BALIUAG UNIVERSITY

CPA Review Program

Management Advisory Services
Luisito V. Correa Jr., CPA, CAT, MBA
__________________________________________________________________________________________
Module 3: Cost Terms, Concepts and Behavior L. V. CORREA

I. Cost Terminologies
✓ Cost Accounting Approaches
• Actual Costing – Valuation method that uses actual direct materials, direct labor and overhead charges in
determining product cost.
• Normal Costing – Valuation method that uses actual direct materials and direct labor, and predetermined
overhead rates in determining product cost.
• Standard Costing – Valuation method that uses predetermined or expected cost of direct materials, direct
labor and overhead in determining product cost.
• Job Order Costing – A system for allocating costs to groups of heterogeneous (customized or unique) products
made to customer specifications. It is applicable where goods or services result from production processes
which are distinct from each other. Product cost is accumulated per job or batch.
• Process Costing – A system for allocating costs to homogeneous (similar or identical) units of a mass-
produced product. It is applicable where goods or services result from a sequence of continuous or repetitive
operations or processes. Product cost is accumulated per process or department.
• Hybrid Costing – A system that blends the characteristics of both the job order and process costing systems.
Operation costing is a hybrid of job-order and process costing systems. Here, direct materials costs are
charged specifically to products or batches as in job-order systems. However, conversion costs are
accumulated and unit conversion is determined for each operation as in process costing.
• Activity-Based Costing – A cost system that focuses on activities, determines their costs, and then uses
appropriate cost drivers to trace costs to the products based on the activities.
• Backflush Costing – A costing system generally used in a just-in-time inventory environment. It omits
recording some or all of the journal entries to track the purchase and production of goods. It delays the costing
process until the production of goods is completed.
• Product Life Cycle Costing – It tracks the accumulation of costs that occur starting with the research and
development for a product and ending with the time at which sales and customer support are withdrawn.
✓ Manufacturing Costs
• Prime Costs – The costs of direct material and direct labor.
• Conversion Costs – They are the costs of converting direct materials into finished products. These include
direct manufacturing labor and manufacturing overhead.
• Manufacturing costs – Total costs of direct material and direct labor and manufacturing overhead.
• Product Costs – Inventoriable costs. Costs that can be associated with the production of specific goods.
Product costs attach to a physical unit and become an expense in the period in which the unit to which they
attach is sold.
• Period Cost – Nonmanufacturing costs. Cannot be associated with manufactured goods. Period costs become
expenses when incurred.
• Direct Cost – Those easily traced to a specific business segment (e.g., product, division, department).
• Indirect Cost – Are not easily traceable to specific segments and include factory overhead.
✓ Decision Making
• Relevant Cost – Future cost that will change as a result of a specific decision.
• Differential/Incremental Cost – Change in cost that result from selecting one alternative over another.
• Sunk Cost – Costs that have already been incurred and cannot be recovered. Sunk costs are irrelevant in any
decision-making process. Past cost or historical cost is a sunk cost.
• Avoidable Cost – Cost that can be avoided if a particular option is selected. Costs that will not continue to be
incurred if a department or product is terminated.
• Unavoidable Cost – Cost that will not be avoided regardless of which course of action is taken.
• Discretionary Cost – Costs that may or may not be spent, at the decision of a manager. Fixed costs whose
level is set by current management decisions.

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 Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
• Committed Cost – Arise from a company’s basic commitment to open its doors and engage in business (e.g.,
depreciation, property taxes, management salaries, etc.). They are costs required to establish and maintain
the readiness to do business.
• Controllable Cost – Controllable costs. Can be affected by a manager during the current period.
• Uncontrollable Cost – Those that cannot be affected by the individual in question.
• Opportunity Cost – Maximum income or savings (benefit) foregone by rejecting an alternative. The
contribution to income that is lost by not using a limited resource in its best alternative use.
• Marginal Cost – The additional costs necessary to produce one more unit.
• Outlay Cost/Out-of-pocket Cost/Explicit Cost – Cash disbursement associated with a specific project.
• Implicit Cost/Imputed Cost – Cost that does not involve any specific cash payment and is not recorded in
the accounting records.
• Engineered Cost – Costs that have a definite physical relationship to the activity base or measure. They result
from activities that have well defined cause and effect relationships between inputs and outputs.

✓ Cost Behavior
• Variable Cost – Costs that vary proportionately in total with the activity level throughout the relevant range.
• Fixed Cost – Costs that do not vary with the level of activity within the relevant range for a given period of
time.
• Mixed Cost – Also called semi-variable cost. Costs that have a fixed component and a variable component.
• Stepped Cost – Also called semi-fixed cost. Fixed over relatively short ranges of production levels.

II. Cost Behavior

✓ Cost Behavior Analysis
Total Per Unit
Variable cost
Fixed cost
✓ Cost Function and Graph
Cost function – A mathematical expression of how a cost changes with changes in the level of activity.
The cost function can be written as follows: y = a + bx
Where: y = the dependent variable and the predicted value of y, which here is total costs.
a = the constant coefficient or y intercept, which here is the fixed cost.
b = the variable coefficient or slope of the line, which here is the variable cost per activity
x = the independent variable, which here is the activity or output (i.e., units or hours).
Cost functions may be illustrated on a graph with the x-axis measuring the level of activity and the y-axis
measuring the corresponding total cost.
A. Variable Cost

B. Fixed Cost

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 Module 3: Cost Terms, Concepts and Behavior L. V. CORREA

C. Mixed Cost (Semi-variable Cost) D. Stepped Cost (Semi-fixed Cost)

✓ Cost Behavior Assumptions

• Relevant Range Assumption – The operating range of activity in which cost behavior patterns are
valid.
• Time Assumption – Cost behavior patterns are true only over a specified period of time.
• Linearity Assumption – The cost is assumed to manifest a linear relationship over a relevant range
despite its tendency to show otherwise in the long run.

III. Cost Estimation/Cost Segregation

✓ Quantitative Methods
1. Scattergraph method.
A graphical approach to computing the relationship between two variables. The dependent variable is
plotted on the y-axis and the independent variable on the x-horizontal axis. A straight line is then drawn
through the observation points which best describes the relationship between the two variables. This
method lacks precision, because by freely drawing the line through the points, it is possible to obtain a
line that does not minimize the deviations of the points from the line.

2. High-Low Points Method

The high-low method computes the slope for the variable rate based on the highest and lowest
observations. The slope is computed as change in Y (cost) over Change in X (activity/volume)
Variable cost per unit = Change in costs (Yhighest – Ylowest)_
Change in activity (Xhighest – Xlowest)

3. Least-Square Method
Regression (least squares) analysis determines the functional relationship between variables with a
measure of probable error. The method of least squares fits a regression line between the observation
points such that the sum of the squared vertical differences between the regression line and the
individual observations is minimized.

Independent variable = ______________ and Dependent variable: ______________

Simple regression – Least-square method with only one independent variable

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Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
Multiple regression – Least-square method with more than one independent variables

Linear equations used in regression analysis:

(1) ∑y = na + b∑x
(2) ∑xy = a∑x + b∑x2
Use simultaneous equation to solve for x and y.

✓ Correlation in Regression Analysis

Correlation is the relationship between variables. If the variables move with each other, they have a
direct relationship (positive correlation) as in A. If the variables move in opposite directions, they have
an inverse relationship (negative correlation) as in B. Weak correlation or no relationship as in C.
Refer to succeeding illustration.

Coefficient of Correlation (R) – Measures the relative strength of linear relationship between the
dependent and independent variables. The closer the value of R to +1.0 or –1.0, the stronger the
relationship between the variables X and Y.
R = +1.0, direct relationship between X and Y (positive correlation)
R = –1.0, an inverse relationship between X and Y (negative correlation)
R = 0, no linear relationship

Coefficient of Determination (R2) – The proportion of total variation in dependent variable (Y) that is
explained or accounted for by the independent variable (X). The goodness of the least squares fit (i.e.,
how well the regression line fits the observed data) is measured by R2.
R2 = 1 indicates that the fitted model explains all variability in y, while R2 = 0 indicates no linear
relationship.

✓ Other cost estimation methods

1. Industrial engineering (work-measurement) method – Estimates of cost functions are derived from
analyzing the physical relationships between inputs and outputs. This method of developing cost
functions is time-consuming and costly.
2. Conference method – Estimates of cost functions are derived from analysis and opinions about cost
relationships by individuals from various departments. This method can be done quickly but may
not be as reliable as quantitative methods.
3. Account analysis method – Estimates of cost functions are derived by analyzing ledger accounts and
designating them as containing fixed costs, variable costs, or mixed costs. This is a widely used
method but to be reliable it must be performed by individuals who understand operations.

✓ Illustration of high-low method

The factory overhead costs for the past six months are as follows:

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Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
Month Production Volume Total Overhead Costs
Jan 18,000 units P 1,560,000
Feb 19,000 1,520,000
Mar 15,000 1,460,000
Apr 11,000 1,320,000
May 11,000 1,280,000
Jun 51,000 8,250,000

Required: (1) Variable factory overhead cost per unit

(2) Estimated annual factory overhead fixed costs
(3) The monthly factory overhead cost function
(4) The estimated cost for July if the planned production is 20,000 units

✓ Illustration of least-square method

The factory overhead costs for the past quarter are as follows:
Month Machine Total Overhead
Hours Costs
Jan 500 P 900.00
Feb 400 800.00
Mar 600 1,000.00
Apr 700 1,200.00

Required: (1) Variable factory overhead cost per unit

(2) Estimated quarterly factory overhead fixed costs
(3) The monthly factory overhead cost function (regression model)
(4) The estimated cost for May if the planned production is 800 machine hours.
(5) The coefficient of correlation (4 decimal places).
(6) Describe the relationship between machine hours and factory overhead
(7) The coefficient of determination (4 decimal places).
(8) Describe the goodness of fit of the regression model

Month X Y XY X2
Jan 500 900.00
Feb 400 800.00
Mar 600 1,000.00
Apr 700 1,200.00
Sum

Linear equations used in regression analysis:

(1) ∑y = na + b∑x (2) ∑xy = a∑x + b∑x2

❖ Multiple Choice Questions

1. Costs that arise from periodic budgeting decisions that have no strong input-output relationship are
commonly called
A. Committed costs C. Opportunity costs
B. Discretionary costs D. Differential costs
2. The estimated unit costs for a company using absorption (full) costing and planning to produce and sell
at a level of 12,000 units per month are as follows.
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Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
Cost Item Unit Cost
Direct materials P32.00
Direct labor 20.00
Variable manufacturing overhead 15.00
Fixed manufacturing overhead 6.00
Variable selling 3.00
Fixed selling 4.00
Estimated conversion costs per unit are
A. 35.00 C. 48.00
B. 41.00 D. 67.00
3. Refer to no. 2. Estimated prime costs per unit are
A. 73.00 C. 67.00
B. 32.00 D. 52.00
4. Refer to no. 2. Estimated total variable costs per unit are
A. 38.00 C. 52.00
B. 70.00 D. 18.00
5. Refer to no. 2. Estimated total costs that would be incurred during a month with a production level of
12,000 units and a sales level of 8,000 units are
A. 692,000 C. 948,000
B. 960,000 D. 932,000
6. A new advertising agency serves a wide range of clients including manufacturers, restaurants, service
businesses, department stores, and other retail establishments. The accounting system the advertising
agency has most likely adopted for its record keeping in accumulating costs is
A. Job-order costing C. Relevant costing
B. Operation costing D. Process costing
7. Normal costing systems are said to offer a user several distinct benefits when compared with actual
costing systems. Which one of the following is not a benefit associated with normal costing systems?
A. More timely costing of jobs and products C. A smoothing of product costs throughout the period
B. Improved accuracy of job and product costing D. More economical way of attaching
overhead to a product.
8. Companies characterized by the production of basically homogeneous products will most likely use
which of the following methods for the purpose of averaging costs and providing management with
unit-cost data?
A. Process costing C. Absorption costing
B. Direct costing D. Job-order costing
9. Inventoriable costs
A. Include only the prime costs of manufacturing a product.
B. Include only the conversion costs of manufacturing a product.
C. Are expensed when products become part of finished goods inventory.
D. Are regarded as assets before the products are sold.
10. An operation costing system is
A. Identical to a process costing system except that actual cost is used for manufacturing overhead.
B. The same as a process costing system except that materials are allocated on the basis of batches of
production.
C. The same as a job order costing system except that materials are accounted for in the same way as
they are in a process costing system.
D. The same as a job order costing system except that no overhead allocations are made since actual
costs are used throughout.
11. Which one of the following categories of cost is most likely not considered a component of fixed factory
overhead?
A. Rent C. Power
B. Property taxes D. Depreciation
12. Committed costs are costs that

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Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
A. Were capitalized and amortized in prior periods.
B. Management decides to incur in the current period that do not have a clear cause and effect
relationship between inputs and outputs.
C. Result from a clear measurable relationship between inputs and outputs.
D. Establish the current level of operating capacity and cannot be altered in the short run.
13. The difference between variable costs and fixed costs is
A. Variable costs per unit fluctuate and fixed costs per unit remain constant.
B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
C. Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs
never change.
D. Variable costs per unit change in varying increments, while fixed costs per unit change in equal
increments.
14. In determining cost behavior in business, the cost function is often expressed as Y = a + bX. Which one
of the following cost estimation methods should not be used in estimating fixed and variable costs for
the equation?
A. Graphic method C. Multiple regression
B. High and low point method D. Simple regression
15. Which one of the following correctly classifies the business application to the appropriate costing
system?
Job Costing System Process Costing System
A. Wallpaper manufacturer Oil refinery
B. Aircraft assembly Public accounting firm
C. Paint manufacturer Retail banking
D. Print shop Beverage drink manufacturer
16. Huron Industries has recently developed two new products, a cleaning unit for laser discs and a tape
duplicator for reproducing home movies taken with a video camera. However, Huron has only enough
plant capacity to introduce one of these products during the current year. The company controller has
gathered the following data to assist management in deciding which product should be selected for
production. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory
salaries. Selling and administrative expenses are not allocated to products.
Tape Duplicator Cleaning Unit
Raw materials P44.00 P36.00
Machining @ P12/hr. 18.00 15.00
Assembly @ P10/hr. 30.00 10.00
Variable overhead @ P8/hr. 36.00 18.00
Fixed overhead @ P4/hr. 18.00 9.00___
Total cost P146.00 P88.00
Suggested selling price P169.95 P99.98
Actual research and development costs P240,000.00 P175,000.00
Proposed advertising and promotion costs P500,000.00 P350,000.00
For Huron's tape duplicator, the unit costs for raw materials, machining, and assembly represent
A. Conversion costs C. Committed costs
B. Separable costs D. Prime costs
17. Refer to no. 16. The difference between the P99.98 suggested selling price for Huron's laser disc
cleaning unit and its total unit cost of P88.00 represents the unit's
A. Contribution margin ratio C. Contribution margin
B. Gross margin D. Gross margin ratio
18. Refer to no. 16. The total overhead cost of P27.00 for Huron's laser disc cleaning unit is a
A. Carrying cost C. Mixed cost
B. Discretionary cost D. Sunk cost
19. Refer to no. 16. Research and development costs for Huron's two new products are
A. Conversion costs C. Relevant costs
B. Sunk costs D. Avoidable costs

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20. Refer to no. 16. The advertising and promotion costs for the product selected by Huron will be
A. Discretionary costs C. Committed costs
B. Opportunity costs D. Incremental costs
21. Refer to no. 16. The costs included in Huron's fixed overhead are
A. Joint costs C. Opportunity costs
B. Committed costs D. Prime costs
22. Which one of the following is least likely to be an objective of a cost accounting system?
A. Product costing C. Sales commission determination
B. Department efficiency D. Inventory valuation
23. In cost terminology, conversion costs consist of
A. Direct and indirect labor C. Direct labor and factory overhead
B. Direct labor and direct materials D. Indirect labor and variable factory overhead
24. Which one of the following best describes direct labor?
A. A prime cost C. A product cost
B. A period cost D. Both a product cost and a prime cost
25. The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
A. Margin of safety C. Marginal cost
B. Opportunity cost D. Incremental cost
26. Job-order costs are most useful for
A. Determining the cost of a specific project C. Estimating the overhead costs included in transfer
prices
B. Determining inventory valuation using LIFO D. Controlling indirect costs of future production
27. Job-order cost accounting systems and process-cost accounting systems differ in the way
A. Manufacturing costs are assigned to production runs and the number of units for which costs are
averaged.
B. Orders are taken and the number of units in the orders.
C. Product-profitability is determined and compared with planned costs.
D. Manufacturing processes can be accomplished
28. Companies in what type of industry may use a standard cost system for cost control, mass production
industry or service industry?
A. Yes Yes C. No No
B. Yes No D. No Yes
29. Which of the following is assigned to goods that were either purchased or manufactured for resale?
A. Relevant cost C. Opportunity cost
B. Period cost D. Product cost
30. Gram Co. develops computer programs to meet customers' special requirements. How should Gram
categorize payments to employees who develop these programs, direct costs or value-adding costs?
A. Yes Yes C. No No
B. Yes No D. No Yes
31. The CPA reviewed the minutes of a board of director's meeting of LQR Corp., an audit client. An order
for widget handles was outsourced to SDT Corp. because LQR couldn't fill the order. By having SDT
produce the order, LQR was able to realize P100,000 in sales profits that otherwise would have been
lost. The outsourcing added a cost of P10,000, but LQR was ahead by P90,000 when the order was
completed. Which of the following statements is correct regarding LQR's action?
A. The use of resource markets outside of LQR involves opportunity cost.
B. Accounting profit is total revenue minus explicit costs and implicit costs.
C. Implicit costs are not opportunity costs because they are internal costs.
D. Explicit costs are opportunity costs from purchasing widget handles from resource market.
32. Thompson Company is in the process of preparing its budget for the next fiscal year. The company has
had problems controlling costs in prior years and has decided to adopt a flexible budgeting system this
year. Many of its costs contain both fixed and variable cost components. A method that can be used to
separate costs into fixed and variable components is:
A. Trend analysis C. Dynamic programming

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B. Monte Carlo simulation D. Regression analysis
33. Regression analysis:
A. Estimates the independent cost variable C. Estimates the dependent cost variable
B. Ignores the coefficient of determination D. Uses probability assumptions to determine total
costs
34. Which of the following is the best example of a committed cost?
A. Advertising expenses C. Company outing
B. Business license cost D. Travel expense
35. In managerial accounting, the term "relevant range" is often used to describe:
A. The theoretical maximums and minimum ranges the company could operate in.
B. The range over which costs fluctuate.
C. The range over which relevant costs are incurred.
D. The range over which cost relationships are valid.
36. Which one of the following is correct regarding a relevant range?
A. Total variable costs will not change.
B. Total fixed costs will not change.
C. The relevant range cannot be changed after being established.
D. The relevant range will remain the same as long as prices do not change.
37. A cost that is fixed per unit is an example of a:
A. Fixed cost C. Mixed cost
B. Variable cost D. Stepped cost
38. A cost that bears an observable and known relationship to a quantifiable activity base is a(n):
A. Engineered cost C. Target cost
B. Indirect cost D. Fixed cost
39. There are a variety of ways of classifying costs of an object as either fixed or variable. The most accurate
method is considered to be:
A. Engineering method C. High-low method
B. Account analysis method D. Regression analysis method
40. Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first
four months of 2012. What is the estimated variable order filling cost component per order?
Month Orders Costs
January 1,200 P 3,120
February 1,300 3,185
March 1,800 4,320
April 1,700 3,895
May 8,000 18,520
A. 2.42 C. 2.48
B. 2.42 D. 2.50
41. Which statement is true?
A. The higher the production within relevant range, the higher is the fixed cost per unit.
B. The higher the production within relevant range, the higher is the variable cost per unit.
C. The lower the production within relevant range, the lower is the total fixed cost.
D. The lower the production within relevant range, the lower is the total variable cost.
42. Sender, Inc. estimates parcel mailing costs using data shown on the chart below. What is Sender’s
estimated cost for mailing 12,000 parcels?

A. 36,000 C. 51,000

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B. 45,000 D. 60,000
43. Which of the following may be used to estimate how inventory warehouse costs are affected by both
the number of shipments and the weight of materials handled?
A. Economic order quantity analysis C. Correlation analysis
B. Probability analysis D. Multiple regression analysis
44. As volume increases
A. Total fixed costs remain constant and per unit fixed costs increase.
B. Total fixed costs remain constant and per unit fixed costs decrease.
C. Total fixed costs remain constant and per unit fixed costs remain constant.
D. Total fixed costs increase and per unit fixed costs increase.
45. Which of the following best describes fixed cost?
A. It may change in total when such change is unrelated to changes in production.
B. It may change in total when such change is related to changes in production.
C. It is constant per unit of changes in production.
D. It may change in total when such change depends upon production or within the relevant range.
46. Fixed cost that cannot be reduced within a short period of time are
A. Committed costs C. Avoidable costs
B. Discretionary costs D. Unnecessary costs
47. An example of discretionary fixed cost would be
A. Depreciation on plant equipment C. Salaries of top management
B. Rent on factory building D. Research and development
48. Relevant costs are
A. All fixed costs and variable costs
B. Costs that would be incurred within the relevant range of production.
C. Past costs that are expected to be different in the future
D. Anticipated future costs that will differ among various alternatives
49. Incremental cost is
A. The difference in total costs that results from selecting one choice instead of another.
B. The profit foregone by selecting one choice instead of another.
C. A cost that continues to be incurred in the absence of activity.
D. A cost common to all choices in question and not clearly or feasibly allocable to any of them.
50. Controllable costs
A. Arise from periodic appropriation decisions and have no well-specified function relating inputs to
outputs.
B. Are primarily subject to the influence of a given manager of a responsibility center for a given span
of time.
C. Arise from having plant, property and equipment, and a functioning organization.
D. Results specifically from a clear-cut measured relationship between inputs and outputs.
51. Imputed cost is
A. The difference in total costs that results from selecting one choice instead of another.
B. A cost that may be shifted to the future with little or no effect on current operations.
C. A cost that cannot be avoided because it has already been incurred.
D. A cost that does not entail any peso outlay but is relevant to decision-making process.
52. Out-of-pocket costs
A. Are not recoverable C. Require expenditure of cash
B. Are under the influence of a supervisor D. Are irrelevant
53. Which of the following is a product cost for a manufacturing company
A. Insurance on corporate headquarters C. Depreciation on sales manager’s assigned
automobile
B. Property taxes on factory D. Salaries of sales personnel
54. Period costs
A. Are always expensed in the same period they are incurred.
B. Vary from one period to the next

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C. Remain unchanged over a given period of time.
D. Are associated with the periodic inventory method.
55. Opportunity cost is
A. The difference in total costs that results from selecting one choice instead of another.
B. The profit foregone by selecting one alternative instead of another.
C. The cost that may be saved by not adopting an alternative.
D. A cost that may be shifted to the future with little or no effect on current operations.
56. The best explanation of the value of the coefficient of correlation is that it
A. Interprets variances in terms of the independent variable.
B. Ranges in size from negative infinity to positive infinity.
C. Is a measure of the relative relationship between two variables.
D. Is positive only for downward-sloping regression lines.
57. If the coefficient of correlation between two variables is zero, how might a scatter diagram of these
variables appear?
A. Random points C. A regression line that slopes up to the right
B. A diagram could not be plotted on a graph D. A regression line that slopes down to the right
58. Arman Corporation is accumulating data to be used in preparing annual profit plan for the coming
year. Data regarding the maintenance hours and costs for last year and the results of the regression
analysis are as follows:
Month Hours of Activity Maintenance Regression Results
Costs
Jan 480 4,200 a coefficient 684.6500
Feb 320 3,000 b coefficient 7.2884
Mar 400 3,600 r2 0.99724
Apr 300 2,820 Standard error for a 49.5150
May 500 4,350 Standard error for b 0.1213
Jun 310 2,960 t-value of a 13.8270
Jul 320 3,030 t-value of b 60.1050
Aug 520 4,470
Sep 490 4,260
Oct 470 4,050
Nov 350 3,300
Dec 340 3,160
If Arman Corporation uses high-low method, the cost equation for the relationship between hours of
activity and maintenance cost will be
A. y = 400 + 9.0x C. y = 3,600 + 400x
B. y = 570 + 7.5x D. y = 570 + 9.0x
59. Refer to no. 58. Using least-square method, 420 maintenance hours for a month would mean a
budgeted maintenance costs of
A. 3,780 C. 3,797
B. 3,461 D. 3,746
60. Refer to no. 58. The coefficient of correlation for the regression equation is
A. 34.4690 ÷ 49.5150 C. √0.99724
B. 0.99724 D. (0.99724)2
61. Refer to no. 58. The percentage of total variance that can be explained by the regression equation
A. 99.724% C. 12.13%
B. 69.613% D. 99.862%
62. The following information were derived from the regression analysis of the relationship between
utility costs and machine hours:
Correlation coefficient 0.800 Intercept 2,050
Regression coefficient 0.825 Standard error of estimate 200
Coefficient of determination 0.640 No. of observations 36
The expected utility cost if the company’s 10 machines will be used for 2,400 hours next month

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A. 4,050 C. 3,970
B. 4,030 D. 3,830
63. Malvar Company derived the following cost relationship from a regression analysis of its monthly
manufacturing overhead cost. C = P80,000.00 + P12.00M
Where: C = monthly fixed manufacturing overhead costs and M = machine hours
The standard time required to manufacture one six-unit case of a product is 4 machine hours. Malvar
applies manufacturing overhead on the basis of machine hours. Normal annual production is 50,000
cases.
Estimated variable manufacturing overhead costs for a month with production of 5,000 cases will be
A. 80,000 C. 240,000
B. 320,000 D. 360,000
64. Refer to no. 63. Malvar’s fixed manufacturing overhead rate would be
A. P1.60/machine hour C. P0.40/machine hour
B. 1.20/machine hour D. 4.80/machine hour
65. Regression analysis is superior to other cost behavior analysis techniques because it
A. Examines only one variable C. Proves a cause and effect relationship
B. Produces measures of probable error D. Is not a sampling technique
66. Below is an examination of last year’s financial statements of Magsaysay Park Co. Labor hours and
production cost for the last four months are as follows:
Month Labor Hours Production Costs
Sep 2,500 20,000
Oct 3,500 25,000
Nov 4,500 30,000
Dec 5,500 34,000
The equation(s) required for applying the least-square method can be expressed as
A. ∑xy = a∑x + b∑x2 C. ∑y = a∑x + b∑x2 and ∑xy = na + b∑x
B. ∑y = a∑x + b∑x2 D. ∑xy = a∑x + b∑x2 and ∑y = na + b∑x
67. Refer to no. 66. Based on the result of least square method, expected monthly fixed production cost is
A. 4,700.00 C. 8,450.00
B. 8,333.33 D. 7,500.00
68. Refer to no. 66. Based on the result of least square method, expected variable production cost per
labor hour
A. 4.70 C. 7.50
B. 4.67 D. 8.33
69. Identify the appropriate statements on regression analysis:
i. It assumes that a change in value of a dependent variable is reated to the change in value of
an independent variable.
ii. A linear relationship between direct cost and production volume can cause a problem when
using accounting data for regression analysis.
iii. It attempts to find an equation for the linear relationship among variables.
iv. It establishes cause and effect relationship.
A. Statements i, ii, iii and iv C. Statements i and iii
B. Statements i, iii and iv D. Statements ii and iv
70. The slope of the line of regression is the
A. Rate at which the dependent variable varies C. Level of total variable fixed costs
B. Level of total fixed costs D. Rate at which the in dependent variable varies
71. JOY Company is preparing a flexible budget and requires a breakdown of the cost of steam used in its
factory into fixed and variable elements. The following data on the cost of steam used and direct labor
hours worked for the last six months are as follows:
Month Cost of Steam Direct Labor
Hours
Jul 15,850 3,000
Aug 13,400 2,050
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Module 3: Cost Terms, Concepts and Behavior L. V. CORREA
Sep 16,370 2,900
Oct 19,800 3,650
Nov 17,600 2,670
Dec 18,500 2,650
If JOY uses high-low point method, the estimated variable cost of steam per direct labor hour is
A. 6.00 C. 0.25
B. 4.00 D. 0.17
72. Refer to no. 71. If JOY uses least-square method, the estimated monthly fixed cost of steam is
A. 210 C. 5,200
B. 1,300 D. 7,684
73. SIGUE Co. normally uses 40,000 direct labor hours for manufacturing 120,000 units of product. Three
units are produced in one hour, and the direct labor rate is P15 per hour. At normal capacity, the
factory overhead is estimated as follows: fixed overhead of P100,000 and variable overhead of
P120,000. If 30,000 direct labor hours are used, total factory overhead costs would be
A. 165,000 C. 130,000
B. 190,000 D. 55,000
74. Ornamental Co. uses predetermined factory overhead rate based on expected actual production
capacity. Budgeted factory overhead is P175,000 for 50,000 units normal capacity and P225,000 for
75,000 units maximum capacity. At the beginning of the year, the company forecasted a production of
60,000 units. The predetermined factory overhead rate to be used for the year would be
A. 2.92 C. 3.25
B. 3.00 D. 3.50
75. Amigo Co. has relevant range of 20,000 to 100,000 gallons of essential compounds used in health
products. It incurs a fixed cost per month of P100,000 and a variable cost of P100 per gallon.
Production in gallons for the past six months are: 2,000 for July, 3,000 for August, 4,000 for
September, 4,400 for October, 5,700 for November and 8,000 for December. For the past six-month
period, fixed cost per unit was
A. 2.67 C. 22.14
B. 3.69 D. 23.69

“Respond intelligently even to unintelligent treatment.” Lao Tzu

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