CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES ACTIVITY COST AND CVP ANALYSIS THEORY
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Which Which of the follow following ing statem statement entss is false? false? A. At zero producti production on level, level, variable variable costs are are usually usually zero. B. At zero producti production on level, level, total costs costs equal equal total fied fied costs. costs. !. At zero zero production production level, level, fied fied costs costs are posit positive. ive. ". At zero zero production production level, level, fied fied costs costs is also zero. zero.
#. $ariable riable cost costss are are all all costs costs A. %hat are associated associated with mar&eting, shipping, warehousing, and billing billing activities. B. %h %hat at do not not chan change ge in tota totall for for a give given n peri period od and and rele releva vant nt rang rangee but but beco becom me progressively smaller on a per unit basis as volume increases. !. 'f manufacturing incurred to produce units of output. ". %hat fluctuate in total in response to small changes in the rate of utilization utilization of capacity. (. )%*, )%*, +nc.s +nc.s net sales sales in 1-- were were 1/0 below below the 1--/ level level.. )%*s )%*s semi semiva varia riable ble costs costs would A. +ncrease +ncrease in total total and increase increase as a percentag percentagee of net sales. sales. B. "ecrease "ecrease in total total and and decrease decrease as a percent percentage age of net net sales. sales. !. +ncrease +ncrease in total, total, but decrease decrease as a percentag percentagee of net sales. sales. ". "ecrease "ecrease in total, total, but increas increasee as a percentage percentage of net sales. sales. 2. 34%s 34%s aver average age cost cost per unit unit is the same same at all levels levels of volume. volume. Which Which of the foll followi owing ng is true? A. 34% must must have have only only variabl variablee costs. costs. B. 34% must must have have only only fied fied costs costs.. !. 34% must must have have some fied fied costs costs and and some variab variable le costs. costs. ". 34%s 34%s cost structur structuree cannot be determined determined from this informat information. ion. /. Which of the followi following ng decisionma&i decisionma&ing ng tools would would )'% be useful useful in determinin determining g the slope and intercept of a mied cost? A. linear programming !. highlow method B. leastsquares method ". scatter diagrams . A cost cost that bears bears an observable observable and &nown relation relationship ship to a quantifiabl quantifiablee activity activity base is a5n6 A. 7ngineered cost. B. +ndirect cost. !. %arget cost. ". 8ied cost. 9. !osts that that increase increase as the the volume volume of activity activity decreases decreases within within the the relevant relevant range are are A. Average costs per unit. !. %otal fied costs. B. Average va variable co costs pe per un unit. ". %otal va variable co costs. :. When productio production n levels are are epected epected to increase increase within within a relevant relevant range range and a fleible fleible budget budget is used. What effect would be anticipated with respect to each of the following costs? A. B. !. ". 8ied !osts per ;nit +ncrease +ncrease "ecrease "ecrease $ariable !osts per ;nit +ncrease )o change "ecrease )o change -. Wea&ness Wea&nesses es of the highlow highlow method method include include all of of the following following ecept ecept A. only two observat observations ions are used used to develop develop the cost cost function. function. B. the high and and low activity activity levels levels may may not be representa representative. tive. !. the method method does not detect detect if if the cost behavio behaviorr is nonlinear nonlinear.. ". the mathemati mathematical cal calculatio calculations ns are relative relatively ly comple. comple.
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1=. %he scatter diagram method of cost estimation A. is influenced by etreme observations B. requires the use of udgment !. uses the leastsquares method ". is superior to other methods in its ability to distinguish between discretionary and committed fied costs 11. %he number of variables used in simple regression analysis is@ A. two B. three !. one
". more than three
1#. 3egression analysis is superior to other cost behavior techniques because it A. 7amines only one variable. !. >roves a cause and effect relationship. B. >roduces measures of probable error. ". +s not a sampling technique. 1(. %he first to be underta&en in a simple regression analysis approach is A. %o calculate the coefficient correlation. B. %o ma&e the least squares computation. !. %o plot two variables in a scatter diagram. ". %o find the standard error of estimate. 12. +f the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear? A. 3andom points. B. A least squares line that slopes up to the right. !. A least squares line that slopes down to the right. ". ;nder this condition a scatter diagram could not be plotted on a graph. 1/. %he relevant range is A. a relatively wide range of sales where total variable costs remain the same B. a relatively wide range of sales where all costs remain the same !. a relatively narrow range of production where total variable costs remain the same ". a relatively wide span of production where total fied costs are epected to remain the same 1. !ostvolumeprofit analysis is most important for the determination of the A. $olume of operation necessary to brea&even B. 3elationship between revenues and costs at various levels of operations !. $ariable revenues necessary to equal fied costs ". 4ales revenue necessary to equal variable costs. 19. %he sum of the costs necessary to effect a oneunit increase in the activity level is a5n6 A.
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#=. As an accountant, the most useful information you can get from brea&even chart is the A. 3elationship among revenues, variable costs, and fied costs at various levels of activity. B. $olume or output level at which the enterprise brea&s even. !. Amount of sales revenue needed to cover enterprise fied costs. ". Amount of sales revenue needed to cover enterprise variable costs. #1. +n a costvolumeprofit graph, the slope of the total revenue curve represents A. the selling price per unit. ". total contribution margin B. the contribution margin per unit 7. total revenues. !. the variable cost per unit ##. +n a profitvolume graph, the slope of the profit curve represents A. the selling price per unit ". total contribution margin B. the contribution margin per unit 7. total revenues. !. the variable cost per unit #(. +f a companys variable costs are 9=0 of sales, which formula represents the computation of dollar sales that will yield a profit equal to 1=0 of the contribution margin when 4 equals sales in dollars for the period and 8! equals total fied costs from the period? A. 4 =.# ÷ 8! !. 4 =.#9 ÷ 8! B. 4 8! ÷ =.# ". 4 8! ÷ =.#9 #2. !ostvolumeprofit analysis is a &ey factor in many decisions, including choice of product lines, pricing of products, mar&eting strategy, and utilization of productive facilities. A calculation used in !$> analysis is the brea&even point. 'nce the brea&even point has been reached operating income will increase by the A. 4ales price per unit for each additional unit sold. B. !ontribution margin per unit for each additional unit sold. !. 8ied cost per unit for each additional unit sold. ". ross margin per unit for each additional unit sold. #/. When used in costvolumeprofit analysis, sensitivity analysis A. "etermines the most profitable mi of products to be sold. B. Allows the decision ma&er to introduce probabilities in the evaluation of decision alternatives. !. +s done through various possible scenarios and computes the impact on profit of various predictions of future events. ". +s limited because in costvolumeprofit analysis, costs are not separated into fied and variable components. #. At its present level of operations, a small manufacturing firm has total variable costs equal to 9/ percent of sales and total fied costs equal to 1/ percent of sales. Based on variable costing, if sales change by C1.==, income will change by A. C=.#/. B. C=.1=. !. C=.9/. ". canDt be determined from the information given. #9. A companys brea&even point in sales dollars may be affected by equal percentage increases in both selling price and variable costs per unit 5assume all other factors are constant within the relevant range.6 %he equal percentage changes in selling price and variable cost per unit will cause the brea&even point in sales dollars to A. "ecrease by less than the percentage increase in selling price. B. "ecrease by more than the percentage increase in the selling price. !. +ncrease by the percentage change in variable cost per unit. ". 3emain unchanged.
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#:. %he most li&ely strategy to reduce the brea&even point would be to A. +ncrease both the fied costs and the contribution margin. B. "ecrease both the fied cost and the contribution margin. !. "ecrease the fied costs and increase the contribution margin. ". +ncrease the fied costs and decrease the contribution margin. #-. A company increased the selling price of its product from C1.== to C1.1= a unit when total fied costs increased from C2==,=== to C2:=,=== and variable cost per unit remained unchanged. Eow will these changes affect the brea&even point? A. %he brea&even point in units will be increased. B. %he brea&even point in units will be decreased. !. %he brea&even point in units will remain unchanged. ". %he effect cannot be determined from the information given. (=. According to !$> analysis, a company could never incur a loss that eceeded its total A. variable costs. B. fied costs. !. costs. ". contribution margin. (1. %wo companies produce and sell the same product in a competitive industry. %hus, the selling price of the product for each company is the same. !ompany 1 has a contribution margin ratio of 2=0 and fied costs of C#/ million. !ompany # is more automated, ma&ing its fied costs 2=0 higher than those of !ompany 1. !ompany # also has a contribution margin ratio that is (=0 greater than that of !ompany 1. By comparison, !ompany 1 will have the FGist AH brea&even point in terms of dollar sales volume and will have the FGist BH dollar profit potential once t he indifference point in dollar sales volume is eceeded.
Gist A Gist B
A. Gower Gesser
B. Gower reater
!. Eigher Gesser
". Eigher reater
(#. Which of the following is a true statement about sales mi? A. >rofits may decline with an increase in total dollars of sales if the sales mi shifts to sell more of the high contribution margin product. B. >rofits may decline with an increase in total dollars of sales if the sales mi shifts to sell more of the lower contribution margin product. !. >rofits will remain constant with an increase in total dollars of sales if the total sales in units remains constant. ". >rofits will remain constant with a decrease in total dollars of sales if the sales mi also remains constant. ((. 4aints !o. sells three chemicals@ 4impol, >lute, and !ople. 4impol is the most profitable product while !ople is the least profitable. Which one of the following events will definitely decrease the firms overall B.7.>. for the upcoming accounting period? A. An increase in the overall mar&et of >lute. B. A decrease in !oples selling price. !. An increase in anticipated sales of 4impol relative to the sales of >lute and !ople. ". An increase in 4impol raw materials cost. (2. A very high degree of operating leverage indicates a firm A. has high fied costs B. has a high net income !. has high variable costs ". is operating close to its brea&even point (/. Gove !orp. is operationally a highly leveraged company, that is, it has high fied costs and low variable costs. As such, small changes in sales volume result in A. >roportionate change in net income. !. )egligible change in net income. B. Garge changes in net income. ". )o change in net income.
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PROBLEMS
1. Bradley !o. budgets its total production costs at C##=,=== for 9/,=== units of output and C#9/,=== for 1==,=== units of output. 4ince additional facilities are needed to produce 1==,=== units, fied costs are budgeted at #=0 more than for 9/,=== units. What is BradleyDs budgeted fied cost at 1==,=== units? A. 1/,=== B. 1/,=== !. ,=== ". 1,/== #. 4mart !ompany is relocating its facilities. %he company estimates that it will ta&e three truc&s to move office contents. +f the per truc& rental charge is C1,=== plus #/ cents per mile, what is the epected cost to move :== miles? A. C1,=== B. C1,#== !. C#,2== ". C(,== (. %he following cost functions were developed for manufacturing overhead costs@ 1#.== a unit. 8ied costs to manufacture this product are >:==,=== for less than /==,=== units and >1,#==,=== for /==,=== or more units. !ontribution margin is #=0. Eow many units must be sold to realize a net income from this product of >/==,===? A. 2((,((( B. /==,=== !. ,9 ". 9=:,((( . %otal production costs of prior periods for a company are listed as follows. Assume that the same cost behavior patterns can be etended linearly over the range of (,=== to (/,=== units and that the cost driver for each cost is the number of units produced. >roduction in units per month (,=== -,=== 1,=== (/,=== !ost L C#(,9== C/#,:= C:,2-= C19:,#= !ost K 29,#:= 121,:2= #/#,1= //1,== What is the average cost per unit at a production level of :,=== units for cost L? A. C/.-: B. C/.:/ !. C9.-= ". C2.:( 9. ;ltra $ogue !o. sells /=,=== units of MyoN a topoftheline garden sprin&ler. %hese were ta&en from the companys records@ Accounts receivable, >1#-,===. !ontribution margin ratio, 2-0. "ays sales outstanding, 1/ days. >rofit for the period was >2:/,=2=. %he ending receivables balance is the average balance during the year. Assume a (=day year. All sales are on credit. "etermine the companys brea&even revenue. A. >#,1=,1## B. >1,=(#,=== !. >(,=-,=== ". >1,/19,=2=
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:. 4ago !o. uses regression analysis to develop a model for predicting overhead costs. %wo different cost drivers 5machine hours and direct materials weight6 are under consideration as the independent variable. 3elevant data were run on a computer using one of the standard regression programs, with the following results@ !oefficient /9/,=== I >:./=L represents the behavior of maintenance costs 5K6 as a function of machine hours 5L6. %hirty 5(=6 monthly observations were used to develop the foregoing regression equation. %he related coefficient of determination was =.-=. +f #,/== machine hours are wor&ed in one month, the related point estimate of total variable maintenance costs would be A. >#(,=== B. >#1,#/= !. >#/,#/= ". >1-,1#/ 1=. %ony&inn !ompany is contemplating of mar&eting a new product. 8ied costs will be C:==,=== for production of 9/,=== units or less and C1,#==,=== if production eceeds 9/,=== units %he variable cost ratio is =0 for the first 9/,===. !ontribution margin percentage will increase to /=0 for units in ecess of 9/,===. +f the product is epected to sell for C#/ per unit, how many units must %ony&inn sell to brea&even? A. 1#=,=== B. 111,=== !. -,=== ". :=,=== 11. A company manufactures a single product. 7stimated cost data regarding this product and other information for the product and the company are as follows@ 4ales price per unit C2= %otal variable production cost per unit C## 4ales commission 5on sales6 /0 8ied costs and epenses
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1/. A company with C#:=,=== of fied costs has the following data@ >roduct A >roduct B 4ales price per unit C/ C $ariable costs per unit C( C/ Assume three units of A are sold for each unit of B sold. Eow much will sales be in dollars of product B at the brea&even point? A. C#==,=== B. C#2=,=== !. C#:=,=== ". C:2=,=== 1. 4ingsing, +nc. manufactures and sells &ey rings embossed with college names and slogans. Gast year, the &ey rings sold for >9/ each, and the variable costs to manufacture them were >##./= per unit. %he company needed to sell #=,=== &ey rings to brea&even. %he net income last year was >/=,2==. %he company epects the following for the coming year@ %he selling price of the &ey rings will be >-=. $ariable manufacturing costs per unit will increase by onethird. 8ied costs will increase by 1=0. %he income ta rate will remain unchanged. 8or the company to brea&even the coming year, the company should sell A. #1,== units. B. #,== units. !. #1,#/= units. ". 1-,#/= units. 19. 4ari4ari rocery is currently open only on 1#2,:==. +ts gross margin is #=0. +t estimates that =0 of 4unday sales to customers would be on other days if its stores were not open on 4undays. %he 4unday sales that would be necessary for 4arisari to attain the same wee&ly operating income is A. >1-,/==. B. >(=,===. !. >#-,#/=. ". >#=,===. 1:. )!B, +nc. manufactures computer tables. +t has an investment of >1,9/=,=== in assets and epects a #/0 return on investment. +ts total fied production costs for #,=== units is >//=,=== plus an additional >1/=,=== for selling and administrative epenses. %he variable cost to manufacture is >1,/== per table. %he selling price per table should be A. >#,=:.9/ B. >1,:/=.== !. >#, /(1.#/ ". >#,9#/.== 1-. )ette O !o. has sales of >2==,=== with variable costs of >(==,===, fied costs of >1#=,===, and an operating loss of >#=,===. By how much would )ette need to increase its sales in order to achieve a target operating income of 1=0 of sales? A. >2==,=== B. >2#,=== !. >/==,=== ". >:==,=== #=. "uring 1--, 3>4 !orporation supplied hospitals with a comprehensive diagnostic &it for >1#=. At a volume of :=,=== &its, 3>4 has fied cost of >1,===,=== and a profit before income taes of >#==,===. "ue to an adverse legal decision, 3>4s 1--9 liability insurance increased by >1,#==,=== over 1--. Assuming the volume and other costs are unchanged, what should be the 1--9 price be if 3>4 is to ma&e the same >#==,=== profit before income taes? A. >1(/. B. >1/=. !. >1#=. ". >#2=. #1. roduct ' to retailers for >#==. %he unit variable cost is >2= with a selling commission of 1=0. 8ied manufacturing costs total >1,===,=== per month while fied selling and administrative costs total >2#=,===. %he income ta rate is (=0. %he target sales if after ta income is >1#(,#== would be A. 1=,-/= units. B. 1/,2= units. !. 1(,9/= units. ". 11,2== units. ##. 4tory
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#(. !W !orporation sells >roduct % at a unit price of >/ deriving annual gross sales of >/=,===. %he variable cost to produce % is >2./= per unit and total fied costs is >1=,===. +f it increases %s unit price to >:, a decrease of sales to only 2,=== units would result. %he effect of the price increase on !Ws net income from the sales of >roduct % will be a@ A. >-,=== increase. B. >1:,=== decrease. !. >2,=== increase. ". )o effect. #2. Austin lanners have determined that sales will increase by #/0 net year, and that the profit margin will remain at 1/0 of sales. Which of the following statements is correct? A. >rofit will grow by #/0. B. %he profit margin will grow by 1/0. !. >rofit will grow proportionately faster than sales. ". %en percent of the increase in sales will become net income. #. Gindsay !ompany reported the following results from sales of /,=== units of >roduct A for June@ 4ales C#==,=== $ariable costs 51#=,===6 8ied costs 5=,===6 'perating income C #=,=== Assume that Gindsay increases the selling price of >roduct A by 1= percent in July. Eow many units of >roduct A would have to be sold in July to generate an operating income of C#=,===? A. 2,=== B. 2,(== !. 2,/== ". /,=== #9. A product has a selling price of >/ and variable cost of >(./= per unit. %he effect of a >=./= per unit increase in cost is to increase the brea&even level of activity by A. /=0 B. ((1Q(0 !. 12.(0 ". >1./= per unit. #:. GL* %uro %uro stores are open for 1/ hours a day 5from @== a.m. to -@== p.m.6. +t sells pac&aged meals at a price of >2= per meal. $ariable cost per meal is >(= while total fied costs for operation of all the stores amounted to #==,=== monthly. +t is thin&ing to reduce its store hours to only 1# hours a day as this would reduce fied costs 5utilities and wages6 by >=,=== a month. +t is epected that the reduced store hours would result in loss of 1,/== pac&ed meals monthly sales. %he reduction in store hours would result in A. A prospective increase in monthly operating income of >2/,===. B. A prospective decrease in monthly operating income. !. A prospective increase in monthly operating income of >=,===. ". )o change in monthly operating income. #-. AB! !ompany brea&s even at C(==,=== sales and earns C(=,=== at C(/=,=== sales. Which of the following is true? A. 8ied costs are C#=,===. B. >rofit at sales of C2==,=== would be C:=,===. !. %he selling price per unit is C(. ". !ontribution margin is =0 of sales.
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(=. A company has sales of C/==,===, variable costs of C(==,===, and preta profit of C1/=,===. +f the company increased the sales price per unit by 1=0, reduced fied costs by #=0, and left variable cost per unit unchanged, what would be the new brea&even point in sales dollars? A. C::,=== B. C1==,=== !. C11=,=== ". C1#/,=== (1. %he -=,=== and a 0 commission is paid to the sales person. +t is considering changing the scheme to a commission arrangement that would pay each person a pac&age of >(=,=== plus a commission of #0 of the sales made by the person. %he amount of total monthly car sales at which Wheels !orp. would be indifferent 5answer may be rounded off6 as to which plan to select is A. >2/,===,=== B. >(,/==,=== !. >((,9/=,=== ". >##,/==,=== ((. %wo companies are epected to have annual sales of 1,===,=== dec&s of playing cards net year. 7stimates for net year are presented below@ !ompany 1 !ompany # 4elling price per dec& C (.== C(.== !ost of paper dec& =.# =./ >rinting in& per dec& =.1( =.1/ Gabor per dec& =.9/ 1.#/ $ariable overhead per dec& =.(= =.(/ 8ied costs C-=,=== C#/#,=== iven these data, which of the following responses is correct? 5+n units6 A. B. !. ". Brea&even point for !o. 1 :==,=== :==,=== /((,((2 /((,((2 Brea&even point for !o. # 2#=,=== 2#=,=== 1=/,=== 1=/,=== $olume at which profits of !o. 1 and !o. # are equal 1,1:=,=== 1,===,=== 1,===,=== 1,1:=,=== *uestions (2 and (/ are based on the following information. A company sells two products, L and K. %he sales mi consists of a composite unit of two units of L for every five units of K 5#@/6. 8ied costs are C2-,/==. %he unit contribution margins for L and K are C#./= and C1.#=, respectively. (2. !onsidering the company as a whole, the number of composite units to brea& even is a. 1,/= b. 2,/== c. :,#/= d. ##,/== (/. +f the company had a profit of C##,===, the unit sales must have been A. B. !. >roduct L /,=== 1(,=== #(,:== >roduct K 1#,/== (#,/== /-,/==
". (#,/== 1(,===
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(. >roduct !ott has sales of C#==,===, a contribution margin of #=0, and a margin of safety of C:=,===. What is !otts fied cost? A. C1,=== B. C#2,=== !. C:=,=== ". C-,=== (9. Bell !ompany has a #/0 margin of safety. +ts beforeta return on sales is 0, and its ta rate is 2=0. Assuming that current sales are C1#=,===, what is Bells total fied costs. A. C(,=== !. C:2,=== B. C#1,== ". C=,=== *uestions (: and (- are based on the following information. %he mar&eting department of Eennessy !o. proposed a price cut on its leading brand, a product called MEenry.N 8rom the accounting records these are available@ >rice per unit > -#.== "iscount to customers 1=0 "irect cost per unit > /#.= $ariable operating epense per unit > /.= >roposed price cut per unit > 1=.== 7stimated sales volume before price cut 1,##= pcs. (:. Eow much is the estimated contribution margin that will be lost due to price cut, assuming the same preprice cut sales volume? A. >1(,=== B. >1=,-:= !. >1:,=== ". >19,--= (-. 8or the same Eennessy !o., in the immediately preceding number, what is the additional volume required after the price cut to get the same contribution margin before the price cut? 3ound off to the nearest whole unit. A. 1,=== units B. /== units !. 9=2 units ". 2=- units *uestions 2= through 2# are based on the following information. Almo !ompany manufactures and sells adustable canopies that attach to motor homes and trailers. %he mar&et covers both new unit purchasers as well as replacement canopies. Almo developed its business plan based on the assumption that canopies would sell at a price of C2== each. %he variable costs for each canopy were proected at C#==, and the annual fied costs were budgeted at C1==,===. AlmoDs afterta profit obective was C#2=,===R the companyDs effective ta rate is 2=0. While AlmoDs sales usually rise during the second quarter, the
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ANSWER KEY
%heory 1. " #. " (. " 2. A /. A . A 9. A :. " -. " 1=. B 11. A 1#. ! 1(. B 12. A 1/. " 1. B 19. ! 1:. " 1-. " #=. A
#1. ##. #(. #2. #/. #. #9. #:. #-. (=. (1. (#. ((. (2. (/.
A B " B ! A " ! " ! A B ! " B
>roblems 1. A #. " (. A 2. ! /. " . A 9. A :. A -. B 1=. B 11. ! 1#. " 1(. ! 12. B 1/. B 1. " 19. B 1:. A 1-. A #=. A
#1. ##. #(. #2. #/. #. #9. #:. #-. (=. (1. (#. ((. (2. (/. (. (9. (:. (-. 2=.
" ! A ! A A A A " A A ! A B B B B B ! !
21. " 2#. !
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