Activity Cost and Analysis

MODULE 3 7. A cost that remains constant on a per unit basis in a given period despite changes in the level
ACTIVITY COST AND COST ANALYSIS of activity should be considered a(an):
A. variable cost. C. fixed cost.
THEORIES: B. prime cost. D. overhead cost. Bobadilla

1. Cost behavior analysis is a study of how a firm's costs 8. Malayan Company’s average cost per unit is the same at all levels of volume. Which of the
A. relate to competitors' costs. following is true?
B. relate to general price level changes. A. MALAYAN must have only variable costs.
C. respond to changes in activity levels within the company. B. MALAYAN must have only fixed costs.
D. respond to changes in the gross national product. Bobadilla C. MALAYAN must have some fixed costs and some variable costs.
D. MALAYAN’s cost structure cannot be determined from this information. Bobadilla
2. The term “relevant range” as used in cost accounting means the range over which
A. costs may fluctuate C. production may vary 9. Depreciation expense based on the number of units produced is classified as what type of
B. cost relationships are valid D. relevant costs are incurred Bobadilla cost?
A. Out-of-pocket cost. C. Variable cost.
3. Most operating decisions by management focus on a narrow range of activity which is called B. Marginal cost. D. Fixed cost. Bobadilla
the:
A. relevant range of production. C. optimal level of production. Bobadilla 10. When production increases, variable manufacturing costs react in which of the following ways?
B. strategic level of production. D. tactical operating level of production. Bobadilla A. B. C. D.
Unit variable cost decreases remains same remains same increases
4. An item or event that has a cause-effect relationship with the incurrence of a variable cost is Total variable cost decreases Increases decreases Increases
called a
A. mixed cost. C. direct cost. 11. When the number of units manufactured increases, the most significant change in unit cost will
B. predictor. D. cost driver. Bobadilla be reflected as a(n)
A. increase in the fixed element. C. increase in the mixed element.
5. If a predetermined overhead rate is not employed and the volume of production is increased B. decrease in the variable element. D. decrease in the fixed element. Bobadilla
over the level planned, the cost per unit would be expected to
A. Decrease for fixed costs and remain unchanged for variable costs. 12. As volume increases,
B. Remain unchanged for fixed costs and increase for variable costs. A. total fixed costs remain constant and per-unit fixed costs increase.
C. Decrease for fixed costs and increase for variable costs. B. total fixed costs remain constant and per-unit fixed costs decrease.
D. Increase for fixed costs and increase for variable costs. Bobadilla C. total fixed costs remain constant and per-unit fixed costs remain constant.
D. total fixed costs increase and per-unit fixed costs increase. Bobadilla
6. 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. 13. Which of the following best describes a fixed cost?
B. Varies in increasing proportion with changes in the activity level. A. It may change in total when such change is unrelated to changes in production.
C. Remains constant with changes in the activity level. B. It may change in total when such change is related to changes in production.
D. Varies in direct proportion with the activity level. Bobadilla 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. Bobadilla

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 Activity Cost Analysis
A. Breakeven point must increase. C. Operating leverage must increase.
14. If activity increases, which of the following statements about cost behavior is true? Bobadilla B. Margin of safety must decrease. D. Profit must increase. Bobadilla
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 21. The indifference point is the level of volume at which a company
A. earns the same profit under different operating scheme.
15. An increase in the activity level within the relevant range results in: B. earns no profit.
A. an increase in fixed cost per unit. C. earns its target profit.
B. a proportionate increase in total fixed costs. D. any of the above. Bobadilla
C. an unchanged fixed cost per unit.
D. a decrease in fixed cost per unit. Bobadilla 22. Operating leverage is the relative mix of
A. revenues earned and manufacturing costs
16. A cost that remains constant in total but varies on a per-unit basis with changes in activity is B. fixed and variable costs.
called a(n) C. high-volume and low-volume products.
A. expired cost. C. variable cost. D. manufacturing costs and period costs. Bobadilla
B. fixed cost. D. mixed cost. Bobadilla
23. The increased use of automation and less use of the work force in companies has caused a
17. Which of the following statements regarding fixed costs is incorrect? trend towards an increase in
A. Expressing fixed costs on a per unit basis usually is the best approach for A. both variable and fixed costs.
decision-making process. B. fixed costs and a decrease in variable costs.
B. Fixed costs expressed on a per unit basis will react inversely with changes in activity. C. variable costs and a decrease in fixed costs.
C. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the D. variable costs and no change in fixed costs. Bobadilla
concept of the relevant range. Bobadilla
D. Fixed costs frequently represent long-term investments in property, plant, and equipment. 24. If fixed costs decrease while variable cost per unit remains constant, the contribution margin
will be
18. Lamang Company changed its cost structure by increasing fixed costs and decreasing its A. Unchanged C. Higher
per-unit variable costs. The change: B. Lower D. Indeterminate Bobadilla
A. Increases risk and increases potential profit.
B. Increases risk and decreases potential profit. 25. Costs that increase as the volume of activity decreases within the relevant range are
C. Decreases risk and decreases potential profit. A. Average cost per unit. C. Total fixed costs.
D. Decreases risk and increases potential profit. Bobadilla B. Average variable cost per unit. D. Total variable costs. Bobadilla

19. A management’s preference for a very low degree of operating leverage might indicate that: 26. Which costs will change with an increase in activity within the relevant range?
A. an increase in sales volume is expected. A. Total fixed costs and total variable cost.
B. a decrease in sales volume is expected. B. Per unit fixed costs and total variable cost.
C. the firm is very unprofitable. C. Per unit variable cost and per unit fixed cost.
D. the firm has very high fixed costs. Bobadilla D. Per unit fixed cost and total fixed cost. Bobadilla

20. Management is considering replacing its existing sales commission compensation plan with a 27. Which of the following best describes the relationship between fixed costs per unit and variable
fixed salary plan. If the change is adopted, the company’s costs per unit, as total volume increases?

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 Activity Cost Analysis
A. Fixed cost per unit stays the same and variable cost per unit stays the same. 35. The equation(s) required for applying the least squares method in the computation of fixed and
B. Fixed cost per unit stays the same and variable cost per unit increases. variable production costs could be expressed as
C. Fixed cost per unit increases and variable cost per unit increases. A. Σxy = ax + b Σx2 C. Σ y = na + b Σx
D. Fixed cost per unit decreases and variable cost per unit stays the same. Bobadilla B. y = a + bx2 D. Σxy = aΣx + b Σx2
Σxy = na + b Σx Σy = na + bΣx Bobadilla
28. Within the relevant range, the difference between variable costs and fixed costs is:
A. variable costs per unit fluctuate and fixed cost per unit remains constant. 36. Weaknesses of the high-low method include all of the following except
B. variable cost per unit is constant and fixed cost per unit fluctuates. A. Only two observations are used to develop the cost function.
C. both total variable cost and total fixed cost are constant. B. The high and low activity levels may not be representative.
D. both total variable cost and total fixed cost fluctuate. Bobadilla C. the method does not detect if the cost behavior is nonlinear.
D. the mathematical calculations are relatively complex. Bobadilla
29. The learning curve in cost estimation is a good example of:
A. non-linear cost behavior. C. simple regression. 37. Which of the following methods estimates costs by identifying costs as variable or fixed based
B. machine-intensive production. D. a random variable. Bobadilla on qualitative analysis?
A. Regression analysis C. Engineering method
30. Cost estimation is the process of B. Account analysis D. High-low method Bobadilla
A. estimating the relationship between costs and the cost drivers that cause those costs.
B. documenting costs in terms of direct and indirect costs. 38. Account analysis as compared to the engineering method
C. summarizing past costs into fixed and variable components. A. relies on past data.
D. all of the above. Bobadilla B. relies on present and future data.
C. measures the work involved in the activities that go into a product.
31. Which of the following methods is used to estimate costs? D. a and c. Bobadilla
A. Account analysis C. Engineering method
B. High-low method D. All of the above Bobadilla 39. Which of the following methods may be used to estimate costs by using time-and-motion
studies to approximate labor time?
32. For analysis purposes, the high-low method usually produces a(n) A. Regression analysis C. Engineering method
A. reasonable estimate. C. overstated estimate. B. Account analysis D. High-low method Bobadilla
B. precise estimate. D. understated estimate. Bobadilla
40. The cost estimation method that gives the most mathematically precise cost prediction
33. The high-low method is criticized because it equation is
A. is not a graphical method. A. the high-low method C. the scatter-diagram method
B. is a mathematical method. B. the contribution margin method D. regression analysis Bobadilla
C. ignores much of the available data by concentrating on only the extreme points.
D. does not provide reasonable estimates. Bobadilla 41. Regression analysis is better than the high-low method of cost estimation because regression
analysis:
34. The high-low method may give unsatisfactory results if A. is more mathematical. C. fits its data into a mathematical equation.
A. the data points all fall on a line. C. the points are not representative. B. uses all the data points, not just two. D. takes more time to do. Bobadilla
B. volume of activity is heavy. D. volume of activity is light. Bobadilla
42. In regression analysis, what does the variable "X" stand for in the model Y = a + bX + e?
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 Activity Cost Analysis
A. The amount of the dependent variable, the cost to be estimated. A. can be used to estimate costs for totally new activities.
B. The regression error, which is the distance between the regression line and the data point. B. can detail each step required to perform an operation.
C. The value for the independent variable, the cost driver for the cost to be estimated; there C. sometimes can be quite expensive to use.
may be one or more cost drivers. D. all of the above are true. Bobadilla
D. The unit variable cost, also called the coefficient of the independent variable. Bobadilla
50. The correlation coefficient or R-squared (R2) is interpreted as:
43. Simple regression is A. the minimum distance between the regression line and a single data point.
A. a regression equation with more than one independent variable. B. the measure of the linear relationship between two or more variables.
B. a regression equation with more than one dependent variable. C. a determination of whether the data point is considered to be an "outlier."
C. a regression equation with more than one independent and dependent variables. D. the proportion of the variation in the dependent variable explained by the independent
D. a regression that considers all unknown factors. Bobadilla variable. Bobadilla

44. Regression shows 51. The closeness of the relationship between the cost and the activity is called
A. the proportion of the variation of dependent variable explained by dependent variables. A. correlation C. spurious
B. the proportion of the variation of independent variable explained by the independent B. regression analysis D. manufacturing overhead Bobadilla
variables.
C. the proportion of the variation of dependent variable explained by the independent 52. R-squared is a measure of
variables. A. the spurious relationship between cost and activity
D. none of the above. Bobadilla B. the fixed cost component
C. the variable cost per unit of activity Bobadilla
45. In the method of least squares, the deviation is the difference between the D. how well the regression line accounts for the changes in the dependent variable
A. predicted and estimated costs. C. predicted and average costs.
B. predicted and actual costs. D. average and actual costs. Bobadilla 53. The principal advantage of the scatter-diagram method over the high-low method of cost
estimation is that the scatter-diagram method
46. A cost-predicting equation determined through regression analysis A. includes cost outside the relevant range.
A. always gives close predictions. B. considers more than two points.
B. will not work any better than one obtained using the high-low method. C. can be used with more types of costs than the high-low method.
C. can be used only for costs that vary with sales of production. D. gives a precise mathematical fit of the points to the line. Bobadilla
D. could be severely affected by outliers. Bobadilla
54. The major objective of preparing a scatter-diagram is to
47. In the cost equation TC = F + VX, the X term is: A. develop an equation to predict future costs.
A. total fixed costs. C. unit variable cost. B. perform regression analysis on the results.
B. total variable costs. D. activity units. Bobadilla C. determine the relevant range. Bobadilla
D. find the high and low points to use for the high-low method of estimating costs.
48. Which of the following methods would be best for estimating costs for totally new activities?
A. Engineering method C. Scattergraph method 55. Advantages of the method of least squares over the high-low method include all of the
B. Account analysis method D. High-Low method Bobadilla following except
A. a statistical method is used to mathematically derive the cost function
49. The engineering method of estimating costs: B. only two points are used to develop the cost function

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 Activity Cost Analysis
C. the squared differences between actual observations and the line (cost function) are unit requires five minutes of direct labor. Harem Company’s budgeted overhead for the month
minimized is
D. all the observations have an effect on the cost function Bobadilla A. P 12,800 C. P 84,800
B. P 18,800 D. P774,000 Bobadilla
56. The scatter diagram method of cost estimation
3
A. is influenced by extreme observations . Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000
B. requires the use of judgment and 60,000 units of budgeted output, respectively. Because of the need for additional facilities,
C. uses the least-squares method budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for
D. is superior to other methods in its ability to distinguish between discretionary and 50,000 units. How much is Jordan’s budgeted variable cost per unit of output?
committed fixed costs Bobadilla A. P 7.50 C. P30.00
B. P16.00 D. P62.50 Bobadilla
4
PROBLEMS: . Deakin Company is preparing a flexible budget for the coming year and the following
maximum capacity estimates for Department OZ are available:
1
. Nite Corporation has developed the following flexible budget formula for annual indirect labor Direct labor hours 60,000
costs: Variable factory overhead P150,000
Total Cost = P480,000 + P5.00 per machine hour Fixed factory overhead P240,000
Operating budgets for the current month are based upon 20,000 machine hours of planned Assume that Deakin’s normal capacity is 80% of maximum capacity. What would be the total
machine time. Indirect labor costs included in this planning budget are: factory overhead rate, based on direct labors, in a flexible budget at normal capacity?
A. P 48,333 C. P580,000 A. P6.00 C. P6.50
B. P100,000 D. P140,000 Bobadilla B. P7.50 D. P8.13 Bobadilla
2
. Harem Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct
labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each 3
. Answer: C
The solution can be made using an equation approach:
a = y – bX
1
. Answer: D (P2,300,000 – 50,000X)1.25 = P2,800,000 – 60,000X
Monthly fixed costs 480,000 / 12 P 40,000 2,875,000 – 62,500X = 2,800,000 – 60,000X
Variable 20,000 x 5 100,000 2,500X = 75,000
Total P140,000 X = P30
2 4
. Answer: B . Answer: B
Monthly budgeted fixed cost (72,000/12) P 6,000 Variable factory overhead (150,000/60,000) P2.50
Variable cost based on actual units: Fixed overhead [240,000/(60,000 x 0.80) 5.00
Number of hours allowed Total rate P7.50
(96,000 x 5/60)= 8,000 hours
Variable cost: 8,000 x 1.60 12,800 Note: Variable rate per activity unit is constant. Fixed overhead per unit behaves inversely
Budgeted overhead cost P18,800 with the activity-unit level.

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 Activity Cost Analysis
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 What would be the expected operating costs, assuming that the occupancy rate increases to
made 1,100 desks at a cost of P46,000. Using the high-low method of cost estimation, total 60 percent during November?
fixed costs in August are: A. P1,056,000 C. P 756,000
A. P56,000 C. P17,600 B. P 846,000 D. P 829,500 Bobadilla
B. P28,400 D. P38,400 Bobadilla
7
. The controller of Jema Company has requested a quick estimate of the manufacturing
6
. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 supplies that it needs for the month of July when the expected production are 470,000 units.
percent of the rooms are occupied each day. The company’s operating cost is P21 per Below are the actual data from the prior three months of operations.
occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure Production in units Manufacturing supplies
contains both variable and fixed cost elements. During October, the occupancy dropped to March 450,000 P723,060
only 45 percent. A total of P792,000 in operating costs were incurred during the month. April 540,000 853,560
May 480,000 766,560
5
. Answer: B Using these data and the high-low method, what is the reasonable estimate of the cost of
Variable rate = (∆ in activity cost)/(∆ in activity level) manufacturing supplies that would be needed for July? (Assume that this activity is within the
= (P84,000 – P46,000)/(3,500 – 1,100) relevant range.)
= P16.00 A. P 805,284 C. P 755,196
B. P1,188,756 D. P 752,060 Bobadilla
Fixed cost a = y – bx
a = P46,000 – (1,100 x 16)
a = P28,400
6
. Answer: B
Days Occupancy:
70% -- 2,000 x 30 days x 0.7 42,000
45% -- 2,000 x 30 days x 0.45 27,000

Variable cost per Room Day:

P6.00
7
Fixed costs: 792,000 – (27,000 x 6) P630,000 . Answer: D
b = (853.560 – 723,060) ÷ (540,000 – 450,000)
Cost at 60% rate: 130,500 ÷ 90,000 P 1.45
Variable:
2,000 x 30 x 0.6 x P6 P216,000 a = 853,560 – (540,000 x 1.45) P 70,560
Fixed 630,000
Y = 70,560 + 1.45b
Total P846,000 = 70,560 + (470,000 x 1.45) P752,060

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 Activity Cost Analysis
8
. The following activity and cost data that were provided by Hoist Corporation would help in A. 10,625 units. C. 6,250 units.
estimating its future maintenance costs: B. 4,375 units. D. 5,250 units. Bobadilla
Units Maintenance Cost
10
3 P450 . Balsy Company has provided the following data for maintenance cost:
7 P530 Prior Year Current Year
11 P640 Machine hours 12,500 15,000
15 P700 Maintenance cost P27,000 P31,000
Using the least-squares regression method to estimate the cost formula, the expected total The best estimate of the cost formula for maintenance would be:
cost for an activity level of 10 units would be closest to: A. P21,625 per year plus P0.625 per machine hour.
A. P612.50. C. P595.84. B. P 7,000 per year plus P0.625 per machine hour.
B. P581.82. D. P601.50. Bobadilla C. P 7,000 per year plus P1.60 per machine hour.
9
D. P27,000 per year plus P1.60 per machine hour. Bobadilla
. Given the cost formula Y = P17,500 + P4X, at what level of activity will total cost be P42,500?
11
. Almond Company wishes to determine the fixed portion of its maintenance expense (a
8
. Answer: D semi-variable expense), as measured against direct labor hours for the first Malayan three
∑X = 36 months of the year. The inspection costs are fixed; however, the adjustments necessitated by
∑Y = 2,320
∑XY = 22,600
∑X2 = 404 4X = 42,500 – 17,500
4X = 25,000
∑Y = na + b∑X
∑XY = as + b∑X2 X = 6,250
10
2,320 = 4a + 36b . Answer: C
22,600 = 36a + 404b b = (31,000 – 27,000) ÷ (15,000 – 12,500)
20,880 = 36a + 324b 4,000 ÷ 2,500
1,720 = 80b b = 1.6
b = 21.50
a = 31,000 - (15,000 x 1.60)
2,320 = 4a + (36 x 21.50) a = 7,000
2,320 = 4a + 774
4a = 1,546 Y = 7,000 + 1.60X
a = 386.50
11
. Answer: B
Y = 386.50 + 21.50 X Variable Rate =
Y = 386.50 + (10 x 21.50) = 0.8333
Y = 601.50
Fixed : 61,000 – (34,000 x .8333)= 32,677
9
. Answer: C
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 Activity Cost Analysis
13
errors found during inspection account for the variable portion of the maintenance costs. . In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is
Information for the first Malayan quarter is as follows: direct labor hours. According to this equation, a 100-hour change in total direct labor hours will
Direct Labor Hours Maintenance Costs change the cost of workers compensation insurance by
January 34,000 P61,000 A. P4,000. C. P4,300.
February 31,000 58,500 B. P 300. D. none of the above amounts. Bobadilla
March 34,000 61,000
14
What is the fixed portion of Almond Company’s maintenance expense, rounded to the nearest . Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units,
pesos? P1,000 of product level costs for 40 products, and P3,500 of customer-level costs for ten
A. P28,330 C. P37,200 customers. The cost of Job 002 which used 800 unit level activities, 4 product level activities,
B. P32,677 D. P40,800 Bobadilla and one customer-level activities amounts to
A. P3,650 C. P3,050
12
. Clone Machinery had the following experience regarding power costs: B. P3,250 D. P2,950 Bobadilla
Month Machine hours Power cost 15
. It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production
Jan. 300 P680
doubles, the average time (per unit) needed to make 8 units would be
Feb. 600 720
A. 4.90 minutes C. 3.33 minutes
Mar. 400 695
B. 3.43 minutes D. 3.23 minutes Bobadilla
Apr. 200 640
Assume that management expects 500 machine hours in May. Using the high-low method, 13
calculate Clone's power cost using machine hours as the basis for prediction. . Answer: B
A. P 700 C. P 710 ∆Y = 100 x 3 P300
B. P 705 D. P1,320 Bobadilla
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.
14
. Answer: A
Unit level costs: P12000 ÷ 3000 x 800 P3,200
Product level costs: P1,000 ÷ 40 x 4 100
Customer level costs: P3,500 ÷ 10 350
12
. Answer: A Cost of Job 002 P3,650
b = (720 – 640) ÷ (600 - 200)
80 ÷ 400 P0.20 Within a relevant range, the amount of fixed cost remain constant at P4,000. The only cost that
will charge in total is variable cost between every additional hour will be accompanied by an
a = 720 – (600 x .2) increase of P3.
720 – 120 P600
15
. Answer: B
Total Cost for month of May Total number of minutes used after completing 8 units:
Y = 600 + (500 x 0.2) P700 (10 × .7 × .7 × .7) 3.43

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 Activity Cost Analysis
18
. The Shepherd Company’s president would like to know the estimated fixed and variable
16
. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for components of a particular cost. Actual data for this cost for four recent periods appear below.
P6,000. Assuming a cumulative learning curve of 90% as production doubles, the incremental Activity Cost
cost of the third and fourth items will be Period 1 24 P174
A. P 0 C. P2,160 Period 2 25 179
B. P 600 D. P1,250 Bobadilla Period 3 20 165
Period 4 22 169
17
. At a sales level of P300,000, Jamaica Company's gross margin is P15,000 less than its Using the least-squares regression method, what is the cost formula for this cost?
contribution margin, its net income is P50,000, and its selling and administrative expenses A. Y = P 0.00 + P7.55X C. Y = P103.38 + P3.00X
total P120,000. At this sales level, its contribution margin would be: B. Y = P110.44 + P2.70X D. Y = P113.35 + P0.89X Bobadilla
A. P250,000. C. P170,000.
B. P155,000. D. P185,000. Bobadilla 19
. 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
18
. Answer: B
∑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
16
. Answer: C 39.75 = 14.75b
Cumulative average after completing 4 units:
1,500 × .9 × .9 P1,215 b = P2.70

Total costs of 4 units 4 x P1,215 P4,860 687 = 4a + (91 X 2.695)

Less total costs of first 2 units 1,500 x 0.9 x 2 2,700 687 = 4a + 245.25
4a = 441.75
Additional costs P2,160 a = P110.44
17
. Answer: D Y = P110.44 + P2.70X
Net income P 50,000
19
Add: selling and admin. Expense 120,000 . Answer: C
Gross Margin 170,000 Variable OH rate P 2.00
Add: excess of contribution margin over gross margin 15,000 Fixed OH rate (340,000 ÷ 425,000) 0.80
Contribution Margin P185,000 Total OH rate P 2.80

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 Activity Cost Analysis
22
is P2. The company's relevant range is from 200,000 to 600,000 machine hours. Sams . Data to be used in applying the high-low method shows the highest cost of P69,000 and the
Company expects to operate at 425,000 machine hours for the coming year. The plant's lowest cost of P52,000. The data shows P148,000 as the highest level of sales and P97,000
theoretical capacity is 850,000. The predetermined overhead rate per machine hour should be as the lowest level. What is the variable cost per peso sales?
A. P2.40. C. P2.80. A. P0.33. C. P0.54.
B. P2.57. D. P2.85. Bobadilla B. P0.47. D. P3.00 Bobadilla
20 23
. The Overland Company wants to develop a cost estimating equation for its monthly cost of . The following information is available for maintenance costs:
electricity. It has the following data:
Month Electricity Cost Direct Labor Hours 22
. Answer: B
January P6,750 1,500 Contribution margin per unit:
April 7,500 1,700 (P154,000 + P26,000) ÷ 12,000 units P15.00
July 8,500 2,000 Variable cost per unit: P20.00 – P15.00 P 5.00
October 7,250 1,600
Using the high-low method, what is the best equation? 23
. Answer: B
A. Y = P 750 + P5.00X C. Y = P 750 + P3.50X ∑X = 1,150,000
B. Y = P1,500 + P3.50X D. Y = P1,500 + P5.00X Bobadilla ∑Y = 3,110,000
∑XY = 770,900 Million
21
. During the month of June, Behold Corporation produced 12,000 units and sold them for P20 ∑X2 = 307, 100 Million
per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000.
Based on the foregoing information, the variable cost per unit for the month of June was The least-squares method is based on the cost model
A. P4.50 C. P6.00 Y = a + bX
B. P5.00 D. P7.17 Bobadilla
I. Since all the observations are included, all the values are summed up:
∑Y = na + b∑X

II. To minimize distortion, the first equation is made bigger by multiplying it by ∑X.
20
. Answer: B ∑XY = a∑X + b∑X2
b = (8,500 – 6,750) ÷ ( 2,000 – 1,500)
= 1,750 ÷ 500 III. Solve for values of b and a
b = 3.50 Eq. 1: 3.11 = .000005 + 1.15b
a = 8,500 – (2,000 x 3.5) Eq. 2: 770,900 = 1.15a + 307,100b
a = 1,500 715,300 = 1.15a + 264,500b
y = 1,500 + 3.50X 55, 600 = 42, 600b
b = P1.305164
21
. Answer: A
Change in cost ÷ Change in sales = Variable cost per peso sale 770,900 = 1.15a + ( 307,100 x 1.31)
(P69,000 – P52,000) ÷ (P148,000 – P97,000) 1.15a = 370,085
P17,000 ÷ P51,000 = P0.333. a = P320, 520

60
 Activity Cost Analysis
Month Production Volume Maintenance Costs A. P1,750 C. P1,200
June 150,000 P500,000 B. P1,500 D. P 900 Bobadilla
July 230,000 620,000
25
August 380,000 800,000 . At a sales level of P300,000, Java Company's gross margin is P15,000 less than its
September 120,000 480,000 contribution margin, its net income is P50,000, and its selling and administrative expenses
October 270,000 710,000 total P120,000. At this sales level, its contribution margin would be:
Using the least squares, the estimate of the fixed portion of maintenance costs (rounded to A. P250,000. C. P170,000.
thousand pesos) is B. P155,000. D. P185,000. Bobadilla
A. P131,000 C. P332,000
B. P321,000 D. P115,000 Bobadilla Question Nos. 26 and 27 are based on the following information:
SERAL Company is a manufacturing entity whose total factory overhead costs fluctuate
24
. Tomas Ocampo has just been appointed chairperson of the Accountancy Department of ADEB considerably from year to year according to increases and decrease in the number of direct labor
College. In reviewing the department’s cost records, Tomas has found the following total cost hours worked in the plant. Total factory overhead costs at high and low levels of activity for recent
associated with MAS Part 2 subject over the last several terms: years follow:
Semester/Term Number of Subjects Offered Total Cost Low High
AY2004, First Semester 4 P10,000 Direct labor hours 50,000 75,000
AY2004, Second Semester 6 14,000 Total factory overhead costs P14,250,000 P17,625,000
AY2004, Summer 2 7,000
AY2005, First Semester 5 13,000 The factory overhead costs above consist of indirect materials, rent, and maintenance. The
AY2005, Second Semester 3 9,500 company has analyzed these costs at the 50,000-hour level of activity as follows:
Tomas knows that there are some variable costs, such as amounts paid to student assistants, Indirect materials (V) P 5,000,000
associated with the course. He would like to have variable and fixed cost components 25
separated for planning purposes. . Answer: D
Using the least-squares method, what is the variable cost per section of MAS? Net income

P 50,000
24
. Answer: A Add Fixed Costs:
∑X = 20
∑Y = 53,500
∑XY = 231,500 Manufacturing
∑X2 = 90 P 15,000

53,500 = 5a + 20b Selling and administrative

231,500 = 20 + 90b 120,000
214,000 = 20a + 80b 135,000
17,500 = 10b Total Contribution Margin

b = P1,750 P185,000

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 Activity Cost Analysis
Rent (F) 6,000,000 The Bora Hotel’s guest-days of occupancy and custodial supplies expense over the last seven
Maintenance (M) 3,250,000 months were:
Total factory overhead costs P14,250,000 Month Guest-Days of Occupancy Custodial Supplies Expense
March 40,000 P 75,000
V = variable; F = fixed; M = mixed April 65,000 82,500
May 80,000 105,000
26
. How much of the P17,625,000 factory overhead cost at the high level of activity consist of June 105,000 120,000
maintenance cost? July 120,000 135,000
A. P4,125,000 C. P4,450,000 August 90,000 107,500
B. P4,220,000 D. P4,525,000 Bobadilla September 75,000 97,500
27
. What total factory overhead costs would you expect the company to incur at an operating level 28
. Using the high-low method, what is the estimated monthly fixed cost for custodial supplies?
of 70,000 direct labor hours? A. P67,500 C. P42,500
A. P16,950,000 C. P13,000,000 B. P45,000 D. P40,000 Bobadilla
B. P13,950,000 D. P10,950,000 Bobadilla
29
. Using the high-low method in calculating the cost formula for custodial supplies, what amount
Question Nos. 28 and 29 will be answered using the following data: of this expense would you expect to be incurred at an occupancy level of 110,000 guests?
A. P 92,500 C. P110,000
26
. Answer: A B. P 98,750 D. P127,500 Bobadilla
Maintenance cost at high level:
Total factory overhead P17,625,000 Question Nos. 30 through 32 are based on the following:
Less: Indirect materials (variable) 75,000 x P100 ( 7,500,000) St John Hospital contains 450 beds. The average occupancy rate is 80 percent per month. In other
Rent (fixed) ( 6,000,000) words, on average, 80 percent of the hospital’s beds are occupied by patients. At this level of
Amount of maintenance cost P 4,125,000 occupancy, the hospital’s operating costs are P32 per occupied bed per day, assuming a 30-day
month. This P32 figure contains both variable and fixed cost components.
27
. Answer: A
Analysis of maintenance cost During the month of June, the hospital’s occupancy rate was only 60 percent. A total of P326,700
b = (P4,125,000 – P3,250,000) ÷ (75,000 – 50,000) in operating cost was incurred during that month.
b = 875,000 ÷ 25,000
b = P35
28
a = P3,250,000 – (50,000 x P35) . Answer: B
a = P1,500,000 b = (135,000 – 75,000) ÷ (120,000 – 40,000) 60,000 ÷ 80,000 P0.75
a = P75,000 – (40,000 x 0.75) P45,000
Indirect materials 70,000 x 100 P 7,000,000
29
Rent 6,000,000 Answer: D
Maintenance 500,000 + (70,000 x 35) 3,950,000 Y = P45,000 + P0.75X
Total Overhead costs P16,950,000 Y = P45,000 + (110,000 x P0.75) P127,500

62
 Activity Cost Analysis
30
. Using the high-low method, the amount of variable cost per occupied bed per cay is
33
A. P 7.00 C. P12.00 . The variable cost for maintenance per machine hour is:
B. P 9.00 D. P15.00 Bobadilla A. P1.30. C. P0.75.
B. P1.44. D. P1.35. Bobadilla
31
. Using the variable cost as determined in number 36, the total fixed operating costs per month
34
are: . The total fixed overhead cost for Omara is:
A. P240,000 C. P290,000 A. P115,000. C. P 60,000.
B. P270,000 D. P300,000 Bobadilla B. P130,000. D. P 55,000. Bobadilla
32 35
. Assuming an occupancy rate of 75 percent in a particular month, what amount of total . If 110,000 machine hours of activity are projected for the next period, total expected overhead
operating costs would you expect the hospital to incur? cost would be:
A. P310,000 C. P340,875 A. P256,000. C. P306,625.
B. P315,500 D. P375,500 Bobadilla B. P263,500. D. P242,500. Bobadilla
36
Question Nos. 33 through 35 are based on the following: . The following data were compiled from the records of Cabral Company:
In the Omara 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 33
. Answer: C
P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At b = (P130,000 – P115,000) ÷ (100,000 – 80,000)
100,000 machine hours, maintenance costs were P130,000. P15,000 ÷ 20,000 P0.75
Assume that all of the activity levels mentioned in this problem are within the relevant range. 34
. Answer: A
a = P130,000 – (10,000 x P0.75)
30
. Answer: A a = P55,000
Number of bed days based on occupancy rate of:
80% = 450 x 30 x 0.8 10,800 Total fixed overhead:
60% = 450 x 30 x 0.6 8,100 Maintenance Cost P 55,000
Depreciation 60,000
b= Total P115,000
35
18,900 ÷ 2,700 P7 . Answer: B
Utilities 110,000 x P0.6 P 66,000
31
. Answer: B Maintenance P55,000 + (110,000 x P0.75) 137,500
a = P326,700 – (8,100 x P7) P270,000 Depreciation 60,000
Total P263,500
32
. Answer: C
36
Number of bed days at 75% occupancy rate . Answer: B
0.75 x 30 x 450 = 10,125 b = (P775 - P550) ÷ (650 - 420)
Y = P270,000 + (10,125 x P7) P340,875 P225 ÷ 230

63
 Activity Cost Analysis
38
Month Usage Cost . The following information pertains to data that have been gathered in the process of estimating
Jan. 600 P750 a simple least squares regression:
Feb. 650 775 Mean value of the dependent variable 30
Mar. 420 550 Mean value of the independent variable 10
Apr. 500 650 Coefficient of the independent variable 3
May 450 570 Number of observations 12
Using the high-low method, what is the fixed cost element (to the nearest peso)? What is the "a" value for the least squares regression model?
A. P225 C. P411 A. 20
B. P138 D. P364 Bobadilla B. 6
C. 0
37
. The following information was taken from a computer printout generated with the least squares D. The intercept term cannot be computed from the information given. Bobadilla
method for use in estimating overhead costs: 39
Slope 90 . TransEx Company operates a fleet of delivery trucks in Luzon. The company has determined
Intercept 11400 that if a truck is driven 105,000 kilometers during a year, the average operating cost is P11.40
Correlation coefficient 0.6 per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating
Activity variable Direct labor hours cost increases to P13.40 per kilometer. Assuming that in a given year, a truck were driven
The cost formula is 80,000 kilometers, what total cost would you expect to be incurred?
A. Overhead = P11,400 – P90X C. Overhead = P11,400 + P90X A. P1,012,000 C. P1,225,143
B. Overhead = P11,400 + (P45 x .6) D. Overhead = P11,400 x .6 Bobadilla
38
. Answer: C
Y = 12 x 30
= P360

a = P360 – (12 x 3 x 10)

=0
39
. Answer: A
b=
b= P0.98
b = (P1,197,000 – P938,000) ÷ 35,000
a = P775 - (650 x 0.98) b = P7.40
= P775 - 637
a = P938,000 – (70,000 x P7.40)
a = P138.00 a = P420,000
37
. Answer: C Y = P420,000 + P7.40X
Slope represents the variable rate. Y = P420,000 + (80,000 x 7.40)
Intercept represents total fixed cost = P1,012,000

64
 Activity Cost Analysis
41
B. P1,407,000 D. P1,072,000 Bobadilla . Given the cost formula Y = P30,000 + P5X, total cost at an activity level of 16,000 units would
be:
Question Nos. 40 through 41 are based on the following: A. P 30,000. C. P 80,000.
The House of TROPS Company is a large retailer of sports equipment. An income statement for B. P 46,000. D. P110,000. Bobadilla
the company’s Ski Department for a recent quarter is presented as follows:
Question Nos. 42 through 45 are based on the following:
The House of TROPS Company A local church wants to rent a hall for P3,000 a day to hold a Bingo fundraiser. Every session of
Income Statement bingo requires a caller for P200. There are supplies that are needed that cost P3 per person
For the Quarter Ended March 31 playing bingo. On an average each bingo player spends P20 and 1,000 people attend each
session. P10,000 in prizes are awarded each session.
Sales P1,500,000
42
Less cost of goods sold 900,000 . Total costs for 1 session can be classified as:
Gross margin 600,000 Bobadilla A. B. C. D.
Less operating expenses: Fixed Costs P13,200 P 3,000 P13,200 P10,000
Selling expenses P300,000 Variable Costs P3 P13,200 P 3,000 P 3,200
Administrative expenses 100,000 400,000
Net income P 200,000 43
. The church conducts 1 Bingo session per month. Over the course of the year, which cost
would not act as a variable cost based on just holding one more session?
Skis sell, on the average, for P7,500. Variable selling expenses are P500 per pair of skis sold. The A. Hall rental. C. Caller salary.
remaining selling expenses are fixed. The administrative expenses are 20 percent variable and 80 B. Cost of supplies. D. Prize money. Bobadilla
percent fixed. The company does not manufacture its own skis; it purchases them from a supplier
for P4,500 per pair. 41
. Answer: D
The total cost at an activity level of 16,000 units is determined as follows:
40
. What is the variable cost per pair of skis? Total cost = P30,000 + (16,000 units x P5.00 per unit) P110,000
A. P 900,000 C. P1,000,000
B. P 920,000 D. P1,020,000 Bobadilla 42
. Answer: C
Total Fixed Costs include:
Rental P 3,000
Cost of the caller 200
Prize money P10,000
Total P13,200
40
. Answer: D
Number of units sold = 1,500,000 ÷ 7,500 200 Total Variable costs are:
P3 per person for the 1,000 people attending P 3,000
Costs of goods sold = P200 x 4,500 P900,000
43
Variable selling expenses 200 x 500 P100,000 . Answer: B
Variable administrative expenses 0.20 x 100000 20,000 The cost of supplies varies based upon the number of players that attend each session not just
Total P1,020,000 the number of sessions

65
 Activity Cost Analysis
46
. Which of the above costs behaves as a Variable Cost?
44
. If the church conducts 12 sessions and 1,000 people attend each session, the average cost A. Rent. C. Cost of Goods sold.
per session is? B. Salary. D. Depreciation. Bobadilla
A. P 9,600. C. P15,200.
47
B. P14,700. D. P16,200. Bobadilla . Which of the above costs behaves as a Mixed Cost?
A. Rent. C. Cost of Goods sold.
45
. The church is thinking of holding 2 Bingo sessions per day with 1,000 people attending each B. Salary. D. Depreciation. Bobadilla
session. If they hold the 2 sessions, the average cost per session is?
48
A. P 9,600. C. P15,200. . Which one does not contain any fixed cost behavior?
B. P14,700. D. P16,200. Bobadilla A. Rent. C. Cost of goods sold.
B. Salary. D. Depreciation. Bobadilla
Use the following Information to answer Question Nos. 46 through 51.
Units Sold @ P60/each 46
. Answer: C
1,000 2,000 3,000 Cost of Goods sold is P15 per unit. A variable cost is one which is constant per unit.
Salary P20,000 P30,000 P40,000 Unit sales
Cost of Goods Sold 15,000 30,000 45,000 Unit Variable Cost
Cost/Unit of Depreciation 300 150 100
Rent 20,000 20,000 20,000 1,000
15,000 ÷ 1,000
P15
2,000
44
. Answer: D 30,000 ÷ 2,000
Total costs: (P3,000 + P13,200) P16,200 P15
3,000
If the number of people attending each session is the same, all of the costs act like variable 45,000 ÷ 3,000
costs and the average cost per session equals the total cost per session. P15
45 47
. Answer: B . Answer: B
If they hold 2 sessions per day: The salary is a mixed cost. Notice that the cost per unit and in total for each volume level are
Hall Rental P 3,000 not the same. There is a variable cost component of P10 per unit and a fixed cost component
Caller salary (2 x P200) 400 of P10,000. Within a relevant range, unit variable cost as well as total fixed cost are constant.
Total prize money 20,000
Total cost of supplies 6,000 Variable cost (30,000 – 20,000) ÷ (2,000 – 1,000) P 10
Total P29,400 Fixed cost 20,000 – (1,000 x 10) P10,000
Average cost per session P29,400 ÷ 2 sessions P14,700
48
. Answer: C
The hall Rental is fixed per day and not per session. The prize money and cost of the caller Cost of Goods Sold is a variable cost. Rent and Depreciation are fixed costs. Salary is a mixed
varies per session and the cost of supplies varies per person attending. cost that has some fixed cost behavior.

66
 Activity Cost Analysis
A. P58,000 and 42,000 hours C. P56,000 and 43,000 hours
49
. If 3,000 units are sold what is the contribution margin? B. P58,000 and 43,000 hours D. P56,000 and 42,000 hours
A. P 75,000. C. P135,000.
B. P105,000. D. P180,000. Use the following simple regression results based on the data from the Madrigal Corporation to
answer Question Nos. 52 and 53.
50
. What is total fixed cost? Dependent variable – Machine maintenance costs
A. P50,000. C. P60,100. Independent variable – Machine hours
B. P60,000. D. P90,000. Computed values
Intercept P3,500
51
. Given the following information, choose the cost and activity that would be used as the high Coefficient on independent variable P 3.50
data point in high-low cost estimation: Coefficient of correlation 0.856
Costs Activity (hours) R2 0.733
P51,000 40,000
52
P50,000 41,000 . What percentage of the variation in maintenance costs is explained by the independent
P58,000 42,000 variable?
P56,000 43,000 A. 85.6% C. 47.3%
B. 95.2% D. 73.3%
49
. Answer: B 53
Sales P60 * 3000 units P180,000 . What is the total maintenance cost for an estimated activity level of 20,000 machine hours?
Total Variable Cost 75,000 A. P73,500 C. P82,300
Contribution Margin P105,000 B. P78,400 D. P84,750

Total variable cost:

Cost of goods sold P45,000
Variable salary cost 30,000
Total P75,000
50
. Answer: B
Rent P20,000 52
. Answer: D
Depreciation 30,000 The question does not require a computation. R2 (goodness of fit) indicates the percentage of
Fixed salary cost 10,000 the variation in the dependent variable (cost) that is explained by variation in the independent
Total fixed costs P60,000 variable (activity). The adjusted R2 varies from zero to 100%, and the higher the percentage,
the better.
51
. Answer: C
To analyze mixed cost using high-low method, the analyst always identifies and uses the 53
. Answer: A
lowest and the highest levels of activities. The reason is that the activity presumably causes Variable cost 20,000 x 3.5 P70,000
costs, so the analyst would like to use data that reflects the greatest possible variation in Fixed cost 3,500
activity. Total cost P73,500

67