STRATA Reviewer 1

I.
Identification
Quantitative - Decision making problem using accounting data

Qualitative - Factors in a decision problem that cannot be expressed effectively in
numerical terms
Sales - refers to the volume of goods and services sold by a business during a reporting
period
Direct Materials - are those materials and supplies that are consumed during the
manufacture of a product, and which are directly identified with that product
Direct Labor - refers to the work done by employees that contribute directly to
producing products or providing services
Factory Overhead - is a significant expense incurred by the business, especially in
manufacturing set up, and it involves all indirect expenses which cannot be directly
attributable to any particular job or work is undertaken
Variable Overhead - is those manufacturing costs that vary roughly in relation to
changes in production output.
Fixed Overhead - are stable regardless of how much is being produced.
Selling, General, and Administrative Expenses - includes all nonproduction
expenses incurred by a company in any given period.
Conversion Cost - is the cost incurred by any manufacturing entity in converting its raw
material into finished goods capable of being sold in the market.
Contribution Margin - is the amount of money a business has to cover its fixed costs
and contribute to net profit or loss after paying variable costs
Managerial Accounting - involves the presentation of financial information for internal
purposes to be used by management in making key business decisions.
Differential Cost Analysis - It is a technique where mainly differential costs are
considered relevant.
Decision Model - refers to the formal method for making a choice that usually involves
quantitative analysis
Total Approach - Under this type of analysis, the total revenues and costs are
determined for each alternative and the results are compared to serve as bases for
making decisions. The project selected is usually the one with the higher projected profit
level.
II. True or False

True: Avoidable costs are costs that can be eliminated or reduced if a certain decision
or action is taken.
False: Incremental cost is the change in total cost that results from producing one
additional unit of output and is typically used to analyze long-term decisions.
False: Opportunity cost is the cost of a particular choice in terms of the next best
alternative that was chosen.
False: Future cash flows refer to the expected inflows and outflows of cash that a
company has already experienced.
True: Irrelevant costs are costs that do not vary based on the decision being made and
do not need to be considered when making a decision because they will not change as
a result of the decision.
False: Joint cost is a cost that can be traced directly to a specific product or service.
False: Depreciation and amortization are considered relevant costs in decision-making

because they involve a cash outflow and can be recovered or changed by the decision
being made.
False: Imputed cost is the theoretical cost of using a resource that is owned by a
company and is considered an irrelevant cost in the decision-making process.
False: Opportunity cost is the potential benefit that is given up by choosing one course
of action over another and is an unimportant concept in decision-making.
False: Imputed cost and opportunity cost can be distinguished by the fact that imputed
cost refers to the theoretical cost of using a company's own resources, while opportunity
cost refers to the value of the next best alternative that is chosen as a result of the
decision.
*Reviewer only, amounts will be changed sa quiz
MAKE OR BUY
Sample Problem #1
Let us assume that Lingkod Company, a manufacturer of furniture sets, is considering
to purchase the seat cushions needed for its chairs. The expected purchase price of
these seat cushions is P50 per unit. Lingkod has been making its own seat cushions
since it started operating. If it would continue to produce these cushions, the company
expects to incur the following costs:
Solution:
Note that only relevant data should be included in the analysis.
As regards fixed costs, they fluctuate with volume but in total amounts, they remain
constant regardless of the change in the number of units. In fact, a company may
possibly continue to incur the same amount of total fixed cost despite producing nothing
during a certain period.
Net advantage of making the seat cushions (P530,000 - P700,000) = P170,000
ACCEPT OR REJECT SPECIAL ORDER

Sample Problem #1
Assume that Grace Company presently produces and sells 20,000 units of Product G
which represents only 80% of its normal capacity of 25,000 units. Its regular selling
price is P50 per unit and its manufacturing, selling and administrative costs are as
follows:
Grace Company received an order from a provincial distributor for 3,000 units. The
customer asks for a special discount of 30%. It is expected that the company will incur
no additional selling and administrative costs.
Solution:
Grace Company can afford to produce additional 3,000 units since it presently has idle
capacity of 5,000 units [25,000 - 20,000].
The special selling price for this order amounts to P35 per unit [P50 - (30% of P50)]. A
comparison of this selling price with the unit cost of P42 indicates that the company
would lose P7 per unit or P21,000 from this special order. The fixed overhead as well as
the selling and administrative costs are irrelevant in this case since they are expected to
remain the same whether the order is accepted or rejected. A more appropriate cost
analysis for this problem is:
Conclusion:
Our cost analysis shows that the special order will increase profit by P5 per unit or a
total of P15,000. However, the company should not base its decision on this cost
analysis alone. Other factors must also be considered. Among them is the effect of this
special order and special price customers. Once they learn that they are paying more
for the on regular company's products, they may demand price reductions or stop
buying from the firm.
CONTINUE OR DISCONTINUE OPERATING A BUSINESS SEGMENT

Sample Problem #2: Assuming that the business segment of a company is
UNPROFITABLE
Rose Descaya operates a chain of bookstores with branches in Manila, Quezon City
and Makati. A summary of operating results of the three branches during a typical
month is shown below:
Like in the previous months, Rose observed that the Makati Branch operated at a loss.
Due to this, Rose is considering to close the Makati Branch, hoping that the loss would
be eliminated. She disclosed her plan to her accountant who in turn informed her that if
she would push through with her plan, Makati's sales, variable costs and direct fixed
costs would all be eliminated. However, total home office costs would not change; the
amount allocated to Makati would just be absorbed by the other branches.
Should Rose continue operating the Makati Branch despite its operating loss?
A comparison of operating results under the alternatives continues or discontinues

operating the Makati Branch is presented below:
Operating loss would increase further if the Makati Branch would be discontinued. This
is so because the company would continue to incur the allocated home office cost
despite the closure of the Makati Branch
Solution:
Another approach in solving this problem may be used, showing only the relevant
factors: Makati's sales and avoidable costs (variable and direct fixed costs). Allocated
home office cost, which is expected to remain the same in total, is an irrelevant factor,
hence may be ignored in making the cost analysis. The solution appears as follows:
Based on the above analysis, Rose should continue operating the Makati Branch
because its own revenue is greater than its own costs. It contributes a positive amount
to the recovery of home office costs.

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I.

Quantitative - Decision making problem using accounting data

II. True or False

False: Depreciation and amortization are considered relevant costs in decision-making

ACCEPT OR REJECT SPECIAL ORDER

CONTINUE OR DISCONTINUE OPERATING A BUSINESS SEGMENT

A comparison of operating results under the alternatives continues or discontinues

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