Synthesis | Managerial Accounting | NBS College | Costs Prediction & Analysis, CVP and Variable Costing
Part 1: Cost Prediction and Analysis
Illustration #1 (Cost Prediction) Using High-Low Method
The controller of MAXICARE Hospital would like to come up with a cost formula that links Admitting Department cost to the
number of patients admitted during a month. The Admission Department’s costs and the number of patients admitted
during the past nine months follow:
Month
April
May
June
July
August
September
October
November
December
Number of Patients
18
19
17
15
15
11
11
48
16
Admission Department’s Cost
P 15,600
P 15,200
P 13,700
P 14,600
P 14,300
P 13,200
P 12,800
P 72,500
P 14,000
REQUIRED: Using the high-low method, determine the admission department’s _____.
1. Variable cost per unit
2. Total annual fixed costs
3. Monthly cost function
4. Estimated cost assuming 12 patients will be admitted next month.
Illustration #2 (Cost Prediction) Using High-Low Method and Least Square Method
MANILA Company’s total overhead costs at various levels of activity are presented below:
Month
March
April
May
June
Machine Hours
500
400
600
700
Total Overhead Costs
P 970
P 851
P 1,089
P 1,208
The breakdown of the overhead costs in April at 400 machine-hour level of activity is as follows:
Supplies (Variable)
Salaries (Fixed)
Utilities (Mixed)
Total
P 260
P 300
P 291
P 851
REQUIRED:
1. How much of June’s overhead cost of P 1,208 consisted of utilities cost?
2. Using high-low method, determine the cost function for utilities cost.
3. Using high-low method, determine the cost function for total overhead cost.
4. Using least-squares method, determine the cost function for total overhead costs.
5. What would be the total overhead costs if operating level is at 450 machine hours?
Illustration #3 (Cost Prediction) Learning Curve Problem
A particular manufacturing job is subject to an estimated 80% learning or experience curve. The first unit required 20 labor
hours to complete.
REQUIRED:
1. What is the cumulative average time per unit after four (4) units are completed?
2. How many hours are required to produce a total of two (2) units?
3. How many hours are required to produce the second unit?
Illustration #4 (Cost Prediction) Learning Curve Problem
The average labor cost per unit for the first batch produced by a new process is P 150. The accumulative average labor
cost after the second batch is P 120 per product. Using a batch size of 100, and assuming the learning curve continues,
how much would be the total labor cost of four batches?
Illustration #5 (Cost Analysis) Regression
ABC Company uses the regression analysis to develop a model for predicting overhead costs. Two different cost drivers:
machine hours and the weight of direct materials used, are under consideration as the independent variable. Relevant data
are presented below:
Machine Hours
Y – Intercept
B
R2
Coefficient
P 2,500
P 4.00
0.70
DM Weight
Y-Intercept
B
R2
Coefficient
P 4,600
P 3.50
0.55
What is the regression equation should the company use that would give more accurate information?
Synthesis | Managerial Accounting | NBS College | Costs Prediction & Analysis, CVP and Variable Costing
Illustration #6 (Cost Analysis) Cost Behavior
Synthesis | Managerial Accounting | NBS College | Costs Prediction & Analysis, CVP and Variable Costing
Part 2: CVP Analysis and Profit Planning
Illustration #1 (CVP Analysis)
Answer the following questions, considering each situation independently. You might not be able to answer the questions
in the order they are asked.
A. A company earned P 200,000 selling 100,000 units at P8 per unit. Its fixed costs are P 400,000.
1. What are variable cost per unit?
2. What is total contribution margin?
3. What would income be if sales increased by 5,000 units?
B. A company has return on sales of 20%, income of P 50,000, selling price of P10, and a contribution margin of 40%.
1. What are fixed costs?
2. What are variable costs per units?
3. What are sales in units?
4. What are sales in dollars?
C. A company has return on sales of 15% at sales of P 400,000. Its fixed cost are P 90,000; variable costs are P25 per
unit.
1. What are sales in units?
2. What is contribution margin per unit?
3. What is income?
Illustration #2 (CVP Analysis and Profit Planning)
After reviewing its cost structure (variable costs of P7.50 per unit and monthly fixed costs of P 60,000) and potential market,
FRANCE INC. established what it considered to be a reasonable selling price. The company expected to sell 50,000 units
per month and planned its monthly results as follows.
Sales
Variable costs
Contribution margin
Fixed costs
Income before taxes
Income taxes (at 40%)
Net income
P 500,000
P 375,000
P 125,000
P 60,000
P 65,000
P 26,000
P 39,000
Required: Using the preceding information, answer the following questions independently.
1. What selling price did the company establish?
2. What is the contribution margin per unit?
3. What is the break-even point in units?
4. If the company determined that a particular advertising campaign had a high profitability of increasing sales by 3,000
units, how much could it pay for such a campaign without reducing its planned profits?
5. If the company wants a P 60,000 before-tax profit, how many units must it sell?
6. If the company wants a 10% before-tax return on sales, what level of sales, in dollars, does it need?
7. If the company wants a P 45,000 after-tax profit, how many units must it sell?
8. If the company wants an after-tax return on sales of 9%, how many units must it sell?
9. If the company wants an after-tax profit of P 45,000 on its expected sales volume of 50,000 units, what price must it
charge?
10. If the company wants a before-tax return on sales of 16% on its expected sales volume of 50,000 units, what price
must it charge?
11. The company is considering offering its salespeople a 5% commission on sales. What would the total sales, in dollars,
have to be in order to implement the commission plan and still earn the planned pre-tax income of P 65,000?
Illustration #3 (CVP Analysis)
ITALY CORP. earned P 150,000 on sales of P 1,000,000. It earned P 330,000 on sales of P 1,400,000.
Required:
1. Find the contribution margin ratio
2. Find the total fixed costs
Illustration #4 (CVP Analysis) Margin of Safety and Degree of Operating Leverage
One of the products produced by ICELAND CORP is citrus Delight. The selling price per half-gallon is P4.50, and variable
cost of production is P 2.70. Total fixed costs per year are P 316,600. The company is currently selling 200,000 half –gallons
per year.
Required
1. What is the margin of safety in units?
2. What is the degree of operating leverage?
3. If the company can increase sales in units by 30 percent, what percentage increase will it experience in income? Prove
your answer using the income statement approach.
4. If the company increases advertising by P 41,200, sales in units will increase by 15 percent. What will be the new breakeven point? The new degree of operating leverage?
Synthesis | Managerial Accounting | NBS College | Costs Prediction & Analysis, CVP and Variable Costing
Illustration #4 (CVP Analysis) Indifference Point
PORTUGAL INC. sells one of its products, a piece of soft-sided luggage, for P60. Variable cost per unit is P 34, and monthly
fixed costs are P 60,000. A combination of changes in the way PORTUGAL produces and sells this product could reduce
per-unit variable cost to P28 but increase monthly fixed costs to P 104,000.
Required:
1. Determine the monthly break-even points under the two available alternatives.
2. Determine the indifference point of the two alternatives.
Illustration #5 (CVP Analysis) Multi-Product CVP
FINLAND CORP. produces three models of pen and paper sets, regular, silver and gold. Price and cost data are as follows.
Selling price
Variable costs
Regular
P 10
P6
Silver
P 20
P8
Gold
P 30
P 15
Monthly fixed costs are P 200,000.
Required:
1. Which model is most profitable per unit sold?
2. Which model is most profitable per peso sales?
3. Suppose that the sales mix in units is 40% Regular, 20% Silver, and 40% Gold.
a. What is the weighted-average unit contribution margin?
b. What is the break-even point in total units?
c. How many total units must FINLAND sell to earn P 30,000 per month?
4. Suppose the sales mix in pesos is 30% Regular, 30% Silver, and 40% Gold.
a. What is the break-even point in total pesos sales?
b. What amount of sales is necessary to earn P 30,000 per month?
Illustration #6 (CVP Analysis) Multi-Product CVP
SPAIN INC. produces and sells two products: A and B in the ratio of 3A to 5B. Selling prices for A and B are, respectively,
P 1,200 and P 240; respective variable costs are P480 and P160. The company's fixed costs are P 1,800,000 per year.
Required: Compute the volume of sales in units of each product needed to:
1. Break even.
2. Earn P 800,000 of income before income taxes.
3. Earn P 800,000 of income after income taxes, assuming a 30 percent tax rate.
4. Earn 12 percent on sales revenue in before-tax income.
Synthesis | Managerial Accounting | NBS College | Costs Prediction & Analysis, CVP and Variable Costing
Part 3: Variable Costing and Absorption Costing
Illustration #1 (Variable Costing vs Absorption Costing)
A Corporation makes single products that sells for P 1,500 each. Data for 2021’s operation follow:
Required:
1. Determine the inventory cost per unit under:
a. Absorption costing
b. Variable costing
2. Determine the total cost of ending inventory under:
a. Absorption costing
b. Variable costing
3. Prepare income statements under
a. Absorption costing
b. Variable costing
4. Without knowing and comparing the profits under absorption & variable costing methods:
a. How much is the difference in profit?
b. Which costing method has the higher profit?
Illustration #2 (Reconciliation of VC and AC)
RV Corporation has fixed manufacturing cost of P8 per unit. Consider the three independent cases that follow.
 Case A: Absorption- and variable costing net income each totaled P 160,000 in a period when the firm produces 20,000
units.
 Case B: Absorption-costing net income totaled P 180,000 in a period when finished-goods inventory level rises by 5,000
units.
 Case C: Absorption-costing net income and variable-costing net income respectively totaled P 240,000 and P 272,000
in a period when the beginning finished-goods inventory was 14,000 units.
Required:
1. In Case A, how many units were sold during the period?
2. In Case B, how much income would RV Company report under variable costing?
3. In Case C, how many units were in the ending finished-goods inventory?
Illustration #3 (Reconciliation of VC and AC)
Luzon Manufacturing Company began its operations on January 1, 2020 and it produces a single product that sells for P45
per unit. During 2020, 60,000 units of the product were produced, 55,000 of which were sold. There was no work in process
inventory at the end of the year. Manufacturing and marketing and administrative expenses for 2020 were as follows:
Materials
Direct labor
Factory OH
Marketing & admin.
Required:
1. Compute the unit cost using variable costing.
2. Compute the unit cost using absorption costing.
3. Compute the amount of income under:
a. Traditional costing
b. Variable costing
Fixed
P 420,000
P 180,000
Variable
P12 per unit produced
P8 per unit produced
P6 per unit produced
P4 per unit sold