Cost Accounting and Costing Systems

Sunk cost refers to expenses that have already been incurred and cannot be recovered. In this scenario, the ₱500,000 spent on the old machine is a sunk cost, as it is a past expenditure that should not impact current decision-making. The decision should focus on future costs and benefits of the new machine versus the old one, rather than considering the money already spent. Ignoring sunk costs helps ensure that decisions are made based on potential future value, rather than being influenced by past investments that cannot be changed.

To find the variable cost per machine hour using the high-low method, first identify the highest and lowest activity levels and their corresponding costs. Here, the highest cost is ₱18,250 at 3,000 machine hours, and the lowest is ₱12,250 at 1,500 machine hours. The change in cost is ₱6,000, and the change in machine hours is 1,500. Dividing the change in cost by the change in machine hours gives a variable cost of ₱4.00 per machine hour.

Total normal overhead applied is calculated by adding fixed overhead to the variable overhead applied based on actual direct labor hours used. Fixed overhead is ₱1,000,000. Variable overhead is ₱40 per direct labor hour, and with 150,000 actual DLH, the variable overhead amounts to ₱6,000,000 (₱40 x 150,000). Therefore, total normal overhead applied is ₱1,000,000 (fixed) + ₱6,000,000 (variable) = ₱7,200,000.

This situation exemplifies step fixed costs because the total cost remains constant within a range of activity but increases when a certain threshold is crossed—in this case, the addition of the 51st worker. The supervision cost does not change with the number of workers up to 50 but jumps to a higher level when an additional supervisor is needed, indicating a step increase in fixed costs rather than a continuous variable change.

Opportunity cost refers to the potential benefits that are lost when one alternative is chosen over another. In this case, the company could have earned ₱200,000 annually by leasing the building, but instead, it is using it for production. This foregone rental income is a critical consideration in the cost analysis for the new product line, as it represents a benefit that the company is sacrificing by not leasing out the building. Thus, it should be classified as an opportunity cost.

When actual manufacturing overhead costs exceed the amount applied, it indicates under-applied overhead. This situation suggests that the company's estimates for overhead were lower than the actual expenses incurred, which may signal inefficiencies in operations or deviations from the budget. Managers need to investigate the reasons behind the discrepancy, as it could point to issues such as increased material costs, labor inefficiencies, or unexpected expenses. Addressing these factors is crucial for future budgeting and operational efficiency, ensuring more accurate cost predictions and resource allocation.

To evaluate the cost of goods still being processed at month-end, the production manager should focus on Work-in-Process Inventory. This inventory account reflects the costs incurred for materials, labor, and overhead that have been applied to products that are not yet completed. Valuing it at the factory cost incurred to date provides an accurate representation of the investment in these goods, ensuring that all production costs are accounted for before they are transferred to finished goods.

To determine the selling price using cost-plus pricing, first calculate the total production cost by adding direct materials, direct labor, and manufacturing overhead: ₱162,000 + ₱120,000 + ₱74,000 = ₱356,000. Next, apply the 25% markup on this total cost: 25% of ₱356,000 is ₱89,000. Finally, add the markup to the total production cost to find the selling price: ₱356,000 + ₱89,000 = ₱445,000.

In a manufacturing context, committed costs are expenses that a company must incur regardless of its production levels. Property taxes on the factory and management salaries are fixed costs that are essential for maintaining operations and are not easily adjustable in the short term. These costs are predetermined by the organization's structure and obligations, making them committed rather than discretionary or controllable. Thus, they represent financial commitments that the company cannot avoid, even if production decreases.

Under the actual costing system, manufacturing overhead is applied based on actual costs incurred rather than estimates. This means that the overhead rate is calculated using real data from the period instead of predetermined rates based on budgeted activity levels. Therefore, the statement incorrectly describes the actual costing method, leading to the conclusion that it is false.