MANAGEMENT ACCOUNTING AND CONTROL (35 items)

1. The cash payback technique:

A. should be used as a final screening tool.
B. can be the only basis for the capital budgeting decision.
C. is relatively easy to compute and understand.
D. considers the expected profitability of a project.

2. Which of the following is a cost that requires a future outlay of cash that is which relevant
for future decision-making?
A. Opportunity cost C. Sunk costs
B. Out-of-pocket cost D. Relevant benefits

3. Solidum Company is investigating the purchase of a piece of automated equipment that

will save P100,000 each year in direct labor and inventory carrying costs. This equipment
costs P750,000 and is expected to have a 10-year useful life with no salvage value. The
company requires a minimum 15% return on all equipment purchases. Management
anticipates that this equipment will provide intangible benefits such as greater flexibility
and higher quality output.

The PV of annuity of 1, 15% for 10 periods 5.01877

The PV of 1, end 10 period 0.24718

What peso value per year would these intangible benefits have to have in order to make
the equipment an acceptable investment?
A. P248,123 C. P 61,331
B. P 49,440 D. P 55,000

4. The margin of safety is a key concept of CVP analysis. The margin of safety is
A. The contribution margin rate.
B. The difference between budgeted contribution margin and actual contribution margin.
C. The difference between budgeted contribution margin and breakeven contribution
margin
D. The difference between budgeted sales and breakeven sales.

5. The sales price per unit will increase from P32 to P40. The variable cost per unit will remain
at P24, and the fixed costs will remain unchanged at P400,000. How many fewer units must
be sold to break-even at the new sales price of P40 per unit?
A. 25,000 C. 10,000
B. 2,500 D. 12,500

6. The following is the Lux Corporation's contribution format income statement for last month:
Sales P2,000,000
Less variable expenses 1,400,000
Contribution margin 600,000
Less fixed expenses 360,000
Net income P 240,000
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

The company has no beginning or ending inventories. A total of 40,000 units were produced
and sold last month. What is the company's degree of operating leverage?
A. 0.12 C. 2.50
B. 0.40 D. 3.30

7. In planning its operations for next year based on a sales forecast of P6,000,000, Herran, Inc.
prepared the following estimated costs and expenses:

Variable Fixed
Direct materials
P1,600,000
Direct labor 1,400,000
Factory overhead 600,000 P 900,000
Selling expenses 240,000 360,000
Administrative expenses 60,000 140,000
P3,900,000 P1,400,000

What would be the amount of peso sales at the breakeven point?

A. P2,250,000. C. P4,000,000.
B. P3,500,000. D. P5,300,000.

8. The presence of any of the following factors would suggest a switch to ABC except when
A. product line differ greatly in volume.
B. overhead costs constitute a minor portion of total costs.
C. the manufacturing process has changed significantly.
D. production managers are ignoring data provided by the existing system.

9. Total activity cost is the sum of

A. resource driver assigned costs and activity driver assigned costs
B. direct and indirect costs
C. directly traceable resource costs and resource driver assigned costs
D. opportunity costs and realized costs

10. Mary Manufacturing Company manufactures two products (X and Y). The overhead
costs of P29,000 have been divided into three cost pools that use the following activity
drivers:

Product No. of Orders No. of Labor No. of Labor Hours

Transactions
X 30 100 1,000
Y 20 300 4,000
Cost perP5,000 P4,000 P20,000
pool

Using traditional costing, what is the amount of overhead cost to be assigned to Product Y
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

using labor hours as the allocation base?

A. P21,750 C. P16,000
B. P 5,800 D. P23,200

11. EMPIRE Company makes two products, E and M. E is being introduced this period,
whereas M has been in production for 2 years. For the period about to begin, 1,000 units
of each product are to be manufactured. The only relevant overhead item is the cost
of engineering change orders. E and M are expected to require eight and two change
orders, respectively. E and M are expected to require 2 and 3 machine hours,
respectively. The cost of a change order is P600.

If EMPIRE is using direct tracing, the amount of overhead per unit that will be assigned to E
and M, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively

Question Nos. 12 and 13 are based on the following:

Toylandia Company manufactures two products, X-MAN and Machman. Toylandia's overhead
costs consist of setting up machines, P400,000; machining, P900,000; and inspecting, P300,000.
Information on the two products is:
X-MAN Machman
Direct labor hours 15,000 25,000
Machine setups 600 400
Machine hours 24,000 26,000
Inspections 800 700

12. Overhead applied to X-MAN using traditional costing is

A. P600,000. C. P832,000.
B. P768,000. D. P960,000.

13. Overhead applied to Machman using activity-based costing is

A. P 640,000. C. P 832,000.
B. P 768,000. D. P1,000,000.

14. Which of the following changes would tend to decrease the company cost of capital for
a traditional firm?
A. Decrease the proportion of equity financing.
B. Increase the market value of the debt.
C. Decrease the proportion of debt financing.
D. Decrease the market value of the equity.

15. The mix of debt, preferred stock, and common equity with which the firm plans to raise
capital is called the:
A. financial risk C. business risk
B. operating leverage D. target capital structure
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

16. The Dumaguete Co. has an equity cost of capital of 17%. The debt to equity ratio is 1.5
and a cost of debt is 11%. What is the weighted average cost of capital of the firm?
(Assume a tax rate of 33%)
A. 3.06% C. 16.97%
B. 13.40% D. 15.52%

17. Calculate the DFL for a firm with EBIT of P6,000,000, fixed cost of P3,000,000, interest expense
of P1,000,000, preferred stock dividends of 800,000, and a 40 percent tax rate.
A. 6.0 C. 1.43
B. 9.0 D. 1.64

18. Alvin Company expects next year’s after-tax income to be P7,500,000. The firm’s debt
ratio is currently 40 percent. Alvin Company has P6,000,000 of profitable investment
opportunities, and it wishes to maintain its existing debt ratio. According to the residual
dividend policy, what is the expected dividend payout ratio next year?
A. 52.0 percent C. 48.0 percent
B. 75.0 percent D. 25.0 percent

19. The Salvage Company projects the following for the upcoming year:
Earnings before interest and taxes P40 million
Interest expense P 5 million
Preferred stock dividends P 4 million
Common stock dividend payout ratio 20%
Average number of common shares outstanding 2 million
Effective corporate income tax rate 40%

The expected dividend per share of common stock is

A. P1.70 C. P2.10
B. P1.86 D. P1.00

20. A basic tenet of direct costing is that period costs should be currently expensed. What is
the rationale behind this procedure?
A. Period costs are uncontrollable and should not be charged to a specific product.
B. Period costs are generally immaterial in amount and the cost of assigning the amounts to
specific products would outweigh the benefits.
C. Allocation of period costs is arbitrary at best and could lead to erroneous decisions by
management.
D. Because period costs will occur whether or not production occurs, it is improper to allocate
these costs to production and defer a current costs of doing business.

21. Under the direct costing concept, unit product cost would most likely be increased by
A. A decrease in the remaining useful life of factory machinery depreciated on the units-of-
production method.
B. A decrease in the number of units produced.
C. An increase in the remaining useful life of factory machinery depreciated on the sum-of-
the-years’-digits method.
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

D. An increase in the commission paid to salesmen for each unit sold.

22. Net earnings determined using full absorption costing can be reconciled to net earnings
determined using direct costing by computing the difference between
A. Inventoried fixed costs in the beginning and ending inventories and any deferred over- or
underapplied fixed factory overhead.
B. Inventoried discretionary costs in the beginning and ending inventories.
C. Gross margin (absorption costing method) and contribution margin (direct costing
method).
D. Sales as recorded under the direct costing method and sales as recorded under the
absorption costing method.

23. The following information pertains to Sharapova Corporation:

Beginning inventory 0 units
Ending inventory 5,000 units
Direct labor per unit P10
Direct materials per unit 8
Variable overhead per unit 2
Fixed overhead per unit 5
Variable selling costs per unit 6
Fixed selling costs per unit 8
What is the value of ending inventory using the variable costing method?
A. P155,000 C. P100,000
B. P125,000 D. P195,000

24. Luna Company had income of P65,000 using absorption costing for a given period.
Beginning and ending inventories for that period were 13,000 units and 18,000
respectively.

Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what
would the income have been using variable costing?
A. P 77,500 C. P 52,500
B. P 60,000 D. P 20,000

Questions 25 through 28 are based on the following annual flexible budget which has been
prepared for use in making decisions relating to Product X.

Budgeted units 100,000 150,000 200,000

Sales Volume P800,000 P1,200,000 P1,600,000
Manufacturing costs:
Variable P300,000 P 450,000 P 600,000
Fixed 200,000 200,000 200,000
P500,000 P 650,000 P 800,000
Selling expenses:
Variable P200,000 P 300,000 P 400,000
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

Fixed 160,000 160,000 160,000

P360,000 P 460,000 P 560,000
Income (or loss) (P60,000) P 90,000 P 240,000

The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing
costs to units of Product X. At the end of the first six months the following information is available:
Units
Production completed 120,000
Sales 60,000

All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred
coincide with the budget.

Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have
the following seasonal pattern:
Portion of Annual Sales
First quarter 10%
Second quarter 20%
Third quarter 30%
Fourth quarter 40%

100%

25. The amount of fixed factory costs applied to product during the first six months under
absorption costing would be
A. Overapplied by P20,000. C. Underapplied by P40,000.
B. Equal to the fixed costs incurred. D. Underapplied by P80,000

26. Reported net income (or loss) for the first six months under absorption costing would be
A. P160,000 C. P 80,000
B. P 40,000 D. P (40,000)

27. Reported net income (or loss) for the firs six months under direct costing would be
A. P144,000. C. P 72,000
B. P0 D. P(36,000)

28. Assuming that 90,000 units of Product X were sold during the first six months and that this is
to be used as a basis, the revised budget estimate for the total number of units to be sold
during this year would be
A. 360,000. C. 240,000
B. 200,000. D. 300,000

29. To measure controllable production inefficiencies, which of the following is the best basis
for a company to use in establishing the standard hours allowed for the output of one unit
of product?
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

A. Average historical performance for the last several years

B. Engineering estimates based on ideal performance
C. Engineering estimates based on attainable performance
D. The hours per unit that would be required for the present workforce to satisfy expected
demand over the long run

30. A difference between standard costs used for cost control and the budgeted costs
representing the same manufacturing effort can exist because
A. standard costs must be determined after the budget is completed
B. standard costs represent what costs should be while budgeted costs represent expected
actual costs
C. budgeted costs are historical costs while standard costs are based on engineering studies
D. budgeted costs include some “slack” or “padding” while standard costs do not

31. Razonable Company installs shingle roofs on houses. The standard material cost for a Type
R house is P1,250, based on 1,000 units at a cost of P1.25 each. During April, Razonable
installed roofs on 20 Type R houses, using 22,000 units of material cost of P26,400.
Razonable’s material price variance for April is:
A. P1,000 favorable C. P1,100 favorable
B. P1,400 unfavorable D. P2,500 unfavorable

32. Under a standard cost system, the materials quantity variance was recorded at P1,970
unfavorable, the materials price variance was recorded at P3,740 favorable, and the
Goods in Process was debited for P51,690. Ninety-six thousand units were completed. What
was the per unit price of the actual materials used?
A. P0.52 each C. P0.54 each
B. P0.53 each D. P0.51 each

33. Blake Company has a standard price of P5.50 per pound for materials. July’s results
showed an unfavorable material price variance of P44 and a favorable quantity variance
of P209. If 1,066 pounds were used in production, what was the standard quantity allowed
for materials?
A. 1,104 C. 1,066
B. 1,074 D. 1,100

34. STA Company uses a standard cost system. The following information pertains to direct
labor costs for the month of June:
Standard direct labor rate per hour P 10.00
Actual direct labor rate per hour P 9.00
Labor rate variance (favorable) P12,000
Actual output (units) 2,000
Standard hours allowed for actual production 10,000 hours

How many actual labor hours were worked during March for STA Company?
A. 10,000 C. 8,000
B. 12,000 D. 10,500
MANAGEMENT ACCOUNTING AND CONTROL (35 items)

35. Harem Corporation consists of two divisions, Mining and Builders. The Mining makes black
steel, a product that can be used in the product that the Builders division makes. Both
divisions are considered profit centers. The following data are available concerning
black steel and the two divisions:

Mining Builders
Average units produced 150,000
Average units sold 150,000
Variable mfg cost per unit P2
Variable finishing cost per unit P5
Fixed divisional costs P75,000 P125,000

The Mining Division can sell all of its output outside the company for P4 per unit. The Builders
Division can buy the black steel from other firms for P4. The Builders Division sells its product
for P12.
What is the optimal transfer price in this case?
A. P2 per unit C. P7 per unit
B. P4 per unit D. P9 per unit