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ReSA MAS - All Lectures PDF

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ReSA MAS - All Lectures PDF

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Razmen Ramirez Pinto
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é 2) ReSA- the Koriew School of Accountancy + Management Services MS-01: COST BEHAVIOR ANALYSIS cost monet ry amount of the resources given up or sacrificed to attain some objective such as goods and services. When notified by a term that defines the purpose, cost. becomes (€.9., acquisition cost; production cost; cost of goods sold) COST BEHAVIOR lation nship between cost and activity - as to how costs react to changes in an activity like production. As production increases, some costs remain the same (j.e., constant or fixed) while if _| ive. inverse relationship) _ Tncreases as production increase | ionship) ae Constant cs [ao wixe ] portionately (vs, total | Decreases less proportionately (vs. unit | (eemi-variable) | variable costs) as production increases | fixed costs) as production increases. | FIXED COST v VARIABLE COST Discretionary Fixed < 4 > True Variable Cinomisetriied Step Variable MIXED ¢ Wea bx ] - the total costs (dependent varial a] - the total fixed costs (y-intercept/vertical axis-intercept) [b] < the variable cost per unit (slope of the line) [X]- the activity or cost driver (independent variable [bx] - the total variable costs ‘COST BEHAVIOR ASSUMPTIONS and LIMITATIONS RELEVANT RANGE Assumption Relevant range refers to the range of activity within which the cost behavior patterns are valid. An level of activity outside this range may show a different cost behavior pattern TIME Assumption The cost behavior patterhs identiied are true only peciied period of inte. Beyond this, the cost may show.a diferent cost behavior pattern LINEARITY Assumption The cost is assumed to manifest a linedr relationship over a relevant range despite its tendency t now otherwise over the long run COST ESTIMATION: SEGREGATING VARIABLE & FIXED COSTS 1), HIGH-LOW POINTS Method The fixed and variable portions of the mixed ampled data points the highest and lowest points ba : Variable cost per unit (b) = change Change x) | SCATTERGRAPH (Scatter Diagram) Me All observed costs at various activity levels are plotted on 2 graph. € nt regression line is then fitted to the plotted points to represent the lie function ) LEAST-SQUARES REGRESSION Method Least-squares method is @ statistical technique that investigates the association between dependent and independent variables. This method determin ne of best ft for a set of observations by nimizing the sum of the squared deviations between cost line and the dats + If there is only one independent variable, the analysis is Known as SIMPLE REGRESSIC + Ifthe analysis involves multiple independent variables, it ls known as MULTIPLE REGRESSION, 4) Other Cost Estimation Methods: A) Industrial Engineering Method - based on the relationship between inputs and outh physical forms; engineering estimates indicate what and how much costs shoul 8) Account Analysis Method each account is classied 3 variab experience and judgment of accounting and other qualified personnel inthe organisation ) Conference Method ~ costs are classified based on opinions from various company det Page 1 of 4 page ReSU - the Rerrew School of Gacourtanrey MS-01 COST BEHAVIOR ANALYSIS CORRELATION ANALYSIS CORRELATION ANALYSIS is used to measure the strength of Jinear relationship variables. es The Correlation between two variables can be seen by drawing a scatter diagram: the points seem to form a straight line, there is a high Correlation. + Ifthe points form a random pattern, there is a low Correlation or no correlation at all ctween two or more COEFFICIENT OF CORRELATION (r) measures the relative strength of linear relationship between t Variables. Its value ranges from ~ 1.0 to + 1.0. * Ifr = 1.0, there is gerfect inverse linear relationship between X and ¥. + If r= 0, no linear relationstip: 2 ifr = +1.0, there is perfect direct relationship between X and ¥. COEFFICIENT OF DETERMINATION (+) is the proportion of the total variation in ¥ that is aceollfited for by the regression equation, regardless of whether the relationship between X and Y is direct or inverse. It is a measure of ‘goodness of fit’ in the regression. ‘The higher the °, the more confidence one can have in the estimated cost formula, EXERCISES: COST BEHAVIOR ANALYSIS Variable Costs vs. Fixed Costs ‘Adriel Company manufactures and sells a single product. A partially completed schedule of the ‘company's total and per unit costs over a relevant range of 60 to 100 units produced each year is given below nits Produced 1) 80 Gil) 100 TOTAL COSTS (A) Variable costs P 120 p72 P (8) Fixed cost: 2 2 500 (C) Total costs P? P 760 P 7 e PER UNIT COSTS. (0) Variable costs P > 2 (©) Fixed costs P 2 REQUIRED. L. Complete the schedule by writing the missing amounts 2. Which two (2) specific costs remain constant over the relevant range? 3. Which two (2) specific costs dre directly related with production? 4. Which specific cost is inversely related with production? 3 6 Express the cost formula based on the line equation form "Y = a + DX. If the company produces 75 units, then how much is the expected total co (Adapted: Managerial Accounting by Garris 2. High-Low Method The controller of SUREDEAD Hospital would like to come up with a cost formula that links emergency department cost to the number of patients admitted during a month. The emergency department's costs and the number of patients admitted during the past nine months follow Month Number of Patients Emergency Department's Cost April P 15,600 ‘A May 2007 june 7 00 duly 4,600 August P 14,306 Septembe 1 P 13,200 October 114 2,800 November N48 P 72,500 December 16 4,000 REQUIRED: Using the high-low methad, determin 1. The variable cost per unit 2. The anqual fixed costs 3. The emergency department's monthly cost 4. The department's estimated cost if 20 patients are expected to be admitted next month. ‘Adapted: Managerial Accounting by Garrison & Ne Page 2 of 4 pages Ke Fd - the Review School of Uecorntaney MS-01 COST BEHAVIOR ANALYSIS 3. Correlation Analysi AY The cagenasof he inearreatonahip between the cost an the acti ithe ¥ correlation Deviation Variation 4. Standard error B) Looking at the following scatter diagrams, we can conclude that . Units ‘Units ‘ Cost A Cost B DN Tag rere Cost A will be easier to predict than cost B. Cost B will be easier to predict than cost A. Cost A is out-of-control. Cost 8 has no variable component. v C)_ Which of these correlation coefficients represents strangest celatianshig between two variables? a. + 0.50 Taner 005 “hots C47 b 2080 a +105 Aeiae Bi = sit Ae item WE Wa! D9Ce a taptecs Manegerial Accounting by Louderback) 4. Least- res Regression Method “Cui. ‘Sy Company's total overhead costs at various levels of activity are presented below: Month Machine Hours Total Overhead Costs 4 March 500 P 970 js dene April 400 hk P85" Yorrible, cork pur seit tune May 600 wp 1,089 1 June 7004 ~ P 1,2087 > ssa Trini monn nates mie yn tios)30 2) 453-241 & 5 a ueenie = . jupplies (Variable) P 260 /400 VK ASS. oosuees Salaries (Fixed) 300 300 eed Utilities (Mixed) 291. say ac ys at bt Total PBs oy 088 8= 3 ecouinen: \ = 29) ~G4(4a}. How much of June's overhead cost of P 1,208 consisted of utilities cost #463, 295 2, Using high-low method, determine the cost fuaction for uti st yn ac + 4K 3. Using high-low method, determine the cost function for fatal overhead cst. y= 34¢ 41 19% <7) 84+ 05 = 119 ast rh JTION GUIDE (requirement 1) per April hrs) June (700 hrs) #)¥ Supplies (Variable) P 260 ASE Salaries (Fixed) 300 a Utilities (Mixed) Total Overhead Costs sc+ de) Month Hours (xX) Total Costs (Y) aay x Mar 500 P970 465/00 250/000 . Apr 400 Past 240,400 (<0, cow May 600 P 1,089 453/40 349/000 Jun 7200 P4208 - TENE LAOS, } SUM 2,960 ane 2934, 100 Ey-na + bex > "age mets ain 24a 49008 €1 19) iint =49 + 2,209) S50 ya qt -2618 Ce eg. 490 = 22000 + 1,240 0006 We 1500 _ 596 2214 Woo = Wes ee ReSU - The Review School of lecommtoncy MS-01 COST BEHAVIOR ANALYSIS WRAP-UP EXERCISES (TRUE OR FALSE; MULTIPLE-CHOICE) Unit variable costs are costs that change in direct proportion to changes in the activity level é 4 Tote Varese RAge. Aue UME UE remain Conte e 2. Consider the following graphic representation of certain costs Costs (P) units Which of the following costs are «nost likely represented by the graph?, ‘Total ixed costs and total variable costs b. Total fixed costs and unit variable costs Unit fixed costs and total variable costs pce 4. Unit fixed costs and unit variable costs... jead@ibet slottd C x In cost analysis using the line equation = 4 + b¥-unit variable cost (b) Is regarded as the 7 "2. Dependent variable €. Slope of the line bs Independent variable a. Y-awis intercept D 4 A company has developed a production cost equation for Its lone product: Y = 50 + 5X, where X is based on the number of labor hours. Assuming a relevant-range of 10 to 20 labor hours, what is the estimated production cost at zero (0) labor hour? a PS Felevort vonge b. P50 cP 5S d. An amount that cannot be determined from the given information 21 0nd obwe. 9. If the coefficient of correlation’ (r) between two variables is + 0.95, how might a scatter diagram of re these variables appear? gues ri ‘of. 2. Random points er ge 6 b. Aregression liné that slopes up to the eft } €. _Aregression line that slopes up.to the right ie A repression line that slopes dove tothe right mene. 4 5. Ana Company is interested in the relationship between sales (dependent variable) and occurrence of + fain (independent varisble). ‘Using the proper formula, te coefficient of correlation (r) fs computed as 199. What conclision about the sales and rain occurrence could one make? 7 2, Rnincrease in sales causes an increase in rain occurrence jel Bo Amincrease in sales causes a decrease In rain occurrence x ¢c, An increase in rain occurrence’ causes a decrease in sales. &.Amincrease in rain occurrence causes an increase in sales, A %7) wnat isthe appropriate range forthe coefficient of determination (2 x a. Oto+t Hie ee A ee bo itor 4. Oto infinity a b, 4, 6 9% Which cost segregation technique gives the most mathematically-precis cost estimate? a, Scatter-diagram method. or b. Least-squares method | €. High-low method d, Calendar method TRUE ~ 10. Knowledge on cost behavior is critical to profit planning, particularly In cost-volume-profit analysis. Page 4 of 4 pages GS © be brie ; : oF ferlit () ReSA- The Review School of Accomrtancy. « Mamogement Services MS-02: COST-VOLUME-PROFIT ANALYSIS = IS useful for profit planning by way of a systematic analysis of the profi’s relationship with various costs and volume of salgs.c= petty \ese\ FACTORS At AFFECTING PROFIT _ Hf there is an increase in... | Then profit fends to. | 1. Selling Price _ “2. Unit Variable Cost ef. 5 - oles a otal Fived CPF ele Cort per Unit moles Mix 3. Fixed Cost E 4. Volume (Unit Sales) Increase 1m mult-product companies, a change in sales mix may also-affect company profit. UNDERLYING CVP ASSUMPTIONS (Limitations) Relevant range, time and linearity assumptions in MS - 01 are also assumed in CVP analysis. ¥ Unless indicated otherwise, unit selling price is constant even if sales volume changes, 7 Inventories do not change significantly from period to period, Perdverian FOUNL * GALES of tn cose raul itcaceesiopay, caer con OT erases BeGaent im mtr Const ree bor product orodyeton Sectaaly TERMS USED IN CVP ANALYSIS Contribution Margin (CM) - is the difference between sales and variable cost. It is otherwise known {8s inarginal income, profit contribution, contribution to fixed cost or incremental contribution. ‘+ CM Ratio = CM + Sales = Unit CM“ Unit Selling Price | CM Ratio = ACM + A Sales NOTE: The sign °A’ is used to mean change or difference. . Break-Even Point’ (BEP) - a level of activity, in units (break-even volume) or in pesos (break-even sales), at which total revenues equal total costs, At the break-even point, there ‘s neither a profit nar a loss. +) BEP units = Fixed Costs ~ CM per unit + BEP peso sales = Fixed Costs + CM Ratio + Unit Sales with Target Profit = (Fixed Costs + Profit) CM per unit Fixed Costs EM Ratio - Return on Sales * Profit must be expressed before tax: Profit after tax + (100% - tax rate) Margin of Safety - the difference between actual sales and break-even sales. It indicates the ‘maximum amount by which sales could decline without incurring,@ loss. + Peso Sales with Target Return on Sales = + Margin of Safety = Sales - Breakeven Sales + | Margin of Safety Ratio = Margin of Safety + Sales Indifference Point ~ the level of volume at which two alternatives being analyzed would yield equal ‘amount of total costs or profits. Alternative A Alternative 8. ? + Unit CM x Q) ~ Fixed Cost (Unit CM x Q) ~ Fixed Cost + Fixed Cost + (Unit VC x Q) Fixed Cost + (Unit VC x Q) NOTE: Q - number of units (indifference point) Sales Mix - the relative combination of quantities of sales of various products that make up ‘the total sales of a company. + Over-all BEP unjes = Fixed Costs + Weighted Average CM per unit ‘+ Qver-ail BEP peso sales = Fixed Costs + Weighted Average CM Ratio Degree of Operating Leverage (DOL) - measures how a percentage change in sales will affect ‘company profits. Tt indicates how sensitive the company is to sales volume increases and decreases. It is also known as operating leverage factor. Of ‘+ DOL = Contribution Margin + Profit before tax + A% sales x DOL = A % profit before tax Page 1 of 3 pages RSA The Review School of Aecourtance MS-02 COST-VOLUME- PROFIT ANALYSIS. EXERCISES: COST-VOLUME-PRC ‘The company’s sales and expenses for a recent FIT ANALYSIS 4. Popoy Company manufactures and sells a single pr month follows? See ee Sales (1,500 units) P-37,500 /iF96 = 25.) ig Less: Variable Costs ___ 15,000 1£50 = _19 (2) Contribution Margin if econ : ae? 1G cue = c/s REQUIRED: 2a) Fo. oS ; 1. Determine the following: fhe, } ‘A) Unt seling price ee | = B) Unit variable cost UH) 15/009 5 : €} Conthibution margin ratio (CHR) Taste KN vy es | oft pa poses, compute the following: 4c 2 2, For profit planning purposes, compute the followings 4 cee + & Sy Break even palnt inne at 5 B) Break-even peso sales a una ales oe required to e0rnP 9,060 prof forthe month? What besa sales are required to earn an after-tax profit of 7.200 (assuming tax rate 6 2008)? ee Sed eat the company president Assume that Popoy Co; Guventy sverisiig were increased by P6,000. How many unks shou! soles increase to give Popoy Co. the same profit or Joss that it is currently earning? sae ease Oe eb how many unis Bre now beng Sold, You dont nsed ths formation 2 Ohette movant) Se aslo a, ike te robler” os sfery of Clean Co. at ts present sales of 27,500? SRE Ne tee atespcople. a monthly slary-of-P4,000-per_manth without ery Popoy, Co. currently Bays Ie sates considers a pla whereby the salespeople would recelve ¢ i tomy the oper acy would fal to 2,500. What sles level wil the company be indifferent between the two compensation plaris? ‘Assume that Popoy Co. is currently selling 800_units i Leg (Adapted and edited: Managerial Accounting by Louderback) é I~ 4 »} SOLUTION GUIDE 2@ a (2).2,000 units (3) 1,600. units (5) 800 units’ —~ Sales 51260 42; 000 20/0 #500 Less: Variable Costs _19.800_ 1p, 900 s10d0 Contribution Margin 1; 600 24,009 i000. . Less: Fixed Costs tgp 800 15,000 Csi ee z . Profit (Loss) oO” 9,00 7 ots g Requirement Nol?) Aewosvt Golub See ret ay fixed cost will decrease by P 1,500 under the proposal (P 4,000 > P 2,500), eh 7 Unie variable cost increases by P 2.50 (10% of P 25) joas = 2u0e [2X Soe cont em ers ts] CU Costs (old) = Costs (new) 1,500 = 2.5 | 15,000 + 10 x = 13,500 + 12.5 X x = 600 units = 108 [26 ai byortne! (Fea Contribution margin ratio x Margin: of safety ratio = net profit Wek ated main rasa « cbuncn mera+ Sle Margin of safety ratio = Margin of safety + Sales Net profit ratio = Profit + Sales ratio 4. Basha’s break-even sales are P 528,000. The variable cost ratio is 60% while the profit ratio i= 89% REQUIRED: Determine the following: Fixed Costs 2, 208 Sales coe Profit 2.9 Margin of Safety cle ~ Margin of Safety Ratio 32% 2 ve Page 2 of 3 pages ReSO The Rerrew School of Cccowntomeg MS-02 COST-VOLUME-PROFIT ANALYSIS. 4. Mahjong Company produces and sells two products, tables and chairs. Following is next month's income budget : Chairs Tables Total’ 1) 86, TES Unit sales 60u 1Su 75u whee Sales P 1,200.00 P 187.50 P 1,387.50 = HO Variable Costs 1,050.00 __112.50 62.50 ae Contribution Margin P'150.00 P'75.00 P'225.00 sai Fixed Costs. 90.0¢ cae Profit 135,00 REQUIRED: 1. How many units of chairs should be sold next month to break-even? 29 \tt 2) How many-Units of fables should be sold to earn a profit of P1207 uists (Adapted: Managerial Accounting by Garrison, et.al.) TION GUIDE Chairs Tables Contribution Margin (CM) per unit P. 2.50 P 5.00 “Sales Mix (4:1 > 80%:20%) 80% 20% ‘Weighted Average CM per unit: 5. Ms, Rita has recently opened the UBE Fitness Gym being offered exclusively for malnourished individuals The results for the gym’s first year of operations are presented as follows Sales 250,000 Variable Costs (100,000) Contribution Margin P 150,000 Fixed Costs. (120,000) Profit P.30,000 Ms, Rita is unhappy abouit the results of his gym’s first year of operations. She observed that despite the high contribution margin, profit was still low because of the high fixed costs. She concludes that an increase in sales would not yleld a satisfactory increase in profit. ») oe REQUIRED: ‘1, Explain to Ms, Rita that his conclusion is not right by computing the operating leverage factor. 2. If sales increase by 10%, then how many percent would profit increase, ceteris paribus? (NOTE: determine the percentage 6 in profit by using the operating leverage factor.) (Adapted: Managerial Accounting by Garrison, et.al.) WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE) = *) 75 a) 2 _A® Bt the break-even point, total contribution margin is zm aiczero €. Equal to total costs BL Equal to total fixed costs d. Equal to total variable costs T ._-Aminerease in contribution margin ratio reduces the break-even point ase © the taxuate jacceases, then the break-even point also increases. WF Amincrease in the income tax rate rept ge aa. Raises the break-even point OT SiS b. Lowers the break-even point to C._ Increases sales required to earn a particular after-tax profit a) 4G. Decreases sales required to earn a particular after-tax profit, SS. An increase in actual sales also increases the margin of safety. ©. A campany that has a negative margin ofsfey necessary operates at alse. + GF Under CvP analysis, which of the following is not assumed to be constant? — 5 ‘a. Unit variable cost c. -Unit selling price D._Unit fixed cost 4, Sales mix DBE A% change In pre-tax profit can be quickly computed by multiplying a % change in peso sales by the 2. Sales mix c. Indifference point b. Margin of safety d. Degree of operating leverage ' D9 The operating leverage factor is equal to 2. Gross margin + profit after tax Contribution margin = profit after tax _ b. Gross margin + profit before tax 4. Contribution margin = profit before tax 130. If inventories are expected to change, the type of costing that provides the best information for breakeven analysis is ‘a. Job-order costing © Joint costing b. Variable costing d. Absorption costing Page 3 of 3 pages fl SUMMARY ARSURETIOS 1) Sctider ALL Monarch "y Ly Fited Had Ganobie é J eroH ae a “PRORUCT Co BAKa Fu coraNe ©) GSU. The Review Sthoobof Cecometancy, MS-03: ABSORPTION & VARIABLE COSTING ABSORPTION COSTING - is 9 costing method that Jachudes all manufacturing casts - direct" materials, 4 abo janie a rt asi — in the cost of a unit of product: Uk tinats Ged factory Gverhead (FFOH) as a product cast. Absorption osting is alsa kaawe as ful) VARIABLE COSTING- is 2 met cludes ariable manufac tala bias, diect Jahor, and aniable manufac in the cost of a unit of product. Wtkaats EROH as 2 pened cost. Variable costing is alsa called dibert ening: PRODUCT vs. PERIOD COST A product cost (san inventariahle cost that ts 5 unsold units Current income ig reduced only by the amount allocated to the saldualts. Consider the following allocation = —.._--? UNSOLD UNITS + Asset (as Inventory) rooucr cost << ce > SOLD UNITS > Expense (as Cost of Goods Sold) A peclod cost is a cost that is charged as expense against income, i Howilocation is necessary; current income is reduced by the Aulamaunt of the period cost. Ceerion cost >—————> FULLY ExpENSED. in.the period incurred, regardiess of sales i Deen +d scone D cuinest te pleconen 2 10a ABSORPTION vs. VARIABLE COSTING 1) RATIONALE Supporters of variable costing argue that FFOH costs are incurred in order to have the capacity to produce Units. These costs are incurred whether or not production occurs. Thus, FFOH costs, having no future service potential, should be dully-axpansed in the came period incurred. ek i 79 POL. a sched ey tepals MEL pres Supporters of atisctnin costing believe! that all manufacturing costé ~~ varlable and xed’ —ore necessary for production to take place and hence should not he ignored in determining product casts. (IMC 2) INVENTORIES, Since FFOH costs are simply expensed (i.e., period cost) \under the variable costing, the peso ‘amount of inventories under variable costing \s always lower than the peso amount of inventories under ‘absorption costing FNC 1 1PAG 3) ACCEPTABILITY Since treating FFOH as part of inventory cost Is consistent with accounting standards, nly absorption costing is acceptable tor nancial reposting and tax puenases, Variable costing, ‘which \iglates the ‘matching niiaciole,’ is accentable omly for internal use by management NOTE: Matching principle is an accounting principle that calls for the recognition of expense by matching it with the related revenue in the same accounting period. It supports the treatment oF cost of, sales es pane grly hen tose ute ava Seen So Nereaien » Sabale EoMHAsy 2) nereprare ie FMA Dacceproblt eek) 5 4) INCOME staTeMeNT are Naas Deets An income statement prepared Wader absorption costing thet casts, Production costs pertaining to sold uns are fst deducted from sales t¢ ave at gross profit, and then other costs are deducted to obtain net income #) gery Marsieg tomar 2) acre, wei Under watlable costing, the income statement distinguishes between variable and fixed costs. All variable costs are first deduicted from revenue te arrive at the contribution margin, and then fired costs are deducted to obtain profit 5) INCOME COMPUTATION rable casting in wy differ (om sbeocption tacti because of the difference in the amount of FFOH recognized as expense during @ period. This is actually caused by the difference between pcoduction and sales In the fong run, however, horh methods sould yield the same results since sales cannot " a s. (NOTE: the term “income” in many accounting literatures is liberally used to mean. “groht") ypcoeti): core mk nr “9 “Wage 1 of 4 pages x STreting thane ty eg eerie x Fr omnes en) pelircans ee ee aur KeSU - The Review School of Cccoumfancy, MS-03° ABSORPTION & VARIABLE COSTING RECONCILIATION OF INCOME UNDER ABSORPTION COSTING & VARIABLE COSTING Under variable costing, EEQH costs are fully expensed as incurred, while under absorption costing, S&0M Consider the following patterns based on production and sales: + Pattern No. 1: When groduction equals sales, there is oa .change in inventory. EEOH expensed under absorption costing equals FFOH expensed under variable costing. PRODUCTION = SALES => Income (Absorption) = Income (Variable) + Pattern No. 2: When production is greater than sales, there is an increase in inventory. £FOH ‘xpansed under absorption costing ic ess than FFOH expensed under variable costing. ‘Therefore, PRODUCTION > SALES ‘=> Income (Absorption) > Income (Variable) + Pattern No. 3: When productian is less than sales, there is a deccease in inventory. EEQH expensed inder absorption costing is greater than FFOH expensed under variable costing. PRODUCTION < SALES ‘=> Income (Absorption) < Income (Variable) + Basie Formula: ‘A Income = A Inventory x unit FFOH Where: 4 Inventory = Ending Inventory ~ Seginning Inventory {4 Inventory = Units Produced ~ Units Sold + Alternative Formula: Income, Absorption costing Pree Add: FFOH in beginning inventory wx Total Proc. Less: FFOH in ending inventory (2000 Income, Variable costing Pox ADVANTAGES OF USING VARIABLE COSTING e Variable costing reports are simpler and more understandable. ‘ The problems involved in allocating fixed costs are eliminated. i ata needed for break-even and cost-volume-profit analyses are readily available Variable costing is more compatible with the standard cost accounting system. Variable costing reports provide useful information for pricing decisions and other operational problems encountered by management DISADVANTAGES OF USING VARIABLE COSTING 1. Variable costing is not in accordance with GAAP; hence, it is not acceptable for external repo? 2. Segregation of costs into fixed and variable might be difficult. 3. The matching principle is violated by using variable costing, which excludes FFOH from product » costs and charges the same as period costs regardless of production and sales. 4. With variable costing, inventory costs and other related accounts, such as working capital, current ratio, and acid-test ratio are understated because of the exclusion of FFOH in the computation of product cost. EXERCISES: ABSORPTION and VARIABLE COSTING : 1, Adriel Company makes state-of-the-art toy car. Each toy car sells for P 1,000 each, Data for 2016's ‘operations are as follows: Units: Variable Costs. Beginning Inventory 5 Direct Materials 24,000 Production 80 Direct Labor 16,000 Ending Inventory 15 Factory Overhead 8,000- Selling and Administrative 4,000 Fixed Costs: Factory Overhead P 20,000 Selling and Administrative 2,000 REQUIRED: ) ‘ Determine the inventory cost per unit uncer: es 'A) Absorption costing“? = 8) Variable costing > 2. Determine the cost of ending inventory under ‘A) Absorption costing Frat 8) Variable costing 360 Boe =, Page 2 of 4 pages AC YC, Erdiiig ¢ Bey ReSU - the Review School of Cecomedaney MS-03 ABSORPTION & VARIABLE COSTING 3: Prepare income statements under (A) absorption and (2) variable costing. 4+ How muem i the eltference in income between the costing methods? sec 2099 = 21c00 5. What causes the difference in iname between the costing methods? (Adapted: Managerial Accounting by Garrison) cap SOLUTION GUIDE 6 requir (A.) Absorption Costing (B) Variable Costing Total Per Unit, Per Unit pM 24 000 200 50 DL leout Ba 4 VFOH yon Iso . FFOH 259 ath Total 60D et ig Prodick 2 Lay ge ‘SOLUTION GUIDE to requirement 3 ce ADRIEL COMPANY Income Statement, for the period of 2016 (A) ABSORPTION Costing (B) VARIABLE Costing . Sales P 40;e09 Sales Pa eo =Costofsales <9, 00 =Variable cost Gross profit 191508 Contribution margin > Expenses _ Gs 000 > Fixed cost Net income P 4,530 Profit 2. The following information are taken fram the books of Mylene Company, which assumes first-in, first= ut (FIFO) for inventory cost flow > Inventory (in units) 2015 2016 Beginning inventory None 7 Production 10,000 units 9,000 units : Ending inventory 2,500 units 1,000 units Sales (P 2 per unit) 2» m7 Veriable manufacturing costs (P 0.75 per unit) P 7,500 P6,750 Fixed manufacturing costs P'5)000 5,400 Selling and administrative costs (50% variable) _P 4,500 P 7,500 REQUIRED: 4. Determine 2015 profit under Variable and absorption costing 2. Reconcile the two income figures in NO. 1 3. Determine 2016 profit under variable and absorption costing 4. Reconcile the two Tacome figures in No, 3 : (Adapted: Cost Accounting by Horngren, et.al.) LUTIONS & ANSWERS to iter no. 2 201 — Abs —Wariable —Absorption, Variable — Sales P'13,000 Sales 13,000 Sales 23,000 Sales P 23,000 ccs _ (8,125) ve _.@,425)_ ccs (5,175) ve (12,375 GP 4,875. CM P5875 GP 7,825 CM P 10,625 Expense. _(4,500)_ FC __(7,250)_ Expense 7,500) FC (9,350) Income P3275 Loss (P.1,375) Income P325 Profit. — PiLd7s 2015: CGS = 6,500 x P 1.25 = P 8,125 VC = (6,500 x P 0.75) + (4,500 x 50%) = P 7,125 FC = 5,000 + (4,500 x 50%) = P 7,250 Reconciliation: Iricome = (3,500 - 0) P 0.50 = P 1,250 9 375 - (-1,375) 2016: CGS = (3,500 xP 1.25) + (8,000 x P 1.35) = P 15,175 (using FIFO) (11,500 x P 0.75) + (7,500 x 50%) = P 12,75 FC = 5,400 +, (7,500 x 50%) = P 9,150 Reconciliation: A Income = A Inventory x unit FFOH beginning inventory (2015 layer): 3,500 x P.0.50 = P 1,750 ending inventory (2016 layer): 1,000 x P.0.60 = _(600) P4,150 > 1,475 - 325 Page 3 of 4 pages & ReSO - the Review School of ecourtaney MsS-03 ABSORPTION & VARIABLE COSTING WRAP-UP EXERCISES (TRUE OR FALSE: MULTIPLE-CHOICE) 1. Under absorption costing, fixed manufacturing overhead costs are best described as, a. Direct period costs €. Direct product costs b. Indirect period costs 4. Indirect product costs Under variable costing, fixed manufacturing overhead costs are best described as, a. Direct period costs ©. Direct product costs b. Indirect period costs 4d. Indirect product costs 3. Under variable costing, all product costs are variable. 4. Absorption casting differs from variable costing in that: ‘a. Variable costing treats all variable costs as product costs. b. Variable costing treats selling costs as period costs. Inventory cost is higher under absorption costing, d. Profit is higher under absorption costing, Items 5 to 7 are based on the following information White Company manufactures a single product. Unit variable production costs are P 20 and fixed production costs are P 150,000. White uses a normal activity of 10,000 units. White began the year with no inventory, produced 12,000 units, and sold 7,500 units. 5. What is the unit product cost under variable costing? ‘a, P20.00 c. P35.00 b. P32.50 d. P.40.00 6. What is the unit product cost under absorption costing? a. P 20.00 c P35.00 b. P 32.50 4. P.40.00 What is the volume (capacity) variance under absorption costing? a. P 24,000 unfavorable ©.” P 30,000 unfavorable b. P 24,000 favorable d. P 30,000 favorable NOTE: volume variance = (actual production ~ normal production) x unit FFOH 8. There is no volume or capacity variance under variable costing. 9. If production is higher than sales, then absorption costing income is expected to be ‘a, Lower than variable costing income b. Higher than variable costing income Equal to the variable costing income d, Incomparable with variable costing income 10. Black Company produced 10,000 units and sold 9,000 units, Fixed manufacturing overhead costs. were P 20,000, and variable manufacturing overhead costs were P 3 per unit. Which of the following best describes the net income under the absorption costing method? ’2. P 2,000 more than net income under variable costing method b. P-5,000 more than net income under variable costing method .P 2,000 less than net income under variable costing method ‘ d. P-5,000 less than net income under variable costing method 11, Green Company has operating income of P 50,000 using direct costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 units, respectively. If the fixed factory overhead application’rate is P 2 per unit, then what is the operating income using the absorption costing? ‘a. P 70,000 &P50,000 b. 60,000 d. P 40,000 12. Violet Company had 16,000 units in its beginning inventory. During the year, the company’s variable production costs were P 6 per unit’and its fixed manufacturing overhead costs were P 4 per unit. The Company's net income for the year was P 24,000 lower under absorption costing than it was under variable costing, How many units does the company have in its ending inventory? a. 22,000 units . 6,000 units b. 10,000 units, 4. 4,000 units 13. Pink Co. had a net income of P 85,500 using variable costing and net income of P 90,000 using absorption costing. Total fixed manufacturing overhead cost was P 150,000, and production was 100,000 units. How did the inventory level change during the year? {. 3,000 units increase . 3,000 units decrease b. 4,500 units increase d. 4,500 units decrease 14, Under a just-in-time (JIT) production environment, income under absorption costing tends to be equal with income under variable costing. 15, Variable costing income fluctuates with production and does not react to changes in sales: 16. Variable costing is unacceptable for ‘a. Financial reporting c. Transfer pricing b. Cost-volume-profit analysis Short-term decision making Page 4 of 1 pages 5 ito i over] © ReSU- The Review School of GecourTancg, » Momagement Services MS-04: RELEVANT COSTING DECISION MAKING ~ is the process of choosing from at least two alternatives. For business entities infanagenient must choose n fave ofthe option thats most bene to the company ogy we ercvlem Inorer to atte the corporate objective of maximizing prof oe Aseeve on OE ttc ee be re ‘SHORT-TERM DECISION ALTERNATIVES (MASS<) FROGS ONT, ten pis oiee site a Gc oulie Gumie GNvey _Susget icing Sosa 2! Accept or reject a special order : ar \prredetog PU 2 Age ORR REELS, mcrae eet etme wee. Wea. 4. Continue or shutdown a business segment 2) Neck the asics sates i Jvientein a ckovie lononstyp erscen te / od Be a Calg aes ema ne, ean Eades eicks (Ns eee 5. Choosing the best product combination 6. Selecting a change in profit factors compen so Ane Wea Gare | ST oiccdnetny THU) 3 Ponung deunone Rieke autre. cw seal pel orc “TYPICAL DECISION MAKING PROCESS Fader saptienne, poser erly, . (_Demante ning 1. Defining the problem. Nore eae ser tecTe I), M compen Sept 2. Specifying the objective and criteria. DSA devon cong, (RYO. On Ae vay gee 5: Edenifnng the alternative courses of action. scm ege nam COE oan cS 4. Evaluating the possible consequences of the alternatives.) "°F er Aieacey /copouty 5. Collecting the data needed to make decision. Deytenal Fouton ane proach are hd 6. Choosing the best alternative and making the decision.” hcjye op yeaneh hee NETS eet poe 7,_ Evaluating the results of the decision. - Tiere Cae Oe ic sent Sows eo metoonanid MOLE EM NONE Tanigerg et ereen Oe ee beemre nO FACTORS CONSIDERED IN DECISION MAKING Tenarogene ny COME NT ORS Qualitative Factors Factors that cannot be expressed effectively in numerical terms Quantitative Factors Factors that can easily be expressed in terms of money or other numerical units. T) vemond onc fae i APPROACHES IN PROBLEM-SOLVING INVOLVING DECISION MAKING ¢) custornters pereepnen of ome ond Pick Total approach Total revenues and costs are determined for each alternative, and the results a. are compared to serve as a basis for the decision to make. <) Poce Foun sity ; ieebcly eblsadh Gey dtr ences oy cshgna i coes wi yeanues'9ve Se ha ae cE end ane ‘TYPES OF COSTS AND TERMINOLOGIES USED IN SHORT-TERM DECISION MAKING J vcginly Hie are veMnt RELEVANT COSTS Future costs that are expected to be differeht ationg alternatives; it Is“0rdse muse considered as the avoidable costs of a particular decision. Vite or NO eyed” ®& DIFFERENTIAL COSTS Increases (increments) or decreases (decrements) in total costs that result from, : pene vet) (S18 feces eek (© AVOIDABLE COSTS Costs that will be saved or those that will not be incurred if a certain decision is made. [Relevant] : {R OPPORTUNITY COSTS —_Income sacrificed or benefit foregone when a certain alternative is chasen over ‘another alternative. (Relevant) i FR SUNK COSTS, Costs that are incurred already and cannot be avoided. regardless of what WOKS Leet Rage decision is made. [Irrelevant] ur mey wey Sac a wosis For making FREMIETY 1% SHUTDOWN Costs Usual costs that a company will continue even if it decides to discontinue or shutdown the operation of 2 company segment. [Irrelevant] & QUT-of POCKET COSTS Costs that will require expenditure of cash or incurrence of a liability as a consequence of a management decision. (Usually relevant) {@ JOINT costs Costs incurred in simultaneously manufacturing two or more (joint) products. that are difficult to identify individually as separate types of products until the products reach @ certain processing stage known as the split-off point. {trrelevant R FURTHER PROCESSING Costs incurred beyond the split-off point as separated joint products are to be costs processed further [Relevant] | SPLIT OFF POINT ‘The earliest stage in the production where joint products can be recognized as distinct and separate products, BOTTLENECK Any particular resource or operation where the capacity is less than the demahd RESOURCES placed upon it. +! RAGE Bee eeLe ANT oN ey) Page 1 of 5 pages Aes Sao O-gemrrunty RE Fouaner recency CO Org -oF Focker Sout S-aink Cost # Pdidagy Dcwitseona PAuR ~ skeen a tere wen grt etheds Wen oF RELEVANT COSTING ime ar ot Say she ene natu hake Tene 2 cor+ me¥up| © eased on Cietel Gots —__, cso] LV Highest revenues, —— Highest possible profit) Lire sy Lowest costs ef Seay o. rae uN + MU Pes awe + Cw MG?) SHORT-TERM DECISION MAKING GUIDELINES Basic rule: choose the action that will yield the BEST PROFIT POSITION. 2) Moder Based Priktg CBanjer 6 Uy orices based On congth te caer ren om Peon caste Os yea ext BY vols Baainces ey, ape tnrgeh ent SS yon wee we ever + | eceray ac a5 = Ga ened He aan gh ah soe cant bo peel a Fakes. Pichon raption ered ct + Gaed on respon Freahne Mead tee ieee orgek erie ~ expe Prices nee + (APE RNID) sib Rarcigoagar sore [pices Ate + (are regent en pe ™ Wocmpatted restore neers of ved Sd oie mec) ae Se wieghaF Cm ath (mActecs) i a =r ae NATURE OF ] ‘ALTeRNATIves | __DESCRIPTION |___DECISION GUIDELINES oS MAKE or BUY. ‘Should a part or product be | Choose the option that has the lower |~ "rt pasion 8 part/preduct ‘manufactured | (in-sourced) or | cost. In most cases, fixed costs are | oe 9 bought (outsourced) from outside | irrelevant. Consider opportunity | °" reais le a | supplier? costs,.if any. by ws 2. ACCEPT or REIECT —|'Should a special order that | Accept the order when Hie addons 5) conpedtion| special order | requires a price lower than the | revenue from the special order |") | regular seling price be accepted? | exceeds additional cost, provided the a) hes Pred regular market will not be affected, |?" In most cases, fixed costs are | "9 I a : i irrelevant [Price celmelag 3. CONTINUE oF ‘Should a Business segment, which | Continue if avoidable revenue of the | Ls yw iy ost SHUTOOWN I ete of te iner_,2 | Seament involved is greater than is, vox icy ee a business segment | department or a branch, be | avoldable costs; otherwise, consider aa yas continued or discontinued? Shutting ‘down the segment. Since |) Penetott= allocated fixed cost is usually | Lp (me's 1-6 | | unavoidable, it is considered | “2 Levt| 4 ¢ —__| irrelevant g 4. SELL or PROCESS Shoulda product, after | Process further if additional revenue FURTHER a product | undergoing the joint process, be | from processing further is ‘greater | S0ld at the spit-off point or be | than further processing costs. Joint | | processed further? ‘costs, since already incurred prior to the split-off point, are considered f —__| sunk costs and irrelevant. | 5. BEST PRODUCT Which product(s) should be | Identify and measure the constraint COMBINATION | Produced and sold when there is a | on the limited resource(s). Rank the (Optimization of given limited resources. or | product(s) according to the highest Scarce Resources) _| bottleneck operation? contribution margin per unit of 8. &. CHANGE IN PROFIT" |'Should any of thé profit factors | Identity the factor to change and the FACTORS such as selling price, unit sales, | amount of contemplated change. panayacormas” | variable cost, fixed cost and sales | Change the profit factor if it. wil Pe mearae C2) | mie be manipulated to Increase |icause’ an itnprovenerr or nd Ue profit? {company’s over-all profit position. | Autumn Company has a sin Kyoto at P-40 per unit, The com; REQUIRED: EXERCISES: RELEVANT COSTING 1. TOTAL ANALYSIS vs. DIFFERENTIAL ANALYSIS Variable Costs. Direct materials Direct labor Variable Overhead Variable Selling Expense Fixed Costs: Fixed Overhead Fixed Selling Expense 1. What is Autumn Company's present profit? 2. Auturnn Company could increase its sales by 25% Determine the effect on company profit using: A) Total analysis 8) Differential analysis Page 2 of 5 pages P10 8 5 2 P25 P 50,000 30,000 if it spends P 20,000 for advertisements. © wgle product called Kyoto. The company currently sells 8,000 units of pany’s costs at this level of activity are given below: ReSU - The Review School of ecourdaney MS-04 RELEVANT COSTING 2. MAKE OR BUY (OUTSOURCING DECISION) BMW Motors is trying to decide whether it must continue to produce an engine component or buy it from SARAW-Philippines for P 2,500 each. The demand for the coming year Is 20 units. The costs of producing a single unit of the engine component are as follows: Direct materials P 1,200 Direct labor 800 Factory Overhead (80% fixed) 1,000 P.3,000 If BMW buys the components, the facility now used to make the components can be rented out to another firm for P 10,000. REQUIRED: ‘Should BMW make or buy the components? 3. ACCEPT OR REJECT (SPECIAL ORDER DECISION) ‘Antonia Company sells a product for a regular unit price of P 75.00. The cost of producing and ‘selling a unit of this product at the normal activity level of 50,000 units per month is as follows: ‘Manufacturing costs. Direct materials P 32,80 per unit Direct labor 7.20 per unit Variable manufacturing overhead 3.00 per unit Fixed manufacturing overhead P 100,000 per month Selling and administrative costs: : Variable P 2,50 per unit Fixed P 36,000 per month ‘An order has been received from a customer for 5,000 units at a discounted unit price of P 50.00. This order has no effect on normal sales and would not change the total fixed costs. The variable selling and administrative expense would be P 0.50 less per unit on this order than on normal sales. REQUIRED: ‘Should Antonia accept or reject the special arder? 4. SPECIAL ORDER PRICING Conrada Company sells I-Phone 8 at a price of P 28,000 per unit,. The costs per unit are: Direct materials 8,000 Direct labor 6,000 Variable overhead 4,000 Fixed overhead 2,000 TOTAL P 20,000 ‘A special order for 1,000 units was received from Marcia Bona, a well-known cell phone dealer based in Cavite. Additional shipping costs for this sale are P 2,000 per unit. REQUIRED. ‘What is the minimum selling price per unit for the special order if A) Conrada is operating at FULL capacity? 8) Conrada has EXCESS capacity? 5. SHUTTING DOWN OPERATIONS The most recent monthly income statement for Gorgon Stores is given below: China Branch Japan Branch Total sales 1,200,000" P.800,000 2,000,000 Less: Variable expenses (840,000) (360,000) (1,200,000) Contribution margin 360,000 P.446,000 "£00,000 Less: Traceable fixed expenses (210,000) ’ (180,000) (390,000) Segment margin P.150,000 260,000 -—-P.410,000 Less: Common fixed expenses (480,000) (120,000) (300,000) Profit (oss) (P 30,000) -P 140,000 P.130,000 If China Branch were eliminated, then its traceable fixed expenses could be avoided. The total cominon fixed expenses are merely allocated and would be unaffected. |A) What will be the new company profit (loss) if China Branch is eliminated? 2. P 260,000 < (P 40,000) b. P 140,000 4, (P 70,000) B) What will be the decrease in company profit if Gorgon closes its China Branch and 20% of its traceable fixed expense would remain unchanged while Japan sales would decrease by 20%? a. P 352,000 <& P 136,000 b. P 280,000 d, No decrease; profit will increase Page 3 of 5 pages eS. The Review School of lccouedamcy MS-04 RELEVANT COSTING ©. PRODUCT ELIMINATION POINT Chrissy Company expects that sales wall drop below the current level of 5,000 units per month. An income statement prepared for the monthly sales of 5,000 units show the following: Sales (5,000 @ P 3) 15,000. Less: Variable costs (5,000 @P 2) P 10,000 Fixed costs. __5,000__15,000 Profit = Nil - If plant operations are suspended, a shutdown cost (i.e., plant maintenance and taxes) of P 2,000 per month will remain as incurred. Since there is no immediate possibility of profit. under’ present conditions, the problem of the company is just how to minimize the loss, REQUIRED: 1. What is the shutdown point in units? 2. Should the company continue or shut down operations if sales next month are expected to be: A) 4,000 units? 8) 2,000 units? SOLUTION GUIDE oe es pe *)8.000 units | B)2,000 units | 3.000 units | (5,000) 000) | 7. SELL OR PROCESS FURTHER ‘Oval Company produces four praducts for a joint cost of P 10,000. The firm could sell the products at the spit-off point forthe following amounts | 15,000 40,000 | 2,000" o Contribution Margin =Lixed Costs (5,000) Profit (loss) fh At present, the products are processed beyond the split-off point and they are sold as follows: ‘Adgitional Processing Cost_ REQUIRED: 1. Which product(s) should the firm sell at split-off point? 2._ Ifthe company takes the most profitable action, then what will be its profit? 2,25 8. BEST PRODUCT COMBINATION Kapos Co. produces three products: A, B and C. One machine is used to produce the products. ‘The contribution margins, sales demands, and time on the machine (in hours) are as follows: Market Limit Unit Contribution Margin Hours on Machine A 100 units 10 per unit 8B 80units 5 per unit C150 units 40 per unit There are 2,400 hours available on the machine during the week. Total fixed cost is P 5,000, REQUIRED: 1. What is the best product combination that maximizes the weekly contribution? 8, 100 units of Aj 80 units of B; 150 units of C b. 50 units of A; 80 units of B; 150 units of C i es €. 90 units of A; 0 unit of B; 150 units of C 6. 100 units of A; 80 units of B; 100 units of C 2. How much is the profit associated with the best product combination? ‘SOLUTION GUIDE pete iS Product A_| Unite |p 20 Hours per unit | 10 hrs, Page 4 of 5 pages KeSla - The Review School of Cecourtancy MS-04 RELEVANT COSTING P_EXERCIS TIPLE-CHOICE} 4. Which of the following costs is generally considered irrelevant in decision making process? a. Direct labor b. Direct materials c. Fixed factory overhead d. Variable factory overhead A. The salary you would otherwise earn by working rather than attending the CPA review is @ good example of 2. Asunk cost b. An opportunity cost © An ineremental cost 4d. An out-of-pocket cost XA opportunity cost is usualy 2. Relevant, but is jot part of traditional accounting records. b. Not relevant, but is part of traditional accounting records. ¢. Relevant, and is part of traditional accounting records, d. Not relevant, and is not part of traditional accounting records. : Al Wihat is the opportunity cost of making @ component part in a factory with excess capacity for which there is no alternative use? a. The total manufacturing cost of the component b. The variable cost of the component ©. The fixed cost of the component é. Zero If there is excess.capacity, the minimum acceptable price for a special order must cover a. Usual fixed manufacturing costs b. Variable and usual fixed manufacturing costs ¢. Variable manufacturing costs associated with the specia) order 44. Variable manufacturing costs plus contribution margin foregone on lost regular units, whe oper pop welerng, fe 2 % 6. If the margin that will be lost by dropping a product line is more than the fixed costs that will be “> avoided, then \ ‘a. The product line operates at a loss b. The product line shall be continued The product line shall be shutdown 4d. The product line has no significant impact on company profit f ime 6 2 Ifthere are shutdown costs, a company’s shutdown point is a. Nilor zero poy dlolang eieddiwo cit = te Bo a b. Below its break-even point i Above its break-even point ; 4. Equal to its break-even point ‘ Bs Which is usually considered irrelevant in sell or process further’ decision making? a. Joint costs b. Further processing costs Sales valve at the split-off point d. Sales value after further processing 5 9. A company that has a limited number of machine hours and abundant labor hours should produce first : the product that has the highest roe a. Demand in units Contribution margin per unit © Contribution margin per labor hour 4. Contribution margin per machine hour ® 1. The role of sunk costs in decision making can be summed up in which of the following sayings? ‘a. No pain, no gain b. Bygones are bygones ©. A penny saved is a penny earned d. The love of money is the root of all evil Page 5 of 5 pages ReSlh- The Review School of lcconetancy, « Mamagemert Serrices | MS-05: BUDGETING BUDGET - Is a detailed olan, expiessed in quantitative terme, about business operations for a specific period @ budget is @ useful too! for Glanning and controling company exnenses, cash flows and earings. The term budgeting is used (o denote the process of coming up with budgets. ADVANTAGES & LIMITATIONS OF BUDGETING _Lesstedeatenes ot budgeting F¥ Planning | «© Teforces managers to.plan 1g Goals /a\ecahing Recawees Limtations of Budgeting Considerable Limeand costs are reaulced + Itprovides 2 means of cammanicating Budgets are merely estimates that ceauice management's plans throughout the entity. + | Itdirects the activities toward the ecessare 2 + successful budgetary systern gequires + Teeoordinates the activities of the entire conperation of all members of the ‘entity by integrating plans of various parts. ‘xganization, + Teprovides a means of allocating resources + Budgets sometimes cestuict the Hexibilty of to seqments efficiently and effectively, ‘the decision-making process. + Tt defines goals that serve as benchmarks for «The budget program is merely a quide, aoa evaluating subsequent performance, ‘substitute for good management ability. » pmenaa bowtenccks cod be discwiceed before ‘THE MASTER BUDGET “') °° MASTER BUDGET. is @ comprehensive budoet that consolidates the overall plan of the organization for a + speciied period: The master budget ts mainly composed of: (1) aneratina buuigets and ewes (2) finansial budgets. The master budget, in. some organizations, 1 also referred to as Stns profane bageet, planning budaet, forecast budget, guaster profit plan Foacam\ wade ea eet Planning tucker —f =“ : arora Pion + [master BuoceT |} OPERATING BUDC FINANCIAL BUOGET ‘Sales Duda: Cash budget Production budget Budgeted balance sheet Direct materials budget Sudgeted cash flow statement Direct labor budget Capital expenditure budget Factory overhead budget Working capital budget Budgeted cost of goods sold Budgeted operating expenses Budgeted net income Budgeted income statement BUDGETING-RELATED TERMINOLOGIES. FIXED BUDGET A budget prepared for 2 ane level of activity within a certain period. (other term: static budaet) FLEXIBLE BUDGET A budget prepared for differeor levels of activity within a certain pesind. (other terms: wariable budget, sliding scale budget) CONTINUOUS A 12-month budget thet (lls two oie month os the cument cont is BUDGETCRSHLING > gompleted (other term: perpetual budget) ZERO-BASED A method of tuceting in which managers ore suid ta BUDGETING a ce being proposed for the first ume IMPOSED A process wherein repated by t ent ait BUDGETING fhguts Go patina erst PARTICIPATORY. ‘A process wherein budgets are deyeiones Nhiough Jou deciee i BUDGETING anagement and operating persone! BUDGET COMMITTEE A group of key management person sesponsible for averall policy mattes fee athe budget graces and for contacaling he budnet orenarsnina, BUDGET MANUAL This lescribes how get Is brenared and lcludles a alanning calendas cin atl istribulion instiuetions for all budget schedules D budget Harming coiendar Keizer -. Japanese tenn stad means > ceatnine Sipraviment at y (2) "10it Gales tov 20 Kas or! Beet ReSU ~The Review School of Uecowitoreg LH Tou MS-05 © Gre +10,000- scvet sect - roe BUDGETING = 65-00 EXERCISES: BUDGETING 1. Monkey Company has budgeted sales at P 100,000 and expects a pialit-of 10% of the sales, Expenses are estimated as follows: selling = 10% of sales; administrative = 15% of sales, Labor is expected to be 40% of the, total manufacturing costs. Factory overhead is to be applied at 75% of direct labor costs. Inventories are to be as follows: January 1 December 31." Materials 2,500, P7500 Worksin-process 8,000 3,000 (0) es oe Finished goods 5,000 10,000 C2tom) pe C3809 OH REQUIRED: Determine the follawing Fee 1, Gost of goods sold a5: co 3. Factory overhead '*'900 Moe : 2) Total manufacturing cost “5.020 4. Matertals purchases 24 SCO) Saad: 296097 (Adapted: AICPA) 2. Past collections experienced by Fire, Inc. indicate 60% of the net sales billed in a month are collected during the month of sales, 30% are collected in the following month, and 10% are collected in the second following month. A record of monthly net sales of previous months is as follows: P 450,000 [March TP 500,000, [i 0. m gah: [P460,000] ,,,, |_April_| 550,000 2016 “February |_-420,000 june | P-790,000_ On January 1, 2016, the accounts receivable balance showed P 229,000. REQUIRED: Determine the following ‘+ Cash collections on accounts receivable during: 1. January 2016 “10% 2, March 2016 444 ‘+ Accounts receivable balance at the end of: a0 May 2016 5? 0 4. February 2016 iva S. Apri 2016 22000 6. june 2016.40 0a SOLUTION GUIDE to Item No. 2 _ Schedule of 2016 Monthly Collections | 480, 000 May | P-600,000 (Adapted: AICPA) mber_| P 450,000 | December | P.460,000 || January | _P 480,000 12 [February | 1P420,0 000 | 500,000 _| P 550,000 | 600,000 700,000 | _ [torat cofections hedule of 2016 M Accounts Recelvabl ch [April [May [ine January | Febroary | Marct AR, beginning eam | Myeod | Ace | 247 @O | 200s, | 295 CoN | + Net Sales Bere SU) aee Oc uns cone yeesv0. con sou aaa A 700 000 = Collections (431-200) | ( | {REED FeO te rome. Ceeoe | {gst cm pigece | tad000 [Zar 8b AR, ending 989 Goo [716 Goo 5. The sales manager of Fresh Merchanelising has budgeted the following sales for the 4% quarter of 2018 ‘October ® 123,500 1 November 156,000 / December 208,000 Other budgeted estimates are: + All merchandises are to sel) at its invoice cost plus 30% mark-up. + Beginning inventories of each month are budgeted at 40% of that particular month's projected cost of goods soid. REQUIRED: Determine the following: 1, Projected merchandise purchases for the month of October. 10.5) 000 2. Projected merchandise purchases for the month of November. 34-909 (Adapied: Managerial Accounting by Warren) coae a5 900 Page 2 of 4 pages 5) StS OD) Heemiee cous (oaby g nf gotyi En 4 . quev0® Jogcod re xy (4 Hom? oe, Tete Tee oe Opercins - TS eng ones Paani - Llobity (rae ROSA - the Review School of lccor tomer MS-05 BUDGETING . 4, The following information is taken from. Glory Corporation's accounting records for the year ended December 31, 2015. These data would be used as the basis for the next year’s cash budget © A). Customer sales seceipts for P 870,000 Pa Aye £ B) Purchased mactinery and equipment for P 425,000 cash, <) | Hoc C) Settled income taxes of P 110,000 9 (2s0ce) ED) Sold javestment securities for P 500,000, Peiiatoy ¥ E) Paid dividends of P 600,000. 5 Pct © F). Recelved rentals of P 105,000, nes G), Issued 500 shares of common stock for P 250,000, =) i © HY Paid a sum of P 100,000,due to suppliers and payroll to employees. 4) 105 008 E}F 1) Purchased real estate for P 550,000 cash that was b a) ayo ote ve 3). Paid P 450,000 for treasury shares. Pies) REQUIRED: Determine the following: 5 sfo0w) gsesee 1. Net cash provided by operations. ox aou Tom !=¥= \ oh 2. Nef cash used in investing activities 9 9%) te, D (ascot) 3, Net cash used in financing activities(secoe) ak gions PR ae ee f niccanh meverpe i ceceere eee ee wrens aCe SOS OD (Fic on)" (ESP) (Adapted: AICPA) WRAP-UP EXERCISES (Multiple > AG The master budget usually begins with the a. Production budget b. Operating budget Financial Budget a. Sales budget choice Questions) (All of the following are considered operating budgets, EXCEPT a, Sales budget Sa 4.’ Capital budget ¢. Materials budget d, Production budget 3 3. The production budget process usually begins with the ~ a.” Sales budget b. Direct labor budget c. Direct’materials budget d._ Manufacturing overhead budget 4 2 Which of these budgets is usually, prepared first? 2. Production budget b. Materials purchases budget c. Cash disbursements budget d. Cash budget p _X-5. whieh of the following budgets is pased oo many othe) Direct labor budget b. Overhead budget Sales budget d. Cash budget aster budget components? pics hg ae a tis orl lata tcn dics ch wamai tn. nas poser sales 10 be P 260,000 nung,» 270,00 in ly and P 300/00 i August J Heal 2Ohate Baath ales the mowth of sale Soe nthe moot followin the sale ard ove inte second ont elowng te sle What is the accounts receivable balance on. Se hy gu 90,000 0 Be | ey as 4 6 P210,000 ee Go gd) 20k ©. P 264,000 a Bie Same other nuinber yy 30 50 25 pein 2u Page 3 of 4 pages TAY 290, UX Zod = G4, 070 ti Aig, 30 0D X 302 = 210,000 264 oy Noch Apok Mey Meh 20, dod | S52 not they 1e/0u0 + 3/000 ape 304, 4s sul Noah 000 FAO xss2= 3 46S mor aol A EW Ayal Goo xa e a= 2240 * 7305 KOS - the Review School of Gecountancy MS-05 BUDGETING 8. Arizona Inc. has projected sales: February, P 10,000; March, P 9,000; April, P 8,000; May, P 10,000; and June, P 11,000. Arizona has 30% cash sales and 70% sales on account, Accounts are collected 40% in the month following the Sale and 55% collected the second month, What would be the. total sh ri cay? cae May 19,000 x 307 = * 3.000 & ps.705 lectures en B pasts0 4. Somme otner number 440) Rowe x sol nag} 8 Morn yomereited = 2 3 Yhe Ohio Company haste oewing strc! pattern on is cred sales: a ahs colected inthe month of ae 15% coltected in the first month after sale <7 10% collected in the second month after sale 4% collected in the third month after sale 1% uncollectible ‘The Sale’ on open account have been budgeted for the last she months of 2016 are shown below: daily 60,000 dled Waite ; ‘August 70,000 ak fois m= ad September 80,000 ty Sore ieee ac October 90,000 Novernber 100,000 oe we at December 85,000 e What would be the eninated total cash collections during the Jaurth.calendar quarter from sales made ‘on open account within the fourth calendar quarter? Oddie SOON Ist = gt Tod, a, P172,500 €. P251,400 Nov. |@,OUx ESL © tooD b. P.230,000 4. P 265,400 bee gs ax ye? = £9500. 0. POY 40. Nevada Company manufactures a single product. The company keeps inventory of raw materials at ‘50% of the coming month's budgeted production, Each unit of product requires 3 pounds of materials, ‘The production budget is (in units): May, 1,000; tune, 1,260; July, 1,300; August, 1,600. 2400 Determine the raw materials purchases in uly. Soy = ae ‘ 8, 1,450 pounds o © 3,900 pounds end wots maemncds 240 b. 2,400 pounds 4. Some other number ea gest bey s4oey tan) 42. PhilSdelphia Company has budgeted sales of 24,000 finished units for the forthcoming 6-month period. 425% Tetakes 4b. of direct materials 10 make one fished unt. Given the following: ay oon Finished Units Direct Materials (pounds) ua) Beginning inventory 14,000 44,000 Target ending inventory 12,000 48,000 ge (How? How many pounds of direct natenals should be budgeted for puschase during the 6-month periSa? 1. 92,000 c- 96,000, freed #2.000 4 b. 88,000 d, 100,000 ©. -BkO00 + 4€c00 w M3000 ~ 4400 % 12. Florida Co. has projected sales to be P 60,000 in January, P 75,000 in February, and P 80,000 In March. = <1. Flora wonts eofave 2586 of ree months gales needs on hand at the end oF a month. If Florida has an average gross profit of 40%, what are the February purthases? Sole. Fran xtad = a. P 30,500 ei ©. P46,250 Eod YOu xéal as b. 45,750 d. P 76,250 ey asobux sel ° Py 13. Michigan Merchandising is preparing its cash budget for June 2016 and made the following projections: ">" ) Sales P 1,500,000 Pudbares TES Gross Profit Rate 25% ee Decrease in Inventories 70,000 sale SH sey Decrease in Accounts Payable for Inventories 120,000 ee aos For June 2016, what will be the estimated:cash disbursements for inventories? LE OOS. Datsun ivertog @. P-935,000 .- P 1,055,000 ee bP 1,050,000 d. P 1,175,000 TOPE Tes Peweare in AP n Ty Bs OZ e _J4. Texas Company hes prepared the Hexible budget formula. for production costs: costs 340,000 9x, where Xs the number of unite produced. Texas prodiced 20,000 units ata total cost of 190,000, ‘What is the variance of actual costs from budgeted costs (ie., budget variance)? Actwol 8 a. P-150,000 favorable ©. P-30,000 unfavorable 499,980 Haron + (20.0%) b. P 30,000 favorable — d. P-90,000 unfavorable < 49009) - s70,080 =. 0, cog, Fovoratle A 75. The use of standard costs in the budgeting process signifies that an organization Ras most likely implemented a oa 'a._ Flexible budget . Zero-based budget b.- Capital budget d, Static budget Page 4 of 4 pages e ReSth. the Keview School of Gecourtancy « Management Services MS-06: STANDARD COSTING STANDARD — a benchmark set by management’ in aid of performance measurement, in manufacturing companies, standards are classified into two (2) categories: + QUANTITY Standard ~ indicates the quantity, of raw materials oF labor time required to produce a Unit of product. This is normally expressed per unit of output (e.g., 3 pieces per unit) * COST Standard ~ indicates what the cost of the quantity standard should be. This is normally expressed per unit of input (e.9., P 2.00 per piece). STANDARD COSTS ~ systematically pre-determined costs established by management to be used as a basis for comparison with actual cost. BUDGETS vs. STANDARDS: STANDARDS | Pirpose Standards pertain to what costs should be | Pe Topstee ea | given a certain level of performa sini | Einphasis | Budgets emphasize cost levels that | Standards emphasize the levels to which costs | ty | should not be exceed. | should be reduced. i Coverage | Budgets are set for all departments in | Standards are set only for the production or [the frm (e9., sales, administration, | manutactuang division ofthe fn. manufacturing) eta ne i Shes Analysis | When actual. data difer trom the | Wateral amounts of variance are reviewed so | budget, it_may be an indication of | that necessary corrective actions are L either good or | implemented accordingly. vents of expected STANDARD COST VARIANCE ANALYSIS ‘Actual Costs (AC) ~ Standard Costs (SC) VA ‘AC > SC: Unfavorable (debit balance) AC < SC: Favorable (credit balance) MATERIALS Variance Actual Materials Cost ¢ Actual Quantity (AQ) x Actual Price (AP) = Standard Materials Cost © Standard Quantity (SQ) x Standard Price (SP) Materials Cost Variance Analysis: Quantity variance; AQ SP Price variance: AQxaP Difference i quantities x Standard price Actual quantity x Difference in prices LABOR Variance Actual Labor Cost © Actual Hours (Atl) x Actual Rate (AR) =) Standard Labor Cost € Standard Hours (SH) x Standard Rate (SR) Labor Cost Variance Analysis, Efficiency variance: A Hx S Difference in hours x Standard rate Rate variance: AHKAR ‘Actual hour x Difference in rates FACTORY OVERHEAD (FOH) Variance = (Actual FOH cost) ~ (Standard FOH cost) (Refer to page 2 for complitte FOH Variance Analysis) MATERIALS PRICE, MIX and YIELD Variances . Mix and yield variances are normally calculated whenever the production process involves combining several materials to produce a unit of product a Materials variance = Actual Materials Cost - Standard Materials Cost Analysis: Price variance: AQxAP Mix variance: (AQ «5 P) - TAQASP Yield variance TAQASP ~ Standard Cost Legend AQ- Actual quantity AP - Difference in prices S$ P- Standard price TAQASP - Total Actual Quantity at Average Standard Price i NOTE! mix and yield variances may also apply to direct labor Page 1 of 6 pages

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