ACCTG 202
STRATEGIC COST
MANAGEMENT
MODULE 1
Prepared by:
WILFREDO P. MONDIDO JR.
Instructor
Page 1 of 47
Dear Student,
Panagdait sa Tanang
Kabuhatan!
The success of this module
lies in your hands. This was
prepared for you to learn
diligently, intelligently, and
independently. This will be a
great opportunity for you to
equip yourself not only with
academic content but as well
as some invaluable skills which
you will be very proud of as a
responsible learner.
Page 2 of 47
STUDY SCHEDULE AND HOUSE RULES
Course Title: Strategic Cost Management
Course Description: An advanced accounting course with an emphasis on
understanding organizational strategy around cost analysis and controls. Students will be
introduced to various Strategic Cost Management concepts via a series of case studies
and discussions. Topics include: i) Cost Concepts and Classification, (ii) Variable Costing,
(iii) Cost-Volume-Profit Analysis, (iv) Budgeting, (v) Standard Costing and Variance
Analysis, (vi) Responsibility Accounting & Transfer Pricing, (vii) Short-term Non-routine
Decisions, (viii) Value Chain Analysis; ix) Strategic Position Analysis; (x) Activity-based
costing; xi) Ethical considerations and Strategic Cost Management, and any other
related topics.
STUDY SCHEDULE
MODULE 1
Understanding & Classifying Costs and Variable Costing
At the end of the module you will be able to:
1. Understand the importance of controlling costs.
2. Describe the different perspective of classifying costs.
3. Discuss the classification of costs according to accountant’s perspective,
manager’s perspective and economist’s perspective.
4. Explain the relationship of economic costs to level of production and sales.
5. Prepare a variable costing statement of profit or loss.
6. Identify the difference in the profit or loss statement prepared under the
absorption costing and variable costing.
7. Explain the nature and characteristics of a product cost and period cost.
8. Account for the difference in the profit under the absorption costing and
variable costing systems.
9. Explain the importance of normal capacity to profit.
10. Compute the volume variance and understand its connection to normal
capacity.
WEEK
TOPIC
Week 1
Lesson 1 – Cost Concepts &
Classifications
Week 2
Lesson 2 – Costs Segregation
Techniques
Week 3
Lesson 3 – Variable Costing Versus
Absorption Costing
Week 4
Lesson 4 – Volume Variance and Its
Connection to Normal Capacity
Week 5
PRELIM
Dates
Days & Time
EXAMINATION
Page 3 of 47
MODULE 2
Cost-Volume-Profit Analysis and Short-term Budgeting
At the end of the module you will be able to:
1. Understand the importance of contribution margin.
2. Enumerate the underlying assumptions in the cost-volume-profit relationships.
3. Understand the relationship of volume, sales price, and costs to profit.
4. Compute the breakeven point and sales with profit.
5. Draw the breakeven graph and CVP graph.
6. Identity the objectives of short-term budgeting.
7. Prepare a master budget and its related schedules.
8. Describe the different models of budgeting.
9. Prepare operating and financial budgets, using the flexible budget model.
10. Relate budgeting to standard-setting, planning and controlling functions of
management.
WEEK
TOPIC
Week 6
Lesson 1 – The Basic CVP Analysis
Week 7
Lesson 2 – CVP Sensitivity Analysis
Week 8
Lesson 3 – Preparation of Master
Budget and Its Schedules
Week 9
Lesson 4 – Budgeting Models
Week 10
MIDTERM
Dates
Days & Time
EXAMINATION
MODULE 3
Standard Costing and Variance Analysis
At the end of the module you will be able to:
1. Understand the concept of standards and standard setting.
2. Identify the different levels of capacity used in standard-setting.
3. Interrelate standards with planning, organizing, directing and controlling.
4. Determine and analyze the costs variances of direct materials and direct
labor.
5. Determine and analyze the costs variances of factory overhead using 2way, 3-way, 4-way, and 5-way analysis.
6. Compute the materials mix and yield variances.
7. Explain the various ways of disposing costs variances.
8.
Journalize costs transactions and cost variances.
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WEEK
TOPIC
Week 11
Lesson 1 – The Materials and Labor
Costs Variances Analysis
Week 12
Lesson 2 – Factory Overhead
Variances Analysis
Week 13
Lesson 3 – Disposition of Variances
Week 14
PREFINAL
Dates
Days & Time
EXAMINATION
MODULE 4
Responsibility Accounting and Short-term Non-routine Decisions
At the end of the module you will be able to:
1. Understand the importance of organizational structure to managerial
reporting.
2. Differentiate centralization from decentralization and empowerment.
3. Identify the different types of responsibility centers.
4. Apply various measurements in evaluating segment performance.
5. Explain the importance of transfer pricing to segment reporting.
6. Identity the various transfer prices and explain their importance to segment
evaluation.
7. Differentiate strategic, tactical and operational decisions.
8. Identity the concerns of tactical (short-term) decisions.
9. Differentiate routinary from non-routinary decisions.
10. Classify relevant from irrelevant costs in decision making
11. Give examples of short-term non-routing decisions.
12. Present relevant cost and quantitative analysis in different situations involving
short-term non-routine decisions.
WEEK
TOPIC
Week 15
Lesson 1 – Responsibility Accounting
Week 16
Lesson 2 – Segment Evaluation and
Transfer Pricing
Week 17
Lesson 3 – Short-term Non-routine
Decisions
Week 18
FINAL
Dates
Days & Time
EXAMINATION
Page 5 of 47
MODULE 1
Understanding &
Classifying Costs
and Variable
Costing
Page 6 of 47
Module 1
Understanding & Classifying Costs
and Variable Costing
Introduction
Figure 1. Retrieved from: https://thegeneralistit.com/blog/2017/02/09/pmp-study-notes-chapter-7-cost-management-part-1/
The growing pressures of global competition, trade wars among countries, technological
innovation, and changes in business processes have made cost management much more
important, critical and dynamic than ever before. Business managers must think and act
competitively and doing so requires strategy.
Strategic cost management involves the development of cost management information
to facilitate the principal management function which is strategic management, the
development of a sustainable competitive position. Cost management information is the
information that the manager needs to effectively manage the firm and it includes both financial
information about cost and revenues as well as relevant nonfinancial information about
productivity, quality and other key success factors for the firm. Cost management information, is
thus a value-added concept. It adds value by helping a firm to be more competitive.
This course will introduce us to the concepts and applications of different subject matters
included in cost management information, the first one which is apparently information about
costs. This module will achieve this objective since this module will introduce us to the concepts
and different classification of costs and some of the traditional methods/ techniques in properly
presenting and analyzing such costs, outlined in four lessons as follows:
•
Lesson 1: Cost Concepts & Classifications
•
Lesson 2: Costs Segregation Techniques
•
Lesson 3: Variable Costing Versus Absorption Costing
•
Lesson 4: Volume Variance and Its Connection to Normal Capacity
So, are you now ready to embark on this journey? I wish you an enriching and productive
learning experience.
Page 7 of 47
Module 1
Lesson 1
Costs Concepts and
Classifications
Learning outcomes:
At the end of the lesson you will be able to:
✓ Understand the importance of controlling costs.
✓ Describe the different perspective of classifying costs.
✓ Discuss the classification of costs according to accountant’s perspective, manager’s
perspective and economist’s perspective.
✓ Explain the relationship of economic costs to level of production and sales.
LECTURE NOTES
Controlling Expenses
Management accounting is about profit management that includes expenses as its vital
component. Expenses affect operating results, hence, should be understood and intelligently
managed. Operating results are summarized in the Statement of Profit or Loss. The end-point of
operating performance is to generate maximum profit performance out of the resources used.
Mathematically, profit increases when sales increase and expenses decrease, or both, as
shown below.
To increase
profit
Sales
P xx
Less: Expenses
_(xx)
Profit (Loss)
P xx
Traditional management accounting provides intelligent information to managers in
order to reduce expenses and increase profit. Reducing expenses requires for its thorough
understanding in line with the planning and controlling functions of management.
To manage cost means to control cost or reduce it or to justify its priority of incurrence.
To control costs means to understand them.
Cost Concepts
The use of the term “costs” here includes both costs and expenses. Cost is the cash or
cash equivalent value sacrificed for goods and services that are expected to bring a current
or future benefit to the organization. Costs are incurred to produce future benefits in a profitmaking firm, future benefits usually mean revenue. As costs are used up in generating
revenues, they are said to expire. Expired costs are called expenses. In each period, expenses
are deducted from revenues in the income statement to determine the period’s profit.
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Cost Classifications
Managing costs means knowing their nature, behavior, and other characteristics. Costs
may mean differently to different people. Costs may be classified in the perspectives of
accountants, managers, and economists.
Accountant’s Perspective
Capital Expenditures vs. Operating Expenditures
•
Capital Expenditures – These are investing outlays normally requiring large amount of
money and resources having a long-term impact to business profitability. These
expenditures would create probable future economic value and benefit and are
capitalized as assets. These costs are converted to expenses once their related income
has been generated.
Examples of capital expenditures are those used in long-term projects and
classified as long-term assets and become an expense once consumed in the production
or sale of a product.
•
Operating Expenditures – These are outlays or consumption used to directly support the
normal operating activities of the business. They are expensed in the current period
because of the following reasons:
a. Immediate recognition such as advertising, salaries and research;
b. Associating cause and effect such as cost of sales
c. Rational and systematic allocation such as depreciation
Cost vs. Expenses vs. Loss
Traditionally, we look at costs according to their functional classifications, that is
according to the place and purpose of their use.
•
Costs of Goods Manufactured are those incurred in producing goods and resources.
Examples are direct materials, direct labor, and factory overhead. Costs of Goods Sold are
those production costs relating to the units that are already sold.
•
Expenses are those incurred in distributing and managing a business. Marketing,
promotions and shipping expenditures are distribution expenses. Those relating to systems
and control, government compliance, and other corporate costs incurred to manage the
business are referred to as administrative expenses.
•
Both costs and expenses give benefits to the business. On the other hand, losses are
reduction in the value of assets without benefit to the business leading to impairment of
equity. Examples of losses are: loss on sale of equipment, loss on inventory obsolescence,
loss on shortages, spoilage, and loss on uncollectible.
Product Cost vs. Period Cost
•
Product Costs are those incurred in the process of producing the product. They are
inventoriable and deferred as assets while the related units are unsold. Once sold, the cost
of inventory is transferred from the asset classification to cost of goods sold.
Direct materials, direct labor, and factory overhead are product costs. Direct materials
and direct labor are prime costs. Direct labor and factory overhead are conversion costs.
Direct materials, direct labor, and variable factory overhead are variable production costs.
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•
Period Costs are those incurred outside of the production process. They are incurred to
administer a business, sell and distribute products, conduct researches, attend to
customer’s needs which are not related to the production function. They are instantly
expensed once incurred.
Direct Product Cost vs. Indirect Product Costs
•
Direct product costs are those that are directly identified with finished goods or services or
those that are directly attributable in the process of making goods or services. There are
only three costs of production: direct materials, direct labor and factory overhead. Direct
materials and direct labor are direct product costs.
•
Factory overhead is the indirect product cost. Factory overhead costs are a varied
collection of production-related costs that cannot be practically or conveniently traced
directly to end products. Examples of the major classification of factory overhead are:
o Indirect materials and supplies: nails, rivets, lubricants, and small tools
o Indirect labor costs: lift-truck driver’s wages, maintenance and inspection labor,
engineering labor, machine helpers, and supervisors
o Other indirect factory costs: building maintenance, machinery and tool
maintenance, property taxes, property insurance, pension costs, depreciation on
plant and equipment, rent expense, and utility expense.
Manager’s Perspective
Relevant Cost vs. Irrelevant Cost
•
Costs that are useful in making decisions are relevant costs. Relevant costs have two
characteristics. They differ from one alternative to another (differential costs) and they deal
about the future (future costs).
•
Those costs that are not useful are irrelevant costs. Past costs, sunk costs, historical costs are
irrelevant costs in making a decision because they can no longer be changed. Remember,
management deals about the future not the past. The future could be influenced or
directed, while the past cannot.
Direct Segment Costs vs. Indirect Segment Costs
•
Direct departmental costs are those that are directly identified with the department,
process, segment or activity. They may be variable or fixed costs.
Examples of direct departmental costs are salaries of a department manager,
salaries of personnel assigned to the department, supplies purchased and used, rental of
equipment directly used in departmental activities, utilities (e.g. electricity and water )
which are directly identified with a department, telecommunications, indirect materials,
indirect labor, and depreciation of equipment used in the department.
•
Indirect departmental costs are those that are not directly identified with a department.
They are sometimes referred to as “allocated costs”, “common costs”, or plainly
“unavoidable costs”.
Examples of indirect departmental costs are salaries of executives in the central
office, other central administrative costs such as advertising, system’s review and
development, interest expenses, training, research and development, real estate property
taxes, and allocated deprecation of non-current assets.
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Avoidable Cost vs. Unavoidable Cost
•
Avoidable costs are those not incurred once activity is not performed. They are normally
become savings on the part of the business. These savings are considered an inflow in the
economic sense and are referred to as imputed costs.
•
Unavoidable costs are those that would remain to be incurred regardless of option a
manager chooses. They remain constant, they do not change, and are irrelevant in shortterm decisions. Common examples of unavoidable costs are rent, depreciation, interest,
property taxes, and all other committed fixed costs.
Controllable Cost vs. Uncontrollable Cost
Another way of classifying costs relates to the degree of authority given to a manager.
•
Controllable costs are those which incurrence or non-incurrence can be influenced or
decided upon by a manager. The influence or decision-making power of a manager
depends on the scope, nature, and extent of authority granted to him by the organization.
•
Uncontrollable costs are those outside of the decision power or influence of a given
manager in a specific situation.
For example, entertainment expense would be controllable by a sales manager if he
or she had power to authorize the amount and type of entertainment for customers. On
the other hand, depreciation of warehouse facilities would not be controllable by the sales
manager, since he has no power to authorize warehouse construction
Planned Cost vs. Actual Cost
•
Planned costs are those that relate to future occurrences and are referred to in multifarious
names such as projected costs, estimated costs, budgeted costs, applied costs, and
standard costs.
•
Actual costs, or explicit costs, are those expenditures already incurred and are recorded
in the accounting books.
The difference between the planned cost and actual cost is called a planning gap or
planning variance.
Budgeted Cost vs. Standard Cost
•
Budgeted costs are those expected to be incurred at the level of activity used in preparing
the master budget.
•
Standard costs are those expected to be incurred at “any level of activity” aside from that
being used in the master budget. The level of activity used in computing the standard cost
may be actual or estimated.
Budgeted costs and standard costs use predetermined standard rates. The difference
between the budgeted and standard cost is called capacity variance.
Out-of-pocket Cost vs. Non-cash Cost
•
Out-of-pocket costs (OPCs) are those that are incurred and paid in cash. OPCs require
cash payments.
•
Those that are not paid in cash are non-cash costs.
.
Sunk Cost vs. Future Cost
•
Sunk costs are those that have been incurred in the past and can no longer be changed.
They are historical and irrelevant in making decisions.
•
Future costs are to be incurred in the coming periods. They are relevant and are of value
in making decisions.
.
Page 11 of 47
Economist’s Perspective
Explicit Cost vs. Implicit Cost
•
Explicit costs are actual costs. They are incurred and recorded in the accounting books.
•
Implicit costs are theoretical costs. They are assumed and are not recognized in the
accounting books. The good examples of implicit costs are opportunity costs and imputed
costs.
.
Opportunity Cost vs. Imputed Cost
•
The benefits given up in favor of another choice are opportunity costs.
•
Imputed costs are those costs not incurred but are implied in a given decision.
Opportunity costs and imputed costs are not recorded in the financial accounting system.
because they are not actually incurred. However, they are relevant and should be considered
when evaluating alternatives for decision-making
Incremental Cost vs. Marginal Cost
•
Incremental costs represent a total increase in costs. Decremental costs are decreases in
costs.
•
Marginal cost is an increase in cost per unit.
.
Variable Cost vs. Fixed Cost
The classification of costs as to fixed or variable refers to their behavior as they relate to
the changes in the activity level of production and sales.
•
Fixed Cost – are those that remain constant regardless of the change in the level of
production and sales, but inversely changes on a per unit basis. Fixed costs may be
classified into two categories, depending on the ability of the management to
influence the level of these costs in the short-term.
o Committed Fixed Costs – are those which incurrence have been committed by the
business in the past by reason of contract, acquisition or agreement. Examples are
rental expense, interest expense, insurance expense, executive salaries,
depreciation expense, patent amortization, real estate, property taxes, and salaries
of production executives.
o Discretionary (or Engineered) Fixed Costs – are those which incurrence is assured
but the amount may change depending on the discretion or value judgement of
the manager. Examples are advertising expense, research and development costs,
executive training costs, salaries of security guards and janitors, and repairs and
maintenance of buildings and grounds.
•
Variable Costs – change in total in direct proportion to changes in the level of
production and sales but is constant on a per-unit basis. That is, if sales increase by 10%,
total variable costs also increase by 10%. If sales decrease by 12%, total variable costs
also decrease by 12%.
Examples of variable costs are direct materials, direct labor, variable overhead,
and variable expenses.
Examples of variable overhead are factory supplies. indirect materials, indirect
labor, and repairs. Examples of variable expenses are delivery expense, salesmen’s
commissions, packaging costs, and supplies.
.
Page 12 of 47
Costs Sensitivity
SAMPLE PROBLEM:
CPA Company provides the following costs structure on its product:
Total Fixed Costs
P200,000
Unit Variable Costs
P20.
Requirement: What will happen to fixed costs and variable costs, in total and per unit, if production
levels are: (a) zero, (b) 5,000 units, (c) 10,000 units and (d) 15,000 units.
SOLUTION:
Production
Level
0
5,000
10,000
15,000
What
happened?
Total Variable Unit Variable
Costs
Cost
0
20
100,000
20
200,000
20
300,000
20
Changes
directly,
Constant per
increases as
unit
production
increases
Total Fixed
Costs
200,000
200,000
200,000
200,000
Constant,
regardless of
the lev els of
production
Unit Fixed
Total Costs
Unit Cost
Cost
N/A
200,000
N/A
40
300,000
60
20
400,000
40
13
500,000
33
Changes
I ncreases as
inv ersely,
production Decreases as
decreases as increases due production
production
to v ariable
increases
increases
costs
The summary of costs behavior may be expressed as follows:
Costs
Variable Costs
Fixed Costs
Total Costs Changes in direct proportion to the
Constant regardless of levels of
level of production and sales
production and sales
Unit Cost
Constant, regardless of levels of
Changes inversely, decreases as
production and sales
production increases and vice versa
How to
Reduce unit variable costs to reduce Increase production to reduce unit
control
total variable costs, that is why variable fixed costs, that is why, fixed cost is
cost is related to spending
related to volume.
PER UNIT
TOTAL
The behavior of costs in relation to changes in the level of production and sales can be
graphically presented as follows:
Variable Cost
Fixed Cost
Total Cost
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 13 of 47
Self-check
Name: _____________________________________________
Course & Year: __________
TEST I. COST CLASSIFICATIONS. Identify the “items” listed to the left by choosing the answers from
the “Choices” given to the right.
NO.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
_________________DESCRIPTION__________________________
Its incurrence depends on the decision of the manager.
Used in making a decision.
Mostly referred to as a sunk cost or past cost.
A past cost, unalterable, and unavoidable
A theoretical cost
A benefit given up in favor of the benefit received.
Income sacrificed in lieu of the decision made.
A saving generated in favor of the decision made.
Costs that are not recognized in the financial accounting
records and reports.
Costs which incurrence or non-incurrence depends on the
decision of the responsible manager.
These are normally allocated and unavoidable costs.
Costs found in all business segments.
Costs found in common operational process needed to be
allocated over the units being produced.
Costs paid in cash when incurred.
Costs used for planning purposes.
Costs that re projected in a given activity.
Costs that are projected and are used in planning a specific
level of activity.
It refers to either estimated costs or budgeted costs.
Estimated costs at a given level of actual or varying level of
activity.
Costs reportedly used in a given actual level of activity.
These are established based on scientific and empirical
processes and are accepted for planning and control purposes.
Research and development, executive training, advertising
costs.
Sometimes referred to as flexible costs.
Sometimes referred to as the master budget,
Salaries, depreciation, and utilities expenses.
Costs identified with the production activities.
_______CHOICES_________
A.
B.
C.
D.
E.
F.
G.
H.
Avoidable Costs
Budgeted Costs
Capital Assets
Common Costs
Controllable Costs
Conversion Costs
Discretionary Costs
Discretionary fixed costs
I.
Estimated Costs
J.
Imputed Costs
K. Incurred Costs
L. Inventoriable Costs
M. Irrelevant Costs
N. Joint Costs
O. Mixed Costs
P. Opportunity Costs
Q. Out-of-pocket costs
R. Period Costs
S. Planned Costs
T.
Prime Costs
U. Product Costs
V. Relevant Costs
W. Standard Costs
X. Unavoidable Costs
Y. Uncontrollable Costs
Z. Variable Production
Costs
It relates with the product and follows the unit being produced.
It is automatically expense when incurred.
It does not relate with the production activities and are
expensed in the time they are incurred.
Direct materials, direct labor and production overhead
Costs incurred to generate measurable and probable future
benefit to business operations in more than a year.
A saving generated from avoiding an alternative course of
action
Direct materials and direct labor.
Direct labor and overhead
Direct materials, direct labor, and variable overhead.
Page 14 of 47
TEST II. COST CLASSIFICATIONS. For each of the following costs indicate whether the costs would be Fixed
(F) or Variable (V) and whether they would be Inventoriable (I) or Period (P). If the cost is an Inventoriable
cost, indicate also whether it is a Direct Material (DM), Direct Labor (DL) or Factory Overhead (FOH). If
the cost is a Period cost, indicate also whether it is a Selling (S) or Administrative (A) cost.
F or V
I or P
Ex: Assembly-line worker’s wages.
V
I – DL
Salaries of President
F
P–A
1. Depreciation – Factory Building
2. Insurance – Store Building
3. Wages of Carpenters
4. Office Supplies used
5. Salary of executives
6. Indirect Labor
7. Indirect Materials
8. Wood used in Furnitures
9. Sales Commission (based on sales)
10. Freight and Handling on merchandise sold
11. Salary of Office staff
12. Factory Rent
13. Depreciation of store building
14. Fabric used in T-shirts
15. Wages of machine operators
16. Supplies used in factory
17. Sales Commission
18. Insurance on Factory equipment
19. Machine depreciation based on machine hours
20. Salary of Factory janitor
TEST III. Identification of Variable, Fixed, and Mixed Costs. Place a check mark in the appropriate
column to indicate whether the following costs are variable, fixed, or mixed.
Item ...................................................................
Variable
Fixed
Mixed
1. Small tools .................................................
2. Patent amortization .................................
3. Health and accident insurance .............
4. Heat, light, and power .............................
5. Straight-line depreciation ........................
6. Maintenance of buildings and grounds
7. Royalties ....................................................
8. Materials handling....................................
9. Property and liability insurance...............
10. Maintenance of factory equipment ......
TEST IV. Classification of Costs. Place a check mark in the appropriate column to indicate the
proper classification of each of the following costs.
Other
Indirect
AdminiIndirect
Indirect Factory
Marketing strative
Materials Labor
Costs
Expenses
Expenses
1. Factory heat, light, and power ........
2. Advertising .........................................
3. Wages of stockroom clerk ................
4. Freight out ..........................................
5. Oil for machines.................................
6. Salary of vice president of human relations
7. Legal expenses ..................................
8. Salary of the factory manager ........
9. Employer payroll taxes on controller's salary
10. Idle time due to assembly line breakdown
Page 15 of 47
TEST III. STRAIGHT PROBLEMS. Read and analyze the problems. Answer the requirements with
solutions to support your answers in good form.
PROBLEM 1. The estimated unit costs for CNR Inc., when it is operating at a production
and sales level of 12,000 units, are as follows:
Expense Item
Estimated Unit Cost
Direct Materials
P 32
Direct Labor
10
Variable Factory Overhead
15
Fixed Factory Overhead
6
Variable Distribution and Administrative
3
Fixed Distribution and Administrative
4
Required:
1. Compute the estimated conversion cost per unit.
2. Compute the estimated prime cost per unit.
3. Compute the estimated variable production cost per unit.
4. Compute the estimated total variable cost per unit.
5. Compute the estimated total fixed production costs.
6. Compute the estimated total fixed costs.
7. Compute the total product cost per unit.
8. Compute the total production costs.
9. Compute the total costs that would be incurred during the month with a production and
sales level of 12,000 units.
10. Compute the total costs that would be incurred during the month with a production
level of 12,000 units and a sales level of 8,000 units.
PROBLEM 2. Barrack Inc. manufactures laser printers within a relevant range of production of
50,000 to 70,000 printers per year. The following partially completed manufacturing cost
schedule has been prepared:
Number of Printers Produced
70,000
90,000
100,000
Total costs:
Total variable costs
$350,000
(d)
(j)
Total fixed costs
630,000
(e)
(k)
Total costs
$980,000
(f)
(l)
Cost per unit:
Variable cost per unit
(a)
(g)
(m)
Fixed cost per unit
(b)
(h)
(n)
Total cost per unit
(c)
(i)
(o)
Required: Complete the preceding cost schedule, identifying each cost by the appropriate
letter (a) through (o).
PROBLEM 3. Tarsier Company produced 400,000 units in August and used the following production
costs:
Direct Materials
P 750,000
Direct Labor
800,000
Factory Overhead:
Variable
80,000
Fixed
110,000
The company sold 360,000 units during the month. There was no inventory of finished goods
on August 1.
Required: Using the traditional cost accounting system, calculate the following:
1. Inventoriable cost per unit.
2. Cost of goods sold during the period.
3. Cost of inventory on August 31.
Page 16 of 47
Module 1
Lesson 2
Cost Segreggation Techniques
Learning outcomes:
At the end of the lesson you will be able to:
✓ Define and explain mixed costs.
✓ Discuss and graph the different types of mixed costs.
✓ Discuss the different techniques in segregating mixed costs into its variable and fixed
components.
✓ Separate the variable costs from fixed costs using High-low method, Least-squares
method and Scattergraph method.
LECTURE NOTES
Mixed Costs
Mixed Costs – Items of cost with fixed and variable components. Mixed costs vary with the level
of production, though not in direct relation to it, probably because part of the cost is fixed
while the rest is variable. Mixed costs could either be semi-variable costs, semi-fixed costs, or
step costs.
o
o
o
Semi-variable costs – change in total but not in direct proportion to the changes in the
level of production and sales.
Semi-fixed costs – are constant in a given level of activity but changes, not in a constant
way when a new level of activity is reached.
Step Costs – are constant in a given level of activity and changes, also in a constant way
as new level of activity is reached.
Examples of mixed costs are electricity, inspection, inter-department services, water and
sewages, maintenance and repairs, employer contributions to government agencies, and
industrial relations expenses.
Graphical Representations of Mixed Costs
Semi-variable Costs
Semi-fixed Costs
Step Costs
Page 17 of 47
Cost Segregation Techniques
Ideally, for both planning and for making certain types of decisions, all costs would be
classified as either fixed or variable, with mixed costs being separated into their fixed and
variable components. The different methods of separating/segregating mixed costs into fixed
and variable components are as follows:
(1) High-Low Method
(2) Least Squares Method, and
(3) Scattergraph Method.
.
High-Low Method
High-Low method is one of the several techniques used to split a mixed cost into its fixed
and variable components. Although easy to understand, high low method is relatively unreliable. This
is because it only takes two extreme activity levels (i.e. labor hours, machine hours, etc.) from a
set of actual data of various activity levels and their corresponding total cost figures .
Illustrative Example:
Summary of Electricity Costs and Direct Labor Hours
Month
Direct Labor Hours
Cost of Electricity
January
February
March
April
May
June
July
August
September
October
November
December
28
24
30
33
38
34
35
40
42
47
43
32
P 625
565
630
640
685
640
655
700
715
726
700
630
Solution:
Highest Month (October)
Lowest Month (February)
Direct Labor Hours
47
___24_
23
_Cost_
P 726
565
P 161
Variable Rate Per Direct Labor Hour = _P161_ = P7/direct labor hour
23 hours
Fixed cost can be computed from either the high or low data:
High
Total Cost of Electricity
P 726
Less: Variable Portion (7/ direct labor hour)
329
Monthly Fixed Cost
P 397
Low
P 565
168
P 397
The formula for projecting the total monthly cost of electricity based on these data
would be P397 plus P7 multiplied by the direct labor hours expected to be worked during the
period (y = a + bx) where
y = Total Cost
b = Variable Cost per cost driver
a = Fixed Cost
x = Activity Level
Page 18 of 47
Least Squares Method
The three formulas to be used in the least-square method are:
Equation 1:
y = a + bx
Equation 2:
∑y = na + b∑x
Equation 3:
∑xy = ∑xa + b∑x2
Illustrative Example:
Month
January
February
March
April
May
June
July
August
September
October
November
December
Total (∑)
Direct Labor
Hours (x)
28
24
30
33
38
34
35
40
42
47
43
32
426
Cost of
Electricity (y)
625
565
630
640
685
640
655
700
715
726
700
630
7,911
xy
x2
17,500
13,560
18,900
21,120
26,030
21,760
22,925
28,000
30,030
34,122
30,100
20,160
284,207
784
576
900
1,089
1,444
1,156
1,225
1,600
1,764
2,209
1,849
1,024
15,620
By elimination method:
Equation 2
∑y = na + b∑x
7,911 = 12a + 426b
Equation 3
∑xy = ∑xa + b∑x2
284,207 = 426a + 15,620b
Equation 2
(7,911 = 12a + 426b) 35.5
284,207
= 426a + 15,620b
280,840.50 = 426a + 15,123b
3,366.50 = 497b
497
497
b = 6.773641851
Substituting the value for Equation 2, compute for a:
7,911 = 12a + 426b
7,911 = 12a + 426(6.773641851)
7,911 = 12a + 2,885.571429
7,911 – 2,885.55 = 12a
5,025.428571 = 12a
12
12
a = 418.7857143 or 418.79
Scattergraph Method
Scatter graph method is a graphical technique of separating fixed and variable
components of mixed cost by plotting activity level along x-axis and corresponding total cost
(mixed cost) along y-axis. A regression line is then drawn on the graph by visual inspection. The
line thus drawn is used to estimate the total fixed cost and variable cost per unit. The point
where the line intercepts y-axis is the estimated fixed cost and the slope of the line is the
average variable cost per unit. Since the visual inspection does not involve any mathematical
testing therefore this method should be applied with great care.
Page 19 of 47
Step 1: Draw scatter graph. Plot the data on scatter graph. Plot activity level (i.e. number of
units, labor hours etc.) along x-axis and total mixed cost along y-axis.
Step 2: Draw regression line. Draw a regression line over the scatter graph by visual inspection
and try to minimize the total vertical distance between the line and all the points. Extend the
line towards y-axis.
Step 3: Find total fixed cost. Total fixed is given by the y-intercept of the line. Y-intercept is the
point at which the line cuts y-axis.
Step 4: Find variable cost per unit. Variable cost per unit is equal to the slope of the line. Take
two points (x1,y1) and (x2,y2) on the line and calculate variable cost using the following
formula:
y2 − y 1
Variable Cost per Unit = Slope of Regression Line =
x2 − x1
Illustrative Example
Company α decides to use scatter graph method to split its factory overhead (FOH)
into variable and fixed components. Following is the data which is provided for the analysis.
Month
1
2
3
4
5
6
7
8
Units
FOH
1,520
1,250
1,750
1,600
2,350
2,100
3,000
2,750
$36,375
38,000
41,750
42,360
55,080
48,100
59,000
56,800
Solution:
Fixed Cost = y-intercept = $18,000
Variable Cost per Unit = Slope of Regression Line
To calculate slope, we will take two points on line: (0,18000) and (3500,68000)
Variable Cost per Unit = (68000 − 18000) = $14.286
(3500 − 0)
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 20 of 47
Self-check
Name: ________________________________________________________
Course & Year: _______________
TEST I. Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan
its operations. A recent trade publication revealed that overhead costs tend to vary with machine
hours. To check this, they collected data for the past 12 months as follows:
Month
1
2
3
4
5
6
7
8
9
10
11
12
Machine
Hours
175
30
160
190
600
200
160
150
210
180
170
145
Overhead
Costs
P 4,500
750
4,321
5,250
16,475
5,400
4,450
3,975
5,275
4,760
4,325
4,100
Requirements:
1. Use the high-low method to estimate the fixed and variable portion of overhead costs
based on machine hours.
2. If the plant is planning to operate at a level of 300 machine hours next period, what would
be the estimated overhead costs?
3. Use the method of least square to estimate the fixed and variable portion of overhead
costs based on machine hours. If the plant is planning to operate at a level of 300
machine hours next period, what would be the estimated overhead costs?
TEST II. Westinghouse Company manufactures major appliances. Because of growing interest in its
product, it has just had its most successful year. In preparing the budget for next year, its controller
compiled these data
Month
May
July
August
September
October
November
December
Machine
Hours
6,000
5,000
4,500
4,000
3,500
3,000
100
Electricity
Costs
P 60,000
53,000
49,500
46,000
42,500
39,000
1,000
Requirements: Using the (1) high-low method, (2) least-squares method and (3) Scattergraph method:
1. Compute the variable cost per machine hour
2. The monthly fixed electricity costs
3. The total electricity costs if 4,800 machine hours are projected to be used next month.
Page 21 of 47
TEST III. Herbart Company monitors its monthly usage of power and defined the relevant range of
assumption to be 20 months. On the month of July last year, there was a consumer return of power
cost by the electric cooperative which reduced the cost and that was just an isolated circumstance.
On October the same year, there was a major increase in the cost paid for power due to illegal
connections in their electric lines in the form of jumper connections, it was an unexpected occurrence
and is outside the relevant range although it happened again January of the current year, the
company assumes that these events are isolated. Regarding the company utilization of such resource,
it gathered the following information on power costs and factory machine usage for the last 20
months:
Month
January
February
March
April
May
June
July
August
September
October
November
December
January (current)
February
March
April
May
June
July
August
September
October
Power Cost
Php24, 400
30,300
29,000
22,340
19,900
14,900
600
25,680
14,900
150,000
26,000
25,900
100,000
23,900
28,500
19,800
26,000
27,000
15,860
12,651
19,552
23,566
Factory Machine Hours
13,900
17,600
16,800
13,200
11,600
6,600
8,000
14,150
6,660
17,000
14,300
14,250
7,000
13,500
16,741
11,452
14,321
15,000
7,000
5,000
11,483
13,350
Requirements:
I.
Using the high-low method of analyzing costs, answer the following questions and show
computations to support your answers.
1. What is the estimated variable portion of power costs per factory machine hour?
2. What is the estimated fixed power cost each month? Formulate the regression equation
3. If it is estimated that 10,000 factory machine hours will be run in November of the current
year, what is the expected total power cost for November?
II.
Using the least square method of analyzing costs, answer the following questions and show
computations to support your answers.
1. What is the estimated variable portion of power costs per factory machine hour?
2. What is the estimated fixed power cost each month? Formulate the regression equation
3. If it is estimated that 12,000 factory machine hours will be run in November of the current
year, what is the expected total power cost for November?
Page 22 of 47
Module 1
Lesson 3
Variable Costing versus
Absorption Costing
Learning outcomes:
At the end of the lesson you will be able to:
✓ Prepare a variable costing statement of profit or loss.
✓ Identify the difference in the profit or loss statement prepared under the absorption
costing and variable costing.
✓ Explain the nature and characteristics of a product cost and period cost.
✓ Account for the difference in the profit under the absorption costing and variable
costing systems.
✓ Understand the behavior of profit in relation to level of activity under variable and
absorption costing systems.
LECTURE NOTES
Profit Modelling
There are two profit determination that are popularly used – the variable costing and
the absorption costing. The variable costing is used for management reporting while the
absorption costing is used for external reporting.
The Variable Costing
Variable Costing is premised on the philosophy that costs are either fixed or variable.
Variable costs relate to units sold. The differences between sales and variable costs is called
the contribution margin. It is the operating profit to absorb fixed costs and profit.
A condensed variable costing statement of profit or loss is shown below.
Variable Costing
Pro-Forma Statement of Profit or Loss
Sales
Less: Variable Costs
Contribution Margin
Less: Fixed Costs
Profit
P xx
xx
P xx
xx
P xx
The variable costing (also called marginal costing or direct costing) income statement
is not in accordance with the established financial reporting standards. Rather, it follows the
economic model of determining profit and gives business managers more accurate
perspective on how profit and wealth are accumulated and controlled.
Page 23 of 47
The Absorption Costing
Absorption Costing operates within the framework of the International Financial
Reporting Standards. It is also known as “full costing” or “traditional costing”. It classifies costs
and expenses according to the functional nature of business operations such as cost of goods
sold, marketing, selling, and administrative expenses. The pro-forma absorption costing
statement of profit or loss is shown below:
Absorption Costing
Pro-Forma Statement of Profit or Loss
Sales
Less: Cost of Goods Sold
Gross Profit
Less: Selling & Admin Exp.
Profit
P xx
xx
P xx
xx
P xx
The Difference Between Absorption Costing & Variable Costing
The difference between absorption and variable costing methods lies on how the fixed
overhead is treated.
Under the absorption costing, fixed overhead is treated as product cost while under
the variable costing, fixed overhead is treated as period cost. The matrix below shows how
costs and expenses are classified under absorption and variable costing systems.
Costs and Expenses
Direct Materials
Direct Labor
Variable Overhead
FIXED OVERHEAD
Variable Expenses
Fixed Expenses
Absorption Costing
Variable Costing
Product Cost
Product Cost
Product Cost
PRODUCT COST
Period Cost
Period Cost
Product Cost
Product Cost
Product Cost
PERIOD COST
Period Cost
Period Cost
Product Costs, also called inventoriable costs or deferrable costs, those that are
associated with units produced or sold. These costs are deferred to inventory if the units are
not yet sold and they are either charged to cost of goods sold and are deducted from sales
once the units are sold. These costs follow the flow of units,
Period Costs are charged outright as expenses regardless of whether the units are sold
or unsold. Once incurred, period costs are immediately deducted from sales. These costs do
not relate to the flow of units but are expenses in the period incurred.
Under absorption costing method, the fixed overhead is a product cost and therefore
is deducted from sales based on the number of units sold (units sold x unit fixed costs)
In variable costing method, the fixed overhead is a period cost and therefore the
amount deducted from sales is equal to the amount incurred or budgeted without regard to
the units sold produced and sold.
Page 24 of 47
Understanding Profit Behavior under Absorption & Variable Costing
Case
Where
Profit (Loss)
A
B
C
Sales > Production
Sales < Production
Sales = Production
Variable Profit > Absorption Profit
Variable Profit < Absorption Profit
Variable Profit = Absorption Profit
Variable Costing profit follows the trend in sales.
• When sales are greater than production, variable costing profit is greater than
absorption costing profit
• When sales are lower than production, variable costing profit is less than absorption
costing profit
• When sales equal production, the profit (loss) between variable costing and absorption
costing is equal.
Now, we should also say that if variable costing follows sales, then, absorption costing
follows production. That is, if production is greater than sales, absorption costing profit is greater
than that of variable costing. And if production is less than sales, absorption costing profit is less
than that of variable costing.
In variable costing, as sales increase, profit also increases; as sales decline, profit also
declines. This observation follows a manager’s normal train of thought with regard to the
relationship of sales and profit. Variable costing gives remedy to a possible report generated
under the absorption costing model where sales are increasing but profit is declining, and vice
versa.
Reconciliation on the Difference in Profit
The difference in profit between absorption and variable costing methods may be
accounted for using four methods as follows:
•
Method 1. Get the difference in the amount of Fixed Overhead charged under the two
methods.
•
Method 2. Get the difference between production and sales in units and multiply by the
unit fixed overhead rate.
•
Method 3. Get the change in inventory between the beginning and ending inventory units
and multiply by the unit fixed overhead rate.
•
Method 4. Get the changes in values of beginning and ending inventories under each
method.
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 25 of 47
Self-check
Name: ________________________________________________________
Course & Year: ______________
TEST I. Mela Corporation has the following standard costs and production data in 2020.
Unit Sales Price
P 200
Unit Variable Cost of Production
120
Unit Fixed Overhead
20
Unit Variable Expenses
10
Unit Fixed Expenses
5
Beginning Inventory
4,000 units
Normal Capacity
20,000 units
The fixed expenses are also based on normal capacity.
Requirement:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Determine the operating income under absorption costing and variable costing under each
of the following cases:
Case
Production
Sales
A
B
C
20,000
20,000
20,000
22,000
19,000
20,000
TEST II. Haiyan Corporation produces a product with the following data:
A. Standard production costs per unit (Normal Capacity = 20,000 units):
Direct Materials
2lbs @ P6.00
P12.00
Direct Labor
1.25 hrs. @ P20.00
25.00
Variable Overhead 1.25 hrs. @ P4.00
5.00
Fixed Overhead
1.25 hrs. @ P8.00
10.00
B. Standard distribution and administrative expenses:
Variable Expenses
P3.00 per unit
Fixed Expenses
P200,000 per month
C. Regular unit sales price
P200.00 per unit
D. Beginning Inventory
2,200 units
Required:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Profit using variable costing and variable costing under each of the following independent
cases:
Case
Production
Sales
A
20,000
22,000
B
20,000
19,300
C
20,000
20,000
Page 26 of 47
TEST III. MULTIPLE CHOICE PROBLEMS. Choose the letter of the correct answer with corresponding
solutions in good form.
1. MNO Products, Inc. planned and actually manufactured 200,000 units of its single product in 2000,
its first year of operations. Variable manufacturing costs were P30 per unit of product. Planned
and actual fixed manufacturing costs were P600,000, and marketing and administrative costs
totaled P400,000 in 2000. MNO sold 120,000 units of product in 2000 at a selling price of P40 per
unit. What is the cost of the ending inventory assuming variable costing is used?
A. P2,400,000
B. P2,750,000
C. P2,250,000
D. P2,640,000
2. LY & Company completed its first year of operations during which time the following information
were generated:
Total units produced
Total units sold @ P100 per unit
Work in process ending inventory
Costs
Raw materials
Direct labor
Factory overhead
Selling and administrative
Variable Cost per Unit
P20.00
12.50
7.50
10.00
100,000
80,000
20,000
Fixed Costs
P1.2 million
0.7 million
If the company used variable (direct) costing method, the operating income would be
A. P2,100,000
B. P4,000,000c.
C. P2,480,000
D. P3,040,000
3. West Co.’s 1988 manufacturing costs were as follows:
Direct materials and direct labor
$700,000
Other variable manufacturing costs
100,000
Depreciation of factory building and manufacturing equipment
80,000
Other fixed manufacturing overhead
18,000
What amount should be considered product cost for external reporting purposes?
A. $700,000
B. $800,000
C. $880,000
D. $898,000
4. At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand. Variable
and fixed manufacturing cost per unit were $90 and $20, respectively. If Killo uses absorption
costing rather than direct (variable) costing, the result would be a higher pretax income of
A. $20,000.
B. $0.
C. $70,000.
D. $90,000.
5. Coomber Industries manufactures a single product using standard costing. Variable production
costs are $13 and fixed production costs are $125,000. Coomber uses a normal activity of 12,500
units to set its standard costs. Coomber began the year with 1,000 units in inventory, produced
11,000 units, and sold 11,500 units. The standard cost of goods sold under absorption costing
would be
A. $115,000
B. $253,000
C. $149,500
D. $264,500
Page 27 of 47
6. Z Corp. incurred the following costs in 2001 (its first year of operations) based on production of
10,000 units:
Direct material
$5 per unit
Direct labor
$3 per unit
Variable product costs
$2 per unit
Fixed product costs (in total)
$100,000
When Z Corp. prepared its 2001 financial statements, its Cost of Goods Sold was listed at
$100,000. Based on this information, which of the following statements must be true:
A. Z Corp. sold all 10,000 units that it produced.
B. Z Corp. sold 5,000 units.
C. Z Corp. had a very profitable year.
D. From the information given, one cannot tell whether Z Corp.'s financial statements were
prepared based on variable or absorption costing.
7. Fleet, Inc. manufactured 700 units of Product A, a new product, during the year. Product A’s
variable and fixed manufacturing costs per unit were $6.00 and $2.00 respectively. The inventory
of Product A on December 31, consisted of 100 units. There was no inventory of Product A on
January 1. What would be the change in the dollar amount of inventory on December 31 if
variable costing were used instead of absorption costing?
A. $800 decrease.
B. $200 decrease.
C. $0
D. $200 increase.
8. GHI Company had P100,000 income using absorption costing. GHI has no variable manufacturing
costs. Beginning inventory was P5,000 and ending inventory was P12,000. What is the income
under variable costing?
A. P100,000.
B. P107,000
C. P88,000
D. P93,000
9. Youthful Biscuits manufactures and sells boxed coconut cookies. The biggest market for these
cookies are as gifts that college students buy for their business teachers. There are 100 cookies
per box. The following income statement shows the result of the first year of operations. This
statement was the one included in the company’s annual report to the stockholders.
Sales (400 boxes at P12.50 a box)
P5,000.00
Less: Cost of goods sold (400 boxes at P8 per box)
3,200.00
Gross margin
1,800.00
Less: Selling and administrative expenses
800.00
Net income
1,000.00
Variable selling and administrative expenses are P0.90 per box sold. The company produced 500
boxes during the year. Variable manufacturing costs are P5.25 per box and fixed manufacturing
overhead costs total P1,375 for the year. What is the company’s direct costing net income?
A. P2,540
B. P2,265
C. P1,000
D. P 725
10. During its first year of operations, a company produced 275,000 units and sold 250,000 units. The
following costs were incurred during the year:
Variable Cost per Unit
Fixed Costs
Direct materials
$15.00
Direct labor
10.00
Manufacturing overhead
12.50
$2,200,000
Selling and administrative
2.50
1,375,000
The difference between operating income calculated on the absorption-costing basis and on the
variable costing basis is that absorption-costing operating income is
Page 28 of 47
A.
B.
C.
D.
$200,000 greater.
$220,000 greater.
$325,000 greater.
$62,500 lesser
11. A company has the following cost data:
Fixed manufacturing costs
Fixed selling, general, and administrative costs
Variable selling costs per unit sold
Variable manufacturing costs per unit
Beginning inventory
Production
Sales
Variable and absorption-cost net incomes are:
A. $320 variable, $520 absorption
B. $330 variable, $530 absorption
C. $520 variable, $320 absorption
D. $530 variable, $330 absorption
$2,000
1,000
1
2
0 units
100 units
90units at $40 per unit
12. A company manufactures 50,000 units of a product and sells 40,000 units. Total manufacturing
cost per unit is $50 (variable manufacturing cost, $10; fixed manufacturing cost, $40). Assuming
no beginning inventory, the effect on net income if absorption costing is used instead of variable
costing is that:
A. net income is $400,000 lower
B. net income is $400,000 higher
C. net income is the same
D. net income is $200,000 higher
13. A company had an income of P50,000 using direct costing for a given month. Beginning and
ending inventories for the month are 13,000 units and 18,000 units, respectively. Ignoring income
tax, if the fixed overhead application rate was P2 per unit, what was the income using absorption
costing?
A. P40,000
B. P50,000
C. P60,000
D. P70,000
Questions 14 through 16 are based on the following information.
The following information is available for X Co. for its first year of operations:
Sales in units
5,000
Production in units
8,000
Manufacturing costs:
Direct labor
$3 per unit
Direct material
5 per unit
Variable overhead
1 per unit
Fixed overhead
$100,000
Net income (absorption method)
$30,000
Sales price per unit
$40
14. What would X Co. have reported as its income before income taxes if it had used variable
costing?
A. $30,000
B. ($7,500)
C. $67,500
D. ($30,000)
15. What was the total amount of SG&A expense incurred by X Co.?
A. $30,000
B. $62,500
C. $6,000
D. $36,000
16. Based on variable costing, what would X Co. show as the value of its ending inventory?
A. $120,000
B. $64,500
C. $27,000
D. $24,000
Page 29 of 47
Module 1
Lesson 4
Volume Variance and Its Connection
to Normal Capacity
Learning outcomes:
At the end of the lesson you will be able to:
✓ Explain the importance of normal capacity to profit.
✓ Compute the volume variance and understand its connection to normal capacity.
✓ Properly treat cost variance on the statement of profit or loss.
LECTURE NOTES
The Volume Variance
Volume Variance represents the ability of the business to meet its normal capacity.
Volume variance is related to fixed overhead since it is constant per total amount but changes
per unit. In short, fixed overhead is not controlled on its total amount but is controlled in relation
to volume (i.e. production).
Volume variance can be computed as follows:
Normal Capacity in units
xx
– Actual Capacity in units
xx
Volume Variance in units
xx
x Standard Fixed Overhead Rate
P xx
Volume Variance in Pesos
P xx
Over the years, a business would have developed its average capacity (i.e. normal
capacity) that settles at the middle of ups and downs of production levels.
• If normal capacity is greater than the actual capacity, there is an under-absorbed
capacity and it is unfavorable variance.
• If normal capacity is less than actual capacity, there is an over-absorbed capacity and
it is a favorable variance.
A cost variance is the difference between the actual costs and standards costs.
• If actual costs are greater than standard costs, the cost variance is unfavorable.
• If actual costs are less than standard costs, the cost variance is favorable.
Unfavorable variances are added to standard cost of goods sold while favorable
variances are deducted from standard cost of goods sold to get the actual cost of goods sold.
That is why unfavorable cost variance is also called debit variance, while favorable cost
variance is called credit variance.
Volume Variance is included only in the absorption costing income statement. Since
volume variance relates to fixed overhead which is a product cost under absorption costing,
the volume variance is considered. Under the variable costing, however, the fixed overhead
is a period cost, an expense and is not subject to cost variance analysis.
Page 30 of 47
The Normal Capacity
Normal Capacity refers to the average production level of the business over a long range
if time. Assume the following levels of production for business which has been operating in the
last seven years:
Year 1
45,000 units
Year 5
55,000 units
Year 2
34,000
Year 6
35,000
Year 3
50,000
Year 7
50,000
Year 4
25,000
Year 8(estimated) 60,000
The business production performance is graph as follows:
70000
60000
50000
40000
30000
20000
10000
0
1
2
3
Budgeted
4
5
Normal
6
7
8
Actual
The normal capacity of the business is 42,000 units. It is the average production level of
the business in the last seven years. The company’s normal capacity is set based on past
experience in relation to production.
Normal capacity rests in the middle level of a company’s production and is therefore
stable in the long run. It is preferred to be used as a denominator in computing the fixed
overhead and fixed expenses rates.
The 60,000 units is the budgeted capacity (or expected actual capacity). Budgeted
capacity is the expected production in the next accounting cycle or business cycle which is
normally expressed in 12 months.
•
•
If the normal capacity is not given, the budgeted capacity is used as a denominator
in determining the standard fixed overhead rate.
If the normal capacity and the budget capacity are not available, then use the
practical capacity, next is the maximum capacity, and then the actual capacity.
Good job! Keep on reading the rest of the module to learn more.
God Bless you!
Page 31 of 47
Self-check
Name: ________________________________________________________
Course & Year: ______________
TEST I. Mela Corporation has the following standard costs and production data in 2020.
Unit Sales Price
P 200
Unit variable cost of production
120
Unit fixed overhead
20
Unit Variable Expenses
10
Unit Fixed Expenses
5
Beginning Inventory
4,000 units
Normal Capacity
20,000 units
The fixed expenses are also based on normal capacity.
Requirement:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Determine the operating income under absorption costing and variable costing under each
of the following cases:
Case
Production
Sales
A
B
21,000
18,000
22,000
15,000
TEST II. Haiyan Corporation produces a product with the following data:
A. Standard production costs per unit (Normal Capacity = 20,000 units):
Direct Materials
2lbs @ P6.00
P12.00
Direct Labor
1.25 hrs. @ P20.00
25.00
Variable Overhead 1.25 hrs. @ P4.00
5.00
Fixed Overhead
1.25 hrs. @ P8.00
10.00
B. Standard distribution and administrative expenses:
Variable Expenses
P3.00 per unit
Fixed Expenses
P200,000 per month
C. Regular unit sales price
P200.00 per unit
D. Beginning Inventory
2,200 units
Required:
1. The standard unit product cost under absorption costing and variable costing systems.
2. The budgeted fixed production costs.
3. Profit using variable costing and variable costing under each of the following independent
cases:
Case
Production
Sales
A
23,000
23,500
B
17,500
17,200
Page 32 of 47
TEST III. MULTIPLE CHOICE PROBLEMS. Choose the letter of the correct answer with corresponding
solutions in good form.
1. Don Juan Ltd. Manufactures a single product for which the costs and selling prices are:
Variable production costs
P 50 per unit
Selling price
P125 per unit
Fixed production overhead
P200,000 per quarter
Fixed selling and administrative overhead
P80,000 per quarter
Normal capacity
20,000 units per quarter
Production in first quarter was 19,000 units and sales volume was 16,000 units. No opening
inventory for the quarter. The absorption costing profit for the quarter was
A. P920,000
B. P950,000
C. P960,000
D. P970,000
Questions 2 through 5 are based on the following information.
The annual flexible budget below was prepared for use in making decisions relations to Product X.
100,000 units
150,000 units
200,000 units
Sales volume
$ 800,000
$1,200,000
$1,600,000
Manufacturing costs:
Variable
$300,000
$450,000
$600,000
Fixed
200,000
200,000
200,000
$500,000
$650,000
$800,000
Selling & other expenses
Variable
$200,000
$300,000
$400,000
Fixed
160,000
160,000
160,000
$360,000
$460,000
$560,000
Income (or loss)
$(60,000)
$90000
$240,000
The 200,000 units budget has been adopted and will be used for allocating fixed manufacturing costs
to units of Product X. At the end of the first 6 months, the following information is available:
Units
Production completed
120,000
Sales
60,000
All fixed costs are budgeted and incurred uniformly throughout the year, and all costs incurred
coincide with the budget. Over- and under-applied fixed manufacturing costs are deferred until
year-end. Annual sales have the following seasonal pattern.
First quarter
Second quarter
Third quarter
Fourth quarter
Portion of Annual Sales
10%
20%
30%
40%
2. The amount of fixed factory costs applied to product during the first 6 months under absorption
costing is
A. Over-applied by $20,000.
B. Equal to the fixed costs incurred.
C. Under-applied by $40,000.
D. Under-applied by $80,000.
3. Reported net income (or loss) for the first 6 months under absorption costing is
A. $160,000
B. $0
C. $40,000
D. $(40,000)
Page 33 of 47
4. Reported net income (or loss) for the first 6 months under variable costing is
A. $180,000
B. $40,000
C. $0
D. $(180,000)
5. Assuming that 90,000 units of Product X were sold during the first 6 months and that this is to be
used as a basis, the revised budget estimate for the total number of units to be sold during this
year is
A. 360,000
B. 240,000
C. 200,000
D. None of the above
Questions 6 through 11 are based on the following information.
Valyn Corporation employs an absorption costing system for internal reporting purposes;
however, the company is considering using variable costing. Data regarding Valyn’s planned and
actual operations for the 1995 calendar year are presented below.
Beginning finished goods inventory in units
Sales in units
Production in units
Planned Activity
Actual Activity
35,000
140,000
140,000
35,000
125,000
130,000
The planned per unit cost figures shown in the next schedule were based on the estimated
production and sale of 140,000 units in 1995. Valyn uses a predetermined manufacturing overhead
rate for applying manufacturing overhead to its product. Thus, a combined manufacturing overhead
rate of $9.00 per unit was employed for absorption costing purposes in1995. Any over- or underapplied manufacturing overhead is closed to the cost of goods sold account at the end of the
reporting year.
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Variable selling expenses
Fixed selling expenses
Variable administrative expenses
Fixed administrative expenses
Total
Planned Cost
Per Unit
Total
$12.00
$1,680,000
9.00
1,260,000
4.00
560,000
5.00
700,000
8.00
1,120,000
7.00
980,000
2.00
280,000
3.00
420,000
$50.00
$7,000,000
Incurred
Costs
$1,560,000
1,170,000
520,000
715,000
1,000,000
980,000
250,000
425,000
$6,620,000
The 1995 beginning finished goods inventory for absorption costing purposes was valued at the
1994 planned unit manufacturing cost, which was the same as the 1995 planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end of the year. The
planned and actual unit selling price for 1995 was $70.00 per unit.
6. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the absorption
costing bases was
A. $900,000
B. $1,200,000
C. $1,220,000
D. $1,350,000
Page 34 of 47
7. The value of Valyn Corporation’s 1995 actual ending finished goods inventory on the variable
costing basis was
A. $1,400,000.
B. $1,125,000.
C. $1,000,000.
D. $750,000
8. Valyn Corporation’s total fixed costs expensed in 1995 on the absorption costing bases were
A. $2,095,000
B. $2,120,000
C. $2,055,000
D. $2,030,000
9. Valyn Corporation’s actual manufacturing contribution margin for 1995 calculated on the
variable costing basis was
A. $4,375,000
B. $4,935,000
C. $4,910,000
D. $5,625,000.
10. The total variable costs expensed in 1995 by Valyn Corporation on the variable costing basis was
A. $4,375,000
B. $4,500,000
C. $4,325,000
D. $4,550,000
11. The difference between Valyn Corporation’s 1995 operating income calculated on the
absorption costing basis and calculated on the variable costing basis was
A. $65,000
B. $25,000
C. $40,000
D. $90,000
Questions 12 through 17 are based on the following information.
Louder Industries manufactures a single product. Variable production costs are $20 and fixed
production costs are $150,000. Louder uses a normal activity of 10,000 units to set its standard costs.
Louder began the year with no inventory, produced 11,000 units, and sold 10,500 units.
12. Ending inventory under variable costing would be
A. $10,000
B. $15,000
C. $17,500
D. $20,000
13. Ending inventory under absorption costing would be
A. $10,000
B. $15,000
C. $17,500
D. $20,000
14. The volume variance under variable costing would be
A. $0
B. $10,000
C. $15,000
D. Some other number.
15. The volume variance under absorption costing would be
A. $0
B. $10,000
C. $15,000
D. Some other number.
16. The standard cost of goods sold under variable costing would be
A. $200,000
B. $210,000
C. $367,500
D. Some other number.
17. The standard cost of goods sold under absorption costing would be
A. $200,000
B. $210,000
C. $367,500
D. Some other number.
Page 35 of 47
MODULE 1
POST TEST
Name: ________________________________________________________ Course & Year: ____________
Find out how much you have learned in this module, try to answer the post-test attached
below: Practice honesty in answering. God bless you.
TEST I. MULTIPLE CHOICE THEORIES
1. Depreciation on factory buildings and equipment is classified as:
A. selling expense
B. administrative expense
C. direct labor
D. indirect materials
E. factory overhead
2. A typical marketing expense is:
A. freight out
B. indirect labor
C. audit fees
D. uncollectible accounts expense
E. direct labor
3. A typical indirect labor cost for a manufacturer is:
A. sales office salaries
B. freight out
C. factory insurance
D. sales commissions
E. materials handling
4. An expense that is likely to contain both fixed and variable components is:
A. security guard wages
B. supplies
C. heat, light, and power
D. small tools
E. taxes on real estate
5. The term "prime costs" refers to:
A. the sum of direct labor costs and all factory overhead costs
B. the sum of direct materials costs and direct labor costs
C. manufacturing costs incurred to produce units of output
D. all costs associated with manufacturing other than direct labor and direct materials costs
E. cost standards that are predetermined and should be attained
6. The term "conversion costs" refers to:
A. costs that are associated with marketing, shipping, warehousing, and billing activities
B. the sum of direct labor costs and all factory overhead costs
C. the sum of direct materials costs and direct labor costs
D. manufacturing costs incurred to produce units of output
E. all costs associated with manufacturing other than direct labor costs and direct materials costs
7. A factory overhead cost:
A. is a direct cost
B. is a prime cost
C. can be a variable cost or a fixed cost
D. can only be a fixed cost
E. includes all factory labor
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8. Prime cost and conversion cost share what common element of total cost?
A. direct labor
B. commercial expense
C. variable overhead
D. fixed overhead
E. direct materials
9. Factory overhead includes:
A. indirect materials but not indirect labor
B. indirect labor but not indirect materials
C. prime costs
D. all manufacturing costs
E. all manufacturing costs, except direct materials and direct labor
10. Indirect materials are a(n):
A. fixed cost
B. irrelevant cost
C. factory overhead cost
D. direct cost
E. prime cost
11. Wages paid to factory machine operators of a manufacturing plant are an element of:
Prime Cost
Conversion Cost
A.
Yes
No
B.
Yes
Yes
C.
No
No
D.
No
Yes
E.
none of the above
12. Direct materials are a
Conversion Cost
A.
Yes
B.
Yes
C.
No
D.
No
Manufacturing Cost
Yes
Yes
Yes
No
Prime Cost
No
Yes
Yes
No
13. The cost of rent for a manufacturing plant is generally considered to be a:
Prime Cost
Product Cost
A.
No
Yes
B.
No
No
C.
Yes
No
D.
Yes
Yes
14. The corporate controller’s salary would be considered a(an)
A. Administrative cost
B. Manufacturing cost
C. Selling expense
D. Product cost
15. The term "variable costs" refers to:
A. all costs whose total amounts change in proportion to changes in activity within a
relevant range
B. all costs that are likely to respond to the amount of attention devoted to them by a
specified manager
C. all costs that are associated with marketing, shipping, warehousing, and billing activities
D. all costs that do not change in total for a given period and relevant range, but become
progressively smaller on a per-unit basis as volume increases
E. all manufacturing costs incurred to produce units of output
Page 37 of 47
16. The following statement that best describes a fixed cost is:
A. it may change in total when such change depends on production within the relevant range
B. it increases on a per-unit basis as production increases
C. it decreases on a per-unit basis as production increases
D. it may change in total when such change is related to changes in production
E. it is constant per unit of production
17. Within a relevant range, the amount of variable cost per unit:
A. moves in the same direction as fixed cost per unit
B. differs at each production level
C. remains constant at each production level
D. increases as production increases
E. decreases as production increases
18. Inventoriable (product) costs are
A. Manufacturing costs incurred to produce units of outputs.
B. The costs of direct labor and all factory overhead costs.
C. All costs associated with manufacturing other than direct labor costs and raw materials costs.
D. Costs that are associated with marketing, shipping, warehousing, and billing activities.
19. In analyzing whether to build another regional service office, the salary of the Chief Executive
Officer (CEO) at the corporate headquarters is:
A. Relevant because salaries are always relevant.
B. Irrelevant because it is a future cost that will not differ between alternatives under consideration.
C. Relevant because this will probably change if the regional service is built.
D. Irrelevant since another imputed cost for the same will be considered.
20. The salary or wage that you could be earning while you are taking this test is
A. an opportunity cost.
B. a sunk cost.
C. an incremental cost.
D. a joint cost.
21. The best characterization of an opportunity cost is that it is
A. relevant to decision making but is not usually reflected in accounting records.
B. not relevant to decision making and is not usually reflected in accounting records.
C. relevant to decision making and is usually reflected in accounting records.
D. not relevant to decision making and is usually reflected in accounting records.
22. Sunk costs
A. Are relevant to long-term decisions but not to short-term decisions
B. Are relevant to decision making
C. Are subtitles for opportunity costs
D. In themselves are not relevant to decision making
23. The costs presented to management for an equipment replacement decision should be limited to
A. Relevant Costs
B. Standard Costs
C. Controllable Costs
D. Conversion Costs
24. A sunk cost is
A. not avoidable.
B. avoidable under one alternative but not under another.
C. joint or common.
D. direct to a segment.
Page 38 of 47
25. The variable cost of a unit of product made yesterday is
A. an incremental cost.
C. a differential cost.
B. an opportunity cost.
D. a sunk cost.
26. The kind of cost that can be ignored in short-term decision making is
A. a differential cost.
C. a relevant cost.
B. an opportunity cost.
D. a sunk cost.
27. The role of sunk costs in decision making can be summed up in which of the following sayings?
A. Nothing ventured, nothing gained.
B. Bygones are bygones.
C. A penny saved is a penny earned.
D. The love of money is the root of all evil.
28. Differential costs are costs that are
A. not avoidable.
B. avoidable under one alternative but not under another.
C. joint or common.
D. not direct to a segment.
29. Allocated costs are
A. generally separable.
B. generally variable.
C. generally common.
D. especially important in deciding whether to drop a segment.
30. An operating expenditure is one that:
A.
varies with the volume of production
B.
is intended to benefit future periods
C.
is reported as an asset
D.
benefits the current period only
E.
remains the same in total as production changes
31. An example of a cost that is irrelevant to a future decision is a(n):
A. differential cost
C. out-of-pocket cost
B. sunk cost
D. opportunity cost
32. As a part of data presented in support of a proposal to increase the production of DVD, the
sales manager of Laguna Suppliers reported the total additional cost required for the proposed
increase in production level. The increase in total cost is known as
A. Incremental Cost
C. Opportunity cost
B. Out-of-pocket cost
D. Controllable cost
33. An opportunity cost is
A. The difference in total costs which results from selecting one choice instead of another.
B. A cost that may be shifted to the future with little or no effect on current operations
C. A cost that may be saved by not adopting an alternative
D. The profit foregone by selecting one choice instead of another.
34. Controllable costs are
A. Costs are likely to respond to the amount of attention devoted to them by a specified manager.
B. Costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only charge slowly in response to small
change in capacity
C. Cost that fluctuate in total in response to small changes in rate of utilization capacity
D. Costs that management decides to incur in the current period to enable the company
to achieve objectives other than the filling orders placed by customers
E. Costs that will be unaffected by current managerial decisions
Page 39 of 47
35. An avoidable cost is
A. The profit foregone by selecting one choice instead of another
B. A cost that does not entail any peso outlay but is relevant in the decision-making process
C. A cost that continues to be incurred even though there is no activity
D. A cost that may be saved by not adopting an alternative
E. A cost common to all choices in question and not clearly or practically allocable to all of them
36. The term “discretionary cost” refers to
A. Costs are likely to respond to the amount of attention devoted to them by a specified manager.
B. Costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only charge slowly in response to small
change in capacity
C. Amortization of costs that were capitalized in previous periods.
D. Costs that management decides to incur in the current period to enable the company to
achieve objectives other than the filling orders placed by customers
E. Costs that will be unaffected by current managerial decisions
37. An imputed 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. A cost that does not entail any peso outlay but which is relevant to the decision-making process.
D. The difference in total costs that results from selecting one choice instead of another.
E. A cost that continues to be incurred even though there is no activity.
38. The term “committed costs” refers to
A. Costs are likely to respond to the amount of attention devoted to them by a specified manager.
B. Costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only charge slowly in response to small
change in capacity
C. Costs that management decides to incur in the current period to enable the company to
achieve objectives other than the filling orders placed by customers
D. Cost that fluctuate in total in response to small changes in rate of utilization capacity
E. Amortization of costs that were capitalized in previous periods.
39. Common costs are those incurred
A. To produce two or more inseparable products
B. Routinary in the industry in which the company operates
C. By every department in an organization
D. To produce common products beyond their split-off point
40. Out-of-pocket costs
A. Are under the influence of a supervisor
B. Require expenditure of cash
C. Are not recoverable
D. Are committed and unavoidable
41. In absorption costing, as contrasted with direct costing, the following are absorbed into inventory.
A. Only the variable manufacturing overhead.
B. All the elements of fixed and variable manufacturing overhead.
C. Only the fixed manufacturing overhead.
D. Neither fixed nor variable manufacturing overhead.
42. Which of the following is a term more descriptive of the type of cost accounting often called
direct costing?
A. Relevant Costing
B. Out-of-pocket costing
C. C. Variable Costing
D. D. Prime Costing
Page 40 of 47
43. Inventory under the variable costing includes
A. Direct materials cost, direct labor cost, but no factory overhead cost.
B. Direct materials cost, direct labor cost, and variable factory overhead.
C. Prime cost but not conversion cost.
D. Prime cost and all conversion cost.
44. If production is greater than sales (units), then absorption costing net income will generally be
A. Equal to direct costing net income.
B. Greater than direct costing net income
C. Less than direct costing net income.
D. Additional data is needed to be able to answer.
45. Which of the following statements is correct?
A. When production is lower than sales, variable costing net income is lower than
absorption costing net income.
B. When production is higher than sales, absorption costing net income is lower than
variable costing net income.
C. If all the products manufactured during the period are sold in that period, variable
costing net income is equal to absorption costing net income.
D. When production and sales level are equal, variable costing net income is lower than
absorption costing net income.
46. An unfavorable volume variance means that
A. Actual output was less than the level used to set the standard fixed cost.
B. Cost control was probably poor.
C. Absorption costing income is lower than variable costing income.
D. Actual output was more than the level used to set the standard fixed cost.
47. Under absorption costing, if sales remain constant from period 1 to period 1, the company will
report a larger income in period 2 when
A. Variable production costs are larger in period 2 than period 1
B. Period 2 production exceeds period 1 production
C. Period 1 production exceeds period 2 production
D. Fixed production costs are larger in period 2 than period 1
48. Absorption costing differs from variable costing in all of the following except
A. Acceptability for external reporting
B. Treatment of fixed manufacturing overhead
C. Treatment of variable production costs.
D. Arrangement of the income statement.
49. Variable costing considers which of the following to be product costs?
Fixed
Fixed
Variable
Variable
Mfg.
Selling &
Mfg.
Selling &
Costs
Adm.
Costs
Adm.
A.
B.
C.
D.
no
yes
yes
no
no
no
no
no
yes
yes
yes
yes
yes
no
yes
no
50. The variable costing method ordinarily includes in product costs the following:
A. Prime cost but not conversion cost.
B. Direct materials cost, direct labor cost, but no manufacturing overhead cost.
C. Direct materials cost, direct labor cost, and variable manufacturing overhead cost.
D. Prime cost and all conversion cost.
Page 41 of 47
Test II. MULTIPLE CHOICE PROBLEMS
Instruction: Write the letter of the correct answer with corresponding solutions in good form.
1. The following additional manufacturing cost data were available for the month of March:
Direct materials used
$ 78,000
Direct labor
60,000
Factory overhead
80,000
During March, prime cost added to production was
A.
$140,000
B.
$138,000
C.
$144,000
D.
$150,000
E.
none of the above
2. Pitino Company has a beginning inventory of direct materials on March 1 of $30,000 and an
ending inventory on March 31 of $36,000. The following additional manufacturing cost data were
available for the month of March:
Direct materials purchased ....................................................................... $84,000
Direct labor .................................................................................................. 60,000
Factory overhead ....................................................................................... 80,000
During March, prime cost added to production was:
A. $140,000
B. $138,000
C. $144,000
D. $150,000
E. none of the above
3. Using the same information in No. 2, the conversion cost added to production was:
A. $80,000
B. $144,000
C. $140,000
D. $138,000
E. none of the above
4. During the month of August, Amer Corporation produced 12,000 units and sold them for P20 per
unit. Total fixed cost for the period were P154,000 and the operating profit was P26,000. Based on
the foregoing information, the variable cost per unit is
A.
P4.50
B.
P5.00
C.
P6.00
D.
P7.17
5. 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
B. y = a + bx2
xy = na + b x
C. y = na + b x
D. xy = xa + b x2
y = na + bx
6. 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.
Page 42 of 47
Production in units
450,000
540,000
480,000
March
April
May
Manufacturing supplies
P723,060
853,560
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
B. P1,188,756
C. P 755,196
D. P 752,060
7. 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.
B. P581.82.
C. P595.84.
D. P601.50.
8. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
A. 10,625 units.
B. 4,375 units.
C. 6,250 units.
D. 5,250 units.
9. Clone Machinery had the following experience regarding power costs:
Month
Jan.
Feb.
Mar.
Apr.
Machine hours
300
600
400
200
Power cost
P680
720
695
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
B. P 705
C. P 710
D. P1,320
10. 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.
Period 1
Period 2
Period 3
Period 4
Activity
24
25
20
22
Cost
P174
179
165
169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X
B. Y = P110.44 + P2.70X
C. Y = P103.38 + P3.00X
D. Y = P113.35 + P0.89X
Page 43 of 47
11. Samar Industries manufactures a single product. Variable production costs are P20 and fixed
production costs are P300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
volume variance under absorption costing would be
A. P20,000
B. P30,000
C. 0
D. Some other number
12. Tacloban Industries manufactures a single product. Variable production costs are P20 and fixed
production costs are P300,000. Rounder uses a normal activity of 20,000 units to set its standard
costs. Rounder began the year with no inventory, produced 22,000 units, and sold 21,000 units. The
standard cost of goods sold under variable costing would be
A. P735,000
B. P400,000
C. P420,000
D. Some other number.
Question 13 and 14 are based on the following information.
The excerpt presented below was taken from Smurf Company’s records for the fiscal year
ended November 30:
Direct materials used
P300,000
Direct labor
100,000
Variable factory overhead
50,000
Fixed factory overhead
80,000
Selling and administrative cost - variable
40,000
Selling and administrative cost – fixed
20,000
13. If Smurf Company uses variable costing, the inventoriable costs for the current fiscal year are
A. 530,000
B. 400,000
C. C. 450,000
D. D. 490,000
14. Using absorption (full) costing, inventoriable costs are
A. P530,000
B. P400,000
C. C. 450,000
D. D. 590,000
15. Compute for the inventory under the direct costing method using the data given: units unsold
at the end of the period 45,000; raw materials used, P6.00 per unit; raw materials inventory,
beginning, P5.90 per unit; direct labor, P3.00 per unit; variable overhead per unit, P2.00 per
unit; indirect labor for the month, P33,750. Total fixed costs, P67,500.
A. P17.45
B. P16.90
C. P11.00
D. P19.15
16. Care Company’s 2013 fixed manufacturing overhead cost totaled P100,000 and variable
seliing costs totaled P80,000. Under direct costing, how should these costs be classified?
Period Cost
Product Cost
A.
P
0
P 180,000
B.
P 80,000
P 100,000
C.
P 100,000
P 80,000
D.
P 180,000
P
0
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17. With a production of 200,000 units of product A during the month of June, Bucayao
Corporation had incurred costs as follows:
Direct Materials
P 200,000
Direct labor used
135,000
Manufacturing overhead:
Variable
75,000
Fixed
90,000
Selling and administrative expenses:
Variable
30,000
Fixed
85,000
Total
P 615,000
Under absorption costing, the unit cost of product A was:
A. P 2.05
B. P 2.50
C. P 2.20
D. P 3.25
18. LY & Company completed its first year of operations during which time the following
information were generated:
Total units produced
100,000
Total units sold
80,000 at 100 per unit
Work in process ending inventory cost
Fixed cost:
Factory Overhead
P 1.2 million
Selling and administrative
P 0.7 million
Per unit variable cost
Raw materials
P 20.00
Direct labor
12.50
Factory Overhead
7.50
Selling and administrative
10.00
If the company used the variable (direct) costing method, the operating income would be
A. P 3,040,000
B. P 4,000,000
C. P 2,100,000
D. P 2,480,000
19. CERTS for life, Inc., manufactures a single product for which the costs and selling prices are:
Variable production costs
P 50 per unit
Selling price
P 125 per unit
Fixed production overhead
P 200,000 per quarter
Fixed selling and administrative overhead
P 80,000 per quarter
Normal capacity is 20,000 units per quarter. Production in the first quarter was 19,000 units
and sales volume was 16,000 units. No opening inventory for the quarter. The absorption
costing profit for the quarter was:
A. P 920,000
B. P 960,000
C. P 950,000
D. P 970,000
Questions 20 and 21 are based on the following information
The following operating data are available from the records of Sheena Company for the
month of January 2013:
Sales (P70 per unit)
P 210,000
Direct materials
59,200
Direct labor
48,000
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Manufacturing overhead:
Fixed
Variable
Marketing and general expenses:
Fixed
Variable
Production in units
Beginning inventory
36,080
24,000
11,000
5% of sales
3,200 units
none
20. The ending finished goods inventory under absorption costing would be:
A. P 14,280
B. P 12,096
C. P 16,968
D. P 16,072
21. The net income for the month under the variable costing method would be:
A. P 32,420
B. P 23,320
C. P 25,500
D. P 22,420
Questions 22 and 23 are based on the following information.
The books of Mariposa Company pertaining to the year ended December 31, 2013
operations, showed the following figures relating to product A:
Beginning inventory-FG and WIP
none
No. of units produced
40,000
No. of units sold at 15
32,500
Direct materials used
P 177,500
Direct labor used
P 85,000
Fixed
P 110,000
Variable
61,500_
P 171,500
Fixed admin expenses
P 30,000
22. Under variable costing, what would be the finished goods inventory as at December 31,
2013?
A. P 81,375.00
B. P 87,000.00
C. P 60,750.00
D. P 49,218.75
23. Which costing method, variable or absorption costing, would show a higher operating
income for 2013 and by how much?
A. Variable by P 20,625
B. variable by P 26,250
C. Absorption by P 20,625
D. absorption by P 26,250
24. During the year 2013, Good Health Corporation manufactured 70,000 units of product A, a
new product. Only 65,000 units were sold during the year. There was no beginning inventory.
Manufacturing cost per unit was P20.00 variable and P50.00 fixed. What would be the effect
in net income if absorption costing is used instead of variable costing?
A. Profit is P 100,000 lower
B. Profit is P250,000 higher
C. Profit is P 250,000 lower
D. D. None of the above.
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Use the following information for questions 25 and 26
The following information has been extracted from P Co.’s financial records for its first year of
operations:
Units produced, 10,000
Units sold, 7,000
Variable costs per unit:
Direct material, P 8
Direct labor, 9
Manufacturing overhead, 3
SG&A, 4
Fixed costs:
Manufacturing overhead, P 70,000
SG&A, 30,000
25. Based on absorption costing, the Cost of Goods Manufactured for P Co.’s first year would be
A. P 200,000
B. P 300,000
C. P 270,000
D. P 210,000
26. Based on absorption costing, what amount of period costs will P Co. Deduct?
A. P 70,000
B. P 30,000
C. P 79,000
D. P 58,000
27. Eastern Co. has total budgeted fixed costs of P150,000. Actual production of 39,000 units
resulted in a P 6,000 favorable volume variance. What normal capacity was used to
determine the fixed overhead rate?
A. P 40,560
B. P 37,500
C. P 33,000
D. Cannot be determined without further information
REFERENCES
Agamata, F. T. (2020). Management Services. Davao City: Certs Publications
Harina, R. M. (2012). Management Accounting for Informed Business Decisions.
Mandaluyong City:Cacho Hermanos, Inc.
Cabrera, M. E. B. (2014). Management Accounting:Concepts and Applications.Manila:GIC
Enterprise & Co.,Inc.
Burns, J. (2013). Management Accounting. London: McGraw-Hill Companies Inc.
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