Relevant Costing-with highlighted answer key.doc

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Relevant Costing (Study Notes) 1.0 Definition and Classification of Cost 1.1 Differential Costs 1.1.1 Those costs that differs between alternative 1.1.2 Not a sunk costs 1.2 Incremental Costs 1.2.1 Costs that will increase if a particular alternative is chosen. 1.2.2 A cost associated with producing an additional unit 1.2.3 It must be compared with the incremental revenue 1.3 Avoidable costs 1.3.1 Those that can be eliminated (in whole or in part) by choosing one alternative over another in a decision 1.4 Sunk Costs 1.4.1 Costs that has already been incurred and that cannot be changed by any decision made now or in the future, are never relevant 1.5 Committed Costs 1.5.1 Present and future costs that will not change regardless of the decision made. 1.6 Opportunity costs 1.6.1 Not recorded in the general ledger. 1.6.2 Factors in the decision-making process because they differ among alternatives. 2.0 Relevant and Irrelevant Items 2.1 Relevant 2.1.1 Any expected future costs which will differ among given alternative courses of actions. 2.1.2 Differential, Avoidable, and Opportunity Costs 2.2 Irrelevant 2.2.1 Unavoidable fixed cost is an ongoing fixed cost which cannot be altered or affected by a particular decision. 2.2.2 All sunk and committed costs 2.2.3 Future revenues and costs that will not change by choosing one alternative over another in a decision are never relevant

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3.0 Decision Making 3.1 Scientific Process 3.1.1 Define the Problem 3.1.1.1 The root cause or hidden problem of variances in a company’s operation 3.1.2 Specify the criteria 3.1.2.1 Determine the perspective that will be used as the basis for the solution 3.1.2.2 What is the objective? Maximize profit, increase market share, social services, etc. 3.1.3 Identify different alternatives 3.1.3.1 Options that can be taken to address the problem 3.1.3.2 Should consider situations of both internal and external environment 3.1.4 Develop the decision model 3.1.4.1 Simplify the problem 3.1.4.2 Define what will be relevant and irrelevant 3.1.4.3 It brings together all elements of the problem – criteria, constraints, and alternatives. 3.1.5 Gather Data 3.1.5.1 This is to facilitate objectivity in the decision making process 3.1.5.2 Data may be primary or secondary 3.1.5.3 Must be up-to-date, timely and accurate. 3.1.6 Evaluate the different alternatives 3.1.6.1 the best options that can address the entity’s objective 3.1.6.2 Based on the decision model and criteria created 3.1.7 Make a conclusion/decision 3.2 Types of Decisions 3.2.1 Routine 3.2.1.1 Decisions made under a specific process and certainty. 3.2.1.2 Recurring and programmed decisions with set responses. 3.2.1.3 Valuable time and resources should not be expended each time the decisions is to be made

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3.2.1.4 Examples of Routine Decisions 3.2.1.4.1 Replenishment of inventory 3.2.1.4.2 Sending delinquency notes 3.2.1.4.3 Giving employees raised Non-Routine 3.2.2.1 Decisions made using the discretion of the decision maker in addressing situations that are uncommon. 3.2.2.2 It is quite risky wherein bad decision is irrevocable and causes material damages. 3.2.2.3 Examples of Non-Routine Decisions 3.2.2.3.1 Make or Buy 3.2.2.3.2 Accept or Reject 3.2.2.3.3 Drop or Maintaining a Segment (Product Line, Geographical Location, etc, Functional Area) 3.2.2.3.4 Sell now or Process Further 3.2.2.3.5 Operating under constrained resources 3.2.2.3.6 Shutdown or Continue Operation

4.0 Make or Buy 4.1 Also called outsourcing decision 4.2 The total cost per unit of a product or service includes a unitized portion of fixed cost, a cost that may continue even if the item or service is purchased elsewhere at a lower price 4.3 General Objective: Whichever of the two options results in the lower cost 4.4 Computation of cost: Cost to Make Cost to Buy Direct Materials xx Purchase Price xx Direct Labor xx Variable Overhead xx Decrease in Fixed xx Overhead (if any) Opportunity Cost (if any – alternative usage of xx the space) TOTAL xx TOTAL xx 5.0 Drop or Maintain

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5.1 The key is the proper handling of fixed costs, particularly allocated common costs, and determination if such amounts are avoidable or unavoidable 5.2 The contribution margin lost from the activity to be dropped must also be considered 5.3 Mutually exclusive decisions – a segment will be affected by decisions made regarding another segment. 5.4 General Objective: As long as the segment can contribute in covering common cost, it should not be closed. 5.5 Computation: Segment Revenue (Sales) xx Less: Variable Cost (xx) Segment Contribution Margin xx Less: Direct/Traceable Fixed Costs (xx) Segment Margin (if positive = Maintain; if negative = xx drop) 5.6 Incremental Approach with consideration to additional items: Loss Segment Margin (see previous section) (xx) Increase in Contribution Margin of other xx segment Decrease in Contribution Margin of other (xx) segment Cost incurred in closing the segment (xx) Increase/(Decrease) in Over-all Operating Income xx 6.0 Accept or Reject 6.1 A special order is a one-time order that is not considered part of the company’s normal ongoing business. 6.2 When analyzing a special order, only the incremental costs and benefits are relevant. 6.3 Since the existing fixed manufacturing overhead costs would not be affected by the order, they are not relevant. 6.4 General Objective: Incremental Revenue (Special selling price) should always be higher than the incremental cost. 6.5 Computation: Sales xx Less: Cost to Make and Sell Direct Materials xx Direct Labor xx Variable Manufacturing Overhead xx

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Variable Selling and Administrative (if required) Special Equipment and other requirements (if any) Lost Contribution Margin – if required to sacrifice regular sales due to lack of capacity. Incremental Income

xx xx xx

(xx) Xx

7.0 Sell or Process Further 7.1 A joint production process results in the commingled manufacture of two or more products, called joint products. 7.2 The products become identifiable from each other at the splitoff point. 7.3 Management must frequently decide whether to sell the products at split-off or, alternatively, incur additional cost beyond split-off (called separable cost) and then sell the goods for a higher price. 7.4 Joint costs incurred prior to split-off are not relevant when making the sell-at-split-off or-process-further decision, because these costs will be incurred regardless of the alternative selected. 7.5 The correct decision is made by comparing the separable cost incurred against the amount of increased sales revenue. 7.6 Computation: Sales after further processing xx Sales at Split-off point (xx) Incremental Revenue xx Cost to be incurred when process further (xx) (Incremental Cost) Net Incremental Profit = if positive xx 8.0 Constrained Resources 8.1 Constraints 8.1.1 Limitations under which a company must operate, such as limited available machine time or raw materials, which restricts the company’s ability to satisfy demand.

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8.1.2

Constraints or bottlenecks limit a company’s ability to grow and limit the total output of the entire system. 8.1.3 Decisions may involve the use of limited labor hours, limited materials, and limited machine time. 8.2 Decision Criteria: 8.2.1 When only one limited resource is present, a company should focus on products that have the greatest amount of contribution margin per unit of the scarce resource. 8.3 Computation Guide: 8.3.1 Identify the constraint 8.3.2 Compute the CM/unit for each of the product line 8.3.3 Compute the Contribution margin per constrained resources 8.3.4 Highest CM/constraint would be prioritize or rank 1 8.4 Effects of Market Limitations 8.4.1 If the product line with the highest contribution margin has a maximum market demand limit, other resources may be devoted to the other product line. 8.4.2 If all the product line has a minimum requirement, this should be prioritized regardless of the ranking, then proceed to the ranking based on the contribution margin per constrained resource 9.0 Shutdown Point 9.1 This is applicable for companies with products that have seasonal, cyclical or random variation in demand. It is also applicable to those companies that are in the process of restructuring its operation. 9.2 This is a situation wherein regardless of the alternative chosen, the company will incur loss. 9.3 Objective: To choose the alternative that will result to the lower loss (choosing the lesser evil) 9.4 Shutdown Point (In Units to be Sold):

9.5 Computation of the Analysis: Continue Operating Sales xx

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Shutdown Shutdown Cost

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Variable Cost Contribution Margin Avoidable Fixed Costs

(xx) xx (xx ) xx

Total

Total

xx

Relevant Costing (Quizzer) Instruction: This quizzer is good for 2 hours. It aims to give you the needed practice to master the concepts of cost classification and analysis. Good Luck!!! 1.

Sunk Costs a. Are substituted for opportunity costs b. Are relevant to long-term decisions but not to short-term decisions c. Are relevant to decision making d. In and themselves are not relevant to decision making

2.

What is the opportunity cost of making a component part in a factory given no alternative use of the capacity? a. The total manufacturing cost of the component b. Zero c. The fixed manufacturing cost of the component d. The variable manufacturing cost of the component

3.

In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run decision is a. Variable Overhead

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b. Fixed overhead that will be avoided if the part is bought from an outside vendor c. Direct Labor d. Fixed overhead that will continue even if the part is bought from an outside vendor 4.

In considering a special order situation that will enable a company to make use of presently idle capacity, which of the following costs would be irrelevant? a. Depreciation b. Variable Overhead c. Materials d. Direct Labor

5.

The salaries you could be earning by working rather than attending college are an example of a. Outlay costs c. Sunk Costs b. Misplaced Costs d. Opportunity Costs

6.

An opportunity cost is a. The difference between in total costs which results from selecting one choice instead of another b. The profit foregone by selecting one choice instead of another. c. A cost that may be saved by not adopting an alternative d. A cost that may be shifted to the future with little or no effect on current operations.

7.

In analyzing whether to build another regional service office, the salary of the Chief executive officer (CEO) at the corporate headquarters: a. Relevant because salaries are always relevant b. Relevant because this will probably change if the regional service office is built. c.Irrelevant because it is future cost that will not differ between the alternatives under consideration d. Irrelevant since another imputed costs for the same will be considered

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8.

Among the costs relevant to a make-or-buy decision include variable manufacturing costs as well as: a. Unavoidable Costs c. Plant Depreciation b. Avoidable Fixed Costs d. Real Estate Taxes

9.

Opportunity Costs are: a. Costs irrevocably incurred by past actions b. The difference between actual and standard costs c. Not recorded in the accounting records d. Partly fixed costs and partly variable costs

10. In a sell or process further decision, which costs below is (are) not relevant in a decision regarding whether the product should be processed further? a. A variable production cost incurred prior to split-off b. A variable production cost incurred after split-off c. An avoidable fixed production cost incurred after split-off d. Both B and C 11. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product? a. Variable selling expenses b. Fixed factory overhead c.Direct labor d. Contribution margin of additional units 12. In a make-or-buy decision, relevant costs include: a. unavoidable fixed costs b. avoidable fixed costs c.fixed factory overhead costs applied to products d. fixed selling and administrative expenses 13. In situations where management must decide between accepting or rejecting a onetime- only special order where there is sufficient idle capacity to fill the order, which one of the following is NOT relevant in making the decision? a. absorption costing unit product costs b. variable costs

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c.incremental costs d. differential costs 14. Total unit costs are a. Relevant for cost-volume-profit analysis b. Irrelevant in marginal analysis c.Independent of the cost system used to generate them d. Needed for determining the product contribution. 15. Which of the following is most relevant to a manufacturing equipment replacement decision? a. Original cost of the old equipment b. Disposal price of the old equipment c.Gain or loss on the disposal of the old equipment d. A lump-sum write-off amount from the disposal of the old equipment. 16. A company’s approach to an outsourcing decision a. Depends on whether the company is operating at or below normal volume b. Involves an analysis of avoidable costs c. Should use absorption costing d. Should use activity-based costing 17. Cavite Corporation contemplates the temporary shutdown of its plant facilities in a provincial area which is economically depressed due to natural disasters. Below are certain manufacturing and selling expense: 1. Depreciation 2. Property tax 3. Interest expense 4. Insurance of Facilities 5. Sales Commissions 6. Delivery Expense 7. Security of Premises Which of the above expenses will continue during the shutdown period? a. All expenses in the list c. Items 1,2,and 3 only b. All except items 5 and 6 d. Items 1,2,3,4, 6, and 7 only 18. A special order generally should be accepted if:

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a. Its revenue exceeds allocated fixed costs, regardless of the variable costs associated with the order. b. Excess capacity exists and the revenue exceeds all variable costs associated with the order. c. Excess capacity exists and the revenue exceeds allocated fixed costs. d. the revenue exceeds total costs, regardless of available capacity. 19. In a make or buy decision, the opportunity cost of capacity could a. be considered to decrease the price of units purchased from suppliers. b. be considered to decrease the cost of units manufactured by the company. c. be considered to increase the price of units purchased from suppliers. d. not be considered since opportunity costs are not part of the accounting records. 20. There is a market for both product X and product Y. Which of the following costs and revenues would be most relevant in deciding whether to sell product X or process it further to make product Y? a. Total cost of making X and the revenue from sale of X and Y. b. Total cost of making Y and the revenue from sale of Y. c. Additional cost of making Y, given the cost of making X, and additional revenue from Y. d. Additional cost of making X, given the cost of making Y, and additional revenue from Y. 21. Lakas Engine Co. manufactures engines for the military equipment on a cost-plus basis. The cost of a particular machine the company manufactures is shown below: Direct Materials P 400,000 Direct Labor 300,000 Overhead: Supervisor’s salary 40,000 Fringe benefit on direct labor 30,000 Depreciation 24,000 Rent 22,000 If the production of this engine were discontinued the production capacity would be idle, and the supervisor will be laid-off should there

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be a next contract for this engine, the company should bid a minimum price of a. P 816,000 b. P 700,000 c. P 730,000 d. P 770,000 22. Chow Inc. has its own cafeteria with the following annual costs: Food P 400,000 Labor 300,000 Overhead 440,000 The overhead is 40% fixed. At the fixed overhead, P 100,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay said salary, the maximum cost Chow will be will to pay an outsider firm to service the cafeteria is a. P 1,140,000 b. P 1,040,000 c. P 700,000 d. P 964,000 23. Jerry Company budgeted sales of 400,000 plastic guns at P40 per unit for 2012. Variable manufacturing costs were budgeted at P16 per unit, and fixed manufacturing costs at P10 per unit. A special order offering to buy 40,000 plastic guns for P23 each was received by Jerry in March 2012. Jerry has sufficient plant capacity to manufacture the additional quantity; however, the production would have to be done on an overtime basis at an estimated additional cost of P3 per plastic guns. Acceptance of the special order would not affect Jerry’s normal sales and no selling expenses would be incurred. What would be the effect on operating profit if the special order were accepted? a. P 240,000 decrease c. P 120,000 decrease b. P 160,000 increase d. P 280,000 increase 24. Chow foods operate a cafeteria for its employees. The operations of the cafeteria require fixed costs of P 470,000 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging P 1,200,000 per month. The company has the opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machine is estimated to be 40% greater than the current sales because the machine is available all hours. By replacing the cafeteria with vending machines, the company would receive 16% of the gross customer spending and avoid all cafeteria costs. A decision to replace the cafeteria with

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vending machines will result in a monthly increase/(decrease) in operating income of a. P 182,000 b. P 258,800 c. P (588,000) d. P 18,800 25.

Julius International produces 15,000 units of Product J1 and 30,000 units of J2 for which P800,000 common variable costs are incurred. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint products. Below are some other information: J1 J2 Unit selling price without further P 24 P 18 processing Unit selling price with further processing P 30 P 22 Total separate weekly variable costs of P further processing P 100,000 90,000 To maximize Julius’ manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week are a. P 95,000 b. P 90,000 c. P 100,000 d. P 190,000

26.

27.

Great Electronics is operating at 70% capacity. The plant manager is considering making component 501 now being purchased for P110 each, a price that is projected to increase in the near future. The plant has the equipment and labor force required to manufacture the component. The design engineer estimates that each component requires P40 of direct materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost. A decision to manufacture component 501 will result in a gain or (loss) for each component of a. P 28 b. P 16 c. P (20) d. P 4 S. Kent Co. has a limited number of machine hours that it can use for manufacturing two products, A and B. Each product has a selling price of P160 per unit but product A has 40% contribution margin and product B has a 70% contribution margin. One unit of B takes twice as many machine hours to make as a unit of A. Assume either product can be sold in whatever quantity is

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produced. Which product or products should the limited number of machine hours be used for? a. A b. Both A and B c. Either A and B d. B Ysabelle Industries Inc. has an opportunity to acquire a new equipment to replace one of its existing equipments. The new equipment would cost P 900,000 and has a five-year useful life, with zero disposal price. Variable operating costs would be P1 million per year. The present equipment has a book value of P 500,000, and a remaining useful life of five years. Its disposal price now is P 50,000 bit would be zero after five years. Variable operating costs would be P 1,250,000 per year. Considering the five years in total but ignoring the time value of money and income taxes, Ysabelle should a. Replace due to P 400,000 advantage b. Not replace due to P 150,000 disadvantage c. Replace due to P 350,000 advantage d. Not replace due to P 100,000 disadvantage

29.

Tagaytay Open-air flea market is along the highway leading to Taal Vista Lodge. Arnel has a stall which specializes in hand-crafted fruit baskets that sells for P60 each. Daily fixed costs are P15,000 and variable costs are P30 per basket. An average of 750 baskets is sold each day. Arnel has a capacity of 800 baskets per day. By closing time yesterday, a bus load of teachers who attended a seminar at the Development Academy of the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P 1,500 for 40 baskets. Arnel should have a. Rejected the offer since he could have lost P500 b. Rejected the offer since he could have lost P900 c. Accepted the offer since he could have P300 contribution margin d. Accepted the offer since he could have P700 contribution margin

30.

Pixie Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual production for the item is 100,000 units. The cost per 100 unit lot of the part are as follows: Direct Materials P 520

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Direct Labor Manufacturing Overhead Variable Fixed Total Manufacturing Costs per 100 units

200 240 320 P 1,280

Bobbie Inc. offered to sell Pixie all 100,000 unit it will need during the coming year for P 1,200 per 100 units. If Pixie accepts the offer from bobbie, the facilities used to manufacture Component 6417 could be used in the production of Component 8275. This change would save Pixie P 180,000 in relevant costs. In addition, a P 200,000 cost item included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pixie should a. Buy component 6417 because of P 300,000 savings b. Buy component 6417 because of P 140,000 savings c. Continue producing component 6417 because of P 40,000 savings d. Continue producing component 6417 because of P 60,000 savings 31.

Maeburg Inc. has excess production capacity. At times, it buys the same product from third party. Below are pertinent information: Selling Price per unit P 70.00 Fixed Cost per unit* 20.00 Variable Cost per unit 35.00 *at present utilized capacity The most it should pay for buying this product it currently makes would be the a. Selling price of P70 b. Total variable cost of producing the product of P35.00 per unit c. Total variable cost per unit of P35.00 plus the reduced fixed cost per unit after accounting for the effects of the added volume d. Total cost of production or P55.00 per unit

32.

Union Co. manufactures plugs used in its electrical gadgets at a cost of P108 per unit that includes P24 of fixed overhead. It needs 30,000 of these plugs yearly, and Divisive Corp. offers to sell these items to Union at P99 per unit. If Union decides to purchase the

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plugs, P 180,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Union purchases the plugs but does not rent the unused facility, the company would a. Save P6.00 per unit c. Lose P 18.00 per unit b. Save P9.00 per unit d. Lose P9.00 per unit 33.

Product A has a contribution margin of P80 per unit, a contribution margin ratio of 50% and requires 4 machine hours to produce. Product B has a contribution margin of p120 per unit, a contribution margin ratio of 40% and requires 5 machine hours to produce. IF the company has limited machine hours available, then it should produce and sell a. Product B since it has the higher contribution margin per unit b. Product A since it requires fewer machine hours per unit than does Product B c. Product B since it has the higher contribution margin per machine hour d. Product A since it has the higher contribution margin per machine hour

34.

Essence Producers Inc. manufactures various scents out of Philippine flowers and plants. It also manufactures exotic oils that it subsequently uses in the scents production. The cost per unit of measure for 15,000 units of exotic oils are as follows: Direct Materials P 20 Direct Labor 34 Variable Factory Overhead 24 Unavoidable Fixed Factory Overhead 32 TOTAL P 110 Xtra Oils, Inc. offered Essence to supply 15,000 units of measure of the exotic oils for P1,260,000. Assuming the facilities for exotic oils have no alternative use, Essence Producers Inc. should a. Continue to produce exotic oils at P 1,170,000 relevant costs against purchase cost of P 1,260,000. b. Produce 7,500 units and buy 7,500 units from Xtra Oils to save P 300,000.

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c. Buy from Xtra Oils, Inc. at P 1,260,000 against cost to produce of P 1,650,000 or savings of P 390,000. d. Produce 7,500 units and buy 7,500 units from Xtra Oils to save P 240,000 35.

Nakinnat Corporation’s Outlet No.5 reported the following results of operations for the period just ended: Sales P 2,500,000 Less: Variable Expenses 1,000,000 Contribution Margin 1,500,000 Less: Fixed Expenses 750,000 Salaries and Wages 50,000 Insurance on Inventories 325,000 Depreciation on Equipment 500,000 Advertising Net Income (Loss) P (125,000) The management is contemplating the dropping of Outlet No. 5 due to the unfavorable operational results. If this would happen, one employee will have to be retained with an annual salary of P 150,000. The equipment has no resale value. Outlet No. 5 should a. Not be dropped due to foregone overall income of P 350,000 b. Be dropped due to foregone overall income of P 325,000 c. Not be dropped due to foregone overall income of P25,000 d. Be dropped due to overall operational loss of P 25,000

36.

Division A of Decision Experts Corporation is being evaluated for elimination. It has contribution margin of P 400,000. It receives an allocated overhead of P1 million, 10% of which cannot be eliminated. The elimination of Division A would affect pre-tax income by a. P 400,000 decrease c. P 400,000 increase b. P 500,000 decrease d. P 500,000 increase

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F & S Inc. has an annual capacity of 2,800 units of output. Its predicted operations for the year are as follows: Sales 2,000 units at P760 each P 1,520,000 Manufacturing Costs: P 500 per unit Variable P 360,000 Fixed Marketing and Administrative Costs P 120 per unit Variable (Sales and Commissions) P 40,000 Fixed Assume there would be no effect on regular sales at regular prices and that the usual sales commission will be reduced to half, should the company accept a one-time only special order for 600 units at a selling price of P640 each. a. Yes, due to incremental income of P 48,000 b. Either on would do as the net effect would be the same c. Yes, due to incremental income of P 30,000 d. No due to the resulting loss of P 37,714

38.

Nore Milling Co. has a plant capacity of 40,000 units per month. Unit costs at capacity are: Direct Materials P 100 Direct Labor 150 Variable Overhead 75 Fixed overhead 75 Marketing Fixed Costs 175 Marketing Variable Costs 90 Present monthly sales are 39,000 units at P630 each. Josh Corporation contacted Nore about purchasing 40,000 units at P600 each. The present sales would not be affected by the special order. Nore should: a. Accept the special order due to P 185,000 incremental income b. Accept the special order due to P 110,000 incremental income

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c. Accept the special order due to P 215,000 incremental income d. Accept the special order due to P 10,000 incremental income

39.

Part BX is a component that Motors & Engines Co. uses in the assembly of motors. The cost to produce one BX is presented below: Direct Materials P 4,000 Materials handling (20% of Direct 800 Materials ) Direct Labor 32,000 Overhead (150% of Direct Labor) 48,000 Total Manufacturing Costs P 84,800 Materials handling which is not included in manufacturing overhead, represent the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. The company’s annual overhead budget is one-third variable and two-thirds fixed. Precasts Co. offers to supple BX at a unit price of P 60,000. Should the company buy or manufacture BX? a. Buy, due to advantage of P 24,800 per unit b. Manufacture, due to advantage of P 7,200 c. Buy, due to advantage of P 12,800 per unit d. Manufacture, due to advantage of P 19,200 per unit

40.

Syanton manufactures a particular computer component. Manufacturing costs per unit are as follows: Direct Materials P 50 Direct Labor 500 Variable Overhead 250 Fixed Overhead 400 TOTAL P 1,200 Fredix, Inc. has contacted Syanton with an offer to sell 10,000 of the component for P 1,100 per unit. If Syanton accepts the proposal, P 2,500,000 of the fixed overhead will be eliminated. Should Syanton make or buy the component and why? a. Buy, due to savings of P 1,000,000

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b. Make, due to savings of P 500,000 c. Buy, due to savings of P 2,500,000 d. Make, due to savings of P 3,000,000

41.

The Mapili Corp. which has experience excess production capacity received a special offer for its product at P78 per unit for 100,000 units. It has been using the variable costing method and has been pricing its product at P96 per unit based on mark-up of 60% as follows: Direct Materials P 30 Direct Labor 20 Variable Overhead 6 Variable Selling and administrative 4 Total Variable Expenses P 60 60% Mark-up 36 Selling price P 96 Assuming that this special offer will not affect the market for the product, should the company accept the special offer? a. Yes, since it will contribute P2.8 million margin b. Yes, since it will contribute P1.8 million margin c. No, since it will mean a loss of P1,8 million d. No, since it will mean a loss of P1.16 million

42.

Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For an annual volume of 10,000 units, fixed manufacturing costs of P 500,000 are incurred. Variable Costs per unit amount are: Direct Materials P 80 Direct Labor 15 Variable Overhead 20 Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000 units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead for 50%. The direct materials for the freezable bag will cost Picnic P20 if it will produce it. Considering Bags Corp. offer, Picnic should a. Buy the freezable ice bag due to P 150,000 advantage b. Produce the freezable ice bag due to P 225,000 advantage

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Produce the freezable ice bag due to P 25,000 advantage Buy the freezable ice bag due to P 50,000 advantage

43.

KXM Bottling Corporation makes and sells two soft drinks. COLA and ORANGE. The comparative data for the two shows: COLA ORANGE Selling price per bottle P 9.50 P 9.80 Variable Costs 6.50 7.20 Production Capacity per hour 250 300 bottles bottles There are 500 available production hours per month. Based on the above information: a. ORANGE and COLA’s unit contribution margin is the same hence it is equally profitable to produce either. b. It is more profitable to produce ORANGE c. COLA’s contribution margin is higher than that of ORANGE hence more profitable to produce. d. It is more profitable to produce COLA

44.

Data Covering QMB Corporation’s two product lines are as follows: Product Product Z W Sales P 36,000 P 25,200 Income before income tax 15,936 8,388 Sales price per unit 30 14 Variable Cost per unit 8.50 15 The total unit sold of W was 2,400 and that of Z was 3,600 units. If product Z is discontinued and this results in a 400 units decrease in sales of Product W, the total effect on income will be? a. P 13,600 decrease b. No effect c. P 6,800 d. P 5,000

45.

Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet include the following applied manufacturing overhead costs; Fixed Costs P 21,000 Variable CostsP 33,000

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The fixed costs include a normal P3,700 allocation for in-house design costs, although no in-house design will be done. Instead the job will require the use of external designers costing P 7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? a. P 36,700 b. P 40,750 c. P 54,000 d. P 58,050 46.

Rollin Corp. manufactures batons. Rollin can manufacture 300,000 batons a year at a variable cost of P 750,000 and a fixed cost of P 450,000. Based on Rollin’s predictions, 240,000 batons will be sold at the regular price of P5.00 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. By what amount would income before taxes be increased or decreased as a result of the special order? a. P 60,000 decrease c. P 30,000 increase b. P 36,000 increase d. P180,000 increase

47.

Scully, Inc. has been manufacturing 5,000 units of Part 20561 that is used in the manufacture of one of its products. At this level of production, the cost per unit of manufacturing part 20561 is as follows: Direct Materials P2 Direct Labor 8 Variable Overhead 4 Fixed Overhead 6 TOTAL P 20 Muller Company has offered to sell Scully 5,000 units of Part 25061 for P19 a unit. Scully has determined that it could use the facilities presently used to manufacture Part 25061 to manufacture product X and generate an operating profit of P 4,000. Scully has also determined that two-thirds of the fixed overhead applied will continue even if Part 25061 is purchased from Muller. To determine whether to accept Muller’s offer, the net relevant manufacturing costs to Scully are: a. P 70,000 b. P 80,000 c. P 90,000 d. P 95,000

48.

Buck Company manufactures part no. 1700 for use in its production cycle. The cost per unit for a 5,000 unit quantity follows: Direct Materials P2

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Direct Labor Variable Overhead Fixed Overhead

12 5 7

Hollow Company has offered to sell Buck 5,000 units of Part 1700 for P27 per unit. If Buck accepts the offer, some of the facilities presently used to manufacture part 1700 could be used to help with the manufacture of Part no. 1211, and P3 per unit of the fixed overhead applied to part no. 1700 would be totally eliminated. By what amount would net relevant costs be increased or decreased if Buck accepts Hollow’s offer? a. P 35,000 decrease c. P 20,000 decrease b. P 15,000 decrease d. P 5,000 increase 49.

Mach Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for P10 and has a contribution margin of P6. It is estimated that if Product X is discontinued, P 50,000 of the P 60,000 in fixed costs charged to Product X could be eliminated. These data indicate that if Product x is discontinued, overall company operating income should: a. Increase by P 2,000 per year b. Increase by P 38,000 per year c. Decrease by P 2,000 per year d. Decrease by P 38,000 per year

50.

Tyler Company currently sells 1,000 units of product M for P1 each. Variable costs are P0.40 and avoidable fixed costs are P400. A discount store has offered P0.80 per unit for 400 units of Product M. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of units they could lose before the order become unprofitable. a. 267 units b. 500 units c. 600 units d. 750 units Items #51 to #54 are based on the following information: Abel Company produces three versions of baseball bats: wood, aluminum, and hard rubber. A condensed segmented income statement for a recent period follows: Wood Aluminum Hard Total Rubber

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CRC-ACE Sales Variable Costs Contribution Margin Fixed Costs Operating Income/(loss)

The Professional CPA Review School P 500,000 325,000 175,000

P 200,000

P 65,000

140,000 60,000

58,000 7,000

P 765,000 523,000 242,000

75,000 100,000

35,000 25,000

22,000 (15,000)

132,000 110,000

51.

Assume none of the fixed expenses for the hard rubber line are avoidable. What will be total net income if the line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000

52.

Assume all of the fixed expenses for the hard rubber line are avoidable. What will be total net income if that line is dropped? a. $125,000 b. $103,000 c. $105,000 d. $140,000

53.

What would have to occur for total net income to remain unchanged when the hard rubber line is dropped? a. Total net income could not remain the same if hard rubber is dropped. b. The avoidable fixed expenses for hard rubber would have to be $15,000. c. The unavoidable fixed expenses for hard rubber would have to equal its contribution margin. d. The avoidable fixed expenses for hard rubber would have to be $7,000.

54.

If the total net income after dropping the hard rubber line is P105,000, hard rubber’s avoidable fixed expenses were a. P20,000 b. P2,000. c. P7,000 d. P5,000

55.

Fitzpatrick Corporation uses a joint manufacturing process in the production of two products, Gummo and Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a cost of P20,000. Each batch of Gummo uses 60% of the Valdene and incurs P10,000 of separate costs. The resulting 3,000 pounds of Gummo sells for P10 per

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pound. The remaining Valdene is used in the production of Xylo which incurs P12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for P12 per pound. Fitzpatrick uses the net realizable value method to allocate the joint material costs. The company is debating whether or not to process Xylo further into a new product, Zinten, which would incur an additional P4,000 in costs and sell for P15 per pound. If Zinten is produced, income would increase by a. P2,000. b. P5,760. c. P14,000 d. P26,000.

56.

Eagle Brand Inc. produces two products. Data regarding these products are presented below. Product X Product Y Selling price per unit P100 P130 Variable costs per unit P80 P100 Raw materials used per unit 4 lbs. 10 lbs. Eagle Brand has 1,000 lbs. of raw materials which can be used to produce Products X and Y. Which one of the alternatives below should Eagle Brand accept in order to maximize contribution margin? a. 100 units of product Y. b. 250 units of product X. c. 200 units of product X and 20 units of product Y. d. 200 units of product X and 50 units of product Y.

57.

Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000 gallons of Beracyl in a joint production process, incurring P250,000 of joint costs. Oakes allocates joint costs based on the physical volume of each product produced. Mononate and Beracyl can each be sold at the split-off point in a semifinished state or, alternatively, processed further. Additional data about the two products are as follows. Mononate Beracyl Sales price per gallon at split-off P7 P15

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Sales price per gallon if processed further P18

Variable production costs if processed further P115,000

P10 P125,000

An assistant in the company’s cost accounting department was overheard saying “....that when both joint and separable costs are considered, the firm has no business processing either product beyond the split-off point. The extra revenue is simply not worth the effort.” Which of the following strategies should be recommended for Oakes? a. b. c. d. 58.

Mononate -Sell at split-off; Beracyl - Sell at split-off. Mononate -Sell at split-off; Beracyl - Process further. Mononate -Process further; Beracyl - Sell at split-off. Mononate -Process further; Beracyl - Process further.

Current business segment operations for Whitman, a mass retailer, are presented below. Merchandise Automotive Restaurant Total Sales P500,000 P400,000 P100,000 P1,000,000 Variable costs 300,000 200,000 70,000 570,000 Fixed costs 100,000 100,000 50,000 250,000 Operating income (loss) P100,000 P100,000 P(20,000) P 180,000 Management is contemplating the discontinuance of the Restaurant segment since “it is losing money.” If this segment is discontinued, P30,000 of its fixed costs will be eliminated. In addition, Merchandise and Automotive sales will decrease 5% from their current levels. What will Whitman’s total contribution margin be if the Restaurant segment is discontinued? a. P160,000 b. P220,000 c. P367,650 d. P380,000

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The Professional CPA Review School

Aril Industries is a multi-product company that currently manufactures 30,000 units of Part 730 each month for use in production. The facilities now being used to produce Part 730 have fixed monthly overhead costs of P150,000, and a theoretical capacity to produce 60,000 units per month. If Aril were to buy Part 730 from an outside supplier, the facilities would be idle and 40% of fixed costs would continue to be incurred. There are no alternative uses for the facilities. The variable production costs of Part 730 are P11 per unit. Fixed overhead is allocated based on planned production levels. If Aril Industries continues to use 30,000 units of Part 730 each month, it would realize a net benefit by purchasing Part 730 from an outside supplier only if the supplier’s unit price is less than a. P12.00 b. P12.50 c. P13.00 d. P14.00.

60.

Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units of Product B. Lark’s staff developed the following information with regard to meeting this contract. Product A Product B Total Selling Price P75 P125 Variable costs P30 P48 Fixed overhead P1,600,000 Machine hours required 3 5 Machine hours available 160,000 Cost if outsourced P45 P60 Lark’s operations manager has identified the following alternatives. Which alternative should be recommended to Lark’s management? a. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder. b. Make 25,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder. c. Make 20,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder. d. Rent additional capacity of 30,000 machine hours which will increase fixed costs by P150,000

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61. Raymund Inc. currently sells its only product to Mall-Stores. Raymund has received a one-time-only order for 2,000 units from another buyer. Sale of the special order items will not require any additional selling effort. Raymund has a manufacturing capacity to produce 7,000 units. Raymund has an effective income tax rate of 40%. Raymund’s Income Statement, before consideration of the one-time-only order, is as follows. Sales (5,000 units at P20 per unit) P100,000 Variable manufacturing costs P50,000 Variable selling costs 15,000 65,000 Contribution margin 35,000 Fixed manufacturing costs 16,000 Fixed selling costs 4,000 20,000 Operating income 15,000 Income taxes 6,000 Net income P 9,000 In negotiating a price for the special order, Raymund should set the minimum per unit selling price at a. P10 b. P13 c. P17 d. P18. 62. The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak furniture line does not seem to be doing well and the president of the company is considering dropping this line. If it is dropped, the revenues associated with the Oak Division will be lost and the related variable costs saved. Also, 50% of the fixed costs allocated to the oak furniture line would be eliminated. The income statements, by divisions, are as follows. Maple Sales P55,000 Variable Costs 40,000 82,000 Contribution Margin 15,000 18,000 Fixed costs 10,000 10,200 Operating profit (loss) P 5,000

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Oak Cherry P85,000 P100,000 72,000 13,000 14,000 P(1,000)

P 7,800

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The Professional CPA Review School

Which one of the following options should be recommended to the president of the company? a. Continue operating the Oak Division as discontinuance would result in a total operating loss of P1,200. b. Continue operating the Oak Division as discontinuance would result in a P6,000 decline in operating profits. c. Discontinue the Oak Division which would result in a P1,000 increase in operating profits. d. Discontinue the Oak Division which would result in a P7,000 increase in operating profits. 63. Aspen Company plans to sell 12,000 units of product XT and 8,000 units of product RP. Aspen has a capacity of 12,000 productive machine hours. The unit cost structure and machine hours required for each product is as follows. Unit Costs XT RP Materials P37 P24 Direct labor 12 13 Variable overhead 6 3 Fixed overhead 37 38 Machine hours required 1.0 1.5 Aspen can purchase 12,000 units of XT at P60 and/or 8,000 units of RP at P45. Based on the above, which one of the following actions should be recommended to Aspen's management? a. Produce XT internally and purchase RP. b. Produce RP internally and purchase XT. c. Purchase both XT and RP. d. Produce both XT and RP. 64. Refrigerator Company manufactures ice-makers for installation in refrigerators. The costs per unit, for 20,000 units of ice-makers, are as follows. Direct materials P7 Direct labor 12 Variable overhead 5 Fixed overhead 10 Total costs P34

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Cool Compartments Inc. has offered to sell 20,000 ice-makers to Refrigerator Company for P28 per unit. If Refrigerator accepts Cool Compartments’ offer, the facilities used to manufacture ice-makers could be used to produce water filtration units. Revenues from the sale of water filtration units are estimated at P80,000, with variable costs amounting to 60% of sales. In addition, P6 per unit of the fixed overhead associated with the manufacture of icemakers could be eliminated. For Refrigerator Company to determine the most appropriate action to take in this situation, the total relevant costs of make vs. buy, respectively, are a. P600,000 vs. P560,000. b. P648,000 vs. P528,000. c. P632,000 vs. P560,000. d. P680,000 vs. P440,000. 65. Lazar Industries produces two products, Crates and Boxes. Per unit selling prices, costs, and resource utilization for these products are as follows. Crates Boxes Selling price P20 P30 Direct material costs P5 P5 Direct labor costs 8 10 Variable overhead costs 3 5 Variable selling costs 1 2 Machine hours per unit 2 4 Production of Crates and Boxes involves joint processes and use of the same facilities. The total fixed factory overhead cost is P2,000,000 and total fixed selling and administrative costs are P840,000. Production and sales are scheduled for 500,000 units of Crates and 700,000 units of Boxes. Lazar maintains no direct materials, work-in-process, or finished goods inventory. Lazar can reduce direct material costs for Crates by 50% per unit, with no change in direct labor costs. However, it would increase machine-hour production time by 1-1/2 hours per unit. For Crates, variable overhead costs are allocated based on machine hours. What would be the effect on the total contribution margin if this change were to be implemented? a. P125,000 increase c. P300,000 increase. b. P250,000 decrease d. P1,250,000 increase.

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CRC-ACE 66.

The Professional CPA Review School

Basic Computer Company (BCC) sells its micro-computers using bid pricing. It develops bids on a full cost basis. Full cost includes estimated material, labor, variable overheads, fixed manufacturing overheads, and reasonable incremental computer assembly administrative costs, plus a 10% return on full cost. BCC believes bids in excess of P925 per computer are not likely to be considered. BCC’s current cost structure, based on its normal production levels, is P500 for materials per computer and P20 per labor hour. Assembly and testing of each computer requires 12 labor hours. BCC’s variable manufacturing overhead is P2 per labor hour, fixed manufacturing overhead is P3 per labor hour, and incremental administrative costs are P8 per computer assembled. The company has received a request from the School Board for 500 computers. BCC’s management expects heavy competition in bidding for this job. As this is a very large order for BCC, and could lead to other educational institution orders, management is extremely interested in submitting a bid which would win the job, but at a price high enough so that current net income will not be unfavorably impacted. Management believes this order can be absorbed within its current manufacturing facility. Which one of the following bid prices should be recommended to BCC’s management? a. P764.00 b. P772.00 c. P849.20 d. P888.80.

67.

Jones Enterprises manufactures 3 products, A, B, and C. During the month of May Jones’ production, costs, and sales data were as follows. Products A B C Totals Units of production 30,000 20,000 70,000 120,000 Joint production costs to split-off point P480,000 Further processing costs PP60,000 P140,000 Unit sales price At split-off 3.75 5.50 10.25 After further processing 8.00 12.50

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Based on the above information, which one of the following alternatives should be recommended to Jones’ management? a. Sell both Product B and Product C at the split-off point. b. Process Product B further but sell Product C at the split-off point. c. Process Product C further but sell Product B at the splitoff point. d. Process both Products B and C further. 68. Synergy Inc. produces a component that is popular in many refrigeration systems. Data on three of the five different models of this component are as follows. Model A B C Volume needed (units) 5,000 6,000 3,000 Manufacturing costs Variable direct costs P10 P24 P20 Variable overhead 5 10 15 Fixed overhead 11 20 17 Total manufacturing costs P26 P54 P52 Cost if purchased P21 P42 P39 Synergy applies variable overhead on the basis of machine hours at the rate of P2.50 per hour. Models A and B are manufactured in the Freezer Department, which has a capacity of 28,000 machine processing hours. Which one of the following options should be recommended to Synergy's management? a. Purchase all three products in the quantities required. b. Manufacture all three products in the quantities required. c. The Freezer Department's manufacturing plan should include 5,000 units of Model A and 4,500 units of Model B. d. The Freezer Department's manufacturing plan should include 2,000 units of Model A and 6,000 units of Model B.

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69. The Doll House, a very profitable company, plans to introduce a new type of doll to its product line. The sales price and costs for the new dolls are as follows. Selling price per doll P100 Variable cost per doll P60 Incremental annual fixed costs P456,000 Income tax rate 30% If 10,000 new dolls are produced and sold, the effect on Doll House’s profit (loss) would be a. P(176,000) b. P(56,000) c. P(39,200) d. P280,000. 70.

Johnson Company manufactures a variety of shoes, and has received a special one-time-only order directly from a wholesaler. Johnson has sufficient idle capacity to accept the special order to manufacture 15,000 pairs of sneakers at a price of P7.50 per pair. Johnson’s normal selling price is P11.50 per pair of sneakers. Variable manufacturing costs are P5.00 per pair and fixed manufacturing costs are P3.00 a pair. Johnson’s variable selling expense for its normal line of sneakers is P1.00 per pair. What would the effect on Johnson’s operating income be if the company accepted the special order? a. Decrease by P60,000 b. Increase by P37,500. c. Increase by P22,500 d. Increase by P52,500.

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