MANAGEMENT ADVISORY SERVICES

COSTS AND COST CONCEPTS

1. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry. c. sales price must equal P0.
b. must have no fixed costs. d. sales price must equal its variable costs.

ANSWER D

ITEMS 2 AND 3 ARE BASED ON THE FOLLOWING:

Castelo, Villasin and Barrera is a large, local accounting firm located in Cebu. Belle Castelo,
one of the Firms founders, appreciates the success her firm has enjoyed and wants to give
something back to her community. She believes that an inexpensive accounting services
clinic could provide basic accounting services for small businesses located in the province.
She wants to price the services at cost.

Since the clinic is brand new, it has no experience to go on. Belle decided to operate the
clinic for two months before determining how much to charge per hour on an ongoing basis.
As a temporary measure, the clinic adopted an hourly charge of P50, half the amount
charged by Castelo, Villasin and Barrera for professional services.

The accounting services clinic opened on January 1. During January, the clinic had 120
hours of professional service. During February, the activity was 150 hours. Costs for these
two level of activity usage are as follows:

Professional hours 120 hours 150 hours

Salaries:
Senior accountant P2,500 P2,500
Office assistant 1,200 1,200
Internet and software subscriptions 700 850
Consulting by senior partner 1,200 1,500
Depreciation (equipment) 2,400 2,400
Supplies 905 1,100
Administration 500 500
Rent (offices) 2,000 2,000
Utilities 332 365

2. The clinics monthly fixed costs amount to:

a. P8,600 c. P 425
b. P9,025 d. P12,189

ANSWER B

Diff. in costs (P12,415 P11,737) P 678

diff. in hours (150 120) 30
Variable rate per hour P22.60

Total cost P12,415 P11,737

Less variable cost (22.60x150) 3,390 (22.60x120) 2,712
Fixed costs P 9,025 P 9,025
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3. Apple Baby, the chief paraprofessional of the clinic, has estimated that the clinic will
average 140 professional hours per month. If the clinic is to be operated as a nonprofit
organization, how much will it need to charge per professional hour?
a. P97.81 c. P82.77
b. P87.06 d. P22.60

ANSWER B

Variable cost (140 x P22.60) P 3,164

Fixed cost 9,025
Total cost P12,189
number of hours 140
Cost per hour P 87.06

4. HSR Computer System designs and develops specialized software for companies and use a
normal costing system. The following data are available for 2015:
Budgeted
Overhead P600,000
Machine hours 24,000
Direct labor hours 75,000
Actual
Units produced 100,000
Overhead P603,500
Prime costs P900,000
Machine hours 25,050
Direct labor hours 75,700

Overhead is applied on the basis of direct labor hours.

What is the unit cost for the year?

a. P15.03 c. P15.09
b. P15.06 d. P15.00

ANSWER B

Prime costs P 900,000

Applied overhead (P600,000/75,000 DLH x 75,700) 605,600
Total cost P1,505,600
Units produced 100,000
Unit cost P 15.06
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ABC SYSTEM

5. Hazelnut Company uses activity-based costing. The company produces two products:
coats and hats. The annual production and sales volume of coats is 8,000 units and of hats
is 6,000 units. There are three activity cost pools with the following expected activities and
estimated total costs:

Activity Estimated Expected Expected

Cost Pool Cost Activity Activity
Coats Hats Total
Activity 1 P20,000 100 400 500
Activity 2 P37,000 800 200 1,000
Activity 3 P91,200 800 3,000 3,800

Using ABC, the cost per unit of coats is approximately:

a. P2.40 c. P 6.60
b. P3.90 d. P10.59

ANSWER C

Activity 1 (P20,000 x 100/500) P 4,000

Activity 2 (P37,000 x 800/1,000) 29,600
Activity 3 (P91,200 x 800/3,800) 19,200
Total allocated cost P52,800
number of units 8,000
Cost per unit P 6.60
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6. Elaine Hospital plans to use the activity-based costing to assign hospital indirect costs to the care of
patients. The hospital has identified the following activities and activity rates for the hospital indirect
costs:
Activity Activity Rate
Room and meals P150 per day
Radiology P95 per image
Pharmacy P28 per physician order
Chemistry lab P85 per test
Operating room P550 per operating room hour

The records of two representative patients were analyzed, using the activity rates. The activity
information associated with the two patients are as follows:
Patient 1 Patient 2
Number of days 7 3
Number of images 4 2
Number of physician orders 5 1
Number of tests 6 2
Number of operating room hours 4.5 1

Determine the activity cost associated with Patient 2.

a. P1,388 c. P1,816
b. P 908 d. P4,555

ANSWER A

Activity costs, Patient 2:

Room and meals (3 x P150) P 450
Radiology (2 x P95) 190
Pharmacy (1 x P28) 28
Chemistry lab (2 x P85) 170
Operating room (1 x P550) 550
Total P1,388
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7. Balat Leather Works, which manufactures saddles and other leather goods, has three
departments. The Assembly Department manufactures various leather products, such as
belts, purses, and saddle bags, using automated production process. The Saddle
Department produces handmade saddles and uses very little machinery. The Tanning
Department produces leather. The tanning process requires little in the way of labor or
machinery, but it does require space and process time. Due to the different production
processes in the three departments, the company uses three different cost drivers for the
application of manufacturing overhead. The cost drivers and overhead rates are as
follows:
Cost Driver Predetermined Overhead Rate
Tanning Department Square-feet of leather P3 per square-foot
Assembly Department Machine time P9 per machine hour
Saddle Department Direct-labor time P4 per direct labor hour

The companys deluxe saddle and accessory set consists of handmade saddle, two
saddlebags, a belt, and a vest, all coordinated to match. The entire set uses 100 square-
feet of leather from the Tanning Department, 3 machine hours in the Assembly
Department, and 40 direct-labor hours in the Saddle Department. The company is
processing Job No. 20 consisting of 20 deluxe saddle and accessory sets.

How much is the applied manufacturing overhead in the Assembly Department for Job No.
20?
a. P3,200 c. P6,000
b. P 540 d. P3,000

ANSWER B

Assembly department = P9/machine hour x 3 machine hours x 20 sets = P540

8. If activity-based costing is implemented in an organization without any other changes

being effected, total overhead costs will
a. be reduced because of the elimination of non-value-added activities.
b. be reduced because organizational costs will not be assigned to products or services.
c. be increased because of the need for additional people to gather information on cost
drivers and cost pools.
d. remain constant and simply be spread over products differently.

ANSWER D
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CVP AND BREAKEVEN ANALYSIS

9. Harry Manufacturing incurs annual fixed costs of P250,000 in producing and selling a single
product. Estimated unit sales are 125,000. An after-tax income of P75,000 is desired by
management. The company projects its income tax rate at 40 percent. What is the
maximum amount that Harry can expend for variable costs per unit and still meet its profit
objective if the sales price per unit is estimated at P6?
a. P3.37 c. P3.00
b. P3.59 d. P3.70

ANSWER C

Projected sales (125,000 x P6) P750,000

Less contribution margin:
Income before tax (75,000/0.60) P125,000
Add fixed cost 250,000 375,000
Variable costs P375,000
number of units 125,000
Variable cost per unit P 3.00

10. For its most recent fiscal year, a firm reported that its contribution margin was equal to 40
percent of sales and that its net income amounted to 10 percent of sales. If its fixed costs
for the year were P60,000, how much was the margin of safety?
a. P150,000 c. P600,000
b. P200,000 d. P 50,000

ANSWER D

Let S = Sales; CM = 0.40S; NY = 0.10S

Fixed Cost = (0.40S 0.10S) = 0.30S

Sales (P60,000 0.30) P200,000

Less breakeven sales (P60,000 0.40) 150,000
Margin of safety P 50,000

11. Sam Company manufactures a single product. In the prior year, the company had sales of
P90,000, variable costs of P50,000, and fixed costs of P30,000. Sam expects its cost
structure and sales price per unit to remain the same in the current year, however total
sales are expected to increase by 20 percent. If the current year projections are realized,
net income should exceed the prior years net income by:
a. 100 percent. c. 20 percent.
b. 80 percent. d. 50 percent.

ANSWER B

Increase in profit (P40,000 x 20%) P 8,000

Present profit:
Contribution margin P40,000
Less fixed costs 30,000 10,000
% change in profit 80%
 Page 7

12. Edil Company produces and sells a single product. The costs and selling prices on a per-unit
basis are as follows:
Selling Price P120
Materials 35
Labor 15
Variable overhead 10
Fixed overhead 10
Variable selling and administrative 20
Fixed selling and administrative 5

The above per-unit figures are computed based on the companys normal capacity of
20,000 units.

The companys expected margin of safety is

a. 7,500 units. c. 62.5%.
b. P2,400,000. d. P12,500.

ANSWER C
Expected sales - units 20,000
Less break-even sales:
Fixed costs (20,000 x [10 + 5]) P300,000
Unit contribution margin
(120 [35 + 15 + 10 + 20]) P40 7,500
Margin of safety 12,500 units
Margin of safety in pesos (12,500 x P120) P1,500,000
Margin of safety ratio (12,500 20,000) 62.5%

13. Antiporda, Inc. sells three products, A, B, and C. The company sells three (3) units of C
for each unit of A and two (2) units of B for each unit of C. Total fixed costs amount to
P760,000. Product As contribution margin per unit is P2, Product Bs is 150% of As, and
Product Cs is twice as much as Bs. How many units of each product must be sold to
break-even?
Product A Product B Product C
a. 2,000 12,000 6,000
b. 20,000 120,000 60,000
c. 29,231 58,462 87,692
d. 69,091 414,546 207,273

ANSWER B
Product A Product B Product C Total
CM per unit P2 (2 x 150%) P 3 (P3 x 2) P 6
x Sales mix ratio 1 (2 x 3) 6 3
Composite CM P2 P18 P18 P38
Number of units per mix (1 + 6 + 3) 10
Weighted average CM per unit P3.8
Weighted-average UCM P3.8
Fixed costs P760,000
Break-even point = = = 200,000 composite units
WaUCM P3.8
Breakdown:Product A =200,000 x 1/10 =20,000 units

Breakdown: Product A = 200,000 x 1/10 = 20,000 units

Product B = 200,000 x 6/10 = 120,000
Product C = 200,000 x 3/10 = 60,000
200,000 composite units
 Page 8

ITEMS 14 to 16 ARE BASED ON THE FOLLOWING INFORMATION:

A company is making plans for next year, using cost-volume-profit analysis as its planning
tool.

Next years sales data about its product are as follows:

Selling price P60.00
Variable manufacturing costs per unit 22.50
Variable selling and administrative costs 4.50
Fixed operating costs (60% is manufacturing cost) P148,500
Income tax rate 32%

14. How much should sales be next year if the company wants to earn profit after tax of
P22,440, the same amount that it earned last year?
a. P310,800 c. P330,000
b. P397,500 d. P222,000

ANSWER C

Fixed costs P148,500

P22,440
Add desired profit ( )
1 0.32 33,000
Total P181,500
60 [22.50 + 4.50]
CMR ( )
60 55%_
Required sales to earn desired profit P330,000

15. Assume that the companys management learned that a new technology that will increase
the quality of its product is available. If implemented, its projections for next year will be
changed:
1. The selling price of the product will increase to P75 per unit.
2. Fixed manufacturing costs will increase by 20%.
3. Additional advertising costs will be incurred to promote the higher-quality
product. This will increase fixed non-manufacturing cost by 10%.
4. The improved product will require a new material that will increase direct
materials cost by P4.50

If the new technology is adapted, how much sales should the company make to earn a pre-
tax profit of 10% on sales?
a. P366,130 c. P253,324
b. P358,875 d. P353,897

ANSWER B
 Page 9

Fixed costs:
Manufacturing (148,500 x 60% x 120%) P106,920
Non-manufacturing (148,500 x 40% x 110%) 65,340
Total fixed costs P172,260
Contribution margin ratio:
Selling price P75.00
Less variable costs:
Manufacturing (P22.50 + P4.50) P27.00
Selling and administrative 4.50 31.50
Contribution margin per unit P43.50
Selling price 75.00
Contribution margin ratio P 58%

Required peso-sales to earn a desired profit ratio:

Fixed Cost P172,260

RS = = = P358,875
CMR PR 58% 10%

16. If the sales required in Item #15 is realized, the company will have an operating leverage
factor of
a. 8.53. c. 17.24%.
b. 5.80. d. 5.50.

ANSWER B

Contribution margin
Operating leverage factor =
Profit before tax
P358,875 x 58%
=
P358,875 x 10%
P208,147.50
= = 5.8
P35,887.50

17. As projected net income increases the

a. degree of operating leverage declines. c. break-even point goes down.
b. margin of safety stays constant. d. contribution margin ratio goes up.

ANSWER A

18. Yamyam Company is considering introducing a new product that will require a P250,000
investment of capital. The necessary funds would be raised through a bank loan at an
interest rate of 8%. The fixed operating costs associated with the product would be
P122,500 while the variable cost ratio would be 58%. Assuming a selling price of P15 per
unit, determine the number of units (rounded to the nearest whole unit) Yamyam would
have to sell to generate earnings before interest and taxes (EBIT) of 32% of the amount of
capital invested in the new product.
a. 35,318 units c. 32,143 units
b. 25,575 units d. 23,276 units

ANSWER C

Fixed cost P122,500

Add desired profit (P250,000 x 32%) 80,000
Total P202,500
CM per unit [P15 x (100% - 58%)] 6.30
Required sales in units 32,143
 Page 10

STANDARD COSTS AND VARIANCE ANALYSIS

19. The materials mix variance for a product is P450 unfavorable and the materials yield
variance is P150 unfavorable. This means that
a. the materials price variance is P600 unfavorable.
b. the materials quantity variance is P600 unfavorable
c. the total materials cost variance is definitely P600 unfavorable.
d. the materials price variance is also unfavorable, but the amount cannot be
determined from the given information.

ANSWER B

Mix variance P450 U

Yield variance 150 U
Quantity variance P600 U

20. Variance analysis would be appropriate to measure performance in

a. profit centers c. cost centers
b. investment centers d. all of the above

ANSWER D

21. Samson Company uses a standard costing system in the production of its only product. The
84,000 units of raw materials inventory were purchased for P126,000 and 4 units of raw
materials are required to produce one unit of final product. In October, the company
produced 14,400 units of product. The standard cost allowed for materials was P72,000,
and there was an unfavorable usage variance of P3,000.

The materials price variance for the units used in October was
a. P15,000 unfavorable. c. P3,000 unfavorable.
b. P15,000 favorable. d. P3,000 favorable.

ANSWER A

Total standard cost P72,000

Std qty for actual production (14,400 x 4) 57,600
Standard price per unit of materials P1.25

The usage variance is P3,000 unfavorable. The standard price is P1.25. Using the formula for Usage variance,
the difference in quantity may be computed as follows:

Usage variance =Difference in quantity x Std. price

3,000 U = Difference in quantity x P1.25

Difference in quantity = 3,000 P1.25
= 2,400 unfavorable

If the difference in quantity is unfavorable, the actual quantity is greater than the standard quantity:

Standard quantity (14,400 x 4) 57,600

Add unfavorable difference in quantity 2,400
Actual quantity used 60,000 units

Price Variance = (AP SP) x AQ

= ([P126,000 84,000] P1.25) x 60,000

= P15,000 unfavorable
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22. The standard direct materials cost to produce a unit of a product is four meters of materials
at P2.50 per meter. During June, 2015, 4,200 meters of materials costing P10,080 were
purchased and used to produce 1,000 units of the product. What was the materials price
variance for June, 2015?
a. P480 unfavorable c. P400 favorable
b. P 80 unfavorable d. P420 favorable

ANSWER D

Actual price (P10,080 4,200) P2.40

Standard price 2.50
Difference in prices - favorable P 0.10
X actual quantity purchased 4,200
Price variance favorable P 420

23. Buchoy Company manufactures one product with a standard direct manufacturing labor cost
of four hours at P12.00 per hour. During June, 1,000 units were produced using 4,100
hours at P12.20 per hour. The unfavorable direct labor efficiency variance was:
a. P820 c. P1,200
b. P400 d. P1,220

ANSWER C

Actual time hours 4,100

Less standard time (1,000 x 4) 4,000
Difference in time unfavorable 100
X standard rate per hour P 12
Efficiency variance unfavorable P1,200

ITEMS 24 TO 28 ARE BASED ON THE FOLLOWING:

Vhong, Inc. evaluates manufacturing overhead in its factory by using variance analysis. The
following information applies to the month of July:
ACTUAL BUDGETED
Number of units produced 19,000 20,000
Variable overhead costs P4,100 P2 per direct labor hour
Fixed overhead costs P22,000 P20,000
Direct labor hours 2,100 0.1 hour per unit

24. The controllable variance amounts to

a. P2,500 unfavorable c. P2,300 unfavorable
b. P1,000 unfavorable d. P2,000 unfavorable

ANSWER C

25. Using the three-way variance analysis, the spending variance amounts to
a. P100 favorable c. P2,000 unfavorable
b. P1,900 unfavorable d. P2,100 unfavorable

ANSWER B

26. The efficiency variance amounts to

a. P400 unfavorable c. P400 favorable
b. P1,900 unfavorable d. P1,000 unfavorable

ANSWER A
 Page 12

27. The non-controllable variance is

a. P2,300 unfavorable c. P2,000 unfavorable
b. P400 unfavorable d. P1,000 unfavorable

ANSWER D

28. The fixed overhead efficiency variance is:

a. P400 unfavorable c. P400 favorable
b. PP2,000 unfavorable d. 0

ANSWER D

24 TO 28
Actual variable overhead P4,100
Actual time x std. var. rate (2,100 x P2) 4,200
Spending variance favorable P 100

Actual time x std. var. rate (2,100 x P2) P4,200

Std. variable overhead [(19,000 x 0.1) x P2] 3,800
Efficiency variance unfavorable P 400

Actual fixed overhead P22,000

Less budgeted fixed overhead 20,000
Fixed spending variance unfavorable P 2,000

Budgeted fixed overhead P20,000

Less standard fixed overhead
[1,900 x (P20,000/<20,000 x 0.1>)] 19,000
Volume variance unfavorable P 1,000

24. Controllable variance (P100 F + P400 U + P2,000 U) = 2,300 U

25. Spending variance (P100 F + P2,000 U) = P1,900 U

 Page 13

PRODUCT COSTING

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

ANSWER D

30. The following information regarding fixed production costs from a manufacturing firm is
available for the current year:
Fixed costs in the beginning inventory P16,000
Fixed costs incurred this period 100,000

Which of the following statements is not true?

a. The maximum amount of fixed production costs that this firm could deduct using
absorption costs in the current year is P116,000.
b. The maximum difference between this firm's the current year income based on
absorption costing and its income based on variable costing is P16,000.
c. Using variable costing, this firm will deduct no more than P16,000 for fixed
production costs.
d. If this firm produced substantially more units than it sold in the current year,
variable costing will probably yield a lower income than absorption costing.

ANSWER C

31. Absorption costing differs from variable costing in all of the following except
a. treatment of fixed manufacturing overhead.
b. treatment of variable production costs.
c. acceptability for external reporting.
d. arrangement of the income statement

ANSWER B

32. If a firm produces more units than it sells, absorption costing, relative to variable costing,
will result in
a. higher income and assets. c. lower income but higher assets.
b. higher income but lower assets. d. lower income and assets.

ANSWER A

33. How will a favorable volume variance affect net income under each of the following
methods?
Absorption Variable
a. reduce no effect
b. reduce increase
c. increase no effect
d. increase reduce
 Page 14

ANSWER C

ITEMS 34 TO 36 ARE BASED ON THE FOLLOWING:

The following information is available for X Co. for its first year of operations:
Sales in units 5,000
Production in units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct material 5 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40

34. What would X Co. have reported as its income before income taxes if it had used variable
costing?
a. P30,000 c. P67,500
b. (P7,500) d. cant be determined from the given
information
ANSWER B

Absorption income P30,000

Diff. in income (8,000-5,000) x (P100k/8k) 37,500
Variable costing income (P 7,500)

35. What was the total amount of SG&A expense incurred by X Co.?
a. P30,000 c. P6,000
b. P62,500 d. cant be determined from the given
information
ANSWER B

Sales (5,000 x P40) P200,000

Less cost of goods sold (5,000 x P21.50) 107,500
Gross profit P 92,500
Less profit 30,000
Selling, gen. & admin. expenses P 62,500

36. Based on variable costing, what would X Co. show as the value of its ending inventory?
a. P120,000 c. P27,000
b. P 64,500 d. P24,000

ANSWER C

Ending inventory units (8,000 5,000) 3,000

X product cost per unit (3 + 5 + 1) P 9
Cost of ending inventory P 27,000

37. Which of the following is an advantage of using variable costing?

a. Variable costing complies with Generally Accepted Accounting Principles.
b. Variable costing complies with the National Internal Revenue Code.
c. Variable costing is most relevant to long-run pricing strategies.
d. Variable costing makes cost-volume-profit relationships more easily apparent.

ANSWER D
 Page 15

38. In its first year of operations, Nasty Company had the following costs when it produced
100,000 units and sold 80,000 units of its only product:
Manufacturing costs:
Fixed P180,000
Variable 160,000
Selling and administrative costs:
Fixed 90,000
Variable 40,000

How much higher would Nastys net income be if it used full absorption costing instead of
variable costing?
a. P94,000 c. P36,000
b. P68,000 d. P54,000

ANSWER C

Change in inventory (100k 80k) 20,000

x fixed overhead cost per unit (P180k 100 1.80
Difference in income P36,000
 Page 16

DIFFERENTIAL COSTS ANALYSIS

39. Siomitos makes bite-size siomai. Which of the following could be a constraint at Siomitos?
a. The siomai steamer
b. The workers who mix the ingredients
c. The workers who prepare the siomai for steaming
d. Any of the above could be the constraint

ANSWER D

40. 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.

ANSWER B
Product X Product Y
CM per unit P 50 P 64
hours per unit 5 8
CM per hour P 10 P 8

80% of capacity must be applied to Product X, the product with the higher CM per hour.

Product X (25,000 x 80%) 5 = 4,000 units x P50 P 200,000

Product Y (25,000 x 20%) 8 = 625 units x P64 40,000
Total contribution margin P240,000

41. 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

ANSWER A

Loss P15,000
Desired profit 10,000
Required increase in profit P25,000
number of units 5,000
Profit per unit P 5.00
Add production costs:
Materials (P6.00 P1.50) P 4.50
Labor 10.00
Variable overhead 3.00
Variable selling exp (P2 P1) 1.00 18.50
Sales price per unit P23.50
 Page 17

42. Dolly Company has 3 divisions: R, S, and T. Division R's income statement shows the
following for the year ended December 31:
Sales P1,000,000
Cost of goods sold (800,000)
Gross profit P 200,000
Selling expenses P100,000
Administrative expenses 250,000 (350,000)
Net loss P (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60
percent are avoidable if the division is closed. All of the selling expenses relate to the
division and would be eliminated if Division R were eliminated. Of the administrative
expenses, 90 percent are applied from corporate costs. If Division R were eliminated, Dollys
income would
a. increase by P150,000. c. decrease by P155,000.
b. decrease by P 75,000. d. decrease by P215,000.

ANSWER C

Avoidable sales P1,000,000

Avoidable costs:
Var. CGS (P800,000 x 75%) P600,000
Fixed CGS (P800,000 P600,000) x 60% 120,000
Selling expenses 100,000
Admin. exps. (P250,000 x 10%) 25,000 845,000
Decrease in income P155,000

43. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a. the total manufacturing cost of the component.
b. the total variable cost of the component.
c. the fixed manufacturing cost of the component.
d. zero.

ANSWER D
 Page 18

ITEMS 44 TO 47 ARE BASED ON THE FOLLOWING:

Schundel Hair Care Company produces shampoo with conditioner. This is the companys
only product, which it sells under the name Shamcon.

The manufacturing cost data for Shamcon are as follows:

Quantity required Current market price
Materials: per 1,000-ml bottle per ml
Chem 1 4 ml P0.54
Chem 2 3 ml 0.36
Chem 3 2 ml 0.20

Direct labor: 2 hours per bottle @ P3 per hour

Factory overhead:
Variable overhead P2.00 per direct labor hour
Fixed overhead 4.00 per direct labor hour

Clever Company, owner and operator of a chain of hotels, asked Schundel Hair Care
Company to submit a bid for 500 boxes of Shamcon. Each box will contain 24 bottles. Per
Clevers specifications, its order should be different in chemical composition from the regular
Shamcon. According to Schundel Companys production manager, Clevers specifications
can be met if an additional chemical, Chem 4 would be used. Schundel Company has
60,000 ml of this chemical. Chem 4 was used by the company in one of its brands that it
decided to eliminate. The remaining inventory of Chem 4 was not sold or discarded
because it does not deteriorate and the company has adequate space for its storage.
Schundel Company can sell Chem 4 at the prevailing market price of P0.40 per ml less
P0.10/ml selling and handling costs. Clevers order would require 5 ml of Chem 4 per
bottle.

The company has a stock of Chem 5. This was used by Schundel Hair Care for its
manufacture of another product that is no longer being produced. Chem. 5, which cannot
be used in Shamcon, can be substituted for Chem 1 on a one-for-one basis without
affecting the quality of the Clever order. There is no problem about the supply of Chem 1.
At present, the company has 20,000 ml of Chem 5 in its inventory, which has a salvage
value of P6,000.

The production of the Clevers order would require the same direct labor hours per bottle as
in the regular Shamcon. However, at present, the company has only 20,000 direct labor
hours available. The Clever order can be produced if the workers would work overtime,
although an overtime premium of 30% of the regular rate should be paid.

Schundel Hair Care Companys policy is to price new products at 130% of full manufacturing
cost.
 Page 19

44. If Schundel Company bids this month for the special one-time order of 500 boxes of the
product, the special orders total direct materials cost will be
a. P73,944. c. P68,880.
b. P61,680. d. P56,880.

ANSWER D

The special order is for 500 boxes of 24 bottles each or a total of 12,000 bottles. Materials costs will be:
Chem 1: Total required 12,000 bottles x 4 ml 48,000 ml
Available Chem 5 that can be substituted
for Chem 1, 20,000 ml, salvage value * P 6,000
Balance of Chem 1 required
(48,000 ml 20,000 ml) x P0.54 15,120
Chem 2: 12,000 bottles x 3 ml x P0.36 12,960
Chem 3 12,000 bottles x 2 ml x P0.20 4,800
Chem 4 12,000 bottles x 5 ml x (P0.40 P0.10)* 18,000

Total materials cost P56,880

* The relevant cost of existing stocks is equal to their salvage value that will not be realized if the stocks are
used in the Clever order.

45. If Schundel Hair Care Company bids this month for the special one-time order of 500 boxes
of the product, the special orders total relevant conversion cost will be
a. P123,600. c. P120,000.
b. P219,600. d. P216,000.

ANSWER A

Labor: Total required time 12,000 bottles x 2 hours 24,000 hours

Labor cost at regular rate (24,000 hours x P3) P72,000
Overtime premium (24,000 20,000) x P3 x 30% 3,600
Total labor cost P75,600
Factory overhead variable (24,000 hours x P2) 48,000
Total relevant conversion cost P123,600

The overtime premium is part of labor cost, not of overhead cost, because the overtime work is attributable to a
particular job.

The total fixed factory overhead is assumed to remain constant whether or not the special order is accepted,
hence, irrelevant.

46. If the companys policy is to price new products at 130% of full manufacturing cost, what is
the bid price per unit for this one-time special order of Clever Company?
a. P19.55 c. P29.95
b. P 6.91 d. P23.80

ANSWER C

Materials cost (from Item #44) P 56,880

Variable conversion cost (from Item #45) 123,600
Fixed factory overhead (24,000 hours x P4) 96,000
Full manufacturing cost P276,480
Number of bottles ordered (500 boxes x 24) 12,000
Full cost per bottle P 23.04
130%
Bid price per unit P 29.95
 Page 20

47. What will be the total variable manufacturing costs for the subsequent, recurring 500-box
orders?
a. P180,480 c. P287,280
b. P373,464 d. P191,280

ANSWER D

Materials:
Chem 1 12,000 bottles x 4 ml x P0.54 P25,920
Chem 2 12,000 bottles x 3 ml x P0.36 12,960
Chem 3 12,000 bottles x 2 ml x P0.20 4,800
Chem 4 12,000 bottles x 5 ml x P0.40 24,000
P67,680
Variable conversion cost (from Item #45) 123,600
Total variable manufacturing costs P191,280

For subsequent orders, the company will have to buy all the required materials because by this time,
the inventory of Chem 4 and Chem 5 would have been fully utilized in the first order.

ITEMS 48 and 49 ARE BASED ON THE FOLLOWING INFORMATION:

Jane Corporation produces wood glue that is used by furniture manufacturers. The company
normally produces and sells 10,000 gallons of the glue each month. White Glue is sold for P280 per
gallon, variable costs is P168 per gallon, fixed factory overhead cost totals P460,000 per month, and
the fixed selling costs totals P620,000 per month.

Labor strikes in the furniture manufacturers that buy the bulk of White Glue have caused
the monthly sales of Jane Corporation to temporarily decrease to only 15% of its normal
monthly volume. Jane Corporations management expects that the strikes will last for
about 2 months, after which, sales of White Glue should return to normal. However, due
to the dramatic drop in the sales level, Jane Corporations management is considering to
close down its plant during the two-moth period that the strikes are on.

If Jane Corporation will temporarily shut down its operations, it is expected that the fixed
factory overhead costs can be reduced to P340,000 per month and that the fixed selling
costs can be reduced by P62,000 per month. Start-up costs at the end of the shut-down
period would total P56,000. Jane Corporation uses the JIT system, so no inventories are
on hand.

48. The shut down point in units is

a. 2,750.00. c. 3,250.00.
b. 9,642.86. d. 1,100.00.

ANSWER A
Fixed costs under continued operations (for 2 months):
Factory overhead (P460,000 x 2 months) P 920,000
Selling costs (P620,000 x 2 months) 1,240,000
Total P2,160,000
Less shutdown costs*:
Factory overhead (P340,000 x 2 months) P 680,000
Selling costs ([P620,000 P62,000] x 2 months) 1,116,000
Start-up costs 56,000 1,852,000
Difference P 308,000
Divide by CM per unit (P280 P168) P112
Shutdown point in units 2,750 units
 Page 21

49. At the sales level of only 30% of the normal volume, should the company continue
operating or shut down temporarily for two months?
a. Continue, because the expected sales is above the shutdown point.
b. Shut down, because the expected sales is above the shutdown point.
c. Continue, so that the shutdown costs may be avoided.
d. Shut down, because the shutdown costs is less than the contribution margin under
continued operations.

ANSWER A

50. The process of choosing among competing alternatives is called

a. controlling c. decision making
b. planning d. performance evaluation

ANSWER C

51. Spikey Company produces two products: Pat and Chin. The projected income for the
coming year, segmented by product line, follow:
Pat Chin Total

Sales P300,000 P2,500,000 P2,800,000

Less variable expenses 100,000 500,000 600,000
Contribution margin P200,000 P2,000,000 P2,200,000
Less direct fixed expenses 28,000 1,500,000 1,528,000
Product margin P172,000 P 500,000 P 672,000
Less common fixed cost 100,000
Operating income P 572,000

The selling prices are P30 for Pat and P50 for Chin.

Spikey company can increase the sales of Pat with increased advertising. The extra
advertising would cost an additional P245,000, and some of the potential purchasers of Chin
would switch to Pat. In total, sales of Pat would increase by 25,000 units, and sales of Chin
would decrease by 5,000 units. This strategy would
a. increase Spikeys total sales by P750,000.
b. decrease Spikeys total contribution margin by P300,000.
c. increase Spikeys total income by P55,000.
d. not affect Spikeys total fixed costs.

ANSWER C

PAT CHIN
Cont. margin P200,000 P2,000,000
units (P300k P30) 10,000 50,000
CM per unit P 20 P 40
X change in units 25,000 (5,000)
Change in CM P500,000 (P200,000)

Increase in CM (P500k P200K) P300,000

Less incremental fixed cost 245,000
Increase in profit P 55,000
 Page 22

CAPITAL BUDGETING

ITEMS 52 AND 53 ARE BASED ON THE FOLLOWING

Ricky Ironworks is considering a proposal to sell an existing lathe and purchase a new
computer-operated lathe. Information on the existing lathe and the computer-operated
lathe follow:
Computer-operated
Existing Lathe Lathe
Cost P100,000 P300,000
Accumulated depreciation 60,000 0
Salvage value now 20,000
Salvage value in 4 years 0 60,000
Annual depreciation 10,000 75,000
Annual cash operating costs 200,000 50,000
Remaining useful life 4 years 4 years

52. What is the payback period for the computer-operated lathe?

a. 1.87 years c. 3.53 years
b. 2.00 years d. 3.29 years

Answer A

Acquisition cost, new lathe P300,000

Less salvage value of old lathe 20,000
Net cost of investment P280,000
savings in cash operating costs (P50,000 P200,000) 150,000
Payback period 1.87 years

53. If the company uses 10 percent as its discount rate, what is the net present value of the
proposed new lathe purchase? (Round present value factors to four decimal places)
a. P236,465 c. P195,485
b. P256,465 d. P30,422

Answer A

Present value of cost savings (P150,000 x 3.1699) P475,485

Present value of salvage value (P60,000 x 0.6830) 40,980
Total PV of cash inflows P516,465
Less net cost of investment 280,000
Net present value P236,465
 Page 23

54. RPI Corporation bought a piece of machinery. Selected data is presented below:

Useful life 6 years

Yearly net cash inflow P45,000
Salvage value -0-
Internal rate of return 18%
Cost of capital 14%

The initial cost of the machinery was (round present value factor to four decimal places)
a. P157,392. c. P165,812.
b. P174,992. d. impossible to determine from the information given.

ANSWER A

Yearly net cash inflow P 45,000

x PVF, 18% for 6 years 3.4976
Initial cost of the machine P157,392

55. All other factors equal, a large number is preferred to a smaller number for all capital
project evaluation measures except
a. net present value. c. internal rate of return.
b. payback period. d. profitability index.

ANSWER B

56. Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more
than the stocks par value. The company incurred underwriting fees of P10 per share. The
stocks will earn annual dividends of P12 per share. If the tax rate is 30%, the cost of
capital (preferred stocks) is
a. 10% c. 7.42%
b. 12% d. 10.91%

ANSWER D
Cost of DPS P12
Preferred = Net issuance P120 P10 = 10.91%
Stocks price
 Page 24

57. At the beginning of the year, Djorn Corporation purchased a new equipment for P360,000. The
machine has an estimated useful life of four (4) years with no salvage value. It is expected to produce
cash flows from operations, net of income taxes of 32%, as follows:
Year 1 P128,000
2 112,000
3 144,000
4 96,000
5 80,000

Djorn Corporation uses the sum-of-the-years-digits method (SYD) in computing depreciation of its
depreciable assets. Using SYD, the new equipment will be depreciated as follows:
Year 1 (P360,000 x 4/10) P144,000
2 (P360,000 x 3/10) 108,000
3 (P360,000 x 2/10) 72,000
4 (P360,000 x 1/10) 36,000

The companys cost of capital is 10%. The present value factors at 10% are as follows:
End of Year 1 0.909
2 0.826
3 0.751
4 0.683
Total, 4 years 3.170

If Djorn Corporation used the straight-line method of depreciation instead of the SYD method, the net
present value provided by the equipment would increase (decrease) by:
a. P13,464 c. (P4,308.48)
b. (P13,464) d. P4,308.48

ANSWER C

Depreciation expense, as a tax shield, provides tax savings. The difference in the present
values of the tax savings under the two depreciation methods will represent the difference
in the net present values of the equipment.
Year 1 P144,000 x 32% = P46,080 0.909 P41,886.72
2 108,000 x 32% = 34,560 0.826 28,546.56
3 72,000 x 32% = 23,040 0.751 17,303.04
4 36,000 x 32% = 11,520 0.683 7,868.16

Total present value of tax savings, SYD method P95,604.48

PV of tax savings, straight-line method
(P360,000 4 years = P90,000 x 32% x 3.170) 91,296.00
Decrease in net present value P 4,308.48
 Page 25

58. Harry owns a computer reselling business and is expanding his business. Harry is presented
with one proposal, Proposal P1, such that the estimated investment for the expansion
project is P85,000 and it is expected to produce cash flows after taxes of P25,000 for each
of the next 6 years. An alternate proposal, Proposal P2, involves an investment of P32,000
and after-tax cash flows of P10,000 for each of the next 6 years. The present value factors
for an annuity of P1 for 1 to 6 years are as follows:

n 10% 12% 14% 16% 18% 20%

1 0.909 0.893 0.877 0.862 0.847 0.833
2 1.736 1.690 1.647 1.605 1.566 1.528
3 2.487 2.402 2.322 2.246 2.174 2.106
4 3.170 3.037 2.914 2.798 2.690 2.589
5 3.791 3.605 3.433 3.274 3.127 2.991
6 4.355 4.111 3.889 3.685 3.498 3.326

The cost of capital that would make Harry indifferent between these two proposals lies between
a. 10% and 12% c. 16% and 18%
b. 14% and 16% d. 18% and 20%

ANSWER C

Indifference point is when the NPVs of the two proposals are equal.
Let x =present value factor for a cost of capital for 6 years
85,000 25,000x =32,000 10,000x
x =3.533, which is between 16% and 18%

59. Harold Co. is considering an investment in a capital project. The sole outlay will be
P716,417.90 at the outset of the project and the annual net after-tax cash inflow will be
P216,309.75 for 6 years. The present value factors at Harolds 8% cost of capital are:
Year PV Factors
1 0.926
2 0.857
3 0.794
4 0.735
5 0.681
6 0.630

What is the break-even time (BET)?

a. 3.31 years c. 5.00 years
b. 4.00 years d. 6.00 years

ANSWER B

Break-even time: the cumulative present value of cash inflows equals the cost of investment
Cash Inflows x PVF = PV
1 216,309.75 0.926 P200,302.83
2 216,309.75 0.857 185,377.46
3 216,309.75 0.794 171,749.94
4 216,309.75 0.735 158,987.67
5 216,309.75 0.681 147,306.94

Total PV of cash inflows, first 4 years = P716,417.90

Break even time = 4 years

 Page 26

60. The investment banking firm of M and Associates will use a dividend valuation model to appraise
the shares of the L&L Corporation. Dividends (D) at the end of the current year will be P1.20. The
growth rate (g) is 9% and the discount rate (K) is 13%?

What should be the price of the stock to the public?

a. P28.75 c. P30.00
b. P31.50 d. P29.00

ANSWER C
D 1.20
Price = = = P30
KG 13 9
61. BSR Co, has an opportunity to purchase a new conveyor line for P250,000. They can
borrow P200,000, paying P50,000 down with annual payments for five years and an interest
of 15%. They also have an opportunity to lease the line for P65,000 a year. The present
value of an annuity of P1 for five years at 9% and 15% are 3.8897 and 3.3522,
respectively. At the end of five years, the estimated salvage value is P40,000. If owned,
the cost of maintenance is expected to be P10,000 per year. Assume straight-line
depreciation, a 40% tax rate, a cost of debt of 15%, and a cost of capital of 9%.

What is the present value of the after-tax cost of leasing for the five-year period?
a. P151,698 c. P144,000
b. P 98,698 d. P165,800

ANSWER A

Annual lease expense, net of tax (P65,000 x 60%) P 39,000

x PVF, 9%, 5 years 3.8897
Present value of the after-tax cost of leasing P151,698
 Page 27

OPERATING & FINANCIAL BUDGETING

62. After careful planning, Change Style, Inc. has decided to switch to a just-in-time inventory
system effective on July 1 of the current year. As of July 1, the corporation has 70 units of
product in inventory. It has 1,000 labor hours available for the month of July. These hours
could produce 250 units of product. Customer demand for July is 200 units. If just-in-time
principles are correctly followed, how many units should Change Style Inc. plan to produce
in July?
a. 200 c. 180
b. 130 d. 250

ANSWER B

Demand 200
Less beginning inventory 70
Production 130

63. Ideally, the number of units that should be produced in a just-in-time manufacturing system
is equal to
a. the maximum productive capacity for the current period.
b. actual customer demand for the current period.
c. budgeted customer demand for the current period.
d. budgeted customer demand for the following period

ANSWER B

64. 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

ANSWER C

Projected sales price P50

Less required profit 12
Target cost P38

65. The preparation of an organization's budget

a. forces management to look ahead and try to see the future of the organization.
b. requires that the entire management team work together to make and carry out the
yearly plan.
c. makes performance review possible at all levels of management.
d. all of the above.

ANSWER D
 Page 28

66. Ivory 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, Ivory Company has the following accounts receivable
balances:
From April sales P21,000
From May sales 48,000

Ivory'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

ANSWER D

A/R balance from April sales P 21,000

uncollected portion (100% - 70% - 15%) 15%
April sale P140,000

67. Bali Company has a policy of maintaining an inventory of finished goods equal to 30 percent
of the following month's sales. For the forthcoming month of March, Bali has budgeted the
beginning inventory at 30,000 units and the ending inventory at 33,000 units. This suggests
that
a. February sales are budgeted at 10,000 units less than March sales.
b. March sales are budgeted at 10,000 units less than April sales.
c. February sales are budgeted at 3,000 units less than March sales.
d. March sales are budgeted at 3,000 units less than April sales.

ANSWER B

Increase in inventory 3,000

30%
Sales increase for April over March 10,000
 Page 29

ITEMS 68 to 71 ARE BASED ON THE FOLLOWING INFORMATION:

The cost of goods sold section of Dale Corporations operating budget for 2015 is presented below:

Materials: Inventory, January 1 (16,000 units) P 960,000

Purchases 9,120,000
Available for use P10,080,000
Inventory, December 31 (18,500 units) 1,184,000 P 8,896,000
Labor 784,000
Factory overhead: Variable P 2,009,600
Fixed 1,120,000 3,129,600
Cost of goods manufactured (140,000 units) P12,809,600
Add finished goods inventory, January 1 (9,300 units) 744,000
Cost of goods available for sale P13,553,600
Less finished goods inventory, December 31 (3,300 units) 301,600
Budgeted cost of goods sold P13,255,000

The actual results for the first quarter of 2015 require the following changes in the budget
assumptions:
The budgeted production for the year is expected to increase by 5,000 units.
During the first quarter, the company has already produced 25,000 units. The
balance of production will be scheduled in equal segments over the last 3 quarters
of the budget year.
The expected finished goods inventory on January 1 dropped to only 9,000 units,
but its total value will not be revised anymore. The ending inventory value is
computed using the average manufacturing cost for the year.
A new Labor Bill passed by Congress is expected to be signed into a law by the
President. The new law will take effect beginning the last quarter of the budget
year, including a provision for an increase of 8% in wage rates.
The company uses the FIFO method in valuing its materials inventory. During the
first quarter, the company purchased 27,500 units of direct materials for
P1,760,000. The remaining direct materials requirement will be purchased evenly
for the last 9 months of the budget year. Effective July 1, 2015, the beginning of
the third quarter, direct materials cost is expected to increase by 5%. The
assumptions regarding the quantity of materials inventories at the beginning and
end of the year will remain unchanged.
The variable factory overhead of P2,009,600 includes indirect materials and factory
supplies amounting to P889,600. It is computed at 10% of the cost of materials
used. The balance of the variable factory overhead varies directly with production.
There will be no change in the budgeted fixed factory overhead cost.

Considering the given actual data for the first quarter, as well as the changes in
assumptions and estimates in the budgeted data for the year, the companys accountant
prepared a revised budgeted cost of goods sold statement. This revised statement should
show:
 Page 30

68. budgeted materials purchases of

a. P9,696,000. c. P9,280,000.
b. P9,120,000. d. P9,440,000.

ANSWER A
It is assumed that each unit of product requires one unit of materials. So, production is equal to raw materials
to be used.
Budgeted raw materials to be used (or production) 140,000+ 5,000 145,000 units
Add raw materials ending inventory 18,500
Total 163,500
Less raw materials beginning inventory 16,000
Budgeted purchases 147,500
Less actual purchases, 1st quarter 27,500
Required purchases in the remaining 3 quarters 120,000 units

Cost computation:
First quarter purchases (27,500 units) P1,760,000
Second quarter (120,000/3 or 40,000 x [P1,760,00027,500] or P64/unit) 2,560,000
Third and fourth quarters ([40,000/qtr. x 2] x[P64 x 105%]) 5,376,000
Total cost of budgeted purchases P9,696,000

69. budgeted cost of materials inventory at December 31, 2015 of

a. P1,024,000. c. P1,184,000.
b. P1,243,200. d. P1,216,100.

ANSWER B

Materials inventory, December 31, 2015 18,500

x Purchase price (P64 x 1.05) P67.20
Cost of materials inventory, December 31, 2015 P1,243,200

The company uses the FIFO method of costing inventory. Thus, the ending inventory should be valued at the new
purchase price of P67.20.

70. the budgeted direct labor cost of

a. P846,720. c. P876,960.
b. P784,000. d. P829,920.

ANSWER D

Original labor cost per unit (P784,000 140,000 units) P 5.60

Labor cost per unit effective on the beginning of the 4th quarter (P5.60 x 108%) P6.048
Budgeted labor cost:
First to third quarters (25,000 + 40,000 + 40,000) x P5.60) P588,000
Fourth quarter (40,000 x P6.048) 241,920
Total budgeted labor cost P 829,920
 Page 31

71. the budgeted cost of goods manufactured of

a. P12,809,600. c. P14,208,000.
b. P13,464,000. d. P12,344,000.

ANSWER B

Materials:
Inventory, January 1 P 960,000
Add purchases 9,696,000
Available for use P10,656,000
Less inventory, December 31 1,243,200 P 9,412,800
Labor 829,920
Factory overhead:
Variable:

Indirect materials (P9,412,800 x 10%) P 941,280

Other variable P2,009,600 P889,600 x
( ) . 1,160,000
overhead 140,000 145,000
Total variable overhead P2,101,280
Fixed 1,120,000 3,221,280
Budgeted cost of goods manufactured P13,464,000

72. the budgeted cost of goods sold of

a. P13,901,578. c. P13,553,600.
b. P13,252,000. d. P14,208,000.

ANSWER A

Cost of goods manufactured (from Item #74) P13,464,000

Add finished goods inventory, January 1 744,000
Total cost of goods available for sale P14,208,000
Less finished goods inventory, December 31
(3,300 units x [P13,464,000 145,000]) 306,422
Budgeted cost of goods sold P13,901,578
 Page 32

WORKING CAPITAL MANAGEMENT & FS ANALYSIS

73. At the end of 2015, Gabbuat Companys total assets was P500,000. In 2016, it earned net
income of P30,000 and paid dividends of P10,000. What is the companys internal growth
rate?
a. 1% c. 5%
b. 4% d. 9%

ANSWER B

Internal growth rate is the percentage increase in assets kept in business.

Increase in assets (P30,000 P10,000) P 20,000
Total assets, beginning of 200B 500,000
Internal growth rate 4%

74. A division of Lockman Corporation reported a return on investment of 20% for a recent
period. If the division's asset turnover was 5, its profit margin must have been
a. 100% c. 4%
b. 25% d. 2%

ANSWER C

ROS x ATO = ROA

ROS x 5 = 20%
ROS = 20% 5 = 4%

75. As of the end of 2015, Ice Company had total assets of P375,000 and equity of P206,250.
For 2016, its budget for capital investment projects is P62,500. To finance a portion of the
capital budget, the company may borrow from a bank which set a condition that the loan
would be approved, provided that the 2016s debt-to-equity ratio should be the same as the
debt-to-equity ratio in 2015.
How much debt should be incurred to satisfy the banks condition?
a. P28,125 c. P34,375
b. P62,500 d. P51,138

ANSWER A

Total assets P375,000

Less equity 206,250
Debt P168,750

Debt-to-Equity Ratio (P168,750 P206,250) 81.82%

*Total financing required for the capital budget P62,500

181.82%
Amount to be financed by equity P34,375

Amount to be financed by debt without changing

the debt-to-equity ratio (P62,500 P34,375) P28,125
 Page 33

76. The management of Seymour Corporation asks you to prepare an analysis of the gross
profit variance based on their comparative income statements for 2015 and 2016:
2016 2015 Variance
Sales P990,000 P800,000 P190,000 F
Cost of goods sold 760,000 640,000 120,000 U
Gross profit P230,000 P160,000 P 70,000 F

The only known information given to you is that volume increased from 2015 to 2016 by
10%.

The variance in gross profit due to the change in volume is

a. P80,000 favorable. c. P16,000 favorable.
b. P64,000 unfavorable. d. P70,000 favorable.

ANSWER C

Sales volume variance P80,000 F

Cost volume variance 64,000 U
Gross profit volume variance P16,000 F

OR
200B units @ 200A gross profit per unit
(P160,000 x 110%) P176,000
Less 200A gross profit 160,000
Gross profit volume variance P 16,000 F

77. Last years asset turnover of Johvic Company was 3.0. This year, the companys sales
increased by 25% and average total assets decreased by 5%. What is this years asset
turnover?
a. 3.9 c. 3.4
b. 3.6 d. 3.1

ANSWER A

Sales
Asset Turnover
= Average Total =3
last year
Assets
Asset Turnover 3 x 1.25
= = 3.75 = 3.9
this year 1 x 0.95 0.95

78. During the year, Tindugan Company earned net income of P60,000. For next year, it has a
capital budget of P80,000. If the companys plowback ratio is 30%, how much external
funding is needed for the capital investment project?
a. P80,000 c. P56,000
b. P62,000 d. P98,000

ANSWER B

Capital budget P80,000

Fund from net income (P60,000 x 30%) 18,000
External funding needed P62,000
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79. The following data are taken from the records of Belle Corporation for the year ended Dec. 31,
2015:

Average Age
Turnove
(360 days
r
Turnover)
R M Inventory RM used P96,000 360
1. = = 12 times 30 days
Turnover Ave. RM Inventory P8,000 12

P576,000 x
FG Inventory Cost of Goods Sold 360
2. = = 75% 36 times 10 days
Turnover
Ave. FG Inventory P12,000 36

Net Credit Sales P576,000 360

3. A/R Turnover = = 7.2 times 50 days
Ave. A/R P80,000 7.2

Net Credit Purchases P120,000 360

4. A/P Turnover = = 24 times (15) days
Ave. A/P P5,000 24
Average number of days in the operating cash conversion
75 days
cycle
Net credit sales P576,000
Average materials inventory 8,000
Average finished goods inventory 12,000
Average accounts receivable 80,000
Average accounts payable 5,000
Net credit purchases 120,000
Raw materials used 96,000
Gross profit rate 25%
Number of days in a year 360 days

What is the average number of days in the companys operating cash conversion cycle?

a. 50 days c. 105 days

b. 75 days d. 45 days

ANSWER B
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80. Using the data presented below, calculate the cost of sales for the Alpha Corporation for the year
just ended.
Current ratio 3.5
Acid test ratio 3.0
Current liabilities at year-end P600,000
Beginning inventory P500,000
Inventory turnover 8.0

a. P1,600,000 c. P3,200,000
b. P2,400,000 d. P6,400,000

ANSWER C

Cost of sales =Average inventory x Inventory turnover

P500,000 + P300,000*
= x8
2
= P3,200,000

Current assets
* Current ratio =
Current liabilities
Current assets
3.50 = Current assets = 2,100,000
600,000

Quick assets
Acid-test ratio =
Current liabilities
Quick assets
3.00 = Quick assets = 1,800,000
600,000
Inventory, ending 300,000
 Page 36

DECENTRALIZATION & PERFORMANCE EVALUATION

81. Which of the following is necessary for any valid performance measurement?
a. It must be part of the financial accounting system in use.
b. It must be quantifiable.
c. Goal congruence must be promoted by its use.
d. It must be financial in nature.

ANSWER C

82. A balanced scorecard

a. records the variances between budgeted and actual revenues and expenses.
b. can be used at multiple organizational levels by redefining the categories and
measurements.
c. is most concerned with organizational financial solvency and business processes.
d. all of the above.

ANSWER B

83. Productivity is measured by the

a. total quantity of output generated from a limited amount of input during a time
period.
b. quantity of good output generated from a specific amount of input during a time
period.
c. quantity of good output generated from the quantity of good input used during a
time period.
d. total quantity of input used to generate total quantity of output for a time period.

ANSWER B

84. Failure Corporation is a manufacturer of a versatile statistical calculator. The following

information is a summary of defective and returned units for the previous year.
Total defective units 1,000
Number of units reworked 750
Number of customer units returned 150
Profit for a good unit P40
Profit for a defective unit P25
Cost to rework a defective unit P10
Cost of a returned unit P15
Total prevention cost P10,000
Total appraisal cost P5,000

The total quality cost is

 Page 37

a. P15,000. c. P28,500.
b. P15,750. d. P11,250.

ANSWER C

Failure costs:
Rework cost (750 units x P10) P7,500
Returned units (150 x P15) 2,250
Not reworked (250 units x P15) 3,750 P13,500
Prevention costs 10,000
Appraisal cost 5,000
Total quality costs P28,500

85. A small manufacturing company recently stated its sales goal for a period was P100,000. At
this level of activity, its budgeted expenses were P80,000. Its actual sales were P100,000,
but its actual expenses were P85,000. This company operated
a. effectively and efficiently. c. effectively but not efficiently.
b. neither effectively nor efficiently. d. efficiently but not effectively.

ANSWER C

ITEMS 86 AND 87 ARE BASED ON THE FOLLOWING

Computer Solutions Corporation manufactures and sells various high-tech office automation
products. Two divisions of Computer Solutions Corporation are the Computer Chip Division
and the Computer Division. The Computer Chip Division manufactures one product, a "super
chip," that can be used by both the Computer Division and other external customers. The
following information is available on this month's operations in the Computer Chip Division:
Selling price per chip P50
Variable costs per chip P20
Fixed production costs P60,000
Fixed SG&A costs P90,000
Monthly capacity 10,000 chips
External sales 6,000 chips
Internal sales 0 chips

Presently, the Computer Division purchases no chips from the Computer Chips Division, but
instead pays P45 to an external supplier for the 4,000 chips it needs each month.

86. Two possible transfer prices (for 4,000 units) are under consideration by the two divisions:
P35 and P40. Corporate profits would be ___________ if P35 is selected as the transfer
price rather than P40, and the Computer Division purchases from the Computer Chip
Division instead of from the external supplier.
a. P 20,000 larger c. P20,000 smaller
b. P100,000 larger d. the same

ANSWER B

Purchase price P45

Less variable cost 20
Savings if acquired from within P25
x number of units 4,000
Increase in profit P100,000

87. Assume, for this question only, that the Computer Chip Division is selling all that it can
produce to external buyers for P50 per unit. How would overall corporate profits be affected
if it sells 4,000 units to the Computer Division at P45? (Assume that the Computer Division
can purchase the super chip from an outside supplier for P45.)
 Page 38

a. no effect c. P20,000 decrease

b. P20,000 increase d. P90,000 increase

ANSWER C

Purchase price P45

Cost if purchased from within:
Variable cost P20
Opportunity cost 30 50
Loss per unit P 5
x number of units 4,000
Decrease in profit P20,000

88. 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%

ANSWER B

Sales P600,000
Less cost of goods sold 250,000
Gross margin P350,000
Variable selling P30,000
Fixed selling (P50,000 x 80%) 40,000
Fixed admin (P20,000 x 50%) 10,000 80,000
Controllable income P270,000
Assets 800,000
ROI 33.75%

89. The following year-end data pertain to Adan Corporation:

Earning before interest and taxes P 800,000
Current assets 800,000
Non-current assets 3,200,000
Current liabilities 400,000
Non-current liabilities 1,000,000

Adan Corporation pays an income tax rate of 32%. Its weighted-average cost of capital is
10%. What is Adan Corporations Economic Value Added (EVA)?
a. P184,000 c. P440,000
b. P144,000 d. P400,000

ANSWER A

After-tax operating income (P800,000 x [1 0.32]) P544,000

Less desired return on investment:
Total assets (P800,000 + P3,200,000) P4,000,000
Less current liabilities 400,000
Investment base P3,600,000
 Page 39

x Weighted-average cost of capital 10% 360,000

Economic value added P184,000

90. The format for internal reports in a responsibility accounting system is prescribed by:
a. Generally Accepted Accounting Principles
b. The Financial Accounting Standards Board
c. The Philippine Institute of Certified Public Accountants
d. Management

ANSWER D

QUANTITATIVE METHODS

91. 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

ANSWER A

EOQ = = 1,000 units

500 units 1,000 units

Carrying cost (500/2)2; (1,000/2)2 P 500 P1,000
Ordering cost (10,000/500) x P100 2,000
(10,000/1,000) x P100 1,000
Total cost P2,500 P2,000

Savings (P2,500 P2,000) P500

92. 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

ANSWER D

1,400 units is the only amount that will not cause Constraint 1 to be violated.
93. King Corporation operates its factory 300 days per year. Its annual consumption of Material
Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time
is 12 business days. What is the order point for Material Y?
a. 10,000 gallons c. 48,000 gallons
b. 38,000 gallons d. 58,000 gallons

ANSWER D

Average daily usage (1,200,000 300) 4,000

x lead time 12
Lead time usage 48,000
 Page 40

add safety stock 10,000

Order point 58,000

94. The school canteen can sell either halo-halo or mami (hot noodle soup) on any given day.
The contribution margin that the canteen could earn from halo-halo and mami is affected by
the weather, as follows:

CONTRIBUTION MARGIN
Item sold
Hot Weather Cold Weather
Halo-Halo P15,000 P 6,000
Mami 11,400 12,000

If the probability of hot weather on a given day at this time is 60%, which item(s) should
the company sell?
a. Halo-Halo, because this item is salable when weather is hot.
b. Mami, because it has the higher expected payoff.
c. Halo-Halo and mami, so the canteen could maximize contribution margin.
d. 60% halo-halo and 40% mami.

ANSWER B

Based on the given data, the expected payoffs are:

Sell halo-halo (15,000 x 60%) + (6,000 x 40%) P11,400
Sell mami (11,400 x 60%) + (12,000 x 40%) 11,640

Therefore, despite the fact that the weather is hot, the canteen should sell mami because it has the
higher expected value or expected payoff.

95. Mr. Javee owns a piece of land that is adjacent to a big area of a vacant lot owned by the
city government. Recently, Mr. Javee heard that the city government has plans about the
vacant lot. He inquired about such plans and he was given the following, including each
plans probability of occurrence:
Probability
Plan A Lease the lot to a businessman who will construct a mall on the lot 60%
B Construct a theme park on the vacant lot 30%
C Construct a building that will house some of the city governments offices 10%

Mr. Javee knows that the value of his land, which he acquired ten years ago at a cost of
only P500 per square meter, will increase depending on which plan would materialize. His
estimates are as follows:
Plan A P5,000 per square meter
B 2,000
C 1,000
What is the expected value of the land?
a. P5,000 c. P2,667
b. P3,000 d. P3,700

ANSWER D
 Page 41

Plan A P5,000 x 60% = P3,000

B 2,000 x 30% = 600
C 1,000 x 10% = 100
Expected value P3,700 per square meter

96. Bahalana Company produces and sells Product Z. Each unit of Product Z contributes P5 to
the recovery of fixed costs and generation of profit.Total fixed costs amounts to P200,000
per period. Selling price of Product Z is P20 per unit.

For the coming period, the company believes that there is a 70% chance that the sales of
Product Z will be 80,000 units, and a 30% chance that sales will equal 10,000 units. The
expected profit from Product Z for the coming period is:
a. P 95,000 c. P 80,000
b. P250,000 d. P295,000

ANSWER A

Expected value of sales volume:

80,000 x 70% 56,000
10,000 x 30% 3,000 59,000
X CM per unit 5
Total CM P295,000
Less fixed costs 200,000
Expected profit P 95,000
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BASIC MAS CONCEPTS

97. A person who is qualified by education, experience, technical ability, and temperament to
advise or assist businessmen on a professional basis in identifying, defining, and solving
specific management problems involving the organization, planning, direction, control, and
operation of a firm is called a
a. Management Consultant. c. Accounting Technician.
b. Certified Public Accountant. d. Management Accountant.

Answer: A

98. Consulting services differ fundamentally from CPAs function of attesting to the assertions of
other parties. In a consulting service,
a. the practitioner expresses a conclusion about the reliability of a written assertion
that is the responsibility of the assertor.
b. the work is generally performed only for the use and benefit of the client.
c. the client develops findings, conclusions, and recommendations.
d. the nature and scope of work is determined solely by the consulting services
practitioner.

ANSWER B

99. Which of the following statements is correct?

a. MAS is confined only to such areas as financial accounting, auditing, and tax
services.
b. Because the MAS practitioner must be independent, he must not allow the client to
participate in any phase of his engagement.
c. Although MAS extends beyond the traditional accounting services, CPAs in the MS
practice are still bound by the rules of professional ethics in the practice of
accounting in general.
d. CPAs provide management services to go around the ethical constraints as
mandated by the Accountancy Act.

ANSWER C

100. Engagements should be adequately planned, supervised, and controlled. Controlling

involves the measurement of progress in attaining the engagement plan and objectives.
At significant engagement points, progress should be measured in terms of
a. time schedule, accomplishments, and quality of work.
b. accomplishments, time schedule, and expenses incurred.
c. quality of work, number of reports prepared, and time schedule.
d. accomplishments, number of personnel who played a role in the engagement, and
attendance of the participants in the engagement.

ANSWER A

101. Which of the following is a characteristic of management advisory services?

a. Services rendered are for third parties.
 Page 43

b. Engagements are usually recurring.

c. Human relations do not play a vital role in each engagement.
d. It involves problem solving.

ANSWER D

INFORMATION SYSTEMS/EDP

102. The basic principles of accounting information system include all the following, except
a. flexible structure. c. implementation.
b. cost awareness. d. useful output.

ANSWER B

103. Which of the following statements is false?

a. Management accounting is an integral part of the controllers function in an
organization.
b. The Standard of Ethical Conduct for Management Accountants include concepts
related to competence, confidentiality, integrity, and objectivity.
c. Modern cost accounting plays a role in planning new products, evaluating
operational procedures, and controlling costs.
d. The COO (Chief Operating Officer) is primarily responsible for management
accounting and financial accounting.

ANSWER D

104. Management accounting is considered successful when it

a. helps managers improve their decisions. c. is relevant.
b. is in accordance with GAAP. d. is accurate.

ANSWER A

105. Electronic Fund Transfer (EFT) is a service provided by financial institutions worldwide
that is based on EDI Technology. EFT transaction costs are lower than for manual systems
because documents and human intervention are eliminated from the transaction process.
However, the EFT system has inherent and unique risks, one of which is
a. unauthorized access and activity.
b. inadequate disaster recovery procedures.
c. insufficient online edit checks.
d. improper change control procedures.

ANSWER A

106. Which of the following descriptions refers to management accounting information?

a. It is prepared for shareholders.
b. It is reliable and verifiable.
c. It is prepared in accordance with GAAP.
d. It provides reasonable and timely estimates

ANSWER D

107. Which of the following is a not a characteristic of management accounting?

a. Internal focus c. Subjective information may be used
b. Broad-based and multidisciplinary d. Historical orientation
 Page 44

ANSWER D

108. Which of the following characteristics distinguishes computer processing from manual
processing?
a. Computer processing virtually eliminates the occurrence of computational error
normally associated with manual processing.
b. Errors or fraud in computer processing will be detected soon after their occurrences.
c. The potential for systematic error is ordinarily greater in manual processing than in
computerized processing.
d. Most computer systems are designed so that transaction trails useful for audit
purposes do not exist.

ANSWER A

109. What type of computer system is characterized by data that are assembled from more
than one location and records that are updated immediately?
a. Microcomputer system c. Batch processing system
b. Minicomputer system d. Online real-time system

ANSWER D

110. A major accounting contribution to the managerial decision-making process in evaluating

possible courses of action is to
a. decide which actions the management should consider.
b. determine the amount of money that should be spent on a project.
c. assign responsibility for the decision.
d. provide relevant revenue and cost data about each course of action.

ANSWER D

111. Which of the following refers to systems design?

a. It is the process of monitoring, evaluating, and modifying a system.
b. It is the process of learning how the current system functions, determining the needs of
users, and developing the logical requirements of a proposed system.
c. It is the process of developing specifications for hardware, software, manpower, data
resources, and information products required to develop a system.
d. It determines the technical, operational, and economic feasibility of a system.

ANSWER C
 Page 45

ECONOMICS

112. Gross domestic product (GDP) is the

a. total amount of expenditures for consumer goods and investment for a period of
time.
b. total purchases by consumers, businesses, government, and foreign entities
c. value of all final goods and services produced by the country by both domestic and
foreign-owned sources.
d. value of all goods and services produced by the country by domestic firms, excluding
those produced by foreign-owned companies.

ANSWER C

113. As the economy becomes more and more depressed, a company's management decides
to slash spending on research and development. What is the likely effect of this action on
net income? Net income will be
a. higher this period and lower in future periods.
b. higher this period and higher in future periods.
c. lower this period and higher in future periods.
d. lower this period and lower in future periods.

ANSWER A

114. Inflation can have positive and negative effects on an economy. Positive effects of
inflation include
a. loss in stability in the real value of money and other monetary items over time.
b. uncertainty about future inflation may discourage investment and saving.
c. shortages of goods if consumers begin hoarding in anticipation of price increases in
the future.
d. mitigation of economic recessions and debt relief by reducing the real level of debt.

ANSWER D

115. The local video stores business increased by 12% after the movie theater raised its prices
from P300 to P400. Thus, relative to movie theater admissions, videos are
a. substitute goods c. complementary goods
b. superior goods d. public goods

ANSWER A

116. In national income terms, aggregate demand is the

a. demand for money by a community in a period of full employment.
b. total expenditure on capital goods by entrepreneurs during a period of full
employment.
c. demand that is needed if the countrys economy is to operate at optimum level and
the level of investment is to be raised.
d. total expenditures on consumer goods and investment, including government and
foreign expenditures, during a given period.
 Page 46

ANSWER D

- end