CPAR MAS Preweek - May 2005 Edition

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preboard & Preweek Materials
Overview Graph 1 Graph 2

Management Advisory Services
1. The primary purpose of management advisory services is to
A. conduct special studies, preparation of recommendations, development of plans and
programs, and provision of advice and assistance in their implementation.
B. provide services or to fulfill some social need. Total units produced Total units produced
C. improve the client's use of its capabilities and resources to achieve the objectives of the
organization. Graph 3 Graph 4
D. earn the best rate of return on resources entrusted to its care with safety of investment
being taken into account and consistent with the firm's social and legal responsibilities.
2. The following characterize management advisory services except

A. involve decision for the future Total units produces Total units produced
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm A. Graph 2 C. Graph 4
D. relate to specific problems where expert help is required B. Graph 3 D. Graph 1
3. Which of the following is not classifiable as a management advisory service by CPA? 6. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted
A. Systems design. C. Make or buy analysis. output and P280,000 for 60,000 units of budgeted output. Because of the need for additional
B. Project feasibility study. D. Assistance in budget preparation. facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for
P50,000 units. How much is Careras budgeted variable cost per unit of output?
Managerial Accounting A. P1.60 C. P3.00
4. The following are inherent to either management accounting or financial accounting: B. P1.67 D. P5.00
1. External report
2. Historical information Cost-Volume-Profit Analysis
3. Contribution approach income statement Breakeven Point
4. Generally accepted accounting principles 7. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
5. Prospective financial statements on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
Which of the foregoing are related to management accounting and financial accounting, volume?
respectively? A. P120,000 C. P225,000
Management Accounting Financial Accounting B. P200,000 D. P450,000
A. 1, 2, 5 3, 4
B. 3, 5 1, 2, 4 8. At a sales volume level of 2,250 units, Luzon Company's contribution margin is one and one-
C. 2, 3 1, 4, 5 half of the fixed costs of P36,000. Contribution margin is 30%. How many units must be sold
D. 3 1, 2, 4, 5 by the company to breakeven?
A. 1,250 C. 2,580
Cost Behavior B. 1,500 D. 2,520
5. Which of the following graphs illustrates the behavior of a total variable cost? (E)
May 2005 Page 1 of 47
9. In calculating the break-even point for a multi-product company, which of the following
assumptions are commonly made when variable costing is used? 13. Mount Park, Inc. had the following economic information for the year 2002:
I. Sales volume equals production volume Sales(50,000 units @ P20) P1,000,000
II. Variable costs are constant per unit Variable manufacturing costs 400,000
III. A given sales mix is maintained for all volume changes Fixed costs 250,000
A. I and II C. II and III Income tax rate 40 percent
B. I and III D. I, II, and III 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
10. Phipps Co. sells two products, Arks and Bins. Last year. Phipps sold 12,000 units of Arks and maintain its sales target for 2003.
28,000 units of Bins, Related data are: What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
Product Unit Selling Price Unit Variable Cost Unit Contribution Margin 2002?
Arks P120 P80 P40 A. P1,125,000 C. P1,187,500
Bins 80 60 20 B. P1,325,000 D. P1,387,500
Assuming that last year's fixed costs totaled P910,000, what was Phipps Co.'s break-even
point in units? (E) 14. Larz Company produces a single product. It sold 25,000 units last year with the following
A. 40,000 C. 35,000 results:
B. 12,000 D. 28,000 Sales P625,000
Variable costs P375,000
11. Bush Electronics, Inc. had the following sales results for 2004: Fixed costs 150,000 525,000
Net income before taxes P100,000
TV sets CD player Radios
Income taxes 40,000
Peso sales component ratio 0.30 0.30 0.40
Net income P 60,000
Contribution margin ratio 0.40 0.40 0.60
In an attempt to improve its product in the coming year, Larz is considering replacing a
Bush Electronics, Inc. had fixed costs of P2,400,000. component part in its product that has a cost of P2.50 with a new and better part costing P4.50
The break-even sales in pesos for Bush Electronics, Inc. are: per unit. A new machine will also be needed to increase plant capacity. The machine would
TV sets CD player Radios cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-
A. P1,800,000 P1,800,000 P3,600,000 line depreciation on all plant assets.
B P1,800,000 P1,800,000 P1,600,000 If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
C. P1,500,000 P1,500,000 P2,000,000 what selling price per unit of product must it charge next year to cover the increased material
D. P1,531,915 P1,531,915 P2,042,553 costs?
A. P27.00 C. P32.50
Profit Planning B. P25.00 D. P28.33
12. 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

Incremental Analysis
15. DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of 19. Valley of Fire Corporation has one department that produces three replacement parts for the
P1,100,000. Total fixed costs are (M) company. However, only one part can be produced in any month because of the adjustments
A. P 0 C. P420,000 that must be made to the equipment. The department can produce up to 15,000 units of any
B. P200,000 D. P900,000 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
16. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. equations and the equation for each replacement part are given below:
During the current month when the unit sales are expected to be only 45,000, there is a loss of (ATR) X ((SP VC) x (U) FC)
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. The fixed ATR = after-tax rate VC = variable cost FC = fixed costs
costs amounted to SP = selling price U = units
A. P80,000 C. P247,500 Part Part Equations
B. P360,000 D. P210,000 AL45 .6 ((P4.00 P1.25) (U) P33,400)
BT65 .6 ((P4.05 P2.55) (U) P15,000)
Point of Indifference GM17 .6 ((P4.10 - P2.00) (U) - P22,365)
17. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The The production and unit sales volume level at which Valley will be indifferent as to whether
average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors Part BT62 or GM17 is produced is
is considering a change to a commission arrangement that would pay each salesperson a A. 7,365 C. 10,380
salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson. B. 4,092 D. 12,275
The amount of total car sales at which BM Motors would be indifferent as to which plan to
select is 20. Dulce, Inc. owns and operates a chain of food centers. The management is considering
A. P22,500,000 C. P24,000,000 installing machines that will make popcorn on the premises. These machines are available in
B. P30,000,000 D. P12,000,000 two different sizes with the following details.
Economy Regular
18. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to
Annual capacity 20,000 50,000
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 Costs: Annual machine rental P60,000.00 P82,500.00
(units) of either product this year. Because the models are very similar, Ravine Ski will Popcorn cost per box 3.90 3.90
produce only one of the two models. The information below was compiled by the accounting Cost of each box 0.80 0.80
department. Other variable cost per box 6.60 4.20
Mountaineering Touring The level of output in boxes at which the Economy and the Regular would earn the same profit
Selling price per unit P880.00 P800.00 (loss) is
Variable costs per unit P528.00 P528.00 A. 20,000 boxes C. 9,375 boxes
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only B. 15,000 boxes D. 12,500 boxes
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 21. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many
regardless of the ski model it decided to produce is styles of shoes that are all sold at the same price. To encourage sales personnel to be
A. P8,800,000 C. P9,240,000 aggressive in their sales efforts, the company pays a substantial sales commission on each
B. P4,224,000 D. P6,864,000 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 companys many D. Neither Firm D nor Firm S will lose profit.
sales outlets:
Selling price P800 25. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
Variable expenses: considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
Invoice costs P360 estimated at P39,000. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that
Sales commission 140 60 percent of its Sunday sales to customers would be made on other days if the stores were
P500 not open on Sundays. The one-day volume of Sunday sales that would be necessary for Six-
Fixed expenses per year: Two to attain the same weekly operating income as the current six-day week is
Rent P1,600,000 A. P6,000 C. P7,500
Advertising 3,000,000 B. P5,000 D. P4,500
Salaries 1,400,000
Total P6,000,000 26. The following data apply to Cross Corporation for the year 2004:
The company is considering eliminating sales commissions entirely in its stores and increasing Total variable cost per unit P3.50
fixed salaries by P2,142,000 annually. Contribution margin/sales 30%
If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be Breakeven sales (present volume) P1,000,000
indifferent to commission basis? Cross wants to sell an additional 50,000 units at the same selling price and contribution
A. 25,300 C. 18,505 margin. By how much can fixed costs increase to generate a gross margin equal to 10% of the
B. 15,300 D. 21,000 sales value of the additional 50,000 units to be sold?
A. P50,000 C. P67,500
Sensitivity Analysis B. P57,500 D. P125,000
22. With the aid of computer software, managers can vary assumptions regarding selling prices,
costs, and volume and can immediately see the effects of each change on the break-even 27. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
point and profit. Such an analysis is called: (E) Selling price per pair of sunglasses P25.00
A. "What if" or sensitivity analysis C. computer aided analysis Variable costs per pair of sunglasses:
B. vary the data analysis D. data gathering Pol Bobadilla Raw materials P11.00
Direct labor 5.00
23. If fixed costs increase while variable cost per unit remains constant, the contribution margin Manufacturing overhead 2.50
will be Selling expenses 1.30
A. lower C. unchanged Total variable costs per unit P19.80
B. higher D. unpredictable Annual fixed costs:
Manufacturing overhead P192,000
24. Firm D and Firm S are competitors within the same industry. Firm D produces its product Selling and administrative 276,000
using large amounts of direct labor. Firm S has replaced direct labor with investment in Total fixed costs P468,000
machinery. Projected sales for both firms are fifteen percent less than in the prior year. Which Forecasted annual sales volume (120,000 pairs) P3,000,000
statement regarding projected profits is true? Income tax rate 40%
A. Firm D will lose more profit than Firm S. Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
B. Firm S will lose more profit than Firm D. many units will Glareless have to sell next year to reach breakeven?
C. Firm D and Firm S will lose the same amount of profit. A. 97,500 units C. 83,572 units

B. 101,740 units D. 86,250 units 28. 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 Madels 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
29. 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
30. 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 33. Claremont Company had is a manufacturer of its only one product line. It had sales of
15 percent. What is the effect on income if the foregoing changes are implemented? P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was
A. Decrease of P21,200 C. Increase of P13,800 10 percent. What are the companys fixed costs?
B. Increase of P1,800 D. Increase of P14,800 A. P72,000 C. P288,000
B. P80,000 D. P320,000
31. 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 34. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety
achieved by the company over the past few years while candy prices have been increasing. ratio of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales
The company is formulating its plans for the coming fiscal year. Presented below are the data constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs?
used to project the current years after-tax net income of P110,400. A. P36,000 C. P432,000
Manufacturers of candy have announced that they will increase prices of their products an B. P90,000 D. P360,000
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 35. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety
rates or levels as the current year. Candyman is subject to 40 percent tax rate. ratio of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales
Average selling price P4.00 per box and fixed costs constant every month. If the tax rate is 40 percent, how much is the annual
Average variable costs fixed costs?
Cost of candy P2.00 per box A. P36,000 C. P432,000
Selling expenses 0.40 per box B. P90,000 D. P360,000
Total P2.40 per box
Annual fixed costs 36. If a business had a margin of safety ratio of 20%. variable costs of 75% of sales, fixed costs of
Selling P169,000 P240,000, a break-even point of P960,000 and operating income of P60,000 for the current
Administrative 280,000 year, what are the current year's sales?
Total P440,000 A. P1,200,000 C. P1,260,000
Expected annual sales volume (390,000 boxes) P1,560,000 B. P1,040,00 D. P1,020,000
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? Degree of Operating Leverage
A. 480,000 C. 27,600 37. A very high operating leverage indicates that a firm
B. 400,000 D. 29,300 A. has high fixed costs
B. has a high net income
Margin of Safety C. has high variable costs
32. Russini, Inc. had the following economic data for 2004: D. is operating close to its breakeven point
Net sales P400,000
Contribution margin P160,000 38. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000,
Margin of safety P 40,000 variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and
What is Russini's breakeven point in 2004? sales price per unit to remain the same in 2001, however total sales are expected to jump by
A. P360,000 C. P288,000 20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
B. P320,000 D. P 80,000 2000 by
A. 100% C. 20%

B. 80% D. 50%
44. The Trinkets Company estimated the following data for the coming year:
39. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a Fixed manufacturing costs P565,000
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income Variable production costs per peso of sales
for 2002 can be expected to increase by what amount over 2001? Materials P0.125
A. P250,000 C. P500,000 Direct labor 0.150
B. 200 percent D. 40 percent Variable overhead 0.075
Variable selling costs per peso of sales 0.150
Variable Costing Vs. Absorption Costing Trinkets estimates its sales for the coming year to be P2,000,000.
Absorption Costing The expected cost of goods sold for the coming year is
40. When a firm prepares financial reports by using absorption costing, it may find that A. P1,265,000 C. P1,115,000
A. profits will always increase with increase in sales. B. P1,565,000 D. P 700,000
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 45. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below
costs. is from the financial records of the company for the year.
D. decreased output and constant sales result in increased profit. Total manufacturing costs were P2,500,000.
Costs of goods of manufactured was P2,425,000.
41. Under which inventory costing method could increases or decreases in income from Applied factory overhead was 30 percent of total manufacturing costs.
operations be misinterpreted to be the result of operating efficiencies or inefficiencies? (M) Factory overhead was applied to production at a rate of 80% of direct labor cost.
A. Variable costing C. Incremental costing Work-in-process inventory at January 1 was 75% of work-in-process inventory at
B. Absorption costing D. Differential costing December 31.
What are the amounts/value of the following cost elements and inventory?
42. The Bush Company has provided information concerning its projections for the coming year as Direct labor Direct materials Work-in-process inventory
follows:
A. P750,000 P750,000 P225,000
Net sales P10,000,000
B. P937,500 P812,500 P225,000
Fixed manufacturing costs P 1,000,000
C. P937,500 P812,500 P300,000
Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in
D. P750,000 P750,000 P300,000
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 46. 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
43. Colger Company manufactures a single product using standard costing. Variable production produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per
costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and
12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory, 40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and
produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under 50% were selling. Black Forest had no raw materials or work-in-process inventories at
absorption costing would be December 31. Actual input prices and quantities per unit of product were equal to standard.
A. P115,000 C. P242,000 Using absorption costing, Black Forests income statement would show:
B. P132,000 D. P253,000 Cost of Goods Sold at Standard Cost Overhead Volume Variance

A. P8,200,000 P800,000 Unf 50. York Company had P200,000 income using absorption costing. York has no variable
B. P7,200,000 P800,000 Fav manufacturing costs. Beginning inventory was P15,000 and ending inventory was P22,000.
C. P6,500,000 P700,000 Unf Income under variable costing would have been (M)
D. P7,000,000 P700,000 Fav A. P178,000 C. P193,000
B. P200,000 D. P207,000
47. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each
year. The predicted and actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor 51. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its
hours, respectively. products are as follows:
2004 2005 Direct Materials P4.00
Sales in units 25,000 25,000 Direct labor 6.00
Factory overhead
Selling price per unit P10 P10
Variable 3.00
Direct materials and direct labor per unit P5 P5 Fixed (based on a normal capacity of 10,000 units) 2.00
The company assumes that the long-run production level is 20,000 direct labor hours per year. Total 15.00
The actual factory overhead cost for the end of 2004 and 2005 was P60,000. Assume that it
takes one direct labor hour to make one finished unit. Beginning inventory 2,000 units
When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005, Production 8,000 units
respectively, are Units sold (selling price P50) 7,000 units
A. P75,000 and P75,000 C. 75,000 and P55,000
B. P125,000 and P125,000 D. P75,000 and P50,000 Actual costs:
Direct materials P 35,000
Absorption Costing vs. Variable Costing Direct labor 50,000
48. Absorption costing differs from variable costing in that (M) Variable overhead 23,000
A. standards can be used with absorption costing/ but not with variable costing. Fixed 18,000
B. absorption costing inventories are more correctly valued, Variable selling and adm. 60,000
C. production influences income under absorption costing, but not under variable costing. Fixed selling and adm. 35,000
D. companies using absorption costing have lower fixed costs.
Variances are closed to cost of sales monthly
49. Which of the following is(are) closely related to variable costing than to absorption costing? How much are the net income under absorption costing and variable costing methods?
(M)
A. B. C. D.
1. Predetermined fixed overhead 5. Gross margin
Absorption P144,000 P143,000 144,000 142,000
2. Unit sales 6. Volume variance
Variable 143,000 144,000 142,000 144,000
3. Production units 7. Cost behavior
4. Contribution margin 8. Management accounting
A. 1, 2, 4, 6, 7, 8 C. 1, 3, 4, 7, 8 52. Lord Industries manufactures a single product. Variable production costs are P10 and fixed
B. 2, 4, 7, 8 D. 1, 3, 5, 6 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.
Absorption Costing & Variable Costing The volume variance under each product costing are:

A. B. C. D. C. the two systems show different volume variances if standard hours do not equal actual
Under Absorption Costing P3,750 P3,750 P7,500 P7,500 hours.
Under Variable Costing P 0 P7,500 P0 P0 D. normal costing is less appropriate for multiproduct firms.
53. Simple Corp. produces a single product. The following cost structure applied to their first year 57. To measure controllable production inefficiencies, which of the following is the best basis for a
of operations, 2000: company to use in establishing the standard hours allowed for the output of one unit of
Variable Costs per Unit Annual Fixed Costs product?
A. Average historical performance for the last several years.
SG&A P2.00 P14,000
B. Engineering estimates based on ideal performance.
Production 4.00 P20,000
C. Engineering estimates based on attainable performance.
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was D. The hours per unit that would be required for the present workforce to satisfy expected
no beginning or ending work-in-process inventory. How much larger or smaller would Simple demand over the long run.
Corp.s income be if it uses absorption rather than variable costing?
A. The absorption costing income would be P6,000 larger Setting Standards
B. The absorption costing income would be P6,000 smaller 58. Which of the following statements about the selection of standards is true?
C. The absorption costing income would be P4,800 larger* A. Ideal standards tend to extract higher performance levels since they give employees
D. The absorption costing income would be P4,000 smaller something to live up to.
B. Currently attainable standards may encourage operating inefficiencies.
Standard Costing & Variance Analysis C. Currently attainable standards discourage employees from achieving their full
Basic Concepts performance potential.
54. Which of the following is a difference between a static budget and a flexible budget? D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
A. A flexible budget includes only variable costs; a static budget includes only fixed costs. causing a decline in performance.
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 59. The per-unit standard cost for variable overhead is normally based on the
does not. A. standard quantity of an input factor used in a unit of product.
D. There is no difference between the two. 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
55. The basic difference between a master budget and a flexible budget is that a produced.
A. flexible budget considers only variable costs but a master budget considers all costs. D. ratio of fringe benefits to the basic cost of labor.
B. flexible budget allows management latitude in meeting goals whereas a master budget is
based on a fixed standard. 60. Dahl Company, a clothing manufacturer uses a standard costing system. Each unit of a
C. master budget is for an entire production facility but a flexible budget is applicable to finished product contains 1.6 yards of cloth. However there is unavoidable waste of 20%
single department only. calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3
D. master budget is based on one specific level of production and a flexible budget can be per yard. The standard direct material cost for cloth per unit of finished product is: (M)
prepared for any production level within a relevant range A. P4.80 C. P7.00
B. P6.00 D. P7.50
56. Normal costing and standard costing differ in that (M)
A. the two systems can show different overhead budget variances. 61. Derby Co. uses a standard costing system in connection with the manufacture of a line of T-
B. only normal costing can be used with absorption costing.
shirts. Each unit of finished product contains 2 yards of direct material. However, a 20 finished product. The material quantity variance is
percent direct material spoilage calculated on input quantities occurs during the manufacturing A. P6,000 unfavorable C. P5,200 unfavorable
process. The cost of the direct materials is P120 per yard. B. P3,200 unfavorable D. P2,000 unfavorable
The standard direct material cost per unit of finished product is
A. P192 C. P288 66. Cox Company's direct material costs for the month of January were as follows:
B. P240 D. P300 Actual quantity purchased 18,000 kilograms
Actual unit purchase price P 3.60 per kilogram
62. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of Materials price variance unfavorable (based on purchases) P 3,600
30,000 direct labor hours. Standard quantity allowed for actual production 16,000 kilograms
Direct materials P800,000 Actual quantity used 15,000 kilograms
Direct labor 600,000 For January there, was a favorable direct material quantity variance of: (M)
Variable manufacturing overhead 360,000 A. P3,360 C. P3,400
Fixed manufacturing overhead 288,000 B. P3,375 D. P3,800
What is the total manufacturing overhead application rate if the Relevant Company has to
operate at 80 percent of the stated capacity? 67. Ramie has a standard price of P5.50 per pound for materials. Julys results showed an
A. P24.00 C. P24.60 unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066
B. P27.00 D. P21.60 pounds were used in production, what was the standard quantity allowed for materials?
A. 1,104 C. 1,074
63. ABC Company is preparing a flexible budget for 2005 and the following maximum capacity B. 1,066 D. 1,100
estimates for the manufacturing division are available:
Direct labor hours 60,000 hours 68. T Company purchased 340,000 pounds of material at a cost of P510,000. The materials price
Variable factory overhead P600,000 variance was unfavorable by P34,000. During the year, 300,000 pounds of this material was
Fixed manufacturing overhead P300,000 requisitioned for production. The materials quantity variance was unfavorable by P11,200. The
Assume that ABC's expected capacity is 80% of maximum capacity. What would be the total standard cost of materials that should have been used in production was
factory overhead rate, based on direct labor hours, in a flexible budget at expected capacity? A. P430,200 C. P555,200
A. P18.75 C. P16.25 B. P551,500 D. 408,800
B. P14.25 D. P15.00
Direct Labor Variance
Raw Materials Variances 69. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency
64. Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage
purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance rate?
and a P3,735 favorable usage variance. If there were no changes in the component of A. P8.94 C. P7.94
inventory, how many units of finished product were produced? B. P8.00 D. P7.80
A. 994 units C. 1,725 units
B. 1,160 units D. 828 units 70. The standards for direct labor for a product are 2.5 hours at P8 per hour. Last month, 9,000
units of the product were made and the labor efficiency variance was P8,000 F. The actual
65. The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent number of hours worked during the past period was: (M)
P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600 units of A. 23,500 C. 20,500

B. 22,500 D. 21,500 Two-Way Overhead Variances

72. The fixed overhead application rate is a function of a predetermined "normal" activity level. If
71. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15 standard hours allowed for good output equal this predetermined activity level for a given
per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual period, the volume variance will be
output for the month was 8,500 units with P127,500 in direct material and P77,775 in direct A. zero
labor expense. Direct labor hours of 6,375 were actually worked during the month. Variance B. favorable
analysis of the performance for the month of May would show a(n) C. unfavorable
A. favorable material quantity variance of P7,500 D. either favorable or unfavorable, depending on the budgeted overhead
B. unfavorable direct labor efficiency variance of P1,275
C. unfavorable material quantity variance of P7,500 73. The unfavorable volume variance may be due to all but which of the following factors? (M)
D. unfavorable direct labor rate variance of P1,275 A. failure to maintain an even flow of work
B. machine breakdowns
C. unexpected increases in the cost of utilities
D. failure to obtain enough sales orders
74. 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. Karlas budgeted overhead for the month is
A. P12,800 C. P84,800
B. P18,800 D. P774,000
75. 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
76. 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 January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units
B. P5,000 F D. P10,500 U of product. The standard cost card for one unit of product includes the following:
Variable factory overhead: 3.0 DLHs @ P4.00 per DLH.
77. The Terrain Company has a standard absorption and flexible budgeting system and uses a Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH
two-way analysis of overhead variances. Selected data for the June production activity are: For January, the company incurred P22,000 of actual fixed overhead costs and recorded a
Budgeted fixed factory overhead costs P 64,000 P875 favorable volume variance.
Actual factory overhead 230,000 The budgeted fixed overhead cost for January is
Variable factory overhead rater per DLH P 5 A. P31,500 C. P32,375
Standard DLH 32,000 B. P30,625 D. P33,250
Actual DLH 32,000
The budget (controllable) variance for June is 82. The standard factory overhead rate is P7.50 per machine hour (P6.20 for variable factory
A. P1,000 favorable C. P6,000 favorable overhead and P1.30 for fixed factory overhead) based on 100% capacity of 80,000 machine
B. P1,000 unfavorable D. P6,000 unfavorable hours. The standard cost and the actual cost of factory overhead for the production of 15,000
units during August were as follows:
78. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of Actual:
actual production are as follows: Variable factory overhead P360,000
Standard cost Fixed factory overhead 104,000
Fixed overhead (based on 10,000 hours) 3 hours @ P.80 per hour Standard hours allowed for units produced: 60,000 hours at P7.50 450,000
Variable overhead 3 hours @ P2 per hour What is the amount of the factory overhead volume variance? (M)
Actual cost A. P12,000 unfavorable C. P14,000 unfavorable
Total variable cost P18,000 B. P12,000 favorable D. P26,000 unfavorable
Total fixed cost P8,000
The amount of the factory overhead controllable variance is (M) Questions 83 & 84 are based on the following information.
A. P2,000 unfavorable C. P0 Lucky Company sets the following standards for 2003:
B. P3,000 favorable D. P3,000 unfavorable Pol Bobadilla Direct labor cost (2 DLH @ P4.50) P 9.00
Manufacturing overhead (2 DLH @ P7.50) 15.00
79. South Company has total budgeted fixed costs of P75,000, Actual production of 19,500 units Lucky Company plans to produce its only product equally each month. The annual budget for
resulted in a P3,000 favorable volume variance. What normal capacity was used to determine overhead costs are:
the fixed overhead rate? Fixed overhead P150,000
A. 16,500 C. 20,313 Variable overhead 300,000
B. 18,750 D. 20,325 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.
80. CTV Company has a standard fixed cost of P6 per unit. At an actual production of 8,000 units Actual overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.)
a favorable volume variance of P12,000 resulted. What were total budgeted fixed costs?
A. P36,000 C. P60,000 83. The amount of overhead volume variance for Lucky Company is
B. P48,000 D. P75,000 A. P250 unfavorable C. P750 Unfavorable
B. P500 unfavorable D. P375 Unfavorable
81. The Pinatubo Company makes and sells a single product and uses standard costing. During

84. Using the preceding data for Lucky Company, the controllable overhead variance was 88. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were
A. P505 favorable C. P245 favorable budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed
B. P505 unfavorable D. P245 unfavorable overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied
must be
Three-Way Overhead Variances A. P516,000 C. P504,000
85. Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable B. P512,000 D. P496,000
overhead spending variance, and P2,000 total under applied overhead. The fixed overhead
budget variance is 89. Mulvey Company derived the following cost relationship from a regression analysis of its
A. P41,000 favorable C. P41,000 Unfavorable monthly manufacturing overhead cost:
B. P45,000 favorable D. P45,000 Unfavorable C = P80,000 + P12M
Where C = monthly manufacturing overhead cost
Four-Way Overhead Variances M = machine hours
86. Franklin Glass Works production budget for the year ended November 30, 2001 was based The standard error of the estimate of the regression is P6,000.
on 200,000 units. Each unit requires two standard hours of labor for completion. Total The standard time required to manufacture one six-unit case of Mulveys single product is 4
overhead was budgeted at P900,000 for the year, and the fixed overhead rate was estimated machine hours. Mulvey applies manufacturing overhead to production on the basis of
to be P3.00 per unit. Both fixed and variable overhead are assigned to the product on the machine hours and its normal annual production is 50,000 cases.
basis of direct labor hours. The actual data for the year ended November 30, 2001 are Mulveys estimated variable manufacturing overhead cost for a month in which scheduled
presented below. production is 5,000 cases would be
Actual production in units 198,000 A. P80,000 C. P240,000
Actual direct labor hours 440,000 B. P320,000 D. P360,000
Actual variable overhead P 352,000
Actual fixed overhead P 575,000 Questions 90 & 91 are based on the following information.
Franklins variable overhead efficiency variance for the year ended November 30, 2001 is The Clark Company makes a single product and uses standard costing. Some data concerning this
A. P33,000 unfavorable C. P66,000 unfavorable product for the month of May follow:
B. P35,520 favorable D. P33,000 favorable Labor rate variance P7,000 F
Labor efficiency variance P12,000 F
87. The Virgin Island Company has standard variable costs as follows: Variable overhead efficiency variance P4,000 F
Materials, 3 pounds at P4.00 per pound P12.00 Number of units produced 10,000
Labor, 2 hours P10.00 per hour 20.00 Standard" labor rate per direct labor hour P12
Variable overhead, P7.50 per labor hour 15.00 Standard variable overhead rate per direct labor hour: P4
Total P47.00 Actual labor hours used: 14,000
During September, Virgin Island produced 6,000 units, using 11,560 labor hours at a total Actual variable manufacturing overhead costs: P58,290
wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead
variances are: 90. The variable overhead spending variance for May was: (M)
A. B. C. D. A. P2,290 F C. P2,290 U
B. P1,710 F D. P1,710 U
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
91. The standard hours allowed to make one unit of finished product are: (M)

A. 1.0 C. 1.5 94. The overhead efficiency variance is

B. 1.2 D. 1.3 A. P22,500 Favorable C. P22,500 Unfavorable
B. P15,000 Favorable D. P15,000 Unfavorable
Questions 92 thru 94 are based on the following information.
The Lustre Company produces its only product, Kool Chewing Gum. The standard overhead cost Gross Profit Variance Analysis
for one pack of the product follows: 95. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are
Fixed overhead (1.50 hours at P18.00) P27.00 as follows:
Variable overhead (1.50 hours at P10.00) 15.00 Actual Expected
Total application rate P42.00 Sales in units 10,000 9,500
Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor Selling price per unit P11 P10
hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and Variable expense per unit P 6
P308,700 variable. What are the price variance and price volume variance?
A. B. C. D.
92. The amount of variable overhead spending variance is Sales Price Variance P10,000 F P 5,000 F P 5,000 U P10,000 U
A. P6,300 Favorable C. P6,300 Unfavorable Price Volume Variance P 5,000 F P10,000 U P10,000 F P 5,000 U
B. P 8,700 Favorable D. P8,700 Unfavorable
Responsibility Accounting & Transfer Pricing
93. The total overhead controllable variance is Basic Concepts
A. P13,700 Favorable C. P13,700 Unfavorable 96. The CEO of a rapidly growing high-technology firm has exercised centralized authority over all
B. P 8,700 Favorable D. P 8, 700 Unfavorable corporate functions. Because the company now operates in four geographically dispersed
locations, the CEO is considering the advisability of decentralizing operation control over
production and sales. Which of the following conditions probably would result from and be a
valid reason for decentralizing?
A. Greater local control over compliance with government regulations.
B. More efficient use of headquarters staff officials and specialists.
C. Quicker and better operating decisions.
D. Greater economies in purchasing.
97. The least complex segment of area of responsibility for which costs ate allocated is a(n)
A. profit center C. contribution center
B. investment center D. cost center
98. 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.

105. The following information pertains to Pluto Company's Satellite Division for 2004:
99. Which of the following does not apply to the content of managerial reports? Sales P311,000
A. Reporting standard is relevant to the decision to be made. Variable cost. 250,000
B. May extend beyond double-entry accounting system. Traceable fixed costs 50,000
C. Pertain to subunits of the entity and may be very detailed. Average invested capital 40,000
D. Pertains to the entity as a whole and is highly aggregated.* Imputed interest rate 10%
Satellite's return on investment was
Return on Investment A. 10.00% C. 27.30%
100. The best measure of managerial efficiency in the use of investments in assets is: (M) B. 13.33% D. 30.00%
A. rate of return on stockholders equity C. income from operations
B. investment turn over D. inventory turnover Pol Bobadilla Residual Income
106. Stevenson Corporation had P550,000 in invested assets, sales of P660,000, income from
101. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the operations amounting to P99,000, and a desired minimum rate of return of 15%, The residual
ROI would income for Stevenson is: (E)
A. increase by 30% C. decrease by 37% A. P0 C. P14,850
B. decrease by 10% D. decrease by 33.3% B. P17,820 D. P16,500
102. Return on investment (ROI) is a term often used to express income earned on capital invested 107. Jar Division of Handy, Inc. expects the following result for 2004:
in a business unit. A companys ROI would be increased if sales Unit sales 70,000
A. increased by the same peso amount as expenses and total assets increased. Unit selling price P 10
B. remained the same and expenses were reduced by the same peso amount that total Unit variable cost P 4
asset increased. Total fixed costs P300,000
C. decreased by the same peso amount that expenses increased. Total investment P500,000
D. and expenses increased by the same percentage that total assets increased. The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Jars manager with an offer to buy 10,000 units at P7 each.
103. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would If Jar accepts the order, it would not lose any of the 70,000 units at the regular price.
A. increase by 4% C. increase by 30% Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
B. increase by 6% D. decrease by 50% What is the minimum price that Jar could accept for the order and still maintain its expected
residual income?
104. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins. A. P5.00 C. P4.75
Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from B. P5.60 D. P9.00
operations for Division X is P50,000, and income from operations for Division Y is P38,000.
Division X has a higher return on investment than Division Y by: (M) Return on Investment & Residual Income
A. using income from operations as a performance measure 108. The following data ate available for the South Division of Banawe Company and the single
B. comparing income from operations product it makes:
C. applying a negotiated price measure Unit setting price P20
D. using its assets more efficiently in generating sales Variable cost per unit P12

Annual fixed costs P280,000 110. The following information relates to two projects of Rica Corporation.
Average operating assets P1,500,000 Project A Project B
If South wants a residual income of P50,000 and the minimum required rate of return is 10%, Operating income P2,500,000 P600,000
the annual turnover will have to be: Residual income P 500,000 P200,000
A. 0.32 C. 1.25 ROI 10% 12%
B. 0.80 D. 1.50 Return on residual investment 2% 4%
A bonus of P50,000 will be paid to the manager whose project contributed most to the overall
109. Scotch Co. has the following results for the year: performance of the firm. The P50,000 bonus should go to the manager of
Sales P740,000 A. project A because the residual income is higher
Variable expenses 260,000 B. project B because the return on investment is higher
Fixed expenses 300,000 C. project A because it was a larger, more complex project
Total divisional assets average P1,000,000. The companys minimum required rate of return D. project B because the return on residual investment is higher*
is 14 percent. The residual income and return on investment for Scotch are:
A. B. C. D. Transfer Pricing
Residual Income P36,000 P40,000 P36,000 P40,000 111. Universal Company has intracompany service transfers from Internal Division, a cost center to
Return on Investment 36% 18% 18% 36% World Division, a profit center. Under stable economic conditions, which of the following
transfer prices is likely to be most conducive to evaluating whether both divisions have met
their responsibilities?
A. Actual cost C. Market price
B. Standard variable cost D. Negotiated price
112. The worst transfer-pricing method is to base the prices on (M)

A. market prices C. budgeted total costs.
B. budgeted variable costs D. actual total costs.
113. 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
114. Plastic Division makes and sells a single product. Presently it sells 12,000 units per year to
outside customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to Relevant Costing
make each unit is P16. All selling expenses are fixed. Light Division would like to buy 10,000 Basic Concepts
units a year from Plastic Division. The unit price that Plastic Division should charge Light 118. A cost that will not be affected by later decisions is termed a(n): (E)
Division, according to the transfer pricing formula, is A. historical cost C. sunk cost
A. P24.00 C. P17.60 B. differential cost D. replacement cost
B. P21.40 D. P16.00
119. The potential benefit that may be obtained from following an alternative course of action is
115. Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased called
from outside suppliers at a cost of P5 per unit. However, the same materials are available from A. opportunity benefit C. relevant cost
Division 6. Division 6 has unused capacity and can produce the materials needed by Division B. opportunity cost D. sunk cost
3 at a variable cost of P3 per unit. A transfer price of P3.20 per unit is established, arid 40,000
units of material are transferred, with no reduction in Division 6s current sales. How much 120.Opportunity costs:
would Aro-Products total income from operations increase? (M) A. Are treated as period costs under variable costing.
A. P32,000 C. P80,000 B. Have already been incurred as a result of past action.
B. P72,000 D. P8,000 C. Are benefits that could have been obtained by following another course of action.
D. Do not vary among alternative courses of action.
116. Barangay Division of Community Company sells 80,000 units of part Z to the outside market.
Part Z sells for P10.00 and has a variable cost of P150 and a fixed cost per unit of P2.50. 121. The Auto Division of Fly Insurance employs three claims processors capable of processing
Barangay has a capacity to produce 100,000 units per period. Municipal Division currently 5,000 claims each. The division currently processes 12,000 claims. The manager has
purchases 10,000 units of part Z from Barangay for P10.00. Municipal has been approached recently been approached by two sister divisions. Division A would like the auto division to
by an outside supplier who is willing to supply the former part Z for P9.00. What are the effects process approximately 2,000 claims. Division B would like the auto division to process
on Community Company's overall profit if: approximately 5,000 claims. The Auto Division would be compensated Division A or Division
Municipal buys outside at P9.00 Municipal buys from Barangay at P9.00 B for processing these claims. Assume that these are mutually exclusive alternatives. Claims
A. No change P35,000 decrease in profit processor salary cost is relevant for
B. No change P35,000 increase in profit A. division A alternative only
C. P35,000 decrease in profit No change B. division B alternative only
C. both Division A and Division B alternatives
D. P35,000 increase in profit P35,000 decrease in profit
D. neither Division A nor Division B alternatives
Product Pricing 122. For the year ended December 31, 2004, Earth Company incurred direct costs of P500,000
117. In a cost-based pricing system the markup should cover based on a particular course of action during the year. If a different course of action had been
I. Selling and administrative expenses taken, direct costs would have been P400,000. In addition, Earth's 2004 fixed costs were
II. Desired profit P90,000. the incremental cost was
III. Manufacturing cost A. P10,000 C. P100,000
A. I, II, and III C. I and III only B. P90,000 D. P190,000
B. I and II only D. II and III only
Sell as is or Process-Further
123. Jones Co. can further process Product B to produce Product C. Product B is currently selling

for P30 per pound and costs P28 per pound to produce. Product C would sell for P60 per 125. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
pound and would require an additional cost of P24 per pound to produce. What is the and 32 respectively. The variable costs for each product are: 20; 50: and 15, respectively.
differential cost of producing Product C? (E) Each product must go through the same processing in a machine that is limited to 2,000 hours
A. P30 per pound C. P28 per pound per month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
B. P24 per pound D. P 6 per pound Assuming that Niva Co. can sell ail of the products they can make, what is the maximum
contribution margin they can earn per month? (E)
124. Ottawa Corporation produces two products from a joint process. Information about the two A. P64,000 C. P56,000
joint products follows: B. P70,000 D. P34,000
Product X Product Y
Anticipated production 2,000 lbs 4,000 lbs 126. The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
Selling price per lb. at split-off P30 P16 price per unit is P50. The company has unused production capacity and has determined that
Additional processing costs/lb after split-off (all variable) P15 P30 units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
Selling price/lb after further processing P40 P50 additional net income per unit to be gained by finishing the unit?
The cost of the joint process is P85,000. A. P3 C. P15
Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which B. P10 D. P12
maximizes profit, Ottawas profit will increase by
A. P16,000 C. P50,000 Product Mix Decision
B. P4,000 D. P10,000 127. The Pato Company produces three products with the following costs and selling prices:
A B C
Selling price per unit P16 P21 P21
Variable cost per unit 7 11 13
Contribution margin per unit P9 P10 P8
Direct labor hours per unit 1 1.5 2
Machine hours per unit 4.5 2 2.5
In what order should the three products be produced if either the direct labor-hours or the
machine hours are the company's production constraint?
A. B. C. D.
Direct labor hours A,B,C B,C,A B,C,A A,B,C
Machine hours B,C,A B,C,A A,C,B A,C,B
128. 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
Factory overhead 40.00 20.00

129. Bear Valley produces three products: A, B, and C, One machine is used to produce the Unit standard cost P54.00 P147.00
products, The contribution margins, sales demands, and time on the machine (in minutes) are Units needed per year 6,000 8,000
as follows: Machine hours per unit 4 2
Demand CM Time on machine Unit cost if purchased P50 P150.00
A 100 P25 10 In past years, ABC has manufactured all of its required components; however, this year only
B 80 18 5 30,000 hours of otherwise idle machine time can be devoted to the production of components.
C 150 30 10 Accordingly, some of the parts must be purchased from outside suppliers. In producing parts,
There are 2400 minutes available on the machine during the week. How many units should be factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will
produced and sold to maximize the weekly contribution? (E) not be affected by any make-or-buy decision represent 60% of the applied overhead.
A. B. C. D. The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum
A 100 50 90 100 potential cost savings. The relevant unit production costs that should be considered in the
B 80 80 0 80 decision to schedule machine time are:
C 150 150 150 100 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
130. Geary Manufacturing has assembled the following data pertaining to two popular products.
Questions 132 & 133 are based on the following information.
Blender Electric mixer
Brynles Manufacturing Company produces two products for which the following data have been
Direct materials P 6 P11 tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour.
Direct labor 4 9
Per Unit XY-7 BD-4
Factory overhead @ P16 per hour 16 32
Cost if purchased from an outside 20 38 Selling price P4.00 P3.00
Variable manufacturing cost P2.00 P1.50
supplier
Fixed manufacturing cost P0.75 P0.20
Annual demand (units) 20,000 28,000
Variable selling cost P1.00 P1.00
Past experience has shown that the fixed manufacturing overhead component included in the
The sales manager has had a P160,000 increase in the budget allotment for advertising and wants
cost per machine hour averages P10. Geary has a policy of filling all sales orders, even if it
to apply the money to the most profitable product. The products are not substitutes for one another
means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal in the eyes of the companys customers.
strategy, it should produce The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4.
132. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased
A. 25,000 electric mixers, and purchase all other units as needed
advertising is
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 A. B. C. D.
D. 28,000 electric mixers and purchase all other units as needed XY-7 P160,000 P640,000 P 80,000 P 80,000
BD-4 P320,000 P960,000 P960,000 P320,000
131. 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
133. 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 137. Dary Co, Produces a single product. Its normal selling price is P28 per unit. The variable costs
resulting from advertising is far in excess of this production capacity, which product should be are P18 per unit. Fixed costs are P20,000 for a normal production run of 5,000 units per
advertised and what is the estimated increase in contribution margin earned? month. Dary received a request for a special order that would not interfere with normal sales.
A. Product XY-7 should be produced, yielding a contribution margin of P75,000. The order was for 1,500 units and a special price of P17.50 per unit. Dary Co. has the capacity
B. Product XY-7 should be produced, yielding a contribution margin of P133,333. to handle the special order, and for this order a variable selling cost of P2 per unit would be
C. Product BD-4 should be produced, yielding a contribution margin of P187,500. eliminated. If the order is accepted, what would be the impact on net income? (M)
D. Product BD-4 should be produced, yielding a contribution margin of P250,000. A. decrease of 750 C. increase of P2,250
B. decrease of P3,750 D. increase of P1,500
Special Order
134. An opportunity cost commonly associated with a special order is Make or Buy
A. the contribution margin on lost sales 138. For the past 12 years, the Blue Company has produced the small electric motors that fit into its
B. the variable costs of the order main product line of dental drilling equipment. As material costs have steadily increased, the
C. additional fixed related to the increased output controller of the Blue Company is reviewing the decision to continue to make the small motors
D. any of the above and has identified the following facts:
1. The equipment used to manufacture the electric motors has a book value of P150,000.
135. Pueblo Company sells a product for P60. Variable cost is P32. Pueblo could accept a special 2. The space now occupied by the electric motor manufacturing department could be used
order for 1,000 units at P46. If Pueblo accepted the order, how many units could it lose at the to eliminate the need for storage space now being rented.
regular price before the decision became unwise? (M) 3. Comparable units can be purchased from an outside supplier for P59.75.
A. 1,000 C. 200 4. Four of the persons who work in the electric motor manufacturing department would be
B. 500 D. 2,000 terminated and given eight weeks severance pay.
5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing
136. Jap Companys unit cost of manufacturing and selling a given item at an activity level of process.
10,000 units per month are: Which of the items above are relevant to the decision that the controller has to make?
Manufacturing costs A. 1, 3, and 4 C. 2, 3, 4, and 5
Direct materials P39 B. 2, 3, and 4 D. 1, 2, 4, and 5
Direct labor 6
Variable overhead 8 139. Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
Fixed overhead 9 its product a year. The following information pertains to the production costs at capacity:
Selling expenses Variable costs P 80,000
Variable 30 Fixed costs 120,000
Fixed 11 Total costs P200,000
The company desires to seek an order for 5,000 units from a foreign customer. The variable A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be costs. What is the price per unit that makes Buena indifferent between the Make and Buy
P20,000. Domestic sales will not be affected by the order. options?
The minimum break-even price per unit to be considered on this special sale is A. P8 C. P20
A. P71 C. P69 B. P12 D. P10
B. P75 D. P84

140. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units B. P11.00 D. P13.00
of its product a year. The follow information pertains to the production costs at capacity:
Variable costs P160,000
Fixed costs 240,000
Total costs P400,000
A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed
costs. What is the price per unit that makes Medford indifferent between the "make" and "buy"
options?
A. P8 C. P20
B. P12 D. P40
141. The following ate details of the monthly unit cost to manufacture and sell a particular product
for Grace Company:
Manufacturing Costs:
Direct materials P3.00
Direct labor 4.00
Vat table indirect 2.00
Fixed indirect 1.50
Marketing Costs.
Variable 2.00
Fixed 1.00
Grace must decide to continue making the product or buy it front an outside supplier. The
supplier has offered to make the product at the same level of totality that the company can
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be
reduced by 25% if the company were to accept the proposal. What is the maximum amount
per unit that Grace can pay the suppliers without decreasing its operating income?
A. P 9.50 C. P 9.00
B. P10.50 D. P11.00
142. 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 suppliers unit price is less than
A. P14.00 C. P16.00

143. Below are a companys monthly unit costs to manufacture and market a particular product. B. P90,000 cost decrease D. P90,000 cost increase
Manufacturing Costs:
Direct materials P2.00 146. Cable Company produces 1,000 units of Part W per month. The total manufacturing costs of
Direct labor 2.40 the part are as follows:
Variable indirect 1.60 Direct materials P10,000
Fixed indirect 1.00 Direct labor 5,000
Marketing Costs: Variable overhead 5,000
Variable 3.00 Fixed overhead 30,000
Fixed 1.50 Total manufacturing costs P50,000
The company must decide to continue making the product or buy it from an outside supplier. An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
The supplier has offered to make the product at the same level of quality that the company can the fixed overhead assigned to Part W will no longer be incurred if the company purchases the
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the
reduced by 30% if the company were to accept the proposal. What is the maximum amount outside supplier per month, then its monthly operating income will
per unit that the company can pay the supplier without decreasing its operating income? A. decrease by P4,000 C. decrease by P20,000
A. P8.50 C. P7.75 B. increase by P1,000 D. increase by P20,000
B. P6.75 D. P6.90
147. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total
144. Gretchen Corporation currently manufactures all component parts used in the manufacture of manufacturing costs of the part are as follows:
various hand tools. A steel handle is used in three different tools. The budget for these Direct materials P10,000
handles is 20,000 units with the following unit cost. Direct labor 5,000
Direct material P6.00 Variable overhead 5,000
Direct labor 4.00 Fixed overhead 30,000
Variable overhead 1.00
Total manufacturing cost P50,000
Fixed overhead 2.00
Total unit cost P13.00 An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
Claudine Steel, Inc. has offered to supply 20,000 units of the handle to Gretchen for P12.50 the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
each delivered. If Gretchen currently has idle capacity that cannot be used, accepting the offer part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the
will outside supplier per month, then its monthly operating income will
A. decrease the handle unit cost by P0.50. C. decrease the handle unit cost by P1.50. A. decrease by P4,000 C. decrease by P20,000
B. increase the handle unit cost by P1.50. D. increase the handle unit cost by P0.50. B. increase by P1,000 D. increase by P20,000
145. A business is operating at 90% of capacity and is currently purchasing a part used in its Keep or Drop
manufacturing operations for P15 per unit. The unit cost for the business to make the part is 148. Indicate which of the following costs would be avoided if a segment is eliminated.
P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are 1. variable manufacturing costs
normally purchased during the year but could be manufactured using unused capacity, what 2. direct fixed costs
would be the amount of differentials cost increase or decrease from making the part rather 3. common fixed costs
than purchasing it? (M) 4. variable selling costs
A. P150,000 cost increase C. P150,000 cost increase 5. direct fixed selling costs
6. common fixed selling costs
A. 2, 3, 5, 6 C. C. show the loan as a cash outflow in the second year of the projects life
B. 1, 2, 4, 5 D. 1, 2, 3, 4, 54, 5, 6 D. ignore the loan
149. BEA Industries produces two products. Information about the products is as follows: 152. Which of the following is NOT relevant in calculating annual net cash flows for an investment?
Item 38B Item 40F (M)
Units produced and sold 1,000 4,000 A. Interest payments on funds borrowed to finance the project.
Selling price per unit P 25 P 20 B. Depreciation on fixed assets purchased for the project.
Variable expenses per unit P 15 P 12 C. The income tax rate.
The companys fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is D. Lost contribution margin if sales of the product invested in will reduce sales of other
dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is products.
A. P3,200 C. P(2,000)
B. P7,000 D. P10,000 153. 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?
Shut Down Point Net Present Value method Internal Rate of Return method
150. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a A. Discount Rate Discount Rate
small electrical relay used in the automotive industry as a component part in various products. B. Discount Rate IRR
The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead C. IRR IRR
costs total P150,000 per month, and fixed selling costs total P30,000 per month. D. IRR Discount Rate
Employment-contract strikes in the companies that purchase the bulk of the E14 have caused
Bulusan Companys sales to temporarily drop to only 9,000 units per month. Bulusan Accounting Rate of Return
Company estimates that the strikes will last for about two months, after which time sales of 154. Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the
E14 should return to normal. Due to the current low level of sales, however, Bulusan expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were
Company is thinking about closing down its own plant during the two months that the strikes acquired. The equipments estimated useful life is 10 years, with no salvage value, and would
are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing be depreciated by the straight-line method. Tamaraws minimum desired rate of return is 12
overhead costs can be reduced to P105,000 per month and that fixed selling costs can be percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value
reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since of 1 due in 10 periods at 12 percent is 0.322.
Bulusan Company uses just-in-time production method, no inventories are on hand. The average accrual accounting rate of return during the first year of assets use is
At what level of unit sales for the two-month period should Bulusan Company be indifferent A. 20.0 percent C. 10.0 percent
between closing the plant or keeping it open? B. 10.5 percent D. 40.0 percent
A. 11,000 C. 10,000
B. 24,125 D. 8,000 155. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a five-
year project at the beginning of the year. GMF estimates that the annual cash savings from
Capital Budgeting this project will amount to P65,000. Tax and book depreciation on the project will be P40,000
Basic Concepts per year for five years. On investments of this type, GMFs desired rate of return is 12%.
151. If Sol Company expects to get a one-year loan to help cover the initial financing of capital Information on present value factors is as follows:
project, the analysis of the project should At 12% At 14% At 16%
A. offset the loan against any investment in inventory or receivable required by the project Present value of P1 for 5 periods 0.57 0.52 0.48
B. show the loan as an increase in the investment Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3
For the projects first year, GMFs accounting rate of return, based on the projects average A. a payback period of less than one-half the life of a project will yield an IRR lower than the
book value would be target rate.
A. 14.4% C. 12.5% B. the payback period is the present value factor for the IRR.
B. 13.9% D. 12.0% C. a project whose payback period does not meet the company's cutoff rate for payback will
not meet the company's criterion for IRR.
156. The Fields Company is planning to purchase a new machine which it will depreciate, for book D. none of the above
purposes, on a straight-line basis over a ten-year period with no salvage value and a full years
depreciation taken in the year of acquisition. The new machine is expected to produce cash 161. Brando is considering an investment in a new cheese-cutting machine to replace its existing
flow from operations, net of income taxes, of P66,000 a year in each of the next ten years. cheese cutter. Information on the existing machine and the replacement machine follow:
The accounting (book value) rate of return on the initial investment is expected to be 12%. Cost of the new machine P40,000
How much will the new machine cost? Net annual savings m operating costs 9,000
A. P300,000 C. P660,000 Salvage value now of the old machine 6,000
B. P550,000 D. P792,000 Salvage value of the old machine in 8 years 0
Salvage value of the new machine in 8 years 5,000
157. The Hills Company, a calendar year company, purchased a new machine for P280,000 on Estimated life of the new machine 8 years
January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The What is the expected payback period for the new machine? (E)
accounting (book value) rate of return (ARR.) is expected to be 15% on the initial increase in A. 4.44 years C. 8.50 years
required investment. On the assumption of a uniform cash inflow, this investment is expected B. 2.67 years D. 3.78 years
to provide annual cash flow from operations, net of income taxes, of
A. P35,000 C. P42,000 Bailout Period
B. P40,250 D. P77,000 162. A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
and salvage value:
Payback Period Year Net cash inflow Salvage value
158. Which of the following is(are) closely relevant to Payback Method? (M) 1 500,000 800,000
A. Intermediate cash flows are reinvested at zero percent. 2 500,000 600,000
B. The use of cash inflows instead of profit. 3 600,000 500,000
C. Avoidance of too much risk of uncertainty. 4 800,000 400,000
D. Explicit considerations of timing of cash flows. 5 700,000 300,000
E. Prevention of excessive liquidity problems.
F. Cost of capital What is the bailout period for the project?
A. All of these C. A, B, C, E A. 3.25 yrs. C. 2.73 yrs
B. A, C, E, F D. B, C, E B. 2.5 yrs D. 2.4 yrs.
159. The payback method assumes that all cash inflows are reinvested to yield a return equal to Net Present Value
A. zero C. the Time-Adjusted-Rate-of-Return 163. The King of Hearts, Inc. is considering to replace its old equipment with a more efficient one.
B. the Discount Rate D. the Cost-of-Capital The old equipment was purchased two years ago for P720,000. Though the old equipment will
be used for eight years, the company elected to depreciate it ever 6 years. If the company
160. The relationship between payback period and IRR is that (E) would keep and use the old equipment during its remaining useful life, the annual cash
operating expenses will be P640,000. The old equipment can be sold for P380,000. Third year 90,000
The new equipment costs the company P900,000. The new equipment will be depreciated Fourth year 60,000
over its useful life of six years without any salvage value. The use of the new equipment will Fifth year 30,000
decrease the company's cash operating expenses by P175,000, The company is consistently
using straight-line method of depreciation with 32% income tax. The company uses 16% cost
of capital.
The purchase of the new equipment will result to net present value of: (D)
A. P127,351 C. P19,901
B. P(14,143) D. P11,922
164. Panama Insurance Companys 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 Companys 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)
165. 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
The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 168. Sulu Company is considering to acquire a machine in order to reduce its direct labor costs.
percent at end of each period are: This machine shall last for 4 years with no salvage value. His initial analysis indicated that the
End of: Period 1 0.8928, Period 2 - 0.79719, Period 3 - 0.71178, Period 4 - 0.63552, time-adjusted rate of return is 15 percent. At 12 percent (cost of capital to finance the
Period 5 - 0.56743 purchase of the machine), the company expects net present value of P5,470,80.
Had Roxas used straight-line method of depreciation, what is the difference in net present The present value of 1 for four periods at 12 percent is 3.03735 and at 15 percent is 2.85499.
value provided by the machine at a discount rate of 12 percent? Ignoring income tax considerations, the profitability index is (D)
A. Increase of P9,750 C. Decrease of P24,376 A. 1,064 C. 1.047
B. Decrease of P9,750 D. Increase of P24,376 B. 1,183 D. 1,250
166. For P450,000, Miggs Corporation purchased a new machine with an estimated useful life of Internal Rate of Return
five years with no salvage value. The machine is expected to produce cash flow from 169. A weakness of the internal rate of return method for screening investment projects is that it:
operations, net of 40 percent income taxes, as follows: (E)
First year P160,000 A. does not consider the time value of money
Second year 140,000 B. implicitly assumes that the company is able to reinvest cash flows from the project at the
Third year 130,000 company's discount rate
Fourth year 120,000 C. implicitly assumes that the company is able to reinvest cash flows from the project at the
Fifth year 100,000 internal rate of return
Miggs will use the sum-of-the-years-digits* method to depreciate the new machine as follows: D. fails to consider the timing of cash flows
First year P150,000
Second year 120,000 170. The Forest Company is planning to invest in a machine with a useful life of five years and no
Third year 90,000 salvage value. The machine is expected to produce cash flow from operations, net of income
Fourth year 60,000 taxes, of P20,000 in each of the five years. Forest's expected rate of return is 10%. Information
Fifth year 30,000 on present value and future amount factors is as follows.
The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 PERI0D
percent at end of each period are: 1 2 3 4 5
End of: Period 1 - 0.8928, Period 2 - 0.79719, Period 3 - 0.71178 Period 4 - 0.63552, Period 5 Present value of P1 at 10% .909 .826 .751 .683 .621
- 0.56743
Present value of an annuity of P1 at 10% .909 1.736 2.487 3.170 3.791
Had Miggs used straight-line method of depreciation, what is the difference in net present
Future amount of P1 at 10% 1.100 1.210 1.331 1.464 1.611
value provided by the machine at a discount rate of 12 percent? (M)
A. Increase of P9,750 C. Decrease of P24,376 Future amount of an annuity of P1 at 10% 1.00 2.100 3.310 4.641 6.105
B. Decrease of P9,750 D. Increase of P24,376 How much will the machine cost?
A. P32,220 C. P 75,820
Profitability Index B. P62,100 D. P122,100
167. 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 171. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltops expected rate
A. 1.367 C. 2.438 of return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and
B. 3.333 D. 1.300 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 173. Payback Company is considering the purchase of a copier machine for P42,825. The copier
the third year? machine will be expected to be economically productive for 4 years. The salvage value at the
A. P17,268 C. P22,994 end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of
B. P22,000 D. P30, 618 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.
172. Care Products Company is considering a new product that will sell for P100 and have a In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflow to
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500 and be provided by the machine?
having a five-year useful life and no salvage value is needed, and will be depreciated using the A. P17,860 C. P25,000
straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in B. P15,000 D. P35,700
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. 174. King of Kings Company has been renting equipment during peak season in addition to its own
Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling equipment in handling standard materials. The rental cost averages P9,000 a year. The
price (rounded to nearest peso) needed to earn a 12 percent internal rate of return? company's Investment Committee is evaluating the possibility of buying additional equipment
A. P81.00 C. P70.00 at a cost of P225,000 with an estimated useful life of 5 years and with no salvage value at the
B. P85.00 D. P90.00 end of 5 years. The committee estimates that it can save P0.25 per unit of material by using its
own equipment. Also, it estimates that 270,000 units can be handled \n each of the 5 years, A
15% discounted rate of return is considered appropriate, ignoring income tax. Present value of
annuity of 1, at 15% for 5 years, is 3,352.
What is the approximate number of units at which the investment can just meet the 15% return
requirement? (D)
A. 232,496 C. 304,496
B. 268,496 D. 256,428
Equipment Replacement
175. 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
176. 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? Project 1 Project 2 Project 3 Project 4
A. P10,000 decrease C. P35,000 increase Initial cash outlay P200,000 P298,000 P248,000 P272,000
B. P15,000 decrease D. P40,000 increase Annual net cash inflows
Year 1 P 65,000 P100,000 P 80,000 P 95,000
Investment Decision Year 2 70,000 135,000 95,000 125,000
177. The NPV and IRR methods give Year 3 80,000 90,000 90,000 90,000
A. the same decision (accept or reject) for any single investment Year 4 40,000 65,000 80,000 60,000
B. the same choice from among mutually exclusive investments Net present value ( 3,798) 4,276 14,064 14,662
C. different rankings of projects with unequal lives Profitability index 98% 101% 106% 105%
D. the same rankings of projects with different required investments Internal rate of return 11% 13% 14% 15%
Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
178. In choosing from among mutually exclusive investments the manager should normally select amount of funds?
the one with the highest No Budget Restriction P600,000Available Funds P300,000Available Funds
A. NPV C. payback reciprocal
A. Projects 2,3, & 4 Projects 3 & 4 Project 3
B. IRR D. book rate of return
B. Projects 1, 2, & 3 Projects 2, 3 & 4 Projects 3 & 4
C. Projects 1, 3, & 4 Projects 2 & 3 Project 2
179. The advantage of the Net Present Value method over the Internal Rate of Return method for
D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
screening investment projects is that it:
A. does not consider the time value of money
B. implicitly assumes that the Compaq is able to reinvest cash flows from the project at the
company's discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the
internal rate of return
D. fails to consider the timing of cash flows
180. 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.
181. Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:

Comprehensive Prior month's sales 75%

182. Which of the following combinations is possible? Sales two months prior to current month 6%
Profitability Index NPV IRR Sales three months prior to current month 4%
A. greater than 1 positive equals cost of capital Cash discounts (2/30, net/90) 2%
B. greater than 1 negative less than cost of capital Doubtful accounts 1%
C. less than 1 negative less than cost of capital* Credit sales:
D. less than 1 positive less than cost of capital January - estimated P2,000,000
December 1,800,000
Master Budget November 1,600,000
Basic Concepts October 1,900,000
183. Zero-base budgeting requires managers to How much is the estimated credit to Accounts Receivable as a result of collections expected
A justify expenditures that are increases over the prior periods budgeted amount. during January?
B. justify all expenditures, not just increases over last years amount. A. P1,730,200 C. P1,762,000
C. maintain a full-year budget intact at all times. B. P1,757,200 D. P1,802,000
D. maintain a budget with zero increases over the prior period.
187. The Mango Company is preparing its cash budget for the month of May. The following
184. A systematized approach known as zero-based budgeting information is available concerning its accounts payable:
A. presents the plan for only one level of activity and does not adjust to changes in the level Estimated credit sales for May P200,000
of activity. Actual credit sales for April 150,000
B. presents a statement of expectations for a period of time but does not present a firm Estimated collections in May for credit sales in May 20%
commitment. Estimated collections in May for credit sales in April 70%
C. divides the activities of individual responsibility centers into a series of packages which Estimated collections in May for credit sales prior to April P12,000
are ranked ordinally. Estimated write-offs in May for uncollectible credit sales 8.000
D. classifies budget requests by activity and estimates the benefits arising from each activity. 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?
Production Budget A. P142,000 C. P150,000
185. Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a B. P149,000 D. P157,000
growth in sales of 5 percent per month. The target ending inventory in units of the product is
80 percent of the next months 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
186. The Magic Company is preparing its cash budget for the month ending January 31. The
following information pertains to Magic's past collection experience from its credit sales:
Current month's sales 12%
188. At the beginning of the current month, Rose had P100,000. Cash disbursements were A. 17% C. 23%
P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money B. 19% D. 25%
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 Integrated Ratios
A. invest P200,000 C. invest P350,000 193. Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The
B. borrow P400,000 D. do nothing 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.
Financial Statement Analysis What are the total equities available if the ratio of long-term debt to stockholders equity is
Horizontal Analysis 60%?
189. Sales for a three-year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0 A. P1,788,000 C. P2,046,000
million. Using year 1 as the base year, the respective percentage increase in sales in year 2 B. P1,980,000 D. P858,000
and 3 are
A. 115% and 125% C. 115% and 130% 194. Selected data from Maui Companys year-end financial statements are presented below. The
B. 115% and 109% D. 87% and 80% difference between average and ending inventory is immaterial.
Current ratio 2.0
Activity Ratios Quick ratio 1.5
190. Baguio Company's accounts receivable were P600,000 at the beginning of the year and Current liabilities P120,000
P800,000 at the end of the year. Cash sales for the year were P300,000. The accounts Inventory turnover (based on cost of sales) 8 times
receivable turnover for the year was 5 times. Baguio Company's total sales for the year were: Gross profit margin 40%
A. P 800,000 C. P3,300,000 Mauis net sales for the year were
B. P1,300,000 D. P3,800,000 A. P800,000 C. P672,000
B. P480,000 D. P1,200,000
Solvency Ratios
191. The ratio that measures a firms ability to generate earnings is 195. Assume you are given the following relationships for the Bryan Company:
A. times interest earned. C. days sales in receivables. Sales/total assets 1.5X
B. sales to working capital. D. operating asset turnover. Return on assets (ROA) 3%
Return on equity (ROE) 5%
Profitability Analysis The Bryan Companys debt ratio is
192. Selected financial data for May on Company appear below: A. 40% C. 60%
Account Balances B. 35% D. 65%
Beginning of Year End of Year
Preferred stock P125,000 P125,000
Common stock 300,000 400,000
Retained earnings 75,000 185,000
During the year, the company paid dividends of P10,000 on its preferred stock. The company's
net income for the year was P120,000. The company's return on common stockholders' equity
for the year is closest to:

196. The following data were obtained from the records of Trend, Inc.: 200. Salami Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The
Current ratio (at year end) 1.5 to 1 president is unhappy with the current return on assets, and he thinks it could be doubled. This
Inventory turnover based on sales and ending inventory 15 times could be accomplished (1) by increasing the profit margin to 15 percent, and (2) by increasing
Inventory turnover based on cost of goods sold and ending inventory 10.5 times the total assets turnover. What new asset turnover ratio, along with the 15 percent profit
Gross margin for 2002 P315,000 margin, is required to double the return on assets?
What was Trend, Inc.s December 31, 2002 balance in the Inventory account? A. 35% C. 40%
A. P138,000 C. P140,000 B. 45% D. 50%
B. P 70,000 D. P135,000
201. The board of directors of Contemporary Company was unhappy with the current return on
197. The following were reflected from the records of War Freak Company: common equity. Though the return on sales (profit margin) was impressively good at 12.5
Earnings before interest and taxes P1,250,000 percent, the asset turnover was only 0.75. The present debt ratio is 0.40.
Interest expense 250,000 Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:
Preferred dividends 200,000 Profit margin should be raised to 15 percent.
Payout ratio 40 percent The new capital structure will be revised by raising debt component.
Shares outstanding throughout 2003 The asset turnover will be maintained at 0.75.
Preferred 20,000 The proposed adjustment is estimated to raise return on equity by 50 percent.
Common 25,000 What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150
Income tax rate 40 percent percent of the present level?
Price earnings ratio 5 times A. 0.52 C. 0.61
The dividend yield ratio is B. 0.68 D. 0.72
A. 0.50 C. 0.12
B. 0.40 D. 0.08 Ratio Analysis
202. The days sales-in-receivable ratio will be understated if the company
Sensitivity Analysis A. uses a natural business year for its accounting period*
198. Annette Company uses the direct write-off method to account for uncollectible accounts B. uses a calendar year for its accounting period
receivable. If the company subsequently collects an account receivable that was written off in C. uses average receivable in the ratio calculation
a prior accounting period, the effect of the collection of the account receivable on Annettes D. has high sales at the end of the year
current ratio and total working capital would be
A. B. C. D. 203. A firms financial risk is a function of how it manages and maintains its debt. Which one of the
Current Ratio None Increase Decrease None following sets of ratios characterizes the firm with the greatest amount of financial risk?
Working Capital None Increase Decrease Increase 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
199. Taylor company paid out one-half of its 2002 earnings in dividends. Taylors earnings C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
increased by 20%, and the amount of its dividends increased by 15% in 2003. Taylors D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity*
dividend payout ratio for 2003 was
A. 75.0% C. 47.9%
B. 52.3% D. 41.7%

Working Capital Management 208. Morr Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly.
Working Capital Policy Morr has the opportunity to invest the money at 24% per annum. The company spends, on the
204. As a company becomes more conservative with respect to working capital policy, it would tend average, P40 for every cash conversion to marketable securities.
to have a(n) What is the optimum average cash balance?
A. increase in the ratio of current liabilities to noncurrent liabilities. A. P60,000 C. P43,000
B. decrease in the operating cycle. B. P55,000 D. P27,500
C. decrease in the operating cycle.
D. increase in the ratio of current assets to noncurrent liabilities.* Receivables Management
209. It is held that the level of accounts receivable that a firm has or holds reflects both the volume
205. Wen Company follows and aggressive financing policy in its working capital management of a firms sales on account and a firms credit policies. Which one of the following items is not
while Manong Corporation follows a conservative financing policy. Which one of the following considered as part of a firms credit policy?
statements is correct? A. The maximum risk group to which credit should be extended.
A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of short- B. The extent (in terms of money) to which a firm will go to collect an account.
term debt to total debt. C. The length of time for which credit is extended.
B. Wen has a low current ratio while Manong has a high current ratio D. The size of the discount that will be offered.
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 210. Relax Companys budgeted sales for the coming year are P40,500,000 of which 80% are
assets with short-term debt. 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
Cash Management from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
206. Gear Inc., has a total annual cash requirement of P14,700,000 which are to be paid uniformly. standards will result in an expected increase in the average accounts receivable balance of
Gear has the opportunity to invest the money at 24% per annum. The company spends, on the A. P540,000 C. P900,000
average, P40 for every cash conversion to marketable securities. B. P2,700,000 D. P1,620,000
What is the optimal cash conversion size?
A. P60,000 C. P80,000 211. Matang-Lawins budgeted sales for the coming year are P48,000,000, of which 80% are
B. P62,500 D. P70,000 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
207. The Alabang Company has a daily average collection of checks of P250,000. It takes the average collection period from 30 days to 45 days. Based on a 360-day year, the proposed
company 4 days to convert the checks to cash. Assume a lockbox system could be employed relaxation of credit standards would result in an expected increase in the accounts receivable
which would reduce the cash conversion period to 3 days. The lockbox system would have a balance of
net cost of P25,000 per year, but any additional funds made available could be invested to net A. P3,440,000 C. P3,040,000
8 percent per year. Should Alabang adopt the lockbox system? B. P1,440,000 D. P960,000
A. Yes; the system would free P250,000 in funds
B. Yes; the benefits of the lock-box system exceed the costs. 212. Lipa company currently has annual sales of P2,000,000. Its average collection period is 40
C. No; the benefit is only P10,000. days, and bad debts are 5 percent of sales. The credit and collection manager is considering
D. No; the firm would lose P5,000 per year if the system were used. 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
Marketable Securities Management 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. Inventory Management
What would be the incremental investment in receivables if the change were made? 213. Which of the following items is irrelevant for a company that is attempting to minimize the cost
A. P(16,667) C. P(48,611) of the stockout?
B. P(27,167) D. P(45,833) A. Cost of placing an order C. Storage cost of inventory
B. Contribution margin on lost sales D. Size of the safety stock
214. 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.
215. The Cindy Fashion uses about 200,000 yards of a particular fabric each year. The fabric costs
P150 per yard. The current policy is to order the fabric 8 times a year. Incremental ordering
costs ate about P900 per order, and incremental carrying costs are about P0.75 per yard,
much of which represents the opportunity cost of the funds tied up in inventory. How much
total annual costs are associated with the current inventory policy?
A. P16,575 C. P25,950
B. P18,750 D. P9,200
216. 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:
A. B. C. D.
Carrying costs P150,000 P300,000 P150,000 P300,000
Set-up costs P 25,000 P 25,000 P 5,000 P 5,000
217. The Glimpse Corporation purchases 60,000 headbands per year. The average purchase lead
time is 20 working days. Maximum lead time is 27 working days. The corporation works 240
days per year. The appropriate safety stock level and the reorder point for the company are:
A. B. C. D.
Safety Stock 1,750 1,750 1,167 1,167
Reorder Point 6,750 5,250 6,750 5,250 the 60th day is

A. 22.27 percent C. 18.37 percent
218. The sales office of Hermit Company has developed the following probability distribution for B. 27.84 percent D. 14.69 percent
daily sales of a perishable product.
X (Units Sold) P (Sales = X) Short-term Loans
200 0.2 222. Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
250 0.5 annum. The bank requires 10 percent of loan as compensating balance in its new checking
300 0.2 account. The loan is payable at the end of 6 months. The effective interest rate of this loan is
350 0.1 A. 28.21% C. 14.29%
B. 27.27% D. 15.38%
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
223. The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate
A. 245 C. 315
of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking
B. 300 D. 220
account. Assuming Dean would normally maintain a zero balance in its checking account, the
effective interest rate on the loan is
219. Each stockout of a product sold by AFM Co. costs P1,750 per occurrence. The companys
A. 8.0% C. 11.11%
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
B. 10.0% D. 6.4%
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
220. If a retailers 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%
221. If a firm purchases raw materials from its supplier on a 3/10, n/50 term, the approximate
annual interest rate (using 360-day year) of giving up a cash discount and making payment on

Cost Of Capital
Cost of Debt Dividend Policy
224. The Maru Companys bonds have 5 years remaining to maturity. Interest is paid annually; the 229. Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current
bonds have a P1,000 face value; and the coupon interest rate is 9 percent. capital structure is 40% debt and 60% common equity. The director of capital budgeting has
What is the estimated yield to maturity of the bonds at their current market price of P850? determined that the optimal capital spending for next year is P1,200,000. If Resi follows a
A. 10.64 percent C. 11.76 percent strict residual dividend policy, what is the expected dividend payout ratio for next year?
B. 13.20 percent D. 10.00 percent A. 80.0% C. 40.0%
B. 66.7% D. 10.0%
Capital Asset Pricing Model
225. Spec, Inc.s stock is expected to generate a dividend and terminal value one year from now of 230. Galvez Company expects next years after-tax income to be P7,500,000. The firms debt ratio
P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6 percent, and the expected is currently 40 percent. Galvez has P6,000,000 of profitable investment opportunities, and it
return market return is 11 percent. What should the equilibrium price of Specs stock in the wishes to maintain its existing debt ratio. According to the residual dividend policy, what is the
market now? expected dividend payout ratio next year?
A. P50.67 C. P53.77 A. 52.0 percent C. 48.0 percent
B. P51.35 D. P43.84 B. 75.0 percent D. 25.0 percent
226. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by 231. Glenda Company expects to generate P10 million internally which could be available for
adding the risk-free rate of return to the incremental yield of the expected market return which financing part of its P12 million capital budget for this coming year. Glendas management
is adjusted by the company's beta. What is MNO's expected rate of return if the equity market believes that a debt-equity ratio of 40 percent is best for the firm. How much should be paid in
is expected to earn 12 percent; the treasury bonds are currently yielding 5 percent. The beta dividends if the target debt-equity ratio is to be maintained?
coefficient for MNO is estimated to be 0.60. MNO is subject to an effective corporate income A. P2,800,000 C. P8,571,429
tax rate of 40 percent. B. P1,428,571 D. P4,000,000
A. 12.00 percent C. 9.20 percent
B. 12.20 percent D. 7.20 percent Quantitative Methods
Learning Curve
Dividend Growth Model 232. Taal Company manufactures specialty components for the electronics industry in a highly
227. Tiger Companys stock is currently selling for P60 a share. The firm is expected to earn P5.40 labor intensive environment. May on Company has asked Taal to bid on a component that
per share and to pay a year-end dividend of P3.60. Taal made for May on last month. The previous order was for 80 units and required 120 hours
If investors require a 9 percent return, what rate of growth must be expected for Tiger? of direct labor to manufacture. Mayon would now like 240 additional components. Taal
A. Zero growth C. 40.0 percent experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed
B. 3.0 percent D. 50.0 percent for Taal to complete 240 additional components is
A. 360.0 C. 307.2
228. The dividends and stock price of Mi Company are expected to grow at 7 percent per year after B. 187.2 D. 76.8
this year. Mis common stock sells for P25 per share, its last dividend was P2.50 and the
company will pay P2.675 at the end of the current year. Mi should pay P2.50 flotation cost. Probabilities
What is the expected returns on retained earnings for Mi Company? 233. Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that
A. 17.7 percent C. 18.45 percent silver worth P15 million can be sold. There is a 20% probability that the silver will only be
B. 18.89 percent D. 19.72 percent worth P500,000. What is the maximum Express would be willing to spend to develop the

mine? 237. Castle Building Company uses the critical path method to monitor construction jobs. The
A. P10,000,000 C. P3,100,000 company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-per-
B. P 5,000,000 D. P0 week completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.
234. CTV Company has three sales departments. Department FA processes about 50 percent of The following activities can be crashed.
CTVs sales, Department TA about 30 percent, and Department PA about 20 percent. In the Activities Cost to Crash 1 Week Cost to Crash 2 Weeks
past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent, and 2.5 B-C P 8,000 P15,000
percent, respectively. A random audit of the sales records yields a recording error of sufficient D-E 10,000 19,600
magnitude to distort the companys results. The probability that Department FA is responsible E-F 8,800 19,500
for this error is Castle desires to reduce the normal completion time of Job WW and, at the same time, report
A. .50 C. .02 the highest possible income for the year. Castle should crash
B. .33 D. .25 A. activity B-C 1 week and activity EF 1 week
B. activity B-C 2 weeks
235. A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft C. activity D-E 1 week and activity B-C 1 week
drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be D. activity D-E 1 week and activity E-F 1 week
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 Linear Programming
60%. 238. Anderson Co. manufactures two different products, A and B. The company has 100 pounds of
The expected payoff for either selling coffee or soft drinks and the expected payoff if the raw materials and 300 direct labor hours available for production. The time requirement and
vendor has perfect information are contribution margins per unit are as follows:
Coffee Soft drinks Perfect information A B
A. P1,360 P1,600 P3,000 Raw materials per unit (lbs) 1 2
B. P1,960 P1,600 P2,200 Direct labor hours per unit 4 2
C. P2,200 P1,900 P1,360 Contribution margin per unit P4 P5
D. P3,900 P1,900 P1,960
The objective function for maximizing profits and the equation for the constrain on raw
materials are:
Expected Value
Objective Function Constraint on raw materials
236. The following table represents payoffs for farm products for three different sales levels. Which
one of the products would be illogical if only three products can be produced? A. Max P1A + P2B 4A + 2B < 100
B. Max P4A + P5B 1A + 2B < 100
Demand Product A Product B Product C Product D
C. Max P4A + P2B 4A + 5B < 100
Sales 1 (10,000) 6,000 8,000 (12,000) D. Min P4A + P5B 4A + 5B < 300
Sales 2 26,000 19,000 22,000 17,000
Sales 3 31,000 38,000 33,000 37,000 Activity-Based Costing
A. Product A C. Product C 239. A cost system that first traces costs to activities and then traces cost from activities to products
B. Product B D. Product D A. Job order cost system. C. Activity-based cost system.
B. Process cost system. D. Flexible cost system.
PERT-CPM

240. The last step in activity-based costing is to C. 1, 2, 3, 4, 5 6

A. identify the major activities that pertain to the manufacture of specific products D. 2, 3, 6 1, 4, 5
B. allocate manufacturing overhead costs to activity cost pools
C. identify the cost drivers that accurately measure each activitys contribution to the finished 246. The Oilfield plant has two categories of overhead: maintenance and inspection. Costs
product expected for these categories for the coming year are as follows:
D. assign manufacturing overhead costs for each activity cost pool to products Maintenance P100,000
Inspection 150,000
241. McMds standard cost card indicates that it takes three hours of direct labor to produce one The plant currently applies overhead using direct labor hours and expected capacity of 50,000
unit of product. A recently conducted time and motion study revealed that it should take one direct labor hours. The following data have been assembled for use in developing a bid for a
hour to produce the same unit. Labor cost is P150 per hour. proposed job:
McMds value-added, and nonvalue-added costs would be Direct materials P1,000
A. P150 and P0 C. P150 and P300 Direct labor P4,000
B. P0 and P150 D. P450 and P0 Machine hours 500
Number of inspections 4
242. Designing and redesigning are activities that are classified as Direct labor hours 800
A. facility level C. unit level Total expected machine hours for all jobs during the year is 25,000, and the total expected
B. batch level D. product level number of inspections is 1,500.
Using activity-based costing and the appropriate activity drivers, the total cost of the potential
243. The examples of activities at the product level include job would be
A. scheduling, setting up, and moving C. heating, lighting, and security A. P2,400 C. P7,400
B. designing, changing, and advertising D. cutting, painting, and packaging B. P3,600 D. P7,750
244. A company that uses activity-based costing to develop standard costs Quality Cost
A. will usually have more than one variable overhead component in its standard costs 247. The cost of statistical quality control in a product quality cost system is
B. cannot compute variable overhead efficiency variances A. training cost C. appraisal cost
C. will have less information about the profitability of individual products B. internal failure cost D. prevention cost
D. all of the above
Information Systems
245. Classify the following as volume (unit) base or nonvolume (activity) base: 248. The process of learning how the current system, functions, determining the needs of users,
1. Number of purchase orders issued and developing the logical requirements of a proposed system is referred to as
2. Direct labor hours A. systems maintenance C. systems feasibility study
3. Number of machine hours B. systems analysis D. systems design
4. Number of set ups
5. Number of receiving reports issued 249. A major advantage of obtaining a package of applications programs from a software vendor is
6. Direct material cost A. the likelihood of reducing the time span from planning to implementation.
Volume (Unit) Base Nonvolume (Activity) Base B. the ability to more easily satisfy the unique needs of users
A. 1, 4, 5, 6 2, 3 C. greater operating efficiency from the computer
B. 1, 4, 5 2, 3, 6 D. the assurance that the programs will be written in a high-level language
B. systems feasibility D. systems maintenance

250. The least risky strategy for converting from a manual to a computerized accounts receivable
system would be a
A. direct conversion C. pilot conversion
B. parallel conversion D. database conversion
251. 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.
252. The batch processing of business transactions can be the appropriate mode when
A. the sequence of master file records is not relevant
B. timeliness is a major issue
C. a single handling of the data is desired
D. economy of scale can be gained because of high volume of transactions
253. 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
254. 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.
255. 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
256. 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

257. An integrated set of computer programs that facilitates the creation, manipulation, and patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
querying of integrated files is called a(n) Annual Patient Days Aides Nurses Supervising Nurses
A. translator C. operating system 10,000 14,000 21 11 4
B. database management system D. flat file system 14,001 17,000 22 12 4
17,001 23,725 22 13 4
258. Turnaround documents 23,726 25,550 25 14 5
A. generally circulate only within the computer center. 25,551 27,375 26 14 5
B. can be read and processed only by the computer. 27,376 29,200 29 16 6
C. are generated by the computer and eventually return to it. The staffing levels above represent full-time equivalents, and it should be assumed that the
D. are only used internally in an organization. Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Situational Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
Questions 259 thru 265 are based on the following information: and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and
Calamba Hospital operates a general hospital but rents space and beds to separate entities for aides was P72,000, P169,000, and P110,000, respectively.
specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
separate entity for common services to its patients like meals and laundry and for all administrative estimated that during 90 of these capacity days, the demand average 17 patients more than
services such as billings, collections, etc. All uncollectible accounts are charged directly to the capacity and even went as high as 20 patients more on some days. The hospital has an additional
entity. Space and bed rentals are fixed for the year. 20 beds available for rent for the coming fiscal 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 365 259. The variable expense per patient day is
days, and had revenue of P1,138,800. A. P15.08 C. P15.00
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were: B. P12.50 D. P50.00
Basis of Allocation
Patient Days Bed Capacity 260. The contribution margin per patient day is
Dietary P 42,952 A. P49.92 C. P50.00
Janitorial P 12,800 B. P52.50 D. P52.00
Laundry 28,000
Lab, other than direct charges to patients 47,800 261. How many patient days are necessary to cover fixed costs for bed capacity and for
Pharmacy 33,800 supervisory nurses?
Repairs and maintenance 5,200 7,140 A. 9,500 C. 12,500
General administrative services 131,760 B. 11,500 D. 10,500
Rent 275,320
Billings and collections 40,000 262. The number of patient days needed to cover total costs is
Bad debt expense 47,000 A. 14,200 C. 15,820
Other 18,048 . B. 15,200 D. 14,220
P262,800 P453,000
The only personnel directly employed by the Pediatrics Department are supervising nurses, 263. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
nurses, and aides. The hospital has minimum personnel requirements based on total annual same as in the past year, what would be the increase in revenue?
A. P99,450 C. P105,450 Net income before taxes P21,125

B. P87,750 D. P89,750 Income taxes (40%) 8,450
Net income P12,675
264. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied Note: The average pizza sells for P2.50.
per patient day is
A. P22,935 C. P22,965 266. What is the tax shield on the noncash fixed costs?
B. P22,950 D. P23,935 A. P3,200 C. P3,400
B. P14,950 D. P5,400
265. What is the increased fixed cost applied for bed capacity, given the increased number of
beds? 267. What is the breakeven point in number of pizzas that must be sold?
A. P151,000 C. P147,000 A. 25,929 C. 18,150
B. P173,950 D. P152,000 B. 23,569 D. 42,114
Questions 266 thru 268 are based on the following information. 268. What is the cash flow breakeven point in number of pizzas that must be sold?
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 A. 19,529 C. 12,990
per month. Two women were hired to work full time at the restaurant and six college students were B. 21,284 D. 10,773
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 Questions 269 through 273 are based on the following information.
P300 per month. The necessary restaurant equipment and delivery cars were purchased with The Statement of Income of Sana, Inc., which represents the operating results for the current fiscal
cash. Ms. Casserole has noticed that expenses for utilities and supplies have been rather year ending December 31, had sales of 1,800 tons of product during the current year. The
constant. Ms. Casserole increased her business between 1998 and 2001. Profits have more than manufacturing capacity of Sana's facilities is 3,000 tons of product. Consider each question's
doubled since 1998. Ms. Casserole does not understand why profits have increased faster than situation separately.
volume. Sales P900,000
A projected income statement for the year ended December 31, 2002, prepared by the accountant, Variable costs
is shown below: Manufacturing P315,000
Selling costs 180,000
Sales P95,000 Total variable costs P495,000
Cost of food sold P28,500 Contribution margin P405,000
Wages & fringe benefits: Fixed costs
Restaurant help 8,150 Manufacturing P90,000
Delivery help 17,300 Setting 112,500
Rent 4,800 Administration 45,000
Accounting services 3,600 Total fixed costs P247,500
Depreciation: Net income before income taxes P157,500
Delivery equipment 5,000 Income taxes (40%) (63,000)
Restaurant equipment 3,000 Net income after income taxes P94,500
Utilities 2,325
Supplies 1,200 73,875 269. The breakeven volume in tons of product for the year is (E)

A. 420 C. 495 Anxious to favorably impress the executive committee, you took the variances and supporting data
B. 1,100 D. 550 home last night to study.
On your way to work this meaning, the papers were laying on the seat of your new, red convertible.
270. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew
stay at the same levels and amounts next year, the after-tax net income that Sana can expect them over the edge of the bridge and into the stream below. You managed to retrieve only one
for next year is (E) page, which contains the following information:
A. P135,000 C. P283,500 Standard Cost Summary
B. P110,250 D. P184,500 Direct materials, 6 pounds at P3 P18.00
Direct labor, 0.8 hours at P5 4.00
271. Sana has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Variable overhead, 0.8 hours at P3 2.40
Assume that all of Sana's costs would be at the same levels and rates as last year. What net Fixed overhead, 0.8 hours at P7 5.60
income after taxes would Sana make if it took this order and rejected some business from P30.00
regular customers so as not to exceed capacity? (M) Total VARIANCES REPORTED
A. P297,500 C. P211,500 Standard Price or Spending Quantity or Volume
B. P252,000 D. P256,500 Cost* Rate Or Efficiency
Budget
272. Without prejudice to your answers to previous questions, and assume that Sana plans to Direct materials P405,000 P6,900 F P9,000 U
market its product in a new territory, Sana estimates that an advertising and promotion Direct labor 90,000 4,850 U 7,000 U
program costing P61,500 annually would need to be undertaken for the next two or three Variable overhead 54,000 P1,300 F ?@
years In addition, a P25 per ton sales commission over and above the current commission to Fixed overhead 126,000 500 F P14,000 U
the sales force in the new territory would be required. How many tons would have to be sold in
* Applied to Work in process during the period
the new territory to maintain Sana's current after-tax income of P94,500? (M)
A. 307.5 C. 273.33 @ Figure obliterated.
B. 1,095 D. 1,545 You recall that manufacturing overhead cost is applied to production on the basis of direct
labor-hours and that all of the materials purchased during the period were used in production.
273. Without prejudice to preceding questions, assume that Sana estimates that the per ton selling Since the company uses JIT to control work flows, work in process inventories are insignificant
price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs and can be ignored.
will not change. What sales volume m pesos will be required to earn an after-tax net income of It is now 8:30 A.M. The executive committee meeting starts in just one hour, you realize that to
P94,500 next year? (M) avoid looking like a bungling fool you must somehow generate the necessary "backup" data
A. P1,140,000 C. P1,500,000 for the variances before the meeting begins. Without backup data it will be impossible to lead
B. P825,000 D. P1,350,000 the discussion or answer any questions.
Questions 274 thru 279 are based on the following information. 275. How many pounds of direct materials were purchased and used in production?
You have recently graduated from a university and have accepted a position with Villar Company, A. 138,000 lbs. C. 132,000 lbs.
the manufacturer of a popular consumer product. During your first week on the job, the vice B. 135,000 lbs. D. 137,300 lbs.
president has been favorably impressed with your work. She has been so impressed, in fact, that
yesterday she called you into her office and asked you to attend the executive committee meeting 275. What was the actual cost per pound of material?
this morning for the purpose of leading a discussion on the variances reported for last period. A. P3.00 C. P3.05
B. P2.95 D. P3.10 Fixed manufacturing OH costs (total) P300,000 P300,000

Horizon produces a single product. Fixed manufacturing overhead costs are applied to the product
276. How many actual direct labor hours were worked during the period? on the basis of each years production, (Thus, a new fixed manufacturing overhead rate is
A. 18,000 C. 16,600 computed each year) Variable selling and administrative expense are P1 per unit sold.
B. 19,400 D. 18,970
280. Had the company used variable costing, the profit for each year , 2004 and 2005, would have
277. How much actual variable manufacturing overhead cost was incurred during the period? been: (E)
A. P55,300 C. P58,200 A. P40,000, P100,000 C. P100,000, P100,000
B. P56,900 D. P59,500 B. P100,000, P40,000 D. P40,000, P40,000
278. What is the total fixed manufacturing overhead cost in the company's flexible budget? 281. Using the absorption costing, the products unit cost for 2004 and 2005, respectively, are: (E)
A. P112,500 C. P140,000 A. B. C. D.
B. P139,500 D. P125,500
2004 P8 P23 P23 P8
2005 P8 P23 P20 P9
279. What were the denominator hours for last period?
A. 18,000 hours C. 22,000 hours
B. 2.0,000 hours D. 25,000 hours 282. If JIT has been in use during 2005, what would the companys net income have been under
absorption costing? (M)
A. P100,000 C. P20,000
Question Nos. 280 through 282 are based on the following information.
This makes no sense at all, said Tom, President of Horizon, Inc. "We sold the same number of B. P40,000 D. P60,000
units this year as we did fast year, yet our profits have more than doubled. Who made the goof -
the computer or the people who operate it?" The statements to which Tom was referring are shown Questions 283 through 286 are based on the following information:
Pinewood Craft Company is considering the purchase of two different items of equipment, as
below (absorption costing basis):
described below:
2004 2005
Sales (20,000 units each year) P700,000 P700,000 Machine A. A compacting machine has just come onto the market that would permit Pinewood
Less cost of goods sold 460,000 400,000 Craft Company to compress sawdust into various shelving products. At present the sawdust is
Gross margin 240,000 300,000 disposed of as a waste product. The following information is available on the machine:
Less: Operating expenses 200,000 200,000 A. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-
Profit P40,000 P100,000 year useful life. The company uses straight-line depreciation and considers salvage value in
computing depreciation deductions.
The statements above show the results of the first two years of operation. In the first year (2004), B. The shelving products manufactured from use of the machine would generate revenues of
the company produced and sold 20,000 units. In 2005, the company again sold 20,000 units, but it P300.000 per year. Variable manufacturing costs would be 20% of sales.
increased production in order to have a stock of units on hand, as shown below: C. Fixed expenses associated with the new shelving products would be (per year): advertising,
2004 2005 P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800.
Production in units 20,000 25,000 Machine B. A second machine has come onto the market that would allow Pinewood Craft
Sales in unite 20,000 20,000 Company to automate a sanding process that is now done largely by hand. The following
Variable production cost per unit P8 P3 information is available.
A. The new sanding machine would cost P234,000 and would have no salvage value at the end 6. 36. 66. 96. 126.
of its 13-year useful life. The company would use straight-line depreciation on the new 7. 37. 67. 97. 127.
machine. 8. 38. 68. 98. 128.
B. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a 9. 39. 69. 99. 129.
scrap value of P9,000. 10. 40. 70. 100. 130.
C. The new sanding machine would provide substantial annual savings in cash operating 11. 41. 71. 101. 131.
costs. It would require an operator at an annual salary of P16,350 and P3,400 in annual 12. 42. 72. 102. 132.
maintenance costs. The current, hand-operated sanding procedure costs the company 13. 43. 73. 103. 133.
P78,000 per year in total. 14. 44. 74. 104. 134.
15. 45. 75. 105. 135.
Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases. 16. 46. 76. 106. 136.
Also, the company will not purchase equipment unless the equipment has a payback period of 4.0
17. 47. 77. 107. 137.
years or less. (In all the following questions, please ignore income tax effect)
18. 48. 78. 108. 138.
19. 49. 79. 109. 139.
283. The expected income each year from the new shelving products (Machine A) is:
A. P52,500 C. P240,000 20. 50. 80. 110. 140.
B. P84,000 D. P 92,500 21. 51. 81. 111. 141.
22. 52. 82. 112. 142.
284. The annual savings in cost if Machine B is purchased is 23. 53. 83. 113. 143.
A. P56,250 C. P43,250 24. 54. 84. 114. 144.
B. P38,250 D. P21,750 25. 55. 85. 115. 145.
26. 56. 86. 116. 146.
285. The simple rates (%) of return for Machine A and Machine B are: 27. 57. 87. 117. 147.
A. B. C. D. 28. 58. 88. 118. 148.
Machine A 12.5 20.0 12.5 20.0 29. 59. 89. 119. 149.
Machine B 17.0 17.0 16.4 16.4 30. 60. 90. 120. 150.
286. The payback periods (years) for Machine A and Machine B are: 151. 181. 211. 241. 271.
A. B. C. D. 152. 182. 212. 242. 272.
Machine A 4.5 5.0 4.5 5.0 153. 183. 213. 243. 273.
Machine B 4.0 4.0 4.2 4.2 154. 184. 214. 244. 274.
155. 185. 215. 245. 275.
1. 31. 61. 91. 121. 156. 186. 216. 246. 276.
2. 32. 62. 92. 122. 157. 187. 217. 247. 277.
3. 33. 63. 93. 123. 158. 188. 218. 248. 278.
4. 34. 64. 94. 124. 159. 189. 219. 249. 279.
5. 35. 65. 95. 125. 160. 190. 220. 250. 280.
161. 191. 221. 251. 281.
162. 192. 222. 251. 282. TRUE STATEMENTS

163. 193. 223. 252. 283.
164. 194. 224. 254. 284. 1. Standard cost can, if properly used, help motivate employees
165. 195. 225. 255. 285.
166. 196. 226. 256. 286. 2. A company would most likely have an unfavorable labor rate variance and a favorable labor
167. 197. 227. 257. efficiency if the mix of workers used in the production process was more experienced than the
168. 198. 228. 258. normal mix
169. 199. 229. 259.
170. 200. 230. 260. 3. The expected annual capacity level has traditionally been used to compute the fixed overhead
171. 201. 231. 261. application rate?
172. 202. 232. 262.
4. A favorable volume variance increases absorption costing net income; it does not affect
173. 203. 233. 263.
variable costing net income.
174. 204. 234. 264.
175. 205. 235. 265.
5. The variable costing format is often more useful to managers than the absorption costing
176. 206. 236. 266. format because costs are classified by their behavior.
177. 207. 237. 267.
178. 208. 238. 268. 6. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable.
179. 209. 239. 269. Consistent with these assumptions, as volume decreases total variable costs and total costs
180. 210. 240. 270. 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 projects relevant cash flows.
9. Payback method does not routinely rely on the assumption that all cash flows occur at the end
of the period?
10. The payback method assumes that all cash inflows are reinvested to yield a return equal to
zero
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?
12. In capital budgeting, a firms cost of capital is frequently used as the discount rate

13. The net present value method assumes that all cash inflows can be immediately reinvested at 26. Discretionary costs are those that management decides to incur in the current period to enable
the discount rate the company to achieve objectives other than the filling of orders placed by customers
14. The basis for measuring the cost of capital derived from bonds and preferred stock, 27. If a firm orders raw materials in quantities larger than the optimum quantity obtained using the
respectively, is the after-tax rate of interest for bonds and stated annual dividend rate for simple economic order quantity model in order to obtain a quantity discount, the company will
preferred stock experience carrying costs higher than ordering costs
15. The weighted average cost of capital that is used to evaluate a specific project should be 28. One of the primary purposes of using a standard cost system is to provide a distinct measure
based on the overall capital structure of the corporation of cost control.
16. The weighted average cost of capital approach to decision making is not directly affected by 29. Favorable variances are not necessarily good variances.
the current budget for capital expansion
30. Whether the variance is favorable or unfavorable is irrelevant to a need of investigating it.
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. 31. The sum of the material price variance and materials quantity variance is not meaningful.
18. The profitability index is the ratio of the present value of cash flows to the original investment 32. The fixed overhead variance would be the same irrespective of the capacity or denominator
used.
19. The rate of interest that produces a zero net present value when a projects discounted cash
operating advantage is netted against its discounted net investment is the internal rate of 33. The fixed overhead volume variance is the least significant variance for control purposes.
return However, it is the most useful variance in evaluating plant utilization.
20. Internal rate of return has been criticized because it might mistakenly imply that earnings are 34. Fixed overhead costs are mostly incurred to provide the capacity to produce and are best
reinvested at the rate of return earned by the investment. controlled on a total basis at the time they are originally negotiated.
21. As the marginal tax rate goes up, the benefit from the depreciation tax shield increases 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.
22. Fixed cost is relevant if it is avoidable
36. In analyzing factory overhead variances, volume variance is the difference between the budget
23. When a scarce resource, such as space, exists in an organization, the criterion that should be allowance based on standard hours allowed for actual production for the period and the
used to determine production is contribution margin per unit of scarce resource amount budgeted to be applied during the period.
24. A cost driver is defined as a causal factor that increases the total cost of a cost objective 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.
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 38. In a just-in-time inventory system, ideal standards become expected standards.
changes in capacity
39. If a firm produces more units than it sells, absorption costing, relative to variable costing, will

result in higher income and assets. allocation of scarce resources.
40. A firm presently has total sales of P100,000. If its sales rise by P1.00, its net income based on 53. A linear programming model must have only one objective function.
variable costing will go up more than its net income based on absorption costing.
54. Strategic planning as assumed by top management is stating and establishing long-term
41. A company could never incur a loss that exceeded its total costs. plans.
42. At breakeven point the contribution margin equals fixed costs. After the level of volume 55. The master budget is a static budget because it is geared to only one level of production and
exceeds the breakeven point, the total contribution margin exceeds the total fixed costs. sales.
43. As projected net income increases the degree of operating leverage declines. 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.
44. A managerial preference for a very low degree of operating leverage might indicate that a
decrease in sales volume is expected. 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
45. The time value of money is considered in long-range investment decisions by assigning underestimate of revenues.
greater value to more immediate cash flows.
58. Performance measurements and a reward system are part of motivational element of cost
46. For a project such as plant investment, the return that should leave the market price of the management system. Focus on cost control and assessing core competencies are part of
firms stock unchanged is known as the cost of capital. informational element of cost management system.
46. Opportunity cost of capital is the highest rate of return that can be earned from the most 59. A decentralized company grows very quickly than a centralized one.
attractive alternative capital project available to the firm.
60. In a decentralized company, transfer pricing system is designed to aid in the appraisal and
47. If an analyst desires a conservative net present value estimate, he will assume that all cash motivation of managerial performance.
inflows occur at year-end.
61. Responsibility accounting refers to an accounting system in which the operations of the
48. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will business are broken down into reportable segments and the control function of sales manager
exceed the pre-tax cash flow on the sale. or supervisor is emphasized.
49. Sensitivity analysis is an appropriate response to uncertainty in cash flow projections. 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
50. Relevant costs are anticipated future costs that will differ among various alternatives. supplying unit.
51. In a make or buy decisions, the opportunity cost of capacity could be considered to decrease 63. A cost classified according to its activity-related behavior is a fixed cost.
the price of units purchased from suppliers.
64. The distinction between direct and indirect costs depends on whether a cost can be
52. Fixed costs are ignored in allocating scarce resources because they are unaffected by the conveniently and physically traced to a cost object under consideration.

65. An accounting system that focuses on transactions is a traditional accounting system.

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preboard & Preweek Materials

Overview Graph 1 Graph 2

2. The following characterize management advisory services except

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30. Machan Co.s year-end income statement is as follows:

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B. 22,500 D. 21,500 Two-Way Overhead Variances

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A. 1.0 C. 1.5 94. The overhead efficiency variance is

98. Controllable costs are costs that

D. fluctuate in total in response to small change in the rate of utilization of capacity.

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112. The worst transfer-pricing method is to base the prices on (M)

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Factory overhead 40.00 20.00

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Comprehensive Prior month's sales 75%

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Reorder Point 6,750 5,250 6,750 5,250 the 60th day is

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240. The last step in activity-based costing is to C. 1, 2, 3, 4, 5 6

B. systems feasibility D. systems maintenance

251. Which of the following is not a characteristic of a batch processing system?

254. One of the first steps in the creation of a data base is to

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A. P99,450 C. P105,450 Net income before taxes P21,125

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B. P2.95 D. P3.10 Fixed manufacturing OH costs (total) P300,000 P300,000

162. 192. 222. 251. 282. TRUE STATEMENTS

8. Payback period potentially ignores part of a projects relevant cash flows.

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result in higher income and assets. allocation of scarce resources.

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65. An accounting system that focuses on transactions is a traditional accounting system.

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