Republic of the Philippines

Tarlac State University

College of Business and Accountancy
CVP Analysis and Variable Costing
Quiz 2

Name:_________________________ Date:_____________
Section:_______________________ Score:____________

I. General Instruction: Write letter of your answer on the space provided. No erasures or any superimposition on
your final answers.

1. Cost-volume-profit analysis assumes that over the relevant range

A. Variable costs are nonlinear.
B. Selling prices are unchanged.
C. Fixed costs are nonlinear.
D. Total costs are unchanged.

2. The amount of variable cost per unit and total fixed cost within a relevant range behave this way in relation to production
level:
A. Production increases, unit variable cost increases, total fixed cost increases.
B. Production decreases, unit variable cost decreases, total fixed cost decreases.
C. Production increases, unit variable cost remains constant, total fixed cost remains the same.
D. Production increases, unit variable cost decreases, total fixed cost remains the same.

3. One of the major assumptions limiting to reliability of break-even analysis is that

A. The cost of productivity will continually increase.
B. The cost of production factors varies with changes in technology.
C. Total variable cost will remain unchanged over the relevant range.
D. Total fixed cost will remain unchanged over the relevant range.

4. Cost-volume-profit analysis is a key factor in many decisions, including choice of product lines, pricing of products,
marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the
breakeven point has been reached, operating income will increase by the
A. Gross margin per unit for each additional unit sold.
B. Contribution margin per unit for each additional unit sold.
C. Variable cost per unit for each additional unit sold.
D. Sales price unit for each additional unit sold.

5. A company’s breakeven point (BEP) in pesos of revenue may be affected by equal percentage increase in both selling
price and variable cost per unit (assume all other factors are constant within the relevant range). The equal percentage
changes in selling price and variable cost per unit will cause the breakeven point in pesos to
A. Decrease by less than the percentage increase in selling price.
B. Decrease by more than the percentage increase in the selling price.
C. Increase by the percentage change in variable cost per unit.
D. Remain unchanged.

6. When an organization is operating above the breakeven point, the degree or amount that revenues may decline before
losses are incurred is the
A. Residual income rate. C. Margin of safety.
B. Marginal rate of return. D. Target (hurdle) rate of return

7. Cost-volume-profit relationships that are curvilinear may be analyzed linearly by considering only
A. Fixed and semi-variable costs. C. Relevant variable costs.
B. Relevant fixed costs. D. A relevant range of volume

8. Total unit costs are

A. Relevant for cost-volume-profit analysis.
B. Independent of the cost system used to generate them.
C. Irrelevant in marginal analysis.
D. Needed for determining product contribution.
9. Given the following notations, what is the breakeven sales level in units?
SP = selling price per unit
FC = total fixed costs
VC = variable cost per unit
A. SP  (FC VC). C. VC (SP – FC).
B. FC  1 – (VC  SP). D. FC  (SP – VC).

10. Contribution margin is the excess of revenues over

A. Direct cost. C. Cost of good sold.
B. Manufacturing cost. D. All variable costs

11. Under the direct costing, which is classified as product costs?

A. Only variable production costs.
B. Only direct costs.
C. All variable costs.
D. All variable and fixed production costs

12. In an income statement prepared as internal report using the variable costing method, variable selling and
administrative expense would
A. Not be used.
B. Be used in the computation of the contribution margin.
C. Be used in the computation of operating income but not in the computation of the contribution margin.
D. Be treated the same as fixed selling and administrative expenses.

13. A type of managerial accounting which refers to the determination of he operating cost regardless of cost behavior,
whether variable or non-variable, is
A. Differential accounting. C. Responsibility accounting.
B. Full cost accounting. D. Profitability accounting.

14. In absorption costing, as contrasted with direct costing, the following are absorbed into inventory.
A. All the elements of fixed and variable manufacturing overhead.
B. Only the fixed manufacturing overhead.
C. Only the variable manufacturing overhead.
D. Neither fixed nor variable manufacturing overhead.

15. If production is greater than sales (units), then absorption costing net income will generally be
A. Greater than direct costing net income.
B. Less than direct costing net income.
C. Equal to direct costing net income.
D. Additional data is needed to be able to answer

16. Which of the following statements is correct?

A. When production is higher than sales, absorption costing net income is lower than variable costing net income.
B. If all the products manufactured during the period are sold in that period, variable costing net income is equal to
absorption costing net income.
C. When production is lower than sales, variable costing net income is lower than absorption costing net income.
D. When production and sales level are equal, variable costing net income is lower than absorption costing net
income.

17. Operating income using direct costing as compared to absorption costing would be higher
A. When the quantity of beginning inventory equals the quantity of ending inventory.
B. When the quantity of beginning inventory is more than the quantity of ending inventory.
C. When the quantity of beginning inventory is less than the quantity of ending inventory.
D. Under no circumstances

18. Other things being equal, income computed by the direct costing method will exceed that computed by an absorption
costing method if
A. Fixed manufacturing cost increases.
B. Units sold exceed units produced.
C. Variable manufacturing costs increase.
D. Units produced exceed units sold.
19. Identify the following statements as true or false.
Statement 1. In a variable costing system, fixed overhead costs are included as
cost of inventory.
Statement 2. Under the direct costing method, the contribution margin discloses
the excess of revenues over fixed costs.
A. Statement 1 is true, Statement 2 is true.
B. Statement 1 is true, Statement 2 is false.
C. Statement 1 is false, Statement 2 is true.
D. Statement 1 is false, Statement 2 is false.

20. The absorption costing method includes in inventory

Fixed factory Variable factory
overhead overhead .
A. No No
B. No Yes
C. Yes Yes
D. Yes No

II. Problems

1. Kent Co.'s operating percentages were as follows:

Revenues 100%
Cost of good sold
Variable 50%
Fixed 10 60
Gross profit 40%
Other operating expenses
Variable 20
Fixed 15 35
Operating income 5%
Kent’s sales totaled P2 million. At what revenue level would Kent break even?

2. Lina Company produced 100,000 units of Product Zee during the month of June. Costs incurred during June were as
follows:
Direct materials P 100,000
Direct labor 80,000
Variable manufacturing overhead 40,000
Fixed manufacturing overhead 50,000
Variable selling and general expenses 12,000
Fixed selling and general expenses 46,000
Total P 327,000

Required:

a. The cost per unit under absorption costing

b. The cost per unit under variable costing

3. The following operating data are available from the records of Sheena Company for the month of January 2005:
Sales (P 70 per unit) P 210,000
Direct materials 59,200
Direct labor 48,000
Manufacturing overhead:
Fixed 36,080
Variable 24,000
Marketing and general expenses:
Fixed 11,000
Variable 5% of sales
Production in units - 3,280 units
Beginning inventory- none

Required:
a. The ending finished goods inventory under absorption costing method
b. The net income for the month under the variable costing method
4. Bulacan Gold, Inc. manufactures and sells key rings embossed with college names and slogans. Last year, the key rings
sold for P75 each, and the variable costs to manufacture them were P22.50 per unit. The company needed to sell 20,000
key rings to break-even. The net income last year was P50,400. The company expects the following for the coming year:
 The selling price of the key rings will be P90.
 Variable manufacturing costs per unit will increase by one-third.
 Fixed cost will increase by 10%.
 The income tax rate will remain unchanged.

For the company to break-even the coming year, what amount of units the company must sell?

5. Lan Pala Tropical Stuff Toys manufactures and sells dolls. The following information relates to the operating results for
the last quarter:
Stuff toys sold 19,375
Breakeven point in number of toys 15,500
Breakeven point in peso sales P65,875
Total fixed costs P47,275

Required:
a. Lan’s variable cost per doll
b. Margin of safety percentage for the last quarter of Lan

6. An organization sells a single product for P40 per unit that it purchased for P20. The salespeople receive a salary plus a
commission of 5% of sales. Last year the organization’s net income (after taxes) was P100,800. The organization is
subject to an income tax rate of 30%. The fixed costs of the organization are
Advertising P 124,000
Rent 60,000
Salaries 180,000
Other fixed costs 32,000
Total P396,000
Required:
a. The breakeven point in unit sales for the organization is
b. The organization is considering changing the compensation plan for sales personnel. If the organization increases
the commission to 10% of revenues and reduces salaries by P80,000, what revenues must the organization have to
earn to have the same net income as last year?

7. Mary Manufacturing Company manufactures two products (X and Y). The overhead costs of P29,000 have been
divided into three cost pools that use the following activity drivers:
Product No. of Orders No. of Labor Transactions No. of Labor Hours
X 30 100 1,000
Y 20 300 4,000
Cost per pool P5,000 P4,000 P20,000
Using traditional costing, what is the amount of overhead cost to be assigned to Product Y using labor hours as the
allocation base?

8. Gilmore Company produces two products in a single factory. The following production and cost information has been
determined:
Model 1 Model 2
Units produced 1,000 200
Material moves (total) 100 40
Testing time (total) 250 125
Direct labor hours per unit 1 5
The controller has determined total overhead to be P480,000. P140,000 relates to material moves; P150,000 relates to
testing; the remainder is related to labor time.

Required:
a. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 2?
b. If Gilmore uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model
2?
 ANSWER KEY
1. C
2. C
3. D
4. B
5. D
6. C
7. D
8. C
9. B
10. D
11. A
12. B
13. B
14. A
15. A
16. B
17. C
18. B
19. D
20. C

PROBLEMS
1. 1,666,666.67
2. 2.7
3. 2.2
4. 14,280
5. 32,420
6. 19,250
7. 1.20
8. 20%
9. 22,000
10. 1150,000
11. 23200
12. 1200
13. 925