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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
Avas 82-01/
MANAGEMENT ADVISORY SERVICES , Not LIM I "t- D TO cpfts but nof oin y bu dy -Sh ou I cl be
------ co ct I i 'CI' ed by...
MANAGEMENT ADVISORY SERVICES - refers to that( ofe,veAts.
accQunting
i: tife 1 g9sk
work concerned with
•. • use
( providing advice and technical assistance to help clients improve e of their resources to
° achieve their goals. - onro 044 n e; app ii0cAtipti ritliiCC - G me - rok4tin e - iot trnal lc ex+eril a i 4 carct
Of knotniltdv III Ciu1/2 fWx11- - G A 4S
MANAGEMENT CONSULTANT -- a per _:gm who is qualified by education, experience, technical
ability, and /temperament to advise or assist businessmen on a professional basis in
identifying, definirib, and solving specific management problems involving the organization,
planning, direction, control, and operation of the firm. . adviser
x CPA. Licensed, mots 4e{s, doctorate c ts mniemeleSePt
iNV AX1), ‘epp7 4-h e„peol
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CHARACTERISTICS OF MAS `1,; cInd

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. 1. Services are rendered for the managemept rather than for third parties. - INTERNAL us ER6
2. Involves problem. solving. b VprObiem -0 titymptorig --t, roof cChtge!--b ((AVG
-

3. Relates to the future.

4. Broad in scope.
5. Involves varied assignments purl-
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6. Engagements are usually non-recurring. r non roafinv - IN < •

\ oats 1 Ly computed
7. Engagements require highly—qualified staff. ) di 0
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8. Human relations
......_ ....___ _ play a vital role
......--..... ineacrengagement.
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L.\ COSTS AND COST CONCEPTS poultry + "Mintn 9 )

Cost — a measurement, in monetary terms, of the amount of resources used for some purpose.
When notified by a term that defines the purpose, cost becomes operational, e.g., selling
cost, acquisition cost, variable cost, etc.

Cost Pool — an account in which a variety of similar costs are accumulated prior to allocation to
cost objects. It is a group of costs associated with an activity. Example; overhead account.

Cost object — the intermediate and final disposition of cost pools. obSorto Ws F.
Example.. product, job, process

Cost driver — a factor that causes a changz in the cost pool for a particular activity. It is used as a
or vot Low basis for cost allocation; any fa or or activity that has a direct cause-effect relationship
or a clivt ty
Eevti unit rreCISWO
Activity — any event, action, transaction, or work sequence that incurs costs when producing a
product or providing a service.

COST BEHAVIOR
COST BEHAVIOR — describes how a cost behaves or changes as the amount of cost driver changes.

TYPES OF COSTS AS TO BEHAVIOR:

1. FIXED COST — in total: constant within the relevant range as activity output changes; per unit:
changes as activity level changes

2. VARIABLE COST -- in total: varies in direct proportion to changes in activity output; per unit:
remains constant

3. MIXED COST — has both fixed and variable components.

 MAS 8201 COST CONCEPTS AND ANALYSIS Page 2 of 6

COST BEHAVIOR ASSUMPTIONS:

1. Relevant Range Assumption
Relevant range refers to the band of activity within which the identified cost behavior
patterns are valid. Any level of activity outside this range may have a different cost
behavior pattern.

2. Time Period Assumption

The cost behavior patterns identified are true only over a specified period of • time.
Beyond this, the cost may show a different behavior.
fp. Sol i eAt % - 0 %c 1 101°
C . ,, eir 0, SEGREGATION OF FIXED AND VARIABLE ELEMENTS OF MIXED COSTS: ---, 'P 11.(qh4otAdi
I
'kV ,,I,
-foist- drive/
=et ( i.1 41' s) 0-- 1. High-Low Points Method — the fixed and variable elements of the mixed costs are 0" - aids I
Q) VU E 1“ ARE y m pli tie computed from two data points (periodsj-zthe high and low periods as to '
■
Excupet tl. , 4 vs avity
yvAAN041/ activity
level or cost driver. -,. Cinsmir (lopt /t/t1) ' no4 clawatt ; omo(c muf-kod-
O's (4,
- aloe- atom-mkt -1) try) (mkt 001 otv#A-09Cn6 ill-eh-hod ° -- 4... /moty;l4cc -* no+. cAftur owkrt4 tj
` 9 2. Statistical Scatty/graph Method- various costs (the dependent variable) are plotted wAii 4/ r:i'Av6
ckivig,C
o3s'' 4
A orowa on a vertical line (y-axis) and measurement figures (cost drivers or activity ,, II nit of
--10'
, c(` c;) Y ' - - - - 7 (.0 e _ Ag levels) are plotted on a horizontal line (x-axis). A straight line is drawn best fa': Klfras
\ ' .4.4 . , .6..---
u‘i\i.ltP 1 1- Ax : (6 b x through the points and, using this line, the rate of variability and the fixed
0 i • V) 1 911 1 y nu&th t m cA ft' cal 1'16 cA p p Yv c‘tdo , >cm. "
!_c2_: cost are computed. I A, ' ckli poivos ( 0 Hoe 9-ouy otat int. Iv, anal 944S
' - A— wWctrw ' el /-9 Ifnuct-- CfCCUatfr 3' ,
3. Method of Least Squares (Regression Analysis) — mathematically determines a line
&A-(AQ.t& i of best fit or a linear regression line through a set of plotted points so that
oft octua, the sum of the squared deviations of each actual plotted point from the point
c ak,i?ffiY,V.- directly above or below it on the regression line is at minimum.
This method uses the following equations in computing for the values of unit
variable cost and fixed cost: f-e,i so 4 ifrots n
-

_____ _ __E_q_._u_afio_ n 4:: _a

_ .;na_ _F.. bal..
_y
c,)
Equation 2: I.xy = aIx + b2x2 --4' -/tY)eme)ii Etl: a 4 " ))

COST FORMULA: y = a + bx

Where: "y" denotes total cost. It is called the dependent variable because it is dependent on
the value of another variable, the activity level x.
"a"is an estirhate of the fixed cost
"b"is an estimate of the variable cost per unit of activity.

EXERCISES:
1. Woodworks, Inc. manufactures furniture, including chairs. Selected costs are given below.
Identify the costs as product cost, period cost, or some other appropriate classification. -
Also, for product and period costs, indicate whether the cost is variable (V) or fixed (F) with
rcspect to behavior.
pg- V-Pa. The chairs are made of wood that costs P1,000 per chair.
PR - V- L b. The chairs are assembled by workers, at a wage cost of P400 per chair.
PR- F-Ot. Workers assembling the chairs are supervised by a factory supervisor who is paid P20,000
per month
d. Electrical costs are P4 per machine-hour. Six machine-hours are required to produce a
-4:44 chair. 4114%-ci
F e. The depreciation on the machines used to make the chairs totals P2,000 per month. The
- machines have no resale value and do not wear out through use, posvimpf.on:
PE - The salary of the president of the company is P50,000 per month.
PE F-Asg. The company spends P100,000 per year to advertise its products.
-

Pt -çh Salespersons are paid a commission of P100 for each chair sold.
Opp i. Instead of producing the chairs, the company coula rent its factory space for P30,000 per
month.
 MAS 8201 COST CONCEPTS AND ANALYSIS ' Page 3 of 6

2. A company, doing business in the city of Manila, reports the following total costs at two
levels of production:
Cost item
........_, _....,______
2 00 0 wits
___________... __,___________
5 000 units
......_...........
r Rent P20,000 P20,000
V Direct materials 24,000 60,000
V Direct labor 16,000 40,000
N' Indirect materials 6,000 20,000
p Indirect labor ' 10,000 10,000
0 Insurance • 25,000 25,000
M Maintenance 5,200 14,000
V Depreciation 8,000 8,000
M Power 8,000 23,000

REQUIRED: Classify each cost as variable, fixed, or mixed.

3. Silent Muffler, Inc,. operates an automobile service facility that specializes in replacing
mufflers on cars. The following
, table shows the costs incurred during a month when 450
mufflers were replaced.

Number of Muffler replacements 300 450 550

Total costs:
Fixed costs 1Yx) a • P15,300 1 6 ‘30° c
Variable costs 6,0th 9,000 11,006 d
Total costs 21,10b e P24 300 tuig.° f

Cost per muffler replacement:

di ek.
Fixed cost si g 3if h Le - 1
Variable cost ao i 10 k eib I
Total cost per muffler replacemert 11.10,.. 5Ln 11782

Required:
, a. Fill in the missing amounts, labeled ( a) through ( o), in the table.
b. Compute income, assuming that the service fee per muffler replacement is P60, and
that the company made 500 muffler replacements during the period. 4.700

4. Managers in the Stamping Department have been studying overhead cost and the
relationship with machine hours, Data from the most recent 12 months follow. A \\.
- s', ic 011.5." 6 : . (Q- )( 14 coo driqer s■nott`\(60A - a
ck'ClA iS\-t (/ eta\ 9 ‘0.
, o`os Month Overfwci Machine Hours Ai si oktfq *.
January P5,030 2,730 i :-. vari obi ottpendent*1 g
c),akcy mita endepen a (0 x,

February, 1,600 600

alit dcifct7 populai,2-i1 oil March 7 0 4, ,
stitect.ed 4. Sam Wog '.
3 403
-/ stern to 0, qcost drivt(
tepits data .1: s (Am pit fcthoc(1. 0 es April . 4,560 2,200 . e, - liAc
ludymazt t___ be r
4 good reps : result- fs For voiaeMay 6,380 3,411 spwious exa ck\a ,0 o v
. June 6,520 2,586 ......._-.:- f_,
va ri ableic (3, tp0 k Y
July 6,230 3,3 64
August 5,570 2,411 ftt. b a "Irt k"'
uoi yudi de,,,I ct
September : ,728 3,960 _
' Octobei' 5,810 2,847 , corrticktioo - .1-0 de,i-- +h-e s-ireo th
Novemy....r 4,530 2,207 anal/51's of the Got° re(
Decemeer 5,1r 0 2,864 c vg ti cA bies"l'In '0}-ty ovo
0vD
80(Th A. ) 4-yii
,--Iy '
relctt
The manager of the deoartment has requested ,a rggression analysis of these two variabl- v irtip h i. ca f
(labeled no 1. below). However, the staff person performing the analysis decided to run C4 ppro (207
0 ra _ 7, 6 i ll another regression that Ei4cluded February .(abeied no. 2). She observed that the volume o "
cosi. 0 pi0,406, *1)1°4 Mrre
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21'.24
411 Xr
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,„c 04-heir to fht if o z no c.04ei.fccdf-
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n . n 0 rnort daily : ow C(il '419 It . ow 4Vilinta , qtrIper Acit t fw ',5forgt+- tine, Lo vs6 owoi
O 10
t SAivr
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cAm diteut o fi ,
ult

MAS 8201 COST CONCEPTS AND ANALYSIS Page 4 of 6

activity was very low for that month because of two factors: a severe flu outbreak and an
electrical fire that disrupted operations for about 10 working days.
vlokakta t
Regression No 1 -,\)1/4' ctme, €/,' Regression No. 2 dEITER,
428.00 -P C
?)

‘r\
Constant ou Constant 550.00
R2 0.79 -y R2 0.74
b coefficient • 1.86 - \of, kitVj b coefficient L90

REQUIRED:
A. Prepare an overhead cost breakdown by using the high-low method. The analysis
should be useful in helping to predict variable and fixed costs under normal
____t1g_COi
Opera ___IS______
iitiOnS. fAtitir Pta-Tf
t.F/hr _V)0 . .
B. Prepare an estimate of overhead cost for a volume of 3,00u machine hours by using
regression no 1. 6.00 (1
C. You now have the ability to analyze three cost estimates from the high-low data in
part (a) and the two regression equations. Which one do you feel would provide the
best estimate? Explain the fact.rs that supiort your choice. Note: Do not calculate
an overhead cost estimate A - a - a ession no 2. omaniex

5. Something New is a small one person company that provides elaborate and imaginative
-

wedding cakes to order for very large wedding receptions. The owner of the company would
like to understand the cost structure of the company and has compiled the following records
of activity and costs incurred. The owner believes that the number of weddings catered is
the best measure of activity. n 1- tf cAnt ) , G ( DE 0 0 - er, I

2.
Month Weciaing5:4% Costs Incurred -4,9 x -V Y
January 3 P3,800 11,400
_ February 2 P3,600 7,02,00
March :6 P4,000 .
April 9 P4,300
May 12 P4,500
June 20 P5,200 _______ ------
234,30d &74,00e
REQUIRED: 11.19 34122
a. Using the high-low method, estimate the variable cost per wedding and the total fixed
cost per month. (Round off the variable cost per wedding to the nearest centavo and
the total fixed cost to the nearest peso.)
' 15.22
b. Using the least squares regression method, estimate the variable cost per wedding
and the tota;fixgd cost per month. (Round of the vadat) ' cost per wedding to the
nearest cent5,l,! and the total fixed cost to the nearest p o.)
6. The Candida Company has provided the following information
Units of Output M000 Units 42 000 Units

Direct materials P 180,000 P 252,000

Workers' wages 1,080,000 1,512,000
Supervisors' salaries 312,000 312,000
Equipment depreciation 151,200 151,200
Maintenance 81,600 110,400
Utilities 184 000 528,21Q
Total P2.j.,...8,1000 E2A61.622

Using the high m method and the information provided above,

-,
..,0
, a. identify the linear cost function equation and (4 z ilq‘,8 "t 54.14x
b„ estimate the total cast at 36,000 units of outpdt. 2 iS 21, 20 0
 -
cocic -, mil - rvNixvfr
ivv2,vriln - Val'

MAS 8201 COST CONCEPTS AND ANALYSIS Page 5 of 6

7. Layug Company is a distributor that has an exclusive franchise to sell a particular product
made by another company. Layug Company's income statements for the last two years are
given below:
This Year Last Year
Units sold aQ1),,QQ__
O MUDD
Sales revenue P1,000,000 P800,000
Less cost of goods sold _Man 560,2QQ.
Gross margin P 300,000 P240,000
Less operating expenses ">10 000 198,000
Net operating income p_Mate.. ._
P ALM

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

REQUIRED:
a. Estimate the company's variable 4Rerating extrf*per unit and its total fixed operating
expenses per year. molt
b. Compute the company's contributior margin for this year 240k
C . Compute operating income if sales is 1 40,000 units. itt(

8. Charger Corporation has three costs: A, which Is variable; B, which is fixed; and C, which is
semivariable, The company uses the high-low method and extracted the following data from
its accounting records: • vuo.c eitoe?
A t 1030,000 F
• At 180,000 hours of activil.), „ Cost A totaled P2,610,000. Ristit•c ro , cs< v 1.4414704"
„,,d
O At 140,000 hours, the low point during the period, Cost C totaled 114%7. 9000; at -"----
200,000 hours, the Mgh point:, Cost Cs fixed portion amounted to P1,75'per' our.
$, At 160,000 hours of activity, the trirn of Costs A, B, and C amounted to P8,162,000.
• 1,320004J 14 I, 462,006
REQUIRED: S4IA 0 Q mtic000
, A. Compute the variable portion (totat) of CasLC at 140,000 hours of activity. gra 10-e- 00
B* Compute Cost C (total) at 160,000 hours of activity* i.tiOtOoo
C. Compute Cost B (total) at 160,000 hours of activity. luso, Ood

9, Danichays Storage ran its freezer in January, a slow month, for 450 hours for a total cost of
P727 000 In lily, a peak month, the freezer ran for 800 hours at a cost of P90 per hour.

REQUIRED:
What is the estimated total cost at an operating level of 600 hours? 72,000

10. The Mix' Company uses the high-:ow method to estimate the cost function. The
information for 201.7 is provided below;
Machine-hours Labor Costs
Highest observation of cost driver 700 P14,000
Lowest observation of cost driver 200 4,000

What !s the toted cost for 500 hours? 10,006

11. Velman Company wants to determine the factors that are associated with overhead. The
controller for Veirrian constructed a rnuitipie regression equation using the following
independent variab!es: direct labor hours, number of setups, and number of purchase orders.
The analysis was run using the past ',Pi months of ea a. rom the prin ou e 0 owing ea a
1 were obtained: 100
MAS 8201 COST CONCEPTS AND ANALYSIS Page 6 of 6

Parameter Estimate
Intercept - F P10,000
Rates of variability:
Direct labor hours (H) P5
Number of setups (S) P600 •
Number of purchase orders (P) P10
Number of observations (n) 100

r2 = 0.95

REQUIRED:
1. Write out the cost formula for monthly overhead for Velman Company. yr. i0,000 I 6'00S flOPOOP

2. If Velman budgets the following for next month, what is the budgeted overhead cost?Agoggi
Direct labor hours 300 .0
Number of setups 20
Number of purchase orders 120

3. Suppose that Veiman's engineers expect the number of setups to increase by 20

percent. How much additional overhead cost would be incurred for the following
month? t,400

12. The chief statistician of Lerny Company has developed the following cost formula:

= P150,000+ +
(pave. vve
Where Y = total monthly manufacturing overhead cost
= labor our
irtaChirif.-'. -hours 4 - - i sn tityl 2/ort inct. \icor tirr/

The measure cfAcgac

5A-01frivrgr6L01 '

fit is gSod and no evides

o good
r r h gity corr clotted vv/ eoloh ofher
olinear . The
company will use 15 000 labor hours and 4,000 machine hours next month.

REQUIRED:
1. Determine the total manufacturing overhead costs that Aloha should incur next
month. aig, 000
2. goha makes a product that has P12.00 in niaterfals costs. It requires two hours of
iabor time and 30 minutes of machine time. Laborers earn P15 per hour. What is
the product's per unit variable manufacturing cost? 50.5
3. Suppose that goha could reduce the labor time for the product described in
requirement 2 by 30 minutes, to 1.50 hours. Machine time will remain the same.
By how much woLki the per unit variable manufacturing cost fall? q

- end —