University of the East – Caloocan

Department of Accounting, Law and Taxation

Managerial accounting
Finals – Quiz

Name: Date
Section:

1 C 21 FALSE

2 C 22 FALSE

3 C 23 TRUE

4 D 24 FALSE

5 A 25 TRUE

6 E 26 FLASE

7 C 27 TRUE

8 C 28 TRUE

9 E 29 A

10 C 30 E

11 A 31 B

12 A 32 D

13 A 33 A

14 B 34 A

15 C 35 B

16 B 36 D

17 A 37 A

18 C 38 B

19 D 39 C

20 B 40 E

41 E

42 E
 University of the East – Caloocan
Department of Accounting, Law and Taxation
Managerial accounting
Finals – Quiz

Name: Date
Section:

Relevant Costing

1. Future costs that differ across alternatives are

a. opportunity costs.
b. sunk costs.
c. relevant costs.
d. variable costs.
e. product costs.

ANS: C

2. Depreciation of equipment is an example of a(n)

a. relevant cost.
b. opportunity cost.
c. sunk cost.
d. variable cost.
e. None of these.

ANS: C

3. An important qualitative factor to consider regarding a special order is the

a. variable costs associated with the special order.
b. avoidable fixed costs associated with the special order.
c. effect the sale of special-order units will have on the sale of regularly priced
units.
d. incremental revenue from the special order.

ANS: C

4. Qualitative factors that should be considered when evaluating a make-or-buy decision

are
a. the quality of the outside supplier's product.
b. whether the outside supplier can provide the needed quantities.
c. whether the outside supplier can provide the product when it is needed.
d. All of these.

ANS: D

5. Which of the following costs is not relevant to a decision to sell a product at split-off or
process the product further and then sell the product?
a. joint costs allocated to the product
b. the selling price of the product at split-off
c. the additional processing costs after split-off
d. the selling price of the product after further processing

ANS: A

6. A decision involving a choice between internal and external production is what kind of
decision?
a. relevant
b. keep-or-drop
c. sell-or-process-further
d. special-order
 e. make-or-buy

ANS: E

7. When managers are considering the optimal product mix, they are most concerned with
a. maximizing revenue.
b. minimizing cost.
c. maximizing profit.
d. minimizing selling and administrative expense.
e. balancing productive capacity.

ANS: C

8. Limited resources and limited demand for a product are generally referred to as
a. resources.
b. problems.
c. constraints.
d. optima.
e. contribution factors.

ANS: C

9. A decision in which a manager needs to determine whether a product line (or segment)
should continue or be eliminated is what kind of decision?
a. relevant
b. make-or-buy
c. sell-or-process-further
d. special-order
e. keep-or-drop

ANS: E

10. A decision that involves potential further processing of joint products is which kind of
decision?
a. relevant
b. make-or-buy
c. sell-or-process-further
d. special-order
e. keep-or-drop

ANS: C

Problem A – Joint product

Autry Company manufactures veterinary products. One joint process involves refining a
chemical (dactylyte) into two chemicals - dac and tyl. One batch of 5,000 gallons of
dactylyte can be converted to 2,000 gallons of dac and 3,000 gallons of tyl at a total joint
processing cost of P12,000. At the split-off point, dac can be sold for P3 per gallon and
tyl can be sold for P4 per gallon. Autry has just learned of a new process to convert dac
into prodac. The new process costs P4,000 and yields 1,700 gallons of prodac for every
2,000 gallons of dac. Prodac sells for P5 per gallon.

11. What is Autry's profit from refining one batch of dactylyte if both dac and tyl are sold at
the split-off point?
a. P6,000
b. P12,000
c. P7,000
d. P8,000
e. P15,000

ANS: A
Revenue [(2,000 ´ P3) + (3,000 ´ P4)] P18,000
 Less: Joint processing cost 12,000
Gross profit P 6,000

12. Should Autry process dac further?

a. No, income will be P1,500 lower.
b. No, income will be P5,000 lower.
c. Yes, income will be P1,500 higher.
d. Yes, income will be P5,000 higher.
e. It doesn't matter; income will be the same.

ANS: A
Sell Dac & Tyl Process Dac
@ Split-off Further
Revenue P18,000 P20,500*
Less: further processing of dac 4,000
Less: Joint processing cost 12,000 12,000
Gross profit P 6,000 P 4,500

(P3 ´ 2,000) = P6,000 Sales of Dac that would not occur if action taken.
(P5 ´ P1,700) = P8,500 Sales of Prodac that would occur if action taken.

*Revenue 2nd option P18,000 - P6,000 + P8,500 = P20,500.

Gross profit is P1,500 less (P4,500 - P6,000).

Problem B – Make or Buy

Ring Company makes telephones. Currently, Ring makes all components of the
telephones in-house. An outside company has offered to supply one component, part
number X76, for P12 each. Ring uses 22,000 of these components per year. Costs of
X76 are as follows:

Direct materials P3.00

Direct labor P1.50
Variable overhead P2.75
Fixed overhead P5.00

13. Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring.
Should Ring purchase the part from the outside supplier?
a. No, income will decrease by P71,500.
b. No, income will decrease by P15,000.
c. Yes, income will increase by P74,500.
d. No, income will decrease by P49,500.
e. Yes, income will increase by P10,500.

ANS: A
Relevant cost per unit= P3.00 + P1.50 + P2.75
+ P1.50 = P8.75
Fixed overhead = P5.00 - (P5.00 x 70%) = P1.50
Decrease in income if purchased = (P12.00 -
P8.75) x 22,000 = P71,500

14. Assume that all of the fixed overhead is allocated and cannot be avoided. Should Ring
purchase the part from the outside supplier?
a. Yes, income will increase by P104,500.
b. No, income will decrease by P104,500.
c. Yes, income will increase by P78,500.
d. No, income will decrease by P84,375.
e. Yes, income will increase by P137,500.

ANS: B
 Relevant cost per unit = P3.00 + P1.50 + P2.75
= P7.25
Decrease in income if purchased = (P7.25 -
P12.00) x 22,000 = P104,500 added cost if
purchased

Problem C – Constraint resources

Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has
just developed a line of sinks and tubs made from a mixture of glass and ceramic. The
sinks sell for P150 each and have variable costs of P80. The tubs sell for P600 and have
variable costs of P450. The glass and ceramic sinks and tubs require the use of
specialized molding equipment. The specialized molding equipment has 4,050 hours of
capacity per year. A sink uses an average of 2 hours of specialized molding equipment
time; a tub uses an average of 5 hours of specialized molding equipment time.

15. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How many
tubs should EBP produce?
a. 1,000
b. 500
c. 410
d. 775
e. 0

ANS: C
Contribution Margin per molding hour for Sinks is (P150 - P80)/2 or P35.
Contribution Margin per molding hour for Tubs is (P600 - P450)/2 or P30.

To maximize profits, they should make as many sinks as will sell since the margin per
molding hour is greater. Solving for the maximum sinks of 1,000, the number of tubs
would be 410.

Expressed mathematically the equation is: 2 ´ sinks + 5 ´ tubs = 4,050

16. Assuming that specialized molding equipment time is the only constrained resource, and
that EBP can sell as many tubs and sinks as it can produce, how many sinks should be
sold?
a. 2,050
b. 2,025
c. 0
d. 4,050
e. 810

ANS: B
Contribution margin per hour of molding for tubs = P150/5 = P30
Contribution margin CM per hour of molding for sinks = P70/2 = P35

Because the contribution margin per hour for sinks (P35) is higher than that of tubs (P30),
EBP would prefer to use the molding equipment as much as possible to make sinks. EBP
has capacity for 2,025 sinks (4,050 hours/2 hours).

Problem D – Retain or Drop

The operations of Smits Corporation are divided into the Child Division and the Jackson
Division. Projections for the next year are as follows:

Child Jackson
Division Division Total
Sales revenue P250,000 P180,000 P430,000
Variable expenses 90,000 100,000 190,000
Contribution margin P160,000 P 80,000 P240,000
 Direct fixed expenses 75,000 62,500 137,500
Segment margin P 85,000 P 17,500 P102,500
Allocated common costs 35,000 27,500 62,500
Total relevant benefit P 50,000 P(10,000) P 40,000
(loss)

17. Operating income for Smits Corporation as a whole if the Jackson Division were dropped
would be
a. P22,500.
b. P24,500.
c. P50,000.
d. P60,000.

ANS: A
SUPPORTING CALCULATIONS:
P85,000 - P62,500 = P22,500

Problem E – Retain or drop

The following information pertains to Dodge Company's three products:

A B C
Unit sales per year 250 400 250

Selling price per unit P9.00 P12.00 P 9.00

Variable costs per unit 3.60 9.00 9.90
Unit contribution margin P5.40 P 3.00 P(0.90)
Contribution margin ratio 60% 25% (10)%

18. Assume that product C is discontinued and the extra space is rented for P300 per month.
All other information remains the same as the original data. Annual profits will
a. increase by P475.
b. decrease by P75.
c. increase by P525.
d. remain the same.

ANS: C
SUPPORTING CALCULATIONS:
(250 ´ P0.90) + P300 = P525

Problem F – Special order

Walton Company manufactures a product with the following costs per unit at the expected
production level of 84,000 units:

Direct materials P12

Direct labor 36
Variable overhead 18
Fixed overhead 24

The company has the capacity to produce 90,000 units. The product regularly sells for
P120. A wholesaler has offered to pay P110 per unit for 7,500 units.

19. If the special order is accepted, the effect on operating income would be a
a. P174,000 increase.
b. P429,000 increase.
c. P495,000 increase.
d. P249,000 increase.

ANS: D
SUPPORTING CALCULATIONS:
Incremental revenue (7,500 ´ P110) P 825,000
 Lost revenue from regular sales (1,500 ´ P120) (180,000)
Incremental costs:
Direct materials (6,000 ´ P12) P 72,000
Direct labor (6,000 ´ P36) 216,000
Variable overhead (6,000 ´ P18) 108,000 (396,000)
Incremental profit P 249,000

Problem G – Special order

The following information relates to a product produced by Creamer Company:

Direct materials P24

Direct labor 15
Variable overhead 30
Fixed overhead 18
Unit cost P87

Fixed selling costs are P500,000 per year, and variable selling costs are P12 per unit
sold. Although production capacity is 600,000 units per year, the company expects to
produce only 400,000 units next year. The product normally sells for P120 each. A
customer has offered to buy 60,000 units for P90 each.

20. The incremental cost per unit associated with the special order is
a. P84.
b. P81.
c. P69.
d. P64.

ANS: B
SUPPORTING CALCULATIONS:
Direct materials P24
Direct labor 15
Variable overhead 30
Variable selling 12
P81

Capital Budgeting

21. In order to use the payback period model, the proposed investment must have even cash
inflows.

ANS: F

22. Only accounting rate of return ignores the time value of money.

ANS: F
Both the payback period and the accounting rate of return ignore the time value of money.

23. Two discounting models for capital investment decision making are net present value
and internal rate of return.

ANS: T

24. The difference between the present value of the cash inflows and outflows associated
with a project is the internal rate of return model.

ANS: F
The difference between the present value of the cash inflows and outflows associated
with a project is the net present value model.

25. The minimum acceptable rate of return for a project is the required rate of return.
 ANS: T

26. If the net present value of an investment is zero, the investment earns less than the
minimum required rate of return.

ANS: F

27. The interest rate that sets the present value of a project's cash inflows equal to the
present value of the project's cost is called the internal rate of return.

ANS: T

28. For independent projects, net present value analysis and internal rate of return analysis
yield the same decision.

ANS: T

29. When the risk of obsolescence is high, managers will want

a. a shorter payback period.
b. a longer payback period.
c. a payback period equal to the life of the investment.
d. All of these.
e. None of these.

ANS: A

30. The required rate of return used in the net present value model can also be called the
a. hurdle rate.
b. minimum acceptable rate of return.
c. cost of capital.
d. discount rate.
e. All of these.

ANS: E

31. A firm is evaluating a project that has a net present value of P0 when a discount rate of
8% is used. A discount rate of 6% will result in a
a. negative net present value.
b. positive net present value.
c. net present value of P0.
d. The question cannot be answered based upon the information provided.

ANS: B

32. The internal rate of return is defined as

a. a blend of the costs of capital from all sources.
b. the minimal acceptable interest rate on investments.
c. the difference between the present value of the cash inflows and outflows
associated with a project.
d. the interest rate that sets the present value of a project's cash inflows equal
to the present value of a project's cost.

ANS: D

Kenner Company is considering two projects.

Project A Project B
Initial investment P85,000 P24,000
Annual cash flows P20,676 P6,011
Life of the project 6 years 5 years
Depreciation per year P14,167 P4,800
 Present value of an Annuity of $1 in Arrears
Periods 8% 10% 12% 14%
1 0.926 0.909 0.893 0.877
2 1.783 1.736 1.690 1.647
3 2.577 2.487 2.402 2.322
4 3.312 3.170 3.037 2.914
5 3.993 3.791 3.605 4.433
6 4.623 4.355 4.111 3.889
7 5.206 4.868 4.564 4.288
8 5.747 5.335 4.968 4.639
9 6.247 5.759 5.328 4.946
10 6.710 6.145 5.650 5.216

33. Which of the two projects, A or B, is better in terms of internal rate of return?
a. project A with an IRR of 12%
b. project B with an IRR of 14%
c. project A with an IRR of 10%
d. project B with an IRR of 10%
e. both projects have the same IRR

ANS: A
Project A: Discount factor = P85,000/P20,676 = 4.111, corresponding to an
IRR of 12%

Project B: Discount factor = $24,000/$6,011 = 3.993, corresponding to an

IRR of 8%

34. Suppose that Kenner Company requires a minimum rate of return of 8%. Which project
is better in terms of net present value?
a. project A with NPV of P10,585
b. project B with NPV of P7,756
c. project A with NPV of P4,210
d. project B with NPV of P1,212
e. both projects have the same NPV

ANS: A
Project A NPV = (P20,676 x 4.623) - P85,000 =
P10,585

Project B NPV = (P6,011 x 3.993) - P24,000 = -P1.92

35. A firm is considering a project with an annual cash flow of P80,000. The project would
have a 10-year life, and the company uses a discount rate of 8%. What is the maximum
amount the company could invest in the project and have the project still be acceptable
(rounded)?
a. P570,350
b. P536,800
c. P406,420
d. P727,208

ANS: B
SUPPORTING CALCULATIONS:
P80,000 ´ 6.710 (PVAF, n = 10, 8%) = P536,800

Sony Lavery is considering investing P45,000 in a project with the following cash
revenues and expenses:

Cash Expenses &

Year Revenues Depreciation
Year 1 P18,000 P8,000
Year 2 22,000 10,000
 Year 3 22,000 9,000
Year 4 24,000 9,000
Year 5 26,000 9,000
Year 6 28,000 12,000
Year 7 28,000 11,000
Year 8 28,000 12,000

36. Refer to Sony Lavery. What is the average income for the project?
a. P19,250
b. P30,000
c. P20,000
d. P14,500
e. P18,000

ANS: D
Average income = (sum of revenues - sum of
expenses)/years
Average income = (P196,000 - P80,000)/8
Average income = P116,000/8 = P14,500

37. Refer to Sony Lavery. What is the accounting rate of return for the project?
a. 32%
b. 40%
c. 20%
d. 26%
e. 35%

ANS: A
Average income = (sum of revenues - sum of
expenses)/years
Average income = (P196,000 - P80,000)/8
Average income = P116,000/8 = P14,500
ARR = Average income/Investment
ARR = P14,500/P45,000 = 0.32 or 32%

38. Refer to Sony Lavery. Assuming straight-line depreciation over 8 years, what is the
payback period for the project?
a. between 4 and 5 years
b. between 2 and 3 years
c. between 5 and 6 years
d. between 7 and 8 years
e. between 1 and 2 years

ANS: B
Year Revenues Cash Expenses Depreciation Revenues - Cash Net cash flow
& Depreciation expenses & (add back
depreciation depreciation)
Year 1 $18,000 $8,000 5,625 $10,000 $15,625
Year 2 $22,000 $10,000 5,625 $12,000 $17,625
Year 3 $22,000 $9,000 5,625 $13,000 $18,625
Year 4 $24,000 $9,000 5,625 $15,000 $20,625
Year 5 $26,000 $9,000 5,625 $17,000 $22,625
Year 6 $28,000 $12,000 5,625 $16,000 $21,625
Year 7 $28,000 $11,000 5,625 $17,000 $22,625
Year 8 $28,000 $12,000 5,625 $16,000 $21,625
$196,000 $80,000

Brandon Company is contemplating the purchase of a new piece of equipment for

P45,000. Brandon is in the 30% income tax bracket. Predicted annual after-tax cash
inflows from this investment are P18,000, P15,000, P9,000, P6,000 and P3,000 for years
1 through 5, respectively. The firm uses straight-line depreciation with no residual value
 at the end of five years.

39. The payback period in years (rounded to the nearest 10th of a year) for this proposed
investment is (assume that the after-tax cash inflows occur evenly throughout the year):
A) 2.5 years.
B) 3.0 years.
C) 3.5 years.
D) 4.0 years.
E) 4.5 years.

Answer: C
Explanation: 1. Cum. After-tax cash flow, Period 0 = ($45,000).
2. Cum. After-tax cash flow, Period 1 = ($45,000) + $18,000 = ($27,000)
3. Cum. After-tax cash flow, Period 2 = ($27,000) + $15,000 = ($12,000)
4. Cum. After-tax cash flow, Period 3 = ($12,000) + $9,000 = ($3,000)
5. Cum. After-tax cash flow, Period 4 = ($3,000) + $6,000 = $3,000
6. Cum. After-tax cash flow, Period 5 = $3,000 + $3,000 = $6,000
7. Therefore, Payback = 3 + ($3,000/$6,000) = 3.5 years

40. Assume that the hurdle rate for accepting new capital investment projects for the
company is 4%, after-tax. (Note: PV $1 factors for 4% are as follows: for year 1 = 0.962,
for year 2 = 0.925, for year 3 = 0.889, for year 4 = 0.855, for year 5 = 0.822; the PV
annuity factor for 4%, 5 years = 4.452.) At an after-tax discount rate of 4%, the estimated
net present value (NPV) of the proposed investment is (rounded to the nearest hundred
peso):
A) (P15,000).
B) (P12,300).
C) (P9,300).
D) (P6,000).
E) P1,788.

Answer: E
Explanation:
● PV of CF, Year 0 = ($45,000) × 1.00 = ($45,000)
● PV of after-tax cash inflows, Year 1 = $18,000 × 0.962 = $17,316
● PV of after-tax cash inflows, Year 2 = $15,000 × 0.925 = $13,875
● PV of after-tax cash inflows, Year 3 = $9,000 × 0.889 = $8,001
● PV of after-tax cash inflows, Year 4 = $6,000 × 0.855 = $5,130
● PV of after-tax cash inflows, Year 5 = $3,000 × 0.822 = $2,466
● NPV = ($45,000) + $17,316 + $13,875 + $8,001 + $5,130 + $2,466 = $1,788

Carmino Company is considering an investment in equipment that is expected to

generate an after-tax income of P6,000 for each year of its four-year life. The asset has
no salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the
investment at the beginning of each year will be as follows:

Year 1 P 30,000
Year 2 15,000
Year 3 7,500
Year 4 3,750

41. The projected after-tax cash inflow generated by the asset in Year 3, rounded to nearest
hundred dollars, is:
A) P6,600.
B) P7,500.
C) P8,100.
D) P9,000.
E) P9,750.

Answer: E
Explanation:
● Projected after-tax income, Year 3 (given) = P6,000
 ● Non-cash charges (depreciation), Year 3 = book value of asset, beginning of Year
3 − book value of asset, end of Year 3 = P7,500 − P3,750 = $3,750
● After-tax cash inflow, Year 3 = After-tax income + non-cash charges (depreciation)
= P6,000 + P3,750 = P9,750

42. Calculate this asset's accounting (book) rate of return (ARR) on average investment
(which is defined as a simple average of the average book value of the asset for each
year of its four-year life). Round the final answer to the nearest whole %.
A) 15%.
B) 27%.
C) 36%.
D) 42%.
E) 58%.

Answer: E
Explanation:
● Average annual after-tax income (given) = $6,000
● Average book values, year by year:
● Average book value, Year 1 = ($30,000 + $15,000)/2 = $22,500
● Average book value, Year 2 = ($15,000 + $7,500)/2 = $11,250
● Average book value, Year 3 = ($7,500 + $3,750)/2 = $5,625
● Average book value, Year 4 = ($3,750 + $0)/2 = $1,875
● Average investment = ($22,500 + $11,250 + $5,625 + $1,875)/4 = $10,313
● Accounting rate of return (ARR) = $6,000/$10,313 = 58% (rounded to nearest whole
percentage; actual calculation = 58.179%)