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Final Exam 8 May 2018, questions and answers

Bachelor of Science in Accountancy (Polytechnic University of the Philippines)

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

COLLEGE OF ACCOUNTANCY
ACCO 4113 – Management Services
FINAL REMOVAL EXAMINATION
Second Semester, AY2017-2018
May 8, 2018

Instruction: Choose the BEST answer for each of the following items. For all questions requiring solutions, show
your computations in a separate worksheet provided.
Theory Questions 1-30: 1 point each Problem Solving Questions 31-65: 2 points each

1. A company with three products classifies its costs as belonging to five functions: design, production,
marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to the
three products. The direct costs of each of the five functions are traced directly to the three products. The
indirect costs of each of the five business functions are collected into five separate cost pools and then
assigned to the three products using appropriate allocation bases. The allocation base that would most
likely be the best for allocating the indirect costs of the distribution function is
a. Number of customer phone calls.
b. Number of sales persons.
c. Peso sales volume.
d. Number of shipments.

2. Which of the following statements about activity-based costing is not true?

a. Activity-based costing is useful for allocating marketing and distribution costs.
b. Activity-based costing is more likely to result in major differences from traditional costing systems
if the firm manufactures only one product rather than multiple products.
c. In activity-based costing, cost drivers are what cause costs to be incurred.
d. Activity-based costing differs from traditional costing systems in that products are not cross-
subsidized.

3. The inventory control supervisor at Iron Man Manufacturing Corporation reported that a large quantity of
a part purchased for a special order that was never completed remains in stock. The order was not
completed because the customer defaulted on the order. The part is not used in any of Iron Man’s regular
products. After consulting with Iron Man’s engineers, the vice president of production approved the
substitution of the purchased part for a regular part in a new product. Iron Man’s engineers indicated that
the purchased part could be substituted providing it was modified. The units manufactured using the
substituted part required additional direct labor hours resulting in an unfavorable direct labor efficiency
variance in the Production Department. The unfavorable direct labor efficiency variance resulting from the
substitution of the purchased part in inventory is best assigned to the
a. Sales manager.
b. Inventory supervisor.
c. Production manager.
d. Vice president of production.

4. Which one 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 of 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 not ensure adherence to strategic organizational goals.

5. Activity-based costing (ABC) is increasingly more feasible because of technological advances that allow
managers to obtain better and more timely information at relatively low cost. For this reason, a
manufacturer is considering using bar-code identification for recording information on parts used by the
manufacturer. A reason to use bar codes rather than other means of identification is to ensure that
a. The movement of parts is easily and quickly recorded.
b. The movement of all parts is recorded.
c. Vendors use the same identification methods.
d. Vendors use the same part numbers.

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6. Captain America Co. is a manufacturer whose cost assignment and product costing procedures follow
activity-based costing principles. Activities have been identified and classified as being either value-adding
or nonvalue-adding as to each product. Which of the following activities, used in Captain America's
production process, is nonvalue-adding?
a. Heat treatment activity.
b. Raw materials storage activity.
c. Drill press activity.
d. Design engineering activity.

7. Which one 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. The amount of uncollectible customer accounts for Year 1.
c. 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.
d. Dividends declared in November Year 1 to be paid in January Year 2 to shareholders of record as of
December Year 1.

8. Warsaw Corporation has long-term debt of P1, 200, 000 and equity of P1, 000, 000. The board of directors
has set a goal of 1:1 for the company’s debt-equity ratio. Which of the following could the company
employ to achieve this goal?
a. Paying a stock dividend to the existing shareholders.
b. Issuing rights to purchase new common stock.
c. Issuing new bonds.
d. Paying a dividend on its common stock.

9. Which one of the following factors would likely cause a firm to increase its use of debt financing as
measured by the debt-to-total-capitalization ratio?
a. An increase in the degree of operating leverage.
b. Increased economic uncertainty.
c. An increase in the corporate income tax rate.
d. An increase in the price-earnings ratio.

10. Spiderman Company is a manufacturer of industrial products and employs a calendar year for financial
reporting purposes. Assume that total quick assets exceeded total current liabilities both before and after
each transaction described. Further assume that Spiderman has positive profits during the year and a
credit balance throughout the year in its retained earnings account.

The early liquidation of a long-term note with cash affects the

a. Current ratio to a greater degree than the quick ratio.
b. Quick ratio to a greater degree than the current ratio.
c. Current and quick ratio to the same degree.
d. Current ratio but not the quick ratio.

11. Assume that a company's total debt to total assets (debt-to-assets) ratio is currently 50%. It plans to
purchase fixed assets either by using borrowed funds for the purchase or by entering into an operating
lease. The company's debt-to-assets ratio as measured by the balance sheet will
a. Increase if the assets are purchased, and decrease if the assets are leased.
b. Remain unchanged whether the assets are purchased or leased.
c. Increase if the assets are purchased, and remain unchanged if the assets are leased.
d. Increase whether the assets are purchased or leased.

12. All of the following statements concerning standard costs are correct except that
a. Standard costs are usually set for one year.
b. Time and motion studies are often used to determine standard costs.
c. Standard costs are usually stated in total, while budgeted costs are usually stated on a per-unit
basis.
d. Standard costs can be used in costing inventory accounts.

13. A manufacturing firm produces multiple families of products requiring various combinations of different
types of parts. The manufacturer has identified various cost pools, one of which consists of materials
handling costs. This cost pool includes the wages and employee benefits of the workers involved in

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receiving materials, inspecting materials, storing materials in inventory, and moving materials to the
workstations; depreciation and maintenance of materials handling equipment (e.g., forklift trucks); and
costs of supplies used as well as other related costs. Of the following, the most appropriate cost driver for
assigning materials handling costs to the various products most likely is
a. Number of parts used.
b. Direct labor hours.
c. Number of units produced.
d. Number of vendors involved.

14. The opportunity cost of an alternate course of action that is relevant to a make or buy decision is
a. subtracted from the "Make" costs.
b. added to the "Make" costs.
c. added to the "Buy" costs.
d. not considered in the analysis.

15. Which of the following stages of the management decision-making process is improperly sequenced?
a. Evaluate possible courses of action  Make decision
b. Assign responsibility for decision  Identify the problem
c. Identify the problem  Determine possible courses of action
d. Assign responsibility for decision  Determine possible courses of action

16. The management of a company computes net income using both the absorption and variable costing
approaches to product costing. This year, the net income under the variable costing approach was greater
than the net income under the absorption costing approach. This difference is most likely the result of
a. A decrease in the variable marketing expenses.
b. An increase in the finished goods inventory.
c. Sales volume exceeding production volume.
d. Inflationary effects on overhead costs.

17. Thor, Inc. pays bonuses to its managers based on operating income. The company uses absorption costing,
and overhead is applied on the basis of direct labor hours. To increase bonuses, Thor's managers may do
all of the following except
a. Increase production schedules independent of customer demands.
b. Defer expenses such as maintenance to a future period.
c. Decrease production of those items requiring the most direct labor.
a. Produce those products requiring the most direct labor.

18. Maria Hill, Avenger Corporation's vice president of planning, has seen and heard it all. She has told the
corporate controller that she is "....very upset with the degree of slack that veteran managers use when
preparing their budgets."

Thomas has considered implementing some of the following activities during the budgeting process.
1. Develop the budgets by top management and issue them to lower-level operating units.
2. Study the actual revenues and expenses of previous periods in detail.
3. Have the budgets developed by operating units and accept them as submitted by a company-wide
budget committee.
4. Share the budgets with all employees as a means to reach company goals and objectives.
5. Use an iterative budgeting process that has several "rounds" of changes initiated by operating
units and/or senior managers.

Which one of these activities should Avenger implement in order to best remedy Thomas's concerns, help
eliminate the problems experienced by Avenger, and motivate personnel?
a. 2 and 3.
b. 1 only.
c. 2 and 4.
d. 2, 4 and 5.

19. The following sequence of steps are employed by a company to develop its annual profit plan.
 Planning guidelines are disseminated downward by top management after receiving input from all
levels of management.
 A sales budget is prepared by individual sales units reflecting the sales targets of the various
segments. This provides the basis for departmental production budgets and other related

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components by the various operating units. Communication is primarily lateral with some upward
communication possible.
 A profit plan is submitted to top management for coordination and review. Top management's
recommendations and revisions are acted upon by middle management. A revised profit plan is
resubmitted for further review to top management.
 Top management grants final approval and distributes the formal plan downward to the various
operating units.
This outline of steps best describes which one of the following approaches to budget development?
a. Total justification of all activities by operating units.
b. Bottom-up approach.
c. Imposed budgeting by top management.
d. Top-down approach.

20. Three concepts relate to most differential decisions, except

a. The only relevant costs or revenues are those expected future costs and revenues that differ
across alternatives.
b. All costs incurred in the past (sunk costs) are irrelevant, unless they have future tax ramifications.
c. Opportunity cost, the income obtainable from an alternative use of a resource, must be
considered.
d. Accountants are mainly involved in developing nonfinancial information for management's
consideration in choosing among alternatives.

21. Which one of the following variances is of least significance from a behavioral control perspective?
a. Fixed overhead volume variance resulting from management's decision midway through the fiscal
year to reduce its budgeted output by 20%.
b. Favorable labor rate variance resulting from an inability to hire experienced workers to replace
retiring workers.
c. Unfavorable labor efficiency variance amounting to 10% more than the budgeted hours for the
output attained.
d. Unfavorable material quantity variance amounting to 20% of the quantity allowed for the output
attained.

22. For cost estimation simple regression differs from multiple regression in that simple regression uses only
a. One dependent variable, while multiple regression uses more than one dependent variable.
b. Dependent variables, while multiple regression can use both dependent and independent
variables.
c. One independent variable, while multiple regression uses more than one independent variable.
d. One dependent variable, while multiple regression uses all available data to estimate the cost
function.

23. In regression analysis, which of the following correlation coefficients represents the strongest relationship
between the independent and dependent variables?
a. – 0.02
b. 0.75
c. – 0.89
d. 1.03

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

25. You have determined the profitability of a planned project by finding the present value of all the cash
flows from that project. Which of the following would cause the project to look less appealing, that is,
have a lower present value?
a. The cash flows are extended over a longer period of time.
b. The discount rate increases.
c. The investment cost decreases without affecting the expected income and life of the project.
d. The cash flows are accelerated and the project life is correspondingly shortened.

26. An organization is said to have a "competitive advantage" over its industry rivals when:

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a. The profitability of the company is greater than that of the average profitability for all other
organizations in its industry.
b. Its distribution channels are wider than others in its industry.
c. It spends more money on advertising than its competitors do.
d. It can distribute its product more quickly than other industry competitors.

27. Consider the following manufacturing-related activities.

I. Conducting the final assembly of wooden furniture.
II. Moving completed production to the finished goods warehouse.
III. Painting newly-manufactured automobiles.
IV. Setting up a machine related to a new production run.
V. Reworking defective goods to bring them up to quality standards.

The activities that would be classified as value-added activities are

a. II, III, IV, and V only.
b. I and III only.
c. I, IV, and V only.
d. I, III, and V only.

28. Which of the following is not a function of a management accounting system?

a. Financial reporting
b. Strategic planning
c. Operational control
d. Product costing

29. Which of the following statements regarding security of electronic mail is correct?
a. All messages on the Internet are encrypted thereby providing enhanced security.
b. Passwords are effective in preventing casual access to another's electronic mail.
c. Supervisory-level access to the file server containing electronic messages would not give access to
the file containing electronic mail messages without first decrypting the security control log.
d. Passwords are not needed with discretionary access control.

30. The difference between the reported income under absorption and variable costing is attributable to the
difference in the
a. income statement formats.
b. treatment of variable manufacturing overhead.
c. treatment of variable selling, general, and administrative expenses.
d. treatment of fixed manufacturing overhead.

Items 31 to 33 are based on the following information:

31. Hulk Inc. employs an absorption costing system for internal reporting purposes; however, the company is
considering using variable costing. Data regarding Hulk’s planned and actual operations for the calendar
year are presented below

Planned Activity Actual Activity

Beginning finished goods inventory in units 35,000 35,000
Sales in units 140,000 125,000
Production in units 140,000 130,000

The planned per-unit cost figures shown in the next schedule were based on the estimated production
and sale of 140,000 units for the year. Hulk uses a predetermined manufacturing overhead rate for
applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of P9.00
per unit was employed for absorption costing purposes. Any over- or under-applied manufacturing
overhead is closed to the cost of goods sold account at the end of the reporting year.

Planned Cost Incurred

Per Unit Total Costs
Direct materials 12.00 1,680,000 1,560,000
Direct labor 9.00 1,260,000 1,170,000
Variable manufacturing overhead 4.00 560,000 520,000
Fixed manufacturing overhead 5.00 700,000 715,000
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Variable selling expenses 8.00 1,120,000 1,000,000

Fixed selling expenses 7.00 980,000 980,000
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000
Total (P) 50.00 7,000,000 6,620,000

The beginning finished goods inventory for absorption costing purposes was valued at the previous year’s
planned unit manufacturing cost, which was the same as the current year’s planned unit manufacturing
cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned
and actual unit selling price for the current year was P70.00 per unit.

The difference between Hulk Inc.’s operating income calculated on the absorption costing basis and
calculated on the variable costing basis was
a. P25, 000 c. P40, 000
b. P65, 000 d. P90, 000

32. Hulk Inc.’s actual manufacturing contribution margin calculated on the variable costing basis was
a. P4, 375, 000 c. P5, 625, 000
b. P4, 910, 000 d. P4, 935, 000

33. The value of Hulk Inc.’s actual ending finished goods inventory on the absorption costing basis was
a. P1, 220, 000 c. P1, 200, 000
b. P900, 000 d. P1, 350, 000

Items 34 to 36 are based on the following information:

34. Black Widow, Inc. manufactures video game machines. Market saturation and technological innovations
have caused pricing pressures, which have resulted in declining profits. To stem the slide in profits until
new products can be introduced, an incentive program has been developed to reward production
managers who contribute to an increase in the number of units produced and effect cost reductions.

The managers have responded to the pressure of improving manufacturing in several ways. The video
game machines are put together by the Assembly Group which requires parts from both the Printed
Circuit Boards (PCB) and the Reading Heads (RH) groups. To attain increased production levels, the PCB
and RH groups commenced rejecting parts that previously would have been tested and modified to meet
manufacturing standards. Preventive maintenance on machines used in the production of these parts has
been postponed with only emergency repair work being performed to keep production lines moving.

The more aggressive Assembly Group production supervisors have pressured maintenance personnel to
attend to their machines at the expense of other groups. This has resulted in machine downtime in the
PCB and RH groups that, when coupled with demands for accelerated parts delivery by the Assembly
Group, has led to more frequent parts rejections and increased friction among departments.

Black Widow operates under a standard cost system. The standard costs for video game machines are as
follows:

Standard Cost per Unit

Cost Item Quantity Cost (P) Total (P)
Direct Materials
Housing unit 1 20 20
Printed circuit boards 2 15 30
Reading heads 4 10 40
Direct labor hours
Assembly group 2 8 16
PCB group 1 9 9
RH group 1.5 10 15
Variable overhead hours 4.5 2 9
Total standard cost per unit 139

Black Widow prepares monthly performance reports based on standard costs. Presented below is the
contribution report for May when production and sales both reached 2,200 units.
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Black Widow, Inc.

Contribution Report
For the Month of May

In Pesos Budget Actual Variance

Units 2,000 2,200 200 F
Revenue 400,000 440,000 40,000 F
Variable costs
40,400
Direct materials 180,000 220,400 U
13,460
Direct labor 80,000 93,460 U
Variable overhead 18,000 18,800 800 U
54,660
Total variable costs 278,000 332,660 U
Contribution margin 122,000 107,340 200 F

Black Widow’s top management was surprised by the unfavorable contribution to overall corporate profits
despite the increased sales in May. Jack Wick, cost accountant, was assigned to identify the reasons for the
unfavorable contribution results as well as the individuals or groups responsible. After review, Wick
prepared the Usage Report presented below.

Black Widow, Inc.

Contribution Report
For the Month of May

Cost Item Quantity Cost (P)

Direct Materials
Housing unit 2,200 units 44,000
Printed circuit boards 4,700 units 75,200
Reading heads 9,200 units 101,200
Direct labor
Assembly 3,900 hours 31,200
Printed circuit boards 2,400 hours 23,760
Reading heads 3,500 hours 38,500
Variable overhead 9,900 hours 18,800
Total variable cost 332,660

Wick reported that the PCB and RH groups supported the increased production levels but experienced
abnormal machine downtime, causing the idling of workers that required the use of overtime to keep up
with the accelerated demand for parts. The idle time was charged to direct labor. Wick also reported that
the production managers of these two groups resorted to parts rejections, as opposed to testing and
modification procedures formerly applied. Wick determined that the Assembly Group met management’s
objectives by increasing production while using lower than standard hours.

What is Black Widow’s variable overhead spending variance?

a. P1, 000 favorable c. P1, 800 unfavorable
b. P1, 800 favorable d. P1, 000 unfavorable

35. What is Black Widow’s variable overhead efficiency variance?

a. P900 unfavorable c. P1, 800 favorable
b. P0 d. P1, 800 unfavorable

36. What is Black Widow’s total direct materials quantity variance?

a. P9, 200 unfavorable c. P9,200 favorable
b. P8, 500 favorable d. P8,500 unfavorable

37. Nick Fury’s sales budget for the coming year is as follows.

Item Volume in Units Sales Price (P) Sales Revenue (P)

1 200,000 50 10,000,000

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2 150,000 10 1,500,000
3 300,000 30 9,000,000
Total Sales Revenue 20,500,000

Items 1 and 3 are different models of the same product. Item 2 is a complement to Item 1. Past experience
indicates that the sales volume of Item 2 relative to the sales volume of Item 1 is fairly constant. Nick Fury
is considering a 10% price increase for the coming year for Item 1, which will cause sales of Item 1 to
decline by 20%, while simultaneously causing sales of Item 3 to increase by 5%. If Nick Fury institutes the
price increase for Item 1, total sales revenue will decrease by
a. P850, 000 c. P550, 000
b. P1, 050, 000 d. P750, 000

Items 38 to 40 are based on the following information:

38. Mountain View Hospital (MVH) has adopted a standard cost accounting system for evaluation and control
of nursing labor. Diagnosis Related Groups (DRGs), instituted by a foreign government for health insurance
reimbursement, are used as the output measure in the standard cost system. A DRG is a patient
classification scheme in which hospitals are regarded as multiproduct firms with inpatient treatment
procedures related to the numbers and types of patient ailments treated. MVH has developed standard
nursing times for the treatment of each DRG classification, and nursing labor hours are assumed to vary
with the number of DRGs treated within a time period. The nursing unit on the fourth floor treats patients
with four DRG classifications. The unit is staffed with registered nurses (RNs), licensed practical nurses
(LPNs), and aides. The standard nursing hours and salary rates and actual numbers of patients for the
month of May were as follows.

DRG No. of Standard Hours per DRG Total Standard Hours

Classification Patients RN LPN Aide RN LPN Aide
1 250 6 4 5 1,500 1,000 1,250
2 90 26 16 10 2,340 1,440 900
3 240 10 5 4 2,400 1,200 960
4 140 12 7 10 1,680 980 1,400
7,920 4,620 4,510

Standard Hourly Rates (P)

RN 12.00
LPN 8.00
Aide 6.00

The results of operations during May for the fourth floor nursing unit are presented below:

RN LPN Aide
Actual hours 8,150 4,300 4,400
Actual salary (P) 100,245 35,260 25,300
Actual hourly rate (P) 12.30 8.20 5.75

Because MVH does not have data to calculate variances by DRG, it uses a flexible budgeting approach to
calculate labor variances for each reporting period by labor classification (RN, LPN, Aide). Labor mix and
labor yield variances are also calculated because one labor input can be substituted for another. The
variances are used by nursing supervisors and hospital administration to evaluate the performance of
nurses.

What is the labor yield variance?

a. P1, 850 unfavorable c. P1, 908 favorable
b. P1, 908 unfavorable d. P1, 850 favorable

39. What is the labor mix variance?

a. P3, 539 unfavorable c. P1, 390 favorable
b. P1, 390 unfavorable d. P3, 539 favorable

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40. What is the total direct labor variance?

a. P1, 745 unfavorable c. P1, 745 favorable
b. P2, 205 unfavorable d. P2, 205 favorable

Items 41 to 43 are based on the following information:

41. Pepper Potts Company manufactures a line of products distributed nationally through wholesalers.
Presented below are planned manufacturing data for the year and actual data for November of the
current year. The company applies overhead based on planned machine hours using a predetermined
annual rate.

Planning Data Data for

Annual November November
P1, P
Fixed overhead 200,000 100,000 Direct labor hours (actual) 4,200
P2, P Direct labor hours (plan based
Variable overhead 400,000 220,000 on output) 4,000

Direct labor hours 48,000 4,000 Machine hours (actual) 21,600

2 Machine hours (plan based on
Machine hours 40,000 22,000 output) 21,000
Fixed overhead P101,200
Variable overhead P214,000

Pepper Potts’ total amount of overhead applied to production for November was
a. P315, 000 c. P316, 200.
b. P320, 000. d. P300, 000.

42. Pepper Potts’ amount of over- or underapplied variable manufacturing overhead for November was
a. P3, 800 underapplied. c. P4, 000 underapplied.
b. P6, 000 underapplied. d. P200 underapplied.

43. Pepper Potts’ fixed overhead volume variance for November was
a. P2, 000 unfavorable. c. P5, 000 favorable.
b. P5, 000 unfavorable. d. P2, 000 favorable.

44. Thanos Press is considering publishing a new textbook. The publisher has developed the following cost
data related to a production run of 6,000, the minimum possible production run. Thanos Press will sell the
textbook for P45 per copy. How many textbooks must Thanos Press sell in order to generate operating
earnings (earnings before interest and taxes) of 20% on sales? (Round your answer up to the nearest
whole textbook.)

Development (reviews, class testing, editing) 35, 000

Typesetting 18, 500
Depreciation on Equipment 9, 320
General and Administrative 7, 500
Miscellaneous Fixed Costs 4, 400
Printing and Binding 30, 000
Sales staff commissions (2% of selling price) 5, 400
Bookstore commissions (25% of selling price) 67, 500
Author's Royalties (10% of selling price) 27, 000
Total costs at production of 6,000 copies P204, 620

a. 5,412 copies.
b. 5,207 copies.
c. 2,076 copies.
d. 6,199 copies.

45. Groot MetalCraft produces three inexpensive socket wrench sets that are popular with do-it-yourselfers.
Budgeted information for the upcoming year is as follows.

Model Selling Price Variable Cost Estimated Sales Volume

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No. 109 P10.00 P5.50 30, 000 sets

No. 145 P15.00 P8.00 75, 000 sets
No. 153 P20.00 P14.00 45, 000 sets

Total fixed costs for the socket wrench product line is P961, 000. If the company's actual experience
remains consistent with the estimated sales volume percentage distribution, and the firm desires to
generate total operating income of P161, 200, how many Model No. 153 socket sets will Groot MetalCraft
have to sell?

a. 54, 300 c. 26, 000

b. 181, 000 d. 155, 000

46. Ant-Man & Company produces educational software. Its unit cost structure, based upon an anticipated
production volume of 150,000 units, is as follows (denominated in US$).

Selling price $150

Variable costs 60
Contribution margin 90
Fixed costs 60
Operating income 30

Sales for the coming year are estimated at 175,000 units, which is within the relevant range of Ant-Man's
cost structure. Cost management initiatives are expected to yield a 20% reduction in variable costs and a
reduction of $750, 000 in fixed costs. Ant-Man's cost structure for the coming year will include a

a. Variable cost ratio of 32% and operating income of $9, 600, 000.
b. Total contribution margin of P15, 300, 000 and fixed costs of $8, 250, 000.
c. Per unit contribution margin of $72 and fixed costs of $55.
d. Contribution margin ratio of 68% and operating income of $7, 050, 000.

47. Nebula Company sells refrigeration components both in the U.S. and to a subsidiary located in France. One
of the components, Part No. 456, has a variable manufacturing cost of $30. The part can be sold
domestically or shipped to the French subsidiary for use in the manufacture of a residential subassembly.
Relevant data with regard to Part No. 456 are shown below.

Part No. 456

Domestic selling price $ 65
Shipping charges to France $ 15
Cost of acquiring Part No. 456 in France $ 75
French residential subassembly sales price $170
Other variable manufacturing costs in France for residential subassembly $ 55
Units shipped to France 150,000*

*If deemed preferable, these units could be sold in the U.S.

Nebula's applicable income tax rates are 40% in the U.S. and 70% in France.

Nebula will transfer Part No. 456 to the French subsidiary at either variable manufacturing cost or the
domestic market price. On the basis of this information, which one of the following strategies should be
recommended to Nebula's management?

a. Sell 150,000 units in the U.S. and the French subsidiary obtains Part No. 456 in France.
b. Transfer 150,000 units at $30 and the French subsidiary pays the shipping costs.
c. Transfer 150,000 units at $65 and the French subsidiary pays the shipping costs.
d. Transfer 150,000 units at $65 and have the U.S. Company absorb the shipping costs.

48. Sam Wilson Co.'s budgeted sales and budgeted cost of sales for the coming year are P212, 000, 000 and
P132, 500, 000, respectively. Short-term interest rates are expected to average 5%. If Sam Wilson could
increase inventory turnover from its current 8 times per year to 10 times per year, its expected cost
savings in the current year would be
a. P331, 250. c. P82, 812

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b. P165, 625 d. P250, 000

49. Historically, Wong Wood Products has had no significant bad debt experience with its customers. Cash
sales have accounted for 10% of total sales, and payments for credit sales have been received as follows:

40% of credit sales in the month of the sale

30% of credit sales in the first subsequent month
25% of credit sales in the second subsequent month
5% of credit sales in the third subsequent month

The forecast for both cash and credit sales is as follows:

Month Sales (P)

January 95,000
February 65,000
March 70,000
April 80,000
May 85,000

Due to deteriorating economic conditions, Wong Wood Products has now decided that its cash forecast
should include a bad debt adjustment of 2% of credit sales, beginning with sales for the month of April.
The 5% collection in the fourth month should be reduced to reflect the bad debt. Because of this policy
change, the total expected cash inflow in April related to sales made in April will

a. Decrease by P1, 260. c. Decrease by P1, 530.

b. Decrease by P1, 440. d. Be unchanged.

Items 50 to 53 are based on the following information:

50. Infinity War Retailers is developing cash and other budget information for July, August, and September. At
June 30, Infinity War had cash of P6, 600, accounts receivable of P524, 000, inventories of P371, 280, and
accounts payable of P159, 666. The budget is to be based on the following assumptions:

Sales

Each month’s sales are billed on the last day of the month. Customers are allowed a 2% discount if
payment is made within 10 days after the billing date. Receivables are booked gross. 65% of the billings
are collected within the discount period, 20% are collected by the end of the month, 10% are collected by
the end of the second month, and 5% prove uncollectible.

Purchases

60% of all purchases of materials and selling, general, and administrative expenses are paid in the month
purchased and the remainder in the following month. Each month’s ending inventory in units is equal to
120% of the next month’s units of sales. The cost of each unit of inventory is P25. Selling, general, and
administrative expenses, of which P3, 000 is depreciation, are equal to 20% of the current month’s sales.

Actual and projected sales are as follows:

Month Pesos Units

May 424,000 10,600
June 436,000 10,900
July 428,000 10,700
August 408,000 10,200
September 432,000 10,800
October 440,000 11,000

The budgeted number of units of inventory Infinity War will purchase during September is
a. 13, 200. c. 11, 040.
b. 10, 800. d. 10, 560.

51. Infinity War’s budgeted purchases for July and August are
a. P236, 000 and P242, 500 c. P247, 500 and P260, 000
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b. P252, 500 and P273, 000 d. P275, 000 and P292, 500

52. Infinity War’s budgeted cash disbursements during August are

a. P272, 518 c. P262, 300
b. P345, 000 d. P297, 306

53. Infinity War’s budgeted cash collections during July are

a. P422, 338. c. P417, 675
b. P407, 332. d. P413, 000.

54. An organization’s sales revenue is expected to be P72, 600, a 10% increase over last year. For the same
period, total fixed costs of P22, 000 are expected to be the same as last year. If the number of units sold is
expected to increase by 1,100, the marginal revenue per unit will be
a. P4 c. P46
b. P6 d. P20

55. Black Panther Inc. is considering replacing equipment that cost P1, 000, 000 ten years ago with a new one
that would cost P3, 000, 000. Shipping and installation would cost an additional 10% of the purchase
price. The old equipment has a book value of P300, 000 and could be sold currently for P100, 000. The
increased production of the new equipment would increase inventories by P300, 000, accounts receivable
by P200, 000 and accounts payable by P250, 000. Black Panther’s net initial investment for analyzing the
acquisition of the new equipment assuming a 40% income tax rate would be
a. P3,470,000 c. P3,530,000
b. P3,370,000 d. P3,450,000

56. Doctor Strange is considering the sale of a plant facility with a book value of P500, 000 and 5 years
remaining in its useful life. Straight-line depreciation of P100, 000 annually is available. The plant facility
has a current market value of P800, 000. What is the cash flow from selling the plant facility if the tax rate
35%?
a. P905, 000 c. P695,000
b. P520, 000 d. P800,000

57. Loki Company is considering the purchase of machinery. Data on the machinery are as follows:
Original investment P400, 000
Net annual cash inflow P150, 000
Expected economic life in years 5
Salvage value at the end of five years P50, 000
The company uses the straight-line method of depreciation with no mid-year convention. What is the
accounting rate of return on original investment rounded off to the nearest percent, assuming no taxes are
paid?
a. 37.5% c. 20.0%
b. 22.0% d. 17.5%

58. A company is considering putting up P60, 000 in a three-year project. The company’s expected rate of
return is 12%. The present value of P1.00 at 12% for one year is 0.893, for two years is 0.797, and for
three years is 0.712. The cash flow, net of income taxes will be P18, 000 (present value of P16, 074) for
the first year and P22, 000 (present value of P17, 534) for the second year. Assuming that the rate of
return is exactly 12%, the cash flow, net of income taxes, for the third year would be
a. P14, 240 c. P26, 392
b. P23, 022 d. P37, 067

59. Star-Lord Corporation is composed of five divisions, and each division is allocated a share of Star-Lord
overhead to make divisional managers aware of the cost of running the corporate headquarters. The
following information relates to the Metro Division:

Sales P7,500,000
Variable operating costs 5,100,000
Traceable fixed operating costs 1,900,000
Allocated corporate overhead 300,000

If the Metro Division is closed, 100% of the traceable fixed operating costs can be eliminated. What will
be the impact on Star-Lord's overall profitability if the Metro Division is closed?
a. Decrease by P200, 000.

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b. Decrease by P500, 000.

c. Decrease by P2, 100,000.
d. Decrease by P2, 400,000.

60. It is the start of the year and Wanda Maximoff plans to replace its old multi-media equipment. These
information are available:
Old New
Equipment cost P70,000 P120,000
Current salvage value 10,000 -
Salvage value, end of useful life 2,000 16,000
Annual operating costs 56,000 38,000
Accumulated depreciation 55,300 -
Estimated useful life 10 years 10 years
The company’s income tax rate is 35% and its cost of capital is 12%. What is the present value of all the
relevant cash flows at time zero?
a. (P54,000) c. (P120,000)
b. (P110,000) d. (P124,700)

61. An investment project is expected to yield P10, 000 in annual revenues, has P2, 000 in fixed costs per year,
and requires an initial investment of P5, 000. Given a cost of goods sold of 60 percent of sales, what is the
payback period in years?
a. 2.50 c. 2.00
b. 0.40 d. 1.25

62. Gamora Corporation is financed 60% by debt with a pretax cost of 10%, and 40% by common equity with a
pretax cost of 15%. Gamora Corporation’s marginal tax rate is 50%. Gamora’s weighted average cost of
capital is
a. 9% c. 12%
b. 10% d. 6%

63. Vision Company is now investigating three mutually exclusive investment opportunities. The company’s
cost of capital is 10 percent. Information on the three investment projects under study is given below:
----1---- ----2---- ----3----
Initial investment P(40,000) P(36,000) P(45,000)
Net present value P(2,024) P7,340 P7,297
Profitability index 0.95 1.20 1.16
Internal rate of return 8% 14% 19%
Life of the project 5 yrs 12 yrs 3 yrs
Vision Company has limited funds available for investment and, therefore, it can’t accept all of the projects
listed above. Which project/s is/are acceptable for Vision Company?
a. Investment 2 c. Investment 2 and 3
b. Investment 3 d. Investment 1, 2, and 3

64. Two months ago, Shuri purchased 4,500 pounds of Hydrol, paying P15, 300. The market for this product
has been very strong since the acquisition, with the market price jumping to P4.05 per pound. (Shuri can
buy or sell Hydrol at this price.) The company recently received a special-order inquiry, one that would
require the use of 4,200 pounds of Hydrol. Which of the following is (are) relevant in deciding whether to
accept the special order?
a. The 300-pound remaining inventory of Hydrol.
b. The P4.05 market price.
c. The P3.40 purchase price.
d. 4,500 pounds of Hydrol.

65. OKOYE is a component that WAKANDA Co. uses in the assembly of motors. The cost to produce one
OKOYE is presented below:

Direct materials P 5,000

Materials handling (30% of direct materials) 1,500
Direct labor 40,000
Overhead (150% of direct labor) 60,000
Total manufacturing costs P106,500

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Materials handling which is not included in manufacturing overhead represents the direct variable costs of
the receiving department that are applied to direct materials and purchased components on the basis of
their cost. The company’s annual overhead budget is one-third variable and two-thirds fixed. Bulldog Co.,
offers to supply OKOYE at a unit price of P85, 000. Should the company buy or manufacture?
a. Buy, due to advantage of P21, 500 per product.
b. Manufacture, due to advantage of P18, 500 per unit.
c. Buy, due to advantage of P5, 800 per unit.
d. Manufacture, due to advantage of P44, 000 per unit.

**End of Examination**

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