Ms03 - Cost Behavior And Cost Classification.pdf

PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

MS03

–

FY 0202-2021

COST BEHAVIOR AND COST CLASSIFICATION TOPIC OUTLINE Definitions Basic Concepts Cost Classification Cost Behavior Patterns

COST BEHAVIOR AND COST CLASSIFICATION

Account Analysis Conference Method

Methods in Segregating Mixed Costs

Engineering Method High-Low Method

Correlation Analysis

Scattergraph Method Least-square Method

LECTURE NOTES BASIC CONCEPTS Definitions Cost Behavior It is the study of how the firm’s costs respond to changes in activity levels with the company. Cost behavior is important in cost analysis in providing management with information to make rational and intelligent decisions regarding planning, coordinating and controlling operations. Cost Driver It is an item or event that has a cause and effect relationship with incurrence of a cost. Simply stated, it is the unit of an activity that causes the change in activity's cost. EXAMPLES: Machine hours, labor hours, no. of inspections, no. of deliveries, mileage. Cost Object It is anything for which cost is computed. Remember that anything that generates costs or has expenses associated with it can be considered a cost object. EXAMPLES: Products, departments, customers. Cost Pool Is a grouping of individual cost items. Cost allocations are then made from a cost pool. For example, the cost of the maintenance department is accumulated in a cost pool and then allocated to those departments using its services. Relevant Range It is a width or span of activities where the relationship of costs and the cost formula are valid, predictable and linear. What is the cost formula? Y=a+bx In Accounting In Mathematics Y= Total Cost / Mixed Cost Dependent Variable a= Total Fixed Cost Y Intercept / Intercept Parameter b= Variable Cost per Unit Slope x= Cost Driver / Activity Level Independent Variable NOTE: Based on the accounting equation, bx is the “TOTAL VARIABLE COST”.

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

Cost Classifications According to Inventoriability (1) Product Costs – are manufacturing or inventoriable costs. These are costs involved in acquiring or making a product. (2) Period Costs – are all costs that are identified with accounting periods and not included in products costs.

(1) (2) (3)

Inventoriable? Cost Flow Accounting Treatment

PRODUCT COSTS vs. PERIOD COSTS PRODUCT COSTS YES Incurrence – Inventories – P/L Capitalized first (Inventories)

PERIOD COSTS NO Incurrence – P/L Expensed Outright

Direct Materials Product Costs

Direct Labor

Indirect Materials

Factory Overhead

Indirect Labor Other Indirect Costs

Direct Materials (DM) – are materials that serve as integral part of a finished product and can be conveniently traced into it. Direct Labor (DL) – includes those labor costs that can be easily traced to particular products. Factory Overhead (FOH) – are all manufacturing costs except direct labor and direct materials. NOTE: All factory overhead costs are INDIRECT COSTS. RELEVANT FORMULAS: (a) PRIME COST = DM + DL

(b) CONVERSION COST = DL + FOH

According to Traceability (1) Direct Costs – Costs that can be economically traced to a single cost object. (2) Indirect Costs – Costs that are not directly traceable to the cost object. According to Time Frame Perspective (1) Committed Cost – Cost that is inevitable consequence of a previous commitment. EXAMPLES: Rent, taxes and licenses, depreciation (2) Discretionary Cost – A.K.A. Programmed or Managed Cost. These are costs for which the size or the time of incurrence is a matter of choice. EXAMPLES: Charitable contributions, research and development, marketing expenses. NOTE: Committed cost CANNOT be eliminated in a short-run basis but CAN be eliminated on a longrun basis. According to Controllability (1) Controllable Costs – These are costs which the incurrence or non-incurrence depends on the decision or control of a specific manager. (2) Non-controllable Costs – These are costs which the incurrence or non-incurrence DO NOT depends on the decision or control of a specific manager. NOTE: Controllability of a cost is dependent on the powers or authority delegated to the manager. According to Relevance (1) Relevant Costs – These are future costs which differ from one alternative to another. (2) Sunk Costs – These are past costs that are incurred and are irrelevant to a future decision. (3) Opportunity Costs – The value of the best alternative forgone as the result of selecting another alternative. According to Behavior (1) Variable Costs – Costs that change directly in proportion to changes in activity (volume). (2) Fixed Costs – Costs that remain unchanged for a given time period regardless of changes in activity. (3) Semi-variable or Mixed Costs – Costs that contain both fixed and variable component. NOTE: Direct materials and direct labor are generally variable costs. On the other hand, factory overhead are generally mixed costs except for indirect material and indirect labor (variable costs) and depreciation (fixed).

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

COST BEHAVIOR PATTERNS Activity Levels / Cost Driver

Cost Classification

↑

↓

Variable Costs:

↑

↓

CONSTANT

CONSTANT

CONSTANT

CONSTANT

Per UNIT Mixed Costs:

↓

↑

Per TOTAL

↑ ↓

↓ ↑

Per TOTAL Per UNIT Fixed Costs: Per TOTAL

Per UNIT

METHODS OF SEGREGATING MIXED COSTS (1) ACCOUNT ANALYSIS METHOD The account analysis approach requires that each individual cost is examined, and based on judgment is categorized as a fixed or variable cost. This requires the use of trend analysis, the past experience in judging whether a cost is fixed or variable. (2)

CONFERENCE METHOD It is an approach to cost estimation that pools together data, analyses, and knowledge from expert sources in order to make decisions about costs. In other words, this method looks at several different parts of an organization to get different perspectives about how to estimate costs.

(3)

ENGINEERING METHOD (INDUSTRIAL ENGINEERING METHOD) Industrial engineering method is a systematical way of examining the relationship between cost drivers and costs by analyzing the inputs coming into the company, the outputs that are created, and the work that goes into the process. In other words, it is a detailed look at the entire production process and how that process affects the costs of an organization. NOTE: Engineering method is the most costly method in analyzing and segregating costs.

(4)

SCATTERGRAPH METHOD (VISUAL FIT METHOD) It is a graphical technique of separating fixed and variable components of mixed cost by plotting activity level along x-axis and corresponding total cost (i.e. 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. CAUTION IN USING THIS METHOD: Since the visual inspection DOES NOT involve any mathematical testing therefore this method should be applied with great care. NOTE: This method is considered the best in detecting outliers. (an outlier is a data point that differs significantly from other observations) The main question is how variable costs, fixed costs and mixed costs do look like in a graphical format?

Variable Cost per Total

Fixed Cost per Total /Variable Cost per Unit

Mixed Cost per Total

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

Fixed Cost per Unit NOTE: (1) – (4) are methods that use or employ judgment in segregating mixed costs. (5)

HIGH-LOW METHOD Is a crude technique or method of segregating mixed costs. This method utilizes only two points in doing a cost analysis making it a least accurate method. (This method provides only a reasonable cost estimate). Advantages: (a) Simple to use and uses less complex computations. (b) Lack of formality in cost estimation. Disadvantages / Limitations: (a) High Low Method assumes a linear relationship between cost and activity which is an over simplified analysis of cost behavior. (b) High Low Method is not representative of entire data as it is based on just 2 activity levels. Thus, outlier may be included in the computation. (c) High-low method does not account for the effect of inflation on a portion of financial data which could result in overestimation of the variable cost element of a mixed cost. STEPS IN APPLYING HIGH LOW METHOD: STEP 1: Identify the highest and lowest activity level or cost driver. NOTE: (1) What is being identified in high-low method as the highest and lowest point is just the cost driver. The highest and lowest cost is not identified separately. (2) What if there are 2 or more highest and lowest points? If you are on the high side, choose the point with the highest cost. If you are on the low side, choose the point with the lowest cost. STEP 2: Calculate variable cost per unit Variable cost per unit = (High TC – Low TC) / (High CD – Low CD) TC = Total Cost CD = Cost Driver STEP 3: Calculate total fixed cost Total Fixed Cost = High TC – (Variable cost per unit x High CD) or Total Fixed Cost = Low TC – (Variable cost per unit x Low CD) STEP 4: Formulate the cost equation that will be used in different level of activities WITHIN RELEVANT RANGE.

(6) LEAST-SQUARE METHOD / LINEAR REGRESSION It is a statistical technique that may be used to estimate a linear total cost function for a mixed cost. This method is considered to be the most accurate since it derives the fixed and variable cost by means of statistical analysis. Advantages: (a) Incorporation of all data in the computation and not just 2 points. (b) Provides precise cost estimation. Disadvantages: (a) Outlier may be included in the computation. (b) More complex mathematical calculations. In using least-square method, the following equations are to be used: ∑y = n a + b ∑ x ∑xy = a ∑ x + b ∑ x2 CORRELATION ANALYSIS Correlation analysis is a method of statistical evaluation used to study the strength of a relationship between two, numerically measured, continuous variables Coefficient of correlation (r) – is a measure of the extent of linear relationship. The results extend from -1 to +1. If r is positive, there is a direct relationship between x and y. When r is negative, there is an inverse relationship between x and y. And when r is 0, there is no relationship at all between x and y. Coefficient of determination (r2) – represents the percentage of the total variation in the dependent variable. The results extend from 0 to +1. High r2 means that cost driver is highly related to the dependent variable. Standard Error of Estimate - is the measure of variation of an observation made around the computed regression line.

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

DISCUSSION EXERCISES STRAIGHT PROBLEMS: COST CLASSIFICATION 1. HUSKAR MANUFACTURING CORP. incurs the month of May. 1. Assembly line wages 2. Raw materials used directly in product 3. Depreciation on office equipment 4. Property taxes on factory building 5. Rent on factory building 6. Sales commissions 7. Depreciation on factory equipment 8. Factory utilities 9. Wages for factory maintenance workers

following manufacturing costs and expenses during the 10. 11. 12.

Advertising Indirect materials used in production Factory manager's salary

REQUIREMENT: Complete the following matrix by placing an X mark under the appropriate headings. Direct Direct Manufacturing Cost Item Materials Labor Overhead 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 2.

Period Costs

The following costs were presented by FURION INC. in relation to its production process: Direct Material Cost P450,000 Gas and Lubricants for Production Equipment 120,000 Gas and Lubricants for Delivery Truck 150,000 Salary of Assembly Line Workers 500,000 Salary of Maintenance Team of Factory Equipment 150,000 Fringe Benefits of Assembly Line Workers 45,000 Outgoing Inspection Cost 60,000 Utilities Expense (2/3 incurred by factory) 120,000 Property Taxes (1/4 for factory building) 100,000 Depreciation (2/5 for production process) 300,000 Other Factory Overhead 150,000 Freight Out 220,000 Abnormal Factory Losses 110,000 Wastage and Rework Cost (normal) 210,000 The company produced 300,000 units in relation to above costs and sold 90,000 units. REQUIREMENTS: Determine the total amount expensed in the income statement for the current year.

DETERMINATION OF COST BEHAVIOR 3. The MAGINA INC. reported the following Month 1 Month 2 Units sold 6,000 8,000 Cost A P35,000 P36,000 Cost B 16,000 16,000 Cost C 1,500 2,000 Cost D 12,000 16,000 Cost E 6,000 8,000 Cost F 2,000 2,000 Cost G 4,200 5,500 Cost H 37,300 44,600 Cost I 13,000 13,500 Cost J 10,000 12,200 REQUIREMENT: Indicate whether each of the costs above is probably a variable, mixed or fixed cost.

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION 4.

FY 0202-2021

TERRORBLADE INC. has the details for its costs on different activity levels:

Per Total: Variable Cost Fixed Cost Total

2,000 units P10,000 ? ?

2,500 units ? ? ?

Per Unit Variable Cost ? Fixed Cost P2.5 Total ? REQUIREMENT: Complete all the missing data on the

3,000 units ? ? ?

? ? ? ? ? ? table for TERRORBLADE INC.

METHODS IN SEGREGATING MIXED COSTS 5. A controller is interested in analyzing the fixed and variable costs of indirect labor as related to direct labor hours. The following data have been accumulated:

Month Indirect Labor Cost Direct Labor Hours March P2,880 425 April 3,256 545 May 2,820 440 June 3,225 560 July 3,200 540 August 3,200 495 REQUIREMENT: Determine the amount of the fixed portion of indirect labor expense and the variable rate for indirect labor expense, using the high and low points method. 6.

RIKIMARU CORP. has an average unit cost of P18.50 at a volume of 100,000 units. At 200,000 units the average unit cost is P14.25. REQUIREMENTS: (a) Compute the variable cost per unit; (b) Compute the total fixed cost.

7.

The owner of Bed and Bath Boutique regularly uses part-time help in addition to full time employees. Some part-time help is needed every day for miscellaneous chores, and the owner arranges for additional hours based on her estimates of sales for the following week. The following is a record of the wages paid to part-time employees at recent monthly sales volumes. Sales Wages Paid to Part-Time Help P 8,210 P 629 1,950 558 6,340 710 17,650 1,360 18,100 1,350 13,800 1,130 15,040 1,466 5,050 675 11,000 1,014 The owner considers these months to be relatively normal; however, in the month with sales of P1,950, the Boutique was closed for over two weeks for repainting and installing new carpeting. REQUIREMENT: Determine the variable cost rate and fixed costs using the high-low method.

8.

A company owns two automobiles that are used by employees on company business, usually for short trips. Mileage and expenses, excluding depreciation, by quarters were as follows during a typical year (quarters instead of months are used to simplify the arithmetic):

Quarter First Second Third Fourth

Mileage Expenses 3,000 P 550 3,500 560 2,000 450 3,500 600 12,000 P2,160 REQUIREMENT: Determine the variable cost per mile (nearest tenth of a cent) and the fixed costs per quarter, using the method of lease squares. CORRELATION ANALYSIS 9. The statistician of RAIGOR CORP. has developed the following cost-prediction equation, using observations from 12,000 to 30,000 machine hours. Y = P236,837 + P3.7625X, r-squared = .81, standard error = P24,363 Y = total maintenance cost, X = machine hours REQUIREMENTS: (a) Find the predicted maintenance cost at 25,000 machine hours. (b) Will maintenance cost at zero machine hours be P236,837?

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION 10.

FY 0202-2021

For the month of May, the total production cost of P120,000 the number of units produced is 60,000 units and the company used 15,000 direct labor hours. For the month of June, the company incurred a total production cost of P150,000 for the production of 90,000 units. The company used a total of 30,000 direct labor hours for the month of June. Using correlation analysis, it was determined that the coefficient of correlation of the dependent variable in relation to the units of production and direct labor hours is 0.85 and -0.91, respectively. REQUIREMENT: How much is the quarterly fixed production cost of the Company?

MULTIPLE CHOICE: (THEORIES) 1. The distinction between indirect and direct costs depends on: A. whether a cost differs between alternatives. B. whether a cost is variable or fixed. C. whether a cost is a product or a period cost. D. whether a cost can be easily traced to the cost object under consideration. 2.

Which of the following is a period cost? A. Direct material. B. Advertising expense. C. Depreciation on cars driven by a firm's president and treasurer. D. Miscellaneous supplies used in production activities. E. Both "B" and "C."

3.

Which of the following is not an example of a committed fixed cost? A. Property taxes. D. Outlays for advertising programs. B. Depreciation on buildings. E. Equipment rental costs. C. Salaries of management personnel.

4.

In the standard cost formula Y = a + bX, what does the “b” represent? A. total cost C. total variable cost B. total fixed cost D. variable cost per unit

5.

Within the relevant range, as the number of units produced increases: A. the variable cost per unit remains the same. B. fixed costs in total remain the same. C. variable costs increase in total. D. all of the above.

6.

Which of the following statements is false? A. At zero production level, fixed costs is also zero. B. At zero production level, fixed costs are positive. C. At zero production level, variable costs are usually zero. D. At zero production level, total costs equal total fixed costs.

7.

Determine the true statement below: I. A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases. II. Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost. III. The cost formula used in estimating the cost of a company is applicable to all level of activities once determined. A. All statements are false C. None except III. B. Only statement II and III. D. Only I and II.

8.

Which of the following correlations shows the strongest relationship? A. 0.85 C. -0.90 B. 1.01 D. -2.1

9.

Statement 1: High-low method, as a means of segregating mixed cost, is known to give a precise estimate of cost. Statement 2: In applying high-low method, the two points needed to be known is the high and low of both the cost to be segregated and its cost driver, separately. A. Only the first statement is true. C. Both statements are true B. Only the second statement is true. D. Both statements are false.

10.

The high-low method may give unsatisfactory results if A. the data points all fall on a line. C. the points are not representative. B. volume of activity is heavy. D. volume of activity is light.

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

QUIZZER (DO-IT-YOURSELF DRILL) THEORIES 1. Variable costs are all costs A. Of manufacturing incurred to produce units of output. B. That are associated with marketing, shipping, warehousing, and billing activities. C. That fluctuate in total in response to small changes in the rate of utilization of capacity. D. 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. 2.

The number of variables used in simple regression analysis is: A. one C. three B. two D. more than three

3.

If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear? A. Random points. B. A least squares line that slopes up to the right. C. A least squares line that slopes down to the right. D. Under this condition a scatter diagram could not be plotted on a graph.

4.

Kelly Corporation, with operations throughout the the firm's various responsibility centers. Which of situation? A. The maintenance department. D. B. Product no. 675. E. C. Kelly Corporation.

country, will soon allocate corporate overhead to the following is definitely not a cost object in this The Midwest division. The telemarketing center.

5.

Which of the following is not an example of a variable cost? A. Straight-line depreciation on a machine that has a five-year service life. B. Wages of manufacturing workers whose pay is based on hours worked. C. Tires used in the production of tractors. D. Aluminum used to make patio furniture. E. Commissions paid to sales personnel.

6.

Which of the following is not a period cost? A. Legal costs. B. Public relations costs. C. Sales commissions. D. Wages of assembly-line workers. E. The salary of a company's chief financial officer (CFO).

Use the following information in answering the next item(s): SAND KING INC. is attempting to classify costs according to their cost behavior. Data concerning activity and costs are listed below: January February Sales in units 1,200 1,400 Maintenance P 600 P 700 Supplies 750 790 Insurance 800 800 Utilities 888 1,036 Lubrication 560 576 Advertising 900 1,050 Total P4,498 P4,952 7. The costs that SAND KING would classify as variable would be: (E) A. maintenance and supplies. B. maintenance, supplies, utilities, lubrication and advertising. C. supplies and advertising. D. maintenance, utilities and advertising 8.

The costs that St SAND KING ewart Company would classify as mixed would be: (E) A. lubrication and advertising. C. supplies and lubrication. B. maintenance and insurance. D. supplies and utilities.

9.

Statement 1: Relevant Range is the width of activities where the cost formula is valid. Statement 2: Cost behaviour is applicable to all types of business. A. Only the first statement is true. C. Both statements are true. B. Only the second statement is true. D. Both statement are false.

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION 10.

The A. B. C. D.

11.

Which of the following defines variable cost behavior? A. B. Total Cost Reaction Remains Remains to increase in Activity Constant Constant Cost Per Unit Remains Reaction to increase Increases Constant in Activity

FY 0202-2021

annual insurance premium for the factory building would be a: fixed cost, period cost, and indirect cost with regard to units of product. fixed cost, product cost, and direct cost with regard to units of product. variable cost, product cost, direct cost with regard to units of product. fixed cost, product cost, indirect cost with regard to units of product. C.

D.

Increases

Increases

Increases

Remain Constant

12.

The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram method A. includes costs outside the relevant range. B. considers more than two points. C. can be used with more types of costs than the high-low method. D. gives a precise mathematical fit of the points to the line.

13.

R-squared is a measure of A. the spurious relationship between cost and activity. B. the fixed cost component. C. the variable cost per unit of activity. D. how well the regression line accounts for the changes in the dependent variable.

14.

Which of the following choices correctly classifies a committed fixed cost and a discretionary fixed cost? Committed Discretionary A. Promotion Management salaries B. Building depreciation Charitable contributions C. Management training Property taxes D. Equipment rentals Equipment depreciation E. Research and development Advertising

15.

I. II. III. A. B. C.

In developing a cost-prediction equation using regression analysis, you might not select the one with the highest correlation. As volume increases, the per-unit amount of a mixed cost increases. Outliers are determined in segregating mixed cost in order to prevent a distorted cost estimation of the company; thus they are included in the computation of segregating mixed cost. False, true, false D. True, false, true True, false, false E. Answer not given False, false, true

16.

Determine whether the following statements are true or false: I. The major variable cost in a manufacturing company is factory overhead. II. A multiple regression equation uses more than one driver to predict costs. III. As volume increases, the per-unit amount of a mixed cost increases. A. Only I is true. C. Only III is false. B. Both I and III are false. D. Only II is false.

17.

Which of the following correlation has the strongest direct relationship? A. 0.91 C. 1.04 B. -0.92 D. 0.65

18.

Which of the following statement shows proper labeling of elements in a cost equation? I. Y = total mixed cost III. Y/X = fixed cost per unit II. B = average cost per unit IV. BX = total variable cost A. I and III D. II and III B. II and IV E. I, III and IV C. I and IV

19.

S1: The high-low method is generally LESS accurate than the least-squares regression method in analyzing cost behavior. S2: Outliers are determined in segregating mixed cost in order to prevent a distorted cost estimation of the company; thus they are not included in the computation of segregating mixed cost. The BEST method that can detect them immediately is the use of Least-squares Method. Which of the above statements is incorrect? A. S1 only C. Both statements B. S2 only D. None from the statements

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION 20.

FY 0202-2021

A company observed a decrease in the cost per unit. All other things being equal, which of the following is probably true? A. The company is studying a variable cost, and total volume has increased. B. The company is studying a variable cost, and total volume has decreased. C. The company is studying a fixed cost, and total volume has increased. D. The company is studying a fixed cost, and total volume has decreased. E. The company is studying a fixed cost, and total volume has remained constant.

PROBLEMS 1. The MOGUL INC. wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data: Month Cost of Electricity Direct Labor Hours January P6,750 1,500 April 7,500 1,700 July 8,500 2,000 October 7,250 1,600 Using the high-low method, what is the best equation? A. Y = P750 + P3.50X D. Y = P1,500 + P5.00X B. Y = P750 + P5.00X E. Y = P2,000 + P3.50X C. Y = P1,500 + P3.50X 2.

Consider the following costs incurred in a recent period: Direct materials P33,000 Depreciation on factory equipment 12,000 Factory janitor’s salary 23,000 Direct labor 28,000 Utilities for factory 9,000 Selling expenses 16,000 Production supervisor’s salary 34,000 Administrative expenses 21,000 What was the total amount of the period costs listed above for the period? A. P78,000 C. P46,000 B. P71,000 D. P37,000

3.

RYLAI INC. direct materials cost is 4 times as the direct labor cost and the latter cost is 50% of the company’s conversion cost. If the direct material cost is P40,000, how much is the company’s total manufacturing cost? A. P90,000 C. P73,333 B. P60,000 D. None of the above.

Use the following information in answering the next item(s): PUCK CORP. is a plastic doll manufacturer and the following costs pertain to the Company for the year under consideration: Plastic materials used P500,000 Salary of assembly and finishing department workers 160,000 Paint and minor materials used 40,000 Salary of the security guard of the factory 80,000 Salary of the driver of the delivery truck 45,000 Corporate asset’s depreciation (60% used in the factory) 120,000 Rental expense (70% for administrative building) 150,000 Utilities expense (30% for factory) 90,000 There were no beginning and ending work in process inventory and raw materials inventory. The company produced 100,000 units and sold 75,000 units during the year. 4.

What is the total expense shown in the income statement for the year ended? A. 924,000 C. 261,000 B. 1,185,000 D. 954,000

5.

What percentage of depreciation was expensed during the year? A. 60% C. 45% B. 85% D. 100%

Use the following information in answering the next item(s): MIRANA CORP. reports that at an activity level of 2,100 machine-hours in a month, its total variable inspection cost is P69,846 and its total fixed inspection cost is P9,072. 6.

What would be the average fixed inspection cost per unit at an activity level of 2,400 units in a month? Assume that this level of activity is within the relevant range. A. P37.58 C. P15.23 B. P4.32 D. P3.78

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION 7.

FY 0202-2021

What would be the total variable inspection cost at an activity level of 2,400 machine-hours in a month? Assume that this level of activity is within the relevant range. A. P78,918 C. P79,824 B. P69,846 D. P10,368

Use the following information in answering the next item(s): CENTAUR CORP. inspection costs are listed below: Units Produced Inspection Costs January 647 P15,309 February 724 15,965 March 694 15,715 April 645 15,271 May 696 15,745 June 665 15,442 July 718 15,933 August 699 15,739 Management believes that inspection cost is a mixed cost that depends on units produced. 8.

Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to: A. P22.80 C. P8.27 B. P8.82 D. P8.78

9.

Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to: A. P9,608 C. P9,587 B. P15,640 D. P15,271

10.

TRAXEX INC. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results: Coefficient Machine hours Direct materials weight Y intercept 2,500 4,600 B 5.00 2.60 R2 0.70 0.80 What regression equation should be used? (M1) A. Y = 2,500 + 3.5X C. Y = 4,600 +1.3X B. Y = 2,500 + 5.0X D. Y = 4,600 + 2.6X

11.

A jewelry manufacturer incurred the following costs: 15,000 units produced with costs of P557,500, and 5,000 units produced with costs of P292,500. Which cost formula would you estimate using the high-low method? A. Y=P265,000+P37.17X C. Y=P265,000+P58.50X B. Y=P160,000+P17.67X D. Y=P160,000+P26.50X

12.

The following data have been provided by a retailer that sells a single product. This Year Last Year Units sold 200,000 150,000 Sales revenue P 1,000,000 P 750,000 Less cost of goods sold 700,000 525,000 Gross margin 300,000 225,000 Less operating expenses 222,000 210,000 Net income P 78,000 15,000 What is the best estimate of the company's variable operating expenses per unit? A. P0.24 per unit C. P0.90 per unit B. P0.71 per unit D. P4.17 per unit

Use the following information in answering the next item(s): BANE CORP. is preparing a flexible budget for next year and requires a breakdown of the factory maintenance cost into the fixed and variable elements. The maintenance costs and machine hours (the selected cost driver) for the past six months are as follows: Maintenance Costs Machine Hours January P15,500 1,800 February 10,720 1,230 March 15,100 1,740 April 15,840 2,190 May 14,800 1,602 June 10,600 1,590

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PSBA :MS 03_COST BEHAVIOR AND COST CLASSIFICATION

FY 0202-2021

13.

If BANE uses the high-low method of analysis, the estimated variable rate of maintenance cost per machine hour is A. P7.23. C. P5.46. B. P8.73. D. P5.33.

14.

The average annual fixed maintenance cost amounts to A. P4,160. C. P49,920. B. P8,320. D. P5,120.

15.

What is the average rate per hour at a level of 1,500 machine hours? A. P5.33 C. P7.23 B. P8.11 D. P5.46

Use the following information in answering the next item(s): IO CORP. asked for your help in analyzing the behavior of its monthly electricity cost. The following information was given to you to help you in your analysis. SUMMARY OF ELECTRICITY COST AND DIRECT LABOR HOURS Month Direct labor hour Cost of electricity January 28 P 525 February 24 565 March 30 630 April 33 640 May 38 685 June 34 640 July 35 655 August 40 700 September 42 715 October 47 726 November 43 700 December 32 630 16. Using High-Low Method, what is the quarterly fixed cost of IO CORP.? A. 419 C. 1,257 B. 397 D. 1,191 17.

Under the least-square method, what is the total electricity cost at 46 direct labor hours? A. 730.42 C. 564.00 B. 856.67 D. None from the choices

18.

Total production costs for RATTLETRAP CORP. are budgeted at P230,000 for 50,000 units of budgeted output and at P280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 50,000 units. How much is RATTLETRAP's budgeted variable cost per unit of output? A. P1.60. C. P3.00. B. P1.67. D. P5.00.

19.

In the INVOKER INC., at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range. The total fixed overhead cost for INVOKER is: (E) A. P 55,000. C. P115,000. B. P 60,000. D. P130,000.

20.

As part of a cost study, the cost accountant of PUDGE CORP. has recorded the cost of operations at seven different levels of material usage. This information is shown as follows: Kilos of Materials Cost of Operations 100 P1,000 75 600 25 400 150 1,500 175 1,600 50 600 125 1,300 Sum of the kilos (X) 700 Sum of the costs (Y) P7,000 Sum of kilos multiplied by costs ((XY)) P852,500 Sum of the kilos squared ((X)2) 87,500 Using the least squares method, the fixed portion of the cost is (E) A. P109 C. P200 B. P129 D. P271 - END OF HANDOUTS -

Management Advisory Services by Karim G. Abitago, CPA

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