5 6255862442081910859

Management Advisory Services - J.
Rocabo, CPA
OVERVIEW COST-VOLUME-PROFIT ANALYSIS

Management Advisory Services Breakeven Point
1. The following characterize management advisory services except 5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
A. involve decision for the future on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
B. broader in scope and varied in nature volume?
C. utilize more junior staff than senior members of the firm A. P120,000 C. P225,000*
D. relate to specific problems where expert help is required B. P200,000 D. P450,000
2. Which of the following is not classifiable as a management advisory service by CPA? 6. Bush Electronics, Inc. had the following sales results for 2004:
A. Systems design. C. Make or buy analysis. TV sets CD player Radios
B. Project feasibility study. D. Assistance in budget preparation. Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60
Managerial Accounting Bush Electronics, Inc. had fixed costs of P2,400,000.
3. The following are inherent to either management accounting or financial accounting: The break-even sales in pesos for Bush Electronics, Inc. are:
1. External report TV sets CD player Radios
2. Historical information
A. P1,800,000 P1,800,000 P3,600,000
3. Contribution approach income statement
B P1,800,000 P1,800,000 P1,600,000
4. Generally accepted accounting principles
C. P1,500,000 P1,500,000 P2,000,000
5. Prospective financial statements
D. P1,531,915 P1,531,915 P2,042,553
Which of the foregoing are related to management accounting and financial
accounting, respectively?
7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Management Accounting Financial Accounting
Selling price per pair of sunglasses P25.00
A. 1, 2, 5 3, 4 Variable costs per pair of sunglasses:
B. 3, 5 1, 2, 4 Raw materials P11.00
C. 2, 3 1, 4, 5 Direct labor 5.00
D. 3 1, 2, 4, 5 Manufacturing overhead 2.50
Selling expenses 1.30
COST BEHAVIOR Total variable costs per unit P19.80
4. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted Annual fixed costs:
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional Manufacturing overhead P192,000
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for Selling and administrative 276,000
P50,000 units. How much is Carera’s budgeted variable cost per unit of output? Total fixed costs P468,000
A. P1.60 C. P3.00 Forecasted annual sales volume (120,000 pairs) P3,000,000
B. P1.67 D. P5.00 Income tax rate 40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units C. 83,572 units
B. 101,740 units D. 86,250 units
May 2005 Page 1 of 29
Management Advisory Services - J. Rocabo, CPA
8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for 11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
device. P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be
Direct labor P180 necessary to generate an operating profit of P48,000?
Direct materials 240 A. P1,350,000 C. P1,135,000
Factory overhead 105 B. P486,425 D. P910,000
Selling costs 75
Total variable costs P600 12. Mount Park, Inc. had the following economic information for the year 2002:
Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except Sales(50,000 units @ P20) P1,000,000
for an operating loss incurred in the year of incorporation, the firm has been profitable over the Variable manufacturing costs 400,000
last five years. Fixed costs 250,000
In 2001, a significant change in Madel’s production technology caused a 10% increase in Income tax rate 40 percent
annual fixed costs and a 20% unit cost increase in the direct labor component as a result of Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
higher skilled direct labor. However, this change permitted the replacement of a costly imported increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
component with a local component. The effect was to reduce unit material costs by 25%. maintain its sales target for 2003.
There has been no change in the Walastik selling price. What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
The annual sales units required for Madel to breakeven are: 2002?
A. B. C. D. A. P1,125,000 C. P1,187,500
B. P1,325,000 D. P1,387,500
2000 22,000 22,000 14,000 14,000
2001 20,840 22,407 22,407 20,840
13. Larz Company produces a single product. It sold 25,000 units last year with the following
results:
Profit Planning Sales P625,000
9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, Variable costs P375,000
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and Fixed costs 150,000 525,000
sales price per unit to remain the same in 2001, however total sales are expected to jump by Net income before taxes P100,000
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in Income taxes 40,000
2000 by Net income P 60,000
A. 100% C. 20% In an attempt to improve its product in the coming year, Larz is considering replacing a
B. 80% D. 50% component part in its product that has a cost of P2.50 with a new and better part costing P4.50
per unit. A new machine will also be needed to increase plant capacity. The machine would
10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are line depreciation on all plant assets.
estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two estimates that If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
60 percent of its Sunday sales to customers would be made on other days if the stores were what selling price per unit of product must it charge next year to cover the increased material
not open on Sundays. The one-day volume of Sunday sales that would be necessary for Six- costs?
Two to attain the same weekly operating income as the current six-day week is A. P27.00 C. P32.50
A. P6,000 C. P7,500 B. P25.00 D. P28.33
B. P5,000 D. P4,500
Point of Indifference 16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The
14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. is considering a change to a commission arrangement that would pay each salesperson a
The sales department assures management that it can sell between 9,000 and 13,000 pairs salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
(units) of either product this year. Because the models are very similar, Ravine Ski will produce The amount of total car sales at which BM Motors would be indifferent as to which plan to
only one of the two models. The information below was compiled by the accounting select is
department. A. P22,500,000 C. P24,000,000
Mountaineering Touring B. P30,000,000 D. P12,000,000
Selling price per unit P880.00 P800.00
Variable costs per unit P528.00 P528.00 17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only styles of shoes that are all sold at the same price. To encourage sales personnel to be
P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40% income tax rate. aggressive in their sales efforts, the company pays a substantial sales commission on each pair
The total sales revenue at which Ravine Ski Company would make the same profit or loss of shoes sold. Sales personnel also receive a small basic salary.
regardless of the ski model it decided to produce is The following cost and revenue data relate to Store 9 and are typical of the company’s many
A. P8,800,000 C. P9,240,000 sales outlets:
B. P4,224,000 D. P6,864,000 Selling price P800
Variable expenses:
15. Valley of Fire Corporation has one department that produces three replacement parts for the Invoice costs P360
company. However, only one part can be produced in any month because of the adjustments Sales commission 140
that must be made to the equipment. The department can produce up to 15,000 units of any P500
one of the three parts in each month. The company expresses the monthly after tax Fixed expenses per year:
cost/volume/profit relationships for each part using an equation method. The format of the Rent P1,600,000
equations and the equation for each replacement part are given below: Advertising 3,000,000
(ATR) X ((SP – VC) x (U) – FC) Salaries 1,400,000
ATR = after-tax rate VC = variable cost FC = fixed costs Total P6,000,000
SP = selling price U = units The company is considering eliminating sales commissions entirely in its stores and increasing
Part Part Equations fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be
AL45 .6 ((P4.00 – P1.25) (U) – P33,400)
indifferent to commission basis?
BT65 .6 ((P4.05 – P2.55) (U) – P15,000)
A. 25,300 C. 18,505
GM17 .6 ((P4.10 - P2.00) (U) - P22,365)
B. 15,300 D. 21,000
The production and unit sales volume level at which Valley will be indifferent as to whether Part
BT62 or GM17 is produced is Sensitivity Analysis
A. 7,365 C. 10,380 18. If fixed costs increase while variable cost per unit remains constant, the contribution margin will
B. 4,092 D. 12,275 be
A. lower C. unchanged
B. higher D. unpredictable

19. Firm D and Firm S are competitors within the same industry. Firm D produces its product using 23. Candyman Company is a wholesale distributor of candy. The company services grocery,
large amounts of direct labor. Firm S has replaced direct labor with investment in machinery. convenience, and drug stores in Metro Manila. Small but steady growth in sales has been
Projected sales for both firms are fifteen percent less than in the prior year. Which statement achieved by the company over the past few years while candy prices have been increasing.
regarding projected profits is true? The company is formulating its plans for the coming fiscal year. Presented below are the data
A. Firm D will lose more profit than Firm S. used to project the current year’s after-tax net income of P110,400.
B. Firm S will lose more profit than Firm D. Manufacturers of candy have announced that they will increase prices of their products an
C. Firm D and Firm S will lose the same amount of profit. average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts,
D. Neither Firm D nor Firm S will lose profit. etc.) and labor costs. Candyman Company expects that all other costs will remain at the same
rates or levels as the current year. Candyman is subject to 40 percent tax rate.
20. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. Average selling price P4.00 per box
During the current month when the unit sales are expected to be only 45,000, there is a loss of Average variable costs
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. The fixed Cost of candy P2.00 per box
costs amounted to Selling expenses 0.40 per box
A. P80,000 C. P247,500 Total P2.40 per box
B. P360,000 D. P210,000 Annual fixed costs
Selling P169,000
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving Administrative 280,000
their place of business to the downtown area. Likewise it is anticipating that the selling price Total P440,000
per unit and the variable expenses will not change. At present, the sales volume necessary to Expected annual sales volume (390,000 boxes) P1,560,000
breakeven is P750,000 but with the expected increase in fixed costs, the sales volume If net income after taxes is to remain the same after the cost of candy increases but no increase
necessary to breakeven would go up to P975,000. Based on these projections, what were the in the sales price is made, how many boxes of candy must Candyman sell?
total fixed costs before the increase of P78,750? A. 480,000 C. 27,600
A. P341,250 C. P183,750 B. 400,000 D. 29,300
B. P262,500 D. P300,000
Margin of Safety
22. Machan Co.’s year-end income statement is as follows: 24. Claremont Company had is a manufacturer of its only one product line. It had sales of
Sales (20,000 units) P360,000 P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was
Variable costs 220,000 10 percent. What are the company’s fixed costs?
Contribution margin P140,000 A. P72,000 C. P288,000
Fixed costs 105,000 B. P80,000 D. P320,000
Net income P 35,000
Management is unhappy with the results and plans to make some changes for next year. If 25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio
management implements a new marketing program, fixed costs are expected to increase by of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs?
15 percent. What is the effect on income if the foregoing changes are implemented? A. P36,000 C. P432,000
A. Decrease of P21,200 C. Increase of P13,800 B. P90,000 D. P360,000
B. Increase of P1,800 D. Increase of P14,800

Degree of Operating Leverage The only personnel directly employed by the Pediatrics Department are supervising
26. A very high operating leverage indicates that a firm nurses, nurses, and aides. The hospital has minimum personnel requirements based on
A. has high fixed costs total annual patient days. Hospital requirements beginning at the minimum, expected
B. has a high net income level of operation follow:
C. has high variable costs Annual Patient Days Aides Nurses Supervising Nurses
D. is operating close to its breakeven point 10,000 – 14,000 21 11 4
14,001 – 17,000 22 12 4
27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a 17,001 – 23,725 22 13 4
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income 23,726 – 25,550 25 14 5
for 2002 can be expected to increase by what amount over 2001? 25,551 – 27,375 26 14 5
A. P250,000 C. P500,000 27,376 – 29,200 29 16 6
B. 200 percent D. 40 percent The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time equivalent
Situational personnel.
Questions 28 thru 34 are based on the following information: Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
Calamba Hospital operates a general hospital but rents space and beds to separate entities for and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and
specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each aides was P72,000, P169,000, and P110,000, respectively.
separate entity for common services to its patients like meals and laundry and for all administrative The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
services such as billings, collections, etc. All uncollectible accounts are charged directly to the estimated that during 90 of these capacity days, the demand average 17 patients more than
entity. Space and bed rentals are fixed for the year. capacity and even went as high as 20 patients more on some days. The hospital has an additional
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each 20 beds available for rent for the coming fiscal year.
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenue of P1,138,800. 28. The variable expense per patient day is
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were: A. P15.08 C. P15.00
Basis of Allocation B. P12.50 D. P50.00
Patient Days Bed Capacity
Dietary P 42,952 29. The contribution margin per patient day is
Janitorial P 12,800 A. P49.92 C. P50.00
Laundry 28,000 B. P52.50 D. P52.00
Lab, other than direct charges to patients 47,800
Pharmacy 33,800 30. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory
Repairs and maintenance 5,200 7,140 nurses?
General administrative services 131,760 A. 9,500 C. 12,500
Rent 275,320 B. 11,500 D. 10,500
Billings and collections 40,000
Bad debt expense 47,000 31. The number of patient days needed to cover total costs is
Other 18,048 . A. 14,200 C. 15,820
P262,800 P453,000 B. 15,200 D. 14,220
Supplies 1,200 73,875

32. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same Net income before taxes P21,125
as in the past year, what would be the increase in revenue? Income taxes (40%) 8,450
A. P99,450 C. P105,450 Net income P12,675
B. P87,750 D. P89,750 Note: The average pizza sells for P2.50.
33. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied 35. What is the tax shield on the noncash fixed costs?
per patient day is A. P3,200 C. P3,400
A. P22,935 C. P22,965 B. P14,950 D. P5,400
B. P22,950 D. P23,935
36. What is the breakeven point in number of pizzas that must be sold?
34. What is the increased fixed cost applied for bed capacity, given the increased number of beds? A. 25,929 C. 18,150
A. P151,000 C. P147,000 B. 23,569 D. 42,114
B. P173,950 D. P152,000
37. What is the cash flow breakeven point in number of pizzas that must be sold?
Questions 35 thru 37 are based on the following information. A. 19,529 C. 12,990
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 B. 21,284 D. 10,773
per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent. VARIABLE COSTING VS. ABSORPTION COSTING
An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays Absorption Costing
P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash. 38. When a firm prepares financial reports by using absorption costing, it may find that
Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms. A. profits will always increase with increase in sales.
Casserole increased her business between 1998 and 2001. Profits have more than doubled since B. profits will always decrease with decreases in sales.
1998. Ms. Casserole does not understand why profits have increased faster than volume. C. profit may decrease with increased sales even if there is no change in selling price and
A projected income statement for the year ended December 31, 2002, prepared by the accountant, costs.
is shown below: D. decreased output and constant sales result in increased profit.
Sales P95,000 39. The Bush Company has provided information concerning its projections for the coming year as
Cost of food sold P28,500 follows:
Wages & fringe benefits: Net sales P10,000,000
Restaurant help 8,150 Fixed manufacturing costs P 1,000,000
Delivery help 17,300 Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in
Rent 4,800 inventory, what will the projected cost of goods sold be?
Accounting services 3,600 A. P5,000,000 C. P7,000,000
Depreciation: B. P6,000,000 D. P8,000,000
Delivery equipment 5,000
Restaurant equipment 3,000 40. Colger Company manufactures a single product using standard costing. Variable production
Utilities 2,325 costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of
12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory, 43. Black Forest, Inc. began operations on January 3. Standard costs were established in early
produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under January assuming a normal production volume of 160,000 units. However, Black Forest
absorption costing would be produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per
A. P115,000 C. P242,000 unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and
B. P132,000 D. P253,000 40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and
50% were selling. Black Forest had no raw materials or work-in-process inventories at
41. The Trinkets Company estimated the following data for the coming year: December 31. Actual input prices and quantities per unit of product were equal to standard.
Fixed manufacturing costs P565,000 Using absorption costing, Black Forest’s income statement would show:
Variable production costs per peso of sales Cost of Goods Sold at Standard Cost Overhead Volume Variance
Materials P0.125 A. P8,200,000 P800,000 Unf
Direct labor 0.150 B. P7,200,000 P800,000 Fav
Variable overhead 0.075 C. P6,500,000 P700,000 Unf
Variable selling costs per peso of sales 0.150 D. P7,000,000 P700,000 Fav
Trinkets estimates its sales for the coming year to be P2,000,000.
The expected cost of goods sold for the coming year is Absorption Costing & Variable Costing
A. P1,265,000 C. P1,115,000 44. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products
B. P1,565,000 D. P 700,000 are as follows:
Direct Materials P4.00
42. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is Direct labor 6.00
from the financial records of the company for the year. Factory overhead
 Total manufacturing costs were P2,500,000. Variable 3.00
 Costs of goods of manufactured was P2,425,000. Fixed (based on a normal capacity of 10,000 units) 2.00
 Applied factory overhead was 30 percent of total manufacturing costs. Total 15.00
 Factory overhead was applied to production at a rate of 80% of direct labor cost.
 Work-in-process inventory at January 1 was 75% of work-in-process inventory at Beginning inventory 2,000 units
December 31. Production 8,000 units
What are the amounts/value of the following cost elements and inventory? Units sold (selling price P50) 7,000 units
Direct labor Direct materials Work-in-process inventory
A. P750,000 P750,000 P225,000 Actual costs:
B. P937,500 P812,500 P225,000 Direct materials P 35,000
C. P937,500 P812,500 P300,000 Direct labor 50,000
D. P750,000 P750,000 P300,000 Variable overhead 23,000
Fixed 18,000
Variable selling and adm. 60,000
Fixed selling and adm. 35,000
Variances are closed to cost of sales monthly

How much are the net income under absorption costing and variable costing methods? Setting Standards
A. B. C. D. 48. Which of the following statements about the selection of standards is true?
Absorption P144,000 P143,000 144,000 142,000 A. Ideal standards tend to extract higher performance levels since they give employees
Variable 143,000 144,000 142,000 144,000 something to live up to.
B. Currently attainable standards may encourage operating inefficiencies.
45. Lord Industries manufactures a single product. Variable production costs are P10 and fixed C. Currently attainable standards discourage employees from achieving their full performance
production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard potential.
costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units. The D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
volume variance under each product costing are: causing a decline in performance.
A. B. C. D.
49. The per-unit standard cost for variable overhead is normally based on the
Under Absorption Costing P3,750 P3,750 P7,500 P7,500
A. standard quantity of an input factor used in a unit of product.
Under Variable Costing P 0 P7,500 P0 P0
B. actual variable overhead cost incurred at the achieved level of production.
C. budgeted total cost for variable overhead divided by the number of units expected to be
Absorption Costing Income vs. Variable Costing Income produced.
46. Simple Corp. produces a single product. The following cost structure applied to their first year D. ratio of fringe benefits to the basic cost of labor.
of operations, 2000:
Variable Costs per Unit Annual Fixed Costs 50. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of 30,000
SG&A P2.00 P14,000 direct labor hours.
Production 4.00 P20,000 Direct materials P800,000
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was Direct labor 600,000
no beginning or ending work-in-process inventory. How much larger or smaller would Simple Variable manufacturing overhead 360,000
Corp.’s income be if it uses absorption rather than variable costing? Fixed manufacturing overhead 288,000
A. The absorption costing income would be P6,000 larger What is the total manufacturing overhead application rate if the Relevant Company has to
B. The absorption costing income would be P6,000 smaller operate at 80 percent of the stated capacity?
C. The absorption costing income would be P4,800 larger* A. P24.00 C. P24.60
D. The absorption costing income would be P4,000 smaller B. P27.00 D. P21.60
STANDARD COSTING & VARIANCE ANALYSIS Raw Materials Variances

Basic Concepts 51. Derby Co. uses a standard costing system in connection with the manufacture of a line of T-
47. Which of the following is a difference between a static budget and a flexible budget? shirts. Each unit of finished product contains 2 yards of direct material. However, a 20 percent
A. A flexible budget includes only variable costs; a static budget includes only fixed costs. direct material spoilage calculated on input quantities occurs during the manufacturing process.
B. A flexible budget includes all costs, a static budget includes only fixed costs. The cost of the direct materials is P120 per yard.
C. A flexible budget gives different allowances for different levels of activity, a static budget The standard direct material cost per unit of finished product is
does not. A. P192 C. P288
D. There is no difference between the two. B. P240 D. P300

52. Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver Two-Way Overhead Variances
purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance 57. Karla Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct
and a P3,735 favorable usage variance. If there were no changes in the component of labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each
inventory, how many units of finished product were produced? unit requires five minutes of direct labor. Karla’s budgeted overhead for the month is
A. 994 units C. 1,725 units A. P12,800 C. P84,800
B. 1,160 units D. 828 units B. P18,800 D. P774,000
53. The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent 58. If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the
P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600 units of standard hours allowed is P15,600, then the overhead controllable variance is
finished product. The material quantity variance is A. P600F C. P1,600F
A. P6,000 unfavorable C. P5,200 unfavorable B. P2,200U D. P1,600U
B. P3,200 unfavorable D. P2,000 unfavorable
59. Universal Company uses a standard cost system and prepared the following budget at normal
54. Ramie has a standard price of P5.50 per pound for materials. July’s results showed an capacity for January
unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066 Direct labor hours 24,000
pounds were used in production, what was the standard quantity allowed for materials? Variable factory OH P48,000
A. 1,104 C. 1,074 Fixed factory OH P108,000
B. 1,066 D. 1,100 Total factory OH per DLH P6.50
Actual data for January were as follows:
Direct Labor Variance Direct labor hours worked 22,000
55. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency Total factory OH P147,000
variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage Standard DLHs allowed for capacity attained 21,000
rate? Using the two-way analysis of overhead variance, what is the controllable variance for January?
A. P8.94 C. P7.94 A. P3,000 F C. P9,000 F
B. P8.00 D. P7.80 B. P5,000 F D. P10,500 U
56. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15 60. The Terrain Company has a standard absorption and flexible budgeting system and uses a two-
per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual output way analysis of overhead variances. Selected data for the June production activity are:
for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor Budgeted fixed factory overhead costs P 64,000
expense. Direct labor hours of 6,375 were actually worked during the month. Variance Actual factory overhead 230,000
analysis of the performance for the month of May would show a(n) Variable factory overhead rater per DLH P 5
A. favorable material quantity variance of P7,500 Standard DLH 32,000
B. unfavorable direct labor efficiency variance of P1,275 Actual DLH 32,000
C. unfavorable material quantity variance of P7,500 The budget (controllable) variance for June is
D. unfavorable direct labor rate variance of P1,275 A. P1,000 favorable C. P6,000 favorable
B. P1,000 unfavorable D. P6,000 unfavorable

61. South Company has total budgeted fixed costs of P75,000, Actual production of 19,500 units 65. Using the preceding data for Lucky Company, the controllable overhead variance was
resulted in a P3,000 favorable volume variance. What normal capacity was used to determine A. P505 favorable C. P245 favorable
the fixed overhead rate? B. P505 unfavorable D. P245 unfavorable
A. 16,500 C. 20,313
B. 18,750 D. 20,325 Three-Way Overhead Variances
66. Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable overhead
62. CTV Company has a standard fixed cost of P6 per unit. At an actual production of 8,000 units a spending variance, and P2,000 total under applied overhead. The fixed overhead budget
favorable volume variance of P12,000 resulted. What were total budgeted fixed costs? variance is
A. P36,000 C. P60,000 A. P41,000 favorable C. P41,000 Unfavorable
B. P48,000 D. P75,000 B. P45,000 favorable D. P45,000 Unfavorable
63. The Pinatubo Company makes and sells a single product and uses standard costing. During Four-Way Overhead Variances
January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units 67. Franklin Glass Works’ production budget for the year ended November 30, 2001 was based on
of product. The standard cost card for one unit of product includes the following: 200,000 units. Each unit requires two standard hours of labor for completion. Total overhead
Variable factory overhead: 3.0 DLHs @ P4.00 per DLH. was budgeted at P900,000 for the year, and the fixed overhead rate was estimated to be P3.00
Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH per unit. Both fixed and variable overhead are assigned to the product on the basis of direct
For January, the company incurred P22,000 of actual fixed overhead costs and recorded a labor hours. The actual data for the year ended November 30, 2001 are presented below.
P875 favorable volume variance. Actual production in units 198,000
The budgeted fixed overhead cost for January is Actual direct labor hours 440,000
A. P31,500 C. P32,375 Actual variable overhead P 352,000
B. P30,625 D. P33,250 Actual fixed overhead P 575,000
Franklin’s variable overhead efficiency variance for the year ended November 30, 2001 is
Questions 64 & 65 are based on the following information. A. P33,000 unfavorable C. P66,000 unfavorable
Lucky Company sets the following standards for 2003: B. P35,520 favorable D. P33,000 favorable
Direct labor cost (2 DLH @ P4.50) P 9.00
Manufacturing overhead (2 DLH @ P7.50) 15.00 68. The Virgin Island Company has standard variable costs as follows:
Lucky Company plans to produce its only product equally each month. The annual budget for Materials, 3 pounds at P4.00 per pound P12.00
overhead costs are: Labor, 2 hours P10.00 per hour 20.00
Fixed overhead P150,000 Variable overhead, P7.50 per labor hour 15.00
Variable overhead 300,000 Total P47.00
Normal activity in direct labor hours 60,000 During September, Virgin Island produced 6,000 units, using 11,560 labor hours at a total wage
In March, Lucky Company produced 2,450 units with actual direct labor hours used of 5,050. Actual of P113,870 and incurring P88,600 in variable overhead. The variable overhead variances are:
overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.) A. B. C. D.
Spending P1,900 favorable P1,900 unfavorable P1,400 favorable P1,400 unfavorable
64. The amount of overhead volume variance for Lucky Company is
Efficiency P3,300 unfavorable P3,300 favorable P1,900 favorable P1,900 favorable
A. P250 unfavorable C. P750 Unfavorable
B. P500 unfavorable D. P375 Unfavorable
69. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were
budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed
overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied 73. The overhead efficiency variance is
must be A. P22,500 Favorable C. P22,500 Unfavorable
A. P516,000 C. P504,000 B. P15,000 Favorable D. P15,000 Unfavorable
B. P512,000 D. P496,000
Gross Profit Variance Analysis
70. Mulvey Company derived the following cost relationship from a regression analysis of its 74. Vicki Division operates as a revenue center and sells only one product. Data
monthly manufacturing overhead cost: for May 2000 are as follows:
C = P80,000 + P12M Actual Expected
Where C = monthly manufacturing overhead cost Sales in units 10,000 9,500
M = machine hours Selling price per unit P11 P10
The standard error of the estimate of the regression is P6,000. Variable expense per unit P 6
The standard time required to manufacture one six-unit case of Mulvey’s single product is 4
What are the price variance and price volume variance?
machine hours. Mulvey applies manufacturing overhead to production on the basis of machine
hours and its normal annual production is 50,000 cases. A. B. C. D.
Mulvey’s estimated variable manufacturing overhead cost for a month in which scheduled Sales Price Variance P10,000 F P 5,000 F P 5,000 U P10,000 U
production is 5,000 cases would be Price Volume Variance P 5,000 F P10,000 U P10,000 F P 5,000 U
A. P80,000 C. P240,000
B. P320,000 D. P360,000 RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
Basic Concepts
Questions 71 thru 73 are based on the following information. 75. Controllable costs are costs that
The Lustre Company produces its only product, Kool Chewing Gum. The standard overhead cost A. are likely to respond to the amount of attention devoted to them by a specified manager.
for one pack of the product follows: B. are governed mainly by past decisions that established the present levels of operating and
Fixed overhead (1.50 hours at P18.00) P27.00 organizational capacity and that only change slowly in response to small changes in
Variable overhead (1.50 hours at P10.00) 15.00 capacity.
Total application rate P42.00 C. will be unaffected by current managerial decisions.
D. fluctuate in total in response to small change in the rate of utilization of capacity.
Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor
hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and P308,700
76. Which of the following does not apply to the content of managerial reports?
variable.
A. Reporting standard is relevant to the decision to be made.
B. May extend beyond double-entry accounting system.
71. The amount of variable overhead spending variance is
C. Pertain to subunits of the entity and may be very detailed.
A. P6,300 Favorable C. P6,300 Unfavorable
D. Pertains to the entity as a whole and is highly aggregated.*
B. P 8,700 Favorable D. P8,700 Unfavorable
Return on Investment
72. The total overhead controllable variance is
77. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the ROI
A. P13,700 Favorable C. P13,700 Unfavorable
would
B. P 8,700 Favorable D. P 8, 700 Unfavorable
A. increase by 30% C. decrease by 37%
B. decrease by 10% D. decrease by 33.3%

Return on Investment 36% 18% 18% 36%

78. Return on investment (ROI) is a term often used to express income earned on capital invested
in a business unit. A company’s ROI would be increased if sales
A. increased by the same peso amount as expenses and total assets increased.
B. remained the same and expenses were reduced by the same peso amount that total asset
increased.
C. decreased by the same peso amount that expenses increased.
D. and expenses increased by the same percentage that total assets increased.
79. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 4% C. increase by 30%
B. increase by 6% D. decrease by 50%
Residual Income
80. Jar Division of Handy, Inc. expects the following result for 2004:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Jar’s manager with an offer to buy 10,000 units at P7 each. If
Jar accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting
the order would increase fixed costs by P10,000 and investment by P40,000.
What is the minimum price that Jar could accept for the order and still maintain its expected
residual income?
A. P5.00 C. P4.75
B. P5.60 D. P9.00
Return on Investment & Residual Income

81. Scotch Co. has the following results for the year:
Sales P740,000
Variable expenses 260,000
Fixed expenses 300,000
Total divisional assets average P1,000,000. The company’s minimum required rate of return is
14 percent. The residual income and return on investment for Scotch are:
A. B. C. D.
Residual Income P36,000 P40,000 P36,000 P40,000
82. The following information relates to two projects of Rica Corporation. RELEVANT COSTING
Project A Project B Basic Concepts
Operating income P2,500,000 P600,000 85. The potential benefit that may be obtained from following an alternative course of action is
Residual income P 500,000 P200,000 called
ROI 10% 12% A. opportunity benefit C. relevant cost
Return on residual investment 2% 4% B. opportunity cost D. sunk cost
A bonus of P50,000 will be paid to the manager whose project contributed most to the overall
performance of the firm. The P50,000 bonus should go to the manager of 86.Opportunity costs:
A. project A because the residual income is higher A. Are treated as period costs under variable costing.
B. project B because the return on investment is higher B. Have already been incurred as a result of past action.
C. project A because it was a larger, more complex project C. Are benefits that could have been obtained by following another course of action.
D. project B because the return on residual investment is higher* D. Do not vary among alternative courses of action.
Transfer Pricing 87. The Auto Division of Fly Insurance employs three claims processors capable of processing
83. An appropriate transfer price between two divisions of the Star Corporation can be determined 5,000 claims each. The division currently processes 12,000 claims. The manager has recently
from the following data: been approached by two sister divisions. Division A would like the auto division to process
Fabrication Division approximately 2,000 claims. Division B would like the auto division to process approximately
Market price of subassembly P50 5,000 claims. The Auto Division would be compensated Division A or Division B for processing
Variable cost of subassembly P20 these claims. Assume that these are mutually exclusive alternatives. Claims processor salary
Excess capacity (in units) 1,000 cost is relevant for
Assembling Division A. division A alternative only
Number of units needed 900 B. division B alternative only
What is the natural bargaining range for the two divisions? C. both Division A and Division B alternatives
A. Between P20 and P50 C. Any amount less than P50 D. neither Division A nor Division B alternatives
B. Between P50 and P70 D. 50 is the only acceptable price
Sell as is or Process-Further
PRODUCT PRICING 88. Ottawa Corporation produces two products from a joint process. Information about
84. In a cost-based pricing system the markup should cover the two joint products follows:
I. Selling and administrative expenses Product X Product Y
II. Desired profit Anticipated production 2,000 lbs 4,000 lbs
III. Manufacturing cost Selling price per lb. at split-off P30 P16
A. I, II, and III C. I and III only Additional processing costs/lb after split-off (all variable) P15 P30
B. I and II only D. II and III only Selling price/lb after further processing P40 P50
The cost of the joint process is P85,000.
Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which
maximizes profit, Ottawa’s profit will increase by
A. P16,000 C. P50,000
B. P4,000 D. P10,000
Obsolete Inventories 92. ABC Electronics has the following standard costs and other data:
89. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling Part Beta Part Zeta
price per unit is P50. The company has unused production capacity and has determined that Direct materials P 4.00 P80.00
units could be finished and sold for P65 with an increase in variable costs of 40%. What is the Direct labor 10.00 47.00
additional net income per unit to be gained by finishing the unit? Factory overhead 40.00 20.00
A. P3 C. P15 Unit standard cost P54.00 P147.00
B. P10 D. P12 Units needed per year 6,000 8,000
Machine hours per unit 4 2
Profit Maximization Unit cost if purchased P50 P150.00
90. Fe Company has only 25,000 hours of machine time each month to manufacture its two In past years, ABC has manufactured all of its required components; however, this year only
products. Product X has a contribution margin of P50 and Product Y has a contribution margin 30,000 hours of otherwise idle machine time can be devoted to the production of components.
of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate Accordingly, some of the parts must be purchased from outside suppliers. In producing parts,
80% of its machine time to the product that will provide the most income, Fe will have a total factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will
monthly contribution margin of not be affected by any make-or-buy decision represent 60% of the applied overhead.
A. P250,000 C. P210,000 The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum
B. P240,000 D. P200,000 potential cost savings. The relevant unit production costs that should be considered in the
decision to schedule machine time are:
91. Geary Manufacturing has assembled the following data pertaining to two popular products. A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta
Blender Electric mixer B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta
Direct materials P 6 P11
Direct labor 4 9 Questions 93 & 94 are based on the following information.
Factory overhead @ P16 per hour 16 32 Brynles Manufacturing Company produces two products for which the following data have been
Cost if purchased from an outside 20 38 tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
supplier Per Unit XY-7 BD-4
Annual demand (units) 20,000 28,000 Selling price P4.00 P3.00
Past experience has shown that the fixed manufacturing overhead component included in the Variable manufacturing cost P2.00 P1.50
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it Fixed manufacturing cost P0.75 P0.20
means purchasing units from outside suppliers. Variable selling cost P1.00 P1.00
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal The sales manager has had a P160,000 increase in the budget allotment for advertising and wants
strategy, it should produce to apply the money to the most profitable product. The products are not substitutes for one another
A. 25,000 electric mixers, and purchase all other units as needed in the eyes of the company’s customers.
B. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4.
C. 20,000 blenders and purchase all other units as needed 93. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased
D. 28,000 electric mixers and purchase all other units as needed advertising is
A. B. C. D.
XY-7 P160,000 P640,000 P 80,000 P 80,000
BD-4 P320,000 P960,000 P960,000 P320,000

94. Suppose Brynles has only 100,000 machine hours that can be made available to produce Make or Buy
additional units of XY-7 and BD-4. If the potential increase in sales units for either product 97. For the past 12 years, the Blue Company has produced the small electric motors that fit into its
resulting from advertising is far in excess of this production capacity, which product should be main product line of dental drilling equipment. As material costs have steadily increased, the
advertised and what is the estimated increase in contribution margin earned? controller of the Blue Company is reviewing the decision to continue to make the small motors
A. Product XY-7 should be produced, yielding a contribution margin of P75,000. and has identified the following facts:
B. Product XY-7 should be produced, yielding a contribution margin of P133,333. 1. The equipment used to manufacture the electric motors has a book value of P150,000.
C. Product BD-4 should be produced, yielding a contribution margin of P187,500. 2. The space now occupied by the electric motor manufacturing department could be used to
D. Product BD-4 should be produced, yielding a contribution margin of P250,000. eliminate the need for storage space now being rented.
3. Comparable units can be purchased from an outside supplier for P59.75.
Special Order 4. Four of the persons who work in the electric motor manufacturing department would be
95. An opportunity cost commonly associated with a special order is terminated and given eight weeks’ severance pay.
A. the contribution margin on lost sales 5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing
B. the variable costs of the order process.
C. additional fixed related to the increased output Which of the items above are relevant to the decision that the controller has to make?
D. any of the above A. 1, 3, and 4 C. 2, 3, 4, and 5
B. 2, 3, and 4 D. 1, 2, 4, and 5
96. Jap Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000
units per month are: 98. Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
Manufacturing costs its product a year. The following information pertains to the production costs at capacity:
Direct materials P39 Variable costs P 80,000
Direct labor 6 Fixed costs 120,000
Variable overhead 8 Total costs P200,000
Fixed overhead 9 A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
Selling expenses costs. What is the price per unit that makes Buena indifferent between the “Make” and “Buy”
Variable 30 options?
Fixed 11 A. P8 C. P20
The company desires to seek an order for 5,000 units from a foreign customer. The variable B. P12 D. P10
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order. 99. Elly Industries is a multi-product company that currently manufactures 30,000 units of Part
The minimum break-even price per unit to be considered on this special sale is MR24 each month for use in production. The facilities now being used to produce Part MR24
A. P71 C. P69 have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If
B. P75 D. P84 Elly were to buy Part MR24 from an outsiDe supplier, the facilities would be idle, but its fixed
costs would continue at 40 percent of their present amount. The variable production costs of
Part MR24 are P11 per unit.
If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by
purchasing Part MR24 from an outside supplier only if the supplier’s unit price is less than
A. P14.00 C. P16.00
B. P11.00 D. P13.00
100.Below are a company’s monthly unit costs to manufacture and market a particular product. An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
Manufacturing Costs: the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
Direct materials P2.00 part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the
Direct labor 2.40 outside supplier per month, then its monthly operating income will
Variable indirect 1.60 A. decrease by P4,000 C. decrease by P20,000
Fixed indirect 1.00 B. increase by P1,000 D. increase by P20,000
Marketing Costs:
Variable 3.00 Keep or Drop
Fixed 1.50 103.Indicate which of the following costs would be avoided if a segment is eliminated.
The company must decide to continue making the product or buy it from an outside supplier. 1. variable manufacturing costs
The supplier has offered to make the product at the same level of quality that the company can 2. direct fixed costs
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be 3. common fixed costs
reduced by 30% if the company were to accept the proposal. What is the maximum amount 4. variable selling costs
per unit that the company can pay the supplier without decreasing its operating income? 5. direct fixed selling costs
A. P8.50 C. P7.75 6. common fixed selling costs
B. P6.75 D. P6.90 A. 2, 3, 5, 6 C.
B. 1, 2, 4, 5* D. 1, 2, 3, 4, 54, 5, 6
101.Cable Company produces 1,000 units of Part W per month. The total manufacturing costs of
the part are as follows: 104.BEA Industries produces two products. Information about the products is as follows:
Direct materials P10,000 Item 38B Item 40F
Direct labor 5,000 Units produced and sold 1,000 4,000
Variable overhead 5,000 Selling price per unit P 25 P 20
Fixed overhead 30,000 Variable expenses per unit P 15 P 12
Total manufacturing costs P50,000 The company’s fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is
the fixed overhead assigned to Part W will no longer be incurred if the company purchases the A. P3,200 C. P(2,000)
part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the B. P7,000 D. P10,000
outside supplier per month, then its monthly operating income will
A. decrease by P4,000 C. decrease by P20,000 Shut Down Point
B. increase by P1,000 D. increase by P20,000 105.Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small
electrical relay used in the automotive industry as a component part in various products. The
102.The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead
costs of the part are as follows: costs total P150,000 per month, and fixed selling costs total P30,000 per month.
Direct materials P10,000 Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Direct labor 5,000 Bulusan Company’s sales to temporarily drop to only 9,000 units per month. Bulusan Company
Variable overhead 5,000 estimates that the strikes will last for about two months, after which time sales of E14 should
Fixed overhead 30,000 return to normal. Due to the current low level of sales, however, Bulusan Company is thinking
Total manufacturing cost P50,000 about closing down its own plant during the two months that the strikes are on. If Bulusan
Company does close down its plant, it is estimated that fixed manufacturing overhead costs can 109.The Fields Company is planning to purchase a new machine which it will depreciate, for book
be reduced to P105,000 per month and that fixed selling costs can be reduced by 10%. Start- purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s
up costs at the end of the shutdown period would total P8,000. Since Bulusan Company uses depreciation taken in the year of acquisition. The new machine is expected to produce cash
just-in-time production method, no inventories are on hand. flow from operations, net of income taxes, of P66,000 a year in each of the next ten years. The
At what level of unit sales for the two-month period should Bulusan Company be indifferent accounting (book value) rate of return on the initial investment is expected to be 12%. How
between closing the plant or keeping it open? much will the new machine cost?
A. 11,000 C. 10,000 A. P300,000 C. P660,000
B. 24,125 D. 8,000 B. P550,000 D. P792,000
CAPITAL BUDGETING 110. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a five-
Basic Concepts year project at the beginning of the year. GMF estimates that the annual cash savings from this
106.If Sol Company expects to get a one-year loan to help cover the initial financing of capital project will amount to P65,000. Tax and book depreciation on the project will be P40,000 per
project, the analysis of the project should year for five years. On investments of this type, GMF’s desired rate of return is 12%.
A. offset the loan against any investment in inventory or receivable required by the project Information on present value factors is as follows:
B. show the loan as an increase in the investment At 12% At 14% At 16%
C. show the loan as a cash outflow in the second year of the project’s life Present value of P1 for 5 periods 0.57 0.52 0.48
D. ignore the loan Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3
For the project’s first year, GMF’s accounting rate of return, based on the project’s average
107.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment book value would be
of cash flows, NPV is better than IRR. What are the reinvestment rate for each method? A. 14.4% C. 12.5%
Net Present Value method Internal Rate of Return method B. 13.9% D. 12.0%
A. Discount Rate Discount Rate
B. Discount Rate IRR Payback Period
C. IRR IRR 111. The payback method assumes that all cash inflows are reinvested to yield a return equal to
D. IRR Discount Rate A. zero C. the Time-Adjusted-Rate-of-Return
B. the Discount Rate D. the Cost-of-Capital
Accounting Rate of Return
108.Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the Bailout Period
expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were 112. A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would and salvage value:
be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12 Year Net cash inflow Salvage value
percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value of 1 500,000 800,000
1 due in 10 periods at 12 percent is 0.322. 2 500,000 600,000
The average accrual accounting rate of return during the first year of asset’s use is 3 600,000 500,000
A. 20.0 percent C. 10.0 percent 4 800,000 400,000
B. 10.5 percent D. 40.0 percent 5 700,000 300,000

What is the bailout period for the project? The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12
A. 3.25 yrs. C. 2.73 yrs percent at end of each period are:
B. 2.5 yrs D. 2.4 yrs. End of: Period 1 – 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552,
Period 5 - 0.56743
Net Present Value Had Roxas used straight-line method of depreciation, what is the difference in net present value
113. Panama Insurance Company’s management is considering an advertising program that would provided by the machine at a discount rate of 12 percent?
require an initial expenditure of P165,500 and bring in additional sales over the next five years. A. Increase of P9,750 C. Decrease of P24,376
The cost of advertising is immediately recognized as expense. The projected additional sales B. Decrease of P9,750 D. Increase of P24,376
revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales
revenue and expenses from the advertising program are projected to increase by 10 percent Profitability Index
each year. Panama Insurance Company’s tax rate is 40 percent. 115. A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are
The present value of 1 at 10 percent, end of each period: P20,505 on an investment of P50,000. the profitability index for this project is
Periods Present value Factory A. 1.367 C. 2.438
1 0.90909 B. 3.333 D. 1.300
2 0.82645
3 0.75131 Internal Rate of Return
4 0.68301 116. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate of
5 0.62092 return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and for
The net present value of the advertising program would be three years is .751. The cash flow, net of income taxes, will be P30,000 for the first year
A. P37,064 C. P(37,064) (present value of P27,270) and P36,000 for the second year (present value of P29,736).
B. P29,136 D. P(29,136) Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for
the third year?
114. For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of A. P17,268 C. P22,994
five years with no salvage value. The machine is expected to produce cash flow from B. P22,000 D. P30, 618
operations, net of 40 percent income taxes, as follows:
First year P160,000 117. Care Products Company is considering a new product that will sell for P100 and have a
Second year 140,000 variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
Third year 180,000 having a five-year useful life and no salvage value is needed, and will be depreciated using the
Fourth year 120,000 straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in
Fifth year 100,000 the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end of
Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows: five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
First year P150,000 Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling
Second year 120,000 price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?
Third year 90,000 A. P81.00 C. P70.00
Fourth year 60,000 B. P85.00 D. P90.00
Fifth year 30,000

118. Payback Company is considering the purchase of a copier machine for P42,825. The copier 122.In choosing from among mutually exclusive investments the manager should normally select
machine will be expected to be economically productive for 4 years. The salvage value at the the one with the highest
end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of A. NPV C. payback reciprocal
return. The company is subject to 40 percent income tax rate. B. IRR D. book rate of return
The present value of an ordinary annuity of 1 for 4 periods is 2.85498.
In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to 123.Why do the NPV method and the IRR method sometimes produce different rankings of mutually
be provided by the machine? exclusive investment projects?
A. P17,860 C. P25,000 A. The NPV method does not assume reinvestment of cash flows while the IRR method
B. P15,000 D. P35,700 assumes the cash flows will be reinvested at the internal rate of return.
B. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR
Equipment Replacement method assumes a reinvestment rate equal to the internal rate of return.*
119. A company is considering replacing a machine with one that will save P40,000 per year in cash C. The IRR method does not assume reinvestment of the cash flows while the NPV assumes
operating costs and have P10,000 more depreciation expenses per year than the existing the reinvestment rate is equal to the discount rate.
machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while
the company by the IRR method assumes a reinvestment rate equal to the discount rate.
A. P28,000 C. P18,0000
B. P24,000 D. P6,000 124.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:
120.Maxwell Company has an opportunity to acquire a new machine to replace one of its present Project 1 Project 2 Project 3 Project 4
machines. The new machine would cost P90,000, have a five-year life, and no estimated Initial cash outlay P200,000 P298,000 P248,000 P272,000
salvage value. Variable operating costs would be P100,000 per year. The present machine Annual net cash inflows
has a book value of P50,000 and a remaining life of five years. Its disposal value now is Year 1 P 65,000 P100,000 P 80,000 P 95,000
P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per Year 2 70,000 135,000 95,000 125,000
year. Ignore present value calculations and income taxes. Year 3 80,000 90,000 90,000 90,000
Considering the five years in total, what would be the difference in profit before income taxes by Year 4 40,000 65,000 80,000 60,000
acquiring the new machine as opposed to retaining the present one? Net present value ( 3,798) 4,276 14,064 14,662
A. P10,000 decrease C. P35,000 increase Profitability index 98% 101% 106% 105%
B. P15,000 decrease D. P40,000 increase Internal rate of return 11% 13% 14% 15%
Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
Investment Decision amount of funds?
121.The NPV and IRR methods give No Budget Restriction P600,000Available Funds P300,000Available Funds
A. the same decision (accept or reject) for any single investment
A. Projects 2,3, & 4 Projects 3 & 4 Project 3
B. the same choice from among mutually exclusive investments
B. Projects 1, 2, & 3 Projects 2, 3 & 4 Projects 3 & 4
C. different rankings of projects with unequal lives
C. Projects 1, 3, & 4 Projects 2 & 3 Project 2
D. the same rankings of projects with different required investments
D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4

Comprehensive 129.At the beginning of the current month, Rose had P100,000. Cash disbursements were
125.Which of the following combinations is possible? P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money
Profitability Index NPV IRR market fund and has a line of credit to cover cash deficiencies.
A. greater than 1 positive equals cost of capital If Rose wishes to start the next month with P150,000, Rose must
B. greater than 1 negative less than cost of capital A. invest P200,000 C. invest P350,000
C. less than 1 negative less than cost of capital* B. borrow P400,000 D. do nothing
D. less than 1 positive less than cost of capital
FINANCIAL STATEMENT ANALYSIS
MASTER BUDGET Horizontal Analysis
Basic Concepts 130.Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0
126.Zero-base budgeting requires managers to million. Using year 1 as the base year, the respective percentage increase in sales in year 2
A justify expenditures that are increases over the prior period’s budgeted amount. and 3 are
B. justify all expenditures, not just increases over last year’s amount. A. 115% and 125% C. 115% and 130%
C. maintain a full-year budget intact at all times. B. 115% and 109% D. 87% and 80%
D. maintain a budget with zero increases over the prior period.
Solvency Ratio
Production Budget 131.A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the
127.Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a following sets of ratios characterizes the firm with the greatest amount of financial risk?
growth in sales of 5 percent per month. The target ending inventory in units of the product is 80 A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
percent of the next month’s estimated sales. There are 150,000 units in inventory as of the end B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
of September. The production requirement in units of Batik for the quarter ending December 31 C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
would be D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity*
A. 670,560 C. 665,720
B. 691,525 D. 675,925 132.The ratio that measures a firm’s ability to generate earnings is
A. times interest earned. C. days’ sales in receivables.
Cash Budget B. sales to working capital. D. operating asset turnover.
128.The Mango Company is preparing its cash budget for the month of May. The following
information is available concerning its accounts payable: Other Ratio
Estimated credit sales for May P200,000 133.Taylor company paid out one-half of its 2002 earnings in dividends. Taylor’s earnings increased
Actual credit sales for April 150,000 by 20%, and the amount of its dividends increased by 15% in 2003. Taylor’s dividend payout
Estimated collections in May for credit sales in May 20% ratio for 2003 was
Estimated collections in May for credit sales in April 70% A. 75.0% C. 47.9%
Estimated collections in May for credit sales prior to April P12,000 B. 52.3% D. 41.7%
Estimated write-offs in May for uncollectible credit sales 8.000
Estimated provision for bad debts in May for credit sales in May 7,000 134.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The
What are the estimated cash receipts from accounts receivable collections in May? dividend payout rate is 60%. Beginning stockholders’ equity was P850,000 and current
A. P142,000 C. P150,000 liabilities are projected to be P300,000 at the end of 2002.
B. P149,000 D. P157,000
What are the total equities available if the ratio of long-term debt to stockholders’ equity is 138.The following data were obtained from the records of Trend, Inc.:
60%? Current ratio (at year end) 1.5 to 1
A. P1,788,000 C. P2,046,000 Inventory turnover based on sales and ending inventory 15 times
B. P1,980,000 D. P858,000 Inventory turnover based on cost of goods sold and ending inventory 10.5 times
Gross margin for 2002 P315,000
135.The following were reflected from the records of War Freak Company: What was Trend, Inc.’s December 31, 2002 balance in the Inventory account?
Earnings before interest and taxes P1,250,000 A. P138,000 C. P140,000
Interest expense 250,000 B. P 70,000 D. P135,000
Preferred dividends 200,000
Payout ratio 40 percent 139.The board of directors of Contemporary Company was unhappy with the current return on
Shares outstanding throughout 2003 common equity. Though the return on sales (profit margin) was impressively good at 12.5
Preferred 20,000 percent, the asset turnover was only 0.75. The present debt ratio is 0.40.
Common 25,000 Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
Income tax rate 40 percent  Profit margin should be raised to 15 percent.
Price earnings ratio 5 times  The new capital structure will be revised by raising debt component.
The dividend yield ratio is  The asset turnover will be maintained at 0.75.
A. 0.50 C. 0.12 The proposed adjustment is estimated to raise return on equity by 50 percent.
B. 0.40 D. 0.08 What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150
percent of the present level?
Integrated Ratios A. 0.52 C. 0.61
136.Selected data from Maui Company’s year-end financial statements are presented below. The B. 0.68 D. 0.72
difference between average and ending inventory is immaterial.
Current ratio 2.0 Sensitivity Analysis
Quick ratio 1.5 140.Annette Company uses the direct write-off method to account for uncollectible accounts
Current liabilities P120,000 receivable. If the company subsequently collects an account receivable that was written off in a
Inventory turnover (based on cost of sales) 8 times prior accounting period, the effect of the collection of the account receivable on Annette’s
Gross profit margin 40% current ratio and total working capital would be
Maui’s net sales for the year were A. B. C. D.
A. P800,000 C. P672,000 Current Ratio None Increase Decrease None
B. P480,000 D. P1,200,000 Working Capital None Increase Decrease Increase
137.Assume you are given the following relationships for the Bryan Company:
141.The days’ sales-in-receivable ratio will be understated if the company
Sales/total assets 1.5X
A. uses a natural business year for its accounting period*
Return on assets (ROA) 3%
B. uses a calendar year for its accounting period
Return on equity (ROE) 5%
C. uses average receivable in the ratio calculation
The Bryan Company’s debt ratio is
D. has high sales at the end of the year
A. 40% C. 60%
B. 35% D. 65%
WORKING CAPITAL MANAGEMENT Receivables Management

Working Capital Policy 146.It is held that the level of accounts receivable that a firm has or holds reflects both the volume
142.As a company becomes more conservative with respect to working capital policy, it would tend of a firm’s sales on account and a firm’s credit policies. Which one of the following items is not
to have a(n) considered as part of a firm’s “credit policy”?
A. increase in the ratio of current liabilities to noncurrent liabilities. A. The maximum risk group to which credit should be extended.
B. decrease in the operating cycle. B. The extent (in terms of money) to which a firm will go to collect an account.
C. decrease in the operating cycle. C. The length of time for which credit is extended.
D. increase in the ratio of current assets to noncurrent liabilities.* D. The size of the discount that will be offered.
143.Wen Company follows and aggressive financing policy in its working capital management while 147.Relax Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
Manong Corporation follows a conservative financing policy. Which one of the following expected to be credit sales at terms of n/30. Relax estimates that a proposed relaxation of
statements is correct? credit standards will increase credit sales by 20% and increase the average collection period
A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of short- from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
term debt to total debt. standards will result in an expected increase in the average accounts receivable balance of
B. Wen has a low current ratio while Manong has a high current ratio A. P540,000 C. P900,000
C. Wen has less liquidity risk while Manong has more liquidity risk. B. P2,700,000 D. P1,620,000
D. Wen finances short-term assets with long-term debt while Manong finances short-term
assets with short-term debt. 148.Matang-Lawin’s budgeted sales for the coming year are P48,000,000, of which 80% are
expected to be credit sales at a terms of n/30. Matang-Lawin estimates that a proposed
Cash Management relaxation of credit standards would increase credit sales by 30 percent and increase the
144.Gear Inc., has a total annual cash requirement of P14,700,000 which are to be paid uniformly. average collection period from 30 days to 45 days. Based on a 360-day year, the proposed
Gear has the opportunity to invest the money at 24% per annum. The company spends, on the relaxation of credit standards would result in an expected increase in the accounts receivable
average, P40 for every cash conversion to marketable securities. balance of
What is the optimal cash conversion size? A. P3,440,000 C. P3,040,000
A. P60,000 C. P80,000 B. P1,440,000 D. P960,000
B. P62,500 D. P70,000
149.Lipa company currently has annual sales of P2,000,000. Its average collection period is 40
145.The Alabang Company has a daily average collection of checks of P250,000. It takes the days, and bad debts are 5 percent of sales. The credit and collection manager is considering
company 4 days to convert the checks to cash. Assume a lockbox system could be employed instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total
which would reduce the cash conversion period to 3 days. The lockbox system would have a sales, and the average collection period would fall to 30 days. However, sales would also fall
net cost of P25,000 per year, but any additional funds made available could be invested to net by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of
8 percent per year. Should Alabang adopt the lockbox system? carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year.
A. Yes; the system would free P250,000 in funds What would be the incremental investment in receivables if the change were made?
B. Yes; the benefits of the lock-box system exceed the costs. A. P(16,667) C. P(48,611)
C. No; the benefit is only P10,000. B. P(27,167) D. P(45,833)
D. No; the firm would lose P5,000 per year if the system were used.

Inventory Management 154.Each stockout of a product sold by AFM Co. costs P1,750 per occurrence. The company’s
150.Which of the following items is irrelevant for a company that is attempting to minimize the cost carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
of the stockout? product 20 times a year at a cost of P100 per order. The probability of a stockout at various
A. Cost of placing an order C. Storage cost of inventory levels of safety stock are:
B. Contribution margin on lost sales D. Size of the safety stock Units of Safety Stock Probability of Stockout
0 0.50
151.When a specified level of safety stock is carried for an item in inventory, the average inventory 100 0.30
level for that item 200 0.14
A. decreased by the amount of the safety stock. 300 0.05
B. is one-half the level of the safety stock. 400 0.01
C. increases by one-half the amount of the safety stock. The optimal safety stock level for the company based on the units of safety stock level above is
D. increases by the amount of the safety stock. A. 0 units C. 300 units
B. 100 units D. 400 units
152.Gleim Company, which manufactures a line of appliances, has an annual demand for its HD
washing machine estimated at 7,500 units. The annual cost of carrying one unit of inventory is Trade Credit
P200, and the cost to initiate a production run is P5,000.There are no HD washing machine on 155.If a retailer’s term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of
hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the not taking the discount? Assume a 360-day year.
coming year. Gleim has 250 business days per year. Assume that sales occur uniformly A. 24.00% C. 24.74%
throughout the year and that production is instantaneous. B. 37.11% D. 31.81%
If Gleim does not maintain a safety stock, the estimated total carrying costs and total set-up
costs for the coming year are: Short-term Loans
A. B. C. D. 156.Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
Carrying costs P150,000 P300,000 P150,000 P300,000 annum. The bank requires 10 percent of loan as compensating balance in its new checking
Set-up costs P 25,000 P 25,000 P 5,000 P 5,000 account. The loan is payable at the end of 6 months. The effective interest rate of this loan is
A. 28.21% C. 14.29%
153.The sales office of Hermit Company has developed the following probability distribution for daily B. 27.27% D. 15.38%
sales of a perishable product.
X (Units Sold) P (Sales = X) 157.The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate
200 0.2 of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking
250 0.5 account. Assuming Dean would normally maintain a zero balance in its checking account, the
300 0.2 effective interest rate on the loan is
350 0.1 A. 8.0% C. 11.11%
The product is restocked at the start of each day. If the company desires a 90% service level in B. 10.0% D. 6.4%
satisfying sales demand, the initial stock balance for each day should be
A. 245 C. 315
B. 300 D. 220

COST OF CAPITAL 163.Glenda Company expects to generate P10 million internally which could be available for
Cost of Debt financing part of its P12 million capital budget for this coming year. Glenda’s management
158.The Maru Company’s bonds have 5 years remaining to maturity. Interest is paid annually; the believes that a debt-equity ratio of 40 percent is best for the firm. How much should be paid in
bonds have a P1,000 face value; and the coupon interest rate is 9 percent. dividends if the target debt-equity ratio is to be maintained?
What is the estimated yield to maturity of the bonds at their current market price of P850? A. P2,800,000 C. P8,571,429
A. 10.64 percent C. 11.76 percent B. P1,428,571 D. P4,000,000
B. 11.00 percent (?) D. 10.00 percent
QUANTITATIVE METHODS
Capital Asset Pricing Model Probabilities
159.Spec, Inc.’s stock is expected to generate a dividend and terminal value one year from now of 164.Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that
P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6 percent, and the expected silver worth P15 million can be sold. There is a 20% probability that the silver will only be worth
return market return is 11 percent. What should the equilibrium price of Spec’s stock in the P500,000. What is the maximum Express would be willing to spend to develop the mine?
market now? A. P10,000,000 C. P3,100,000
A. P50.67 C. P53.77 B. P 5,000,000 D. P0
B. P51.35 D. P43.84
165.CTV Company has three sales departments. Department FA processes about 50 percent of
Dividend Growth Model CTV’s sales, Department TA about 30 percent, and Department PA about 20 percent. In the
160.Tiger Company’s stock is currently selling for P60 a share. The firm is expected to earn P5.40 past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent, and 2.5
per share and to pay a year-end dividend of P3.60. percent, respectively. A random audit of the sales records yields a recording error of sufficient
If investors require a 9 percent return, what rate of growth must be expected for Tiger? magnitude to distort the company’s results. The probability that Department FA is responsible
A. Zero growth C. 40.0 percent for this error is
B. 3.0 percent D. 50.0 percent A. .50 C. .02
B. .33 D. .25
Dividend Policy
161.Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current 166.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft
capital structure is 40% debt and 60% common equity. The director of capital budgeting has drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
determined that the optimal capital spending for next year is P1,200,000. If Resi follows a strict P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
residual dividend policy, what is the expected dividend payout ratio for next year? cold, the profit will be P2,000.The probability of cold weather on a given day at this time is 60%.
A. 80.0% C. 40.0% The expected payoff for either selling coffee or soft drinks and the expected payoff if the vendor
B. 66.7% D. 10.0% has perfect information are
Coffee Soft drinks Perfect information
162.Galvez Company expects next year’s after-tax income to be P7,500,000. The firm’s debt ratio A. P1,360 P1,600 P3,000
is currently 40 percent. Galvez has P6,000,000 of profitable investment opportunities, and it B. P1,960 P1,600 P2,200
wishes to maintain its existing debt ratio. According to the residual dividend policy, what is the C. P2,200 P1,900 P1,360
expected dividend payout ratio next year? D. P3,900 P1,900 P1,960
A. 52.0 percent C. 48.0 percent
B. 75.0 percent D. 25.0 percent

Linear Programming 172.A company that uses activity-based costing to develop standard costs
167. Anderson Co. manufactures two different products, A and B. The company has 100 pounds of A. will usually have more than one variable overhead component in its standard costs
raw materials and 300 direct labor hours available for production. The time requirement and B. cannot compute variable overhead efficiency variances
contribution margins per unit are as follows: C. will have less information about the profitability of individual products
A B D. all of the above
Raw materials per unit (lbs) 1 2
Direct labor hours per unit 4 2 173.Classify the following as volume (unit) base or nonvolume (activity) base:
Contribution margin per unit P4 P5 1. Number of purchase orders issued
The objective function for maximizing profits and the equation for the constrain on raw materials 2. Direct labor hours
are: 3. Number of machine hours
Objective Function Constraint on raw materials 4. Number of set ups
5. Number of receiving reports issued
A. Max P1A + P2B 4A + 2B < 100
6. Direct material cost
B. Max P4A + P5B 1A + 2B < 100
C. Max P4A + P2B 4A + 5B < 100 Volume (Unit) Base Nonvolume (Activity) Base
D. Min P4A + P5B 4A + 5B < 300 A. 1, 4, 5, 6 2, 3
B. 1, 4, 5 2, 3, 6
ACTIVITY-BASED COSTING C. 1, 2, 3, 4, 5 6
168.A cost system that first traces costs to activities and then traces cost from activities to products D. 2, 3, 6 1, 4, 5
A. Job order cost system. C. Activity-based cost system.
B. Process cost system. D. Flexible cost system. 174.The Oilfield plant has two categories of overhead: maintenance and inspection. Costs
expected for these categories for the coming year are as follows:
169.The last step in activity-based costing is to Maintenance P100,000
A. identify the major activities that pertain to the manufacture of specific products Inspection 150,000
B. allocate manufacturing overhead costs to activity cost pools The plant currently applies overhead using direct labor hours and expected capacity of 50,000
C. identify the cost drivers that accurately measure each activity’s contribution to the finished direct labor hours. The following data have been assembled for use in developing a bid for a
product proposed job:
D. assign manufacturing overhead costs for each activity cost pool to products Direct materials P1,000
Direct labor P4,000
170.McMd’s standard cost card indicates that it takes three hours of direct labor to produce one unit Machine hours 500
of product. A recently conducted time and motion study revealed that it should take one hour to Number of inspections 4
produce the same unit. Labor cost is P150 per hour. Direct labor hours 800
McMd’s value-added, and nonvalue-added costs would be Total expected machine hours for all jobs during the year is 25,000, and the total expected
A. P150 and P0 C. P150 and P300 number of inspections is 1,500.
B. P0 and P150 D. P450 and P0 Using activity-based costing and the appropriate activity drivers, the total cost of the potential
job would be
171.Designing and redesigning are activities that are classified as A. P2,400 C. P7,400
A. facility level C. unit level B. P3,600 D. P7,750
B. batch level D. product level
QUALITY COST 182.An integrated set of computer programs that facilitates the creation, manipulation, and querying
175.The cost of statistical quality control in a product quality cost system is of integrated files is called a(n)
A. training cost C. appraisal cost A. translator C. operating system
B. internal failure cost D. prevention cost B. database management system D. flat file system
INFORMATION SYSTEMS 183.Turnaround documents

176.The process of learning how the current system, functions, determining the needs of users, and A. generally circulate only within the computer center.
developing the logical requirements of a proposed system is referred to as B. can be read and processed only by the computer.
A. systems maintenance C. systems feasibility study C. are generated by the computer and eventually return to it.
B. systems analysis D. systems design D. are only used internally in an organization.
177.Which of the following is not a characteristic of a batch processing system? Answer Key
A. The collection of like transactions which are sorted and processed sequentially against a 1. C 11. C 21. B 31. C 41. A
master file. 2. D 12. A 22. A 32. A 42. C
B. Keypunching of transactions, followed by machine processing. 3. B 13. D 23. A 33. B 43. C
C. The production of numerous printouts. 4. C 14. A 24. A 34. A 44. C
D. The posting of a transaction, as it occurs, to several files without intermediate printouts. 5. C 15. D 25. C 35. A 45. D
6. C 16. C 26. D 36. A 46. C
178.All activity related to a particular application in a manual system is recorded in a journal. The 7. A 17. B 27. C 37. A 47. C
name of the corresponding item in a computerized system is a 8. B 18. C 28. C 38. C 48. D
A. master file C. transaction file 9. B 19. B 29. C 39. C 49. A
B. year-to-date file D. current balance file 10. C 20. B 30. D 40. D 50. A
179.One of the first steps in the creation of a data base is to
51. D 61. B 71. A 81. B 91. B
A. define common variables and fields used throughout the firm*
52. B 62. A 72. A 82. D 92. D
B. increase the secondary storage capacity.
53. A 63. B 73. D 83. A 93. B
C. obtain software that will facilitate data retrieval.
D. integrate the accounting system into the data base. 54. A 64. A 74. A 84. B 94. D
55. B 65. D 75. A 85. B 95. A
180.A system with several computers that are connected for communication and data transmission 56. D 66. A 76. D 86. C 96. B
purposes but that permits each computer to process its own data is a 57. B 67. A 77. C 87. B 97. B
A. distributed data processing network C. decentralized network 58. C 68. B 78. B 88. A 98. A
B. centralized network D. multidrop network 59. A 69. B 79. A 89. A 99. A
60. D 70. C 80. B 90. B 100. D
181.The process of developing specifications for hardware, software, personnel hours, data
resources, and information products required to develop a system is referred to as
A. systems analysis C. systems design
B. systems feasibility D. systems maintenance
101. A 111. A 121. A 131. D 141. A TRUE STATEMENTS

102. A 112. B 122. A 132. A 142. D
103. B 113. A 123. B 133. C 143. B 1. Standard cost can, if properly used, help motivate employees
104. B 114. B 124. A 134. A 144. D
105. A 115. D 125. C 135. D 145. D 2. A company would most likely have an unfavorable labor rate variance and a favorable labor
106. D 116. D 126. B 136. A 146. B efficiency if the mix of workers used in the production process was more experienced than the
107. B 117. B 127. C 137. A 147. D normal mix
108. B 118. A 128. D 138. B 148. C
109. A 119. A 129. A 139. A 149. D 3. The expected annual capacity level has traditionally been used to compute the fixed overhead
110. B 120. D 130. A 140. B 150. A application rate?
4. A favorable volume variance increases absorption costing net income; it does not affect
151. D 161. D 171. D 181. C
variable costing net income.
152. A 162. A 172. A 182. B
153. B 163. B 173. D 183. C
5. The variable costing format is often more useful to managers than the absorption costing format
154. D 164. C 174. C because costs are classified by their behavior.
155. D 165. B 175. C
156. C 166. B 176. B 6. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
157. B 167. B 177. D Consistent with these assumptions, as volume decreases total variable costs and total costs
158. B 168. C 178. C decrease while fixed costs remain constant.
159. A 169. D 179. A
160. B 170. C 180. A 7. A managerial preference for a very low degree of operating leverage might indicate that a
decrease in sales volume is expected
8. Payback period potentially ignores part of a project’s relevant cash flows.
9. Payback method does not routinely rely on the assumption that all cash flows occur at the end
of the period?
10. The payback method assumes that all cash inflows are reinvested to yield a return equal to
zero
11. When using one of the discounted cash flow methods to evaluate the desirability of a capital
budgeting project, the method of financing the project under consideration is not an important
factor?
12. In capital budgeting, a firm’s cost of capital is frequently used as the discount rate

13. The net present value method assumes that all cash inflows can be immediately reinvested at
the discount rate 27. If a firm orders raw materials in quantities larger than the optimum quantity obtained using the
simple economic order quantity model in order to obtain a quantity discount, the company will
14. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, experience carrying costs higher than ordering costs
is the after-tax rate of interest for bonds and stated annual dividend rate for preferred stock
28. One of the primary purposes of using a standard cost system is to provide a distinct measure of
15. The weighted average cost of capital that is used to evaluate a specific project should be based cost control.
on the overall capital structure of the corporation
29. Favorable variances are not necessarily good variances.
16. The weighted average cost of capital approach to decision making is not directly affected by the
current budget for capital expansion 30. Whether the variance is favorable or unfavorable is irrelevant to a need of investigating it.
17. At a profitability index of 1.0, the NPV is 0, and the IRR equals the discount rate used. If the PI 31. The sum of the material price variance and materials quantity variance is not meaningful.
is above 1.0, the NPV is positive and the IRR is higher than the discount rate used.
32. The fixed overhead variance would be the same irrespective of the capacity or denominator
18. The profitability index is the ratio of the present value of cash flows to the original investment used.
19. The rate of interest that produces a zero net present value when a project’s discounted cash 33. The fixed overhead volume variance is the least significant variance for control purposes.
operating advantage is netted against its discounted net investment is the internal rate of return However, it is the most useful variance in evaluating plant utilization.
20. Internal rate of return has been criticized because it might mistakenly imply that earnings are 34. Fixed overhead costs are mostly incurred to provide the capacity to produce and are best
reinvested at the rate of return earned by the investment. controlled on a total basis at the time they are originally negotiated.
21. As the marginal tax rate goes up, the benefit from the depreciation tax shield increases 35. In a standard cost system, when production is greater than the estimated unit or denominator
level of activity, there will be a favorable volume variance.
22. Fixed cost is relevant if it is avoidable
36. In analyzing factory overhead variances, volume variance is the difference between the budget
23. When a scarce resource, such as space, exists in an organization, the criterion that should be allowance based on standard hours allowed for actual production for the period and the amount
used to determine production is contribution margin per unit of scarce resource budgeted to be applied during the period.
24. A cost driver is defined as a causal factor that increases the total cost of a cost objective 37. The use of separate variable and fixed overhead rates is better than a combined rate because
such a system is more effective in assigning overhead costs to products.
25. Committed costs are governed mainly by past decisions that established the current levels of
operating and organizational capacity and that only change slowly in response to small 38. In a just-in-time inventory system, ideal standards become expected standards.
changes in capacity
39. If a firm produces more units than it sells, absorption costing, relative to variable costing, will
26. Discretionary costs are those that management decides to incur in the current period to enable result in higher income and assets.
the company to achieve objectives other than the filling of orders placed by customers
40. A firm presently has total sales of P100,000. If its sales rise by P1.00, its net income based on 53. A linear programming model must have only one objective function.
variable costing will go up more than its net income based on absorption costing.
54. Strategic planning as assumed by top management is stating and establishing long-term plans.
41. A company could never incur a loss that exceeded its total costs.
55. The master budget is a static budget because it is geared to only one level of production and
42. At breakeven point the contribution margin equals fixed costs. After the level of volume sales.
exceeds the breakeven point, the total contribution margin exceeds the total fixed costs.
56. The primary reason why managers impose a minimum cash balance in the cash budget is that
43. As projected net income increases the degree of operating leverage declines. it protects the organization from the uncertainty of the budgeting process.
44. A managerial preference for a very low degree of operating leverage might indicate that a 57. Slack in operating budgets is greater when managers are allowed to participate in the
decrease in sales volume is expected. budgeting process. Budget slack refers to intentional overestimate of expenses or
underestimate of revenues.
45. The time value of money is considered in long-range investment decisions by assigning greater
value to more immediate cash flows. 58. Performance measurements and a reward system are part of motivational element of cost
management system. Focus on cost control and assessing core competencies are part of
46. For a project such as plant investment, the return that should leave the market price of the informational element of cost management system.
firm’s stock unchanged is known as the cost of capital.
59. A decentralized company grows very quickly than a centralized one.
46. Opportunity cost of capital is the highest rate of return that can be earned from the most
attractive alternative capital project available to the firm. 60. In a decentralized company, transfer pricing system is designed to aid in the appraisal and
motivation of managerial performance.
47. If an analyst desires a conservative net present value estimate, he will assume that all cash
inflows occur at year-end. 61. Responsibility accounting refers to an accounting system in which the operations of the
business are broken down into reportable segments and the control function of sales manager
48. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will or supervisor is emphasized.
exceed the pre-tax cash flow on the sale.
62. The most valid reason for using something other than a full-cost based transfer price between
49. Sensitivity analysis is an appropriate response to uncertainty in cash flow projections. units of a company is because a full-cost price does not ensure the control of costs of a
supplying unit.
50. Relevant costs are anticipated future costs that will differ among various alternatives.
63. A cost classified according to its activity-related behavior is a fixed cost.
51. In a make or buy decisions, the opportunity cost of capacity could be considered to decrease
the price of units purchased from suppliers. 64. The distinction between direct and indirect costs depends on whether a cost can be
conveniently and physically traced to a cost object under consideration.
52. Fixed costs are ignored in allocating scarce resources because they are unaffected by the
allocation of scarce resources. 65. An accounting system that focuses on transactions is a traditional accounting system.

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Management Advisory Services - J.

OVERVIEW COST-VOLUME-PROFIT ANALYSIS

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Supplies 1,200 73,875

Variances are closed to cost of sales monthly

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STANDARD COSTING & VARIANCE ANALYSIS Raw Materials Variances

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Return on Investment 36% 18% 18% 36%

Return on Investment & Residual Income

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WORKING CAPITAL MANAGEMENT Receivables Management

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INFORMATION SYSTEMS 183.Turnaround documents

101. A 111. A 121. A 131. D 141. A TRUE STATEMENTS

8. Payback period potentially ignores part of a project’s relevant cash flows.

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May 2005 Page 29 of 29

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