MANAGEMENT ADVISORY SERVICES

PROBLEMS

1. A company has the following cost components for 100,000 units of product for the year:
Materials P200,000
Labor 100,000
Manufacturing overhead 200,000
Selling and administrative expenses 150,000

All costs are variable except for P100,000 of manufacturing overhead and P100,000 of
selling and administrative expenses. The total costs to produce and sell 110,000 units for
the year are:
a. P540,000 c. P715,000
b. P695,000 d. P650,000

2. A manufacturing company employs variable costing for internal reporting and analysis
purposes. However, it converts its records to absorption costing for external reporting.
The accounting department always reconciles the two operating income figures to assure
that no errors have occurred in the conversion. Financial data for the year are presented
below. The fixed manufacturing overhead cost per unit was based on the planned level of
production of 480,000 units.

Budgeted and Actual Levels for Sales and Production

Budget Actual
Sales (in units) 495,000 510,000
Production (in units) 480,000 500,000

Standard Unit Manufacturing Costs

Variable Absorption
Costing Costing
Variable costs P10.00 P10.00
Fixed manufacturing overhead 0 6.00
Total unit manufacturing costs P10.00 P16.00

The difference between the operating income calculated under the variable costing
method and the operating income calculated under the absorption costing method would
be
a. P120,000 c. P60,000
b. P90,000 d. P57,600

5. A manufacturer can sell its single product for P660. Below are the cost data for the product:
Direct materials P170
Direct labor 225
Manufacturing overhead 90

The relevant margin amount when beginning a theory of constraints (TOC) analysis is
a. P175 c. P345
b. P265 d. P490
 Items 6 and 7 are based on the following information:

Blackhall Corporation produces chemicals used in the cleaning industry. During the
previous month, Blackhall incurred P300,000 of joint costs in producing 60,000 units of
AR-01 and 40,000 units of JZ-02. Blackhall uses the units-of-production method to
allocate joint costs. Currently, AR-01 is sold at split-off for P3.50 per unit. Franck
Corporation has approached Blackhall to purchase all of the production of AR-01 after
further processing. The further processing will cost Blackhall P90,000.

6. Concerning AR-01, which one of the following alternatives is most advantageous?

a. Blackhall should process further and sell to Franck if the selling price is greater than
P3.00, which covers the joint costs.
b. Blackhall should continue to sell at split-off unless Franck offers at least P4.50 per
unit after further processing, which covers Blackhall’s total costs.
c. Blackhall should process further and sell to Franck if the selling price is greater than
P5.00.
d. Blackhall should process further and sell to Franck if the selling price is greater than
P5.25, which maintains the same gross profit percentage.

7. Assume that Blackhall Corporation agreed to sell AR-01 to Franck Corporation at P5.50 per
unit after further processing. During the first month of production, Blackhall sold 50,000 units
with 10,000 units remaining in inventory at the end of the month. With respect to AR-01,
which one of the following statements is true?
a. The operating profit last month was P50,000, and the inventory value is P15,000.
b. The operating profit last month was P50,000, and the inventory value is P45,000.
c. The operating profit last month was P125,000, and the inventory value is P30,000.
d. The operating profit last month was P200,000, and the inventory value is P30,000.

8. Meemon Manufacturing, which is subject to a 40% income tax rate, had the following
operating data for the period just ended:
Selling price per unit P60
Variable costs per unit P22
Fixed costs P504,000

Management plans to improve quality of its sole product by (1) replacing ta component
that costs P3.50 with a higher-grade unit that costs P5.50, and (2) acquiring a P180,000
packaging machine. Meemon will depreciate the machine over a 10-year life with no
estimated salvage value by the straight-line method of depreciation. If the company
wants to earn after-tax income of P172,800 in the upcoming period, it must sell
a. 19,300 units. c. 22,500 units.
b. 21,316 units. d. 23,800 units.

9. Given the following data, what is the marginal propensity to consume?

Level of Level of
Disposable income Consumption
P40,000 P38,000
48,000 44,000

a. 1.33 c. 0.95
b. 1.16 d. 0.75
 Items 10 and 11 are based on the following information:

JSR Manufacturing has assembled the data appearing below pertaining to two products.
Past experience has shown that the unavoidable fixed manufacturing factory overhead
included in the cost per machine hour averages P10. JSR has a policy of filling all sales
orders, even if it means purchasing units from outside suppliers. Total machine capacity
is 50,000 hours.
Blender Electric Mixer
Direct materials P6 P11
Direct labor 4 9
Manufacturing overhead at P16/hr 16 32
Cost if purchased from outside supplier 20 38
Annual demand (units) 20,000 28,000

10. If JSR Manufacturing desires to follow an optimal strategy, it should produce

a. 25,000 electric mixers and purchase all other units as needed.
b. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed.
c. 20,000 blenders and purchase all other units as needed.
d. 28,000 electric mixers and purchase all other units as needed.

11. With all other things constant, if JSR Manufacturing is able to reduce the direct materials for
an electric mixer to P6 per unit, the company should
a. produce 25,000 electric mixers and purchase all other units as needed.
b. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as
needed.
c. produce 20,000 blenders and purchase all other units as needed.
d. purchase all units as needed.

12. Listed below are selected line items from the Cost of Quality Report for Watsup Products for
last month:
Rework P 725
Equipment maintenance 1,154
Product testing 786
Product repair 695
What is Watsup’s total prevention and appraisal cost for last
month? a. P786 c. P1,940
b. P1,154 d. P2,665

13. Donnie Auto has developed the following production plan:

January 10,000
February 8,000
March 9,000
April 12,000

Each unit contains 3 kilograms of direct materials. The desired direct materials ending
inventory each month is 120% of the next month’s production, plus 500 kilograms. (The
beginning inventory meets this requirement.) Donnie has developed the following direct
labor standards for production of these units.
Department 1 Department 2
Hours per unit 2.0 0.5
Hourly rate P7.25 P12.00

Donnie Auto’s total budgeted direct labor pesos for February usage should
be a. P164,000. c. P184,500.
b. P174,250. d. P221,400.
14. Based on past experience, a company has developed the following budget formula for
estimating its shipping expenses. The company’s shipments average 12 kg. per shipment:

Shipping costs = P16,000 + (P0.50 x kg. shipped)

The planned and actual activities regarding order and shipments for the current month are
given in the following schedule:
Plan Actual
Sales orders 800 780
Shipments 800 820
Units shipped 8,000 9,000
Sales P120,000 P144,000
Total kilograms shipped 9,600 12,300

The actual shipping costs for the month amounted to P21,000. The appropriate monthly
flexible budget allowance for shipping costs for the purpose of performance evaluation
would be
a. P20,680. c. P20,800.
b. P20,920. d. P22,150.

15. Ebony Company has the following expected pattern of collections on credit sales: 70 percent
collected in the month of sale, 15 percent in the month after the month of sale, and 14
percent in the second month after the month of sale. The remaining 1 percent is never
collected. At the end of May, Ebony Company has the following accounts receivable
balances:
From April sales P21,000
From May sales 48,000
Ebony's expected sales for June are P150,000. What were total sales for
April? a. P150,000 c. P 70,000
b. P 72,414 d. P140,000

16. The following information is given for the Alpha Division of Sorority Corporation.
Sales P600,000
Var. cost of goods sold 200,000
Fixed manufacturing costs 50,000
Variable selling 30,000
Fixed admin. (50% allocated) 20,000
Fixed selling (20% allocated) 50,000
Assets at cost 800,000
Accumulated depreciation 200,000

If Sorority Corporation uses ROI to evaluate division managers and uses historical cost as
the investment base, the ROI for Alpha Division is:
a. 31.25% c. 41.67%
b. 33.75% d. 45.00%
17. In the two following constraint equations, X and Y represent two products (in units)
produced by the Uncommon Products Corporation.

Constraint 1: 3X + 5Y < 4,200

Constraint 2: 5X + 2Y > 3,000
What is the maximum number of units of Product X that can be produced?
a. 4,200 c. 600
b. 3,000 d. 1,400

18. The projected sales price for a new product (which is still in the development stage of the
product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the
first-year cost to be P60. On this type of product, the company requires a P12 per unit profit.
What is the target cost of the new product?
a. P60 c. P38
b. P30 d. P43

19. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per
year and the ordering costs are P100. The company uses an order quantity of 500 units. By
how much could the company reduce its total costs if it purchased the economic order
quantity instead of 500 units?
a. P 500 c. P2,500
b. P2,000 d. P 0

20. Ning 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 hours of machine time, and Product Y requires 8 hours
of machine time. If Ning Company wants to dedicate 80 percent of its machine time to the
product that will provide the most income, the company will have a total contribution margin
of
a. P250,000. c. P210,000.
b. P240,000. d.P200,000

21. Mangit Company is currently operating at a loss of P15,000. The sales manager has received
a special order for 5,000 units of product, which normally sells for P35 per unit. Costs
associated with the product are: direct material, P6; direct labor, P10; variable overhead, P3;
applied fixed overhead, P4; and variable selling expenses, P2. The special order would allow
the use of a slightly lower grade of direct material, thereby lowering the price per unit by
P1.50 and selling expenses would be decreased by P1. If Mangit wants this special order to
increase the total net income for the firm to P10,000, what sales price must be quoted for
each of the 5,000 units?
a. P23.50 c. P27.50
b. P24.50 d. P34.00

22. Briar Co. signed a government construction contract providing for a formula price of actual
cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the
formula price being less than the target price of P2,200,000. Briar’s actual costs incurred
were P1,920,000. How much should Briar receive from the contract?
a. P2,060,000 c. P2,156,000
b. P2,112,000 d. P2,200,000
23. The following is a summarized income statement of Carr Co.’s Profit Center No. 43 for March
2013:
Contribution margin P70,000
Period expenses:
Manager’s salary P20,000
Facility depreciation 8,000
Corporate expense allocation 5,000
33,000
Profit center income P37,000

Which of the following amounts would most likely be subject to the control of the profit
center’s manager?
a. P70,000 c. P37,000
b. P50,000 d. P33,000

24. The budget for Edwin Auto Repair Shop for the year is as follows:
Direct labor per hour P30
Total labor hours 10,000
Overhead costs:
Materials handling and storage P10,000
Other (rent, utilities, depreciation, insurance) P120,000
Direct materials cost P500,000

Edwin allocates materials handling and storage costs per peso of direct materials cost.
Other overhead is allocated based on total labor hours. In addition, Edwin adds a charge
of P8 per labor hour to cover profit margin. Cargo Trucking Co. has brought one of its
trucks to Edwin for an engine overhaul. If the overhaul requires twelve labor hours and
P800 parts, what price should Edwin charge Cargo for these repair services?
a. P1,160 c. P1,416
b. P1,256 d. P1,472

Items 25 to 29 are based on the following information:

The following information pertains to a product for a ten-week budget

period: Sales price P11 per unit
Materials P3 per unit
Manufacturing conversions costs: Fixed P210,000
Variable P2 per unit
Selling and administrative costs: Fixed P45,000
Variable P1 per unit
Beginning accounts payable for materials P40,000

Manufacturing and sales of 70,000 units are expected to occur evenly over the period.
Materials are paid for in the week following use. There are no beginning inventories.

25. What amount should be budgeted for cash payments to material suppliers during the period?
a. P189,000 c. P229,000
b. P 40,000 d. P250,000

26. Using variable costing, what is the budgeted income for the
period? a. P 95,000 c. P420,000
b. P350,000 d. P210,000

27. Using absorption costing, what is the budgeted income for the period?
a. P 95,000 c. P420,000
b. P350,000 d. P210,000
28. Actual results are as budgeted, except that only 60,000 of the 70,000 units produced were
sold. Using absorption costing, what is the difference between the reported income and the
budgeted net income?
a. P50,000 c. P110,000
b. P30,000 d. P 20,000

29. If a special order for 4,000 units would cause a loss of 1,000 regular sales, what minimum
amount of revenue must be generated from the special order so that net income is not
reduced? (All cost relationships remain unchanged.)
a. P 5,000 c. P24,000
b. P29,000 d. P20,000

30. Lifelong Company has been asked to evaluate the profitability of a product that it
manufactured and sold from Year 7 through Year 10. The product had a one-year warranty
from date of sale. The following information appears in the financial records:

Research, development, and design cost, Years 5 & 6 P5,000,000

Manufacturing and distribution costs, Years 7 to 10 7,000,000
Warranty costs, Years 7 to 10 200,000
Warranty cost, Year 11 100,000

The life-cycle cost for this product is

a. P10,000,000. c. P12,200,000.
b. P12,000,000. d. P12,300,000.

31. Yellow Co. is considering the purchase of a new machine that costs P450,000. The new
machine will generate net cash flow of P150,000 per year and net income of P100,000 per
year for five years. Yellow’s desired rate of return is 6%. The present value factor for a five-
year annuity of P1, discounted at 6%, is 4.212. The present value factor of P1, at compound
interest of 6% due in five years, is 0.7473. What is the new machine’s net present value?
a. P450,000 c. P181,800
b. P373,650 d. P110,475

ITEMS 32 AND 33 ARE BASED ON THE FOLLOWING INFORMATION:

Assume that Micky Industries is considering investing in a project with the following
characteristics:
Initial investment P500,000
Additional investment in working capital 10,000
Cash flows before income taxes for years 1 through 5 140,000
Yearly tax depreciation 90,000
Terminal value of investment 50,000
Cost of capital 10%
Present value of P1 received after 5 years discounted at 10% 0.621
Present value of an ordinary annuity of P1 for 5 years at 10% 3.791
Marginal tax rate 30%
Investment life 5 years

Assume that all cash flows come at the end of the year.

32. What is the amount of the after-tax cash flows in year 2?

a. P140,000 c. P
98,000
b. P125,000 d. P 70,000
33. What is the net present value of the investment?
a. P175,000 c. P 1,135
b. P 58,000 d. P (12,340)

34. A company with P4.8 million in credit sales per year plans to relax its credit standards,
projecting that this will increase credit sales by P720,000. The company’s average collection
period for new customers is expected to be 75 days, and the payment behavior of the
existing customers is not expected to change. Variable costs are 80% of sales. The firm’s
opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s
benefit (loss) from the planned change in credit terms?
a. P0 c. P144,000
b. P 28,800 d. P120,000

ITEMS 35 AND 36 ARE BASED ON THE FOLLOWING INFORMATION

NOSIGNAL Telecom is considering a project for the coming year that will cost P50 million.
NOSIGNAL plans to use the following combination of debt and equity to finance the
investment.

• Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and
flotation costs of 2% of par.

• Use P35 million of funds generated from earnings.

The equity market is expected to earn 12%. Treasury bills are currently yielding 5%. The
beta coefficient for NOSIGNAL is estimated to be 0.60. NOSIGNAL is subject to an
effective corporate income tax rate of 40%.

35. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine
the weighted-average cost of capital.
a. 10.50% c. 9.50%
b. 8.50% d. 6.30%

36. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by
adding the risk-free rate of return to the incremental yield of the expected market return that
is adjusted by the company’s beta. Compute NOSIGNAL’s expected rate of return.
a. 9.20% c. 7.20%
b. 12.20% d. 12.00%
 ITEMS 37 AND 38 ARE BASED ON THE FOLLOWING INFORMATION:

The following information is available for Armstrong Enterprises for 2013:

Net operating profit (income) after taxes P36,000,000

Depreciation expense 15,000,000
Change in net working capital 10,000,000
Capital expenditures 12,000,000
Invested capital (total assets – current liabilities) 100,000,000
Weighted-average cost of capital 10%

37. What is the amount of the economic value added (EVA)?

a. P20,000,000 c. P15,000,000
b. P26,000,000 d. P36,000,000

38. What is the free cash flow for 2013?

a. P36,000,000 c. P29,000,000
b. P30,000,000 d. P26,000,000

39. A 2013 cash budget is being prepared for the purchase of Toytoy, a merchandise item.
Budgeted data are
Cost of goods sold for 2013 P300,000
Accounts payable 1/1/13 20,000
Inventory—1/1/13 30,000
12/31/13 42,000

Purchases will be made in twelve equal monthly amounts and paid for in the following
month. What is the 2013 budgeted cash payment for purchases of Toytoy?
a. P295,000 c. P306,000
b. P300,000 d. P312,000

40. Product Kitty has sales of P200,000, a contribution margin of 20%, and a margin of safety of
P80,000. What is Kitty’s fixed cost?
a. P16,000 c. P80,000
b. P24,000 d. P96,000
41. Hector Corporation uses an activity-based costing system with the following three activity
cost pools:
Activity Cost Pool Total Activity
Fabrication 20,000 machine-hours
Order processing 200 orders
Other Not applicable

The Other activity cost pool is used to accumulate costs of idle capacity and organization-
sustaining costs.

The company has provided the following data concerning its costs:
Wages and salaries P480,000
Depreciation 120,000
Occupancy 200,000
Total P800,000

The distribution of resource consumption across activity cost pools is given below:

Fabrication Order Processing Other Total

Wages and salaries 55% 20% 25% 100%
Depreciation 10% 45% 45% 100%
Occupancy 25% 40% 35% 100%

The activity rate for the Order Processing activity cost pool is closest to:
a. P1,400 per order c. P1,150 per order
b. P1,600 per order d. P800 per order

42. The following information relates to Snowball Corporation:

Sales at the break-even point P312,500
Total fixed expenses P250,000
Net operating income P150,000

What is Snowball's margin of safety?

a. P62,500 c. P100,000
b. P187,500 d. P212,500

USE THE FOLLOWING TO ANSWER QUESTIONS 43-47:

The Ben Company uses standard costing for the single product the company makes and
sells. The following data are for the month of April:
• Actual cost of direct material purchased and used: P62,400
• Material price variance: P4,800 unfavorable
• Total materials variance: P14,400 unfavorable
• Standard cost per pound of material: P6
• Standard cost per direct labor hour: P8
• Actual direct labor hours: 3,800 hours
• Labor efficiency variance: P1,600 favorable
• Standard number of direct labor hour per unit of product: 2
• Total labor variance: P680 unfavorable

43. The total number of units produced during April was:

a. 8,000 c. 2,000
b. 12,000 d. 3,800
 44. The standard quantity of material allowed to produce one unit of product was:
a. 1 pound c. 6 pounds
b. 4 pounds d. 2 pounds

45. The actual material cost per pound was:

a. P6.50 c. P5.00
b. P6.00 d. P7.20

46. The actual direct labor rate per hour was:

a. P16.00 c. P8.00
b. P 6.50 d. P8.60

47. The labor rate variance was:

a. P2,280 favorable c. P920 favorable
b. P2,280 unfavorable d. P920 unfavorable

48. The Nut House, Inc., sells three types of nuts: almonds, cashews, and walnuts. Ten
thousand cans of nuts were sold in 2011, and the amount of walnuts sold were twice as
much as the number of cans of cashews, whereas almond sales were one-half the amount of
cashew sales. Fixed costs were P37,680, and the unit sales prices and unit variable costs
were as follows:

Product Unit Sales Price Unit Variable Cost

Almonds P8 P4
Cashews 10 5
Walnuts 6 4

The company plans to earn profit of P6,280. The overall break-even unit sales is:
a. 10,000 c. 12,000
b. 14,000 d. 6,857

49. Jacob Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
P103.40 per unit.
Sales volume (units) 5,000 6,000
Cost of sales P315,500 P378,600
Selling, general, and administrative costs P162,500 P177,600

The best estimate of the total contribution margin when 5,300 units are sold
is: a. P 56,710 c. P 41,340
b. P133,560 d. P213,590

50. Steady Company produces a single product. Last year, the company's net operating income
computed by the absorption costing method was P6,400, and its net operating income
computed by the variable costing method was P9,100. The company's unit product cost was
P17 under variable costing and P20 under absorption costing. If the ending inventory
consisted of 2,100 units, the beginning inventory in units must have been:
a. 1,200 c. 3,000
b. 2,100 d. 4,800
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53
Konrado’s Engine Company manufactures part TE45 used in several of its engine models. Monthly
production costs for 1,000 units are as follows:

Direct materials P 40,000

Direct labor 10,000
Variable overhead costs 30,000
Fixed overhead costs 20,000
Total costs P100,000

It is estimated that 10% of the fixed overhead costs assigned to TE45 will no longer be
incurred if the company purchases TE45 from the outside supplier. Konrado’s Engine
Company has the option of purchasing the part from an outside supplier at P85 per unit.

51. If Konrado’s Engine Company accepts the offer from the outside supplier, the monthly
avoidable costs (costs that will no longer be incurred) total:
a. P 82,000 c. P 50,000
b. P 98,000 d. P100,000

52. If Konrado’s Engine Company purchases 1,000 TE45 parts from the outside supplier per
month, then its monthly operating income will:
a. increase by P2,000 c. decrease by P3,000
b. increase by P80,000 d. decrease by P85,000

53. The maximum price that Konrado’s Engine Company should be willing to pay the outside
supplier is:
a. P80 per TE45 part c. P98 per TE45 part
b. P82 per TE45 part d. P100 per TE45 part

54. King Company produces a single product. During March, the company had net operating
income under absorption costing that was P3,500 lower than under variable costing. The
company sold 7,000 units in March, and its variable costs were P7 per unit, of which P3
was variable selling expense. If fixed manufacturing overhead was P2 per unit under
absorption costing, then how many units did the company produce during March?
a. 5,250 units c. 6,500 units
b. 8,750 units d. 6,125 units

55. XYZ Company believes that its collection costs could be reduced through modification of
collection procedures. This action is expected to result in a lengthening of the average
collection period from 28 days to 34 days; however, there will be no change in uncollectible
accounts. The company’s budgeted credit sales for the coming year are P27,000,000, and
short-term interest rates are expected to average 8%. To make the changes in collection
procedures cost beneficial, the minimum savings in collection costs (using a 360-day year)
for the coming year would have to be
a. P360,000 c. P36,000
b. P180,000 d. P30,000
56. Presented below are excerpts from the income statements of Jesse Company for the years
ended December 31, 2013 and 2012:
2013 2012
Sales P1,584,000 P1,600,000
Cost of goods sold 928,000 960,000
Gross profit P 656,000 P 640,000

The 2013 selling price was 10% lower than in 2012.

The change in gross profit due to the change in the numbers of units sold is:
a. P17,600 unfavorable c. P128,000 favorable
b. P160,000 unfavorable d. P64,000 favorable

57. Sanrok Company makes a household appliance with model number RSR1914. The goal for
2013 is to reduce direct materials usage per unit. No defective units are currently
produced. Manufacturing conversion costs depend on production capacity defined in terms
of RSR1914 units that can be produced. The industry market size for appliances increased
5% from 2012 to 2013. The following additional data are available for 2012 and 2013:

2012 2013
Units of RSR1914 produced and sold 10,000 10,500
Selling price P100 P95
Direct materials (square feet) 30,000 29,000
Direct material costs per square foot P10 P11
Manufacturing capacity for RSR1914 (units) 12,500 12,000
Total conversion costs P250,000 P240,000
Conversion costs per unit of capacity P20 P20

What is the revenue effect of the growth component?

a. P2,500 unfavorable c. P52,500 unfavorable
b. P47,500 favorable d. P50,000 favorable

58. Labor Day, Inc. is considering a 10-year capital investment project with forecasted
revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per
year. The initial cost of the equipment for the project is P23,000 and Labor Day expects
to sell the equipment for P9,000 at the end of the tenth year. The equipment will be
depreciated over 7 years. The project requires a working capital investment of P7,000 at
its inception and another P5,000 at the end of year 5. Assuming a 40% income tax rate,
the expected net cash flow from the project in the tenth year is
a. P32,000 c. P20,000
b. P24,000 d. P11,000

59. Apple Enterprises is experiencing a growth rate of 9% with a return on assets of 12%. If
the debt ratio is 36% and the market price of the stock is P38 per share, what is the
return on equity?
a. 18.75% c. 9.0%
b. 12.0% d. 7.68%
60. A vendor offered Tanya Company P25,000 in compensation for losses resulting from faulty
raw materials. Alternatively, a lawyer offered to represent Tanya in a lawsuit against the
vendor for a P12,000 retainer and 50% of any reward over P35,000. Possible court
awards with their associated probabilities are as follows:

Award Probability
P75,000 60%
0 40%

Compared with accepting the vendor’s offer, the expected value for Tanya to litigate the
matter to a verdict provides a
a. P38,000 gain c. P8,000 gain
b. P21,000 gain d. P4,000 loss

THEORIES

1. Management accounting:
a. focuses on estimating future revenues, costs, and other measures to forecast
activities and their results
b. provides information about the company as a whole
c. reports information that has occurred in the past that is verifiable and reliable
d. provides information that is generally available only on a quarterly or annual

basis

2. The terms direct costs and indirect costs are commonly used in accounting. A particular
cost might be considered a direct cost of a manufacturing department but an indirect cost
of the product produced in the manufacturing department. Classifying the cost as either
direct or indirect depends upon
a. Whether an expenditure is unavoidable because it cannot be changed regardless of
any action taken.
b. The cost object to which the cost is being related.
c. Whether the cost is expensed in the period in which it is incurred.
d. The behavior of the cost in response to volume changes.

3. Costs are allocated to cost objects in many ways and for many reasons. Which one of the
following is purpose of cost allocation?
a. Aiding in variable costing for internal reporting.
b. Budgeting cash and controlling expenditures.
c. Measuring income and assets for external reporting.
d. Evaluating revenue center performance

4. Which of the following is correct regarding a relevant range?

a. The relevant range cannot be changed after being established.
b. Actual fixed costs usually fall outside the relevant range.
c. Total fixed cost will not change.
d. Total variable costs will not change.

5. “Discretionary costs” are costs that

a. will be unaffected by current managerial decisions.
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. are likely to respond to the amount of attention devoted to them by a specified
manager.
d. management decides to incur in the current period to enable the company to
achieve objectives other than the filling of orders placed by the customers.
 6. An imputed cost is
a. a cost that continues to be incurred even though there is no activity.
b. a cost that does not entail any peso outlay but is relevant to the decision-making
process.
c. a cost that cannot be avoided because it has already been incurred.
d. the difference in total costs that results from selecting one alternative instead of
another.

7. An accounting system that collects financial and operating data on the basis of the
underlying nature and extent of the cost drivers is
a. Variable costing c. Activity-based costing
b. Cycle-time costing d. Direct costing

8. A difference between standard costs used for cost control and budgeted costs
a. cannot exist because they should be the same amounts.
b. can exist because budgeted costs are historical costs, whereas standard costs are
based on engineering studies.
c. can exist because standard costs represent what costs should have been, whereas
budgeted costs represent expected actual costs.
d. can exist because standard costs must be determined after the budget is completed.

9. A standard costing system is most often used by a firm in conjunction with

a. flexible budgets c. target (hurdle) rates of return
b. participative management programs d. management by objectives

10. The use of activity-based costing (ABC) normally results in

a. equalizing set-up costs for all product lines.
b. decreased set-up costs being charged to low volume products.
c. substantially lower unit costs for low-volume products than is reported by traditional
product costing.
d. substantially greater unit costs for low-volume products than is reported by
traditional product costing.

11. Which of the following statements is true regarding absorption costing and variable
costing?
a. Gross margins are the same under both costing methods.
b. Variable manufacturing costs are lower under variable costing.
c. If finished goods inventory increases, absorption costing results in higher income.
d. Overhead costs are treated in the same manner under both costing methods.

12. A firm that is deploying just-in-time manufacturing for the first time will
a. acquire considerable computer processing capability to manage the demands of the
data-dependent kanban inventory management system.
b. maintain a carefully calibrated safety stock since interruptions in supply are
inevitable.
c. establish contracts with a few carefully chosen suppliers since an interruption in
supply is extremely disruptive of the production process.
d. establish contracts with many suppliers since an interruption in supply is extremely
disruptive of the production process.

13. Each organization plans and budgets its operations for slightly different reasons. Which
one of the following is not a significant reason for planning?
a. Checking progress toward the objectives of the organization.
b. Ensuring profitable operations.
c. Forcing managers to consider expected future trends and conditions.
d. Providing a basis for controlling operations.
14. Which of the following statements concerning approaches for the budget development
process is correct?

a. Since department managers have the most detailed knowledge about organizational
operations, they should use this information as the building blocks for the operating
budget.
b. With the information technology available, the role of budgets as an organizational
communication device has declined.
c. To prevent ambiguity, once departmental budgeted goals have been developed, they
should remain fixed even if the sales forecast upon which they are based proves to
be wrong in the middle of the fiscal year.
d. The top-down approach to budgeting will ensure adherence to strategic
organizational goals.

15. When compared with ideal standards, practical standards

a. serve as a better motivating target for manufacturing personnel.
b. incorporate very generous allowance for spoilage and worker inefficiencies.
c. result in a less desirable basis for the development of budgets.
d. produce lower per-unit product costs.

16. The correlation coefficient that indicates the weakest linear association between two
variables is
a. 0.35 c. -0.11
b. 0.12 d. -0.73

16. Through the use of decision models, managers thoroughly analyze many alternatives and
decide on the best alternative for the company. Often, the actual results achieved from a
particular decision are not what was expected when the decision was made. In addition,
an alternative that was not selected would have actually been the best decision for the
company. The appropriate technique to analyze the alternatives by using expected inputs
and altering them before a decision is mad is
a. Program Evaluation Review Technique c. Linear programming
b. Sensitivity analysis d. Expected value analysis

17. Which of the following may be used to estimate how inventory warehouse costs are
affected by both the number of shipments and the weight of materials handled?
a. Economic order quantity analysis c. Correlation analysis
b. Probability analysis d. Multiple regressions analysis

18. Breakeven analysis assumes that over the relevant range

a. unit revenues are non-linear. c. total costs are unchanged.
b. unit variable costs are unchanged. d. total fixed costs are non-linear.

19. Division A is considering a project that will earn a rate of return which is greater than the
imputed interest charge for invested capital, but less than the division’s historical return
on invested capital. Division B is considering a project that will earn a rate of return that
is greater than the division’s historical return on invested capital. if the objective is to
maximize residual income, should these divisions accept or reject their projects?

A B
a. Accept Accept
b. Reject Accept
c. Reject Reject
d. Accept Reject

20. Which measures would be useful in evaluating the performance of a manufacturing

 system?
I. Throughput time
II. Total setup for time machines/Total production time
III. Number of rework units/Total number of units completed

a. I and II only c. I and III only

b. II and III only d. I, II, and III only

21. The discount rate (hurdle rate of return) must be determined in advance for the
a. Payback period method. c. Net present value method.
b. Time-adjusted rate of return method. d. Internal rate of return method

22. To assist in an investment decision, Gift Co. selected the most likely sales volume from
several possible outcomes. Which of the following attributes would that selected sales
volume reflect?
a. The midpoint of the range. c. The greatest probability.
b. The median. d. The expected value.

23. If everything else remains constant and a firm increases its cash conversion cycle, its
profitability will likely
a. Increase. c. Decrease.
b. Increase if earnings are positive. d. Not be affected.

24. In considering cost of quality methodology, quality circles are associated with
a. Prevention. c. Internal failure.
b. Appraisal. d. External failure.

25. Management of organizations that engage in business process management view business
processes as
a. Requirements for good control over the organization.
b. Systems that provide information for good management.
c. Strategic assets that must be understood, managed and improved.
d. Mechanisms that keep employees from shirking.

26. The balanced scorecard has been adopted by many corporations. Which of the following
best describes the balanced scorecard?

a. A strategy that meets management’s objectives.

b. A diagram illustrating cause and effect relationships.
c. A table of key actions to achieve strategic objectives.
d. A strategic performance measurement and management framework.

27. The most likely strategy to reduce the breakeven point, would be to
a. Increase both the fixed costs and the contribution margin.
b. Decrease both the fixed costs and the contribution margin.
c. Decrease the fixed costs and increase the contribution margin.
d. Increase the fixed costs and decrease the contribution margin.

28. A technique that is often used in project management to identify tasks where attention
should be focused because they are the most critical is referred to as
a. ABC Analysis. c. Work breakdown analysis.
b. Milestone analysis. d. Tasking.

29. Which of the following statements regarding transfer pricing is false?

 a. When idle capacity exists, there is no opportunity cost to producing intermediate
products for another division.
b. Market-based transfer prices should be reduced by any costs avoided by selling
internally rather than externally.
c. No contribution margin is generated by the transferring division when variable cost-
based transfer prices are used.
d. The goal of transfer pricing is to provide segment managers with incentive to
maximize the profits of their divisions.

30. Another name for return on investment is the:

a. net present value c. residual income
b. accounting rate of return d. internal rate of return

31. A manager would like to see a decreasing trend in all of the following
operating measures except:
a. Customer complaints as a percentage of units sold.
b. Scrap as a percentage of total cost.
c. Setup time.
d. Manufacturing cycle efficiency

32. Which of the following would produce a labor rate variance?

a. Poor quality materials causing breakage and work interruptions.
b. Use of persons with high hourly wage rates in tasks that call for low hourly
wage rates.
c. Excessive number of hours worked in completing a job.
d. An unfavorable variable overhead spending variance.

33. XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000
valves annually. Currently XIAN produces 40,000 valves and is thinking about increasing
production to 45,000 valves next year. What is the most likely behavior of total
manufacturing costs and unit manufacturing costs given this change?
a. Total manufacturing costs will increase and unit manufacturing costs will stay the
same.
b. Total manufacturing costs will increase and unit manufacturing costs will decrease.
c. Total manufacturing costs will stay the same and unit manufacturing costs will stay
the same.
d. Total manufacturing costs will stay the same and unit manufacturing costs will
decrease.

34. Project Noble has an expected cash flow of P500,000 at the end of year 5. Project Heroic
has expected cash flows of P100,000 to be received at the end of each year for the next
five years. What can be said of the net present value of Project Noble compared to
Project Heroic?
a. They are the same because both cash flows total P500,000 over the lives of the
projects.
b. Project Noble is preferred because of the largest lump-sum payment in year 5.
c. Project Heroic is preferred because of the periodic payments made consistently
throughout the years and are made earlier.
d. Both Project Noble and Project Heroic have the same internal rate of return and
either should be accepted.

35. At Key Enterprises, the controller is responsible for directing the budgeting process. In this
role, the controller has significant influence with executive management as individual
department budgets are modified and approved. For the current year, the controller was
instrumental in the approval of a particular line manager’s budget without modification ,
even though significant reductions were made to the budgets submitted by other line
managers. As a token of appreciation, the line manager has given the controller a gift
certificate for a popular local restaurant. In considering whether or not to accept the
certificate, the controller should refer to which section of IMA’s Statement of Ethical
Professional Practice?
a. Competence c. Integrity
 b. Confidentiality d. Credibility

36. Inventoriable costs are

a. include only the prime costs of manufacturing a product.
b. include only the conversion costs of manufacturing a product.
c. are expensed when products become part of finished goods inventory.
d. are regarded as assets before the products are sold.

37. Which of the following items would have to be included for a company preparing a
schedule of cash receipts and disbursements for calendar Year 1?
a. A purchase order issued in December Year 1 for items to be delivered in February
Year 2.
b. Dividend declared in November Year to be paid in January Year 2 to shareholders of
record as of December Year 1.
c. The amount of uncollectible accounts for Year 1.
d. The borrowing of funds from a bank on a note payable taken out in June Year 1 with
an agreement to pay the principal and interest in June Year 2.

38. As a business owner you have determined that the demand for your product is inelastic.
Based upon this assessment you understand that
a. Increasing the price of your product will increase total revenue.
b. Decreasing the price of your product will increase total revenue.
c. Increasing the price of your product will have no effect on total revenue.
d. Increasing the price of your product will increase competition.

39. What technology is needed in order to convert a paper document into a computer file?
a. Optical character recognition. c. Bar-coding scanning.
b. Electronic data interchange. d. Joining and merging.

40. In a make-versus-buy decision, the relevant costs include variable manufacturing costs, as
well as
a. factory management costs c. avoidable fixed costs.
b. general office costs. d. depreciation costs.

- end -