Manila * Cavite * Laguna * Cebu * Cagayan De Oro * Davao

Since 1977

MAS.3202 TRINIDAD/ALENTON/URO
Costs Behavior, Determination and Determination MAY 2022

LECTURE NOTES

Cost classifications are used to define costs in terms of • Its advantage is that it can be used when
their relationships to the following four items: only limited data are available.
• Time of incurrence
• Reaction to changes in activity 4. Regression analysis or the least-squares method.
• Classification on the financial statements • Mathematically describe the relationship
• Impact on decision-making between costs and activities
• Because all data observations are used, the
I. Cost behavior refers to the way costs respond to resulting linear equation is more
changes in volume or activity. representative of cost behavior than either
II. Cost object is anything for which management the high-low or scatter diagram methods.
wants to collect or accumulate costs
III. Managers use assumptions about cost behavior in Contribution margin income statements
almost every decision they make. A. A contribution margin income statement is
• When planning, managers use cost behavior to formatted to emphasize cost behavior rather
determine how many units of products or than organizational functions.
services must be sold to generate a targeted B. Contribution margin (CM) is the amount that
amount of profit and how changes in planned remains after all variable costs are subtracted
activities will affect operating income. from sales.
• When performing their duties, managers use
cost behavior to determine the impact of their Operating leverage or cost structure. As part of
decisions on operating income. planning, the management should consider the
• When evaluating and reporting on operating leverage, i.e., the relationship of fixed costs to
performance, managers analyze how changes variable costs.
in costs and sales affect profitability. • Low operating leverage – It is characterized of
IV. The behavior of costs relatively lower amount of total fixed costs and
1. Variable costs. Total costs that change in direct higher variable costs per unit. This cost
proportion to changes in productive output (or relationship involves less operating risk because
other volume measures). However, on a per of having a lower amount of fixed costs.
unit basis, variable costs remain constant as However, because the amount of unit variable
volume changes. The traditional definition of cost is higher, the profit potential is lower as the
variable costs assumes that a linear relationship contribution margin per unit when aggregated
exists between costs and the measure of for the recovery of fixed cost and generation of
capacity chosen. profit is relatively lower.
2. Fixed costs are total costs that remain constant • High operating leverage – It refers to cost
within a relevant range of volume or activity. relationship whereby the amount of fixed costs is
Fixed unit costs vary inversely with changes in relatively higher with lower amount of variable
activity or volume. cost per unit. Hence, the profit potential is
3. Mixed (semi-variable) costs have both variable higher but the operating risk is also higher.
and fixed cost components.
Note: The high operating leverage is suited for
Separating mixed costs into their variable and higher activity level. If the company can only
fixed operate at a lower level of activity, it is better to
1. Engineering method. Separates costs by employ low operating leverage because it so risky to
performing step-by-step analysis of tasks, costs have higher amount of fixed costs that may not be
and processes involved. It is also called a time fully recovered by the amount of contribution
and motion study. margin.

2. Scatter diagram or visual fit method Indifference point. It is the level of volume at which
• Used when there is doubt about the behavior total costs, and hence the amount of profits, are the
pattern of a particular cost. same under both operating leverage. Based on the
• If the diagram suggests a linear relationship, indifference point, the manager can choose between
a cost line can be imposed. The use of the cost-structure alternatives. If the anticipated
scatter diagram (visual fit) usually reveals volume would exceed the indifference point,
the presence of outliers. the manager is likely to choose higher
operating leverage.
3. High-low method
• Its disadvantage is that if one or both data
points are not representative of the
remaining data set, the estimate of variable
and fixed costs may not be accurate.

Page 1 of 5 www.teamprtc.com.ph MAS.3202

EXCEL PROFESSIONAL SERVICES, INC.

DISCUSSION QUESTIONS
STRAIGHT PROBLEMS Prima Mover Co. operates a fleet of delivery trucks in
Manila. The company has determined that if a truck is
PROBLEM NO. 1. driven 120,000 kilometers during a year, the average
Handy Inc. is studying the costs of several clients and operating costs is P4.80 per kilometer. If a truck is
has found that the accompanying graphs appear as driven only 80,000 kilometers during a year, the
follows: (Unless told otherwise, assume that the average operating cost increases to P5.20 per kilometer.
horizontal axis represents total activity and the vertical
axis represents total cost). Requirements:
1. Using the high-low method, estimate the variable
1. A straight line that gradually slopes upward and fixed cost elements of the annual cost of truck
to the right operation.
2. A curvilinear line that gradually slopes 2. Express the variable and fixed costs in the form Y =
upward to the right a + bX.
3. A straight line that is parallel to the graph's 3. If a truck were driven 110,000 kilometers during a
horizontal axis year, what total cost would you expect Prime to
4. A straight line that gradually slopes incur?
downward to the right
5. A curvilinear line that gradually slopes PROBLEM NO. 4.
downward to the right ZJ Movers Inc. documented the miles driven and total
6. A straight line that gradually slopes upward moving van costs for the past five months as follows:
to the right and then, at a specific point, Number of miles Total vehicle costs
flattens out to run parallel to the horizontal January 2,000 P4,800
axis February 2,500 5,050
7. A series of straight lines that appear to March 5,000 6,100
resemble a set of steps April 4,000 5,600
May 5,000 6,000
Requirements:
For items A-E, which graph listed above best represents In order to budget total vehicle costs for the upcoming
the cost behavior pattern described. summer months, ZJ wishes to estimate total vehicle costs
using the high-low method.
A. The salary cost of lab technicians employed
at a clinic. One technician is needed for Requirements:
every 1,500 patients serviced. 1. What is the equation to predict estimated total
B. The cost of glass used by a manufacturer of vehicle costs?
automobile windshields. 2. If the company expects to drive 7,500 miles in
C. A profit-sharing bonus that is paid to the June, what will be the estimated total vehicle
associate director of a firm that conducts costs?
professional-development courses for
executives. The bonus is based on revenues PROBLEM NO. 5.
from courses that are being run, subject to a St. Dominic’s Hospital contains 450 beds. The average
maximum amount each year. occupancy rate is 80% per month. In other words, on
D. Flood insurance premiums that are paid by average, 80% of the hospital’s beds are occupied by
Reliable Manufacturing, which operates a patients. At this level of occupancy, the hospital’s
production facility close to a river. operating costs are P32 per occupied bed per day,
E. The paper cost that is used in the production assuming a 30-day month. This P32 figure contains
of a textbook. Note: Assume that for this both variable and fixed cost elements.
part only, the graph's vertical axis represents During the month of June, the hospital’s occupancy rate was
the cost per unit rather than total cost. only 60%. A total of P326,700 in operating cost was
incurred during the month.
PROBLEM NO. 2.
Silver Products has presented the following information Requirements:
for the past eight months operations: 1. Using the high-low method, estimate the variable
Month Units Total Costs cost per occupied bed on a daily basis and the total
April 8,000 P50,400 fixed operating costs per month.
May 6,400 45,500 2. Assume an occupancy rate of 70% per month. What
June 4,000 39,600 amount of total operating cost would you expect the
July 5,600 43,500 hospital to incur?
August 7,000 47,000
September 8,200 50,100 PROBLEM NO. 6.
October 7,800 49,000 Sulucan Medical Center has collected data on all of its
November 6,800 46,600 activities for the past seven months. Data for the cardiac
nursing care follow:
Requirements: Cost Hours of Nursing
1. Using the high-low method, calculate the fixed Care
cost per month and variable cost per unit. September 2021 P69,500 1,700
2. What would total costs be for a month with 5,400 October 2021 64,250 1,550
units produced? November 2021 52,000 1,200
December 2021 66,000 1,600
PROBLEM NO. 3. January 2022 83,000 1,800

Page 2 of 5 www.teamprtc.com.ph MAS.3202

EXCEL PROFESSIONAL SERVICES, INC.

February 2022 66,550 1,330 P2,800,000 for 60,000 units of budgeted output.
March 2022 79,500 1,700 Because of the need for additional facilities, budgeted
fixed costs for 60,000 units are 25 percent more than
Requirements: budgeted fixed costs for 50,000 units. How much is
1. Using the high-low method, calculate the variable rate Jorrel’s budgeted variable cost per unit of output?
per hour and the fixed cost for the nursing care
activity.
2. Upon looking into the events that happened at the MULTIPLE CHOICE QUESTIONS
end of 2021, you find that the cardiology ward bought
a cardiac-monitoring machine for the nursing station. 1. A fixed cost within the relevant range
A decision was also made to add a new supervisory a. increases in total as output increases
position for the evening shift. Monthly depreciation b. does not change in total as output changes
on the monitor and the salary of the new supervisor c. decreases in total as output decreases
totals P10,000. Calculate the fixed cost and variable d. has both a variable and a fixed component
rate applicable to November 2021 and the fixed cost
and variable rate applicable to March 2022? 2. Variable costs within the relevant range
3. What is the expected cost for the month of April 2022 a. stay constant on a per unit basis as output
assuming that the center operates at 75,000-patient changes
level with 1,750 hours of nursing care? b. increase in total as output increases
c. decrease in total as output decreases
PROBLEM NO. 7. d. all of these are correct
Below are cost and activity data for a particular cost
over the last four periods. Your boss has asked you to 3. When a mixed cost is graphed the slope of the line
analyze this cost so that management will have a better equals
understanding of how this cost changes in response to a. the fixed cost per unit of output
changes in activity. b. the total cost per unit
c. the sales price per unit
Activity Cost d. the variable cost per unit of the activity driver
Period 1 41 468
Period 2 43 484 4. If sales revenue doubles, fixed costs will
Period 3 48 520 a. decrease in total.
Period 4 46 499 b. increase in total.
c. decrease on a per unit basis.
Using the least-squares regression method, estimate the d. increase on a per unit basis.
cost formula for this cost.
5. Of the following methods, the one that would not
PROBLEM NO. 8. be appropriate for analyzing how a specific cost
Airline, Inc. used Excel to run a least-squares regression behaves is
analysis, which resulted in the following output: a. the scattergraph method.
Regression Statistics b. the industrial engineering approach.
Multiple R 0.7225 c. linear programming.
R Square 0.8500 d. statistical regression analysis.
Observations 30
Constant 38,000 6. Advantages of the method of least squares over the
Coefficient 5.75 high-low method include all of the following except
Standard error 0.4641 a. a statistical method is used to mathematically
derive the cost function
Requirements: b. only two points are used to develop the cost
1. What is Newport's total fixed cost? function
2. What is Newport's variable cost per unit? c. the squared differences between actual
3. What total cost would Newport predict for a month observations and the line (cost function) are
in which they sold 5,000 units? minimized
4. What proportion of variation in Newport's cost is d. all the observations have an effect on the cost
explained by variation in production? function

PROBLEM NO. 9. 7. A management accountant performs a linear

Indie, Inc. uses a semi-automated process in its regression of maintenance cost vs. production using
production. It is faced with a proposal to completely a computer spreadsheet. The regression output
automate its production. Below are data for these shows an "intercept" value of P322,897. How
alternative methods: should the accountant interpret this information?
Complete Semi-Automated a. Y has a value of P322,897 when X equals zero.
Automation b. X has a value of P322,897 when Y equals zero.
Materials cost per unit P12.00 P10.50 c. The residual error of the regression is P322,897.
Labor cost per unit 3.00 15.00 d. Maintenance cost has an average value of
Other variable cost/unit 4.50 3.00 P322,897.
Lease cost per year 75,000 30,000
Maintenance cost/year 15,000 6,000 8. In regression analysis, which of the following
What is the indifference point? correlation coefficients represents the strongest
relationship between the independent and
PROBLEM NO. 10. dependent variables?
Total production costs for Jorrel, Inc. are budgeted at a. 1.03 c. -.89
P2,300,000 for 50,000 units of budgeted output and b. -.02 d. .75

Page 3 of 5 www.teamprtc.com.ph MAS.3202

EXCEL PROFESSIONAL SERVICES, INC.

9. The relationship between cost and activity is 17. The following summations are available:
termed: Sum of hours 860
a. cost estimation. c. cost behavior. Sum of costs 4,120
b. cost prediction. d. cost analysis. Sum of hours x cost 890,000
Sum of hours squared 187,000
10. Norman Company pays a sales commission of 5% Number of months analyzed 4
on each unit sold. If a graph is prepared, with the Using the “least squares method” for splitting a
vertical axis representing per-unit cost and the semi-variable cost, what is the variable rate per
horizontal axis representing units sold, how would a hour?
line that depicts sales commissions be drawn? Variable rate per hour Fixed cost
a. As a straight diagonal line, sloping upward to the a. P3 P500
right. b. P2 P600
b. As a straight diagonal line, sloping downward to c. P2 P500
the right. d. P4 P600
c. As a horizontal line.
d. As a vertical line. 18. Fixed cost per unit is P9 when 20,000 units are
produced and P6 when 30,000 units are produced.
11. A high R 2 measure in regression analysis is preferred What is the total fixed cost when nothing is
because: produced?
a. it indicates a good fit of the regression line a. P120,000
through the data points. b. P270,000
b. it shows that a great deal of the change in the c. P15
dependent variable is explained by change in the d. P180,000
independent variable. e. P0
c. it means that the independent variable is a good
predictor of the dependent variable. 19. Citrus, Inc. used the high-low method to estimate
d. it means that the cost analyst can be relatively that its fixed costs are P210,000. At its low level of
confident in his or her cost predictions. activity, 100,000 units, average cost was P2.60 per
e. all of the preceding statements are true. unit. What would Citrus predict its average cost per
unit to be when production is 200,000 units?
12. Since Anytime Pan is open 24 hours a day, its oven a. P1.05 c. P2.60
is constantly on and is, therefore, always using b. P1.55 d. P5.20
natural gas. However, when there is no pan in the
oven, the oven automatically lowers its flame and Use the following information for the next two questions.
reduces its natural gas usage by 70%. The cost of Tory Company derived the following cost relationship
natural gas would best be described as a: from a regression analysis of its monthly manufacturing
a. fixed cost d. step-variable cost overhead cost.
b. mixed cost e. true variable cost
c. step-fixed cost y = P80,000 + P12X
where: y = monthly manufacturing overhead cost
13. Which cost is LEAST likely to be direct to a particular X = machine-hours
product?
a. Salaries of salespeople who sell all of the The standard error of estimate of the regression is
company's products. P6,000.
b. Advertising of the product.
c. License fees paid to the designer of the product. The standard time required to manufacture one six-unit
d. Cost of materials used to make the product. case of Tory’s single product is four machine-hours. Tory
applies manufacturing overhead to production on the
14. The range of activity within which a linear cost basis of machine-hours, and its normal annual production
function is valid is called the is 50,000 cases.
a. normal range.
b. relevant range. 20. Tory’s estimated variable manufacturing overhead
c. activity range. cost for a month in which scheduled production is
d. none of these. 10,000 cases would be
a. P80,000. c. P160,000.
15. If a cost can be reduced to zero in the short run without b. P480,000. d. P320,000.
significantly harming the organization, the cost is a
a. variable cost. c. discretionary cost. 21. Tory’s predetermined fixed manufacturing overhead
b. committed cost. d. product cost. rate would be
a. P4.80/MH. c. P3.20/MH.
16. Which of the following is a variable cost? b. P4.00/MH. d. P1.60/MH.
a. A cost that is P26,000 when production is 65,000,
and P26,000 when production is 91,000. 22. Litton Productions, Inc. owns and operates a chain
b. A cost that is P26,000 when production is 65,000, of movie theaters. The theaters in the chain vary
and P36,400 when production is 91,000. from low volume, small town to high volume, Big
c. A cost that is P26,000 when production is 65,000, City/downtown theaters. Management is considering
and P52,000 when production is 91,000. installing machines that will make popcorn on the
d. A cost that is P52,000 when production is 65,000, premises. This proposed feature would be properly
and P52,000 when production is 91,000. advertised and is intended to increase patronage at
the company’s theaters.

Page 4 of 5 www.teamprtc.com.ph MAS.3202

EXCEL PROFESSIONAL SERVICES, INC.

These machine are available in two different sizes with activity when sales equaled 10,000 units and an
the following details: average cost per unit of P6.50 at its highest level of
Economy Regular activity when sales equaled 20,000 units. Holly
Annual capacity (in boxes) 50,000 120,000 would estimate fixed costs as
Costs a. P70,000. c. P8.25.
Annual machine rental P 80,000 P110,000 b. P16.50. d. P100,000.
Popcorn cost per box 1.30 1.30
Cost of each box 0.80 0.80 27. A mixed cost function has a constant component of
Other variable costs/box 2.20 1.40 P20,000. If the total cost is P60,000 and the
The level of output in boxes at which the Economy independent variable has the value 200, what is the
Popper and the Regular Popper would earn the same value of the slope coefficient?
profit (loss) is a. P200 c. P400
a. 50,000 c. 37,500 b. P600 d. P40,000
b. 65,000 d. 40,000
28. A company wants to open a new store in one of two
23. Alma Corporation has developed the following nearby shopping malls. In Mall A, the rent will be
flexible budget formula for annual indirect labor P250,000 per year. In Mall B, the rent will be 4% of
costs: gross revenues. Assuming that revenues and all
Total Cost = P180,000 + P4.50 per machine hr. other elements under consideration are the same for
Operating budgets for the current month are based both malls, at what level of revenues will the
upon 20,000 machine hours of planned machine time. company be indifferent between the two malls?
Indirect labor costs included in this monthly planning a. P1,000,000 c. P 4,000,000
budget are: b. P6,250,000 d. P12,500,000
a. P 90,000 c. P180,000
b. P105,000 d. P270,000 Use the following information for the next two questions.
Data concerning Nelson Company's activity for the first
24. Anderson Corporation has provided the following six months of the year appear below:
production and average cost data (per unit) for two Machine Electrical
levels of monthly production volume. The company Month Hours Cost
produces a single product. January 4,000 P3,120
Production volume 4,000 units 5,000 units February 6,000 P4,460
Direct materials P99.20 P99.20 March 4,800 P3,500
Direct labor P45.50 P45.50 April 3,800 P3,040
Manufacturing overhead P94.00 P77.60 May 3,600 P2,900
The best estimate of the total monthly fixed June 4,200 P3,200
manufacturing cost is:
a. P388,000 c. P376,000 29. Using the high-low method of analysis, the
b. P954,800 d. P328,000 estimated variable electrical cost per machine hour
is:
25. A review of Parry Corporation's accounting records a. P0.65. c. P0.70.
found that at a volume of 90,000 units, the variable b. P0.40. d. P0.67.
and fixed cost per unit amounted to P8 and P4,
respectively. On the basis of this information, what 30. Using the high-low method of analysis, the
amount of total cost would Parry anticipate at a estimated monthly fixed component of the electrical
volume of 85,000 units? cost is:
a. P1,020,000. c. P1,060,000. a. P1,520. c. P 260.
b. P1,040,000. d. P1,080,000. b. P 440. d. P 560.

26. Holly, which uses the high-low method, had an – end -

average cost per unit of P10 at its lowest level of

Page 5 of 5 www.teamprtc.com.ph MAS.3202