“ReSA - The Review School of Accountancy * Management Advisory Services MAS-01: COST BEHAVIOR ANALYSIS cost. the ménetaty amount of the resources glen up or sacr Deed to attain some_objective_such_as- tne hog gouds and services. When nofified by aterm thet devas. the purpose, cost becomes cau e.g. acaustion cost; praducion cot; cost of goods £214) COST BEHAVIOR ‘Cost behavior is the relationshi eon costs and associated activities ~ as to how costs react to changes in an activity ike production. As production nerePee some costs remain the same (.e., constant ‘onsider the following patterns: ‘COSTS. | TOTAL amount. PER UNIT arnount sxe conta a al Are are constant Sanco, | ages romney race’ | asic aemuco mene FIXED COST vs. VARIABLE COST Discretionary Fixed <———} Soe ‘True Variable . Committed Fed, <—— step Variable MIXED COST 7 YsatbX Where: [Y] - the total costs (dependent variable) [a] - the total xed costs (y-intercept/ vertical axis-ntercePt) {b] - the variable cost per unit (slope of the line) [x] - the activity or cos r (independent variable) {bx - the total variable costs, ————~ [ASSUMPTIONS and LIMITATIONS of COST BEHAVIOR ANALYSIS ~ RELEVANT RANGE Assumption. EVANE RANGE fetes to the range of activity within which the cost behavior Patterns are valid. Any 'a different cost behavior pattern, {evel of activity outside this range may sho ‘a specified period of time, Beyond this, the TIME Assumption ‘The cost behavior patterns identified are true only. over: Cost may show a different cost behavior pattern. LINEARITY Assumption “The cost Is assumed to manifest a linear relath show otherwise over the long run. COST ESTIMATION: SEGREGATING VARIABLE COSTS & FIXED COSTS 1) HIGH-LOW POINTS Method the mixed costs are computed from two sampled data points ~ The fixed and variable portions of the highest and lowest points based on activity or cost driver. Change in Costs (Yi — ‘Change in Activity (Xu jonship over a relevant range despite its tendency to wo) ‘Variable cost per unit (b) = =X) 2) SCATTERGRAPH (Scatter Diagram) Method ‘ Ri Spwerved costs at various activity levels are plotted: on a graph. 8 cession line fs then Fited to the plotted points to represent the ine function 3) LEAST-SQUARES REGRESSION Method LEAST Sot os method isa statistical technique that investigates the-2ssocialon betwee dependent Least sates rabies, THis thetbod determines wh line of beet i for 8 setof ebeervars PY mninimizing the sum of Geviations between cost line and in . 1s Sty one lndenendes-uatable the analais i known as SIMFLE REGRESS. Ir erere 1s Only One ae multiple indeperidentveriables, its known es MULTIPLE REGRESSION. 4) Other Cost Estimation Methods: R) industral Engineering Method ~ based on the relationship, petweet inputs and outputs in Tisical forms; engineering estimates indicate what and how much costs should be. 15) Rokount Analysis Method - each account is, classified as, ether ‘fixed or variable. based on walified personnel in the ofganization a costs are classified based on. ments exi ¢) “Conference Method process engineering, manufacturing, such as purchasing, ‘employee relations and so on. 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Correlation Analysis A). The closeness of the linear relati “Correlation Variation jonship between the cost and the activity Is the © Deviation’ d, Standard error B) Looking at the following scatter diagrams, we can conclude that Units Cost A ‘a. Cost A will be easier to predict than cost 8. _b; Cost B will be easier to predict than cost A. €. Cost A Is out-of-control. d. Cost B has no variable component. 1 Units Cost B C) Which of these correlation coefficients represents strongest relationship between two variables? a7 +0.50 = 0.80, Least-Squares Regression Method <= 0.05 d+ 1.05 (Adapted: Managerial Accounting by Louderback) ae ae wid overhead costs various levels of activity are presented below: in Month \ Machine Hours Total Overhead Costs | Hone eee fv ae Hl ‘April 400 ~ PB51 suo” ‘oy 60 1,089 ©, nape OT 700 pi208 i |___ The breakdown of the overhead costs in April at 400 machine-hour level of activity s as follows: Supplies (Variable) P2601" sq Salaries (Fixed) 300 Utilities (Mixed) s Total REQUIRED: flow much of June’s overhead cost of P 1,208 consisted of utilities cost? 'C 2. Using high-low method, determine the cost function for utilities cost. > sgt he 3. Using high-low method, determine the cost function for total overhi@ad cost. = 739 4. Using least-squares method, determine the cost function for total overhead costs. 3. What would be the total overhead costs if operating level Is at 200 machine hours? 2 (Adapted: Managerial Accounting by Garrison & Noreen) ' ‘SOLUTION GUIDE (requirement 1) A April (400 hrs) Jun Ir Supplies (Variable) 260 Salaries (Fixed) 300 Utilities (Mixed) nap. Total Overhead Costs R851 P1,208, wulrement 4 = Lea: ec) Bay Month . 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"FACTORS AFFECTING PROFIT : Ffthere isan increase in. profit tends to. Selling Price 2. Unit Variable Cost 3. Fined Cost, Volume (Unit Sales} Increase in multi-product companies, @ change in sales jnix may also effect company profit \AS - 01 are algo assumed in CVP ahalysis: LIMITATIONS and ASSUMPTIOI jes volume changes. lysis Relevant range, time and linearity assumptions in M/ Unless indicated otherwise, unit selling price ts constant even if Sal {nventories do not change significantly from period to period, Th case of a multi-product company, sales mix is constant. gor productivity, production technology and market conditions remain stable. Prere ‘TERMINOLOGIES USED IN CVP ANALYSIS Contribution Margin (CM) ~ is the difference between sales and variable cost 1 otherwise known rain income, profit contrition, contribution t0 fixed cast or incrementa} contribution. CM Ratio = CM + Sales = Unit CM + Unit Selling Price + CM Ratio = 2 CM = A Sales NOTE: The sign ‘A’is used to mean change or difference, ,ak-even volume) or in pesos (break-even cP) - a level of activity, in units (bre: total costs. At the break-even point, there sales), at which total revenues equal is neither a profit nor a loss, BEP units = Fixed Costs + CM per unit ' + BEP peso sales = Fixed Costs + CM Ratio 7 Unit Sales with Target Profit = (Fixed Costs + Profit*) + CM per unit Fixed Costs. ‘EM Ratio ~ Return on Sales x profit must be expressed before tax: Profit after tax,+ (100% - tax rate) ‘ctual sales and break-even sales. It indicates the -cline without incurring loss. Break-Even Point (8 = Peso Sales with Target Return on Sale: Margin of Safety the difference between at maximum amount by which sales could de + Margin of Safety = Sales - Greakeven Sales Margin of Safety Ratio = Margin of Safety + Sales alternatives being analyzed would yield equal the level of volume at which two ‘amount of total costs or profits, Alternative A Alternative B (Unie CM x Q) ~ Fixed Cost =) (Unit CM x Q) ~ Fixed Cost + Fixed Cost + (Unit VC x Q) Fixed Cost + (Unit VC x Q) NOTE: Q = number of units (indifference point) Indifference Point ~ he relative combination of quantities of sales of various products that make up the total sales of a company: + Over-all BEP units = Fixed Costs = Over-all BEP peso sales = Fixed Cos Sales Mix - + Weighted Average CM per unit sts + Weighted Average CM Ratio measures how a percentage change in sales will affect ‘dieates how sensitive the company is to sales volume Tt is also known as operating leverage factor. Degree of Operating Leverage (DOL) - ‘company profits. It in increases and decreases, © DOL = Contribution Margin + Profit before tax © AM sales x DOL = 4% profit before tax Page 1 of 3 pagesseBed ¢ jo z a6eq Bab /0. oney A9jes Jo uIbIeN “s : ‘ales J0 ibe “> Jo ‘ PFs woud “€ iz “4p )80K0s fe otliz. 1865 paxig *t 4 nee :Buioyo} x9 ouniuioiaG !ORIMORS | aoa les "98'S! one: Youd LA BIYM 9409 SI o1,e1 4S09 aIgeIeA auA “000'8ZE 4 Bue Soles UOAD-NeOIa SOPIN “E Sajes + org = o7ed youd ION Soles = Ayayes Jo ube = one! Areyes J0 UIGIEW JW * MD saeg = uiGseW uoRNqugUED = ONeS UIBIeU Uo;;NqUIUOS :2:94m, oned ayoid yu = ones Aisjes Jo uIGiew x One) UbIeW UORR@MUOD :9NINOYE % suun 009 = x XS°I + 00S‘ET = x OT + 000'ST XS'Z = 005'T (Wau) 81609 = (Pio) $1809 (XO-+ @ =f, WORDUN 1509 UO pasey (52. 30 %01) asz d Aq Soseo.0U! 3300 ajqeuen wun > “(00S'Z d © 000’r 4) lesodoud aya Jpun dos’ g Aq as¢a.00p 111M 3509 poxu AWAUOW 7 ON SWEDE a Opeb : (8501) aod Be See ora 51505 POX 15537 sk ee ujB4eW uor;nquau0> Be amor eke ates Sie ang Ad aay Cen] Teall SYSOD SIEUEN 15507 aidie noo a052 sales SyUTOOs(S) SHUN 00ST AStoreon gains NoLMos 45 21 40066, = 01 #0096) peqiaption Ay uunedoy jeusbeuew :poribe pue pexdepy) shez 2 7 O0SEl by5-2l = <5 + 0) ésue|d uonesuadusos ony ayy UdaNiaq EJ0MIPUI 2q, ‘Auedwod au I\MM [OA] S9}es IeyM “00S"E d 01 jIe} PINOM Auejes AjUAUOU a4 Ing ‘UOISsIIWIOD %OT. @ anis3as pinom aidoadsaies aif Agoseym Ueld e sJopisu0D AUeCLIOD 9u3,OABMOM "UOIS{UNOD fue aroun AAUOU 10d DOD's 40. Albles Aluwuow e oldoedsoles 31 shed, AnuDun "oD e108 M15 90 O05¢} 2006/E d JO soles Wososd si Ye 05 10g 40 AtD}es Jo UIb.OW 2X9} YEU y Cwaigoid ayy aajos 1 wonewiolu si posu 20u op nos ‘pjos Bulag mou Sue syn AueW MoU MOU MOA UONBUIe :2i0N) \ C7p\¢8ujuses Ajguadano 5} 3! 124) $50} 40 WYOsd aes ain “0 e10g aAjO 03 aseasDUT Sales pnous sun Auew oH "000'9 4 Aa postoisu! arom bulsiionpe j aseai5u1 plnoM sojes dein Sonatog Usplsaid Auedwoo ous yey) pUe YIUOH 1ad sjuN QDs Buyias AQUALND s} “0D e10g Jey aUNSsy Aa} itosoz si xe, xey Suiminsse) OG2'Z do aueud Yep soy Ue Lite ca pauribas ase ores Oood Bun (27. wus at 4) )01d O00" 4 uses oa pasinoos a1 safes HUN UMA ‘bale, sojes osed uane-nesie (a nq. “Auunen sod usne yeas Ay Guy moyjoy ayy BINdwOD ‘sasodind Buruueld yyosd 404 “7 7.0) (UND) Ones UIBIeW LORNELIUOD. (5 01 soo aiaeuenaiun (@ SoFeoud Suyjesaun Suimo|o} ayy aULIONeG “t A Loop sah fazMnose 005° d Word xe 000'ST '$9S0D paxiy S907 ‘ O0s’Ze d__uidie uopnquau0D “QO0'ST. 59505 ajaeuen ‘5597 o0s'Ze d (syun oos’t) sajes -Smoljo} yuo yu9004 @ 10) sasuadxe pue sojes s,Auedwon ay, “jonposd ajBuIs & sijas pue SaimPesueW AUedWIOD Bog “T | ‘SISMIVNV LISOBd-IWMION-1SOD 'S3STIWS . SISATYNY LI4OU¥d-AWMIOA-1S03 Z0-SVIN AduRIUNOSOY Jo [OOYDS MATADY HYL - WSIYReSA - The Review School of Accountancy MAS-02 (COST-VOLUME-PROFIT ANALYSIS i 4: Matyong Company produces and sells two: products, tables and chairs, Following {s next month's income budget: : « ie Chairs ‘Tables Total pa Unit sales 60.u iue- 75u 6 Soles 1,200.00: P187.50I>gP 1,387.50 42 3 Variable Costs vos0.00.-14z.50 1.36250 “Poh enetbution Margin 6 150.002" P 75.006" P-225.00 Fixed Costs 90,00 vee S. Profit P 135.00 REQUIRED of LA ow many units'of chairs should be sold next month to break-even? $7” a oe any units of fables should be sold to earn a profit of P 1202-4 - (Adapted: Managerial Accounting by Garrison, et.al.) SOLUTION GUIDE Chairs Tables Contribution Margin (CM) per unit P 2.50 P 5.00 Sales Mix (4:1 > 80%:20%) __“_80% __20%__ Weighted Average CM per unit: 5, Me, Rita has recently opened the UBE Fitness Gym being offered exclusively for malnourishe Ms, Results for the gym’s first year of operations are presented as follows: sales 250,000. yi Variable Costs (400,000) _ Contribution Margin P 150,000." Jovic Fixed Costs (120,000) _ Profit 30,000 tne! Rte ie unnappy ebout the reaults of hislayn's frst year ‘of operations. She observed that despite the Me, ita Is unnaPPt ra, prof, woe sll om because of te gh fixed eos She concider that an an alee would not Yield a satisfactory increase in profit REQUIRED: WIRED vs. Rita that Ne conclusion isnot right by computing the operating leverage focor- 1. Explain (o Moses by 10%, then ROW many percent would profit increase, ceteris paribus? (7 sores Gatcrnine the percentage & In profit by using the operating leverage feCtOr 7. (Adapted: Managerial Accounting by Garrison, et.al.) MN WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE) a 1. At the break-even point, total contribution margin is % hit a. Zero c. Equal to total costs Fee AEC, Equal to total fixed costs Equal to total variable costs 3. An create in contribution margin ratio reduces the break-even point. 3. If the tax rate increases, then the break-even point also increases. § 4. An increase in the income tax rate 2 paises the break-even point “ B.__ Lowers the break-even point ‘ oo Tetteuses soles required to ear a particular after-tax profi §. Decreases soles required to earn a particular after-tax profit 5, An increase in actual sales also increases the margin of safety. 1 6. Acompany that has a negative margin ‘of safety necessarily operates at a loss. 7. Under CVP analysis, which of the following js (NOT assumed to be constant? @, Unit variable cost “e Unit selling price Unit fixed cost Sales mix Bee ee ie akc profit con be quickly computed by multiplying 2 % change in peso sales y the a. Sales mix c. Indifference point b. Margin of safety _d< Degree of operating leverage 9, The operating leverage factor is equal to ‘2 Gross margin = profit after tax Contribution margin + profit after tax a. Gross marain ¢ Profi before tax” tl Contribution margin + profi before tax 10.17 egies tae pec ta-change, the wpe of costing that provides the. best nformeten for 3, Job-order costing ,_ Joint costing JB. Variable costing Sao Absorption costing Page 3 of 3 pages .(>) ReSA - The Review School of Accountancy * Management Advisory Services \ MAS-03: ABSORPTION & VARIABLE COSTING qvoar cash ) fe 4 costing/ method that includes all manufacturing costs ~ direct materials, fdirect labor, variable and fixed factory overhead - in the cost of @ unit of product, It treats fixed factory overhead (FFOH) as a product cost. Absorption ABSORPTION COSTING ~ Costing is also known as full costing, — VARIABLE COSTING - ‘Is 9 costing method that: includes) only, variable manufacturing costs — cect faterials, direct labor, and variable manufacturing overhead ~ in the cost of 3 unit of product. It treats FFOH as a period cost. Variable costing is also called direct costing. PRODUCT vs. PERIOD COST 1k product cost 's_an inventorlable cost that is subjéct to allocation between sold and unsold tals Current Income is reduced only By the amount allocated to the sold units. Consider the following allocation: — UNSOLD UNITS > Asset (as Inventory) PRODUCT COST <= SOLD UNITS > Expense (as Cost of Goods Sold) A period cost is a cost that is chafged as expense against income, regardless of the sales performance, No allocation ig necessary; current income is reduced by the full amount of the period cost PERIOD COST FULLY EXPENSED in the period incurred, regardless of sales ABSORPTION vs. VARIABLE COSTING 1) RATIONALE Srpporters of variable costing argue that FFOH costs are incurred in order to have the capacity to produce units. These costs are incurred whether or not production occurs: Thus, FFOH costs, Raving no future service potential, should be fully expensed in the same period incurred. Supporters of absorption costing believe that all manufacturing costs ~~ variable and fixed — are necessary for production to take place and hence should not be ignored in determining product costs. 2) INVENTORIES Re FFOH costs are simply expensed, (i.e./-Period Cost) under. the variable costing, the peso amannt of inventories under variable costing is 6lways lower than the peso amount of inventories under ‘absorption costing, 3) ACCEPTABILITY ‘Since treating FFOH as part of inventory cost is consistent. with accounting standards, only absorption costing is acceptable for financial reporting: and! tax purposes. Variable costing, which Giolates the ‘matching principle,” is acceptable only for internal use by management, NOTE: Matching principle is an accounting principle that calls for the recognition of expense by matching it with the related revenue in the same accounting period. It supports the treatment of cost of Sales as expense only when related units have been sold. 4) INCOME STATEMENT Qn income. statement prepared under absorption costing, distinguishes between. production and ‘other costs, Production costs pertaining to sold units are first deducted from sales to arrive at gross profit, and then ether costs are deducted to obtain net income, Under variable costing, the. Income statement distinguishes between variable and fixed costs. All varioble costs are first deducted from revenue to arrive at the contribution margin,.and then fixed costs are deducted to obtain profit. '5)_ INCOME COMPUTATION Variable costing income may differ from absorption costing income because of the difference in the ‘amount of FFOH recognized as expense during a period. This Is actually caused, by’the difference between production and sales, In ‘the long run,/ however, ‘both :methods. would) yield’ the same. results since sales cannot Continueusly exceed ‘production, nor production can continuously exceed sales. (NOTE: the term Sincome’ in many accounting literatures is liberally used to mean “profit”) Page 1 of 4 pages\ so6ed'y yo z 860g "00, Gunsos araeuen (a 9% Buysoo uondiosay (y ]9PUN. 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Suptiom Se.uons ‘swunosoe pareial 19\g0 pue s3s0> AIOWUOAUK “BuASDS aigtiion ng,“ |s2les Due Uoh=npoid so sso/pieba4 s3509 pouad se awes aig sobeys puc seen nPevd, wou HOA S2PMXS UUM ‘Gunse> ageien Bulsn Aq pareja; s) aldmuud Buumeu snr “¢ 3INUIP 24 2UGIW) a1geuIen pue poxy ow $3502.40 uoNebaI6aS = “Burmodo, f@ulayx9 10) igeydance Jou 511 ‘Sou tayo wpm sauepI02ze UI Iu 9 BuRs0D aldenes, <5 9NLLSOD J18VTVA ONISN 40 SADVLNVAQVSIO quaWeBeUeW Aq paisyunosue sws}qoad Tuoneiade J91N0 pue suoisipep BuiDl4d 405 uoneuLojw Imjasn apincid suodal Busco siquien wusishs Buljund20e 3s02 puepuers ayy Yim ajqhediues aou S| BuRSoD aIqeLEA ‘aigettene Aj1pead axe sasdjeue youd-auunjon-3500 pue UaAd-Hea1q 10) papaou eq “payeunuya 248 $3509 paxy BuReD|Ie UI PaAlOAU! suHB|qoud 34), “eIgepueIsi@pun sow pue s9\dus ae stiode/ Gunso aiqeen ~ SNIISOD J1a¥TIVA ONISN Jo SIDVINVAAY 2d Burson aiqeusen ‘awoatit WR} Auoyuonu! Buypua ut HOY 25597 0d revo. 4 RRO. Aroyuanuy Suyuii6—q uw; HOS :PPY XK d Bunsoo uondiosqy ‘suoout seInuUOY BAnBUIEYY + IOS yun ~ paonpoig syun = Alouanut y Aowuenuy SusUiBaq ~ AiouonuT Bu)puy = Aoruenut y 219M HOJd wun xX AOqUeAUT Y= dul (219e44eA) ewoouy > (uordsosqy) awioduy <= SaIvs > NOLLOINGOE “Sursoo a1geuen Japun pasuedxo HO.44 UeU) 403¢046 s} BuRscD uondiosqe Japun Pasuadx® HOJ4 “Auoquanul ul asea.5ap es} auay) ‘sajes ueUA S59) si UoNSNposd UOyM :E “ON WioHed © gynuoy 218g + (21getien) awiosut < (uoAdiosqy) awosU] <= szTVS < NOLLONGONd “@ulo2u! 2iqelien ueus 1938016 owoou! uondosge ‘ei0je194, BurSoD a1qBLLeA J9puN pasuadxe HOM uel) ssa] S| BuASOD UONdiosqe Jopun pasusdxs HOdd ~Aioqwanuy ul ase9.9U1 ue st o1awn ‘sales UeUn 192946 s} UoRINposd UOyM :z ‘ON WONed + (21921NeA) ewosuT = (uodiosqy) awosut <> SFIS = NOLLINGONd “Buias09 aiqesen sapun pasuadxe HO44 sienbs 6uNIs02 uoRdiosqe apun: Posuadko HOL4 “Aloiuanul u a6ue4> ou s1 aroun ‘sae sjenbo UoRInpoud UoUM :T “ON Weed + : . 'sajes pue tonanpasd uo paseq susoqed BUIMO}IO} tN JapIsuo) “pls ue SaIeIe1 HOY YONS UDIYm oy UN ayy uaYym poliad a4} U) Pasuadxe exe sjsoo Hod ‘Buns0> uondiosqe Japun ally “pouinout se pasuadxa Ayny axe 33809 O44 ‘BUNNSOD aiqeuuea Jopun 9NILSOD JIGVIYVA @ ONTLSOD NOLLdYOSEY YIGNN SWOONT JO NOTLYITIINOD3IY ONLLSOD F1SVIYWA 8 NOLdyOsSay £0-SVIN AQuBTUNOIDY JO JOOYDS MaTAry ay], - VSeuMAS-03 ReSA - The Review School of Accountancy ABSORPTION & VARIABLE COSTING Hoot 00 3. Prepare income statements under {A) absorption costing and (B) variable costing. 3. How much fs the difference in income between the costing methods? @60.0 &° What causes the difference in income between the costing methods? (Adapted: Managerial Accounting by Garrison) ‘SOLUTION GUIDE to requirement 1 (A) rption. cin Costin Total Per Unit Per Unit pM ase 300 DL e eo? 209 %o ; ve oo 9 lou FFOH MRL eae Total 650 « CoD SOLUTION GUIDE to requirement 3 } ADRIEL COMPANY | Income Statement, for the period of 2016 i (A) ABSORPTION Costing (B) VARIABLE Costing } Sales Pp. 7000; sales P tan | = Cost of sales 4500) = Variable cost i Agaon 2 | Gross profit P1500 Contribution margin P 1402). - Expenses too = Fixed cost 220K Net income P4600 Profit P 2000 | which assumes first 2, ‘The following information are takén from the books of Mylene Company, 5 05 FE) ier a ow ; | Nese. eis Inventory-(in units) 2015 2016 d ado, CARE i onleaghoto mene Seid aes is. 5 OE aaa (hs) Ces?) Production 410,000 units» 9,000 units an ee Ending inventory 3,500 units. 1,000 units Clr) (17495) Re SS ‘ Sita MSH MCOD ~ . Sales (P 2 per unit) ™ 22 PE Was (hay 280 Variable manufacturing costs'(P 0.75 per unit) 750045 | P6750 (9500) (Algg Sole poe Fixed manufacturing costs P5,000 'S P5400 Wn 1) As CAS) Selling and administrative costs (50% variable) P4,500 P7500 25 Te REQUIRED: 1 Determine 2035 profit under variable and absorption costing ; 2, Reconcile the two income figures in No. 1. Determine 2046 profit under variable and absorption costing. 4, Recoitcile the two income figures in No. 3 SOLUTIONS & ANSWERS to item no. 2 RON Gh a | (Adapted: Cost Accounting by Horngren, et.al.) | Sg e i “Absorption Variable: ‘Absorption ~ Variable. Sales P 13,000 Sales 13,000. Sales 23,000 Saiés P.-23,000 écs (8,125) ve 7,425) CGS 05,175) VC (12,375) GP 4,975. CM 5,875 GP VP 7,825 CM P 10,625, Expense (4,500) FC 7,250) Expense * (7,500) FC __ (9,150 Income P37 Loss (1,375) Income 325 Profit P4753 2015: | CGS = 6,500 x P 1.25 =P 8,125 VC = (6,500 x P'0.75) + (4,500 x 50%) = P 7,125 FC = 5,000 + (4,500 x 50%) = P-7,250 (3,500 - 0) P.0.50'= P 1,750 > 375 - (-1,375) 3,500 x P'1.25) + (8,000 x P 1.35) = P 15,175 (using FIFO) (11/500 x P.0.75) + (7,500 x 50%) = P 12,375 5,400 + (7,500 x 50%) = P 9/150 | Reconciliation: A Income = A Inventory x unit FFOH ‘beginning inventory (2015 layer): 3,500 x P 0.50 = P 1,750 ‘ending inventory (2016 layer): 1,000 x P'0.60 = (600) P 1,150 > 1,475 ~ 325 Page 3 of 4 pages Aas‘ sofed p joy aBey Bupjew uorsioap wsay-u0Yys “p sishjeue 3yod-auINjoA-3s0 “ Buniodas jeoueuy 40} 2iqeadeazeun si Bunsoo aqeuen si 'S2/@S Ut S26UeU> 0} 39e94 OU sap PU VOR INpO/d YIM SaJENIINY awodU) Buryso> aiqey St 4 ‘Bups09 a}qeIsen sapun wI09 Jenbe aq €2 spus1 Gunso uondiosge Jopun awoout ‘quouiucsiaua UoRshpold (itt) auteuraent c separ 9589.09 lun oos'r “p 25€a.9u) sun O0s’» “a eseanap syun o00’e 3 aseaudui syun 000’ >R : 4404 249 Buunp sbuey> jana} Aloauanu! 912 pIp MoH sy oy, “sun 000'00r Sem uon2npe1d pur ‘OOO‘OSTd Sem 3502 peDYIen GuUMDeNUeW Paxy [eC “BURNsOD uoHdvosGe Sutsn 00006 4 Jo auoau yeu pue GuRsoD. sigetien Bulsn oOs’ce d Jo sUOOUI YOU e peY “OD ru suun 000'r “p sun ooo'oT “4. hee 2 4 eg e, aint Pedy 4 comme eens th aves ancl yee ene a, ne ON ee ‘cunstsoiaauen 2pun Sein 1 vein Bunse9 dondiosqe spun s0mo] OOU'FE a SEM 1204 a4 404 oulvoUl ere tetaee UL "Hun 40d ¥ ¢ Blom $9509 peoUion BuuntDeynueWs poxy SY pus HUN Joe Sy arom sIe09 Lonsopoad aiqeuien sAueduos ayy “4294 ayy Bung “Aioquenu Gujuuiboq $3) Ul siluT OOO'ST ey Auleduo> asIoIA 000'0rd "Pp 000'09 d “H 000'0S d. 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For business entities, management must choose in favor of the option that maximize e company profit. SHORT-TERM DECISION ALTERNATIVES | orawees Make or buy a part or a product line ‘Acceptor reject a special order ‘Sell or process further a product line Continue or shutdown a business segment Choosing the best product combination Selecting a change in prof factors TYPICAL DECISION MAKING PROCESS Nowayeye Defining the problem. ‘Specifying the objective and criteria. — Identifying the alternative courses of action. — ~ Evaluating the possible consequences of the alternatives. - Collecting the data needed to make decision... « Choosing the best alternative and making the decisio Evaluating the results of the decision. FACTORS CONSIDERED IN DECISION MAKING. Qualitative Factors - factors that cannot be expressed effectively. >» Quantitative Factors ~ factors that an be express monetary or other numerical us Quantitative approaches in decision making i) TOTAL approach - the total revenues and each alternative, and the results are compared to serve as 2 s basis for the decision to-make 2) OIFFERENTIAL approach - only the differences or changes in costs and revenues are considered. NOTE: In decision-making: cases:that-involve-2- conflict between-qualitative and quantitative factors, “quality” usually prevails over “quantity, ‘TERMINOLOGIES USED IN SHORT-TERM DECISION MAKING RELEVANT COSTS _ DIFFERENTIAL COSTS AVOIDABLE COSTS OPPORTUNITY COSTS SUNK Costs SHUTDOWN Costs soINT Costs. FURTHER PROCESSING costs SPLIT OFF POINT BOTTLENECK RESOURCES Futurecosts that are different among alternatives; it is considered as the “avoidable costs of a particular decision Increases (increments) or decreases (decrefnents) in total costs that result from selecting one alternative instead of another. [Relevant] Costs that will be made. [Relevant] 3 ll Not be incurred if @ certain decision Is Income saci ils when a certain alternative is chosen over ‘another alternative, [Relevant] Costs that are incurred already and cannot be avoided regardless of what decision is made. [Irrelevant} Usual costs that a company will continue even if it decides to discontinue or shutdown the operation of a company segment. [Irrelevant] Costs incurred in simultaneously manufacturing two or more (joint) products that are difficult to identify individually as separate types of products until the products reach a certain processing stage known as: the split-off point. [Irrelevant] Casts incurred beyond the spit-off point as separated joint products are to be processed further. [Relevant] ‘The earliest stage in the production where joint products can be recognized: as, distinct and separate products. Any particular resource or operation where the capacity is. laced upon it. Page 1 of 5 pages(0009) “slusmasiienpe 10) OOT'OZ ¢ spuads 41 4) sz, 0006 0005. 00pay ponte anged) 00004 e gtd 00005 AoQer, ‘s SG pce 8 (e008) “90000 mp. Od 00, coenrg seBed¢ jo z 8eq Ga005 ~ 99005%, ~000n0}, 70900200095 sishyeue \enuaseyia (9 sisAreue 1ei01 (y *Bulsh qWoid AUedwos uo yay aLp auiutiorg esuadx3 Buijies paxig PPBUENO paxiy ‘51509 PX esuadxa 6uljas aiqeuen peay9N0 aiqeuen 4092 Pasig sievarew aug 5950 9/92UGA, Aq. S825 sy aseaioU! 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MAKE OR BUY (OUTSOURCING DECISION) SMW Motors must decide whether it must continue to produce an engine component or buy it from sunt Hogan "Teena econ Var = 20 eo SAA re rete ae camet eels ae es gare Direct materials 1,200 Direct labor ‘300 Factory Overhead/(80% fixed) __1,000 P.3,000 Xf tiw buys the components, the Facity now used to make the components canbe, rented out to Srotner fm for P 10,000, aeons REQUIRED: See BMW make or buy the components? uy Save 4000 3. ACCEPT OR REJECT (SPECIAL ORDER DECISION) a, By 7M aon rT OF Eapany cells 4 product for a regular unit price of 75.00. THe cost &f producing and seling 6 unit of this product at the normal activity evel of 50,000 units per month is, as follows: ‘Manufacturing costs: oe Direct materials 32.80 perunt 73.4 Direct labor 520 per unt Variable manufacturing overhead 3100 perunt 2 Fixed manufacturing overhead 100,000 per month Gees Selling and administrative costs: F Shon feof Variable 2.50 per unit Fixed P 36,000 per month hacer? ‘an order has been received from a customer for 5,000-units at @ discounted unit price of P 50.00. ‘This order age the total fixed The variable reihig and administrative expense would be P 0.50 less per unit on this order thar on wormal sales. REQUIRED ; ‘Should Antonia accept or reject the special order? ‘Aaeft profit’ 26k Z 4. SPECIAL ORDER PRICING : “ ‘Conrada Company sells I-Phone.10.at.a price of P.28,000.per-unit...The-costs per-unit-are:. Direct materials 8,000 Direct labor 6,000 Variable overhead 4,000 Fixed overhead 2,000 TOTAL, P.20,000 ‘A special order for 1,000 units was received from Marcia Bona, a well-known cell phone dealer based in Cavite. Additional’shipping costs for this sale’are P.2,000:per unit. ‘ asec ipping for le Pe full cafecity

décld B) Conrada has EXCESS capacity? 760) 5. SHUTTING DOWN OPERATIONS “The most recent monthly income statement: for Gorgon Stores is given bel ‘China Branch | Japan Branch Total Sales P 1,200,000 P.800,000 2,000,000 Less: Variable expenses 40,000) (360,000) (1,200,000) sjpeContribution margin 360,000. 440,000 800,000 af (Legs: Traceable fixed expenses “> | (210,000) 42 (180,000) -_ (390,000) ‘Segment margin P150,000 | 260,000 ‘410,000 Tess: Common fixed expenses (180,000) (420,000) (300,000) Prof (loss) (30,000), 140,000 F-110,000 If China Branch were eliminated, then its traceable fixed expenses could be avoided. The total common fixed expenses are merely allocated and would be uhaffected. A) What will be the new company profit (loss) if China Branch is eliminated? a. P-260,000 “s (P-40,000) bP 140,000 @. (P 70,000) ) What will be the decrease In ‘company profit if Gorgon. doses its Chine Branch and 20%°oF its Weak ble ted expense would remain unchanged while Japan sales would decrease by 20%? Sogo a. 352,000 : cP 136,000 - 6. P 280,000 G. No decrease; profit will increase ) Page 3 of S pages: Gn) ‘@ ose te z FE nar ea ws "SHY OF Sys] Sig of [aun sed Sino] a gid ded} wow Danpeig | gAonpoid |v enpard INS WOLINTOS: Ob| guoneuiquies jonposd asaq au Ui poreoosse qwosd ayy s) yonW MOH *Z 940 Suun OOT ‘A Jo suiun og !y Jo syun oot ‘p 940 sun OST ‘@ 40 31UN 9 !y Jo syuN 9g “> ‘940 SulUn OST {q Jo syun og !y Jo Sylun gg 940 sulun o¢t ‘a Jo sun og ty 40 swun ogre uopNGIAUOD ApeaM aun SeziLUPCeW BIA YOReUIqUICD Yonpald ysoq 24S! 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UieUss im eeoous 49d 000° ¢ 40 (sexe pue soueuauIeW yUeId '2")) 3509 umopinys e “papuadsns aie suoneiado aUeld st nN qWwold ‘00st 0007S 9809 paxld oo0'0t d — (2d © 00's) s1509 aiqeuen 13897 wea 2 o00’st a (€ 4 @ 000°s) sares sBurmonoy 24a mo\s swWUN 909's Jo S2/Bs AjAUOLL 243 40) Pa1edaid quaUloxers 9UIOIU1 Uy “WUOW! Jed su1UN 999s Jo Fane] qUaxiND ayy mojeg doup |INm Sajes eI sI29dX9 AUedWOD ASHIUD i ANIOd NOLLWNIWI1a 19nGeud ‘9 SNLLS@D LNWAR1Fa OYIS MITATY FLL - WSO vO-SVIN ADURIUNEDIY Jo |!ReSA - The Review School of Accountancy MAS-04 RELEVANT COSTING WRAP-UP EXERCISES (MULTIPLE 1. Which of the following costs is generally considered irrelevant in decision making process? a. Direct labor b. Direct materials é Fixed factory overhead d. Variable factory overhead 2. The salary you would otherwise earn by working rather than attending the CPA review is a good example of ‘a, Asunk Cost 26 An opportunity cost An incremental cost t d, An out-of-pocket cost 3. An opportunity cost is usually: "a Relevant, but is not part of traditional accounting records. | b.. Not relevant, but is part of traditional accounting records. Relevant, and is part of traditional accounting records. d. Not relevant, and is not part of traditional accounting records, E | there is no alternative vse? 2 The total manufacturing cost ofthe component B. The vanable cost ofthe component The fixed cost ofthe component | zee 4. What is the opportunity cost of making a component part in a factory with excess capacity for which | 5, IF there is excess capacity, the minimum acceptable price for a special order must cover | ‘a, Usual fixed manufacturing costs (22 Variable and usual fixed manufacturing costs . Variable manufacturing costs associated with the special order : | 4d. Variable manufacturing costs plus contribution margin foregone on lost regular units. JKC The product line shall be continued 7. If there are shutdown costs, then a company’s shutdown point is _ i 2. Nilor zero | Below its break-even point i > Above its break-even point d. Equal to its break-even point -> flere fe Mo ChUfeun cea | 6. Which is yeuely considered irrelevant in ‘sll or process further decision making? "a Dont costs 4 Purther processing costs e Salen Vue some cence gine di Salon volue er further proessing 9. Accompany that has a limited number of machine hours and abundant labor hours should produce first the product that has the highest a, Demand in units b. Contribution margin per unit c. £ontribution margin’per labor hour Contribution margin per machine hour : | 10. The role of sunk costs in decision making can be summed up in which of the following sayings? a. No pain, no gain BL Bygones are bygones © Apenny saved is a penny earned d. The love of money is the root of all evil | Page 5 of 5 pages ‘ ®cA untancy Management Advisory Services & Gs) ReSA - The Review School of Acco! MAS-05: BUDGETING BUDGET - i¢ a detailed plan, expressed in quantita budget Is a ADVANTAGES & LIMITATIONS OF BUDGETING ‘Uses/Advantages of Budgeting ‘+ Tt forces managers to It provides a mean: cating fnanagement’s plans throughout the entity. + Tedirects the activities. als. ache + “Te coordinates the activities of the entire entity by integrating plans of various parts. + Teprovides a means. tos «Tt defines goals that serve as benchmarks for evaluating subsequent performance. ‘THE MASTER BUDGET MASTER BUDGET - is comprehensive budget that. | for planning and controll form Budgeting is used to denote the process | wsolidates the overall pl terms, about business operations, cific period @ ry company expenses, cash fiows and earnings: The ‘coming up with budgets: Limitations of Budaeting Considerable time and cost are required. Budgets are mere judgment and might be modified or revised if sary eC SSaY yudgetary system requires A eecceion otal members ofthe organization: Budgets sdmetimes restrict the flexibility of the decison: aba process, ‘The budget program is merely a.quide, not a substitute for good management ability. speci the master budget Is mainly composed of: (1) and ‘inanci i Tice master budget, in some organizations, is elso referred to as ‘proforma budge, planning budoe, forecast budget,.master raft plan. [MASTER BUDGET oO OPERATING BUDGET sales budget Production budget Direct materials budget Direct labor budget Factory overhead budget. Budgeted cost of goods sold Budgeted operating expenses ~ Budgeted net income Budgeted income statement TERMINOLOGIES USED IN BUDGETING FIXED BUDGET term: static budget) FLEXIBLE BUDGET ‘A budget prepared for different levels of activi Sia lina ee FINANCIAL BUDGET ‘Cash budget ‘ ‘Budgeted balance sheet Budgeted cash flow statement - Capital expenditure budget Working capital budget ‘one level of activity.within a certain period (other ‘A budget prepared for a one le in period., (other termes variable budget, siding scle budget) CONTINUOUS ‘A 12-month budget that rolls month Is BUDGET ‘compieted (other term: perpetual budget) ZERO-BASED ‘A method of budgeting in which managers are.requirs asit BUDGETING the a bein ie first time IMPOSED fh process wherein budgets are-prepared_by-top_management with itie-or-np BUDGETING ‘inputs from operating. personnel PARTICIPATORY ‘A process wherein budgets are developed through joint decisions by top BUDGETING fanagement.and operating personnel puncet COMMITTEE A grou of key management persn_respanane ot evie-Al_oaley ett relating to the budget program and for coordi ting the budget preparation het ‘This deseribes how a budaet is prepared and includes a planning calendar and BUDGET MANUAL, distribution instructions for all budget schedules Page 1 of 4 pages© seGed » jo Z abeg (uatiem Aq uaunos>y jevre6eueyy :pordepy) OFP%¢\ “s9qWEAON 30 YUOWW 943 40) SeseyD:Nd asIpUeYZioW payaford -7~ 29 00| 494000 40 \AUOUS Bu} 40} sase\find Ssipuey>iow paYrafoud =Gumojos tp ouluareG saauTnORE “pjos spod6 Jo 3809 parsefold s.ynvous deynoried Jews Jo %OF 38 parebpng ave yRUOW y>ee Jo SalioqUaAUI BulUUIbsa = dn-ynewi GOP'SMI 9 eoionul yw jas oy axe S9sIpUEYDIOW y= sale Soyewinse parsbpng saIno, x 7 Ap) >19%¢- o00'80z sdequiazeq > Aak >192- O00'9ST Jaquianon 4 29 - AREAL -OOs'eeT A 49q0o1299—_ 19TOZ 40 Je32nb wb 218 JF SeTes'GuIMolio} atp pera6pnq sey SulsipueYDIOH opnddl Jo J9OeuEW Sores aly, “¢ i =e i : % —1 saunosoy « Ys{eroz Aen 2€ — Cenpiforoz usiew. 7% WILh groz Aenuet, 7 :BuLinp ajgehie2—4 swuno22e uo suoNDe|IO9 YseD :Buymolios tp euaReG “azumnOIH (000'62z 4 pamoys aouejeg aiqentaas squnoaoe ayp ‘9TOz “t Arenuer uo “000"002 d_[_sune coorozy dT Arenidas_ [55> ‘oooTo09 {Few | .,,, [00's d | Azenuer 000%0ss ¢_| judy e000 d | Jequsz=eq | (000005 d_| wiew 000%0S% | JequIerON. —____iSMOIIOJ SP 51 S\UOUI snoInaid Jo Sa}es 1aU ANUOUA Jo p10de Y -yUOU BUIMOII0} puod—s 21291109 348 OT Pur ‘nLrOU SuMMO}IOF UA UT PE19]]09 31 EOE ‘SELES Jo YIU ai BuLINP pa3901/0> S48 tAWOU-e UT PAI Safes IU oY 46 %09 yey oYe2}pu! AuedwOD IBeN Aq pa2uaLIOdxo suoNDa}IOD ised “Z (aot :peadepy) v ‘ (002 soserpind seusey“p 19 3809 6uumpenuew jero1. “ a ip) peapTono rowed ° 449 PlOS spoo8 Jo 3809 “T ase i Buymolioy 47 SUIWOG FO3UINDIY 000‘01 000's ‘Spoo6 paysiul4 ba 00s‘z o0s‘2 $$a00sd-UI-10 M34 -49 000d ot O00'e d sjeusen 4 pe Te Teques3q Tener M031). 40 “oa :Smoljo} se aq 0} a1e sauoiUSAut {31502 40921 1euIp Jo-%EZ re pondde 2q 01 s1 peoyione Aloive4 ‘sIs09-BuMPeMMUEUT TO cee 0b 0a 03 perradxe 51 10487 “sofesso-BAET = onensiiwpe ‘soIeE IO TOT ~ Buljos seoioye) Le oem Se sasuady “Seles 241 30 MOT JO WoId e sisadxo pue GOV'OUT d 1 912s parOpng sey AUedWwe> Uouiey “T SNIISDONG “S3SIOWIS onLa9GNe GO-SVIN. AaueqNoddy Jo JooysS MaTAZy UL YSOYReSA - The Review School of Accountancy MAS-05 BUDGETING ‘4. The following information is taken from. Glery Corporation's. accounting records for the year ended Sar ieese data would be used as the basis for the next year's cash budget. December 31, (a). Customer sales receipts for P 870,000 | (5B) Purchased machinery and equipment for P 125,000 cash epee cae {0C), Settled income taxes of, P 110,000 =o 1D) Sold investment securities for P 500,000 e7ok Chsk (HE) Paid dividends of P 600,000, CY “cok £1). Received rentals of P 105,000 ie Hr) £ G) Issued 500 shares of common stock for P 250,000. 23 250k EG), ue S00 eer 50,000 due to supplies and payroll to employees (Wik) (SK) gc0k so) Paretased real estate for P-550,000 cash that was borrowed from o Panke Clow’) f:53) Pata P 450,000 for treasury shares REQUIRED: Determine the following: 4 1. Net cash provided by opesating activities: 765- 2. Net cash vsedin investing actites 295 (175 ) 3. Net cash used In financing activities: 4-59, 9) 4] Net cash increase or decrease. -34y 4; i ig (Adapted; AICPA) WRAP-UP EXERCISES (Multiple-Cholce Questions) 1. The master budget usualy begins withthe a production budget B._Operating budget c. Financial budget Sales budget 2. AMlof the following are considered operating budgets, EXCEPT a, Sales budget be Capital budget ‘c. Materials budget 4. Production budget ‘3:~-The'production budget process usually begins with the “a: Sales budget b. Direct labor budget ¢. Direct materials budget 6. Manufacturing overhead budget 4, Which of these budgets is usually prepared first? Production budget . Materials purchases budget © Cash disbursements budget AL Gash budget * 5. Which of the following budgets is based on many-other master budget components? 'a. Direct labor budget b. Overhead budget c. Sales budget -d- Cash budget 6. ina cash budget prepared based on operating, investing and financing activities, dividend payments to shareholders shall be classified as part of ‘a. Investing activities Jb Financing activities ‘c._ Operating activities d. Any cash flow activity 7. Hawaii inc, has projected sales to be P 260,000 In June, P 270,000 in July and F. 200,000 jn Hugi Tama collects 30% of a month's sales in the month of sale, 50% in the month following the sale; and 20% in the second month following the sale. What Is the accounts receivable balance on August 31? a. P90,000 4 b, 210,000 -c. P.264,000 d. Some other number Page 3 of 4 pages