INTRODUCTION TO MANAGEMENT ACCOUNTING

1. The following factors affect break-even point, except

a. Selling price c. Total fixed costs
b. Sales volume d. Unit variable costs

Answer: B

2. Which of the following company roles is most likely a line position?

a. VP for Research of a conglomerate firm
b. Store manager of a retail convenience outlet
c. Chief financial officer of a merchandising company
d. Human resources manager for an educational institution

Answer: B

3. Managerial accounting is very similar to financial accounting in this aspect.

a. Users of reports c. Emphasis between past and future
b. Type of data provided to users d. Reliance on the accounting database

Answer: D
NOTE: A data warehouse or ‘Infobarn’ stores information used by different managers for multiple purposes.

4. Which financial executive is primarily responsible for both management and financial accounting?
a. Treasurer c. Chief Financial Officer (CFO)
b. Controller d. Chief Operating Officer (COO)

Answer: B

5. The person (s) directly responsible for attaining of organizational objectives is (are) the:
a. Controller c. Line management
b. Chief financial officer d. Staff management

Answer: C
COST CONCEPTS & BEHAVIOR

1. KathDen Company uses an annual cost formula for overhead of P 18,000 + P 1.60 for each direct labor hour worked. For the
upcoming month, Sana plans to manufacture 96,000 units. Each unit required five minutes of direct labor. What is KathDen’s budgeted
overhead for the upcoming month?
a. P 14,300 c. P 30,800
b. P 18,800 d. P 171,600

Answer: A
Solution: Y = (18,000 12 months per year) + 1.60 (96,000 units x 5 minutes/60 minutes) = P 14,300

2. For a simple regression analysis that is used to estimate the total factory overhead, DJ Padilat, an internal auditor finds that the line
of regression that intersects with the y-axis is P 5,000 while the slope of the line is 0.20. The independent variable amounts to P
900,000 for month. What is the estimated amount of factory overhead for the month?
a. P 92,500 b. P 180,000 c. P 185,000 d. P 230,000

Answer: C
Solution: Y = a + bX = 5,000 + 0.20 (900,000)

3. When 20,000 units are produced, fixed costs are P 16 per unit. Therefore, when 40,000 units are produced, fixed costs will:
a. Increase to P 32 per unit c. Remain at P 16 per unit
b. Decrease to P 8 per unit d. Total P 640,000

Answer: B
Solution: Total Fixed Costs = 20,000 (16) = P 320,000 Unit FC = 320,000 / 40,000 = P 8

4. Hello, Love, CPA Co. incurred the following factory overhead costs for the second quarter of the year:
Machine Hours Factory Overhead
April 150 P 4,200
May 120 P 3,600
June 180 P 4,800
Using high-low method, how much is the fixed factory overhead cost for the second quarter?
a. P 1,200 b. P 2,400 c. P 3,600 d. P 4,800

Answer: C
Solution: Variable cost per hour = ∆ Y ÷ ∆ X = (4,800 – 3,600) ÷ (180 – 120) = 20 per hour
Monthly fixed cost = 3,600 – 20 (120) = 1,200

5. The following information pertains to a simple least squares regression for The Loyal Summer Corporation:
Mean value of the dependent variable 30
Mean value of the independent variable 8
Coefficient of the independent variable 3
Number of observations 12
What is the "a" value for the least-squares regression model?
a. 60 b. 20 c. 6 d. 0

Answer: C
Solution: cost function Y = a + bX 30 = a + 3 (8)
COST-VOLUME-PROFIT ANALYSIS

1. Rico Blangko, Inc. sells a single product, at P 20 per unit. The firm's most recent income statement revealed unit sales of 100,000,
variable costs of P 800,000, and fixed costs of P 400,000. If a P 4 drop in selling price will boost unit sales volume by 20%, what will
the company experience?
a. P 80,000 drop in profitability
b. P 240,000 drop in profitability
c. P 400,000 drop in profitability
d. No change in profit because a 20% drop in sales price is balanced by a 20% increase in volume

Answer: B
Solution:
Profit (now) = 100,000 (20 – 8*) – 400,000 = P 800,000 *Unit VC: 800,000 100,000 = 8
Profit (new) = 120,000 (16 – 8) – 400,000 = P 560,000
Decrease in profitability: 800,000 – 560,000 = P 240,000
Alternative Solution (Relevant Costing): 100,000 units (– 4) + 20,000 units (16 – 8) = – P 240,000

2. Marie Sacal, the owner of Smoked Bacon then Duck Company, has a monthly target operating income of P 32,000. Variable
expenses are 40% of sales and monthly fixed expenses are P 8,000. Assuming that Marie reaches its target, by how would its
operating income change if sales volume declines by 4%?
a. Increase by 4% c. Decrease by 4%
b. Increase by 5% d. Decrease by 5%

Answer: D
Solution: DOL = CM Profit = (32,000 + 8,000) 32,000 = 1.25 times
∆ Sales x DOL = ∆ Profit = 4% 🢙 (1.25) = 5% 🢙

3. Method Acting Company that has sales of P 200,000, a contribution margin ratio of 20% and a margin of safety (MS) of P 80,000.
What is its fixed cost?
a. P 16,000 b. P 24,000 c. P 80,000 d. P 96,000

Answer: B
Solution 1: BES = Sales – MS = 200,000 – 80,000 = 120,000 FC = BES x CMR = 120,000 x 20%
Solution 2: CM = Sales x CMR = 40,000 Profit = MS x CMR = 16,000 FC = CM – profit = 40,000 – 16,000

Items 4 to 5 are based on the following information:

Jam Screenshot Co. manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for P 7.50
each, and the variable cost to manufacture them was P 2.25 per unit. The company needed to sell 20,000 shirts to break even. The net
after-tax income last year was P 5,040. The company’s expectations for the coming year include the following:

 The sales price of the T-shirts will be P 9.

 Variable costs to manufacture will increase by one-third.
 Fixed costs will increase by 10%.
 The income tax rate of 40% will be unchanged.

4. What is the number of T-shirts Jam Screenshot Co. must sell to break even in the coming year?
a. 17,500 c. 20,000
b. 19,250 d. 22,000

Answer: B
Solution: Last year: @ BEP CM = fixed costs (7.50 – 2.25) 20,000 = P 105,000 BEP = 105,000 (1.1) ÷ (9 – 3) = 19,250 units

5. If Jam Screenshot Co. wishes to earn P 22,500 in post-tax income for the coming year, the company’s sales volume in pesos must
be
a. P 207,000 c. P 229,500
b. P 213,750 d. P 257,625

Answer: C
Solution: Unit sales: [105,000 (1.1) + (22,500 ÷ 60%)] ÷ (9 – 3) = 25,500 units Peso sales: 25,500 units x P 9 = P 229,500
VARIABLE AND ABSORPTION COSTING

1. Anthony Jen Z Manufacturers had the following costs when it produces 100,000 and sold 80,000 units of its only product:
Manufacturing costs Selling & Admin. Costs
Fixed P 180,000 Fixed P 90,000
Variable 160,000 Variable 40,000

How much lower would Anthonia’s profit be if it used variable costing (VC) instead of absorption costing (AC)?
a. P 36,000 b. P 54,000 c. P 68,000 d. P 94,000

Answer: A
Solution: ∆ income = ∆ Inventory x unit FFOH = (100,000 – 80,000) x (180,000 ÷ 100,000)

2. Marizo Racalzo manufactures a single product. Unit variable production costs are P 20 and fixed production costs are P 150,000.
Marizo uses a normal activity of 10,000 units to set its standard costs. Marizo began the year with no inventory, produced 11,000 units,
and sold 10,500 units. Ending inventory under absorption costing (AC) is:
a. P 17,500 b. P 15,000 c. P 10,000 d. P 20,000

Answer: C
Solution: AC inventory: [20 + (150,000 ÷ 10,000)] x (11,000 – 10,500)
Incidentally, VC inventory: 20 (500)
Note: Once normal capacity is given, the unit FFOH is based on normal production. A capacity or volume variance explains any
difference between the normal production used and actual production attained.

3. For the first year of Incognito Company’s operations, 5,000 units of its only product remained on hand:
Manufacturing costs Fixed P 250,000
(Production: 50,000 units) Variable 180,000
Selling and administrative costs Fixed 75,000
Variable 80,000
How would the profit of Incognito compare between direct costing and full costing?
a. Direct costing will be P 25,000 higher c. Full costing will be P 32,500 higher
b. Full costing will be P 25,000 higher d. Direct costing will be P 32,500 higher

Answer: B
Solution: ∆ Income = ∆ Inventory x Unit FFOH = (5,000 units – 0) x (250,000 ÷ 50,000) = P 25,000
Since Production > Sales or Ending Inventory > Beginning Inventory, then Absorption Costing Profit > Variable Costing Profit

Items 4 and 5 are based on the following information:

Xian Gasha Chismis, Inc. presents the following cost and other pertinent information for its lone product: unit selling price, P 15;
variable manufacturing costs per unit of production, P 8; total annual fixed manufacturing costs, P 25,000; variable administrative
costs per unit of production, P 3; total annual fixed selling & administrative expenses, P 15,000. During Xian’s first year, 12,500 units
were produced and 10,000 units were sold.

4. The ending inventory under variable costing would be:

a. P 20,000 c. P 25,000
b. P 27,500 d. P 32,500

Answer: A
Solution: (12,500 – 10,000) 8 = P 20,000

5. The total fixed costs charged against the first year of operations under full costing would be:
a. P 15,000 c. P 25,000
b. P 35,000 d. P 40,000

Answer: B
Solution: 25,000 x (10,000/12,500) + 15,000 = P 35,000
COST OF CAPITAL

1. [CPALE] Jollibaby Company believes that it can sell long-term bonds with a 6% coupon, but a price that gives a yield-to-maturity of
9%. If such bonds are part of next year’s financing plans, which of the following should be used for bonds in the after-tax (40%) cost-
of-capital calculation?
a. 3.6% b. 5.4% c. 4.2% d. 6.0%

Answer: B
Solution: Cost of debt: yield rate (100% – tax rate) = 9% (100% – 40%)

2. Shawarma and Shake Company is expected to pay a dividend of P 5.00 per share this year. Dividend is expected to grow at a rate of
6%. If the current market price of the stock is P 60 per share, what is the estimated cost of equity?
a. 6% b. 8.3% c. 12% d. 14.3%

Answer: D
Solution: Cost of equity (Gordon model): dividend yield + growth rate = (5 ÷ 60) + 6%

3. Coach K Inc. carries no debt in its capital structure. Its beta is 0.8. The risk-free rate is 9 percent and the expected return on the
market is 15 percent. The company has an opportunity to invest in a project that earns 12%. What is Coach K’s required rate of return
(i.e., cost of capital)?
a. 4.8% b. 9% c. 12% d. 13.8%

Answer: D
Solution: Cost of capital (CAPM): risk-free rate + beta-adjusted risk premium = 9% + 0.8 (15% - 9%)

4. Baby Kisses Company sold 12%, non-convertible preferred stock with a par value of P 50. The stock sold for P 55, and flotation costs
were 6% of the market price. Tax rate is 30%. What is Baby’s cost of preferred stock?
a. 11.61% b. 10.91% c. 8.12% d. 7.64%

Answer: A
Solution: Cost of preferred stock: dividend yield = expected dividend ÷ net price = [50 (12%)] ÷ [55 (94%)]
NOTE: Flotation cost is considered in computing cost of debts/shares, NOT in computing cost of retained earnings.

5. Confidential Farm Inc. has determined that it can minimize its WACC by using a debt-equity ratio of 2/3. The firm’s cost of debt is
9% before taxes while the cost of equity is estimated to be 12% before taxes. If the tax rate is 40%, then what is the company’s
WACC?
a. 6.48% c. 9.36%
b. 7.92% d. 10.80%

Answer: C
Solution: WACC: 40% [9% (100-40%)] + 60% (12%)
Debt-equity of 2/3 means that debt ratio is 40% or 2/5 and equity ratio is 60% or 3/5.
CAPITAL BUDGETING

1. Sis How Much Dis Industries is replacing a grinder purchased 5 years ago for P 15,000 with a new one costing P 25,000. The old
grinder is being depreciated on a straight-line basis over 15 years to a zero-salvage value; Flamingo will sell this old equipment to a
third party for P 6,000. The new equipment will be depreciated on a straight- line basis over 10 years with a zero-salvage value.
Assuming a 40% tax rate, what is Sis How’s net cash investment at the time of purchase if the old grinder is sold and the new one
purchased?
a. P 25,000 c. P 17,400
b. P 19,000 d. P 15,000

Answer: C
Solution:
Costs: present cash OUT: P 25,000
Savings: present cash IN: 6,000 + 40% (10,000* – 6,000) = P 7,600
* Book value of old machine: 15,000 (10 ÷ 15) = P 10,000 (depreciated for 5 years)

2. A capital project that requires a P 50,000 investment has a profitability index of 1.2. The project’s NPV is:
a. P 12,500 c. P 10,000
b. (P 12,500) d. (P 10,000)

Answer: C
Solution:
PV of Cash Inflows: 1.2 (50,000) = P 60,000 NPV = 60,000 – 50,000 = P 10,000

3. Assuming P 20,000 net annual cash inflows from a 3-year P 36,000-capital investment project, then what is the closest estimate of
the break-even cash flow rate of return (IRR) for the project?
a. 30.9% c. 30.7%
b. 30.8% d. 30.6%

Answer: D
Solution: Target PV factor: 36,000 ÷ 20,000 = 1.800
Based on trial & error, compute Present Value annuity factor for 3 years based on the rates indicated in the choices; among the
choices, 30.6% is closest to exact IRR.

4. Touch Me Not Company has a payback goal of 3 years for a new sorter being evaluated that costs P 450,000 and has a 5-year life.
Straight-line depreciation will be used; no salvage value is anticipated. Tax rate is 40%. To meet the payback goal, how much must the
sorter generate as pre-tax cash savings?
a. P 60,000 c. P 150,000
b. P 100,000 d. P 190,000

Answer: D
Solution:
Using indirect method to compute cash flows: net income + depreciation = net cash flows
Net income = net cash flow – depreciation = (450,000 ÷ 3) – (450,000 ÷ 5) = 60,000
Pre-tax cash savings: income before tax + depreciation = (60,000 ÷ 0.6) + 90,000
Using direct method to compute cash flows: after-tax cash flow + tax savings on depreciation 150,000 = Pre-tax cash savings (60%) +
90,000 (40%)

5. Jose Mari Tyan invested in a new machine that cost P 80,000. The machine being depreciated over 5 years using straight-line
depreciation with no salvage value. The machine is expected to produce incremental cash revenues of P 100,000 per year and
incremental cash expenses of P 30,000 per year. The tax rate is 25%. Calculate Jose Mari Tyan’s incremental operating after-tax cash
flows.
a. P 70,000 b. P 56,500 c. P 52,500 d. P 40,500

Answer: B
Solution:
After-tax cash flow: (100,000 – 30,000) 75% = 52,500
Tax shield of depreciation: (80,000 ÷ 5 years) 25% = 4,000