Republic of the Philippines

SORSOGON STATE COLLEGE

PRE-REVIEW LECTURE IN MANAGEMENT ADVISORY SERVICES
Management accounting concepts & techniques
for planning and control ROMAN JULIO B. INFANTE
PROBLEM 1 – CVP Analysis

After reviewing its cost structure (variable costs of P6.00 per unit and monthly fixed cost of P120,000) and potential market,
Jolina C. Romcris Company established what is considered to be a reasonable selling price. The company expected to sell
50,000 units per month and planned its monthly results as follows:

SALES P 500,000
VARIABLE COSTS 300,000
CONTRIBUTION MARGIN P 200,000
FIXED COSTS 120,000
INCOME BEFORE TAXES P 80,000
INCOME TAXES (40%) 32,000
NET INCOME P 48,000
(A) What is the contribution margin ratio?
Contribution Margin (CM) = Total Sales – Total Variable Costs
Contribution Margin per Unit (CM per unit) =Selling price per unit – Variable Cost per Unit
Contribution Margin Ratio (CM%) = CM ÷ Total Sales
-or-
= CM per unit ÷ Selling price per unit

(B) What is the break-even point in units?

BEP Sales = Fixed Cost (FC) ÷ CM%
BEP Units = FC ÷ CM per unit
(C) All other factors remaining unchanged, how much increase in profit would Jolina expect if the number of units sold is
55,000 (before tax)?
(D) If the company determined that a particular advertising campaign had a high probability of increasing sales by 3,000
units, how much could it pay for such a campaign without reducing its planned profits?
(E) A plan includes an increase in advertising cost of P20,000. What is the minimum increase in unit sales to compensate
for the increase in advertising cost?
(F) If the company wants a P60,000 before-tax profit, how many units must it sell?

Required Unit Sales Before Tax Profit + FC

=
at Target Profit * CM per unit
(G) If the company wants a 10% before tax return on sales, what level of sales in pesos does it need?

Required Sales at Before Tax Profit + FC

Target Profit*
=
CM%
Note: Profit should be on a Before-Tax basis in using this formula.
(H) If the company wants a P45,000 after tax profit, how many units must it sell?
If the Target Profit is in After Tax figure, use the following formula to convert to before tax basis:

Before Tax After Tax Profit

Profit = 1- Tax Rate

(I) If the company wants an after-tax return on sales of 9%, how many units must it sell?
(J) If the company wants an after-tax profit P45,000 on its expected sales volume of 50,000 units, what price must it
charge?
(K) If the company wants a before-tax return on sales of 16% on its expected sales volume of 50,000 units, what price
must Jolina charge?
(L) The company is considering offering its salespeople a 5% commission on sales. What would be the total peso-sales
required in order to implement the commission plan and still earn the planned pre-tax income of P80,000?
(M) What is the margin of safety in peso sales and the margin of safety ratio at the expected sales of 50,000 units?
Margin of Safety (MOS) = Actual Sales – BEP Sales

Margin of Safety Ratio (MOS%) = MOS ÷ Actual Sales

(N) Assuming that the cost structure remains unchanged, but the volume of sales is expected to increase to 60,000 units,
what is the new margin of safety ratio and the amount of profit after-tax?
(O) What is the degree of operating leverage based on expected level of sales?

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 Degree Operating Leverage (DOL) = CM ÷ Operating Income

HIGH OL LOW OL
Low VC High VC
High FC Low FC
High CM Low CM
High BEP Low BEP
Sales after BEP have Sales after BEP have lesser
greater impact on profits impact on profits
Note: DOL X MOS% = 100%, thus,

DOL = 1 ÷ MOS% and

MOS% = 1 ÷ DOL
(P) Assuming that the cost structure and the selling price remains constant, what is the percentage of change in profit and
the new expected profit after tax if the company can sell 55,000 units?

Change in Profit = Change in Sales Peso x CM%

-or-

= % change in Sales x DOL

(Q) The operations manager believes variable cost will increase to P8.25 per unit. The sales manager believes the selling
price can be increased. What is the new selling price that will give the same contribution margin ratio?
(R) The operations manager believes variable cost will increase to P8.25 per unit. The sales manager believes increasing
the selling price may not be a good decision. What is the new breakeven point in units?

PROBLEM 2 – Standard Costing

Price Variance = (Actual Price – Standard Price) x Actual Quantity Purchased

Quantity* Variance = (Actual Quantity Used – Standard Quantity Used) x Standard Price
* Volume Variance = (Expected production – Actual production) x Standard Price

Nose-to-Nose Company operates with a standard cost accounting system and uses cost variances as a means of detecting
costs that may require more control. A standard cost sheet for a component that is manufactured exclusively in one plant
is as follows:

Direct Materials (5 units @ P8) P 40.00

Direct Labor (0.5 hour @ P40) 20.00
Variable Overhead (0.5 direct labor hour @ P6) 3.00
Fixed Overhead (0.5 direct labor hour @ P10) 5.00
Standard Unit Cost P 68.00

Data from the past year were as follows:

1. Purchased 1,550,000 units of materials at a cost of 4. Used 1,480,000 units of materials in production.
P12,430,000 5. Utilized 150,000 direct labor hours.
2. Manufactured 295,000 units of product and sold 6. Spent P5,960,000 for direct labor.
275,000 units. 7. Spent P910,000 for variable overhead.
3. Budgeted P1,500,000 for fixed overhead for the year. 8. Spent P1,525,000 for fixed overhead.

Using standard costing system, determine the following variances:

a. Material Price Variance

b. Material Usage (Efficiency) Variance
c. Labor Rate Variance
d. Labor Efficiency Variance
e. Variable Overhead Budget Variance (break this into spending and efficiency)
f. Fixed Overhead Budget Variance
g. Fixed Overhead Volume Variance
h. Using normal costing, analyze the overhead variance into four components

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 PROBLEM 3 - Variable Costing
Absorption VS Variable

Absorption Variable
DM √ √
DL √ √
VOH √ √
FOH √ X
VOX X X
FOX X X
√ - Product Cost
X – Period Cost

Absorption Costing (Conventional/Full Costing) Variable Costing (Direct/Differential/Marginal Costing)

Sales xxx Sales xxx
Cost of Sales xxx Variable Costs xxx
Gross Margin xxx Contribution Margin xxx
Operating Expenses xxx Fixed Costs xxx
Operating Income xxx Operating Income xxx

Profit/Ending Inventory Reconciliation*

P=S AC = VC -
P>S AC > VC AC - FOHU(P - S) = VC
P<S AC < VC AC + FOHU(P - S) = VC
* Unit Cost is constant over time
* Fixed cost variance are written off rather than prorated to inventory balances

AC NI XX VC NI XX
BEG FOH XX BEG FOH (XX)
END FOH (XX) END FOH XX
VC NI XX AC NI XX

Note: No fixed cost variance under variable costing

Sherrill Corporation produces a single product. The following is a cost structure applied to its first year of operations.

Sales price P15 per unit

Variable costs:
SG&A P2 per unit
Production P4 per unit
Fixed costs (total cost incurred for the year):
SG&A P14,000
Production P20,000

During the first year, Sherrill Corporation manufactured 5,000 units and sold 3,800. There was no beginning or ending
work-in-process inventory.

a. How much income before income taxes would be reported if Stanley uses absorption costing?
b. How much income before income taxes would be reported if variable costing was used?
c. Show why the two costing methods give different income amounts.

PROBLEM 4 – BUDGETING

Sales Budget Cash Collections Budget

Units to be sold xx Collections for current month’s sale xx
Selling price per unit xx Collections for prior months’ sale xx
Sales pesos xx Receipts from transactions other than sale xx

Total cash receipts xx

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Patsy Company has the following collection pattern for its accounts receivable:

40 percent in the month of sale

50 percent in the month following the sale
8 percent in the second month following the sale
2 percent uncollectible

The company has recent credit sales as follows:

April: P200,000
May: 420,000
June: 350,000

How much should the company expect to collect on its receivables in June?
Production Budget (Units) DM Budget (Units)
Beginning FG xx Production xx
Production xx x DM per FG produced xx
GAS xx DM used xx

Units to be sold (xx) Beginning DM xx

Ending FG xx Purchases xx
DM Available xx
DM Used (xx)
Ending DM xx

DM Budget (Pesos)
Purchases (in units) xx
x Cost per DM xx
Purchases (pesos) xx

Southworth Company

Southworth Company manufactures Product A from three raw materials (X, Y, and Z). The following table
indicates the number of pounds of each material that is required to manufacture the product:

Material X Material Y Material Z

2 3 2
2 1 2
3 2 2

The company has a policy of maintaining an inventory of finished goods on the product equal to 25 percent of
the next month's budgeted sales. Listed below is the sales budget for the first quarter of 2021:
Month Product A
Jan. 10,000
Feb. 9,000
Mar. 11,000

a. Refer to Southworth Company. Assuming that the company meets its required inventory policy, prepare
a production budget for the first 2 months of 2021.
b. Refer to Southworth Company. Unit costs of materials X, Y, and Z are respectively P4, P3, and P5. The
Southworth Company has a policy of maintaining its raw material inventories at 50 percent of the next
month's production needs. Assuming that this policy is satisfied, prepare a material purchases budget
for all three materials in both pounds and pesos for January.

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Other pro-forma budgets:

DL Budget OH Budget
Production xx Activity base xx
x Std time allowed/unit xx x VOH rate per activity xx
Std time allowed xx Total VOH Cost xx
x Cost per DL time xx + Fixed OH xx
DL Cost xx Total OH xx

Selling and Admin Budget Total OH xx

Units to be sold xx Noncash OH (xx)
x Var SA per unit sold xx Cash based OH xx

Total Var SA Cost xx

+Fixed SA Cost xx Cash Budget
Total SA Cost xx Beginning balance xx
Cash receipts xx
Total SA Cost xx Cash disbursements (xx)
Noncash SA Cost (xx) Cash excess xx
Cash based SA xx -Minimum balance (xx)
(Cash needed)/available (xx)/xx
Cash to borrow/(invest) xx/(xx)
Ending balance xx

PROBLEM 5 – Activity Based Management

McMahon Company would like to institute an activity-based costing system to price products. The company's
Purchasing Department incurs costs of P550,000 per year and has six employees. Purchasing has determined
the three major activities that occur during the year.

Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase orders 1 P150,000
Reviewing receiving reports # of receiving reports 2 P175,000
Making phone calls # of phone calls 3 P225,000

During the year, 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and
10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50 purchase
orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.

a. Determine the amount of purchasing department cost that should be assigned to each of these
products.

b. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of Product
B were manufactured during the year.

“It is not a question of how much money you have, but how wise you are to save it” – Shaquille O’Neal,
DBA

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