MAS-02

Batch 3
COST BEHAVIOR ANALYSIS

 Cost behavior analysis is the study of how specific costs respond to changes in the level
of activity within a company.

 The starting point in cost behavior analysis is measuring the key activities in the
company’s business.

 Activity levels may be expressed in terms of

– sales peso (retail company),
– miles driven (trucking company),
– room occupancy (hotel), or
– number of dance classes taught (dance studio).

 For an activity level to be useful in cost behavior analysis, there should be correlation
between changes in the level or volume of activity and changes in the costs.

 The activity level selected is referred to as the activity (or volume) index.

 The activity index identifies the activity that causes changes in the behavior of costs.

VARIABLE COST:

Variable costs are costs that vary in total directly and proportionately with changes in the
activity level.

A variable cost may also be defined as a cost that remains the same per unit at every level
of activity.

FIXED COST

Fixed costs are costs that remain the same in total regardless of changes in the activity level.

Since fixed costs remain constant in total as activity changes, fixed costs per unit vary
inversely with activity. As volume increases, unit cost declines and vice versa.

SUMMARY:
SALES (Increase) Sales (Decrease)

Total Variable Cost Increase Decrease

Variable Cost Per Unit Same Same
Total Fixed Cost Same Same
Fixed Cost Per Unit Decrease Increase

MIXED COST

Mixed costs contain both a variable cost element and a fixed cost element.

Sometimes called semivariable costs, mixed costs change in total but not proportionately with
changes in the activity level.
 In CVP analysis, it is assumed that mixed costs must be classified into their fixed
and variable elements.

 Firms usually ascertain variable and fixed costs on an aggregate basis at the end of a
time period, using the company’s past experience with the behavior of the mixed cost at
various activity levels.

a. HIGH-LOW METHOD - is a mathematical method that uses the total costs incurred at
the high and low levels of activity.

The steps in calculating fixed and variable costs under this method are as follows:

1. Determine variable cost per unit from the following formula:

High minus Low Costs  High minus Low Activity Level = Variable Cost per unit

2. Determine the fixed cost by subtracting the total variable cost at either the high or the
low activity level from the total cost at that activity level.

Please take note:

CORRECT
Cost at Cost at
Highest Low est
Activity Activity
-
-
Highest Low est
Activity Activity

WRONG
Highest Low est
Cost - Cost
-

Highest Low est

Activity Activity

b. REGRESSION ANALYSIS - refers to a technique for estimating the relationship

between variables. It helps people understand how the value of a dependent variable
changes when one independent variable is variable while another is held constant.
Regression analysis is used in forecasting future data. 

The steps in calculating fixed and variable costs under this method are as follows

1. Determine variable cost per unit from the following formula:

Where:
E = Summation
x = Activity
y = Cost
xy = Activity multiply to Cost
n = term
_
x = Average activity
_
y = Average cost

2. Determine the Fixed Cost:

_ _
a = Exy – n (x) (y)
COST BEHAVIOR ANALYSIS
PROBLEMS:

A. Rivera Inc. operates an automobile service facility, which specializes in replacing mufflers on
cars. The following table shows the costs incurred during a month when 750 mufflers were
replaced.
Number of Muffler Replacements
400 500 800
Total Costs
Fixed Cost 1. 50,000 P50,000 2. 50,000
Variable Cost 3. 48,000 60,000 4. 96,000
Total Costs 5. 98,000 P110,000 6.146,000
Cost per muffler/unit
Fixed Cost 7. 125. 8. 100. 9. 62.50
Variable Cost 10. 120. 11. 120. 12. 120
Total Costs 13. 245. 14. 220 15.182.50

Required: Fill the missing amounts.

B. Francis Villamin Company has assembled the following data pertaining to certain costs that
cannot be easily identified as either fixed or variable. Ramos Company has heard about a
method of measuring cost functions called the high-low method and has decided to use it in this
situation.
Cost Hours
P24,900 5,250
25,000 5,500
36,400 7,500
44,160 9,750
45,000 9,500

Required:
a. Compute for Variable cost per unit.

VC unit = (2) 44,160 – (4)24,900

(1) 9,750 – (3) 5,250

VC unit = Php4.28

b. Compute for Total Fixed Cost

High Low
TC 44,160 24,900
VC; unit (x) 4.28 x 9,750 41,730 4.28 x 5,250. 22,470
FC 2,430 2,430

c. What is the cost function?

TC = VC unit (x) + TFC

TC = 4.28 (X) + PHP2,430
C. Bee Jay De Leon Company has provided the following data for the first five months of the
year:
Machine Hours Lubrication Cost
January 120 P750
February 160 P800
March 200 P870
April 150 P790
May 170 P840
1. Using the high-low method of analysis, compute the estimated variable lubrication cost
per machine hour rounded to the nearest centavo

VC UNIT = 870 - 750

200 – 120
VC UNIT = P1.50
2. Using the high-low method of analysis, the compute estimated monthly fixed component of
the lubrication cost.

TC 870 750
VC/UNIT (X) 1.50 X 200. 300 1.50 X 120 180
FC 570 570

3. Using the least-squares regression method of analysis, the estimated variable lubrication cost
per machine hour is closest to?

(ACTIVITY) (COST) 2
N X Y XY X
1 120 750 90,000 14,400
2 160 800 128,000 25,600
3 200 870 174,000 40,000
4 150 790 118,500 22,500
5 170 840 142,800 28,900
800 4,050 653,300 131,400
EX EY EXY EX2
_ _
X = 800 / 5 = 160 Y = 4,050 / 5 = 810
_. _
VC UNIT = EXY – N (X)(Y)
EX2 – N (X)2

VC UNIT = 653,300 – 5 (160) (810)

131,400 – 5 (160)2

VC UNIT = 1.56

4. Using the least-squares regression method of analysis, the estimated monthly fixed
component of lubrication cost is closest to:
_ _
FC = Y – VC/UNIT (X)
FC = 810 – 1.56(160)
FC = 561

5. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 130 is closest to:

TC = VC/UNIT(X) + FC
TC = P1.50 (130) + PHP570
TC = PHP765
6. Using the least-squares regression method of analysis, the estimated total lubrication
cost for June if the estimated machine hours is 130 is closest to:

TC = VC/UNIT(X) + FC
TC = 1.56 (130) + 561
TC = PHP763.80

7. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 0 is closest to: FC = PHP570

8. Using the least-squares regression method of analysis, the estimated total lubrication
cost for June if the estimated machine hours is 0 is closest to: FC = PHP561

D. The following data are available for Advanced Review Solutions, Ms. Mary Joseph Lopo, the
owner/review director wants to find out if class hours indeed drives utility costs. The following
data shows the number of hours spent in CPA review classes from January to October,
however, for the month of May CPD (Continuing Professional Development ) seminars were
also conducted in the review school in addition to the CPA review classes.

Month Class Hours Utility Costs(P) Month Class Hours Utility Costs(P)
Jan 7,260 2,960 Jun 4,900 1,860
Feb 8,850 3,410 Jul 4,600 2,180
Mar 4,800 1,920 Aug 8,900 3,470
Apr 9,000 3,500 Sep 5,900 2,480
May 11,000 3,900 Oct 5,500 2,310

1. What is the variable costs rate under high low method?

VC Unit = 3,500 - 2,180

9,000 - 4,600

VC unit = 0.30

2. What is the fixed costs under high low method?

HIGH
TC 3,500
VC 9,000 X 0.30. 2,700
FC 800
3. What is the variable costs rate using regression analysis?

N X Y XY X2
1 7,260 2,960. 21,489,600. 52,707,600
2 8,850 3,410 30,178,500. 78,322,500
3 4,800 1,920 9,216,000. 23,040,000
4 9,000 3,500 31,500,000. 81,000,000
5 4,900 1,860 9,114,000. 24,010,000
6 4,600 2,180. 10,028,000. 21,160,000
7 8,900 3,470. 30,883,000. 79,210,000
8 5,900 2,480 14,632,000. 34,810,000
9 5,500 2,310. 12,705,000. 30,250,000
59,710 24,090 169,746,100 424,510,100
EX EY EXY EX2

_
X = 59,710 / 9 = 6,634.44
_
Y = 24,090 / 9 = 2,676.67
_. _
VC = EXY – N(X)(Y)
EX2 – N(X)2

VC = 169,746,100 – 9 (6,634) (2,677)

424,510,100 – 9 (6,634)2

VC UNIT = 0.35

4. What is the fixed costs using regression analysis?

_ _
FC = Y – VC/UNIT (X)
FC = 2,677 – 0.35 (6,634)
FC = 354 OR 356.08

E. The income statement of Michael Gatchalian Foods are presented below.

Particular October(P) November(P)
Sales 80,000 90,000
Cost of Sales 48,000 54,000
Gross Profit 32,000 36,000
Operating Expenses
Selling 8,500 8,800
Administrative 9,200 9,400
Total Operating Expenses 17,700 18,200

Net Income 14,300 17,800

Michael Gatchalian, the owner enlist your help to develop a CVP relationship for planning and
control.
Required:
1. Using the high-low method, compute the variable and fixed component of the cost of
sales, selling and administrative expenses.

VC UNIT = 72,200 - 65,700

90,000 – 80,000

VC UNIT = 0.65

HIGH
TC 72,200
VC 0.65 (90,000) 58,500
FC 13,700

2. Prepare a contribution margin income statement based on sales of P100,000.

CHANGE RATE
Particular October(P) November(P)
Sales 80,000 90,000 10,000 100%
Cost of Sales 48,000 54,000 6,000 60%
Gross Profit 32,000 36,000 40%
Operating Expenses
Selling 8,500 8,800 300 3%
Administrative 9,200 9,400 200 2%
Total Operating Expenses 17,700 18,200

Net Income 14,300 17,800

Sales 90,000
VC
COS (60%) 54,000
SELLING. (3%). 2,700
ADMIN (2%). 1,800
65% 58,500
CM 31,500
FC
COS 0
SELLING. 8,800 – 2700 6,100
ADMIN 9,400 – 1,800 7,600
NET INCOME 17,800
Sales 100,000
VC
COS (60%) 60,000
SELLING. (3%). 3,000
ADMIN (2%). 2,000
65% 65,000
CM 35,000
FC
COS 0
SELLING 6,100
ADMIN 7,600 13,700
NET INCOME 21,300

3. Compute for the peso breakeven point.

BEP = 13,700 / 35% = 39,142.86

MULTIPLE CHOICE PROBLEM:

Costs Classification

1. The term relevant cost applies to all the following decision situations except the
A. Acceptance of a special order
B. Determination of a product price
C. Replacement of equipment
D. Addition or deletion of a product line

1. B
? A situation where the term relevant cost does not apply
 Relevant costs are those used in making decisions. These costs have two characteristics –
differential costs and future costs. The term relevant costs applies to the acceptance or rejection of a
special sales order, replacement or retention of equipment, addition or deletion of a product line, and
even in the determination of a product price. Among the choices given however, choice letter “b” is
the best answer because relevant cost is least applied in the determination of regular selling price.

2. A decision making concept, described as “the contribution to income that is foregone by not using a
limited source for its best alternative use” is called
A. Marginal cost C. Potential cost
B. Incremental cost D. Opportunity cost

2. D
? The term used to describe the contribution to income that is foregone by not using a limited source for
its best alternative use
 The benefit foregone or sacrificed for not using a limited resource for its best alternative use is called
an opportunity cost. Hence, choice letter “d” is correct. Choice letter “a” is incorrect because marginal
cost is the increase in cost per unit product. Choice letter “b” is incorrect because incremental cost is
the total increase in cost from an alternative to another. Choice letter “c” is incorrect because potential
cost may refer to future cost that may arise if an alternative is chosen.

3. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost
component?
A. Labor C. Depreciation
B. Overhead D. Selling

3. C
? The cost that is not likely to contain a variable cost component
 Choice letter “c” is the correct answer. Depreciation expense, if the problem is “silent”, is a fixed cost,
and therefore not variable neither would it contain a variable component. Choice letter “a”, labor is
academically treated as variable cost. Choice letter “b”, overhead has both the variable and fixed cost
components. Choice letter “d”, selling expense, also has both the variable and fixed cost components.
4. The term that refers to costs incurred in the past that are not relevant to a future decision is
A. Full absorption cost C. Sunk cost
B. Under-allocated indirect cost D. Incurred marginal cost

4. C
? The term that refers costs incurred in the past that are not relevant to a future decision
 Choice letter “c” is the correct answer. Sunk costs are those already incurred, cannot be avoided,
refers to the past, and are therefore, irrelevant in making decisions. Choice letter “a”, full absorption
cost refers to the total costs of production without regard to whether fixed or variable as long as the
costs are necessary in the manufacture of a product. Choice letter “b” is incorrect because under-
allocated indirect cost relates to the amount of allocation and not to the period of time, either past or
otherwise. Choice letter “d” is an inferior choice because incurred marginal cost although a past cost
and, therefore, not relevant to future decisions, is only an example of the more generic term sunk cost
which aptly describes the phrase to be completed.

Questions 5 to 7 are based on the following information. Management accountants are frequently asked
to analyze various decision situations including the following:
I. The cost of a special device that is necessary if a special order is accepted
II. The cost proposed annually for the plant service for the grounds at corporate headquarters
III. Joint production cost incurred, to be considered in a sell-at-split versus a process-further decision
IV. The cost of alternative use of plant space to be considered in a make-or-buy decision
A. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-
disposal decision

5. The costs described in situations I and IV are

A. Prime costs C. Relevant costs
B. Discretionary costs D. Differential costs

5. C
? The costs described in situations I and IV
 The costs described in situations I and IV are relevant costs, choice letter “c” is the best answer. Item
I, the cost of a special device that is necessary if a special order is accepted, is an incremental cost of
accepting the order and is a relevant and is a relevant cost. Item IV, the cost of alternative use of
plant space to be considered in a make-or-buy decision, is an opportunity cost and, is relevant in
making decisions.

6. The costs described in situations III and V are

A. Prime costs C. Discretionary costs
B. Sunk costs D. Relevant costs

6. B
? The costs described in situations III and V
 Item III, joint production cost already incurred, and item V would no longer be avoided whether the
products are sold at split-off point or not. The cost of obsolete inventory acquired several years ago in
relation to the decision whether to keep or dispose the inventory is already incurred, a sunk cost. In
both situations, the costs described are sunk costs and are irrelevant in decision-making. Hence,
choice letter “b” is correct.

7. The costs described in situation II is a

A. Prime cost C. Relevant cost
B. Discretionary cost D. Differential cost

7. B
? The cost described in situation II
 The cost described in situation II is more accurately a discretionary cost, choice letter “b” is correct.
Choice letter “a” is incorrect because prime costs refer to direct materials and direct labor. Choice
letter “c” is incorrect because relevant costs are determined when decisions are to be made, and not
merely a proposal, which may be decided to be incurred or not. Choice letter “d” is also incorrect
because differential cost is a quality of a relevant cost which is determinable only at a time a decision
is to be made.

8. Management accountants are concerned with incremental unit costs. These costs are similar to the
following except
A. The economic marginal cost C. The cost to produce an additional unit
B. The variable cost D. The manufacturing unit cost

8. D
? The cost that is not similar to incremental unit costs
 The best choice among the given should be choice letter “d”. A manufacturing unit cost may include a
fixed cost that is not incremental in nature. Choice letter “a” is incorrect because marginal cost is the
increase in cost per unit of increase in production and is similar to incremental costs that also indicate
an increase. Choice letter “b” is incorrect because variable cost normally is an incremental cost.
 Choice letter “c” is also incorrect because the cost to produce an additional unit is the same as
marginal cost. Technically speaking, incremental costs are the total increase in costs from one
production level to another, from an option to another, or from an event to another.

9. Opportunity costs
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

9. C
? The best statement about opportunity costs
 Opportunity costs are those benefits foregone in favor of the alternative chosen. They are sacrificed
benefits, not incurred but is implied, and not recorded in the accounting books because they are
theoretical. Hence, choice letter “c” is correct.
Choice letter “a” is incorrect because costs incurred by past actions are past costs or sunk costs.
Choice letter “b” is incorrect because the difference between actual and standard cost is called the
cost variance. Choice letter “d” is incorrect because costs that are partly fixed and partly variable are
called mixed costs.

10. Cost of goods sold is a component of the income statement. In a merchandising establishment, this
refers to purchases adjusted for changes in inventory. In a manufacturing company, what replaced
purchases to arrive at cost of goods sold?
A. Finished goods C. Work in process inventory
B. Fixed manufacturing overhead D. Cost of good manufactured
E.

10. D
? The account that replaces purchases to arrive at cost of goods sold in a manufacturing company
 Choice letter “d” is correct. In the computation of cost of goods sold, net purchases is replaced by the
cost of goods manufactured (CGM) in a manufacturing company. Just like merchandise purchases,
CGM is added to finished goods-beginning and then finished goods-ending is deducted to get the
cost of goods sold.
Choice letter “a” is incorrect because finished goods inventories are added to or deducted from
CGM to arrive at CGS. Choice letter “b” is incorrect because fixed manufacturing overhead is directly
used in the computation of total factory costs. Choice letter “c” is incorrect because work-in-process
inventory is used in the computation of CGM, not in CGS.

11. The salaries you could be earning by working rather than attending college is an example of
A. Outlay costs C. Sunk costs
B. Misplaced costs D. Opportunity costs

11. D
? The classification of the salaries you could be earning by working rather than attending college
 The salaries that should have been earned by working rather than attending college is an example of
an opportunity cost. It is a profit, savings, or benefit foregone in favor of the alternative chosen.
Choice letter “a” is incorrect because outlay costs may refer to the amount of fund used to finance
an acquisition or operations. Choice letter “b” is incorrect because misplaced costs is an irregular
description of costs and has not found great usage and acceptance in the management accounting
literature. Choice letter “c” is incorrect because sunk costs are those that are already incurred in the
past and can no longer be changed, and are always irrelevant.

12. In analyzing whether to build another regional service office, the salary of the Chief Executive Officer
(CEO) at the corporate headquarters is
A. Relevant because salaries are always present
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

12. C
? The treatment of the salary of the Chief Executive Officer (CEO) at the corporate headquarters in
deciding whether to build another regional office or not
 In deciding whether to build another regional office or not, the salary of the CEO does not change,
and therefore, is irrelevant although it is a future cost (choice letter “c” is correct).
A cost, to be relevant in decision making, must differ from one alternative to another (differential
cost) and must deal with the future (future cost). Both conditions must be met. A cost may be relevant
in one decision-making exercise but is irrelevant in the other.

13. Sunk costs

A. Are substitutes for opportunity costs
 B. Are relevant to long-term decisions but not to short-term decisions
C. Are relevant to decision-making
D. In themselves are not relevant to decision making

13. D
? A correct description of sunk costs
 Sunk costs are past costs, “historical”, already incurred, and can no longer be changed or affected by
future decisions. These costs are always irrelevant in making decisions (choice letter “d” is correct)
Choice letter “a” is incorrect because sunk costs are not, and would never be substitutes for
opportunity costs. Sunk costs are recorded in the accounting books. Choice letters “b” and “c” are
incorrect because sunk costs are never relevant to decision-making, both long-term and short-term
decisions.

14. When all manufacturing costs used in production are attached to the products, whether direct, or
indirect, variable or fixed, this is called
A. Process costing C. Variable costing
B. Absorption costing D. Job order costing

14. B
? A costing system that includes all manufacturing costs used in production as product costs, whether
direct, or indirect, variable or fixed
 Choice letter “b”, absorption costing is the correct answer. Absorption costing includes all
manufacturing costs whether direct or indirect, variable or fixed, in the determination of product costs.
This is the traditional concept of cost determination, is in accordance with the generally accepted
accounting principles, and includes all manufacturing costs as inventoriable costs because they are
all relevant expenditures in the manufacturing process.
Choice letter “a”, process costing is incorrect because it relates to the model of accumulating
production costs by following the departmentalized transfer of units in the production process. Choice
letter “c”, variable costing, is incorrect because it assigns only variable production cost as product
cost. Choice letter “d”, job order costing, is incorrect because it refers to the model of accumulating
production per order made by customers.

High-low Method

15. Mine and Yours Company uses a regression equation to analyze the behavior of its transportation
costs (T) as a function of travel time (H). They developed the following equation using two years’
observation with a related coefficient of determination of 85:
T = 100,000 + 50H
If 500 hours of travel time were logged in one period, the related point estimate of total transportation
costs would be
A. P110,000 C. P106,250
B. P121,250 D. P125,000

15. D
? The related point estimate of transportation costs
1. Total costs equal fixed costs plus variable costs. The fixed costs and the variable rate per hour are
given. Therefore:
Fixed costs P 100,000
Variable costs (P50 X 500 hours) 25,000
Total costs P 125,000

16. These are among the methods of segregating fixed cost and variable costs except
A. Breakeven method C. Scattergraph method
B. Simple regression analysis D. High-low method

16. A
? A method which is not used in segregating fixed and variable costs
 The methods used in separating the fixed and variable costs elements are: practical method (e.g.
historical records), simple average high-low method, weighted average high-low method,
scattergraph method, and least-squares method.
Choice letter “a” is the correct. The breakeven method is not used in segregating fixed into
variable costs but is instead used in analyzing the potential profitability and areas of sensitivity in
controlling profit.

17. Jackson, Inc., is preparing a flexible budget for next year and requires a breakdown of the cost of
steam used in its factory into the fixed and variable elements. The following data on the cost of steam
used and direct labor hours worked are available for the last 6 months of this year.
 Month Cost of Steam Direct Labor Hours
July P 15,850 3,000
August 13,400 2,050
September 16,370 2,900
October 19,800 3,650
November 17,600 2,670
December 18,500 2,650
TOTAL P 101,520 16,920

Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of steam
per direct labor hour is
A. P4.00 C. P5.82
B. P5.42 D. P6.00

17. A
? Using the high-low method, (HLM), the estimated variable cost of steam per direct labor hour
 The high-low method relates to range analysis where in a range there is the highest point and the
lowest point. The high-low method identifies the highest observation and the lowest observation, and
getting their differences both in units and in amount. The highest observation is the month of October
while the lowest observation is the month of August. Tabulating the data of the highest and the lowest
occurrences, we have:
Direct labor hours Cost
Highest (October) 3,650 19,800
Lowest (August) 2,050 13,400
Difference 1,600 6,400

VCR = ∆ in Costs / ∆ in Units = P6,400 / 1,600 = P4 / DLH

Under the HLM, the variable cost rate is equal to the change in costs over the change in units.
This high-low method of computing the variable cost per unit rests on the principle that a change in
cost is attributed to variable, since total fixed cost remains unchanged.
The HLM is used when there is positive relationship between costs and units. That is, if total unit
increases, total cost also increases and if total unit decreases, total costs also decreases. Otherwise,
HLM is not applicable, and the scattergraph method and least squares method are to be used in
segregating the variable costs from the fixed costs.

18. In the Timbungan Country, Inc., a maintenance cost is partly fixed and partly variable in nature. At the
low level of activity (150 direct labor hours), maintenance costs total P2,100. At high level of activity
(270 direct labor hours), maintenance costs are P3,000. Using the high-low method, what is the
variable maintenance cost per unit and the total fixed maintenance cost?

Variable Maintenance Cost Fixed Maintenance Cost

A. P 7.50 P 975
B. P 7.50 P2,100
C. P10.00 P 600
D. P10.00 P2,100

18. A
? The variable cost per unit and the total fixed costs using the high-low method
1. Variable cost per unit may be determined by dividing the change in costs over the change in units.
The change in costs is P900 (i.e. P3,000 - P2,100) and the change in units is 120 (i.e. 270 - 150). The
variable cost rate P 7.50 (i.e. P900/120)
The fixed cost is the difference between total costs and variable costs, as follows:
@ 270 DLH @ 150 DLH
Total costs P 3,000 P 2,100
- Variable costs (P7.50 x DLH) 2,025 1,125
Fixed costs P 975 P 975

19. Mat Company estimates its material handling costs at two activity levels as follows:
Kilos Handled Cost
P 80,000 P 160,000
P 60,000 P 132,000

What is Mat’s estimated cost of handling 75,000 kilos?

A. P 150,000 C. 157,500
B. P 153,000 D. 132,000

19. B
? The estimated costs of handling 75,000 kilos
 The estimated costs of handling 75,000 kilograms is composed of variable costs and fixed costs. The
variable cost is determined by first establishing the variable cost rate. The variable cost rate is
computed as follows:
Variable cost rate = ∆ in Costs / ∆ in Sales
= (P160,000 - P132,000) / (80,000 - 60,000)
= P28,000 / 20,000 = P1.40 / kg

Given the variable cost rate and the fixed costs, the estimated cost of handling 75,000 kilograms
shall be:
Variable costs (75,000 kgs x P1.40) P105,000
Fixed costs 48,000
Total estimated costs at 75,000 kgs P153,000

20. The total production cost for 20,000 units was P21,000 and the total production cost for making
50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed costs of P4,000
were incurred. The full production cost per unit for making 30,000 units is.
A. P 0.30 C. P 0.84
B. P 0.68 D. P 0.93

20. D
? The full production cost per unit for making 30,000
 The full production cost per unit is composed of the unit variable cost and unit fixed cost. The unit
variable cost is determined follows:
Unit variable cost = (∆ in Costs – Increase in Fixed Costs) / ∆ in Sales
= [(P34,000 - P21,000) – P4,000] / (50,000 - 20,000)
= P9,000 / 30,000 = P 0.30

The total fixed costs should be determined at 50,000 units since the cost per unit to be computed is at
30,000 units. At 50,000 units the increase in fixed costs of P4,000 is already included. Fixed cost is
total cost less variable cost. Therefore, the total fixed cost is P19,000 [i.e. P34,000 – (50,000 x
P0.30)]. Finally, the unit cost at 30,000 units shall be:
Unit variable costs (constant) P0.30
Unit fixed costs (P19,000/30,000 units) 0.63
Unit cost (at 30,000 units) P0.93

21. Hungarian sausage wishes to analyze the fixed and variable components of the semi-variable cost.
The following information is available:
Output Output
Month (Units) Costs Month (Units) Costs
1 1,000 P12,000 4 800 P11,000
2 700 10,000 5 1,400 18,750
3 1,100 14,000 6 1,200 15,000

Using the high-low method, which one of the following is correct?

A. Variable costs are P15 per unit C. Fixed costs are P1,250 per month
B. Variable costs are P10 per unit D. Fixed costs are P1,000 per month

21. C
? Using the high-low method, the correct expression of cost rate

22. The controller of James Company has requested a quick estimate of the manufacturing supplies
needed for the Morton Plant for the month of July when production is expected to be 470,000 units to
meet the ending inventory requirements and sales of 475,000 units. James Company’s budget
analysis has the following actual data for the last three months
Production Manufacturing
Month in units Supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560

Using these data and the high-low method to develop a cost accounting equation, the estimate of
needed manufacturing supplies for July would be
A. P652,500 C. P749,180
B. P681,500 D. P752,060

22. D
? The estimated cost of manufacturing supplies for July using the high-low method

23. For the six months of the year, the highest level of activity for LQP Corporation was 18,000 full units
of production with maintenance cost at P114,000 and its lowest level of activity for the same period
was at 14,000 full units of production with maintenance cost at 94,000. What amount of maintenance
cost should LPQ expect in a month in which it was scheduled 16,000 equivalent full units of
production?
A. P 24,000 C. P 80,000
B. P104,000 D. P 70,560

23. B
? The expected amount of maintenance costs at 16,000 units of production

Regression Analysis

24. Simple regression analysis provides the means to evaluate a line of regression, which is fitted to a
plot of data and represents
A. The way costs change with respect to the dependent variable
B. The way costs change with respect to both independent and dependent variables
C. The variability expense with pesos of production
D. The way costs change with respect to the independent variable

24. D
? A statement that represents the simple regression line
 A simple regression line represents the way the dependent variable (“Y”, normally described in
pesos) varies with respect to the changes in the independent variable (“x”, normally presented in
units).
Choice letters “a” and “b” are incorrect because cost changes with respect to the independent
variable, not with the dependent variable or both. Choice letter “c” is incorrect because the variability
of expenses is related to units of measurement and not normally in terms of pesos of production.

25. The slope of the line of regression is

A. The rate at which the independent variable varies
B. The rate at which the dependent variable varies
C. The level of the fixed costs
D. The level of the total variable costs
25. A
? A description about the slope of the line of regression
 The slope is the “b” in the regression line Y = a + bx. Applying this equation to costs, we have:
Total costs = fixed costs + variable costs
The “b” (or slope) represents the variable cost rate or the rate at which the independent variable
varies (choice letter “a” is correct)
Choice letter “b” is incorrect because the rate at which the dependent variable (Y) varies depends
on the value “x”, the independent variable. Choice letter “c” is incorrect because fixed costs are not
the same as the slope or variable cost rate. Choice letter “d” is incorrect because the level of the total
variable costs (e.g. “bx”) is the total of slope (e.g. “b”) multiplied by the independent variable (e.g. “x”).

26. Regression analysis

A. Estimates the independent cost variable
B. Uses the probability assumption to determine the total project cost
C. Estimates the dependent cost variable
D. Ignores the coefficient of determination

26. C
?

27. The segregation of fixed cost and variable cost is the key to proper cost analysis. Regression analysis
is a technique used for this purpose. Identify the appropriate statement below on regression analysis

a. It assumes that a change in value of a dependent variable is related to the change in value of an
independent variable.
b. A linear relationship between the direst cost and production volume can cause a problem when
using accounting data for regression analysis.
c. It attempts to find an equation for a linear relationship among the variables.
d. It establishes a cause and effect relationship

i. All four statements are appropriate

ii. Statements 1, 3, and 4 only
iii. Statements 1 and 3 only
iv. Statements 2 and 4 only
v. Statements 2, 3, and 4 only
vi. Statements 1 and 4 only

27. C
?
F. Jimmy Balmediano Company has a 25% margin of safety. Its after tax return on sales is 6%,
and its tax rate is 40%.

Required:
1. Compute for the contribution margin ratio.

MOS = AS/ES – BEP SALES

25% = 100% - 75%

ACTUAL BEP
SALES 100% 75%
VC
CM TC 90% TC. 75%
FC
EBT 100%. 10% 0
TAX. 40%. 4%
EAT. 60%. 6%

VC = TOTAL CHANGE (P,%) IN COST

TOTAL CHANGE (P, %) IN SALES

VC = 90% - 75%
100% - 75%

VC = 60%
CM = 40%

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2. Compute for fixed cost assuming sales of P120,000.

ACTUAL BEP
SALES 100% 120,000 75% 90,000
VC 60%. 72,000 60%. 54,000
CM 40% 48,000 36,000
FC 30%. 36,000 36,000
EBT 100%. 10% 12,000 0% 0
TAX. 40%. 4%
EAT. 60%. 6%

VC = TOTAL CHANGE (P,%) IN COST

TOTAL CHANGE (P, %) IN SALES

ACTUAL BEP CHANGE

SALES 100% 120,000 75% 90,000. 30,000
VC 60%. 72,000 60%. 54,000 18,000
CM 40% 48,000 36,000
FC 30%. 36,000 36,000 0
EBT 100%. 10% 12,000 0% 0
TAX. 40%. 4%
EAT. 60%. 6%

VC = TOTAL CHANGE (P,%) IN COST

TOTAL CHANGE (P, %) IN SALES

VC = 18,000 + 0
30,000

Page |3
VC RATIO = 60%

G. Andrew Manacop Co. had a loss of P3 per unit when sales were 40,000 units and a loss of
P1.60 per unit at 50,000 units sales.

Required:

1. Compute contribution margin per unit.

CHANGE
40,000 50,000 10,000
SALES
VC
CM 40,000
FC 0
NL. 3 X 40,000 (120,000) 1.60 X 50,000 (80,000) 40,000

CM UNIT = CHANGE IN CM (P)

CHANGE IN UNIT SALES

=40,000 / 10,000
= 4.00

2. Determine fixed costs.

CHANGE
40,000 50,000 10,000
SALES
VC
CM 4 X 40,000 160,000 4 X 50,000. 200,000 40,000.
FC 280,000 280,000 0
NL. 3 X 40,000 (120,000) 1.60 X 50,000 (80,000) 40,000

Page |4
3. Compute for the units breakeven point.

BEP IN UNITS = 280,000 / 4 = 70,000 UNITS

MULTIPLE CHOICE:
Costs Classification

1. The term relevant cost applies to all the following decision situations except the
A. Acceptance of a special order
B. Determination of a product price
C. Replacement of equipment
D. Addition or deletion of a product line

1. B
? A situation where the term relevant cost does not apply

Page |5
 Relevant costs are those used in making decisions. These costs have two
characteristics – differential costs and future costs. The term relevant costs applies to the
acceptance or rejection of a special sales order, replacement or retention of equipment, addition
or deletion of a product line, and even in the determination of a product price. Among the
choices given however, choice letter “b” is the best answer because relevant cost is least
applied in the determination of regular selling price.

2. A decision-making concept, described as “the contribution to income that is foregone by

not using a limited source for its best alternative use” is called

A. Marginal cost
B. Incremental cost
C. Potential cost
D. Opportunity cost

2. D
? The term used to describe the contribution to income that is foregone by not using a
limited source for its best alternative use
 The benefit foregone or sacrificed for not using a limited resource for its best alternative
use is called an opportunity cost. Hence, choice letter “d” is correct. Choice letter “a” is incorrect
because marginal cost is the increase in cost per unit product. Choice letter “b” is incorrect
because incremental cost is the total increase in cost from an alternative to another. Choice
letter “c” is incorrect because potential cost may refer to future cost that may arise if an
alternative is chosen.

3. In a decision analysis situation, which one of the following costs is not likely to contain a
variable cost component?

A. Labor
B. Overhead
C. Depreciation
D. Selling

3. C
? The cost that is not likely to contain a variable cost component
 Choice letter “c” is the correct answer. Depreciation expense, if the problem is “silent”, is
a fixed cost, and therefore not variable neither would it contain a variable component. Choice
letter “a”, labor is academically treated as variable cost. Choice letter “b”, overhead has both the

Page |6
variable and fixed cost components. Choice letter “d”, selling expense, also has both the
variable and fixed cost components.

4. The term that refers to costs incurred in the past that are not relevant to a future decision
is

A. Full absorption cost

B. Under-allocated indirect cost
C. Sunk cost
D. Incurred marginal cost

4. C
? The term that refers costs incurred in the past that are not relevant to a future decision
 Choice letter “c” is the correct answer. Sunk costs are those already incurred, cannot be
avoided, refers to the past, and are therefore, irrelevant in making decisions. Choice letter “a”,
full absorption cost refers to the total costs of production without regard to whether fixed or
variable as long as the costs are necessary in the manufacture of a product. Choice letter “b” is
incorrect because under-allocated indirect cost relates to the amount of allocation and not to the
period of time, either past or otherwise. Choice letter “d” is an inferior choice because incurred
marginal cost although a past cost and, therefore, not relevant to future decisions, is only an
example of the more generic term sunk cost which aptly describes the phrase to be completed.

Questions 5 to 7 are based on the following information. Management accountants are

frequently asked to analyze various decision situations including the following:
I. The cost of a special device that is necessary if a special order is accepted
II. The cost proposed annually for the plant service for the grounds at corporate
headquarters
III. Joint production cost incurred, to be considered in a sell-at-split versus a process-further
decision
IV. The cost of alternative use of plant space to be considered in a make-or-buy decision
A. The cost of obsolete inventory acquired several years ago, to be considered in a keep-
versus-disposal decision

5. The costs described in situations I and IV are

A. Prime costs
B. Discretionary costs
C. Relevant costs
D. Differential costs

Page |7
5. C
? The costs described in situations I and IV
 The costs described in situations I and IV are relevant costs, choice letter “c” is the best
answer. Item I, the cost of a special device that is necessary if a special order is accepted, is an
incremental cost of accepting the order and is a relevant and is a relevant cost. Item IV, the cost
of alternative use of plant space to be considered in a make-or-buy decision, is an opportunity
cost and, is relevant in making decisions.

6. The costs described in situations III and V are

A. Prime costs
B. Sunk costs
C. Discretionary costs
D. Relevant costs

6. B
? The costs described in situations III and V
 Item III, joint production cost already incurred, and item V would no longer be avoided
whether the products are sold at split-off point or not. The cost of obsolete inventory acquired
several years ago in relation to the decision whether to keep or dispose the inventory is already
incurred, a sunk cost. In both situations, the costs described are sunk costs and are irrelevant in
decision-making. Hence, choice letter “b” is correct.

7. The costs described in situation II is a

A. Prime cost
B. Discretionary cost
C. Relevant cost
D. Differential cost

7. B
? The cost described in situation II
 The cost described in situation II is more accurately a discretionary cost, choice letter “b”
is correct. Choice letter “a” is incorrect because prime costs refer to direct materials and direct
labor. Choice letter “c” is incorrect because relevant costs are determined when decisions are to
be made, and not merely a proposal, which may be decided to be incurred or not. Choice letter
“d” is also incorrect because differential cost is a quality of a relevant cost which is determinable
only at a time a decision is to be made.

Page |8
8. Management accountants are concerned with incremental unit costs. These costs are
similar to the following except

A. The economic marginal cost

B. The variable cost
C. The cost to produce an additional unit
D. The manufacturing unit cost

8. D
? The cost that is not similar to incremental unit costs
 The best choice among the given should be choice letter “d”. A manufacturing unit cost
may include a fixed cost that is not incremental in nature. Choice letter “a” is incorrect because
marginal cost is the increase in cost per unit of increase in production and is similar to
incremental costs that also indicate an increase. Choice letter “b” is incorrect because variable
cost normally is an incremental cost. Choice letter “c” is also incorrect because the cost to
produce an additional unit is the same as marginal cost. Technically speaking, incremental
costs are the total increase in costs from one production level to another, from an option to
another, or from an event to another.

9. Opportunity costs
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

9. C
? The best statement about opportunity costs
 Opportunity costs are those benefits foregone in favor of the alternative chosen. They
are sacrificed benefits, not incurred but is implied, and not recorded in the accounting books
because they are theoretical. Hence, choice letter “c” is correct.
Choice letter “a” is incorrect because costs incurred by past actions are past costs or sunk
costs. Choice letter “b” is incorrect because the difference between actual and standard cost is
called the cost variance. Choice letter “d” is incorrect because costs that are partly fixed and
partly variable are called mixed costs.

10. Cost of goods sold is a component of the income statement. In a merchandising

establishment, this refers to purchases adjusted for changes in inventory. In a manufacturing
company, what replaced purchases to arrive at cost of goods sold?

Page |9
A. Finished goods
B. Fixed manufacturing overhead
C. Work in process inventory
D. Cost of good manufactured
E.

10. D
? The account that replaces purchases to arrive at cost of goods sold in a manufacturing
company
 Choice letter “d” is correct. In the computation of cost of goods sold, net purchases is
replaced by the cost of goods manufactured (CGM) in a manufacturing company. Just like
merchandise purchases, CGM is added to finished goods-beginning and then finished goods-
ending is deducted to get the cost of goods sold.
Choice letter “a” is incorrect because finished goods inventories are added to or deducted from
CGM to arrive at CGS. Choice letter “b” is incorrect because fixed manufacturing overhead is
directly used in the computation of total factory costs. Choice letter “c” is incorrect because
work-in-process inventory is used in the computation of CGM, not in CGS.

11. The salaries you could be earning by working rather than attending college is an
example of

A. Outlay costs
B. Misplaced costs
C. Sunk costs
D. Opportunity costs

11. D
? The classification of the salaries you could be earning by working rather than attending
college
 The salaries that should have been earned by working rather than attending college is
an example of an opportunity cost. It is a profit, savings, or benefit foregone in favor of the
alternative chosen.
Choice letter “a” is incorrect because outlay costs may refer to the amount of fund used to
finance an acquisition or operations. Choice letter “b” is incorrect because misplaced costs is an
irregular description of costs and has not found great usage and acceptance in the management
accounting literature. Choice letter “c” is incorrect because sunk costs are those that are already
incurred in the past and can no longer be changed, and are always irrelevant.

12. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is

P a g e | 10
A. Relevant because salaries are always present
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

12. C
? The treatment of the salary of the Chief Executive Officer (CEO) at the corporate
headquarters in deciding whether to build another regional office or not
 In deciding whether to build another regional office or not, the salary of the CEO does
not change, and therefore, is irrelevant although it is a future cost (choice letter “c” is correct).
A cost, to be relevant in decision making, must differ from one alternative to another (differential
cost) and must deal with the future (future cost). Both conditions must be met. A cost may be
relevant in one decision-making exercise but is irrelevant in the other.

13. Sunk costs

A. Are substitutes for opportunity costs
B. Are relevant to long-term decisions but not to short-term decisions
C. Are relevant to decision-making
D. In themselves are not relevant to decision making

13. D
? A correct description of sunk costs
 Sunk costs are past costs, “historical”, already incurred, and can no longer be changed
or affected by future decisions. These costs are always irrelevant in making decisions (choice
letter “d” is correct)
Choice letter “a” is incorrect because sunk costs are not, and would never be substitutes for
opportunity costs. Sunk costs are recorded in the accounting books. Choice letters “b” and “c”
are incorrect because sunk costs are never relevant to decision-making, both long-term and
short-term decisions.

14. When all manufacturing costs used in production are attached to the products, whether
direct, or indirect, variable or fixed, this is called

A. Process costing
B. Absorption costing
C. Variable costing
D. Job order costing

14. B

P a g e | 11
? A costing system that includes all manufacturing costs used in production as product
costs, whether direct, or indirect, variable or fixed
 Choice letter “b”, absorption costing is the correct answer. Absorption costing includes
all manufacturing costs whether direct or indirect, variable or fixed, in the determination of
product costs. This is the traditional concept of cost determination, is in accordance with the
generally accepted accounting principles, and includes all manufacturing costs as inventoriable
costs because they are all relevant expenditures in the manufacturing process.
Choice letter “a”, process costing is incorrect because it relates to the model of accumulating
production costs by following the departmentalized transfer of units in the production process.
Choice letter “c”, variable costing, is incorrect because it assigns only variable production cost
as product cost. Choice letter “d”, job order costing, is incorrect because it refers to the model of
accumulating production per order made by customers.

High-low Method

15. Mine and Yours Company uses a regression equation to analyze the behavior of its
transportation costs (T) as a function of travel time (H). They developed the following equation
using two years’ observation with a related coefficient of determination of 85:
T = 100,000 + 50H
If 500 hours of travel time were logged in one period, the related point estimate of total
transportation costs would be

A. P110,000
B. P121,250
C. P106,250
D. P125,000

15. D
? The related point estimate of transportation costs
 Total costs equal fixed costs plus variable costs. The fixed costs and the variable rate
per hour are given. Therefore:
Fixed costs P 100,000
Variable costs (P50 X 500 hours) 25,000
Total costs P 125,000

16. These are among the methods of segregating fixed cost and variable costs except

A. Breakeven method
B. Simple regression analysis

P a g e | 12
C. Scattergraph method
D. High-low method

16. A
? A method which is not used in segregating fixed and variable costs
 The methods used in separating the fixed and variable costs elements are: practical
method (e.g. historical records), simple average high-low method, weighted average high-low
method, scattergraph method, and least-squares method.
Choice letter “a” is the correct. The breakeven method is not used in segregating fixed into
variable costs but is instead used in analyzing the potential profitability and areas of sensitivity
in controlling profit.

17. Jackson, Inc., is preparing a flexible budget for next year and requires a breakdown of
the cost of steam used in its factory into the fixed and variable elements. The following data on
the cost of steam used and direct labor hours worked are available for the last 6 months of this
year.

Month Cost of Steam Direct Labor Hours

July P 15,850 3,000
August 13,400 2,050
September 16,370 2,900
October 19,800 3,650
November 17,600 2,670
December 18,500 2,650
TOTALP 101,520 16,920

Assuming that Jackson uses the high-low method of analysis, the estimated variable cost of
steam per direct labor hour is

A. P4.00
B. P5.42
C. P5.82
D. P6.00

17. A
? Using the high-low method, (HLM), the estimated variable cost of steam per direct labor
hour
 The high-low method relates to range analysis where in a range there is the highest
point and the lowest point. The high-low method identifies the highest observation and the
lowest observation, and getting their differences both in units and in amount. The highest

P a g e | 13
observation is the month of October while the lowest observation is the month of August.
Tabulating the data of the highest and the lowest occurrences, we have:
Direct labor hours Cost
Highest (October) 3,650 19,800
Lowest (August) 2,050 13,400
Difference 1,600 6,400

VCR = ∆ in Costs / ∆ in Units = P6,400 / 1,600 = P4 / DLH

Under the HLM, the variable cost rate is equal to the change in costs over the change in
units. This high-low method of computing the variable cost per unit rests on the principle that a
change in cost is attributed to variable, since total fixed cost remains unchanged.
The HLM is used when there is positive relationship between costs and units. That is, if
total unit increases, total cost also increases and if total unit decreases, total costs also
decreases. Otherwise, HLM is not applicable, and the scattergraph method and least squares
method are to be used in segregating the variable costs from the fixed costs.

18. In the Timbungan Country, Inc., a maintenance cost is partly fixed and partly variable in
nature. At the low level of activity (150 direct labor hours), maintenance costs total P2,100. At
high level of activity (270 direct labor hours), maintenance costs are P3,000. Using the high-low
method, what is the variable maintenance cost per unit and the total fixed maintenance cost?

Variable Maintenance Cost Fixed Maintenance Cost

A. P 7.50 P 975
B. P 7.50 P2,100
C. P10.00 P 600
D. P10.00 P2,100

18. A
? The variable cost per unit and the total fixed costs using the high-low method
 Variable cost per unit may be determined by dividing the change in costs over the
change in units. The change in costs is P900 (i.e. P3,000 - P2,100) and the change in units is
120 (i.e. 270 - 150). The variable cost rate P 7.50 (i.e. P900/120)
The fixed cost is the difference between total costs and variable costs, as follows:
@ 270 DLH @ 150 DLH
Total costs P 3,000 P 2,100
- Variable costs (P7.50 x DLH) 2,025 1,125
Fixed costs P 975 P 975

19. Mat Company estimates its material handling costs at two activity levels as follows:

P a g e | 14
Kilos Handled Cost
P 80,000 P 160,000
P 60,000 P 132,000

What is Mat’s estimated cost of handling 75,000 kilos?

A. P 150,000
B. P 153,000
C. 157,500
D. 132,000

19. B
? The estimated costs of handling 75,000 kilos
 The estimated costs of handling 75,000 kilograms is composed of variable costs and
fixed costs. The variable cost is determined by first establishing the variable cost rate. The
variable cost rate is computed as follows:
Variable cost rate = ∆ in Costs / ∆ in Sales
= (P160,000 - P132,000) / (80,000 - 60,000)
= P28,000 / 20,000 = P1.40 / kg

Given the variable cost rate and the fixed costs, the estimated cost of handling 75,000
kilograms shall be:
Variable costs (75,000 kgs x P1.40) P105,000
Fixed costs 48,000
Total estimated costs at 75,000 kgs P153,000

20. The total production cost for 20,000 units was P21,000 and the total production cost for
making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed costs
of P4,000 were incurred. The full production cost per unit for making 30,000 units is.

A. P 0.30
B. P 0.68
C. P 0.84
D. P 0.93

20. D
? The full production cost per unit for making 30,000
 The full production cost per unit is composed of the unit variable cost and unit fixed cost.
The unit variable cost is determined follows:
Unit variable cost = (∆ in Costs – Increase in Fixed Costs) / ∆ in Sales
= [(P34,000 - P21,000) – P4,000] / (50,000 - 20,000)

P a g e | 15
 = P9,000 / 30,000 = P 0.30

The total fixed costs should be determined at 50,000 units since the cost per unit to be
computed is at 30,000 units. At 50,000 units the increase in fixed costs of P4,000 is already
included. Fixed cost is total cost less variable cost. Therefore, the total fixed cost is P19,000 [i.e.
P34,000 – (50,000 x P0.30)]. Finally, the unit cost at 30,000 units shall be:
Unit variable costs (constant) P0.30
Unit fixed costs (P19,000/30,000 units) 0.63
Unit cost (at 30,000 units) P0.93

21. Hungarian sausage wishes to analyze the fixed and variable components of the semi-
variable cost. The following information is available:
Output Output
Month (Units) Costs Month (Units) Costs
1 1,000 P12,000 4 800 P11,000
2 700 10,000 5 1,400 18,750
3 1,100 14,000 6 1,200 15,000

Using the high-low method, which one of the following is correct?

A. Variable costs are P15 per unit

B. Variable costs are P10 per unit
C. Fixed costs are P1,250 per month
D. Fixed costs are P1,000 per month

21. C
? Using the high-low method, the correct expression of cost rate

22. The controller of James Company has requested a quick estimate of the manufacturing
supplies needed for the Morton Plant for the month of July when production is expected to be
470,000 units to meet the ending inventory requirements and sales of 475,000 units. James
Company’s budget analysis has the following actual data for the last three months
Production Manufacturing
Month in units Supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560

Using these data and the high-low method to develop a cost accounting equation, the estimate
of needed manufacturing supplies for July would be

P a g e | 16
A. P652,500
B. P681,500
C. P749,180
D. P752,060

22. D
? The estimated cost of manufacturing supplies for July using the high-low method

23. For the six months of the year, the highest level of activity for LQP Corporation was
18,000 full units of production with maintenance cost at P114,000 and its lowest level of activity
for the same period was at 14,000 full units of production with maintenance cost at 94,000.
What amount of maintenance cost should LPQ expect in a month in which it was scheduled
16,000 equivalent full units of production?

A. P 24,000
B. P104,000
C. P 80,000
D. P 70,560

23. B
? The expected amount of maintenance costs at 16,000 units of production

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