MANAGEMENT SERVICES (MS)

Relevant Costing

THEORY

1. The process of evaluating financial data that change under alternative courses of action is called
a. Incremental analysis
b. Decision-making analysis
c. Contribution margin analysis
d. Cost-benefit analysis

2. Which of the following pairs of stages in the management decision-making process is properly sequenced?
a. Evaluate possible courses of action -> Make a decision
b. Review the actual impact of the decision -> Determine possible courses of action
c. Assign responsibility for the decision -> Identify the problem
d. Make a decision -> Assign responsibility for the decision

3. Relevant costs are

a. All fixed and variable costs
b. All costs that would be incurred within the relevant range of production
c. Past costs that are expected to be different in the future
d. Anticipated future costs that will differ among various alternatives

4. An opportunity cost is
a. A cost that may be shifted to the future with little or no effect on current operations
b. A cost that cannot be avoided because it has already been incurred
c. The difference in total costs that results from selecting one alternative instead of another
d. The profit foregone by selecting one alternative instead of another

5. The term "differential cost" refers to

a. The profit foregone by selecting one alternative instead of another
b. A cost that continues to be incurred even though there is no activity
c. A cost common to all alternatives in question and not clearly or practically allocable to any of the
alternatives
d. The difference in total costs that results from selecting one alternative instead of another

6. A cost incurred in the past that cannot be changed by any future action is a(n)
a. Opportunity cost
b. Sunk cost
c. Relevant cost
d. Avoidable cost

7. Irrelevant costs generally include

Sunk costs Historical costs Allocated costs

a. Yes Yes No
b. Yes No No
c. No No Yes
d. Yes Yes Yes

8. In a make-or-buy decision
a. Fixed costs that can be avoided in the future are relevant
b. Only variable costs are relevant
c. Only prime costs are relevant
d. Fixed costs that will continue regardless of the decision are relevant

9. In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is relevant to the
short-run decision is:
a. Direct materials and direct labor
b. Variable overhead
c. Fixed overhead that will be avoided if the part is bought from an outside vendor
d. All of the above
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10. In considering a special order that will enable a company to make use of present idle capacity, which of
the following costs would be irrelevant?
a. Fixed factory overhead that can be avoided
b. Materials
c. Depreciation of the factory building
d. Direct labor

11. The minimum selling price that should be acceptable in a special-order situation, assuming with excess
capacity, is equal to total
a. Production cost
b. Variable production cost
c. Variable costs
d. Production cost plus a normal profit margin

12. The opportunity cost of making a component part in a factory with excess capacity for which there is no
alternative use is
a. The total manufacturing cost of the component
b. The total variable cost of the component
c. The fixed manufacturing cost of the component
d. Zero

13. A company is deciding whether or not to replace some old equipment with new equipment. Which of the
following is not considered in the incremental analysis?
a. Annual operating cost of the new equipment
b. Annual operating cost of the old equipment
c. Net cost of the new equipment
d. Book value of the old equipment

14. A manager is attempting to determine whether a segment of the business should be eliminated. The
focus of attention for this decision should be on
a. The net income shown on the segment's income statement
b. Sales minus total expenses of the segment
c. Sales minus total direct expenses of the segment
d. Sales minus total variable expenses and avoidable fixed expenses of the segment

15. The costs incurred prior to the split-off point are referred to as
a. Separable costs
b. Split-off costs
c. Joint product costs
d. Joint costs

16. When a scarce resource, such as space, exists in an organization, the criterion that should be used to
determine production is
a. Contribution margin per unit
b. Selling price per unit
c. Contribution margin per unit of scarce resource
d. Total variable costs of production
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PROBLEM

Use the following for the next two (2) questions:

1. Pinnacle Company needs 10,000 units of a certain part to be used in its production cycle. The following
information is available concerning the unit product cost:

Direct materials........................................... P 6
Direct labor ................................................. 24
Variable manufacturing overhead................. 12
Fixed manufacturing overhead ..................... 15
Unit product cost......................................... P57

A supplier has offered to supply Pinnacle’ entire annual requirements of the part for P53 each. If it buys
the part from the supplier instead of making it, it will have no other use for the facilities and 60% of the
fixed manufacturing overhead would continue. In deciding whether to make or buy the part:

Question 1: The total relevant costs to make the part internally are:
a. P342,000
b. P480,000
c. P530,000
d. P570,000
MAKE = DM + DL + VOH + FOH BUY = 53 (SELLING PRICE)
= 6 + 24 + 12 + (15 x 40%)
= 42 + 6
= 48

= 48 x 10,000
= 480,000

Question 2: The best alternative course of action is to:

a. Make, P20,000 savings
b. Buy, P20,000 savings
c. Make, P50,000 savings
d. Buy, P50,000 savings
= MAKE - BUY - 10,000 x 5 = 50,000 SAVINGS, MAKE
= 48 - 53
=5
2. ABC Company manufactures components for use in producing one of its finished products. When 12,000
units are produced, the full cost per unit is P35, separated as follows:

Direct materials P5
Direct labor 15
Variable overhead 10
Fixed overhead 5
 XYZ Company has offered to sell 12,000 components to ABC for P37 each. If ABC accepts the offer, some
of the facilities currently being used to manufacture the components can be rented as warehouse space
for P40,000. However, P3 of the fixed overhead currently applied to each component would have to be
covered by ABC’s other products.
MAKE = 5 + 15 + 10 + 2 BUY = 37 *12,000x37 = 444,000 - 40,000 = 404,000
= 32
COST TO MAKE = 32 x 12,000
= 384,000

DC = 384,000 - 404,000
= 20,000

What is the differential cost to ABC Company of purchasing the components from XYZ?
a. P8,000
b. P20,000
c. P24,000
d. P44,000

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3. ABC Company uses production of large diesel engines. The cost to manufacture one unit of engine is
presented below:

Direct materials P2,000

Materials handling (20% of direct material cost) 400
Direct labor 16,000
Manufacturing overhead (150% of direct labor) 24,000
Total manufacturing cost P42,400

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of
the receiving department that are applied to direct materials and purchased components on the basis of
their cost. ABC’s annual manufacturing overhead is one-third variable and two-thirds fixed. An outside
vendor has offered to supply at a unit price of P30,000.

Question 1: If ABC purchases 10 units from the outside vendor, the capacity ABC used to manufacture these
parts would be idle. Should ABC decide to purchase the parts, the out-of-pocket cost per unit would:
a. Decrease P6,400
b. Increase P3,600
c. Increase P9,600
d. Decrease P4,400

MAKE = 2,000 + 400 + 16000 + (24k x ⅔ - 24k) BUY = 30,000 + (30k x 20%) =36,000
= 18,400 + 8000
= 26,400

= 26,400 - 36,000
= 9,600 INCREASE

Question 2: Assume ABC is able to rent all idle capacity for P50,000 per month. If ABC decides to purchase
the 10 units from outside vendor, ABC’s monthly cost would:
 a. Increase P46,000
b. Decrease P64,000
c. Increase P96,000
d. Decrease P34,000
MAKE = 26,400 x 10 = 264000
BUY = 36000 x 10 = 360000 - 50,000 = 310,000

= 264,000 - 310,000
= 46,000

4. The Marker Division of ABC, Inc. produces a high-quality white board markers. Unit production costs
(based on capacity production of 10,000 units per year) follow:

Direct material P50

Direct labor 20
Overhead (20% variable) 10

Other information:
Selling price 100
SG&A costs (40% variable) 15

Question 1: Assume, for this question only, that the Marker Division is operating at a level of 7,000 units
per year. What is the minimum price that the division would consider on a "special order" of 1,000 units
to be distributed through normal channels?
a. P 78
b. P 95
c. P 100
d. P 81
50 + 20 + 2 + 6 = 78

Question 2: Assume, for this question only, that the Marker Division is producing and selling at capacity.
What is the minimum selling price that the division would consider on a "special order" of 1,000 units on
which no variable period costs would be incurred?
a. P 100
b. P 72
c. P 81
d. P 94
50 + 20 + 2 = 72 100-78 = 22 72+22= 94

Question 3: Assume, for this question only, that the Marker Division is presently operating at a level of
8,000 units per year. Accepting a "special order" on 2,000 units at P88 will
a. Increase total corporate profits by P4,000
b. Increase total corporate profits by P20,000
c. Decrease total corporate profits by P14,000
d. Decrease total corporate profits by P24,000
10,000 - 8000 = 2000 88-78=10 2000x10= 20000

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5. A company is currently operating at a loss of P15,000. The sales manager has received a special order for
5,000 units of product, which normally sells for P35 per unit. Costs associated with the product are:
direct material, P6; direct labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable
selling expenses, P2. The special order would allow the use of a slightly lower grade of direct material,
thereby lowering the price per unit by P1.50 and selling expenses would be decreased by P1.

If it wants this special order to increase the total net income for the firm to P10,000, what sales price
must be quoted for each of the 5,000 units?
a. P 23.50 4.5+10+3+1=18.5 (15,000) + 10000 = 25,000/5000 = 5 18.5 + 5= 23.5
b. P 24.50
c. P 27.50
d. P 34.00
6. A company is trying to decide whether it should keep its existing machine or purchase a new one that has
technological advantages (which translate into cost savings) over the existing machine. Information on
each machine follows:
Old machine New machine
Original cost P9,000 P20,000
Accumulated depreciation 5,000 0
Annual cash operating costs 9,000 4,000
Current salvage value of old machine 2,000
Salvage value in 10 years 500 1,000
Remaining life 10 yrs. 10 yrs.

Question 1: The P4,000 of annual operating costs that are common to both the old and the new machine
are an example of a(n)
a. Sunk cost
b. Irrelevant cost
c. Future avoidable cost
d. Opportunity cost
9,000 - 4,000 = 5,000 DC
*4000 is IRRELEVANT

Question 2: The P9,000 cost of the original machine represents a(n)

a. Sunk cost
b. Future relevant cost
c. Historical relevant cost
d. Opportunity cost

Question 3: The P20,000 cost of the new machine represents a(n)

a. Sunk cost
b. Future relevant cost
c. Future irrelevant cost
d. Opportunity cost

Question 4: The incremental cost to purchase the new machine is

a. P 11,000
b. P 20,000
c. P 13,000
d. P 18,000

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PP NEW MACHINE 20,000
SAL. VALUE OF OLD MACHINE (2,000)
INCREMENTAL LOSS 18,000

7. ABC Industries, Inc. has an opportunity to acquire a new equipment to replace one of its existing
equipment. The new equipment would cost P900,000 and has a five-year useful life, with a zero terminal
disposal price. Variable operating cost would be P1 million per year.

The present equipment has a book value of P500,000 and a remaining life of 5 years. Its disposal price
 now is P50,000 but would be zero after 5 years. Variable operating costs would be P1,250,000 per year.
Considering the 5 years in total, the company should:
a. Replace due to P400,000 advantage
b. Not replace due to P150,000 disadvantage
c. Replace due to P350,000 advantage
d. Not replace due to P100,000 disadvantage

PP (900,000)

SALVAGE VALUE OF OLD MACHINE 50,000

SAVINGS (1250M - 1M) x 5 yrs 1,250,000

400,000

8. AB Corporation currently operates two divisions which had operating results last year as follows:

Division A Division B
Sales............................................................ P600,000 P300,000
Variable costs .............................................. 310,000 200,000
Contribution margin..................................... 290,000 100,000
Traceable fixed costs.................................... 110,000 70,000
Allocated common corporate costs............... 90,000 45,000
Net operating income (loss).......................... P 90,000 (P 15,000)

Since the Division B also sustained an operating loss in the prior year, the president is considering the
elimination of this division. Division B's traceable fixed costs could be avoided if the division were
eliminated. The total common corporate costs would be unaffected by the decision. If the Division B had
been eliminated at the beginning of last year, the operating income for last year would have been:
a. P 15,000 higher
b. P 30,000 lower
c. P 45,000 lower
d. P 60,000 higher

9. ABC Corporation’s branch reported the following results of operations for the period just ended:

Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin 1,500,000
Less: Fixed expenses
Salaries and wages P750,000
Insurance on inventories 50,000
Depreciation on equipment 325,000
Advertising 500,000 1,625,000
Profit (Loss) (P125,000)

The management is contemplating dropping the branch due to the unfavorable operating results. If this
would happen, one employee will have to be retained with an annual salary of P150,000. The equipment will
be transferred to another branch. The branch should
a. Not be dropped due to foregone overall income of P850,000
b. Be dropped due to forgone overall income of P325,000
c. Not be dropped due to foregone overall income of P25,000
d. Be dropped due to overall operational loss of P25,000
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10. A company manufactures three chemicals (A, B, and C) from a joint process. The three chemicals are in
industrial grade form at the split-off point. They can either be sold at that point or processed further into
premium grade. Costs related to each batch of this chemical process is as follows:

ABC
Sales value at split-off point.......................... P16,000 P12,000 P5,000
Sales value after further processing............... P20,000 P18,000 P9,000
4000 6000 4000
Cost of further processing............................. (P 5,000) (P 3,000) (P2,000)
-1000 3000 2000

Allocated joint costs..................................... P 6,000 P 6,000 P6,000

For which product(s) above would it be more profitable for the company to sell at the split-off point
rather than process further?
a. A only
b. C only
c. A and C only
d. B and C only

11. Two products, X and Y emerge from a joint process. Product X has been allocated P9,600 of the total joint
costs of P12,000. A total of 9,000 units of product X are produced from the joint process. Product X can
be sold at the split-off point for P13 per unit, or it can be processed further for an additional total cost of
P54,000 and then sold for P18 per unit.

If product X is processed further and sold, what would be the effect on the overall profit of the company
compared with sale in its unprocessed form directly after the split-off point?
a. P 18,600 less profit
b. P 108,000 more profit
c. P 600 more profit
d. P 9,000 less profit 18-13= 5x9,000= 45,000 IR 54000 IC 45,000-54,000= 9000

12. The constraint at ABC Corporation is time on a particular machine. The company makes three products
that use this machine. Data concerning those products appear below:

ABC
Selling price per unit......................... P192.00 P542.66 P222.84
Variable cost per unit........................ P158.72 P420.54 P167.76
33.28 122.12 55.00
DVIDE: Minutes on the constraint................. 3.20 8.60 3.60
10.4 14.2 15.3
Market demand (units) 100 150 200
TOTAL UNITS 2150
C (200 x 3.6) 720
B (150 x 8.6) 1290
A 140/3.20 = 44

Assume that the total available minutes is 2,150 minutes, determine the best combination of the
products to produce.
a. 150 units of C, 100 units of B, 20 units of A
b. 100 units of C, 50 units of B, 50 units of A
c. 200 units of C, 150 units of B, 44 units of A
d. 200 units of C, 150 units of B, 100 units of A

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