Cost Concepts, Classification and Segregation

Drill
Problem 1
Lowa Inc. Builds tabletop replicas of some of the most famous resorts
in the Philippines. The company is highly automated and thus, maintenance
cost is a significant organizational expense. The company’s owner has
decided to use machine hours as a basis of predicting maintenance costs
and has gathered the following data from the prior 8 weeks of operations:
No. Of
Machine Maintenance
Week Hours Costs
1 3000 9,800.00
2 4500 12,900.00
3 8000 18,100.00
4 6000 13,500.00
5 9000 24,800.00
6 3500 10,400.00
7 5500 13,000.00
8 7000 16,000.00

Required:
a. Variable cost rate
b. Total Fixed Costs
c. If the company expects to use 8,200 machine hours next month, how
much is the estimated maintenance costs.
Problem 2
One of the products of Makati Inc. Goes through a glazing process. For
the last six quarters, the cost of the glazing process was observed in
relation with the number of units produced as a tabulated below:
Quarters Units Produced Total Cost
1 800 27,000.00
2 500 20,000.00
3 1000 31,000.00
4 400 19,000.00
5 600 24,000.00
6 900 29,000.00
Required:
a. Using the least square method, calculate the variable cost rate
and the total fixed costs elements of the glazing process.
b. Express the cost data in”a” above in the form Y = a + bx.
c. Assume, the company processes 1,120 units in the next qaurter, how
much is the expected glazing cost?

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Theories
1. The term relevant cost applies to all the following decision
situations except the
a. Acceptance of a special order
b. Determination of a product price
c. Replacement of equipment
d. Addition or deletion of a product line
2. A decision making concept, described as “the contribution to income
that is foregone by not using a limited source for its best
alternative use”, is called
a. Marginal cost
b. Incremental cost
c. Potential cost
d. Opportunity cost
3. In a decision analysis situation, which of the following costs is
not likely to contain a variable cost component?
a. Labor
b. Overhead
c. Depreciation
d. Selling
4. The term that refers to cost incurred in the past that are not
relevant to a future decision is
a. Full absorption cost
b. Under-allocated indirect cost
c. Sunk cost
d. Incuured marginal cost
5. In the standard cost formula Y = a + bX, what does the “a”
represent?
a. total cost
b. total fixed cost
c. total variable cost
d. variable cost per unit
6. Which of the following would usually be considered a discretionary
fixed cost for a soft drink bottling company?
a. the cost of advertising its products
b. the cost of fire insurance on its factory building
c. depreciation on its manufacturing equipment
d. both a and b above
7. Which of the following statements is true when referring to the
high-low method of cost analysis?
a. The high-low method has no major weaknesses.
b. The high-low method is very hard to apply.
c. In essence, the high-low method draws a straight line through
two data points.
d. None of the above is true.
8. The least-squares regression method:
a. fits a regression line by minimizing the sum of the squared
errors from the regression line.
b. is generally less accurate than the scattergraph method.

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 c. can be used only if the fixed cost element is larger than the
variable cost element.
d. is the only method acceptable under generally accepted
accounting principles.
9. Multiple regression analysis is used when:
a. more than one cost category must be analyzed.
b. when more than one factor causes variation in a cost.
c. the high-low method cannot be used because there is only one
observation.
d. all of the points on a scattergraph fall exactly on a regression
line.
10. Salaries of accounts receivable clerks when one clerical
worker is needed for every 750 accounts receivable is an example
of a:
a. fixed cost
b. step-variable cost
c. mixed cost
d. curvilinear cost
Problems
1. Mine and Yours Company uses a regression equation to analyze the
behavior of its transportation costs (T) as a function of travel
time (H). they developed the following equation using two years’
observation with a related coefficient of determination of 85:
T = 100,000 + P50H
If 500 hours of travel time were logged in one period, the related
estimate of total transportation costs would be
a. P110,000
b. P121,250
c. P106,250
d. P125,000
2. Jackson Inc., is preparing a flexible budget for next year and
requires a breakdown of the cost of steam used in its factory into
the fixed variable elements. The following data on the cost of
steam used and direct labor hours worked are available for the last
6 months of this year.

Month Cost of Steam Direct Labor Hours

July 15,850.00 3000
August 13,400.00 2050
September 16,370.00 2900
October 19,800.00 3650
November 17,600.00 2670
December 18,500.00 2650
101,520.00 16920

Assuming that Jackson uses the high-low method of analysis. The

estimated variable cost of steam per direct labor hour is.
a. P4.00
b. P5.42

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 c. P5.82
d. P6.00
3. In the Davao Inc., a maintenance cost is partly fixed and partly
variable in nature. At the low level of activity (150 direct labor
hours), maintenance costs total P2,100. At high level activity (270
direct labor hours), maintenance costs are P3,000. Using the high-
low method, what is the Variable Maintenance Cost per unit and the
total Fixed Maintenance Costs?
a. VMC – P7.50; FMC – P975
b. VMC – P7.50; FMC – P2,100
c. VMC – P10.00; FMC – P600
d. VMC – P10.00; FMC – P2,100
4. Mat Co. estimates its material handling costs at two activity
levels as follows:

Kilos Handled Cost

80000 160,000.00
60000 132,000.00

What is Mat’s estimated cost of handling 75,000 kilos?

a. P150,000
b. P153,000
c. P157,500
d. P132,000
5. The total production cost for 20,000 units was P21,000 and the
total production cost for making 50,000 units was P34,000. Once
production exceeds 25,000 units, additional fixed costs of P4,000
were incurred. The full production cost per unit for making 30,000
units is:
a. P0.30
b. P0.68
c. P0.84
d. P0.93
6. Hungarian Sausage wishes to analyze the fixed and variable
components of the semi-variable cost. The following information is
available:

Month Output (Units) Costs

1 1000 12,000.00
2 700 10,000.00
3 1100 14,000.00
4 800 11,000.00
5 1400 18,750.00
6 1200 15,000.00

Using the high-low method, which of the following is correct?

a. VC are P15 per unit
b. VC are P10 per unit
c. FC are P1,250 per month
d. FC are P1,000 per month

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 7.The information below relates to Derby Manufacturing Company's
operations for a recent month. (Assume that all raw materials are
direct materials.):

Purchases of raw materials .. P91,000

Direct labor cost ........... P122,000
Selling costs (total) ....... P42,000
Administrative costs (total) P56,000
Manufacturing overhead costs (total) P340,000
Raw materials inventory, beginning P22,000
Work in process inventory, beginning P27,000
Finished goods inventory, beginning P42,000
Raw materials inventory, ending P7,000
Work in process inventory, ending P35,000
Finished goods inventory, ending P15,000

What was Derby's cost of goods manufactured for the month?

a. P545,000
b. P560,000
c. P568,000
d. P587,000
8.Consider the following costs incurred in a recent period:
Direct materials .............. P33,000
Depreciation on factory equipment P12,000
Factory janitor’s salary ...... P23,000
Direct labor .................. P28,000
Utilities for factory ......... P9,000
Selling expenses .............. P16,000
Production supervisor’s salary P34,000
Administrative expenses ....... P21,000

What was the total amount of the period costs listed above for
the period?
a. P78,000
b. P71,000
c. P46,000
d. P37,000
9.The following data pertain to a recent period's operations:
Sales ........................ ?
Beginning finished goods inventory P12,000
Cost of goods manufactured.... P36,000
Ending finished goods inventory P6,000
Cost of goods sold ........... ?
Gross margin ................. 40% of Sales
Administrative and selling expenses P10,000
Net operating income ......... ?

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 Net operating income was:
a. P18,000
b. P10,000
c. P14,000
d. P46,000
10. During the month of April, LTP Company incurred P30,000 of
manufacturing overhead, P40,000 of direct labor, and purchased
P25,000 of raw materials. Between the beginning and the end of the
month, the raw materials and work in process inventories decreased
by P4,000 and P3,000, respectively. The total manufacturing costs
used in the computation of cost of goods manufactured during the
month of April was:
a. P88,000
b. P91,000
c. P99,000
d. P102,000
Ore Corporation has provided the following data for the month of June.
The beginning balance in the finished goods inventory account was P35,000
and the ending balance was P26,000. Sales totaled P220,000. Cost of goods
manufactured was P99,000, selling expense was P15,000, and
administrative expense was P46,000.
11. The cost of goods sold for June was:
A) P99,000
B) P160,000
C) P90,000
D) P108,000
12. The net operating income for June was:
A) P51,000
B) P60,000
C) P121,000
D) P130,000

Clean Corporation reported the following data for the month of

October:

Inventories: Beginning Ending

Raw materials ...... P29,000 P36,000
Work in process .... P19,000 P21,000
Finished goods ..... P55,000 P53,000

Additional information:
Raw materials purchases . P75,000
Direct labor cost ....... P45,000
Manufacturing overhead cost P64,000
Selling expense ......... P16,000
Administrative expense .. P44,000

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13. The total manufacturing cost for October was:
A) P177,000
B) P184,000
C) P64,000
D) P109,000
14.The cost of goods manufactured for October was:
A) P177,000
B) P175,000
C) P184,000
D) P179,000
Server Corporation has provided the following data for July. The
beginning balance in the raw materials inventory account was P22,000.
During the month, the company made raw materials purchases amounting to
P76,000. At the end of the month, the balance in the raw materials
inventory account was P36,000. Direct labor cost was P25,000 and
manufacturing overhead cost was P79,000. The beginning balance in the
work in process account was P11,000 and the ending balance was P20,000.
The beginning balance in the finished goods account was P43,000 and the
ending balance was P39,000.

15. The total manufacturing cost for July was:

A) P166,000
B) P104,000
C) P79,000
D) P180,000
16. The cost of goods manufactured for July was:
A) P166,000
B) P157,000
C) P180,000
D) P175,000

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