Theory

1. __________ relationship is one that appears to exist even though there is no causal relationship.
a. Correlation.
b. Outlier.
c. Spurious.
d. Value-added.
(Louderback, 2002)

2. A manufacturing company prepares income statements using both absorption and variable costing
methods. At the end of a period actual sales revenues, total gross profit, and total contribution margin
approximated budgeted figures, whereas net income was substantially greater than the budgeted amount.
There were no beginning or ending inventories. The most likely explanation of the net income increase is
that, compared to budget, actual

a. Manufacturing fixed costs had increased.

b. Selling and administrative fixed expenses had decreased.

c. Sales prices and variable costs had increased proportionately.

d. Sales prices had declined proportionately less than variable costs.

(Wiley, 2016)

3. RST's average cost per unit is the same at all levels of volume. Which of the following is true?
a. RST must have only variable costs.
b. RST must have only fixed costs.
c. RST must have some fixed costs and some variable costs.
d. RST's cost structure cannot be determined from this information.
(Louderback, 2002)

4. Company A has a lower variable cost per unit and higher total fixed costs than Company B. The selling
prices of their products are the same. Sales fluctuate considerably for both companies. Therefore,
a. Company A has a lower break-even point than Company B.
b. Company A earns more profit than Company B.
c. Company A is more risky than Company B.
d. Company A has a lower contribution margin percentage than Company B.
(Louderback, 2002)

5. Consider the following statements about absorption- and variable-costing income:

I. Yearly income reported under absorption costing will differ from income reported under variable costing
if production and sales volumes differ.
II. In the long-run, total income reported under absorption costing will often be close to that reported under
variable costing.
III. Differences in income under absorption and variable
costing can often be reconciled by multiplying the change in inventory (in units) by the variable
manufacturing overhead cost per unit.
Which of the above statements is (are) true?
A. I only.
B. II only.
C. III only.
D. I and II.
(Hilton, 2011)
6. Which of the following will increase a company's breakeven point?
a. increasing variable cost per unit
b. increasing contribution margin per unit
c. reducing its total fixed costs
d. increasing the selling price per unit

(Horngren, 14th Ed)

7. Absorption costing is required for all of the following except:

a. generally accepted accounting principles
b. determining a competitive selling price
c. external reporting to shareholders
d. income tax reporting
(Horngren, 14th Ed)

8. Statement 1: High-low, scatter diagram, and regression analysis are methods of developing formulas to
predict mixed costs.

Statement 2: In developing a cost-prediction equation using regression analysis, you might not select the
one with the highest correlation.

a. Statement 1 is True, Statement 2 is False

b. Statement 1 is False, Statement 2 is True
c. Both Statements are True
d. Both Statement are False
(Louderback, 2002)

9. The indifference point is the level of volume at which a company

a. earns the same profit under different operating schemes.
b. earns no profit.
c. earns its target profit.
d. any of the above.
(Louderback, 2002)

10. Which of the following is true about activity-based costing?

a. It should not be used with process or job costing.
b. It can be used only with process costing.
c. It can be used only with job costing.
d. It can be used with either process or job costing.
(Wiley, 2016)

11. Looking at the following scatter diagrams we can conclude that

$ $
| ** | **
| * ** | ** *
| *** * | * *
| * * | **
| |
| |
|__________________ |__________________
Activity Activity

Cost A Cost B
 a. cost A will be easier to predict than cost B.
b. cost B will be easier to predict than cost A.
c. cost A is out-of-control.
d. cost B has no fixed component.
(Louderback, 2002)

12. Which of the following would produce the largest increase in the contribution margin per unit?
a. A 7% increase in selling price.
b. A 15% decrease in selling price.
c. A 14% increase in variable cost.
d. A 17% decrease in fixed cost.
(Hilton, 2011)
13. Breakeven analysis assumes that over the relevant range
a. Unit revenues are nonlinear.
b. Unit variable costs are unchanged.
c. Total costs are unchanged.
d. Total fixed costs are nonlinear.
(Wiley, 2016)

14. A cost pool is

a. all of the costs of a particular department.
b. all costs in a group such as variable costs or discretionary fixed costs.
c. all costs related to a product or product line.
d. all costs that have the same driver.
(Louderback, 2002)

15. In CVP analysis, focusing on target net income rather than operating income:
a. will increase the breakeven point
b. will decrease the breakeven point
c. will not change the breakeven point
d. does not allow calculation of breakeven point
(Horngren, 14th Ed)

16. Landscaping is an example of a(n) _____________ activity.

a. Batch
b. Facility-sustaining
c. Product-sustaining
d. Unit
(Louderback, 2002)

17. Statement 1: ABC will be most useful in estimating fixed costs.

Statement 2: Activities that drive resource requirements are known as activity drivers.

a. Statement 1 is True, Statement 2 is False

b. Statement 1 is False, Statement 2 is True
c. Both Statements are True
d. Both Statement are False
(Louderback, 2002)
18. CVP analysis can be used to study the effect of:
a. changes in selling prices on a company's profitability.
b. changes in variable costs on a company's profitability.
c. changes in fixed costs on a company's profitability.
d. all of the above
(Hilton, 2011)
19. Which of the following decreases per-unit contribution margin the most for a company currently
earning a profit?
a. A 10% decrease in selling price.
b. A 10% increase in variable cost per unit.
c. A 10% increase in fixed costs.
d. A 10% increase in fixed cost per unit.
(Louderback, 2002)

20. The most likely strategy to reduce the breakeven point, would be to
a. Increase both the fixed costs and the contribution margin.
b. Decrease both the fixed costs and the contribution margin.
c. Decrease the fixed costs and increase the contribution margin.
d. Increase the fixed costs and decrease the contribution margin.
(Wiley, 2016)

21. Statement 1: Absorption costing "absorbs" only fixed manufacturing costs.

Statement 2: Under both variable and absorption costing, all variable manufacturing costs are
inventoriable costs.

a. Statement 1 is True, Statement 2 is False

b. Statement 1 is False, Statement 2 is True
c. Both Statements are True
d. Both Statement are False
(Horngren, 14th Ed)

22. Activity-based costing

a. requires the identification of cost drivers.
b. is used only in JIT operations.
c. applies only to discretionary fixed costs.
d. does not help to identify activities as value-adding or non-value-adding.
(Louderback, 2002)

23. A cost-volume-profit graph reflects relationships

a. expected to hold over the relevant range.
b. of results over the past few years.
c. that the company's managers would like to have happen.
d. likely to prevail for the industry.
(Louderback, 2002)

24. Statement 1: Cost-volume-profit analysis is based on certain general assumptions. One of these
assumptions is that product prices will remain constant as volume varies within the relevant range.

Statement 2: The extent to which an organization uses fixed costs in its cost structure is measured by
financial leverage.

a. Statement 1 is True, Statement 2 is False

b. Statement 1 is False, Statement 2 is True
c. Both Statements are True
d. Both Statement are False
(Hilton, 2011)
25. Statement 1: A company with no fixed costs has a break-even point of zero.

Statement 2: A company that has no variable costs can never break even.

A. Statement 1 is True, Statement 2 is False

B. Statement 1 is False, Statement 2 is True
C. Both Statements are True
D. Both Statement are False
(Louderback, 2002)

26. Which of the following is true about activity-based costing?

a. It should not be used with process or job costing.
b. It can be used only with process costing.
c. It can be used only with job costing.
d. It can be used with either process or job costing.
(Wiley, 2016)

27. The contribution-margin format of the income statement:

a. is used with absorption costing
b. highlights the lump sum of fixed manufacturing costs
c. distinguishes manufacturing costs from nonmanufacturing costs
d. calculates gross margin
(Horngren, 14th Ed)

28. What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost
(ABC) system replaces a traditional cost system?

Cost Pools Allocation Bases

A. No Effect No Effect
B. Increase No Effect
C. No Effect Increase
D. Increase Increase
(Louderback, 2002)

29. The breakeven point is the activity level where:

a. revenues equal fixed costs
b. revenues equal variable costs
c. contribution margin equals variable costs
d. revenues equal the sum of variable and fixed costs
(Horngren, 14th Ed)

30. Which of the following will increase a company's breakeven point?

a. increasing variable cost per unit
b. increasing contribution margin per unit
c. reducing its total fixed costs
d. increasing the selling price per unit
(Horngren, 14th Ed)
Problem Solving

AMS Company incurred P475,000 in overhead costs making 40,000 units in November. It made 30,000
units and incurred P447,000 in overhead costs in December.

1. Compute the variable component of overhead cost.

a. P 3.02
b. P 1.87
c. P 4.65
d. P 2.80
2. Find the fixed factor of overhead cost.
a. P 356,400
b. P 363,000
c. P 354,200
d. P 307,500

Qi Company produces a single product. It sold 25,000 units last year with the following results:

Sales P625, 000

Variable Costs P375, 000

Fixed Costs 150, 000 525, 000

Net Income before taxes 100, 000

Income Taxes (45%) 45, 000

Net Income P 55, 000

In an attempt to improve its product, Qi is considering replacing a component part in its product that has a
cost of P2.50 with a new and better part costing P4.50 per unit in the coming year. A new machine would
also be needed to increase plant capacity. The machine would cost P18, 000 with a useful life of 6 years
and no salvage value. The company uses straight line depreciation on all plant assets.

3. What was Qi Companys break-even point in number of units last year?

a. 6, 000 b. 15, 000 c. 21, 000 d. 18, 000

4. How many units of product would Qi Company have had to sell in the last year to earn P77, 000 in net
income after taxes?

a. 29, 000 b. 23, 000 c. 22, 700 d. 29, 300

5. If Qi Company holds the sales price constant and makes the suggested changes, how many units of
product must be sold in the coming year to break-even?

a. 15, 300 b. 18, 750 c. 19, 125 d. 21, 000

6. If Qi Company holds the sales price constant and makes the suggested changes, how many units of the
product will the company have to sell to make the same net income after taxes as last year?
 a. 31, 625 b. 31, 250 c. 33, 500 d. 25, 300

7. If Qi Company wishes to maintain the same contribution margin ratio, what selling price per unit of
product must it charge next year to cover the increased material costs?

a. P27.00 b. P25.00 c. P32.50 d. P28.33

(Past CPA Board Exam,)

Jack and Jill Company sells pillows for P25.00 each. The manufacturing cost, all variable, is P10 per
pillow. The company is planning on renting an exhibition booth for both display and selling purposes at
the annual crafts and art convention. The convention coordinator allows three options for each
participating company. They are:

1. paying a fixed booth fee of P5,010, or

2. paying an P4,000 fee plus 10% of revenue made at the convention, or
3. paying 20% of revenue made at the convention.

Compute the breakeven sales in pillows of each option and which option should Jack and Jill Company
choose, assuming sales are expected to be 800 pillows?

8. Option 1
a. 501 pillows b. 334 pillows c. 200 pillows d. 301 pillows

9. Option 2
a. 334 pillows b. 267 pillows c. 178 pillows d. 320 pillows

10. Option 3
a. 200 pillows b. 320 pillows c.334 pillows d. 0 pillows

11. Which option should Jack and Jill Company choose?

a. Option 1 b. Option 2 c. Option 3 d. Option 1 and 3

(Horngren, 14th Ed.)

Jenko Schimdt, controller for 21JS Enterprises, has decided to estimate the fixed and variable components
associated with the companys shipping activity. She has collected the following data for the past six
months:

Packages Shipped Total Shipping Costs

10 P 800
20 1,100
15 900
12 900
18 1,050
25 1,250

Estimate the fixed and variable components for the shipping costs using the high-low method. Using the
cost formula, predict the total cost of shipping if 14 packages are shipped.

12. What is the variable cost per unit?

a. 25 b. 35 c. 30 d. 27
13. What is the total fixed cost?

a. 625 b. 500 c. 375 d. 575

14. What is the total cost of shipping if 14 packages are shipped.

a. P920 b. P975 c.865 d.953

(Hansen & Mowen, 2017)

15. If the contribution margin ratio is 0.40, targeted operating income is P50,000, and fixed costs are
P75,000, then sales volume in pesos is:

A) P250,000
B) P312,500
C) P275,000
D) P350,000

(Horngren, 14th Ed.)

16. Given that the break-even sales is 3/2 of the margin of safety in sales. How much is the net income if
variable cost ratio is three times more than the contribution margin ratio given that total variable cost is
285,000?

a. P 57,000 b. P 38,000 c. P 152,000 d. P 114,000

(Tiong, 2017)
The following information is for JFK Corporation:

Product X: Revenue P10.00

Variable Cost P2.50

Product Y: Revenue P15.00

Variable Cost P5.00

Total fixed costs P50,000

17. What is the breakeven point assuming the sales mix consists of two units of Product X and one unit of
Product Y?
A) 1,000 units of Y and 2,000 units of X
B) 1,013 units of Y and 2,025 units of X
C) 2,013 units of Y and 4,025 units of X
D) 2,000 units of Y and 4,000 units of X
(Horngren, 14th Ed.)

WBB Corporation provides the following ABC costing information:

Activities Total Costs Activity-cost drivers
Labor hours P320,000 8,000 hours
Gas P36,000 6,000 gallons
Invoices P40,000 2,500 invoices
Total costs P396,000
The above activities used by their three departments are:
Lawn Department Bush Department Plowing
Department
Labor hours 2,500 hours 1,200 hours 4,300 hours
Gas 1,500 gallons 800 gallons 3,700 gallons
Invoices 1,600 invoices 400 invoices 500 invoices

18. How much of invoice cost will be assigned to the Bush Department?
A) P6,400
B) P8,000
C) P25,600
D) P40,000

19. How much of the total cost will be assigned to the Plowing Department?
A) P396,000
B) P202.200
C) P134,600
D) P172,000

20. How much of the total costs will be assigned to the Lawn Department?
A) P100,000
B) P49,200
C) P200,000
D) P134,600

SOLUTION:

1. P2.80 [(P475,000 - P447,000)/(40,000 - 30,000)]

2. P363,000 [P447,000 - (30,000 x P2.80), or P475,000 - (40,000 x P2.80)]

3. 150,000/[(625,000-375,000)/25,000)] = 15,000

4. [77,000/(1-0.45)]+150,000 = 290,000
290,000/10 = 29,000

5. selling price per unit: 25

new variable cost per unit: 17 (15+(4.5-2.5))
new fixed cost: 153,000 (150,000 + (18,000/6)

153,000/8 = 19,125

6. 100,000+153,000 = 253,000
253,000/(25-17) = 31,625

7. variable cost ratio : (375,000/625,000)= 60%

17/0.6 = 28.33

8. Option 1 N = Breakeven in pillows

P25N - P10N - P5,010 = 0
P15N - P5,010 = 0
N = P5,010/P15 = 334 pillows

9. Option 2 N = Breakeven in pillows

P25N - P10N - 0.10(P25N) - P4,000 = 0
P12.5N - P4,000 = 0
N = P4,000/P12.5 = 320 pillows

10. Option 3 N = Breakeven in pillows

P25N - P10N - 0.20(P25N) = 0
P10N - P0 = 0
N = P0/P10 = 0 pillows

11. Option 1 profit for 800 pillows = P15 800 - P5,010 = P6,990
Option 2 profit for 800 pillows = P12.5 800 - P4,000 = P6,000
Option 3 profit for 800 pillows = P10 800 = P8,000
Option 3 is the best choice.

12. Variable rate = (P1,250 - P800)/(25 - 10)

= P450/15

=P30 per package

13. Fixed amount = P1,250 - P30(25) = P500

14. Total cost = P500 + P30X

= P500 + P30(14)

= P920

15. X = (50,000 + 75,000)/.4; X = P312,500

16. (P285,000/0.75) = P380,000

Let X =Margin of Safety

X+(3/2)X = P380,000
(5/2)X = P380,000
X = P152,000

P152,000*25% = P38,000

17. N = units of product Y; and 2N = units of product X;

(P10.00 - P2.50)2N + (P15.00 - P5.00) N - P50,000 = 0
P15N + P10N = P50,000
P25N = P50,000
N = 2,000 units

Product Y = 2,000 units; Product X = 4,000 units

18. (P40,000/ 2,500) 400 = P6,400

19. (P320,000 / 8,000) x 4,300 = P172,000

(P36,000 / 6,000) x 3,700 = P 22,200
 (P40,000 / 2,500) x 500 = P 8,000
P202,200

20. (P320,000 / 8,000) x 2,500 = P100,000

(P36,000 / 6,000) x 1,500 = P 9,000
(P20,000 / 2,500) x 1,600 = P 25,600
P134,600