MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
OVERVIEW
Management Advisory Services
1. The following characterize management advisory services except
A. involve decision for the future
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm
D. relate to specific problems where expert help is required
COST-VOLUME-PROFIT ANALYSIS
Breakeven Point
5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
volume?
A. P120,000
C. P225,000*
B. P200,000
D. P450,000
2. Which of the following is not classifiable as a management advisory service by CPA?
A. Systems design.
C. Make or buy analysis.
B. Project feasibility study.
D. Assistance in budget preparation.
6. Bush Electronics, Inc. had the following sales results for 2004:
TV sets
CD player
Peso sales component ratio
0.30
0.30
Contribution margin ratio
0.40
0.40
Bush Electronics, Inc. had fixed costs of P2,400,000.
The break-even sales in pesos for Bush Electronics, Inc. are:
TV sets
CD player
A.
P1,800,000
P1,800,000
B
P1,800,000
P1,800,000
C.
P1,500,000
P1,500,000
D.
P1,531,915
P1,531,915
Managerial Accounting
3. The following are inherent to either management accounting or financial accounting:
1. External report
2. Historical information
3. Contribution approach income statement
4. Generally accepted accounting principles
5. Prospective financial statements
Which of the foregoing are related to management accounting and financial accounting,
respectively?
Management Accounting
Financial Accounting
A.
1, 2, 5
3, 4
B.
3, 5
1, 2, 4
C.
2, 3
1, 4, 5
D.
3
1, 2, 4, 5
COST BEHAVIOR
4. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for
P50,000 units. How much is Carera’s budgeted variable cost per unit of output?
A. P1.60
C. P3.00
B. P1.67
D. P5.00
May 2005
Radios
0.40
0.60
Radios
P3,600,000
P1,600,000
P2,000,000
P2,042,553
7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Selling price per pair of sunglasses
P25.00
Variable costs per pair of sunglasses:
Raw materials
P11.00
Direct labor
5.00
Manufacturing overhead
2.50
Selling expenses
1.30
Total variable costs per unit
P19.80
Annual fixed costs:
Manufacturing overhead
P192,000
Selling and administrative
276,000
Total fixed costs
P468,000
Forecasted annual sales volume (120,000 pairs)
P3,000,000
Income tax rate
40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units
C. 83,572 units
B. 101,740 units
D. 86,250 units
Page 1 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for
P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik
device.
Direct labor
P180
Direct materials
240
Factory overhead
105
Selling costs
75
Total variable costs
P600
Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000.
Except for an operating loss incurred in the year of incorporation, the firm has been profitable
over the last five years.
In 2001, a significant change in Madel’s production technology caused a 10% increase in
annual fixed costs and a 20% unit cost increase in the direct labor component as a result of
higher skilled direct labor. However, this change permitted the replacement of a costly
imported component with a local component. The effect was to reduce unit material costs by
25%. There has been no change in the Walastik selling price.
The annual sales units required for Madel to breakeven are:
A.
B.
C.
D.
2000
22,000
22,000
14,000
14,000
2001
20,840
22,407
22,407
20,840
Profit Planning
9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000,
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and
sales price per unit to remain the same in 2001, however total sales are expected to jump by
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
2000 by
A. 100%
C. 20%
B. 80%
D. 50%
May 2005
10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two estimates that
60 percent of its Sunday sales to customers would be made on other days if the stores were
not open on Sundays. The one-day volume of Sunday sales that would be necessary for SixTwo to attain the same weekly operating income as the current six-day week is
A. P6,000
C. P7,500
B. P5,000
D. P4,500
Page 2 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be
necessary to generate an operating profit of P48,000?
A. P1,350,000
C. P1,135,000
B. P486,425
D. P910,000
12. Mount Park, Inc. had the following economic information for the year 2002:
Sales(50,000 units @ P20)
P1,000,000
Variable manufacturing costs
400,000
Fixed costs
250,000
Income tax rate
40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
2002?
A. P1,125,000
C. P1,187,500
B. P1,325,000
D. P1,387,500
13. Larz Company produces a single product. It sold 25,000 units last year with the following
results:
Sales
P625,000
Variable costs
P375,000
Fixed costs
150,000
525,000
Net income before taxes
P100,000
Income taxes
40,000
Net income
P 60,000
In an attempt to improve its product in the coming year, Larz is considering replacing a
component part in its product that has a cost of P2.50 with a new and better part costing P4.50
per unit. A new machine will also be needed to increase plant capacity. The machine would
cost P18,000 with a useful life of 6 years and no salvage value. The company uses straightline depreciation on all plant assets.
If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
what selling price per unit of product must it charge next year to cover the increased material
costs?
A. P27.00
C. P32.50
B. P25.00
D. P28.33
May 2005
Page 3 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
Point of Indifference
14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to
15,000 pairs of cross-country skis of either the mountaineering model or the touring model.
The sales department assures management that it can sell between 9,000 and 13,000 pairs
(units) of either product this year. Because the models are very similar, Ravine Ski will
produce only one of the two models. The information below was compiled by the accounting
department.
Mountaineering
Touring
Selling price per unit
P880.00
P800.00
Variable costs per unit
P528.00
P528.00
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only
P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40% income tax rate.
The total sales revenue at which Ravine Ski Company would make the same profit or loss
regardless of the ski model it decided to produce is
A. P8,800,000
C. P9,240,000
B. P4,224,000
D. P6,864,000
15. Valley of Fire Corporation has one department that produces three replacement parts for the
company. However, only one part can be produced in any month because of the adjustments
that must be made to the equipment. The department can produce up to 15,000 units of any
one of the three parts in each month. The company expresses the monthly after tax
cost/volume/profit relationships for each part using an equation method. The format of the
equations and the equation for each replacement part are given below:
(ATR) X ((SP – VC) x (U) – FC)
ATR = after-tax rate
VC = variable cost
FC = fixed costs
SP = selling price
U = units
Part
Part Equations
AL45
.6 ((P4.00 – P1.25) (U) – P33,400)
BT65
.6 ((P4.05 – P2.55) (U) – P15,000)
GM17
.6 ((P4.10 - P2.00) (U) - P22,365)
The production and unit sales volume level at which Valley will be indifferent as to whether
Part BT62 or GM17 is produced is
A. 7,365
C. 10,380
B. 4,092
D. 12,275
May 2005
Page 4 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The
average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
is considering a change to a commission arrangement that would pay each salesperson a
salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
The amount of total car sales at which BM Motors would be indifferent as to which plan to
select is
A. P22,500,000
C. P24,000,000
B. P30,000,000
D. P12,000,000
19. Firm D and Firm S are competitors within the same industry. Firm D produces its product
using large amounts of direct labor. Firm S has replaced direct labor with investment in
machinery. Projected sales for both firms are fifteen percent less than in the prior year. Which
statement regarding projected profits is true?
A. Firm D will lose more profit than Firm S.
B. Firm S will lose more profit than Firm D.
C. Firm D and Firm S will lose the same amount of profit.
D. Neither Firm D nor Firm S will lose profit.
17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many
styles of shoes that are all sold at the same price. To encourage sales personnel to be
aggressive in their sales efforts, the company pays a substantial sales commission on each
pair of shoes sold. Sales personnel also receive a small basic salary.
The following cost and revenue data relate to Store 9 and are typical of the company’s many
sales outlets:
Selling price
P800
Variable expenses:
Invoice costs
P360
Sales commission
140
P500
Fixed expenses per year:
Rent
P1,600,000
Advertising
3,000,000
Salaries
1,400,000
Total
P6,000,000
The company is considering eliminating sales commissions entirely in its stores and increasing
fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be
indifferent to commission basis?
A. 25,300
C. 18,505
B. 15,300
D. 21,000
20. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units.
During the current month when the unit sales are expected to be only 45,000, there is a loss of
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. The fixed
costs amounted to
A. P80,000
C. P247,500
B. P360,000
D. P210,000
Sensitivity Analysis
18. If fixed costs increase while variable cost per unit remains constant, the contribution margin
will be
A. lower
C. unchanged
B. higher
D. unpredictable
May 2005
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving
their place of business to the downtown area. Likewise it is anticipating that the selling price
per unit and the variable expenses will not change. At present, the sales volume necessary to
breakeven is P750,000 but with the expected increase in fixed costs, the sales volume
necessary to breakeven would go up to P975,000. Based on these projections, what were the
total fixed costs before the increase of P78,750?
A. P341,250
C. P183,750
B. P262,500
D. P300,000
22. Machan Co.’s year-end income statement is as follows:
Sales (20,000 units)
P360,000
Variable costs
220,000
Contribution margin
P140,000
Fixed costs
105,000
Net income
P 35,000
Management is unhappy with the results and plans to make some changes for next year. If
management implements a new marketing program, fixed costs are expected to increase by
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by
15 percent. What is the effect on income if the foregoing changes are implemented?
A. Decrease of P21,200
C. Increase of P13,800
B. Increase of P1,800
D. Increase of P14,800
Page 5 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
23. Candyman Company is a wholesale distributor of candy. The company services grocery,
convenience, and drug stores in Metro Manila. Small but steady growth in sales has been
achieved by the company over the past few years while candy prices have been increasing.
The company is formulating its plans for the coming fiscal year. Presented below are the data
used to project the current year’s after-tax net income of P110,400.
Manufacturers of candy have announced that they will increase prices of their products an
average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts,
etc.) and labor costs. Candyman Company expects that all other costs will remain at the same
rates or levels as the current year. Candyman is subject to 40 percent tax rate.
Average selling price
P4.00 per box
Average variable costs
Cost of candy
P2.00 per box
Selling expenses
0.40 per box
Total
P2.40 per box
Annual fixed costs
Selling
P169,000
Administrative
280,000
Total
P440,000
Expected annual sales volume (390,000 boxes)
P1,560,000
If net income after taxes is to remain the same after the cost of candy increases but no
increase in the sales price is made, how many boxes of candy must Candyman sell?
A. 480,000
C. 27,600
B. 400,000
D. 29,300
Margin of Safety
24. Claremont Company had is a manufacturer of its only one product line. It had sales of
P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was
10 percent. What are the company’s fixed costs?
A. P72,000
C. P288,000
B. P80,000
D. P320,000
25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety
ratio of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales
constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs?
A. P36,000
C. P432,000
B. P90,000
D. P360,000
May 2005
Preweek Quizzer
Degree of Operating Leverage
26. A very high operating leverage indicates that a firm
A. has high fixed costs
B. has a high net income
C. has high variable costs
D. is operating close to its breakeven point
27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income
for 2002 can be expected to increase by what amount over 2001?
A. P250,000
C. P500,000
B. 200 percent
D. 40 percent
Situational
Questions 28 thru 34 are based on the following information:
Calamba Hospital operates a general hospital but rents space and beds to separate entities for
specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each
separate entity for common services to its patients like meals and laundry and for all administrative
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
entity. Space and bed rentals are fixed for the year.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenue of P1,138,800.
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patient Days
Bed Capacity
Dietary
P 42,952
Janitorial
P 12,800
Laundry
28,000
Lab, other than direct charges to patients
47,800
Pharmacy
33,800
Repairs and maintenance
5,200
7,140
General administrative services
131,760
Rent
275,320
Billings and collections
40,000
Bad debt expense
47,000
Other
18,048
.
P262,800
P453,000
Page 6 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
The only personnel directly employed by the Pediatrics Department are supervising nurses,
nurses, and aides. The hospital has minimum personnel requirements based on total annual
patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
Annual Patient Days
Aides
Nurses
Supervising Nurses
10,000 – 14,000
21
11
4
14,001 – 17,000
22
12
4
17,001 – 23,725
22
13
4
23,726 – 25,550
25
14
5
25,551 – 27,375
26
14
5
27,376 – 29,200
29
16
6
The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and
aides was P72,000, P169,000, and P110,000, respectively.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than
capacity and even went as high as 20 patients more on some days. The hospital has an additional
20 beds available for rent for the coming fiscal year.
28. The variable expense per patient day is
A. P15.08
B. P12.50
C. P15.00
D. P50.00
29. The contribution margin per patient day is
A. P49.92
B. P52.50
C. P50.00
D. P52.00
30. How many patient days are necessary to cover fixed costs for bed capacity and for
supervisory nurses?
A. 9,500
C. 12,500
B. 11,500
D. 10,500
31. The number of patient days needed to cover total costs is
A. 14,200
C. 15,820
B. 15,200
D. 14,220
May 2005
Preweek Quizzer
32. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
same as in the past year, what would be the increase in revenue?
A. P99,450
C. P105,450
B. P87,750
D. P89,750
33. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
per patient day is
A. P22,935
C. P22,965
B. P22,950
D. P23,935
34. What is the increased fixed cost applied for bed capacity, given the increased number of
beds?
A. P151,000
C. P147,000
B. P173,950
D. P152,000
Questions 35 thru 37 are based on the following information.
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400
per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent.
An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays
P300 per month. The necessary restaurant equipment and delivery cars were purchased with
cash. Ms. Casserole has noticed that expenses for utilities and supplies have been rather
constant. Ms. Casserole increased her business between 1998 and 2001. Profits have more than
doubled since 1998. Ms. Casserole does not understand why profits have increased faster than
volume.
A projected income statement for the year ended December 31, 2002, prepared by the accountant,
is shown below:
Sales
Cost of food sold
Wages & fringe benefits:
Restaurant help
Delivery help
Rent
Accounting services
Depreciation:
Delivery equipment
Restaurant equipment
P28,500
P95,000
8,150
17,300
4,800
3,600
5,000
3,000
Page 7 of 35
MANAGEMENT ADVISORY SERVICES
Utilities
Supplies
Net income before taxes
Income taxes (40%)
Net income
Note: The average pizza sells for P2.50.
CPA Review School of the Philippines
2,325
1,200
73,875
P21,125
8,450
P12,675
35. What is the tax shield on the noncash fixed costs?
A. P3,200
C. P3,400
B. P14,950
D. P5,400
36. What is the breakeven point in number of pizzas that must be sold?
A. 25,929
C. 18,150
B. 23,569
D. 42,114
37. What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529
C. 12,990
B. 21,284
D. 10,773
VARIABLE COSTING VS. ABSORPTION COSTING
Absorption Costing
38. When a firm prepares financial reports by using absorption costing, it may find that
A. profits will always increase with increase in sales.
B. profits will always decrease with decreases in sales.
C. profit may decrease with increased sales even if there is no change in selling price and
costs.
D. decreased output and constant sales result in increased profit.
39. The Bush Company has provided information concerning its projections for the coming year as
follows:
Net sales
P10,000,000
Fixed manufacturing costs
P 1,000,000
Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in
inventory, what will the projected cost of goods sold be?
A. P5,000,000
C. P7,000,000
B. P6,000,000
D. P8,000,000
May 2005
Preweek Quizzer
40. Colger Company manufactures a single product using standard costing. Variable production
costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of
12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory,
produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under
absorption costing would be
A. P115,000
C. P242,000
B. P132,000
D. P253,000
41. The Trinkets Company estimated the following data for the coming year:
Fixed manufacturing costs
Variable production costs per peso of sales
Materials
Direct labor
Variable overhead
Variable selling costs per peso of sales
Trinkets estimates its sales for the coming year to be P2,000,000.
The expected cost of goods sold for the coming year is
A. P1,265,000
C. P1,115,000
B. P1,565,000
D. P 700,000
P565,000
P0.125
0.150
0.075
0.150
42. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below
is from the financial records of the company for the year.
• Total manufacturing costs were P2,500,000.
• Costs of goods of manufactured was P2,425,000.
• Applied factory overhead was 30 percent of total manufacturing costs.
• Factory overhead was applied to production at a rate of 80% of direct labor cost.
• Work-in-process inventory at January 1 was 75% of work-in-process inventory at
December 31.
What are the amounts/value of the following cost elements and inventory?
Direct labor
Direct materials
Work-in-process inventory
A.
P750,000
P750,000
P225,000
B.
P937,500
P812,500
P225,000
C.
P937,500
P812,500
P300,000
D.
P750,000
P750,000
P300,000
Page 8 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
43. Black Forest, Inc. began operations on January 3. Standard costs were established in early
January assuming a normal production volume of 160,000 units. However, Black Forest
produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per
unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and
40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and
50% were selling. Black Forest had no raw materials or work-in-process inventories at
December 31. Actual input prices and quantities per unit of product were equal to standard.
Using absorption costing, Black Forest’s income statement would show:
Cost of Goods Sold at Standard Cost
Overhead Volume Variance
A.
P8,200,000
P800,000 Unf
B.
P7,200,000
P800,000 Fav
C.
P6,500,000
P700,000 Unf
D.
P7,000,000
P700,000 Fav
Absorption Costing & Variable Costing
44. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its
products are as follows:
Direct Materials
P4.00
Direct labor
6.00
Factory overhead
Variable
3.00
Fixed (based on a normal capacity of 10,000 units)
2.00
Total
15.00
Beginning inventory
Production
Units sold (selling price P50)
Actual costs:
Direct materials
Direct labor
Variable overhead
Fixed
Variable selling and adm.
Fixed selling and adm.
2,000 units
8,000 units
7,000 units
P 35,000
50,000
23,000
18,000
60,000
35,000
Preweek Quizzer
How much are the net income under absorption costing and variable costing methods?
A.
B.
C.
D.
Absorption
P144,000
P143,000
144,000
142,000
Variable
143,000
144,000
142,000
144,000
45. Lord Industries manufactures a single product. Variable production costs are P10 and fixed
production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard
costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units.
The volume variance under each product costing are:
A.
B.
C.
D.
Under Absorption Costing
P3,750
P3,750
P7,500
P7,500
Under Variable Costing
P
0
P7,500
P0
P0
Absorption Costing Income vs. Variable Costing Income
46. Simple Corp. produces a single product. The following cost structure applied to their first year
of operations, 2000:
Variable Costs per Unit
Annual Fixed Costs
SG&A
P2.00
P14,000
Production
4.00
P20,000
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was
no beginning or ending work-in-process inventory. How much larger or smaller would Simple
Corp.’s income be if it uses absorption rather than variable costing?
A. The absorption costing income would be P6,000 larger
B. The absorption costing income would be P6,000 smaller
C. The absorption costing income would be P4,800 larger*
D. The absorption costing income would be P4,000 smaller
STANDARD COSTING & VARIANCE ANALYSIS
Basic Concepts
47. Which of the following is a difference between a static budget and a flexible budget?
A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static budget
does not.
D. There is no difference between the two.
Variances are closed to cost of sales monthly
May 2005
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Setting Standards
48. Which of the following statements about the selection of standards is true?
A. Ideal standards tend to extract higher performance levels since they give employees
something to live up to.
B. Currently attainable standards may encourage operating inefficiencies.
C. Currently attainable standards discourage employees from achieving their full
performance potential.
D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
causing a decline in performance.
49. The per-unit standard cost for variable overhead is normally based on the
A. standard quantity of an input factor used in a unit of product.
B. actual variable overhead cost incurred at the achieved level of production.
C. budgeted total cost for variable overhead divided by the number of units expected to be
produced.
D. ratio of fringe benefits to the basic cost of labor.
50. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of
30,000 direct labor hours.
Direct materials
P800,000
Direct labor
600,000
Variable manufacturing overhead
360,000
Fixed manufacturing overhead
288,000
What is the total manufacturing overhead application rate if the Relevant Company has to
operate at 80 percent of the stated capacity?
A. P24.00
C. P24.60
B. P27.00
D. P21.60
Raw Materials Variances
51. Derby Co. uses a standard costing system in connection with the manufacture of a line of Tshirts. Each unit of finished product contains 2 yards of direct material. However, a 20
percent direct material spoilage calculated on input quantities occurs during the manufacturing
process. The cost of the direct materials is P120 per yard.
The standard direct material cost per unit of finished product is
A. P192
C. P288
B. P240
D. P300
May 2005
Preweek Quizzer
52. Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver
purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance
and a P3,735 favorable usage variance. If there were no changes in the component of
inventory, how many units of finished product were produced?
A. 994 units
C. 1,725 units
B. 1,160 units
D. 828 units
53. The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent
P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600 units of
finished product. The material quantity variance is
A. P6,000 unfavorable
C. P5,200 unfavorable
B. P3,200 unfavorable
D. P2,000 unfavorable
54. Ramie has a standard price of P5.50 per pound for materials. July’s results showed an
unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066
pounds were used in production, what was the standard quantity allowed for materials?
A. 1,104
C. 1,074
B. 1,066
D. 1,100
Direct Labor Variance
55. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency
variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage
rate?
A. P8.94
C. P7.94
B. P8.00
D. P7.80
56. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15
per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual
output for the month was 8,500 units with P127,500 in direct material and P77,775 in direct
labor expense. Direct labor hours of 6,375 were actually worked during the month. Variance
analysis of the performance for the month of May would show a(n)
A. favorable material quantity variance of P7,500
B. unfavorable direct labor efficiency variance of P1,275
C. unfavorable material quantity variance of P7,500
D. unfavorable direct labor rate variance of P1,275
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Two-Way Overhead Variances
57. Karla Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct
labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each
unit requires five minutes of direct labor. Karla’s budgeted overhead for the month is
A. P12,800
C. P84,800
B. P18,800
D. P774,000
58. If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the
standard hours allowed is P15,600, then the overhead controllable variance is
A. P600F
C. P1,600F
B. P2,200U
D. P1,600U
59. Universal Company uses a standard cost system and prepared the following budget at normal
capacity for January
Direct labor hours
24,000
Variable factory OH
P48,000
Fixed factory OH
P108,000
Total factory OH per DLH
P6.50
Actual data for January were as follows:
Direct labor hours worked
22,000
Total factory OH
P147,000
Standard DLHs allowed for capacity attained
21,000
Using the two-way analysis of overhead variance, what is the controllable variance for
January?
A. P3,000 F
C. P9,000 F
B. P5,000 F
D. P10,500 U
60. The Terrain Company has a standard absorption and flexible budgeting system and uses a
two-way analysis of overhead variances. Selected data for the June production activity are:
Budgeted fixed factory overhead costs
P 64,000
Actual factory overhead
230,000
Variable factory overhead rater per DLH
P
5
Standard DLH
32,000
Actual DLH
32,000
The budget (controllable) variance for June is
A. P1,000 favorable
C. P6,000 favorable
B. P1,000 unfavorable
D. P6,000 unfavorable
May 2005
Preweek Quizzer
61. South Company has total budgeted fixed costs of P75,000, Actual production of 19,500 units
resulted in a P3,000 favorable volume variance. What normal capacity was used to determine
the fixed overhead rate?
A. 16,500
C. 20,313
B. 18,750
D. 20,325
62. CTV Company has a standard fixed cost of P6 per unit. At an actual production of 8,000 units
a favorable volume variance of P12,000 resulted. What were total budgeted fixed costs?
A. P36,000
C. P60,000
B. P48,000
D. P75,000
63. The Pinatubo Company makes and sells a single product and uses standard costing. During
January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units
of product. The standard cost card for one unit of product includes the following:
Variable factory overhead: 3.0 DLHs @ P4.00 per DLH.
Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH
For January, the company incurred P22,000 of actual fixed overhead costs and recorded a
P875 favorable volume variance.
The budgeted fixed overhead cost for January is
A. P31,500
C. P32,375
B. P30,625
D. P33,250
Questions 64 & 65 are based on the following information.
Lucky Company sets the following standards for 2003:
Direct labor cost (2 DLH @ P4.50)
P 9.00
Manufacturing overhead (2 DLH @ P7.50)
15.00
Lucky Company plans to produce its only product equally each month. The annual budget for
overhead costs are:
Fixed overhead
P150,000
Variable overhead
300,000
Normal activity in direct labor hours
60,000
In March, Lucky Company produced 2,450 units with actual direct labor hours used of 5,050.
Actual overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.)
64. The amount of overhead volume variance for Lucky Company is
A. P250 unfavorable
C. P750 Unfavorable
B. P500 unfavorable
D. P375 Unfavorable
Page 11 of 35
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65. Using the preceding data for Lucky Company, the controllable overhead variance was
A. P505 favorable
C. P245 favorable
B. P505 unfavorable
D. P245 unfavorable
Three-Way Overhead Variances
66. Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable
overhead spending variance, and P2,000 total under applied overhead. The fixed overhead
budget variance is
A. P41,000 favorable
C. P41,000 Unfavorable
B. P45,000 favorable
D. P45,000 Unfavorable
Four-Way Overhead Variances
67. Franklin Glass Works’ production budget for the year ended November 30, 2001 was based
on 200,000 units. Each unit requires two standard hours of labor for completion. Total
overhead was budgeted at P900,000 for the year, and the fixed overhead rate was estimated
to be P3.00 per unit. Both fixed and variable overhead are assigned to the product on the
basis of direct labor hours. The actual data for the year ended November 30, 2001 are
presented below.
Actual production in units
198,000
Actual direct labor hours
440,000
Actual variable overhead
P 352,000
Actual fixed overhead
P 575,000
Franklin’s variable overhead efficiency variance for the year ended November 30, 2001 is
A. P33,000 unfavorable
C. P66,000 unfavorable
B. P35,520 favorable
D. P33,000 favorable
68. The Virgin Island Company has standard variable costs as follows:
Materials, 3 pounds at P4.00 per pound
P12.00
Labor, 2 hours P10.00 per hour
20.00
Variable overhead, P7.50 per labor hour
15.00
Total
P47.00
During September, Virgin Island produced 6,000 units, using 11,560 labor hours at a total
wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead
variances are:
A.
B.
C.
D.
Spending
P1,900 favorable P1,900 unfavorable P1,400 favorable P1,400 unfavorable
Efficiency
P3,300 unfavorable P3,300 favorable P1,900 favorable P1,900 favorable
May 2005
Preweek Quizzer
69. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were
budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed
overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied
must be
A. P516,000
C. P504,000
B. P512,000
D. P496,000
70. Mulvey Company derived the following cost relationship from a regression analysis of its
monthly manufacturing overhead cost:
C = P80,000 + P12M
Where C = monthly manufacturing overhead cost
M = machine hours
The standard error of the estimate of the regression is P6,000.
The standard time required to manufacture one six-unit case of Mulvey’s single product is 4
machine hours. Mulvey applies manufacturing overhead to production on the basis of
machine hours and its normal annual production is 50,000 cases.
Mulvey’s estimated variable manufacturing overhead cost for a month in which scheduled
production is 5,000 cases would be
A. P80,000
C. P240,000
B. P320,000
D. P360,000
Questions 71 thru 73 are based on the following information.
The Lustre Company produces its only product, Kool Chewing Gum. The standard overhead cost
for one pack of the product follows:
Fixed overhead (1.50 hours at P18.00)
P27.00
Variable overhead (1.50 hours at P10.00)
15.00
Total application rate
P42.00
Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor
hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and
P308,700 variable.
71. The amount of variable overhead spending variance is
A. P6,300 Favorable
C. P6,300 Unfavorable
B. P 8,700 Favorable
D. P8,700 Unfavorable
72. The total overhead controllable variance is
A. P13,700 Favorable
B. P 8,700 Favorable
C. P13,700 Unfavorable
D. P 8, 700 Unfavorable
Page 12 of 35
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Preweek Quizzer
73. The overhead efficiency variance is
A. P22,500 Favorable
B. P15,000 Favorable
C. P22,500 Unfavorable
D. P15,000 Unfavorable
Gross Profit Variance Analysis
74. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are
as follows:
Actual
Expected
Sales in units
10,000
9,500
Selling price per unit
P11
P10
Variable expense per unit
P 6
What are the price variance and price volume variance?
Sales Price Variance
Price Volume Variance
A.
P10,000 F
P 5,000 F
B.
P 5,000 F
P10,000 U
C.
P 5,000 U
P10,000 F
D.
P10,000 U
P 5,000 U
RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
Basic Concepts
75. Controllable costs are costs that
A. are likely to respond to the amount of attention devoted to them by a specified manager.
B. are governed mainly by past decisions that established the present levels of operating
and organizational capacity and that only change slowly in response to small changes in
capacity.
C. will be unaffected by current managerial decisions.
D. fluctuate in total in response to small change in the rate of utilization of capacity.
76. Which of the following does not apply to the content of managerial reports?
A. Reporting standard is relevant to the decision to be made.
B. May extend beyond double-entry accounting system.
C. Pertain to subunits of the entity and may be very detailed.
D. Pertains to the entity as a whole and is highly aggregated.*
Return on Investment
77. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the
ROI would
A. increase by 30%
C. decrease by 37%
B. decrease by 10%
D. decrease by 33.3%
May 2005
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78. Return on investment (ROI) is a term often used to express income earned on capital invested
in a business unit. A company’s ROI would be increased if sales
A. increased by the same peso amount as expenses and total assets increased.
B. remained the same and expenses were reduced by the same peso amount that total
asset increased.
C. decreased by the same peso amount that expenses increased.
D. and expenses increased by the same percentage that total assets increased.
Return on Investment
Preweek Quizzer
36%
18%
18%
36%
79. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would
A. increase by 4%
C. increase by 30%
B. increase by 6%
D. decrease by 50%
Residual Income
80. Jar Division of Handy, Inc. expects the following result for 2004:
Unit sales
70,000
Unit selling price
P
10
Unit variable cost
P
4
Total fixed costs
P300,000
Total investment
P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Jar’s manager with an offer to buy 10,000 units at P7 each.
If Jar accepts the order, it would not lose any of the 70,000 units at the regular price.
Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
What is the minimum price that Jar could accept for the order and still maintain its expected
residual income?
A. P5.00
C. P4.75
B. P5.60
D. P9.00
Return on Investment & Residual Income
81. Scotch Co. has the following results for the year:
Sales
P740,000
Variable expenses
260,000
Fixed expenses
300,000
Total divisional assets average P1,000,000. The company’s minimum required rate of return
is 14 percent. The residual income and return on investment for Scotch are:
A.
B.
C.
D.
Residual Income
P36,000
P40,000
P36,000
P40,000
May 2005
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Preweek Quizzer
82. The following information relates to two projects of Rica Corporation.
Project A
Project B
Operating income
P2,500,000
P600,000
Residual income
P 500,000
P200,000
ROI
10%
12%
Return on residual investment
2%
4%
A bonus of P50,000 will be paid to the manager whose project contributed most to the overall
performance of the firm. The P50,000 bonus should go to the manager of
A. project A because the residual income is higher
B. project B because the return on investment is higher
C. project A because it was a larger, more complex project
D. project B because the return on residual investment is higher*
RELEVANT COSTING
Basic Concepts
85. The potential benefit that may be obtained from following an alternative course of action is
called
A. opportunity benefit
C. relevant cost
B. opportunity cost
D. sunk cost
Transfer Pricing
83. An appropriate transfer price between two divisions of the Star Corporation can be determined
from the following data:
Fabrication Division
Market price of subassembly
P50
Variable cost of subassembly
P20
Excess capacity (in units)
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50
C. Any amount less than P50
B. Between P50 and P70
D. 50 is the only acceptable price
87. The Auto Division of Fly Insurance employs three claims processors capable of processing
5,000 claims each. The division currently processes 12,000 claims. The manager has
recently been approached by two sister divisions. Division A would like the auto division to
process approximately 2,000 claims. Division B would like the auto division to process
approximately 5,000 claims. The Auto Division would be compensated Division A or Division
B for processing these claims. Assume that these are mutually exclusive alternatives. Claims
processor salary cost is relevant for
A. division A alternative only
B. division B alternative only
C. both Division A and Division B alternatives
D. neither Division A nor Division B alternatives
PRODUCT PRICING
84. In a cost-based pricing system the markup should cover
I. Selling and administrative expenses
II. Desired profit
III. Manufacturing cost
A. I, II, and III
C. I and III only
B. I and II only
D. II and III only
May 2005
86.Opportunity costs:
A. Are treated as period costs under variable costing.
B. Have already been incurred as a result of past action.
C. Are benefits that could have been obtained by following another course of action.
D. Do not vary among alternative courses of action.
Sell as is or Process-Further
88. Ottawa Corporation produces two products from a joint process. Information about the two
joint products follows:
Product X Product Y
Anticipated production
2,000 lbs
4,000 lbs
Selling price per lb. at split-off
P30
P16
Additional processing costs/lb after split-off (all variable)
P15
P30
Selling price/lb after further processing
P40
P50
The cost of the joint process is P85,000.
Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which
maximizes profit, Ottawa’s profit will increase by
A. P16,000
C. P50,000
B. P4,000
D. P10,000
Page 15 of 35
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Preweek Quizzer
Obsolete Inventories
89. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
price per unit is P50. The company has unused production capacity and has determined that
units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
additional net income per unit to be gained by finishing the unit?
A. P3
C. P15
B. P10
D. P12
Profit Maximization
90. Fe 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 machine hours and Product Y, 8 hours. If Fe wants to dedicate
80% of its machine time to the product that will provide the most income, Fe will have a total
monthly contribution margin of
A. P250,000
C. P210,000
B. P240,000
D. P200,000
91. Geary Manufacturing has assembled the following data pertaining to two popular products.
Blender
Electric mixer
Direct materials
P 6
P11
Direct labor
4
9
Factory overhead @ P16 per hour
16
32
Cost if purchased from an outside
20
38
supplier
Annual demand (units)
20,000
28,000
Past experience has shown that the fixed manufacturing overhead component included in the
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it
means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal
strategy, it should produce
A. 25,000 electric mixers, and purchase all other units as needed
B. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed
C. 20,000 blenders and purchase all other units as needed
D. 28,000 electric mixers and purchase all other units as needed
May 2005
Page 16 of 35
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Preweek Quizzer
92. ABC Electronics has the following standard costs and other data:
Part Beta
Part Zeta
Direct materials
P 4.00
P80.00
Direct labor
10.00
47.00
Factory overhead
40.00
20.00
Unit standard cost
P54.00
P147.00
Units needed per year
6,000
8,000
Machine hours per unit
4
2
Unit cost if purchased
P50
P150.00
In past years, ABC has manufactured all of its required components; however, this year only
30,000 hours of otherwise idle machine time can be devoted to the production of components.
Accordingly, some of the parts must be purchased from outside suppliers. In producing parts,
factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will
not be affected by any make-or-buy decision represent 60% of the applied overhead.
The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum
potential cost savings. The relevant unit production costs that should be considered in the
decision to schedule machine time are:
A. P54.00 for Beta and P147.00 for Zeta
C. P14.00 for Beta and P127.00 for Zeta
B. P50.00 for Beta and P150.00 for Zeta
D. P30.00 for Beta and P135.00 for Zeta
Questions 93 & 94 are based on the following information.
Brynles Manufacturing Company produces two products for which the following data have been
tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Per Unit
XY-7
BD-4
Selling price
P4.00
P3.00
Variable manufacturing cost
P2.00
P1.50
Fixed manufacturing cost
P0.75
P0.20
Variable selling cost
P1.00
P1.00
The sales manager has had a P160,000 increase in the budget allotment for advertising and wants
to apply the money to the most profitable product. The products are not substitutes for one another
in the eyes of the company’s customers.
The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4.
93. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased
advertising is
A.
B.
C.
D.
XY-7
P160,000
P640,000
P 80,000
P 80,000
BD-4
P320,000
P960,000
P960,000
P320,000
May 2005
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94. Suppose Brynles has only 100,000 machine hours that can be made available to produce
additional units of XY-7 and BD-4. If the potential increase in sales units for either product
resulting from advertising is far in excess of this production capacity, which product should be
advertised and what is the estimated increase in contribution margin earned?
A. Product XY-7 should be produced, yielding a contribution margin of P75,000.
B. Product XY-7 should be produced, yielding a contribution margin of P133,333.
C. Product BD-4 should be produced, yielding a contribution margin of P187,500.
D. Product BD-4 should be produced, yielding a contribution margin of P250,000.
Special Order
95. An opportunity cost commonly associated with a special order is
A. the contribution margin on lost sales
B. the variable costs of the order
C. additional fixed related to the increased output
D. any of the above
96. Jap Company’s unit cost of manufacturing and selling a given item at an activity level of
10,000 units per month are:
Manufacturing costs
Direct materials
P39
Direct labor
6
Variable overhead
8
Fixed overhead
9
Selling expenses
Variable
30
Fixed
11
The company desires to seek an order for 5,000 units from a foreign customer. The variable
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order.
The minimum break-even price per unit to be considered on this special sale is
A. P71
C. P69
B. P75
D. P84
May 2005
Preweek Quizzer
Make or Buy
97. For the past 12 years, the Blue Company has produced the small electric motors that fit into its
main product line of dental drilling equipment. As material costs have steadily increased, the
controller of the Blue Company is reviewing the decision to continue to make the small motors
and has identified the following facts:
1. The equipment used to manufacture the electric motors has a book value of P150,000.
2. The space now occupied by the electric motor manufacturing department could be used
to eliminate the need for storage space now being rented.
3. Comparable units can be purchased from an outside supplier for P59.75.
4. Four of the persons who work in the electric motor manufacturing department would be
terminated and given eight weeks’ severance pay.
5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing
process.
Which of the items above are relevant to the decision that the controller has to make?
A. 1, 3, and 4
C. 2, 3, 4, and 5
B. 2, 3, and 4
D. 1, 2, 4, and 5
98. Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
its product a year. The following information pertains to the production costs at capacity:
Variable costs
P 80,000
Fixed costs
120,000
Total costs
P200,000
A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
costs. What is the price per unit that makes Buena indifferent between the “Make” and “Buy”
options?
A. P8
C. P20
B. P12
D. P10
99. Elly Industries is a multi-product company that currently manufactures 30,000 units of Part
MR24 each month for use in production. The facilities now being used to produce Part MR24
have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If
Elly were to buy Part MR24 from an outsiDe supplier, the facilities would be idle, but its fixed
costs would continue at 40 percent of their present amount. The variable production costs of
Part MR24 are P11 per unit.
If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by
purchasing Part MR24 from an outside supplier only if the supplier’s unit price is less than
A. P14.00
C. P16.00
B. P11.00
D. P13.00
Page 18 of 35
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Preweek Quizzer
100.Below are a company’s monthly unit costs to manufacture and market a particular product.
Manufacturing Costs:
Direct materials
P2.00
Direct labor
2.40
Variable indirect
1.60
Fixed indirect
1.00
Marketing Costs:
Variable
3.00
Fixed
1.50
The company must decide to continue making the product or buy it from an outside supplier.
The supplier has offered to make the product at the same level of quality that the company can
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be
reduced by 30% if the company were to accept the proposal. What is the maximum amount
per unit that the company can pay the supplier without decreasing its operating income?
A. P8.50
C. P7.75
B. P6.75
D. P6.90
101.Cable Company produces 1,000 units of Part W per month. The total manufacturing costs of
the part are as follows:
Direct materials
P10,000
Direct labor
5,000
Variable overhead
5,000
Fixed overhead
30,000
Total manufacturing costs
P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
the fixed overhead assigned to Part W will no longer be incurred if the company purchases the
part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the
outside supplier per month, then its monthly operating income will
A. decrease by P4,000
C. decrease by P20,000
B. increase by P1,000
D. increase by P20,000
May 2005
102.The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total
manufacturing costs of the part are as follows:
Direct materials
P10,000
Direct labor
5,000
Variable overhead
5,000
Fixed overhead
30,000
Total manufacturing cost
P50,000
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An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the
outside supplier per month, then its monthly operating income will
A. decrease by P4,000
C. decrease by P20,000
B. increase by P1,000
D. increase by P20,000
Keep or Drop
103.Indicate which of the following costs would be avoided if a segment is eliminated.
1. variable manufacturing costs
2. direct fixed costs
3. common fixed costs
4. variable selling costs
5. direct fixed selling costs
6. common fixed selling costs
A. 2, 3, 5, 6
C.
B. 1, 2, 4, 5*
D. 1, 2, 3, 4, 54, 5, 6
104.BEA Industries produces two products. Information about the products is as follows:
Item 38B
Item 40F
Units produced and sold
1,000
4,000
Selling price per unit
P 25
P 20
Variable expenses per unit
P 15
P 12
The company’s fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is
A. P3,200
C. P(2,000)
B. P7,000
D. P10,000
Shut Down Point
105.Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a
small electrical relay used in the automotive industry as a component part in various products.
The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead
costs total P150,000 per month, and fixed selling costs total P30,000 per month.
Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Bulusan Company’s sales to temporarily drop to only 9,000 units per month. Bulusan
Company estimates that the strikes will last for about two months, after which time sales of
E14 should return to normal. Due to the current low level of sales, however, Bulusan
Company is thinking about closing down its own plant during the two months that the strikes
May 2005
Preweek Quizzer
are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing
overhead costs can be reduced to P105,000 per month and that fixed selling costs can be
reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since
Bulusan Company uses just-in-time production method, no inventories are on hand.
At what level of unit sales for the two-month period should Bulusan Company be indifferent
between closing the plant or keeping it open?
A. 11,000
C. 10,000
B. 24,125
D. 8,000
CAPITAL BUDGETING
Basic Concepts
106.If Sol Company expects to get a one-year loan to help cover the initial financing of capital
project, the analysis of the project should
A. offset the loan against any investment in inventory or receivable required by the project
B. show the loan as an increase in the investment
C. show the loan as a cash outflow in the second year of the project’s life
D. ignore the loan
107.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment
of cash flows, NPV is better than IRR. What are the reinvestment rate for each method?
Net Present Value method
Internal Rate of Return method
A.
Discount Rate
Discount Rate
B.
Discount Rate
IRR
C.
IRR
IRR
D.
IRR
Discount Rate
Accounting Rate of Return
108.Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the
expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were
acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would
be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12
percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value
of 1 due in 10 periods at 12 percent is 0.322.
The average accrual accounting rate of return during the first year of asset’s use is
A. 20.0 percent
C. 10.0 percent
B. 10.5 percent
D. 40.0 percent
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109.The Fields Company is planning to purchase a new machine which it will depreciate, for book
purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s
depreciation taken in the year of acquisition. The new machine is expected to produce cash
flow from operations, net of income taxes, of P66,000 a year in each of the next ten years.
The accounting (book value) rate of return on the initial investment is expected to be 12%.
How much will the new machine cost?
A. P300,000
C. P660,000
B. P550,000
D. P792,000
110.Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a fiveyear project at the beginning of the year. GMF estimates that the annual cash savings from
this project will amount to P65,000. Tax and book depreciation on the project will be P40,000
per year for five years. On investments of this type, GMF’s desired rate of return is 12%.
Information on present value factors is as follows:
At 12%
At 14% At 16%
Present value of P1 for 5 periods
0.57
0.52
0.48
Present value of an annuity of 1 for 5 periods
3.6
3.4
3.3
For the project’s first year, GMF’s accounting rate of return, based on the project’s average
book value would be
A. 14.4%
C. 12.5%
B. 13.9%
D. 12.0%
Payback Period
111. The payback method assumes that all cash inflows are reinvested to yield a return equal to
A. zero
C. the Time-Adjusted-Rate-of-Return
B. the Discount Rate
D. the Cost-of-Capital
Bailout Period
112.A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
and salvage value:
Year
Net cash inflow
Salvage value
1
500,000
800,000
2
500,000
600,000
3
600,000
500,000
4
800,000
400,000
5
700,000
300,000
May 2005
What is the bailout period for the project?
A. 3.25 yrs.
B. 2.5 yrs
Preweek Quizzer
C. 2.73 yrs
D. 2.4 yrs.
Net Present Value
113.Panama Insurance Company’s management is considering an advertising program that would
require an initial expenditure of P165,500 and bring in additional sales over the next five years.
The cost of advertising is immediately recognized as expense. The projected additional sales
revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales
revenue and expenses from the advertising program are projected to increase by 10 percent
each year. Panama Insurance Company’s tax rate is 40 percent.
The present value of 1 at 10 percent, end of each period:
Periods
Present value Factory
1
0.90909
2
0.82645
3
0.75131
4
0.68301
5
0.62092
The net present value of the advertising program would be
A. P37,064
C. P(37,064)
B. P29,136
D. P(29,136)
114.For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of
five years with no salvage value. The machine is expected to produce cash flow from
operations, net of 40 percent income taxes, as follows:
First year
P160,000
Second year
140,000
Third year
180,000
Fourth year
120,000
Fifth year
100,000
Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:
First year
P150,000
Second year
120,000
Third year
90,000
Fourth year
60,000
Fifth year
30,000
Page 21 of 35
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The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12
percent at end of each period are:
End of: Period 1 – 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552,
Period 5 - 0.56743
Had Roxas used straight-line method of depreciation, what is the difference in net present
value provided by the machine at a discount rate of 12 percent?
A. Increase of P9,750
C. Decrease of P24,376
B. Decrease of P9,750
D. Increase of P24,376
Profitability Index
115.A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are
P20,505 on an investment of P50,000. the profitability index for this project is
A. 1.367
C. 2.438
B. 3.333
D. 1.300
Internal Rate of Return
116.Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate
of return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and
for three years is .751. The cash flow, net of income taxes, will be P30,000 for the first year
(present value of P27,270) and P36,000 for the second year (present value of P29,736).
Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for
the third year?
A. P17,268
C. P22,994
B. P22,000
D. P30, 618
117.Care Products Company is considering a new product that will sell for P100 and have a
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and
having a five-year useful life and no salvage value is needed, and will be depreciated using the
straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in
the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end
of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478.
Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling
price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?
A. P81.00
C. P70.00
B. P85.00
D. P90.00
May 2005
Preweek Quizzer
118.Payback Company is considering the purchase of a copier machine for P42,825. The copier
machine will be expected to be economically productive for 4 years. The salvage value at the
end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of
return. The company is subject to 40 percent income tax rate.
The present value of an ordinary annuity of 1 for 4 periods is 2.85498.
In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to
be provided by the machine?
A. P17,860
C. P25,000
B. P15,000
D. P35,700
Equipment Replacement
119.A company is considering replacing a machine with one that will save P40,000 per year in
cash operating costs and have P10,000 more depreciation expenses per year than the
existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash
flows of the company by
A. P28,000
C.
P18,0000
B. P24,000
D. P6,000
120.Maxwell Company has an opportunity to acquire a new machine to replace one of its present
machines. The new machine would cost P90,000, have a five-year life, and no estimated
salvage value. Variable operating costs would be P100,000 per year. The present machine
has a book value of P50,000 and a remaining life of five years. Its disposal value now is
P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per
year. Ignore present value calculations and income taxes.
Considering the five years in total, what would be the difference in profit before income taxes
by acquiring the new machine as opposed to retaining the present one?
A. P10,000 decrease
C. P35,000 increase
B. P15,000 decrease
D. P40,000 increase
Investment Decision
121.The NPV and IRR methods give
A. the same decision (accept or reject) for any single investment
B. the same choice from among mutually exclusive investments
C. different rankings of projects with unequal lives
D. the same rankings of projects with different required investments
Page 22 of 35
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122.In choosing from among mutually exclusive investments the manager should normally select
the one with the highest
A. NPV
C. payback reciprocal
B. IRR
D. book rate of return
123.Why do the NPV method and the IRR method sometimes produce different rankings of
mutually exclusive investment projects?
A. The NPV method does not assume reinvestment of cash flows while the IRR method
assumes the cash flows will be reinvested at the internal rate of return.
B. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR
method assumes a reinvestment rate equal to the internal rate of return.*
C. The IRR method does not assume reinvestment of the cash flows while the NPV assumes
the reinvestment rate is equal to the discount rate.
D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while
the IRR method assumes a reinvestment rate equal to the discount rate.
124.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:
Project 1
Project 2
Project 3
Project 4
Initial cash outlay
P200,000 P298,000 P248,000
P272,000
Annual net cash inflows
Year 1
P 65,000 P100,000 P 80,000
P 95,000
Year 2
70,000
135,000
95,000
125,000
Year 3
80,000
90,000
90,000
90,000
Year 4
40,000
65,000
80,000
60,000
Net present value
( 3,798)
4,276
14,064
14,662
Profitability index
98%
101%
106%
105%
Internal rate of return
11%
13%
14%
15%
Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
amount of funds?
No Budget Restriction
P600,000Available Funds
P300,000Available Funds
A.
Projects 2,3, & 4
Projects 3 & 4
Project 3
B.
Projects 1, 2, & 3
Projects 2, 3 & 4
Projects 3 & 4
C.
Projects 1, 3, & 4
Projects 2 & 3
Project 2
D.
Projects 3 & 4
Projects 2 & 4
Projects 2 & 4
May 2005
Comprehensive
125.Which of the following combinations is possible?
Profitability Index
NPV
A. greater than 1
positive
B. greater than 1
negative
C. less than 1
negative
D. less than 1
positive
Preweek Quizzer
IRR
equals cost of capital
less than cost of capital
less than cost of capital*
less than cost of capital
MASTER BUDGET
Basic Concepts
126.Zero-base budgeting requires managers to
A justify expenditures that are increases over the prior period’s budgeted amount.
B. justify all expenditures, not just increases over last year’s amount.
C. maintain a full-year budget intact at all times.
D. maintain a budget with zero increases over the prior period.
Production Budget
127.Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a
growth in sales of 5 percent per month. The target ending inventory in units of the product is
80 percent of the next month’s estimated sales. There are 150,000 units in inventory as of the
end of September. The production requirement in units of Batik for the quarter ending
December 31 would be
A. 670,560
C. 665,720
B. 691,525
D. 675,925
Cash Budget
128.The Mango Company is preparing its cash budget for the month of May. The following
information is available concerning its accounts payable:
Estimated credit sales for May
P200,000
Actual credit sales for April
150,000
Estimated collections in May for credit sales in May
20%
Estimated collections in May for credit sales in April
70%
Estimated collections in May for credit sales prior to April
P12,000
Estimated write-offs in May for uncollectible credit sales
8.000
Estimated provision for bad debts in May for credit sales in May
7,000
What are the estimated cash receipts from accounts receivable collections in May?
A. P142,000
C. P150,000
B. P149,000
D. P157,000
Page 23 of 35
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Preweek Quizzer
129.At the beginning of the current month, Rose had P100,000. Cash disbursements were
P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money
market fund and has a line of credit to cover cash deficiencies.
If Rose wishes to start the next month with P150,000, Rose must
A. invest P200,000
C. invest P350,000
B. borrow P400,000
D. do nothing
FINANCIAL STATEMENT ANALYSIS
Horizontal Analysis
130.Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0
million. Using year 1 as the base year, the respective percentage increase in sales in year 2
and 3 are
A. 115% and 125%
C. 115% and 130%
B. 115% and 109%
D. 87% and 80%
Solvency Ratio
131.A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the
following sets of ratios characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity*
132.The ratio that measures a firm’s ability to generate earnings is
A. times interest earned.
C. days’ sales in receivables.
B. sales to working capital.
D. operating asset turnover.
Other Ratio
133.Taylor company paid out one-half of its 2002 earnings in dividends. Taylor’s earnings
increased by 20%, and the amount of its dividends increased by 15% in 2003. Taylor’s
dividend payout ratio for 2003 was
A. 75.0%
C. 47.9%
B. 52.3%
D. 41.7%
134.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The
dividend payout rate is 60%. Beginning stockholders’ equity was P850,000 and current
liabilities are projected to be P300,000 at the end of 2002.
May 2005
Page 24 of 35
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Preweek Quizzer
What are the total equities available if the ratio of long-term debt to stockholders’ equity is
60%?
A. P1,788,000
C. P2,046,000
B. P1,980,000
D. P858,000
135.The following were reflected from the records of War Freak Company:
Earnings before interest and taxes
Interest expense
Preferred dividends
Payout ratio
Shares outstanding throughout 2003
Preferred
Common
Income tax rate
Price earnings ratio
The dividend yield ratio is
A. 0.50
C. 0.12
B. 0.40
D. 0.08
P1,250,000
250,000
200,000
40 percent
20,000
25,000
40 percent
5 times
Integrated Ratios
136.Selected data from Maui Company’s year-end financial statements are presented below. The
difference between average and ending inventory is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P120,000
Inventory turnover (based on cost of sales)
8 times
Gross profit margin
40%
Maui’s net sales for the year were
A. P800,000
C. P672,000
B. P480,000
D. P1,200,000
137.Assume you are given the following relationships for the Bryan Company:
Sales/total assets
Return on assets (ROA)
Return on equity (ROE)
The Bryan Company’s debt ratio is
A. 40%
C. 60%
B. 35%
D. 65%
May 2005
1.5X
3%
5%
Page 25 of 35
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Preweek Quizzer
138.The following data were obtained from the records of Trend, Inc.:
Current ratio (at year end)
1.5 to 1
Inventory turnover based on sales and ending inventory
15 times
Inventory turnover based on cost of goods sold and ending inventory
10.5 times
Gross margin for 2002
P315,000
What was Trend, Inc.’s December 31, 2002 balance in the Inventory account?
A. P138,000
C. P140,000
B. P 70,000
D. P135,000
WORKING CAPITAL MANAGEMENT
Working Capital Policy
142.As a company becomes more conservative with respect to working capital policy, it would tend
to have a(n)
A. increase in the ratio of current liabilities to noncurrent liabilities.
B. decrease in the operating cycle.
C. decrease in the operating cycle.
D. increase in the ratio of current assets to noncurrent liabilities.*
139.The board of directors of Contemporary Company was unhappy with the current return on
common equity. Though the return on sales (profit margin) was impressively good at 12.5
percent, the asset turnover was only 0.75. The present debt ratio is 0.40.
Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
•
Profit margin should be raised to 15 percent.
•
The new capital structure will be revised by raising debt component.
•
The asset turnover will be maintained at 0.75.
The proposed adjustment is estimated to raise return on equity by 50 percent.
What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150
percent of the present level?
A. 0.52
C. 0.61
B. 0.68
D. 0.72
143.Wen Company follows and aggressive financing policy in its working capital management
while Manong Corporation follows a conservative financing policy. Which one of the following
statements is correct?
A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of shortterm debt to total debt.
B. Wen has a low current ratio while Manong has a high current ratio
C. Wen has less liquidity risk while Manong has more liquidity risk.
D. Wen finances short-term assets with long-term debt while Manong finances short-term
assets with short-term debt.
Sensitivity Analysis
140.Annette Company uses the direct write-off method to account for uncollectible accounts
receivable. If the company subsequently collects an account receivable that was written off in
a prior accounting period, the effect of the collection of the account receivable on Annette’s
current ratio and total working capital would be
A.
B.
C.
D.
Current Ratio
None
Increase
Decrease
None
Working Capital
None
Increase
Decrease
Increase
141.The days’ sales-in-receivable ratio will be understated if the company
A. uses a natural business year for its accounting period*
B. uses a calendar year for its accounting period
C. uses average receivable in the ratio calculation
D. has high sales at the end of the year
May 2005
Cash Management
144.Gear Inc., has a total annual cash requirement of P14,700,000 which are to be paid uniformly.
Gear has the opportunity to invest the money at 24% per annum. The company spends, on the
average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000
C. P80,000
B. P62,500
D. P70,000
145.The Alabang Company has a daily average collection of checks of P250,000. It takes the
company 4 days to convert the checks to cash. Assume a lockbox system could be employed
which would reduce the cash conversion period to 3 days. The lockbox system would have a
net cost of P25,000 per year, but any additional funds made available could be invested to net
8 percent per year. Should Alabang adopt the lockbox system?
A. Yes; the system would free P250,000 in funds
B. Yes; the benefits of the lock-box system exceed the costs.
C. No; the benefit is only P10,000.
D. No; the firm would lose P5,000 per year if the system were used.
Page 26 of 35
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Receivables Management
146.It is held that the level of accounts receivable that a firm has or holds reflects both the volume
of a firm’s sales on account and a firm’s credit policies. Which one of the following items is not
considered as part of a firm’s “credit policy”?
A. The maximum risk group to which credit should be extended.
B. The extent (in terms of money) to which a firm will go to collect an account.
C. The length of time for which credit is extended.
D. The size of the discount that will be offered.
147.Relax Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
expected to be credit sales at terms of n/30. Relax estimates that a proposed relaxation of
credit standards will increase credit sales by 20% and increase the average collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
standards will result in an expected increase in the average accounts receivable balance of
A. P540,000
C. P900,000
B. P2,700,000
D. P1,620,000
148.Matang-Lawin’s budgeted sales for the coming year are P48,000,000, of which 80% are
expected to be credit sales at a terms of n/30. Matang-Lawin estimates that a proposed
relaxation of credit standards would increase credit sales by 30 percent and increase the
average collection period from 30 days to 45 days. Based on a 360-day year, the proposed
relaxation of credit standards would result in an expected increase in the accounts receivable
balance of
A. P3,440,000
C. P3,040,000
B. P1,440,000
D. P960,000
149.Lipa company currently has annual sales of P2,000,000. Its average collection period is 40
days, and bad debts are 5 percent of sales. The credit and collection manager is considering
instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total
sales, and the average collection period would fall to 30 days. However, sales would also fall
by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of
carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year.
What would be the incremental investment in receivables if the change were made?
A. P(16,667)
C. P(48,611)
B. P(27,167)
D. P(45,833)
May 2005
Preweek Quizzer
Inventory Management
150.Which of the following items is irrelevant for a company that is attempting to minimize the cost
of the stockout?
A. Cost of placing an order
C. Storage cost of inventory
B. Contribution margin on lost sales
D. Size of the safety stock
151.When a specified level of safety stock is carried for an item in inventory, the average inventory
level for that item
A. decreased by the amount of the safety stock.
B. is one-half the level of the safety stock.
C. increases by one-half the amount of the safety stock.
D. increases by the amount of the safety stock.
152.Gleim Company, which manufactures a line of appliances, has an annual demand for its HD
washing machine estimated at 7,500 units. The annual cost of carrying one unit of inventory is
P200, and the cost to initiate a production run is P5,000.There are no HD washing machine on
hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the
coming year. Gleim has 250 business days per year. Assume that sales occur uniformly
throughout the year and that production is instantaneous.
If Gleim does not maintain a safety stock, the estimated total carrying costs
and total set-up costs for the coming year are:
Carrying costs
Set-up costs
A.
P150,000
P 25,000
B.
P300,000
P 25,000
C.
P150,000
P 5,000
D.
P300,000
P 5,000
153.The sales office of Hermit Company has developed the following probability distribution for
daily sales of a perishable product.
X (Units Sold)
P (Sales = X)
200
0.2
250
0.5
300
0.2
350
0.1
The product is restocked at the start of each day. If the company desires a 90% service level
in satisfying sales demand, the initial stock balance for each day should be
A. 245
C. 315
B. 300
D. 220
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MANAGEMENT ADVISORY SERVICES
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154.Each stockout of a product sold by AFM Co. costs P1,750 per occurrence. The company’s
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
product 20 times a year at a cost of P100 per order. The probability of a stockout at various
levels of safety stock are:
Units of Safety Stock
Probability of Stockout
0
0.50
100
0.30
200
0.14
300
0.05
400
0.01
The optimal safety stock level for the company based on the units of safety stock level above
is
A. 0 units
C. 300 units
B. 100 units
D. 400 units
Trade Credit
155.If a retailer’s term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of
not taking the discount? Assume a 360-day year.
A. 24.00%
C. 24.74%
B. 37.11%
D. 31.81%
Short-term Loans
156.Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
annum. The bank requires 10 percent of loan as compensating balance in its new checking
account. The loan is payable at the end of 6 months. The effective interest rate of this loan is
A. 28.21%
C. 14.29%
B. 27.27%
D. 15.38%
157.The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate
of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking
account. Assuming Dean would normally maintain a zero balance in its checking account, the
effective interest rate on the loan is
A. 8.0%
C. 11.11%
B. 10.0%
D. 6.4%
May 2005
Preweek Quizzer
COST OF CAPITAL
Cost of Debt
158.The Maru Company’s bonds have 5 years remaining to maturity. Interest is paid annually; the
bonds have a P1,000 face value; and the coupon interest rate is 9 percent.
What is the estimated yield to maturity of the bonds at their current market price of P850?
A. 10.64 percent
C. 11.76 percent
B. 11.00 percent (?)
D. 10.00 percent
Capital Asset Pricing Model
159.Spec, Inc.’s stock is expected to generate a dividend and terminal value one year from now of
P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6 percent, and the expected
return market return is 11 percent. What should the equilibrium price of Spec’s stock in the
market now?
A. P50.67
C. P53.77
B. P51.35
D. P43.84
Dividend Growth Model
160.Tiger Company’s stock is currently selling for P60 a share. The firm is expected to earn P5.40
per share and to pay a year-end dividend of P3.60.
If investors require a 9 percent return, what rate of growth must be expected for Tiger?
A. Zero growth
C. 40.0 percent
B. 3.0 percent
D. 50.0 percent
Dividend Policy
161.Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current
capital structure is 40% debt and 60% common equity. The director of capital budgeting has
determined that the optimal capital spending for next year is P1,200,000. If Resi follows a
strict residual dividend policy, what is the expected dividend payout ratio for next year?
A. 80.0%
C. 40.0%
B. 66.7%
D. 10.0%
162.Galvez Company expects next year’s after-tax income to be P7,500,000. The firm’s debt ratio
is currently 40 percent. Galvez has P6,000,000 of profitable investment opportunities, and it
wishes to maintain its existing debt ratio. According to the residual dividend policy, what is the
expected dividend payout ratio next year?
A. 52.0 percent
C. 48.0 percent
B. 75.0 percent
D. 25.0 percent
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MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
163.Glenda Company expects to generate P10 million internally which could be available for
financing part of its P12 million capital budget for this coming year. Glenda’s management
believes that a debt-equity ratio of 40 percent is best for the firm. How much should be paid in
dividends if the target debt-equity ratio is to be maintained?
A. P2,800,000
C. P8,571,429
B. P1,428,571
D. P4,000,000
QUANTITATIVE METHODS
Probabilities
164.Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that
silver worth P15 million can be sold. There is a 20% probability that the silver will only be
worth P500,000. What is the maximum Express would be willing to spend to develop the
mine?
A. P10,000,000
C. P3,100,000
B. P 5,000,000
D. P0
165.CTV Company has three sales departments. Department FA processes about 50 percent of
CTV’s sales, Department TA about 30 percent, and Department PA about 20 percent. In the
past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent, and 2.5
percent, respectively. A random audit of the sales records yields a recording error of sufficient
magnitude to distort the company’s results. The probability that Department FA is responsible
for this error is
A. .50
C. .02
B. .33
D. .25
166.A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft
drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be
P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is
cold, the profit will be P2,000.The probability of cold weather on a given day at this time is
60%.
The expected payoff for either selling coffee or soft drinks and the expected payoff if the
vendor has perfect information are
Coffee
Soft drinks
Perfect information
A.
P1,360
P1,600
P3,000
B.
P1,960
P1,600
P2,200
C.
P2,200
P1,900
P1,360
D.
P3,900
P1,900
P1,960
May 2005
Preweek Quizzer
Linear Programming
167. Anderson Co. manufactures two different products, A and B. The company has 100 pounds of
raw materials and 300 direct labor hours available for production. The time requirement and
contribution margins per unit are as follows:
A
B
Raw materials per unit (lbs)
1
2
Direct labor hours per unit
4
2
Contribution margin per unit
P4
P5
The objective function for maximizing profits and the equation for the
constrain on raw materials are:
A.
B.
C.
D.
Objective Function
Max P1A + P2B
Max P4A + P5B
Max P4A + P2B
Min P4A + P5B
Constraint on raw materials
4A + 2B < 100
1A + 2B < 100
4A + 5B < 100
4A + 5B < 300
ACTIVITY-BASED COSTING
168.A cost system that first traces costs to activities and then traces cost from activities to products
A. Job order cost system.
C. Activity-based cost system.
B. Process cost system.
D. Flexible cost system.
169.The last step in activity-based costing is to
A. identify the major activities that pertain to the manufacture of specific products
B. allocate manufacturing overhead costs to activity cost pools
C. identify the cost drivers that accurately measure each activity’s contribution to the finished
product
D. assign manufacturing overhead costs for each activity cost pool to products
170.McMd’s standard cost card indicates that it takes three hours of direct labor to produce one
unit of product. A recently conducted time and motion study revealed that it should take one
hour to produce the same unit. Labor cost is P150 per hour.
McMd’s value-added, and nonvalue-added costs would be
A. P150 and P0
C. P150 and P300
B. P0 and P150
D. P450 and P0
171.Designing and redesigning are activities that are classified as
A. facility level
C. unit level
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MANAGEMENT ADVISORY SERVICES
B. batch level
CPA Review School of the Philippines
D. product level
Preweek Quizzer
172.A company that uses activity-based costing to develop standard costs
A. will usually have more than one variable overhead component in its standard costs
B. cannot compute variable overhead efficiency variances
C. will have less information about the profitability of individual products
D. all of the above
173.Classify the following as volume (unit) base or nonvolume (activity) base:
1. Number of purchase orders issued
2. Direct labor hours
3. Number of machine hours
4. Number of set ups
5. Number of receiving reports issued
6. Direct material cost
Volume (Unit) Base
Nonvolume (Activity) Base
A.
1, 4, 5, 6
2, 3
B.
1, 4, 5
2, 3, 6
C.
1, 2, 3, 4, 5
6
D.
2, 3, 6
1, 4, 5
174.The Oilfield plant has two categories of overhead: maintenance and inspection. Costs
expected for these categories for the coming year are as follows:
Maintenance
P100,000
Inspection
150,000
The plant currently applies overhead using direct labor hours and expected capacity of 50,000
direct labor hours. The following data have been assembled for use in developing a bid for a
proposed job:
Direct materials
P1,000
Direct labor
P4,000
Machine hours
500
Number of inspections
4
Direct labor hours
800
Total expected machine hours for all jobs during the year is 25,000, and the total expected
number of inspections is 1,500.
Using activity-based costing and the appropriate activity drivers, the total cost of the potential
job would be
A. P2,400
C. P7,400
B. P3,600
D. P7,750
May 2005
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MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
QUALITY COST
175.The cost of statistical quality control in a product quality cost system is
A. training cost
C. appraisal cost
B. internal failure cost
D. prevention cost
INFORMATION SYSTEMS
176.The process of learning how the current system, functions, determining the needs of users,
and developing the logical requirements of a proposed system is referred to as
A. systems maintenance
C. systems feasibility study
B. systems analysis
D. systems design
177.Which of the following is not a characteristic of a batch processing system?
A. The collection of like transactions which are sorted and processed sequentially against a
master file.
B. Keypunching of transactions, followed by machine processing.
C. The production of numerous printouts.
D. The posting of a transaction, as it occurs, to several files without intermediate printouts.
178.All activity related to a particular application in a manual system is recorded in a journal. The
name of the corresponding item in a computerized system is a
A. master file
C. transaction file
B. year-to-date file
D. current balance file
179.One of the first steps in the creation of a data base is to
A. define common variables and fields used throughout the firm*
B. increase the secondary storage capacity.
C. obtain software that will facilitate data retrieval.
D. integrate the accounting system into the data base.
180.A system with several computers that are connected for communication and data transmission
purposes but that permits each computer to process its own data is a
A. distributed data processing network
C. decentralized network
B. centralized network
D. multidrop network
181.The process of developing specifications for hardware, software, personnel hours, data
resources, and information products required to develop a system is referred to as
A. systems analysis
C. systems design
B. systems feasibility
D. systems maintenance
May 2005
Page 31 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
182.An integrated set of computer programs that facilitates the creation, manipulation, and
querying of integrated files is called a(n)
A. translator
C. operating system
B. database management system
D. flat file system
183.Turnaround documents
A. generally circulate only within the computer center.
B. can be read and processed only by the computer.
C. are generated by the computer and eventually return to it.
D. are only used internally in an organization.
Answer Key
1. C
2. D
3. B
4. C
5. C
6. C
7. A
8. B
9. B
10. C
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
C
A
D
A
D
C
B
C
B
B
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
B
A
A
A
C
D
C
C
C
D
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
C
A
B
A
A
A
A
C
C
D
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
B
A
B
A
D
A
A
B
B
C
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
A
A
D
A
A
D
C
B
A
B
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
B
D
A
B
B
C
B
A
A
B
91. B
92. D
93. B
94. D
95. A
96. B
97. B
98. A
99. A
100. D
D
B
A
A
B
D
B
C
A
D
May 2005
A
C
C
C
D
C
C
D
A
A
Preweek Quizzer
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
A
A
B
B
A
D
B
B
A
B
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
A
B
A
B
D
D
B
A
A
D
121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
A
A
B
A
C
B
C
D
A
A
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
D
A
C
A
D
A
A
B
A
B
151.
152.
153.
154.
155.
156.
157.
158.
159.
160.
D
A
B
D
D
C
B
B
A
B
161.
162.
163.
164.
165.
166.
167.
168.
169.
170.
D
A
B
C
B
B
B
C
D
C
171.
172.
173.
174.
175.
176.
177.
178.
179.
180.
D
A
D
C
C
B
D
C
A
A
181. C
182. B
183. C
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
A
D
B
D
D
B
D
C
D
A
Page 32 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
TRUE STATEMENTS
1. Standard cost can, if properly used, help motivate employees
2. A company would most likely have an unfavorable labor rate variance and a favorable labor
efficiency if the mix of workers used in the production process was more experienced than the
normal mix
3. The expected annual capacity level has traditionally been used to compute the fixed overhead
application rate?
4. A favorable volume variance increases absorption costing net income; it does not affect
variable costing net income.
5. The variable costing format is often more useful to managers than the absorption costing
format because costs are classified by their behavior.
6. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
Consistent with these assumptions, as volume decreases total variable costs and total costs
decrease while fixed costs remain constant.
7. A managerial preference for a very low degree of operating leverage might indicate that a
decrease in sales volume is expected
8. Payback period potentially ignores part of a project’s relevant cash flows.
9. Payback method does not routinely rely on the assumption that all cash flows occur at the end
of the period?
Preweek Quizzer
13. The net present value method assumes that all cash inflows can be immediately reinvested at
the discount rate
14. The basis for measuring the cost of capital derived from bonds and preferred stock,
respectively, is the after-tax rate of interest for bonds and stated annual dividend rate for
preferred stock
15. The weighted average cost of capital that is used to evaluate a specific project should be
based on the overall capital structure of the corporation
16. The weighted average cost of capital approach to decision making is not directly affected by
the current budget for capital expansion
17. At a profitability index of 1.0, the NPV is 0, and the IRR equals the discount rate used. If the
PI is above 1.0, the NPV is positive and the IRR is higher than the discount rate used.
18. The profitability index is the ratio of the present value of cash flows to the original investment
19. The rate of interest that produces a zero net present value when a project’s discounted cash
operating advantage is netted against its discounted net investment is the internal rate of
return
20. Internal rate of return has been criticized because it might mistakenly imply that earnings are
reinvested at the rate of return earned by the investment.
21. As the marginal tax rate goes up, the benefit from the depreciation tax shield increases
22. Fixed cost is relevant if it is avoidable
10. The payback method assumes that all cash inflows are reinvested to yield a return equal to
zero
23. When a scarce resource, such as space, exists in an organization, the criterion that should be
used to determine production is contribution margin per unit of scarce resource
11. When using one of the discounted cash flow methods to evaluate the desirability of a capital
budgeting project, the method of financing the project under consideration is not an important
factor?
24. A cost driver is defined as a causal factor that increases the total cost of a cost objective
12. In capital budgeting, a firm’s cost of capital is frequently used as the discount rate
May 2005
25. Committed costs are governed mainly by past decisions that established the current levels of
operating and organizational capacity and that only change slowly in response to small
changes in capacity
Page 33 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
26. Discretionary costs are those that management decides to incur in the current period to enable
the company to achieve objectives other than the filling of orders placed by customers
39. If a firm produces more units than it sells, absorption costing, relative to variable costing, will
result in higher income and assets.
27. If a firm orders raw materials in quantities larger than the optimum quantity obtained using the
simple economic order quantity model in order to obtain a quantity discount, the company will
experience carrying costs higher than ordering costs
40. A firm presently has total sales of P100,000. If its sales rise by P1.00, its net income based on
variable costing will go up more than its net income based on absorption costing.
28. One of the primary purposes of using a standard cost system is to provide a distinct measure
of cost control.
29. Favorable variances are not necessarily good variances.
30. Whether the variance is favorable or unfavorable is irrelevant to a need of investigating it.
41. A company could never incur a loss that exceeded its total costs.
42. At breakeven point the contribution margin equals fixed costs. After the level of volume
exceeds the breakeven point, the total contribution margin exceeds the total fixed costs.
43. As projected net income increases the degree of operating leverage declines.
31. The sum of the material price variance and materials quantity variance is not meaningful.
44. A managerial preference for a very low degree of operating leverage might indicate that a
decrease in sales volume is expected.
32. The fixed overhead variance would be the same irrespective of the capacity or denominator
used.
45. The time value of money is considered in long-range investment decisions by assigning
greater value to more immediate cash flows.
33. The fixed overhead volume variance is the least significant variance for control purposes.
However, it is the most useful variance in evaluating plant utilization.
46. For a project such as plant investment, the return that should leave the market price of the
firm’s stock unchanged is known as the cost of capital.
34. Fixed overhead costs are mostly incurred to provide the capacity to produce and are best
controlled on a total basis at the time they are originally negotiated.
46. Opportunity cost of capital is the highest rate of return that can be earned from the most
attractive alternative capital project available to the firm.
35. In a standard cost system, when production is greater than the estimated unit or denominator
level of activity, there will be a favorable volume variance.
47. If an analyst desires a conservative net present value estimate, he will assume that all cash
inflows occur at year-end.
36. In analyzing factory overhead variances, volume variance is the difference between the budget
allowance based on standard hours allowed for actual production for the period and the
amount budgeted to be applied during the period.
48. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will
exceed the pre-tax cash flow on the sale.
37. The use of separate variable and fixed overhead rates is better than a combined rate because
such a system is more effective in assigning overhead costs to products.
38. In a just-in-time inventory system, ideal standards become expected standards.
May 2005
49. Sensitivity analysis is an appropriate response to uncertainty in cash flow projections.
50. Relevant costs are anticipated future costs that will differ among various alternatives.
51. In a make or buy decisions, the opportunity cost of capacity could be considered to decrease
the price of units purchased from suppliers.
Page 34 of 35
MANAGEMENT ADVISORY SERVICES
CPA Review School of the Philippines
Preweek Quizzer
52. Fixed costs are ignored in allocating scarce resources because they are unaffected by the
allocation of scarce resources.
64. The distinction between direct and indirect costs depends on whether a cost can be
conveniently and physically traced to a cost object under consideration.
53. A linear programming model must have only one objective function.
65. An accounting system that focuses on transactions is a traditional accounting system.
54. Strategic planning as assumed by top management is stating and establishing long-term
plans.
55. The master budget is a static budget because it is geared to only one level of production and
sales.
56. The primary reason why managers impose a minimum cash balance in the cash budget is that
it protects the organization from the uncertainty of the budgeting process.
57. Slack in operating budgets is greater when managers are allowed to participate in the
budgeting process. Budget slack refers to intentional overestimate of expenses or
underestimate of revenues.
58. Performance measurements and a reward system are part of motivational element of cost
management system. Focus on cost control and assessing core competencies are part of
informational element of cost management system.
59. A decentralized company grows very quickly than a centralized one.
60. In a decentralized company, transfer pricing system is designed to aid in the appraisal and
motivation of managerial performance.
61. Responsibility accounting refers to an accounting system in which the operations of the
business are broken down into reportable segments and the control function of sales manager
or supervisor is emphasized.
62. The most valid reason for using something other than a full-cost based transfer price between
units of a company is because a full-cost price does not ensure the control of costs of a
supplying unit.
63. A cost classified according to its activity-related behavior is a fixed cost.
May 2005
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