for the time value of
money, risk, financing, or other important considerations, such as the opportunity
cost. Whilst the time value of money can be rectified by applying a weighted average
cost of capital discount, it is generally agreed that this tool for investment decisions
should not be used in isolation. Alternative measures of "return" preferred by
economists are net present value and internal rate of return. An implicit assumption
in the use of payback period is that returns to the investment continue after the
payback period. Payback period does not specify any required comparison to other
investments or even to not making an investment.

3. What are examples of variable costs?

Here are a number of examples of variable costs, all in a production setting:

 Direct materials. The most purely variable cost of all, these are the raw materials that go
into a product.
 Piece rate labor. This is the amount paid to workers for every unit completed (note: direct
labor is frequently not a variable cost, since a minimum number of people are needed to
staff the production area; this makes it a fixed cost).
 Production supplies. Things like machinery oil are consumed based on the amount of
machinery usage, so these costs vary with production volume.
 Billable staff wages. If a company bills out the time of its employees, and those employees
are only paid if they work billable hours, then this is a variable cost. However, if they are
paid salaries (where they are paid no matter how many hours they work), then this is a
fixed cost.
 Commissions. Salespeople are paid a commission only if they sell products or services, so
this is clearly a variable cost.
 Credit card fees. Fees are only charged to a business if it accepts credit card purchases from
customers. Only the credit card fees that are a percentage of sales (i.e., not the monthly
fixed fee) should be considered variable.
 Freight out. A business incurs a shipping cost only when it sells and ships out a product.
Thus, freight out can be considered a variable cost.

FROM JUDY LOPEZ

1. How does variable cost affect management decision in producing a product?

Since variable costs are costs that change in proportion to the good or service that a
business produces, and variable costs are also the sum of marginal costs over all
units produced, knowing the variable costs of a certain product will help the
manager decide as to whether to continue with the business operation or not.
Furthermore, knowledge about variable costs can also help managers in
determining new ways to reduce variable costs. He can choose a different supplier
or consider a different process.

2. In flexible manufacturing, does inventory control in JIT minimize costs?

Yes, it will greatly reduce costs. A flexible manufacturing system uses highly automated
material-handling and production equipment to manufacture a variety of similar products.
In the new production process, setups would be quicker and more frequent and production
runs would be smaller. Hence, fewer inspections would be required, due to the total quality
control (TQC) philosophy that often accompanies JIT. Variable manufacturing costs would
be lower, due to savings in direct labor, also due to reduced costs because of lesser
inspections. Finally, general factory overhead costs would increase, due to the greater
depreciation charges on the new production equipment.

3. In pricing decisions, why is absorption costing preferred by many managers?

Under absorption costing, all manufacturing costs, including fixed manufacturing overhead,
are assigned as product costs and stored in inventory until the products are sold. Thus, the
process is simpler and easier to follow.

FROM PRETTY EDULAN

1. Why is there a need to learn about the relation between cost behavior and cost
estimation in planning and decision-making?

Cost behavior refers to the relationship between cost and activity. Cost estimation is the
process of determining how a particular cost behaves, often relying on historical cost data.
Determining cost behavior can be accomplished in a number of ways.

Hence, cost behavior is the main determinant in order to do cost estimation. Cost
estimation is a very critical part of the job of a accounting and operations managers, since
cost estimation is very significant in cost prediction and cost analysis. Cost prediction
means using our knowledge of cost behavior to forecast the cost to be incurred at a
particular level of activity. Cost analysis helps management plan for the costs to be incurred
at various levels of sales activity.

These are all interrelated with each other, and is critical in making proper decisions so as
to reduce costs at the most optimum level.

2. What is the importance of knowing break-even point?

Break-point point indicates whether an industry or business s is operating at a loss. If it

goes below the break-even point, then the enterprise is operating at a loss, while if it is at
the break-even point, then the business has neither incurred a loss or has earned any profit
at all. If the business is perpetually below or at the break-even point, then it is no longer
feasible to continue with the business at that price level.

3. What is the purpose of knowing operating leverage?

 The extent to which an organization uses fixed costs in its cost structure is called operating
leverage. The operating leverage is greatest in firms with a large proportion of fixed costs,
low proportion of variable costs, and the resulting high contribution-margin ratio.

The operating leverage factor is a measure, at a particular level of sales, of the percentage
impact on net income of a given percentage change in sales revenue. Multiplying the
percentage change in sales revenue by the operating leverage factor yields the percentage
change in net income.

The result of high operating leverage is that the firm can generate a large percentage
increase in net income from a relatively small percentage increase in sales revenue. Simply
put, the higher the operating leverage, the more profit a business can generate even with
only a slight percentage increase in sales revenue.

FROM ELISA TEJERO

1. What is the meaning of CVP?

Cost-volume-profit relationships are so important to understanding an organization’s

operations that some companies disclose CVP information in their published annual
reports. Cost–volume–profit (CVP) is a form of cost accounting. It is a simplified model,
useful for short-run decisions.

CVP analysis expands the use of information provided by break-even analysis. A critical
part of CVP analysis is the point where total revenues equal total costs (both fixed and
variable costs). At this break-even point, a company will experience no income or loss. This
break-even point can be an initial examination that precedes more detailed CVP analysis.

2. Can you give examples of fixed expenses?

Here are several examples of fixed costs:

 Amortization. This is the gradual charging to expense of the cost of an intangible asset (such
as a purchased patent) over the useful life of the asset.
 Depreciation. This is the gradual charging to expense of the cost of a tangible asset (such as
production equipment) over the useful life of the asset.
 Insurance. This is a periodic charge under an insurance contract.
 Interest expense. This is the cost of funds loaned to a business by a lender. This is only a
fixed cost if a fixed interest rate was incorporated into the loan agreement.
 Property taxes. This is a tax charged to a business by the local government, which is based
on the cost of its assets.
 Rent. This is a periodic charge for the use of real estate owned by a landlord.
 Salaries. This is a fixed compensation amount paid to employees, irrespective of their hours
worked.
 Utilities. This is the cost of electricity, gas, phones, and so forth. This cost has a variable
element, but is largely fixed.

3. What is operating leverage?

The extent to which an organization uses fixed costs in its cost structure is called operating
leverage. The operating leverage is greatest in firms with a large proportion of fixed costs,
low proportion of variable costs, and the resulting high contribution-margin ratio.

The operating leverage factor is a measure, at a particular level of sales, of the percentage
impact on net income of a given percentage change in sales revenue. Multiplying the
percentage change in sales revenue by the operating leverage factor yields the percentage
change in net income.

The result of high operating leverage is that the firm can generate a large percentage
increase in net income from a relatively small percentage increase in sales revenue. Simply
put, the higher the operating leverage, the more profit a business can generate even with
only a slight percentage increase in sales revenue.

FROM TERESITA AGSIMON

1. Define cost behavior and how does it affect analysis.

Cost behavior refers to the relationship between cost and activity. Such information
obtained from cost behavior is then used in cost estimation, which in turn is utilized in cost
analysis.

Cost estimation is the process of determining how a particular cost behaves, often relying
on historical cost data. Determining cost behavior can be accomplished in a number of
ways.

Hence, cost behavior is the main determinant in order to do cost estimation. Cost
estimation is a very critical part of the job of a accounting and operations managers, since
cost estimation is very significant in cost prediction and cost analysis. Cost prediction
means using our knowledge

Hence, cost behavior is the main determinant in order to do cost estimation. Cost
estimation is a very critical part of the job of a accounting and operations managers, since
cost estimation is very significant in cost prediction and cost analysis. Cost prediction
means using our knowledge of cost behavior to forecast the cost to be incurred at a
particular level of activity. Cost analysis helps management plan for the costs to be incurred
at various levels of sales activity.

These are all interrelated with each other, and is critical in making proper decisions so as
to reduce costs at the most optimum level, for the maximization of profits.

2. What are the differences between variable and fixed cost?

A fixed cost remains unchanged in total as the activity level (or cost driver) varies. Facilities
costs, which include property taxes, depreciation on buildings and equipment, and the
salaries of maintenance personnel, are fixed costs. The fixed cost per unit does change as
activity varies. For example, if activity increases to 150,000 dozen items, unit fixed cost will
decline further, the fixed cost per dozen bakery items declines steadily as activity increases.

To summarize, as the activity level increases, total fixed cost does not change, but unit fixed
cost declines. For this reason, it is preferable in any cost analysis to work with total fixed
cost rather than fixed cost per unit

In contrast, a variable cost changes in total in direct proportion to a change in the activity
level (or cost driver). For example, as the company sells more donuts, muffins, and sweet
rolls, the total cost of the ingredients for these goods increases in direct proportion to the
number of items sold. Moreover, the quantities of beverages sold and paper products used
by customers also increase in direct proportion to the number of bakery items sold. As a
result, the costs of beverages and paper products are also variable costs.

To summarize, as activity changes, total variable cost increases in direct proportion to the
change in activity level, but the variable cost per unit remains constant.

3. How will you determine price on your own-produced product?

Costs helps in determining the prices of your products. You have to consider all costs
including fixed and variable costs to be able to arrive at the proper price level. You should
also take into consideration the prices of the competitors as well, so as to make your price
within the similar range of the price of the products of your competitors.

MY QUESTIONS TO THE REPORT OF MS TERESITA AGSIMON ON 5/11/2015

1. Is there a possibility that there will be a shift from Job-order costing to process-
costing?
2. Which do you recommend: traditional volume-based product costing system or
activity based costing, in analyzing the profitability of a business enterprise, or in
reducing costs to increase profitability?
3. How does Just-in-Time inventory affect costs?