CAGAYAN STATE UNIVERSITY – ANDREWS

College of Business, Entrepreneurship and Accountancy

2nd Semester SY 2020-2021

STRATEGIC COST MANAGEMENT

Quiz No. 1

Write your answer on a separate sheet of paper.

1) Explain when a manager would use cost-volume-profit analysis.

2) Auto Tires has been in the tire business for four years. It rents a building but owns all of its equipment. All
employees are paid a fixed salary except for the busy season (April-June), when temporary help is hired by
the hour. Utilities and other operating charges remain fairly constant during each month except those in the
busy season.

Selling prices per tire average ₱75 except during the busy season. Because a large number of customers buy
tires prior to winter, discounts run above average during the busy season. A 15% discount is given when two
tires are purchased at one time. During the busy months, selling prices per tire average ₱60.

The president of Auto Tires is somewhat displeased with the company's management accounting system
because the cost behavior patterns displayed by the monthly breakeven charts are inconsistent; the busy
months' charts are different from the other months of the year. The president is never sure if the company
has a satisfactory margin of safety or if it is just above the breakeven point.

Required:
a. What is wrong with the accountant's computations?
b. How can the information be presented in a better format for the president?

3) Alex Miller, Inc., sells car batteries to service stations for an average of ₱30 each. The variable cost of each
battery is ₱20 and monthly fixed manufacturing costs total ₱10,000. Other monthly fixed costs of the
company total ₱8,000.

Required:
a. What is the breakeven point in batteries?
b. What is the margin of safety, assuming sales total ₱60,000?
c. What is the breakeven level in batteries, assuming variable costs increase by 20%?
d. What is the breakeven level in batteries, assuming the selling price goes up by 10%, fixed manufacturing
costs decline by 10%, and other fixed costs decline by ₱100?

4) Explain how activity-based costing systems can provide more accurate product costs than traditional cost
systems.

5) For each of the following activities identify an appropriate activity-cost driver.

a. machine maintenance
b. machine setup
c. quality control
d. material ordering
e. production scheduling
f. warehouse expense
g. engineering design

6) Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe
model. The following activity and cost information has been compiled:
Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150
Overhead costs ₱40,000 ₱120,000

Assume a traditional costing system applies the ₱160,000 of overhead costs based on direct labor hours.
a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?
 Assume an activity-based costing system is used and that the number of setups and the number of
components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC
system. Which system provides a better estimate of costs? Why?

7) Come-On-In Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis
for support costs has been direct labor dollars. For 2010, Come-On-In compiled the following data for the
two products:

Deluxe Standard
Sales units ₱50,000 ₱400,000

Sales price per unit ₱650.00 ₱475.00

Direct material and labor costs per unit ₱180.00 ₱130.00
Manufacturing support costs per unit ₱ 80.00 ₱120.00

Last year, Come-On-In Manufacturing purchased an expensive robotics system to allow for more decorative
door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help
evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following ABC
information for 2010:

Activity Cost Driver Cost Total Deluxe Standard

Setups of setups ₱ 500,000 500 400 100
Machine-related of machine hours ₱44,000,000 600,000 300,000 300,000
Packing of shipments ₱ 5,000,000 250,000 50,000 200,000

Requi red:
a. Using the current system, what is the estimated
1. total cost of manufacturing one unit for each type of door?
2. profit per unit for each type of door?

b. Using the current system, estimated manufacturing overhead costs per unit are less for the deluxe door
(₱80 per unit) than the standard door (₱120 per unit). What is a likely explanation for this?

c. Review the machine-related costs above. What is a likely explanation for machine-related costs being so
high? What might explain why total machining hours for the deluxe doors (300,000 hours) are the same as
for the standard doors (300,000 hours)?

d. Using the activity-based costing data presented above,

1. compute the cost-driver rate for each overhead activity.
2. compute the revised manufacturing overhead cost per unit for each type of entry door.
3. compute the revised total cost to manufacture one unit of each type of entry door.

e. Is the deluxe door as profitable as the original data estimated? Why or why not?

f. What considerations need to be examined when determining a sales mix strategy?

8) Describe the purpose of variance analysis.

9) Madzinga's Draperies manufactures curtains. A certain window requires the following:

Direct materials standard 10 square yards at ₱5 per yard

Direct manufacturing labor standard 5 hours at ₱10

During the second quarter, the company made 1,500 curtains and used 14,000 square yards of fabric costing
₱68,600. Direct labor totaled 7,600 hours for ₱79,800.

Required:
a. Compute the direct materials price and efficiency variances for the quarter.
b. Compute the direct manufacturing labor price and efficiency variances for the quarter.
10) The following data for the Alma Company pertain to the production of 1,000 urns during August.

Direct Materials (all materials purchased were used):

Standard cost: ₱6.00 per pound of urn.

Total actual cost: ₱5,600.
Standard cost allowed for units produced was ₱6,000.
Materials efficiency variance was ₱120 unfavorable.

Direct Manufacturing Labor:

Standard cost is 2 urns per hour at ₱24.00 per hour.

Actual cost per hour was ₱24.50.
Labor efficiency variance was ₱336 favorable.

Requi red:
a. What is standard direct material amount per urn?
b. What is the direct material price variance?
c. What is the total actual cost of direct manufacturing labor?
d. What is the labor price variance for direct manufacturing labor?

11) During February the Lungren Manufacturing Company's costing system reported several variances that the
production manager was surprised to see. Most of the company's monthly variances are under ₱125, even
though they may be either favorable or unfavorable. The following information is for the manufacture of
garden gates, its only product:

1. Direct materials price variance, ₱800 unfavorable.

2. Direct materials efficiency variance, ₱1,800 favorable.
3. Direct manufacturing labor price variance, ₱4,000 favorable.
4. Direct manufacturing labor efficiency variance, ₱600 unfavorable.

Required:
a. Provide the manager with some ideas as to what may have caused the price variances.
b. What may have caused the efficiency variances?

12) Waddell Productions makes separate journal entries for all cost accounting-related activities. It uses a
standard cost system for all manufacturing items. For the month of June, the following activities have taken
place:

Direct Manufacturing Materials Purchased ₱300,000

Direct Manufacturing Materials Used 250,000
Direct Materials Price Variance 10,000 unfavorable
(at time of purchase)
Direct Materials Efficiency Variance 15,000 favorable
Direct Manufacturing Labor Price Variance 6,000 favorable
Direct Manufacturing Labor Efficiency Variance 4,000 favorable
Direct Manufacturing Labor Payable 170,000

Requi red:
Record the necessary journal entries to close the accounts for the month.

13) Explain why there is no efficiency variance for fixed manufacturing overhead costs.

14) Abby Company has just implemented a new cost accounting system that provides two variances for fixed
manufacturing overhead. While the company's managers are familiar with the concept of spending
variances, they are unclear as to how to interpret the production-volume overhead variances. Currently, the
company has a production capacity of 54,000 units a month, although it generally produces only 46,000 units.
However, in any given month the actual production is probably something other than 46,000.

Required:

a. Does the production-volume overhead variance measure the difference between the 54,000 and 46,000,
or the difference between the 46,000 and the actual monthly production? Explain.
 b. What advice can you provide the managers that will help them interpret the production-volume
overhead variances?

15) Explain why there is no production-volume variance for variable manufacturing overhead costs.

16) McKenna Company manufactured 1,000 units during April with a total overhead budget of ₱12,400.
However, while manufacturing the 1,000 units the microcomputer that contained the month's cost
information broke down. With the computer out of commission, the accountant has been unable to complete
the variance analysis report. The information missing from the report is lettered in the following set of data:

Variable overhead:
Standard cost per unit: 0.4 labor hour at ₱4 per hour
Actual costs: ₱2,100 for 376 hours
Flexible budget: a
Total flexible-budget variance: b
Variable overhead spending variance: c
Variable overhead efficiency variance: d

Fixed overhead:
Budgeted costs: e
Actual costs: f
Flexible-budget variance: ₱500 favorable

Requi red:
Compute the missing elements in the report represented by the lettered items.