Activity Cost and Analysis
MODULE 3
ACTIVITY COST AND COST ANALYSIS
7. A cost that remains constant on a per unit basis in a given period despite changes in the level
of activity should be considered a(an):
A. variable cost.
C. fixed cost.
B. prime cost.
D. overhead cost.
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THEORIES:
1. Cost behavior analysis is a study of how a firm's costs
A. relate to competitors' costs.
B. relate to general price level changes.
C. respond to changes in activity levels within the company.
D. respond to changes in the gross national product.
2. The term “relevant range” as used in cost accounting means the range over which
A. costs may fluctuate
C. production may vary
B. cost relationships are valid
D. relevant costs are incurred
8. Malayan Company’s average cost per unit is the same at all levels of volume. Which of the
following is true?
A. MALAYAN must have only variable costs.
B. MALAYAN must have only fixed costs.
C. MALAYAN must have some fixed costs and some variable costs.
D. MALAYAN’s cost structure cannot be determined from this information.
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9. Depreciation expense based on the number of units produced is classified as what type of
cost?
A. Out-of-pocket cost.
C. Variable cost.
B. Marginal cost.
D. Fixed cost.
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3. Most operating decisions by management focus on a narrow range of activity which is called
the:
A. relevant range of production.
C. optimal level of production.
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B. strategic level of production.
D. tactical operating level of production.
10. When production increases, variable manufacturing costs react in which of the following ways?
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A.
B.
C.
D.
Unit variable cost
decreases remains same remains same
increases
Total variable cost
decreases
Increases
decreases
Increases
4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is
called a
A. mixed cost.
C. direct cost.
B. predictor.
D. cost driver.
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11. When the number of units manufactured increases, the most significant change in unit cost will
be reflected as a(n)
A. increase in the fixed element.
C. increase in the mixed element.
B. decrease in the variable element.
D. decrease in the fixed element. Bobadilla
5. If a predetermined overhead rate is not employed and the volume of production is increased
over the level planned, the cost per unit would be expected to
A. Decrease for fixed costs and remain unchanged for variable costs.
B. Remain unchanged for fixed costs and increase for variable costs.
C. Decrease for fixed costs and increase for variable costs.
D. Increase for fixed costs and increase for variable costs.
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12. As volume increases,
A. total fixed costs remain constant and per-unit fixed costs increase.
B. total fixed costs remain constant and per-unit fixed costs decrease.
C. total fixed costs remain constant and per-unit fixed costs remain constant.
D. total fixed costs increase and per-unit fixed costs increase.
6. Which of the following describes the behavior of the variable cost per unit? Variable cost:
A. Varies in increasing proportion with changes in the activity level.
B. Varies in increasing proportion with changes in the activity level.
C. Remains constant with changes in the activity level.
D. Varies in direct proportion with the activity level.
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13. Which of the following best describes a fixed cost?
A. It may change in total when such change is unrelated to changes in production.
B. It may change in total when such change is related to changes in production.
C. It is constant per unit of change in production.
D. It may change in total when such change depends on production within the relevant
range.
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Activity Cost Analysis
A. Breakeven point must increase.
B. Margin of safety must decrease.
14. If activity increases, which of the following statements about cost behavior is true? Bobadilla
A. Fixed cost per unit will increase
C. Fixed cost per unit will decrease
B. Variable cost per unit will increase
D. Variable cost per unit will decrease
15. An increase in the activity level within the relevant range results in:
A. an increase in fixed cost per unit.
B. a proportionate increase in total fixed costs.
C. an unchanged fixed cost per unit.
D. a decrease in fixed cost per unit.
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16. A cost that remains constant in total but varies on a per-unit basis with changes in activity is
called a(n)
A. expired cost.
C. variable cost.
B. fixed cost.
D. mixed cost.
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C. Operating leverage must increase.
D. Profit must increase.
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21. The indifference point is the level of volume at which a company
A. earns the same profit under different operating scheme.
B. earns no profit.
C. earns its target profit.
D. any of the above.
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22. Operating leverage is the relative mix of
A. revenues earned and manufacturing costs
B. fixed and variable costs.
C. high-volume and low-volume products.
D. manufacturing costs and period costs.
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23. The increased use of automation and less use of the work force in companies has caused a
trend towards an increase in
A. both variable and fixed costs.
B. fixed costs and a decrease in variable costs.
C. variable costs and a decrease in fixed costs.
D. variable costs and no change in fixed costs.
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17. Which of the following statements regarding fixed costs is incorrect?
A. Expressing fixed costs on a per unit basis usually is the best approach for decisionmaking process.
B. Fixed costs expressed on a per unit basis will react inversely with changes in activity.
C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the
concept of the relevant range.
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D. Fixed costs frequently represent long-term investments in property, plant, and equipment.
24. If fixed costs decrease while variable cost per unit remains constant, the contribution margin
will be
A. Unchanged
C. Higher
B. Lower
D. Indeterminate
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18. Lamang Company changed its cost structure by increasing fixed costs and decreasing its perunit variable costs. The change:
A. Increases risk and increases potential profit.
B. Increases risk and decreases potential profit.
C. Decreases risk and decreases potential profit.
D. Decreases risk and increases potential profit.
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25. Costs that increase as the volume of activity decreases within the relevant range are
A. Average cost per unit.
C. Total fixed costs.
B. Average variable cost per unit.
D. Total variable costs.
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19. A management’s preference for a very low degree of operating leverage might indicate that:
A. an increase in sales volume is expected.
B. a decrease in sales volume is expected.
C. the firm is very unprofitable.
D. the firm has very high fixed costs.
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26. Which costs will change with an increase in activity within the relevant range?
A. Total fixed costs and total variable cost.
B. Per unit fixed costs and total variable cost.
C. Per unit variable cost and per unit fixed cost.
D. Per unit fixed cost and total fixed cost.
20. Management is considering replacing its existing sales commission compensation plan with a
fixed salary plan. If the change is adopted, the company’s
27. Which of the following best describes the relationship between fixed costs per unit and
variable costs per unit, as total volume increases?
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Activity Cost Analysis
A.
B.
C.
D.
Fixed cost per unit stays the same and variable cost per unit stays the same.
Fixed cost per unit stays the same and variable cost per unit increases.
Fixed cost per unit increases and variable cost per unit increases.
Fixed cost per unit decreases and variable cost per unit stays the same.
28. Within the relevant range, the difference between variable costs and fixed costs is:
A. variable costs per unit fluctuate and fixed cost per unit remains constant.
B. variable cost per unit is constant and fixed cost per unit fluctuates.
C. both total variable cost and total fixed cost are constant.
D. both total variable cost and total fixed cost fluctuate.
29. The learning curve in cost estimation is a good example of:
A. non-linear cost behavior.
C. simple regression.
B. machine-intensive production.
D. a random variable.
35. The equation(s) required for applying the least squares method in the computation of fixed and
variable production costs could be expressed as
A. xy = ax + b x2
C.  y = na + b x
B. y = a + bx2
D. xy = ax + b x2
xy = na + b x
y = na + bx
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36. Weaknesses of the high-low method include all of the following except
A. Only two observations are used to develop the cost function.
B. The high and low activity levels may not be representative.
C. the method does not detect if the cost behavior is nonlinear.
D. the mathematical calculations are relatively complex.
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37. Which of the following methods estimates costs by identifying costs as variable or fixed based
on qualitative analysis?
A. Regression analysis
C. Engineering method
B. Account analysis
D. High-low method
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30. Cost estimation is the process of
A. estimating the relationship between costs and the cost drivers that cause those costs.
B. documenting costs in terms of direct and indirect costs.
C. summarizing past costs into fixed and variable components.
D. all of the above.
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31. Which of the following methods is used to estimate costs?
A. Account analysis
C. Engineering method
B. High-low method
D. All of the above
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32. For analysis purposes, the high-low method usually produces a(n)
A. reasonable estimate.
C. overstated estimate.
B. precise estimate.
D. understated estimate.
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38. Account analysis as compared to the engineering method
A. relies on past data.
B. relies on present and future data.
C. measures the work involved in the activities that go into a product.
D. a and c.
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39. Which of the following methods may be used to estimate costs by using time-and-motion
studies to approximate labor time?
A. Regression analysis
C. Engineering method
B. Account analysis
D. High-low method
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40. The cost estimation method that gives the most mathematically precise cost prediction
equation is
A. the high-low method
C. the scatter-diagram method
B. the contribution margin method
D. regression analysis
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33. The high-low method is criticized because it
A. is not a graphical method.
B. is a mathematical method.
C. ignores much of the available data by concentrating on only the extreme points.
D. does not provide reasonable estimates.
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41. Regression analysis is better than the high-low method of cost estimation because regression
analysis:
A. is more mathematical.
C. fits its data into a mathematical equation.
B. uses all the data points, not just two.
D. takes more time to do.
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34. The high-low method may give unsatisfactory results if
A. the data points all fall on a line.
C. the points are not representative.
B. volume of activity is heavy.
D. volume of activity is light.
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42. In regression analysis, what does the variable "X" stand for in the model Y = a + bX + e?
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Activity Cost Analysis
A. The amount of the dependent variable, the cost to be estimated.
B. The regression error, which is the distance between the regression line and the data
point.
C. The value for the independent variable, the cost driver for the cost to be estimated; there
may be one or more cost drivers.
D. The unit variable cost, also called the coefficient of the independent variable.
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49. The engineering method of estimating costs:
A. can be used to estimate costs for totally new activities.
B. can detail each step required to perform an operation.
C. sometimes can be quite expensive to use.
D. all of the above are true.
50. The correlation coefficient or R-squared (R2) is interpreted as:
A. the minimum distance between the regression line and a single data point.
B. the measure of the linear relationship between two or more variables.
C. a determination of whether the data point is considered to be an "outlier."
D. the proportion of the variation in the dependent variable explained by the independent
variable.
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43. Simple regression is
A. a regression equation with more than one independent variable.
B. a regression equation with more than one dependent variable.
C. a regression equation with more than one independent and dependent variables.
D. a regression that considers all unknown factors.
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44. Regression shows
A. the proportion of the variation of dependent variable explained by dependent variables.
B. the proportion of the variation of independent variable explained by the independent
variables.
C. the proportion of the variation of dependent variable explained by the independent
variables.
D. none of the above.
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45. In the method of least squares, the deviation is the difference between the
A. predicted and estimated costs.
C. predicted and average costs.
B. predicted and actual costs.
D. average and actual costs.
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46. A cost-predicting equation determined through regression analysis
A. always gives close predictions.
B. will not work any better than one obtained using the high-low method.
C. can be used only for costs that vary with sales of production.
D. could be severely affected by outliers.
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47. In the cost equation TC = F + VX, the X term is:
A. total fixed costs.
C. unit variable cost.
B. total variable costs.
D. activity units.
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51. The closeness of the relationship between the cost and the activity is called
A. correlation
C. spurious
B. regression analysis
D. manufacturing overhead
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52. R-squared is a measure of
A. the spurious relationship between cost and activity
B. the fixed cost component
C. the variable cost per unit of activity
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D. how well the regression line accounts for the changes in the dependent variable
53. The principal advantage of the scatter-diagram method over the high-low method of cost
estimation is that the scatter-diagram method
A. includes cost outside the relevant range.
B. considers more than two points.
C. can be used with more types of costs than the high-low method.
D. gives a precise mathematical fit of the points to the line.
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54. The major objective of preparing a scatter-diagram is to
A. develop an equation to predict future costs.
B. perform regression analysis on the results.
C. determine the relevant range.
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D. find the high and low points to use for the high-low method of estimating costs.
48. Which of the following methods would be best for estimating costs for totally new activities?
A. Engineering method
C. Scattergraph method
B. Account analysis method
D. High-Low method
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55. Advantages of the method of least squares over the high-low method include all of the
following except
A. a statistical method is used to mathematically derive the cost function
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Activity Cost Analysis
B. only two points are used to develop the cost function
C. the squared differences between actual observations and the line (cost function) are
minimized
D. all the observations have an effect on the cost function
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Direct labor hours
60,000
Variable factory overhead
P150,000
Fixed factory overhead
P240,000
Assume that Deakin’s normal capacity is 80% of maximum capacity. What would be the total
factory overhead rate, based on direct labors, in a flexible budget at normal capacity?
A. P6.00
C. P6.50
B. P7.50
D. P8.13
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56. The scatter diagram method of cost estimation
A. is influenced by extreme observations
B. requires the use of judgment
C. uses the least-squares method
D. is superior to other methods in its ability to distinguish between discretionary and
committed fixed costs
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5. Irma Company manufactures office furniture. During the most productive month of the year,
3,500 desks were manufactured at a total cost of P84,400. In its slowest month, the company
made 1,100 desks at a cost of P46,000. Using the high-low method of cost estimation, total
fixed costs in August are:
A. P56,000
C. P17,600
B. P28,400
D. P38,400
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PROBLEMS:
1. Nite Corporation has developed the following flexible budget formula for annual indirect labor
costs:
Total Cost = P480,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 20,000 machine hours of planned
machine time. Indirect labor costs included in this planning budget are:
A. P 48,333
C. P580,000
B. P100,000
D. P140,000
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6. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70
percent of the rooms are occupied each day. The company’s operating cost is P21 per
occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure
contains both variable and fixed cost elements. During October, the occupancy dropped to
only 45 percent. A total of P792,000 in operating costs were incurred during the month.
What would be the expected operating costs, assuming that the occupancy rate increases to
60 percent during November?
A. P1,056,000
C. P 756,000
B. P 846,000
D. P 829,500
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2. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct
labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each
unit requires five minutes of direct labor. Harem Company’s budgeted overhead for the month
is
A. P 12,800
C. P 84,800
B. P 18,800
D. P774,000
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7. The controller of Jema Company has requested a quick estimate of the manufacturing
supplies that it needs for the month of July when the expected production are 470,000 units.
Below are the actual data from the prior three months of operations.
Production in units
Manufacturing supplies
March
450,000
P723,060
April
540,000
853,560
May
480,000
766,560
Using these data and the high-low method, what is the reasonable estimate of the cost of
manufacturing supplies that would be needed for July? (Assume that this activity is within the
relevant range.)
A. P 805,284
C. P 755,196
B. P1,188,756
D. P 752,060
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3. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000
and 60,000 units of budgeted output, respectively. Because of the need for additional facilities,
budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for
50,000 units. How much is Jordan’s budgeted variable cost per unit of output?
A. P 7.50
C. P30.00
B. P16.00
D. P62.50
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4. Deakin Company is preparing a flexible budget for the coming year and the following
maximum capacity estimates for Department OZ are available:
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Activity Cost Analysis
8. The following activity and cost data that were provided by Hoist Corporation would help in
estimating its future maintenance costs:
Units
Maintenance Cost
3
P450
7
P530
11
P640
15
P700
Using the least-squares regression method to estimate the cost formula, the expected total
cost for an activity level of 10 units would be closest to:
A. P612.50.
C. P595.84.
B. P581.82.
D. P601.50.
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B. P32,677
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12. Clone Machinery had the following experience regarding power costs:
Month
Machine hours
Power cost
Jan.
300
P680
Feb.
600
720
Mar.
400
695
Apr.
200
640
Assume that management expects 500 machine hours in May. Using the high-low method,
calculate Clone's power cost using machine hours as the basis for prediction.
A. P 700
C. P 710
B. P 705
D. P1,320
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9. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
A. 10,625 units.
C. 6,250 units.
B. 4,375 units.
D. 5,250 units.
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10. Balsy Company has provided the following data for maintenance cost:
Prior Year
Current Year
Machine hours
12,500
15,000
Maintenance cost
P27,000
P31,000
The best estimate of the cost formula for maintenance would be:
A. P21,625 per year plus P0.625 per machine hour.
B. P 7,000 per year plus P0.625 per machine hour.
C. P 7,000 per year plus P1.60 per machine hour.
D. P27,000 per year plus P1.60 per machine hour.
D. P40,800
13. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is
direct labor hours. According to this equation, a 100-hour change in total direct labor hours will
change the cost of workers compensation insurance by
A. P4,000.
C. P4,300.
B. P 300.
D. none of the above amounts.
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14. Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units,
P1,000 of product level costs for 40 products, and P3,500 of customer-level costs for ten
customers. The cost of Job 002 which used 800 unit level activities, 4 product level activities,
and one customer-level activities amounts to
A. P3,650
C. P3,050
B. P3,250
D. P2,950
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11. Almond Company wishes to determine the fixed portion of its maintenance expense (a semivariable expense), as measured against direct labor hours for the first Malayan three months
of the year. The inspection costs are fixed; however, the adjustments necessitated by errors
found during inspection account for the variable portion of the maintenance costs. Information
for the first Malayan quarter is as follows:
Direct Labor Hours
Maintenance Costs
January
34,000
P61,000
February
31,000
58,500
March
34,000
61,000
What is the fixed portion of Almond Company’s maintenance expense, rounded to the nearest
pesos?
A. P28,330
C. P37,200
15. It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production
doubles, the average time (per unit) needed to make 8 units would be
A. 4.90 minutes
C. 3.33 minutes
B. 3.43 minutes
D. 3.23 minutes
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16. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for
P6,000. Assuming a cumulative learning curve of 90% as production doubles, the incremental
cost of the third and fourth items will be
A. P 0
C. P2,160
B. P 600
D. P1,250
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Activity Cost Analysis
17. At a sales level of P300,000, Jamaica Company's gross margin is P15,000 less than its
contribution margin, its net income is P50,000, and its selling and administrative expenses
total P120,000. At this sales level, its contribution margin would be:
A. P250,000.
C. P170,000.
B. P155,000.
D. P185,000.
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Based on the foregoing information, the variable cost per unit for the month of June was
A. P4.50
C. P6.00
B. P5.00
D. P7.17
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22. Data to be used in applying the high-low method shows the highest cost of P69,000 and the
lowest cost of P52,000. The data shows P148,000 as the highest level of sales and P97,000
as the lowest level. What is the variable cost per peso sales?
A. P0.33.
C. P0.54.
B. P0.47.
D. P3.00
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18. The Shepherd Company’s president would like to know the estimated fixed and variable
components of a particular cost. Actual data for this cost for four recent periods appear below.
Activity
Cost
Period 1
24
P174
Period 2
25
179
Period 3
20
165
Period 4
22
169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X
C. Y = P103.38 + P3.00X
B. Y = P110.44 + P2.70X
D. Y = P113.35 + P0.89X
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23. The following information is available for maintenance costs:
Month
Production Volume
Maintenance Costs
June
150,000
P500,000
July
230,000
620,000
August
380,000
800,000
September
120,000
480,000
October
270,000
710,000
Using the least squares, the estimate of the fixed portion of maintenance costs (rounded to
thousand pesos) is
A. P131,000
C. P332,000
B. P321,000
D. P115,000
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19. Sams Company. wants to develop a single predetermined overhead rate. The company's
expected annual fixed overhead is P340,000 and its variable overhead cost per machine hour
is P2. The company's relevant range is from 200,000 to 600,000 machine hours. Sams
Company expects to operate at 425,000 machine hours for the coming year. The plant's
theoretical capacity is 850,000. The predetermined overhead rate per machine hour should be
A. P2.40.
C. P2.80.
B. P2.57.
D. P2.85.
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24. Tomas Ocampo has just been appointed chairperson of the Accountancy Department of
ADEB College. In reviewing the department’s cost records, Tomas has found the following
total cost associated with MAS Part 2 subject over the last several terms:
Semester/Term
Number of Subjects Offered
Total Cost
AY2004, First Semester
4
P10,000
AY2004, Second Semester
6
14,000
AY2004, Summer
2
7,000
AY2005, First Semester
5
13,000
AY2005, Second Semester
3
9,500
Tomas knows that there are some variable costs, such as amounts paid to student assistants,
associated with the course. He would like to have variable and fixed cost components
separated for planning purposes.
Using the least-squares method, what is the variable cost per section of MAS?
A. P1,750
C. P1,200
B. P1,500
D. P 900
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20. The Overland Company wants to develop a cost estimating equation for its monthly cost of
electricity. It has the following data:
Month
Electricity Cost
Direct Labor Hours
January
P6,750
1,500
April
7,500
1,700
July
8,500
2,000
October
7,250
1,600
Using the high-low method, what is the best equation?
A. Y = P 750 + P5.00X
C. Y = P 750 + P3.50X
B. Y = P1,500 + P3.50X
D. Y = P1,500 + P5.00X
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21. During the month of June, Behold Corporation produced 12,000 units and sold them for P20
per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000.
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Activity Cost Analysis
25. At a sales level of P300,000, Java Company's gross margin is P15,000 less than its
contribution margin, its net income is P50,000, and its selling and administrative expenses
total P120,000. At this sales level, its contribution margin would be:
A. P250,000.
C. P170,000.
B. P155,000.
D. P185,000.
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March
April
May
June
July
August
September
Question Nos. 26 and 27 are based on the following information:
SERAL Company is a manufacturing entity whose total factory overhead costs fluctuate
considerably from year to year according to increases and decrease in the number of direct labor
hours worked in the plant. Total factory overhead costs at high and low levels of activity for recent
years follow:
Low
High
Direct labor hours
50,000
75,000
Total factory overhead costs
P14,250,000
P17,625,000
40,000
65,000
80,000
105,000
120,000
90,000
75,000
P 75,000
82,500
105,000
120,000
135,000
107,500
97,500
28. Using the high-low method, what is the estimated monthly fixed cost for custodial supplies?
A. P67,500
C. P42,500
B. P45,000
D. P40,000
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29. Using the high-low method in calculating the cost formula for custodial supplies, what amount
of this expense would you expect to be incurred at an occupancy level of 110,000 guests?
A. P 92,500
C. P110,000
B. P 98,750
D. P127,500
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The factory overhead costs above consist of indirect materials, rent, and maintenance. The
company has analyzed these costs at the 50,000-hour level of activity as follows:
Indirect materials (V)
P 5,000,000
Rent (F)
6,000,000
Maintenance (M)
3,250,000
Total factory overhead costs
P14,250,000
Question Nos. 30 through 32 are based on the following:
St John Hospital contains 450 beds. The average occupancy rate is 80 percent per month. In other
words, on average, 80 percent of the hospital’s beds are occupied by patients. At this level of
occupancy, the hospital’s operating costs are P32 per occupied bed per day, assuming a 30-day
month. This P32 figure contains both variable and fixed cost components.
V = variable; F = fixed; M = mixed
During the month of June, the hospital’s occupancy rate was only 60 percent. A total of P326,700
in operating cost was incurred during that month.
26. How much of the P17,625,000 factory overhead cost at the high level of activity consist of
maintenance cost?
A. P4,125,000
C. P4,450,000
B. P4,220,000
D. P4,525,000
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30. Using the high-low method, the amount of variable cost per occupied bed per cay is
A. P 7.00
C. P12.00
B. P 9.00
D. P15.00
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27. What total factory overhead costs would you expect the company to incur at an operating level
of 70,000 direct labor hours?
A. P16,950,000
C. P13,000,000
B. P13,950,000
D. P10,950,000
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31. Using the variable cost as determined in number 36, the total fixed operating costs per month
are:
A. P240,000
C. P290,000
B. P270,000
D. P300,000
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Question Nos. 28 and 29 will be answered using the following data:
The Bora Hotel’s guest-days of occupancy and custodial supplies expense over the last seven
months were:
Month
Guest-Days of Occupancy
Custodial Supplies Expense
32. Assuming an occupancy rate of 75 percent in a particular month, what amount of total
operating costs would you expect the hospital to incur?
A. P310,000
C. P340,875
B. P315,500
D. P375,500
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58
Activity Cost Analysis
The cost formula is
A. Overhead = P11,400 – P90X
B. Overhead = P11,400 + (P45 x .6)
Question Nos. 33 through 35 are based on the following:
In the Omara Manufacturing Company, at an activity level of 80,000 machine hours, total overhead
costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was
P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At
100,000 machine hours, maintenance costs were P130,000.
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34. The total fixed overhead cost for Omara is:
A. P115,000.
B. P130,000.
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C. P 60,000.
D. P 55,000.
39. TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined
that if a truck is driven 105,000 kilometers during a year, the average operating cost is P11.40
per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating
cost increases to P13.40 per kilometer. Assuming that in a given year, a truck were driven
80,000 kilometers, what total cost would you expect to be incurred?
A. P1,012,000
C. P1,225,143
B. P1,407,000
D. P1,072,000
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35. If 110,000 machine hours of activity are projected for the next period, total expected overhead
cost would be:
A. P256,000.
C. P306,625.
B. P263,500.
D. P242,500.
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36. The following data were compiled from the records of Cabral Company:
Month
Usage
Cost
Jan.
600
P750
Feb.
650
775
Mar.
420
550
Apr.
500
650
May
450
570
Using the high-low method, what is the fixed cost element (to the nearest peso)?
A. P225
C. P411
B. P138
D. P364
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38. The following information pertains to data that have been gathered in the process of estimating
a simple least squares regression:
Mean value of the dependent variable
30
Mean value of the independent variable
10
Coefficient of the independent variable
3
Number of observations
12
What is the "a" value for the least squares regression model?
A. 20
B. 6
C. 0
D. The intercept term cannot be computed from the information given.
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Assume that all of the activity levels mentioned in this problem are within the relevant range.
33. The variable cost for maintenance per machine hour is:
A. P1.30.
C. P0.75.
B. P1.44.
D. P1.35.
C. Overhead = P11,400 + P90X
D. Overhead = P11,400 x .6
Question Nos. 40 through 41 are based on the following:
The House of TROPS Company is a large retailer of sports equipment. An income statement for
the company’s Ski Department for a recent quarter is presented as follows:
The House of TROPS Company
Income Statement
For the Quarter Ended March 31
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Sales
Less cost of goods sold
Gross margin
Less operating expenses:
Selling expenses
Administrative expenses
Net income
37. The following information was taken from a computer printout generated with the least squares
method for use in estimating overhead costs:
Slope
90
Intercept
11400
Correlation coefficient
0.6
Activity variable
Direct labor hours
59
P1,500,000
900,000
600,000
P300,000
100,000
400,000
P 200,000
Activity Cost Analysis
B. P14,700.
Skis sell, on the average, for P7,500. Variable selling expenses are P500 per pair of skis sold. The
remaining selling expenses are fixed. The administrative expenses are 20 percent variable and 80
percent fixed. The company does not manufacture its own skis; it purchases them from a supplier
for P4,500 per pair.
40. What is the variable cost per pair of skis?
A. P 900,000
B. P 920,000
C. P1,000,000
D. P1,020,000
Use the following Information to answer Question Nos. 46 through 51.
Units Sold @ P60/each
1,000
2,000
Salary
P20,000
P30,000
Cost of Goods Sold
15,000
30,000
Cost/Unit of Depreciation
300
150
Rent
20,000
20,000
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41. Given the cost formula Y = P30,000 + P5X, total cost at an activity level of 16,000 units would
be:
A. P 30,000.
C. P 80,000.
B. P 46,000.
D. P110,000.
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Question Nos. 42 through 45 are based on the following:
A local church wants to rent a hall for P3,000 a day to hold a Bingo fundraiser. Every session of
bingo requires a caller for P200. There are supplies that are needed that cost P3 per person
playing bingo. On an average each bingo player spends P20 and 1,000 people attend each
session. P10,000 in prizes are awarded each session.
42. Total costs for 1 session can be classified as:
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A.
B.
Fixed Costs
P13,200
P 3,000
Variable Costs
P3
P13,200
C.
P13,200
P 3,000
D. P16,200.
D.
P10,000
P 3,200
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3,000
P40,000
45,000
100
20,000
46. Which of the above costs behaves as a Variable Cost?
A. Rent.
C. Cost of Goods sold.
B. Salary.
D. Depreciation.
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47. Which of the above costs behaves as a Mixed Cost?
A. Rent.
C. Cost of Goods sold.
B. Salary.
D. Depreciation.
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48. Which one does not contain any fixed cost behavior?
A. Rent.
C. Cost of goods sold.
B. Salary.
D. Depreciation.
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49. If 3,000 units are sold what is the contribution margin?
A. P 75,000.
C. P135,000.
B. P105,000.
D. P180,000.
43. The church conducts 1 Bingo session per month. Over the course of the year, which cost
would not act as a variable cost based on just holding one more session?
A. Hall rental.
C. Caller salary.
B. Cost of supplies.
D. Prize money.
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50. What is total fixed cost?
A. P50,000.
B. P60,000.
C. P60,100.
D. P90,000.
51. Given the following information, choose the cost and activity that would be used as the high
data point in high-low cost estimation:
Costs
Activity (hours)
P51,000
40,000
P50,000
41,000
P58,000
42,000
P56,000
43,000
A. P58,000 and 42,000 hours
C. P56,000 and 43,000 hours
B. P58,000 and 43,000 hours
D. P56,000 and 42,000 hours
44. If the church conducts 12 sessions and 1,000 people attend each session, the average cost
per session is?
A. P 9,600.
C. P15,200.
B. P14,700.
D. P16,200.
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45. The church is thinking of holding 2 Bingo sessions per day with 1,000 people attending each
session. If they hold the 2 sessions, the average cost per session is?
A. P 9,600.
C. P15,200.
60
Activity Cost Analysis
Use the following simple regression results based on the data from the Madrigal Corporation to
answer Question Nos. 52 and 53.
Dependent variable – Machine maintenance costs
Independent variable – Machine hours
Computed values
Intercept
P3,500
Coefficient on independent variable
P 3.50
Coefficient of correlation
0.856
R2
0.733
2,875,000 – 62,500X = 2,800,000 – 60,000X
2,500X = 75,000
X = P30
4 . Answer: B
Variable factory overhead (150,000/60,000)
Fixed overhead [240,000/(60,000 x 0.80)
Total rate
Note: Variable rate per activity unit is constant. Fixed overhead per unit behaves inversely
with the activity-unit level.
52. What percentage of the variation in maintenance costs is explained by the independent
variable?
A. 85.6%
C. 47.3%
B. 95.2%
D. 73.3%
5 . Answer: B
Variable rate = (∆ in activity cost)/(∆ in activity level)
= (P84,000 – P46,000)/(3,500 – 1,100)
= P16.00
53. What is the total maintenance cost for an estimated activity level of 20,000 machine hours?
A. P73,500
C. P82,300
B. P78,400
D. P84,750
1 . Answer: D
Monthly fixed costs 480,000 / 12
Variable 20,000 x 5
Total
2 . Answer: B
Monthly budgeted fixed cost (72,000/12)
Variable cost based on actual units:
Number of hours allowed
(96,000 x 5/60)= 8,000 hours
Variable cost: 8,000 x 1.60
Budgeted overhead cost
P2.50
5.00
P7.50
Fixed cost a = y – bx
a = P46,000 – (1,100 x 16)
a = P28,400
6 . Answer: B
Days Occupancy:
70% -- 2,000 x 30 days x 0.7
45% -- 2,000 x 30 days x 0.45
P 40,000
100,000
P140,000
42,000
27,000
Variable cost per Room Day:
P 6,000
(42,000 x 21) - 792,000
42,000 - 27,000
12,800
P18,800
3 . Answer: C
The solution can be made using an equation approach:
a = y – bX
(P2,300,000 – 50,000X)1.25 = P2,800,000 – 60,000X
61
P6.00
Fixed costs: 792,000 – (27,000 x 6)
P630,000
Cost at 60% rate:
Variable:
2,000 x 30 x 0.6 x P6
Fixed
P216,000
630,000
Activity Cost Analysis
Total
7 . Answer: D
b = (853.560 – 723,060) ÷ (540,000 – 450,000)
130,500 ÷ 90,000
P846,000
X = 6,250
10 . Answer: C
b = (31,000 – 27,000) ÷ (15,000 – 12,500)
4,000 ÷ 2,500
b = 1.6
P 1.45
a = 853,560 – (540,000 x 1.45)
P 70,560
Y = 70,560 + 1.45b
= 70,560 + (470,000 x 1.45)
P752,060
a = 31,000 - (15,000 x 1.60)
a = 7,000
8 . Answer: D
∑X = 36
∑Y = 2,320
∑XY = 22,600
∑X2 = 404
Y = 7,000 + 1.60X
11 . Answer: B
Variable Rate =
61,000 - 58,500
3,000
= 0.8333
∑Y = na + b∑X
∑XY = as + b∑X2
Fixed : 61,000 – (34,000 x .8333)= 32,677
2,320 = 4a + 36b
22,600 = 36a + 404b
20,880 = 36a + 324b
1,720 = 80b
b = 21.50
2,320 = 4a + (36 x 21.50)
2,320 = 4a + 774
4a = 1,546
a = 386.50
12 . Answer: A
b = (720 – 640) ÷ (600 - 200)
80 ÷ 400
P0.20
a = 720 – (600 x .2)
720 – 120
P600
Total Cost for month of May
Y = 600 + (500 x 0.2)
P700
13 . Answer: B
∆Y = 100 x 3
Y = 386.50 + 21.50 X
Y = 386.50 + (10 x 21.50)
Y = 601.50
P300
Within a relevant range, the amount of total fixed cost remains constant at P4,000. The
only cost that will change in total is variable cost because every additional hour will add
P3 to total costs.
9 . Answer: C
4X = 42,500 – 17,500
4X = 25,000
62
Activity Cost Analysis
14 . Answer: A
Unit level costs: P12000 ÷ 3000 x 800
Product level costs: P1,000 ÷ 40 x 4
Customer level costs: P3,500 ÷ 10
Cost of Job 002
15,629.25 = 91a + 2,070.25b
39.75 = 14.75b
P3,200
100
350
P3,650
b = P2.70
687 = 4a + (91 X 2.695)
687 = 4a + 245.25
4a = 441.75
a = P110.44
Within a relevant range, the amount of fixed cost remain constant at P4,000. The only cost that
will charge in total is variable cost between every additional hour will be accompanied by an
increase of P3.
15 . Answer: B
Total number of minutes used after completing 8 units:
(10 × .7 × .7 × .7)
16 . Answer: C
Cumulative average after completing 4 units:
1,500 × .9 × .9
Y = P110.44 + P2.70X
3.43
P1,215
Total costs of 4 units 4 x P1,215
Less total costs of first 2 units 1,500 x 0.9 x 2
P4,860
2,700
Additional costs
P2,160
17 . Answer: D
Net income
Add: selling and admin. Expense
Gross Margin
Add: excess of contribution margin over gross margin
Contribution Margin
19 . Answer: C
Variable OH rate
Fixed OH rate (340,000 ÷ 425,000)
Total OH rate
P 2.00
0.80
P 2.80
20 . Answer: B
b = (8,500 – 6,750) ÷ ( 2,000 – 1,500)
= 1,750 ÷ 500
b = 3.50
a = 8,500 – (2,000 x 3.5)
a = 1,500
y = 1,500 + 3.50X
P 50,000
120,000
170,000
15,000
P185,000
21 . Answer: A
Change in cost  Change in sales = Variable cost per peso sale
(P69,000 – P52,000) ÷ (P148,000 – P97,000)
P17,000  P51,000 = P0.333.
18 . Answer: B
∑X = 91
∑Y = 687
∑XY = 15,669
∑X2 = 2,085
22 . Answer: B
Contribution margin per unit:
(P154,000 + P26,000) ÷ 12,000 units
Variable cost per unit: P20.00 – P15.00
23 . Answer: B
∑X = 1,150,000
∑Y = 3,110,000
687 = 4a + 91b
15,669 = 91a + 2,085b
63
P15.00
P 5.00
Activity Cost Analysis
∑XY = 770,900 Million
∑X2 = 307, 100 Million
Add Fixed Costs:
Manufacturing
Selling and administrative
Total Contribution Margin
The least-squares method is based on the cost model
Y = a + bX
26 . Answer: A
Maintenance cost at high level:
Total factory overhead
Less: Indirect materials (variable) 75,000 x P100
Rent (fixed)
Amount of maintenance cost
I. Since all the observations are included, all the values are summed up:
∑Y = na + b∑X
II. To minimize distortion, the first equation is made bigger by multiplying it by ∑X.
∑XY = a∑X + b∑X2
III. Solve for values of b and a
Eq. 1: 3.11 = .000005 + 1.15b
Eq. 2: 770,900 = 1.15a + 307,100b
715,300 = 1.15a + 264,500b
55, 600 = 42, 600b
b = P1.305164
135,000
P185,000
P17,625,000
( 7,500,000)
( 6,000,000)
P 4,125,000
27 . Answer: A
Analysis of maintenance cost
b = (P4,125,000 – P3,250,000) ÷ (75,000 – 50,000)
b = 875,000 ÷ 25,000
b = P35
a = P3,250,000 – (50,000 x P35)
a = P1,500,000
770,900 = 1.15a + ( 307,100 x 1.31)
1.15a = 370,085
a = P320, 520
Indirect materials 70,000 x 100
Rent
Maintenance 500,000 + (70,000 x 35)
Total Overhead costs
24 . Answer: A
∑X = 20
∑Y = 53,500
∑XY = 231,500
∑X2 = 90
28 . Answer: B
b = (135,000 – 75,000) ÷ (120,000 – 40,000) 60,000 ÷ 80,000
a = P75,000 – (40,000 x 0.75)
53,500 = 5a + 20b
231,500 = 20 + 90b
214,000 = 20a + 80b
17,500 = 10b
29 Answer: D
Y = P45,000 + P0.75X
Y = P45,000 + (110,000 x P0.75)
b = P1,750
25 . Answer: D
Net income
P 15,000
120,000
30 . Answer: A
Number of bed days based on occupancy rate of:
80% = 450 x 30 x 0.8
P 50,000
64
P 7,000,000
6,000,000
3,950,000
P16,950,000
P0.75
P45,000
P127,500
10,800
Activity Cost Analysis
60% = 450 x 30 x 0.6
b=
8,100
b= P0.98
(10,800 x 32) - 326,700
10,800 - 8,100
18,900 ÷ 2,700
31 . Answer: B
a = P326,700 – (8,100 x P7)
32 . Answer: C
Number of bed days at 75% occupancy rate
0.75 x 30 x 450 = 10,125
Y = P270,000 + (10,125 x P7)
33 . Answer: C
b = (P130,000 – P115,000) ÷ (100,000 – 80,000)
P15,000 ÷ 20,000
a = P775 - (650 x 0.98)
= P775 - 637
P7
a = P138.00
37 . Answer: C
Slope represents the variable rate.
Intercept represents total fixed cost
P270,000
38 . Answer: C
Y = 12 x 30
= P360
P340,875
a = P360 – (12 x 3 x 10)
=0
P0.75
39 . Answer: A
34 . Answer: A
a = P130,000 – (10,000 x P0.75)
a = P55,000
Total fixed overhead:
Maintenance Cost
Depreciation
Total
35 . Answer: B
Utilities 110,000 x P0.6
Maintenance P55,000 + (110,000 x P0.75)
Depreciation
Total
b=
(105,000 x P11.40) - (70,000 x P13.40)
105,000 - 70,000
b = (P1,197,000 – P938,000) ÷ 35,000
b = P7.40
P 55,000
60,000
P115,000
a = P938,000 – (70,000 x P7.40)
a = P420,000
P 66,000
137,500
60,000
P263,500
Y = P420,000 + P7.40X
Y = P420,000 + (80,000 x 7.40)
= P1,012,000
40 . Answer: D
Number of units sold = 1,500,000 ÷ 7,500
36 . Answer: B
b = (P775 - P550) ÷ (650 - 420)
P225 ÷ 230
Costs of goods sold = P200 x 4,500
65
200
P900,000
Activity Cost Analysis
Variable selling expenses 200 x 500
Variable administrative expenses 0.20 x 100000
Total
P100,000
20,000
P1,020,000
The hall Rental is fixed per day and not per session. The prize money and cost of the caller
varies per session and the cost of supplies varies per person attending.
46 . Answer: C
Cost of Goods sold is P15 per unit.
Unit sales
1,000
2,000
3,000
41 . Answer: D
The total cost at an activity level of 16,000 units is determined as follows:
Total cost = P30,000 + (16,000 units x P5.00 per unit) P110,000
42 . Answer: C
Total Fixed Costs include:
Rental
Cost of the caller
Prize money
Total
Total Variable costs are:
P3 per person for the 1,000 people attending
P 3,000
200
P10,000
P13,200
A variable cost is one which is constant per unit.
Unit Variable Cost
15,000 ÷ 1,000
P15
30,000 ÷ 2,000
P15
45,000 ÷ 3,000
P15
47 . Answer: B
The salary is a mixed cost. Notice that the cost per unit and in total for each volume level are
not the same. There is a variable cost component of P10 per unit and a fixed cost component
of P10,000. Within a relevant range, unit variable cost as well as total fixed cost are constant.
Variable cost (30,000 – 20,000) ÷ (2,000 – 1,000)
Fixed cost 20,000 – (1,000 x 10)
P 3,000
P
10
P10,000
43 . Answer: B
The cost of supplies varies based upon the number of players that attend each session not
just the number of sessions
48 . Answer: C
Cost of Goods Sold is a variable cost. Rent and Depreciation are fixed costs. Salary is a mixed
cost that has some fixed cost behavior.
44 . Answer: D
Total costs: (P3,000 + P13,200)
49 . Answer: B
Sales P60 * 3000 units
Total Variable Cost
Contribution Margin
P16,200
If the number of people attending each session is the same, all of the costs act like variable
costs and the average cost per session equals the total cost per session.
45 . Answer: B
If they hold 2 sessions per day:
Hall Rental
Caller salary (2 x P200)
Total prize money
Total cost of supplies
Total
Average cost per session P29,400 ÷ 2 sessions
Total variable cost:
Cost of goods sold
Variable salary cost
Total
P 3,000
400
20,000
6,000
P29,400
P14,700
50 . Answer: B
Rent
Depreciation
Fixed salary cost
Total fixed costs
66
P180,000
75,000
P105,000
P45,000
30,000
P75,000
P20,000
30,000
10,000
P60,000
Activity Cost Analysis
51 . Answer: C
To analyze mixed cost using high-low method, the analyst always identifies and uses the
lowest and the highest levels of activities. The reason is that the activity presumably causes
costs, so the analyst would like to use data that reflects the greatest possible variation in
activity.
52 . Answer: D
The question does not require a computation. R2 (goodness of fit) indicates the percentage of
the variation in the dependent variable (cost) that is explained by variation in the independent
variable (activity). The adjusted R2 varies from zero to 100%, and the higher the percentage,
the better.
53 . Answer: A
Variable cost 20,000 x 3.5
Fixed cost
Total cost
P70,000
3,500
P73,500
67