LYCEUM OF THE PHILIPPINES UNIVERSITY

MANAGEMENTADVISORYSERVICES jjaurojrtcbic
2 Cost Behavior Analysis May 2019

PROBLEMS

A. Cute Company has provided the following data for the first five months of the year:

Machine Lubrication
Hours Cost
January..................
120 P750
February................
160 P800
March....................
200 P870
April......................
150 P790
May.......................
170 P840

1.Using the high-low method of analysis, compute the estimated variable lubrication cost per
machine hour rounded to the nearest centavo

2.Using the high-low method of analysis, the compute estimated monthly fixed component of the
lubrication cost.

3. Using the least-squares regression method of analysis, the estimated variable lubrication cost
per machine hour is closest to?

4. Using the least-squares regression method of analysis, the estimated monthly fixed component
of lubrication cost is closest to:

5. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 130 is closest to:

6. Using the least-squares regression method of analysis, the estimated total lubrication cost for
June if the estimated machine hours is 130 is closest to:

7. Using the high-low method of analysis, the estimated total lubrication cost for June if the
estimated machine hours is 0 is closest to:

8. Using the least-squares regression method of analysis, the estimated total lubrication cost for
June if the estimated machine hours is 0 is closest to:

B. The following data are available for CTDI CPA Review School. Ms. Louisita Aristorenas, the
owner/review director wants to find out if class hours indeed drives utility costs. The following data
shows the number of hours spent in CPA review classes from January to October, however, for the
month of May CPD (Continuing Professional Development ) seminars were also conducted in the
review school in addition to the CPA review classes.

Month Class Hours Utility Costs(P) Month Class Hours Utility Costs(P)
Jan 7,260 2,960 Jun 4,900 1,860
Feb 8,850 3,410 Jul 4,600 2,180
Mar 4,800 1,920 Aug 8,900 3,470
Apr 9,000 3,500 Sep 5,900 2,480
May 11,000 3,900 Oct 5,500 2,310

1. What is the variable costs rate under high low method?

2. What is the fixed costs under high low method?

3. What is the variable costs rate using regression analysis?

4. What is the fixed costs using regression analysis?

C. Francis Villamin, owner/finance director of CTDI has been trying to manage supplies costs.
He recorded the following monthly data:

Month Revenues Supplies Month Revenues Supplies Month Revenues Supplies

(P) Cost(P) (P) Cost(P) (P) Cost(P)
 Jan. 53,500 3,420 Apr. 61,500 3,880 Jun. 54,600 3,445
Feb. 55,450 3,645 May 52,000 3,456 Jul. 52,570 3,280
Mar. 57,250 3,622

Assume usage is within the relevant range of activity.

Required:
1. Using the high-low method, compute the variable and fixed component of the cost.

2. CTDI estimates its revenues for August at P60,000. Compute the projected total
supplies cost for August.

3. Use a scatter diagram to derive a cost prediction equation.

4. Using the regression method from an excel output below, compute the variable and
fixed component of the cost.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.920883
R Square 0.848026
Adjusted R Square 0.817631
Standard Error 83.84407
Observations 7

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 483.7685 578.6072 0.836091 0.441216 -1003.59 1971.123
Monthly Service Revenues 0.055217 0.010454 5.282077 0.003239 0.028345 0.082088

5. Explain the meaning of the equation and its components.

6. CTDI estimates its revenues for August at P60,000. Compute the projected total supplies cost
for August.

7. If CTDI shutdowns in August is it safe to predict cost at P483.7685?

8. Is this the best equation to predict supplies costs?

D. The income statement of Guzman Health Foods are presented below.

Particular October November

(P) (P)
Sales 80,000 90,000
Cost of Sales 48,000 54,000
Gross Profit 32,000 36,000
Operating
Expenses
Selling 8,500 8,800
Administrative 9,200 9,400
Total
Operating
Expenses 17,700 18,200
Net Income 14,300 17,800

William Guzman, the owner enlist your help to develop a CVP relationship for planning and control.

Required:
1. Using the high-low method, compute the variable and fixed component of the cost of sales,
selling and administrative expenses.

2. Prepare a contribution margin income statement based on sales of P100,000.

3. Compute for the peso breakeven point.

E. Rivera Company has a 25% margin of safety. Its after tax return on sales is 6%, and its
tax rate is 40%.
Required:

1. Compute for the contribution margin ratio.

2. Compute for fixed cost assuming sales of P120,000.

F. Cristy Co. had a loss of P3 per unit when sales were 40,000 units and a loss of P1.60 per
unit at 50,000 units sales.

Required:

1. Compute contribution margin per unit.

2. Determine fixed costs.
3. Compute for the units breakeven point.

MULTIPLE CHOICE

Items 1 and 2 are based on the following information:

Total production costs of prior periods for a company are listed below. Assume that the same cost
behavior patterns can be extended linearly over the range of 3,000 to 35,000 units and that the
cost driver for each cost is the number of units produced.

Production in units per month 3,000 9,000 16,000 35,000

Cost X P23,700 P52,680 P86,490 P178,260
Cost Y 47,280 141,840 252,160 551,600

1. What is the average cost per unit at a production level of 8,000 units for cost X?
a. P5.98
b. P5.85
c. P7.90
d. P4.83

2. Identify the cost curve for the average cost per unit for cost Y.

a. Curve 1.
b. Curve 2.
c. Curve 3.
d. Curve 4.

3. Suarez Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
P127.20 per unit.

Sales volume (units)................................. 5,000 6,000

Cost of sales............................................ P419,000 P502,800
Selling and administrative costs.................. P186,500 P202,200

The best estimate of the total contribution margin when 5,300 units are sold is:
A) P230,020
 B) P51,410
C) P146,810
D) P32,330

4. Utility costs at Garcia, Inc. are a mixture of fixed and variable components. Records
indicate that utility costs are an average of P0.40 per hour at an activity level of 9,000
machine hours and P0.25 per hour at an activity level of 18,000 machine hours. Assuming
that this activity is within the relevant range, what is the expected total utility cost if the
company works 13,000 machine hours?
A) P4,225
B) P5,200
C) P4,000
D) P3,250

5. Clerical costs in the billing department of Rhea Company are a mixture of variable and
fixed components. Records indicate that average unit processing costs are P0.50 per
account processed at an activity level of 32,000 accounts. When only 22,000 accounts are
processed, the total cost of processing is P12,500. Assuming that this activity is within the
relevant range, at a budgeted level of 25,000 accounts:
A) processing costs are expected to total P8,750.
B) fixed processing costs are expected to be P10,400.
C) the variable processing costs are expected to be P0.35 per account processed.
D) processing costs are expected to total P14,975.

6. Rene, Inc., used the high-low method to derive its cost formula for electrical power cost.
According to the cost formula, the variable cost per unit of activity is P3 per machine-hour.
Total electrical power cost at the high level of activity was P7,600 and at the low level of
activity was P7,300. If the high level of activity was 1,200 machine hours, then the low
level of activity was:
A) 800 machine hours
B) 900 machine hours
C) 1,000 machine hours
D) 1,100 machine hours

7. The following production and average cost data for a month's operations have been
supplied by a company that produces a single product.

Production volume......................... 1,000 units 2,000 units

Direct materials............................. P4.00 per unit P4.00 per unit
Direct labor.................................. P3.50 per unit P3.50 per unit
Manufacturing overhead................. P10.00 per unit P6.20 per unit

The total fixed manufacturing cost and variable manufacturing cost per unit are as follows:
A) P3,600; P7.50
B) P3,600; P9.90
C) P7,600; P7.50
D) P7,600; P9.90

8. Enriquez Corporation is a wholesaler that sells a single product. Management has provided
the following cost data for two levels of monthly sales volume. The company sells the
product for P88.70 per unit.

Sales volume (units)............................ 4,000 5,000

Cost of sales...................................... P273,600 P342,000
Selling and administrative costs............ P56,800 P68,000

The best estimate of the total variable cost per unit is:
A) P68.40
B) P79.60
C) P82.60
D) P82.00

9. A company produces a single product. The following volume and average cost data for two
accounting periods have been provided by management:

Number of units............................ 500 800

Direct materials............................. P2.00 P2.00
Direct labor.................................. P1.50 P1.50
Manufacturing overhead................. P2.50 P1.75
 Other overhead............................. P1.00 P0.625

The best estimate for the cost formula for the total cost of producing and selling the
product (where X is the number of units produced and sold in a period) is:
A) P1,000 + P1.125 X
B) P1,000 + P3.50 X
C) P1,500 + P3.50 X
D) P1,500 + P4.00 X

10. 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.

11. 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.

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

13. A cost is variable if it varies with the

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

14. A non-value-adding cost is

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

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

16. RST's average cost per unit is the same at all levels of volume. Which of the following is
true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.

17. A mixed cost

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

18. A non-value-adding activity

a. cannot be a cost driver.
b. should be eliminated.
c. usually drives only variable costs.
d. cannot usually be observed by managers.

19. A cost-predicting equation determined through regression analysis

a. always gives close predictions.
b. will not work any better than one obtained using the high-low method.
c. can be used only for costs that vary with sales or production.
d. could be severely affected by outliers.
20. Which of the following do JIT operations try to eliminate?
a. Discretionary fixed costs.
b. Non-value-adding costs.
c. Avoidable costs.
d. Direct costs.

21. 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.

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

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

24. Identifying cost drivers

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

25. 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.

26. A committed fixed cost

a. can never be eliminated.
b. can be eliminated in the short-term and in the long-term.
c. can be eliminated in the long-term, but not in the short-term.
d. can be eliminated in the short-term, but not in the long-term.

27. Avoidable costs are usually

a. committed.
b. common.
c. direct.
d. fixed.

28. Direct costs are

a. associated with a specific activity.
b. always variable.
c. usually committed.
d. usually discretionary.

29. Discretionary costs

a. are usually unavoidable.
b. are not necessary for successful operations.
c. can be either direct or indirect.
d. should be the first ones cut in a cost-reduction program.

30. Predicting costs at activity levels that are outside the relevant range is called
a. association.
b. correlation.
c. extrapolation.
d. none of the above.

31. Looking at the following scatter diagrams we can conclude that

P P
 | * * | **
| * * * | ** *
| * * * * | * *
| * * | * *
| |
| |
|__________________ |__________________
activity activity
Cost A Cost B

a. cost A will be easier to predict than cost B.

b. cost B will be easier to predict than cost A.
c. cost A is out-of-control.
d. cost B has no fixed component.

32. The closeness of the relationship between the cost and the activity is called
a. correlation.
b. spurious.
c. regression analysis.
d. manufacturing overhead.

33. R-squared is a measure of

a. the spurious relationship between cost and activity.
b. the fixed cost component.
c. the variable cost per unit of activity.
d. how well the regression line accounts for the changes in the dependent variable.