RELEVANT COSTING - MIDTERM REVIEWER 10.

Consider the following statements:

Hulguin, Alyssa Isabel D. I. A division's net operating income, after deducting both traceable
BSA - 2 and allocated common corporate costs, is negative.
II. The division's avoidable fixed costs exceed its contribution
1. Cost that do not appear in accounting records and that do not margin.
require peso outlays but do involve a foregone opportunity by the III. The division's traceable fixed costs plus its allocated common
entity whose costs are being measured are corporate costs exceed its contribution margin.
A. conversion costs. B. differential costs.
C. imputed costs. D. prime costs. Which of the above statements give an economic reason for
eliminating the division?
2. Pear Company temporarily has unused production capacity. The а. Only I. b. Only II.
idle plant facilities can be used to manufacture a low-margin item. D. Only III. D. Only I and II.
The low-margin item should be produced if it can be sold for more
than its 11. In a make or buy delision:
a. fixed costs. a. only the variable costs are relevant.
b. variable costs. b. only the fixed costs are relevant.
c. variable costs plus any opportunity cost of the idle facilities. c. both the variable costs and the fixed costs which will continue
d. indirect costs plus any opportunity cost of the idle facilities. regardless of the decision are relevant.
d. both the variable costs and the fixed costs which are avoidable are
3. As part of the data presented in support of a proposal to increase relevant.
the production of clock-radios, the sales manager of Whittaker
Electronics reported the total additional cost required for the 12. Which of the following best describes an opportunity cost?
proposed increased production level. The increase in total cost is A. It is a relevant cost in decision making, but it is not part of the
known as traditional accounting records.
a. controllable cost. b. differential cost. c. It is not a relevant cost in decision making, but is part of the
C, opportunity cost. D. out-of-pocket cost. traditional accounting records.
d. It is a relevant cost in decision making, and is part of the
4. An item whose entire amount is usually a differential cost is traditional accounting records.
A. factory overhead. B. direct cost. e. It is not a relevant cost in decision making, and is not part of the
C, conversion cost. D. period cost. traditional accounting records.

5. In the development of accounting data for decision-making 13. The opportunity cost of making a component part in a factory
purpose, relevant costs are defined as with excess capacity for which there is no alternative use is:
а. future costs which will differ under each alternative course of A. . the variable manufacturing cost of the component.
action. B. the total manufacturing cost of the component.
b. the change in prime cost under each alternative course of action. C. the fixed manufacturing cost of the component.
c. standard costs which are developed by time and motion study D. zero.
techniques because of their relevance to managerial control.
d. historical costs which are the best available basis for estimating 14. In a sell or process further decision, consider the following costs:
future costs. I. A variable production cost incurred prior to split-off.
II. A variable production cost incurred after split-off.
6. Which of the following cost are always irrelevant in decision III. An avoidable fixed production cost incurred after split-off.
making?
a. avoidable costs. b. sunk costs. Which of the above costs is (are) not relevant in a decision regarding
B. opportunity costs. D. fixed costs. whether the product should be processed further?
а. Only I. b. Only III.
7. Consider the following statements: B. Only I and II. D. Only I and III.
I. Assemble all costs associated with each alternative being
considered. 15. Consider the following statements:
II. Eliminate those costs that are sunk. I. A firm that decides to produce its own parts runs the risk of
III. Eliminate those costs that differ between alternatives. destroying long-run relationships with suppliers.
II. An integrated firm is less dependent on its suppliers.
Which of the above statements does not represent a step in III. Changing technology often makes continued production of
identifying the relevant costs in a decision problem? one's own parts more costly than buying them from the outside.
a. Only I. b. Only II.
C. Only III. D. Only I and III. Which of these statements indicate hazards to a firm that arise from
being vertically integrated?
8, The acceptance of a special order will improve overall net a. Only I. b. Only II.
operating income so long as the revenue from the special order b. C. Only I and Il. D. Only 1 and III.
exceeds:
а. the contribution margin on the order. 16. Kala Company prepared the following tentative forécast
B. the incremental costs associated with the order. concerning product A for 20X3.
C. the variable costs associated with the order.
D. the sunk costs associated with the order. Sales P500,000
Selling price per unit P5.00
9. Allocated common fixed costs: Variable costs P300,000
a. can make a product line appear to be unprofitable. Fixed costs PI50,000
b. are always incremental costs.
с. are always relevant in decisions involving dropping a product line. Study made by the sales manager disclosed that the unit selling price
d. responses a, b, and c are all correct. could be increased by 20%, with an expected volume decrease of
only 10%. Assuming that Kala incorporates these changes in its 20X3
forecast, what should be the operating income from product A?
a. P66,000 b. P90,000
b. P120,000 d. P145,000
Solution Solution
Sales [(100,000 x 90%) x (5 x 120%)] 540,000 a. Variable cost / unit at special price (5 x 60%) 3
Less: Variable costs (300,000 x 90%) 270,000 Variable cost / unit at regular price (750,000/300,000) 2.5
CM 270,000 Difference in variable cost 0.5
Less: Fixed Costs 150,000 Multiplied by special order quantity 60,000
Operating Income 120,000 30,000
b. Increase in sales (60,000 x 3) 180,000
17. Wiggle Company sells product A at a selling price of P21 per unit. Less: Increase in variable cost (60,000 x 2.5) 150,000
Wiggle’s cost per unit based on the full capacity of 200,000 units is as Net increase in income 30,000
follows:
20. Three companies are each manufacturing and selling annually
Direct materials P4 10,000 units of a similar product at a sales price of P20 per unit.
Direct labor P5 The companies have fixed and variable costs as follows:
Overhead (2/3 of which is fixed) P6 Company Fixed Cost Variable Cost per unit
15 R P40,000 P12
A special order affecting to buy 20,000 units was received from a S 80,000 8
foreign distributor. The only selling costs that would be incurred on T 120,000 4
this order would be P3 per unit for shipping. Wiggle has sufficient Each company contemplates a price decrease from P20 to P16 per
existing capacity to manufacture the additional units. In negotiating unit in the expectation that sales will incraese from 10,000 to
a price for the special order, Wiggle should consider that the 15,000 units per year.
minimum selling price per unit should be
а. P14. b. P15. The contribution margin for each company at the present sales
c. P16. d. P18. level is:
A. R - 80,000 S - 80,000 T - 80,000
Solution B. R - 160,000 S - 120,000 T - 80,000
DM 4 C. R - 80,000 S - 120,000 T - 160,000
DL 5 D. R - 40,000 S - 40,000 T - 40,000
Overhead (6 x 1/3) 2 E. None of the above
Selling Cost 3
Minimum selling price per unit 14 Solution
R S T
18. Plainfield Company manufactures Part G for use in its production Sales (10,000 x 20) 200,000 200,000 200,000
cycle. The costs per unit for 10,000 for Part G are as follows:
Variable Cost 120,000 80,000 40,000
CM 80,000 120,000 160,00
Direct materials P3
Direct labor 15
21. Refer to No. 20. The operation income for each company at
Variable overhead 6
the contemplated price and sales levels are:
Fixed overhead 8
A. R - 60,000 S - 120,000 T - 80,000
32
B. R - 60,000 S - 60,000 T - 80,000
C. R - 40,000 S - 40,000 T - 40,000
Verona company has offered to sell Plainfield 10,000 units of Part G
D. R - 20,000 S - 40,000 T - 60,000
for P30 per unit. If Plainfield accepts Verona’s offer, the r4eleased
E. None of the above
facilities could be used to save P45,000 in relevant costs in the
manufacture of Part H. In addition P5 per unit of the fixed overhead
applied to Part G would be totally eliminated. What alternative is
Solution
more desirable and by what amount is it more desirable?
R S T
Alternative Amount Sales (15,000 x 16) 240,000 240,000 240,000
A. Manufacture P10,000 Variable Cost 180,000 120,000 60,000
B. Manufacture P15,000 CM 60,000 120,000 180,000
C. Buy P35,000 Fixed Cost 40,000 80,000 120,000
D. Buy P65,000 Net Income 20,000 40,000 60,000

Solution 22. Refer to No. 20. The increase (decrease) in operating income
Relevant cost to make (10,000 x 24) 240,000 for R Company resulting from the price decrease and the sal3es
Purchase Cost 300,000 volume increase is:
Less: Savings in manufacturing cost 45,000 A. P20,000 decrease D. No increase or decrease
Avoidable fixed overhead 50,000 95,000 B. P20,000 increase E. None of the above.
Net Purchase Price 205,000 C. P5,000 increase
Difference in favor of buy alternative 35,000
Solution 10,000 at 20 15,000 at 16
19. Relic Corp. Manufactures batons. Relic can manufacture 300,000 Sales 200,000 240,000
batons a year at a variable cost of P750,000 and a fixed cost of Variable Cost 120,000 180,000
P450,000. Based on Relic’s predictions, 240,000 batons will be sold at CM 80,000 60,000
a regular price of P5.00 each. In addition, a special order was placed Fixed Cost 40,000 40,000
for 60,000 batons to be sold at a 40% discount off the regular price. Net Income 40,000 20,000 (20,000)
By what amount would income before taxes be increased or
decreased as a result of the special order? 23. From the accounting records of Sta. Barbara Company, the
A. P60,000 decrease C. P36,000 increase following data on costs for the quarter ended September 30, 20x3
B. P30,000 increase D. P180,000 increase were determined:
Variable Costs Fixed Costs
Direct Materials P300,000
Direct Labor 400,000
Factory Overhead 80,000 P50,000
Marketing expenses 70,000 P30,000
Administrative expenses 50,000 P20,000
 Solution
Sales for the quarter totaled P1,200,000 DM (2 x 5,000) 10,000
The company is considering two alternative proposals that would DL (8 x 5,000) 40,000
change certain cost items. Proposal A would increase fixed costs by Variable overhead (4 x 5,000) 20,000
P10,000 with sales and variable costs remaining the same. Total variable costs 70,000
Proposal B would involve acquiring modern equipment at an Add: Avoidable fixed overhead 10,000
annual increase of fixed costs of P25,000, with the expectation of Total 80,000
saving the same amount in each of the direct materials and direct
labor costs. 26. Dipper Company needs 20,000 of a certain part to use in its
production cycle. The following information is available:
If Proposal A is adopted, the company’s profit would be:
A. P110,000 D. P190,000 Cost to Dipper to make the part P4
B. P120,000 E. None of the above Direct Materials 16
C. P175,000 Direct Labor 18
Variable Overhead 10
Solution Fixed overhead applied 48
Sales 1,200,000
Less: Variable costs Cost to buy the part from the
Direct Materials 300,000 Orion Company P36
Direct Labor 400,000
Factory Overhead 80,000 If Dipper buys the part from Orion instead of making it, Dipper
Marketing expenses 70,000 could not used the released facilities in another manufacturing
Administrative expenses 50,000 900,000 activity. 60% of the fixed overhead applied will continue regardless
CM 300,000 of what decision is made.
Less: Fixed Costs In deciding whether to make or buy the part, the total relevant
Factory Overhead 50,000 costs to make the part are:
Marketing expenses 30,000 A. P560,000 C. P720,000
Administrative expenses 20,000 B. P640,000 D. P840,000
Increase in fixed costs 10,000 110,000
Profit 190,000 27. The Blade Division of Dana Company produces hardened steel
blades. One third of the Blade’s Division’s output is sold to the
24. Refer to Question No. 23. If Proposal B is adopted, the Lawn Products Division of Dana; the remainder is sold to outside
company's profit would be: customers. The Blade Division’s estimated sales and standard cost
A. P110,000 d. P190,000 data for the fiscal year ending June 30, 20X3, are as follows:
B. P120,000 e. none of the above Lawn Products Outsiders
C. P175,000 Sales P15,000 P40,000
Variable Costs (10,000) (20,000)
Solution Fixed Costs ( 3,000) ( 6,000)
Sales 1,200,000 Gross Margin P2,000 P14,000
Less: Variable costs
Direct Materials 275,000 Unit Sales 10,000 20,000
Direct Labor 375,000
Factory Overhead 80,000 The Lawn Products Division has an opportunityt to purchase
Marketing expenses 70,000 10,000 blades of identical quality from an outside supplier at a cost
Administrative expenses 50,000 850,000 of P1.25 per unit on a continuing basis. Assume that the Blade
CM 350,000 Division cannot sell any additional products to outside customers,
Less: Fixed Costs Should Dana allow its Lawn Products Division to purchase the
Factory Overhead 50,000 blades from the outside supplier, and why?
Marketing expenses 30,000 A. Yes, because buying the blades would save Dana Company
Administrative expenses 20,000 P500
Increase in fixed costs (6,250) 93,750 B. No, because making the blades would save Dana Company
Profit 256,250 P1,500
C. Yes, because buying the blades would save Dana Company
25. Scully Inc. Has been manufacturing 5,000 units of Part 20561 P2,500
which is used in the manufacture of one of its products. At this D. No, because making the blades would save Dana Company
level of prodution, the cost per unit of manufacturing Part 20561 is P2,500
as follows:
28. Sta. Helena Company manufactures men’s caps. The projected
Direct Materials P2 income statement for the year before any special order is as
Direct Labor 8 follows:
Variable overhead 4 Amount Per Unit
Fixed overhead applied 6 Sales P400,000 P20
Total P20 COGS 320,000 16
Gross Margin P 80,000 P4
Mulder Company has offered to sell Scully 5,000 units of Part Selling Expenses 30,000 3
20561 for P19 a unit. Scully has setermined that it could use the Operating Income 50,000 P1
facilities presently used to manufacture Part 20561 to
manufacture Product X and generate an operating profit of P4,000. Fixed costs included in above projected income statement are
Scully has also determined that two thirds of the fixed overhead P80,000 in costs of goods sold and P9,000 in selling expenses.
applied will continue even if Part 20561 is purchased from Mulder.
To determine whether to accept Mulder’s offer, the net relevant A special order offering to buy 2,000 caps for P17 each was made
manufacturing costs to Scully are: to Sta. Helena. No additional selling expenses will be incurred if
A. P70,000 C. P90,000 the special order is accepted. Sta. Helena has the capacity to
B. P80,000 D. P95,000 manufacture 2,000 more caps.
 33. ADD Realty manages five apartment complexes in its region.
As a result of the special order, the operating income would Shown below are summary income statements for each apartment
increase by: complex:
A. P34,000 D. No increase or decrease Apartment Complexes
B. P24,000 E. None of these U V X Y Z
C. P10,000 Rental Income P1,000 P1,210 P2,347 P1,878 P1,065
Expenses 800 1,300 2,600 2,400 1,300
29. Petey Company is considering a proposal to replace exisiting Operating Income P 200 P (90) P(253) P(522) P(235)
machine used for the manufacture of product A. The new
machines are expected to cause increased annual fixed costs of Included in the expenses is P1,200 of common corporate expenses
P120,000; however, variable costs should decrease by 20% due to that have been allocated to the apartment complexes based on
a reduction in direct labor hours and more efficient usage of direct rental income. These common corporate expenses would have to
materials. Before this change was under consideration, Petey had be incurred regardless of how many apartment complexes ADD
budgeted product A sales and costs for 20X3 as follows: Realty manages. The apartment complex(s) ADD Realty should
consider dropping is (are):
Sales P2,000,000 A. V, W, X, Y C. X, Y
Variable costs 70% of sales B. W, X , Y D. X
Fixed costs P400,000
34. Mott Company manufactures 10,000 units of Part EM each
Assuming that Petey implemented the above proposal by January year for use in its production. The following total costs were
1, 20X3. What would be the increase in budgeted operating profit reported last year:
for Product A for 20X3? Direct Materials 20,000
A. P160,000 C. P360,000 Direct Labor 55,000
B. P280,000 D. P480,000 Variable Manufacturing OH 45,000
Fixed Manufacturing OH 70,000
30. Laney Appliance Company makes and sells electric fans. Each Total Manufacturing Cost 190,000
fan regularly sells for P42. The following cost data per fan is based
on a full capacity of 150,000 fans produced each period. Volvo Company has offered to sell Mott 10,000 units of Part EM
for P18 per unit. If Mott accepts the offer, some of the facilities
Direct Materials P8 presently used to manufacture Part EM could be rented to a third
Direct Labor P9 party at an annual rental of P15,000. Additionally, P4 per unit of
Manufacturing overhead (70% variable and the fixed overhead applied to Part EM would be totally eliminated.
30% unavoidable fixed) 10 Should Mott accept Volvo’s offer, and why?
A. No, because it would be P5,000 cheaper to make the part.
A special order has been received by Laney for a sale of 25,000 B. Yes, because it would be P10,000 cheaper to buy the part.
fans to an overseas customer. The only selling costs that would be C. No, because it would be P15,000 cheaper to make the part.
incurred on this order would be P4 per fan for shipping. Laney is D. Yes, because it would be P25,000 cheaper to buy the part.
now selling 120,000 fans through regular channels each period.
What should Laney use as minimum selling price per fan in 35. Hollie Company produces three products, with costs and
negotiating a price for this special order? selling prices are shown below:
A. P28 C. P31 Products
B. P27 D. P24 A B C
Selling price PU P30 100% P20 100% P15 100%
31. Zach Company produces and sells 8,000 units of Product X Variable costs PU 18 60 15 75 6 40
each year. Each unit of Product X sells for P10 and has a CM per unit P12 40% P 5 25% P 9 60%
contribution margin of P6. It is estimated that if Product X is
discontinued, P50,000 of the P60,000 in fixed costs charged to A particular machine is a bottleneck. On that machine, 3 machine
Product X could be eliminated. These data indicate that ifProduct X hours is required to produce each unit of Product A, 1 hour is
is discontinued, overall company operating income should: required to produce each unit of Product B, and 2 hours are
A. Increase by P2,000 per year required to produce each unit of Product C. In which order should
B. Decrease by P2,000 per year it produce its products?
C. Increase by P38,000 per year A. C, A, B C. B, C, A
D. Decrease by P38,000 per year B. A, C, B D. the order of production doesn’t matter

32. The Siller Company has two divisions - East and West. The
divisions have the following revenues and expenses:
East West
Sales P720,000 P350,000
Variable costs 370,000 240,000
Traceable fixed costs 130,000 80,000
Allocated common
corporate costs 120,000 50,000
Operating Income P100,000 P(20,000)

The management at Siller is ponderinf the elimination of the West

division since it has shown an operating loss for the past several
years. If the west division were eliminated, its traceable fixed costs
could be avoided. The total common corporate costs would be
unaffected by this decision. Given these data, the elimination of
the West Division would result in an overall company operating
income of:
A. P100,000 C. P120,000
B. P80,000 D. P50,000