Final Examination
Management Accounting
Instruction. Choose the Best answer.
1.
a.
b.
c.
d.
Which of the following types costs is always relevant to a decision?
Sunk costs
Average costs
Incremental costs
Fixed costs
2. Alpha corporation is considering renting vacant office space to Beta Company. Which of
the following is not relevant to this decision?.
a. The amount of rent to be paid by Beta Company.
b. The cost of preparing the office space for occupancy.
c. The amount of property taxes paid by Alpha Corporation on the office space.
d. Alternative uses for the office space.
3.
a.
b.
c.
d.
Incremental costs can be defined as:
Costs that are expected to increase regardless of the course of action chosen.
The differences between costs incurred under the alternative courses of action.
Costs incurred in the past.
Costs that are irrelevant in decision making.
4.
a.
b.
c.
d.
Opportunity costs:
Are treated as period costs under variable costing.
Have already been incurred as a result of past actions.
Are benefits that could have been obtained by following another course of action.
Do not vary among alternative courses of action.
5.
a.
b.
c.
d.
Sunk costs:
Have already been incurred as a result of past actions.
Vary among the alternative courses of action being considered.
Are benefits that could have been obtained by following another course of action.
Result from unfavorable cost variances.
6. Consider the following statements:
I.
The integrated firm is more dependent on its suppliers.
II.
Many firms feel they can control quality better by making their own parts.
III.
The integrated firm realizes profits from the part it is “making” instead of “buying”
as well as profits from its regular operations.
Which of the above statements represent advantages to a firm that is vertically integrated?
a.
b.
c.
d.
Only I
Only III
Only I and II
Only II and III
7. Consider the following statements:
I.
Assemble all costs associated with each alternative being considered.
II.
Eliminate those costs that are sunk
III.
Eliminate those costs that differ between alternatives.
Which of the above statements does not represent a step identifying the relevant costs in a
decision problem?.
a.
b.
c.
d.
Only I
Only II
Only III
Only I and II
8. Consider the following statements:
I.
The division’s net income, after deducting both direct and allocated costs, negative.
II.
The division’s direct fixed costs exceed its contribution margin.
III.
The division’s direct fixed costs plus its allocated corporate costs exceed its
contribution margin.
Which of the above statements give an economic reason for eliminating the division?
a.
b.
c.
d.
Only I
Only II
Only III
Only I and II
9. Dow Construction Company needs an on-site office for its Midland Towers construction
project. Dow can rent a house trailer for this purpose at a rate of P100 per month with
an minimum rental period of 18 months or, as an alternative, Dow can construct an
on-site office. Dow estimates that the construction of an on-site office would require
materials costing P1,500, 20 percent of which are salvageable upon dismantling, and
labor costing P1,000 . Ignoring interest and income tax implications, Dow will realize a
net benefit by constructing its own on-site office for the Midland Towers project only if
the length of the project is estimated to be greater than
a. 18 months
b. 20 months
c. 22 months
d. 25 months
10. Peluso Company, a manufacturer of snowmobiles, is operating at 70 percent of plant
capacity. Peluso’s plant manager is considering making the headlights now being
purchased for P11.00 each, a price that is not expected to change in the near future. The
Peluso plant has the equipment and labor force required to manufacture the headlights.
The design engineer estimates that each headlight requires P4.00 of direct material and
P3.00 of direct labor. Peluso’s plant overhead rate is 200 percent of direct labor pesos ,
and 40 percent of the overhead fixed cost. A decision by Peluso Company to
manufacture the headlights will result in a gain (loss) for each headlight
a. P(2.00)
b. P1.60
c. P0.40
d. P2.80
11. If Elly industries continues to use 30,000 units of 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
b. P11.00
c. P16.00
d. P13.00
12. If Elly industries is able to obtain part MR24 from an outside supplier at a unit purchase
price of P12.875, the monthly usage at which it will be indifferent between purchasing
and making Part MR24 is
a. 30,000 units
b. 32,000 units
c. 80,000 units
d. 48,000 units
Situational: 13-15
Peace industries has been producing two bearings, components B12 and B18, for use in
production. Data regarding these two components are as follows.
B12
Machine hours required per unit
B18
2.5
3.0
Standard cost per unit
Direct material
P 2.25
P 3.75
4.00
4.50
Variable
2.00
2.25
Fixed
3.75
4.50
Direct labor
Manufacturing overhead
Variable manufacturing overhead is applied on the basis of direct labor hours.
Fixed manufacturing overhead is applied on the basis of machine hours.
Peace’s annual requirement for these components is 8,000 units of B12 and 11,000 units of B18.
Recently , Peace’s management decided to devote additional machine time to other product
lines resulting in only 14,000 machine hours per year that can be dedicated to the production of
the bearings. An outside company has offered to sell peace and annual supply of the bearings at
prices of 11.25 for B12 and P13.50 fro b18. Peace wants to schedule otherwise idle 41,000
machine hours to produce bearings so that the company can minimize its costs ( maximize its
net benefits).
13. The net benefits (loss) per machine hours would result if Peace industries accepts the
suppliers offer of P13.50 for B18 is
a. P0.50
b. (1.00).
c. P1.50
d. P(1.75)
14. Peace industries will maximize its net benefits by
a. Purchasing 4,800 units of B12 and manufacturing the remaining bearings.
b. Purchasing 8,000 of B12 and manufacturing 11,000 units of B18
c. Purchasing 11,000 units of B18 and manufacturing 8,000 units of B12
d. Purchasing 4,000 units of B18 and manufacturing the remaining bearings.
15. Without prejudice to items 12 and 13, assume that Peace Industries’
idle capacity of 41,000 machine hours has a traceable avoidable annual fixed cost of
P44,000 that will continue if the capacity is not used. The maximum price, Peace
Industries would be willing to pay a supplier for component B18 is
a. P10.50
b. P14.00
c. P14.50
d. 18.00
16. Which factor is not relevant in deciding whether or not to accept a special order?
a. Incremental revenue that will be earned.
b. Additional costs that will be incurred.
c. The effect that the order will have on the company’s regular sales volume and selling
price.
d. The average cost of production if the special order is accepted.
17. Accepting a special order is profitable whenever the revenue from the special order
exceeds:
a. The average unit cost of production multiplied by the number of units in the order .
b. The incremental cost of producing order.
c. The materials and direct labor costs of producing the order.
d. The fixed manufacturing costs for the period.
18. Consider a decision facing a firm of either accepting or not accepting a special offer for
one of its products. A cost that is not relevant to a decision of this type is
a. Direct materials
b. Direct labor
c. Variable factory overhead
d. Fixed factory overhead that will continue even if the special offer is not accepted
19. Given the following target selling price for a unit product:
Direct materials P18
Direct labor
7
Overhead(20% variable)
15*
Cost of manufacture 40
Desired Markup—30% 12
Target selling price per unit P52 ,
● Based on 25,000 units produced each year
A foreign distributor has offered to purchase 5,000 units at a special price of P38 per unit. The
company is selling only 20,000 units per year through regular channels and so it has idle
capacity . Variable selling costs is accepted , the company’s overall net income will
a.
b.
c.
d.
Increase P40,000
Decrease by P10,000
Increase by P50,000
Decrease by P70,000
Situational: (20 -21)
The Flint Fan Company is considering the addition of a new model fan, the F-27, to its current
product lines. The expected cost and revenue data for the F-27 fan are as follows:
Annual sales
Unit selling price
4,000 units
P58
Unit variable costs:
Production
Selling
P34
P4
Avoidable direct fixed costs per year:
Production
Selling
P20,000
P30,000
If the F-27 model is added as a new product line, it is expected that the contribution margin of
other product lines at Flint will drop by P7,000 per year.
20. If the F-27 product line is added next year, the change in net income resulting from this
decision would be
a. P30,000
b. P5,000
c. P23,000
d. P15,000
21. What is the lowest unit selling price that could be charged for the F-27 model and still
make it economically desirable for Flint to add the new product line?
a. P52.25
b. P50.50
c. P55.75
d. P49.00
22. Labor Appliance Company makes and sells electric fans. Each fan regularly sells for P42.
The following cost data per fan is based on a full capacity of P150,000 fans produced
each period.
Direct materials
P8
Direct labor
9
Factory overhead (70% variable and
And 30% unavoidable fixed) 10
A special order has been received by Landor for a sale of P25,000 fans to an overseas
customer. The only selling costs that would incurred on this order would be P4 per fan
for shipping. Landor is now selling 120,000 fans through regular channels each period.
What should Landor use as a minimum selling price per fan in negotiating a price for this
special order?
a.
b.
c.
d.
P28
P27
P31
P24
23. Sunflower company operates a cafeteria for its employees. The operation of the
cafeteria requires fixed costs of P4,700 per month and variable costs of 40% sales.
Cafeteria sales are currently averaging of P12,000 per month.
Sunflower has an opportunity to replace the cafeteria with vending machines. Gross
customer spending at the vending machines is estimated to be 40% greater than
current sales because machines are available at all hours. By replacing the cafeteria with
vending machines Sunflower would receive 16% of the gross customer spending and
avoid all cafeteria costs. A decision by Sunflower Company to replace the cafeteria with
vending machines will result in a monthly increase (decrease) in operating income of
a. P(580)
b. P1,820
c. P2,588
d. P188
24. Evergreen Farms is a local grocery store that is currently open only Monday through
Saturday. Evergreen is considering opening on Sundays. The annual incremental costs of
Sunday openings are estimated at P24,960. Evergreens Farm’s gross margin on sales is
20 percent. Evergreen estimates that 60 percent of its Sunday sales to customer would
be made on other days if stores were not open on Sundays. The one day volume of
Sunday sales that would be necessary for Evergreen Farms to attain the same weekly
operating income as the current six-day week is
a. P5,850.
b. P6,000.
c. P3,900.
d. P4,000.
25. The operating results of Valor Company by division for the current year are summarized
below. Unavoidable company headquarters’ costs of P1,540,000 included in the total
costs have been distributed to the divisions on the basis of sales revenue. The remaining
portion of the total costs have been incurred at the divisional level and can be avoided if
a division is shut down.
Valor Company
Operating Results
For the Year Ended November 30, 2006
(P000 omitted)
Total
North South
Sales revenue P6,600 P990 P2,640
Total costs
6,226
572 2,090
Profit (loss)
P 418 P 550
P374
East
West
P990 P1,980
1,276
2,288
P(286) P (308)
The division(s) of Valor Company that should be shut down due to failure to cover
divisional cost is (are)
a. South, East and West
b. East and West
c. South and West
d. East
26-28
Condensed monthly operating income data for Cosmo Inc. for November 2006 is presented
below. Additional information regarding Cosmo’s operations follows the statement.
Sales
Total
Mall Store
Town Store
P200,000
P80,000
P120,000
Less variable costs
116,000
32,00
84,000
Contribution margin
P84,000
P48,000
P36,000
Less direct fixed expenses 60,000
20,000
40,000
P28,000
P( 4,000)
4,000
6,000
Store segment margin
P24,000
Less common fixed expenses 10,000
Operating income
P14,000
P24,000
P(10,000)
. one – fourth of each store’s direct fixed expenses would continue through December 31, 2007,
if either store were closed.
. cosmo allocates common fixed expenses to each store on the basis of sales pesos.
. management estimates that closing the Town Store would result in a 10% decrease in Mall
Store sales, while closing the Mall Store would not affect Town Store sales
The operating results for November 2006 are representative of all months
26. A decision by Cosmo Inc. to close the Town Store would result in a monthly increase
(decrease) ins Cosmo’s operating income during 2007 of
a. P4,000
b. P(10,800)
c. P(800)
d. P(6000) (CMA adapted)
27. Cosmo is considering a promotional campaign at the Town Store that would not affect
Mall Store. Increasing annual promotion expenses at the town Store by P60,000 in order
to increase Town Store sales by 10 % would result in a monthly increase (decrease) in
Cosmo’s operating during 2007 of
a. P(16,800)
b. P3,400
c. P7,000
d. P(1,400)
28. One – half of Town Store’s peso sales are from items sold at variable cost to attract
customers to the store. Cosmo is considering the deletion of these items, a move that
would reduce the Town Stores direct fixed expenses by 15% and result in the loss of 20
% of the remaining Town Stores sales volume. This change would not affect the Mall
Store. A decision by Cosmo to eliminate the items sold at cost would result in a monthly
increase (decrease) in Cosmo’s operating income during 2007 of
a. P(6000)
b. P(1,200)
c. P2,600
d. P2,400
29. In a sell or process further decision, consider the following costs:
I.
II.
III.
A variable production cost incurred prior to split-off.
A variable production cost incurred after split-off.
An avoidable fixed production cost incurred after split-off.
Which of the above costs is (are) not relevant in a decision regarding whether the
product should be processed further?
a.
b.
c.
d.
Only I
Only III
Only I and II
Only I and III
30. Computer city manufactured 100 personal computers at a cost P65,000. It can sell them
as is for P100,000 or install hard disks in them and sell them for P140,000. The P65,000
original manufacturing cost is:
a. An out-of-pocket cost because it has already been paid.
b. A sunk cost because it is not relevant to the decision
c. An incremental cost because it is relevant to the decision
d. A fixed cost because it will remain the same no matter which action is taken.
31. The Garey Company has 3,000 circuit boards (all like) which are out of date and are
carried in inventory at a total cost of P216,000. The circuit boards can be reworked and
upgraded at a total cost of P63,000 and then sold for P110,000. As an alternative, the
company can these circuit boards to an outside buyer for P48,000. If Garey chooses to
upgrade the circuit boards rather than sell them to the outside buyer, the opportunity
cost to Garey is
a. P48,000
b. P1,000
c. P27,000
d. P116,000
32- 34. The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a
total cost of P10,000 they can be sold for a total selling price of P30,000. As an alternative , the
calculators can be sold in their present condition for P11,200.
32. The sunk cost in this situation is
a. P10,000
b. P26,800
c. P11,200
d. P0
33. What is the net advantage or disadvantage to the company from upgrading and selling
the calculators?
a. P8,800 advantage
b. P18,000 disadvantage
c. P20,000 advantage
d. P8,000 disadvantage
34. Assume that Tolar decides to upgrade the calculators. At what selling price per unit
would the company be as well off as if it just sold the calculators in their present
condition?
a. P8
b. P30
c. P53
d. P67
35. Wallace Company produces 15,000 pounds of Product A and 30,000 pounds of Product B
each week by incurring a common variable cost of P400,000. These two products can be
sold as is or processed further subsequent batches of the joint product. Data regarding
these two products are as follows:
Selling price per pound without
Further processing
Selling price per pound with
Further processing
Total separate weekly variable
Costs of further processing
P12,000
P9,000
P15,000
P11,000
P50,000
P45,000
To maximize Wallace Company’s manufacturing contribution margin, the total separate
variable costs of further processing that should be incurred each week are
a. P45,000
b. P50,000
c. P95,000
d. 0
36. Hollie Company produces three products, with costs and selling prices as shown below:
Product
A
B
C
Selling price per unit
P30 100% P20 100% P15 100%
Variable costs per unit
18
60
15 75
6 40
Contribution margin per unit m P12 40% P 5 25% P 9 60%
A particular machine is a bottleneck. On that machine, 3 machine hours are required to
produce each unit of Product A, 1 hour is required to produce each unit of Product B,
and 2 hours are required to produce each unit of Product C. In which order should it
produce products
?C,A,B
a. A,C,B
b. B,C,A
c. The order of production doesn’t matter
37. Assume the company uses the absorption approach to cost-plus pricing and desires a
markup of 40 percent. The target selling price would be
a. P16
b. P14
c. P16.80
d. P14.00
38. Assume that the company uses the contribution approach to cost-plus pricing and
desires a markup of 75 percent. The target selling price would be
a. P17.50
b. P12.25
c. P15.75
d. P14.00
39. Sauer Company and sells 25,000 units of product X each year. The company incurs the
following unit costs at the 25,000-unit level of activity:
Direct materials P16
Direct labor
10
Variable overhead 4
Fixed overhead
13
Variable selling and administrative expense 6
Fixed selling and administrative expense
8
The “floor” below which the company should not go, even in special pricing decisions, is
a. P26
b. P36
c. P44
d. P48
40. Minden Company estimates that the following costs and activity would be associated
with the manufacture and sale of product A:
Number of unit sold annually
40,000
Required investment in assets P800,000
Cost to manufacture one unit
25
Selling and administrative expenses(annual) 600,000
If the company uses the absorption approach to cost-plus pricing and desires a 15
percent ROI, the required markup for Product A would be
a. 12%
b. 15%
c. 60%
d. 72%
41. Miter Company, a manufacturer of household products, wants to introduce a new
hand-operated food blender. To compete effectively, the blender could not be priced
more than P30. The company requires a 25 percent return on investment on all new
products. In order to produce and sell 40,000 blenders each year, the company would
a.
b.
c.
d.
need to make an investment of P600,000. Selling and administrative expenses would
total P400,000 per year. The target cost to manufacture one blender would be
P10.00
P20.00
P16.25
P23.25
42. Roberts Company is planning to introduce a new product line. The following information
has been assembled:
Expected annual sales in units 60,000
Investment required
P750,000
Production costs:
Variable (materials, labor, and overhead)
12
Fixed overhead (total)
480,000
Selling and administrative costs:
Variable (freight and commissions)
3
Fixed (total)
420,000
The company requires a 20 percent return on investment on all product lines. Assuming
that the company uses the absorption approach to cost-plus pricing, the markup needed
to achieve the desired ROI would be (to the nearest tenth of a percent)
a. 12.5%
b. 20.0%
c. 50.0%
d. 62.5%
43. Incremental costs defined as:
a. Costs that are expected to increase regardless of the course of action chosen.
b. The differences between costs incurred under alternative courses of action.
c. Costs incurred in the past.
d. Costs that are irrelevant in decision making.
44. Baker company manufactures and sells 20,000 units of product X per month. Each unit
of Product X sells for P15 and has a contribution margin of P4. If product X is
discontinued, P56,000 in fixed monthly overhead costs would be eliminated and there
would be no effect on the sales volume of Baker’s Company’s other products. If Product
X is discontinued, Baker Company’s monthly income before taxes should:
a.
b.
c.
d.
Increase by P80,000.
Increase by P24,000.
Decrease by P80,000.
Decrease by P24,000.
45. Accepting a special order is profitable whenever the revenue from the special order
exceeds:
a. The average unit cost of production multiplied by the number of units in the order.
b. The incremental cost of producing the order.
c. The materials and direct labor costs of producing the order.
d. The fixed manufacturing costs for the period.
Summary:
1. C
2. C
3. B
4. C
5. A
6. D
7. C
8. B
9. C
10. C
11. A
12. D
13. B
14. D
15. D
16. D
17. B
18. D
19. A
20. C
21. B
22. A
23. C
24. B
25. B
26. B
27. D
28. B
29. A
30. B
31. B
32. A
33. A
34. C
35. B
36. A
37. B
38. D
39. B
40. D
41. C
42. C
43. B
44. D
45. B