COSTS AND COST CONCEPTS

ITEMS 1 AND 2 ARE BASED ON THE FOLLOWING:

Castelo, Villasin and Barrera is a large, local accounting firm located in Cebu. Belle Castelo, one of the Firm’s
founders, appreciates the success her firm has enjoyed and wants to give something back to her community.
She believes that an inexpensive accounting services clinic could provide basic accounting services for small
businesses located in the province. She wants to price the services at cost.

Since the clinic is brand new, it has no experience to go on. Belle decided to operate the clinic for two months
before determining how much to charge per hour on an ongoing basis. As a temporary measure, the clinic
adopted an hourly charge of P50, half the amount charged by Castelo, Villasin and Barrera for professional
services.

The accounting services clinic opened on January 1. During January, the clinic had 120 hours of professional
service. During February, the activity was 150 hours. Costs for these two level of activity usage are as follows:

Professional hours 120 hours 150 hours

Salaries:
Senior accountant P2,500 P2,500
Office assistant 1,200 1,200
Internet and software subscriptions 700 850
Consulting by senior partner 1,200 1,500
Depreciation (equipment) 2,400 2,400
Supplies 905 1,100
Administration 500 500
Rent (offices) 2,000 2,000
Utilities 332 365

1. The clinic’s monthly fixed costs amount to:

a. P8,600 c. P 425
b. P9,025 d. P12,189

2.Apple Baby, the chief paraprofessional of the clinic, has estimated that the clinic will average 140 professional
hours per month. If the clinic is to be operated as a nonprofit organization, how much will it need to charge per
professional hour?
a. P97.81 c. P82.77
b. P87.06 d. P22.60

3. HSR Computer System designs and develops specialized software for companies and use a normal costing
system. The following data are available for the current year:
Budgeted
Overhead P600,000
Machine hours 24,000
Direct labor hours 75,000
Actual
Units produced 100,000
Overhead P603,500
Prime costs P900,000
Machine hours 25,050
Direct labor hours 75,700

Overhead is applied on the basis of direct labor hours.

What is the unit cost for the year?

a. P15.03 c. P15.09
b. P15.06 d. P15.00

CVP AND BREAKEVEN ANALYSIS

8.Harry Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single product. Estimated unit
sales are 125,000. An after-tax income of P75,000 is desired by management. The company projects its income
tax rate at 40 percent. What is the maximum amount that Harry can expend for variable costs per unit and still
meet its profit objective if the sales price per unit is estimated at P6?
a. P3.37 c. P3.00
b. P3.59 d. P3.70

9.For its most recent fiscal year, a firm reported that its contribution margin was equal to 40 percent of sales and that
its net income amounted to 10 percent of sales. If its fixed costs for the year were P60,000, how much was the
margin of safety?
a. P150,000 c. P600,000
b. P200,000 d. P 50,000
10. Sam Company manufactures a single product. In the prior year, the company had sales of P90,000, variable
costs of P50,000, and fixed costs of P30,000. Sam expects its cost structure and sales price per unit to remain
the same in the current year, however total sales are expected to increase by 20 percent. If the current year
projections are realized, net income should exceed the prior year’s net income by:
a. 100 percent. c. 20 percent.
b. 80 percent. d. 50 percent.

11. Edil Company produces and sells a single product. The costs and selling prices on a per-unit basis are as follows:
Selling Price P120
Materials 35
Labor 15
Variable overhead 10
Fixed overhead 10
Variable selling and administrative 20
Fixed selling and administrative 5

The above per-unit figures are computed based on the company’s normal capacity of 20,000 units.

The company’s expected margin of safety is

a. 7,500 units. c. 62.5%.
b. P2,400,000. d. P12,500.

ITEMS 12 to 13 ARE BASED ON THE FOLLOWING INFORMATION:

A company is making plans for next year, using cost-volume-profit analysis as its planning tool.

Next year’s sales data about its product are as follows:

Selling price P60.00
Variable manufacturing costs per unit 22.50
Variable selling and administrative costs 4.50
Fixed operating costs (60% is manufacturing cost) P148,500
Income tax rate 32%

12. How much should sales be next year if the company wants to earn profit after tax of P22,440, the same
amount that it earned last year?
a. P310,800 c. P330,000
b. P397,500 d. P222,000

13. Assume that the company’s management learned that a new technology that will increase the quality of its
product is available. If implemented, its projections for next year will be changed:
1. The selling price of the product will increase to P75 per unit.
2. Fixed manufacturing costs will increase by 20%.
3. Additional advertising costs will be incurred to promote the higher-quality product. This will
increase fixed non-manufacturing cost by 10%.
4. The improved product will require a new material that will increase direct materials cost by P4.50

If the new technology is adapted, how much sales should the company make to earn a pre-tax profit of 10% on
sales?
a. P366,130 c. P253,324
b. P358,875 d. P353,897

14. As projected net income increases the

a. degree of operating leverage declines. c. break-even point goes down.
b. margin of safety stays constant. d. contribution margin ratio goes up.

15. Yamyam Company is considering introducing a new product that will require a P250,000 investment of capital.
The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed operating costs
associated with the product would be P122,500 while the variable cost ratio would be 58%. Assuming a selling
price of P15 per unit, determine the number of units (rounded to the nearest whole unit) Yamyam would have to
sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the new
product.
a. 35,318 units c. 32,143 units
b. 25,575 units d. 23,276 units
1. ANSWER B

Diff. in costs (P12,415 – P11,737) P 678

÷ diff. in hours (150 – 120) 30
Variable rate per hour P22.60

Total cost P12,415 P11,737

Less variable cost (22.60x150) 3,390 (22.60x120) 2,712
Fixed costs P 9,025 P 9,025

2. ANSWER B

Variable cost (140 x P22.60) P 3,164

Fixed cost 9,025
Total cost P12,189
÷ number of hours 140
Cost per hour P 87.06

3. ANSWER B

Prime costs P 900,000

Applied overhead (P600,000/75,000 DLH x 75,700) 605,600
Total cost P1,505,600
÷ Units produced 100,000
Unit cost P 15.06
8. ANSWER C

Projected sales (125,000 x P6) P750,000

Less contribution margin:
Income before tax (75,000/0.60) P125,000
Add fixed cost 250,000 375,000
Variable costs P375,000
÷ number of units 125,000
Variable cost per unit P 3.00
9. ANSWER D

Let S = Sales; CM = 0.40S; NY = 0.10S

Fixed Cost = (0.40S – 0.10S) = 0.30S

Sales (P60,000 ÷ 0.30) P200,000

Less breakeven sales (P60,000 ÷ 0.40) 150,000
Margin of safety P 50,000

10. ANSWER B

Increase in profit (P40,000 x 20%) P 8,000

÷ Present profit:
Contribution margin P40,000
Less fixed costs 30,000 10,000
% change in profit 80%
11. ANSWER C
Expected sales - units 20,000
Less break-even sales:
Fixed costs (20,000 x [10 + 5]) P300,000
÷ Unit contribution margin
(120 – [35 + 15 + 10 + 20]) P40 7,500
Margin of safety 12,500 units
Margin of safety in pesos (12,500 x P120) P1,500,000
Margin of safety ratio (12,500 ÷ 20,000) 62.5%

12. ANSWER C

Fixed costs P148,500

P22,440
Add desired profit ( )
1 – 0.32 33,000
Total P181,500
60 – [22.50 + 4.50]
÷ CMR ( )
60 55%_
Required sales to earn desired profit P330,000

13. ANSWER B
Fixed costs:
Manufacturing (148,500 x 60% x 120%) P106,920
Non-manufacturing (148,500 x 40% x 110%) 65,340
Total fixed costs P172,260
Contribution margin ratio:
Selling price P75.00
Less variable costs:
Manufacturing (P22.50 + P4.50) P27.00
Selling and administrative 4.50 31.50
Contribution margin per unit P43.50
÷ Selling price 75.00
Contribution margin ratio P 58%

Required peso-sales to earn a desired profit ratio:

Fixed Cost P172,260

RS = = = P358,875
CMR – PR 58% – 10%

14. ANSWER A

15. ANSWER C

Fixed cost P122,500

Add desired profit (P250,000 x 32%) 80,000
Total P202,500
÷ CM per unit [P15 x (100% - 58%)] 6.30
Required sales in units 32,143