MANAGEMENT SERVICES
REVIEW
2nd SEM 2023-2024
1. The following relationships pertain to activity and cost for
two different years for Smythe Company:
Direct labor hours 300,000 400,000
Total costs P 129,000 P 154,000
Pretest # 2 What are the expected fixed costs for a year?
a. P 25,000
64/158 b. P 54,000
c. P 75,000
d. P 100,000
ACCOUNTANT’S PERSPECTIVE
1. As to functions:
a. Product – DM, DL, VOH, FxOH
b. Period – administrative, marketing and distribution
2. As to product:
a. Direct – directly attributable; DM & DL
b. Indirect – Factory OH, VOH & FxOH
3. As to process:
a. Common – all department; salaries, depreciation,
COST electricity
b. Joint – for 2 or more products; not directly traced
CLASSIFICATION MANAGER’S PERSPECTIVE
1. As to segment: direct; indirect
2. As to control: controllable, uncontrollable
3. As to incurrence: avoidable, unavoidable
PROPRIETOR’S PERSPECTIVE
1. Out-of-Pocket
2. Noncash costs
Per Unit
Total
TYPE PER UNIT TOTAL
Costs as to FIXED Varies constant
Behavior VARIABLE constant Varies
Costs = Variable Costs & Fixed Costs
The term “cost” covers all costs & expenses
Operating activities are made within the relevant range
Profit = Sales – Costs
Profit = Sales – FC – VC
BASIC CM = Sales – VC
Profit = CM – FC
PRINCIPLES Margin of safety = Budgeted Sales – Breakeven Sales
MS – shows how much sales volume can be reduced
without sustaining losses
Increase in DL hours 100,000.00
Increase in Total Costs PHP 25,000.00
Variable Cost per hour PHP 0.25
F C = TC - VC
Pretest # 2 1st year 129,000 – (300,000 x .25)
PHP 54,000.00
2nd year 154,000 –(400,000 x .25)
PHP 54,000.00
1. The breakeven point in units increases
when units costs
a.Increase and sales price remains
unchanged.
Pretest # 5 b.Decrease and sales price remains
unchanged.
55/158
c. Remain unchanged and sales price
increases.
d.Increase and sales price increases.
BEP Sales = FC / CMR
BEP Units = FC / CM per unit
MS = Actual Sales – Breakeven Sales
BEP % = BEP / AS
CMR or Profit-Volume Ratio = CM/ Actual Sales
Net Profit Ratio (NPR) = MS% x CM%
BREAKEVEN Profit = Net Profit Ratio x Actual Sales
RELEVANT = (MSR x CMR) x AS
= MSR x (CM / AS) x AS
FORMULAS = MSR x AS
AS (w/ desired profit)
(1) AS = FC + DP before tax
CMR
(2) AS = FC + [DP after tax / (1 – Tax Rate)]
CMR
Total Costs 129,000.00
Fixed Costs 54,000.00
SAMPLE Variable Costs 75,000.00
PROBLEM Units Produced 10,000 units
Selling Price PHP 16.00/unit
Contribution Margin
BEP units
COMPUTE
BEP Sales
1. The best characteristics of a standard cost system is
a. standard can pinpoint responsibility and help
motivation
Pretest #7 b. all variances from standard should be reviewed
c. all significant unfavorable variances should be reviewed
26/158 d. standard cost involves cost control which is cost
reduction
1. A credit balance in the labor efficiency variance indicates
that:
a. standard hours exceed actual hours
b. actual hours exceed standard hours
Pretest #8 c. standard rate and standard hours exceed actual rate and
41/158 actual hours
d. actual rate and actual hours exceed standard rate and
standard hours
STANDARD COST
predetermined cost which is calculated from
management’s standards of efficient operation &
relevant necessary expenditure
ADVANTAGES OF STANDARD COSTING
1. Used as a basis in managerial planning
2. As an instrument in coordination
3. As a reference in cost control
Standard 4. Used in formulating price & production policies
5. Serves as a basis of giving incentives to
Costing employees
ACTUAL – was incurred for actual production
STANDARD – should have been incurred for actual
production
BUDGET – should be incurred for planned/ budgeted
production
BASIC CONCEPTS
STANDARDS
Expected norms of performance
May be qualitative (laws, policies, rules, order,
promulgations) and quantitative (pesos or metric)
REASONS FOR STANDARD SETTING
1. Motivation – set objectives, reward system,
recognition
Standard
2. Planning – predicting the future
3. Monitoring – directing and controlling
Costing
4. Evaluation – recognition and reward of society
5. Corrective Action – learning
STANDARD COSTING
Preparation & use of standard costs, their
comparisons w/ actual costs, and the analysis of
variances to their causes & points of incidence
PRODUCTION COST
VARIANCES
ACTUAL COSTS > STANDARD COSTS
Unfavorable
Addition to Standard COGS
Debit variance
Standard ACTUAL COSTS < STANDARD COSTS
Costing Favorable
Deduction from Standard COGS
Credit variance
Example: Shampoo (sachet)
Standard cost 6.00
Actual 6.50
If the Vega Division sells wheels to the Walsh Division,
Vega can avoid P 2 per wheel in sales commissions. An
outside supplier has offered to supply wheels to the Walsh
Division for P 41 each.
Suppose that Vega can sell 9,000 wheels each month to
outside consumers, so transfers to the Walsh Division cut
into outside sales. What should be the lowest acceptable
Pretest transfer price from the perspective of the Vega Division?
(VD)
# 9&10
35/158 a. P 28.00
b. P 31.75
c. P 41.00
d. P 42.00
1. In transfer pricing, if the selling division does not meet all
bona fide outside prices, then:
a. the buying division would accept the selling division’s
freedom.
Pretest b. the company should drop the market price approach and
# 9&10 use cost to control transfers.
35/158 c. the buying division should be free to purchase
outside.
d. the transfer should be made at the lowest outside price.
DEFINITION
– the amount charged by one segment of a firm for
products or services that are supplied to another segment of
the same firm. It is also known as intersegment price.
PRIMARY OBJECTIVE:
- To evaluate performance by virtually transforming cost
Transfer Pricing centers into profit centers so that performance of the
manager of mainly cost centers can be measured reliably
in terms of both revenues and expenses
SECONDARY OBJECTIVE
- To save on costs involved in producing or buying a
product by insourcing rather than outsourcing.
BASIS OF TRANSFER PRICE
- COST-BASED TRANSFER PRICE
- Variable Cost
- Full cost (Variable and fixed mftg and non-mftg
costs)
- Full absorption cost (Variable and fixed mftg costs)
- Cost-plus (Variable costs/ full costs/ full absorption
Transfer Pricing costs plus mark-up)
- MARKET-BASED TRANSFER PRICE
- Market price (Regular selling price)
- Modified market (Selling price adjusted for any
allowance for discounts, etc.)
- NEGOTIATED PRICE
- ARBITRARY PRICE
MAXIMUM VS MINIMUM TRANSFER
PRICE
For transfer pricing not to defeat its purpose, organization normally sets
a limitation as to the transfer price being charged by one segment to
another segment. To minimize the effect of sub-optimization, a range for
transfer price must be set based on the following limits
UPPER LIMIT
Maximum transfer price = Cost of buying from outside suppliers
Transfer Pricing Strictly speaking, upper limit shall be the higher amount of:
1. Cost of buying from outside suppliers, OR
2. Selling price to outside customers
LOWER LIMIT
Minimum transfer price = Variable cost per unit + Lost CM per unit
on outside sales
When a company segment is operating at full capacity, the lost
CM per unit on outside sales is the opportunity cost of transferring
products to another company segment
Wayco Industrial Supply has a pre-tax cost of
debt of 7.6 percent, a cost of equity of 14.3
percent, and a cost of preferred stock of 8.5
percent. The firm has 220,000 shares of
common stock outstanding at a market price of
Pretest #12 $27 a share. There are 25,000 shares of
preferred stock outstanding at a market price
15/158 of $41 a share. The bond issue has a face value
of $550,000 and a market quote of 101.2. The
company's tax rate is 37 percent. What is the
firm's weighted average cost of capital?
a.10.18 percent
b.10.84 percent
Pretest #12 c.11.32 percent
15/158 d.12.81 percent
