1

UNIVERSITY OF SOUTHERN PHILIPPINES FOUNDATION

CPA Review
Cebu

MANAGEMENT ADVISORY SERVICES

COST TERMS, CONCEPTS AND BEHAVIOR

Cost – a measurement, in monetary terms, of the amount of resources used for some purpose. When notified by
a term that defines the purpose, cost becomes operational, e.g., selling cost, acquisition cost, variable cost, etc.

Cost Pool – an account in which a variety of similar costs are accumulated prior t allocation to cost objects. It is
a group of costs associated with an activity. Example: overhead account.

Cost object – the intermediate and final disposition of cost pools. Example: product, job, process

Cost driver – a factor that causes a change in the cost pool for a particular activity. It is used as a basis for cost
allocation; any factor or activity that has a direct cause-effect relationship.

Activity – any event, action, transaction or work sequence that incurs costs when producing a product or
providing a service

Classification of Costs According to Different Perspectives:

I. Accountant’s Perspective
1. Capital Expenditures vs. Operating Expenditures
2. Costs vs. Expenses vs. Loss
3. Product Cost vs. Period Cost
4. Direct product cost vs. Indirect product cost

II. Manager’s Perspective

1. Relevant cost vs. Irrelevant cost
2. Direct segment cost vs. Indirect segment cost
3. Avoidable cost vs. Unavoidable cost
4. Controllable cost vs. Uncontrollable cost
5. Planned cost vs. Actual cost
6. Budgeted cost vs. Standard cost
7. Out-of-pocket cost vs. Non-cash costs
8. Sunk cost vs. Future cost

III. Economist’s Perspective

1. Explicit cost vs. Implicit cost
2. Opportunity cost vs. Imputed cost
3. Incremental cost vs. marginal cost
4. Variable cost vs. Fixed costs

COST BEHAVIOR

Cost behavior – describes how a cost behaves or changes as the amount of cost driver changes.

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST – in total: constant within the relevant range of activity, as activity output changes; per
unit changes as activity level changes. To control increase production to decrease unit fixed costs, that is
why fixed cost is related to volume.
a. Committed fixed costs – are those which incurrence have been committed by the business in the
past by reason of contract, acquisition, or agreement.
b. Discretionary (engineered) fixed costs – are those which incurrence is assured but the amount
may change depending on the discretion or value judgment of the manager.

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2. VARIABLE COST – in total, varies in direct proportion to changes in activity level; per unit, remains
constant. To control, reduce unit variable cost to decrease total variable cost, that is why variable cost is
related to spending.

3. MIXED COST – has both fixed and variable components. It could either be semi-variable costs, semi
fixed costs, or step costs.
a. Semi-variable costs change in total but not in direct proportion to changes in the level of
production and sales.
b. Semi-fixed costs are constant in given level of activity but changes, not in a constant way, when
a new level of activity is reached.
c. Step costs are constant in a given level of activity and changes, also in a constant way as new
activity level is reached.

COST BEHAVIOR ASSUMPTIONS:

1. Relevant Range Assumption
Relevant range refers to the band of activity within which the identified cost behavior patterns
are valid. Any level of activity outside this range may have a different cost behavior pattern.

2. Time Period Assumption

The cost behavior patterns identified are true only over a specified period of time. Beyond this,
the cost may show a different behavior.

SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS:

1. HIGH-LOW POINTS METHOD – the fixed and variable elements of mixed costs are computed from
two data points (periods) – the high and low periods as to activity level or cost driver.

2. STATISTICAL SCATTERGRAPH METHOD – various costs (the dependent variable) are plotted
on a vertical line (y-axis) and measurement figures (cost drivers or activity levels) are plotted on a
horizontal line (x-axis). A straight line is drawn through the points and, using this line, the rate of
variability and the fixed costs are computed.

3. LEAST SQUARES METHOD (REGRESSION ANALYSIS) – mathematically determines a line of

best fit or a linear regression line through a set of plotted points so that the sum of the squared deviations
of each actual plotted point from the point directly above or below it on the regression line is at
minimum.

This method uses the following equations in computing for the values of unit variable cost and fixed
cost:

Equation 1: ∑Y = na + b∑x
Equation 2: ∑xy = a∑x + b∑

COST FORMULA: y = a + bx

Where:
y = denotes total cost. It is called the dependent variable because it is dependent on the value of
another variable, the activity level x.
a = is an estimate of the fixed cost.
b = is an estimate of the variable cost per unit of activity

Direct Method:
a = y – bx
b = ∑xy – n(x)(y)
∑x – n(x)

Coefficient of Correlation (r) – it is used to determine the degree of relationship between x and y
variable.

Coefficient of Determination ( – is the proportion of the variance in the dependent variable that is
predictable from the independent variable.

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I. COST CLASSIFICATION
1. Classify whether: (a) Fixed or Variable; (b) Manufacturing or Non-manufacturing; (c) Direct or Indirect
Product Cost
1) Property taxes, factory
2) Boxes used for packaging detergent produced by the company
3) Salesperson’s commission
4) Supervisor’s salary – factory
5) Depreciation, executive autos
6) Wages of workers assembling computers
7) Insurance, finished goods warehouses
8) Lubricants for production equipment
9) Advertising costs
10) Microchips used in producing calculators
11) Shipping costs on merchandise sold
12) Magazine subscriptions, factory lunch room
13) Thread in a garment factory
14) Billing costs
15) Executive life insurance
16) Ink used in textbook production
17) Fringe benefits, assembly line workers
18) Yarn used in sweater production
19) Wages of receptionist, executive offices

II. PROBLEM SOLVING

Problem 1. The total maintenance costs of Silver Company in the last four months are presented as follows:
Month Machine Hours Maintenance Cost
January 7,200 P 450,000
February 6,800 422,000
March 7,000 440,000
April 6,400 418,000

The company expects to use 7,400 machine hours in May. Using the high-low method for segregating
mixed costs solve for the following:
a. Variable cost rate
b. Total fixed costs
c. Budgeted maintenance cost in the month of May

Problem 2. The CFO of Frank Dean Corporation is analyzing the relationship of its electricity costs and the
number of batches produced. The following data are assembled for this purpose:

Month No. of Batches Electricity Cost Month No. of Batches Electricity Cost
January 4 P 22,000 May 3 P 21,500
February 5 30,000 June 6 29,000
March 7 25,000 July 8 36,000
April 2 15,000

Determine the total fixed cost and variable cost rate of electricity using the least-square method:
d. Equation method
e. Direct formula method

Problem 3. Gold Company is a distributor that has an exclusive franchise to sell a particular product made by
another company. Gold Company’s income statement for the last two years are given below:

This year Last Year

Units sold 200,000 160,000
Sales revenue P1,000,000 P800,000
Cost of goods sold 700,000 560,000
Gross margin 300,000 240,000
Operating expenses 210,000 198,000
Net operating income P90,000 P42,000
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Operating expenses are a mixture of fixed costs and variable costs that vary with respect to the
number of units sold.

Required:
f. Estimate the company’s variable operating expenses per unit, and its total fixed operating
expenses per year.
g. Compute the company’s contribution margin for the year.
h. Compute the operating income if sales is 180,000 units.

Problem 4. The following data have been collected for four different cost items.
Cost Item Cost at 80 units Cost at 100 units Classification
A P2,400 P2,880
B P1,800 P2,250
C P1,900 P1,900
D P3,600 P3,720

Classify each cost item according to their cost classification by behavior.

Problem 5. Black Company, a Philippine merchandising firm, is the exclusive distributor of a product that is
gaining rapid market acceptance. The company’s revenues and expenses for the last three months are given
below:
April May June
Sales in units 3,000 3,750 4,500

Sales revenue P420,000 P525,000 P630,000

Cost of goods sold 168,000 210,000 252,000
Shipping expense 44,000 50,000 56,000
Advertising expense 70,000 70,000 70,000
Salaries and commissions 107,000 125,000 143,000
Insurance expense 9,000 9,000 9,000
Depreciation expense 42,000 42,000 42,000

Identify each of the company’s expenses, including cost of goods sold as being variable, fixed or
mixed.

Problem 6. Brown Company manufactures and sells a single product. A partially completed schedule of the
company’s total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually
is given below:
Units produced and 30,000 40,000 50,000
sold
Total costs:
Variable costs P180,000 ? ?
Fixed costs 280,000 ? ?
Total P460,000 ? ?

Cost per unit:

Variable cost ? ? ?
Fixed cost ? ? ?
Total ? ? ?

Required:
a. Complete the schedule of the company’s total and unit costs above.
b. Compute the income, assuming that the company produces and sells 35,000 units during a year at a
selling price of P16 per unit.

Problem 7. Black Forest Clinic contains 450 beds. The average occupancy rate is 80% per month. In order
words, an average of 80% of the clinic’s beds are occupied by patients. At this level of occupancy, the clinic’s
operating costs are P32 per occupied bed per day, assuming a 30-day month. This P32 contains both variable
and fixed cost elements.

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During April, the clinic’s occupancy rate was only 60%. A total of P326,700 in operating costs was incurred
during the month.

Required:
a. Using the high-low method, estimate the (a) variable cost per occupied bed on a daily basis and
(b) the total fixed operating costs per month.
b. Assume an occupancy rate of 70% per month. What amount of total operating costs would you
expect the clinic to incur?

Problem 8. In the Yellow 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.
a. The variable cost for maintenance per machine hour is:
b. The total fixed overhead cost for Yellow is:
c. If 110,000 machine hours of activity are projected for the next period, total expected overhead cost
would be:

Problem 9. The following information was taken from a computer printout generated with the least squares
method for use in estimating overhead costs:
Slope 90
Intercept 11400
Correlation coefficient 0.6
Activity variable Direct labor hours
The cost formula is

Problem 10. The following information pertains to data that have been gathered in the process of estimating a
simple least squares regression:
Mean value of the dependent variable 30
Mean value of the independent variable 10
Coefficient of the independent variable 3
Number of observations 12

What is the "a" value for the least squares regression model?

Problem 11. TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined that
if a truck is driven 105,000 kilometers during a year, the average operating cost is P11.40 per kilometer. If a
truck is driven only 70,000 kilometers during a year, the average operating cost increases to P13.40 per
kilometer. Assuming that in a given year, a truck were driven 80,000 kilometers, what total cost would you
expect to be incurred?

Problem 12. The House of TROPS Company is a large retailer of sports equipment. An income statement for
the company’s Ski Department for a recent quarter is presented as follows:

The House of TROPS Company

Income Statement
For the Quarter Ended March 31

Sales P1,500,000
Less cost of goods sold 900,000
Gross margin 600,000
Less operating
expenses:
Selling expenses P300,000
Administrative 100,000 400,000
expenses
Net income P 200,000

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Skis sell, on the average, for P7,500. Variable selling expenses are P500 per pair of skis sold. The remaining
selling expenses are fixed. The administrative expenses are 20 percent variable and 80 percent fixed. The
company does not manufacture its own skis; it purchases them from a supplier for P4,500 per pair.

Required:
a. What is the variable cost per pair of skis?
b. Given the cost formula Y = P30,000 + P5X, total cost at an activity level of 16,000 units would be:

Problem 13. Use the following simple regression results based on the data from the Madrigal Corporation
Dependent variable – Machine maintenance costs
Independent variable – Machine hours
Computed values
Intercept P3,500
Coefficient on independent variable P 3.50
Coefficient of correlation 0.856
R2 0.733
What percentage of the variation in maintenance costs is explained by the independent variable?

Problem 14. The following are costs incurred by Red Manufacturing Corporation during the previous month:
Direct materials P5,000
Indirect materials 2,000
Direct labor 6,000
Indirect labor 1,000
Factory utilities 4,000
Advertising costs 8,000
Sales commissions 12,000
Depreciation on administration building 3,000
Salaries on administrative personnel 20,000
Depreciation-delivery equipment 2,000
Overtime pay-factory workers 1,500
Rework cost on defective products discovered 2,500
during quality inspection

a. The total product costs is

b. The total period costs is

Problem 15. Data about Green Company’s production and inventories for the month of June are as follows:
Purchases – direct materials P143,440
Freight in 5,000
Purchase returns and allowances 2,440
Direct labor 175,000
Actual factory overhead 120,000

Inventories June 1 June 30

Finished goods P 68,000 P 56,000
Work in process 110,000 135,000
Direct materials 52,000 44,000

The company applies factory overhead to production at 80% of direct labor cost. Over-or under applied
overhead is closed to cost of goods sold at year-end. The company’s accounting period is on the
calendar year basis.
a. Green Company’s prime cost for June was
b. Green Company’s conversion cost for June was
c. For the month of June, the company’s total manufacturing cost was
d. For June, the company’s cost of goods transferred to the finished goods inventory account was
e. The company’s cost of goods sold for June was
f. The amount of over/under applied overhead factory for the month of June was
g. The cost of goods sold for the month of June should be increased (decreased) by the amount of
over/under-applied factory overhead of

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MULTIPLE CHOICE QUESTIONS – Practice Problems

1. The equation(s) required for applying the least squares method in the computation of fixed and variable
production costs could be expressed as
A. xy = ax + b x2 C.  y = na + b x
B. y = a + bx 2
D. xy = ax + b x2
xy = na + b x y = na + bx

2. Weaknesses of the high-low method include all of the following except

A. Only two observations are used to develop the cost function.
B. The high and low activity levels may not be representative.
C. the method does not detect if the cost behavior is nonlinear.
D. the mathematical calculations are relatively complex.

3. The correlation coefficient or R-squared (R2) is interpreted as:

A. the minimum distance between the regression line and a single data point.
B. the measure of the linear relationship between two or more variables.
C. a determination of whether the data point is considered to be an "outlier."
D. the proportion of the variation in the dependent variable explained by the independent variable.

4. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that
the scatter-diagram method
A. includes cost outside the relevant range.
B. considers more than two points.
C. can be used with more types of costs than the high-low method.
D. gives a precise mathematical fit of the points to the line.

5. Irma Company manufactures office furniture. During the most productive month of the year, 3,500 desks
were manufactured at a total cost of P84,400. In its slowest month, the company made 1,100 desks at a cost
of P46,000. Using the high-low method of cost estimation, total fixed costs in August are:
A. P56,000 C. P17,600
B. P28,400 D. P38,400

6. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the
rooms are occupied each day. The company’s operating cost is P21 per occupied room per day at this
occupancy level, assuming a 30-day month. This P21 figure contains both variable and fixed cost elements.
During October, the occupancy dropped to only 45 percent. A total of P792,000 in operating costs were
incurred during the month.

What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent
during November?
A. P1,056,000 C. P 756,000
B. P 846,000 D. P 829,500

7. The controller of Jema Company has requested a quick estimate of the manufacturing supplies that it needs
for the month of July when the expected production are 470,000 units. Below are the actual data from the
prior three months of operations.
Production in units Manufacturing
supplies
March 450,000 P723,060
April 540,000 853,560
May 480,000 766,560
Using these data and the high-low method, what is the reasonable estimate of the cost of manufacturing
supplies that would be needed for July? (Assume that this activity is within the relevant range.)
A. P 805,284 C. P 755,196
B. P1,188,756 D. P 752,060

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8. The following activity and cost data that were provided by Hoist Corporation would 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. C. P595.84.
B. P581.82. D. P601.50.

9. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
A. 10,625 units. C. 6,250 units.
B. 4,375 units. D. 5,250 units.

10. Balsy Company has provided the following data for maintenance cost:
Prior Year Current Year
Machine hours 12,500 15,000
Maintenance cost P27,000 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. P 7,000 per year plus P0.625 per machine hour.
C. P 7,000 per year plus P1.60 per machine hour.
D. P27,000 per year plus P1.60 per machine hour.

11. Almond Company wishes to determine the fixed portion of its maintenance expense (a semi-variable
expense), as measured against direct labor hours for the first Malayan three months of the year. The
inspection costs are fixed; however, the adjustments necessitated by errors found during inspection account
for the variable portion of the maintenance costs. Information for the first Malayan quarter is as follows:
Direct Labor Hours Maintenance Costs
January 34,000 P61,000
February 31,000 58,500
March 34,000 61,000
What is the fixed portion of Almond Company’s maintenance expense, rounded to the nearest pesos?
A. P28,330 C. P37,200
B. P32,667 D. P40,800

12. Clone Machinery had the following experience regarding power costs:
Month Machine hours Power cost
Jan. 300 P680
Feb. 600 720
Mar. 400 695
Apr. 200 640
Assume that management expects 500 machine hours in May. Using the high-low method, calculate Clone's
power cost using machine hours as the basis for prediction.
A. P 700 C. P 710
B. P 705 D. P1,320

13. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is direct labor
hours. According to this equation, a 100-hour change in total direct labor hours will change the cost of
workers compensation insurance by
A. P4,000. C. P4,300.
B. P 300. D. none of the above amounts.

14. The major objective of preparing a scatter-diagram is to

A. derive an equation to predict future costs.
B. perform regression analysis on the results.
C. determine the relevant range.
D. find the high and low points to use for the high-low method of estimating costs.

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15. The cost estimation method that gives the most mathematically precise cost prediction equation is
A. the high-low method.
B. the scatter-diagram method.
C. the contribution margin method.
D. regression analysis.

16. Which cost is most likely to be mixed for a manufacturer?

A. Raw materials.
B. Direct labor.
C. Manufacturing overhead.
D. Insurance.

17. Which combinations of object of cost and classification of cost is most reasonable?
Object of Cost Classification of Cost
--------------- ----------------------
A. Materials used to make products Discretionary fixed cost
B. Advertising cost Discretionary fixed cost
C. Straight-line depreciation Variable cost
D. President's salary Avoidable fixed cost

18. A cost is variable if it varies with the

A. number of units manufactured.
B. number of units sold.
C. level of some activity.
D. selling price of the product.

19. A non-value-adding cost is

A. usually direct to a product.
B. the same as a discretionary cost.
C. unavoidable.
D. not essential to manufacturing a product.

20. Fixed costs that cannot be reduced within a short period of time are
A. committed.
B. variable.
C. avoidable.
D. unnecessary.

21. Which cost is most likely to be committed?

A. Repairs and maintenance.
B. Sum-of-the-years'-digits depreciation on the factory building.
C. Fee for a consultant on the company's long-range planning.
D. Advertising.

22. RST's average cost per unit is the same at all levels of volume. Which of the following is true?
A. RST must have only variable costs.
B. RST must have only fixed costs.
C. RST must have some fixed costs and some variable costs.
D. RST's cost structure cannot be determined from this information.

23. A mixed cost

A. increases in steps as volume increases.
B. contains a fixed component and a variable component.
C. varies with more than one measure of volume.
D. cannot be accurately predicted.
24. A non-value-adding activity
A. cannot be a cost driver.
B. should be eliminated.
C. usually drives only variable costs.
D. cannot usually be observed by managers.

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25. A cost-predicting equation determined through regression analysis

A. always gives close predictions.
B. will not work any better than one obtained using the high-low method.
C. can be used only for costs that vary with sales or production.
D. could be severely affected by outliers.

26. Which of the following do JIT operations try to eliminate?

A. Discretionary fixed costs.
B. Non-value-adding costs.
C. Avoidable costs.
D. Direct costs.

27. Which statement is true for a manufacturer?

A. It cannot use the contribution-margin format of the income statement.
B. Many costs vary with production activities, not with sales.
C. The concepts of fixed and variable costs do not apply.
D. Cost-volume-profit analysis is not appropriate.

28. Fixed costs that managers can change on short notice are
A. value-adding costs.
B. variable costs.
C. unavoidable costs.
D. discretionary costs.

29. A cost pool is

A. all of the costs of a particular department.
B. all costs in a group such as variable costs or discretionary fixed costs.
C. all costs related to a product or product line.
D. all costs that have the same driver.

30.. Looking at the following scatter diagrams we can conclude that

P P
| * * | **
| * * * | ** *
| * * * * | * *
| * * | * *
| |
| |
|__________________ |__________________
activity activity
Cost A Cost B

A. cost A will be easier to predict than cost B.

B. cost B will be easier to predict than cost A.
C. cost A is out-of-control.
D. cost B has no fixed component.

31. The Shepherd Company’s president would like to know the estimated fixed and variable components of a
particular cost. Actual data for this cost for four recent periods appear below.
Activity Cost
Period 1 24 P174
Period 2 25 179
Period 3 20 165
Period 4 22 169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X C. Y = P103.38 + P3.00X
B. Y = P110.44 + P2.70X D. Y = P113.35 + P0.89X

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32. Sams Company. wants to develop a single predetermined overhead rate. The company's expected annual
fixed overhead is P340,000 and its variable overhead cost per machine hour is P2. The company's relevant
range is from 200,000 to 600,000 machine hours. Sams Company expects to operate at 425,000 machine
hours for the coming year. The plant's theoretical capacity is 850,000. The predetermined overhead rate per
machine hour should be
A. P2.40. C. P2.80.
B. P2.57. D. P2.85.

33. Almond Company wishes to determine the fixed portion of its maintenance expense (a semi-variable
expense), as measured against direct labor hours for the first Malayan three months of the year. The inspection
costs are fixed; however, the adjustments necessitated by errors found during inspection account for the variable
portion of the maintenance costs. Information for the first Malayan quarter is as follows:
Direct Labor Hours Maintenance Costs
January 34,000 P61,000
February 31,000 58,500
March 34,000 61,000
What is the fixed portion of Almond Company’s maintenance expense, rounded to the nearest pesos?
A. P28,330 C. P37,200
B. P32,677 D. P40,800

34. Clone Machinery had the following experience regarding power costs:
Month Machine hours Power cost
Jan. 300 P680
Feb. 600 720
Mar. 400 695
Apr. 200 640
Assume that management expects 500 machine hours in May. Using the high-low method, calculate Clone's
power cost using machine hours as the basis for prediction.
A. P 700 C. P 710
B. P 705 D. P1,320

35. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is direct labor
hours. According to this equation, a 100-hour change in total direct labor hours will change the cost of workers
compensation insurance by
A. P4,000. C. P4,300.
B. P 300. D. none of the above amounts.

36. Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units, P1,000 of product
level costs for 40 products, and P3,500 of customer-level costs for ten customers. The cost of Job 002 which
used 800 unit level activities, 4 product level activities, and one customer-level activities amounts to
A. P3,650 C. P3,050
B. P3,250 D. P2,950

37. The following information is available for maintenance costs:

Month Production Volume Maintenance Costs
June 150,000 P500,000
July 230,000 620,000
August 380,000 800,000
September 120,000 480,000
October 270,000 710,000
Using the least squares, the estimate of the fixed portion of maintenance costs (rounded to thousand pesos)
is
A. P131,000 C. P332,000
B. P321,000 D. P115,000

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38. Ms. Batingal has just been appointed chairperson of the Accountancy Department of HNU. In reviewing the
department’s cost records, Batingal has found the following total cost associated with MAS Part 2 subject over
the last several terms:
Semester/Term Number of Subjects Total Cost
Offered
AY2017, First Semester 4 P10,000
AY2017, Second Semester 6 14,000
AY2017, Summer 2 7,000
AY2018, First Semester 5 13,000
AY2018, Second Semester 3 9,500
Batingal knows that there are some variable costs, such as amounts paid to student assistants, associated
with the course. He would like to have variable and fixed cost components separated for planning purposes.
Using the least-squares method, what is the variable cost per section of MAS?
A. P1,750 C. P1,200
B. P1,500 D. P 900

39. At a sales level of P300,000, Java 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. C. P170,000.
B. P155,000. D. P185,000.

Question Nos. 40 and 41 are based on the following information: SERAL Company is a manufacturing
entity whose total factory overhead costs fluctuate considerably from year to year according to increases and
decrease in the number of direct labor hours worked in the plant. Total factory overhead costs at high and
low levels of activity for recent years follow:
Low High
Direct labor hours 50,000 75,000
Total factory overhead costs P14,250,000 P17,625,000

The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has
analyzed these costs at the 50,000-hour level of activity as follows:
Indirect materials (V) P 5,000,000
Rent (F) 6,000,000
Maintenance (M) 3,250,000
Total factory overhead costs P14,250,000

V = variable; F = fixed; M = mixed

40. How much of the P17,625,000 factory overhead cost at the high level of activity consist of maintenance
cost?
A. P4,125,000 C. P4,450,000
B. P4,220,000 D. P4,525,000

41. What total factory overhead costs would you expect the company to incur at an operating level of 70,000
direct labor hours?
A. P16,950,000 C. P13,000,000
B. P13,950,000 D. P10,950,000

-END OF HANDOUTS-

RM MONTALBAN MAS 2002