MANAGEMENT ADVISORY SERVICES TEST BANK COSTS AND COST CONCEPTS ITEMS 1 AND 2 ARE BASED ON THE FOLLOWING: Castelo, Villasin and Barrera is a large, local accounting firm located in Cebu. Belle Castelo, one of the Firm’s 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 Salaries: Senior accountant Office assistant Internet and software subscriptions Consulting by senior partner Depreciation (equipment) Supplies Administration Rent (offices) Utilities 1. The clinic’s monthly fixed costs amount to: a. P8,600 b. P9,025
120 hours P2,500 1,200 700 1,200 2,400 905 500 2,000 332
150 hours P2,500 1,200 850 1,500 2,400 1,100 500 2,000 365
c. P 425 d. P12,189
2. 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 3. HSR Computer System designs and develops specialized software for companies and use a normal costing system. The following data are available for the current year: 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 b. P15.06
c. P15.09 d. P15.00
Page 2 ABC SYSTEM 4. 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 Cost Pool Activity 1 Activity 2 Activity 3
Estimated Cost P20,000 P37,000 P91,200
Expected Activity Coats 100 800 800
Expected Activity Hats 400 200 3,000
Total 500 1,000 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 5. 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
6. 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 company’s 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 squarefeet 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 Assembly Department for Job No. 20? a. P3,200 c. P6,000 b. P 540 d. P3,000
Page 3 7. 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. CVP AND BREAKEVEN ANALYSIS 8. 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 9. 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 10. 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 year’s net income by: a. 100 percent. c. 20 percent. b. 80 percent. d. 50 percent. 11. Edil Company produces and sells a single product. The costs and selling prices on a per-unit basis are as follows: Selling Price Materials Labor Variable overhead Fixed overhead Variable selling and administrative Fixed selling and administrative
P120 35 15 10 10 20 5
The above per-unit figures are computed based on the company’s normal capacity of 20,000 units. The company’s expected margin of safety is a. 7,500 units. b. P2,400,000.
c. 62.5%. d. P12,500.
Page 4
ITEMS 12 to 13 ARE BASED ON THE FOLLOWING INFORMATION: A company is making plans for next year, using cost-volume-profit analysis as its planning tool. Next year’s sales data about its product are as follows: Selling price Variable manufacturing costs per unit Variable selling and administrative costs Fixed operating costs (60% is manufacturing cost) Income tax rate
P60.00 22.50 4.50 P148,500 32%
12. 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 13. Assume that the company’s 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 pretax profit of 10% on sales? a. P366,130 c. P253,324 b. P358,875 d. P353,897 14. As projected net income increases the a. degree of operating leverage declines. b. margin of safety stays constant.
c. break-even point goes down. d. contribution margin ratio goes up.
15. 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
Page 5 STANDARD COSTS AND VARIANCE ANALYSIS 16. 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. 17. 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. 18. 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 19. 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
Page 6 ITEMS 20 TO 24 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 20. The controllable variance amounts to a. P2,500 unfavorable b. P1,000 unfavorable
c. P2,300 unfavorable d. P2,000 unfavorable
21. 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 22. The efficiency variance amounts to a. P400 unfavorable b. P1,900 unfavorable
c. P400 favorable d. P1,000 unfavorable
23. The non-controllable variance is a. P2,300 unfavorable b. P400 unfavorable
c. P2,000 unfavorable d. P1,000 unfavorable
24. The fixed overhead efficiency variance is: a. P400 unfavorable b. PP2,000 unfavorable
c. P400 favorable d. 0
Page 7 PRODUCT COSTING 25. 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. 26. The following information regarding fixed production costs from a manufacturing firm is available for the current year: Fixed costs in the beginning inventory Fixed costs incurred this period
P16,000 100,000
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. 27. 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.
Page 8 ITEMS 28 TO 30 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 28. 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. can’t be determined from the given information 29. What was the total amount of SG&A expense incurred by X Co.? a. P30,000 c. P6,000 b. P62,500 d. can’t be determined from the given information 30. 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 31. 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. 32. 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 Nasty’s 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
Page 9 DIFFERENTIAL COSTS ANALYSIS 33. 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. 34. 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 35. 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, Dolly’s income would a. increase by P150,000. c. decrease by P155,000. b. decrease by P 75,000. d. decrease by P215,000. 36. 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.
ITEMS 37 TO 40 ARE BASED ON THE FOLLOWING:
Page 10
Schundel Hair Care Company produces shampoo with conditioner. This is the company’s only product, which it sells under the name “Shamcon.” The manufacturing cost data for Shamcon are as follows: Quantity required Materials: per 1,000-ml bottle Chem 1 4 ml Chem 2 3 ml Chem 3 2 ml
Current market price per ml P0.54 0.36 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 Clever’s specifications, its order should be different in chemical composition from the regular Shamcon. According to Schundel Company’s production manager, Clever’s 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. Clever’s 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 Clever’s 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 Company’s policy is to price new products at 130% of full manufacturing cost. 37. If Schundel Company bids this month for the special one-time order of 500 boxes of the product, the special order’s total direct materials cost will be a. P73,944. c. P68,880. b. P61,680. d. P56,880. 38. If Schundel Hair Care Company bids this month for the special one-time order of 500 boxes of the product, the special order’s total relevant conversion cost will be a. P123,600. c. P120,000. b. P219,600. d. P216,000. 39. If the company’s 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 40. 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
Page 11
ITEMS 41 and 42 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 Corporation’s 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 Corporation’s 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. 41. The shut down point in units is a. 2,750.00. b. 9,642.86.
c. 3,250.00. d. 1,100.00.
42. 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. 43. Spikey Company produces two products: Pat and Chin. The projected income for the coming year, segmented by product line, follow: Pat Chin Total Sales Less variable expenses Contribution margin Less direct fixed expenses Product margin Less common fixed cost Operating income
P300,000 100,000 P200,000 28,000 P172,000
P2,500,000 500,000 P2,000,000 1,500,000 P 500,000
P2,800,000 600,000 P2,200,000 1,528,000 P 672,000 100,000 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 Spikey’s total sales by P750,000. b. decrease Spikey’s total contribution margin by P300,000. c. increase Spikey’s total income by P55,000. d. not affect Spikey’s total fixed costs.
Page 12 CAPITAL BUDGETING ITEMS 44 AND 45 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 44. 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 45. 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 46. RPI Corporation bought a piece of machinery. Selected data is presented below: Useful life Yearly net cash inflow Salvage value Internal rate of return Cost of capital
6 years P45,000 -018% 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. 47. Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more than the stock’s 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%
Page 13 48.
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 2 3 4 5
P128,000 112,000 144,000 96,000 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 2 3 4
(P360,000 x 4/10) (P360,000 x 3/10) (P360,000 x 2/10) (P360,000 x 1/10)
P144,000 108,000 72,000 36,000
The company’s cost of capital is 10%. The present value factors at 10% are as follows: End of Year 1 2 3 4 Total, 4 years
0.909 0.826 0.751 0.683 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
49.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 Harold’s 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 b. 4.00 years
c. 5.00 years d. 6.00 years
50.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.
b. P31.50
P30.00
d. P29.00
51. 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
Page 14 OPERATING & FINANCIAL BUDGETING 52. 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 53. 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 54. 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 55. 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 56. 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.
ITEMS 57 to 61 ARE BASED ON THE FOLLOWING INFORMATION:
Page 15
The cost of goods sold section of Dale Corporation’s 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 Labor Factory overhead: Variable P 2,009,600 Fixed 1,120,000 Cost of goods manufactured (140,000 units) Add finished goods inventory, January 1 (9,300 units) Cost of goods available for sale Less finished goods inventory, December 31 (3,300 units) Budgeted cost of goods sold
P 8,896,000 784,000 3,129,600 P12,809,600 744,000 P13,553,600 301,600 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.
Based on actual data for the first quarter, as well as the changes in assumptions and estimates in the budgeted data for the year, the company’s accountant prepared a revised budgeted cost of goods sold statement. This revised statement should show: 57. budgeted materials purchases of a. P9,696,000. b. P9,120,000.
c. P9,280,000. d. P9,440,000.
58. budgeted cost of materials inventory at December 31, 2015 of a. P1,024,000. b. P1,243,200.
c. P1,184,000. d. P1,216,100.
59. the budgeted direct labor cost of a. P846,720. b. P784,000.
c. P876,960. d. P829,920.
60. the budgeted cost of goods manufactured of a. P12,809,600. b. P13,464,000.
c. P14,208,000. d. P12,344,000.
61. the budgeted cost of goods sold of a. P13,901,578.
c.
b. P13,252,000.
d. P14,208,000.
P13,553,600.
Page 16 WORKING CAPITAL MANAGEMENT & FS ANALYSIS 62. At the end of 2017, Gabbuat Company’s total assets was P500,000. In 2018, it earned net income of P30,000 and paid dividends of P10,000. What is the company’s internal growth rate? a. 1% c. 5% b. 4% d. 9% 63. 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% 64. As of the end of 2017, Ice Company had total assets of P375,000 and equity of P206,250. For 2018, 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 2018 debt-to-equity ratio should be the same as the debt-to-equity ratio in 2017. How much debt should be incurred to satisfy the bank’s condition? a. P28,125 c. P34,375 b. P62,500 d. P51,138 65. 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: 2018 2017 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 2017 to 2018 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. 66. Last year’s asset turnover of Johvic Company was 3.0. This year, the company’s sales increased by 25% and average total assets decreased by 5%. What is this year’s asset turnover? a. 3.9 c. 3.4 b. 3.6 d. 3.1 67. During the year, Tindugan Company earned net income of P60,000. For next year, it has a capital budget of P80,000. If the company’s 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 68.Belle Corporation provided the following data are for the year ended Dec. 31, 2017: Net credit sales Average materials inventory Average finished goods inventory Average accounts receivable Average accounts payable Net credit purchases Raw materials used Gross profit rate Number of days in a year
P576,000 8,000 12,000 80,000 5,000 120,000 96,000 25% 360 days
What is the average number of days in the company’s operating cash conversion cycle? a. 50 days
c.
105 days
b. 75 days
d.
45 days
Page 17 69.Using the data presented below, calculate the cost of goods sold 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
b. P2,400,000
c. P3,200,000
d. P6,400,000
DECENTRALIZATION & PERFORMANCE EVALUATION 70. 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. 71. 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. 72. 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 a. P15,000. b. P15,750.
c. P28,500. d. P11,250.
73. 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.
Page 18 74. 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. 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.) a. no effect b. P20,000 increase
c. P20,000 decrease d. P90,000 increase
75. 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% 76. 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 Corporation’s Economic Value Added (EVA)? a. P184,000 c. P440,000 b. P144,000 d. P400,000 QUANTITATIVE METHODS 77. 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
Page 19 78. 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 79. 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 80. 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:
Item sold Halo-Halo Mami
CONTRIBUTION MARGIN Hot Weather Cold Weather P15,000 P 6,000 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. 81.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 plan’s 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 government’s 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 82. 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
Page 20 BASIC MAS CONCEPTS 83. Consulting services differ fundamentally from CPA’s 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. 84. 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. 85. 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. INFORMATION SYSTEMS/EDP 86. The basic principles of accounting information system include all the following, except a. flexible structure. c. implementation. b. cost awareness. d. useful output. 87. Which of the following statements is false? a. Management accounting is an integral part of the controller’s 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. 88. Management accounting is considered successful when it a. helps managers improve their decisions. b. is in accordance with GAAP.
c. is relevant. d. is accurate.
89. 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.
Page 21 90. Which a. b. c. d.
of the following descriptions refers to management accounting information? It is prepared for shareholders. It is reliable and verifiable. It is prepared in accordance with GAAP. It provides reasonable and timely estimates
91. 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 92. 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. 93. 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 94. 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. 95. 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.
ECONOMICS 96. 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. 97. 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.
Page 22 98. 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. 99. The local video store’s 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 100. 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 country’s 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.
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