MANAGEMENT ADVISORY SERVICES
COSTS AND COST CONCEPTS
1. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry.
c. sales price must equal P0.
b. must have no fixed costs.
d. sales price must equal its variable costs.
ANSWER D
ITEMS 2 AND 3 ARE BASED ON THE FOLLOWING:
Castelo, Villasin and Barrera is a large, local accounting firm located in Cebu. Belle Castelo,
one of the Firm’s founders, appreciates the success her firm has enjoyed and wants to give
something back to her community. She believes that an inexpensive accounting services clinic
could provide basic accounting services for small businesses located in the province. She
wants to price the services at cost.
Since the clinic is brand new, it has no experience to go on. Belle decided to operate the clinic
for two months before determining how much to charge per hour on an ongoing basis. As a
temporary measure, the clinic adopted an hourly charge of P50, half the amount charged by
Castelo, Villasin and Barrera for professional services.
The accounting services clinic opened on January 1. During January, the clinic had 120 hours
of professional service. During February, the activity was 150 hours. Costs for these two level
of activity usage are as follows:
Professional hours
Salaries:
Senior accountant
Office assistant
Internet and software subscriptions
Consulting by senior partner
Depreciation (equipment)
Supplies
Administration
Rent (offices)
Utilities
2. The clinic’s monthly fixed costs amount to:
a. P8,600
b. P9,025
120 hours
P2,500
1,200
700
1,200
2,400
905
500
2,000
332
c. P 425
d. P12,189
ANSWER B
Diff. in costs (P12,415 – P11,737)
÷ diff. in hours (150 – 120)
Variable rate per hour
Total cost
Less variable cost (22.60x150)
Fixed costs
P 678
30
P22.60
P12,415
3,390 (22.60x120)
P 9,025
P11,737
2,712
P 9,025
150 hours
P2,500
1,200
850
1,500
2,400
1,100
500
2,000
365
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3. Apple Baby, the chief paraprofessional of the clinic, has estimated that the clinic will average
140 professional hours per month. If the clinic is to be operated as a nonprofit organization,
how much will it need to charge per professional hour?
a. P97.81
c. P82.77
b. P87.06
d. P22.60
ANSWER B
Variable cost (140 x P22.60)
Fixed cost
Total cost
÷ number of hours
Cost per hour
P 3,164
9,025
P12,189
140
P 87.06
4. HSR Computer System designs and develops specialized software for companies and use a
normal costing system. The following data are available for 2015:
Budgeted
Overhead
Machine hours
Direct labor hours
Units produced
Overhead
Prime costs
Machine hours
Direct labor hours
Actual
P600,000
24,000
75,000
100,000
P603,500
P900,000
25,050
75,700
Overhead is applied on the basis of direct labor hours.
What is the unit cost for the year?
a. P15.03
b. P15.06
c. P15.09
d. P15.00
ANSWER B
Prime costs
Applied overhead (P600,000/75,000 DLH x 75,700)
Total cost
÷ Units produced
P 900,000
605,600
P1,505,600
100,000
Unit cost
P
15.06
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ABC SYSTEM
5. Hazelnut Company uses activity-based costing. The company produces two products: coats
and hats. The annual production and sales volume of coats is 8,000 units and of hats is 6,000
units. There are three activity cost pools with the following expected activities and estimated
total costs:
Activity
Cost Pool
Activity 1
Activity 2
Activity 3
Estimated
Cost
P20,000
P37,000
P91,200
Expected
Activity
Coats
100
800
800
Expected
Activity
Hats
400
200
3,000
Using ABC, the cost per unit of coats is approximately:
a. P2.40
c. P 6.60
b. P3.90
d. P10.59
ANSWER C
Activity 1 (P20,000 x 100/500)
Activity 2 (P37,000 x 800/1,000)
Activity 3 (P91,200 x 800/3,800)
Total allocated cost
÷ number of units
Cost per unit
P 4,000
29,600
19,200
P52,800
8,000
P 6.60
Total
500
1,000
3,800
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6. Elaine Hospital plans to use the activity-based costing to assign hospital indirect costs to the care of
patients. The hospital has identified the following activities and activity rates for the hospital indirect
costs:
Activity
Activity Rate
Room and meals
P150 per day
Radiology
P95 per image
Pharmacy
P28 per physician order
Chemistry lab
P85 per test
Operating room
P550 per operating room hour
The records of two representative patients were analyzed, using the activity rates. The activity
information associated with the two patients are as follows:
Patient 1
Patient 2
Number of days
7
3
Number of images
4
2
Number of physician orders
5
1
Number of tests
6
2
Number of operating room hours
4.5
1
Determine the activity cost associated with Patient 2.
a. P1,388
c. P1,816
b. P 908
d. P4,555
ANSWER A
Activity costs, Patient 2:
Room and meals (3 x P150)
Radiology (2 x P95)
Pharmacy (1 x P28)
Chemistry lab (2 x P85)
Operating room (1 x P550)
Total
P 450
190
28
170
550
P1,388
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7. Balat Leather Works, which manufactures saddles and other leather goods, has three
departments. The Assembly Department manufactures various leather products, such as
belts, purses, and saddle bags, using automated production process. The Saddle
Department produces handmade saddles and uses very little machinery. The Tanning
Department produces leather. The tanning process requires little in the way of labor or
machinery, but it does require space and process time. Due to the different production
processes in the three departments, the company uses three different cost drivers for the
application of manufacturing overhead. The cost drivers and overhead rates are as follows:
Cost Driver
Tanning Department
Assembly Department
Saddle Department
Square-feet of leather
Machine time
Direct-labor time
Predetermined Overhead Rate
P3 per square-foot
P9 per machine hour
P4 per direct labor hour
The company’s deluxe saddle and accessory set consists of handmade saddle, two
saddlebags, a belt, and a vest, all coordinated to match. The entire set uses 100 squarefeet of leather from the Tanning Department, 3 machine hours in the Assembly Department,
and 40 direct-labor hours in the Saddle Department. The company is processing Job No.
20 consisting of 20 deluxe saddle and accessory sets.
How much is the applied manufacturing overhead in the Assembly Department for Job No.
20?
a. P3,200
c. P6,000
b. P 540
d. P3,000
ANSWER B
Assembly department = P9/machine hour x 3 machine hours x 20 sets = P540
8. If activity-based costing is implemented in an organization without any other changes
being effected, total overhead costs will
a. be reduced because of the elimination of non-value-added activities.
b. be reduced because organizational costs will not be assigned to products or services.
c. be increased because of the need for additional people to gather information on cost
drivers and cost pools.
d. remain constant and simply be spread over products differently.
ANSWER D
CVP AND BREAKEVEN ANALYSIS
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9. Harry Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of P75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the maximum
amount that Harry can expend for variable costs per unit and still meet its profit objective if
the sales price per unit is estimated at P6?
a. P3.37
c. P3.00
b. P3.59
d. P3.70
ANSWER C
Projected sales (125,000 x P6)
Less contribution margin:
Income before tax (75,000/0.60)
Add fixed cost
Variable costs
÷ number of units
Variable cost per unit
P750,000
P125,000
250,000
375,000
P375,000
125,000
P 3.00
10. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40
percent of sales and that its net income amounted to 10 percent of sales. If its fixed costs for
the year were P60,000, how much was the margin of safety?
a. P150,000
c. P600,000
b. P200,000
d. P 50,000
ANSWER D
Let S = Sales; CM = 0.40S; NY = 0.10S
Fixed Cost = (0.40S – 0.10S) = 0.30S
Sales (P60,000 ÷ 0.30)
Less breakeven sales (P60,000 ÷ 0.40)
Margin of safety
P200,000
150,000
P 50,000
11. Sam Company manufactures a single product. In the prior year, the company had sales of
P90,000, variable costs of P50,000, and fixed costs of P30,000. Sam expects its cost structure
and sales price per unit to remain the same in the current year, however total sales are
expected to increase by 20 percent. If the current year projections are realized, net income
should exceed the prior year’s net income by:
a. 100 percent.
c. 20 percent.
b. 80 percent.
d. 50 percent.
ANSWER B
Increase in profit (P40,000 x 20%)
÷ Present profit:
Contribution margin
Less fixed costs
% change in profit
P 8,000
P40,000
30,000
10,000
80%
12. Edil Company produces and sells a single product. The costs and selling prices on a per-unit
basis are as follows:
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Selling Price
Materials
Labor
Variable overhead
Fixed overhead
Variable selling and administrative
Fixed selling and administrative
P120
35
15
10
10
20
5
The above per-unit figures are computed based on the company’s normal capacity of 20,000
units.
The company’s expected margin of safety is
a. 7,500 units.
b. P2,400,000.
ANSWER C
Expected sales - units
Less break-even sales:
Fixed costs (20,000 x [10 + 5])
÷ Unit contribution margin
(120 – [35 + 15 + 10 + 20])
Margin of safety
c. 62.5%.
d. P12,500.
20,000
P300,000
P40
7,500
12,500 units
Margin of safety in pesos (12,500 x P120)
P1,500,000
Margin of safety ratio (12,500 ÷ 20,000)
62.5%
13. Antiporda, Inc. sells three products, A, B, and C. The company sells three (3) units of C for
each unit of A and two (2) units of B for each unit of C. Total fixed costs amount to
P760,000. Product A’s contribution margin per unit is P2, Product B’s is 150% of A’s, and
Product C’s is twice as much as B’s. How many units of each product must be sold to breakeven?
Product A
a.
b.
c.
d.
2,000
20,000
29,231
69,091
Product B
Product C
12,000
120,000
58,462
414,546
6,000
60,000
87,692
207,273
ANSWER B
CM per unit
x Sales mix ratio
Composite CM
÷ Number of units per mix (1 + 6 + 3)
Weighted average CM per unit
Weighted-average UCM
Fixed costs
Break-even point =
WaUCM
Breakdown:Product A
Breakdown:
Product A
Product B
Product C
=
=
=
Product A
Product B
P2 (2 x 150%) P 3
1
(2 x 3)
6
P2
P18
=
P760,000
P3.8
Product C
(P3 x 2) P 6
3
P18
P38
10
P3.8
P3.8
= 200,000 composite units
=200,000 x 1/10
200,000 x 1/10 =
200,000 x 6/10 =
200,000 x 3/10 =
Total
20,000 units
120,000
60,000
200,000 composite units
ITEMS 14 to 16 ARE BASED ON THE FOLLOWING INFORMATION:
=20,000 units
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A company is making plans for next year, using cost-volume-profit analysis as its planning
tool.
Next year’s sales data about its product are as follows:
Selling price
Variable manufacturing costs per unit
Variable selling and administrative costs
Fixed operating costs (60% is manufacturing cost)
Income tax rate
P60.00
22.50
4.50
P148,500
32%
14. How much should sales be next year if the company wants to earn profit after tax of
P22,440, the same amount that it earned last year?
a. P310,800
c. P330,000
b. P397,500
d. P222,000
ANSWER C
Fixed costs
Add desired profit
(
P148,500
P22,440
)
1 – 0.32
33,000
P181,500
Total
60 – [22.50 + 4.50]
60
Required sales to earn desired profit
÷ CMR
(
)
55%_
P330,000
15. Assume that the company’s management learned that a new technology that will increase
the quality of its product is available. If implemented, its projections for next year will be
changed:
1. The selling price of the product will increase to P75 per unit.
2. Fixed manufacturing costs will increase by 20%.
3. Additional advertising costs will be incurred to promote the higher-quality
product. This will increase fixed non-manufacturing cost by 10%.
4. The improved product will require a new material that will increase direct materials
cost by P4.50
If the new technology is adapted, how much sales should the company make to earn a pretax profit of 10% on sales?
a. P366,130
c. P253,324
b. P358,875
d. P353,897
ANSWER B
Fixed costs:
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Manufacturing (148,500 x 60% x 120%)
Non-manufacturing (148,500 x 40% x 110%)
Total fixed costs
P106,920
65,340
P172,260
Contribution margin ratio:
Selling price
Less variable costs:
Manufacturing (P22.50 + P4.50)
Selling and administrative
Contribution margin per unit
÷ Selling price
Contribution margin ratio
P75.00
P27.00
4.50
31.50
P43.50
75.00
P 58%
Required peso-sales to earn a desired profit ratio:
RS =
Fixed Cost
CMR – PR
P172,260
58% – 10%
=
= P358,875
16. If the sales required in Item #15 is realized, the company will have an operating leverage
factor of
a. 8.53.
c. 17.24%.
b. 5.80.
d. 5.50.
ANSWER B
Operating leverage factor =
=
=
Contribution margin
Profit before tax
P358,875 x 58%
P358,875 x 10%
P208,147.50
= 5.8
P35,887.50
17. As projected net income increases the
a. degree of operating leverage declines.
b. margin of safety stays constant.
c. break-even point goes down.
d. contribution margin ratio goes up.
ANSWER A
18. Yamyam Company is considering introducing a new product that will require a P250,000
investment of capital. The necessary funds would be raised through a bank loan at an interest
rate of 8%. The fixed operating costs associated with the product would be P122,500 while
the variable cost ratio would be 58%. Assuming a selling price of P15 per unit, determine the
number of units (rounded to the nearest whole unit) Yamyam would have to sell to generate
earnings before interest and taxes (EBIT) of 32% of the amount of capital invested in the
new product.
a. 35,318 units
c. 32,143 units
b. 25,575 units
d. 23,276 units
ANSWER C
Fixed cost
P122,500
Add desired profit (P250,000 x 32%)
80,000
Total
P202,500
÷ CM per unit [P15 x (100% - 58%)]
6.30
Required sales in units
32,143
STANDARD COSTS AND VARIANCE ANALYSIS
Page 10
19. The materials mix variance for a product is P450 unfavorable and the materials yield variance
is P150 unfavorable. This means that
a. the materials price variance is P600 unfavorable.
b. the materials quantity variance is P600 unfavorable
c. the total materials cost variance is definitely P600 unfavorable.
d. the materials price variance is also unfavorable, but the amount cannot be determined
from the given information.
ANSWER B
Mix variance
Yield variance
Quantity variance
P450 U
150 U
P600 U
20. Variance analysis would be appropriate to measure performance in
a. profit centers
c. cost centers
b. investment centers
d. all of the above
ANSWER D
21. Samson Company uses a standard costing system in the production of its only product. The
84,000 units of raw materials inventory were purchased for P126,000 and 4 units of raw
materials are required to produce one unit of final product. In October, the company
produced 14,400 units of product. The standard cost allowed for materials was P72,000, and
there was an unfavorable usage variance of P3,000.
The materials price variance for the units used in October was
a. P15,000 unfavorable.
c. P3,000 unfavorable.
b. P15,000 favorable.
d. P3,000 favorable.
ANSWER A
Total standard cost
P72,000
÷ Std qty for actual production (14,400 x 4)
57,600
Standard price per unit of materials
P1.25
The usage variance is P3,000 unfavorable. The standard price is P1.25. Using the formula for Usage variance,
the difference in quantity may be computed as follows:
Usage variance =Difference in quantity x Std. price
3,000 U = Difference in quantity x P1.25
Difference in quantity = 3,000 ÷ P1.25
= 2,400 unfavorable
If the difference in quantity is unfavorable, the actual quantity is greater than the standard quantity:
Standard quantity (14,400 x 4)
Add unfavorable difference in quantity
Actual quantity used
57,600
2,400
60,000 units
Price Variance = (AP – SP) x AQ
= ([P126,000 ÷ 84,000] – P1.25) x 60,000
= P15,000 unfavorable
22. The standard direct materials cost to produce a unit of a product is four meters of materials
at P2.50 per meter. During June, 2015, 4,200 meters of materials costing P10,080 were
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purchased and used to produce 1,000 units of the product. What was the materials price
variance for June, 2015?
a. P480 unfavorable
c. P400 favorable
b. P 80 unfavorable
d. P420 favorable
ANSWER D
Actual price (P10,080 ÷ 4,200)
Standard price
Difference in prices - favorable
X actual quantity purchased
Price variance – favorable
P2.40
2.50
P 0.10
4,200
P 420
23. Buchoy Company manufactures one product with a standard direct manufacturing labor cost
of four hours at P12.00 per hour. During June, 1,000 units were produced using 4,100 hours
at P12.20 per hour. The unfavorable direct labor efficiency variance was:
a. P820
c. P1,200
b. P400
d. P1,220
ANSWER C
Actual time – hours
Less standard time (1,000 x 4)
Difference in time – unfavorable
X standard rate per hour
Efficiency variance – unfavorable
4,100
4,000
100
P 12
P1,200
ITEMS 24 TO 28 ARE BASED ON THE FOLLOWING:
Vhong, Inc. evaluates manufacturing overhead in its factory by using variance analysis. The
following information applies to the month of July:
ACTUAL
BUDGETED
Number of units produced
19,000
20,000
Variable overhead costs
P4,100
P2 per direct labor hour
Fixed overhead costs
P22,000
P20,000
Direct labor hours
2,100
0.1 hour per unit
24. The controllable variance amounts to
a. P2,500 unfavorable
b. P1,000 unfavorable
c. P2,300 unfavorable
d. P2,000 unfavorable
ANSWER C
25. Using the three-way variance analysis, the spending variance amounts to
a. P100 favorable
c. P2,000 unfavorable
b. P1,900 unfavorable
d. P2,100 unfavorable
ANSWER B
26. The efficiency variance amounts to
a. P400 unfavorable
b. P1,900 unfavorable
c. P400 favorable
d. P1,000 unfavorable
ANSWER A
27. The non-controllable variance is
a. P2,300 unfavorable
c. P2,000 unfavorable
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b. P400 unfavorable
d. P1,000 unfavorable
ANSWER D
28. The fixed overhead efficiency variance is:
a. P400 unfavorable
b. PP2,000 unfavorable
c. P400 favorable
d. 0
ANSWER D
24 TO 28
Actual variable overhead
Actual time x std. var. rate (2,100 x P2)
Spending variance – favorable
Actual time x std. var. rate (2,100 x P2)
Std. variable overhead [(19,000 x 0.1) x P2]
Efficiency variance – unfavorable
P4,100
4,200
P 100
P4,200
3,800
P 400
Actual fixed overhead
Less budgeted fixed overhead
Fixed spending variance – unfavorable
P22,000
20,000
P 2,000
Budgeted fixed overhead
Less standard fixed overhead
[1,900 x (P20,000/<20,000 x 0.1>)]
Volume variance – unfavorable
P20,000
19,000
P 1,000
24.
Controllable variance (P100 F + P400 U + P2,000 U) = 2,300 U
25.
Spending variance (P100 F + P2,000 U) = P1,900 U
PRODUCT COSTING
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29. A basic tenet of variable costing is that period costs should be currently expensed. What is
the rationale behind this procedure?
a. Period costs are uncontrollable and should not be charged to a specific product.
b. Period costs are generally immaterial in amount and the cost of assigning the amounts
to specific products would outweigh the benefits.
c. Allocation of period costs is arbitrary at best and could lead to erroneous decision by
management.
d. Because period costs will occur whether production occurs, it is improper to allocate
these costs to production and defer a current cost of doing business.
ANSWER D
30. The following information regarding fixed production costs from a manufacturing firm is
available for the current year:
Fixed costs in the beginning inventory
P16,000
Fixed costs incurred this period
100,000
Which of the following statements is not true?
a. The maximum amount of fixed production costs that this firm could deduct using
absorption costs in the current year is P116,000.
b. The maximum difference between this firm's the current year income based on
absorption costing and its income based on variable costing is P16,000.
c. Using variable costing, this firm will deduct no more than P16,000 for fixed production
costs.
d. If this firm produced substantially more units than it sold in the current year, variable
costing will probably yield a lower income than absorption costing.
ANSWER C
31. Absorption costing differs from variable costing in all of the following except
a. treatment of fixed manufacturing overhead.
b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement
ANSWER B
32. If a firm produces more units than it sells, absorption costing, relative to variable costing, will
result in
a. higher income and assets.
c. lower income but higher assets.
b. higher income but lower assets.
d. lower income and assets.
ANSWER A
33. How will a favorable volume variance affect net income under each of the following methods?
Absorption
Variable
a. reduce
no effect
b. reduce
increase
c. increase
no effect
d. increase
reduce
ANSWER C
ITEMS 34 TO 36 ARE BASED ON THE FOLLOWING:
The following information is available for X Co. for its first year of operations:
Page 14
Sales in units
Production in units
Manufacturing costs:
Direct labor
Direct material
Variable overhead
Fixed overhead
Net income (absorption method)
Sales price per unit
5,000
8,000
P3 per unit
5 per unit
1 per unit
P100,000
P30,000
P40
34. What would X Co. have reported as its income before income taxes if it had used variable
costing?
a. P30,000
c. P67,500
b. (P7,500)
d. can’t be determined from the given
information
ANSWER B
Absorption income
Diff. in income (8,000-5,000) x (P100k/8k)
Variable costing income
P30,000
37,500
(P 7,500)
35. What was the total amount of SG&A expense incurred by X Co.?
a. P30,000
c. P6,000
b. P62,500
d. can’t be determined from the given
information
ANSWER B
Sales (5,000 x P40)
Less cost of goods sold (5,000 x P21.50)
Gross profit
Less profit
Selling, gen. & admin. expenses
P200,000
107,500
P 92,500
30,000
P 62,500
36. Based on variable costing, what would X Co. show as the value of its ending inventory?
a. P120,000
c. P27,000
b. P 64,500
d. P24,000
ANSWER C
Ending inventory – units (8,000 – 5,000)
X product cost per unit (3 + 5 + 1)
Cost of ending inventory
3,000
P
9
P 27,000
37. Which of the following is an advantage of using variable costing?
a. Variable costing complies with Generally Accepted Accounting Principles.
b. Variable costing complies with the National Internal Revenue Code.
c. Variable costing is most relevant to long-run pricing strategies.
d. Variable costing makes cost-volume-profit relationships more easily apparent.
ANSWER D
38. In its first year of operations, Nasty Company had the following costs when it produced
100,000 units and sold 80,000 units of its only product:
Manufacturing costs:
Fixed
P180,000
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Variable
Selling and administrative costs:
Fixed
Variable
160,000
90,000
40,000
How much higher would Nasty’s net income be if it used full absorption costing instead of
variable costing?
a. P94,000
c. P36,000
b. P68,000
d. P54,000
ANSWER C
Change in inventory (100k – 80k)
x fixed overhead cost per unit (P180k ÷ 100
Difference in income
20,000
1.80
P36,000
DIFFERENTIAL COSTS ANALYSIS
39. Siomitos makes bite-size siomai. Which of the following could be a constraint at Siomitos?
a. The siomai steamer
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b. The workers who mix the ingredients
c. The workers who prepare the siomai for steaming
d. Any of the above could be the constraint
ANSWER D
40. Ning Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of P50, and Product Y has a contribution margin
of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine
time. If Ning Company wants to dedicate 80 percent of its machine time to the product that
will provide the most income, the company will have a total contribution margin of
a. P250,000.
c. P210,000.
b. P240,000.
d. P200,000.
ANSWER B
Product X
P 50
5
P 10
CM per unit
÷ hours per unit
CM per hour
Product Y
P 64
8
P 8
80% of capacity must be applied to Product X, the product with the higher CM per hour.
Product X (25,000 x 80%) ÷ 5 = 4,000 units x P50
Product Y (25,000 x 20%) ÷ 8 = 625 units x P64
Total contribution margin
P 200,000
40,000
P240,000
41. Mangit Company is currently operating at a loss of P15,000. The sales manager has received
a special order for 5,000 units of product, which normally sells for P35 per unit. Costs
associated with the product are: direct material, P6; direct labor, P10; variable overhead, P3;
applied fixed overhead, P4; and variable selling expenses, P2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by
P1.50 and selling expenses would be decreased by P1. If Mangit wants this special order to
increase the total net income for the firm to P10,000, what sales price must be quoted for
each of the 5,000 units?
a. P23.50
c. P27.50
b. P24.50
d. P34.00
ANSWER A
Loss
Desired profit
Required increase in profit
÷ number of units
Profit per unit
Add production costs:
Materials (P6.00 – P1.50)
Labor
Variable overhead
Variable selling exp (P2 – P1)
Sales price per unit
P15,000
10,000
P25,000
5,000
P 5.00
P 4.50
10.00
3.00
1.00
18.50
P23.50
42. Dolly Company has 3 divisions: R, S, and T. Division R's income statement shows the following
for the year ended December 31:
Sales
P1,000,000
Cost of goods sold
(800,000)
Gross profit
P 200,000
Selling expenses
P100,000
Page 17
Administrative expenses
Net loss
250,000
(350,000)
P (150,000)
Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent
are avoidable if the division is closed. All of the selling expenses relate to the division and
would be eliminated if Division R were eliminated. Of the administrative expenses, 90 percent
are applied from corporate costs. If Division R were eliminated, Dolly’s income would
a. increase by P150,000.
c. decrease by P155,000.
b. decrease by P 75,000.
d. decrease by P215,000.
ANSWER C
Avoidable sales
Avoidable costs:
Var. CGS (P800,000 x 75%)
Fixed CGS (P800,000 – P600,000) x 60%
Selling expenses
Admin. exps. (P250,000 x 10%)
Decrease in income
P1,000,000
P600,000
120,000
100,000
25,000
845,000
P155,000
43. The opportunity cost of making a component part in a factory with excess capacity for which
there is no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.
ANSWER D
ITEMS 44 TO 47 ARE BASED ON THE FOLLOWING:
Schundel Hair Care Company produces shampoo with conditioner. This is the company’s only
product, which it sells under the name “Shamcon.”
The manufacturing cost data for Shamcon are as follows:
Quantity required
Current market price
Page 18
Materials:
Chem 1
Chem 2
Chem 3
per 1,000-ml bottle
4 ml
3 ml
2 ml
per ml
P0.54
0.36
0.20
Direct labor: 2 hours per bottle @ P3 per hour
Factory overhead:
Variable overhead – P2.00 per direct labor hour
Fixed overhead
– 4.00 per direct labor hour
Clever Company, owner and operator of a chain of hotels, asked Schundel Hair Care Company
to submit a bid for 500 boxes of Shamcon. Each box will contain 24 bottles. Per Clever’s
specifications, its order should be different in chemical composition from the regular Shamcon.
According to Schundel Company’s production manager, Clever’s specifications can be met if
an additional chemical, Chem 4 would be used. Schundel Company has 60,000 ml of this
chemical. Chem 4 was used by the company in one of its brands that it decided to eliminate.
The remaining inventory of Chem 4 was not sold or discarded because it does not deteriorate
and the company has adequate space for its storage. Schundel Company can sell Chem 4 at
the prevailing market price of P0.40 per ml less P0.10/ml selling and handling costs. Clever’s
order would require 5 ml of Chem 4 per bottle.
The company has a stock of Chem 5. This was used by Schundel Hair Care for its manufacture
of another product that is no longer being produced. Chem. 5, which cannot be used in
Shamcon, can be substituted for Chem 1 on a one-for-one basis without affecting the quality
of the Clever order. There is no problem about the supply of Chem 1. At present, the
company has 20,000 ml of Chem 5 in its inventory, which has a salvage value of P6,000.
The production of the Clever’s order would require the same direct labor hours per bottle as
in the regular Shamcon. However, at present, the company has only 20,000 direct labor
hours available. The Clever order can be produced if the workers would work overtime,
although an overtime premium of 30% of the regular rate should be paid.
Schundel Hair Care Company’s policy is to price new products at 130% of full manufacturing
cost.
44. If Schundel Company bids this month for the special one-time order of 500 boxes of the
product, the special order’s total direct materials cost will be
a. P73,944.
c. P68,880.
b. P61,680.
d. P56,880.
ANSWER D
The special order is for 500 boxes of 24 bottles each or a total of 12,000 bottles. Materials costs will be:
Chem 1: Total required – 12,000 bottles x 4 ml
48,000 ml
Available Chem 5 that can be substituted
Page 19
for Chem 1, 20,000 ml, salvage value… *
Balance of Chem 1 required
(48,000 ml – 20,000 ml) x P0.54
Chem 2: 12,000 bottles x 3 ml x P0.36
Chem 3 12,000 bottles x 2 ml x P0.20
Chem 4 12,000 bottles x 5 ml x (P0.40 – P0.10)*
P 6,000
Total materials cost
P56,880
15,120
12,960
4,800
18,000
* The relevant cost of existing stocks is equal to their salvage value that will not be realized if the stocks are
used in the Clever order.
45. If Schundel Hair Care Company bids this month for the special one-time order of 500 boxes
of the product, the special order’s total relevant conversion cost will be
a. P123,600.
c. P120,000.
b. P219,600.
d. P216,000.
ANSWER A
Labor: Total required time – 12,000 bottles x 2 hours
Labor cost at regular rate (24,000 hours x P3)
Overtime premium (24,000 – 20,000) x P3 x 30%
Total labor cost
Factory overhead – variable (24,000 hours x P2)
Total relevant conversion cost
24,000 hours
P72,000
3,600
P75,600
48,000
P123,600
The overtime premium is part of labor cost, not of overhead cost, because the overtime work is attributable to a
particular job.
The total fixed factory overhead is assumed to remain constant whether or not the special order is accepted,
hence, irrelevant.
46. If the company’s policy is to price new products at 130% of full manufacturing cost, what is
the bid price per unit for this one-time special order of Clever Company?
a. P19.55
c. P29.95
b. P 6.91
d. P23.80
ANSWER C
Materials cost (from Item #44)
Variable conversion cost (from Item #45)
Fixed factory overhead (24,000 hours x P4)
Full manufacturing cost
÷ Number of bottles ordered (500 boxes x 24)
Full cost per bottle
Bid price per unit
P 56,880
123,600
96,000
P276,480
12,000
P 23.04
130%
P 29.95
47. What will be the total variable manufacturing costs for the subsequent, recurring 500-box
orders?
a. P180,480
c. P287,280
b. P373,464
d. P191,280
ANSWER D
Materials:
Chem 1
Chem 2
Chem 3
12,000 bottles x 4 ml x P0.54
12,000 bottles x 3 ml x P0.36
12,000 bottles x 2 ml x P0.20
P25,920
12,960
4,800
Page 20
Chem 4
12,000 bottles x 5 ml x P0.40
Variable conversion cost (from Item #45)
Total variable manufacturing costs
24,000
P67,680
123,600
P191,280
For subsequent orders, the company will have to buy all the required materials because by this time, the
inventory of Chem 4 and Chem 5 would have been fully utilized in the first order.
ITEMS 48 and 49 ARE BASED ON THE FOLLOWING INFORMATION:
Jane Corporation produces wood glue that is used by furniture manufacturers. The company normally
produces and sells 10,000 gallons of the glue each month. White Glue is sold for P280 per gallon,
variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per month, and the fixed
selling costs totals P620,000 per month.
Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused
the monthly sales of Jane Corporation to temporarily decrease to only 15% of its normal
monthly volume. Jane Corporation’s management expects that the strikes will last for about
2 months, after which, sales of White Glue should return to normal. However, due to the
dramatic drop in the sales level, Jane Corporation’s management is considering to close
down its plant during the two-moth period that the strikes are on.
If Jane Corporation will temporarily shut down its operations, it is expected that the fixed
factory overhead costs can be reduced to P340,000 per month and that the fixed selling
costs can be reduced by P62,000 per month. Start-up costs at the end of the shut-down
period would total P56,000. Jane Corporation uses the JIT system, so no inventories are
on hand.
48. The shut down point in units is
a. 2,750.00.
b. 9,642.86.
c. 3,250.00.
d. 1,100.00.
ANSWER A
Fixed costs under continued operations (for 2 months):
Factory overhead (P460,000 x 2 months)
Selling costs (P620,000 x 2 months)
Total
Less shutdown costs*:
Factory overhead (P340,000 x 2 months)
Selling costs ([P620,000 – P62,000] x 2 months)
Start-up costs
Difference
Divide by CM per unit (P280 – P168)
Shutdown point in units
P 920,000
1,240,000
P2,160,000
P 680,000
1,116,000
56,000
1,852,000
P 308,000
÷
P112
2,750 units
49. At the sales level of only 30% of the normal volume, should the company continue operating
or shut down temporarily for two months?
a. Continue, because the expected sales is above the shutdown point.
b. Shut down, because the expected sales is above the shutdown point.
c. Continue, so that the shutdown costs may be avoided.
d. Shut down, because the shutdown costs is less than the contribution margin under
continued operations.
ANSWER A
50. The process of choosing among competing alternatives is called
a. controlling
c. decision making
Page 21
b. planning
d. performance evaluation
ANSWER C
51. Spikey Company produces two products: Pat and Chin. The projected income for the coming
year, segmented by product line, follow:
Pat
Chin
Total
Sales
P300,000
P2,500,000
P2,800,000
Less variable expenses
100,000
500,000
600,000
Contribution margin
P200,000
P2,000,000
P2,200,000
Less direct fixed expenses
28,000
1,500,000
1,528,000
Product margin
P172,000 P 500,000 P 672,000
Less common fixed cost
100,000
Operating income
P 572,000
The selling prices are P30 for Pat and P50 for Chin.
Spikey company can increase the sales of Pat with increased advertising. The extra advertising
would cost an additional P245,000, and some of the potential purchasers of Chin would switch
to Pat. In total, sales of Pat would increase by 25,000 units, and sales of Chin would decrease
by 5,000 units. This strategy would
a. increase Spikey’s total sales by P750,000.
b. decrease Spikey’s total contribution margin by P300,000.
c. increase Spikey’s total income by P55,000.
d. not affect Spikey’s total fixed costs.
ANSWER C
PAT
CHIN
Cont. margin
P200,000 P2,000,000
÷ units (P300k ÷ P30)
10,000
50,000
CM per unit
P
20 P
40
X change in units
25,000
(5,000)
Change in CM
P500,000 (P200,000)
Increase in CM (P500k – P200K)
Less incremental fixed cost
Increase in profit
P300,000
245,000
P 55,000
CAPITAL BUDGETING
ITEMS 52 AND 53 ARE BASED ON THE FOLLOWING
Ricky Ironworks is considering a proposal to sell an existing lathe and purchase a new
computer-operated lathe. Information on the existing lathe and the computer-operated lathe
follow:
Computer-operated
Existing Lathe
Lathe
Cost
P100,000
P300,000
Accumulated depreciation
60,000
0
Page 22
Salvage value now
Salvage value in 4 years
Annual depreciation
Annual cash operating costs
Remaining useful life
20,000
0
10,000
200,000
4 years
60,000
75,000
50,000
4 years
52. What is the payback period for the computer-operated lathe?
a. 1.87 years
c. 3.53 years
b. 2.00 years
d. 3.29 years
Answer A
Acquisition cost, new lathe
Less salvage value of old lathe
Net cost of investment
÷ savings in cash operating costs (P50,000 – P200,000)
Payback period
P300,000
20,000
P280,000
150,000
1.87 years
53. If the company uses 10 percent as its discount rate, what is the net present value of the
proposed new lathe purchase? (Round present value factors to four decimal places)
a. P236,465
c. P195,485
b. P256,465
d. P30,422
Answer A
Present value of cost savings (P150,000 x 3.1699)
Present value of salvage value (P60,000 x 0.6830)
Total PV of cash inflows
Less net cost of investment
Net present value
P475,485
40,980
P516,465
280,000
P236,465
54. RPI Corporation bought a piece of machinery. Selected data is presented below:
Useful life
Yearly net cash inflow
Salvage value
Internal rate of return
Cost of capital
6 years
P45,000
-018%
14%
The initial cost of the machinery was (round present value factor to four decimal places)
a. P157,392.
c. P165,812.
b. P174,992.
d. impossible to determine from the information given.
Page 23
ANSWER A
Yearly net cash inflow
x PVF, 18% for 6 years
Initial cost of the machine
P 45,000
3.4976
P157,392
55. All other factors equal, a large number is preferred to a smaller number for all capital project
evaluation measures except
a. net present value.
c. internal rate of return.
b. payback period.
d. profitability index.
ANSWER B
56. Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more
than the stock’s par value. The company incurred underwriting fees of P10 per share. The
stocks will earn annual dividends of P12 per share. If the tax rate is 30%, the cost of capital
(preferred stocks) is
a. 10%
c.
7.42%
b. 12%
d. 10.91%
ANSWER D
Cost of
Preferred
Stocks
57.
=
DPS
Net issuance
price
=
P12
P120 – P10
= 10.91%
At the beginning of the year, Djorn Corporation purchased a new equipment for P360,000. The machine
has an estimated useful life of four (4) years with no salvage value. It is expected to produce cash flows
from operations, net of income taxes of 32%, as follows:
Year 1
2
3
4
5
P128,000
112,000
144,000
96,000
80,000
Djorn Corporation uses the sum-of-the-years-digits method (SYD) in computing depreciation of its
depreciable assets. Using SYD, the new equipment will be depreciated as follows:
Year 1
2
(P360,000 x 4/10)
(P360,000 x 3/10)
P144,000
108,000
Page 24
3
4
(P360,000 x 2/10)
(P360,000 x 1/10)
72,000
36,000
The company’s cost of capital is 10%. The present value factors at 10% are as follows:
End of Year 1
2
3
4
Total, 4 years
0.909
0.826
0.751
0.683
3.170
If Djorn Corporation used the straight-line method of depreciation instead of the SYD method, the net
present value provided by the equipment would increase (decrease) by:
a. P13,464
c. (P4,308.48)
b. (P13,464)
d. P4,308.48
ANSWER C
Depreciation expense, as a tax shield, provides tax savings. The difference in the present
values of the tax savings under the two depreciation methods will represent the difference
in the net present values of the equipment.
Year 1
P144,000 x 32% =
P46,080
0.909
P41,886.72
2
108,000 x 32% =
34,560
0.826
28,546.56
3
72,000 x 32% =
23,040
0.751
17,303.04
4
36,000 x 32% =
11,520
0.683
7,868.16
Total present value of tax savings, SYD method
PV of tax savings, straight-line method
(P360,000 ÷ 4 years = P90,000 x 32% x 3.170)
P95,604.48
91,296.00
Decrease in net present value
P 4,308.48
58. Harry owns a computer reselling business and is expanding his business. Harry is presented
with one proposal, Proposal P1, such that the estimated investment for the expansion project
is P85,000 and it is expected to produce cash flows after taxes of P25,000 for each of the
next 6 years. An alternate proposal, Proposal P2, involves an investment of P32,000 and
after-tax cash flows of P10,000 for each of the next 6 years. The present value factors for
an annuity of P1 for 1 to 6 years are as follows:
n
10%
12%
14%
16%
18%
20%
1
0.909
0.893
0.877
0.862
0.847
0.833
2
1.736
1.690
1.647
1.605
1.566
1.528
3
2.487
2.402
2.322
2.246
2.174
2.106
4
3.170
3.037
2.914
2.798
2.690
2.589
Page 25
5
3.791
3.605
3.433
3.274
3.127
2.991
6
4.355
4.111
3.889
3.685
3.498
3.326
The cost of capital that would make Harry indifferent between these two proposals lies between
a.
10% and 12%
c. 16% and 18%
b.
14% and 16%
d. 18% and 20%
ANSWER C
Indifference point is when the NPVs of the two proposals are equal.
Let x = present value factor for a cost of capital for 6 years
85,000 – 25,000x =32,000 – 10,000x
x = 3.533, which is between 16% and 18%
59. Harold Co. is considering an investment in a capital project. The sole outlay will be
P716,417.90 at the outset of the project and the annual net after-tax cash inflow will be
P216,309.75 for 6 years. The present value factors at Harold’s 8% cost of capital are:
Year
PV Factors
1
2
3
4
5
6
0.926
0.857
0.794
0.735
0.681
0.630
What is the break-even time (BET)?
a. 3.31 years
b. 4.00 years
c. 5.00 years
d. 6.00 years
ANSWER B
Break-even time: the cumulative present value of cash inflows equals the cost of investment
Cash Inflows
x
PVF
=
PV
1
216,309.75
0.926
P200,302.83
2
216,309.75
0.857
185,377.46
3
216,309.75
0.794
171,749.94
4
216,309.75
0.735
158,987.67
5
216,309.75
0.681
147,306.94
Total PV of cash inflows, first 4 years = P716,417.90
Break even time = 4 years
60. The investment banking firm of M and Associates will use a dividend valuation model to appraise the
shares of the L&L Corporation. Dividends (D) at the end of the current year will be P1.20. The growth
rate (g) is 9% and the discount rate (K) is 13%?
What should be the price of the stock to the public?
a. P28.75
c.
b. P31.50
P30.00
d. P29.00
ANSWER C
Price =
D
=
K–G
1.20
13 – 9
= P30
61. BSR Co, has an opportunity to purchase a new conveyor line for P250,000. They can borrow
P200,000, paying P50,000 down with annual payments for five years and an interest of 15%.
They also have an opportunity to lease the line for P65,000 a year. The present value of an
Page 26
annuity of P1 for five years at 9% and 15% are 3.8897 and 3.3522, respectively. At the end
of five years, the estimated salvage value is P40,000. If owned, the cost of maintenance is
expected to be P10,000 per year. Assume straight-line depreciation, a 40% tax rate, a cost
of debt of 15%, and a cost of capital of 9%.
What is the present value of the after-tax cost of leasing for the five-year period?
a. P151,698
c. P144,000
b. P 98,698
d. P165,800
ANSWER A
Annual lease expense, net of tax (P65,000 x 60%)
x PVF, 9%, 5 years
P 39,000
3.8897
Present value of the after-tax cost of leasing
P151,698
OPERATING & FINANCIAL BUDGETING
62. After careful planning, Change Style, Inc. has decided to switch to a just-in-time inventory
system effective on July 1 of the current year. As of July 1, the corporation has 70 units of
product in inventory. It has 1,000 labor hours available for the month of July. These hours
could produce 250 units of product. Customer demand for July is 200 units. If just-in-time
principles are correctly followed, how many units should Change Style Inc. plan to produce in
July?
a. 200
c. 180
b. 130
d. 250
ANSWER B
Demand
Less beginning inventory
200
70
Page 27
Production
130
63. Ideally, the number of units that should be produced in a just-in-time manufacturing system
is equal to
a. the maximum productive capacity for the current period.
b. actual customer demand for the current period.
c. budgeted customer demand for the current period.
d. budgeted customer demand for the following period
ANSWER B
64. The projected sales price for a new product (which is still in the development stage of the
product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the
first-year cost to be P60. On this type of product, the company requires a P12 per unit profit.
What is the target cost of the new product?
a. P60
c. P38
b. P30
d. P43
ANSWER C
Projected sales price
Less required profit
Target cost
P50
12
P38
65. The preparation of an organization's budget
a. forces management to look ahead and try to see the future of the organization.
b. requires that the entire management team work together to make and carry out the
yearly plan.
c. makes performance review possible at all levels of management.
d. all of the above.
ANSWER D
66. Ivory Company has the following expected pattern of collections on credit sales: 70 percent
collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent
in the second month after the month of sale. The remaining 1 percent is never collected. At
the end of May, Ivory Company has the following accounts receivable balances:
From April sales
P21,000
From May sales
48,000
Ivory's expected sales for June are P150,000. What were total sales for April?
a. P150,000
c. P 70,000
b. P 72,414
d. P140,000
ANSWER D
A/R balance from April sales
÷ uncollected portion (100% - 70% - 15%)
April sale
P 21,000
15%
P140,000
Page 28
67. Bali Company has a policy of maintaining an inventory of finished goods equal to 30 percent
of the following month's sales. For the forthcoming month of March, Bali has budgeted the
beginning inventory at 30,000 units and the ending inventory at 33,000 units. This suggests
that
a. February sales are budgeted at 10,000 units less than March sales.
b. March sales are budgeted at 10,000 units less than April sales.
c. February sales are budgeted at 3,000 units less than March sales.
d. March sales are budgeted at 3,000 units less than April sales.
ANSWER B
Increase in inventory
Sales increase for April over March
3,000
÷ 30%
10,000
ITEMS 68 to 71 ARE BASED ON THE FOLLOWING INFORMATION:
The cost of goods sold section of Dale Corporation’s operating budget for 2015 is presented below:
Materials: Inventory, January 1 (16,000 units)
P
960,000
Purchases
9,120,000
Available for use
P10,080,000
Inventory, December 31 (18,500 units)
1,184,000
Labor
Factory overhead: Variable
P 2,009,600
Fixed
1,120,000
Cost of goods manufactured (140,000 units)
Add finished goods inventory, January 1 (9,300 units)
Cost of goods available for sale
Less finished goods inventory, December 31 (3,300 units)
Budgeted cost of goods sold
P 8,896,000
784,000
3,129,600
P12,809,600
744,000
P13,553,600
301,600
P13,255,000
Page 29
The actual results for the first quarter of 2015 require the following changes in the budget
assumptions:
 The budgeted production for the year is expected to increase by 5,000 units. During
the first quarter, the company has already produced 25,000 units. The balance of
production will be scheduled in equal segments over the last 3 quarters of the budget
year.

The expected finished goods inventory on January 1 dropped to only 9,000 units,
but its total value will not be revised anymore. The ending inventory value is
computed using the average manufacturing cost for the year.

A new Labor Bill passed by Congress is expected to be signed into a law by the
President. The new law will take effect beginning the last quarter of the budget
year, including a provision for an increase of 8% in wage rates.

The company uses the FIFO method in valuing its materials inventory. During the
first quarter, the company purchased 27,500 units of direct materials for P1,760,000.
The remaining direct materials requirement will be purchased evenly for the last 9
months of the budget year. Effective July 1, 2015, the beginning of the third quarter,
direct materials cost is expected to increase by 5%. The assumptions regarding the
quantity of materials inventories at the beginning and end of the year will remain
unchanged.

The variable factory overhead of P2,009,600 includes indirect materials and factory
supplies amounting to P889,600. It is computed at 10% of the cost of materials
used. The balance of the variable factory overhead varies directly with production.

There will be no change in the budgeted fixed factory overhead cost.
Considering the given actual data for the first quarter, as well as the changes in assumptions
and estimates in the budgeted data for the year, the company’s accountant prepared a
revised budgeted cost of goods sold statement. This revised statement should show:
68. budgeted materials purchases of
a. P9,696,000.
b. P9,120,000.
c. P9,280,000.
d. P9,440,000.
ANSWER A
It is assumed that each unit of product requires one unit of materials. So, production is equal to raw materials
to be used.
Budgeted raw materials to be used (or production) – 140,000+ 5,000
Add raw materials ending inventory
Total
Less raw materials beginning inventory
Budgeted purchases
Less actual purchases, 1st quarter
Required purchases in the remaining 3 quarters
Cost computation:
First quarter purchases (27,500 units)
Second quarter (120,000/3 or 40,000 x [P1,760,000÷27,500] or P64/unit)
145,000 units
18,500
163,500
16,000
147,500
27,500
120,000 units
P1,760,000
2,560,000
Page 30
Third and fourth quarters ([40,000/qtr. x 2] x[P64 x 105%])
Total cost of budgeted purchases
5,376,000
P9,696,000
69. budgeted cost of materials inventory at December 31, 2015 of
a. P1,024,000.
b. P1,243,200.
c. P1,184,000.
d. P1,216,100.
ANSWER B
Materials inventory, December 31, 2015
x Purchase price (P64 x 1.05)
Cost of materials inventory, December 31, 2015
18,500
P67.20
P1,243,200
The company uses the FIFO method of costing inventory. Thus, the ending inventory should be valued at the new
purchase price of P67.20.
70. the budgeted direct labor cost of
a. P846,720.
b. P784,000.
c. P876,960.
d. P829,920.
ANSWER D
Original labor cost per unit (P784,000 ÷ 140,000 units)
P 5.60
Labor cost per unit effective on the beginning of the 4th quarter (P5.60 x 108%)
P6.048
Budgeted labor cost:
First to third quarters (25,000 + 40,000 + 40,000) x P5.60)
Fourth quarter (40,000 x P6.048)
P588,000
241,920
Total budgeted labor cost
71. the budgeted cost of goods manufactured of
a. P12,809,600.
b. P13,464,000.
P 829,920
c. P14,208,000.
d. P12,344,000.
ANSWER B
Materials:
Inventory, January 1
Add purchases
Available for use
Less inventory, December 31
Labor
Factory overhead:
Variable:
Indirect materials (P9,412,800 x 10%)
P2,009,600 – P889,600
Other variable
(
140,000
overhead
P 960,000
9,696,000
P10,656,000
1,243,200
P 941,280
x
)
145,000
. 1,160,000
P 9,412,800
829,920
Page 31
Total variable overhead
Fixed
Budgeted cost of goods manufactured
P2,101,280
1,120,000
3,221,280
P13,464,000
72. the budgeted cost of goods sold of
a. P13,901,578.
b. P13,252,000.
c.
P13,553,600.
d. P14,208,000.
ANSWER A
Cost of goods manufactured (from Item #74)
Add finished goods inventory, January 1
Total cost of goods available for sale
Less finished goods inventory, December 31
(3,300 units x [P13,464,000 ÷ 145,000])
Budgeted cost of goods sold
P13,464,000
744,000
P14,208,000
306,422
P13,901,578
WORKING CAPITAL MANAGEMENT & FS ANALYSIS
73. At the end of 2015, Gabbuat Company’s total assets was P500,000. In 2016, it earned net
income of P30,000 and paid dividends of P10,000. What is the company’s internal growth
rate?
a. 1%
c. 5%
b. 4%
d. 9%
ANSWER B
Internal growth rate is the percentage increase in assets kept in business.
Increase in assets (P30,000 – P10,000)
÷ Total assets, beginning of 200B
Internal growth rate
P 20,000
÷ 500,000
4%
74. A division of Lockman Corporation reported a return on investment of 20% for a recent period.
If the division's asset turnover was 5, its profit margin must have been
a. 100%
c. 4%
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b. 25%
d. 2%
ANSWER C
ROS x ATO = ROA
ROS x 5 = 20%
ROS = 20% ÷ 5 = 4%
75. As of the end of 2015, Ice Company had total assets of P375,000 and equity of P206,250.
For 2016, its budget for capital investment projects is P62,500. To finance a portion of the
capital budget, the company may borrow from a bank which set a condition that the loan
would be approved, provided that the 2016’s debt-to-equity ratio should be the same as the
debt-to-equity ratio in 2015.
How much debt should be incurred to satisfy the bank’s condition?
a. P28,125
c. P34,375
b. P62,500
d. P51,138
ANSWER A
Total assets
Less equity
Debt
P375,000
206,250
P168,750
Debt-to-Equity Ratio (P168,750 ÷ P206,250)
81.82%
*Total financing required for the capital budget
Amount to be financed by equity
Amount to be financed by debt without changing
the debt-to-equity ratio (P62,500 – P34,375)
P62,500
÷181.82%
P34,375
P28,125
76. The management of Seymour Corporation asks you to prepare an analysis of the gross profit
variance based on their comparative income statements for 2015 and 2016:
Sales
Cost of goods sold
Gross profit
2016
P990,000
760,000
P230,000
2015
P800,000
640,000
P160,000
Variance
P190,000 F
120,000 U
P 70,000 F
The only known information given to you is that volume increased from 2015 to 2016 by 10%.
The variance in gross profit due to the change in volume is
a. P80,000 favorable.
c. P16,000 favorable.
b. P64,000 unfavorable.
d. P70,000 favorable.
ANSWER C
Sales volume variance
Cost volume variance
Gross profit volume variance
P80,000 F
64,000 U
P16,000 F
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– OR –
200B units @ 200A gross profit per unit
(P160,000 x 110%)
Less 200A gross profit
Gross profit volume variance
P176,000
160,000
P 16,000 F
77. Last year’s asset turnover of Johvic Company was 3.0. This year, the company’s sales
increased by 25% and average total assets decreased by 5%. What is this year’s asset
turnover?
a. 3.9
c. 3.4
b. 3.6
d. 3.1
ANSWER A
Asset Turnover
last year
Asset Turnover
this year
Sales
Average Total
Assets
3
x
1.25
=
= 3.75
1 x 0.95
0.95
=
=3
= 3.9
78. During the year, Tindugan Company earned net income of P60,000. For next year, it has a
capital budget of P80,000. If the company’s plowback ratio is 30%, how much external
funding is needed for the capital investment project?
a. P80,000
c. P56,000
b. P62,000
d. P98,000
ANSWER B
Capital budget
Fund from net income (P60,000 x 30%)
External funding needed
P80,000
18,000
P62,000
79. The following data are taken from the records of Belle Corporation for the year ended Dec. 31, 2015:
Net credit sales
Average materials inventory
Average finished goods inventory
Average accounts receivable
Average accounts payable
Net credit purchases
Raw materials used
Gross profit rate
Number of days in a year
P576,000
8,000
12,000
80,000
5,000
120,000
96,000
25%
360 days
What is the average number of days in the company’s operating cash conversion cycle?
a. 50 days
b. 75 days
ANSWER B
c.
d.
105 days
45 days
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Average Age
(360 days ÷
Turnover)
Turnover
RM used
Ave. RM Inventory
1.
R M Inventory
=
Turnover
2.
Cost of Goods Sold
FG Inventory
=
=
Turnover
Ave. FG Inventory
3. A/R Turnover =
Net Credit Sales
Ave. A/R
=
=
P96,000
P8,000
12 times
360
12
P576,000 x
75%
P12,000
36 times
P576,000
P80,000
7.2 times
360
7.2
50 days
24 times
360
24
(15) days
360
30 days
10 days
36
Net Credit Purchases
P120,000
=
Ave. A/P
P5,000
Average number of days in the operating cash conversion
cycle
4. A/P Turnover =
75 days
80. Using the data presented below, calculate the cost of sales for the Alpha Corporation for the year just
ended.
Current ratio
3.5
Acid test ratio
3.0
Current liabilities at year-end
P600,000
Beginning inventory
P500,000
Inventory turnover
8.0
a.
P1,600,000
b. P2,400,000
c. P3,200,000
d. P6,400,000
ANSWER C
Cost of sales =Average inventory x Inventory turnover
P500,000 + P300,000*
=
2
= P3,200,000
x8
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* Current ratio =
3.50 =
Current assets
Current liabilities
Current assets
600,000
Current assets
=
2,100,000
Quick assets
=
1,800,000
‘
Acid-test ratio =
3.00 =
Quick assets
Current liabilities
Quick assets
600,000
Inventory, ending
DECENTRALIZATION & PERFORMANCE EVALUATION
81. Which of the following is necessary for any valid performance measurement?
a. It must be part of the financial accounting system in use.
b. It must be quantifiable.
c. Goal congruence must be promoted by its use.
d. It must be financial in nature.
ANSWER C
82. A balanced scorecard
300,000
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a. records the variances between budgeted and actual revenues and expenses.
b. can be used at multiple organizational levels by redefining the categories and
measurements.
c. is most concerned with organizational financial solvency and business processes.
d. all of the above.
ANSWER B
83. Productivity is measured by the
a. total quantity of output generated from a limited amount of input during a time period.
b. quantity of good output generated from a specific amount of input during a time
period.
c. quantity of good output generated from the quantity of good input used during a time
period.
d. total quantity of input used to generate total quantity of output for a time period.
ANSWER B
84. Failure Corporation is a manufacturer of a versatile statistical calculator. The following
information is a summary of defective and returned units for the previous year.
Total defective units
1,000
Number of units reworked
750
Number of customer units returned
150
Profit for a good unit
P40
Profit for a defective unit
P25
Cost to rework a defective unit
P10
Cost of a returned unit
P15
Total prevention cost
P10,000
Total appraisal cost
P5,000
The total quality cost is
a. P15,000.
b. P15,750.
c. P28,500.
d. P11,250.
ANSWER C
Failure costs:
Rework cost (750 units x P10)
Returned units (150 x P15)
Not reworked (250 units x P15)
Prevention costs
Appraisal cost
Total quality costs
P7,500
2,250
3,750
P13,500
10,000
5,000
P28,500
85. A small manufacturing company recently stated its sales goal for a period was P100,000. At
this level of activity, its budgeted expenses were P80,000. Its actual sales were P100,000, but
its actual expenses were P85,000. This company operated
a. effectively and efficiently.
c. effectively but not efficiently.
b. neither effectively nor efficiently.
d. efficiently but not effectively.
ANSWER C
ITEMS 86 AND 87 ARE BASED ON THE FOLLOWING
Computer Solutions Corporation manufactures and sells various high-tech office automation
products. Two divisions of Computer Solutions Corporation are the Computer Chip Division
and the Computer Division. The Computer Chip Division manufactures one product, a "super
Page 37
chip," that can be used by both the Computer Division and other external customers. The
following information is available on this month's operations in the Computer Chip Division:
Selling price per chip
P50
Variable costs per chip
P20
Fixed production costs
P60,000
Fixed SG&A costs
P90,000
Monthly capacity
10,000 chips
External sales
6,000 chips
Internal sales
0
chips
Presently, the Computer Division purchases no chips from the Computer Chips Division, but
instead pays P45 to an external supplier for the 4,000 chips it needs each month.
86. Two possible transfer prices (for 4,000 units) are under consideration by the two divisions:
P35 and P40. Corporate profits would be ___________ if P35 is selected as the transfer price
rather than P40, and the Computer Division purchases from the Computer Chip Division
instead of from the external supplier.
a. P 20,000 larger
c. P20,000 smaller
b. P100,000 larger
d. the same
ANSWER B
Purchase price
Less variable cost
Savings if acquired from within
x number of units
Increase in profit
P45
20
P25
4,000
P100,000
87. Assume, for this question only, that the Computer Chip Division is selling all that it can produce
to external buyers for P50 per unit. How would overall corporate profits be affected if it sells
4,000 units to the Computer Division at P45? (Assume that the Computer Division can
purchase the super chip from an outside supplier for P45.)
a. no effect
c. P20,000 decrease
b. P20,000 increase
d. P90,000 increase
ANSWER C
Purchase price
Cost if purchased from within:
Variable cost
Opportunity cost
Loss per unit
x number of units
Decrease in profit
P45
P20
30
50
P 5
4,000
P20,000
88. The following information is given for the Alpha Division of Sorority Corporation.
Sales P600,000
Var. cost of goods sold
200,000
Fixed manufacturing costs
50,000
Variable selling
30,000
Fixed admin. (50% allocated)
20,000
Fixed selling (20% allocated)
50,000
Assets at cost
800,000
Accumulated depreciation
200,000
If Sorority Corporation uses ROI to evaluate division managers and uses historical cost as
the investment base, the ROI for Alpha Division is:
a. 31.25%
c. 41.67%
b. 33.75%
d. 45.00%
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ANSWER B
Sales
Less cost of goods sold
Gross margin
Variable selling
P30,000
Fixed selling (P50,000 x 80%) 40,000
Fixed admin (P20,000 x 50%) 10,000
Controllable income
÷ Assets
ROI
P600,000
250,000
P350,000
80,000
P270,000
800,000
33.75%
89. The following year-end data pertain to Adan Corporation:
Earning before interest and taxes
P 800,000
Current assets
800,000
Non-current assets
3,200,000
Current liabilities
400,000
Non-current liabilities
1,000,000
Adan Corporation pays an income tax rate of 32%. Its weighted-average cost of capital is
10%. What is Adan Corporation’s Economic Value Added (EVA)?
a. P184,000
c. P440,000
b. P144,000
d. P400,000
ANSWER A
After-tax operating income (P800,000 x [1 – 0.32])
Less desired return on investment:
Total assets (P800,000 + P3,200,000) P4,000,000
Less current liabilities
400,000
Investment base
P3,600,000
x Weighted-average cost of capital
10%
Economic value added
90. The
a.
b.
c.
d.
P544,000
360,000
P184,000
format for internal reports in a responsibility accounting system is prescribed by:
Generally Accepted Accounting Principles
The Financial Accounting Standards Board
The Philippine Institute of Certified Public Accountants
Management
ANSWER D
QUANTITATIVE METHODS
91. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per
year and the ordering costs are P100. The company uses an order quantity of 500 units. By
how much could the company reduce its total costs if it purchased the economic order quantity
instead of 500 units?
a. P 500
c. P2,500
b. P2,000
d. P 0
ANSWER A
EOQ =
500 units
= 1,000 units
1,000 units
Page 39
Carrying cost (500/2)2; (1,000/2)2
Ordering cost (10,000/500) x P100
(10,000/1,000) x P100
Total cost
P 500
2,000
P1,000
1,000
P2,000
P2,500
Savings (P2,500 – P2,000)
P500
92. In the two following constraint equations, X and Y represent two products (in units) produced
by the Uncommon Products Corporation.
Constraint 1: 3X + 5Y < 4,200
Constraint 2: 5X + 2Y > 3,000
What is the maximum number of units of Product X that can be produced?
a. 4,200
c.
600
b. 3,000
d. 1,400
ANSWER D
1,400 units is the only amount that will not cause Constraint 1 to be violated.
93. King Corporation operates its factory 300 days per year. Its annual consumption of Material
Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time
is 12 business days. What is the order point for Material Y?
a. 10,000 gallons
c. 48,000 gallons
b. 38,000 gallons
d. 58,000 gallons
ANSWER D
Average daily usage (1,200,000 ÷ 300)
x lead time
Lead time usage
add safety stock
Order point
4,000
12
48,000
10,000
58,000
94. The school canteen can sell either halo-halo or mami (hot noodle soup) on any given day.
The contribution margin that the canteen could earn from halo-halo and mami is affected by
the weather, as follows:
Item sold
CONTRIBUTION MARGIN
Hot Weather
Cold Weather
Halo-Halo
Mami
P15,000
11,400
P 6,000
12,000
If the probability of hot weather on a given day at this time is 60%, which item(s) should
the company sell?
a. Halo-Halo, because this item is salable when weather is hot.
b. Mami, because it has the higher expected payoff.
c. Halo-Halo and mami, so the canteen could maximize contribution margin.
d. 60% halo-halo and 40% mami.
Page 40
ANSWER B
Based on the given data, the expected payoffs are:
Sell halo-halo (15,000 x 60%) + (6,000 x 40%)
Sell mami (11,400 x 60%) + (12,000 x 40%)
P11,400
11,640
Therefore, despite the fact that the weather is hot, the canteen should sell mami because it has the higher
expected value or expected payoff.
95. Mr. Javee owns a piece of land that is adjacent to a big area of a vacant lot owned by the
city government. Recently, Mr. Javee heard that the city government has plans about the
vacant lot. He inquired about such plans and he was given the following, including each
plan’s probability of occurrence:
Probability
Plan A – Lease the lot to a businessman who will construct a mall on the lot
60%
B – Construct a theme park on the vacant lot
30%
C – Construct a building that will house some of the city government’s offices 10%
Mr. Javee knows that the value of his land, which he acquired ten years ago at a cost of
only P500 per square meter, will increase depending on which plan would materialize. His
estimates are as follows:
Plan A –
P5,000 per square meter
B –
2,000
C –
1,000
What is the expected value of the land?
a. P5,000
c. P2,667
b. P3,000
d. P3,700
ANSWER D
Plan A
P5,000 x 60%
B
2,000 x 30%
C
1,000 x 10%
Expected value
=
=
=
P3,000
600
100
P3,700 per square meter
96. Bahalana Company produces and sells Product Z. Each unit of Product Z contributes P5 to
the recovery of fixed costs and generation of profit.Total fixed costs amounts to P200,000
per period. Selling price of Product Z is P20 per unit.
For the coming period, the company believes that there is a 70% chance that the sales of
Product Z will be 80,000 units, and a 30% chance that sales will equal 10,000 units. The
expected profit from Product Z for the coming period is:
a. P 95,000
c. P 80,000
b. P250,000
d. P295,000
ANSWER A
Expected value of sales volume:
80,000 x 70%
56,000
10,000 x 30%
3,000
X CM per unit
Total CM
Less fixed costs
Expected profit
59,000
5
P295,000
200,000
P 95,000
Page 41
BASIC MAS CONCEPTS
97. A person who is qualified by education, experience, technical ability, and temperament to
advise or assist businessmen on a professional basis in identifying, defining, and solving
specific management problems involving the organization, planning, direction, control, and
operation of a firm is called a
a. Management Consultant.
c. Accounting Technician.
b. Certified Public Accountant.
d. Management Accountant.
Answer: A
98. Consulting services differ fundamentally from CPA’s function of attesting to the assertions of
other parties. In a consulting service,
a. the practitioner expresses a conclusion about the reliability of a written assertion that
is the responsibility of the assertor.
b. the work is generally performed only for the use and benefit of the client.
c. the client develops findings, conclusions, and recommendations.
Page 42
d. the nature and scope of work is determined solely by the consulting services
practitioner.
ANSWER B
99. Which of the following statements is correct?
a. MAS is confined only to such areas as financial accounting, auditing, and tax services.
b. Because the MAS practitioner must be independent, he must not allow the client to
participate in any phase of his engagement.
c. Although MAS extends beyond the traditional accounting services, CPAs in the MS
practice are still bound by the rules of professional ethics in the practice of accounting
in general.
d. CPAs provide management services to go around the ethical constraints as mandated
by the Accountancy Act.
ANSWER C
100. Engagements should be adequately planned, supervised, and controlled. Controlling
involves the measurement of progress in attaining the engagement plan and objectives. At
significant engagement points, progress should be measured in terms of
a. time schedule, accomplishments, and quality of work.
b. accomplishments, time schedule, and expenses incurred.
c. quality of work, number of reports prepared, and time schedule.
d. accomplishments, number of personnel who played a role in the engagement, and
attendance of the participants in the engagement.
ANSWER A
101. Which of the following is a characteristic of management advisory services?
a. Services rendered are for third parties.
b. Engagements are usually recurring.
c. Human relations do not play a vital role in each engagement.
d. It involves problem solving.
ANSWER D
INFORMATION SYSTEMS/EDP
102. The basic principles of accounting information system include all the following, except
a. flexible structure.
c. implementation.
b. cost awareness.
d. useful output.
ANSWER B
103. Which of the following statements is false?
a. Management accounting is an integral part of the controller’s function in an
organization.
b. The Standard of Ethical Conduct for Management Accountants include concepts
related to competence, confidentiality, integrity, and objectivity.
c. Modern cost accounting plays a role in planning new products, evaluating operational
procedures, and controlling costs.
d. The COO (Chief Operating Officer) is primarily responsible for management accounting
and financial accounting.
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ANSWER D
104. Management accounting is considered successful when it
a. helps managers improve their decisions.
c. is relevant.
b. is in accordance with GAAP.
d. is accurate.
ANSWER A
105. Electronic Fund Transfer (EFT) is a service provided by financial institutions worldwide that
is based on EDI Technology. EFT transaction costs are lower than for manual systems
because documents and human intervention are eliminated from the transaction process.
However, the EFT system has inherent and unique risks, one of which is
a. unauthorized access and activity.
b. inadequate disaster recovery procedures.
c. insufficient online edit checks.
d. improper change control procedures.
ANSWER A
106. Which of the following descriptions refers to management accounting information?
a. It is prepared for shareholders.
b. It is reliable and verifiable.
c. It is prepared in accordance with GAAP.
d. It provides reasonable and timely estimates
ANSWER D
107. Which of the following is a not a characteristic of management accounting?
a. Internal focus
c. Subjective information may be used
b. Broad-based and multidisciplinary
d. Historical orientation
ANSWER D
108. Which of the following characteristics distinguishes computer processing from manual
processing?
a. Computer processing virtually eliminates the occurrence of computational error
normally associated with manual processing.
b. Errors or fraud in computer processing will be detected soon after their occurrences.
c. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
d. Most computer systems are designed so that transaction trails useful for audit
purposes do not exist.
ANSWER A
109. What type of computer system is characterized by data that are assembled from more than
one location and records that are updated immediately?
a. Microcomputer system
c. Batch processing system
b. Minicomputer system
d. Online real-time system
ANSWER D
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110. A major accounting contribution to the managerial decision-making process in evaluating
possible courses of action is to
a. decide which actions the management should consider.
b. determine the amount of money that should be spent on a project.
c. assign responsibility for the decision.
d. provide relevant revenue and cost data about each course of action.
ANSWER D
111. Which of the following refers to “systems design”?
a. It is the process of monitoring, evaluating, and modifying a system.
b. It is the process of learning how the current system functions, determining the needs of
users, and developing the logical requirements of a proposed system.
c. It is the process of developing specifications for hardware, software, manpower, data
resources, and information products required to develop a system.
d. It determines the technical, operational, and economic feasibility of a system.
ANSWER C
ECONOMICS
112. Gross domestic product (GDP) is the
a. total amount of expenditures for consumer goods and investment for a period of time.
b. total purchases by consumers, businesses, government, and foreign entities
c. value of all final goods and services produced by the country by both domestic and
foreign-owned sources.
d. value of all goods and services produced by the country by domestic firms, excluding
those produced by foreign-owned companies.
ANSWER C
113. As the economy becomes more and more depressed, a company's management decides to
slash spending on research and development. What is the likely effect of this action on net
income? Net income will be
a. higher this period and lower in future periods.
b. higher this period and higher in future periods.
c. lower this period and higher in future periods.
d. lower this period and lower in future periods.
Page 45
ANSWER A
114. Inflation can have positive and negative effects on an economy. Positive effects of inflation
include
a. loss in stability in the real value of money and other monetary items over time.
b. uncertainty about future inflation may discourage investment and saving.
c. shortages of goods if consumers begin hoarding in anticipation of price increases in
the future.
d. mitigation of economic recessions and debt relief by reducing the real level of debt.
ANSWER D
115. The local video store’s business increased by 12% after the movie theater raised its prices
from P300 to P400. Thus, relative to movie theater admissions, videos are
a. substitute goods
c. complementary goods
b. superior goods
d. public goods
ANSWER A
116. In national income terms, aggregate demand is the
a. demand for money by a community in a period of full employment.
b. total expenditure on capital goods by entrepreneurs during a period of full
employment.
c. demand that is needed if the country’s economy is to operate at optimum level and
the level of investment is to be raised.
d. total expenditures on consumer goods and investment, including government and
foreign expenditures, during a given period.
ANSWER D
- end –