test bank chapter 5 cost behavior analysis

Chapter 5
Cost Behavior: Analysis and Use

True/False
1.
T
Easy

Modern technology is causing shifts away from variable costs toward more fixed costs
in many industries.

2.
F
Medium

In order for a cost to be variable it must vary with either units produced or units sold.

3.
T
Easy

A cost that is obtainable in large chunks and that increases or decreases only in
response to fairly wide changes in the activity level is known as a step-variable cost.

4.
F
Easy

The concept of the relevant range does not apply to fixed costs.

5.

F
Medium

Indirect costs, such as manufacturing overhead, are always fixed costs.

6.
T
Easy

A cost formula may not be valid outside the relevant range of activity.

7.
T
Easy

Discretionary fixed costs arise from annual decisions by management to spend in
certain fixed cost areas.

8.
F
Easy

Significant reductions in committed fixed costs can usually be made on a temporary
basis without seriously impairing the long-run goals of a firm.

9.
F
Easy

The planning horizons for committed fixed costs and discretionary fixed costs are

generally the same.

10.
T
Easy

The high-low method is generally less accurate than the least-squares regression
method for analyzing the behavior of mixed costs.

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11.
T
Easy

In a scattergraph, the line fitted to the plotted points is known as a regression line.

12.
F
Easy

The adjusted R2 (i.e., R-squared) indicates the proportion of a mixed cost that is
variable.

13.
F
Easy

In least-squares regression, independent variables are not included in the
computations of the slope and intercept.

14.
T
Easy

The contribution approach to the income statement classifies costs by behavior rather
than by function.

15.
T
Easy

A mixed cost is partially variable and partially fixed.

Multiple Choice
16.
C
Medium

Expense A is a fixed cost; expense B is a variable cost. During the current year the
activity level has increased, but is still within the relevant range. In terms of cost per
unit of activity, we would expect that:
a. expense A has remained unchanged.
b. expense B has decreased.
c. expense A has decreased.
d. expense B has increased.

17.
B
Easy

Which costs will change with a decrease in activity within the relevant range?
a. Total fixed costs and total variable cost.
b. Unit fixed costs and total variable cost.
c. Unit variable cost and unit fixed cost.
d. Unit fixed cost and total fixed cost.

18.
B
Medium

Within the relevant range of activity, variable cost per unit will:
a. increase in proportion with the level of activity.
b. remain constant.
c. vary inversely with the level of activity.
d. none of these.

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19.
D
Medium

An increase in the activity level within the relevant range results in:

a. an increase in fixed cost per unit.
b. a proportionate increase in total fixed costs.
c. an unchanged fixed cost per unit.
d. a decrease in fixed cost per unit.

20.
B
Easy
CPA adapted

The term "relevant range" means the range over which:
a. costs may fluctuate.
b. a particular cost formula is valid.
c. production may vary.
d. relevant costs are incurred.

21.
A
Medium

The linear equation Y = a + bX is often used to express cost formulas. In this
equation:
a. the b term represents variable cost per unit of activity.
b. the a term represents variable cost in total.
c. the X term represents total cost.
d. the Y term represents total fixed cost.

22.
C
Easy

An example of a discretionary fixed cost is:
a. insurance.
b. taxes on real estate.
c. management training.
d. depreciation of buildings and equipment.

23.
C
Easy

An example of a committed fixed cost is:
a. a training program for salespersons.
b. executive travel expenses.
c. property taxes on the factory building.
d. new product research and development.

24.
D
Easy

Discretionary fixed costs:
a. vary directly and proportionately with the level of
activity.
b. have a long-term planning horizon, generally encompassing many years.
c. are made up of plant, equipment, and basic organizational
costs.
d. none of the above.

25.

B
Medium

In describing the cost formula equation Y = a + bX, which of the following statements
is correct?
a. "X" is the dependent variable.
b. "a" is the fixed component.
c. In the high-low method, "b" equals change in activity divided by change in costs.
d. As "X" increases "Y" decreases.

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26.
B
Easy

The contribution approach to the income statement:
a. organizes costs on a functional basis.
b. is useful to managers in planning and decision making.
c. shows a contribution margin rather than a net income figure
statement.
d. can be used only by manufacturing companies.

at the bottom of the

27.
D

Easy
CMA
adapted

Contribution margin is the excess of revenues over:
a. cost of goods sold.
b. manufacturing cost.
c. all direct costs.
d. all variable costs.

28.
B
Easy

An example of a cost that is variable with respect to the number of units produced and
sold is:
a. insurance on the headquarters building.
b. power to run production equipment.
c. supervisory salaries.
d. depreciation of factory facilities.

29.
C
Medium
CMA
adapted

A cost driver is:
a. the largest single category of cost in a company.
b. a fixed cost that cannot be avoided.

c. a factor that causes variations in a cost.
d. an indirect cost that is essential to the business.

30.
C
Medium

The following data pertain to activity and costs for two recent months:
Activity level in units

October November
5,000 10,000

Variable costs ............ P10,000
?
Fixed costs ...............
30,000
?
Mixed costs ............... 20,000
? _
Total costs ............... P60,000 P75,000
Assuming that these activity levels are within the relevant range, the mixed costs for
November were:
a. P40,000.
b. P35,000.
c. P25,000.
d. P20,000.

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31.
C
Medium

The following data pertains to activity and costs for two months:
June
10,000

July
20,000

Variable costs ................ P20,000
Fixed costs ...................
15,000
Mixed costs ................... 10,000
Total costs ................... P45,000

P ?
?
? _
P70,000

Activity level in units

Assuming that these activity levels are within the relevant range, the mixed costs for
July were:
a. P10,000.

b. P35,000.
c. P15,000.
d. P40,000.
32.
B
Easy

At an activity level of 10,000 units, variable costs totaled P35,000 and fixed costs
totaled P20,800. If 16,000 units are produced and this activity is within the relevant
range, then:
a. total cost would equal P89,280.
b. total unit cost would equal P4.80.
c. fixed cost per unit would equal P5.58.
d. total costs would equal P55,800.

33.
D
Medium

Anaconda Mining Company shipped 9,000 tons of copper concentrate for P450,000 in
March and 11,000 tons for P549,000 in April. Shipping costs for 12,000 tons to be
shipped in May would be expected to be:
a. P548,780.
b. P549,020.
c. P594,000.
d. P598,500.

34.
A
Medium

An analysis of past maintenance costs indicates that maintenance cost is an average of
P0.20 per machine-hour at an activity level of 10,000 machine-hours and P0.25 per
machine-hour at an activity level of 8,000 machine-hours. Assuming that this activity
is within the relevant range, what is the total expected maintenance cost if the activity
level is 8,700 machine-hours?
a. P2,000
b. P400
c. P2,250
d. P1,740

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35.
D
Medium

Shipping expense is P9,000 for 8,000 pounds shipped and P11,250 for 11,000 pounds
shipped. Assuming that this activity is within the relevant range, if the company ships
9,000 pounds, its expected shipping expense is closest to:
a. P10,125.
b. P8,583.
c. P9,972.
d. P9,750.

36.
C

Hard

Average maintenance costs are P1.50 per machine-hour at an activity level of 8,000
machine-hours and P1.20 per machine-hour at an activity level of 13,000 machinehours. Assuming that this activity is within the relevant range, total expected
maintenance cost for a budgeted activity level of 10,000 machine-hours would be
closest to:
a. P16,128.
b. P15,000.
c. P13,440.
d. P11,433.

37.
D
Medium
CMA
adapted

The controller of JoyCo has requested a quick estimate of the manufacturing supplies
needed for the month of July when production is expected to be 470,000 units. Below
are actual data from the prior three months of operations.
Production
in units
March 450,000
April
540,000
May
480,000

Manufacturing
supplies

P723,060
853,560
766,560

Using these data and the high-low method, what is the best estimate of the cost of
manufacturing supplies that would be needed for July? (Assume that this activity is
within the relevant range.)
a. P805,284
b. P1,188,756
c. P755,196
d. P752,060

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38.
D
Hard

(Appendix) The following activity and cost data were provided by Hammer Corp.,
which would like help in estimating its future maintenance costs:
Units Maintenance Cost
3
P450
7
P530
11
P640

15
P700
Using the least-squares regression method to estimate the cost formula, the expected
total cost for an activity level of 10 units would be closest to:
a. P612.50.
b. P581.82.
c. P595.84.
d. P601.50.

39.
C
Easy

Given the cost formula Y = P15,000 + P5X, total cost at an activity level of 8,000
units would be:
a. P23,000.
b. P15,000.
c. P55,000.
d. P40,000.

40.
B
Easy

Given the cost formula Y = P12,000 + P6X, total cost at an activity level of 8,000
units would be:
a. P20,000.
b. P60,000.
c. P12,000.
d. P48,000.

41.
D
Easy

Reddy Company has the following cost formulas for overhead:
Cost
Indirect materials
Maintenance
Machine setup
Utilities
Depreciation

Cost Formula
P2,000 plus P0.40 per machine hour
P1,500 plus P0.60 per machine hour
P0.30 per machine hour
P200 plus P0.10 per machine hour
P800

Based on these cost formulas, the total overhead cost at 600 machine hours is
expected to be:
a. P4,500.
b. P5,200.
c. P5,620.
d. P5,340.

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42.
C
Medium

Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be
P42,500?
a. 10,625 units.
b. 4,375 units.
c. 6,250 units.
d. 5,250 units.

43.
D
Easy

The following data pertains to activity and utility costs for two recent years:
Year 2 Year 1
Activity level in units 12,000
8,000
Utilities cost
P15,000 P12,000
Using the high-low method, the cost formula for utilities is:
a. P1.50 per unit.
b. P8,000 plus P0.50 per unit.
c. P1.25 per unit.
d. P6,000 plus P0.75 per unit.

44.

D
Easy

The following data pertains to activity and utility costs for two recent years:
Year 2 Year 1
Activity level in units
10,000 6,000
Utilities cost observed P12,000 P9,000
Using the high-low method, the cost formula for utilities is:
a. P1.50 per unit.
b. P1.20 per unit.
c. P3,000 plus P3.00 per unit.
d. P4,500 plus P0.75 per unit.

45.
D
Easy

At an activity level of 6,000 units the cost for maintenance is P7,200 and at 10,000
units the cost for maintenance is P11,600. Using the high-low method, the cost
formula for maintenance is:
a. P1.20 per unit.
b. P1.16 per unit.
c. P1,200 plus P1.10 per unit.
d. P600 plus P1.10 per unit.

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150

46.
C
Easy

Bell Company has provided the following data for maintenance costs:
April
Machine hours incurred
12,000
Maintenance cost incurred P24,000

May
16,000
P26,000

Using the high-low method, the cost formula for maintenance cost would be:
a. P2.00 per machine hour.
b. P1.625 per machine hour.
c. P18,000 plus P0.50 per machine hour.
d. P24,000 plus P0.50 per machine hour.
47.
C
Medium

Buckeye Company has provided the following data for maintenance cost:
Prior Year
Machine hours .....
12,500
Maintenance cost .. P27,000

Current Year
15,000
P31,000

The best estimate of the cost formula for maintenance would be:
a. P21,625 per year plus P0.625 per machine hour.
b. P7,000 per year plus P0.625 per machine hour.
c. P7,000 per year plus P1.60 per machine hour.
d. P27,000 per year plus P1.60 per machine hour.
48.
A
Hard

Selected information about Buehler Corporation's operations at high and at low levels
of activity follow:
Level of Activity
Low
High
Number of units produced ............ 25,000
30,000
Total manufacturing costs ........... P575,000 P680,000
Direct material cost per unit .......
P5
P5
Direct labor cost per unit ..........
P6
P6
Using the high-low method, what is the cost formula for manufacturing overhead?
a. P50,000 per period plus P10 per unit
b. P50,000 per period plus P21 per unit

c. P50,000 per period plus P22 per unit
d. P347,000 per period plus P0.10 per unit

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49.
D
Hard

At a sales level of P300,000, James Company's gross margin is P15,000 less than its
contribution margin, its net income is P50,000, and its selling and administrative
expenses total P120,000. At this sales level, its contribution margin would be:
a. P250,000.
b. P155,000.
c. P170,000.
d. P185,000.

50.
B
Hard

(Appendix) Your boss would like you to estimate the fixed and variable components
of a particular cost. Actual data for this cost for four recent periods appear below.
Period 1
Period 2
Period 3
Period 4

Activity
24
25
20
22

Cost
P174
179
165
169

Using the least-squares regression method, what is the cost formula for this cost?
a. Y = P 0.00 + P7.55X
b. Y = P110.44 + P2.70X
c. Y = P103.38 + P3.00X
d. Y = P113.35 + P0.89X
Reference: 5-1
Rymore Company would like to classify the following costs according to their cost behavior:
July
Sales in units.. 1,500

August
1,600

Cost A ......... P35,000
Cost B ......... 16,000
Cost C ......... 67,500

P36,000
16,000
72,000

51.
A
Easy
Refer To: 51

Which of the following classifications best describes the behavior of Cost A?
a. Mixed.
b. Variable.
c. Fixed
d. none of the above.

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52.
C
Easy
Refer To: 51

Which of the following classifications best describes the behavior of Cost B?
a. Mixed.
b. Variable.
c. Fixed.
d. none of the above.

53.
B
Easy
Refer To: 51

Which of the following classifications best describes the behavior of Cost C?
a. Mixed.
b. Variable.
c. Fixed.
d. none of the above.

Reference: 5-2
Comparative income statements for Boggs Sports Equipment Company for the last two months are
presented below:
Sales in Units .............
Sales Revenue ..............
Less Cost of Goods Sold ....
Gross Margin ...............
Less Operating Expenses:
Rent .....................
Sales Commissions ........
Maintenance Expenses .....
Clerical Expense .........
Total Operating Expenses ...
Net income .................

July
11,000

August
10,000

P165,000 P150,000
72,600
66,000
92,400
84,000
12,000 12,000
13,200 12,000
13,500 13,000
16,000
15,000
54,700
52,000
P 37,700 P 32,000

All of the company's costs are either fixed, variable, or a mixture of the two (i.e., mixed). Assume that
the relevant range includes all of the activity levels mentioned in this problem.
54.
B
Easy
Refer To: 52

Which of the operating expenses of the company is variable?
a. Rent.
b. Sales Commissions.
c. Maintenance Expense.
d. Clerical Expense.

55.
C
Hard
Refer To: 52

The total monthly fixed cost for Boggs Sporting Equipment Company is:
a. P12,000.
b. P22,500.
c. P25,000.
d. P40,000.

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56.
D
Medium
Refer To: 52

If sales are projected to be 8,000 units in September, total expected operating
expenses would be:
a. P49,300.
b. P41,600.
c. P44,750.
d. P46,600.

Reference: 5-3
Gasson Company is a merchandising firm. Next month the company expects to sell 800 units. The

following data describe the company's revenue and cost structure:
Selling price per unit .......
P40
Sales commission .............
5%
Purchase price (cost) per unit
P18
Advertising expense ..........
P4,000 per month
Administrative expense ....... P4,500 per month plus 15% of sales
Assume that all activity mentioned in this problem is within the relevant range.
57.
A
Medium
Refer To: 53

The expected gross margin next month is:
a. P17,600.
b. P11,200.
c. P14,400.
d. P16,000.

58.
C
Easy
Refer To: 53

The expected total administrative expense next month is:
a. P 4,800.
b. P13,300.

c. P 9,300.
d. P14,900.

59.
B
Medium
Refer To: 53

The expected contribution margin next month is:
a. P17,600.
b. P11,200.
c. P14,400.
d. P16,000.

60.
C
Medium
Refer To: 53

The expected net income next month is:
a. P 7,500.
b. P 5,100.
c. P 2,700.
d. P11,200.

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154

Reference: 5-4
In the O'Donnell Manufacturing Company, 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.
61.
C
Hard
Refer To: 54

The variable cost for maintenance per machine hour is:
a. P1.30.
b. P1.44.
c. P0.75.
d. P1.35.

62.
A
Hard
Refer To: 54

The total fixed overhead cost for O'Donnell is:
a. P115,000.
b. P130,000.
c. P 60,000.
d. P 55,000.

63.
B

Hard
Refer To: 54

If 110,000 machine hours of activity are projected for next period, total expected
overhead cost would be:
a. P256,000
b. P263,500.
c. P306,625.
d. P242,500.

Reference: 5-5
Maxwell Company has a total expense per unit of P2.00 per unit at the 16,000 level of activity and total
expense per unit of P1.95 at the 21,000 unit level of activity.
64.
B
Medium
Refer To: 55

The best estimate of the variable cost per unit for Maxwell Company is:
a. P0.56.
b. P1.79.
c. P2.00.
d. P1.95.

65.
C
Medium
Refer To: 55

The best estimate of the total fixed cost per period for Maxwell Company is:

a. P40,950.
b. P32,000.
c. P3,360.
d. P29,190.

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66.
C
Medium
Refer To: 55

The best estimate of the total expected costs at the 19,000 level of activity for
Maxwell Company is:
a. P37,050.
b. P38,000.
c. P37,370.
d. P39,830.

Reference: 5-6
Johnson Company has provided the following data for the first five months of the year:
Machine Hours
January ....
120
February ... 160
March ......
200

April ......
150
May ........
170

Lubrication Cost
P750
P800
P870
P790
P840

67.
D
Medium
Refer To: 56

Using the high-low method of analysis, the estimated variable lubrication cost per
machine hour is closest to:
a. P1.40.
b. P1.25.
c. P0.67.
d. P1.50.

68.
A
Medium
Refer To: 56

Using the high-low method of analysis, the estimated monthly fixed component of

lubrication cost is closest to:
a. P570.
b. P560.
c. P585.
d. P565.

69.
B
Hard
Refer To: 56

(Appendix) Using the least-squares regression method of analysis, the estimated
variable lubrication cost per machine hour is closest to:
a. P0.80.
b. P1.56.
c. P1.40.
d. P1.28.

70.
A
Hard
Refer To: 56

(Appendix) Using the least-squares regression method of analysis, the estimated
monthly fixed component of lubrication cost is closest to:
a. P561.
b. P580.
c. P525.
d. P572.

Managerial Accounting, 9/e

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Reference: 5-7
Gargymal Company would like to estimate the variable and fixed components of its electrical costs and
has compiled the following data for the last five months of operations.

August ......
September ...
October .....
November ....
December ....

Machine
Hours
1,000
900
1,500
2,000
1,300

Electrical
Cost
P1,620
1,510
1,870
1,950
1,730

71.
A
Medium
Refer To: 57

Using the high-low method of analysis, the estimated variable cost per machine hour
for electricity is closest to:
a. P0.40.
b. P2.50.
c. P0.98.
d. P1.68.

72.
D
Medium
Refer To: 57

Using the high-low method of analysis, the estimated fixed cost per month for
electricity is closest to:
a. P1,306.50.
b. P 870.00.
c. P1,290.00.
d. P1,150.00.

Reference: 5-8
Wilson Company's activity for the first six of the current year is as follows:
Machine
Month
Hours

January .... 2,000
February ... 3,000
March ...... 2,400
April ...... 1,900
May ........ 1,800
June ....... 2,100
73.
D
Medium
Refer To: 58

Electrical
Cost
P1,560
P2,200
P1,750
P1,520
P1,480
P1,600

Using the high-low method, the variable cost per machine hour would be:
a. P0.67.
b. P0.64.
c. P0.40.
d. P0.60.

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74.
A
Medium
Refer To: 58

Using the high-low method, the fixed portion of the electrical cost each month would
be:
a. P400.
b. P760.
c. P280.
d. P190.

Reference: 5-9
Prater Company has provided the following data:
This Year Last Year
Units sold ................
300,000
250,000
Sales revenue .............
P1,300,000 P1,050,000
Less cost of goods sold ...
910,000
735,000
Gross margin ..............
390,000
315,000
Less operating expenses ... 272,000
260,000
Net income ................

P 118,000
P 55,000
75.
A
Medium
Refer To: 59

The best estimate of the company's variable operating expense per unit is:
a. P0.24 per unit.
b. P4.17 per unit.
c. P0.91 per unit.
d. P0.96 per unit.

76.
C
Medium
Refer To: 59

The best estimate of the company's total fixed operating expense per year is:
a. P188,000.
b. P72,000.
c. P200,000.
d. P212,000.

Reference: 5-10
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 .............. P1,000,000 P750,000

Less cost of goods sold .... 700,000
525,000
Gross margin ............... P 300,000 P225,000
Less operating expenses .... 222,000
210,000
Net income .................
P 78,000 P 15,000
77.
B
Medium
Refer To: 510

What is the best estimate of the company's variable operating expenses per unit?
a. P4.17 per unit
b. P0.24 per unit
c. P0.90 per unit
d. P0.71 per unit

Managerial Accounting, 9/e

158


78.
D
Medium
Refer To: 510

What is the best estimate of the company's total fixed operating expenses per year?
a. P0

b. P80,000
c. P44,000
d. 174,000

79.
A
Hard
Refer To: 510

What is the best estimate of the company's contribution margin for this year?
a. P252,000
b. P300,000
c. P158,000
d. P120,000

Reference: 5-11
The following information has been provided by the Evans Retail Stores, Inc., for the first quarter of
the year:
Sales.............................
P350,000
Variable selling expense......... . 35,000
Fixed selling expenses............
25,000
Cost of goods sold................
160,000
Fixed administrative expenses... 55,000
Variable administrative expenses 15,000
80.
D
Easy

Refer To: 511

The gross margin of Evans Retail Stores, Inc. for the first quarter is:
a. P210,000.
b. P140,000.
c. P220,000.
d. P190,000.

81.
B
Easy
Refer To: 511

The contribution margin of Evans Retail Stores, Inc. for the first quarter is:
a. P300,000.
b. P140,000.
c. P210,000.
d. P190,000.

Managerial Accounting, 9/e

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Reference: 5-12
Porter Company has provided the following data for the second quarter of the most recent year:
Sales ..............................
P300,000
Fixed manufacturing overhead ....... 55,000
Direct labor .......................

72,500
Fixed selling expense ..............
46,250
Variable manufacturing overhead .... 41,000
Variable administrative expense ....
48,000
Direct materials ...................
51,500
Fixed administrative expense .......
44,500
Variable selling expense ...........
49,750
Assume that direct labor is a variable cost and that there were no beginning or ending inventories.
82.
A
Medium
Refer To: 512

The total contribution margin of Porter Company for the second quarter was:
a. P37,250.
b. P87,000.
c. P176,000.
d. P211,000.

83.
B
Medium
Refer To: 512

The gross margin for Porter Company for the second quarter was:

a. P(12,500).
b. P80,000.
c. P131,500.
d. P135,000.

Reference: 5-13
An income statement for Crandall's Bookstore for the first quarter of the current year is presented
below:
Crandall's Bookstore
Income Statement
For the First Quarter of the Current Year
Sales ......................
P800,000
Less cost of goods sold ....
560,000
Gross margin ...............
240,000
Less operating expenses:
Selling .................
P98,000
Administrative .......... 98,000 196,000
Net income .................
P 44,000
On average, a book sells for P50. Variable selling expenses are P5.50 per book, with the remaining
selling expenses being fixed. The variable administrative expenses are 3% of sales, with the remainder
being fixed.

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160

84.
B
Hard Refer
To: 5-13

The contribution margin for Crandall's Bookstore for the first quarter is:
a. P688,000.
b. P128,000.
c. P152,000.
d. P240,000.

85.
C
Medium
Refer To: 513

The net income using the contribution approach for the first quarter is:
a. P240,000.
b. P152,000.
c. P44,000.
d. P128,000.

86.
A
Hard Refer
To: 5-13

The cost formula for operating expenses with "X" equal to the number of books sold

is:
a. Y = P84,000 + P7.00X.
b. Y = P84,000 + P8.50X.
c. Y = P98,000 + P7.00X.
d. Y = P98,000 + P8.50X.

Essay
87.
Easy

The following information summarizes the company's cost structure:
Variable cost per unit ....... P1.30
Fixed cost per unit .......... 4.50
Total cost per unit ....... P5.80
Units produced and sold ...... 48,000
Assume that all of the activity levels mentioned in this problem are within the relevant
range.
Required:
Prepare a schedule showing predictions for the following items at the 40,000 unit
level of activity:
a. Total variable cost.
b. Total fixed cost.
c. Variable cost per unit.
d. Fixed cost per unit.

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161

Answer:
Note: The total fixed cost is P4.50 x 48,000 = P216,000.
Total costs:
Variable (P1.30 x 40,000 units) ....... P 52,000
Fixed .................................
216,000
Costs per unit:
Variable (unchanged) ..................
P1.30
Fixed (P216,000 ÷ 40,000 units)........
5.40
88.
Medium

Mateo Company's average cost per unit is P1.425 at the 16,000 unit level of activity
and P1.38 at the 20,000 unit level of activity.
Assume that all of the activity levels mentioned in this problem are within the
relevant range.
Required:
Predict the following items for Mateo Company:
a. Variable cost per unit.
b. Total fixed cost per period.
c. Total expected costs at the 18,000 unit level of activity.
Answer:
Cost Units
High level of activity (20,000 units x P1.38).. P27,600 20,000
Low level of activity (16,000 units x P1.425).. 22,800 16,000
Change.......................................
P 4,800 4,000
a. P4,800 ÷ 4,000 units = P1.20 per unit variable cost

b. Total cost at the high level ......................
P27,600
Less variable element (P1.20 x 20,000 units) ...... 24,000
Fixed element .....................................
P 3,600
c. Variable cost (P1.20 x 18,000 units) ..............
Fixed cost ........................................
Total cost ........................................

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P21,600
3,600
P25,200

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89.
Hard

ABC Company's total overhead costs at various levels of activity are presented below:
Month Machine Hours Total Overhead Costs
March ... 60,000
P216,800
April ...
50,000
194,000
May .....
70,000

239,600
June ....
80,000
262,400
Assume that the overhead costs above consist of utilities, supervisory salaries, and
maintenance. At the 50,000 machine-hour level of activity these costs are:
Utilities (V) ................
P 54,000
Supervisory salaries (F) ..... 62,000
Maintenance (M) .............. 78,000
Total overhead costs ......... P194,000
V = Variable; F = Fixed; M = Mixed.
The company wants to break down the maintenance cost into its basic variable and
fixed cost elements.
Required:
a. Estimate the maintenance cost for June.
b. Use the high-low method to estimate the cost formula for

maintenance cost.

c. Estimate the total overhead cost at an activity level of 55,000 machine hours.
Answer:
a.
Total overhead cost at 80,000 machine hours ....... P262,400
Less:
Utilities (P54,000  50,000) x 80,000 ..........
86,400
Supervisory salaries (fixed) ...................
62,000
Portion of overhead for June that represents

maintenance ......................................
P114,000
b. High-low analysis of maintenance cost:
Maintenance Cost Machine-Hours
High point ............... P114,000
80,000
Low point ................
78,000
50,000
Change observed......... .P 36,000
30,000

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Variable rate:
Change in cost = P36,000 = P1.20 per machine hr
Change in activity 30,000 MH
Total fixed cost:
Total maintenance cost at the low point......... P78,000
Less variable cost element (50,000 x P1.20)..... 60,000
Fixed cost element .............................
P18,000
The cost formula is: Y = P18,000 + P1.20X
c. Total overhead at 55,000 machine hours:
Utilities (P54,000  50,000) x 55,000 ..
P 59,400
Supervisory salaries ...................

62,000
Maintenance cost:
Variable: (55,000 x P1.20) ........... P66,000
Fixed ................................
18,000
84,000
Total overhead cost at 55,000 MH .......
P205,400
90.
Medium

Stuart Manufacturing produces metal picture frames. The company's income
statements for the last two years are given below:
Units sold ................

Last year
50,000

This year
70,000

Sales .....................
P800,000 P1,120,000
Less cost of goods sold ... 550,000
710,000
Gross margin ..............
250,000
410,000
Less operating expenses ... 150,000
190,000

Net income ................
P100,000 P 220,000
The company has no beginning or ending inventories.
Required:
a. Estimate the company's total variable cost per unit, and its
year. (Remember that this is a manufacturing firm.)

total fixed costs per

b. Compute the company's contribution margin for this year.
Answer:
a. Variable component of cost of goods sold:
Variable rate = Change in costs/Change in units
Variable rate = (P710,000 - P550,000)/(70,000 - 50,000)
Variable rate = P8.00 per unit

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Fixed cost:
High units: P710,000 - P8.00(70,000) = P150,000
Low units: P550,000 - P8.00(50,000) = P150,000
Variable component of operating expenses:
Variable rate = Change in costs/Change in units
Variable rate = (P190,000 - P150,000)/(70,000 - 50,000)
Variable rate = P2.00 per unit
Fixed cost:
High units: P190,000 - P2.00(70,000) = P50,000

Low units: P150,000 - P2.00(50,000) = P50,000
Total variable cost per unit:
P8.00 + P2.00 = P10.00 per unit
Total fixed cost:
P150,000 + P50,000 = P200,000
b. Sales revenue ...................
P1,120,000
Less variable expenses:
Variable cost of goods sold .. P560,000
Variable operating expenses .. 140,000 700,000
Contribution margin ............
P 420,000
91.
Hard

The Central Valley Company is a merchandising firm that sells a single product. The
company's revenues and expenses for the last three months are given below:
Central Valley Company
Comparative Income Statement
For the Second Quarter
April
May
June
Sales in units ...................
4,500
5,250
6,000
Sales revenue ....................
P630,000 P735,000 P840,000
Less cost of goods sold ........

252,000 294,000 336,000
Gross Margin .....................
378,000 441,000 504,000
Less operating expenses:
Shipping expense ..............
56,000
63,500 71,000
Advertising expense ...........
70,000
70,000 70,000
Salaries and commissions . 143,000 161,750 180,500
Insurance expense .............
9,000
9,000
9,000
Depreciation expense .......... 42,000
42,000
42,000
Total operating expenses ... 320,000
346,250 372,500
Net income .......................
P 58,000
P 94,750 P131,500

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Required:

a. Determine which expenses are mixed and, by use of the high- low method,
separate each mixed expense into its variable
and fixed components. State the cost
formula for each mixed expense.

b. Compute the company's total contribution margin for May.
Answer:
a. The cost of goods sold for this company is a variable cost
and is P56 per unit.
The Shipping Expense and the Salaries and Commissions Expense are mixed. All
other expenses are
constant for each of the months shown and are therefore
fixed.
Shipping Expense:
P71,000 - P56,000 = P15,000 = P10 per unit
6,000 - 4,500 1,500
P56,000 - (4,500 x P10) = P11,000.
Cost formula = P11,000 per month plus P10 per unit.
Salaries and Commissions:
P180,500 - 143,000 = P37,500 = P25 per unit
6,000 - 4,500
1,500
P143,000 - (4,500 x P25) = P30,500
Cost formula = P30,500 per month plus P25 per unit.
b. Contribution margin for May:
Sales in units .....................
Sales revenue ......................
Variable expenses:
Cost of goods sold ............
Shipping expense (P10 x 5,250)

Salaries & commissions
(P25 x 5,250) ..........
Contribution margin ................
92.
Medium

5,250
P735,000
P294,000
52,500
131,250

477,750
P257,250

Selected data about Pitkin Company's manufacturing operations at two levels of
activity are given below:
Number of units produced ....... 10,000
Total manufacturing costs ...... P157,000
Direct material cost per unit
P4
Direct labor cost per unit .....
P6

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15,000
P225,000
P4
P6

166


Required:
Using the high-low method, estimate the cost formula for manufacturing overhead.
Assume that both direct material and direct labor are variable costs.

Answer:
Low
Total manufacturing costs ............ P157,000
Less:
Direct materials (P4 x 10,000 and
P4 x 15,000, respectively) .......
40,000
Direct labor (P6 x 10,000 and
P6 x 15,000, respectively) .......
60,000
Manufacturing overhead cost ........ P 57,000

High
P225,000
60,000
90,000
P 75,000

Cost
Activity
High level of activity ............... P 75,000 15,000 units
Low level of activity ................ 57,000 10,000 units
Change ............................

P 18,000 5,000 units
P18,000 ÷ 5,000 units = P3.60 per unit variable cost
Total cost at the high level of activity ........
P 75,000
Less variable element (P3.60 x 15,000 units) ..... 54,000
Fixed cost element ..............................
P 21,000
Therefore, the cost formula for manufacturing overhead is P21,000 per period plus
P3.60 per unit produced, or
Y = P21,000 + P3.60X.

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