RQ1 (With Answers)

RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

Name: Name: ____________________________

Score: Score: _________

I. Write the letter of the best answer before the number. Erasures are not allowed. ( 15  points) 1. The salaries you could be earning by working rather than attending college are an example of a. Outlay costs  b. Misplaced costs c. Sunk costs d. Opportunity costs 2. Sunk costs a.  Are substitutes substitutes for opportunity opportunity costs costs  b.  Are relevant relevant to long-term long-term decisions decisions but not to short-term short-term decisions decisions c.  Are relevant relevant to decision-makin decision-making g d. In and of themselves are not relevant to decision-making 3.  An opportunity opportunity cost is usually a. Relevant, but is not part of traditional accounting records  b. Not relevant, but is part of traditional accounting records c. Relevant, and is not part of traditional accounting records d. Not relevant, and is not part of traditional accounting records 4. In the development of accounting data for decision-making purchases, relevant costs are defined as a. Future costs which will differ under each alternative course of action  b. The change in prime costs under each alternative course of action c. Standard costs which are developed by time-and-motion study techniques  because of their their relevance relevance to managerial managerial control control d. Historical costs which are the best available basis for estimating future costs 5. In analysing whether to build another regional service office, the salary of the Chief Executive Officer at the corporate headquarters is 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 cost for the same will be considered 6.  Among the costs relevant to a make-or-buy make-or-buy decision include variable manufacturing costs as well as a. Unavoidable costs  b. Real estate taxes c. Plant depreciation d.  Avoidable fixed fixed costs 7. The distinction between avoidable and unavoidable costs is similar to the distinction between a.  Variable costs costs and fixed fixed costs  b.  Variable costs costs and mixed mixed costs c. Step-variable costs and fixed costs d. Discretionary costs and committed costs 8.  Assume a company produces three products: A, B and C. It can only sell up to 3,000 units of each product. Production capacity is unlimited. The company should produce the product/s that has/have the highest a. Contribution margin per hour of machine time  b. Gross margin per unit c. Contribution margin per unit 1

RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

d. Sales price per unit 9.  A product should be dropped if a. It has negative incremental profit  b. It has a negative contribution margin c. Dropping it will increase the total profit of the company d. It is not essential to the company’s product line 10. Pinoy Company temporarily has excess production capacity, the idle plant facilities can be used to manufacture a low-margin item. The low-margin item should be produced if it can be sold for more than its a.  Variable costs plus opportunity costs of idle facilities  b. Indirect costs plus any opportunity cost of idle facilities c. Fixed costs d.  Variable costs 11.  An item whose entire amount is usually a differential cost a. Factory overhead  b. Direct cost c. Conversion cost d. Period cost 12. Consider the following statements: I.  Assemble all costs associated with each alternative being considered. II. Eliminate those costs that are sunk. III. Eliminate those costs that differ between alternatives.  Which of the above statements does not represent a step in identifying the relevant costs in a decision problem? a. Only I  b. Only II c. Only III d. Only I and III 13. In a sell or process further decision, consider the following costs: I.  A variable production cost incurred prior to split-off II.  A variable production cost incurred after split-off III.  An avoidable fixed production cost incurred after split-off  Which of the above costs is (are) not relevant in a decision regarding whether the product should processed further? a. Only I  b. Only III c. Only I and II d. Only I and III 14.  Allocated common fixed costs: a. Can make a product line appear to be unprofitable  b.  Are always incremental costs c.  Are always relevant in decisions involving dropping a product line d.  All are correct. 15. Consider the following statements: I.  A division’s net operating income, after deducting both traceable and allocated common corporate costs, is negative. II. The division’s avoidable fixed costs exceed its contribution margin. III. The division’s traceable fixed costs plus its allocated common corporate costs exceed its contribution margin.  Which of the above statements give an economic reason for eliminating the division? a. Only I  b. Only II 2

RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

c. Only III d. Only I and II II. Write your final answer before the number. Erasures are not allowed. Provide solutions in good form on the back of the next sheet. (20 points) 16. Kala Company prepared the following tentative forecast concerning product A for 2017. Sales P500,000 Selling price per unit P5.00  Variable costs P300,000 Fixed costs P150,000 Study made by the sales manager disclosed that the unit selling price could be increased by 20%, with an expected volume decrease of only 10%. Assuming that Kala incorporates these changes in its 2017 forecast, what should be the operating income from product A?

17.  Wiggle Company sells product A at a selling price of P21 per unit. Wiggle’s cost per unit based on the full capacity of 200,000 units is as follows: Direct materials P4 Direct labor 5 Overhead (two-thirds of which is fixed) 6 P15  A special order affecting to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be P3 per unit for shipping. Wiggle has sufficient existing capacity to manufacture the additional units. In negotiating a price for the special order, Wiggle should consider that the minimum selling price per unit should be:

18. Plainfield Company manufactures part G for use in its production cycle. The costs per unit for 10,000 units for part G are as follows: Direct materials P3 Direct labor 15  Variable overhead 6 Fixed overhead 8 P32  Verona Company has offered to sell Plainfield 10,000 units of Part G for P30 per unit. If Plainfield accepts Verona’s offer, the released facilities could be used to save P45,000 in relevant costs in the manufacture of part H. In addition P5 per unit of the fixed overhead applied to part G would be totally eliminated. What alternative is more desirable and by what amount is it more desirable?

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

19. Relic Corp. manufactures batons. Relic can manufacture 300,000 batons a year at a variable cost of P750,000 and a fixed cost of P450,000. Based on Relic’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?

20. Three companies are each manufacturing and selling annually 10,000 units of a similar product at a sales price of P20 per unit. The companies have fixed and  variable costs as follows: Company Fixed cost Variable cost per unit R P40,000 P12 S 80,000 8 T 120,000 4 Each company contemplates a price decrease from P20 to P16 per unit in the expectation that sales will increase from 10,000 to 15,000 units per year. The contribution margin for each company at the present sales level is:

21. The operating income for each company at the contemplated price and sales levels are:

22. The increase (decrease) in operating income for R Company resulting from the price decrease and the sales volume increase is:

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

23. From the accounting records of Sta. Barbara Company, the following data on costs for the quarter ended September 30, 2017 were determined:  Variable costs Fixed costs Direct materials P300,000 Direct labor 400,000 Factory overhead 80,000 P50,000 Marketing expenses 70,000 30,000  Administrative expenses 50,000 20,000 Sales for the quarter totalled P1,200,000. The company is considering two alternative proposals that would change certain cost items. Proposal A would increase fixed costs by P10,000 with sales and  variable costs remaining the same. Proposal B would involve acquiring modern equipment at an annual increase of fixed costs of P25,000, with the expectation of saving the same amount in each of the direct materials and direct labor costs. If proposal A is adopted, the company’s profit would be:

24. If proposal B is adopted, the company’s profit would be:

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

25. Scully Inc. has been manufacturing 5,000 units of Part 20561 which 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 applied 6 P20 Mulder Company has offered to sell Scully 5,000 units of Part 20561 for P19 per unit. Scully has determined that it could use the facilities presently used to manufacture Part 20561 to manufacture Product X and generate an operating profit of P4,000. Scully has also determined that two-thirds of the fixed overhead applied will continue even if Part 20561 is purchased from Mulder. To determine  whether to accept Mulder’s offer, the net relevant manufacturing costs to Scully  are:

26. Dipper Company needs 20,000 of a certain part to use in its production cycle. The following information is available: Cost to Dipper to make the part: Direct materials P4 Direct labor 16  Variable overhead 18 Fixed overhead applied 10 P48 Cost to buy the part from Orion Co. P36 If Dipper buys the part from Orion instead of making it, Dipper could not use the released facilities in another manufacturing activity. 60% of the fixed overhead applied will continue regardless of what decision is made: In deciding whether to make or buy the part, the total relevant costs to make the part are:

27. The Blade Division of Dana Company produces hardened steel blades. One third of the Blade Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. The Blade Division’s estimated sales and standard cost data for the fiscal year ending June 30, 2017, are as follows: Lawn Products Outsiders Sales P15,000 P40,000  Variable costs (10,000) (20,000) Fixed costs (3,000) (6,000) Gross margin 2,000 P14,000 Unit sales 10,000 20,000

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

The Lawn Products Division has an opportunity to purchase 10,000 blades of identical quality from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division cannot sell any additional products to outside customers. Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier? Show your supporting computation.

28. Sta. Helena Company manufactures men’s caps. The projected income statement for the year before any special order is as follows:  Amount Per Unit Sales P400,000 P20 Cost of goods sold 320,000 16 Gross margin 80,000 4 Selling expenses 30,000 3 Operating income 50,000 1 Fixed costs included in above projected income statement are P80,000 in cost of goods sold and P9,000 in selling expenses.  A special order offering to buy 2,000 caps for P17 each was made to Sta. Helena. No additional selling expenses will be incurred if the special order is accepted. Sta. Helena has the capacity to manufacture 2,000 more caps. As a result of the special order, the operating income would increase by:

29. Laney Appliance Company makes and sells electric fans. Each fan regularly sells for P42. The following cost data per fan is based on a full capacity of 150,000 fans produced each period. Direct materials P8 Direct labor 9 Manufacturing overhead (70% variable and 30% unavoidable fixed) 10  A special order has been received by Laney for a sale of 25,000 fans to an overseas customer. The only selling costs that would be incurred on this order  would be P4 per fan for shipping. Laney is now selling 120,000 fans through regular channels each period. What should Laney use as a minimum selling price per fan in negotiating a price for this special order?

30. Zach 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, P50,000 of the P60,000 in fixed costs charged to product X could be eliminated. These data indicate that if Product X is discontinued, overall company operating income should:

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

31. The Siller Company has two divisions –  East and West. The divisions have the following revenues and expenses: East West Sales P720,000 P350,000  Variable costs 370,000 240,000 Traceable fixed costs 130,000 80,000  Allocated common corporate costs 120,000 50,000 Operating income (loss) 100,000 (20,000) The management at Siller is pondering the elimination of the West division since it has shown an operating loss for the past several years. If the West division were eliminated, its traceable fixed costs could be avoided. The total common corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would result in an overall company operating income of:

32. Mott Company manufactures 10,000 units of Part EM each year for use in its production. The following total costs were reported last year: Direct materials P20,000 Direct labor 55,000  Variable overhead 45,000 Fixed overhead applied 70,000 P190,000  Volvo Company has offered to sell Mott 10,000 units of Part EM for P18 per unit. If Mott accepts the offer, some of the facilities presently used to manufacture Part EM could be rented to a third party at an annual rental of P15,000. Additionally, P4 per unit of the fixed overhead applied to Part EM would be totally eliminated. Should Mott accept Volvo’s offer? Show your computation.

33. Hollie Company produces three products, with costs and selling prices as shown  below: Products  A B C Selling price per unit P30 100% P20 100% P15 100%  Variable costs per unit 18 60 15 75 6 40 Contribution margin per unit 12 40% P5 25% P9 60%  A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In  what order should the products be produced? Show your computation.

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RQ1 (Relevant Costing)

MANAGERIAL ACCOUNTING 2

34. Kristin Company manufactures a fast-bonding glue in its Laguna plant. The company normally produces and sells 40,000 gallons of the glue each month. This glue, which is known as KK8, is used in the wood industry to manufacture plywood. The selling price of KK8 is P35 per gallon, variable costs are P21 per gallon, fixed manufacturing overhead costs in the plant total 230,000 per month, and the fixed selling costs total P310,000 per month. Strikes in the mills that purchase the bulk of the KK8 glue have caused Kristin Company’s sales to temporarily drop to 11,000 gallons per month. Kristin Company’s management estimates that strikes will last for two months, after  which sales of KK8 should return to normal. Due to the current low level of sales, Kristin Company’s management is thinking about closing down the Laguna plant during the strike. If Kristin Company does close down the Laguna plant, fixed manufacturing overhead costs can be reduced by P60,000 per month and fixed selling costs can  be reduced by 10%. Start up costs at the end of the shutdown period would total 14,000.  Assuming that the strikes continue for two months, would you recommend that Kristin Company close the Laguna plant? Show computations to show your answer. No, continue because of difference of 140,000. 35. At what level of sales (in gallons) for the two-month period should Kristin Company be indifferent between closing the plant or keeping it open? Show computations. 12,000 units

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