CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

MANAGEMENT ADVISORY SERVICES

RELEVANT COSTING

THEORY
1. In the development of accounting data for decision-making, relevant costs are
A. Historical costs which are the best available basis for estimating future costs.
B. Future costs which will differ under each alternative course of action.
C. Budgetary costs authorized for the administrative year.
D. Standard costs developed by time and motion experts.

2. The term relevant cost applies to all of the following decision situations except the
A. Acceptance of special product order.
B. Manufacture or purchase of a component part.
C. Determination of product price.
D. Replacement of equipment.

3. The relevance of a particular cost to a decision is determined by

A. Riskiness of the decision. C. Amount of the cost.
B. Number of decision variables. D. Potential effect on the decision.

4. A fixed cost is relevant if it is

A. a future cost. B. avoidable. C. sunk. D. a product cost.

5. Management accountants are concerned with incremental unit costs. These costs are similar
to the following except
a. The economic marginal cost. c. The cost to produce an additional unit.
b. The variable cost d. The manufacturing unit cost.

6. The type of cost vital to decision making but not recorded in the accounting records
a. Sunk costs b. Opportunity costs c. Direct costs d. Out of pocket costs

7. What is the opportunity cost of making a component part in a factory given no alternative use
of the capacity?
a. The variable manufacturing cost of the component.
b. The total manufacturing cost of the component.
c. The total variable cost of the component.
d. Zero.

8. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is
a. Relevant because salaries are always relevant.
b. Relevant because this will probably change if the regional service office is build.
c. Irrelevant because it is future cost that will not differ between the alternatives under
consideration.
d. Irrelevant since another imputed costs for the same will be considered.

9. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of
each product. Production capacity is unlimited. The company should produce the product (or
products) that has (have) the highest
a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

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10. All of the following are examples of imputed costs except
A. The stated interest paid on a bank loan.
B. The use of the firm's internal cash funds to purchase assets.
C. Assets that are considered obsolete that maintain a net book value.
D. Decelerated depreciation.

11. The distinction between avoidable and unavoidable costs is similar to the distinction between
a. variable costs and fixed costs. c. step-variable costs and fixed costs.
b. variable costs and mixed costs. d. discretionary costs and committed costs.

12. Total unit costs are

a. Relevant for cost-volume-profit analysis.
b. Needed for determining product contribution.
c. Irrelevant in marginal analysis.
d. Independent of the cost system used to generate them.

13 If a cost is irrelevant to a decision, the cost could not be

a. a sunk cost. b. a future cost. c. a variable cost. d. an incremental cost.

14 Sunk costs
a. Are substitute for opportunity costs.
b. In and of themselves are not relevant to decision making.
c. Are relevant to decision making.
d. Are fixed costs.

15 The variable cost of a unit of product made yesterday is

a. An incremental cost. c. A differential cost.
b. An opportunity cost. d. A sunk cost.

16 The manner of determining whether favorable results of an alternative are sufficient to justify
the cost of taking that alternative
a. Cost behavior analysis c. Cost control analysis
b. Cost benefit analysis d. Cost center analysis

17. When there is one scarce resource, the product that should be produced first is the product
with
a. the highest contribution margin per unit of the scarce resource
b. the highest sales price per unit of scarce resource
c. the highest demand
d. the highest contribution margin per unit

18. Fixed costs are ignored in allocating scarce resources because

a. they are sunk.
b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
d. fixed costs only apply to long-run decisions.

19. Among the costs relevant to a make-or-buy decision include variable manufacturing costs as
well as
a. Unavoidable costs. c. Avoidable fixed costs.
b. Plant depreciation. d. Real estate taxes.

20. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

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21. Which of the following activities within an organization would be least likely to be
outsourced?
a. accounting b. product design c. transportation d. data processing

22. Which of the following costs are relevant to a make-or-buy decision?

a. original cost of the production equipment
b. annual depreciation of the equipment
c. the amount that would be received if the production equipment were sold
d. the cost of direct materials purchased last month and used to manufacture the component

23. A purchasing agent has two potential firms to buy materials from for production. If both
firms charge the same price, the material cost is
a. an irrelevant cost b. a sunk cost c. a committed cost. d. an opportunity cost

24. Which of the following is NOT relevant in a make-or-buy decision about a part the entity
uses in some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier’s per-unit variable cost to make the part.
d. The number of units of the part needed each period.

25. When only differential manufacturing costs are taken into account for special-order pricing,
an essential assumption is that
a. Manufacturing fixed and variable costs are linear.
b. Selling and administrative fixed and variable costs are linear.
c. Acceptance of the order will not affect regular sales.
d. Acceptance of the order will not cause unit selling and administrative variable costs to
increase.

26. If a firm is at full capacity, the minimum special order price must cover
a. variable costs associated with the special order
b. variable and fixed manufacturing costs associated with the special order
c. variable and incremental fixed costs associated with the special order
d. variable costs and incremental fixed costs associated with the special order plus foregone
contribution margin on regular units not produced
e. both c and d.

27. Idle capacity in the interim (normally temporary) will generate short-term benefit in
accepting sales at price that
a. Positively motivate employees.
b. Result in less than normal contribution margin.
c. Increase total fixed costs.
d. Reduce the overall operating income to sales ratio.

28. Pinoy Company temporarily has excess production capacity, the idle plant facilities can be
used to manufacture a low-margin item. The low-margin item should be produced if it can
be sold for more than its
a. Variable costs plus opportunity cost of idle facilities.
b. Indirect costs plus any opportunity cost of idle facilities.
c. Fixed costs.
d. Variable costs.

29. An opportunity cost commonly associated with a special order is

a. The contribution margin on lost sales.
b. The variable costs of the order.
c. Additional fixed costs related to the increased output.
d. Any of the above.

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30. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin. c. product line operating income.
b. product line segment margin. d. corporate net income.

31. Which of the following costs is NOT relevant to a special order decision?
a. the direct labor costs to manufacture the special order units
b. the variable manufacturing overhead incurred to manufacture the special-order units
c. the portion of the cost of leasing the factory that is allocated to the special order
d. All of the above costs are relevant.

32. There is a market for both product X and product Y. Which of the following costs and
revenues would be most relevant in deciding whether to sell product X or process it further to
make product Y?
A. Total cost of making X and the revenue from sale of X and Y.
B. Total cost of making Y and the revenue from sale of Y.
C. Additional cost of making Y, given the cost of making X, and additional revenue from Y.
D. Additional cost of making X, given the cost of making Y, and additional revenue from Y.

33. A manager is attempting to determine whether a segment of the business should be

eliminated. The focus of attention for this decision should be on
a. the net income shown on the segment's income statement.
b. sales minus total expenses of the segment.
c. sales minus total direct expenses of the segment.
d. sales minus total variable expenses and avoidable fixed expenses of the segment.

34. A product should be dropped if

a. It has negative incremental profit.
b. It has a negative contribution margin.
c. Dropping it will increase the total profit of the company.
d. It is not essential to the company’s product line.

35. The consulting firm of Magaling Corporation is considering the replacement of their
computer system. Taking into account the income tax effect and considering the carrying
value of the old system (CVOS) and the salvage value of the new system (SVNS), which
combination below applies to the decision making process?
A. B. C. D.
CVOS Irrelevant Irrelevant Relevant Relevant
SVNS Irrelevant Relevant Irrelevant Relevant

36. In equipment-replacement decisions, which one of the following does not affect the decision-
making process?
a. Current disposal price of the old equipment.
b. Operating costs of the old equipment.
c. Original fair market value of the old equipment.
d. Cost of the new equipment.

37. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial
area which is economically depressed due to natural disasters. Below are certain
manufacturing and selling expenses.
1. Depreciation 5. Sales commissions
2. Property tax 6. Delivery expenses
3. Interest expense 7. Security of premises
4. Insurance of facilities
Which of the following expenses will continue during the shutdown period?
a. All expenses in the list. c. Items 1, 2 and 3 only.
b. All except 5 and 6. d. Items 1, 2, 3, 4, 6, and 7 only.

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PROBLEM
1. A proprietor who just inherited a building is considering using it in a new business venture.
Projections for the business are: revenue of $100,000, fixed cost of $30,000, and variable
cost of $50,000. If the business is not started, the owner will work for a company for a wage
of $23,000. Also, there have been two offers to rent the building, one for $1,000 per month
and one for $1,200 per month. What are the expected annual net economic profits (losses) to
the owner if the new business is started?
A. $20,000 B. $(3,000) C. $(15,000) D. $(17,400)

2. Bolsa Co. estimates that 60,000 special zipper will be used in the manufacture of industrial
bags during the next year. Sure Zipper Co. has quoted a price of P6 per zipper. Bolsa would
prefer to purchase 5,000 units per month but Sure is unable to guarantee this delivery
schedule. In order to ensure the availability of these zippers, Bolsa is considering the
purchase of all 60,000 units at the beginning of the year. Assuming that Bolsa can invest
cash at 12%, the company’s opportunity cost of purchasing the 60,000 units are the
beginning of the year is
a. P21,600 b. P43,200 c. P19,800 d. P39,600

3. Chow Inc. has its own cafeteria with the following annual costs
Food P 400,000
Labor 300,000
Overhead 440,000
Capital P1,140,000
The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria
supervisor. The remainder of the fixed overhead has been allocated from total company
overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay
said salary, the maximum cost Chow will be willing to pay an outsider firm to service the
cafeteria is
a. P1,140,000 b. P1,040,000 c. P700,000 d. P964,000

4. Listed below are a company’s monthly unit costs to manufacture and market a particular
product.
Unit Costs Variable Cost Fixed Costs
Direct materials $2.00
Direct labor 2.40
Indirect Manufacturing 1.60 $1.00
Marketing 2.50 1.50
The company must decide to continue making the product or buy it from an outside supplier.
The supplier has offered to make the product at the same level of quality that the company
can make it. Fixed marketing costs would be unaffected, but variable marketing costs would
be reduced by 30% if the company were to accept the proposal. What is the maximum
amount per unit that the company can pay the supplier without decreasing its operating
income?
a. $8.50 b. $6.75 c. $7.75 d. $5.25

5. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For
an annual volume of 10,000 units, fixed manufacturing costs of P500,000 are incurred.
Variable costs per unit amount are direct materials – P80; direct labor – P15, and variable
factory overhead – P20
Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000
units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead by
50%. The direct materials for the freezable bag will cost Picnic P20 if it will produce it.
Considering Bags Corp. offer, Picnic should
a. Buy the freezable ice bag due to P150,000 advantage.
b. Produce the freezable ice bag due to P25,000 advantage.
c. Produce the freezable ice bag due to P50,000 advantage.
d. Buy the freezable bag due to P50,000 advantage.

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6. Savage Industries is a multi-product company that currently manufactures 30,000 units of
Part QS42 each month for use in production. The facilities now being used to produce Part
QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per
month. If Savage were to buy Part QS42 from an outside supplier, the facilities would be
idle, but its fixed costs would continue at 40% of their present amount. The variable
production costs of Part QS42 are P11 per unit.
If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase
price of P12.875, the monthly usage at which it will be indifferent between purchasing and
making Part QS42 is
A. 30,000 units. B. 32,000 units. C. 80,000 D. 48,000

7. Great Electronics is operating at 70% capacity. The plant manager is considering making
component 501 now being purchased for P110 each, a price that is projected to increase in
the near future. The plant has the equipment and labor force required to manufacture the
component. The design engineer estimates that each component requires P40 of direct
materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and
40% of the overhead is fixed cost. A decision to manufacture component 501 will result in a
gain or (loss) for each component of
a. P28 b. P16 c. P(20) d. P4

8. Part BX is a component that Motors and Engines Co. uses in the assembly of motors. The
cost to produce one BX is presented below:
Direct materials P 4,000
Materials handling (20% of direct materials) 800
Direct labor 32,000
Overhead (150% of direct labor) 48,000
Total manufacturing costs P84,800
Materials handling which is not included in manufacturing overhead, represents the direct
variable costs of the receiving department that are applied to direct materials and purchased
components on the basis of their cost.
The company’s annual overhead budget is one-third variable and two-thirds fixed. Pre-casts
Co., offers to supply BX at a unit price of P60,000. Should the company buy or
manufacture?
a. Buy, due to advantage of P24,800 per product.
b. Manufacture, due to advantage of P7,200 per unit.
c. Buy, due to advantage of P12,800 per unit.
d. Manufacture, due to advantage of P19,200 per unit.

9. Panghulo Company manufactures part H for use in its production cycle. The cost per unit for
3,000 units of Part N are
Direct labor P50 Fixed overhead P30
Direct materials P10 Variable overhead P20
Quebadia Company has offered to sell Panghulo 3,000 units of part H for P100 per unit. If
Panghulo accepts Quebada’s offer, the released facilities could be used to save P70,000 in
relevant costs in its manufacture of Part I. In addition, P15 per unit of fixed overhead applied
to Part H would be totally eliminated.
The alternative that is more desirable and the corresponding net cost savings is
a. b. c. d.
Alternative Manufacture Manufacture Buy Buy
Net cost savings P10,000 P20,000 P55,000 P85,000

10. Tyler Company currently sells 1,000 units of product M for $1 each. Variable costs are
$0.40 and avoidable fixed costs are $400. A discount store has offered $0.80 per unit for 400
units of product M. The managers believe that if they accept the special order, they will lose
some sales at the regular price. Determine the number of units they could lose before the
order become unprofitable.
a. 267 units. b. 500 units. c. 600 units. d. 750 units

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11. The Blue Plate Co. is operating at 50% capacity producing 100,000 units of ceramic plates a
year. With the economic boom that the country is expected to have in the coming year, the
company plans to utilize 75% capacity. Part of the manufacturing process is hand-painting
which has a variable cost of material at P4.50 and labor at P5.50 per plate. This painting
process has variable overhead at P1.00 which is 40% of total variable factory overhead.
Total factory overhead is P500 per 100 plates. No increase in fixed factory overhead is
expected even with the substantial increase in production. An offer to sub-contract the
incremental hand-painting job was given at P10.50 per plate but the company will have to
lease an equipment at P10,000 annual rental. The plates sell for P50.00 per plate a piece at
the contribution margin rate of 45%.
Should Blue Plate Company sub-contract? Why?
a. No, because the company will lose P135,000.
b. Yes, because the company will save P65,000.
c. Yes, because the company will earn P15,000 more.
d. No, because there is no benefit for the company.

12. Pixie Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual
production for the item is 100,000 units. The cost per unit lot of the part are as follows:
Direct material P520
Direct labor 200
Manufacturing overhead
Variable 240
Fixed 320
Total manufacturing costs per 100 units P1,280
Bobbie Inc. has offered to sell Pixie all 100,000 units it will need during the coming year for
P1,200 per 100 units. If Pixie accepts the offer from Bobbie, the facilities used to
manufacture Component 6417 could be used in the production of Component 8275. This
change would save Pixie P180,000 in relevant costs. In addition, a P200,000 cost item
included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pixie
should
a. Buy Component 6417 because of P300,000 savings.
b. Buy Component 6417 because of P140,000 savings.
c. Continue producing Component 6417 because of P40,000 savings.
d. Continue producing Component 6417 because of P60,000 savings.

13. Chow Foods operates a cafeteria for its employees. The operations of the cafeteria requires
fixed costs of P470,000 per month and variable costs of 40% of sales. Cafeteria sales are
currently averaging P1,200,000 per month. The company has the opportunity to replace the
cafeteria with vending machines. Gross customer spending at the vending machines is
estimated to be 40% greater than the current sale because the vending machines are available
at all hours. By replacing the cafeteria with vending machines, the company would receive
16% of the gross customer spending and avoid cafeteria costs. A decision to replace the
cafeteria with vending machines will result in a monthly increase (decrease) in operating
income of
a. P182,000 b. P258,800 c. (P588,000) d. P18,800

14. ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this
order will not affect the regular sales of 80,000 units. The cost to manufacture one unit of
this particular product is:
Variable costs (per unit) Fixed costs (per year)
Direct materials $1.50
Direct labor 2.50
Overhead 0.80 $100,000
Selling and administrative 3.00 50,000
Variable selling costs for each of these 5,000 units will be $1.00. What is the differential cost
to ABC Company of accepting this special order?
A. $39,000 B. $34,000 C. $30,250 D. $29,000

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15. PQR Company expects to incur the following costs at the planned production level of 10,000
units:
Direct materials P100,000
Direct labor 120,000
Variable overhead 60,000
Fixed overhead 30,000
The selling price is P50 per unit. The company currently operates at full capacity of 10,000
units. Capacity can be increased to 13,000 units by operating overtime. Variable costs
increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged
when overtime operations occur. PQR Company has received a special order from a
wholesaler who has offered to buy 2,000 units at P45 each.
. What is the incremental cost associated with this special order?
a. P84,000 b. P31,000 c. P62,000 d. P42,000

16. Clay Co. has considerable excess manufacturing capacity. A special job order’s cost sheet
includes the following applied manufacturing overhead costs: fixed costs - $21,000, and
variable costs - $33,000.
The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-
house design will be done. Instead, the job will require the use of external designers costing
$7,750. What is the total amount to be included in the calculation to determine the minimum
acceptable price for the job?
a. $36,700 b. $40,750 c. $54,000 d. $58,050

17. Sandow Co. is currently operating at a loss of $15,000. The sales manager has received a
special order for 5,000 units of product, which normally sells for $35 per unit. Costs
associated with the product are: direct material, $6; direct labor, $10; variable overhead, $3;
applied fixed overhead, $4; and variable selling expenses, $2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by
$1.50 and selling expenses would be decreased by $1. If Sandow wants this special order to
increase the total net income for the firm to $10,000, what sales price must be quoted for
each of the 5,000 units?
a. $23.50 b. $24.50 c. $27.50 d. $34.00

18. Tagaytay Open-Air Flea Market is along the highway leading to Taal Vista Lodge. Arnel has
a stall which specializes in hand-crafted fruit baskets that sell for P60 each. Daily fixed costs
are P15,000 and variable costs are P30 per basket. An average of 750 baskets are sold each
day. Arnel has a capacity of 800 baskets per day. By closing time, yesterday, a bus load of
teachers who attended a seminar at the Development Academy of the Philippines stopped by
Arnel’s stall. Collectively, they offered Arnel P1,500 for 40 baskets. Arnel should have
a. Rejected the offer since he could have lost P500.
b. Rejected the offer since he could have lost P900.
c. Accepted the offer since he could have P300 contribution margin.
d. Accepted the offer since he could have P700 contribution margin.

19. Kirklin Co. is a manufacturer operating at 95% of capacity. Kirklin has been offered a new
order at $7.25 per unit requiring 15% of capacity. No other use of the 5% current idle
capacity can be found. However, if the order were accepted, the subcontracting for the
required 10% additional capacity would cost $7.50 per unit. The variable cost of production
for Kirklin on a per-unit basis follows:
Materials $3.50
Labor 1.50
Variable overhead 1.50
$6.50
In applying the contribution margin approach to evaluating whether to accept the new order,
assuming subcontracting, what is the average variable cost per unit?
A. $6.83 B. $7.00 C. $7.17 D. $7.25

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20. Sta. Elena Company manufactures men’s caps. The projected income statement for the year
before any special order is as follows:
Amount Per Unit
Sales P 400,000 P 20
Cost of goods sold 320,000 16
Gross margin P 80,000 P 4
Selling expenses 30,000 3
Operating income P 50,000 P 1
Fixed costs included in above projected income statement are P80,000 in cost of goods sold
and P9,000 in selling expenses.
A special order offering to buy 2,000 caps for P17 each was made to Sta. Elena. No
additional selling expenses will be incurred if the special order is accepted. Sta. Elena has
the capacity to manufacture 2,000 more caps.
As a result of the special order, the operating income would increase by
a. P34,000 b. P24,000 c. P10,000 d. P0

21. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and
Greenhills area. Shown below are the summary income statements for each complex:
In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
based on rental income. The complex that the company should consider selling is (are)
a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.

22. Division A of Decision Experts Corporation is being evaluated for elimination. It has
contribution to overhead of P400,000. It receives an allocated overhead of P1 million, 10%
of which cannot be eliminated. The elimination of Division A would affect pre-tax income
by
a. P400,000 decrease. c. P500,000 decrease.
b. P400,000 increase. d. P500,000 increase.

23. Data covering QMB Corporation’s two product lines are as follows:
Product “W” Product “Z”
Sales P36,000 P25,200
Income before income tax 15,936 (8,388)
Sales price per unit 30.00 14.00
Variable cost per unit 8.50 15.00
The total unit sold of “W” was 1,200 and that of “Z” was 1,800 units.
If Product “Z” is discontinued and this results in a 400 units decrease in sales of Product
“W”, the total effect on income will be
a. P13,600 decrease. b. P6,800 decrease. c. P8,600 decrease. d. P5,000 decrease.

24. Ysabelle Industries, Inc. has an opportunity to acquire a new equipment to replace one of its
existing equipments. The new equipment would cost P900,000 and has a five-year useful
life, with a zero terminal disposal price. Variable operating costs would be P1 million per
year. The present equipment has a book value of P500,000 and a remaining life of five years.
Its disposal price now is P50,000 but would be zero after five years. Variable operating costs
would be P1,250,000 per year. Considering the five years in total, but ignoring the time
value of money and income taxes. Ysabelle should
a. Replace due to P400,000 advantage.
b. Not replace due to P150,000 disadvantage.
c. Replace due to P350,000 advantage.
d. Not replace due to P100,000 disadvantage.

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25. Nakinnat Corporation’s Outlet No. 5 reported the following results of operations for the
period just ended:
Sales P2,500,000
Less: Variable expenses 1,000,000
Contribution margin P1,500,000
Less: Fixed expenses
Salaries & wages P 750,000
Insurance on inventories 50,000
Depreciation on equipment 325,000
Advertising 500,000 1,625,000
Net income (loss) (P125,000)
The management is contemplating on dropping outlet No. 5 due to the unfavorable
operational results. If this would happen, one employee will have to be retained with an
annual salary of P150,000. The equipment has no resale value. Outlet No. 5 should
a. Not be dropped due to foregone overall income of P350,000.
b. Be dropped due to foregone overall income of P325,000.
c. Not be dropped due to foregone overall income of P25,000.
d. Be dropped due to overall operational loss of P25,000.

Questions 26 through 28 are based on the following information.

The owners of Dynamics, Inc. has engaged you to assist them in arriving at certain decisions.
Dynamics maintains its home office in Manila and rents factory plants in Bulacan, Laguna and
Naga, all of which produce the same product.
The management of Dynamics provided you with a projection of operations for 1981 as follows:
TOTAL Bulacan Laguna Naga
Sales P 2,200,000 P 1,100,000 P 700,000 P 400,000
Variable costs 725,000 332,500 212,500 180,000
Fixed costs:
Factory 550,000 280,000 140,000 130,000
Administrative 175,000 105,000 55,000 15,000
Allocated home office costs 250,000 112,500 87,500 50,000
Total costs 1,700,000 830,000 495,000 375,000
Net profit from operations 500,000 270,000 205,000 25,000
The sales price per unit is P12.50.

Due to the poor results of operations of the plant in Naga, Dynamics has decided to cease
operations and offer the plant’s machinery and equipment for sale by the end of 1980. The
company expects to sell these assets at a good price to cover all termination costs.
Dynamics, however, wishes to continue serving its customers in Naga and is considering one of
the following three alternatives:
1. Expand the operations of Laguna plant by using space presently idle. This move would
result in the following changes in that plant operations;
Increase over plant’s current operations
Sales 50%
Fixed costs – factory 20%
– administrative 10%
Under this proposal, variable costs would be P4.00 per unit sold.
2. Enter into a long-term contract with another company who will serve the area’s
customers. This company will pay Dynamics a royalty of P2.00 per unit based upon an
estimate of P30,000 units being sold.
3. Close the Naga plant and not expand the operations of the Laguna plant.
The total home office costs of P250,000 will remain the same under each situation.

26. The estimated net profit from total operations of Dynamics, Inc. that would result from
expansion of Laguna plant (Alternative 1) is
a. P425,000 b. P485,000 c. P535,000 d. P618,000

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27. The estimated net profit from total operations of Dynamics, Inc. that would result from
negotiation of long-term contract on a royalty basis (Alternative No. 2) is
a. P425,000 b. P485,000 c. P535,000 d. P560,000

28. The estimated net profit from total operations of Dynamics, Inc. that would result from
shutdown of Naga plant with no expansion of other locations (Alternative No. 3) is
a. P330,000 b. P345,000 c. P425,000 d. P475,000

29. JKL Company is considering replacing a machine with a book value of P100,000, a
remaining useful life of 4 years, and annual straight-line depreciation of P25,000. The
existing machine has a current market value of P80,000. The replacement machine would
cost P160,000, have a 4-year useful life, save P50,000 per year in cash operating costs. If the
replacement machine would be depreciated using straight-line method and the tax rate is
40%, what would be the increases in annual income taxes if the company replaces the
machine?
A. P21,000 B. P14,000 C. P32,000 D. P20,000

Questions 30 and 31 are based on the following information.

The Sampaguita Steam Laundry bought a laundry truck that can be used for 5 years. The cost of
the truck is P225,000 with a salvage value of P35,000. Since the truck is not working efficiently,
management has thought of selling the truck immediately and buy a delivery wagon which will
serve the company’s purposes more properly. The estimated net returns of the truck for 5 years
is P150,000. If the truck is sold, management can only recover P175,000. (In all calculations,
use the straight line method of depreciation)

30. The net gain (loss) that will arise if the Company decides to sell the truck is:
a. P(50,000) b. P(75,000) c. P75,000 d. P140,000

31. If the firm decides to keep the truck, the net gain (loss) over the 5-year period is
a. P(40,000) b. P(75,000) c. P50,000 d. P140,000

32. Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating cost of
P1,850,000 (all cash items except depreciation of P350,000). The company is considering
the purchase of a new machine costing P1,200,000 per year. The new machine would
increase (1) revenues to P2,900,000; (2) operating cost to P2,050,000; and (3) depreciation to
P500,000 per year. Assuming a 35% income tax rate, Arlene’s annual incremental after-tax
cash flows from the machine would be
a. P330,000 b. P345,000 c. P292,500 d. P300,000

33. Julius International produces weekly 15,000 units of Product JI and 30,000 units of JII for
which P800,000 common variable costs are incurred. These two products can be sold as is or
processed further. Further processing of either product does not delay the production of
subsequent batches of the joint products. Below are some information:
JI JII
Unit selling price without further processing P24 P18
Unit selling price with further processing P30 P22
Total separate weekly variable costs of further processing P100,000 P90,000
To maximize Julius’ manufacturing contribution margin, the total separate variable costs of
further processing that should be incurred each week are
a. P95,000 b. P90,000 c. P100,000 d. P190,000

34. A manufacturing company's primary goals include product quality and customer satisfaction.
The company sells a product, for which the market demand is strong, for $50 per unit. Due to
the capacity constraints in the Production Department, only 300,000 units can be produced
per year. The current defective rate is 12% (i.e., of the 300,000 units produced, only 264,000
units are sold and 36,000 units are scrapped). There is no revenue recovery when defective
units are scrapped. The full manufacturing cost of a unit is $29.50, including

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 Direct materials $17.50
Direct labor 4.00
Fixed manufacturing overhead 8.00
The company's designers have estimated that the defective rate can be reduced to 2% by
using a different direct material. However, this will increase the direct materials cost by
$2.50 per unit to $20 per unit. The net benefit of using the new material to manufacture the
product will be
A. $(120,000) B. $120,000 C. $750,000 D. $1,425,000

35. The Table Top Model Corp. produces three products. “Tic,” “Tac.”, and “Toc.” The owner
desires to reduce production load to only one product line due to prolonged absence of the
production manager. Depreciation expense amounts to P600,000 annually. Other fixed
operating expenses amount to P660,000 per year. The sales and variable cost data of the
three products are (000’s omitted)
Tic Tac Toc
Sales P6,600 P5,300 P10,800
Variable costs 3,900 1,700 8,900
Which product must be retained and what is the opportunity cost of selecting such product
line?
a. Retain product “Tac”; opportunity cost is P4.6 million.
b. Retain product “Tac”; opportunity cost is P3.14 million.
c. Retain product “Tic”; opportunity cost is P4.04 million.
d. Retain product “Toc”; opportunity cost is P4.84 million.

36. A company produces and sells three products:

Products
C J P
Sales $200,000 $150,000 $125,000
Separable (product) fixed costs 60,000 35,000 40,000
Allocated fixed costs 35,000 40,000 25,000
Variable costs 95,000 75,000 50,000
The company lost its lease and must move to a smaller facility. As a result, total allocated
fixed costs will be reduced by 40%. However, one of its products must be discontinued in
order for the company to fit in the new facility. Because the company's objective is to
maximize profits, what is its expected net profit after the appropriate product has been
discontinued?
A. $10,000 B. $15,000 C. $20,000 D. $25,000

Questions 37 and 38 are based on the following information.

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant
will provide the company's power needs for the next 20 years. Hermo will use only 60% of the
power output annually. At this level of capacity, Hermo's annual operating costs will amount to
$1,800,000, of which 80% are fixed.
Quigley Company currently purchases its power from MP Electric at an annual cost of
$1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of
capacity. This would reduce the estimated life of the plant to 14 years.

37. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in
the life of the plant and the appropriate variable costs. Hermo has decided that the charge for
the decreased life should be based on the original cost of the plant calculated on a straight-
line basis. The minimum annual amount that Hermo would charge Quigley would be
A. $450,000. B. $630,000. C. $990,000. D. $800,000

38. The maximum amount Quigley would be willing to pay Hermo annually for the power is
A. $600,000. B. $1,050,000. C. $1,200,000. D. $1,000,000

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ANSWER KEY
Theory Problems
1. B 16. B 31. C 1. D 16. B 31. A
2. C 17. A 32. C 2. C 17. A 32. B
3. D 18. B 33. D 3. D 18. C 33. B
4. B 19. C 34. C 4. B 19. C 34. C
5. D 20. A 35. B 5. B 20. C 35. A
6. B 21. B 36. C 6. D 21. B 36. D
7. D 22. C 37. B 7. D 22. D 37. B
8. C 23. A 8. D 23. B 38. C
9. C 24. C 9. C 24. A
10. A 25. C 10. A 25. A
11. D 26. D 11. B 26. D
12. C 27. B 12. B 27. B
13. D 28. A 13. D 28. C
14. B 29. A 14. D 29. B
15. D 30. A 15. A 30. A

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 CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila

MANAGEMENT ADVISORY SERVICES

STANDARD COSTING & VARIANCE ANALYSIS

THEORY
1. Which one of the following terms best describes the rate of output which qualified workers
can achieve as an average over the working day or shift, without over-exertion, provided they
adhere to the specified method of working and are well motivated in their work?
A. Standard time B. Standard hours C. Standard unit D. Standard performance

2. The best characteristics of a standard cost system is

A. standard can pinpoint responsibility and help motivation
B. all variances from standard should be reviewed
C. all significant unfavorable variances should be reviewed
D. standard cost involves cost control which is cost reduction

3. Standard costs are used for all of the following except:

A. income determination C. measuring efficiencies
B. controlling costs D. forming a basis for price setting

4. Standard costs are least useful for

A. Measuring production efficiency C. Job order production systems
B. Simplifying costing procedures D. Determining minimum inventory levels

5. To which of the following is a standard cost nearly like?

A. Estimated cost. B. Budgeted cost. C. Product cost. D. Period cost.

6. A difference between standard costs used for cost control and budgeted costs
A. Can exist because standard costs must be determined after the budget is completed.
B. Can exist because standard costs represent what costs should be while budgeted costs
represent expected actual costs.
C. Can exist because budgeted costs are historical costs while standard costs are based on
engineering studies.
D. Can exist because establishing budgeted costs involves employee participation and
standard costs do not.

7. Normal costing and standard costing differ in that

A. the two systems can show different overhead budget variances.
B. only normal costing can be used with absorption costing.
C. the two systems show different volume variances if standard hours do not equal actual
hours.
D. normal costing is less appropriate for multiproduct firms

8. When standard costs are used in a process-costing system, how, if at all, are equivalent units
of production (EUP) involved or used in the cost report at standard?
A. Equivalent units are not used.
B. Equivalent units are computed using a special approach.
C. The actual equivalent units are multiplied by the standard cost per unit.
D. The standard equivalent units are multiplied by the actual cost per unit.

9. The type of standard that is intended to represent challenging yet attainable results is:
A. theoretical standard D. normal standard
B. flexible budget standard E. expected actual standard
C. controllable cost standard

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 10. A company using very tight standards in a standard cost system should expect that
A. Most variances will be unfavorable
B. No incentive bonus will be paid
C. Costs will be controlled better than if lower standards were used
D. Employees will be strongly motivated to attain the standard

11. A predetermined overhead rate for fixed costs is unlike a standard fixed cost per unit in that a
predetermined overhead rate is
A. based on an input factor like direct labor hours and a standard cost per unit is based on a
unit of output.
B. based on practical capacity and a standard fixed cost can be based on any level of
activity.
C. used with variable costing while a standard fixed cost is used with absorption costing.
D. likely to be higher than a standard fixed cost per unit.

12. If a company wishes to establish factory overhead budget system in which estimated costs
can be derived directly from estimates of activity levels, it should prepare a
A. Flexible budget. B. Fixed budget. C. Capital budget. D. Discretionary budget.

13. Lanta Restaurant compares monthly operating results with a static budget. When actual sales
are less than budget, would Lanta usually report favorable variances on variable food costs
and fixed supervisory salaries.
A. B. C. D.
Variable food costs Yes Yes No No
Fixed supervisory salaries Yes No Yes No

14. The primary difference between a fixed (static) budget and a variable (flexible) budget is that
a fixed budget:
A. cannot be changed after the period begins; while a variable budget can be changed after
the period begins
B. is a plan for a single level of sales (or other measure of activity); while a variable budget
consists of several plans, one for each of several levels of sales (or other measure of
activity)
C. includes only fixed costs; while variable budget includes only variable costs
D. is concerned only with future acquisitions of fixed assets; while a variable budget is
concerned with expenses that vary with sales

15. Which of the following term is best identified with a system of standard cost?
A. Contribution approach. C. Marginal
costing.
B. Management by exception. D. Standard accounting system.

16. Which department is typically responsible for a materials price variance?

A. Engineering. B. Production. C. Purchasing. D. Sales.

17. Under a standard cost system, the materials efficiency variance are the responsibility of
A. Production and industrial engineering. C. Purchasing and sales.
B. Purchasing and industrial engineering. D. Sales and industrial engineering.

18. Which of the following people is most likely responsible for an unfavorable variable
overhead efficiency variance?
A. production supervisor C. supplier
B. accountant D. purchasing agent

19. Which variance is LEAST likely to be affected by hiring workers with less skill than those
already working?
A. Material use variance. C. Material price variance.

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B. Labor rate variance. D. Variable overhead efficiency variance.

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20. Which of the following standard costing variances would be least controllable by a
production supervisor?
A. Overhead volume. B. Materials usage. C. Labor efficiency. D. Overhead efficiency.

21. The variance resulting from obtaining an output different from the one expected on the basis
of input is the:
A. mix variance B. usage variance C. yield variance D. efficiency variance

22. For the doughnuts of McDonut Co. the Purchasing Manager decided to buy 65,000 bags of
flour with a quality rating two grades below that which the company normally purchased.
This purchase covered about 90% of the flour requirement for the period. As to the material
variances, what will be the likely effect?
A. B. C. D.
Price variance Unfavorable Favorable No effect Favorable
Usage variance Favorable Unfavorable Unfavorable Favorable

23. Using the two-variance method for analyzing overhead, which of the following variances
contains both variable and fixed overhead elements?
A. B. C. D.
Controllable (Budget) Variance Yes Yes Yes No
Volume Variance Yes Yes No No
Efficiency Variance Yes No No No

24. Which of the following unfavorable variances is directly affected by the relative position of a
production process on a learning curve?
A. Materials mix. B. Materials price. C. Labor rate. D. Labor efficiency.

25. A manager prepared the following table by which to analyze labor costs for the month:
Actual Hours at Actual Hours at Standard Hours at
Actual Rate Standard Rate Standard Rate
$10,000 $9,800 $8,820
What variance was $980?
A. Labor efficiency variance. C. Volume variance.
B. Labor rate variance. D. Labor spending variance.

26. A credit balance in the labor efficiency variance indicates that:

A. standard hours exceed actual hours
B. actual hours exceed standard hours
C. standard rate and standard hours exceed actual rate and actual hours
D. actual rate and actual hours exceed standard rate and standard hours

27. If the actual labor rate exceeds the standard labor rate and the actual labor hours exceed
the number of hours allowed, the labor rate variance and labor efficiency variance will be
A. B. C. D.
Labor Rate Variance Favorable Favorable Unfavorable Unfavorable
Labor Efficiency Variance Favorable Unfavorable Favorable Unfavorable

28. In the analysis of standard cost variances, the item which receives the most diverse
treatment in accounting is
A. Direct labor cost C. Direct material cost
B. Factory overhead cost D. Variable cost.

29. When expenses estimated for the capacity attained differ from the actual expenses
incurred, the resulting balance is termed the
A. Activity variance. C. Unfavorable variance.
B. Budget variance. D. Volume variance.

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30. The total overhead variance is
A. The difference between actual overhead costs and budgeted overhead.
B. Based on actual hours worked for the units produced.
C. The difference between actual overhead costs and applied overhead.
D. The difference between budgeted overhead and applied overhead.

31. Management scrutinizes variances because

A. Management desires to detect such variances to be able to plan for promotions.
B. Management needs to determine the benefits foregone by such variances.
C. It is desirable under conventional knowledge on good management.
D. Management recognizes the need to know why variances happen to be able to make
corrective actions and fairly reward good performers.

32. If a company uses a predetermined rate for absorption of manufacturing overhead, the
volume variance is
A. The under- or over-applied fixed cost element of overhead.
B. The under- or over-applied variable cost element of overhead.
C. The difference between budgeted cost and actual cost of fixed overhead items.
D. The difference between budgeted cost and actual cost of variable overhead items.

33. The production volume variance occurs when using the

A. Absorption costing approach because of production exceeding the sales.
B. Absorption costing approach because production differs from that used in setting the
fixed overhead rate used in applying fixed overhead to production.
C. Variable costing approach because of sales exceeding the production for the period.
D. Variable costing approach because of production exceeding the sales for the period.

34. Henley Company uses a standard cost system in which it applies manufacturing overhead to
units of product on the basis of direct labor hours. For the month of January, the fixed
manufacturing overhead volume variance was $2,220 favorable. The company uses a fixed
manufacturing overhead rate of $1.85 per direct labor hour. During January, the standard
direct labor hours allowed for the month's output:
A. exceeded denominator hours by 1,000. C. exceeded denominator hours by 1,200.
B. fell short of denominator hours by 1,000. D. fell short of denominator hour by 1,200.

35. A spending variance for variable factory O/H based on direct labor hours is the difference
between actual variable factory O/H and the variable factory O/H that should have been
incurred for the actual hours worked. This variance results from
A. Price and quantity differences for overhead costs.
B. Price differences for overhead costs
C. Quantity differences for overhead costs
D. Differences caused by production volume variation

36. Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable efficiency variance?
A. The mix of workers assigned to the particular job was heavily weighted toward the use of
higher-paid, experienced individuals.
B. The mix of workers assigned to the particular job was heavily weighted toward the use of
new, relatively low-paid unskilled workers.
C. Because of the production schedule, workers from other production areas were assigned
to assist in this particular process.
D. Defective materials caused more labor to be used to product a standard unit.

37. The variable factory overhead rate under the normal volume, practical capacity, and
expected activity levels would be the
A. Same except for practical capacity C. Same except for normal volume
B. Same except for expected capacity D. Same for all three activity levels

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38. A company reported a significant materials efficiency variance for the month of January. All
of the following are possible explanations for this variance except
A. Cutting back preventive maintenance.
B. Inadequately training and supervising the labor force.
C. Processing a large number of rush orders.
D. Producing more units than planned for in the master budget.

39. A debit balance in the labor efficiency variance indicates that

A. Standard hours exceed actual hours. C. Standard rate exceeds actual rate.
B. Actual hours exceed standard hours. D. Actual rate exceeds standard rate.

40. What type of direct material variances for price and usage will arise if the actual number of
pounds of materials used was less than standard pounds allowed but actual cost exceeds
standard cost?
A. B. C. D.
Usage Unfavorable Favorable Favorable Unfavorable
Price Favorable Favorable Unfavorable Unfavorable

41. Which one of the following would not explain an adverse direct labor efficiency variance?
A. Poor scheduling of direct labor hours
B. Setting standard efficiency at a level that is too low
C. Unusually lengthy machine breakdowns
D. A reduction in direct labor training

42. You used predetermined overhead rates and the resulting variances when compared with the
results using the actual rates were substantial. Production data indicated that volumes were
lower than the plan by a large difference. This situation can be due to
A. Overhead being substantially composed of fixed costs.
B. Overhead being substantially composed of variable costs.
C. Overhead costs being recorded as planned.
D. Products being simultaneously manufactured in single runs.
43. During 1990, a department’s three-variance factory O/H standard costing system reported
unfavorable spending and volume variances. The activity level selected for allocating
factory O/H to the product was based on 80% of practical capacity. If 100% of practical
capacity had been selected instead, how would the reported unfavorable spending and
volume variances have been affected?
A. B. C. D.
Spending Variance Increased Increased Unchanged Unchanged
Volume Variance Unchanged Increased Increased Unchanged
44. The journal entry to record the direct materials quantity variance may be recorded
A. Only when direct materials are purchased
B. Only when direct materials are issued to production
C. Either (a) or (b)
D. When inventory is taken at the end of the year.
45. Overapplied factory overhead results when
A. A plant is operated at less than its normal capacity.
B. Factory overhead costs incurred are greater than the costs charged to production.
C. Factory overhead costs incurred are less than the costs charged to production.
D. Factory overhead costs incurred are unreasonably large in relation to the number of units
produced.
46. Standard costing will produce the same results as actual or conventional costing when
standard cost variances are distributed to
A. Cost of goods sold and inventories C. An income or expense account
B. A balance sheet account D. Cost of goods sold

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PROBLEMS
1. KNOTTY, Inc. estimated the cost of a project it started in October 19x4 as follows: Direct
materials, P495,000; direct labor, 6,000 hours at P30 per hour; variable overhead, P24 per
direct labor hour. By the end of the month, all the required materials have been used at
P491,900; labor was 80% complete at 4,650 hours at P30 per hour; and, the variable
overhead amounted to P113,700. The total variance for the project as at the end of the month
was
A. P7,500 U B. P8,400 U C. P9,000 F D. P9,00 F

2. SUPER Co. at normal capacity, operates at 600,000 labor hours with standard labor rate of
P20 per hour. Variable factory overhead is applied at the rate of P12 per labor hour. Four
units should be completed in an hour.
Last year, 1,350,000 units were produced using 300,000 labor hours. All labor hours were
paid at the standard rate, and actual overhead cost consisted of P3,738,000 for variable items
and P3,000,000 fixed items.
The total labor and overhead costs saved, by producing at more than standard, amounted to
A. P450,000 B. P500,000 C. P750,000 D. P1,200,000

3. A defense contractor for a government space project has incurred $2,500,000 in actual design
costs to date for a guidance system whose total budgeted design cost is $3,000,000. If the
design phase of the project is 60% complete, what is the amount of the contractor's current
overrun or savings on this design work?
A. $300,000 savings. C. $500,000 savings.
B. $500,000 overrun. D.
$700,000 overrun.

4. Hankies Unlimited has a signature scarf for ladies that is very popular. Certain production
and marketing data are indicated below:
Cost per yard of cloth P36.00
Allowance for rejected scarf 5% of production
Yards of cloth needed per scarf 0.475 yard
Airfreight from supplier P0.60/yard
Motor freight to customers P0.90 /scarf
Purchase discounts from supplier 3%
Sales discount to customers 2%
The allowance for rejected scarf is not part of the 0.475 yard of cloth per scarf. Rejects have
no market value. Materials are used at the start of production.
Calculate the standard cost of cloth per scarf that Hankies Unlimited should use in its cost
sheets.
A. P16.87 B. P17.76 C. P18.21 D. P17.30

5. ALPHA Co. uses a standard cost system. Direct materials statistics for the month of May,
19x7 are summarize below:
Standard unit price P90.00
Actual units purchased 40,000
Standard units allowed for actual production 36,250
Materials price variance- favorable P6,000
What was the actual purchase price per unit?
A. P75.00 B. P85.89 C. P88.50 D. P89.85

6. ChemKing uses a standard costing system in the manufacture of its single product. The
35,000 units of raw material in inventory were purchased for $105,000, and two units of raw
material are required to produce one unit of final product. In November, the company
produced 12,000 units of product. The standard allowed for material was $60,000, and there
was an unfavorable quantity variance of $2,500. The materials price variance for the units
used in November was
A. $2,500 U B. $11,000 U C. $12,500 U D. $3,500 F

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7. The Porter Company has a standard cost system. In July the company purchased and used
22,500 pounds of direct material at an actual cost of $53,000; the materials quantity variance
was $1,875 Unfavorable; and the standard quantity of materials allowed for July production
was 21,750 pounds. The materials price variance for July was:
A. $2,725 F. B. $2,725 U. C. $3,250 F. D. $3,250 U.

8. Cox Company's direct material costs for the month of January were as follows:
Actual quantity purchased 18,000 kilograms
Actual unit purchase price $ 3.60 per kilogram
Materials price variance – unfavorable (based on purchases) $ 3,600
Standard quantity allowed for actual production 16,000 kilograms
Actual quantity used 15,000 kilograms
For January there was a favorable direct material quantity variance of
A. $3,360. B. $3,375. C. $3,400. D. $3,800.

9. JKL Company has a standard of 15 parts of component X costing P1.50 each. JKL
purchased 14,910 units of component X for P22,145. JKL generated a P220 favorable price
variance and a P3,735 favorable quantity variance. If there were no changes in the
component inventory, how many units of finished product were produced?
A. 994 units. B. 1,090 units. C. 1,000 units D. 1,160 units

10. The following direct labor information pertains to the manufacture of product Glu:
Time required to make one unit 2 direct labor hours
Number of direct workers 50
Number of productive hours per week, per worker 40
Weekly wages per worker $500
Workers’ benefits treated as direct labor costs 20% of wages
What is the standard direct labor cost per unit of product Glu?
A. $30. B. $24. C. $15. D. $12.

11. ACE Company’s operations for the month just ended originally set up a 60,000 direct labor
hour level, with budgeted direct labor of P960,000 and budgeted variable overhead of
P240,000. The actual results revealed that direct labor incurred amounted to P1,148,000 and
that the unfavorable variable overhead variance was P40,000. Labor trouble caused an
unfavorable labor efficiency variance of P120,000, and new employees hired at higher rates
resulted in an actual average wage rate of P16.40 per hour. The total number of standard
direct labor hours allowed for the actual units produced is
A. P52,500 B. P60,000 C. P62,500 D. P70,000

12. Pane Company's direct labor costs for April are as follows:
Standard direct labor hours 42,000
Actual direct labor hours 41,200
Total direct labor payroll $247,200
Direct labor efficiency variance – favorable $3,840
What is Pane's direct labor rate variance?
A. $44,496 U B. $49,440 U C. $49,440 F D. $50,400 F

13. TAMARAW, Inc. has a maintenance shop where repairs to its motor vehicles are done.
During last month’s labor strike, certain recorded were lost. The actual input of direct labor
hours was 1,000, and the resulting direct labor budget variance was a favorable P3,400. The
standard direct labor rate was P28.00 per hour, but an unexpected labor shortage necessitated
the hiring of higher-paid workers for some jobs and had resulted in a rate variance of P800.
The actual direct labor rate was
A. P27.20 per hour B. P28.80 per hour C. P30.25 per hour D. P31.40 per hour

14. To improve productivity, ST. MICHAEL Corp. instituted a bonus plan where employees are
paid 75% of the time saved when production performance exceeds the standard level of

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 production. The company computes the bonus on the basis of four-week periods. The
standard production is set at 3 units per hour. Each employee works 37 hours per week, and
the wage rate is P24 per hour. Below are data for one 4-week period:
Weekly Production (Units)
Employee 1st 2nd 3rd 4th Total
ALAN 107 100 110 108 425
JOEL 104 110 115 115 444
ROMY 108 112 112 133 465
TONY 123 120 119 124 486
The employee who had the inconsistent performance (sometimes performing below standard)
but got a bonus is
A. Alan = P36 bonus. C. Romy = P126 bonus.
B. Joel = P54 bonus. D. Tony = P252 bonus.

15. PALOS Manufacturing Co. has an expected production level of 175,000 product units for
19x7. Fixed factory overhead is P450,000 and the company applies factory overhead on the
basis of expected production level at the rate of P5.20 per unit. The variable overhead cost
per unit is
A. P2.57 B. P2.63 C. P2.93 D. P3.02

16. The following were among Gage Co.’s 2000 costs:

Normal spoilage $ 5,000
Freight out 10,000
Excess of actual manufacturing costs over standard costs 20,000
Standard manufacturing costs 100,000
Actual prime manufacturing costs 80,000
Gage’s 2000 actual manufacturing overhead was
A. $40,000 B. $45,000 C. $55,000 D. $120,000

17. Nil Co. uses a predetermined factory O/H application rate based on direct labor cost. For the
year ended December 31, Nil’s budgeted factory O/H was $600,000, based on a budgeted
volume of 50,000 direct labor hours, at a standard direct labor rate of $6 per hour. Actual
factory O/H amounted to $620,000, with actual direct labor cost of $325,000. For the year,
over-applied factory O/H was
A. $20,000 B. $25,000 C. $30,000 D. $50,000

18. Peters Company uses a flexible budget system and prepared the following information for the
year
Percentage of total capacity
80% 90%
Direct labor hours 24,000 27,000
Variable factory O/H $48,000 $54,000
Fixed factory O/H $108,000 $108,000
Total factory O/H rate per DLH $6.50 $6.00
Peters operated at 80% capacity during the year but applied factory overhead based on the
90% capacity level. Assuming that actual factory O/H was equal to the budgeted amount for
the attained capacity, what is the amount of O/H variance for the year?
A. $6,000 over-absorbed. C. $12,000 over-absorbed.
B. $6,000 under-absorbed. D. $12,000 under-absorbed.

19. MNO Company applies overhead at P5 per direct labor hour. In March 2001, MNO
incurred overhead of P120,000. Under applied overhead was P5,000. How many direct
labor hours did MNO work?
A. 25,000 B. 22,000 C. 24,000 D. 23,000

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20. At the beginning of the year, Smith Inc. budgeted the following:
Units 10,000
Sales $100,000
Minus:
Total variable expenses 60,000
Total fixed expenses 20,000
Net income $ 20,000

Factory overhead:
Variable $ 30,000
Fixed 10,000
There were no beginning inventories. At the end of the year, no work was in process, total
factory overhead incurred was $39,500, and underapplied factory overhead was $1,500.
Factory overhead was applied on the basis of budgeted unit production. How many units
were produced this year?
A. 10,250. B. 10,000. C. 9,875. D. 9,500.

21. Premised on past experience, Mayo Corp. adopted the following budgeted formula for
estimating shipping expenses. The company’s shipments average 12 kilos per shipment.
Shipping costs = P8,000 + (0.25 x kgs. shipped)
Planned Actual
Sales order 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales 240,000 288,000
Total kilograms shipped 9,600 12,300
The actual shipping costs for the month amounted to P10,500. The appropriate monthly
flexible budget allowance for shipping costs for purposes of performance evaluation
would be
A. P10,250 B. P11,075 C. P10,340 D. P10,400

22. Universal Company uses a standard cost system and prepared the following budget at normal
capacity for the month of January:
Direct labor hours 24,000
Variable factory O/H $48,000
Fixed factory O/H $108,000
Total factory O/H per DLH $6.50

Actual data for January were as follows:

Direct labor hours worked 22,000
Total factory O/H $147,000
Standard DLH allowed for capacity attained 21,000
Using the two-way analysis of O/H variances, what is the budget (controllable) variance for
January?
A. $3,000 F. B. $13,500 U. C. $9,000 F. D. $10,500 U.

23. ABC Company uses the equation P300,000 + P1.75 per direct labor hour to budget
manufacturing overhead. ABC has budgeted 125,000 direct labor hours for the year. Actual
results were 110,000 direct labor hours, P297,000 fixed overhead, and P194,500 variable
overhead. What is the fixed overhead volume variance for the year?
A. P35,000 U. B. P36,000 U. C. P2,000 F D. P3,000 F

24. JKL Co. has total budgeted fixed costs of P75,000. Actual production of 19,500 units
resulted in a $3,000 favorable volume variance. What normal capacity was used to determine
the fixed overhead rate?
A. 18,750 B. 20,313 C. 17,590 D. 16,500

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25. TYD, Inc. reported the following data for 1996:
Actual hours 120,000
Denominator hours 150,000
Standard hours allowed for output 140,000
Fixed predetermined overhead rate P6 per hour
Variable predetermined overhead rate P4 per hour
TYD’s 1996 volume variance was
a. P60,000 which is neither favorable nor under-applied.
b. P60,000 favorable.
c. No volume variance.
d. P60,000 under-applied.

26. Patridge Company uses a standard cost system in which it applies manufacturing overhead to
units of product on the basis of direct labor hours. The information below is taken from the
company's flexible budget for manufacturing overhead:
Percent of capacity 70% 80% 90%
Direct labor hours 21,000 24,000 27,000
Variable overhead $ 42,000 $ 48,000 $ 54,000
Fixed overhead 108,000 108,000 108,000
Total overhead $150,000 $156,000 $162,000
During the year, the company operated at exactly 80% of capacity, but applied
manufacturing overhead to products based on the 90% level. The company's fixed overhead
volume variance for the year was:
A. $6,000 U. B. $6,000 F. C. $12,000 U D. $12,000 F.

27. Margolos, Inc. ends the month with a volume variance of $6,360 unfavorable. If budgeted
fixed factory O/H was $480,000, O/H was applied on the basis of 32,000 budgeted machine
hours, and budgeted variable factory O/H was $170,000, what were the actual machine hours
(AH) for the month?
A. 32,424 B. 32,000 C. 31,687 D. 31,576

28. Web Company uses a standard cost system in which manufacturing overhead is applied to
units of product on the basis of machine hours. During February, the company used a
denominator activity of 80,000 machine hours in computing its predetermined overhead rate.
However, only 75,000 standard machine hours were allowed for the month's actual
production. If the fixed overhead volume variance for February was $6,400 unfavorable, then
the total budgeted fixed overhead cost for the month was:
A. $96,000. B. $102,400. C. $100,000. D. $98,600.

29. The following information is available from the Tyro Company:

Actual factory O/H $15,000
Fixed O/H expenses, actual $7,200
Fixed O/H expenses, budgeted $7,000
Actual hours 3,500
Standard hours 3,800
Variable O/H rate per DLH $2.50
Assuming that Tyro uses a three-way analysis of O/H variances, what is the spending
variance?
A. $750 F. B. $750 U. C. $950 F D. $200 U

30. At Overland Company, maintenance cost is exclusively a variable cost that varies directly
with machine-hours. The performance report for July showed that actual maintenance costs
totaled $9,800 and that the associated spending variance was $200 unfavorable. If 8,000
machine-hours were actually worked during July, the budgeted maintenance cost per
machine-hour was:
A. $1.20. B. $1.25. C. $1.275. D. $1.225.

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31. Given for the variable factory overhead of GHI Products, Inc.: P39,500 actual input at
budgeted rate, P41,500 flexible budget based on standard input allowed for actual output,
P2,500 favorable flexible budget variance. Compute the spending variance.
A. P500 unfavorable. C. P500 favorable.
B. P2,000 favorable. D. P2,000 unfavorable.

32. Daly had a $18,000 favorable volume variance, a $15,000 unfavorable variable overhead
spending variance, and $12,000 total over-applied overhead. The fixed overhead budget
variance was
A. $9,000 F. B. $16,000 F. C. 49,000 U. D. $16,000 U.

Problems 33 and 34 are based on the following information.

The MABINI CANDY FACTORY has the following budgeted factory overhead costs:
Budgeted fixed monthly factory overhead costs P85,000
Variable factory overhead P4.00 per direct labor hour
For the month of January, the standard direct labor hours allowed were 25,000. An analysis of
the factory overhead shows that in January, the factory had an unfavorable budget (controllable)
variance of P3,500 and a favorable volume variance of P1,200. The factory uses a two-way
analysis of factory overhead variances.

33. The actual factory overhead incurred in January was

A. P186,200 B. P188,500 C. P181,500 D. P103,500

34. The applied factory overhead in January was

A. P188,500 B. P183,800 C. P186,200 D. P103,500

Questions 35 & 36 are based on the following information.

Raff Co. has a standard cost system in which manufacturing overhead is applied to units of
product on the basis of direct labor hours (DLHs). The following standards are based on 100,000
direct labor hours:
Variable overhead 2 DLHs @ $3 per DLH = $6 per unit
Fixed overhead 2 DLHs @ $4 per DLH = $8 per unit
The following information pertains operations during March:
Units actually produced 38,000
Actual direct labor hours worked 80,000
Actual manufacturing overhead incurred:
Variable overhead $250,000
Fixed overhead $384,000

35. For March, the variable overhead spending variance was:

A. $6,000 F. B. $10,000 U. C. $12,000 U. D. $22,000 F.

36. For March, the fixed overhead volume variance was:

A. $96,000 U. B. $96,000 F. C. $80,000 U. D. $80,000 F.

Questions 37 thru 39 are based on the following information.

The Murray Company makes and sells a single product. The company recorded the following
activity and cost data for May:
Number of units completed 45,000 units
Standard direct labor-hours allowed per unit of product 1.5 DLHS
Budgeted direct labor-hours (denominator activity) 72,000 DLHS
Actual fixed overhead costs incurred $66,000
Volume variance $4,275 U
The fixed portion of the predetermined overhead rate is $0.95 per direct labor-hour.

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37. The amount of fixed overhead contained in the company's overhead flexible budget for May
was:
A. $64,125. B. $67,500. C. $68,400. D. $70,275.

38. The amount of fixed manufacturing overhead cost applied to work in process during May
was:
A. $61,725. B. $62,700. C. $42,750. D. $64,125.

39. The fixed overhead budget variance for May was:

A. $2,400 U. B. $2,400 F. C. $6,000 U. D. $6,000 F.

Questions 40 and 41 are based on the following information.

Valenzuela Plastics Inc. has set a standard cost, P5.25 per unit for Material D and P12.25 per unit
for Material E. In June, Valenzuela bought 17,500 units of Material D and 8,750 units of
Material E. All Material D, except 1,400 units were bought at the standard unit cost. The 1,400
units had a unit cost of P6.15. Valenzuela bought 7,875 units of Material E at standard cost and
875 units at a unit cost of P14.
In accordance with the standard two units of Material D and one unit of Material E should be
used to make each unit of Product F. In January, 7,000 units of Product F were made and 15,050
units of Material D were used and 7,175 units of Material E were used.

40. The total materials price variance is

A. P2,791.25 F B. P2,791,25 U C. P13,781.25 F D. P13,781.25 U

41. The total materials quantity variance is

A. P7,656.25 F B. P7,656.25 U C. P13,781.25 F D. P13,781.25 U

Questions 42 and 43 are based on the following information.

Based on normal capacity operations, Sta. Ana Company employs 25 workers in its Refining
Department, working 8 hours a day, 20 days per month at a wage rate of P6 per hour. At normal
capacity, production in the department is 5,000 units per month. Indirect materials average
P0.25 per direct labor hour; indirect labor cost is 12½% of direct labor cost; and other overhead
are P0.15 per direct labor hour.
The flexible budget at the normal capacity activity level follows:
Direct materials P 4,000
Direct labor 24,000
Fixed factory overhead 1,200
Indirect materials 1,000
Indirect labor 3,000
Other overhead 600
Total P 33,800
Cost per unit P 6.76

42. The cost per unit at 60% capacity is

A. P6.00 B. P6.50 C. P6.82 D. P6.92

43. The total production cost for one month at 80% capacity is
A. P20,760 B. P21,500 C. P27,280 D. P30,160

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ANSWER KEY
Theory Problem
1. D 26. A 1. D 26. C
2. A 27. D 2. D 27. D
3. A 28. B 3. D 28. B
4. D 29. B 4. B 29. A
5. B 30. C 5. D 30. A
6. B 31. D 6. C 31. C
7. C 32. A 7. C 32. A
8. C 33. B 8. C 33. B
9. D 34. C 9. D 34. C
10. A 35. A 10. A 35. B
11. A 36. A 11. C 36. A
12. A 37. D 12. B 37. C
13. B 38. D 13. B 38. D
14. B 39. B 14. C 39. B
15. B 40. C 15. B 40. B
16. C 41. B 16. A 41. B
17. A 42. A 17. C 42. D
18. A 43. C 18. D 43. C
19. C 44. B 19. D
20. A 45. C 20. D
21. C 46. A 21. B
22. B 22. A
23. C 23. B
24. D 24. A
25. A 25. D

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