Chapter 4

CHAPTER 4
COST IN MANAGERIAL ACCOUNTING

CONCEPTS, CLASSIFICATIONS,
ACCUMULATION
JHON KENNETH G LANDAO
BACHELOR OF SCIENCE IN ACCOUNTANCY
JOSE MARIA COLLEGE
PHIL-JAPAN FRIENSHIP HIGHWAY, DAVAO CITY

COST
- The monetary measure of the amount of resources given up or used for some
purpose;
- The monetary value of goods and services expended to obtain current or future
benefits.
SOME COST TERMS USED IN MANAGERIAL ACCOUNTING
 COST OBJECT- anything for which the cost is computed.
Examples: a product, product line, a segment of the organization
 COST DRIVER – any variable, such as a level of activity or volume that usually
affects costs over a period of time.
Examples: production, sales, number of hours
 COST POOL – a grouping of individual cost items; an account in which a variety

of similar costs are accumulated
Examples: work in process, factory overhead control
 ACTIVITY- an event, action, transaction, task, or unit of work with specified

purpose
VALUE ADDING ACTIVITES- activities that are necessary (non- eliminable to

produce the products
Examples: assembling the different component parts of the product
NON- VALUE- ADDING ACTIVITIES – activities that do not make the products or
service more valuable to the customer
Examples: moving materials and equipment parts from/ to the stockroom or a workstation
DIFFERENT COSTS FOR DIFFERENT PURPOSES
A. AS TO TYPE
1. PRODUCTS COSTS – cost incurred to manufacture the product
 Product cost of the units sold during the period are recognized as expense (cost of
goods sold) in the income statement.
 Product costs of the unsold units become the costs of inventory and treated as asset
in the balance sheet.
2. PERIOD COSTS- the non-manufacturing costs that include selling, administrative,
and research and development costs. These costs are expensed in the period of
incurrence and do not become part of the cost of inventory.
B. AS TO FUNCTION
1. MANUFACTURING COSTS- all costs incurred in the factory to convert raw
materials into finished goods
a. Direct manufacturing costs – materials and labor
b. Indirect manufacturing costs- the manufacturing overhead or factory overhead
costs
2. NON- MANUFACTURING COSTS- all cost which are not incurred in
transforming materials to finished goods
a. Research and development- incurred in designing and bringing new products to
the market
b. Marketing costs- advertising and promotion expenses
c. Distribution costs- costs incurred in delivering the products to the customers
d. Selling costs- salaries and commission of sales staff and other selling expenses
e. After sales costs- cost incurred in dealing with customers after sales. Examples are
warranty, repairs costs, and costs incurred in receiving/ entertaining / acting on
customer’s complaints.
f. General and administrative costs- all the non-manufacturing costs that do not fall
under categories (a) to (e).
C. AS TO TRACEABILITY/ASSIGNMENT TO COST OBJECT
1. DIRECT COSTS- costs that are related to a particular cost object and can
economically and effectively be traced to that cost object.
2. INDIRECT COSTS- costs that are related to a cost object, but cannot practically,
economically, and effectively be traced to such cost object. Cost assignment is done
by allocating the indirect cost to the related cost objects.
D. FOR DECISION MAKING

1. RELEVANT COSTS – future costs that will differ under alternative courses of
action.
2. DIFFERENTIAL COSTS – difference in costs between any two alternative courses
of action
a. Incremental – increase in cost from one alternative to another
b. Decremental cost- decrease in cost from one alternative to another
3. OPPORTUNITY COSTS- income benefit given up when one alternative is selected
over another
4. SUNK/PAST OR HISTORICAL COSTS – already incurred and cannot be changed
by any decision made now or to be made in the future.
E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER)

1. VARIABLE COST- within the relevant range and time period under consideration,
the total amount varies directly to the change in activity level or cost driver, and the
per unit amount is constant.
2. FIXED COST- within the relevant range and time period under consideration, the
total amount remains unchanged, and the per unit amount varies inversely or
indirectly with the change in the cost driver.
a. Committed fixed cost- long term in nature and cannot be eliminated even for short
period of time without affecting the probability of long term goals of the firm.
Example: depreciation of building and equipment
b. Discretionary or Managed Fixed Costs- usually arise from periodic (may be

annual, etc.) decisions by management to spend in certain fixed costs area such as
research, advertising, maintenance contracts. Discretionary fixed costs may be
changed by management from period to period or even during (within) the period,
if circumstances demand such change.
Examples: research and development costs, advertising expense, maintenance

costs provided by service contractors
3. MIXED COST- this cost has both a variable and a fixed component
4. STEP COST- when activity changes, a step costs shifts upward or downward by a
certain interval or step.
 Step variable cost – have small steps
COST
(P)
ACTIVITY (units, hours, etc.,)

 Step Fixed Cost – have large steps
COST(P)
ACTIVITY (units, hours, etc., )
Relevant range – a range of activity that reflects the company’s normal operating
range. Within this relevant range, the aforementioned cost behavior is valid, i.e.:
TOTAL AMOUNT PER COST DRIVER

VARIABLE COST Varies directly with cost Constant
driver
FIXED COST Constant Varies inversely with cot
driver
ANALYSIS OF MIXED COSTS
MIXED COST OR TOTAL COST – have variable and fixed costs components
TC =FC+VC
Where: TC = total cost

FC = Total fixed cost
VC = Total variable cost
Total variable cost varies directly with the activity level or cost driver.
VC = variable cost per cost driver x cost driver or

VC = bx
Where; VC = total variable cost

b = variable cost per cost driver
x = cost driver
Example: if the cost driver is number of units and variable cost per unit is P5, then VC = 5x
The total or mixed cost function may be expressed as:
TC = FC + bx
LINEARITY ASSUMPTION – within the relevant range, there is a strict linear relationship
between the cost and cost driver. Costs may therefore be shown graphically as straight lines.
P P P
COST COST COST
Variable
cost
Fixed Cost
COST DRIVER COST DRIVER COST DRIVER
THE COST FUNCTION
Since total cost is linearly related to the activity level or cost driver, the cost function (cost
formula) may be expressed as:
Y = a + bx where; Y = Total Cost

a = total fixed cost
b = variable cost per cost driver
x = activity level or cost driver
SEPARATION OF THE FIXED AND VARIABLE COMPONENTS OF MIXED COSTS
1. High – Low Method

2. Scattergraph Method
3. Least squares Regression Method
MULTIPLE REGRESSION ANALYSIS - this is used when the dependent variable (cost, for
example) is caused by more than one factor. In other words, the dependent variable (cost) is
related to more than one independent variable (units, machine hours, etc)
CORRELATION ANALYSIS
Correlation – measure of the co- variation between the dependent and independent
variables.
If all plotted points fall on the regression line, there is perfect correlation.
If correlation between the cost and cost driver is high and the past relationship between such
variables will continue in the future, then the cost driver chosen will be useful for predicting
future levels of the costs being analyzed.
Coefficient of correlation (denoted by r) – measure of the extent of the linear relationship
between two variables
Range of values of r: from -1 to 1
r = -1≤ 0 ≤ 1
When r = 0, there is no correlation
Mga dot ni ngari nagkatag

kamo nalay sabot .
When r is positive, there is a positive or direct relationship between the dependent (y) and
independent (x) variables. That is, the value of y increases when the value of x increases. The
regression line slopes upward to the right.
. . .
. .
. .
X
When r is negative, there is a negative or inverse, or indirect relationship between the variables.
The value of y decreases as the value of x increases. The regression line slopes downward to the
right.
. .
. .
. .
. .
X
Coefficient of determination (denoted by r^2 ) is computed by squaring the value of r. it
represents the percentage of the total variation in the independent variable y that is explained or
accounted for by regression equation.
A very high r^2 means that the values in the regression equation explain virtually the entire
amount of the total cost. The variables are highly correlated, i.e., the cost driver selected is
highly related to the dependent cost.
Standard error of the estimate – the standard deviation about the regression line
Estimated values computed using the regression equation may differ from the actual costs. The
differences are called prediction errors or errors of estimate.
The standard error of estimate is calculated to serve as a confidence interval or acceptable range
of tolerance, for use in exercising control over the costs. By comparing a cost variance with the
standard error of estimate, management can decide whether to investigate such variance or not.
If r^2 = 1, the standard error = 0

a small value of the standard error indicates a good fit.
COST ACCOUNTING SYSTEMS
COST ACCOUNTING – a part of the accounting system that measures costs for decision-
making and financial reporting purposes.
COST ACCOUNTING PROCESSES
1. COST ACCUMULATION – involves collecting costs by natural classification, such as

materials or labor.
2. COST ALLOCATION OR COST ASSIGNMENT – involves tracing and assigning
costs to cost objects, such as departments or products.
COST ACCOUNTING SYSTEMS
1. JOB ORDER COSTING

This product costing system is used by firms that provide limited quantities of products or
services unique to a customer’s needs or specifications. Cost are assigned or traced to
individual products
Examples: automobile repair shops, tailoring/dressmaking business
2. PROCESS COSTING
This system is used by firms that produce many units of a single product (or nearly
identical products) for long periods at a time.
In this costing system, costs are accumulated in a particular operation or department for
an entire period (a week, a month, etc.) the total cost incurred in each operation or
department is then divided by the total number of units produced (or the total equivalent
units produced) to determine the average cost per unit of product.
Examples: soft drinks Company, toy manufacturers
3. HYBRID PRODUCT COSTING SYSTEM

This costing system incorporate features from two or more alternative product costing
while conversion costs are accumulated using process costing.
Examples: clothing and food processing operations
4. STANDARD COSTING
This can be used with the other cost accounting systems, such as job-order costing and
process costing
This costing method uses predetermined factors (quantity and price) to compute the
standard cost of materials, labor and factory overhead, so that such costs may be assigned
to the various inventory accounts and cost of goods sold.
5. BACKFLUSH COSTING
This is a streamlined cost accounting method that simplifies speeds up, and reduces
accounting effort procedures in accumulating product costs. Unlike in the traditional job
order costing systems, backflush costing eliminates the detailed tracking of the cost of
work in process.
COMPARISON OF BACKFLUSH AND TRADITIONAL COSTING SYSTEMES
TRADITIONAL BACKFLUSH
COST TRACKING Detailed and sequential, cost are computed only when
from acquisition of the goods are completed or
materials to sale of finished at the end of the period.
goods
JOURNAL ENTRIES
A. PURCHASE OF
MATERIALS Materials xxx Materials and
Accounts payable xxx conversion costs xxx
accounts payable
xxx
B. ISSUANCE OF Work in process xxx
MATERIALS TO Materials xxx No entry
PRODUCTION
C. FACTORY PAYROLL Salaries and Materials and
Wages xxx conversion costs xxx
Salaries payable/ salaries payable/
Cash xxx cash xxx
DISTRIBUTION OF Direct labor xxx
PAYROLL TO PROPER Factory overhead xxx No entry
ACCOUNTS Salaries and \
wages
xxx
ASSIGNMENT OF Work in process xxx
LABOR COST TO Direct labor xxx No entry
WORK
IN PROCESS
D. INCURRENCE OF Factory overhead xxx Materials and
OTHER Various credits xxx conversion costs xxx
MANUFACTURING various credit xxx
COST
E. ASSIGNMENT OF
FACTORY OVERHEAD Work in process xxx No entry
TO WORK IN PROCESS Factory overhead
xxx
F. RECORDING OF
COMPLETED GOODS Finished goods xxx Finished goods xxx
Work in process Materials and
xxx conversion cost xxx
G. SALE OF GOODS Cost of goods sold xxx Cost of goods sold xxx
Finished goods Finished goods
xxx xxx
Note: There may be other versions of backflush system depending on the company’s
requirements.
6. ACTIVITY- BASED COSTING SYSTEM
This costing system is a two stage procedure that uses multiple drivers to predict and
allocate costs to products and services
STAGE 1- significant activities are identified and costs are assigned to activity cost pools
based on the way resources are consumed by such activities.
STAGE 2- costs are allocated from each activity cost pool to each cost target (jobs,
products, customers) in proportion to the amount of cost driver consumed by the cost
target.
DIFFERENCES BETWEEN ABC AND TRADITIONAL COSTING SYSTEM
ACTIVITY – BASED COSTING TRADITIONAL COSTING

1. Assume that cost objects consume 1 Assume that cost objects consume
activities resources
2. Uses drivers at various levels 2 Uses volume related allocation bases
3. Process- oriented 3 Structure oriented
TYPE OF ACTIVITY LEVELS
1. UNIT LEVEL- activity that must be done for each unit of production
2. BATCH LEVEL- performed for each batch of product produced, rather than each unit
Examples: setup, receiving and inspection, material handling, packaging, shipping, and
quality assurance
3. PRODUCT LEVEL (OR PRODUCT SUSTAINING LEVEL)- activities that are

needed to support the entire product line regardless of the number of units and batches
produced.
Examples: engineering costs, product development costs
4. FACILITY LEVEL (OR GENERAL OPERATIONS LEVEL) – performed in order

for the entire production process to occur
Examples: plant maintenance, plant management property taxes and insurance.
MULTIPLE CHOICE
1. Cost is the monetary measure of the amount of resources given up in obtaining goods
and services. Costs may be classified as unexpired or unexpired.
Which of the following costs is not always considered to be expired immediately upon
being recognized?
a. Salesmen’s commission
b. Depreciation expense for factory equipment
c. Cost of goods sold
d. Salary of the company president
2. An activity that causes resources to be consumed is called a
a. Non- value- added activity c. just- in- time activity
b. Cost driver d. extracurricular activity
3. It refers to anything (a product, product line, a business segment) for which cost is
computed.
a. Cost object c. cost control
b. Cost driver d. cost variance
4. It is a grouping of individual cost items, or an account in which a variety of similar

costs are accumulated.
a. Cost driver c. income statement
b. Cost variance d. cost pool
5. It is an event, action, transaction, task or unit of work that consumes resources and
with a specified purpose.
a. Cost object c. cost driver
b. Activity d. Direct labor
6. An activity that adds costs to the product or service, but does not make such product
or service more valuable to customers is called
a. Non-value-adding activity c. costly activity
b. Value-adding activity d. valuable activity
7. Which of the following statements is correct?

a. A cost driver is an accounting technique used to control costs
b. A cost driver is a measure of activity, such as direct labor hours, machine hours, beds
occupied, computer time, etc., that is a causal factor in the incurrence of costs.
c. A cost driver is an accounting measurement used to evaluate whether or not
performance is proceeding according to plan.
d. A cost driver is a mechanical basis used to assign costs to activities
8. Products costs or inventoriable costs

a. Are charged to expense when products become part of the finished goods inventory
b. Include only the prime costs of producing a product
c. Are treated as assets before the products are sold.
d. Include only the conversion costs of producing the products.
9. Which of the following costs is not a product cost?

a. Wages paid to workers for rework on defective products
b. Wages paid to truck loaders who load finished goods onto outgoing delivery trucks.
c. Fringe benefits paid to factory workers
d. Wages paid to workers for idle time due to machine breakdown in a production
department.
10. Product costs

a. Are always expensed in the same period in which they are incurred.
b. Are inventoriable
c. Vary directly with changes in the cost driver
d. Are always charged to an asset account in the same period in which they are incurred.
ITEMS 11 AND 12 ARE BASED ON THE FOLLOWING INFORMATION:
Following are costs incurred by Abtina Manufacturing Corporation during the previous
month:
Direct materials 5000

Indirect materials 2000
Direct Labor 6000
Indirect Labor 1000
Factory Utilities 4000
advertising costs 8000
Sales commissions 12000
Depreciation on administration building 3000
Salaries of administrative personnel 20000
Depreciation- delivery equipment 2000
Overtime pay- factory workers 1500
Rework cost on defective product
Discovered during quality inspection 2500
11. Total product costs:
a. 67,000 c. 22,000
b. 45,000 d. 18,000
12. Total period costs:

a. 67,000
b. 45,000
c. 49,000
d. 22,000
13. Manufacturing costs do not include

a. Prime costs
b. Conversion cost
c. Indirect materials
d. Salary of the company president, under whom is the vice president for production
14. Direct labor cost is a
a. Prime cost c. product cost
b. Conversion cost d. all of the above
Data about Anabelle Company’s production and inventories for the month of June are as follows:
Purchases – direct materials 143,000

Freight I 5000
purchase returns and allowances 2240
Direct labor 175,000
actual factory overhead 120,000
Inventories: June July
Finished goods 68,000 56,000

work in process 110,000 135,000
direct Materials 52,000 44,000
Annabelle Company applies factory overhead to production at 80% of direct labor cost. Over –
or under applied overhead is closed to cost of goods sold at year end. The company’s accounting
period is on the calendar year basis.
15. Annabelle Company’s prime cost for June was

a. 154,000
b. 329,000
c. 198,000
d. 315,000
16. Annabelle Company’s conversion cost for June was
a. 315,000
b. 295,000
c. 329,000
d. 444,000
17. For the month of June, Annabelle Company’s total manufacturing cost was
a. 469,000
b. 444,000
c. 644,000
d. 449,000
18. For June, Annabelle Company’s cost of goods transferred to the finished goods
inventory account was
a. 579,000
b. 461,000
c. 469,000
d. 444,000
19. Annabelle Company’s cost of goods sold for June was
a. 441,000
b. 481,000
c. 456,000
d. 444,000
20. The amount of over/under applied overhead factory for the month of June was
a. 140,000 overapplied
b. 120,000 underapplied
c. 20,000 overapplied
d. 20,000 underapplied
21. The cost of goods sold for the month of June should be increased (decreased ) by the
amount of over / under – applied factory overhead of
a. 20,000
b. (20,000)
c. 120,000
d. 0
22. For product costing purposes, an indirect factory cost
a. Is not directly chargeable to the company
b. Is chargeable to prime cost
c. Is chargeable to conversion cost
d. Is never included in the computation of product cost
23. A fixed cost that would be considered a direct cost is
a. Salary of the sales manager when the cost object is the sales department.
b. Salary of the controller when the cost object is a unit of product.
c. Fees of the board of directors when the cost object is the production department
d. The rental cost of the finished goods warehouse when the cost object is the
accounting department
24. Indirect materials and indirect labor are
Prime cost conversion cost manufacturing cost
a. Yes Yes Yes
b. No No Yes
c. No Yes Yes
d. Yes No No
25. Which of the following is a direct product cost?

a. Wood in a furniture factory
b. Salary of the foreman in the assembly division of an automobile company
c. Depreciation of factory equipment
d. Salesman’s commission
26. The variable portion of the semi- variable cost of electricity for a manufacturing plant
is a
Prime cost conversion cost manufacturing cost
a. No No Yes
b. Yes Yes No
c. Yes Yes Yes
d. Yes No Yes
27. The salaries of the factory janitorial and maintenance staff should be classified as
a. Direct Labor cost
b. Period cost
c. Prime cost
d. Factory overhead
28. For decision making purpose, relevant costs are
a. Variable past cost
b. All fixed and variable cost
c. Anticipated future costs that will differ among various alternatives
d. Costs incurred within the relevant range of production
29. Differential Costs
a. Are variable costs
b. Are anticipated future costs that will differ among various alternatives
c. Are the differences in costs between any two alternative courses of action
d. Area costs that differ under alternatives
30. An income or benefit that is given up when one alternative is selected over another is
called
a. Loss
b. Opportunity cost
c. Relevant cost
d. Differential cost
31. Sunk costs
a. Are relevant costs
b. Can be changed by a decision made now or to be made in the future
c. Are irrelevant for decision making purposes
d. Are decreases in costs from one alternative to another
32. Which of the following costs would be considered relevant in short term decision
making?
a. Production costs of goods available for sale
b. Incremental fixed costs
c. Acquisition cost of idle asset to be used in a proposed project
d. Variable costs
33. Which of the following statements about cost behavior is correct?
a. Within the relevant range, total variable costs may vary directly with activity, while
total fixed costs remain unchanged for a given period despite fluctuations in activity
b. Within the relevant range, variable cost per unit varies directly with activity, while
fixed cost per unit remains unchanged for a given period despite fluctuations in
activity
c. Within the relevant range, fixed cost per unit varies directly with activity, while
variable cost per unit remains unchanged for a given period despite fluctuations in
activity
d. Within the relevant range, total variable costs may vary inversely with activity; while
total fixed cost remain unchanged for a given period despite fluctuations in activity.
34. In cost accounting, the term relevant range refers to the range over which
a. Relevant costs are incurred
b. Production should be confined
c. Total fixed costs fluctuate
d. Cost relationships are valid
35. Depreciation computed using the straight line method is classified as
a. Variable cost
b. Fixed cost
c. Relevant cost
d. Opportunity cost
36. Within the relevant range, unit variable costs
a. Are constant per unit, regardless of units produced or sold
b. Vary directly with the activity level
c. Vary inversely with the activity level
d. Are at the minimum
37. When production (in units) decreases, the average cost per unit of product increases.
This increase in the average cost per unit is due to the
a. Increase in variable cost per unit
b. Increase in fixed cost per unit
c. Increase in total variable costs
d. Increase in total fixed costs
38. Consider line AB in each of the following graph:
B B
A A B
UNITS UNITS UNITS
Line AB is the
Graph Graph 2 Graph 3
a. Total sales line fixed cost per unit line total variable cost
b. Variable cost per unit line total variable cost line total fixed cost line
c. Total variable cost line total fixed cost line total cost line
d. Break even line parallel line total sales line
39. When the activity changes, this cost shifts upward or downward by a certain interval.
a. Step cost
b. Cost interval
c. Shifting cost
d. Incremental cost
40. These costs are long term in nature and cannot be eliminated even for short periods of
time without affecting the probability or long term goals of the firm.
a. Avoidable costs
b. Committed fixed costs
c. Variable costs
d. Controllable costs
41. This type of fixed costs usually arises from periodic decisions by management to
spend in certain fixed costs area. They may be changed by management from period
to period or even within the period if circumstances demand such change.
a. Period costs
b. Committed fixed costs
c. Variable costs
d. Discretionary fixed costs
42. Mixed costs are costs that have
a. Variable an fixed costs components
b. Manufacturing and administrative costs components
c. Selling and administrative cost components
d. Direct and indirect costs components
43. In cost behavior analysis, the linearity assumption states that
a. In all cases, there is a strict linear relationship between the cost and cost driver
b. Within the relevant range, there is a strict relationship between the cost and the cost
driver
c. Within the relevant range, there is a strict linear relationship between the cost and
cost driver
d. Within the relevant range, all costs are fixed and may be drawn graphically as straight
lines
44. The fixed and variable components of mixed costs may be separated by using any of
the following methods, except
a. High low method
b. Scattergraph method
c. Least squares method
d. Weighted average method
45. The following data were collected from the records of the Receiving Department of a
Company:
Month number of items received receiving and handing cost

January 2,800 P17,500
February 2,000 12,500
March 1,190 7,450
April 5,200 32,500
May 4,410 27,600
June 4,016 25,100
The receiving and handling cost is most likely to be a

a. Step cost
b. Variable cost
c. Fixed cost
d. Semi- variable cost
ITEMS 46 to 48 ARE BASED ON THE FOLLOWING INFORMATION:
Charity Company wants to analyze the behavior of its selling costs for budgeting
purposes. Cost drivers (activity measures) and costs incurred in the first quarter and the first
month of the second quarter are as follows:
January February March April
Selling costs:
Sales salaries P42,500 P42,500 P42,500 P51,000
Commissions 15,000 17,500 14,000 16,000

Shipping costs 34,000 38,000 32,400 35,600
Advertising 20,000 20,000 25,000 20,000
Cost drivers:
Peso sales P300,000 P350,000 P280,000 P320,000

Sales in Units 30,000 35,000 28,000 32,000
Sales orders 150 175 140 160
The sales staffs are paid monthly salaries plus commission. Advertising expenses are charged
subject to the discretion of management. The increase in sales salaries in April is due to the
increase in the sales staff, from five to six persons.
46. In relation to the appropriate cost drivers, how should the company’s selling costs be
classified?
Sales salaries Commissions shipping cost Advertising
a. Variable Variable Variable Variable
b. Fixed Variable Variable Fixed
c. Fixed Variable Mixed Fixed
d. Mixed Variable Mixed Fixed

47. Using the high- low method and the algebraic equation y= at bx (where y equals total
shipping costs; a equals total fixed costs; b equals variable shipping cost per unit; and
x is the number of units sold), the cost formula for the shipping costs may be
expressed as
a. Y= 10,000 + 0.80x
b. Y=0.80 +10,000x
c. Y=10,000 + 0.80
d. Y= 10,000 + 5,600
48. If the company plans to sell 36,000 units in May and fixed costs will remain at the
April level, the total selling costs for May would be
a. P122,600
b. P125,800
c. P127,800
d. P81,000
Maco Corporation’s Research and Development department was able to develop a new
product- a flashlight powered by solar energy. After reviewing the data prepared by the
company’s controller, Maco’s management is confident that the new product will contribute
profit to the company.
The data prepared by the controller are as follows:
Suggested selling price P200

Cost: Materials P 60
Parts fabrication (P10 per hour) 40
Assembly (P6 per hour) 18
Variable overhead (P4 per hour) 28
Fixed overhead (P3 per hour) 21
Total cost P167
The total research and development cost incurred to develop the new product amounted to P200,
000. The company is planning to spend half of this amount for promotion and advertising.
The company’s fixed overhead includes rent, equipment depreciation, and salaries of factory
supervisors.
49. For Maco’s new flashlight, total prime costs amount to

a. P118
b. P167
c. P146
d. P107
50. The difference between the flashlight’s suggested selling price of P200 and the total
cost of P167 represents each flashlight’s
a. Gross profit
b. Contribution margin
c. Net profit
d. Operating income
51. The total overhead cost of P49 per unit is a
a. Prime cost
b. Variable cost
c. Mixed cost
d. Fixed cost
52. The total research and development costs of P200,000 incurred to develop the new
product is a(n)
a. Relevant cost
b. Sunk cost
c. Avoidable cost
d. Postponable cost
53. The cost included in Maco’s fixed overhead are
a. Prime cost
b. Discretionary costs
c. Committed costs
d. Variable cost
54. The planned spending on promotion and advertising for the flashlight is a
a. Variable cost
b. Discretionary cost
c. Sunk cost
d. Past cost
55. The least exact method for separating the variable and fixed cost components of a
mixed cost is
a. Matrix algebra
b. The high low method
c. The least squares method
d. Computer simulation
Meng Company is preparing a flexible budget for next year and requires a breakdown of
the factory maintenance cost into the fixed and variable elements.
The maintenance costs and machine hours (the selected cost driver) for the past six months are as
follows:
Maintenance costs Machine Hours
January P15, 500 1,800

February 10,720 1,230
Maintenance costs Machine Hours
March 15,100 1,740

April 15,840 2,190
May 14,800 1,602
June 10,600 1,590
56. If Meng Company uses the high low method of analysis, the estimated variable rate
of maintenance cost per machine hour is
a. P 7.23
b. P 8.73
c. P 5.46
d. P 5.33
57. The average annual fixed maintenance cost amounts to
a. P4,160
b. P8,320
c. P49,920
d. P5,120
58. What is the average rate per hour at a level of 1,500 machine hours?
a. P5.33
b. P8.11
c. P7.23
d. P5.46
59. The manager of the mixing department of Ali Van Company wants to determine the
fixed variable components of the department’s costs. He collected information on
total cost and the number of kilos mixed for the past 12 months. He wants more
accurate results, so he is planning to use a sophisticated method for cost separation.
The manager should use
a. High low method
b. Regression analysis
c. Game theory
d. Queuing theory
60. The usual formula of the regression (least squares) equation is:
Y= a + bx + e.
Considering such equation, which of the following incorrect?
a. The independent variable is x, while the independent variable is y.
b. The y- axis intercept is a
c. The slope of the line is b
d. The error term is e
61. Multiple regression analysis involves the use of
Dependent variable(s) Independent variable(s)
a. None One
b. One One
c. One Two or More
d. Two or more One
Frances Corporation conducted a regression analysis of its factory overhead costs. The
analysis yielded the following cost relationship:
Total factory overhead cost = P50, 000 per month + 5H*
*H = number of direct labor hours, the selected cost driver for overhead costs.
Each unit of product requires 6 direct labor hours. The company’s normal production is
20,000 units of product per year.
62. The total overhead cost for a month’s production of 2,000 units is
a. P60,000
b. P50,000
c. P110,000
d. P0
63. The predetermined fixed overhead rate per hour is
a. P6.00
b. P5.00
c. P2.50
d. P0.42
64. The total predetermined factory overhead rate per hour is
a. P5.00
b. P7.50
c. P10.00
d. P35.00
The management of a hotel is interested in the relationship between room cleaning costs
band guest days in its hotel. Using regression analysis on room cleaning costs and guest days
collected over 12 months, the relationship was shown graphically as follows:
Room Cleaning Costs

P60, 000
50,000
40,000
30,000
20,000
10,000
500 1000 1500 2000 2500
Guest- days
65. The estimated monthly fixed room cleaning cost is

a. P25,000
b. P30,000
c. P10,000
d. P0
66. The estimated increase in the room cleaning cost for each additional guest day is
a. P26.67
b. P10.00
c. P60,000
d. P25,000
67. The cost formula for the room cleaning costs may be expressed as
a. Cost= P25,000 +guest day
b. Cost= P25,000
c. Cost= P25,000 + P10
d. Cost= P25,000 + P10 (guest day)
68. If the relevant range is from 0 to 2,000 guest days, how much is the total room
cleaning cost for 2,200 guest days?
a. P47,000
b. P22,000
c. P25,000
d. Cannot be determined from the given information
Belle 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 Unit 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
Based on the given information and using the least squares method of computation, select the
best answer for each question, where:
Y= total monthly production costs

X= number of units produced per month
a = fixed production cost per month
b= variable production cost per unit
n= number of months
Σ= summation
69. If the least squares method is to be used to segregate the variable and fixed cost
components of the total production costs, the equation(s) required to express the
relationship between fixed and variable costs are
a. Σy= na+bΣx and Σxy= aΣx+bΣx2
b. Σxy=aΣ +bΣx2
c. Σy=na+ bΣx
d. Y=a+bΣx2 and Σy= na +bΣx
70. The cost 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
71. The monthly production costs can be expressed as
a. Y= a + bx
b. Y= b + ax
c. Y= ax + b
d. Y= a + by
72. Using the least squares method, the variable production cost per unit is approximately
a. P5
b. P10
c. P0.27
d. P3.74
73. Using the least squares method, the monthly fixed production cost per unit is
approximately
a. P 1,500
b. P 18,000
c. P 4,350
d. P 52,200
74. 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 cost
a. Equal Equal
b. Higher by P1.26 Lower by P 2, 850
c. Lower by P 1.26 Higher by P 2,850
d. Higher by P5 Lower by P1,500
The cost accountant of Ginatemple Corporation has complied the actual costs for six
different levels of activity. The data are shown in the table and graph below:
Observation Units produced Actual Costs
A 40 P100,000
B 80 100,000
C 120 300,000
D 160 400,000
E 200 500,000
F 200 600,000
75. In the graph, line segment ACDE is known as the line of
a. Segregation
b. Average cost
c. Regression
d. Standard deviation
76. If only the points that lie on the line are to be considered, a cost analysis will show
that such costs are
a. Variable costs
b. Fixed costs
c. Mixed costs
d. Step costs
77. If points B and F will not be considered in the computation, a cost function for the
given data will be expressed as
a. Y= a + bx
b. Y= a
c. Y= bx
d. Y= a + b
As part of a cost study, the cost accountant of Shinly Corporation has recorded the cost of
operations at seven different levels of materials usage. The records show the following;
Kilos of Materials Cost of Operation
80 P800
60 480
20 320
Kilos of Materials Cost of Operation
120 1200
140 1,280
40 480
100 1, 040
Sum of the kilos (Σx) 560

sum of the costs (Σy) P5, 600
sum of the kilos multiplied by the costs (Σxy) P545,600
sum of the kilos squared (Σx2) 56,000
78. Using the high low points method, the variable cost operations per kilo of materials
used is
a. P8.00
b. P9.14
c. P16
d. P10
79. Using the same high low points method, the fixed cost of operations is
a. P320
b. P103
c. P160
d. P206
80. Using the least squares method, the average rate of variability per kilo of materials
used is
a. P8.00
b. P0.11
c. P10.00
d. P8.71
81. Using the least squares method, the fixed portion of the cost is
a. P320
b. P103
c. P160
d. P206
82. The projected cost of operations for 90 kilos of materials is
a. P886.90 if the high low points method is used
b. P880.90 if the method of least squares is used
c. P886.90 if the method of least squares is used
d. P880.00 regardless of the method used
83. The cost accountant of Trisha Company conducted an analysis of total costs in
relation to the number of labor hours used and came up with a cost function for a
relevant range of 50,000 labor hours to 400,000 labor hours, as follows:
Total cost = P400, 000 + 20x
*x = number of direct labor hours
How much is the total cost for 40,000 direct labor hours?
a. P1,200,000
b. P800,000
c. P400,000
d. Cannot be determined from the given information
84. It is the measure of the co- variation between the dependent and independent
variables
a. Correlation
b. Ratio
c. Standard error
d. Variance
85. Correlation is a term frequently used in conjunction with regression analysis and is
measured by the value of the coefficient of correlation r. the value of r
a. Is always positive
b. Is always negative
c. Is a measure of the relative relationship between two variables
d. Ranges in size from negative one to zero
86. The coefficient of correlation that indicates the strongest linear association between
the dependent and independent variables is
a. –0.08
b. 0.40
c. -0.80
d. 0.04
87. What coefficient of correlation results from the following data?
X Y
2 4
4 8
6 12
8 16
10 20
a. -1
b. +1
c. 0
d. cannot be determined from the given data
88. A scatter diagram is a tool which may be used to demonstrate correlations. The
scatter diagram’s objective is to
a. Show frequency distribution in graphic form
b. Display a population of items for analysis
c. Indicate the critical path
d. Divide a universe of data into homogenous groups
89. If the coefficient of correlation between two variables is -0.95, how might a scatter
diagram of these variables appear?
a. A least squares line that slopes up to the right
b. A least squares line that slopes down to the right
c. Random points
d. A least squares line that slopes down to the left
90. Using regression analysis, Melody, the accountant of Lacuata Company graphed the
following relationship of its most expensive product line’s sales with its customer’s
income levels: If there is a strong statistical relationship between the sales and
customer’s income levels, which of the following best represents the correlation
coefficient for this relationship?
a. 0
b. -0.96
c. +0.96
d. +9.6
91. In regression analysis, the coefficient of determination is a measure of
a. The estimated values of the dependent variable
b. The slope of the line of regression
c. The amount of variation in the dependent variable that cannot be explained by the
independent variable
d. The amount of variation in the dependent variable that can be explained by the
independent variable
92. Verfermin Company uses regression analysis to develop a cost formula for predicting
production costs. The Company’s accountant is considering two different cost drivers
(units produced and direct labor hours) as the independent variable [x]. the analysis
showed the following results
Independent variable Y-intercept slope (b) r r2
Units produced P30,000 12 0.85 0.72
Direct labor costs 50,000 8 0.95 0.90
Which cost formula should be used?
a. Cost= 30,000 + 12x
b. Cost = 50,000 + 8x
c. Cost = 30,000 + 0.85x
d. Cost= 50,000 + 7.60x
93. Consider the following graph
Factor
overhead cost .
3 .
2 . .
1 .
1 2 3 4 5
DIRECT LABOR HOURS
If the regression analysis is applied to the data on the graph , the coefficients of correlation (r)
and determination (r2 will indicate the existence of a
a. High direct linear relationship, high explained variation ratio

b. Low direct linear relationship, low explained variation ratio
c. High inverse linear relationship, high explained variation ratio
d. Low inverse linear relationship, low explained variation ratio
94. Odessa, the author of Sta. Maria appliance Center has developed a multiple regression
model that has been used for a number of years to estimate the amount of installment
sales from credit applicant’s income levels. During the current year, Odessa applied
the model and discovered that the r2 value decreased dramatically, although the model
seems to be working well. Which conclusion is justified by the change?
a. Regression analysis is no longer an appropriate technique to estimate
installment sales
b. Some new factors, not included in the model, are causing installment sales to
change
c. The model is no longer reliable
d. The decrease in the value of r2 should not be considered in the model
95. It is a part of the accounting system that measures costs for decision- making and
financial reporting purposes.
a. Financial accounting
b. Cost accounting
c. Responsibility accounting
d. Segment accounting
96. Traditional cost accounting may best described by
a. All of the journals, ledgers, records, and financial statements used by an entity
to record, classify, summarize, and report the economic activities of such
activity
b. The entire general and subsidiary ledgers of a merchandising firm
c. The general ledger and subsidiary accounts and related records used by an
entity to accumulate the costs of goods or services that it provides
d. The subsidiary ledgers used to record the economic activities of the firm
97. A cost accounting system has internal and external reporting objectives. Such
objectives include the following, except
a. Income determination.
b. Product costing and inventory valuation.
c. Planning, evaluating, and controlling operations.
d. Determination of sales commission.
98. Which of the following statements is correct?
a. The accounting system is part of cost accounting that measures Costs for
decision-making and financial reporting purposes..
b. Cost accumulation involves collecting costs by natural classification, such as
materials or labor.
c. Cost allocation or cost assignment involves tracing and assigning costs to cost
drivers, such as direct labor hours or number of units.
d. Cost and managerial accounting are goods in the economic sense and, as such,
their costs must exceed their benefits.
99. The method of averaging costs and providing management with unit cost data used by
companies may depend on the type of products being produced-whether homogenous
or heterogeneous products. The appropriate costing methods for such types of
products are
Homogeneous Products Heterogeneous Products
a. Process costing Job- order costing
b. Process costing Process costing
c. Job- order costing Job- order costing
d. Job- order costing Process costing
100. Which of the following statement is correct?

a. Standard costing is a method that uses predetermined factors, such as quantity
and price, to compute the standard cost of the manufacturing cost elements.
b. Standard costing may be used with job-order costing, but not with process
costing.
c. Standard costing may be used with process costing, but not with job-order
costing.
d. Backflush costing is a cost accounting method that keeps track (in detail) of the
flow of cost of work in process.
101. This costing system is a hybrid of job-order and process costing systems wherein
materials are allocated on the basis of batches of production.
a. Job-process costing system
b. Pro-job costing system
c. Operation costing system
d. Backflush costing system
102. An operation costing system is
a. The master Control program that governs the operation of a computer system
b. The same as a process costing system, except that batches conversion costs are
charged specifically to products or batches as in job-order costing system.
c. Identical to a process costing system, except that actual cost is used for direct
labor.
d. The same as a process costing system, except that direct materials costs are
charged specifically to products or batches of production.
103. Within the accounting system, cost accounting
a. Is a combination of managerial accounting and financial accounting since its
purpose can be to provide internal reports for use in management planning,
control and decision-making, and because its product costing function satisfies
external reporting requirements.
b. Is concerned only with internal reporting that aids management in decision-
making.
c. Can best be defined as external reporting to government, stockholders, and
other interested parties.
d. is a combination of managerial accounting and responsibility
104. Which of the following alternatives does not correctly classify the business
application to the appropriate costing system?
Process Costing System Job-order Costing System
a. Car repair shop Paint manufacturer
b. Soft drinks manufacturer Public accounting firm
c. Wallpaper manufacturer Print shop
d. Pen manufacturer Renovation job contractors
105. Operation costing is a hybrid of process and job-order costing. It is used by
companies that produce goods that undergo some similar and some dissimilar
processes. Which of the following would most likely use the operation costing
system?
a. Movie production
b. Clothing manufacturing systems.
c. Paper manufacturing
d. Custom printing
106. It is a costing method that delays much of the accounting for production costs
until the completion of production or even the sale of goods. It is most appropriate
when inventories are low or when the change in inventories is minimal, that is, when
most production costs for a period flow into cost of goods sold. This costing method
is called
a. Standard costing.
b. Process costing.
c. Job- order costing.
d. backflush costing
107. Backflush costing is most likely to be used when
a. The company carries significant amount of inventory.
b. The company wants sequential tracking of costs.
c. a just-in-time production philosophy has been adopted by the company
d. when the change in inventories is significant
108. A company changed from a traditional manufacturing operation with a job order
costing system to a JIT operation with a backflush costing system. How will this
change affect the company's inspection costs and recording detail of costs traced to
jobs in process?
Inspection Costs Detail of Costs Tracked to Jobs
a. Increase Decrease
b. No effect No effect
c. Decrease Decrease
d. Increase Decrease
ITEMS 109 to 113 ARE BASED ON THE FOLLOWING INFORMATION: Duque

Corporation-uses backflush costing in accounting for the cos of its product. During the period,
the following data were recorded:
Production 20,000 units

Sales 18,000 units
Direct Materials purchased P562, 000
Direct Materials Used P560, 000
Conversion costs incurred P300, 000
The company sells its product for P50 per unit. Its backflush accounting system records the
purchase of direct materials and the completion and sale of finished goods.
109. The journal entry to record the purchase of direct materials is

a. Finished goods inventory 562,800
Accounts payable 562,800
b. Materials 562,800
c. Finished goods 560,000
Materials 560,000
d. No entry
110. The journal entry to record the usage of direct materials in production is
a. Work in process 560,000
Materials 560,000
b. Finished goods 560,000
Materials 560,000
c. Materials inventory 2,800
Materials 2,800
d. No entry
111. The journal entry to record the incurrence of conversion costs is
Conversion costs 300,000
b. Conversion cost control 300,000
Cash, Accounts payable, other credits 300,000
d. No entry
112. The journal entry to charge conversion cost to production is
Conversion costs control 300,000
b. Work in process 300,000
Conversion costs inventory 300,000
d. No entry
113. The journal entry to record the completion and sale of finished goods is
a. Finished goods 86,000
Cost of goods sold 774,000
Materials 560,000
Conversion cost control 300,000
b. Finished goods 86,280
Materials 562,800
Conversion cost 300,000
Work in process 860,000
d. No entry
114. In this costing system, the various activities performed in a business segment or in
the organization are identified, costs are collected on the basis of the underlying
nature and extent of such activities, and then assigned to the products or services
based on the consumption of such activities by the products or services
a. Operation costing system
b. Activity- based costing system
c. Job-order costing system
d. Process costing system
A company produces and sells two types of products. It classifies its costs as belonging to
four functions- production, marketing, distribution, and customer services. For purposes
of setting selling prices for the products, all company costs are assigned to the two
products. The direct costs of the four functions are traced directly to the two products.
The indirect costs, on the other hand, are accumulated into four separate cost pools
and then assigned to the two products using appropriate allocation bases.
115. The allocation base that would most likely be the best for allocating the indirect
costs of the marketing function is
a. Number of shipments.
b. Number of sales persons.
c. Number of customer phone calls.
d. Direct labor hours.
costs of the distribution function is
c. Direct labor hours.
d. Machine hours
costs of the of the distribution of the customers services function is
c. Number of customer phone calls.
d. Number of units produced.
118. It is a comprehensive understanding of how an organization generates its output.
It involves the determination of which activities are value adding or non-value-adding
and how the latter may be reduced or eliminated. It is a key component of ABC
Management that links product costing and continuous improvement.
a. ABC system
b. Process value analysis
c. Backflush costing
d. JIT system
119. Which of the following statements is not correct?
a. ABC tends to increase the number of cost pools and cost drivers used
b. ABC's philosophy is to accumulate heterogeneous cost pools.
c. In ABC system, homogenizing cost pools minimizes broad averaging of costs
that have different drivers.
d. Design of an ABC system starts with process value analysis, a comprehensive
understanding of how an organization generates its output
120. In ABC system, costs are grouped in cost pools and then allocated by a common
allocation base, which ordinarily is the cost's cost driver Such allocation base is the
common denominator for systematically correlating indirect costs and a cost object.
In a homogeneous cost pool, the allocation base should
a. Be a non-financial measure so that the allocation may be more objective.
b. Be a financial measure so that the allocation may be more objective.
c. Have a cause and-effect relationship with the cost items in
d. Assign the costs in the pool uniformly to cost objects even if the cost objects do
not use resources uniformly.
121. Which of the following statements is false?
a. Under ABC, a product is allocated only those costs that pertain to its
production, hence, the products are not cross subsidized
b. In ABC, the activities determined serve as cost objects. Costs for each activity
are accumulated in a cost pool and then allocated using the appropriate activity
base or cost driver
c. If a firm manufactures only one product, rather than multiple products, ABC is
more likely to result in major differences from traditional costing systems. D
d. ABC is useful for allocating production costs, as well as marketing and
distribution costs.
122. ABC differs from traditional product costing because it uses multiple allocation
bases and therefore, allocates costs (such as overhead costs) more accurately. This
normally results in
a. Equalizing setup costs for all product lines
b. Lower setup costs being charged to low volume products
c. Decreased unit cost for low volume products than is reported by traditional
product costing systems.
d. Substantially greater unit costs for low volume products than is reported by
traditional product costing systems.

T. Formeloza Corp. has used a traditional cost accounting system to apply quality control
costs uniformly to all products at a rate of P20 per direct labor hour. The average monthly
direct labor hours for its main product are 9,600 hours.
Trisha wants to shift to ABC system in order to allocate quality control costs to its
products in a more equitable manner; To start with, process value analysis was
conducted. Quality control activities were determined, as well as the appropriate cost drivers and
cost driver rates. The analysis yielded the following:
Quantity for
Activity Cost driver Rate main product
Inspection of materials Classes of P500 per class 20 classes
deliveries materials
Inspection of goods in Number of 10 per unit 12,000 units
process units
Final inspection before Number of 200 per order 100 orders
delivery of finished goods orders
123. The quality control cost that would be assigned to the main product using the
traditional costing system is
a. P240, 000.
b. P150, 000.
c. P120, 000.
d. P192, 000.
124. The quality control cost that would be assigned to the main product using ABC
system is
a. P240, 000.
b. P150, 000.
c. P120, 000.
d. P192, 000.
ITEMS 125 to 126 ARE BASED ON THE FOLLOWTNG INFORMATION:
The cost accountant of L. Rosales, Inc. is considering to use the ABC system in
determining the cost of its products.
At present, the company uses the traditional costing system wherein factory overhead
costs are allocated based on direct labor hours. The cost accountant believes that the
resent system may be providing misleading cost information, hence, the plan to change to
the ABC system.
For the coming period, the company is planning to use 5,000 direct labor hours, and its total
budgeted factory overhead amounts to P90, 000, broken down as follows
Activity Cost driver Budgeted Activity Budgeted cost
1. Setup costs Number of setups 40 P20,000

2. Production
monitoring Number of batches 20 40,000
3. Quality control Number of inspections 1000 30,000
Total overhead cost 90,000
Projected data for one of the company’s products, product X, for the coming period are
as follows:
Production and sales 1,000 units
Direct labor hours 2,000 hours
Units per batch 500
Number of setups 4
Number of inspections 200
Direct labor cost P10 per unit
Direct labor rate P20 per hour
125. If the company will use the traditional full cost system, the cost per unit of
product X for the coming period will be.
a. P36
b. P50
c. P86
d. P68
126. If the company will use the ABC system, the cost per unit of product X for the
coming year will be
a. P62
b. P50
c. P86
d. P12
ITEMS to 128 ARE BASED ON THE FOLLOWING INFORAMATION:
Jarred Pereña operates Daddy's Nursery which provides baby siting services for children
between 2 to 5 years old. Working mothers leave their children at 8:00 am and pick them up after
office hours.
Jarred converted his house into a nursery home where children are provided with sleeping areas,
play pen, and study areas, as well as meals, milk, and snacks. Nursery fee is computed by adding
a markup to the total cost of service provided to each child.
At present, Jarred uses the traditional costing system in computing the cost of service per child,
where the total cost is divided by the number of children served.
During the previous month, the nursery served 100 children, for which the company incurred
P50, 000 total cost of service. Jarred observed, however, that it is not right to just divide the total
cost the number of children because incurrence of some costs may vary depending on some
factors. For example, children between 2 to 3 years old need more attention and are provided
more services than those above 3 years old.
Considering this, Jarred plans to apply ABC system in determining the cost of service per child.
He conducted a study of the previous month’s operations, and the following results came out:
Cost category Cost Cost driver Cost driver

quantity
Meals, Snacks, P20,000 Number of children 100 children
supplies
Caregiving P30,000 Staff hours 1,200 hours
(nursing
assistance and
tutorials) hours
Children category Number of Children Staff hours
Babies (2-3 years old) 60 1,000
Kiddies (above 3 years old) 40 200
127. If the traditional costing system were used and nursery fee was computed at
300% of the cost of service per child, Daddy’s Nursery could have charged each
child a fee of
a. P1,500
b. P500
c. P166.67
d. P650
128. If the ABC system were used nursery fee per child should have been
a. P1,850 for the babies, P975 for the kiddies
b. P616.67 for the babies, P325 for the kiddies
c. P1,500 for both the babies and kiddies
d. P1,412.50 for both the babies and kiddies
129. The activity based costing system is one means of avoiding what has been called
peanut butter costing. Inaccurately averaging or spreading costs like peanut butter
over products or services units that use different amounts of resources results in cross
subsidization of product costs. Cost subsidization
a. Describes the condition in which the miscasting of one product causes the
miscasting of other products.
b. Involves a determination of which activities that use resources are value -adding
or non- value adding and how the latter may be reduced or eliminated
c. Is the linkage of product costing and continuous improvement of process, and it
encompasses driver analysis, activity analysis, and performance measurement
d. Is a hybrid of job-order costing and process costing that emphasizes physical
processes or operations for cost management and control purposes.
130. If Mich Roxa Corp. produces and sells two products, A and B. Data about the two
products are as follows:
Product A Product B
Budgeted production 3,000units 3,000units
Direct labor hours 9,000 hours 15,000 hours
Number of setups 4 6
Cost per setup P1,800
If Mich applies the setup cost on the basis of direct labor hours, the cross subsidy per
unit arising from this peanut-butter costing approach is
a. PO.15.
b. P1.20.
c. P3.00.
d. P1.50.
131. Costs that are common to many different activities within an organization are
known as ____ costs.
a. product- or process level
b. unit-level
c. organizational level
d. batch-level
132. Setup time is a
Batch cost value –added cost production cost
a. No No Yes
b. Yes Yes No
c. Yes Yes Yes
d. Yes No Yes
133. In allocating variable costs to products,

a. A company should never use more than one cost driver,
b. A volume-based cost driver should be used.
c. A company should always use the same allocation base that it uses for fixed
costs.
d. Direct labor hours should always be used as the allocation base.
134. Traditional overhead allocations results in which of the following allocations?
a. High-volume products are assigned too much overhead, and a. low-volume
products are assigned too little overhead
b. Low-volume products are assigned too much, and high- b. volume products are
assigned too little overhead
c. Overhead costs are assigned as period costs to manufacturing operations.
d. The resulting allocations cannot be used for financial reports.
135. Traditionally, overhead has been assigned based on direct labor hours or machine
hours. What effect does this have on the cost of a high-volume product?
a. Under-costs the product
b. over-costs the product
c. has no effect on the product cost
d. cost per unit is unaffected by product volume
136. Relative to traditional product costing, activity-based costing differs in the way
costs are
a. Incurred,
b. Benchmarked.
c. Allocated.
d. Processed.
137. In allocating fixed costs to products in activity-based costing,
a. Direct labor hours should always be used as the allocation base.
b. A company should use the same allocation base that it uses for variable costs.
c. Cost driver that is not volume related should be used
d. Machine hours should always be used.
138. Of the following, which is the best reason for using activity-based costing?
a. to assign indirect overhead costs to different overhead pools A
b. to better assign overhead costs to products
c. to keep better track of overhead costs
d. to more accurately assign overhead costs to cost pools so that these costs are
better controlled
139. These activities are needed to support an entire product line regardless of the
number of units and batches produced.
a. Batch-level Activities
b. Unit-level Activities
c. Facility-level Activities
d. Product-level Activities
140. Setup, receiving and inspection, are examples of:
a. Batch-level Activities
b. Unit-level Activities
c. Facility-level Activities
d. Product-level Activities
KEY ANSWERS:
141. B 40.B 79.C 118.B

142. B 41.D 80.D 119.B
143. A 42.A 81.B 120C
144. D 43.C 82.C 121.C
145. B 44D 83.D 122.D
146. A 45.B 84.A 123.D
147. B 46.C 85.C 124.B
148. C 47.A 86.C .125.C
149. B 48.C 87.B 126.A
150. B 49.A 88.B 127.A
151. C 50.C 89.B 128.A
152. B 51.C 90.C 129.A
153. D 52.B 91.D 130.A
154. D 53.C 92.B 131.C
155. B 54.B 93.A 132.D
156. A 55.B 94.B 133.B
157. A 56.D 95.B 134.C
158. D 57.C 96.C 135.B
159. C 58.B 97.D 136.C
160. C 59.B 98.B 137.C
161. D 60.A 99.A 138.B
162. C 61.C 100.A 139.D
163. A 62.C 101.C 140.A
164. C 63.B 102.D
165. A 64.C 103.A
166. D 65.A 104.A
167. D 66.B 105.B
168. C 67.D 106.D
169. C 68.D 107.C
170. B 69.A 108.C
171. C 70.A 109.B
172. B 71.A 110.D
173. A 72.D 111.B
174. D 73.C 112.D
175. B 74.B 113.A
176. A 75.C 114.B
177. B 76.A 115.B
178. C 77.C 116.B
179. A 78.A 117.C
1. B unexpired cost are assets

Expired costs are treated as expense or period costs. i.e., charged against revenues during
the period
Depreciation expense for factory equipment becomes part of the cost of inventory (an
asset ). It expires, or is charged to cost of goods sold when the inventory is sold.
Salesmen’s commission and company president’s salary are period costs. These are not
inventoriable costs, hence charged to expense outright in the period of incurrence.
Cost of goods sold is the cost of inventory sold. From being unexpired (inventory, asset),
the cost expires when charged to the cost of goods sold account.
2. B this is one way of defining the term “cost driver”

3. A the statement is the definition of the term “cost object”
4. D the statement defines the term “cost pool”
5. B this is the definition of the term “activity”
6. A the statement defines the term “non- value-adding activities”
7. B choice B gives the definition of the term “cost driver” per statement on Management
Accounting.
 Statement A – A cost driver is a measure of activity, not an accounting technique
 Statement C does not refer to a cost driver
 Statement D – a cost driver need not be a mechanical basis
8. C product costs are the manufacturing costs (materials, labor, and factory overhead)
incurred to produce a product. These costs become part of the cost of inventory (asset)
until the products are sold when the costs are charged to cost of goods sold (expensed)
 Statement A- when the products become part of the finished goods inventory,
product costs are treated as asset (unexpired cost)
 Statement B- prime costs are composed of materials and labor cost only. Product
costs include not only prime costs, but factory overhead cost as well
 Statement D- product cost is composed of conversion cost (labor and factory
overhead) and materials costs
9. B wages paid truck loaders is not manufacturing cost, since the loaders are not involved
in production. Hence, wages paid to them is classified as period cost.
 Choices A and D are manufacturing overhead costs which are classified as period
costs
 Fringe benefits paid to factory workers are either direct labor or factory overhead
costs, both of which are product costs
10. B product cost, which are the costs incurred to manufacture products, become part of the
cost of inventory.
 Choices A and D – product cost are charged to inventory (asset) first, then to cost
of goods sold (expense) when the units are sold. Such units may be sold now
(current period) on in the future.
 Choice C – costs that are vary directly with changes in the cost driver are variable
costs. Product costs may be composed of variable and fixed costs.
11. C
Direct materials 5,000
indirect materials 2,000
Direct Labor 6,000
indirect labor 1,000
Factory utilities 4,000
Overtime pay- factory workers 1,500
rework costs on defective products 2,500
Total product cost 22,000
12. B
Advertising costs 8,000
sales commission 12,000
depreciation and administration building 3,000
salaries of administrative personnel 20,000
Depreciation- delivery equipment 2,000
total period cost 45,000
13. D the salary of the company president is an administrative cost
 Prime costs are composed of materials and labor costs which are manufacturing
costs
 Conversion costs are composed of direct labor and factory overhead, which are
manufacturing costs.
 Indirect materials cost is a factory overhead cost item.
14. D prime cost is composed of materials and direct labor cost.
Conversion cost is composed of direct labor and factory overhead cost.
Direct labor is a manufacturing cost, hence a product cost.
15. B direct materials inventory, June 1 52,000
Add purchases 143,440
freight in 5,000
total 148, 440
Less purchase returns and
allowances 2, 440 146,000
Total materials available for use 198,000
less direct materials inventory, June 30 44,000
direct materials used 154,000
direct labor 175,000
total prime costs 329,000
16. A. direct labor 175,000

applied factory overhead (175,000 x 80%) 140,000
conversion costs 315,000
17. A Materials 154,000
Direct Labor 175,000
Applied Factory Overhead 140,000
total manufacturing costs 469,000
18. D total manufacturing costs 469,000

Add work in process inventory, June 1 110,000
total work in process 579,000
less work in process inventory, June 30 135,000
Cost of goods manufactured ( or cost
of goods transferred to the finished
Goods inventory account)
total period cost 444,000
19. C Cost of goods manufactured 444,000

Add finished goods inventory, June 1 68,000
Cost of goods available for sale 512,000
Less finished goods inventory, June 30 56,000
Cost of Goods sold 456,000
20. C Actual factory overhead P120,000

Applied factory overhead 140,000
Overapplied factory overhead P20,000
21. D Over/underapplied factory overhead is closed to the cost of goods sold at year-end
22. C Examples of indirect costs are indirect materials and indirect labor. Which are
chargeable to factory overhead, a conversion cost
 Choice A- A cost that is not directly chargeable to the company is not a cost of
that company
 Choice B- Prime cost is composed of direct materials and direct labor. No indirect
cost is included
 Choice D- Indirect factory costs are chargeable to factory overhead, one of the
items included in the computation or product costs. Variable costing (Except for
fixed indirect costs under variable costing)
23. A A direct cost can be specifically and economically associated or traced with a
single cost object The salary of the sales manager is directly traceable or chargeable to his
own department, i.e., the sales department
 The costs mentioned in the other choices are not directly traceable/
chargeable to the specific cost objects given
24. C indirect materials and indirect labor are manufacturing costs that are charged to
factory overhead, a conversion cost
Prime costs are composed of direct materials and direct labor
25. The assumption here is that such wood is used as direct materials to produce the furniture
 Choices B and C- The items refer to indirect factory costs both of which
are parts of factory overhead costs.
 Choice D –salesman’s commission is a period cost, not a product cost.
26. D cost of electricity (whether variable or fixed) in a manufacturing plant is a factory
overhead cost- a conversion cost that is included in the computation of product cost
27. D the salaries of the factory janitorial and maintenance staff is an indirect
manufacturing cost chargeable to factory overhead cost
28. C for decision making purposes, relevant costs are future costs that will differ under
alternatives. Such costs may be variable, fixed, or semi-variable as long as the two tests
(futurity and difference) are passed.
29. C differential costs, which may either be increases (incremental) or decreases
(decremental ) are the differences in costs among various alternatives
 Choice A- differential costs may be the differences in variable or fixed costs
under alternatives
 Choice B- The choice refers to relevant costs
 Choice D- Differential costs are the differences in costs, not the costs per se that
differ under alternatives
30. B opportunity costs are income or benefit given up when one alternative is chosen
over another. Opportunity costs are not recorded on the books of accounts but they are
considered relevant for decision making purposes
31. C sunk costs (also called past or historical costs) are costs already incurred in the
past and cannot be changed by any decision made now or to be made in the future. Sunk
costs being past (not future) costs are always irrelevant for decision making purposes
 Choice D refers to decremental costs, a type of differential costs
32. B relevant costs are future costs that will differ among alternatives. An example is
incremental fixed cost
Choice A – production cost of goods available for sale is a sunk costs, therefore irrelevant
Choice C- Acquisition cost of an idle asset is a sunk cost
Choice D- variable costs are usually, but not always relevant
33. A CHARACTERISTICES OF VARIABLE AND FIXED COSTS OVER THE
RELEVANT RANGE FOR A GIVEN PERIOD OF TIME.
TOTAL AMOUNT PER UNIT

Variable costs Varies directly with activity Remains unchanged
Fixed costs Remains unchanged Varies inversely with activity
34. D relevant range is the range of activity over which the relationship between costs and the
cost driver or activity level as presented in item #33 are valid.
 Choice A- relevant costs may be incurred at any level, whether within or outside
the relevant range
 Choice B- the firm is not required to confine its production within the relevant
range. Production level may be within or outside the relevant range.
 Choice C – within the relevant range, total fixed costs remain unchanged despite
the changes in activity level.
35. B under the straight line method of computing depreciation, the depreciable asset is
depreciated at a fixed amount per period of time.
36. A variable costs per unit are constant, though not necessarily at the minimum level,
within the relevant range
37. B despite the decrease in production, the total amount of fixed cost remains
unchanged. This same total will be divided by fewer units, thereby increasing the average
cost per unit
38. C TOTAL VARIABLE COST LINE
COST
UNITS
Total variable cost is a straight line because its slope, the variable cost per unit, is constant
It starts from (0,0) because there will be no total variable cost if the number of units is zero
It moves upward to the right because the total variable cost is directly related to the number of
units
COST
A B
UNITS
A straight line because total amount is constant regardless of the change in the number of units.
It does not start from (0,0). It is possible that fixed costs is incurred even when production or
sales in units is zero
TOTAL COST LINE
COST
UNITS
It is composed of total variable cost and total fixed cost
It is a straight line because the variable cost per unit and the total fixed costs are constant
It does not start from (0,0) because of the presence of fixed cost
It moves upward to the right because of the variable cost element
39. A when activity changes, a step cost shifts upward or downward by acertain interval
or step as follows.
 Step variable cost
 Step fixed cost have big steps
40. B this is the definition of committed fixed costs. An example is depreciation of
buildings and equipment.
41. D This is the definition of discretionary or managed fixed costs. Examples are
advertising expenses and research and development costs.
42. A Mixed costs, also called semi-variable or semi-fixed costs, are composed of
variable and fixed costs components. An example is factory overhead as to product, it is
an indirect cost, but it is composed of variable costs (indirect materials) and fixed costs
(straight line depreciation of factory equipment), among others.
43. C In cost behavior analysis, the Linearity Assumption states that there is a strict
linear relationship between the cost and cost driver. The costs may therefore be shown
graphically as straight lines
44. D The weighted-average method is not among the methods that may be used to
separate the components of mixed costs.
45. B Definitely, the costs are not fixed, since the total amounts are not constant.
The receiving and handling costs change directly with the change in the numbers of
items received and the costs per item are relatively constant at P6.25 per unit.
The costs therefore are variable costs.

46. C SALES SALARIES- Fixed cost - The increase in April salaries is due to increase
in sales staff, not to the change in the given cost drivers.
COMMISSIONS- Purely variable at 5% of peso sales
SHIPPING COST - Mixed cost - The total amounts are not constant, therefore, not fixed
although such total amounts change with the change in the number of units sold. the
shipping costs per unit are not constant hence, the costs cannot be considered as purely
variable cost
ADVERTISING- This is an example of discretionary fixed cost

The increase in advertising expenses in March was due to management’s
decision, not due to the change in any of the given cost drivers
47. A shipping cost sales in units
High (February) P38,000 35,000
Low (March) 32,400 28,000
Difference P 5,600 7,000
Variable cost per unit =P5, 600= P 0.80

7,000
February March
Total cost P38, 000 P32,400
Less variable cost
(Units sold x P0.80) 28,000 22,400
Fixed cost P10, 000 P10, 000
Cost function: total cost= P10, 000 + 0.80x
48. C sales salaries P51,000

Commissions (36,000 units x P10 x 5%) 18,000
Shipping costs (P10, 000 + 0.80[36,000]) 38,800
Advertising 20,000
Total selling costs in May P127, 800
49. A materials P60
Direct labor: parts fabrication P40
Assembly 18 58
Total prime costs P118
50. A gross profit is the difference between the selling price and production cost of the
units sold.
51. C it is a mixed cost because it is composed of variable overhead (P28) and fixed
overhead (21)
Overhead is not part of prime costs
52. B the research and development cost is a sunk cost – a past cost already incurred.
53. C the fixed cost items given (rent and depreciation) cannot be changed for a period
of time without affecting the profit- ability of the product/firm. Hence these are
considered committed fixed cost
54. B the amount too be spent of advertising and promotion during a period of time
depends on the decision of management
55. B the high –low method is a simple approximation of the mixed cost formula
Matrix algebra is a precise method of separating the components of mixed costs
The least squares method is sophisticated method of identifying the variable and fixed
costs components of mixed costs
Computer simulation is a more exact method of mixed costs components separation

In some cases, the cost of using more sophisticated methods outweighs the benefits or
incremental accuracy achieved
In such cases, the high low method is sufficient.
56. D Cost Machine Hours

High (April) P15, 840 2,190
Low (February) 10,720 1,230
Differences P 5,120 960
Variable rate per hour = P5,120 = P5.33 per hour

960
The lowest number of hours (1,230) does not correspond to the lowest cost (10,600) in
this case; the cost driver or activity level prevails.
57. C High Low
Total cost P15,840 P10,720
Less variable cost (2,190 x P5.33) 11,680
(1,230 x P5.33) 6, 560
Monthly fixed cost P4, 160 P4, 160
Average annual fixed maintenance costs =P4, 160 x 12
=P49, 920
58. B Variable cost (1,500 x P5.33) P 8,000

Fixed cost 4,160
Total cost P 12,160
/ Machine hours 1,500
Average rate per hour P 8.11
59. B regression analysis or the least squares method is a sophisticated method for cost
segregation. High low method yields a mere approximation of the mixed cost formula.
Hence. The user cannot expect to get accurate results from this method.
GAME THEORY- a mathematical approach to decision making where the actions of

competitors are considered
QUEUING THEORY – used to minimize the sum of the costs of waiting lines and
servicing waiting lines when items arrive randomly at a service point and are serviced
sequentially
60. A the dependent variable is y. this is the item to be estimated, calculated, or
predicted
The independent variable is x. changes in this variable are used to predict or calculate the
values of the dependent variable y.
61. C in multiple regression analysis, multiple independent variables are used to

calculate the changes in one dependent variable
In contrast in simple regression analysis, one independent variable is used to calculate

the changes in one dependent variable.
62. C Variable cost (2,000 x 6 hrs x P5/hr) P 60,000

Fixed cost 50,000
Total overhead cost P110,000
63. B annual fixed overhead (50,000 x 12) P 600,000

/ normal hours for one year
(20,000 units x 6 hours ) 120,000
Fixed overhead rate per hour P 5
64. C variable rate per hour P5

Fixed rate (from No. 67) P5
Total predetermined factory
overhead rate per hour P10
65. A The y intercept or P25,000 at 0 guset days represents the monthly fixed cost.
66. B The estimated increase in the room cleaning cost for each additional guest day is
actually the slope of the line or the variable cost per guest day, computed as follows:
Varaible cost per guest day = change in cost____

change in guest days
= P 40,000 – P30,000
1,500-500
= P 10
 Two points ([1, 500, P40, 000] and [500, P30,000]) were arbitrarily chosen.
67. D Total cost is the sum of the monthly fixed cost (P25,000) and the total variable
cost, depending on the number of guest days (P10 x guest -days)
68. D the cost formula of P25,000 + P10(guest- days ) is valid only within the relevant
range. Since 2,200 guest-days is outside the relevant range already, fixed cost is not
necessarily P25,000, nor is variable cost P10 per guest – day hence, the total cost for the
2,200 guest- days cannot be determined from the given information.
69.
70. A the cost function derived by the least squares method is linear, containing both
fixed cost and variable elements
 Using calculus to test for minima and maxima (minimum and maximum points)
is not appropriate in a linear function
71. A the correct expression is y= a + bx, where y is the total production cost, a is the
total fixed cost, b is the variable cost per unit, and x is the number of units.
72. D UNITS TOTAL

PRODUCED COST
(X) (Y) XY X2
500 P4,000 P2,000,000 250,000

700 8,000 5,600,000 490,000
900 6,000 5,400,000 810,000
600 7,500 4,500,000 360,000
800 8,500 6,800,000 640000
550 7,250 3, 987, 500 302,500
2
Σx= 4,050 Σy= P41, 250 Σxy=P28, 287,500 Σx =2,852,500
n=6
1. Σy= na + bΣx
41,250 = 6a + 4,050b
2. Σxy= aΣx + bΣx2
28,287,500= 4,050a + 2,852,500b
3. (41,250= 6a + 4,050b) 4050/6
27,843,750 = 4,050a + 2,733,750b
4. (2)-(3)
28, 287, 500 = 4,050a + 2,852, 500b
(27,843,750 = 4,050a + 2,733, 750b)
443, 750 = 118, 750b
b= 443,750 = 3.74
118,750
the variable production cost per unit (b) = P 3.74

73. Using figures derived in item #72, substitute the value ob b in equation 1.
Σy = na + bΣx
41,250 = 6a + 4,050 (3.74)
41,250 = 6a + 15, 147
6a = 26,103
a = P4, 350
Total monthly fixed production cost (a)= P4,350
74. B Total cost Units
High P6, 000 900
Low 4,000 500
Difference 2,000 400
Variable cost per unit = P2,000 = P5

400
High Low
Total cost P6, 000 P4, 000

less variable cost
(900 x P5) 4,500
(500 x P5) 2,500
fixed cost P1,500 P1,500
COMPARISON OF RESULTS:
High –low Least Squares Remarks
Variable cost P5 P3.74 High low result is higher by

per unit P 1.26
Fixed cost P1,500 P4,350 high –low result is lower by

P2,850
75. C the line of regression is the line fitted to a large number of points in a scatter-
graph where the sum of the squared deviations from that line is at a minimum.
76. A The total costs vary directly with the number of units produced, and the costs per
unit are constant at P 2,500 (e.g. P100,000/40 = P 2,500). These are the behavioral
characteristics of purely variable costs.
77. C the cost function is y= bx, where y is the total cost, b is the variable cost per unit,
and x is the number of units produced. The usual cost function is y = a + bx, where a is the
fixed cost. In this case, fixed cost is zero.
78. A Cost Kilos
High P 1,280 140

Low 320 20
Difference P960 120
Variable cost per kilo = P960 = p28

120
79. C High Low
Total cost P 1,280 320

Less variable cost
(140 x P8) 1,120
(20 x P8) 160
Fixed cost P 160 160
80. D 1.) Σy = na + bΣx

5,600 = 7a +560b
2.) Σxy = aΣx + bΣx2
545,600 = 560a + 56,000b
3.)multiply (1) by 560/7 or 80 to make the numerical coefficient of a be equal to
560:
(5,600 = 7a + 560b ) 80
448,000 = 560a + 44,800b
4.) (2)-(3) to eliminate 560a:
545,600 = 560a + 56,000b
(448,000 = 560a + 44,800b)
97,600 = 11,200b
b= 8.71, the variable cost /kilo
81. B using figures derived in item #80, substitute the value of b (8.71) in (1)
5,600 = 7a + 560 (8.71)

5,600 = 7a + 4,877.60
7a = 722.40
722.40
.a= 722.40 = P103, the fixed cost portion
7
82. C High –Low Least Square

Cost function (where x is the
Number of kilos of materials) cost = 160 +8x cost= 103 + 8.71x
Cost computation for 90 kilos cost = 160 + 8(90) cost = 103 + 8.71(90)
Cost of operations = P880 = P88.90
83. D The cost function is valid only within the relevant range of 50,000 to 400,000
direct labor hours. Forty thousand (40,000) hours is not within the relevant range, so the
cost formula may not be applicable. Outside the relevant range, the total fixed cost and
variable cost per unit may be different from P400, 000 and P20, respectively.
84. A This is the definition of the term “correlation”
85. C the coefficient of correlation (r) measures the strength of the linear relationship
between two variables. Its value ranges from negative one (-1) to positive one (+1).
86. C the range of values of the coefficient of correlation (r) is from negative 1 to
positive 1
If r = ±1, the relationship indicates a perfect correlation
If r = 0, there is no relationship between the variables.
Thus, an r that is nearest to ±1 would indicate the strongest linear association.
An r that is nearest to zero would indicate the weakest linear association
In this term- 0.80 indicates the strongest linear association as it is nearest to a perfect
relationship, in this case, -1, a negative correlation
87. B as x increases by 2, y consistently increases by 4. Hence, a perfect positive
relationship exists, and r must be equal to +1
88. B the scatter diagram is drawn to display on the graph a population (or sample) of
items for analysis.
 Showing frequency distribution is graphic form is the objective of a histogram
 The critical path may be determined by drawing a PERT diagram.
 Stratification is used to divide a universe of data into homogeneous groups
89. B The diagram may look like:
. .
. .
. .
. .
The regression line (or least squares line) slopes down to the right. It indicates an
indirect or inverse relationship between variables.
90. C The diagram shows that sales and income levels are directly or positively related.
The regression line slopes upward to the right. As the income level increases, sales
likewise increase. The value of r therefore, may be +0.96. Choice D (+9.6) cannot be the
answer because the value of r is from negative one to positive one only. Coefficient of
correlation (r) = 0 when the variables are not correlated.
91. D The coefficient of determination (r2) is a measure of the amount of variation in the
dependent variable that can be explained by the independent variable. Its value is
computed by squaring the value of the coefficient of correlation (r).
92. B The appropriate cost driver or independent variable is the direct labor hours.
Based on the analysis, if the direct labor hour is used as the cost driver, it shows a higher
coefficient of correlation (r), meaning that the cost and direct labor hours are strongly
related linearly. Moreover, it has a higher coefficient of determination (r2), meaning that
more variation or changes in the cost are explained by the direct labor hours. Hence, the
variables are indeed, strongly related.
93. A If a regression line is drawn through the points, majority of the points will lie on
it, while the other points will be very close to it. The straight line will slope upward to the
right. Hence, there is a high direct or positive linear relationship, with high coefficient of
determination, i.e., there is a high-explained variation ratio. The variables, (factory
overhead and direct labor hours) are strongly related linearly.
94. B Accordingly, the model seems to be working well. Hence, it is still reliable and
regression analysis is still appropriate in this case. The value of r2 (coefficient of
determination) should be considered, as it measures the amount of explained variations in
installment sales. A decrease in the value of r2 indicates that fewer amounts of variations
in installment sales are explained by the applicants' income levels. The relationship
between the variables became weak Some new factors not included in the model are
therefore causing installment sales to change.
95. B This item refers to the definition of Cost Accounting
96. C Cost accounting includes all the accounts and records used to accumulate the cost
of goods and services provided by an entity
 Choice A- refers to the accounting system in general

 Choice B- the entire general and subsidiary ledgers are used not only for the
accumulation of cost data but also for other financial accounting functions.
 Choice D- The economic activities of a firm are typically recorded in the general
ledgers and journals.
97. D Determination of sales commission is ordinarily based on sales, not on cost.
Hence it is not among the objectives of accounting.
98. B
 Choice A- Cost accounting is part of the accounting system that measures cost
for decision-making and financial reporting purposes.
 Choice C – Cost allocation or cost assignment involves tracing and assigning
costs to cost objects, such as departments or products
 Choice D- Cost and managerial accounting are goods in the economic sense, and
as such their benefits must exceed their costs
99. A HOMOGENEOUS PRODUCTS - like products (products having the same

characteristics) that are mass- produced. Costs are accumulated using the process costing
method, i.e., costs are accumulated in a particular operation (process) or department for an
entire period
HETEROGENEOUS PRODUCTS- Products that have varied characteristics. Since the
products/services are unique and produced/provided according to the customers' needs or
specifications, costs are assigned or traced to the individual products using the job-order
costing method. The statement is one way of describing the standard costing method.
100.A The statement is one way of describing the standard costing method
 Choices B and C- Standard costing may be used with both the job-order
and process costing methods
 Choice D-Backflush costing eliminates the detailed tracking of the cost of
work in process
101.C Operation costing is a hybrid of job-order and process costing

systems. It is used by companies that produce goods that
undergo some similar and dissimilar processes. It accumulates
total conversion costs and determines a unit conversion cost for
each operation, but direct materials costs are allocated
specifically to products or batches, as in job-order systems.
102.D Please refer to the discussion in Item 101.

 Choice A-pertains to operating systems, a computer term
103. A In a broad sense, cost accounting can best be defined within

the accounting system as internal reporting for use
management planning and control and in making non-routine
decisions, and external reporting to the extent its product-
costing function satisfies external reporting requirements. It is
therefore a combination of managerial accounting and financial
accounting.
104.A A car repair shop would use job-order costing, while a paint
manufacturer would use process costing system.
105.B In clothing manufacturing, conversioncosts may be

accumulated using the process costing system, while materials
may be allocated based on the type of clothing to be produced.
In the other choices, the appropriate costing methods are:
 Movie production-job-order costing

 Paper manufacturing- process costing
 Custom printing- job-order costing
106.D The opening paragraph is a description of backflush costing.
107.C Backflush costing eliminates the sequential tracking of costs as

is done in traditional cost accounting systems. It delays much of
the accounting for production costs until the completion of
production or even the sale of goods. It is most appropriate
when inventories are low or when the change in inventories is
minimal. Hence, this costing method is most commonly used
with a JIT system.
108.C Backflush costing eliminates the sequential tracking of costs. So, the recording
detail of costs tracked to jobs in process would decrease.
In a JIT system, suppliers are properly selected and are expected to perform all
necessary inspections before delivery.
A shift to this system will therefore decrease inspection costs of the company (buyer). Deliveries
arrive just in time the goods are needed and are sent directly to the area where the same are to be
used without the need for inspection.
109.B Please see discussion and complete set of journal entries in Item
110.D Please see discussion and complete set of journal entries in Item 113.
111.B Please see discussion and complete set of journal entries in Item 113
112.D Please see discussion and complete set of journal entries in Item 113
113.A Materials used P560,000

Convention costs 300,000
Total production costs 860,000
/ Number of units produced 20,000
Cost per unit P 43,000
Finished goods inventory (2,000 x P43) P86, 000

Cost of goods sold (18,000 x P43) 774,000
Backflush costing eliminates the sequential tracking of costs. In this problem, the company
records the purchase of direct materials and the completion and sale of finished goods. Therefor,
the work- in- process account is not used. The journal entries to record the transactions using
backflush coasting are as follows:
1. PURCHASE OF MATERIALS
Materials 562,800
2. INCURRENCE OF CONVERSION COSTS
Convention costs control 300,000
Various credits 300,000
3. COMPLETION &SALE OF FINISHED GOODS
Finished goods 86,000
Materials 560,000
Conversion costs control 300,000
114.B The paragraph describes the activity-based costing system, otherwise known as
the ABC system.
115. B A cause-and-effect relationship may exist between the number of sales persons
and the marketing function.
116.
117.
118.B The paragraph enumerates the elements of Process Value Analysis.
119.B ABC's philosophy is to accumulate homogeneous cost pools, so that the cost
elements in a pool should be consumed by cost objects in proportion to the same driver
120.C In a homogenous cost pool, all costs should have the same or a similar cause-and-
effect relationship with the cost driver or cost allocation base
The allocation base may be both financial (e.g. peso sales. labor costs) or non-financial
(e.g. number of setups, number of inspections) measures
121.C When the firm produces only one product all of the costs incurred is assigned to
that one product; the particular method used to allocate cost does not matter
122.D ABC often charges low volume products with higher unit costs than a traditional
system. An example is the allocation of setup costs.
Consider the following data:
Batch 1 (one setup) 200 units

Batch 2 (one setup) 500 units
Setup costs P500 per setup
Direct labor hours 2 hours per unit
ABC SYSTEM TRADITIONAL COSTING
Setup cost is Setup cost is

allocated based on allocated based on
the number of setups direct labor hours
Total setups cost* P1,000 P1,000

Allocation base 2 setups 1,400 hours**
Cost per cost driver P 500 per setup P0.71 per hour
*P500 x 2 setups
**(200 + 500)x 2hrs
Cost assignment – BATCH 1
Batch 1 Batch 2 Batch 2 Batch 2

(low) (high) (low) (high)
Setup cost P500 P500 P284 P710

/ number of units 200 500 200 500
Cost per unit P2.50 P1.00 P1.42 P1.42
*200 x 2 x 0.71
**500 x 2 0.71
The setup cost per unit of Batch 1 (low volume) under ABC is P 2.50, higher that the
setup cost per unit of P 1.42 in the traditional costing system.
123.D direct labor hours 9,600

Quality control cost rate per direct labor hour P20
Total quality control cost P192,000
124.B inspection of materials
Deliveries 20 classes x P500 per class P10, 000
Inspection of goods in process 12,000 unit x P10 per unit 120,000
Final inspection 100 orders x P200 per order 20,000
Total quality control cost P150,000
125.Direct materials P10

Direct labor (2 hours per unit x P20 per hour) 40
Factory overhead (P18 per hour x 2 hour per unit)* 36
Cost per unit of product X P86
*Labor time per unit = 2,000 hours /1,000 units = 2 hours per unit
*overhead rate per hour = P90,000/5,000 hours= P18 per hour
126.A Direct materials P10

Direct labor (2 hours x P20 per hour ) 40
Factory overhead * 12
Cost per unit of Product X – ABC system P62
*COMPUTATION OF FACTORY OVERHEAD COSTS- ABC SYSTEM
1. setup = P20,000/40 x 4 setups P2,000
2. production monitoring
= P40,000/20 batches x 1000 units/500 units per batch
= P2,000 per batch x 2 batches 4,000
3 Quality control
= 30,000/1,000 inspections x 200 inspections 6,000
Total overhead cost for product X P12,000

/number of units 1,000
Factory overhead cost per unit P 12
127.A Cost per child (P50,000/ 100 children ) P500

x 300%
Nursery fee per child P1,500 P 1,500
128. A COST RATE PER CATEGORY:
Meals,snacks,supplies P20,000/100 P200 per child

children
Caregiving P30,000/ 1,200 25 per staff hour
staff hours
COST OF SERVICE PER CHILDREN CATEGORY:

Baby Kiddie
1
Meals, snacks, supplies P12,000 P8,000 2
Caregiving 25,000 3 5,000 4
Total cost P37,000 P13,000
/ number of children 60 40
Cost of service per child P616. 67 P325
x300% x300%
Nursery fee per child P 1,850 P975
1 2
60 x P200 40 x P200
3 4
1,000 hours x P25 200 hours x P25
129.A choice B refers process value analysis: Choice C refers to activity based
Management: Choice D refers to operation costing.
130.A ALLOCATION BASED ON LABOR HOURS:
Total setup cost (P1,800 x [4+6] P18,000

/ total direct labor hours (9,000 + 15,000) 24,000
Setup rate per hour P0.75
SETUP COST PER UNIT
Product A (3 hours x P0.75) P2.25

Product B (5 hours x P0.75) P 3.75
ALLOCATION BASED ON UNITS PRODUCED:
Product A Product B
Number of setups 4 6
x cost per setup P 1,800 P 1,800
Total setup cost P 7,200 P 10,800
Product A Product B
Total setup cost P7, 200 P10, 800

/number of units 3000 3000
Setup cost per unit P 2.40 P3.60
COMPARISON OF UNITS COSTS:
Setup cost per unit- computed based on

Direct labor hours P 2.25 P3.75
Setup cost per unit – based on production 2.40 3.60
Cross subsidy P0.15 P0.15
The understatement in unit cost of Product A (P0.15)is the overstatement in unit cost of
product B (P0.15). Hence, the miscosting of product A causes the miscosting of product B
– a condition referred to as cross subsidization.

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CHAPTER 4

COST IN MANAGERIAL ACCOUNTING

JHON KENNETH G LANDAO

BACHELOR OF SCIENCE IN ACCOUNTANCY

JOSE MARIA COLLEGE

PHIL-JAPAN FRIENSHIP HIGHWAY, DAVAO CITY

SOME COST TERMS USED IN MANAGERIAL ACCOUNTING

 COST OBJECT- anything for which the cost is computed.

Examples: a product, product line, a segment of the organization

Examples: production, sales, number of hours

 COST POOL – a grouping of individual cost items; an account in which a variety

Examples: work in process, factory overhead control

 ACTIVITY- an event, action, transaction, task, or unit of work with specified

VALUE ADDING ACTIVITES- activities that are necessary (non- eliminable to

Examples: assembling the different component parts of the product

DIFFERENT COSTS FOR DIFFERENT PURPOSES

D. FOR DECISION MAKING

E. AS TO BEHAVIOR (REACTION TO CHANGES IN COST DRIVER)

Example: depreciation of building and equipment

b. Discretionary or Managed Fixed Costs- usually arise from periodic (may be

Examples: research and development costs, advertising expense, maintenance

 Step variable cost – have small steps

ACTIVITY (units, hours, etc.,)

ACTIVITY (units, hours, etc., )

TOTAL AMOUNT PER COST DRIVER

ANALYSIS OF MIXED COSTS

Where: TC = total cost

VC = variable cost per cost driver x cost driver or

Where; VC = total variable cost

The total or mixed cost function may be expressed as:

COST DRIVER COST DRIVER COST DRIVER

THE COST FUNCTION

Y = a + bx where; Y = Total Cost

SEPARATION OF THE FIXED AND VARIABLE COMPONENTS OF MIXED COSTS

1. High – Low Method

Range of values of r: from -1 to 1

When r = 0, there is no correlation

Mga dot ni ngari nagkatag

If r^2 = 1, the standard error = 0

COST ACCOUNTING SYSTEMS

COST ACCOUNTING PROCESSES

1. COST ACCUMULATION – involves collecting costs by natural classification, such as

COST ACCOUNTING SYSTEMS

1. JOB ORDER COSTING

Examples: automobile repair shops, tailoring/dressmaking business

Examples: soft drinks Company, toy manufacturers

3. HYBRID PRODUCT COSTING SYSTEM

Examples: clothing and food processing operations

COMPARISON OF BACKFLUSH AND TRADITIONAL COSTING SYSTEMES

6. ACTIVITY- BASED COSTING SYSTEM

ACTIVITY – BASED COSTING TRADITIONAL COSTING

TYPE OF ACTIVITY LEVELS

3. PRODUCT LEVEL (OR PRODUCT SUSTAINING LEVEL)- activities that are

Examples: engineering costs, product development costs

4. FACILITY LEVEL (OR GENERAL OPERATIONS LEVEL) – performed in order

Examples: plant maintenance, plant management property taxes and insurance.

4. It is a grouping of individual cost items, or an account in which a variety of similar

7. Which of the following statements is correct?

8. Products costs or inventoriable costs

9. Which of the following costs is not a product cost?

10. Product costs

Direct materials 5000