RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

Name: ____________________________ Score: _________

I. Write the letter of the best answer before the number. Erasures are not
allowed. (15 points)

1. The salaries you could be earning by working rather than attending

college are an example of
a. Outlay costs
b. Misplaced costs
c. Sunk costs
d. Opportunity costs

2. Sunk costs
a. Are substitutes for opportunity costs
b. Are relevant to long-term decisions but not to short-term
decisions
c. Are relevant to decision-making
d. In and of themselves are not relevant to decision-making

3. An opportunity cost is usually

a. Relevant, but is not part of traditional accounting records
b. Not relevant, but is part of traditional accounting records
c. Relevant, and is not part of traditional accounting records
d. Not relevant, and is not part of traditional accounting records

4. In the development of accounting data for decision-making purchases,

relevant costs are defined as
a. Future costs which will differ under each alternative
course of action
b. The change in prime costs under each alternative course of
action
c. Standard costs which are developed by time-and-motion study
techniques because of their relevance to managerial control
d. Historical costs which are the best available basis for
estimating future costs

5. In analysing whether to build another regional service office, the

salary of the Chief Executive Officer at the corporate headquarters is
a. Relevant because salaries are always relevant
b. Relevant because this will probably change if the regional
service office is built
c. Irrelevant because it is future cost that will not differ
between the alternatives under consideration
d. Irrelevant since another imputed cost for the same will be
considered

6. Among the costs relevant to a make-or-buy decision include variable

manufacturing costs as well as
a. Unavoidable costs
b. Real estate taxes
c. Plant depreciation
d. Avoidable fixed costs

7. The distinction between avoidable and unavoidable costs is similar to

the distinction between
a. Variable costs and fixed costs
b. Variable costs and mixed costs
c. Step-variable costs and fixed costs
d. Discretionary costs and committed costs

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

8. Assume a company produces three products: A, B and C. It can only

sell up to 3,000 units of each product. Production capacity is
unlimited. The company should produce the product/s that has/have
the highest
a. Contribution margin per hour of machine time
b. Gross margin per unit
c. Contribution margin per unit
d. Sales price per unit

9. A product should be dropped if

a. It has negative incremental profit
b. It has a negative contribution margin
c. Dropping it will increase the total profit of the company
d. It is not essential to the company’s product line

10.Pinoy Company temporarily has excess production capacity, the idle

plant facilities can be used to manufacture a low-margin item. The
low-margin item should be produced if it can be sold for more than its
a. Variable costs plus opportunity costs of idle facilities
b. Indirect costs plus any opportunity cost of idle facilities
c. Fixed costs
d. Variable costs

11.An item whose entire amount is usually a differential cost

a. Factory overhead
b. Direct cost
c. Conversion cost
d. Period cost

12.Consider the following statements:

I. Assemble all costs associated with each alternative being
considered.
II. Eliminate those costs that are sunk.
III. Eliminate those costs that differ between alternatives.

Which of the above statements does not represent a step in

identifying the relevant costs in a decision problem?
a. Only I
b. Only II
c. Only III
d. Only I and III

13.In a sell or process further decision, consider the following costs:

I. A variable production cost incurred prior to split-off
II. A variable production cost incurred after split-off
III. An avoidable fixed production cost incurred after split-off

Which of the above costs is (are) not relevant in a decision regarding

whether the product should processed further?
a. Only I
b. Only III
c. Only I and II
d. Only I and III

14.Allocated common fixed costs:

a. Can make a product line appear to be unprofitable
b. Are always incremental costs
c. Are always relevant in decisions involving dropping a product
line
d. All are correct.

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

15.Consider the following statements:

I. A division’s net operating income, after deducting both
traceable and allocated common corporate costs, is negative.
II. The division’s avoidable fixed costs exceed its contribution
margin.
III. The division’s traceable fixed costs plus its allocated common
corporate costs exceed its contribution margin.

Which of the above statements give an economic reason for

eliminating the division?
a. Only I
b. Only II
c. Only III
d. Only I and II

II. Write your final answer before the number. Erasures are not allowed.
Provide solutions in good form on the back of the next sheet. (20 points)

16.Kala Company prepared the following tentative forecast concerning

product A for 2017.
P500,00
Sales 0
Selling price per
unit P5.00
P300,00
Variable costs 0
P150,00
Fixed costs 0

Study made by the sales manager disclosed that the unit selling price
could be increased by 20%, with an expected volume decrease of only
10%. Assuming that Kala incorporates these changes in its 2017
forecast, what should be the operating income from product A?

17.Wiggle Company sells product A at a selling price of P21 per unit.

Wiggle’s cost per unit based on the full capacity of 200,000 units is as
follows:
Direct materials P4
Direct labor 5
Overhead (two-thirds of which is
fixed) 6
P1
5

A special order affecting to buy 20,000 units was received from a

foreign distributor. The only selling costs that would be incurred on
this order would be P3 per unit for shipping. Wiggle has sufficient
existing capacity to manufacture the additional units. In negotiating a
price for the special order, Wiggle should consider that the minimum
selling price per unit should be:

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

18.Plainfield Company manufactures part G for use in its production

cycle. The costs per unit for 10,000 units for part G are as follows:
Direct
materials P3
Direct labor 15
Variable
overhead 6
Fixed overhead 8
P3
2

Verona Company has offered to sell Plainfield 10,000 units of Part G

for P30 per unit. If Plainfield accepts Verona’s offer, the released
facilities could be used to save P45,000 in relevant costs in the
manufacture of part H. In addition P5 per unit of the fixed overhead
applied to part G would be totally eliminated. What alternative is
more desirable and by what amount is it more desirable?

19.Relic Corp. manufactures batons. Relic can manufacture 300,000

batons a year at a variable cost of P750,000 and a fixed cost of
P450,000. Based on Relic’s predictions, 240,000 batons will be sold at
the regular price of P5.00 each. In addition, a special order was
placed for 60,000 batons to be sold at a 40% discount off the regular
price. By what amount would income before taxes be increased or
decreased as a result of the special order?

20.Three companies are each manufacturing and selling annually 10,000

units of a similar product at a sales price of P20 per unit. The
companies have fixed and variable costs as follows:
Compan Fixed Variable cost per
y cost unit
R P40,000 P12
S 80,000 8
T 120,000 4

Each company contemplates a price decrease from P20 to P16 per

unit in the expectation that sales will increase from 10,000 to 15,000
units per year. The contribution margin for each company at the
present sales level is:

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

21.The operating income for each company at the contemplated price

and sales levels are:

22.The increase (decrease) in operating income for R Company resulting

from the price decrease and the sales volume increase is:

23.From the accounting records of Sta. Barbara Company, the following

data on costs for the quarter ended September 30, 2017 were
determined:
Variable Fixed
costs costs
Direct materials P300,000
Direct labor 400,000
Factory overhead 80,000 P50,000
Marketing expenses 70,000 30,000
Administrative
expenses 50,000 20,000

Sales for the quarter totalled P1,200,000.

The company is considering two alternative proposals that would

change certain cost items. Proposal A would increase fixed costs by
P10,000 with sales and variable costs remaining the same. Proposal B
would involve acquiring modern equipment at an annual increase of
fixed costs of P25,000, with the expectation of saving the same
amount in each of the direct materials and direct labor costs.

If proposal A is adopted, the company’s profit would be:

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

24.If proposal B is adopted, the company’s profit would be:

25.Scully Inc. has been manufacturing 5,000 units of Part 20561 which is
used in the manufacture of one of its products. At this level of
production, the cost per unit of manufacturing Part 20561 is as
follows:
Direct materials P2
Direct labor 8
Variable overhead 4
Fixed overhead
applied 6
P2
0

Mulder Company has offered to sell Scully 5,000 units of Part 20561
for P19 per unit. Scully has determined that it could use the facilities
presently used to manufacture Part 20561 to manufacture Product X
and generate an operating profit of P4,000. Scully has also
determined that two-thirds of the fixed overhead applied will continue
even if Part 20561 is purchased from Mulder. To determine whether to
accept Mulder’s offer, the net relevant manufacturing costs to Scully
are:

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

26.Dipper Company needs 20,000 of a certain part to use in its

production cycle. The following information is available:
Cost to Dipper to make the
part:
Direct materials P4
Direct labor 16
Variable overhead 18
Fixed overhead applied 10
P4
8
Cost to buy the part from P3
Orion Co. 6

If Dipper buys the part from Orion instead of making it, Dipper could
not use the released facilities in another manufacturing activity. 60%
of the fixed overhead applied will continue regardless of what
decision is made:

In deciding whether to make or buy the part, the total relevant costs
to make the part are:

27.The Blade Division of Dana Company produces hardened steel blades.

One third of the Blade Division’s output is sold to the Lawn Products
Division of Dana; the remainder is sold to outside customers. The
Blade Division’s estimated sales and standard cost data for the fiscal
year ending June 30, 2017, are as follows:
Lawn Outside
Products rs
Sales P15,000 P40,000
Variable (20,000
costs (10,000) )
Fixed costs (3,000) (6,000)
Gross
margin 2,000 P14,000
Unit sales 10,000 20,000

The Lawn Products Division has an opportunity to purchase 10,000

blades of identical quality from an outside supplier at a cost of P1.25
per unit on a continuing basis. Assume that the Blade Division cannot
sell any additional products to outside customers. Should Dana allow
its Lawn Products Division to purchase the blades from the outside
supplier? Show your supporting computation.

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

28.Sta. Helena Company manufactures men’s caps. The projected income

statement for the year before any special order is as follows:
Per
Amount Unit
P400,00
Sales 0 P20
Cost of goods
sold 320,000 16
Gross margin 80,000 4
Selling
expenses 30,000 3
Operating
income 50,000 1

Fixed costs included in above projected income statement are

P80,000 in cost of goods sold and P9,000 in selling expenses.

A special order offering to buy 2,000 caps for P17 each was made to
Sta. Helena. No additional selling expenses will be incurred if the
special order is accepted. Sta. Helena has the capacity to
manufacture 2,000 more caps. As a result of the special order, the
operating income would increase by:

29.Laney Appliance Company makes and sells electric fans. Each fan
regularly sells for P42. The following cost data per fan is based on a
full capacity of 150,000 fans produced each period.
P
Direct materials 8
Direct labor 9
Manufacturing overhead (70% variable and 30% 1
unavoidable fixed) 0

A special order has been received by Laney for a sale of 25,000 fans
to an overseas customer. The only selling costs that would be incurred
on this order would be P4 per fan for shipping. Laney is now selling
120,000 fans through regular channels each period. What should
Laney use as a minimum selling price per fan in negotiating a price
for this special order?

30.Zach Company produces and sells 8,000 units of Product X each year.
Each unit of Product X sells for P10 and has a contribution margin of
P6. It is estimated that if Product X is discontinued, P50,000 of the

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

P60,000 in fixed costs charged to product X could be eliminated.

These data indicate that if Product X is discontinued, overall company
operating income should:

31.The Siller Company has two divisions – East and West. The divisions
have the following revenues and expenses:
East West
P720,00 P350,00
Sales 0 0
Variable costs 370,000 240,000
Traceable fixed costs 130,000 80,000
Allocated common corporate
costs 120,000 50,000
Operating income (loss) 100,000 (20,000)
The management at Siller is pondering the elimination of the West
division since it has shown an operating loss for the past several
years. If the West division were eliminated, its traceable fixed costs
could be avoided. The total common corporate costs would be
unaffected by this decision. Given these data, the elimination of the
West Division would result in an overall company operating income of:

32.Mott Company manufactures 10,000 units of Part EM each year for

use in its production. The following total costs were reported last
year:
Direct materials P20,000
Direct labor 55,000
Variable overhead 45,000
Fixed overhead
applied 70,000
P190,00
0

Volvo Company has offered to sell Mott 10,000 units of Part EM for
P18 per unit. If Mott accepts the offer, some of the facilities presently
used to manufacture Part EM could be rented to a third party at an
annual rental of P15,000. Additionally, P4 per unit of the fixed
overhead applied to Part EM would be totally eliminated. Should Mott
accept Volvo’s offer? Show your computation.

33.Hollie Company produces three products, with costs and selling

prices as shown below:
Products
A B C

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RQ1 (Relevant Costing) MANAGERIAL ACCOUNTING 2

P3 100 P2 100 P1 100

Selling price per unit 0 % 0 % 5 %
Variable costs per unit 18 60 15 75 6 40
Contribution margin per
unit 12 40% P5 25% P9 60%

A particular machine is a bottleneck. On that machine, 3 machine

hours are required to produce each unit of Product A, 1 hour is
required to produce each unit of Product B, and 2 hours are required
to produce each unit of Product C. In what order should the products
be produced? Show your computation.

34.Kristin Company manufactures a fast-bonding glue in its Laguna

plant. The company normally produces and sells 40,000 gallons of the
glue each month. This glue, which is known as KK8, is used in the
wood industry to manufacture plywood. The selling price of KK8 is
P35 per gallon, variable costs are P21 per gallon, fixed manufacturing
overhead costs in the plant total 230,000 per month, and the fixed
selling costs total P310,000 per month.

Strikes in the mills that purchase the bulk of the KK8 glue have
caused Kristin Company’s sales to temporarily drop to 11,000 gallons
per month. Kristin Company’s management estimates that strikes will
last for two months, after which sales of KK8 should return to normal.
Due to the current low level of sales, Kristin Company’s management
is thinking about closing down the Laguna plant during the strike.

If Kristin Company does close down the Laguna plant, fixed

manufacturing overhead costs can be reduced by P60,000 per month
and fixed selling costs can be reduced by 10%. Start up costs at the
end of the shutdown period would total 14,000.

Assuming that the strikes continue for two months, would you
recommend that Kristin Company close the Laguna plant? Show
computations to show your answer. No, continue because of
difference of 140,000.

35.At what level of sales (in gallons) for the two-month period should
Kristin Company be indifferent between closing the plant or keeping it
open? Show computations. 12,000 units

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