0505 MAS Preweek

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Preweek Quizzer
OVERVIEW fixed costs for P50,000 units. How much is Careras budgeted
Management Advisory Services variable cost per unit of output?
1. The following characterize management advisory services except A. P1.60 C. P3.00
A. involve decision for the future B. P1.67 D. P5.00
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm
D. relate to specific problems where expert help is required
2. Which of the following is not classifiable as a management advisory

service by CPA?
A. Systems design. C. Make or buy analysis.
B. Project feasibility study. D. Assistance in budget
preparation.
Managerial Accounting
3. The following are inherent to either management accounting or
financial accounting:
1. External report
2. Historical information
3. Contribution approach income statement
4. Generally accepted accounting principles
5. Prospective financial statements
Which of the foregoing are related to management accounting and
financial accounting, respectively?
Management Financial Accounting
Accounting
A. 1, 2, 5 3, 4
B. 3, 5 1, 2, 4
C. 2, 3 1, 4, 5
D. 3 1, 2, 4, 5
COST BEHAVIOR
4. Total production costs for Carera, Inc. are budgeted at P230,000 for
50,000 units of budgeted output and P280,000 for 60,000 units of
budgeted output. Because of the need for additional facilities,
budgeted fixed costs for 60,000 units are 25% more than budgeted
May 2005 Page 1 of 46

COST-VOLUME-PROFIT ANALYSIS (120,000 pairs)

Breakeven Point Income tax rate 40%
5. Scrambled Brain Company has fixed costs of P90,000. At a sales Glareless Company estimates that its direct labor costs will increase
volume of P300,000, return on sales is 10%; at a P500,000 volume, 8 percent next year. How many units will Glareless have to sell
return on sales is 22%. What is the break-even volume? next year to reach breakeven?
A. P120,000 C. P225,000* A. 97,500 units C. 83,572 units
B. P200,000 D. P450,000 B. 101,740 units D. 86,250 units
6. Bush Electronics, Inc. had the following sales results for 2004:
TV sets CD Radios
player
Peso sales component 0.30 0.30 0.40
ratio
Contribution margin 0.40 0.40 0.60
ratio
Bush Electronics, Inc. had fixed costs of P2,400,000.
The break-even sales in pesos for Bush Electronics, Inc. are:
TV sets CD player Radios
A. P1,800,000 P1,800,000 P3,600,000
B P1,800,000 P1,800,000 P1,600,000
C. P1,500,000 P1,500,000 P2,000,000
D. P1,531,915 P1,531,915 P2,042,553
7. Glareless Company manufactures and sells sunglasses. Price and

cost data are as follows:
Selling price per pair of sunglasses P25.00
Variable costs per pair of sunglasses:
Raw materials P11.00
Direct labor 5.00
Manufacturing overhead 2.50
Selling expenses 1.30
Total variable costs per unit P19.80
Annual fixed costs:
Manufacturing overhead P192,000
Selling and administrative 276,000
Total fixed costs P468,000
Forecasted annual sales volume P3,000,000
8. Madel Company manufactures a single electronic product called P39,000. Six-Twos gross margin on sales is 25 percent. Six-Two
Walastik. Walastik sells for P900 per unit. In 2000, the following estimates that 60 percent of its Sunday sales to customers would
variable costs were incurred to produce each Walastik device. be made on other days if the stores were not open on Sundays.
Direct labor P180 The one-day volume of Sunday sales that would be necessary for
Direct materials 240 Six-Two to attain the same weekly operating income as the current
Factory overhead 105 six-day week is
Selling costs 75 A. P6,000 C. P7,500
Total variable costs P600 B. P5,000 D. P4,500
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
Profit Planning
9. Signal Co. manufactures a single product. For 2000, the company
had sales of P90,000, variable costs of P50,000, and fixed costs of
P30,000. Signal expects its cost structure and sales price per unit
to remain the same in 2001, however total sales are expected to
jump by 20%. If the 2001 projections are realized, net income in
2001 should exceed net income in 2000 by
A. 100% C. 20%
B. 80% D. 50%
10.Six-Two Convenience Store currently opens only Monday through

Saturday. Six-Two is considering opening on Sundays. The annual
incremental fixed costs of Sunday openings are estimated at
11.Gorilla, Co. provides two products, M and W. M accounts for 60 salvage value. The company uses straight-line depreciation on all
percent of total sales, variable cost as a percentage of selling price plant assets.
are 60% for M and 85% for W. Total fixed costs are P225,000. If If Larz wishes to maintain the same contribution margin ratio after
fixed costs will increase by 30 percent, what amount of peso sales implementing the changes, what selling price per unit of product
would be necessary to generate an operating profit of P48,000? must it charge next year to cover the increased material costs?
A. P1,350,000 C. P1,135,000 A. P27.00 C. P32.50
B. P486,425 D. P910,000 B. P25.00 D. P28.33
12.Mount Park, Inc. had the following economic information for the
year 2002:
Sales(50,000 units @ P20) P1,000,000
Variable manufacturing costs 400,000
Fixed costs 250,000
Income tax rate 40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000.
The company anticipates increased competition; hence, an
additional P75,000 advertising costs is budgeted in order to
maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal
the after-tax income in 2002?
A. P1,125,000 C. P1,187,500
B. P1,325,000 D. P1,387,500
13.Larz Company produces a single product. It sold 25,000 units last

year with the following results:
Sales P625,000
Variable costs P375,000
Fixed costs 150,000 525,000
Net income before taxes P100,000
Income taxes 40,000
Net income P 60,000
In an attempt to improve its product in the coming year, Larz is
considering replacing a component part in its product that has a
cost of P2.50 with a new and better part costing P4.50 per unit. A
new machine will also be needed to increase plant capacity. The
machine would cost P18,000 with a useful life of 6 years and no

Point of Indifference The production and unit sales volume level at which Valley will be
14.Ravine Ski Company recently expanded its manufacturing capacity indifferent as to whether Part BT62 or GM17 is produced is
to allow it to produce up to 15,000 pairs of cross-country skis of A. 7,365 C. 10,380
either the mountaineering model or the touring model. The sales B. 4,092 D. 12,275
department assures management that it can sell between 9,000
and 13,000 pairs (units) of either product this year. Because the
models are very similar, Ravine Ski will produce only one of the two
models. The information below was compiled by the accounting
department.
Mountaineering Touring
Selling price per unit P880.00 P800.00
Variable costs per unit P528.00 P528.00
Fixed costs will total P3,696,000 if the mountaineering model is
produced but will be only P3,168,000 if the touring model is
produced. Ravine Ski is subject to a 40% income tax rate.
The total sales revenue at which Ravine Ski Company would make
the same profit or loss regardless of the ski model it decided to
produce is
A. P8,800,000 C. P9,240,000
B. P4,224,000 D. P6,864,000
15.Valley of Fire Corporation has one department that produces three

replacement parts for the company. However, only one part can be
produced in any month because of the adjustments that must be
made to the equipment. The department can produce up to 15,000
units of any one of the three parts in each month. The company
expresses the monthly after tax cost/volume/profit relationships for
each part using an equation method. The format of the equations
and the equation for each replacement part are given below:
(ATR) X ((SP VC) x (U) FC)
ATR = after-tax rate VC = variable cost FC = fixed costs
SP = selling price U = units
Part Part Equations
AL45 .6 ((P4.00 P1.25) (U) P33,400)
BT65 .6 ((P4.05 P2.55) (U) P15,000)
GM17 .6 ((P4.10 - P2.00) (U) - P22,365)

16.BM Motors, Inc. employs 40 sales personnel to market its line of 18.If fixed costs increase while variable cost per unit remains constant,
luxury automobiles. The average car sells for P1,200,000 and a 6% the contribution margin will be
commission is paid to the salesperson. BM Motors is considering a A. lower C. unchanged
change to a commission arrangement that would pay each B. higher D. unpredictable
salesperson a salary of P24,000 per month plus a commission of 2%
of the sales made by that salesperson. 19.Firm D and Firm S are competitors within the same industry. Firm D
The amount of total car sales at which BM Motors would be produces its product using large amounts of direct labor. Firm S
indifferent as to which plan to select is has replaced direct labor with investment in machinery. Projected
A. P22,500,000 C. P24,000,000 sales for both firms are fifteen percent less than in the prior year.
B. P30,000,000 D. P12,000,000 Which statement regarding projected profits is true?
A. Firm D will lose more profit than Firm S.
17.Zapatero, Inc. operates a chain of shoe stores around the country. B. Firm S will lose more profit than Firm D.
The stores carry many styles of shoes that are all sold at the same C. Firm D and Firm S will lose the same amount of profit.
price. To encourage sales personnel to be aggressive in their sales D. Neither Firm D nor Firm S will lose profit.
efforts, the company pays a substantial sales commission on each
pair of shoes sold. Sales personnel also receive a small basic 20.Last month, Zamora Company had an income of P0.75 per unit with
salary. sales of 60,000 units. During the current month when the unit sales
The following cost and revenue data relate to Store 9 and are are expected to be only 45,000, there is a loss of P1.25 per unit.
typical of the companys many sales outlets: Both the variable cost per unit and total fixed costs remain
Selling price P800 constant. The fixed costs amounted to
Variable expenses: A. P80,000 C. P247,500
Invoice costs P360 B. P360,000 D. P210,000
Sales commission 140
P500 21.The Liberal Marketing Co., is expecting an increase of fixed costs by
Fixed expenses per year: P78,750 upon moving their place of business to the downtown area.
Rent P1,600,000 Likewise it is anticipating that the selling price per unit and the
Advertising 3,000,000 variable expenses will not change. At present, the sales volume
Salaries 1,400,000 necessary to breakeven is P750,000 but with the expected increase
Total P6,000,000 in fixed costs, the sales volume necessary to breakeven would go
The company is considering eliminating sales commissions entirely up to P975,000. Based on these projections, what were the total
in its stores and increasing fixed salaries by P2,142,000 annually. fixed costs before the increase of P78,750?
If this change is made, what will be the number of pairs of shoes to A. P341,250 C. P183,750
be sold by Store 9 to be indifferent to commission basis? B. P262,500 D. P300,000
A. 25,300 C. 18,505
B. 15,300 D. 21,000 22.Machan Co.s year-end income statement is as follows:
Sales (20,000 units) P360,000
Sensitivity Analysis Variable costs 220,000

Contribution margin P140,000 If net income after taxes is to remain the same after the cost of
Fixed costs 105,000 candy increases but no increase in the sales price is made, how
Net income P 35,000 many boxes of candy must Candyman sell?
Management is unhappy with the results and plans to make some A. 480,000 C. 27,600
changes for next year. If management implements a new B. 400,000 D. 29,300
marketing program, fixed costs are expected to increase by
P19,200 and variable costs to increase by P1 per unit. Unit sales Margin of Safety
are expected to increase by 15 percent. What is the effect on 24.Claremont Company had is a manufacturer of its only one product
income if the foregoing changes are implemented? line. It had sales of P400,000 for 2002 with a contribution margin
A. Decrease of P21,200 C. Increase of P13,800 ratio of 20 percent. Its margin of safety ratio was 10 percent. What
B. Increase of P1,800 D. Increase of P14,800 are the companys fixed costs?
A. P72,000 C. P288,000
23.Candyman Company is a wholesale distributor of candy. The B. P80,000 D. P320,000
company services grocery, convenience, and drug stores in Metro
Manila. Small but steady growth in sales has been achieved by the 25.Lemery Corporation had sales of P120,000 for the month of May. It
company over the past few years while candy prices have been has a margin of safety ratio of 25 percent, and after-tax return on
increasing. The company is formulating its plans for the coming sales of 6 percent. The company assumes its sales constant every
fiscal year. Presented below are the data used to project the month. If the tax rate is 40 percent, how much is the monthly fixed
current years after-tax net income of P110,400. costs?
Manufacturers of candy have announced that they will increase A. P36,000 C. P432,000
prices of their products an average of 15% in the coming year due B. P90,000 D. P360,000
to increases in raw material (sugar, cocoa, peanuts, etc.) and labor
costs. Candyman Company expects that all other costs will remain
at the same rates or levels as the current year. Candyman is
subject to 40 percent tax rate.
Average selling price P4.00 per box
Average variable costs
Cost of candy P2.00 per box
Selling expenses 0.40 per box
Total P2.40 per box
Annual fixed costs
Selling P169,000
Administrative 280,000
Total P440,000
Expected annual sales volume (390,000 P1,560,000
boxes)

Degree of Operating Leverage Repairs and maintenance 5,200 7,140

26.A very high operating leverage indicates that a firm General administrative services 131,760
A. has high fixed costs Rent 275,320
B. has a high net income Billings and collections 40,000
C. has high variable costs Bad debt expense 47,000
D. is operating close to its breakeven point Other 18,048 .
P262,800 P453,000
27.The Didang Company has an operating leverage of 2. Sales for The only personnel directly employed by the Pediatrics Department are
2001 are P2,000,000 with a contribution margin of P1,000,000. supervising nurses, nurses, and aides. The hospital has minimum
Sales are expected to be P3,000,000 in 2002. Net income for 2002 personnel requirements based on total annual patient days. Hospital
can be expected to increase by what amount over 2001? requirements beginning at the minimum, expected level of operation
A. P250,000 C. P500,000 follow:
B. 200 percent D. 40 percent Annual Patient Aides Nurses Supervising
Days Nurses
Situational 10,000 21 11 4
Questions 28 thru 34 are based on the following information: 14,000
Calamba Hospital operates a general hospital but rents space and beds 14,001 22 12 4
to separate entities for specialized treatment such as pediatrics, 17,000
maternity, psychiatric, etc. Calamba charges each separate entity for 17,001 22 13 4
common services to its patients like meals and laundry and for all 23,725
administrative services such as billings, collections, etc. All 23,726 25 14 5
uncollectible accounts are charged directly to the entity. Space and 25,550
bed rentals are fixed for the year. 25,551 26 14 5
For the entire year ended June 30, the Pediatrics Department at 27,375
Calamba Hospital charged each patient an average of P65 per day, had 27,376 29 16 6
a capacity of 60 beds, operated 24 hours per day for 365 days, and 29,200
had revenue of P1,138,800. The staffing levels above represent full-time equivalents, and it should
Expenses charged by the hospital to the Pediatrics Department for the be assumed that the Pediatrics Department always employs only the
year ended June 30 were: minimum number of required full-time equivalent personnel.
Basis of Allocation Annual salaries for each class of employee follow: supervising nurses,
Patient Days Bed Capacity P18,000; nurses, P13,000; and aides, P5,000. Salary expense for the
Dietary P 42,952 year ended June 30 for supervising nurses, nurses, and aides was
Janitorial P 12,800 P72,000, P169,000, and P110,000, respectively.
Laundry 28,000 The Pediatrics Department operated at 100% capacity during 111 days
Lab, other than direct charges 47,800 of the past year. It is estimated that during 90 of these capacity days,
to patients the demand average 17 patients more than capacity and even went as
Pharmacy 33,800

high as 20 patients more on some days. The hospital has an additional Ms. Casserole started a pizza restaurant in 1998. For this purpose a
20 beds available for rent for the coming fiscal year. building was rented for P400 per month. Two women were hired to
work full time at the restaurant and six college students were hired to
28.The variable expense per patient day is work 30 hours per week delivering pizza. This level of employment has
A. P15.08 C. P15.00 been consistent. An outside accountant was hired for tax and
B. P12.50 D. P50.00 bookkeeping purposes, for which Ms. Casserole pays P300 per month.
The necessary restaurant equipment and delivery cars were purchased
29.The contribution margin per patient day is with cash. Ms. Casserole has noticed that expenses for utilities and
A. P49.92 C. P50.00 supplies have been rather constant. Ms. Casserole increased her
B. P52.50 D. P52.00 business between 1998 and 2001. Profits have more than doubled
since 1998. Ms. Casserole does not understand why profits have
30.How many patient days are necessary to cover fixed costs for bed increased faster than volume.
capacity and for supervisory nurses? A projected income statement for the year ended December 31, 2002,
A. 9,500 C. 12,500 prepared by the accountant, is shown below:
B. 11,500 D. 10,500
Sales P95,000
31.The number of patient days needed to cover total costs is Cost of food sold P28,500
A. 14,200 C. 15,820 Wages & fringe benefits:
B. 15,200 D. 14,220 Restaurant help 8,150
Delivery help 17,300
32.If the Pediatrics Department rented an additional 20 beds and all Rent 4,800
other factors remain the same as in the past year, what would be Accounting services 3,600
the increase in revenue? Depreciation:
A. P99,450 C. P105,450 Delivery equipment 5,000
B. P87,750 D. P89,750 Restaurant equipment 3,000
Utilities 2,325
33.Continuing to consider the 20 additional rented beds, the increase Supplies 1,200 73,875
in total variable cost applied per patient day is Net income before taxes P21,125
A. P22,935 C. P22,965 Income taxes (40%) 8,450
B. P22,950 D. P23,935 Net income P12,675
Note: The average pizza sells for P2.50.
34.What is the increased fixed cost applied for bed capacity, given the
increased number of beds? 35.What is the tax shield on the noncash fixed costs?
A. P151,000 C. P147,000 A. P3,200 C. P3,400
B. P173,950 D. P152,000 B. P14,950 D. P5,400
Questions 35 thru 37 are based on the following information. 36.What is the breakeven point in number of pizzas that must be sold?

A. 25,929 C. 18,150 41.The Trinkets Company estimated the following data for the coming
B. 23,569 D. 42,114 year:
Fixed manufacturing costs P565,000
37.What is the cash flow breakeven point in number of pizzas that Variable production costs per peso of sales
must be sold? Materials P0.125
A. 19,529 C. 12,990 Direct labor 0.150
B. 21,284 D. 10,773 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
38.When a firm prepares financial reports by using absorption costing, A. P1,265,000 C. P1,115,000
it may find that B. P1,565,000 D. P 700,000
A. profits will always increase with increase in sales.
B. profits will always decrease with decreases in sales. 42.Nirvana Co. employs a normal (nonstandard) absorption cost
C. profit may decrease with increased sales even if there is no system. The information below is from the financial records of the
change in selling price and costs. 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.
39.The Bush Company has provided information concerning its Applied factory overhead was 30 percent of total manufacturing
projections for the coming year as follows: costs.
Net sales P10,000,000 Factory overhead was applied to production at a rate of 80% of
Fixed manufacturing costs P 1,000,000 direct labor cost.
Bush projects variable manufacturing costs of 60% of net sales.
Work-in-process inventory at January 1 was 75% of work-in-
Assuming no change in inventory, what will the projected cost of
process inventory at December 31.
goods sold be?
What are the amounts/value of the following cost elements and
A. P5,000,000 C. P7,000,000
inventory?
B. P6,000,000 D. P8,000,000
Direct labor Direct materials Work-in-process
inventory
40.Colger Company manufactures a single product using standard
A. P750,000 P750,000 P225,000
costing. Variable production costs are P12 and fixed production
B. P937,500 P812,500 P225,000
costs are P125,000. Colger uses a normal activity of 12,500 units
C. P937,500 P812,500 P300,000
to set its standard costs. Colger began the year with 1,000 units in
D. P750,000 P750,000 P300,000
inventory, produced 11,000 units, and sold 11,500 units. The
standard costs of goods sold under absorption costing would be
A. P115,000 C. P242,000
B. P132,000 D. P253,000

43.Black Forest, Inc. began operations on January 3. Standard costs Variable overhead 23,000
were established in early January assuming a normal production Fixed 18,000
volume of 160,000 units. However, Black Forest produced only Variable selling and adm. 60,000
140,000 units of product and sold 100,000 units at a selling price of Fixed selling and adm. 35,000
P180 per unit during the year. Variable costs totaled P7,000,000, of
which 60% were manufacturing and 40% were selling. Fixed costs Variances are closed to cost of sales monthly
totaled P11,200,000, of which 50% were manufacturing and 50%
were selling. Black Forest had no raw materials or work-in-process
inventories at December 31. Actual input prices and quantities per
unit of product were equal to standard.
Using absorption costing, Black Forests income statement would
show:
Cost of Goods Sold at Overhead Volume Variance
Standard Cost
A. P8,200,000 P800,000 Unf
B. P7,200,000 P800,000 Fav
C. P6,500,000 P700,000 Unf
D. P7,000,000 P700,000 Fav
Absorption Costing & Variable Costing

44.Southseas Corp. uses a standard cost system. The standard cost
per unit of one of its products are as follows:
Direct Materials P4.00
Direct labor 6.00
Factory overhead
Variable 3.00
Fixed (based on a normal capacity of 2.00
10,000 units)
Total 15.00
Beginning inventory 2,000 units

Production 8,000 units
Units sold (selling price P50) 7,000 units
Actual costs:
Direct materials P 35,000
Direct labor 50,000
How much are the net income under absorption costing and A. A flexible budget includes only variable costs; a static budget
variable costing methods? includes only fixed costs.
A. B. C. D. B. A flexible budget includes all costs, a static budget includes only
Absorption P144,000 P143,000 144,000 142,000 fixed costs.
Variable 143,000 144,000 142,000 144,000 C. A flexible budget gives different allowances for different levels of
activity, a static budget does not.
45.Lord Industries manufactures a single product. Variable production D. There is no difference between the two.
costs are P10 and fixed production costs are P75,000. Lord uses a
normal activity of 10,000 units to set its standard costs. Lord began Setting Standards
the year with no inventory, produced 11,000 units and sold 10,500 48.Which of the following statements about the selection of standards
units. The volume variance under each product costing are: is true?
A. B. C. D. A. Ideal standards tend to extract higher performance levels since
Under Absorption P3,750 P3,750 P7,500 P7,500 they give employees something to live up to.
Costing B. Currently attainable standards may encourage operating
Under Variable P 0 P7,500 P0 P0 inefficiencies.
Costing C. Currently attainable standards discourage employees from
achieving their full performance potential.
D. Ideal standards demand maximum efficiency which may leave
Absorption Costing Income vs. Variable Costing Income
workers frustrated, thus causing a decline in performance.
46.Simple Corp. produces a single product. The following cost
structure applied to their first year of operations, 2000:
49.The per-unit standard cost for variable overhead is normally based
Variable Costs per Annual Fixed
on the
Unit Costs
A. standard quantity of an input factor used in a unit of product.
SG&A P2.00 P14,000 B. actual variable overhead cost incurred at the achieved level of
Production 4.00 P20,000 production.
Assume that during 2000 Simple Corp. manufactured 5,000 units C. budgeted total cost for variable overhead divided by the number
and sold 3,800. There was no beginning or ending work-in-process of units expected to be produced.
inventory. How much larger or smaller would Simple Corp.s D. ratio of fringe benefits to the basic cost of labor.
income be if it uses absorption rather than variable costing?
A. The absorption costing income would be P6,000 larger 50.Relevant Company had the following flexible budget for 2003 at
B. The absorption costing income would be P6,000 smaller 100 percent capacity of 30,000 direct labor hours.
C. The absorption costing income would be P4,800 larger* Direct materials P800,000
D. The absorption costing income would be P4,000 smaller Direct labor 600,000
Variable manufacturing overhead 360,000
STANDARD COSTING & VARIANCE ANALYSIS Fixed manufacturing overhead 288,000
Basic Concepts
47.Which of the following is a difference between a static budget and a
flexible budget?
What is the total manufacturing overhead application rate if the B. 1,066 D. 1,100
Relevant Company has to operate at 80 percent of the stated
capacity? Direct Labor Variance
A. P24.00 C. P24.60 55.Anne had a P750 unfavorable direct labor rate variance and an
B. P27.00 D. P21.60 P800 favorable efficiency variance. Anne paid P7,150 for 800 hours
of labor. What was the standard direct labor wage rate?
Raw Materials Variances A. P8.94 C. P7.94
51.Derby Co. uses a standard costing system in connection with the B. P8.00 D. P7.80
manufacture of a line of T-shirts. Each unit of finished product
contains 2 yards of direct material. However, a 20 percent direct 56.The flexible budget for the month of May 2002 was for 9,000 units
material spoilage calculated on input quantities occurs during the with direct material at P15 per unit. Direct labor was budgeted at
manufacturing process. The cost of the direct materials is P120 per 45 minutes per unit for a total of P81,000. Actual output for the
yard. month was 8,500 units with P127,500 in direct material and
The standard direct material cost per unit of finished product is P77,775 in direct labor expense. Direct labor hours of 6,375 were
A. P192 C. P288 actually worked during the month. Variance analysis of the
B. P240 D. P300 performance for the month of May would show a(n)
A. favorable material quantity variance of P7,500
52.Silver Company has a standard of 15 parts of Component R costing B. unfavorable direct labor efficiency variance of P1,275
P1.50 each. Silver purchased 14,910 units of R for P22,145. Silver C. unfavorable material quantity variance of P7,500
generated a P220 favorable price variance and a P3,735 favorable D. unfavorable direct labor rate variance of P1,275
usage variance. If there were no changes in the component of
inventory, how many units of finished product were produced?
A. 994 units C. 1,725 units
B. 1,160 units D. 828 units
53.The standard usage for raw materials is 5 pounds at P40.00 per

pound. Cave Company spent P131,200 in purchasing 3,200
pounds. Cave used 3,150 pounds to produce 600 units of finished
product. The material quantity variance is
A. P6,000 unfavorable C. P5,200 unfavorable
B. P3,200 unfavorable D. P2,000 unfavorable
54.Ramie has a standard price of P5.50 per pound for materials. Julys
results showed an unfavorable material price variance of P44 and a
favorable quantity variance of P209. If 1,066 pounds were used in
production, what was the standard quantity allowed for materials?
A. 1,104 C. 1,074

Two-Way Overhead Variances Actual DLH 32,000

57.Karla Company uses an annual cost formula for overhead of The budget (controllable) variance for June is
P72,000 + P1.60 for each direct labor hour worked. For the A. P1,000 favorable C. P6,000 favorable
upcoming month Karla plans to manufacture 96,000 units. Each B. P1,000 unfavorable D. P6,000 unfavorable
unit requires five minutes of direct labor. Karlas budgeted
overhead for the month is 61.South Company has total budgeted fixed costs of P75,000, Actual
A. P12,800 C. P84,800 production of 19,500 units resulted in a P3,000 favorable volume
B. P18,800 D. P774,000 variance. What normal capacity was used to determine the fixed
overhead rate?
58.If actual overhead is P14,000, overhead applied is P13,400, and A. 16,500 C. 20,313
overhead budgeted for the standard hours allowed is P15,600, then B. 18,750 D. 20,325
the overhead controllable variance is
A. P600F C. P1,600F 62.CTV Company has a standard fixed cost of P6 per unit. At an actual
B. P2,200U D. P1,600U production of 8,000 units a favorable volume variance of P12,000
resulted. What were total budgeted fixed costs?
59.Universal Company uses a standard cost system and prepared the A. P36,000 C. P60,000
following budget at normal capacity for January B. P48,000 D. P75,000
Direct labor hours 24,000
Variable factory OH P48,000 63.The Pinatubo Company makes and sells a single product and uses
Fixed factory OH P108,000 standard costing. During January, the company actually used 8,700
Total factory OH per DLH P6.50 direct labor-hours (DLHs) and produced 3,000 units of product. The
Actual data for January were as follows: standard cost card for one unit of product includes the following:
Direct labor hours worked 22,000 Variable factory overhead: 3.0 DLHs @ P4.00 per DLH.
Total factory OH P147,000 Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH
Standard DLHs allowed for capacity attained 21,000 For January, the company incurred P22,000 of actual fixed overhead
Using the two-way analysis of overhead variance, what is the costs and recorded a P875 favorable volume variance.
controllable variance for January? The budgeted fixed overhead cost for January is
A. P3,000 F C. P9,000 F A. P31,500 C. P32,375
B. P5,000 F D. P10,500 U B. P30,625 D. P33,250
60.The Terrain Company has a standard absorption and flexible Questions 64 & 65 are based on the following information.
budgeting system and uses a two-way analysis of overhead Lucky Company sets the following standards for 2003:
variances. Selected data for the June production activity are: Direct labor cost (2 DLH @ P4.50) P 9.00
Budgeted fixed factory overhead costs P 64,000 Manufacturing overhead (2 DLH @ P7.50) 15.00
Actual factory overhead 230,000 Lucky Company plans to produce its only product equally each month.
Variable factory overhead rater per DLH P 5 The annual budget for overhead costs are:
Standard DLH 32,000 Fixed overhead P150,000

Variable overhead 300,000 A. P33,000 unfavorable C. P66,000 unfavorable

Normal activity in direct labor hours 60,000 B. P35,520 favorable D. P33,000 favorable
In March, Lucky Company produced 2,450 units with actual direct labor
hours used of 5,050. Actual overhead costs for the month amounted 68.The Virgin Island Company has standard variable costs as follows:
to P37,245 (Fixed overhead is as budgeted.) Materials, 3 pounds at P4.00 per pound P12.00
Labor, 2 hours P10.00 per hour 20.00
64.The amount of overhead volume variance for Lucky Company is Variable overhead, P7.50 per labor hour 15.00
A. P250 unfavorable C. P750 Unfavorable Total P47.00
B. P500 unfavorable D. P375 Unfavorable During September, Virgin Island produced 6,000 units, using 11,560
labor hours at a total wage of P113,870 and incurring P88,600 in
65.Using the preceding data for Lucky Company, the controllable variable overhead. The variable overhead variances are:
overhead variance was A. B. C. D.
A. P505 favorable C. P245 favorable Spendin P1,900 P1,900 P1,400 P1,400
B. P505 unfavorable D. P245 unfavorable g favorable unfavorable favorable unfavorable
Efficienc P3,300 P3,300 P1,900 P1,900
Three-Way Overhead Variances y unfavorable favorable favorable favorable
66.Arlene had an P18,000 unfavorable volume variance, a P25,000
unfavorable variable overhead spending variance, and P2,000 total
69.Fixed manufacturing overhead was budgeted at P500,000 and
under applied overhead. The fixed overhead budget variance is
25,000 direct labor hours were budgeted. If the fixed overhead
A. P41,000 favorable C. P41,000 Unfavorable
volume variance was P12,000 favorable and the fixed overhead
B. P45,000 favorable D. P45,000 Unfavorable
spending variance was P16,000 unfavorable, fixed manufacturing
overhead applied must be
Four-Way Overhead Variances
A. P516,000 C. P504,000
67.Franklin Glass Works production budget for the year ended
B. P512,000 D. P496,000
November 30, 2001 was based on 200,000 units. Each unit
requires two standard hours of labor for completion. Total
70.Mulvey Company derived the following cost relationship from a
overhead was budgeted at P900,000 for the year, and the fixed
regression analysis of its monthly manufacturing overhead cost:
overhead rate was estimated to be P3.00 per unit. Both fixed and
C = P80,000 + P12M
variable overhead are assigned to the product on the basis of direct
Where C = monthly manufacturing overhead cost
labor hours. The actual data for the year ended November 30,
M = machine hours
2001 are presented below.
The standard error of the estimate of the regression is P6,000.
Actual production in units 198,000
The standard time required to manufacture one six-unit case of
Actual direct labor hours 440,000
Mulveys single product is 4 machine hours. Mulvey applies
Actual variable overhead P 352,000
manufacturing overhead to production on the basis of machine
Actual fixed overhead P 575,000
hours and its normal annual production is 50,000 cases.
Franklins variable overhead efficiency variance for the year ended
Mulveys estimated variable manufacturing overhead cost for a
November 30, 2001 is
month in which scheduled production is 5,000 cases would be
A. P80,000 C. P240,000 73.The overhead efficiency variance is

B. P320,000 D. P360,000 A. P22,500 Favorable C. P22,500 Unfavorable
B. P15,000 Favorable D. P15,000 Unfavorable
Questions 71 thru 73 are based on the following information.
The Lustre Company produces its only product, Kool Chewing Gum. Gross Profit Variance Analysis
The standard overhead cost for one pack of the product follows: 74.Vicki Division operates as a revenue center and sells only one
Fixed overhead (1.50 hours at P18.00) P27.00 product. Data for May 2000 are 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 Selling price per P11 P10
used 31,500 direct labor hours for the production of 20,000 units. unit
Actual overhead costs were P545,000 fixed and P308,700 variable. Variable expense P 6
per unit
71.The amount of variable overhead spending variance is What are the price variance and price volume variance?
A. P6,300 Favorable C. P6,300 Unfavorable A. B. C. D.
B. P 8,700 Favorable D. P8,700 Unfavorable Sales Price P10,000 F P 5,000 P 5,000 U P10,000 U
Variance F
72.The total overhead controllable variance is Price Volume P 5,000 F P10,000 P10,000 F P 5,000 U
A. P13,700 Favorable C. P13,700 Unfavorable Variance U
B. P 8,700 Favorable D. P 8, 700 Unfavorable
RESPONSIBILITY ACCOUNTING & TRANSFER PRICING
Basic Concepts
75.Controllable costs are costs that
A. are likely to respond to the amount of attention devoted to them
by a specified manager.
B. are governed mainly by past decisions that established the
present levels of operating and organizational capacity and that
only change slowly in response to small changes in capacity.
C. will be unaffected by current managerial decisions.
D. fluctuate in total in response to small change in the rate of
utilization of capacity.
76.Which of the following does not apply to the content of managerial

reports?
A. Reporting standard is relevant to the decision to be made.
B. May extend beyond double-entry accounting system.
C. Pertain to subunits of the entity and may be very detailed.
D. Pertains to the entity as a whole and is highly aggregated.* What is the minimum price that Jar could accept for the order and
still maintain its expected residual income?
Return on Investment A. P5.00 C. P4.75
77.If the investment turnover decreased by 10 percent and ROS B. P5.60 D. P9.00
decreased by 30 percent, the ROI would
A. increase by 30% C. decrease by 37% Return on Investment & Residual Income
B. decrease by 10% D. decrease by 33.3% 81.Scotch Co. has the following results for the year:
Sales P740,000
78.Return on investment (ROI) is a term often used to express income Variable expenses 260,000
earned on capital invested in a business unit. A companys ROI Fixed expenses 300,000
would be increased if sales Total divisional assets average P1,000,000. The companys
A. increased by the same peso amount as expenses and total minimum required rate of return is 14 percent. The residual income
assets increased. and return on investment for Scotch are:
B. remained the same and expenses were reduced by the same A. B. C. D.
peso amount that total asset increased. Residual Income P36,000 P40,000 P36,000 P40,000
C. decreased by the same peso amount that expenses increased. Return on 36% 18% 18% 36%
D. and expenses increased by the same percentage that total Investment
assets increased.
79.If the investment turnover increased by 30% and ROS decreased by

20%, the ROI would
A. increase by 4% C. increase by 30%
B. increase by 6% D. decrease by 50%
Residual Income
80.Jar Division of Handy, Inc. expects the following result for 2004:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and divisions are
evaluated on residual income. A foreign customer has approached
Jars manager with an offer to buy 10,000 units at P7 each. If Jar
accepts the order, it would not lose any of the 70,000 units at the
regular price. Accepting the order would increase fixed costs by
P10,000 and investment by P40,000.

82.The following information relates to two projects of Rica B. I and II only D. II and III only
Corporation.
Project A Project B
Operating income P2,500,000 P600,000
Residual income P 500,000 P200,000
ROI 10% 12%
Return on residual 2% 4%
investment
A bonus of P50,000 will be paid to the manager whose project
contributed most to the overall performance of the firm. The
P50,000 bonus should go to the manager of
A. project A because the residual income is higher
B. project B because the return on investment is higher
C. project A because it was a larger, more complex project
D. project B because the return on residual investment is higher*
Transfer Pricing
83.An appropriate transfer price between two divisions of the Star
Corporation can be determined from the following data:
Fabrication Division
Market price of P50
subassembly
Variable cost of P20
subassembly
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
PRODUCT PRICING
84.In a cost-based pricing system the markup should cover
I. Selling and administrative expenses
II. Desired profit
III. Manufacturing cost
A. I, II, and III C. I and III only

RELEVANT COSTING off (all variable)

Basic Concepts Selling price/lb after further processing P40 P50
85.The potential benefit that may be obtained from following an The cost of the joint process is P85,000.
alternative course of action is called Ottawa currently sells both products at the split-off point. If Ottawa
A. opportunity benefit C. relevant cost makes decisions which maximizes profit, Ottawas profit will
B. opportunity cost D. sunk cost increase by
A. P16,000 C. P50,000
86.Opportunity costs: B. P4,000 D. P10,000
A. Are treated as period costs under variable costing.
B. Have already been incurred as a result of past action.
C. Are benefits that could have been obtained by following another
course of action.
D. Do not vary among alternative courses of action.
87.The Auto Division of Fly Insurance employs three claims processors

capable of processing 5,000 claims each. The division currently
processes 12,000 claims. The manager has recently been
approached by two sister divisions. Division A would like the auto
division to process approximately 2,000 claims. Division B would
like the auto division to process approximately 5,000 claims. The
Auto Division would be compensated Division A or Division B for
processing these claims. Assume that these are mutually exclusive
alternatives. Claims processor salary cost is relevant for
A. division A alternative only
B. division B alternative only
C. both Division A and Division B alternatives
D. neither Division A nor Division B alternatives
Sell as is or Process-Further
88.Ottawa Corporation produces two products from a joint process.
Information about the two joint products follows:
Product Product
X Y
Anticipated production 2,000 4,000
lbs lbs
Selling price per lb. at split-off P30 P16
Additional processing costs/lb after split- P15 P30

Obsolete Inventories A. 25,000 electric mixers, and purchase all other units as needed
89.The cost to manufacture an unfinished unit is P40 (P30 variable and B. 20,000 blenders and 15,000 electric mixers, and purchase all
P10 fixed). The selling price per unit is P50. The company has other units as needed
unused production capacity and has determined that units could be C. 20,000 blenders and purchase all other units as needed
finished and sold for P65 with an increase in variable costs of 40%. D. 28,000 electric mixers and purchase all other units as needed
What is the additional net income per unit to be gained by finishing
the unit?
A. P3 C. P15
B. P10 D. P12
Profit Maximization
90.Fe Company has only 25,000 hours of machine time each month to
manufacture its two products. Product X has a contribution margin
of P50 and Product Y has a contribution margin of P64. Product X
requires 5 machine hours and Product Y, 8 hours. If Fe wants to
dedicate 80% of its machine time to the product that will provide
the most income, Fe will have a total monthly contribution margin
of
A. P250,000 C. P210,000
B. P240,000 D. P200,000
91.Geary Manufacturing has assembled the following data pertaining

to two popular products.
Blender Electric mixer
Direct materials P 6 P11
Direct labor 4 9
Factory overhead @ P16 16 32
per hour
Cost if purchased from 20 38
an outside supplier
Annual demand (units) 20,000 28,000
Past experience has shown that the fixed manufacturing overhead
component included in the cost per machine hour averages P10.
Geary has a policy of filling all sales orders, even if it means
purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing
desires to follow an optimal strategy, it should produce

92. ABC Electronics has the following standard costs and other data: The sales manager has had a P160,000 increase in the budget
Part Beta Part Zeta allotment for advertising and wants to apply the money to the most
Direct materials P 4.00 P80.00 profitable product. The products are not substitutes for one another in
Direct labor 10.00 47.00 the eyes of the companys customers.
Factory overhead 40.00 20.00 The manager may devote the entire P160,000 to increased advertising
Unit standard cost P54.00 P147.00 for either XY-7 or BD-4.
Units needed per year 6,000 8,000 93.The minimum increase in peso sales of either XY-7 or BD-4 required
Machine hours per unit 4 2 to offset the increased advertising is
Unit cost if purchased P50 P150.00 A. B. C. D.
In past years, ABC has manufactured all of its required components; XY-7 P160,000 P640,000 P 80,000 P 80,000
however, this year only 30,000 hours of otherwise idle machine BD-4 P320,000 P960,000 P960,000 P320,000
time can be devoted to the production of components. Accordingly,
some of the parts must be purchased from outside suppliers. In
producing parts, factory overhead is applied at P10 per standard
machine hour. Fixed capacity costs that will not be affected by any
make-or-buy decision represent 60% of the applied overhead.
The 30,000 hours available machine time are to be scheduled so
that ABC realizes maximum potential cost savings. The relevant
unit production costs that should be considered in the decision to
schedule machine time are:
A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta
and P127.00 for Zeta
B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta
and P135.00 for Zeta
Questions 93 & 94 are based on the following information.

Brynles Manufacturing Company produces two products for which the
following data have been tabulated. Fixed manufacturing cost is
applied at a rate of P1.00 per machine hour.
Per Unit XY-7 BD-4
Selling price P4.00 P3.00
Variable P2.00 P1.50
manufacturing cost
Fixed manufacturing P0.75 P0.20
cost
Variable selling cost P1.00 P1.00

94.Suppose Brynles has only 100,000 machine hours that can be made The minimum break-even price per unit to be considered on this
available to produce additional units of XY-7 and BD-4. If the special sale is
potential increase in sales units for either product resulting from A. P71 C. P69
advertising is far in excess of this production capacity, which B. P75 D. P84
product should be advertised and what is the estimated increase in
contribution margin earned?
A. Product XY-7 should be produced, yielding a contribution margin
of P75,000.
B. Product XY-7 should be produced, yielding a contribution margin
of P133,333.
C. Product BD-4 should be produced, yielding a contribution margin
of P187,500.
D. Product BD-4 should be produced, yielding a contribution margin
of P250,000.
Special Order
95.An opportunity cost commonly associated with a special order is
A. the contribution margin on lost sales
B. the variable costs of the order
C. additional fixed related to the increased output
D. any of the above
96.Jap Companys unit cost of manufacturing and selling a given item

at an activity level of 10,000 units per month are:
Manufacturing costs
Direct materials P39
Direct labor 6
Variable overhead 8
Fixed overhead 9
Selling expenses
Variable 30
Fixed 11
The company desires to seek an order for 5,000 units from a foreign
customer. The variable selling expenses will be reduced by 40%,
but the fixed costs for obtaining the order will be P20,000.
Domestic sales will not be affected by the order.

Make or Buy 99.Elly Industries is a multi-product company that currently

97.For the past 12 years, the Blue Company has produced the small manufactures 30,000 units of Part MR24 each month for use in
electric motors that fit into its main product line of dental drilling production. The facilities now being used to produce Part MR24
equipment. As material costs have steadily increased, the have a fixed monthly costs of P150,000 and a capacity to produce
controller of the Blue Company is reviewing the decision to continue 84,000 units per month. If Elly were to buy Part MR24 from an
to make the small motors and has identified the following facts: outsiDe supplier, the facilities would be idle, but its fixed costs
1. The equipment used to manufacture the electric motors has a would continue at 40 percent of their present amount. The variable
book value of P150,000. production costs of Part MR24 are P11 per unit.
2. The space now occupied by the electric motor manufacturing If Elly Industries is able to obtain Part MR24 each month, it would
department could be used to eliminate the need for storage realize a net benefit by purchasing Part MR24 from an outside
space now being rented. supplier only if the suppliers unit price is less than
3. Comparable units can be purchased from an outside supplier for A. P14.00 C. P16.00
P59.75. B. P11.00 D. P13.00
4. Four of the persons who work in the electric motor
manufacturing department would be terminated and given eight
weeks severance pay.
5. A P10,000 unsecured note is still outstanding on the equipment
used in the manufacturing process.
Which of the items above are relevant to the decision that the
controller has to make?
A. 1, 3, and 4 C. 2, 3, 4, and 5
B. 2, 3, and 4 D. 1, 2, 4, and 5
98.Buena Corporation operates a plant with a productive capacity to

manufacture 10,000 units of its product a year. The following
information pertains to the production costs at capacity:
Variable costs P 80,000
Fixed costs 120,000
Total costs P200,000
A supplier has offered to sell 8,000 units to Buena annually.
Assume no change in the fixed costs. What is the price per unit
that makes Buena indifferent between the Make and Buy
options?
A. P8 C. P20
B. P12 D. P10

100. Below are a companys monthly unit costs to manufacture and 102. The Rural Cooperative, Inc. produces 1,000 units of Part M per
market a particular product. month. The total manufacturing costs of the part are as follows:
Manufacturing Costs: Direct materials P10,000
Direct materials P2.00 Direct labor 5,000
Direct labor 2.40 Variable overhead 5,000
Variable indirect 1.60 Fixed overhead 30,000
Fixed indirect 1.00 Total manufacturing cost P50,000
Marketing Costs: An outside supplier has offered to supply the part at P30 per unit. It
Variable 3.00 is estimated that 20% of the fixed overhead assigned to Part M will
Fixed 1.50 no longer be incurred if the company purchases the part from the
The company must decide to continue making the product or buy it outside supplier. If Rural Cooperative purchases 1,000 units of Part
from an outside supplier. The supplier has offered to make the M from the outside supplier per month, then its monthly operating
product at the same level of quality that the company can make it. income will
Fixed marketing costs would be unaffected, but variable marketing A. decrease by P4,000 C. decrease by P20,000
costs would be reduced by 30% if the company were to accept the B. increase by P1,000 D. increase by P20,000
proposal. What is the maximum amount per unit that the company
can pay the supplier without decreasing its operating income? Keep or Drop
A. P8.50 C. P7.75 103. Indicate which of the following costs would be avoided if a
B. P6.75 D. P6.90 segment is eliminated.
1. variable manufacturing costs
101. Cable Company produces 1,000 units of Part W per month. The 2. direct fixed costs
total manufacturing costs of the part are as follows: 3. common fixed costs
Direct materials P10,000 4. variable selling costs
Direct labor 5,000 5. direct fixed selling costs
Variable overhead 5,000 6. common fixed selling costs
Fixed overhead 30,000 A. 2, 3, 5, 6 C.
Total manufacturing costs P50,000 B. 1, 2, 4, 5* D. 1, 2, 3, 4, 54, 5, 6
An outside supplier has offered to supply the part at P30 per unit. It
is estimated that 20% of the fixed overhead assigned to Part W will 104. BEA Industries produces two products. Information about the
no longer be incurred if the company purchases the part from the products is as follows:
outside supplier. If Cable Company purchases 1,000 units of Part W Item 38B Item 40F
from the outside supplier per month, then its monthly operating Units produced and 1,000 4,000
income will sold
A. decrease by P4,000 C. decrease by P20,000 Selling price per P 25 P 20
B. increase by P1,000 D. increase by P20,000 unit
Variable expenses P 15 P 12
per unit
The companys fixed costs totaled P40,000, of which P8,000 can be A. offset the loan against any investment in inventory or receivable
avoided if Item 38B is dropped and P25,000 can be avoided if Item required by the project
40F is dropped. Product margin for Item 40F is B. show the loan as an increase in the investment
A. P3,200 C. P(2,000) C. show the loan as a cash outflow in the second year of the
B. P7,000 D. P10,000 projects life
D. ignore the loan
Shut Down Point
105. Bulusan Company normally produces and sells 30,000 units of 107. When compared Net Present Value method to Internal Rate of
E14 each month. E14 is a small electrical relay used in the Return in terms of reinvestment of cash flows, NPV is better than
automotive industry as a component part in various products. The IRR. What are the reinvestment rate for each method?
selling price is P22 per unit, variable costs are P14 per unit, fixed Net Present Value method Internal Rate of Return
manufacturing overhead costs total P150,000 per month, and fixed method
selling costs total P30,000 per month. A. Discount Rate Discount Rate
Employment-contract strikes in the companies that purchase the B. Discount Rate IRR
bulk of the E14 have caused Bulusan Companys sales to C. IRR IRR
temporarily drop to only 9,000 units per month. Bulusan Company D. IRR Discount Rate
estimates that the strikes will last for about two months, after which
time sales of E14 should return to normal. Due to the current low Accounting Rate of Return
level of sales, however, Bulusan Company is thinking about closing 108. Tamaraw Company is negotiating to purchase equipment that
down its own plant during the two months that the strikes are on. If would cost P200,000, with the expectation that P40,000 per year
Bulusan Company does close down its plant, it is estimated that could be saved in after-tax cash costs if the equipment were
fixed manufacturing overhead costs can be reduced to P105,000 acquired. The equipments estimated useful life is 10 years, with
per month and that fixed selling costs can be reduced by 10%. no salvage value, and would be depreciated by the straight-line
Start-up costs at the end of the shutdown period would total method. Tamaraws minimum desired rate of return is 12 percent.
P8,000. Since Bulusan Company uses just-in-time production Present value of an annuity of 1 at 12 percent for 10 periods is
method, no inventories are on hand. 5.65. Present value of 1 due in 10 periods at 12 percent is 0.322.
At what level of unit sales for the two-month period should Bulusan The average accrual accounting rate of return during the first year
Company be indifferent between closing the plant or keeping it of assets use is
open? A. 20.0 percent C. 10.0 percent
A. 11,000 C. 10,000 B. 10.5 percent D. 40.0 percent
B. 24,125 D. 8,000
109. The Fields Company is planning to purchase a new machine
CAPITAL BUDGETING which it will depreciate, for book purposes, on a straight-line basis
Basic Concepts over a ten-year period with no salvage value and a full years
106. If Sol Company expects to get a one-year loan to help cover the depreciation taken in the year of acquisition. The new machine is
initial financing of capital project, the analysis of the project should expected to produce cash flow from operations, net of income
taxes, of P66,000 a year in each of the next ten years. The

accounting (book value) rate of return on the initial investment is 5 700,000 300,000
expected to be 12%. How much will the new machine cost?
A. P300,000 C. P660,000
B. P550,000 D. P792,000
110. Green Meadows Foundation (GMF), a tax-exempt organization,

invested P200,000 in a five-year project at the beginning of the
year. GMF estimates that the annual cash savings from this project
will amount to P65,000. Tax and book depreciation on the project
will be P40,000 per year for five years. On investments of this type,
GMFs desired rate of return is 12%. Information on present value
factors is as follows:
At 12% At At
14% 16%
Present value of P1 for 5 periods 0.57 0.52 0.48
Present value of an annuity of 1 3.6 3.4 3.3
for 5 periods
For the projects first year, GMFs accounting rate of return, based
on the projects average book value would be
A. 14.4% C. 12.5%
B. 13.9% D. 12.0%
Payback Period
111. The payback method assumes that all cash inflows are reinvested
to yield a return equal to
A. zero C. the Time-Adjusted-Rate-of-
Return
B. the Discount Rate D. the Cost-of-Capital
Bailout Period
112. A project costing P1,800,000 is expected to produce the
following annual cash flows (after tax) and salvage value:
Year Net cash inflow Salvage value
1 500,000 800,000
2 500,000 600,000
3 600,000 500,000
4 800,000 400,000
What is the bailout period for the project? Second year 120,000
A. 3.25 yrs. C. 2.73 yrs Third year 90,000
B. 2.5 yrs D. 2.4 yrs. Fourth year 60,000
Fifth year 30,000
Net Present Value
113. 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)
114. For P450,000, Roxas Corporation purchased a new machine with

an estimated useful life of five years with no salvage value. The
machine is expected to produce cash flow from operations, net of
40 percent income taxes, as follows:
First year P160,000
Second year 140,000
Third year 180,000
Fourth year 120,000
Fifth year 100,000
Roxas will use the sum-of-the-years-digits method to depreciate
the new machine as follows:
First year P150,000

The present value of 1 for 5 periods at 12 percent is 3.60478. The of five periods is 0.56743; present value of annuity of 1 for 5
present values of 1 at 12 percent at end of each period are: periods is 3.60478.
End of: Period 1 0.8928, Period 2 - 0.79719, Period 3 - Suppose the 20,000 estimated volume is sound, but the price is in
0.71178, Period 4 - 0.63552, Period 5 - 0.56743 doubt. What is the selling price (rounded to nearest peso) needed
Had Roxas used straight-line method of depreciation, what is the to earn a 12 percent internal rate of return?
difference in net present value provided by the machine at a A. P81.00 C. P70.00
discount rate of 12 percent? B. P85.00 D. P90.00
A. Increase of P9,750 C. Decrease of P24,376
B. Decrease of P9,750 D. Increase of P24,376
Profitability Index
115. A project has a NPV of P15,000 when the cutoff rate is 10%. The
annual cash flows are P20,505 on an investment of P50,000. the
profitability index for this project is
A. 1.367 C. 2.438
B. 3.333 D. 1.300
Internal Rate of Return

116. Hilltop Company is planning to invest P80,000 in a three-year
project. Hilltops expected rate of return is 10%. The present value
of P1 at 10% for one year is .909, for years is .826, and for three
years is .751. The cash flow, net of income taxes, will be P30,000
for the first year (present value of P27,270) and P36,000 for the
second year (present value of P29,736). Assuming the rate of
return is exactly 10%, what will the cash flow, net of income taxes,
be for the third year?
A. P17,268 C. P22,994
B. P22,000 D. P30, 618
117. Care Products Company is considering a new product that will

sell for P100 and have a variable cost of P60. Expected volume is
20,000 units. New equipment costing P1,500 and having a five-year
useful life and no salvage value is needed, and will be depreciated
using the straight-line method. The machine has cash operating
costs of P20,000 per year. The firm is in the 40 percent tax bracket
and has cost of capital of 12 percent. The present value of 1, end

118. Payback Company is considering the purchase of a copier 121. The NPV and IRR methods give
machine for P42,825. The copier machine will be expected to be A. the same decision (accept or reject) for any single investment
economically productive for 4 years. The salvage value at the end B. the same choice from among mutually exclusive investments
of 4 years is negligible. The machine is expected to provide 15 C. different rankings of projects with unequal lives
percent internal rate of return. The company is subject to 40 D. the same rankings of projects with different required
percent income tax rate. investments
The present value of an ordinary annuity of 1 for 4 periods is
2.85498.
In order to realize the IRR of 15 percent, how much is the estimated
before-tax cash inflow to be provided by the machine?
A. P17,860 C. P25,000
B. P15,000 D. P35,700
Equipment Replacement
119. A company is considering replacing a machine with one that will
save P40,000 per year in cash operating costs and have P10,000
more depreciation expenses per year than the existing machine.
The tax rate is 40%. Buying the new machine will increase annual
net cash flows of the company by
A. P28,000 C. P18,0000
B. P24,000 D. P6,000
120. Maxwell Company has an opportunity to acquire a new machine

to replace one of its present machines. The new machine would
cost P90,000, have a five-year life, and no estimated salvage value.
Variable operating costs would be P100,000 per year. The present
machine has a book value of P50,000 and a remaining life of five
years. Its disposal value now is P5,000, but it would be zero after
five years. Variable operating costs would be P125,000 per year.
Ignore present value calculations and income taxes.
Considering the five years in total, what would be the difference in
profit before income taxes by acquiring the new machine as
opposed to retaining the present one?
A. P10,000 decrease C. P35,000 increase
B. P15,000 decrease D. P40,000 increase
Investment Decision

122. In choosing from among mutually exclusive investments the Profitability index 98% 101% 106% 105%
manager should normally select the one with the highest Internal rate of 11% 13% 14% 15%
A. NPV C. payback reciprocal return
B. IRR D. book rate of return Which project(s) should Investors, Inc. select during the upcoming
year under each budgeted amount of funds?
123. Why do the NPV method and the IRR method sometimes No Budget P600,000Available P300,000Available
produce different rankings of mutually exclusive investment Restriction Funds Funds
projects? A. Projects 2,3, & 4 Projects 3 & 4 Project 3
A. The NPV method does not assume reinvestment of cash flows B. Projects 1, 2, & Projects 2, 3 & 4 Projects 3 & 4
while the IRR method assumes the cash flows will be reinvested 3
at the internal rate of return. C. Projects 1, 3, & Projects 2 & 3 Project 2
B. The NPV method assumes a reinvestment rate equal to the 4
discount rate while the IRR method assumes a reinvestment rate D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
equal to the internal rate of return.*
C. The IRR method does not assume reinvestment of the cash flows
while the NPV assumes the reinvestment rate is equal to the
discount rate.
D. The NPV method assumes a reinvestment rate equal to the bank
loan interest rate while the IRR method assumes a reinvestment
rate equal to the discount rate.
124. Investors, Inc. uses a 12% hurdle rate for all capital expenditures
and has done the following analysis for four projects for the
upcoming year:
Project 1 Project Project Project 4
2 3
Initial cash outlay P200,000 P298,0 P248,0 P272,000
00 00
Annual net cash
inflows
Year 1 P 65,000 P100,0 P P 95,000
00 80,000
Year 2 70,000 135,00 95,000 125,000
0
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000
Net present value ( 3,798) 4,276 14,064 14,662

Comprehensive Estimated collections in May for credit sales in May 20%

125. Which of the following combinations is possible? Estimated collections in May for credit sales in April 70%
Profitability Index NPV IRR Estimated collections in May for credit sales prior to April
A. greater than 1 positive equals cost of capital P12,000
B. greater than 1 negative less than cost of Estimated write-offs in May for uncollectible credit sales8.000
capital Estimated provision for bad debts in May for credit sales in May
C. less than 1 negative less than cost of 7,000
capital* What are the estimated cash receipts from accounts receivable
D. less than 1 positive less than cost of collections in May?
capital A. P142,000 C. P150,000
B. P149,000 D. P157,000
MASTER BUDGET
Basic Concepts
126. Zero-base budgeting requires managers to
A justify expenditures that are increases over the prior periods
budgeted amount.
B. justify all expenditures, not just increases over last years
amount.
C. maintain a full-year budget intact at all times.
D. maintain a budget with zero increases over the prior period.
Production Budget
127. Isabelle, Industries plans to sell 200,000 units of Batik products
in October and anticipates a growth in sales of 5 percent per month.
The target ending inventory in units of the product is 80 percent of
the next 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
128. The Mango Company is preparing its cash budget for the month
of May. The following information is available concerning its
accounts payable:
Estimated credit sales for May P200,000
Actual credit sales for April 150,000

129. At the beginning of the current month, Rose had P100,000. its dividends increased by 15% in 2003. Taylors dividend payout
Cash disbursements were P2,600,000 and cash collections were ratio for 2003 was
P2,850,000. Rose invests all excess cash in a money market fund A. 75.0% C. 47.9%
and has a line of credit to cover cash deficiencies. B. 52.3% D. 41.7%
If Rose wishes to start the next month with P150,000, Rose must
A. invest P200,000 C. invest P350,000 134. Glo expects sales for 2002 to be P2,000,000, resulting in a
B. borrow P400,000 D. do nothing return on sales of 10%. The dividend payout rate is 60%.
Beginning stockholders equity was P850,000 and current liabilities
FINANCIAL STATEMENT ANALYSIS are projected to be P300,000 at the end of 2002.
Horizontal Analysis
130. Sales for a three-year period are: Year 1, P4.0 million, Year 2,
P4.6 million, and Year 3, P5.0 million. Using year 1 as the base
year, the respective percentage increase in sales in year 2 and 3
are
A. 115% and 125% C. 115% and 130%
B. 115% and 109% D. 87% and 80%
Solvency Ratio
131. A firms financial risk is a function of how it manages and
maintains its debt. Which one of the following sets of ratios
characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile
return on equity
B. High debt-to-equity ratio, high interest coverage ratio, stable
return on equity
C. Low debt-to-equity ratio, low interest coverage ratio, volatile
return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile
return on equity*
132. The ratio that measures a firms ability to generate earnings is

A. times interest earned. C. days sales in receivables.
B. sales to working capital. D. operating asset turnover.
Other Ratio
133. Taylor company paid out one-half of its 2002 earnings in
dividends. Taylors earnings increased by 20%, and the amount of

What are the total equities available if the ratio of long-term debt to Return on equity (ROE) 5%
stockholders equity is 60%? The Bryan Companys debt ratio is
A. P1,788,000 C. P2,046,000 A. 40% C. 60%
B. P1,980,000 D. P858,000 B. 35% D. 65%
135. The following were reflected from the records of War Freak
Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2003
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
A. 0.50 C. 0.12
B. 0.40 D. 0.08
Integrated Ratios
136. Selected data from Maui Companys year-end financial
statements are presented below. The difference between average
and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
Gross profit margin 40%
Mauis net sales for the year were
A. P800,000 C. P672,000
B. P480,000 D. P1,200,000
137. Assume you are given the following relationships for the Bryan
Company:
Sales/total assets 1.5X
Return on assets (ROA) 3%

138. The following data were obtained from the records of Trend, Inc.: Ratio
Current ratio (at year end) 1.5 to 1 Working None Increase Decrease Increase
Inventory turnover based on sales and ending inventory15 times Capital
Inventory turnover based on cost of goods sold and ending
inventory 10.5 times 141. The days sales-in-receivable ratio will be understated if the
Gross margin for 2002 P315,000 company
What was Trend, Inc.s December 31, 2002 balance in the Inventory A. uses a natural business year for its accounting period*
account? B. uses a calendar year for its accounting period
A. P138,000 C. P140,000 C. uses average receivable in the ratio calculation
B. P 70,000 D. P135,000 D. has high sales at the end of the year
139. The board of directors of Contemporary Company was unhappy

with the current return on common equity. Though the return on
sales (profit margin) was impressively good at 12.5 percent, the
asset turnover was only 0.75. The present debt ratio is 0.40.
Atty. Tristan, the vice-president of corporate planning, presented a
proposal as follows:
Profit margin should be raised to 15 percent.
The new capital structure will be revised by raising debt
component.
The asset turnover will be maintained at 0.75.
The proposed adjustment is estimated to raise return on equity by
50 percent.
What debt ratio did Atty. Tristan propose in order to raise the return
on equity (ROE) to 150 percent of the present level?
A. 0.52 C. 0.61
B. 0.68 D. 0.72
Sensitivity Analysis
140. Annette Company uses the direct write-off method to account
for uncollectible accounts receivable. If the company subsequently
collects an account receivable that was written off in a prior
accounting period, the effect of the collection of the account
receivable on Annettes current ratio and total working capital
would be
A. B. C. D.
Current None Increase Decrease None
WORKING CAPITAL MANAGEMENT A. Yes; the system would free P250,000 in funds
Working Capital Policy B. Yes; the benefits of the lock-box system exceed the costs.
142. As a company becomes more conservative with respect to C. No; the benefit is only P10,000.
working capital policy, it would tend to have a(n) D. No; the firm would lose P5,000 per year if the system were used.
A. increase in the ratio of current liabilities to noncurrent liabilities.
B. decrease in the operating cycle.
C. decrease in the operating cycle.
D. increase in the ratio of current assets to noncurrent liabilities.*
143. Wen Company follows and aggressive financing policy in its

working capital management while Manong Corporation follows a
conservative financing policy. Which one of the following
statements is correct?
A. Wen has low ratio of short-term debt to total debt while Manong
has a high ratio of short-term debt to total debt.
B. Wen has a low current ratio while Manong has a high current
ratio
C. Wen has less liquidity risk while Manong has more liquidity risk.
D. Wen finances short-term assets with long-term debt while
Manong finances short-term assets with short-term debt.
Cash Management
144. Gear Inc., has a total annual cash requirement of P14,700,000
which are to be paid uniformly. Gear has the opportunity to invest
the money at 24% per annum. The company spends, on the
average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P60,000 C. P80,000
B. P62,500 D. P70,000
145. The Alabang Company has a daily average collection of checks

of P250,000. It takes the company 4 days to convert the checks to
cash. Assume a lockbox system could be employed which would
reduce the cash conversion period to 3 days. The lockbox system
would have a net cost of P25,000 per year, but any additional funds
made available could be invested to net 8 percent per year. Should
Alabang adopt the lockbox system?

Receivables Management percent of total sales, and the average collection period would fall
146. It is held that the level of accounts receivable that a firm has or to 30 days. However, sales would also fall by an estimated
holds reflects both the volume of a firms sales on account and a P250,000 annually. Variable costs are 60 percent of sales and the
firms credit policies. Which one of the following items is not cost of carrying receivables is 12 percent. Assume a tax rate of 40
considered as part of a firms credit policy? percent and 360 days per year.
A. The maximum risk group to which credit should be extended. What would be the incremental investment in receivables if the
B. The extent (in terms of money) to which a firm will go to collect change were made?
an account. A. P(16,667) C. P(48,611)
C. The length of time for which credit is extended. B. P(27,167) D. P(45,833)
D. The size of the discount that will be offered.
147. Relax Companys budgeted sales for the coming year are
P40,500,000 of which 80% are expected to be credit sales at terms
of n/30. Relax estimates that a proposed relaxation of credit
standards will increase credit sales by 20% and increase the
average collection period from 30 days to 40 days. Based on a 360-
day year, the proposed relaxation of credit to standards will result
in an expected increase in the average accounts receivable balance
of
A. P540,000 C. P900,000
B. P2,700,000 D. P1,620,000
148. Matang-Lawins budgeted sales for the coming year are

P48,000,000, of which 80% are expected to be credit sales at a
terms of n/30. Matang-Lawin estimates that a proposed relaxation
of credit standards would increase credit sales by 30 percent and
increase the average collection period from 30 days to 45 days.
Based on a 360-day year, the proposed relaxation of credit
standards would result in an expected increase in the accounts
receivable balance of
A. P3,440,000 C. P3,040,000
B. P1,440,000 D. P960,000
149. Lipa company currently has annual sales of P2,000,000. Its

average collection period is 40 days, and bad debts are 5 percent of
sales. The credit and collection manager is considering instituting a
stricter collection policy, whereby bad debts would be reduced to 2

Inventory Management The product is restocked at the start of each day. If the company
150. Which of the following items is irrelevant for a company that is desires a 90% service level in satisfying sales demand, the initial
attempting to minimize the cost of the stockout? stock balance for each day should be
A. Cost of placing an order C. Storage cost of inventory A. 245 C. 315
B. Contribution margin on lost sales D. Size of the safety stock B. 300 D. 220
151. When a specified level of safety stock is carried for an item in 154. Each stockout of a product sold by AFM Co. costs P1,750 per
inventory, the average inventory level for that item occurrence. The companys carrying cost per unit of inventory is P5
A. decreased by the amount of the safety stock. per year, and the company orders 1,500 units of product 20 times a
B. is one-half the level of the safety stock. year at a cost of P100 per order. The probability of a stockout at
C. increases by one-half the amount of the safety stock. various levels of safety stock are:
D. increases by the amount of the safety stock. Units of Safety Stock Probability of Stockout
0 0.50
152. Gleim Company, which manufactures a line of appliances, has 100 0.30
an annual demand for its HD washing machine estimated at 7,500 200 0.14
units. The annual cost of carrying one unit of inventory is P200, and 300 0.05
the cost to initiate a production run is P5,000.There are no HD 400 0.01
washing machine on hand, and Gleim has scheduled 5 equal The optimal safety stock level for the company based on the units
production runs of HD washing machines for the coming year. of safety stock level above is
Gleim has 250 business days per year. Assume that sales occur A. 0 units C. 300 units
uniformly throughout the year and that production is instantaneous. B. 100 units D. 400 units
If Gleim does not maintain a safety stock, the estimated total carrying costs
and total set-up costs for the coming year are: Trade Credit
A. B. C. D. 155. If a retailers term of trade are 3/10, net 45 with supplier, what is
Carrying P150,000 P300,000 P150,000 P300,000 the cost on an annual basis of not taking the discount? Assume a
costs 360-day year.
Set-up P 25,000 P 25,000 P 5,000 P 5,000 A. 24.00% C. 24.74%
costs B. 37.11% D. 31.81%
153. The sales office of Hermit Company has developed the following Short-term Loans
probability distribution for daily sales of a perishable product. 156. Alice Company borrows from a bank a certain loan at a stated
X (Units Sold) P (Sales = X) discount rate of 12 percent per annum. The bank requires 10
200 0.2 percent of loan as compensating balance in its new checking
250 0.5 account. The loan is payable at the end of 6 months. The effective
300 0.2 interest rate of this loan is
350 0.1 A. 28.21% C. 14.29%
B. 27.27% D. 15.38%

COST OF CAPITAL
157. The Dean Company has an outstanding 1 year bank loan of Cost of Debt
P800,000 at a stated interest rate of 8%. In addition, Dean is 158. The Maru Companys bonds have 5 years remaining to maturity.
required to maintain a 20% compensating balance in its checking Interest is paid annually; the bonds have a P1,000 face value; and
account. Assuming Dean would normally maintain a zero balance the coupon interest rate is 9 percent.
in its checking account, the effective interest rate on the loan is What is the estimated yield to maturity of the bonds at their current
A. 8.0% C. 11.11% market price of P850?
B. 10.0% D. 6.4% A. 10.64 percent C. 11.76 percent
B. 11.00 percent (?) D. 10.00 percent
Capital Asset Pricing Model

159. Spec, Inc.s stock is expected to generate a dividend and
terminal value one year from now of P57.00. The stock has a beta
of 1.3, the risk-free interest rate is 6 percent, and the expected
return market return is 11 percent. What should the equilibrium
price of Specs stock in the market now?
A. P50.67 C. P53.77
B. P51.35 D. P43.84
Dividend Growth Model

160. Tiger Companys stock is currently selling for P60 a share. The
firm is expected to earn P5.40 per share and to pay a year-end
dividend of P3.60.
If investors require a 9 percent return, what rate of growth must be
expected for Tiger?
A. Zero growth C. 40.0 percent
B. 3.0 percent D. 50.0 percent
Dividend Policy
161. Resi, Inc. expects net income of P800,000 for the next fiscal
year. Its targeted and current capital structure is 40% debt and
60% common equity. The director of capital budgeting has
determined that the optimal capital spending for next year is
P1,200,000. If Resi follows a strict residual dividend policy, what is
the expected dividend payout ratio for next year?
A. 80.0% C. 40.0%
B. 66.7% D. 10.0%

A. .50 C. .02
162. Galvez Company expects next years after-tax income to be B. .33 D. .25
P7,500,000. The firms debt ratio is currently 40 percent. Galvez
has P6,000,000 of profitable investment opportunities, and it wishes 166. A beverage stand can sell either soft drinks or coffee on any
to maintain its existing debt ratio. According to the residual given day. If the stand sells soft drinks and the weather is hot, it
dividend policy, what is the expected dividend payout ratio next will make P2,500; if the weather is cold, the profit will be P1,000. If
year? the stand sells coffee and the weather is hot, it will make P1,900; if
A. 52.0 percent C. 48.0 percent the weather is cold, the profit will be P2,000.The probability of cold
B. 75.0 percent D. 25.0 percent weather on a given day at this time is 60%.
The expected payoff for either selling coffee or soft drinks and the
163. Glenda Company expects to generate P10 million internally expected payoff if the vendor has perfect information are
which could be available for financing part of its P12 million capital Coffee Soft drinks Perfect
budget for this coming year. Glendas management believes that a information
debt-equity ratio of 40 percent is best for the firm. How much A. P1,360 P1,600 P3,000
should be paid in dividends if the target debt-equity ratio is to be B. P1,960 P1,600 P2,200
maintained? C. P2,200 P1,900 P1,360
A. P2,800,000 C. P8,571,429 D. P3,900 P1,900 P1,960
B. P1,428,571 D. P4,000,000
Linear Programming
QUANTITATIVE METHODS 167. Anderson Co. manufactures two different products, A and B. The
Probabilities company has 100 pounds of raw materials and 300 direct labor
164. Express Co. is developing a silver mine at a cost of P5 million. hours available for production. The time requirement and
There is a 20% probability that silver worth P15 million can be sold. contribution margins per unit are as follows:
There is a 20% probability that the silver will only be worth A B
P500,000. What is the maximum Express would be willing to spend Raw materials per unit 1 2
to develop the mine? (lbs)
A. P10,000,000 C. P3,100,000 Direct labor hours per 4 2
B. P 5,000,000 D. P0 unit
Contribution margin per P4 P5
165. CTV Company has three sales departments. Department FA unit
processes about 50 percent of CTVs sales, Department TA about 30
percent, and Department PA about 20 percent. In the past,
The objective function for maximizing profits and the equation for the
Departments FA, TA, and PA had error rates of about 2 percent, 5 constrain on raw materials are:
percent, and 2.5 percent, respectively. A random audit of the sales Objective Function Constraint on raw materials
records yields a recording error of sufficient magnitude to distort A. Max P1A + P2B 4A + 2B < 100
the companys results. The probability that Department FA is B. Max P4A + P5B 1A + 2B < 100
responsible for this error is C. Max P4A + P2B 4A + 5B < 100
D. Min P4A + P5B 4A + 5B < 300
172. A company that uses activity-based costing to develop standard

ACTIVITY-BASED COSTING costs
168. A cost system that first traces costs to activities and then traces A. will usually have more than one variable overhead component in
cost from activities to products its standard costs
A. Job order cost system. C. Activity-based cost system. B. cannot compute variable overhead efficiency variances
B. Process cost system. D. Flexible cost system. C. will have less information about the profitability of individual
products
169. The last step in activity-based costing is to D. all of the above
A. identify the major activities that pertain to the manufacture of
specific products 173. Classify the following as volume (unit) base or nonvolume
B. allocate manufacturing overhead costs to activity cost pools (activity) base:
C. identify the cost drivers that accurately measure each activitys 1. Number of purchase orders issued
contribution to the finished product 2. Direct labor hours
D. assign manufacturing overhead costs for each activity cost pool 3. Number of machine hours
to products 4. Number of set ups
5. Number of receiving reports issued
170. McMds standard cost card indicates that it takes three hours of 6. Direct material cost
direct labor to produce one unit of product. A recently conducted Volume (Unit) Base Nonvolume (Activity) Base
time and motion study revealed that it should take one hour to A. 1, 4, 5, 6 2, 3
produce the same unit. Labor cost is P150 per hour. B. 1, 4, 5 2, 3, 6
McMds value-added, and nonvalue-added costs would be C. 1, 2, 3, 4, 5 6
A. P150 and P0 C. P150 and P300 D. 2, 3, 6 1, 4, 5
B. P0 and P150 D. P450 and P0
174. The Oilfield plant has two categories of overhead: maintenance
171. Designing and redesigning are activities that are classified as and inspection. Costs expected for these categories for the coming
A. facility level C. unit level year are as follows:
B. batch level D. product level Maintenance P100,000
Inspection 150,000
The plant currently applies overhead using direct labor hours and
expected capacity of 50,000 direct labor hours. The following data
have been assembled for use in developing a bid for a proposed
job:
Direct materials P1,000
Direct labor P4,000
Machine hours 500
Number of inspections 4
Direct labor hours 800

Total expected machine hours for all jobs during the year is 25,000, B. increase the secondary storage capacity.
and the total expected number of inspections is 1,500. C. obtain software that will facilitate data retrieval.
Using activity-based costing and the appropriate activity drivers, D. integrate the accounting system into the data base.
the total cost of the potential job would be
A. P2,400 C. P7,400 180. A system with several computers that are connected for
B. P3,600 D. P7,750 communication and data transmission purposes but that permits
each computer to process its own data is a
QUALITY COST A. distributed data processing network C. decentralized
175. The cost of statistical quality control in a product quality cost network
system is B. centralized network D. multidrop network
A. training cost C. appraisal cost
B. internal failure cost D. prevention cost 181. The process of developing specifications for hardware, software,
personnel hours, data resources, and information products required
INFORMATION SYSTEMS to develop a system is referred to as
176. The process of learning how the current system, functions, A. systems analysis C. systems design
determining the needs of users, and developing the logical B. systems feasibility D. systems maintenance
requirements of a proposed system is referred to as
A. systems maintenance C. systems feasibility study
B. systems analysis D. systems design
177. Which of the following is not a characteristic of a batch

processing system?
A. The collection of like transactions which are sorted and
processed sequentially against a master file.
B. Keypunching of transactions, followed by machine processing.
C. The production of numerous printouts.
D. The posting of a transaction, as it occurs, to several files without
intermediate printouts.
178. All activity related to a particular application in a manual system

is recorded in a journal. The name of the corresponding item in a
computerized system is a
A. master file C. transaction file
B. year-to-date file D. current balance file
179. One of the first steps in the creation of a data base is to

A. define common variables and fields used throughout the firm*

182. An integrated set of computer programs that facilitates the

creation, manipulation, and querying of integrated files is called 101. A 111. A 121. A 131. D 141. A
a(n) 102. A 112. B 122. A 132. A 142. D
A. translator C. operating system 103. B 113. A 123. B 133. C 143. B
B. database management system D. flat file system 104. B 114. B 124. A 134. A 144. D
105. A 115. D 125. C 135. D 145. D
183. Turnaround documents 106. D 116. D 126. B 136. A 146. B
A. generally circulate only within the computer center. 107. B 117. B 127. C 137. A 147. D
B. can be read and processed only by the computer. 108. B 118. A 128. D 138. B 148. C
C. are generated by the computer and eventually return to it. 109. A 119. A 129. A 139. A 149. D
D. are only used internally in an organization. 110. B 120. D 130. A 140. B 150. A
Answer Key
151. D 161. D 171. D 181. C
1. C 11. C 21. B 31. C 41. A
152. A 162. A 172. A 182. B
2. D 12. A 22. A 32. A 42. C
153. B 163. B 173. D 183. C
3. B 13. D 23. A 33. B 43. C
154. D 164. C 174. C
4. C 14. A 24. A 34. A 44. C
155. D 165. B 175. C
5. C 15. D 25. C 35. A 45. D
156. C 166. B 176. B
6. C 16. C 26. D 36. A 46. C
157. B 167. B 177. D
7. A 17. B 27. C 37. A 47. C
158. B 168. C 178. C
8. B 18. C 28. C 38. C 48. D
159. A 169. D 179. A
9. B 19. B 29. C 39. C 49. A
160. B 170. C 180. A
10. C 20. B 30. D 40. D 50. A
51. D 61. B 71. A 81. B 91. B

52. B 62. A 72. A 82. D 92. D
53. A 63. B 73. D 83. A 93. B
54. A 64. A 74. A 84. B 94. D
55. B 65. D 75. A 85. B 95. A
56. D 66. A 76. D 86. C 96. B
57. B 67. A 77. C 87. B 97. B
58. C 68. B 78. B 88. A 98. A
59. A 69. B 79. A 89. A 99. A
60. D 70. C 80. B 90. B 100. D

TRUE STATEMENTS 11.When using one of the discounted cash flow methods to evaluate
the desirability of a capital budgeting project, the method of
1. Standard cost can, if properly used, help motivate employees financing the project under consideration is not an important
factor?
2. A company would most likely have an unfavorable labor rate
variance and a favorable labor efficiency if the mix of workers used 12.In capital budgeting, a firms cost of capital is frequently used as
in the production process was more experienced than the normal the discount rate
mix
13. The net present value method assumes that all cash inflows can be
3. The expected annual capacity level has traditionally been used to immediately reinvested at the discount rate
compute the fixed overhead application rate?
14. The basis for measuring the cost of capital derived from bonds and
4. A favorable volume variance increases absorption costing net preferred stock, respectively, is the after-tax rate of interest for
income; it does not affect variable costing net income. bonds and stated annual dividend rate for preferred stock
5. The variable costing format is often more useful to managers than 15.The weighted average cost of capital that is used to evaluate a
the absorption costing format because costs are classified by their specific project should be based on the overall capital structure of
behavior. the corporation
6. CVP analysis relies on the assumptions that costs are either strictly 16.The weighted average cost of capital approach to decision making
fixed or strictly variable. Consistent with these assumptions, as is not directly affected by the current budget for capital expansion
volume decreases total variable costs and total costs decrease
while fixed costs remain constant. 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
7. A managerial preference for a very low degree of operating the IRR is higher than the discount rate used.
leverage might indicate that a decrease in sales volume is expected
18.The profitability index is the ratio of the present value of cash flows
8. Payback period potentially ignores part of a projects relevant cash to the original investment
flows.
19.The rate of interest that produces a zero net present value when a
9. Payback method does not routinely rely on the assumption that all projects discounted cash operating advantage is netted against its
cash flows occur at the end of the period? discounted net investment is the internal rate of return
10.The payback method assumes that all cash inflows are reinvested 20.Internal rate of return has been criticized because it might
to yield a return equal to zero mistakenly imply that earnings are reinvested at the rate of return
earned by the investment.

21.As the marginal tax rate goes up, the benefit from the depreciation 32. The fixed overhead variance would be the same irrespective of the
tax shield increases capacity or denominator used.
22.Fixed cost is relevant if it is avoidable 33.The fixed overhead volume variance is the least significant variance
for control purposes. However, it is the most useful variance in
23.When a scarce resource, such as space, exists in an organization, evaluating plant utilization.
the criterion that should be used to determine production is
contribution margin per unit of scarce resource 34.Fixed overhead costs are mostly incurred to provide the capacity to
produce and are best controlled on a total basis at the time they
24.A cost driver is defined as a causal factor that increases the total are originally negotiated.
cost of a cost objective
35.In a standard cost system, when production is greater than the
25.Committed costs are governed mainly by past decisions that estimated unit or denominator level of activity, there will be a
established the current levels of operating and organizational favorable volume variance.
capacity and that only change slowly in response to small changes
in capacity 36.In analyzing factory overhead variances, volume variance is the
difference between the budget allowance based on standard hours
26.Discretionary costs are those that management decides to incur in allowed for actual production for the period and the amount
the current period to enable the company to achieve objectives budgeted to be applied during the period.
other than the filling of orders placed by customers
37.The use of separate variable and fixed overhead rates is better than
27.If a firm orders raw materials in quantities larger than the optimum a combined rate because such a system is more effective in
quantity obtained using the simple economic order quantity model assigning overhead costs to products.
in order to obtain a quantity discount, the company will experience
carrying costs higher than ordering costs 38.In a just-in-time inventory system, ideal standards become
expected standards.
28.One of the primary purposes of using a standard cost system is to
provide a distinct measure of cost control. 39.If a firm produces more units than it sells, absorption costing,
relative to variable costing, will result in higher income and assets.
29.Favorable variances are not necessarily good variances.
40.A firm presently has total sales of P100,000. If its sales rise by
30.Whether the variance is favorable or unfavorable is irrelevant to a P1.00, its net income based on variable costing will go up more
need of investigating it. than its net income based on absorption costing.
31.The sum of the material price variance and materials quantity 41.A company could never incur a loss that exceeded its total costs.
variance is not meaningful.

42.At breakeven point the contribution margin equals fixed costs.

After the level of volume exceeds the breakeven point, the total 52.Fixed costs are ignored in allocating scarce resources because they
contribution margin exceeds the total fixed costs. are unaffected by the allocation of scarce resources.
43.As projected net income increases the degree of operating leverage 53.A linear programming model must have only one objective function.
declines.
54.Strategic planning as assumed by top management is stating and
44.A managerial preference for a very low degree of operating establishing long-term plans.
leverage might indicate that a decrease in sales volume is
expected. 55.The master budget is a static budget because it is geared to only
one level of production and sales.
45.The time value of money is considered in long-range investment
decisions by assigning greater value to more immediate cash flows. 56.The primary reason why managers impose a minimum cash balance
in the cash budget is that it protects the organization from the
46.For a project such as plant investment, the return that should leave uncertainty of the budgeting process.
the market price of the firms stock unchanged is known as the cost
of capital. 57.Slack in operating budgets is greater when managers are allowed to
participate in the budgeting process. Budget slack refers to
46.Opportunity cost of capital is the highest rate of return that can be intentional overestimate of expenses or underestimate of revenues.
earned from the most attractive alternative capital project available
to the firm. 58.Performance measurements and a reward system are part of
motivational element of cost management system. Focus on cost
47.If an analyst desires a conservative net present value estimate, he control and assessing core competencies are part of informational
will assume that all cash inflows occur at year-end. element of cost management system.
48.When a profitable corporation sells an asset at a loss, the after-tax 59.A decentralized company grows very quickly than a centralized one.
cash flow on the sale will exceed the pre-tax cash flow on the sale.
60.In a decentralized company, transfer pricing system is designed to
49.Sensitivity analysis is an appropriate response to uncertainty in aid in the appraisal and motivation of managerial performance.
cash flow projections.
61.Responsibility accounting refers to an accounting system in which
50.Relevant costs are anticipated future costs that will differ among the operations of the business are broken down into reportable
various alternatives. segments and the control function of sales manager or supervisor is
emphasized.
51.In a make or buy decisions, the opportunity cost of capacity could
be considered to decrease the price of units purchased from
suppliers.

62.The most valid reason for using something other than a full-cost
based transfer price between units of a company is because a full-
cost price does not ensure the control of costs of a supplying unit.
63. A cost classified according to its activity-related behavior is a fixed

cost.
64. The distinction between direct and indirect costs depends on

whether a cost can be conveniently and physically traced to a cost
object under consideration.
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 Preweek Quizzer

2. Which of the following is not classifiable as a management advisory

May 2005 Page 1 of 46

COST-VOLUME-PROFIT ANALYSIS (120,000 pairs)

7. Glareless Company manufactures and sells sunglasses. Price and

10.Six-Two Convenience Store currently opens only Monday through

13.Larz Company produces a single product. It sold 25,000 units last

May 2005 Page 4 of 46

15.Valley of Fire Corporation has one department that produces three

May 2005 Page 5 of 46

May 2005 Page 6 of 46

May 2005 Page 7 of 46

Degree of Operating Leverage Repairs and maintenance 5,200 7,140

May 2005 Page 8 of 46

May 2005 Page 9 of 46

May 2005 Page 10 of 46

Absorption Costing & Variable Costing

Beginning inventory 2,000 units

53.The standard usage for raw materials is 5 pounds at P40.00 per

May 2005 Page 13 of 46

Two-Way Overhead Variances Actual DLH 32,000

May 2005 Page 14 of 46

Variable overhead 300,000 A. P33,000 unfavorable C. P66,000 unfavorable

A. P80,000 C. P240,000 73.The overhead efficiency variance is

76.Which of the following does not apply to the content of managerial

79.If the investment turnover increased by 30% and ROS decreased by

May 2005 Page 17 of 46

May 2005 Page 18 of 46

RELEVANT COSTING off (all variable)

87.The Auto Division of Fly Insurance employs three claims processors

May 2005 Page 19 of 46

91.Geary Manufacturing has assembled the following data pertaining

May 2005 Page 20 of 46

Questions 93 & 94 are based on the following information.

May 2005 Page 21 of 46

96.Jap Companys unit cost of manufacturing and selling a given item

May 2005 Page 22 of 46

Make or Buy 99.Elly Industries is a multi-product company that currently

98.Buena Corporation operates a plant with a productive capacity to

May 2005 Page 23 of 46

May 2005 Page 25 of 46

110. Green Meadows Foundation (GMF), a tax-exempt organization,

114. For P450,000, Roxas Corporation purchased a new machine with

May 2005 Page 27 of 46

Internal Rate of Return

117. Care Products Company is considering a new product that will

May 2005 Page 28 of 46

120. Maxwell Company has an opportunity to acquire a new machine

May 2005 Page 29 of 46

May 2005 Page 30 of 46

Comprehensive Estimated collections in May for credit sales in May 20%

May 2005 Page 31 of 46

132. The ratio that measures a firms ability to generate earnings is

May 2005 Page 32 of 46

May 2005 Page 33 of 46

139. The board of directors of Contemporary Company was unhappy

143. Wen Company follows and aggressive financing policy in its

145. The Alabang Company has a daily average collection of checks

May 2005 Page 35 of 46

148. Matang-Lawins budgeted sales for the coming year are

149. Lipa company currently has annual sales of P2,000,000. Its

May 2005 Page 36 of 46