DMC COLLEGE FOUNDATION, INC.

SCHOOL OF BUSINESS AND ACCOUNTANCY

Sta. Filomena, Dipolog City
2 SEMESTER, SY: 2021-2022
ND

Bachelor of Science in Accountancy

CA 423: MANAGEMENT ADVISORY SERVICES
CA423-MAS-02: EXERCISES-THEORIES AND PROBLEMS RACHELL-ANN BALOT BULJATIN, CPA

PART I. MULTIPLE CHOICE QUESTIONS: THEORIES

Instruction. Choose the letter of the correct answer.

1. Cost is the monetary measure of the amount of resources given up in obtaining goods and services. Costs may be classified as
unexpired or expired. Which of the following costs is not always considered to be expired immediately upon being recognized?
a. Salesmen’s commission
b. Depreciation expense for factory equipment
c. Cost of goods sold
d. Salary of the company president

2. An activity that causes resources to be consumed is called a –

a. non-value added activity. c. cost driver.
b. just-in-time activity . d. extracurricular activity.

3. It refers to anything for which cost is computed.

a. Cost object c. Cost driver
b. Cost control d. Cost variance

4. It is a grouping of individual cost items, or an account in which a variety of similar costs are accumulated.
a. Cost driver c. Cost variance
b. Income statement d. Cost pool

5. It is an event, action, transaction, task or unit of work that consumes resources and with a specified purpose.
a. Cost object c. Activity
b. Cost driver d. Direct labor

6. An activity that adds cost to the product or service, but does not make such product or service more valuable to customers is
called-
a. non-value adding activity. c. value-adding activity.
b. costly activity. d. valuable activity.

7. Which of the following statements is correct?

a. A cost driver is an accounting technique used to control costs.
b. A cost driver is a measure of activity, such as direct labor hours, machine hours, beds occupied, computer time, etc., that is a
casual factor in the incurrence of costs.
c. A cost driver is an accounting measurement used to evaluate whether or not performance is proceeding according to plan.
d. A cost driver is a mechanical basis used to assign costs to activities.

8. Product costs or inventoriable costs -

a. are charged to expense when products become part of the finished goods inventory.
b. include only the prime costs of producing a product.
c. are treated as assets before the products are sold.
d. include only the conversion costs of producing the products.

9. Which of the following costs is not a product cost?

a. Wages paid to workers for rework on defective products.
b. Wages paid to truck loaders who load finished goods onto outgoing delivery trucks
c. Fringe benefits paid to factory workers.
d. Wages paid to workers for idle time due to machine breakdown in a production department.

10. Product costs –

a. are always expensed in the same period in which they are incurred.
b. are inventoriable costs.
c. vary directly with changes in the cost driver.
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d. are always charged to an asset account in the same period in which they are incurred.

11. Manufacturing costs do not include –

a. prime costs.
b. conversion costs.
c. indirect materials.
d. salary of the company president, under whom is the vice president for production.

12. Direct labor cost is a

a. prime cost b. conversion cost c. product cost d. All of these

13. For product costing purposes, an indirect factory cost

a. is not directly chargeable to the company.
b. is chargeable to prime costs.
c. is chargeable to conversion costs.
d. is never included in the computation of product costs.

14. For decision-making purposes, relevant costs are

a. variable past costs.
b. all fixed and variable costs.
c. anticipated future costs that will differ among various alternative.
d. costs incurred within the relevant range of production.

15. Differentials costs

a. are variable costs.
b. are anticipated future costs that will differ among various alternatives.
c. are the difference in costs between any two alternative courses of action.
d. are costs that differ under alternatives.

16. An income or benefit that is given up when one alternative selected over another is called –
a. Loss. c. Opportunity cost.
b. Relevant cost . d. Differential cost.

17. Sunk costs -

a. are relevant costs.
b. can be changed by a decision made now or to be made in the future.
c. are irrelevant for decision –making purposes.
d. are decreases in costs from one alternative to another.

18. Which of the following costs would be considered relevant in short-term decision making?
a. Production costs of goods available for sales
b. Incremental fixed costs
c. Acquisition cost of idle asset to be used in a proposed project
d. Variable costs

19. In cost accounting, the term relevant range refers to the range over which -
a. relevant costs are incurred. c. production should be confined.
b. total fixed costs fluctuate. d. cost relationships are valid.

20. Depreciation computed using the straight-line method is classified as –

a. variable cost c. fixed cost
b. relevant cost d. opportunity cost

21. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram
method
a. includes costs 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.

22. 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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23. The cost estimation method that gives the most mathematically precise cost prediction equation is
a. the high-low method. c. the scatter-diagram method.
b. the contribution margin method. d. regression analysis.

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

a. Raw materials. c. Direct labor.
b. Manufacturing overhead. d. Insurance.

25. A cost is variable if it varies with the

a. number of units manufactured. c. number of units sold.
b. level of some activity. d. selling price of the product.

26. A non-value-adding cost is

a. usually direct to a product. c. the same as a discretionary cost
b. unavoidable. d. not essential to manufacturing a product.

27. Fixed costs that cannot be reduced within a short period of time are
a. committed b. variable c. avoidable d. unnecessary.

28. 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

29. A mixed cost

a. increases in steps as volume increases. c. contains a fixed component and a variable component.
b. varies with more than one measure of volume. d. cannot be accurately predicted.

30. The components of manufacturing cost are

a. variable costs, fixed costs, and overhead costs.
b. materials, direct labor, and overhead.
c. purchases, wages, and manufacturing overhead.
d. wages and salaries, maintenance and repairs, utilities, and depreciation.

31. Fixed costs that managers can change on short notice are
a. value-adding costs c. variable costs.
b. unavoidable costs. d. discretionary costs.

32. A(n) __________ relationship is one that appears to exist even though there is no causal relationship.
a. Correlation. c. Outlier.
b. Spurious. d. Value-added.

33. Identifying cost drivers

a. is not necessary with regression analysis. c. is the same as identifying cost pools.
b. is an important part of cost management. d. is useful only with step-variable costs.

34. As volume increases,

a. total fixed costs remain constant and per-unit fixed costs increase.
b. total fixed costs remain constant and per-unit fixed costs decrease.
c. total fixed costs remain constant and per-unit fixed costs remain constant.
d. total fixed costs increase and per-unit fixed costs increase.

35. 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

36. Cost behavior analysis is a study of how a firm's costs -

a. relate to competitors' costs. c. relate to general price level changes.
b. respond to changes in activity levels within the company. d. respond to changes in the gross national product.
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37. The term “relevant range” as used in cost accounting means the range over which
a. costs may fluctuate. c. production may vary.
b. cost relationships are valid. d. relevant costs are incurred.

38. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a
a. mixed cost. c. direct cost
b. predictor. d. cost driver.

39. Which of the following describes the behavior of the variable cost per unit? Variable cost:
a. varies in increasing proportion with changes in the activity level.
b. varies in increasing proportion with changes in the activity level.
c. remains constant with changes in the activity level.
d. varies in direct proportion with the activity level.

40. A cost that remains constant on a per unit basis in a given period despite changes in the level of activity should be considered
a(an):
a. variable cost. c. fixed cost.
b. prime cost. d. overhead cost.

41. When production increases, variable manufacturing costs react in which of the following ways?
A. B. C. D.

Unit variable cost decreases remains same remains same increases

Total variable cost decreases Increases decreases Increases

42. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n)
a. increase in the fixed element. c. increase in the mixed element.
b. decrease in the variable element. d. decrease in the fixed element.

43. As volume increases,

a. total fixed costs remain constant and per-unit fixed costs increase.
b. total fixed costs remain constant and per-unit fixed costs decrease.
c. total fixed costs remain constant and per-unit fixed costs remain constant.
d. total fixed costs increase and per-unit fixed costs increase.

44. Which of the following best describes a fixed cost?

a. It may change in total when such change is unrelated to changes in production.
b. It may change in total when such change is related to changes in production.
c. It is constant per unit of change in production.
d. It may change in total when such change depends on production within the relevant range.

45. If activity increases, which of the following statements about cost behavior is true?
a. Fixed cost per unit will increase c. Fixed cost per unit will decrease
b. Variable cost per unit will increase d. Variable cost per unit will decrease

46. An increase in the activity level within the relevant range results in:
a. an increase in fixed cost per unit. c. a proportionate increase in total fixed costs.
b. an unchanged fixed cost per unit. d. a decrease in fixed cost per unit.

47. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n)
a. expired cost. c. variable cost.
b. fixed cost. d. mixed cost.

48. Which of the following statements regarding fixed costs is incorrect?

a. Expressing fixed costs on a per unit basis usually is the best approach for decision-making process.
b. Fixed costs expressed on a per unit basis will react inversely with changes in activity.
c. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of the relevant range.
d. Fixed costs frequently represent long-term investments in property, plant, and equipment.

49. Cost estimation is the process of

a. estimating the relationship between costs and the cost drivers that cause those costs.
b. documenting costs in terms of direct and indirect costs.
c. summarizing past costs into fixed and variable components.
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d. all of the above.

50. Which of the following methods is used to estimate costs?

a. Account analysis c. Engineering method
b. High-low method d. All of these

51. For analysis purposes, the high-low method usually produces a(n)
a. reasonable estimate. c. overstated estimate.
b. precise estimate. d. understated estimate.

52. The high-low method is criticized because it

a. is not a graphical method.
b. is a mathematical method.
c. ignores much of the available data by concentrating on only the extreme points.
d. does not provide reasonable estimates.

53. The high-low method may give unsatisfactory results if

a. the data points all fall on a line. c. the points are not representative.
b. volume of activity is heavy. d. volume of activity is light

54. 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 + bx2 d. xy = ax + b x2
xy = na + b x y = na + bx

55. 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.

56. Regression analysis is better than the high-low method of cost estimation because regression analysis:
a. is more mathematical. c. fits its data into a mathematical equation.
b. uses all the data points, not just two. d. takes more time to do.

57. 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.

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

a. develop 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.

59. Advantages of the method of least squares over the high-low method include all of the following except
a. a statistical method is used to mathematically derive the cost function
b. only two points are used to develop the cost function
c. the squared differences between actual observations and the line (cost function) are minimized
d. all the observations have an effect on the cost function

60. The scatter diagram method of cost estimation

a. is influenced by extreme observations
b. requires the use of judgment
c. uses the least-squares method
d. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs

PART 2. PROBLEMS
INSTRUCTION: Give the answer or select the letter of the correct answer whichever is applicable in each number.
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Items 1 and 2 are based on the following information:

Following are costs incurred by ABTIK Manufacturing Corporation

Direct Materials 5,000

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 of administrative personnel 20,000
Depreciation – delivery equipment 2,000
Overtime pay – factory workers 1,500
Rework cost on defective products
discovered during quality inspection 2,500

Requirements: Compute for:

1. Total product cost P 22,000
2. Total period cost P45,000

Items 3 to 7 are based on the following information:

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 @ 10 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 240,000.00 P 175,000.00

Proposed advertising and promotion costs P 500,000.00 P 350,000.00

3. For Malabon’s Product A, the unit costs for raw materials, machining, and assembly represent
a. Conversion costs c. prime costs (direct materials plus direct labor)
a. Separable costs d. common costs

4. The difference between the P 99.98 suggested selling price for product B and its total unit cost P 88.00 represents the unit’s
a. Gross profit (Sales – COS) c. contribution
b. Contribution margin ratio d. gross profit margin ratio

5. The total overhead cost of P27.00 for Product B is a

a. Carrying cost c. committed cost
b. Mixed cost (Fixed and Variable) d. sunk cost

6. Research and development costs for the two new products are
a. Sunk costs (already incurred) c. avoidable costs
b. Conversion costs d. relevant costs

7. The advertising and promotion costs for the product selected by Malabon will be
a. Discretionary cost (still a proposal) c. incremental cost
b. Opportunity cost d. prime cost

Items 8 to 13 are based on the following information:

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ICAN Coporation’s Research and Development Department was able to develop a new product – a flashlight by solar energy. After
reviewing the data prepared by the company’s controller, ICAN’s management is confident that the new product will contribute profit to
the company.

The data prepared by the controller are as follows:

Suggested selling price P200
Costs : materials P60
Parts fabrication (P10 per hour) 40
Assembly (P6 per hour) 18
Variable overhead (P4 per hour) 28
Fixed overhead (P3 per hour) 21
Total cost P167

The total research and development costs incurred to develop the new product amounted to P200,000. The company is planning to
spend half of this amount for promotion and advertising. The company’s fixed overhead includes rent, equipment depreciation, and
salaries of factory supervisors.

8. For ICAN’s new flashlight, total prime costs amount to –

a. P118 b. 167 c. P146 d. P107

9. The difference between the flashlight’s suggested selling price of P200 and the total cost of P167 represents each flashlight’s
a. gross profit. b. contribution margin. c. net profit. d. operating income.

10. The total overhead cost of P49 per unit is a –

a. prime cost b. variable cost. c. mixed cost. d. fixed cost

11. The total research cost and development costs of P200,000 incurred to develop the new product is a(n)-
a. Relevant cost b. sunk cost c. avoidable cost d. postponable cost

12. The costs included in ICAN’s fixed overhead are

a. prime costs. b. discretionary costs. c. committed costs d. variable cost.

13. The planned spending on promotion and advertising for the flashlight is a
a. variable cost b. discretionary costs c. sunk cost d. past cost

Items 14 to 16 are based on the following information:

SAYONRANI Company is preparing a flexible budget for next year and requires a breakdown of the factory maintenance cost into the
fixed and variable elements.
The maintenance cost and machine hours (the selected cost driver) for the past six months are as follows:

Maintenance costs Machine hours

January P15,500 1,800
February 10,720 1,230
March 15,100 1,740
April 15,840 2,190
May 14,800 1,602
June 10,600 1,590
14. If SAYONRANI Company uses the high-low method of analysis, the estimated variable rate of maintenance cost per machine hour
is –
a. 7.23 b. 8.73 c. 5.46 d. 5.33

NOTE: the activity or cost drivers must be the basis of identifying the highest and lowest point and the cost applicable for
the selected highest and lowest points shall be used.

Variability rate = Highest cost - lowest cost

Highest cost driver - lowest cost driver

= 15,840 - 10,720
2,190 - 1,230

= ₱ 5,120.00
960
= ₱ 5.3333
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15. The average annual fixed maintenance cost amounts to

a. P4,160 b. 8,320 c. 49,920 d. 5,120

HIGH LOW
15, 10,
Total Cost 840 720
(2,190 x 11,
Less: Variable cost P5.3333) 680
6,
(1,230*P5.3333) 560
4, 4,
Monthly Fixed Cost 160 - 160

OR , you may use:

Y = a + bx
Where :
Y = total cost
a = total fixed cost
b =variable cost per unit or per cost driver (variability rate)
x = total units or cost drivers

if Y is given, a can be computed by a=Y-bx

a
Highest point = 15,840 - (2,190 x P5.3333)
a
= 15,840-11,680
a
= 4,160.00

a
Highest point = 10,720 - (1,230*P5.3333)
a
= 10,720 - 6,560
a
= 4,160.00

16. What is the average rate per hour at a level of 1,500 machine hours?
a. 5.33 b. 8.11 c. 7.23 d. 5.46

Variable cost (1,500 x P5.3333) 8,000.00

Fixed Cost 4,160.00
Total cost 12,160.00
divided by: machine hours 1,500.00
Average rate per hour (Fixed & Variable) 8.11

Items 17 to 22 are based on the following information:

KOMPYUT Company produces and sells rattan baskets. The number of units produced and the corresponding total production cost for
six months, which are representatives for the year, are as follows:
Month Units produced Production Costs
April 500 P4,000
May 700 8,000
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June 900 6,000
July 600 7,500
August 800 8,500
September 550 7,250

Based on the given information and using the least squares method of computation, select the best answer for each question, where:
y = total monthly production costs
x = number of units produced per month
a = fixed production cost per month
b = variable production cost per unit
n = number of months
∑= summation

17. If the least squares method is to be used to segregate the variable and fixed cost components of the total production costs, the
equation (s) required to express the relationship between fixed and variable costs are-
a. ∑y=na + b∑x and ∑xy = a∑x + b∑x2
b. ∑xy= a∑x + b∑x2
c. ∑y=na + b∑x
d. y=a + b∑x2 and ∑y = na + b∑x

18. The cost function derived by the simple least squares method -
a. is linear c. is curvilinear
b. is parabolic d. must be tested for minimum and maximum points.

19. The monthly production costs can be expressed as –

a. y= a + bx b. y = b + ax c. y = ax + b d. x = a + by

20. Using the least squares method, the monthly fixed production cost is approximately
a. P5 b. P10 c. P0.27 d. P3.74

21. Using the least squares method, the monthly fixed production cost is approximately
a. 1,500 b. P18,000 c. P4,350 d. P52,200

22. 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 Hihger by P2,850
d. Higher by P5 Lower by P1,500

23. Nite Corporation has developed the following flexible budget formula for annual indirect labor costs:Total Cost = P480,000 + P5.00
per machine hour. Operating budgets for the current month are based upon 20,000 machine hours of planned machine time.
Indirect labor costs included in this planning budget are:
a. P 48,333 b. P580,000 c. P100,000 d. P140,000

Monthly fixed costs 480,000 / 12 P 40,000

Variable 20,000 x 5 100,000

Total P140,000

24. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For the
upcoming month Harem plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Harem Company’s
budgeted overhead for the month is
a. P 12,800 b. P 84,800 c. P 18,800 d. P774,000

Monthly budgeted fixed cost (72,000/12) P 6,000

Variable cost based on actual units:

Number of hours allowed

(96,000 x 5/60)= 8,000 hours

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Variable cost: 8,000 x 1.60 12,800

Budgeted overhead cost P18,800

25. 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 b. P17,600 c. P28,400 d. P38,400

Variable rate = (∆ in activity cost)/(∆ in activity level)

= (P84,000 – P46,000)/(3,500 – 1,100)

= P16.00

Fixed cost a = y – bx

a = P46,000 – (1,100 x 16)

a = P28,400

26. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
a. 10,625 units. b. 6,250 units. c. 4,375 units. d. 5,250 units.

4X = 42,500 – 17,500

4X = 25,000

X = 6,250

27. 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 b. P 710 c. P 705 D. d. P1,320

b = (720 – 640) ÷ (600 - 200)

80 ÷ 400 P0.20

a = 720 – (600 x .2)

720 – 120 P600

Total Cost for month of May

Y = 600 + (500 x 0.2) P700

28. 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. b. P4,300. c. P 300. d. none of the above amounts.
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∆Y = 100 x 3

= P300

Within a relevant range, the amount of total fixed cost remains constant at P4,000. The only cost that will change in total is variable
cost because every additional hour will add P3 to total costs.

29. 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

∑X = 91
∑Y = 687
∑XY = 15,669
∑X2 = 2,085

687 = 4a + 91b
15,669 = 91a + 2,085b
15,629.25 = 91a + 2,070.25b
39.75 = 14.75b

b = P2.70

687 = 4a + (91 X 2.695)

687 = 4a + 245.25
4a = 441.75
a = P110.44

Y = P110.44 + P2.70X

30. The Overland Company wants to develop a cost estimating equation for its monthly cost of electricity. It has the following data:
Month Electricity Cost Direct Labor Hours

January P6,750 1,500

April 7,500 1,700

July 8,500 2,000

October 7,250 1,600

Using the high-low method, what is the best equation?

a. A. Y = P 750 + P5.00X c. Y = P 750 + P3.50X

b. Y = P1,500 + P3.50X d. Y = P1,500 + P5.00X

b = (8,500 – 6,750) ÷ ( 2,000 – 1,500)

= 1,750 ÷ 500
b = 3.50
a = 8,500 – (2,000 x 3.5)
a = 1,500
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y = 1,500 + 3.50X

*** END of CA423-MAS-02 Exercises***

GOD IS GOOD, ALL THE TIME!

“Commit to the Lord whatever you do, and He will establish your plans”
Proverbs 16:3