CPAR
CPA Review School of the Philippines MANAGEMENT ADVISORY SERVICES
COSTS AND CONCEPTS
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 which a variety of similar costs are accumulated prior to 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.
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 as activity output changes; per unit: changes as activity level changes.
2. VARIABLE COST – in total: varies in direct proportion to changes in activity output; per unit: remains constant.
3. MIXED COST – has both fixed and variable components. 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 the mixed costs are computed from two data points (period)-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 (x-axis). A straight line is drawn through the points and, using this line, the rate of variability and the fixed cost are computed.
3. Method of Least Squares (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∑
xEquation 2:
∑
xy = a∑
x + b∑
x2COST 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. EXERCISES:
1. Malabon Industries has developed two new products but has only enough plant capacity to introduce one product during the coming year. The following data will assist management in deciding which product should be selected.
Malabon’s fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products.
Product A Product B
Raw materials P 44.00 P 36.00 Machining @ P12 per hour 18.00 15.00 Assembly @ P10 per hour 30.00 10.00 Variable overhead @ P8 per hour 36.00 18.00 Fixed overhead @ P4 per hour 18.00 9.00
Total cost P 146.00 P 88.00
Suggested selling price P 169.95 P 99.98 Actual R & D costs P 240,000 P175,000 Propoed advertising and promotion costs P 500,000 P350,000
A. For Malabon’s Product A, the unit costs for raw materials, machining, and assembly represent a. Conversion costs c. Prime costs
b. Separable costs d. Common costs
B. The difference between the P99.98 suggested selling price for Product B and its total unit cost of P88.00 represents the unit’s
a. Contribution margin c. Prime costs
b. Gross profit d. Common costs
C. The total overhead cost of P27.00 for Product b is a
a. Carrying cost c. Mixed cost
b. Sunk cost d. Committed cost
D. Research and development costs for two new products are a. Conversion cost c. Relevant cost
b. Sunk cost d. Avoidable costs
E. The advertising and promotion costs for the product selected by Malabon will be
a. Discretionary costs c. Prime costs
b. Opportunity costs d. Incremental costs F. The costs included in the fixed overhead are
a. Joint costs c. Opportunity costs
b. Committed costs d. Prime costs
2. The following data have been collected for four different cost items. Cost item cost at 100 units cost at 140 units
W P8,000 P10,560
X P5,000 P5,000
Y P6,500 P9,100
Z P6,700 P8,580
Which of the following classifications of these cost items by cost behavior is correct?
Cost W Cost X Cost Y Cost Z
a. Variable fixed mixed variable
b. Mixed fixed variable mixed
c. Variable fixed variable variable
d. Mixed fixed mixed mixed
3. The administrator of Buntis Maternity Hospital would like a cost formula linking the costs involved in admitting patients to the number of patients admitted during a month. The admitting department cost and the number of patients admitted during the immediately preceding ten months are given in the following table:
Month Number of patients Admitted Admitting Department Costs
May 201 P13,845 June 276 20,624 July 122 12,941 August 386 18,452 September 274 14,843 October 436 21,890 November 321 16,831 December 328 21,924 January 24 1,826 February 161 16,832
The administrator realizes that many more months of data should be gathered before jumping to conclusions about how costs behave. He also wishes that more detailed classifications were available (for example, age of patient, sex, height, weight etc. ). But he has decided to use the foregoing data as a start.
REQUIRED:
1. Segregation the fixed and variable components of the admitting costs using the high-low method. 2. Express the fixed and variable components of admitting costs as a cost formula in the linear
equation form Y = a + bX.
4. The controller of Leon Furniture, a retail store, wants to determine the variable and fixed cost components of the company’s costs and expenses. He has prepared income statements for recent months, which he plans to use in conducting cost analysis.
Sales P80,000 P90,000
Cost of goods sold 48,000 54,000
Gross profit P32,000 P36,000
Operating expenses:
Selling P 8,500 P 8,800
Total P17,700 P18,200
Profit P14,300 P17,800
Required:
a. Determine the fixed and variable components of cost of goods sold, selling expenses, and administrative expenses.
b. Compute income if sales amount to P100,000.
5. Below is an examination of last year’s financial statements of Mickey Company. Units produced and production costs for the first four (4) months of the year, which are representative for the year, were as follows:
Month Labor Hours Total Production Costs
January 25 P200
February 35 250
March 45 300
April 35 250
REQUIRED:
1. Using the least-square method, calculate the monthly fixed and variable components of the total production costs.
2. Using the estimates made in number 1, compute the total cost for 300 units.
6. An analysis of past janitorial costs indicates that the average janitorial cost is P1.50 per machine hour at an activity level of 40,000 machine hours and P1.20 per machine hour at an activity level of 50,000 machine hours. Assuming that this activity is within the relevant range, what is the total expected janitorial cost if the activity level is 45,000 machine hours?
7. The Mix? Company uses the high-low method to estimate the cost function. The information for 2012 is provided below:
Machine-hours Labor cost Highest observation of cost driver 500 P15,000 Lowest observation of cost driver 220 6,600 What is the total cost for 400 hours?
8. Black Forest Clinic contains 600 beds. The average occupancy rate is 90% per month. In other words, an average of 90% of the clinic’s beds are occupied by patients. At this level of occupancy, the clinic’s operating costs are P25 per occupied bed per day, assuming a 30-day month. This P25 contains both variable and fixed costs elements.
During April, the clinic’s occupancy rate was only 80%. A total P390,600 in operating costs was incurred during the month.
REQUIRED:
1. 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.
2. Assume an occupancy rate of 85% per month. What amount of total operating costs would you expect the clinic to incur?
9. Makina Company’s total overhead costs at various levels of activity are presented below: Month Machine Hours Total Overhead Costs
April 140,000 P198,000
May 120,000 174,000
July 180,000 246,000
Assume that the total overhead costs above consist of utilities, supervisory salaries and maintenance. The breakdown of these costs at the 120,000 machine-hour level of activity is:
Utilities (V) P 48,000
Supervisory salaries (F) 21,000
Maintenance (M) 105,000
Total overhead costs P174,000 V = variable; F = fixed; M = mixed
Makina Company’s management wants to break down the maintenance cost into its basic variable and fixed cost elements.
REQUIRED: 1. As shown above, overhead costs in July amounted to P246,000. Determined how much of this consisted of maintenance cost.
2. By means of the high-low method, estimate a cost formula for maintenance. 3. Express the company’s total overhead costs in the linear equation from Y=a + bX
4. What total overhead costs would you expect to be incurred at an operating activity level of 150,000 machine hours?
10. The chief statistician of Aloha Company has developed the following cost formula: Y= P49,272 + P1.78L + P2.68M
Where: Y= total monthly manufacturing overhead cost L= labor hours
M = machine hours
The measure of goodness of fit is good and no evidence of multicolinearity exists. The company will use 12,000 labor hours and 2,000 machine hours next month.
REQUIRED:
1. Determine the total manufacturing overhead costs that Aloha should incur next month.
2. Aloha makes a product that has P6.00 in material cost. it requires two hours of labor time and 30 minutes of machine time. Laborers earn P10 per hour. What is the product’s per unit variable manufacturing cost?
3. Suppose that Aloha could reduce the labor time for the product described in requirement 2 by 30 minutes, to 1.50 hours. Machine time will remain the same. By how much would the per unit variable manufacturing cost fall?
11. M. Munda Company produces and sells rattan baskets. The number of units produced and the corresponding total production costs for six months, which are representatives for the year are as follows:
Month Unit produced Production Costs
April 500 P4,000 May 700 8,000 June 900 6,000 July 600 7,500 August 800 8,500 September 550 7,250
11a.The cost function derived by the simple least squares method a. Is linear.
b. Is curvilinear c. Is parabolic
11b. Using the least squares method, the variable production cost per unit is approximately
a. P 5 c. P 0.27
b. P 10 d. P 3.74
11c.Using the least squares method, the monthly fixed production cost is approximately
a. P 1,500. c. P 4,350
b. P 18,000 d. P 52,200
11d. If the high-low points method is used, the results when compared with those under the method of least squares, are
Variable Cost Per Unit Total Fixed Costs
a. Equal Equal
b. Higher by P1.26 Lower by P2,850
c. Lower by P1.26 Higher by P2,850 d. Higher by P5 Lower by P1,500
12. Meemon 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 sold 30,000 40,000 50,000 Total Costs:
Variable costs P180,000 ? ? Fixed costs 300,000 ? ?
Total P480,000 ? ?
Cost per unit:
Variable cost ? ? ?
Fixed cost ? ? ?
Total ? ? ?
Required:
a. Complete the schedule of the company’s total and unit costs above.
b. Compute income, assuming that the company produces and sells 45,000 units during a year at a sell price of P16 per unit.
13. A company makes prestige high-end watches in small lots. The company has been in operation since 1990. One of the company’s productions, a platinum diving watch, goes through an etching process. The company has observed etching costs as follows over the last six weeks:
Week Units Total Etching Costs
1 4 P 18 2 3 17 3 8 25 4 6 20 5 7 24 6 2 16 30 P120
For planning purposes management would like to know the amount of variable etching cost per unit and the total fixed etching cost per week.
Required:
1. Using the least squares regression method, estimate the variable and fixed elements of etching costs.
2. Express the cost data in (1) above in the form of Y = a + bX.
3. If the company processes five (5) units next week, what would be the expected total etching cost?
