DRILL #1

COST CONCEPTS & ANALYSIS

1. A Company, doing business in the city of Makati, reports the following total costs at two levels
of production:
COST ITEM 2000 units 5000 units
Depreciation P 5,000 P 5,000
Materials 10,000 25,000
Labor 4,000 10,000
Factory supplies 8,000 10,000
Factory supervisors’ salaries 10,000 10,000
Insurance 3,000 3,000
Maintenance 5,000 19,000
Rent 20,000 20,000
Electricity 5,500 16,250

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

2. Pampanga Meat Company produces one of the best meat products in Pampanga. The
company’s controller used the account-classification method to compile the following
information.
a. Depreciation schedules revealed that monthly depreciation on buildings and equipment
is P21,000.
b. Inspection of several invoices from meat packers indicated that meat costs the company
P1.20 per kilo of meat produced.
c. Wage records showed that compensation for production employees cost P0.85 per kilo
of meat produced.
d. Payroll records showed that supervisory salaries total P11,000 per month.
e. Utility bills revealed that the company incurs utility costs of P5,000 per month plus
P0.25 per kilo of meat produced.

REQUIRED:

a. Classify each cost item as variable, fixed or mixed.

b. Write a cost formula to express the cost behaviour of the firm’s production cost. (Use
the form Y=a+bx where Y denotes production cost and X denotes quantity of meat
produced.)

3. Bodywow Fitness operated a chain of fitness centers in Metro Manila. Data regarding the
maintenance hours and costs for last year are as follows:
January 525 P4,710
February 505 4,310
March 310 2,990
 April 495 4,200
May 315 3,000
June 485 4,215
July 315 2,950
August 405 3,680
September 475 4,100
October 345 3,250
November 350 3,260
December 50 400

REQUIRED:

a. Using the high-low method of cost estimation, estimate the behaviour of the
maintenance costs incurred by Bodywow Fitness. Express the cost behaviour
pattern in equation form.
b. Compute the predicted maintenance cost at 600 hours of activity.
c. Using the least squares regression method, estimate the variable cost per hour and
the total fixed cost per month. (Round off VC per hour to the nearest centavo and
the total FC to the nearest peso.)

COST-VOLUME-PROFIT ANALYSIS

4. Apotheena Baseball Company makes baseballs that sell for P6.00 per unit. Current annual
production and sales are 980,392 baseballs. Costs for each baseball are as follows:
Variable costs:
DM P2.00
DL 1.75
VOH 0.50
VSE 0.25 P 4.50
Fixed costs:
Manufacturing P1,000,000
S&A 250,000 1,250,000

REQUIRED:

a. Calculate the unit contribution margin in pesos and the contribution margin ratio for
the company.
b. Determine the BEP in number of baseballs.
c. Calculate the peso BEP using the contribution margin ratio.
d. Determine the company’s margin of safety in number of baseballs, in sales pesos,
and as a percentage.
e. How many baseballs must the company sell if it desires to earn P250,000 in pre-tax
profit?
 f. If the company wants to earn P350,000 after tax and is subject to a 30 percent tax
rate, how many baseballs must be sold?
g. Use original information. How many baseballs must the company sell to breakeven
if its fixed cost increased by P50,000?

5. Gosnell Company produces two products: squares and circles. The projected income for the
coming year, segmented by product line, follows:

SQUARES CIRCLES TOTAL

Sales P 300,000 P 2,500,000 P 2,800,000
Less: VC 100,000 500,000 600,000
CM 200,000 2,000,000 2,200,000
Less: Direct FC 28,000 1,500,000 1528,000
Product margin 172,000 500,000 672,000
Less: Common FC 100,000
Operating Income P 572,000

The selling prices are P30 for squares and P50 for circles.

REQUIRED:

a. Compute BEP in units and in pesos.

b. Compute the revenue that must be earned to produce an operating income of 10% of
sales revenues.
c. Assume that the marketing manager changes the sales mix of the two products so that
the ratio is three squares to five circles. Repeat Requirements 1 and 2.

ETHICAL STANDARDS FOR MANAGEMENT ACCOUNTANTS

A. COMPETENCE B. CONFIDENTIALITY C. INTEGRITY D. OBJECTIVITY

6. Provision in this section of Ethical Standards for Management Accountants require management
accountants to develop their knowledge and skills and to do their tasks in accordance with
relevant laws, regulations and standards.
7. Provision in this section of Ethical Standards for Management Accountants require management
accountants to act on, or even appear to act on, confidential information they acquire in doing
their work, except when authorized or when legally obligated to do so.
 8. Provision in this section of Ethical Standards for Management Accountants cover avoidance of
conflicts of interest, improprieties of accepting gifts or favors, and other matters generally
associated with professional behaviour.
9. Management accountants have a responsibility to communicate information fairly and
objectively, and isclose fully all relevant information that could reasonably be expected to
influence an intended user's understanding of the reports, comments, and recommendations
presented.

BUDGETING

10. Carson, Inc. produces office supplies, including pencils. Pencils are bundled in packages; each
package sells for P20. The sales budget for the first four months of the year follows for this
product.
January 100,000 units
February 120,000
March 110,000
April 100,000
Company policy requires that ending inventories for each month be 10 percent of next month’s
sales. However, due to greater sales in December than anticipated, the ending inventory of
pencils for that month is only 5,000 packages.

REQUIRED: Prepare a production budget for the first quarter of the year. Show the number of
units that should be produced each month as well as for the quarter in total.

11. The production budget of a corporation for the upcoming fiscal year is as follows:
Budgeted production in units:
Q1 2,000 Q2 2,050 Q3 2,125 Q4 1,950
Each unit requires 4 hours of DL. The company’s variable manufacturing OH rate is P5 per DL
and the company’s fixed manufacturing OH rate P50,000 per quarter. The only non-cash item
included in fixed manufacturing overhead is depreciation, which is 20,000 per quarter.

REQUIRED: Construct the company’s manufacturing overhead budget for the upcoming fiscal
year.

12. Lawrence Inc., found that about 20% of its sales during the month were for cash. Lawrence has
the following AR payment experience:
In the month of sale 40%
In the month after sale 50%
 In the 2nd month after sale 8%

Lawrence’s anticipated sales for the next few months are:

April P240,000
May P288,000
June P276,000
July P295,000
August P300,000

REQUIRED: Prepare a cash receipts budget for the month of July and August.

13. The balance sheet for Araullo, Inc. at December 31, 200A is as follows

Assets Liabilities and Equity

Cash P 90,000 Accounts payable P 80,000
Accounts receivable 120,000 Capital stock 300,000
Inventory 130,000 Retained earnings 310,000
Property, plant and equipment net 350,000
Total assets P690,000 Total liabilities & equity P690,000

For the year 200B, cash receipts are estimated at P860,000, representing collection of
accounts receivable. Cash payments are budgeted at P830,000. Included in these payments is
P150,000 for various expenses that do not flow through accounts payable. Credits for the
accounts payable for the year are estimated at P740,000, all merchandise purchases. All cash
payments are for expenses or purchases. Depreciation expense is P60,000. Net sales are
estimated at P1,200,000. The inventory of merchandise is expected to increase to P150,000 by
the end of the year. Income tax is estimated at 30 percent and will be paid after December 31,
200B.

REQUIRED: From the information given, prepare a budgeted balance sheet at December 31,
200B. Prove the retained earnings balance by computing the net income.