Exercises:

I. Cost Classification – Listed below are costs found in various organizations.

1. Property taxes, factory
2. Boxes used for packaging detergent produced by the company
3. Salespersons’ commissions
4. Supervisors’ salary, factory
5. Depreciation, executive autos
6. Wages of workers assembling computers
7. Insurance, finished goods warehouses
8. Lubricants for production equipment
9. Advertising costs
10. Microchips used in producing calculators
11. Shipping costs on merchandise sold
12. Magazine subscriptions, factory lunch room
13. Thread in a garment factory
14. Billing costs
15. Executive life insurance
16. Ink used in textbook production
17. Fringe benefits, assembly line workers
18. Yarn used in sweater production
19. Wages of receptionist, executive offices

REQUIRED:
1. For each cost item, indicate whether it would be variable or fixed with respect to the
number of units produced and sold; and then whether it would be non-manufacturing cost,
or a manufacturing (product) cost. Use the format given below.
2. Which of the costs would be typically treated as direct cost with respect to units of product?

Variable Non-manufacturing Manufacturing

Cost Item or Fixed Cost (Product) Cost
Direct Labor V X

II. The following data have been collected for four different cost items.

Cost Item Cost at 80 units Cost at 100 units

A P2,400 P2,880
B P1,800 P2,250
C P1,900 P1,900
D P3,600 P3,720

Which of the following classifications of these cost items by cost behavior is correct?
 Cost A Cost B Cost C Cost D
a) variable fixed mixed variable
b) mixed variable fixed mixed
c) variable fixed variable variable
d) mixed variable fixed variable

III. Meemon Company manufactures and sells a single product. A partially completed schedule of the
company’s total and per unit costs over the relevant range of 30,000 to 50,000 units produced and
sold annually is given below:

Units produced and sold 30,000 40,000 50,000

Total costs:
Variable costs P180,000 ? ?
Fixed costs 280,000 ?
Total P460,000 ? ?

Cost per unit:

Variable cost ? ? ?
Fixed cost ? ? ?
Total ? ? ?

Required:
a. Complete the schedule of the company’s total and unit costs above.
b. Compute income, assuming that the company produces and sells 35,000 units during a year
at a selling price of P16 per unit.

IV. Something New is a small one-person company that provides elaborate and imaginative wedding
cakes to order for very large wedding receptions. The owner of the company would like to
understand the cost structure of the company and has compiled the following records of activity
and costs incurred. The owner believes that the number of weddings catered is the best measure of
activity.

Month Weddings Costs Incurred

January 3 P3,800
February 2 3,600
March 6 4,000
April 9 4,300
May 16 5,300
June 100 28,200
July 20 5,200

REQUIRED:
a. Using the high-low method, estimate the variable cost per wedding and the total fixed cost
per month. (Round off the variable cost per wedding to the nearest centavo and the total
fixed cost to the nearest peso.)
 b. Using the least-squares regression method, estimate the variable cost per wedding and the
total fixed cost per month. (Round off the variable cost per wedding to the nearest centavo
and the total fixed cost to the nearest peso.)

V. Butler Sales Company is a distributor that has an exclusive franchise to sell a particular product
made by another company. Butler Sales Company’s income statements for the last two years are
given below:

This Year Last Year

Units sold 200,000 160,000
Sales revenue P1,000,000 P800,000
Less cost of goods sold 700,000 560,000
Gross margin 300,000 240,000
Less operating expenses 210,000 198,000
Net operating income P90,000 P42,000

Operating expenses are a mixture of fixed costs and variable ad mixed costs that vary with respect
to the number of units sold.

REQUIRED:
a. Estimate the company’s variable operating expenses per unit, and its total fixed operating
expenses per year.
b. Compute the company’s contribution margin for this year.
c. Compute the operating income if sales is 180,000 units.

VI. Seyko Company makes prestige high-end custom watches in small lots. One of the company’s
products, a platinum diving watch, goes through an etching process. The company has observed
etching costs as follows over the last six months:

Week Units Total Etching Costs

1 4 P1,800
2 3 1,700
3 8 2,500
4 6 2,000
5 7 2,400
6 2 1,600
30 P12,000

For planning purposes, management would like to know the amount of variable etching cost per
unit and the total fixed etching cost per week.

REQUIRED:
1. Using the least squares method, calculate the variable and fixed elements of etching cost.
2. If the company processes five units next week, what would be the expected total etching
cost?
VII. An analysis of past janitorial costs indicates that the average janitorial cost is P5.00 per machine
hour at an activity level of 25,000 machine hours. Assuming that this activity is within the relevant
range, what is the total expected janitorial cost if the activity is 23,000 machine hours?

VIII. The Mix Company uses the high-low method to estimate the cost function. The information for 2019
is provided below:

Machine-hours Labor Costs

Highest observation of cost driver 300 P6,000
Lowest observation of cost driver 160 3,200

What is the total cost for 260 hours?

IX. Black Forest Clinic contains 450 beds. The average occupancy rate is 80% per month. In other words,
an average of 80% of the clinic’s beds are occupied by patients. At this level of occupancy, the
clinic’s operating costs are P32 per occupied bed per day, assuming a 30-day month. This P32
contains both variable and fixed cost elements.

During April, the clinic’s occupancy rate was only 60%. A total of P326,700 in operating costs was
incurred during the month.

REQUIRED:
1. Using the high-low method, estimate the (a) variable cost per occupied bed on a daily basis
and (b) the total fixed operating costs per month.
2. Assume an occupancy rate of 70% per month. What amount of total operating costs would
you expect the clinic to incur?

X. Goljess Company is a manufacturing company whose total factory overhead costs fluctuate
considerable from year to year according to increases and decreases in the number of direct labor-
hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent
years are given below:

LOW HIGH
Direct labor hours 50,000 75,000
Total factory overhead costs P14,250,000 P17,625,000

The factory overhead costs above consist of indirect materials, rent and maintenance. The company
has analyzed these costs at the 50,000-hour level of activity as follows:

Indirect materials (Variable) P5,000,000

Rent (Fixed) 6,000,000
Maintenance (Mixed) 3,250,000
Total overhead costs P14,250,000
 To have data available for planning, the company wants to break down the maintenance cost into its
variable and fixed costs elements.

REQUIRED:
1. Estimate how much of the P17,625,000 factory overhead cost at the high level of activity
consists of maintenance cost.
2. By mean of the high-low method, estimate a cost formula for maintenance.
3. Express the company’s total overhead costs in the linear equation form Y = a + bX
4. What total overhead costs would you expect to be incurred at an operating activity level of
70,000 direct labor hours?

XI. Velman Company wants to determine the factors that are associated with overhead. The controller
for Velman constructed a multiple regression equation using the following independent variables:
direct labor hours, number of setups, and number of purchase orders. The analysis was run using
the past 60 months of data. From the printout, the following data were obtained:

Parameter Estimate
Intercept 2,130
Direct labor hours (H) 17
Number of setups (S) 810
Number of purchase orders (P) 26
Number of observations (n) 60

r2 = 0.95

REQUIRED:
1. Write out the cost formula for monthly overhead for Velman Company.
2. If Velman budgets the following for next month, what is the budgeted overhead cost?
Direct labor hours 600
Number of setups 50
Number of purchase orders 120
3. Suppose that Velman’s engineers found a way to reduce the number of setups by 50
percent. How much would be saved in overhead cost for the following month?

XII. The chief statistician of Aloha Company has developed the following cost formula:

Y = P50,000 + 2L + 3M

Where: Y = total monthly manufacturing overhead cost

L = labor hours
M = machine hours

The measure of goodness of fit is good and no evidence of multicolinearity exists. The company will
use 10,000 labor hours and 3,000 machine hours next month.
 REQUIRED:
1. Determine the total manufacturing overhead costs that Aloha should incur next month.
2. Aloha makes a product that has P6.00 in material costs. It requires two hours of labor time
and 30 minutes of machine time. Laborers earn P10 per hour. What is the product’s per unit
variable manufacturing cost?
3. Suppose that Aloha could reduce the labor time for the product described in requirement 2
by 30 minutes, to 1.50 hours. Machine time will remain the same. By how much would the
per unit variable manufacturing cost fall?

XIII. M. Munda Company produces and sells rattan baskets. The number of units produced and the
corresponding total production costs for six months, which are representatives for the year, are as
follows:

Month Units Produced Production Costs

April 500 P4,000
May 700 8,000
June 900 6,000
July 600 7,500
August 800 8,500
September 550 7,250

13a.The cost of function derived by the simple least squares method

a. is linear
b. is curvilinear
c. is parabolic
d. must be tested for minimum and maximum points

13b.Using the least squares method, the variable production cost per unit is approximately
a. P5
b. P10
c. P0,27
d. P3.74

13c.Using the least squares method, the monthly fixed production cost is approximately
a. P1,500
b. P18,000
c. P4,350
d. P52,200

13d. If the high-low points method is used, the results when compared with those under the
method of least squares, are

Variable Cost per Unit Total Fixed Costs

a. Equal Equal
b. Higher by P1.26 Lower by P2,850
c. Lower by P1.26 Higher by P2,850
d. Higher by P5 Lower by P1,500