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Relevant Costing
(Study Notes)
1.0 Definition and Classification of Cost
1.1 Differential Costs
1.1.1 Those costs that differs between alternative
1.1.2 Not a sunk costs
1.2 Incremental Costs
1.2.1 Costs that will increase if a particular alternative is
chosen.
1.2.2 A cost associated with producing an additional unit
1.2.3 It must be compared with the incremental revenue
1.3 Avoidable costs
1.3.1 Those that can be eliminated (in whole or in part) by
choosing one alternative over another in a decision
1.4 Sunk Costs
1.4.1 Costs that has already been incurred and that
cannot be changed by any decision made now or in
the future, are never relevant
1.5 Committed Costs
1.5.1 Present and future costs that will not change
regardless of the decision made.
1.6 Opportunity costs
1.6.1 Not recorded in the general ledger.
1.6.2 Factors in the decision-making process because they
differ among alternatives.
2.0 Relevant and Irrelevant Items
2.1 Relevant
2.1.1 Any expected future costs which will differ among
given alternative courses of actions.
2.1.2 Differential, Avoidable, and Opportunity Costs
2.2 Irrelevant
2.2.1 Unavoidable fixed cost is an ongoing fixed cost
which cannot be altered or affected by a particular
decision.
2.2.2 All sunk and committed costs
2.2.3 Future revenues and costs that will not change by
choosing one alternative over another in a decision
are never relevant

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3.0 Decision Making

3.1 Scientific Process
3.1.1 Define the Problem
3.1.1.1 The root cause or hidden problem of
variances in a companys operation
3.1.2 Specify the criteria
3.1.2.1 Determine the perspective that will be used
as the basis for the solution
3.1.2.2 What is the objective? Maximize profit,
increase market share, social services, etc.
3.1.3 Identify different alternatives
3.1.3.1 Options that can be taken to address the
problem
3.1.3.2 Should consider situations of both internal
and external environment
3.1.4 Develop the decision model
3.1.4.1 Simplify the problem
3.1.4.2 Define what will be relevant and irrelevant
3.1.4.3 It brings together all elements of the problem
criteria, constraints, and alternatives.
3.1.5 Gather Data
3.1.5.1 This is to facilitate objectivity in the decision
making process
3.1.5.2 Data may be primary or secondary
3.1.5.3 Must be up-to-date, timely and accurate.
3.1.6 Evaluate the different alternatives
3.1.6.1 the best options that can address the entitys
objective
3.1.6.2 Based on the decision model and criteria
created
3.1.7 Make a conclusion/decision
3.2 Types of Decisions
3.2.1 Routine
3.2.1.1 Decisions made under a specific process and
certainty.
3.2.1.2 Recurring and programmed decisions with
set responses.
3.2.1.3 Valuable time and resources should not be
expended each time the decisions is to be
made

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3.2.1.4 Examples of Routine Decisions

3.2.1.4.1 Replenishment of inventory
3.2.1.4.2 Sending delinquency notes
3.2.1.4.3 Giving employees raised
Non-Routine
3.2.2.1 Decisions made using the discretion of the
decision maker in addressing situations that
are uncommon.
3.2.2.2 It is quite risky wherein bad decision is
irrevocable and causes material damages.
3.2.2.3 Examples of Non-Routine Decisions
3.2.2.3.1 Make or Buy
3.2.2.3.2 Accept or Reject
3.2.2.3.3 Drop or Maintaining a Segment
(Product Line, Geographical
Location, etc, Functional Area)
3.2.2.3.4 Sell now or Process Further
3.2.2.3.5 Operating under constrained
resources
3.2.2.3.6 Shutdown or Continue Operation

4.0 Make or Buy

4.1 Also called outsourcing decision
4.2 The total cost per unit of a product or service includes a
unitized portion of fixed cost, a cost that may continue even if
the item or service is purchased elsewhere at a lower price
4.3 General Objective: Whichever of the two options results in the
lower cost
4.4 Computation of cost:
Cost to Make
Cost to Buy
Direct Materials
xx
Purchase Price
xx
Direct Labor
xx
Variable Overhead
xx
Decrease in Fixed
xx
Overhead (if any)
Opportunity Cost (if any
alternative usage of
xx
the space)
TOTAL
xx
TOTAL
xx
5.0 Drop or Maintain

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5.1 The key is the proper handling of fixed costs, particularly

allocated common costs, and determination if such amounts
are avoidable or unavoidable
5.2 The contribution margin lost from the activity to be dropped
must also be considered
5.3 Mutually exclusive decisions a segment will be affected by
decisions made regarding another segment.
5.4 General Objective: As long as the segment can contribute in
covering common cost, it should not be closed.
5.5 Computation:
Segment Revenue (Sales)
xx
Less: Variable Cost
(xx)
Segment Contribution Margin
xx
Less: Direct/Traceable Fixed Costs
(xx)
Segment Margin (if positive = Maintain; if negative =
xx
drop)
5.6 Incremental Approach with consideration to additional items:
Loss Segment Margin (see previous section)
(xx)
Increase in Contribution Margin of other
xx
segment
Decrease in Contribution Margin of other
(xx)
segment
Cost incurred in closing the segment
(xx)
Increase/(Decrease) in Over-all Operating Income
xx
6.0 Accept or Reject
6.1 A special order is a one-time order that is not considered part
of the companys normal ongoing business.
6.2 When analyzing a special order, only the incremental costs and
benefits are relevant.
6.3 Since the existing fixed manufacturing overhead costs would
not be affected by the order, they are not relevant.
6.4 General Objective: Incremental Revenue (Special selling price)
should always be higher than the incremental cost.
6.5 Computation:
Sales
xx
Less: Cost to Make and Sell
Direct Materials
xx
Direct Labor
xx
Variable Manufacturing Overhead
xx

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Variable Selling and Administrative (if

required)
Special Equipment and other requirements
(if any)
Lost Contribution Margin if required to
sacrifice regular sales due to lack of
capacity.
Incremental Income

xx
xx
xx

(xx)
Xx

7.0 Sell or Process Further

7.1 A joint production process results in the commingled
manufacture of two or more products, called joint products.
7.2 The products become identifiable from each other at the splitoff point.
7.3 Management must frequently decide whether to sell the
products at split-off or, alternatively, incur additional cost
beyond split-off (called separable cost) and then sell the
goods for a higher price.
7.4 Joint costs incurred prior to split-off are not relevant when
making the sell-at-split-off or-process-further decision, because
these costs will be incurred regardless of the alternative
selected.
7.5 The correct decision is made by comparing the separable cost
incurred against the amount of increased sales revenue.
7.6 Computation:
Sales after further processing
xx
Sales at Split-off point
(xx)
Incremental Revenue
xx
Cost to be incurred when process further
(xx)
(Incremental Cost)
Net Incremental Profit = if positive
xx
8.0 Constrained Resources
8.1 Constraints
8.1.1 Limitations under which a company must operate,
such as limited available machine time or raw
materials, which restricts the companys ability to
satisfy demand.

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8.1.2

Constraints or bottlenecks limit a companys ability

to grow and limit the total output of the entire
system.
8.1.3 Decisions may involve the use of limited labor hours,
limited materials, and limited machine time.
8.2 Decision Criteria:
8.2.1 When only one limited resource is present, a
company should focus on products that have the
greatest amount of contribution margin per unit of
the scarce resource.
8.3 Computation Guide:
8.3.1 Identify the constraint
8.3.2 Compute the CM/unit for each of the product line
8.3.3 Compute the Contribution margin per constrained
resources
8.3.4 Highest CM/constraint would be prioritize or rank 1
8.4 Effects of Market Limitations
8.4.1 If the product line with the highest contribution
margin has a maximum market demand limit, other
resources may be devoted to the other product line.
8.4.2 If all the product line has a minimum requirement,
this should be prioritized regardless of the ranking,
then proceed to the ranking based on the
contribution margin per constrained resource
9.0 Shutdown Point
9.1 This is applicable for companies with products that have
seasonal, cyclical or random variation in demand. It is also
applicable to those companies that are in the process of
restructuring its operation.
9.2 This is a situation wherein regardless of the alternative chosen,
the company will incur loss.
9.3 Objective: To choose the alternative that will result to the lower
loss (choosing the lesser evil)
9.4 Shutdown Point (In Units to be Sold):

9.5 Computation of the Analysis:

Continue Operating
Sales
xx

Shutdown
Shutdown Cost

xx

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Variable Cost
Contribution Margin
Avoidable Fixed Costs

(xx)
xx
(xx
)
xx

Total

Total

xx

Relevant Costing (Quizzer)

Instruction: This quizzer is good for 2 hours. It aims to give you the
needed practice to master the concepts of cost classification and analysis.
Good Luck!!!
1.

Sunk Costs
a. Are substituted for opportunity costs
b. Are relevant to long-term decisions but not to short-term decisions
c. Are relevant to decision making
d. In and themselves are not relevant to decision making

2.

What is the opportunity cost of making a component part in a factory

given no alternative use of the capacity?
a. The total manufacturing cost of the component
b. Zero
c. The fixed manufacturing cost of the component
d. The variable manufacturing cost of the component

3.

In deciding whether to manufacture a part or buy it from an outside

vendor, a cost that is irrelevant to the short-run decision is
a. Variable Overhead

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b. Fixed overhead that will be avoided if the part is bought from an

outside vendor
c. Direct Labor
d. Fixed overhead that will continue even if the part is bought
from an outside vendor
4.

In considering a special order situation that will enable a company to

make use of presently idle capacity, which of the following costs
would be irrelevant?
a. Depreciation
b. Variable Overhead
c. Materials
d. Direct Labor

5.

The salaries you could be earning by working rather than attending

college are an example of
a. Outlay costs
c. Sunk Costs
b. Misplaced Costs
d. Opportunity Costs

6.

An opportunity cost is
a. The difference between in total costs which results from selecting
one choice instead of another
b. The profit foregone by selecting one choice instead of
another.
c. A 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.

7.

In analyzing whether to build another regional service office, the

salary of the Chief executive officer (CEO) at the corporate
headquarters:
a. Relevant because salaries are always relevant
b. Relevant because this will probably change if the regional
service office is built.
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

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8.

Among the costs relevant to a make-or-buy decision include variable

manufacturing costs as well as:
a. Unavoidable Costs
c. Plant Depreciation
b. Avoidable Fixed Costs
d. Real Estate Taxes

9.

Opportunity Costs are:

a. Costs irrevocably incurred by past actions
b. The difference between actual and standard costs
c. Not recorded in the accounting records
d. Partly fixed costs and partly variable costs

10. In a sell or process further decision, which costs below is (are) not
relevant in a decision regarding whether the product should be
processed further?
a. A variable production cost incurred prior to split-off
b. A variable production cost incurred after split-off
c. An avoidable fixed production cost incurred after split-off
d. Both B and C
11. A factory is operating at less than 100% capacity. Potential additional
business will not use up the remainder of the plant capacity. Given
the following list of costs, which one should be ignored in a decision
to produce additional units of product?
a. Variable selling expenses
b. Fixed factory overhead
c.Direct labor
d. Contribution margin of additional units
12. In a make-or-buy decision, relevant costs include:
a. unavoidable fixed costs
b. avoidable fixed costs
c.fixed factory overhead costs applied to products
d. fixed selling and administrative expenses
13. In situations where management must decide between accepting or
rejecting a onetime- only special order where there is sufficient idle
capacity to fill the order, which one of the following is NOT relevant in
making the decision?
a. absorption costing unit product costs
b. variable costs

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c.incremental costs
d. differential costs
14. Total unit costs are
a. Relevant for cost-volume-profit analysis
b. Irrelevant in marginal analysis
c.Independent of the cost system used to generate them
d. Needed for determining the product contribution.
15. Which of the following is most relevant to a manufacturing equipment
replacement decision?
a. Original cost of the old equipment
b. Disposal price of the old equipment
c.Gain or loss on the disposal of the old equipment
d. A lump-sum write-off amount from the disposal of the old
equipment.
16. A companys approach to an outsourcing decision
a. Depends on whether the company is operating at or below normal
volume
b. Involves an analysis of avoidable costs
c. Should use absorption costing
d. Should use activity-based costing
17. Cavite Corporation 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
expense:
1. Depreciation
2. Property tax
3.
Interest expense
4. Insurance of Facilities
5. Sales Commissions
6.
Delivery Expense
7. Security of Premises
Which of the above expenses will continue during the shutdown
period?
a. All expenses in the list
c. Items 1,2,and 3 only
b. All except items 5 and 6
d. Items 1,2,3,4, 6,
and 7 only
18. A special order generally should be accepted if:

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a. Its revenue exceeds allocated fixed costs, regardless of the

variable costs associated with the order.
b. Excess capacity exists and the revenue exceeds all variable
costs associated with the order.
c. Excess capacity exists and the revenue exceeds allocated fixed
costs.
d. the revenue exceeds total costs, regardless of available capacity.
19. 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.
20. 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.
21. Lakas Engine Co. manufactures engines for the military equipment on
a cost-plus basis. The cost of a particular machine the company
manufactures is shown below:
Direct Materials
P 400,000
Direct Labor
300,000
Overhead:
Supervisors salary
40,000
Fringe benefit on direct labor
30,000
Depreciation
24,000
Rent
22,000
If the production of this engine were discontinued the production
capacity would be idle, and the supervisor will be laid-off should there

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be a next contract for this engine, the company should bid a

minimum price of
a. P 816,000
b. P 700,000 c. P 730,000 d. P 770,000
22. Chow Inc. has its own cafeteria with the following annual costs:
Food
P 400,000
Labor
300,000
Overhead
440,000
The overhead is 40% fixed. At the fixed overhead, P 100,000 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 will to
pay an outsider firm to service the cafeteria is
a. P 1,140,000
b. P 1,040,000
c. P 700,000 d. P
964,000
23. Jerry Company budgeted sales of 400,000 plastic guns at P40 per unit
for 2012. Variable manufacturing costs were budgeted at P16 per
unit, and fixed manufacturing costs at P10 per unit. A special order
offering to buy 40,000 plastic guns for P23 each was received by Jerry
in March 2012. Jerry has sufficient plant capacity to manufacture the
additional quantity; however, the production would have to be done
on an overtime basis at an estimated additional cost of P3 per plastic
guns. Acceptance of the special order would not affect Jerrys normal
sales and no selling expenses would be incurred. What would be the
effect on operating profit if the special order were accepted?
a. P 240,000 decrease
c. P 120,000 decrease
b. P 160,000 increase
d. P 280,000 increase
24. Chow foods operate a cafeteria for its employees. The operations
of the cafeteria require fixed costs of P 470,000 per month and
variable costs of 40% of sales. Cafeteria sales are currently
averaging P 1,200,000 per month. The company has the
opportunity to replace the cafeteria with vending machines. Gross
customer spending at the vending machine is estimated to be 40%
greater than the current sales because the machine is available all
hours. By replacing the cafeteria with vending machines, the
company would receive 16% of the gross customer spending and
avoid all cafeteria costs. A decision to replace the cafeteria with

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vending machines will result in a monthly increase/(decrease) in

operating income of
a. P 182,000
b. P 258,800 c. P (588,000) d. P
18,800
25.

Julius International produces 15,000 units of Product J1 and 30,000

units of J2 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 other
information:
J1
J2
Unit selling price without further
P 24
P 18
processing
Unit selling price with further processing
P 30
P 22
Total separate weekly variable costs of
P
further processing
P 100,000 90,000
To maximize Julius manufacturing contribution margin, the total
separate variable costs of further processing that should be
incurred each week are
a. P 95,000
b. P 90,000
c. P 100,000 d. P 190,000

26.

27.

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.
P 28
b. P 16
c. P (20)
d. P 4
S. Kent Co. has a limited number of machine hours that it can use
for manufacturing two products, A and B. Each product has a
selling price of P160 per unit but product A has 40% contribution
margin and product B has a 70% contribution margin. One unit of
B takes twice as many machine hours to make as a unit of A.
Assume either product can be sold in whatever quantity is

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produced. Which product or products should the limited number of

machine hours be used for?
a. A
b. Both A and B
c. Either A and B
d.
B
Ysabelle Industries Inc. has an opportunity to acquire a new
equipment to replace one of its existing equipments. The new
equipment would cost
P 900,000 and has a five-year useful life,
with zero disposal price. Variable operating costs would be P1
million per year. The present equipment has a book value of P
500,000, and a remaining useful life of five years. Its disposal price
now is P 50,000 bit would be zero after five years. Variable
operating costs would be P 1,250,000 per year. Considering the
five years in total but ignoring the time value of money and
income taxes, Ysabelle should
a. Replace due to P 400,000 advantage
b. Not replace due to P 150,000 disadvantage
c. Replace due to P 350,000 advantage
d. Not replace due to P 100,000 disadvantage

29.

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 sells for P60 each. Daily fixed costs are P15,000 and
variable costs are P30 per basket. An average of 750 baskets is
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 Arnels stall. Collectively, they offered Arnel P 1,500 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

30.

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 100 unit lot of the part are as follows:
Direct Materials
P 520

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Direct Labor
Manufacturing Overhead
Variable
Fixed
Total Manufacturing Costs per 100 units

200
240
320
P 1,280

Bobbie Inc. offered to sell Pixie all 100,000 unit it will need during
the coming year for P 1,200 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 P 180,000 in relevant costs. In addition, a P
200,000 cost item included in fixed overhead is specifically related
to Part 6417 and would be eliminated. Pixie should
a. Buy component 6417 because of P 300,000 savings
b. Buy component 6417 because of P 140,000 savings
c. Continue producing component 6417 because of P
40,000 savings
d. Continue producing component 6417 because of P 60,000
savings
31.

Maeburg Inc. has excess production capacity. At times, it buys the

same product from third party. Below are pertinent information:
Selling Price per unit
P 70.00
Fixed Cost per unit*
20.00
Variable Cost per unit
35.00
*at present utilized capacity
The most it should pay for buying this product it currently makes
would be the
a. Selling price of P70
b. Total variable cost of producing the product of P35.00
per unit
c. Total variable cost per unit of P35.00 plus the reduced fixed
cost per unit after accounting for the effects of the added
volume
d. Total cost of production or P55.00 per unit

32.

Union Co. manufactures plugs used in its electrical gadgets at a

cost of P108 per unit that includes P24 of fixed overhead. It needs
30,000 of these plugs yearly, and Divisive Corp. offers to sell these
items to Union at P99 per unit. If Union decides to purchase the

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plugs, P 180,000 of the annual fixed overhead applied will be

eliminated, and the company may be able to rent the facility
previously used for manufacturing the plugs. If Union purchases
the plugs but does not rent the unused facility, the company would
a. Save P6.00 per unit
c. Lose P 18.00
per unit
b. Save P9.00 per unit
d. Lose P9.00
per unit
33.

Product A has a contribution margin of P80 per unit, a contribution

margin ratio of 50% and requires 4 machine hours to produce.
Product B has a contribution margin of p120 per unit, a
contribution margin ratio of 40% and requires 5 machine hours to
produce. IF the company has limited machine hours available, then
it should produce and sell
a. Product B since it has the higher contribution margin per unit
b. Product A since it requires fewer machine hours per unit than
does Product B
c. Product B since it has the higher contribution margin
per machine hour
d. Product A since it has the higher contribution margin per
machine hour

34.

Essence Producers Inc. manufactures various scents out of

Philippine flowers and plants. It also manufactures exotic oils that
it subsequently uses in the scents production. The cost per unit of
measure for 15,000 units of exotic oils are as follows:
Direct Materials
P 20
Direct Labor
34
Variable Factory Overhead
24
Unavoidable Fixed Factory Overhead
32
TOTAL
P 110
Xtra Oils, Inc. offered Essence to supply 15,000 units of measure of
the exotic oils for P1,260,000. Assuming the facilities for exotic oils
have no alternative use, Essence Producers Inc. should
a. Continue to produce exotic oils at P 1,170,000 relevant costs
against purchase cost of P 1,260,000.
b. Produce 7,500 units and buy 7,500 units from Xtra Oils to
save P 300,000.

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c. Buy from Xtra Oils, Inc. at P 1,260,000 against cost

to produce of P 1,650,000 or savings of P 390,000.
d. Produce 7,500 units and buy 7,500 units from Xtra Oils to
save P 240,000
35.

Nakinnat Corporations Outlet No.5 reported the following results

of operations for the period just ended:
Sales
P 2,500,000
Less: Variable Expenses
1,000,000
Contribution Margin
1,500,000
Less: Fixed Expenses
750,000
Salaries and Wages
50,000
Insurance on Inventories
325,000
Depreciation on Equipment
500,000
Advertising
Net Income (Loss)
P (125,000)
The management is contemplating the dropping of 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 P
150,000. The equipment has no resale value. Outlet No. 5 should
a. Not be dropped due to foregone overall income of P
350,000
b. Be dropped due to foregone overall income of P 325,000
c. Not be dropped due to foregone overall income of P25,000
d. Be dropped due to overall operational loss of P 25,000

36.

Division A of Decision Experts Corporation is being evaluated for

elimination. It has contribution margin of P 400,000. 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. P 400,000 decrease
c. P 400,000 increase
b. P 500,000 decrease
d. P 500,000 increase

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F & S Inc. has an annual capacity of 2,800 units of output. Its

predicted operations for the year are as follows:
Sales 2,000 units at P760 each
P 1,520,000
Manufacturing Costs:
P 500 per unit
Variable
P 360,000
Fixed
Marketing and Administrative Costs
P 120 per unit
Variable (Sales and Commissions)
P 40,000
Fixed
Assume there would be no effect on regular sales at regular prices
and that the usual sales commission will be reduced to half, should
the company accept a one-time only special order for 600 units at
a selling price of P640 each.
a. Yes, due to incremental income of P 48,000
b. Either on would do as the net effect would be the same
c. Yes, due to incremental income of P 30,000
d. No due to the resulting loss of P 37,714

38.

Nore Milling Co. has a plant capacity of 40,000 units per month.
Unit costs at capacity are:
Direct Materials
P 100
Direct Labor
150
Variable Overhead
75
Fixed overhead
75
Marketing Fixed Costs
175
Marketing Variable Costs
90
Present monthly sales are 39,000 units at P630 each. Josh
Corporation contacted Nore about purchasing 40,000 units at P600
each. The present sales would not be affected by the special order.
Nore should:
a. Accept the special order due to P 185,000 incremental
income
b. Accept the special order due to P 110,000 incremental income

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The Professional CPA Review School

c. Accept the special order due to P 215,000 incremental income

d. Accept the special order due to P 10,000 incremental income

39.

Part BX is a component that Motors & 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
800
Materials )
Direct Labor
32,000
Overhead (150% of Direct Labor)
48,000
Total Manufacturing Costs
P 84,800
Materials handling which is not included in manufacturing
overhead, represent the direct variable costs of the receiving
department that are applied to direct materials and purchased
components on the basis of their cost. The companys annual
overhead budget is one-third variable and two-thirds fixed. Precasts Co. offers to supple BX at a unit price of P 60,000. Should the
company buy or manufacture BX?
a. Buy, due to advantage of P 24,800 per unit
b. Manufacture, due to advantage of P 7,200
c. Buy, due to advantage of P 12,800 per unit
d. Manufacture, due to advantage of P 19,200 per unit

40.

Syanton manufactures a particular computer component.

Manufacturing costs per unit are as follows:
Direct Materials
P 50
Direct Labor
500
Variable Overhead
250
Fixed Overhead
400
TOTAL
P 1,200
Fredix, Inc. has contacted Syanton with an offer to sell 10,000 of
the component for P 1,100 per unit. If Syanton accepts the
proposal, P 2,500,000 of the fixed overhead will be eliminated.
Should Syanton make or buy the component and why?
a. Buy, due to savings of P 1,000,000

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The Professional CPA Review School

b. Make, due to savings of P 500,000

c. Buy, due to savings of P 2,500,000
d. Make, due to savings of P 3,000,000

41.

The Mapili Corp. which has experience excess production capacity

received a special offer for its product at P78 per unit for 100,000
units. It has been using the variable costing method and has been
pricing its product at P96 per unit based on mark-up of 60% as
follows:
Direct Materials
P 30
Direct Labor
20
Variable Overhead
6
Variable Selling and administrative
4
Total Variable Expenses
P 60
60% Mark-up
36
Selling price
P 96
Assuming that this special offer will not affect the market for the
product, should the company accept the special offer?
a. Yes, since it will contribute P2.8 million margin
b. Yes, since it will contribute P1.8 million margin
c. No, since it will mean a loss of P1,8 million
d. No, since it will mean a loss of P1.16 million

42.

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 P 500,000 are incurred. Variable Costs per
unit amount are:
Direct Materials
P 80
Direct Labor
15
Variable Overhead
20
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 for 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 P 150,000 advantage
b.
Produce the freezable ice bag due to P 225,000 advantage

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c.
d.

The Professional CPA Review School

Produce the freezable ice bag due to P 25,000

advantage
Buy the freezable ice bag due to P 50,000 advantage

43.

KXM Bottling Corporation makes and sells two soft drinks. COLA
and ORANGE. The comparative data for the two shows:
COLA
ORANGE
Selling price per bottle
P 9.50
P 9.80
Variable Costs
6.50
7.20
Production Capacity per hour
250
300
bottles
bottles
There are 500 available production hours per month. Based on the
above information:
a. ORANGE and COLAs unit contribution margin is the same
hence it is equally profitable to produce either.
b. It is more profitable to produce ORANGE
c. COLAs contribution margin is higher than that of ORANGE
hence more profitable to produce.
d. It is more profitable to produce COLA

44.

Data Covering QMB Corporations two product lines are as follows:

Product
Product Z
W
Sales
P 36,000
P 25,200
Income before income tax
15,936
8,388
Sales price per unit
30
14
Variable Cost per unit
8.50
15
The total unit sold of W was 2,400 and that of Z was 3,600 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. P 13,600 decrease
b. No effect c. P 6,800
d. P
5,000

45.

Clay Co. has considerable excess manufacturing capacity. A special

job orders cost sheet include the following applied manufacturing
overhead costs;
Fixed Costs
P 21,000
Variable CostsP 33,000

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The Professional CPA Review School

The fixed costs include a normal P3,700 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 P 7,750. What
is the total amount to be included in the calculation to determine
the minimum acceptable price for the job?
a. P 36,700
b. P 40,750 c. P 54,000 d. P 58,050
46.

Rollin Corp. manufactures batons. Rollin can manufacture 300,000

batons a year at a variable cost of P 750,000 and a fixed cost of P
450,000. Based on Rollins predictions, 240,000 batons will be sold
at the regular price of P5.00 each. In addition, a special order was
placed for 60,000 batons to be sold at a 40% discount off the
regular price. By what amount would income before taxes be
increased or decreased as a result of the special order?
a. P 60,000 decrease
c. P 30,000 increase
b. P 36,000 increase
d. P180,000 increase

47.

Scully, Inc. has been manufacturing 5,000 units of Part 20561 that
is used in the manufacture of one of its products. At this level of
production, the cost per unit of manufacturing part 20561 is as
follows:
Direct Materials
P2
Direct Labor
8
Variable Overhead
4
Fixed Overhead
6
TOTAL
P 20
Muller Company has offered to sell Scully 5,000 units of Part 25061
for P19 a unit. Scully has determined that it could use the facilities
presently used to manufacture Part 25061 to manufacture product
X and generate an operating profit of P 4,000. Scully has also
determined that two-thirds of the fixed overhead applied will
continue even if Part 25061 is purchased from Muller. To determine
whether to accept Mullers offer, the net relevant manufacturing
costs to Scully are:
a. P 70,000
b. P 80,000 c. P 90,000
d. P 95,000

48.

Buck Company manufactures part no. 1700 for use in its

production cycle. The cost per unit for a 5,000 unit quantity
follows:
Direct Materials
P2

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The Professional CPA Review School

Direct Labor
Variable Overhead
Fixed Overhead

12
5
7

Hollow Company has offered to sell Buck 5,000 units of Part 1700
for P27 per unit. If Buck accepts the offer, some of the facilities
presently used to manufacture part 1700 could be used to help
with the manufacture of Part no. 1211, and P3 per unit of the fixed
overhead applied to part no. 1700 would be totally eliminated. By
what amount would net relevant costs be increased or decreased if
Buck accepts Hollows offer?
a. P 35,000 decrease
c. P 20,000 decrease
b. P 15,000 decrease
d. P 5,000 increase
49.

Mach Company produces and sells 8,000 units of Product X each

year. Each unit of Product X sells for P10 and has a contribution
margin of P6. It is estimated that if Product X is discontinued, P
50,000 of the P 60,000 in fixed costs charged to Product X could be
eliminated. These data indicate that if Product x is discontinued,
overall company operating income should:
a. Increase by P 2,000 per year
b. Increase by P 38,000 per year
c. Decrease by P 2,000 per year
d. Decrease by P 38,000 per year

50.

Tyler Company currently sells 1,000 units of product M for P1 each.

Variable costs are P0.40 and avoidable fixed costs are P400. A
discount store has offered P0.80 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
Items #51 to #54 are based on the following information:
Abel Company produces three versions of baseball bats: wood,
aluminum, and hard rubber. A condensed segmented income
statement for a recent period follows:
Wood
Aluminum
Hard
Total
Rubber

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Sales
Variable Costs
Contribution
Margin
Fixed Costs
Operating
Income/(loss)

The Professional CPA Review School

P
500,000
325,000
175,000

P 200,000

P 65,000

140,000
60,000

58,000
7,000

P
765,000
523,000
242,000

75,000
100,000

35,000
25,000

22,000
(15,000)

132,000
110,000

51.

Assume none of the fixed expenses for the hard rubber line are
avoidable. What will be total net income if the line is dropped?
a. $125,000
b. $103,000 c. $105,000 d. $140,000

52.

Assume all of the fixed expenses for the hard rubber line are
avoidable. What will be total net income if that line is dropped?
a. $125,000
b. $103,000 c. $105,000 d. $140,000

53.

What would have to occur for total net income to remain

unchanged when the hard rubber line is dropped?
a. Total net income could not remain the same if hard rubber is
dropped.
b. The avoidable fixed expenses for hard rubber would have to
be $15,000.
c. The unavoidable fixed expenses for hard rubber would have to
equal its contribution margin.
d. The avoidable fixed expenses for hard rubber would
have to be $7,000.

54.

If the total net income after dropping the hard rubber line is
P105,000, hard rubbers avoidable fixed expenses were
a. P20,000
b. P2,000. c. P7,000
d.
P5,000

55.

Fitzpatrick Corporation uses a joint manufacturing process in the

production of two products, Gummo and Xylo. Each batch in the
joint manufacturing process yields 5,000 pounds of an
intermediate material, Valdene, at a cost of P20,000. Each batch of
Gummo uses 60% of the Valdene and incurs P10,000 of separate
costs. The resulting 3,000 pounds of Gummo sells for P10 per

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The Professional CPA Review School

pound. The remaining Valdene is used in the production of Xylo

which incurs P12,000 of separable costs per batch. Each batch of
Xylo yields 2,000 pounds and sells for P12 per pound. Fitzpatrick
uses the net realizable value method to allocate the joint material
costs. The company is debating whether or not to process Xylo
further into a new product, Zinten, which would incur an additional
P4,000 in costs and sell for P15 per pound. If Zinten is produced,
income would increase by
a. P2,000.
b. P5,760.
c. P14,000
d. P26,000.

56.

Eagle Brand Inc. produces two products. Data regarding these

products are presented below.
Product X
Product Y
Selling price per unit
P100
P130
Variable costs per unit
P80
P100
Raw materials used per unit 4 lbs.
10 lbs.
Eagle Brand has 1,000 lbs. of raw materials which can be used to
produce Products X and Y. Which one of the alternatives below
should Eagle Brand accept in order to maximize contribution
margin?
a. 100 units of product Y.
b. 250 units of product X.
c. 200 units of product X and 20 units of product Y.
d. 200 units of product X and 50 units of product Y.

57.

Oakes Inc. manufactured 40,000 gallons of Mononate and 60,000

gallons of Beracyl in a joint production process, incurring P250,000
of joint costs. Oakes allocates joint costs based on the physical
volume of each product produced. Mononate and Beracyl can each
be sold at the split-off point in a semifinished state or,
alternatively, processed further. Additional data about the two
products are as follows.
Mononate
Beracyl
Sales price per gallon at split-off
P7
P15

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The Professional CPA Review School

Sales price per gallon if processed further

P18

Variable production costs if processed further

P115,000

P10
P125,000

An assistant in the companys cost accounting department was

overheard saying ....that when both joint and separable costs are
considered, the firm has no business processing either product
beyond the split-off point. The extra revenue is simply not worth
the effort. Which of the following strategies should be
recommended for Oakes?
a.
b.
c.
d.
58.

Mononate -Sell at split-off; Beracyl - Sell at split-off.

Mononate -Sell at split-off; Beracyl - Process further.
Mononate -Process further; Beracyl - Sell at split-off.
Mononate -Process further; Beracyl - Process further.

Current business segment operations for Whitman, a mass retailer, are presented
below.
Merchandise Automotive Restaurant
Total
Sales
P500,000
P400,000
P100,000
P1,000,000
Variable costs
300,000
200,000
70,000
570,000
Fixed costs
100,000
100,000
50,000
250,000
Operating
income (loss) P100,000 P100,000
P(20,000)
P
180,000
Management is contemplating the discontinuance of the
Restaurant segment since it is losing money. If this segment is
discontinued, P30,000 of its fixed costs will be eliminated. In
addition, Merchandise and Automotive sales will decrease 5% from
their current levels. What will Whitmans total contribution margin
be if the Restaurant segment is discontinued?
a. P160,000
b. P220,000 c. P367,650 d. P380,000

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59.

The Professional CPA Review School

Aril Industries is a multi-product company that currently

manufactures 30,000 units of Part 730 each month for use in
production. The facilities now being used to produce Part 730 have
fixed monthly overhead costs of P150,000, and a theoretical
capacity to produce 60,000 units per month. If Aril were to buy
Part 730 from an outside supplier, the facilities would be idle and
40% of fixed costs would continue to be incurred. There are no
alternative uses for the facilities. The variable production costs of
Part 730 are P11 per unit. Fixed overhead is allocated based on
planned production levels. If Aril Industries continues to use
30,000 units of Part 730 each month, it would realize a net benefit
by purchasing Part 730 from an outside supplier only if the
suppliers unit price is less than
a. P12.00
b. P12.50
c. P13.00
d. P14.00.

60.

Lark Industries accepted a contract to provide 30,000 units of

Product A and 20,000 units of Product B. Larks staff developed the
following information with regard to meeting this contract.
Product A
Product B
Total
Selling Price
P75
P125
Variable costs
P30
P48
Fixed overhead
P1,600,000
Machine hours required
3
5
Machine hours available
160,000
Cost if outsourced
P45
P60
Larks operations manager has identified the following
alternatives. Which alternative should be recommended to Larks
management?
a. Make 30,000 units of Product A, utilize the remaining
capacity to make Product B, and outsource the
remainder.
b. Make 25,000 units of Product A, utilize the remaining capacity
to make Product B, and outsource the remainder.
c. Make 20,000 units of Product A, utilize the remaining capacity
to make Product B, and outsource the remainder.
d. Rent additional capacity of 30,000 machine hours which will
increase fixed costs by P150,000

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61. Raymund Inc. currently sells its only product to Mall-Stores.

Raymund has received a one-time-only order for 2,000 units from
another buyer. Sale of the special order items will not require any
additional selling effort. Raymund has a manufacturing capacity to
produce 7,000 units. Raymund has an effective income tax rate of
40%. Raymunds Income Statement, before consideration of the
one-time-only order, is as follows.
Sales (5,000 units at P20 per unit)
P100,000
Variable manufacturing costs
P50,000
Variable selling costs
15,000
65,000
Contribution margin
35,000
Fixed manufacturing costs
16,000
Fixed selling costs
4,000
20,000
Operating income
15,000
Income taxes
6,000
Net income
P 9,000
In negotiating a price for the special order, Raymund should set
the minimum per unit selling price at
a. P10
b. P13
c. P17
d. P18.
62. The Furniture Company currently has three divisions: Maple, Oak,
and Cherry. The oak furniture line does not seem to be doing well
and the president of the company is considering dropping this line.
If it is dropped, the revenues associated with the Oak Division will
be lost and the related variable costs saved. Also, 50% of the fixed
costs allocated to the oak furniture line would be eliminated. The
income statements, by divisions, are as follows.
Maple
Sales
P55,000
Variable Costs
40,000
82,000
Contribution Margin 15,000
18,000
Fixed costs
10,000
10,200
Operating profit (loss)
P 5,000

28

Oak
Cherry
P85,000
P100,000
72,000
13,000
14,000
P(1,000)

P 7,800

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The Professional CPA Review School

Which one of the following options should be recommended to the

president of the company?
a. Continue operating the Oak Division as discontinuance would
result in a total operating loss of P1,200.
b. Continue operating the Oak Division as discontinuance
would result in a P6,000 decline in operating profits.
c. Discontinue the Oak Division which would result in a P1,000
increase in operating profits.
d. Discontinue the Oak Division which would result in a P7,000
increase in operating profits.
63. Aspen Company plans to sell 12,000 units of product XT and 8,000
units of product RP. Aspen has a capacity of 12,000 productive
machine hours. The unit cost structure and machine hours
required for each product is as follows.
Unit Costs
XT
RP
Materials
P37
P24
Direct labor
12
13
Variable overhead
6
3
Fixed overhead
37
38
Machine hours required
1.0
1.5
Aspen can purchase 12,000 units of XT at P60 and/or 8,000 units
of RP at P45. Based on the above, which one of the following
actions should be recommended to Aspen's management?
a. Produce XT internally and purchase RP.
b. Produce RP internally and purchase XT.
c. Purchase both XT and RP.
d. Produce both XT and RP.
64. Refrigerator Company manufactures ice-makers for installation in
refrigerators. The costs per unit, for 20,000 units of ice-makers, are
as follows.
Direct materials
P7
Direct labor
12
Variable overhead
5
Fixed overhead
10
Total costs
P34

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The Professional CPA Review School

Cool Compartments Inc. has offered to sell 20,000 ice-makers to

Refrigerator Company for P28 per unit. If Refrigerator accepts Cool
Compartments offer, the facilities used to manufacture ice-makers
could be used to produce water filtration units. Revenues from the
sale of water filtration units are estimated at P80,000, with
variable costs amounting to 60% of sales. In addition, P6 per unit
of the fixed overhead associated with the manufacture of icemakers could be eliminated. For Refrigerator Company to
determine the most appropriate action to take in this situation,
the total relevant costs of make vs. buy, respectively, are
a.
P600,000 vs. P560,000.
b.
P648,000 vs. P528,000.
c.
P632,000 vs. P560,000.
d.
P680,000 vs. P440,000.
65. Lazar Industries produces two products, Crates and Boxes. Per unit
selling prices, costs, and resource utilization for these products are
as follows.
Crates
Boxes
Selling price
P20
P30
Direct material costs
P5
P5
Direct labor costs
8
10
Variable overhead costs
3
5
Variable selling costs
1
2
Machine hours per unit
2
4
Production of Crates and Boxes involves joint processes and use of
the same facilities. The total fixed factory overhead cost is
P2,000,000 and total fixed selling and administrative costs are
P840,000. Production and sales are scheduled for 500,000 units of
Crates and 700,000 units of Boxes. Lazar maintains no direct
materials, work-in-process, or finished goods inventory. Lazar can
reduce direct material costs for Crates by 50% per unit, with no
change in direct labor costs.
However, it would increase machine-hour production time by 1-1/2
hours per unit. For Crates, variable overhead costs are allocated
based on machine hours. What would be the effect on the total
contribution margin if this change were to be implemented?
a. P125,000 increase
c. P300,000 increase.
b. P250,000 decrease
d. P1,250,000 increase.

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66.

The Professional CPA Review School

Basic Computer Company (BCC) sells its micro-computers using

bid pricing. It develops bids on a full cost basis. Full cost includes
estimated material, labor, variable overheads, fixed manufacturing
overheads, and reasonable incremental computer assembly
administrative costs, plus a 10% return on full cost. BCC believes
bids in excess of P925 per computer are not likely to be
considered. BCCs current cost structure, based on its normal
production levels, is P500 for materials per computer and P20 per
labor hour. Assembly and testing of each computer requires 12
labor hours. BCCs variable manufacturing overhead is P2 per labor
hour, fixed manufacturing overhead is P3 per labor hour, and
incremental administrative costs are P8 per computer assembled.
The company has received a request from the School Board for
500 computers. BCCs management expects heavy competition in
bidding for this job. As this is a very large order for BCC, and could
lead to other educational institution orders, management is
extremely interested in submitting a bid which would win the job,
but at a price high enough so that current net income will not be
unfavorably impacted. Management believes this order can be
absorbed within its current manufacturing facility. Which one of the
following bid prices should be recommended to BCCs
management?
a. P764.00
b. P772.00 c. P849.20
d. P888.80.

67.

Jones Enterprises manufactures 3 products, A, B, and C. During the

month of May Jones production, costs, and sales data were as
follows.
Products
A
B
C
Totals
Units of production
30,000
20,000
70,000
120,000
Joint production costs to split-off point
P480,000
Further processing costs
PP60,000 P140,000
Unit sales price
At split-off
3.75
5.50
10.25
After further processing
8.00
12.50

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Based on the above information, which one of the following

alternatives should be recommended to Jones management?
a. Sell both Product B and Product C at the split-off point.
b. Process Product B further but sell Product C at the split-off
point.
c. Process Product C further but sell Product B at the splitoff point.
d. Process both Products B and C further.
68. Synergy Inc. produces a component that is popular in many
refrigeration systems. Data on three of the five different models of
this component are as follows.
Model
A
B
C
Volume needed (units)
5,000
6,000
3,000
Manufacturing costs
Variable direct costs
P10
P24
P20
Variable overhead
5
10
15
Fixed overhead
11
20
17
Total manufacturing costs P26
P54
P52
Cost if purchased
P21
P42
P39
Synergy applies variable overhead on the basis of machine hours
at the rate of P2.50 per hour. Models A and B are manufactured in
the Freezer Department, which has a capacity of 28,000 machine
processing hours.
Which one of the following options should be recommended to
Synergy's management?
a. Purchase all three products in the quantities required.
b. Manufacture all three products in the quantities required.
c. The Freezer Department's manufacturing plan should
include 5,000 units of Model A and 4,500 units of
Model B.
d. The Freezer Department's manufacturing plan should include
2,000 units of Model A and 6,000 units of Model B.

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69. The Doll House, a very profitable company, plans to introduce a

new type of doll to its product line. The sales price and costs for
the new dolls are as follows.
Selling price per doll
P100
Variable cost per doll
P60
Incremental annual fixed costs
P456,000
Income tax rate
30%
If 10,000 new dolls are produced and sold, the effect on Doll
Houses profit (loss) would be
a. P(176,000)
b. P(56,000) c. P(39,200) d.
P280,000.
70.

Johnson Company manufactures a variety of shoes, and has

received a special one-time-only order directly from a wholesaler.
Johnson has sufficient idle capacity to accept the special order to
manufacture 15,000 pairs of sneakers at a price of P7.50 per pair.
Johnsons normal selling price is P11.50 per pair of sneakers.
Variable manufacturing costs are P5.00 per pair and fixed
manufacturing costs are P3.00 a pair. Johnsons variable selling
expense for its normal line of sneakers is P1.00 per pair. What
would the effect on Johnsons operating income be if the company
accepted the special order?
a. Decrease by P60,000
b. Increase by P37,500.
c. Increase by P22,500
d. Increase by P52,500.

33