MENT ACCOUNT) paar 2= MANAGE 6 568 . ‘MumPLe Chore: 1. Ima decison making case, which ofthe Following ost s genera rot relevant tothe desSOn? ety cst Qmais 5 Se 2. Ina decisionmaking case, which ofthe following Costs IS Not likely tw contain a relevant cost component? Labor cost Seling cost Depreciation cost of an existing asset Factory overhead cost 3. Opportunity cost is an important concept in decision-making. This maybe desibe as ¢ the difference in total casts between two choices. & the continuton to Income that Is forgone by not using ltd resources ns best alerative we. ast that oy arse nthe fie. cast that has aeady bas nce. 4. Which of the following must be considered in determining the relevance ofa particular cost toa decision? 3. Verifabilty and accuracy of the cost Potential effect ofthe coston the decision ‘c. Amount of cost ._Riskiness of the decision 5. Which of the folowing statements about relevant or differential ‘cost analysis is correct? a 2. All variable costs are relevant. All fied costs are irrelevant. ‘Al variable and fixed costs to be incured are considered as they change with each decision altematve. All future costs are relevant. ‘Chapter 12 ~ Concepts and Techniques for Decision Making 569 ITEMS 6 to 9 ARE BASED ON THE FOLLOWING INFORMATION: Miss Mickey Reyes, a graduate of Cebu Universt, is gong to Manila ‘to review for the CPA Board Examination. She is considering to stay in 2 dormitory tat is jut a stone's tow away from the review Schoo! during her Smonth stay in Manila, Her aunt, however, offering her a room in her house which is about three (3) kilometers aay from the schoo. She told her aunt that she would frst conduct differential anaiyss before making her decision on where to stay. She sted the following costs and cost estimates: Uf she will stay in Her Aunts House A Dormitory Plane tcket: Cebu-Manila-Cebu P8000 P 8,000, Tatton fee 1000 1,000 Board and lodging fee 25,000 ‘Share in food and household expenses 10,000 = Transportation (Aunts house-school-Aunt’s house) 1,700 - Snacks, etc, while in schoo! 400 4,000 Books used! in college to be used during the review 30000 10,000 New review books to be purchased 2000 2,000 Clothes tobe brought to Manila 6000 6,000, Personal supplies while in Manila 400 2,000 Other expenses: (for contingencies, gimmicks, et.) 3000 5,000, © Being an honor graduate, Mickey has to pay the ‘miscellaneous fee of only P1,000 for the whole review term. © Her Aunt will shoulder some of her personal supplies if she will stayin her (Aun’s) house, ‘Mickey i currently working as an accounting clerk in a Cebu-based firm, earning P8,000 per month. “She could have stayed in Cebu ‘and continue working, but she wants to review in Manila and fulfil her dream of becoming a CPA. . ‘She informed her boss of her decison to review in Malla. She fled 2 five-month study leave (without pay) which her boss approved.gant MANAGEMENT ACCOUNTING 570 ‘chapter 12 ~ Concepts and Techniques for Decision Making 571 her Aunts HOUSE OF in g 6. IF te alternatives are whether to stay IM 40, Should Ramon Corporation accept the special order, assuming that dormitory, the relevant costs are: it would rot affect regular sales? ‘a, Yes, because operating income would increase to P500,000.. = Aunt’ house es (2) P15,100 32,0 B) Yes, because operating income would increase by P500,000. SS “ag.100 63,000 “©? No becouse the special pice of PSB is much lower than the © $5,000 16,000 recuar price of P00. 4. 16,000 55,000 d. No, because the special price of PSB Is lower than the full cat of P65. in Manila? 7. Whats the opportunity cost of veg (@) P40,000 oP p'scoo 6 0 fn Monta, sca 8. Mickey will incur some future costs during her stay ‘items, although future costs, are ‘considered Irrelevant because they do not differ under the alternatives, The total amount of seh ated freee © esse, a. 16,000. bi. P6100. id. 763,000. re ‘Assume that the avaliable (excess) capacty forthe special order is ‘only 30,000 units, and that ifthe 50,000 units being ordered is ‘accepted, Ramon Corporation would reduce its sales to the regular ‘ustome's. Should the corporation accept the order? 1. Yes, because operating income would increase by P500,000, Yes, because operating income would increase by P2,500,000. © No. because operating income would decrease by P700,000. No. because operating income would decrease by P2,100,000. 12, Given for Owen Company are the following information: 9. Included in Mickey's list are some costs wich are. considered Regulor production and sales per year 60,000 units Irrelevant because they have already been incurred in the past. Total fixed costs 576,000 These costs are called past costs, sunk costs, oF historical costs, Total variable costs 528,000 ‘and amount to ‘One-ime-only special order received 12,000 units (a) 16,000. c P55,000. Reguar seling price per unit P20 B. P47,100. d.P64,000. ‘Specal selling price per unit Pio [ITEMS 10 and 11 ARE BASED ON THE FOLLOWING INFORMATION: Ramon Corporation, a manufacturer of light bulbs, budgeted sales, ‘of 500,000 units of light bulbs at P100 per unit for the year 200A. Variable manufacturing costs was budgeted at P40 per unit and foxed manufacturing costs at P25 per unt. A speci order ofrng to uy 50,00 vs of ht bulbs for P58 ach was reeves by Ramon Crpraton In March 200A._Ramon orp. has sft plant capcty t produce the adel uns af ta bib Hones, ovr Wak as tbe doe ta tonal cost of 8 per Unt Ho sling expenses Would be incurred for this special order. se What is te incremental cost per unit ofthe special order? a. PISA 10.00 b. P 9.60 P 8.80 ITEMS 13 to 15 ARE BASED ON THE FOLLOWING INFORMATION: ‘Alex Company is a manufacturer of electronic switches. One of their products, “Sensory Switch,” Is used as a component of most electrical appliances.572 an 2-MANASEMENT ACO, sensory Such haste folowing fenc $22 per unit: os Seling price ie Variable costs: Mater 24 feat 15 Factory overeod Erapig and banding «= 3 PG P36 3B. 14, 15. 16. Fired costs: Factory overhioad Eating and administrate 14 __5 Total Pug During the month, Alex has received a SPEC, One-time one, 1,500 units of Sensory Switch. Assuming that the company has excess capacty that IS enoug produce ths specs! order without affecting sales. to Gistomes, and the company wents to improve BS profitably, Dre at ace fths pepal ete rer in exc a. P80, P60. b pu a. P50. Assume thet Alexis operting at full capadky and that &t des 1g tant eur @ los om tis ode, the minimum acceptable pee (a) P180. c. Ped. we. pio a. P50. ‘Assume that the excess capacity available for the special orders ‘only 1,000 units, so that If the order were accepted, Alex wous have to reduce sales to regular customers. What is the minivan price for this special order? a. 180 Pe b. PLO 4) P10 Bautista Corporation, presently operating at 90% of capacity, his been offered 2 new order at a special price of P7.90 per unt ferkin 25% of cpmcy, Aten thaw 0 char is le capacity of 10%, but i the special order were accepts the additional 15% capacity required shall be subcontracted at & Chapter 12 ~ Concepts and Techniques fr Decision Making 7. 18, 573 cost of 8,00 per unit, that is, PO.S0 more than the company's variable manufacturing cost. Should the special order be accepted? 73) es, because the specal order has a postive contribution ‘margin of P.10 per unt b. Yes, because the specal order has @ postive contribution ‘margin of PO.15 per unt No, because the special pce of F7.90 & lower than the subcontracting cost of E.00, 4. (No, because the special order cannot be produced entirely Using the company’s plant capacity. Feith Corporation has considerable excess capacity. During the month, it received a special order at a price much lower than its regular price, The special order's cost sheet shows the folowing: Materials 8,000, Labor 12,000 Applied factory overhead costs: Variable 35,000 Fixed 20,000 “The applied fixed factory overiead cost includes an allocated 5,000 for in-house design costs although no in-house cesign cost will be done for the special order. Instead, the job will require the Use of external designers for which the company wil incur P7,000 ‘What Is the total amount to be included in the calculation to termine the minimum acceptable price forthe Special order? i) 62,000 c.P77,000 ’b. P55,000 4. 57,000 Production of a special order will increase the company’s profit the incremental revenue from the special order is greater than the ‘a. fixed costs incurred in producing the special order. direct materials and labor costs in producing the order. relevant costs of producing and seling the order, including ‘any opportunity cost to be Incurred ifthe order is accepted. di indirect costs of producing the order.574 19, 20, 2 PART? MANAGEMENT ACCOUNTINg a special order which wil enable ants to conduct a diferent the order. ‘A company is considering to accept Ito use its curently idle capacty. Tt cost analysis soit could set the special price for Init cost analysis, which of the following should not be included? ‘a. Variable overhead Direct materials b._ Direct labor (6) Depreciation nen ne et tah! tant ee te ee anon acai TSE, | OMe soy cern posse at PD Soc ee rae sect tas Roel ok Materials P20 Labor 10 Factory overhead 4 Seling and administrative 1s Total costs Pe Annual fxed costs are: Factory Overhead 5,000,000 Seling and administrative 3,000,000 Total costs 6.000.000 During the month, a customer has offered to buy 80,000 units at 60 per unit. Per the customer's specications, the products wil ot be packed individually. Instead, they will be packaged in large cartons, to be picked up by the customer using its own truck. Thus, variable selling and administrative costs will be reduced by 1/3. ‘No additional fixed costs wil be incurred for this order. Assuming that the regular and special markets can be distinguished, the company should 2, reject the order because total prof wll decrease by P1,600, 000 Chapter 12 ~ Cones nd Tehnqus fr Decision kin 575 3 2, 24 , accep the order because, although t wl res into 2 ess, t will erable the company to use ile capacity. Seether be tl rt een #72000, (@) accept the order because it wil contribute atonal profi of e000, Ina make or buy decsion analysis, the cost to buy is compared withthe ‘ay total cost to make, variable manufacturing cost. 8) relevant costto make, 4. costto purchase. In a make-or-buy decision analysis, which of the folowing qualtatve factors is/are usualy considered? '2.. Assurance of quality contro Sled fabor Special technology @ Alot the stove Which of the following statements about a make-or-buy decision analysis isnot correct? 2. Available resources should be used as efficiently as possible before outsourciig. The analysis should involve avoidable costs only. Ifthe total relevant cost of production is less than the cost to buy the item, It should be produced In-house. (6) The decision depends on whether the company is operating at or below the normal capacty, Which of the folowing qualitative factors favors the buy choice in, a make-or-buy decision? ‘2. Quality contol is enical . There is available ice capacty The costto buy sles than the relevant cost to make. “The maintenance of long-run relationship with supplies 1S desirable.paRT2MANAGEMENT ACCOUNTING 576 26. Avian Corporation manufactures a component. part with the following standard costs: Direct materials Po Direct labor 15 Factory overhead 60 Pal ‘Standard cost per unit standard direct labor hour. Factory overhead is applied at P2 per st H cost is fixed and is not ‘Thirty percent (30%) of the applied FO! affected by any make-or-buy decision. -The component part can be purchased from outside suppliers at P73 per unit. In the decision to "make or buy,” what isthe total relevant unit ‘manufacturing cost? a, PBL PIB P63 J. P39 oe 27 "RBBB Company produces and sells @ product with the folowing nit costs: Prime costs Variable indirect manufacturing costs P10. 6 Fixed indirect manufacturing costs 4 Variable marketing costs 8 Fixed marketing costs 3 ‘Total unit cost a5y -The company is considering wheter to contrue producing Ie product ‘or simply buy ft from an outside supplier, ‘thas found a supplier which tan produce the product per the company’ Ir the company buys the product, variable marketing COs would be peed by 60%, but feced marketing costs would remain the same. cana maximum un pie thatthe company WOU be willing to pay the supplier without decreasing ts operating income? a. 20.80 c. PBL b. P19.20 d. P24 Chapter 12— Concepts an pts and Techniques for Decision Making 577 28. hae Produces a subassembly that is used to manufac on ft products. The mony requrement (he ly 1S 10,000 nts, presenty produced at P40 per unt, broken down as fle: Diet mater m0 version costs (20 Conversion cnt (20% ue) z 1 oper ts oft se 10,00 ts 20 ants per mont oft fife fan caoton te 3 pro ge Grain ape ee iy aren ite subassembly can be rented to another rin ouhper man ome Seo 1 te objective ito mprove the compen’ over profitably, 2. buy the subassembly because the purchase’ price of P36 & {ess tha Une fll production eostof P40 per unit . continue making’ the subassembly because the purchase price of P36 s greater than the variable cost of P34 per unt c. not buy the subassembly because the relevant cost to. make is greater than the net purchase cost. d. buy the subassembly because this decision would result in additional income of P50,000. [ITEMS 29 an 30 ARE BASED ON THE FOLLOWING INFORMATION: ‘Songer Sewing Machines uses one unit of a component part, the Foot Pedal, for each unit of ts product. The cost to produce a unis (of Foot Pedal is as follows: Direct materials P S00 Materials handling 50 Direct labor 950 Factory overhead 1,900 Total cost per unit Paa00 Materials handling cost is applied based on the cost of maverils ‘and purchased components.ART 2 MANAGEMENT ACCOUNTING 578 2. 30, onthe apled based on dec labor east. Shy percent Foawy re apie faccry oven cst fo Songer i (60) oto ousouce the Foot Pedal, supper, Padak Com. conse a of Foot Pedals, has offered to Supply the pat to Songer nice of P2,200. Songer’ average requirement for Foot Pedals month is 500 units. Accordingly, Padyak can meet this De ranent should Songer decide to outsource this component part ‘Assume that should Songer outsource the Foot Pedal, the faciities tused to produce this component part would just remain idle, Which alternative (outsource or insource) is more advantageous ‘and by how much? ‘a, Outsource, P30,000 Outsource, 600,000 b. Insource, P80,009 4, nsource, P350,000 ‘Assume that f the Foot Pedal is purchased, the facies used to produce it could be rented to another company for 100,000. Which altemative (outsource or insource) is more advantageous and how much isthe net advantage? a. Insource, P100,000 ‘Outsource, P20, 000 '. Insource, P70,000, 4. Outsource, P130,000 [ITEMS 31 and 32 ARE BASED ON THE FOLLOWING INFORMATION: a1. Case Corporation produces cellular phone cases. Each case requires a keypad which it also manufactures at a cost of P20 per Unk, incusive of fixed overhead cost of PS. Case Corporation needs 50,000 units of this keypad annually. & supplier, Keypad Corp, has offered to sell to Case Corp. ts keypad requirements at P24 per unt. If Case decides to buy the keypads, 2 per unit of the fbxed overhead based on the annual estimate could be eliminated, and the feciity previously used to produce the keypad could be rented to another company. If Case Corp. outsources the keypads but does not rent the unused facity, it would 2. save P4 per unit. close P4 per unit. ‘save P2 per unit. d. lose P7 per unit. Chonter 12 Concepts a4 Techniques or Deion Making Eh 32. If the Keypads were purchased and the faciity rented, how much must the annual rent on the fality be if Case Corporation wishes to realize annual savings of PB0,000? ‘a. P270,000 280,000, 'b. P430,000 . 380,000 Malubay Corporation operates its own canteen for its factory workers in its manufacturing plant. Almost always, the canteen’s ‘operation just breaks even, which is Justa ight for the company, since it iS not supposed to be an income-generating segment, ‘Annual costs of the canteen are as follows: Variable: Food 300,000 Labor 250,000 Overhead 450,000 Fixed overhead 100,000 ‘ighty thousand pesos (P80,000) of the fixed overhead is merely located to the canteen Segment fram the company's total overhead. The balance regresents the salary ofthe cantren supervisor. Recently, a caterer offered to operate the canteen for the company for a fee. The caterer will shoulder all the cost of food, labor, and variable overhead. In case the company decides to accept the offer of the caterer, the canteen supervsor, who is one of Malubay Corporation's pioneer employees, will be transferred to another segment of the firm. What is the maximum amount that Malubay Corporation will be willing to pay the caterer? ‘3. P700,000 <. P720,000 800,000 6. 780,000, Luisa Manufacturing Corporation wants to modity one of ts machines 50 & could be used to fabricate more types of component parts. ‘An engineering fim offered to do the job for Luisa Manufacturing Corporation at a flat fee of 250,000, inclusive of materials butpera MANAGEMENT ACCOUNTING 580 35, excushe of testing costs, Testing would be done BY Lal's engineers as part of thelr regular wu Corporation’ However, the chief engineer of Luisa Manufacturing " Tosisering Department said that his department 2? do te Jo it Freessineering staff would be allowed to work overtime SO 25 not to affect their regular workload. te estimated that a total of 200 overtime hours wil be required to BE the ob. Four engineering staff, whose regular Roury rate is a0, wil be asigned to do the modification. They wil be paid an Prertime premium of 20%. Materials to be used wil cost about 200,000. Testing, to be conducted by 1 engineering staf, wit equi 5 days at 8 hours per day. After the modification, the Teautine ig expected to consume more electrity, about, 20 Hlowatt-hours per day at 50 per Kiowatthour. It will be operated for 300 days per year- based on the yiven quontitative data, which of the following statements is comect? 2. If the outside engineering firm's offer is accepted, Luisa Manufacturing Corporation will lose P22, 200. b. The testing cast of P3,200 is relevant inthis case. C.The incremental cost of electricity after the modification of the machine Is relevant. 1d. If the outside engineering firm's offer is accepted, Luise Manufacturing Corporation will save P74,000. In joint-product costing analysis, which of the following costs is relevant when deciding the point at which a product should be sald to maximize profits? ‘a, Joint costs to the spit-ff point. . Separable costs incurred after the splt-off point. Common costs incurred prior to spit-off point. d. Materials. costs incurred during the Joint manufacturing process Chapter 12 ~ Concepts and Techniques for Deion Making 36. 37. 581 ‘A company’s manager wants to make a decision whether to sell Product A or process it further to produce Product 8. In this ‘decision-making analysis, the manager should consider only the relevant revenues and costs, which ae the ‘final sales value and total costs after processing Product A : id total processing b._ soles value of Product A and the cost to produce Product B. (c_increase in sales value if Product B is produced and the cost to process Product into Product B. 1d. gross profit from Product A and revenue from Product B. Processor, Inc. produces Preduct A in a joint’ manufacturing process. ‘Processor is studying whether to sell Product A at the splt-off point or process it further into Product AA. The following Information pertains to the two products: Seling price of Product A Seling pice of Product AA Joint production cost to produce Product A Variable manufacturing cost to produce Product AA Avoidable fed costto produce Product AA In a sell or process further decision analysis, which of the given Information should not be considered? a. 1,2,3,4,and5 c b. Sands d only 4,3, and 5 ‘A company produces two joint products (X and ¥) from one unit of raw materials, which costs P5,000. Conversion costs incurred in the joint manufacturing process amount to P10,000. “The two products can be sold at the spliff point or they can be processed further and sold at a higher price. The sales values of the two products are:ART 2- MANAGEMENT ACCOUNT 582 ‘Sales Value at the Sales Value after ‘Solit-off Point Further Processing Product X 1,000 yn Product Y ‘800 1 “The additional processing costs is P750 per unit for both Products Xand ¥, If the objective Is to maximize profit, which product should the company process beyond the spt-ff point? 2. Product X ony bi. Product ¥ only Both Products X and ¥ 4. Nether Product Xor Product Y [ITEMS 39 and 40 ARE BASED ON THE FOLLOWING INFORMATION: ‘Sunga Corporation produces three joint products, XY» and Z, form one hput, The products can be sold at the spliff point or processed further. The joint production costs for. the month, allocated among the products based on the relative physical volume of output, ae as follows: Materials 150,000 Labor 30,000 Factory overhead 20,000 Total joint costs 200.000 ‘Additional information about the three products are given in the following tabulation: i ie inUnis —ASplta! Processed Further Pressing Cut Product x 5,000 0 P00 pis Product ¥ 3,000, 5 60 20 Product 2 2,000, 0 75 10 39. If the company takes the most profitable action with respect to ‘each ofthe product, it should ‘a. sell all the products at the spl-of point. ._ process all the products beyond the spit-off point. ji haper 12 Concepls and Techniques for econ Maing 583 sell Product Y at the spliff point and process further Products X and 2, 4. sell products X and Z at splt-off point and process Product Y further. 40, How much is the total gross profit if the company took the most profitable action with respect to each of the three products? 2. 590,000 ‘c. P535,000 b. 430,000 d. P490,000 4. Kuo, Ic. produces soya beans extract that used by food processor, During the month, Kua produced 2000 kos ofthe tract at a ttl cos of P0000, ‘Te extrac sod fr P8 perk. ‘A customer, Tofu Corporation, approached Kulefu and said that it would buy’ all the extracts’ produced if the same would be processed further per is (Tofu) specifications. Kulafu estimates that furties processing Custs would bé P30,000. Which of the follwing ateratves is the mest advantageous for Kulatu’ ‘@. Kulafu should sel all the products to Tofu after processing further i the seling price per kilo after futher processing is greater than P9.50. '. Kulafu shouid sell all the products to Tofu after processing further ifthe selling price per kilo after futher processing is ‘greater than 8.00. Kulafu should sell al the products to Tofs after processing further if the seling price per kilo after futher processing is ‘greater than PS.00., 4. Kulafu should dectine Tofu offer. 42. Liezle Corporation produces Products A and B frem a joint process. ‘The total joint cost during the month was P80,000 allocated to the: jon products based on the physical volume of output. Other data ‘are 2s follows:584 43. 45, PART 2-MANAGEMENT ACCOUNTING Units Further Increase in Sales Value Produced Processing Costs f Processed Further Product X 4,000 units PS per unit P10 Y 5.000 7 per unit 6 10,000 units Which of the following statements is not correct? ‘a. Product X should be sold after processing further. . Product ¥ should be sold at the split-off point. c. The total cost of Product X after processing further is P13 per unit. d._If Product Y is sold at the split-off point, its cost per unit amounts to P15. Ina decision-making analysis involving a question on whether to continue or discontinue selling a product oF operating 2 business segment, 2. the avoidable revenues should be compared with the avoidable costs. “ i 1052 total enst is greater b. the product or business segment wih than Its revenue should be discontinued. call fixed costs are irrelevant. i . the product or business segment that has a positive contribution margin should not be discontinued, Which of the following is not relevant to a decision about whether to drop a segment or not? 4 ‘a. The available fixed costs direct to that segment. b. The contribution margin expected to be earned by the segment. = c.The complementary effects of aiscontinuing the segment G._ The indirect cost allocated to the segment. Iya Company plans to discontinue a department with the following ‘average monthly operating results: (Chapter 32 ~ Concent and Techniques fr Decson Maing 585 Soles Verb css et Contribution margin F 50,000 Fixed costs 80,000 Operating loss ‘B.30,000 Tf the department is discontin fp 1 he dpa ued, P35,000 of the fixed costs could What would be the effect of the discontinuance of the dey 1e department ‘on Disco Company's pretax profit? @, Decrease of P15,000. ¢.__ Increase of P5,000 ._ Increase of P1S,000, Decrease of P5,000 46. A company plans to discontinue 2_division with a P50,000 Contribution to overhead. Overhead allocated to the division is 80,000 of which P35,000 cannot be eliminated. The effect of this discontinuance on the campany/s income before tax is a/an ‘8. increase of P5,000. ‘eincrease of P30,000, bb. decrease of P5,000, 4d. decrease of P30,000 47. The Dry Goods Section of a supermarket shows sales of P400,000, variable costs of P300,000, and allocated unavoidable fied costs (of P180,000, leaving a loss of P80,000. Based on this information ‘and assuming that all other things will remain the same, ‘a, the Dry Goods Section should be closed. the Dry Goods Section contributes P400,000 to total profit. {discontinuing the operations of the Dry Goods Section will : reduce total company profit by P100,000. | dk the Dry Goods Section’s operations should be continued only ifthe peso-sales volume can be increased by P80,000. ITEMS 48 and 49 ARE BASED ON THE FOLLOWING INFORMATION: ‘The following data pertain to the three products being produced ‘and sold by Kenan Corporation in a typical month: