CPA Review School of the Philippines Final Pre-board Examination

MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Final Pre-board Examination
Overview 3. The following are characteristics of financial accounting, except?

Management advisory services A. Reporting of historical information
1. The primary purpose of management advisory services is to B. Compliance to generally accepted accounting principles
A. conduct special studies, preparation of recommendations, development of plans and C. Contribution approach income statement
programs, and provision of advice and assistance in their implementation. D. External users of financial report
B. provide services or to fulfill some social need.
C. improve the client's use of its capabilities and resources to achieve the objectives of the 4 The following are inherent to either management accounting or financial accounting:
organization. 1. External report
D. earn the best rate of return on resources entrusted to its care with safety of investment 2. Historical information
being taken into account and consistent with the firm's social and legal responsibilities. 3. Contribution approach income statement
4. Generally accepted accounting principles
1. The following characterize management advisory services except 5. Prospective financial statements
A. involve decision for the future Which of the foregoing are related to management accounting and financial accounting
B. broader in scope and varied in nature respectively?
C. utilize more junior staff than senior members of the firm A. B. C. D.
D. relate to specific problems where expert help is required Management Accounting 1, 2, 5 3, 5 2, 3 3
Financial Accounting 3, 4 1, 2, 4 1, 4, 5 1, 2, 4, 5
2. Which of the following is not classifiable as a management advisory service by CPA?
A. Systems design. C. Make or buy analysis. 5. The costing method that is properly classified for both external and internal repotting purposes
B. Project feasibility study. D. Assistance in budget preparation. is
External reporting Internal reporting
2. Which of the following statement is false?
Activity-based costing Yes Yes
A. CPAs provide management services to go around the ethical constraints as mandated by
the Accountancy Act. Variable costing Yes No
Process costing No Yes
B. Businesses hire management consultants to help define specific problems and develop
solutions Standard costing Yes No
C. Included in the practice of consulting is the provision of confidential service in which the
identity of the client is concealed Quality Costs
D. CPAs performing management services may be considered to be in the practice of 6. The cost of statistical quality control in a product quality cost system is
management consulting A. training cost C. appraisal cost
B. internal failure cost D. prevention cost
Management accounting & financial accounting
1. Which of the following characteristics is inherent to management accounting? Activity-based Costing
A. Reporting of historical information 7. The last step in activity-based costing is to
B. Compliance to generally accepted accounting principles A. identity the major activities that pertain to the manufacture of specific products
C. Contribution approach income statement B. allocate manufacturing overhead costs to activity cost pools
D. External users of financial report C. Identify the cost drivers that accurately measure each activitys contribution to the finished
product
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D. Assign manufacturing overhead costs for each activity cost pool to products 12. McMd's standard cost card indicates that it takes three hours of direct labor to produce one
unit of product. A recently conducted time and motion study revealed that it should take one
8. Designing and redesigning are activities that are classified as hour to produce the same unit. Labor cost is P150 per hour.
A. Facility level C. Unit level McMd's value-added, and non value-added costs would be
B. Batch level D. Product level A. P150 and P0 C. P150 and P300
B. P0 and P150 D. P450 and P0
9. The examples of activities at the product level include
A. scheduling, setting up, and moving C. heating, lighting, and security 13. Moon Company makes two products, Alpha and Beta. Alpha is being introduced this period,
B. designing, changing, and advertising D. cutting, painting, and packaging whereas Beta has been in production for 2 years. For the period about to begin, 1,000 units of
each product are to be manufactured. The only relevant overhead item is the cost of
1. Examples of activities at the batch level of costs include engineering change orders. Alpha and Beta are expected to require eight and two change
A. scheduling, setting up, and moving C. heating, lighting, and security orders, respectively. Alpha and Beta are expected to require 2 and 3 machine hours,
B. designing, changing, and advertising D. cutting, painting, and packaging respectively. The cost of a change order is P600.
If Moon is using direct tracing, the amount of overhead per unit that will be assigned to Alpha
2. Scheduling, setting up, and moving are examples of activities that are classified as and Beta, respectively, are
A. Batch level C. Unit level A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively
B. Product level D. Facility level B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively
10. Examples of unit level activities are Just-in-Time Manufacturing System

A. scheduling, setting up, and receiving C. heating, lighting, and security 14. Which of the following is not a typical characteristic of a just-in-time (JIT) production
B. designing, changing, and advertising D. cutting, painting, and packaging environment?
A. Lot sizes equal to one C. Push-through system
3. An example of a nonvolume-related overhead base would be: B. Insignificant set up times and costs D. Balanced and level workloads
A. Direct materials cost C. Direct Labor cost
B. Machine hours D. Number of inspections Cost Behavior
Variable Costs
11. Classify the following as volume (unit) base or non-volume (activity) base: 6. Total production costs for Jordan, Inc. are budgeted at P2,300,000 for 50,000 units of
1. Number of purchase orders issued budgeted output and P2,800,000 for 60,000 units of budgeted output. Because of the need for
2. Direct labor hours additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted
3. Number of machine hours fixed costs for 50,000 units. How much is Jordans budgeted variable cost per unit of output?
4. Number of set ups A. P 7.50 C. P30.00
5. Number of receiving reports issued B. P16.00 D. P62.50
6. Direct material cost
A. B. C. D. 15. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted
Volume (Unit) Base 1, 4, 5, 6 1, 4, 5 1, 2, 3, 4, 5 2, 3, 6 output and P280,000 for 60,000 units of budgeted output. Because of the need for additional
Non-volume (Activity) Base 2, 3 2, 3, 6 6 1, 4, 5 facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for
P50,000 units. How much is Careras budgeted variable cost per unit of output?
A. P1.60 C. P3.00
B. P1.67 D. P5.00 A. Graph 2 C. Graph 4

B. Graph 3 D. Graph 1
3. Total production costs for Laguna, Inc. are budgeted at P230,000 for 50,000 units of budgeted
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional Fixed Costs
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 9. Parts Company wishes to determine the fixed portion of its maintenance expense (a semi-
50,000 units. How much is Lagunas total budgeted variable cost at 60,000 units? variable expense), as measured against direct labor hours for the first three months of the
A. P96,000 C. P180,000 year. The inspection costs are fixed; the adjustments necessitated by errors found during
B. P100,200 D. P100,000 inspection account for the variable portion of the maintenance costs. Information for the first
quarter is as follows:
16. Mulvey Company derived the following cost relationship from a regression analysis of its Direct Labor Hours Maintenance Costs
monthly manufacturing overhead cost: January 34,000 P61,000
C = P80,000 + P12M February 31,000 58,500
Where C = monthly manufacturing overhead cost March 34,000 61,000
M = machine hours What is the fixed portion of Parts Companys maintenance expense, rounded to the nearest
The standard error of the estimate of the regression is P6,000. pesos?
The standard time required to manufacture one six-unit case of Mulvey's angle product is 4 A. P28,330 C. P37,200
machine hours. Mulvey applies manufacturing overhead to production on the basis of machine B. P32,780 D. P40,800
hours and its normal annual production is 50,000 cases
Mulvey's estimated variable manufacturing overhead cost for a month in which scheduled 5. Largo Company wishes to determine the fixed portion of its maintenance expense (a semi-
production is 5,000 cases would be variable expense), as measured against direct labor hours for the first three months of the
A. P80,000 C. P240,000 year. Information for the first quarter is as follows:
B. P320,000 D. P360,000 Direct Labor Hours Maintenance Costs
January 25,000 P210,000
1. Which of the following graphs illustrates the behavior of a total variable cost? (E)
February 30,000 240,000
Graph 1 Graph 2
March 27,000 222,000
What is the fixed portion of Largo Companys maintenance expense?
A. P60,000 C. P90,000
B. P30,000 D. P120,000
Total units produced Total units produced
Total Costs
Graph 3 Graph 4 17. Molds Corporation has developed the following flexible budget formula for annual indirect labor
costs:
Total Cost = P300,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 18,000 machine hours of planned
machine time.
Total units produces Total units produced Indirect labor costs included in this planning budget are:
A. P300,000 C. P 90,000

B. P390,000 D. P115,000 contains both variable and fixed cost elements. During October, the occupancy dropped to
only 45%. A total of P792,000 in operating cost was incurred during the month.
8. Arens Corporation has developed the following flexible budget formula for annual indirect labor What would be the expected operating costs, assuming that the occupancy rate increases to
costs: 60% during November?
Total Cost = P480,000 + P5.00 per machine hour A. P1,056,000 C. P846,000
Operating budgets for the current month are based upon 20,000 machine hours of planned B. P756,000 D. P829,500
machine time. Indirect labor costs included in this planning budget are:
A. P 48,333 C. P100,000 Cost-Volume-Profit Relationship
B. P580,000 D. P140,000 Basic Concepts
2. With the aid of computer software, managers can vary assumptions regarding selling prices,
2. Boy & Millie Company uses an annual cost formula for overhead of P72,000 + P1.60 for each costs, and volume and can immediately see the effects of each change on the break-even
direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. point and profit. Such an analysis is called: (E)
Each unit requires five minutes of direct labor. Boy & Millies budgeted overhead for the month A. "What if" or sensitivity analysis C. computer aided analysis
is B. vary the data analysis D. data gathering
A. P12,800 C. P 84,800
B. P18,800 D. P774,000 Breakeven Analysis Single Product
Sales Amount
2. Saldua Company uses a monthly cost formula for overhead of P50,000 + P30.00 for each 20. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
direct labor hour worked. For the coming year, Saldua plans to manufacture 200,000 units. on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
Each unit requires five minutes of direct labor. Salduas total budgeted overhead for the volume?
coming year is A. P120,000 C. P225,000
A. P 550,000 C. P1,200,000 B. P200,000 D. P450,000
B. P1,100,000 D. P 650,000
Units Sold
6. The following cost functions were developed for manufacturing overhead costs: 18. At a sales volume level of 2,250 units, Luzon Companys contribution margin is one and one-
Manufacturing Overhead Costs Cost Function half of the fixed costs of P36,000. Contribution margin is 30%. How many units must be sold
Electricity P100 + P20 per direct labor hour by the company to breakeven?
Maintenance P200 + P30 per direct labor hour A. 1,250 C. 2,580
Supervisors salaries P10,000 per month B. 1,500 D. 2,520
Indirect materials P16 per direct labor hour
If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated 8. At 40,000 units of sales, Snail Company had an operating loss of P3.00 per unit. When sales
manufacturing overhead costs would be were 70,000 units, the company had a profit of P1.20 per unit. The number of units to
A. P109,300 C. P76,300 breakeven is
B. P99,000 D. P10,366 A. 35,000 C. 52,500
B. 45,000 D. 57,647
7. El Noche, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average,
70% of the rooms are occupied each day. The companys operating costs are P21 per 9. Gala Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per
occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which are
incurred uniformly throughout the year, amount to P792,000 (manufacturing costs of P500,000 In 2001, a significant change in Madels production technology caused a 10% increase in
and selling expenses of P292,000). There are no beginning inventories. annual fixed cost and a 20% unit cost increase in the direct labor component as a result of
If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in wages and higher skilled direct labor. However, this change permitted the replacement of a costly
salaries would increase the number of units required to breakeven to imported component with a local component. The effect was to reduce unit material costs by
A. 152,423 C. 175,617 25%. There has been no change in the Walastik selling price.
B. 143,875 D. 129,938 The annual sales units required for Madel to breakeven are:
A. B. C. D.
10. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows: 2000 22,000 22,000 14,000 14,000
Selling price per pair of sunglasses P25.00 2001 20,840 22,407 22,407 20,840
Variable costs per pair of sunglasses:
Raw materials P11.00 Selling Price
Direct labor 5.00 8. The BEDANs is planning its annual Riverboat Extravaganza. The Extravaganza committee
Manufacturing overhead 2.50 has assembled the following expected costs for the event:
Selling expenses 1.30 Dinner per person P 70
Total variable costs per unit P19.80 Programs and souvenir per person 30
Annual fixed costs: Orchestra 15,000
Manufacturing overhead P192,000 Tickets and advertising 7,000
Selling and administrative 276,000 Riverboat rental 48,000
Total fixed costs P468,000 Floor show and strolling entertainment 10,000
Forecasted annual sales volume (120,000 pairs) P3,000,000 The committee members would like to charge P300 per person for the evenings activities.
Income tax rate 40% Assuming that only 250 persons are expected to attend the extravaganza, what ticket price
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How must be charged to breakeven?
many units will Glareless have to sell next year to reach breakeven? A. P420 C. P350
A. 97,500 units C. 83,572 units B. P320 D. P390
B. 101,740 units D. 86,250 units
Breakeven Analysis Multiple Product
22. Madel Company manufactures a single electronic product called Walastik. Walastik sells for 23. In calculating the break-even point for a multi-product company, which of the following
P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik assumptions are commonly made when variable costing is used?
device. I. Sales volume equals production volume
Direct labor P180 II. Variable costs are constant per unit
Direct materials 240 III. A given sales mix is maintained for all volume changes
Factory overhead 105 A. I and II C. II and III
Selling costs 75 B. I and III D. I, II, and III
Total variable costs P600
Madel is subject to 40 percent income tax rate, and annual fixed cost are P6,600,000. Except Unit Sales
for an operating loss incurred in the year of incorporation, the firm has been profitable over the 3. Phipps Co. sells two products, Arks and Bins. Last year. Phipps sold 12,000 units of Arks and
last five years. 28,000 units of Bins, Related data are:

Product Unit Selling Price Unit Variable Cost Unit Contribution Margin A. 4,500 units C. 1,800 units
Arks P120 P80 P40 B. 5,000 units D. 36,000 units
Bins 80 60 20
Assuming that last year's fixed costs totaled P910,000, what was Phipps Co.'s break-even 11. Ms Makiling started a canteen in 2002. For this purpose a space was rented for P4,000 per
point in units? (E) month. Two women were hired to work full time at the canteen and six college students were
A. 40,000 C. 35,000 hired to work 30 hours per week delivering value meals. This level of employment has been
B. 12,000 D. 28,000 consistent. An outside accountant was hired for tax and bookkeeping purposes, for which Ms.
Makiling pays P3,000 per month. The necessary canteen equipment and delivery car were
Sales Amount purchased with cash. Ms. Makiling has noticed that expenses for utilities and supplies have
24. Bush Electronics, Inc. had the following sales results for 2004: been rather constant. Ms. Makiling increased her business between 2002 and 2005. Profits
TV sets CD player Radios have more than doubled since 2002. Ms. Makiling does not understand why profits have
increased faster than volume.
Peso sales component ratio 0.30 0.30 0.40
A projected income statement for the year ended December 31, 2005, prepared by the
Contribution margin ratio 0.40 0.40 0.60
accountant, is shown below:
Bush Electronics, Inc. had fixed costs of P2,400,000. Sales (each P25) P950,000
The break even sales in pesos for Bush Electronics, Inc. are: Cost of food sold P285,000
A. B. C. D. Wages & fringe benefits:
TV sets P1,800,000 P1,800,000 P1,500,000 P1,531,915 Restaurant help 81,500
CD player P1,800,000 P1,800,000 P1,500,000 P1,531,915 Delivery help 173,000
Radios P3,600,000 P1,600,000 P2,000,000 P2,042,553 Rent 48,000
Accounting services 36,000
4. The manager of Salvacion Store reviewed the following data: Depreciation:
Fruits Meat Canned Products Delivery equipment 50,000
Contribution margin ratio 40% 50% 40% Restaurant equipment 30,000
Sales mix in pesos 20% 30% 50% Utilities 23,250
Fixed costs, P1,290,000 per month. Supplies 12,000 738,750
The breakeven sales for each month is Net income before taxes P211,250
A. P1,677,000 C. P4,500,000 Income taxes (40%) 84,500
B. P3,000,000 D. P6,000,000 Net income P126,750
Breakeven Analysis Cash Basis What is the cash flow breakeven point sales that must be sold?
16. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed A. P488,215 C. P324,750
overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and B. P533,929 D. P269,325
will continue whether or not production ceases. Depreciation on the equipment is P20,000 a
year. If production is stopped, the equipment can be sold for P18,000, if production continues, Breakeven Analysis - ABC
however, it will be useless at the end of 1 year and will have no salvage value. The selling 15. Perla Company had the following information.
price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break Activity Driver Unit Variable Cost Level of Activity Driver
even on a cash flow basis is Units sold P40
Setups 1,000 80 results:

Engineering hours 60 2,000 Sales P625,000
Other data: Variable costs P375,000
Total fixed costs (traditional) P400,000 Fixed costs 150,000 525,000
Total fixed costs (ABC) P150,000 Net income before taxes P100,000
Unit selling price P80 Income taxes 40,000
What is the breakeven point using ABC? Net income P 60,000
A. 10,000 units. C. 5,000 units. In an attempt to improve its product in the coming year, Larz is considering replacing a
B. 15,000 units. D. 8,750 units. component part in its product that has a cost of P2.50 with a new and better part costing P4.50
per unit. A new machine will also be needed to increase plant capacity. The machine would
Profit Planning cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-
Selling Price line depreciation on all plant assets.
21. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
The selling price should be what selling price per unit of product must it charge next year to cover the increased material
A. P1.60 C. P2.40 costs?
B. P2.10 D. P2.50 A. P27.00 C. P32.50
B. P25.00 D. P28.33
22. Purvis Company manufactures a product that has a variable cost of P50 per unit. Fixed costs
total P1,000,000 and are allocated on the basis of the number of units produced. Selling price Additional unit sales
is computed by adding a 10% markup to full cost. How much should the selling price be per 25. In 2001 Lucia Company had a net loss of P8,000. The company sells one product with a
unit for 100,000 units? selling price of P80 and a variable cost per unit of P60. In 2002, the company would like to
A. P55. C. P61 earn a before-tax profit of P40,000. How many additional units must the company sell in 2002
B. P60. D. P66 than it sold in 2001? Assume that the tax rate is 40 percent.
A. 1,600 C. 2,400
29. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and B. 2,000 D. 5,400
slogans, Last year, the shirts sold for P7.50 each, and the variable cost to manufacture them
was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income Unit sales
last year was P5,040. Donnelly's expectation for the coming year include the following: 36. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
The sales price of the T-shirts will be P9 cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
Variable cost to manufacture will increase by one-third P225,000.
Fixed costs will increase by 10% If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to
The income tax rate of 40% will be uncharged generate an operating profit of P48,000?
A. P1,350,000 C. P1,135,000
The selling price that would maintain the same contribution margin rate as last year is
B. P486,425 D. P910,000
A. P9.00 C. P10.00
B. P8.25 D. P9.75
10. Tip Company wishes to market a new product for P15.00 a unit. Fixed costs to manufacture
this product are P1,000,000 for less than 500,000 units and P1,500,000 for 500,000 or more
23. Larz Company produces a single product. It sold 25,000 units last year with the following

units. The contribution margin is 20%. How many units must be sold to realize net income Fixed cost will total P369,600 if the mountaineering model is produced but will be only
from this product of P1,000,000? P316,800 if the touring model is produced. Siberian ski is subject to a 40% income tax rate.
A. 266,667 C. 833,333 If Siberian Ski Company desires an after tax net income of P24,000, how many pairs of touring
B. 533,333 D. 666,667 model skis will the company have to sell?
A. 13,118 C. 13,853
18. Lindsay Company reported the following results from sales of 5,000 units of product A for B. 12,529 D. 4,460
June:
Sales P200,000 Sales amount
Variable costs (120,000) 5. DJH Company has sales of P360,000, variable costs of P216,000, and fixed costs of
Fixed costs ( 60,000) P150,000. To earn a 10% return on sates, DJH must have sales of (E)
Operating income P 20,000 A. P375,000 C. P440,000
Assume that Lindsay increases the selling price of product A by 10% on July. How many units B. P470,000 D. P500,000
of product A would have to be sold in July to generate an operating income of P20,000?
A. 4,000 C. 4,500 26. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
B. 4,300 D. 5,000 cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be
20. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows. necessary to generate an operating profit of P48,000?
The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00 A. P1,350,000 C. P1,135,000
per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of B. P486,425 D. P910,000
additional fixed costs associated with this new product. A corporate fixed charge of P20,000
currently absorbed by other products will be allocated to this new product. 32. Mount Park, Inc. had the following economic information for the year 2002:
How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling Sales (50,000 units @ P20) P1,000,000
price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is Variable manufacturing costs 400,000
40%) Fixed costs 250,000
A. 10,700 C. 20,000 Income tax rate 40 percent
B. 12,100 D. 28,300 Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
41. Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to maintain its sales target for 2003.
produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
model. The Sales Department assures management that it can sell between 9,000 pars and 2002?
13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will A. P1,125,000 C. P1,187,500
produce only one of the two models. B. P1,325,000 D. P1,387,500
The following information was compiled by the Accounting Department.
Per Unit (Pairs) Data 27. Mount Park, Inc. had the following economic information for the year 2002:
Mountaineering Touring Sales(50,000 units @ P20) P1,000,000
Selling price P88.00 P80.00 Variable manufacturing costs 400,000
Variable costs 52.80 52.80 Fixed costs 250,000
Income tax rate 40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to last year was P5,040. Donnellys expectation for the coming year include the following:
maintain its sales target for 2003. The sales price of the T-shirts will be P9
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in Variable cost to manufacture will increase by one-third
2002? Fixed costs will increase by 10%
A. P1,125,000 C. P1,187,500 The income tax rate of 40% will be unchanged
B. P1,325,000 D. P1,387,500 If Donnelly wishes to earn P22,500 in net income for the coming year, the companys sales
volume in pesos must be
26. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is A. P213,750 C. P207,000
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are B. P257,625 D. P229,500
estimated at P41,600. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that
60percent of its Sunday sales to customers would be made on other days if the stores were no 25. Madden, Company has projected its income before taxes for next year as shown below.
open on Sundays. The one-day volume of Sunday sales that would be necessary for Six-Two Madden is subject to a 40% income tax rate.
to attain the same weekly operating income as the current six-day week is
Sales (160,000 units) P8,000,000
A. P6,000 C. P7,500
Cost of sales
B. P5,000 D. P8,000
Variable costs P 2,000,000
Fixed costs 3,000,000 5,000,000
5. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
Income before taxes P 3,000,000
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
estimated at P39,000. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that Maddens net assets are P36,000,000. The peso sales that must be achieved for Madden to
60 percent of its Sunday sales to customers would be made on other days if the stores were earn a 10 percent after tax return on assets would be
not open on Sundays. The one-day volume of Sunday sales that would be necessary for Six- A. P8,800,000 C. P12,000,000
Two to attain the same weekly operating income as the current six-day week is B. P16,000,000 D. P6,880,000
A. P6,000 C. P7,500
B. P5,000 D. P4,500 Unit variable cost
31. Story Manufacturing incurs an annual fixed cost of P250,000 in producing and selling "Tales"
10. Camay Company is a grocery store that is currently open only Monday through Saturday. Estimated unit sales for 2000 are 125,000. An after-tax income of P75,000 is desired by
Camay Company is considering opening on Sundays. The annual incremental costs of management. The company projects its income tax rate at 40%. What is the maximum amount
Sunday openings are estimated at P31,200. Camays gross margin on sales is 25 percent. that Story can expend for variable costs per unit and still meet its profit objective if the sale
Camay estimates that 75 percent of its Sunday sales to customers would be made on other price per unit is projected at P6?
days if the store were not open on Sundays. A. P3.37 C. P3.00
The one-day volume of Sunday sales that would be necessary for Camay to attain the same B. P3.59 D. P3.70
weekly operating as the current six-day week is
A. P2,400 C. P9,600 Unit Contribution Margin
B. P3,200 D. P9,984 28. The following relates to Gloria Corporation, which produced and sold 50,000 units during a
recent accounting period:
28. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and Sales P850,000
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to manufactures them Income tax rate 40%
Variable Fixed Variable costs P600,000

Manufacturing cost 140,000 210,000 Fixed costs P300,000
Selling & administrative expense 45,000 300,000 Based on a market study in December of this year, Wilson estimated that it could increase the
For the next accounting period, if production and sales are expected to be 40,000 units, the unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent
company should anticipate a contribution margin per unit of on advertising. Assuming that Wilson incorporates these changes in its forecast, what should
A. P1.00. C. P3.10 be the operating income from product G?
B. P13.30. D. P7.30 A. P175,000 C. P205,000
B. P190,000 D. P365,000
Contribution Margin Ratio
29. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs 27. Below is an income statement for Bender Co. for 2000:
are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a Sales P400,000
10% increase over last year. For the company to increase income by P15,000 in the coming Variable costs (125,000)
year, the marginal contribution margin rate must be Contribution margin P275,000
A. 20% C. 40% Fixed costs (200,000)
B. 30% D. 70% Profit before tax P75,000
Assuming that the fixed costs are expected to remain at P200,000 for 2001, and the sales
Total Fixed Costs price per unit and variable costs per unit are also expected to remain constant, how much
30. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell profit before tax will be produced if the company anticipates 2001 sales rising to 130% of the
100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 2000 level?
70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, A. P97,000
what must the total fixed costs be? B. P195,000
A. P80,000 C. P240,000 C. P157,500
B. P90,000 D. P600,000 D. A prediction cannot be made from the information
Operating income 34. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many
32. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6 styles of shoes that are all sold at the same price. To encourage sales personnel to be
and total fixed costs are P12,000. At this selling price, the company earns a profit equal to aggressive in their sales efforts, the company pays a substantial sales commission on each
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can pair of shoes sold. Sales personnel also receive a small basic salary.
increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed The following cost and revenue data relate to Store 21 and are typical of the companys many
costs and variable costs per unit remain unchanged. If the selling price were reduced to P9 sales outlets:
per unit, the profit would be Selling price P 800
A. P3,000 C. P5,000 Variable expenses:
B. P4,000 D. P6,000 Invoice costs P360
Sales commission 140
33. Wilson Co. prepared the following preliminary forecast concerning product G for next year 500
assuming no expenditure for advertising: Fixed expenses per year:
Selling price per unit P 10 Rent P1,600,000
Units sales 100,000 Advertising 3,000,000
April 16, 2005 Page 10 of 67
Salaries 1,400,000 commission to a 5 percent commission plus P20,000 per month in salary. They now receive
Total P6,000,000 only commission.
The company is considering paying the store manager a P60 commission on each pair of The change in compensation plan should change the monthly breakeven point by
shoes sold in excess of break-even point. If this change were made, what will be the stores A. 1,071 Increase C. 1,538 Increase
before tax profit or loss assuming 23,500 pairs of shoes are sold in a year? B. 1,071 Decrease D. 1,538 Decrease
A. P(360,000) C. P840,000
B. P2,930,000 D. P1,330,000 Contribution margin
34. If fixed costs increase while variable cost per unit remains constant, the contribution margin
Change in operating income will be
30. Machan Co.s year-end income statement is as follows: A. Lower C. Unchanged
Sales (20,000 units) P360,000 B. Higher D. Unpredictable
Variable costs 220,000
Contribution margin P140,000 21. Paperbacks Publishing Co. projected the following information for next year:
Fixed costs 105,000 Selling price per unit P500
Net income P35,000 Variable cost per unit P300
Management is unhappy with the results and plans to make some changes for next year. If Total fixed costs P2,000,000
management implements a new marketing program, fixed costs are expected to increase by What is the profit when one unit more than the breakeven point is sold?
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by A. P500 C. P5,000,500
15 percent. What is the effect on income if the foregoing changes are implemented? B. P200 D. P2,000,200
A. decrease of P21,200 C. increase of P13,800
B. increase of P1,800 D. increase of P14,800 Fixed costs
4. DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of
31. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, P1,100,000. Total fixed costs are (M)
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and A. P 0 C. P420,000
sales price per unit to remain the same in 2001, however total sales are expected to jump by B. P200,000 D. P900,000
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
2000 by 35. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units.
A. 100% C. 20% During the current month when the units sales are expected to be only 45,000, there is a loss
B. 80% D. 50% of P1.25 per unit. Both the variable cost per unit and total costs remain constant.
The fixed costs amounted to
Sensitivity Analysis A. P80,000 C. P247,500
Change in breakeven point B. P360,000 D. P210,000
19. The following data relate to Homer Company which sells a single product:
Unit selling price P 20.00 6. Aloha, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70
Purchase cost per unit 11.00 percent of the rooms are occupied each day. The companys operating costs are P21 per
Sales commission, 10% of selling price 2.00 occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure
Monthly fixed costs P80,000 contains both variable and fixed cost elements. During October, the occupancy dropped to
The firms salespersons would like to change their compensation from a 10 percent only 45 percent. A total of P792,000 in operating cost was incurred during the month.
April 16, 2005 Page 11 of 67
What would be the expected operating costs, assuming that the occupancy rate increases to
60 percent during November? 38. MS operates a chain of shoe stores around the metropolitan city. MS stores carry many styles
A. P1,056,000 C. P846,000 of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in
B. P 756,000 D. P829,500 their sales efforts, the company pays a substantial sales commissions on each pair of shoes
sold. Sales personnel also receive a minimum basic salary.
Change in fixed costs The following cost and revenue data typical of the companys many sales outlets:
33. The following data apply to Cross Corporation for the year 2004: Selling price P800
Total variable cost per unit P3.50 Variable expenses:
Contribution margin/sales 30% Invoice costs P360
Breakeven sales (present volume) P1,000,000 Sales commission 140
Cross wants to sell an additional 50,000 units at the same selling price and contribution P500
margin. By how much can fixed costs increase to generate a gross margin equal to 10% of the Fixed expenses per year:
sales value of the additional 50,000 units to be sold? Rent P1,600,000
A. P50,000 C. P67,500 Advertising 3,000,000
B. P57,500 D. P125,000 Salaries 1,400,000
Total P6,000,000
9. Santos Company is planning its advertising campaign for next year and has prepared the The company is considering paying the store manager a P60 commission on each pair of
following budget data based on a zero advertising expenditure: shoes sold in excess of break-even point. If this change were made, what will be the stores
Normal plant capacity 200,000 units before tax profit or loss assuming 23,000 pairs of shoes are sold in a year?
Sales 150,000 units A. P 720,000 C. P 920,000
Selling price P25 per unit B. P(480,000) D. P(680,000)
Variable manufacturing costs P15 per unit
Fixed manufacturing costs P800,000 7. Candyman Company is a wholesale distributor of candy. The company services grocery,
Fixed selling and adm costs P700,000 convenience, and drug stores in Metro Manila. Small but steady growth in sales has been
An advertising agency claims that an aggressive advertising campaign would enable Santos to achieved by the company over the past few years while candy prices have been increasing.
increase its unit sales by 20%. What is the maximum amount that Santos Company can pay The company is formulating its plans for the coming fiscal year. Presented below are the data
for advertising and have an operating profit of P200,000 next year? used to project the current years after-tax net income of P110,400.
A. P100,000 C. P300,000 Average selling price P4.00 per box
B. P200,000 D. P550,000 Average variable costs
Cost of candy P2.00 per box
37. The Rizal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their Selling expenses 0.40 per box
place of business to the downtown area. Likewise it is anticipating that the selling price per unit Total P2.40 per box
and the variable expense will not change. At present, the sales volume necessary to Annual fixed costs
breakeven is P750,000 but with the expected increase in fixed costs, the sales volume Selling P160,000
necessary to breakeven would go up to P975,000. Based on these projections, what would be Administrative 280,000
the total fixed costs after the increase of P78,750? Total fixed costs P440,000
A. P341,250 C. P183,750 Expected annual sales volume (390,000 boxes) P1,560,000
B. P262,500 D. P300,000
April 16, 2005 Page 12 of 67
Manufacturers of candy have announced that they will increase prices of their products an Sales amount
average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts, 39. BM Motors Inc. employs 40 sales personnel to market its line of luxury automobiles. The
etc.) and labor costs. Candyman Company expects that all other costs will remain at the same average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
rates or levels as the current year. Candyman is subject to 40 percent tax rate. is considering a change to a commission arrangement that would pay each salesperson a
If net income after taxes is to remain the same after the cost of candy increases but no salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
increase in the sales price is made, how many boxes of candy must Candyman sell? The amount of total car sales at which BM Motors would be indifferent as to which plan to
A. 480,000 C. 503,225 select is
B. 423,385 D. 443,871 A. P22,500,000 C. P24,000,000
B. P30,000,000 D. P12,000,000
Indifference Point
Units sold 10. Blue Ski Company recently expanded its manufacturing capacity to allow it to produce up to
40. Dulce, Inc. owns and operates a chain of food centers. The management is considering 15,000 pairs of cross-country skis of either the mountaineering model or the touring model.
installing machines that will make popcorn on the premises. These machines are available in The sales department assures management that it can sell between 9,000 and 13,000 pairs
two different sizes with the following details. (units) of either product this year. Because the models are very similar, Blue Ski will produce
Economy Regular only one of the two models. The information below was compiled by the accounting
Annual capacity 20,000 50,000 department.
Costs: Annual machine rental P60,000.00 P82,500.00 Mountaineering Touring
Popcorn cost per box 3.90 3.90 Selling price per unit P880.00 P800.00
Cost of each box 0.80 0.80 Variable costs per unit P528.00 P528.00
Other variable cost per box 6.60 4.20 Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only
The level of output in boxes at which the Economy and the Regular would earn the same profit P3,168,000 if the touring model is produced. Blue Ski is subject to a 40% income tax rate.
(loss) is The total sales revenue at which Blue Ski Company would make the same profit or loss
A. 20,000 boxes C. 9,375 boxes regardless of the ski model it decided to produce is
B. 15,000 boxes D. 12,500 boxes A. P8,800,000 C. P4,224,000
B. P9,240,000 D. P6,864,000
13. The following data relate to Homer Company which sells a single product:
Unit selling price P 20.00 Margin of Safety
Purchase cost per unit 11.00 9. The following information pertains to Dove Corporation for the year ending December 31,
Sales commission, 10% of selling price 2.00 2000:
Monthly fixed costs P80,000 Budgeted sales P1,000,000
The firms salespersons would like to change their compensation from a 10 percent Breakeven sales 700,000
commission to a 5 percent commission plus P20,000 per month in salary. They now receive Budgeted contribution margin 600,000
only commissions. Cashflow breakeven 200,000
At what sales volume would the two compensation plans be indifferent? Doves margin of safety is
A. 12,500 C. 20,000 A. P300,000 C. P500,000
B. 22,222 D. 22,860 B. P400,000 D. P800,000
Breakeven point
April 16, 2005 Page 13 of 67
42. Russini, Inc. had the following economic data for 2004: A. Firm D will lose more profit than Firm S.
Net sales P400,000 B. Firm S will lose more profit than Firm D.
Contribution margin P160,000 C. Firm D and Firm S will lose the same amount of profit.
Margin of safety P 40,000 D. Neither Firm D nor Firm S will lose profit.
What is Russini's breakeven point in 2004?
A. P360,000 C. P288,000 44. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a
B. P320,000 D. P 80,000 contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income
for 2002 can be expected to increase by what amount over 2001?
Current sales A. P250,000 C. P500,000
6. If a business had a margin of safety ratio of 20%. variable costs of 75% of sales, fixed costs of B. 200 percent D. 40 percent
P240,000, a break-even point of P960,000 and operating income of P60,000 for the current
year, what are the current year's sales? (M) 46. Signal Co. manufactures a single product. For 2000, the company had a sales of P90,000,
A. P1,200,000 C. P1,260,000 variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and
B. P1,040,00 D. P1,020,000 sales price per unit to remain the same in 2001, however total sales are expected to jump by
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
6. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent, 2000 by
and tax rate of 40 percent. If fixed costs amount to P320,000, how much sales did Pansipit A. 100% C. 20%
make for the year? B. 80% D. 50%
A. P1,066,667 C. P1,000,000
B. P1,280,000 D. P 800,000 Absorption Costing & Variable Costing
Variable Costing
Fixed costs 47. Which of the following statements is true for a firm that uses variable (direct) costing?
7. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio A. The cost of a unit of product changes because of changes in the number of units
of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales and manufactured
fixed costs constant every month. If the tax rate is 40 percent, how much is the annual fixed B. Profits fluctuate with sales
costs? (M) C. An idle facility variation is calculated
A. P36,000 C. P432,000 D. Product costs include direct (variable) administrative costs
B. P90,000 D. P360,000
48. Which of the following is not true of variable costing?
Operating Leverage A. Profits may increase though sales decrease
43. A very high operating leverage indicates that a firm B. Profits fluctuate with sales
A. has high fixed cost C. has high variable costs C. The cost of the product consists of all variable production costs
B. has high net income D. is operating close to its breakeven point D. The income statement under variable costing does not include overhead volume variance.
45. Firm D and Finn S are competitors within the same industry. Firm D produces its product using 21. The following information was extracted from the first year of absorption-based accounting
large amounts of direct tabor. Firm S has replaced direct labor with investment in machinery. records of NOLI Co.
Projected sales for both firms are fifteen percent less than in the prior year. Which statement Total fixed costs incurred .P100,000
regarding projected profits is true? Total variable costs incurred 50,000
April 16, 2005 Page 14 of 67
Total period costs incurred .70,000 Direct labor 40

Total variable period costs incurred 30,000 Indirect labor (variable) 30
Units produced 20,000 Other variable factory overhead 50
Units sold 12,000 Fixed factory overhead 140
Unit sales Price P 12 Variable selling expenses 100
Based on variable costing, if NOLI Company had sold 12,001 units instead of 12,000, its Fixed selling expenses 70
income before taxes would have been During the period, the company produced and sold 1,000 units.
A. P 9.50 higher C. P8.50 higher What is the inventory cost per unit using absorption costing?
B. P11.00 higher D. P8.33 higher A. P520 C. P420
B. P350 D. P310
49. Coo Company manufactures a single product using standard costing. Variable production
costs; are P12 and fixed production costs are P125,000. Coo uses a normal activity of 12,500 50. Colger Company manufacture a single product using standard costing. Variable production
units to set its standard costs. Coo began the year with 1,000 unite in inventory, produced costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of
11,000 units, and sold 11,500 units. 12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory,
The standard cost of goods sold under variable costing would be produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under
A. P115,000 C. P242,000 absorption costing would be
B. P138,000 D. P253,000 A. P115,000 C. P242,000
B. P132,000 D. P253,000
Absorption Costing
15. When a firm prepares financial reports by using absorption costing 51. The Trinkets Company estimated the following data for the coming year:
A. profits will always increase with increase in sales Fixed manufacturing costs P565,000
B. profits will always decrease with decreases in sales Variable production costs per peso of sales
C. profits may decrease with increased sales even if there is no change in selling prices and Materials P0.125
costs Direct labor 0.150
D. decreased output and constant sales result in increased profits Variable overhead 0.075
Variable selling costs per peso of sales 0.150
18. West Co.s 2000 manufacturing costs were as follows: Trinkets estimates its sales for the coming year to be P2,000,000.
Direct materials and direct labor P 700,000 The expected costs of goods sold for the coming year is
Other variable manufacturing costs 100,000 A. P1,265,000 C. P1,115,000
Depreciation of factory building and manufacturing equipment 80,000 B. P1,565,000 D. P700,000
Other fixed and manufacturing overhead 18,000
What amount should be considered product cost for external reporting purposes? 52. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each
A. P 700,000 C. P880,000 year. The predicted and actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor
B. P800,000 D. P898,000 hours, respectively.
2004 2005
16. Toshiba Company incurred the following costs in manufacturing desk calculators: Sales in units 25,000 25,000
Direct materials . P70 Selling price per unit P10 P10
Indirect materials (variable) 20
April 16, 2005 Page 15 of 67
Direct materials and direct labor per unit P5 P5 Costs of goods of manufactured was P2,425,000
The company assumes that the long-run production level is 20,000 direct labor hours per year. Applied factory overhead was 30 percent of total manufacturing costs
The actual factory overhead cost for the end of 2004 and 2005 was P60,000. Assume that it Factory overhead was applied to production at a rate of 80% of direct labor cost
takes one direct labor hour to make one finished unit. Work-in-process inventory at January 1 was 75% of work-in-process inventory at
When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005, December 31
respectively, are What are the amounts/value of the following cost elements and inventory?
A. P75,000 and P75,000 C. 75,000 and P55,000 Direct labor Direct materials Work-in-process inventory
B. P125,000 and P125,000 D. P75,000 and P50,000 A. P750,000 P750,000 P225,000
B. P937,500 P812,500 P225,000
14. Apo Companys variable costing income statement for August appears below: C. P937,500 P812,500 P300,000
Sales (P15 per unit) P600,000 D. P750,000 P750,000 P300,000
Less variable costs:
Variable cost of goods sold:
Variable & Absorption Costing
Beginning inventory P 72,000
55. Lord Industries manufactures a single product. Variable production costs are P10 and fixed
Add variable cost of goods manufactured 315,000
production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard
Goods available for sale 387,000
costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units.
Less ending inventory 27,000
The volume variance under each product costing are:
Variable cost of goods sold 360,000
Variable selling expenses 80,000 A. B. C. D.
Total variable costs 440,000 Under Absorption Costing P3,750 P3,750 P7,500 P7,500
Contribution margin 160,000 Under Variable Costing 0 7,500 3,750 0
Fixed costs:
Fixed manufacturing P 105,000 56. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its
Fixed selling and administrative 35,000 products are as follows:
Total fixed costs 140,000 Direct Materials P4.00
Net income P 20,000 Direct labor 6.00
The company produces 35,000 units each month. Variable production costs per unit and total Factory overhead
fixed costs have remained constant over the past several months. Variable 3.00
Using the absorption costing method, the peso value of the companys inventory on August 31 Fixed (based on a normal capacity of 10,000 units) 2.00
and the absorption income, respectively, would be Total 15.00
A. B. C. D.
Inventory Value P27,000 P27,000 P36,000 P36,000 Beginning inventory 2,000 units
Absorption Income P35,000 P 5,000 P 5,000 P35,000 Production 8,000 units
Units sold (selling price P50) 7,000 units
54. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is
Actual costs:
from the financial records of the company for the year.
Direct materials P35,000
Total manufacturing costs were P2,500,000
Direct labor 50,000
April 16, 2005 Page 16 of 67
Variable overhead 23,000 10. Under which inventory costing method could increases or decreases in income from
Fixed 18,000 operations be misinterpreted to be the result of operating efficiencies or inefficiencies? (M)
Variable selling and adm. 60,000 A. Variable costing C. Incremental costing
Fixed selling and adm. 35,000 B. Absorption costing D. Differential costing
Variances are closed to cost of sales monthly
How much are the net income under absorption costing and variable costing methods? Reconciliation of Variable & Absorption Costing Income
A. B. C. D. 11. York Company had P200,000 income using absorption costing. York has no variable
Absorption P144,000 P143,000 P144,000 P142,000 manufacturing costs. Beginning inventory was P15,000 and ending inventory was P22,000.
Variable P143,000 P144,000 P142,000 P144,000 Income under variable costing would have been (M)
A. P178,000 C. P193,000
Variable vs. Absorption Costing B. P200,000 D. P207,000
8. Absorption costing differs from variable costing in that (M)
A. standards can be used with absorption costing/ but not with variable costing. 58. Simple Corp. produces a single product. The following cost structure applied to their first year
B. absorption costing inventories are more correctly valued, of operations, 2000:
C. production influences income under absorption costing, but not under variable costing. Variable costs:
D. companies using absorption costing have lower fixed costs. SG&A P2.00 per unit
Production 4.00 per unit
12. A manufacturing firm presently has total sales of P1,000,000. If its sales rise, its Fixed Costs (total cost incurred for the year)
A. net income based on variable costing will go up more than its net income based on SG&A P14,000
absorption costing. Production P20,000
B. net income based on absorption costing will go up more than its net income based on Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800 There was no
variable costing. beginning or ending work-in-process inventory. How much larger or smaller would Simple
C. fixed costs will also rise. Corp.'s income be if it uses absorption rather than variable costing?
D. per unit variable costs will rise. A. The absorption costing income would be P6,000 larger
B. The absorption costing income would be P6,000 smaller
9. Which of the following is(are) closely related to variable costing than to absorption costing? (M) C. The absorption costing income would be P4,800 larger
1. Predetermined fixed overhead 5. Gross margin D. The absorption costing income would be P4,000 smaller
2. Unit sales 6. Volume variance
3. Production units 7. Cost behavior 59. The following information has been extracted from P Co.s financial records for its first year of
4. Contribution margin 8. Management accounting operations:
A. 1, 2, 4, 6, 7, 8 C. 1, 3, 4, 7, 8 Units produced 10,000
B. 2, 4, 7, 8 D. 1, 3, 5, 6 Units sold 7,000
Variable cost per unit:
57. The level of production affects income; under which of the following methods? Direct materials P8
A. Absorption costing C. both absorption and variable costing Direct labor 9
B. variable costing D. neither absorption nor variable costing Factory overhead 3
SG&A 4
Fixed costs:
April 16, 2005 Page 17 of 67
Manufacturing overhead P70,000 manufacturing cost. There are no work-in-process inventories at either the beginning or the
SG&A 30,000 end of the year. The planned and actual unit selling price for 2001 was P70.00 per unit
Based on absorption costing, P Co.s income in its first year of operations will be The difference between Valyn Corporations 2001 operating income calculated on the
A. P21,000 higher than it would be under variable costing absorption costing basis and calculated on the variable costing basis was
B. P70,000 higher than it would be under variable costing A. P65,000 C. P40,000
C. P30,000 higher than it would be under variable costing B. P25,000 D. P90,000
D. Higher than it would be under variable costing, but the exact difference cannot be
determinable from this information Standard Costing & Variance Analysis
Basic Concepts
60. Valyn Corporation employs an absorption costing system for internal reporting purposes; 12. Normal costing and standard costing differ in that (M)
however, the company is considering using variable costing. Data regarding Valyn's planned A. the two systems can show different overhead budget variances.
and actual operations for the 2001 calendar year are presented below. B. only normal costing can be used with absorption costing.
Planned activity Actual activity C. the two systems show different volume variances if standard hours do not equal actual
Beginning finished goods inventory in units 35,000 35,000 hours.
Sales in units 140,000 125,000 D. normal costing is less appropriate for multiproduct firms.
Production in units 140,000 130,000
The planned per unit cost figures shown in the next schedule were based on 62. Which of the following is a difference between a static budget and a flexible budgets?
A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
the estimated production and sale of 140,000 units in 2001. Valyn uses a
B. A flexible budget includes all costs, a static budget includes only fixed costs.
predetermined manufacturing overhead rate for applying manufacturing C. A flexible budget gives different allowances for different levels of activity, a static budget
overhead to its product; thus, a combined manufacturing overhead rate of does not
P9.00 per unit was employed for absorption costing purposes in 2001. Any D. There is no difference between the two.
over-or under applied manufacturing overhead is closed to the cost of goods
sold account at the end of the repotting year. Standard Setting
Planned costs Incurred 63. Which of the following statements about the selection of standards is true?
Per unit Total Costs A. Ideal standards tend to extract higher performance levels since they give employees
Direct materials P12.00 P1,680,000 P1,560,000 something to live up to.
Direct labor 9.00 1,260,000 1,170,000 B. Currently attainable standards may encourage operating inefficiencies.
Variable manufacturing overhead 4.00 560,000 520,000 C. Currently attainable standards discourage employees from achieving their full
Fixed manufacturing overhead 5.00 700,000 715,000 performance potential.
Variable selling expenses 8.00 1,120,000 1,000,000 D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
Fixed selling expenses 7.00 980,000 980,000 causing a decline in performance.
Variable administrative expenses 2.00 280,000 250,000
Fixed administrative expenses 3.00 420,000 425,000 64. The best basis upon which costs standards should be set to measure controllable production
inefficiencies is
Total P50.00 P7,000,000 P6,620,000
A. Engineering standards based on ideal standards
The 2001 beginning finished goods inventory for absorption costing purposes was valued at
B. Normal capacity
the 1998 planned unit manufacturing cost, which was the same as the 2001 planned unit
C. Recent average historical performance
April 16, 2005 Page 18 of 67
D. Engineering standards based on attainable performance A. P430,200 C. P555,200

B. P551,500 D. 408,800
65. To measure controllable production inefficiencies, which of the following is the best basis for a
company to use in establishing the standard hours allowed for the output of one unit of 67. Derby Co. uses a standard costing system in connection with the manufacture of a line of T-
product? shirts. Each unit of finished products contains 2 yards of direct material. However, a 20 percent
A. Average historical performance for the last several years. direct material spoilage calculated on input quantities occurs during the manufacturing
B. Engineering estimates based on ideal performance. process. The cost of the direct materials is P120 per yard.
C. Engineering estimates based on attainable performance. The standard direct material cost per unit of finished products is
D. The hours per unit that would be required for the present workforce to satisfy expected A. P192 C. P240
demand over the long run. B. P288 D. P300
Direct materials Variable Overhead

14. Dahl Company, a clothing manufacturer uses a standard costing system. Each unit of a 21. The per-unit standard cost for variable overhead is normally based on which of the following:
finished product contains 1.6 yards of cloth. However there is unavoidable waste of 20% A. The standard quantity of an input factor used in a unit of product.
calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 B. The actual variable overhead cost incurred at the achieved level of production.
per yard. The standard direct material cost for cloth per unit of finished product is: (M) C. The budgeted total cost for variable overhead divided by the number of units expected to
A. P4.80 C. P7.00 be produced.
B. P6.00 D. P7.50 D. The ratio of fringe benefits to the basic cost of labor.
16. Each finished unit of Spring contains 60 pounds of raw material. The manufacturing process Total Overhead
must provide for a 20% waste allowance. The raw material can be purchased for P2.50 a 68. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of
pound under terms of 2/10, n/30. The company takes all cash discounts. The standard direct 30,000 direct labor hours.
material cost for each unit of Spring is Direct materials P800,000
A. P180.00 C. P183.75 Direct labor 600,000
B. P187.50 D. P176.40 Variable manufacturing overhead 360,000
Fixed manufacturing overhead 288,000
17. Agusan Company uses a standard costing system in connection with manufacture of a one What is the total manufacturing overhead application rate id the Relevant Company has to
size fits all article of clothing. Each unit of finished product contains 2 yards of direct material. operate at 80 percent of the stated capacity?
However, a 20% direct material spoilage calculated on input quantities occurs during the A. P24.00 C. P24.60
manufacturing process. The cost of the direct material is P150 per yard. The standard direct B. P27.00 D. P21.60
material cost per unit of finished product is
A. P240 C. P360 69. ABC Company is preparing a flexible budget for 2004 and the following maximum capacity
B. P300 D. P375 estimates for the manufacturing division are available:
Direct labor hours 60,000 hours
66. T Company purchased 340,000 pounds of material at a cost of P510,000. The materials price Variable factory overhead P600,000
variance was unfavorable by P34,000. During the year, 300,000 pounds of this material was Fixed manufacturing overhead P300,000
requisitioned for production. The materials quantity variance was unfavorable by P11,200. The Assume that ABCs expected capacity is 80% of maximum capacity. What would be the total
standard cost of materials that should have been used in production was factory overhead rate, based on direct labor hours, in a flexible budget at expected capacity?
April 16, 2005 Page 19 of 67
A. P18.75 C. P16.25 Materials price variance unfavorable (based on purchases) P 3,600

B. P14.25 D. P15.00 Standard quantity allowed for actual production 16,000 kilograms
Actual quantity used 15,000 kilograms
19. Serafin Company is preparing a flexible budget for 2004 and the following maximum capacity For January there, was a favorable direct material quantity variance of: (M)
estimates for Assembly Department are available: A. P3,360 C. P3,400
Direct labor hours 80,000 hours B. P3,375 D. P3,800
Variable factory overhead P640,000
Fixed manufacturing overhead P300,000 Standard quantity
Assume that Serafins expected capacity is 75% of maximum capacity. What would be the 71. Ramie has a standard price of P5.50 per pound for materials. July's results showed an
total factory overhead rate, based on direct labor hours, in a flexible budget at expected unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066
capacity? pounds were used in production, what was the standard quantity allowed for materials?
A. P13.00 C. P11.75 A. 1,104 C. 1,074
B. P15.67 D. P11.00 B. 1,066 D. 1,100
Materials Variance 18. The Bohol Company uses standard costing. The following data are available for October:
Price variance Actual quantity of direct materials used 23,500 pounds
70. Information on Energys direct material costs for October is as follows: Standard price of direct materials P2 per pound
Actual quantity of direct materials purchased and used 30,000 lbs. Material quantity variance P1,000 unfavorable
Actual cost of direct materials P92,000 The standard quantity of material allowed for October production is
Unfavorable direct materials usage variance P 3,000 A. 23,000 lbs C. 24,500 lbs
Standard quantity of direct materials allowed for May production 29,000 lbs B. 24,000 lbs D. 25,000 lbs
For the month of October, Energys direct materials price variance was:
A. P3,000 favorable C. P2,000 unfavorable Units produced
B. P2,000 favorable D. P2,000 favorable 72. Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver
purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance
11. Information on Mirriams direct material costs for May is as follows: and a P3,735 favorable usage variance. If there were no changes in the component of
Actual quantity of direct materials purchased and used 30,000 lbs. inventory, how many units of finished product were produced?
Actual cost of direct materials P84,000 A. 994 units C. 1,725 units
Unfavorable direct materials usage variance P 3,000 B. 1,160 units D. 828 units
Standard quantity of direct materials allowed for May production 29,000 lbs
For the month of May, Mirriams direct materials price variance was: Mix & Yield Variance
A. P2,800 favorable C. P6,000 unfavorable 73. Xtra Klean manufactures a cleaning solvent. The company employs both skilled and unskilled
B. P2,800 unfavorable D. P6,000 favorable workers. Skilled workers class C are paid P12 per hour, while unskilled workers class D are
paid P7 per hour. To produce one 55-gallon drum of solvent requires 4 hours of skilled labor
Quantity Variance and 2 hours of unskilled labor. The solvent requires 2 different materials: A and B. The
15. Cox Company's direct material costs for the month of January were as follows: standard and actual material information is given below:
Actual quantity purchased 18,000 kilograms Standard:
Actual unit purchase price P 3.60 per kilogram Material A: 30.25 GALLONS @ P1.25 per gallon
April 16, 2005 Page 20 of 67
Material B: 24.75 gallons @ P2.00 per gallon Standard hourly rate P60.00
Labor efficiency variance, Favorable P6,000
Actual: How many direct labor hours were actually worked during the month of April?
Material A: 10,716 gallons purchased and used @ P1.50 gallon A. 1,400 C. 1,498
Material B: 17,484 gallons purchased and used @ P1.90 per gallon B. 1,402 D. 1,600
Skilled labor hours: 1,950 @ P11.90 per hour
Unskilled labor hours: 1,300 @ P7.15 per hour 76. Information on Ulan Companys direct labor costs is as follows:
During the current month Xtra Klean manufactured five hundred 55-gallon drums. (Round all Standard direct labor rate P7.50
answers to the nearest whole peso) Actual direct labor rate P7.00
What are the total materials mix variance and material yield variance? Standard direct labor hours 20,000
A. B. C. D. Direct labor usage variance unfavorable P8,400
Mix P3,596 U P3,596 F P4,864 F P4,864 U What were the actual hours worked, rounded to the nearest hour?
Yield P1,111 U P1,111 F P2,670 F P2,670 U A. 21,914 C. 21,120
B. 20,714 D. 21,200
Labor Variance 12. Information on Rita Companys direct labor costs is as follows:
Labor rate variance Standard direct labor rate P 3.75
74. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15 Actual direct labor rate P 3.50
per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual output Standard direct labor hours 10,000
for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor Direct labor usage variance unfavorable P 4,200
expense. Direct labor hours of 6,375 were actually worked during the month. Variance analysis What were the actual hours worked, rounded to the nearest hour?
of the performance for the month of May would show a(n) A. 11,914 C. 11,120
A. favorable material quantity variance of P7,500 B. 10,714 D. 11,200
B. unfavorable direct labor efficiency variance of P1,275
C. unfavorable material quantity variance of P7,500 Standard hours allowed
D. unfavorable direct labor rate variance of P1,275 13. The Carrera Corporation makes a variety of leather goods. It uses standards costs and a
flexible budget to aid planning and control. Budgeted variable overhead at a 45,000-direct
Actual hours labor hour level is P27,000.
16. The standards for direct labor for a product are 2.5 hours at P8 per hour. Last month, 9,000 During April material purchases were P241,900. Actual direct-labor costs incurred were
units of the product were made and the labor efficiency variance was P8,000 F. The actual P140,700. The direct-labor usage variance was P5,100 unfavorable. The actual average
number of hours worked during the past period was: (M) wage rate was P0.20 lower than the average standard wage rate.
A. 23,500 C. 20,500 The company uses a variable overhead rate of 20% of standard direct-labor cost for flexible
B. 22,500 D. 21,500 budgeting purposes. Actual variable overhead for the month was P30,750.
What were the standard hours allowed during the month of April?
75. Stars Company uses a standard cost system. Information about its direct labor costs for A. 50,250 C. 48,550
Product Mars for the month of April follows: B. 58,625 D. 37,520
Standard hours allowed for actual production 1,500
Actual hourly rate paid P61.00 Standard rate
April 16, 2005 Page 21 of 67
77. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency annual manufacturing overhead is:
variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage Variable P3,600,000
rate? Fixed 3,000,000
A. P8.94 C. P7.94 During November, GMA produced 26,000 units. GMA used 53,500 direct labor hours in
B. P8.00 D. P7.80 November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000
fixed and P325,000 variable.
Two-Way Overhead Variance The manufacturing overhead controllable variance for November is
Budget or Controllable Variance A. P13,000 unfavorable C. P3,000 favorable
22. Which of the following are considered controllable variance? B. P10,000 favorable D. P4,000 favorable
A. B. C. D.
VOH Spending Yes No No Yes 79. Calma Company uses a standard cost system. The following budget, at normal capacity, and
Total Overhead Budget Yes No Yes Yes the actual results are summarized for the month of December:
Volume Yes Yes No No Direct labor hours 24,000
Variable factory OH P 48,000
78. If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the Fixed factory OH P108,000
standard hours allowed is P15,600, then the overhead controllable variance is Total factory OH per DLH P 6.50
A. P600 F C. P1,600 F
B. P2,200 U D. P1,600 U Actual data for December were as follows:
Direct labor hours worked 22,000
17. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of Total factory OH P147,000
actual production are as follows: Standard DLHs allowed for capacity attained 21,000
Standard cost Using the two-way analysis of overhead variance, what is the controllable variance for
Fixed overhead (based on 10,000 hours) 3 hours @ P.80 per hour December?
Variable overhead 3 hours @ P2 per hour A. P3,000 Favorable C. P 9,000 Favorable
Actual cost B. P5,000 Favorable D. P10,500 Unfavorable
Total variable cost P18,000
Total fixed cost P8,000 Volume Variance
The amount of the factory overhead controllable variance is (M) 13. The unfavorable volume variance may be due to all but which of the following factors? (M)
A. P2,000 unfavorable C. P0 A. failure to maintain an even flow of work
B. P3,000 favorable D. P3,000 unfavorable B. machine breakdowns
C. unexpected increases in the cost of utilities
15. GMA Company employs a standard absorption system for product costing. The standard cost D. failure to obtain enough sales orders
of its product is as follows:
Direct materials P14.50 20. How will a favorable volume variance affect net income under each of the following methods?
Direct labor (2 direct labor hours at P8) 16.00 A. B. C. D.
Manufacturing overhead ( 2 DLH at P11) 22.00 Absorption Reduce Reduce Increase Increase
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor Variable No effect Increase No effect Reduce
hours. Joker planned to produce 25,000 units each month during the year. The budgeted
April 16, 2005 Page 22 of 67
80. The fixed overhead application rate is a function of a predetermined "normal" activity level. If Direct materials P14.50
standard hours allowed for good output equal this predetermined activity level for a given Direct labor (2 direct labor hours at P9) 18.00
period, the volume variance will be Manufacturing overhead ( 2 DLH at P12) 24.00
A. zero The manufacturing overhead rate is based upon the annual normal activity level of 600,000
B. favorable direct labor hours. Meteor planned to produce 25,000 units each month during the year. The
C. unfavorable budgeted annual manufacturing overhead is:
D. either favorable or unfavorable, depending on the budgeted overhead Variable P4,200,000
Fixed 3,000,000
18. The standard factory overhead rate is P7.50 per machine hour (P6.20 for variable factory During November, Meteor produced 26,000 units. Meteor used 53,500 direct labor hours in
overhead and P1.30 for fixed factory overhead) based on 100% capacity of 80,000 machine November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000
hours. The standard cost and the actual cost of factory overhead for the production of 15,000 fixed and P325,000 variable.
units during August were as follows: The manufacturing overhead volume variance for November is
Actual: A. P10,000 unfavorable C. P5,000 unfavorable
Variable factory overhead P360,000 B. P10,000 favorable D. P5,000 favorable
Fixed factory overhead 104,000
Standard hours allowed for units produced: Budgeted Overhead
60,000 hours at P7.50 450,000 83. Karla Company use an annual cost formula for overhead of P72,000 + P1.60 for each direct
What is the amount of the factory overhead volume variance? (M) labor hour worked. For the upcoming mouth Karla plans to manufacture 96,000 units. Each
A. P12,000 unfavorable C. P14,000 unfavorable unit requires five minutes of direct labor. Karla's budgeted overhead for the month is
B. P12,000 favorable D. P26,000 unfavorable A. P12,800 C. P84,800
B. P18,800 D. P774,000
81. Hero Company uses a flexible budget system and prepared the following information for the
year: Budgeted fixed costs
Percent of Capacity 80 Percent 90 Percent 84. CTV Company has a standard feed cost of P6 per unit. At an actual production of 8,000 units a
Direct labor hours 24,000 27,000 favorable volume variance of P 12,000 resulted. What were total budgeted fixed costs?
Variable factory overhead P 54,000 P 60,750 A. P36,000 C. P60,000
Fixed factory overhead P108,000 P 108,000 B. P48,000 D. P75,000
Total factory overhead rate per DLH P6.75 P6.25
23. The Arayat Company makes and sells a single product and uses standard costing. During
Hero operated at 80 percent of capacity during the year, but applied factory overhead based January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units
on the 90 percent capacity level. of product. The standard cost card for one unit of product includes the following:
Assuming that actual factory overhead was equal to the budgeted amount of overhead, how Variable factory overhead: 3.0 DLHs @ P4.00 per DLH.
much was the overhead volume variance for the year? Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH
A. P12,000 unfavorable C. P16,750 unfavorable For January, the company incurred P22,000 of actual fixed overhead costs and recorded a
B. P12,000 favorable D. P16,750 favorable P875 favorable volume variance.
The budgeted fixed overhead overhead cost for January is
82. Meteor Company employs a standard absorption system for product costing. The standard A. P31,500 C. P32,375
cost of its product is as follows: B. P30,625 D. P33,250
April 16, 2005 Page 23 of 67
Budgeted output 4,800 unit per month

Normal Capacity The overhead efficiency variance is
85. South Company has total budgeted fixed costs of P75,000. Actual production of 19,500 units A. P3,000 Favorable C. P5,400 Favorable
resulted in a P3,000 favorable volume variance. What normal capacity was used to determine B. P3,000 Unfavorable D. P5,400 Unfavorable
the fixed overhead rate?
A. 16,500 C. 20,313 26. The Suez Company has standard variable costs as follows:
B. 18,750 D. 20,325 Materials, 3 pounds at P4.00 per pound P12.00
Labor, 2 hours P10.00 per hour 20.00
Questions 86 & 87 are based on the following information. Variable overhead, P7.50 per labor hour 15.00
Lucky Company sets the following standards for 2003: Total P47.00
Direct labor cost (2 DLH @ P4.50) P9.00 During September Suez Company produced 6,000 units, using 11,560 labor hours at a total
Manufacturing overhead (2 DLH @ P7.50) 15.00 wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead
Lucky Company plans to produce its only product equally each month. The annual budget for variances are:
overhead costs are: A. B. C. D.
Fixed overhead P150,000 Spending P1,900 F P1,900 U P1,400 F P1,400 U
Variable overhead 300,000 Efficiency P3,300 U P3,300 F P1,900 F P1,900 F
Normal activity in direct labor hours 60,000
In March, Lucky Company produced 2,450 units with actual direct labor hours used of 5,050. Actual Questions 24 & 25 are based on the following information.
overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.) Richard Company employs a standard absorption system for product costing. The standard cost of
its product is as follows:
86. The amount of overhead volume variance for Lucky Company is Raw materials P14.50
A. P250 unfavorable C. P750 unfavorable Direct labor (2 DLH x P8) 16.00
B. P500 unfavorable D. P375 unfavorable Manufacturing overhead (2 DLH x P11) 22.00
Total standard cost P52.50
87. The controllable overhead variance was The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
A. P505 favorable C. P245 favorable hours. Richard planned to produce 25,000 units each month during the year. The budgeted
B. P505 unfavorable D. P245 favorable annual manufacturing overhead is:
Variable P3,600,000
Three-Way Overhead Variance Fixed 3,000,000 P6,600,000
88. The following data are the actual results for Bustos Company for the month of May: During November, Richard produced 26,000 units. Richard used 53,500 direct labor hours in
Actual output 4,500 units November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000
Actual variable overhead P360,000 fixed and P315,000 variable. The total manufacturing overhead applied during November was
Actual fixed overhead P108,000 P572,000.
Actual machine time 14,000 MH
Standard cost and budget information for Bustos Company follows: 24. The fixed manufacturing overhead volume variance for November is
Standard variable overhead rate P6.00 per MH A. P10,000 favorable C. P3,000 unfavorable
Standard quantity of machine hours 3 hours per unit B. P10,000 unfavorable D. P22,000 favorable
Budgeted fixed overhead P777,600 per year
April 16, 2005 Page 24 of 67
25. The total variance related to efficiency of the manufacturing operation for November is B. P1,710 F D. P1,710 U
A. P9,000 unfavorable C. P21,000 unfavorable
B. P12,000 unfavorable D. P11,000 unfavorable 20. The standard hours allowed to make one unit of finished product are: (M)
A. 1.0 C. 1.5
Three-Way Overhead Variance (Variable OH Spending, Fixed OH Budget, Volume) B. 1.2 D. 1.3
89. Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable
overhead spending variance, and P2,000 total under applied overhead. The fixed overhead Variable overhead efficiency variance
budget variance is 90. Franklin Glass Works, production budget for the year ended November 30, 2001 was based
A. P41,000 favorable C. P41,000 unfavorable on 200,000 units. Each unit requires two standard hours of labor for completion. Total
B. P45,000 favorable D. P45,000 unfavorable overhead was budgeted at P900,000 for the year, and the fixed overhead rate was estimated
to be P3.00 per unit. Both fixed and variable overhead are assigned to the product on The
Four-Way Overhead Variance basis of direct labor hours. The actual data for the year ended November 30,2001 are
Variable overhead spending variance presented below.
18. Baltimore, Inc. analyzes manufacturing overhead in the production of its only one product, Blu. Actual production in units 198,000
The following set of information applies to the month of May, 2003: Actual direct labor hours 440,000
Budgeted Actual Actual variable overhead P 352,000
Units produced 40,000 38,000 Actual freed overhead P 575,000
Variable manufacturing overhead P4/DLH P16,400 Franklin's variable overhead efficiency variance for the year ended November 30, 2001 is
Fixed manufacturing overhead P20/DLH P88,000 A. P33,000 unfavorable C. P66,000 unfavorable
Direct labor hours 6 minutes/unit 4,200 hours B. P35,520 favorable D. P33,000 favorable
How much was the variable overhead spending variance?
A. P400 Favorable C. P1,200 Favorable Fixed overhead spending variance
B. P400 Unfavorable D. P1,200 Unfavorable 91. Long Company analyzes its manufacturing overhead in the production of its only one product,
Shorts. The following set of information applies to the month of January 2004:
Questions 19 & 20 are based on the following information. Budgeted Actual
The Clark Company makes a single product and uses standard costing. Some data concerning this Units produced 40,000 38,000
product for the month of May follow: Variable manufacturing overhead P4/DLH P16,400
Labor rate variance P7,000 F Fixed manufacturing overhead P20/DLH P85,000
Labor efficiency variance P12,000 F Direct labor hours 6 minutes/unit 4,000 hours
Variable overhead efficiency variance P4,000 F What is the fixed overhead spending variance?
Number of units produced 10,000 A. P5,000 Favorable C. P1,600 Unfavorable
Standard" labor rate per direct labor hour P12 B. P1,600 Favorable D. P5,000 Unfavorable
Standard variable overhead rate per direct labor hour: P4
Actual labor hours used: 14,000 17. Bravo Corporations master budget calls for the production of 5,000 units of product monthly.
Actual variable manufacturing overhead costs: P58,290 The annual master budget includes indirect labor of P144,000 annually. Bravo considers
indirect labor to be a variable cost. During the month of April, 4,500 units of product were
19. The variable overhead spending variance for May was: (M) produced, and indirect labor costs of P10,100 were incurred. A performance report utilizing
A. P2,290 F C. P2,290 U flexible budgeting would report a budget variance for indirect labor of
April 16, 2005 Page 25 of 67
A. P1,900 Unfavorable C. P700 Unfavorable Sale in units 10,000 9,500

B. P1,900 Favorable D. P700 Favorable Selling price per unit P11 P10
Variable expense per unit P6
Applied fixed manufacturing overhead What are the price variance and price volume variance?
92. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were A. B. C. D.
budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed Sales Price Variance P10,000 F P5,000 F P5,000 U P10,000 U
overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied Price Volume Variance P5,000 F P10,000 U P10,000 F P5,000 U
must be
A. P516,000 C. P504,000
Master Budget
B. P512,000 D. P496,000
Basic Concepts
97. The basic difference between a master budget and a flexible budget is that a
Comprehensive
A. Flexible budget considers only variable costs but a master budget considers all costs.
Questions 93 thru 95 are based on the following information.
B. Flexible budget allows management latitude in meeting goals whereas a master budget is
The Lustre Company produces its only product. Kool Chewing Gum. The standard overhead costs
based on a fixed standard.
for one pack of the product follows:
C. Master budget is for an entire production facility but a flexible budget is applicable to
Fixed overhead (1.50 hours at P18.00) P27.00
single department only.
Variable overhead (1.50 hours at P10.00) 15.00
D. Master budget is based on one specific level of production and a flexible budget can be
Total application rate P42.00
prepared for any production level within a relevant range
Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor
hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and P308,700
98. Zero-base budgeting requires managers to
variable.
A. Justify expenditures that are increases over the prior periods budget amount
B. Justify all expenditures, not just increases over last years amount.
93. The amount of variable overhead spending variance is
C. Maintain a full-year budget intact at all times.
A. P6,300 Favorable C. P6,300 Unfavorable
D. Maintain a budget with zero increases over the prior period.
B. P8,700 Favorable D. P8,700 Unfavorable
99. A systematized approach known as zero-based budgeting
94. The total overhead controllable variance is
a Presents the plan for only one level of activity and does not adjust to changes in the level
of activity.
B. Presents a statement of expectations for a period of time but does not present a firm
commitment.
95. The overhead efficiency variance is
C. Divides the activities of individual responsibility centers into a series of packages which
are ranked ordinally.
D. Classifies budget requests by activity and estimates the benefits arising from each activity.
Gross Profit Variation Analysis
23. Budget slack is a condition in which
96. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are
A. Demand is low at various times of the year
as follows:
B. Excess machine capacity exists in some areas of the plant
Actual Expected
April 16, 2005 Page 26 of 67
C. There is an intentional overestimate of expenses or an underestimate of revenues A. 1,000,000 units C. 1,010,000 units
D. Managers grant favored employees extra time-off B. 1,020,000 units D. 990,000 units
100.When preparing the series of annual operating budgets, management usually starts the Cash Budget
process with the 105.At the beginning of the current month, Rose had P100,000. Cash disbursements were
A. Cash budget C. Sales budget P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money
B. Production budget D. Capital budget market fund and has a line of credit to cover cash deficiencies.
If Rose wishes to start the next month with P150,000, Rose must
Production Budget A. invest P200,000 C. invest P350,000
101.Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a B. borrow P400,000 D. do nothing
growth in sales of 5 percent per month. The target ending inventory in units of the product is
80 percent of the next months estimated sales. There are 150,000 units in inventory as of the 103.The Mango Company is preparing its cash budget for the month of May. The following
end of September. The production requirement in units of Batik for the quarter ending information is available concerning its accounts payable:
December 31 would be Estimated credit sales for May P200,000
A. 670,560 C. 665,720 Actual credit sales for April 150,000
B. 691,525 D. 675,925 Estimated collections in May for credit sales in May 20%
Estimated collections in May for credit sales in April 70%
Purchasing Budget Estimated collections in May for credit sales prior to April P12,000
102.The Jung Corporation's budget calls for the following production: Estimated write-offs in May for uncollectible credit sales 8.000
Quarter 1 45,000 units Estimated provision for bad debts in May for credit sales in May 7,000
Quarter 2 38,000 units What are the estimated cash receipts from accounts receivable collections in May?
Quarter 3 34,000 units A. P142,000 C. P150,000
Quarter 4 48,000 units B. P149,000 D. P157,000
Each unit of product requires three pounds of direct material. The company's policy is to begin
each quarter with an inventory of direct materials equal to 30% of that quarters direct material 26. The Queen Company has the following historical pattern on its credit sales.
purchase requirements. Budgeted direct materials purchases for the third quarter would be percent collected in month of sale
A. 114,600 pounds C. 38,200 pounds percent collected in the first month after sale
B. 89,400 pounds D. 29,800 pounds percent collected in the second month after sale
percent collected in the third month after sale
25. Plainfield Company prepares its budgets on annual basis. The following beginning and ending percent uncollectible
inventory unit levels are planned for the fiscal year of June 1, 2002 through May 31, 2003. The sales on open account have been budgeted for the last six months of 2003 are shown
June 1, 2002 May 31, 2003 below:
Raw material* 40,000 50,000 July P 60,000
Work-in-process 10,000 10,000 August 70,000
Finished goods 80,000 50,000 September 80,000
*Two (2) units of raw material are needed to produce each unit of finished product. October 90,000
If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by November 100,000
Plainfield Company, the units of raw material needed to be purchased would be
April 16, 2005 Page 27 of 67
December 85,000 Basic Concepts

The estimated total cash collections during the fourth calendar quarter from sales made on 27. What term identifies an accounting system in which the operations of the business are broken
open account during the fourth calendar quarter would be down into reportable segments and the control functions of a foreperson, sales managers, or
A. P172,500 C. P230,000 supervisor is emphasized?
B. P265,400 D. P251,400 A. Responsibility accounting C. Control accounting
B. Operations-research accounting D. Budgetary accounting
104.The Magic Company is preparing its cash budget for the month ending January 31. The
following information pertains to Peaces past collection experience from its credit sales: 107.Controllable costs are
Current months sales 12% A. Costs that are likely to respond to the amount of attention devoted to them by a specified
Prior months sales 75% manager.
Sales two months prior to current month 6% B. Costs that are governed mainly by past decisions that established the present levels of
Sales three months prior to current month 4% operating and organizational capacity and that only change slowly in response to small
Cash discounts (2/30, net/90) 2% changes in capacity
Doubtful accounts 1% C. Costs that will be unaffected by current managerial decisions.
Credit sales: D. Costs that fluctuate in total in response to small change in the rate of utilization of
January estimated P2,000,000 capacity.
December 1,800,000
November 1,600,000 108.The CEO of a rapidly growing high-technology firm has exercised centralized authority over all
October 1,900,000 corporate functions. Because the company now operates in four geographically dispersed
How much is the estimated credit to Accounts Receivable as a result of collections expected locations, the CEO is considering the advisability of decentralizing operation control over
during January? production and sales. Which of the following conditions probably would result from and be a
A. P1,730,200 C. P1,762,000 valid reason for decentralizing?
B. P1,757,200 D. P1,802,000 A. Greater local control over compliance with government regulations.
B. More efficient use of headquarters staff officials and specialists.
106.The Mango Company is preparing its cash budget for the month of May. The following C. Quicker and better operating decisions.
information is available concerning its accounts payable: D. Greater economies in purchasing.
Estimated credit sales for May P200,000
Actual credit sales for April 150,000 109.The least complex segment of area of responsibility for which costs ate allocated is a(n)
Estimated collections in May for credit sales in May 25% A. profit center C. contribution center
Estimated collections in May for credit sales in April 70% B. investment center D. cost center
Estimated collections in May for credit sales prior to April P15,000
Estimated write-offs in May for uncollectible credit sales 8,000 110. Which of the following does not apply to the content of managerial reports?
Estimated provision for bad debts in May for credit sales in May 7,000 A. Reporting standard is relevant to the decision to be made
What are the estimated cash receipts from accounts receivable collections in May? B. May extend beyond double-entry accounting system
A. P142,000 C. P157,000 C. Pertains to subunits of the entity and may be very detailed
B. P149,000 D. P170,000 D. Pertains to the entity as a whole and is highly aggregated.
Responsibility Accounting & Transfer Pricing 29. The best measure of managerial efficiency in the use of investments in assets is: (M)
April 16, 2005 Page 28 of 67
A. rate of return on stockholders equity C. income from operations

B. investment turn over D. inventory turnover Residual Income
32. Stevenson Corporation had P550,000 in invested assets, sales of P660,000, income from
Return on Investment operations amounting to P99,000, and a desired minimum rate of return of 15%, The residual
111. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the income for Stevenson is: (E)
ROI would A. P0 C. P14,850
A. increase by 30% C. decrease by 37% B. P17,820 D. P16,500
B. decrease by 10% D. decrease by 33.3%
113. Scotch Co. has the following results for the year:
112. The following information pertains to Pluto Company's Satellite Division for 2004: Sales P740,000
Sales P311,000 Variable expenses 260,000
Variable cost. 250,000 Fixed expenses 300,000
Traceable fixed costs 50,000 Total divisional assets average P1,000,000. The companys minimum required rate of return is
Average invested capital 40,000 14 percent.
Imputed interest rate 10% The residual income and return on investment for Scotch are:
Satellite's return on investment was A. B. C. D.
A. 10.00% C. 27.50% Residual Income P36,000 P40,000 P36,000 P40,000
B. 13.33% D. 30.00% Return on Investment 36% 18% 18% 36%
30. The following data relate to the Happy Division of Euphoria Company: 114. Ylagan Company is a highly decentralized company. It evaluates the performance of each
Sales P10,000,000 segment using both the Return on Investments, as well as Residential Income provided by
Variable costs 3,000,000 each segment. Ylagan Company requires each segment to provide at least 20 percent return
Direct fixed costs 5,000,000 on all its investments.
Invested capital 8,000,000 The following data are typical of the operations of North Division, one of the leading segments
Allocated actual interest costs 800,000 of Ylagan Company.
Capital charge 12% Sales P24,000,000
The divisional return on investment is: Variable costs 10,000,000
A. 15 percent C. 25 percent Fixed costs 8,000,000
B. 13 percent D. 20 percent Share on headquarters costs 3,000,000
Average investment 25,000,000
31. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins. What are the Norths Return on Investments and Residual Income, respectively?
Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from A. 12.00 percent and P(2,000,000) C. 24.00 percent and P1,000,000
operations for Division X is P50,000, and income from operations for Division Y is P38,000. B. 12.00 percent and P1,000,000 D. 24.00 percent and P(2,000,000)
Division X has a higher return on investment than Division Y by: (M)
A. using income from operations as a performance measure 115. The Global Division of Sun Company expects the following result for 2004:
B. comparing income from operations Unit sales 70,000
C. applying a negotiated price measure Unit selling price P 10
D. using its assets more efficiently in generating sales Unit variable cost P 4
April 16, 2005 Page 29 of 67
Total fixed costs P300,000 greater than the divisions historical return on invested capital, but less than the imputed
Total investment P500,000 interest charge for invested capital. If the objective is to maximize residual income, should
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A these divisions accept or reject their projects?
foreign customer has approached Globals manager with an offer to buy 10,000 units at P7 A. B. C. D.
each. If Global accepts the order, it would not lose any of the 70,000 units at the regular price. Alpha Accept Reject Reject Accept
Accepting the order would increase fixed costs by P10,000 and investment by P40,000. Beta Accept Accept Reject Reject
What is the minimum price that Global could accept for the order and still maintain its expected
residual income? Segment Reporting
A. P5.00 C. P4.75 118. Stellar Industries has two divisions: North Division and South Division. Information relating to
B. P5.60 D. P9.00 the divisions for the year just ended is as follows:
North South
116. The following data ate available for the South Division of Banawe Company and the single
Units produced and sold 30,000 40,000
product it makes:
Selling price per unit P 8.00 P 15.00
Unit setting price P20
Variable cost per unit P12 Variable expenses per unit P 3.00 P 5.00
Annual fixed costs P280,000 Direct fixed expanse P48.000 P110,000
Average operating assets P1,500,000 Common fixed expenses P40,000 P 40,000
If South wants a residual income of P50,000 and the minimum required rate of return is 10%, Common fixed expenses have been allocated equally to each of the two division.
the annual turnover will have to be: Stellar's contribution and segment margin for North Division are:
A. 0.32 C. 1.25 A. P150,000 and P102,000 C. P150,000 and P72,000
B. 0.80 D. 1.50 B. P400,000 and P290,000 D. P400,000 and P250,000
117. The following information relates to two projects of Rica Corporation. Transfer Pricing
Project A Project B 119. To avoid waste and maximize efficiency when transferring products among segments is a
competitive economy, a large diversified entity should base transfer prices on
Operating income P2,500,000 P600,000
A. Bargained price C. Market price
Residual income P 500,000 P200,000
B. Dual transfer price D. Full cost
ROI 10% 12%
Return on residual investment 2% 4%
30. The worst transfer-pricing method is to base the prices on (M)
A bonus of P 50,000 will be paid to the manager whose project contributed most to the A. market prices C. budgeted total costs.
performance of the firm. The P50,000 bonus should go to the manager of B. budgeted variable costs D. actual total costs.
A. Project A because the residual income is higher
B. Project E because the return on investment is higher 120.Universal Company has intracompany service transfers from Internal Division, a cost center to
C. Project A because it was a larger, mote complex project World Division, a profit center. Under stable economic conditions, which of the following
D. Project B because the return on residual investment is higher transfer prices is likely to be most conducive to evaluating whether both divisions have met
their responsibilities?
32. Division Alpha is considering a project that will earn a rate of return which is greater than the A. Actual cost C. Market price
imputed interest charge for invested capital, but less than the divisions historical return on B. Standard variable cost D. Negotiated price
invested capital. Division Beta is considering a project that will earn a rate of return which is
April 16, 2005 Page 30 of 67
units of part Z from Pasig for P10.00. Marikina has been approached by an outside supplier
121.An appropriate transfer price between two divisions of the Star Corporation can be determined who is willing to supply the former part Z for P9.00. What are the effects on Rivers overall
from the following data: profit if:
Fabrication Division Marikina Buys Outside at P9.00 Marikina Buys from Pasig at P9.00
Market price of subassembly P50 A. No change P35,000 decrease in profit
Variable cost of subassembly P20 B. P35,000 decrease in profit P35,000 increase in profit
Excess capacity (in units) 1,000 C. P35,000 decrease in profit No change
Assembling Division D. P35,000 increase in profit No change
Number of units needed 900
What is the natural bargaining range for the two divisions? Partial Excess Capacity
A. Between P20 and P50 C. Any amount less than P50 123.Plastic Division makes and sells a single product. Presently it sells 12,000 units per year to
B. Between P50 and P70 D. P50 is the only acceptable price outside customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to
make each unit is P16. All selling expenses are fixed. Light Division would like to buy 10,000
122.Clara Industries is a decentralized company that evaluates its divisions based on ROI. The units a year from Plastic Division. The unit price that Plastic Division should charge Light
Ibarra Division has the capacity to make 1,000 units of a component. The Ibarra Division's Division, according to the transfer pricing formula, is
variable costs are P40 per unit. Ibarra can sell all that it produces for P100 each. A. P24.00 C. P17.60
The Simoun Division can use the component in one of its products. The Simoun Division B. P21.40 D. P16.00
would incur P50 of variable costs to convert the component into its own product which sells for
P160. Simoun needs 100 units. Full Capacity
What are the minimum transfer price that Ibarra is willing to accept and the maximum price 124.The High Division of Para Company produces a high quality kite. Unit production costs (based
that Simoun is willing to pay for the goods? on capacity production of 100,000 units per year) follow:
A. B. C. D. Direct materials P 60
Ibarras Minimum Price P40 P40 P100 P100 Direct labor 25
Simouns Maximum Price P100 P110 P110 P100 Overhead (20% variable) 15
Excess Capacity Other information

33. Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased Sales price 120
from outside suppliers at a cost of P5 per unit. However, the same materials are available from Selling expenses (15% variable) 20
Division 6. Division 6 has unused capacity and can produce the materials needed by Division The High Division is producing and selling at capacity.
3 at a variable cost of P3 per unit. A transfer price of P3.20 per unit is established, arid 40,000 What is the minimum selling price that the division would consider as a transfer price to the
units of material are transferred, with no reduction in Division 6s current sales. How much Recreation Division on which no variable period costs would be incurred?
would Aro-Products total income from operations increase? (M) A. P120 C. P 91
A. P32,000 C. P80,000 B. P 88 D. P117
B. P72,000 D. P8,000
31. The Red Division of Colour Company produces a high quality marker. Unit production costs
30. Pasig Division of River Company sells 80,000 units of part Z to the outside market. Part Z (based on capacity production of 100,000 units per year) follow:
sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Pasig has Direct materials P 60
a capacity to produce 100,000 units per period. Marikina Division currently purchases 10,000 Direct labor 25
April 16, 2005 Page 31 of 67
Overhead (20% variable) 15 125.Barangay Division of Community Company sells 80,000 units of part Z to the outside market.
Other information Part Z sells for P10.00 and has a variable cost of P150 and a fixed cost per unit of P2.50.
Sales price 120 Barangay has a capacity to produce 100,000 units per period. Municipal Division currently
The Red Division is producing and selling at capacity. purchases 10,000 units of part Z from Barangay for P10.00. Municipal has been approached
What is the minimum selling price that the division would consider as a transfer price to the by an outside supplier who is willing to supply the former part Z for P9.00. What are the effects
Violet Division on which no variable period costs would be incurred? on Community Company's overall profit if:
A. P120 C. P 91 Municipal buys outside at P9.00 Municipal buys from Barangay at P9.00
B. P 88 D. P117 No change P35,000 decrease in profit
No change P35,000 increase in profit
Questions 32 and 33 are based on the following information. P35,000 decrease in profit No change
Blade Division of Dana Company produces hardened steel blades. One-third of the Blades
P35,000 increase in profit P35,000 decrease in profit
Divisions output is sold to the Lawn Products Division of Dana; the remainder is sold to outside
customers. The Blade Divisions estimated sales and standard costs data for the fiscal year ending
June 30 are as follows: Product Pricing
Lawn Products Outsiders 126.In a cost-based pricing system the markup should cover
Sales P15,000 P40,000 I. Selling and administrative expenses
Variable costs (10,000) (20,000) II. Desired profit
Fixed costs (3,000) (6,000) III. Manufacturing cost
Gross |margin P 2,000 P14,000 A. I, II, and III C. I and III only
Unit sales 10,000 20,000 B. I and II only D. II and III only
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an
Relevant Costing
outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division
Basic Concepts
cannot sell any additional products to outside customers.
21. A cost that will not be affected by later decisions is termed a(n): (E)
A. historical cost C. sunk cost
32. Should Dana allow its Lawn Products Division to purchase the blades from the outside
B. differential cost D. replacement cost
supplier, and why?
A. Yes, because buying the blades would save Dana Company P500.
127.The Auto Division of Fly Insurance employs three claims processors capable of processing
B. No, because making the blades would save Dana Company P1,500.
5,000 claims each. The division currently processes 12,000 claims. The manager has recently
C. Yes, because buying the blades would save Dana Company P2,500.
been approached by two sister divisions. Division A would like the auto division to process
D. No, because making the blades would save Dana Company P2,500
approximately 2,000 claims. Division B would like the auto division to process approximately
5,000 claims. The Auto Division would be compensated Division A or Division B for processing
33. Assume the Blade Division is now at capacity and sufficient demand exist to sell all production
these claims. Assume that these are mutually exclusive alternatives. Claims processor salary
to outsiders at present prices. What is the differential cost (benefit) of producing the blade
cost is relevant for
internally?
A. division A alternative only
A. P2,500 benefit C. P7,500 cost
B. division B alternative only
B. P0 differential cost D. P10,000 cost
C. both Division A and Division B alternatives
D. neither Division A nor Division B alternatives
Decision
April 16, 2005 Page 32 of 67
23. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
128.For the year ended December 31, 2004, Earth Company incurred direct costs of P500,000 and 32 respectively. The variable costs for each product are: 20; 50: and 15, respectively.
based on a particular course of action during the year. If a different course of action had been Each product must go through the same processing in a machine that is limited to 2,000 hours
taken, direct costs would have been P400,000. In addition, Earth's 2004 fixed costs were per month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
P90,000. the incremental cost was Assuming that Niva Co. can sell ail of the products they can make, what is the maximum
A. P10,000 C. P100,000 contribution margin they can earn per month? (E)
B. P90,000 D. P190,000 A. P64,000 C. P56,000
B. P70,000 D. P34,000
Opportunity Cost
129.The potential benefit that may be obtained from following an alternative course of action is 30. The Hingis Corporation manufactures two products: X and Y. Contribution
called margin per unit is determined as follows:
A. Opportunity benefit C. Relevant cost Product Xf Product Y
B. Opportunity cost D. Sunk cost
Revenue P130 P80
Variable costs 70 P38
31. An important concept in decision making is described as the contribution to income that is
Contribution margin P 60 P42
forgone by not using a limited resources in its best alternative use. This concept is called
A. Marginal cost C. Potential cost Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce
B. Incremental cost D. Opportunity cost resource. 42,000 machine hours are available during the year. Product X requires 6 machine
hours per unit while product Y requires 3 machine hours per unit.
130.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the How many units of X and Y should Hingis Corporation produce?
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of A. B. C. D.
P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could Product X 16,000 8,000 7,000 3,000
not guarantee this delivery schedule. In order to ensure availability of these components, Product Y -0- 4,000 -0- 8,000
Luzon is considering the purchase of all 60,000 units at the beginning of the year. Assuming
Luzon can invest cash at 8%, the companys opportunity cost of purchasing the 60,000 units at 132.Geary Manufacturing has assembled the following data pertaining to two popular products.
the beginning of the year is Blender Electric mixer
A. P132,000 C. P150,000 Direct materials P6 P11
B. P144,000 D. P264,000 Direct labor 4 9
Factory overhead @ P16 per hour 16 32
Profit Maximization Cost if purchased from an outside supplier 20 38
131.Fe Company has only 25,000 hours of machine time each month to manufacture its two Annual demand (units) 20,000 28,000
products. Product X has a contribution margin of P50 and Product Y has a contribution margin
Past experience has shown that the fixed manufacturing overhead component included in the
of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate
cost per machine hour averages P10. Geary has a policy of filling, all sales orders, even if it
80% of its machine time to the product that will provide the most income, Fe will have a total
means purchasing units from outside suppliers.
monthly contribution margin of
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal
A. P250,000 C. P210,000
strategy, it should
B. P240,000 D. P200,000
A. produce 25,000 electric mixers, and purchase all other units as needed
April 16, 2005 Page 33 of 67

B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as 3. common fixed costs
needed 4. variable selling costs
C. produce 20,000 blenders and purchase all other units as needed 5. direct listed selling costs
D. produce 28,000 electric mixers and purchase all other units as needed 6. common fixed setting costs
A. 2, 3, 5, 5 C. 2, 3, 4, 5
133.The Pato Company produces three products with the following costs and selling prices: B. 1, 2, 4, 3 D. 1, 4, 5, 6
A B C
Selling price per unit P16 P21 P21 22. Jones Co. can further process Product B to produce Product C. Product B is currently selling
Variable cost per unit 7 11 13 for P30 per pound and costs P28 per pound to produce. Product C would sell for P60 per
Contribution margin per unit P9 P10 P8 pound and would require an additional cost of P24 per pound to produce. What is the
differential cost of producing Product C? (E)
Direct labor hours per unit 1 1.5 2
A. P30 per pound C. P28 per pound
Machine hours per unit 4.5 2 2.5 B. P24 per pound D. P 6 per pound
In what order should the three products be produced if either the direct labor-hours or the
machine hours are the company's production constraint? 135.The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
A. B. C. D. price per unit is P50. The company has unused production capacity and has determined that
Direct labor hours A,B,C B,C,A B,C,A A,B,C units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
Machine hours B,C,A B,C,A A,C,B A,C,B additional net income per unit to be gained by finishing the unit?
A. P3 C. P15
24. Bear Valley produces three products: A, B, and C, One machine is used to produce the B. P10 D. P12
products, The contribution margins, sales demands, and time on the machine (in minutes) are
as follows: 136.Ottawa Corporation produces two products from a joint process. Information about the two
Demand CM Time on machine joint products follows:
A 100 P25 10 Product X Product Y
B 80 18 5 Anticipated production 2,000 lbs 4,000 lbs
C 150 30 10 Selling price lb at split-off P30 P16
There are 2400 minutes available on the machine during the week. How many units should be Additional processing costs/lb after Split-off (all variable) P15 P30
produced and sold to maximize the weekly contribution? (E) Selling prices/lb after further processing F40 P50
A. B. C. D. The cost of the joint process is P85,000.
A 100 50 90 100 Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which
B 80 80 0 80 maximizes profit, Ottawa's profit will increase by
C 150 150 150 100 A. P16,000 C. P50,000
B. P4,000 D. P10,000
Sell as is or Process Further
134.Indicate which of the following costs would be avoided if a segment is eliminated. 137.BEA Industries produces two products. Information about the products is as follows:
1. variable manufacturing costs Item 38B Item 40F
2. direct fixed costs Units produced and sold 1,000 4,000
April 16, 2005 Page 34 of 67

Selling price per unit P 25 P 20 P7,750. What is the total amount to be included in the calculation to determine the minimum
Variable expenses per unit P 15 P12 acceptable price for the jobs?
The company's fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is A. P36,700 C. P54,000
dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is B. P40,750 D. P58,050
A. P3,200 C. P(2,000)
B. P7,000 D. P10,000 25. KC Industries manufactures a product with the following costs per unit at the expected
production of 30,000 units.
38. Green Companys unit cost of manufacturing and selling a given item at an activity level of Direct materials .P 4
10,000 units per month are: Direct labor . 12
Manufacturing costs Variable manufacturing overhead . 6
Direct materials P24 Fixed manufacturing overhead . 8
Direct labor 8 The company has the capacity to produce 40,000 units. The product regularly sells for P40. A
Variable overhead 5 wholesaler has offered to pay P32 a unit for 2,000 units.
Fixed overhead 6 If the firm is at capacity and the special order is accepted, the effect on operating income
Selling expenses would be
Variable 11 A. a P20,000 increase C. a P4,000 increase
Fixed 8 B. a P16,000 decrease D. P0
The company has an inventory of 3,000 of this item left over from last years model. These
must be sold through regular channels at reduced prices. The inventory will be valueless 28. Dary Co, Produces a single product. Its normal selling price is P28 per unit. The variable costs
unless sold this way. What unit cost is relevant for establishing the minimum selling price of are P18 per unit. Fixed costs are P20,000 for a normal production run of 5,000 units per
these 3,000 units? month. Dary received a request for a special order that would not interfere with normal sales.
A. P11 C. P48 The order was for 1,500 units and a special price of P17.50 per unit. Dary Co. has the capacity
B. P37 D. P62 to handle the special order, and for this order a variable selling cost of P2 per unit would be
eliminated. If the order is accepted, what would be the impact on net income? (M)
Special Order A. decrease of 750 C. increase of P2,250
27. Pueblo Company sells a product for P60. Variable cost is P32. Pueblo could accept a special B. decrease of P3,750 D. increase of P1,500
order for 1,000 units at P46. If Pueblo accepted the order, how many units could it lose at the
regular price before the decision became unwise? (M) 37. Fiesta Companys unit cost of manufacturing and selling a given item at an activity level of
A. 1,000 C. 200 10,000 units per month are:
B. 500 D. 2,000 Manufacturing costs
Direct materials P39
24. Climate Co. has considerable excess manufacturing capacity. A special job orders cost sheet Direct labor 6
includes the following applied manufacturing overhead costs: Variable overhead 8
Fixed costs .P21,000 Fixed overhead 9
Variable costs . 33,000 Selling expenses
The fixed costs include a normal P3,700 allocation for in-house design costs, although no in- Variable 30
house design will be done. Instead the job will require the use of external designers costing Fixed 11
The company desires to seek an order for 5,000 units from a foreign customer. The variable
April 16, 2005 Page 35 of 67
selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order. 139 Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
The minimum break-even price per unit to be considered on this special sale is its product a year. The following information pertains to the production costs at capacity:
A. P71 C. P69 Variable costs P80,000
B. P75 D. P84 Fixed costs 120,000
Total costs P200,000
Make or Buy A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
138.For the past 12 years, the Blue Company has produced the small electric motors that fit into its costs.
main product line of dental drilling equipment. As material costs have steadily increased, the What is the price per unit that makes Buena indifferent between the Make and Buy options?
controller of the Blue Company is reviewing the decision to continue to make the small motors A. P8 C. P20
and has identified the following facts: B. P12 D. P10
1. The equipment used to manufacture the electric motors has a book value of P150,000.
2. The space now occupied by the electric motor manufacturing department could be used 25. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units
to eliminate the need for storage space now being rented. of its product a year. The follow information pertains to the production costs at capacity:
3. Comparable units can be purchased from an outside supplier for P59.75 Variable costs P160,000
4. Four of the persons who work in the electric motor manufacturing department would be Fixed costs 240,000
terminated and given eight weeks severance pay Total costs P400,000
5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed
process. costs. What is the price per unit that makes Medford indifferent between the "make" and "buy"
Which of the items above are relevant to the decision that the controller has to make? options? (E)
A. 1, 3, and 4 C. 2, 3, 4, and 5 A. P8 C. P20
B. 2, 3, and 4 D. 1, 2, 4, and 5 B. P12 D. P40
144.AFM, Inc. manufactures jet engines for an aircraft assembler on a cost plus basis. The cost of 140.Elly Industries is a multi-product company that currently manufacture 30,000 units of Part
a particular jet engine that the company manufactures is shown below: MR24 each month for use in production. The facilities now being used to produce Part MR24
Direct materials P20,000,000 have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If
Direct labor 15,000,000 Elly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed
Overhead: costs would continue at 40 percent of their present amount. The variable production costs of
Supervisors salary 2,000,000 Part MR24 are P11 per unit.
Fringe benefits on direct labor 1,500,000 If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by
Depreciation 1,200,000 purchasing Part MR24 from an outside supplier only if the suppliers unit price is less than
Rent 1,100,000 A. P14.00 C. P16.00
Total P40,800,000 B. P11.00 D. P13.00
If production of this engine were discontinued, the production capacity would be idle, and the
supervisor would be laid off. When asked to bid on the next contract for the engine, the 141.The following are details of the monthly unit cost to manufacture and sell a particular product
minimum unit price that AFM Inc should bid is for Grace Company:
A. P38,500,000 C. 36,500,000 Manufacturing Costs:
B. P40,800,000 D. 39,700,000 Direct materials P3.00
April 16, 2005 Page 36 of 67
Direct labor 4.00 B. Increase the handle unit cost by P1.50 D. Increase the handle unit cost by P0.50
Variable indirect 2.00
Fixed indirect 1.50 26. The Connell Company uses 5,000 units of part 501 each year. The cost of manufacturing one
unit part 501 at this volume is as follows:
Marketing Costs: Direct materials .. P2.50
Variable 2.00 Direct labor . 3.50
Fixed 1.00 Variable overhead 1.50
Grace must decide to continue making the product or buy it from an outside supplier. The Fixed overhead . 1.00
supplier has offered to make the product at the same level of quality that the company can Total. P8.50
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be An outside supplier has offered to sell Connell unlimited quantities of part 501 at a unit cost of
reduced by 25% if the company were to accept the proposal. What is the maximum amount P7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned to
per unit that Grace can pay the suppliers without decreasing its operating income? part 501. Furthermore, the space devoted to the manufacture of part 501 would be rented to
A. P 9.50 C. P 9.00 another company for P6,000 per year. If Connell accepts the offer of the outside supplier,
B. P10.50 D. P11.00 annual profits will
A. Increase by P13,500 C. increase by P11,000
142.Savage Industries is a multi-product company that currently manufactures 30,000 units of Part B. increase by P7,250 D. increase by P1,250
QS42 each month for use in production. The facilities now being used to produce Part QS42
have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If 26. A business is operating at 90% of capacity and is currently purchasing a part used in its
Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its manufacturing operations for P15 per unit. The unit cost for the business to make the part is
fixed costs would continue at 40 percent of their present amount. The variable production P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are
costs of Part QS42 are P11 per unit. normally purchased during the year but could be manufactured using unused capacity, what
If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase would be the amount of differentials cost increase or decrease from making the part rather
price of P12,875, the monthly usage at which it will be indifferent between purchasing and than purchasing it? (M)
making Part QS42 is A. P150,000 cost increase C. P150,000 cost increase
A. 30,000 units C. 80,000 units B. P90,000 cost decrease D. P90,000 cost increase
B. 32,000 units D. 48,000 units
33. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total
143.Classic Company currently manufactures all components parts used in the manufacture of manufacturing costs of the part are as follows:
various hand tools. A steel handle is used in three different tools. The 2001 budget for 20,000 Direct materials P10,000
handles has the following unit cost: Direct labor 5,000
Direct material P6.00 Variable overhead 5,000
Direct labor 4.00 Fixed overhead 30,000
Variable overhead 1.00 Total manufacturing cost P50,000
Fixed overhead 2.00 An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
Total unit cost P13.00 the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
Modern Steel has offered to supply 20,000 handles to Classic for P12.50 each delivered. If part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the
Classic Co. currently has idle capacity that cannot be used, accepting the offer will outside supplier per month, then its monthly operating income will
A. Decrease the handle unit cost by P0.50 C. Decrease the handle unit cost by P1.50 A. decrease by P4,000 C. decrease by P14,000
April 16, 2005 Page 37 of 67
B. increase by P4,000 D. increase by P14,000 2. direct fixed costs 5. direct fixed selling costs
3. common fixed costs 6. common fixed selling costs
14. The Reno Company manufactures Part No. 498 for use in its production cycle. The cost per
unit for 20,000 units of part No. 498 are as follows: A. 2, 3, 5, 6 C. 2, 3, 4, 5
Direct materials P6 B. 1, 2, 4, 5 D. 1, 4, 5, 6
Direct labor 30
Variable overhead 12 32. Banahaw Company plans to discontinue a department that has a contribution margin of
Fixed overhead applied 16 P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The
P64 effect of this discontinuance on Banahaws overall net operating income would be a(an)
The Tray Company has offered to sell 20,000 units of part No. 498 to Reno for P60 per unit. A. decrease of P30,000 C. decrease of P10,000
Reno will make the decision to buy the part from Tray if there is a savings of P25,000 for B. increase of P30,000 D. increase of P10,000
Reno. If Reno accepts Trays offer, P9 per unit of the fixed overhead applied would be totally
eliminated. Furthermore, Reno has determined that the released facilities could be used to 34. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are
save relevant costs in the manufacture of part No. 575. In order to have a savings of P25,000, P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2003 was
the amount of the relevant costs that would be saved by using the released facilities in the P(1,200,000). The management of Mina Co. was considering dropping the mining of Gold
manufacture of part No. 575 would have to be Ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment
A. P80,000 C. P125,000 was dropped. If Gold Ore were dropped, net income for Arayat Mining would
B. P85,000 D. P140,000 A. Increase by P2,000,000 C. Increase by P1,200,000
B. Decrease by P2,000,000 D. Decrease by P1,200,000
34. Bulacan Company manufactures part G for use in its production cycle. The costs per unit for
10,000 units of part G are as follows: 28. BEA Industries produces two products. Information about the products is as follows:
Direct materials P 3 Item 38B Item 40F
Direct labor 15 Units produced and sold 1,000 4,000
Variable overhead 6 Selling price per unit P 25 P 20
Fixed overhead 8 Variable expenses per unit P 15 P 12
Total P32 The companys fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If dropped and P25,000 can be avoided if Item 40F is dropped.
Bulacan accepts Pampangas offer, the released facilities could be used to save P45,000 in Product margin for Item 40F is
relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead A. P3,200 C. P(2,000)
applied to part G would continue. B. P7,000 D. P10,000
What alternative is more desirable and by what amount?
A. B. C. D.
Alternative Manufacture Manufacture Buy Buy Capital Budgeting
Amount P10,000 P15,000 P15,000 P10,000 Basic Concepts
145.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment
Keep-or-Drop a Segment of cash flows, NPV is better than IRR. What are the reinvestment rate for each method?
27. Indicate which of the following costs would be avoided if a segment is eliminated. Net Present Value Method Internal Rate of Return Method
1. variable manufacturing costs 4. variable selling costs
April 16, 2005 Page 38 of 67
A. Discount Rate Discount Rate 41. Water Lily Foundation (WLF), a tax-exempt organization, invested P200,000 in a five-year
B. Discount Rate IRR project at the beginning of the year. WLF estimates that the annual cash savings from this
C. IRR IRR project will amount to P65,000. Tax and book depreciation on the project will be P40,000 per
D. IRR Discount Rate year for five years. On investments of this type, WLFs desired adjusted rate of return is 12%.
Information on present value factors is as follows:
Accounting Rate of Return At 12% At 14% At 16%
Net investment Present value of P1 for 5 periods 0.57 0.52 0.48
39. The Zambales Company is planning to purchase a new machine which it will depreciate, for Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3
book purposes, on a straight-line basis over a ten-year period with no salvage value and a full For the projects first year, WLFs accounting rate of return, based on the projects average
years depreciation taken in the year of acquisition. The new machine is expected to produce book value would be
cash flow from operations, net of income taxes, of P175,000 a year in each of the next ten A. 14.4% C. 12.5%
years. The accounting (book value) rate of return on the average investment is expected to be B. 13.9% D. 25.0%
15%. How much will the new machine cost?
A. P1,000,000 C. P1,666,667
B. P 700,000 D. P1,800,000 Cash Flows
Net Investment
Differential income 147.Big City Motors is trying to decide whether it should keep its existing cash washing machine or
146.Maxwell Company has an opportunity to acquire a new machine to replace one of its present purchase a new one that has technological advantages (which translate into cost savings)
machines. The new machines would cost P90,000, have a five-year life, and no estimated over the existing machine. Information on each machine follows:
salvage value. Variable operating costs would be P100,000 per year. The present machine has Existing Machine New Machine
a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000, Original cost P9,000 P20,000
but it would be zero after five years. Variable operating costs would be P125,000 per year. Accumulated depreciation 5,000 0
Ignore present value calculations and income taxes. Annual cash operating costs 9,000 4,000
Considering the five years in total, what would be the difference in profit before income taxes Current salvage value in 10 years 2,000 1,000
by acquiring the new machine as opposed to retaining the present one? Remaining life 10 years 10 years
A. P10,000 decrease C. P35,000 increase The incremental cost to purchase the new machine is
B. P15,000 decrease D. P40,000 increase A. P11,000 C. P13,000
B. P20,000 D. P18,000
Operating cash flow before tax
37. The Mutya ng Pasig Company, a calendar company, purchased a new machine for P280,000 148.Gray Company is considering replacing a machine with a book value of P200,000, a remaining
on January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The useful-life of 5 years, and annual straight-line depreciation of P40,000. The existing machine
accounting (book value) rate of return (ARR) is expected to be 20% on the initial increase in has a current market value of P200,000. The replacement machine would cost P350,000, have
required investment. On the assumption of a uniform cash inflow, this investment is expected a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine
to provide annual cash flow from operations, before 30 percent income taxes, of would be depreciated using the straight-line method and the tax rate is 40%, what would be
A. P80,000 C. P115,000 the net investment required to replace to the existing machine?
B. P91,000 D. P175,000 A. P90,000 C. P150,000
B. P210,000 D. P350,000
ARR based on average investment
April 16, 2005 Page 39 of 67
End-of-life Cash Flow

Operating Cash Flow After Tax 152.Acme is considering the sale of any of the two machines, Machine A or Machine B. Machine A
34. Which of the following is NOT relevant in calculating annual net cash flows for an investment? has a book value of P50,000, 3 years remaining it its useful life with P15,000 annual straight-
(M) line depreciation. Its market value is P75,000. Machine B has a book value of P75,000, 3-
A. Interest payments on funds borrowed to finance the project. years remaining in its life, with P25,000 annual straight-line depreciation. Its current market
B. Depreciation on fixed assets purchased for the project. value is P50,000. What are the cash flows from selling any of the two machines if the tax rate
C. The income tax rate. is 40%?
D. Lost contribution margin if sales of the product invested in will reduce sales of other A. B. C. D.
products. Machine A P65,000 P65,000 P45,000 P45,000
Machine B P40,000 P60,000 P60,000 P40,000
149.The Hills Company, a calendar year company, purchased a new machine for P280,000 on
January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The Comprehensive
accounting (book value) rate of return (ARR.) is expected to be 15% on the initial increase in 153.Bata Company is considering replacing a machine with a book value of P100,000, a remaining
required investment. On the assumption of a uniform cash inflow, this investment is expected useful life of 5 years, and annual straight-line depreciation of P20,000. The existing machine
to provide annual cash flow from operations, net of income taxes, of has a current market value of P100,000. The replacement machine would cost P150,000, have
A. P35,000 C. P42,000 a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine
B. P40,250 D. P77,000 would be depreciated using the straight-line method arid the tax rate is 40%, what would be
the economic values relevant to me decision?
150.A company is considering replacing a machine with one that will save P40,000 per year in A. B. C. D.
cash operating costs and have P10,000 more depreciation expense per year than the existing
Net Investment P50,000 P50,000 P150,000 P150,000
machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of
Net Incremental Cash Flow P34,000 P42,000 P34,000 P42,000
the company by
Net Incremental Annual Income Taxes P16,000 P16,000 P3,000 P8,000
A. P28,000 C. P18,000
B. P24,000 D. P6,000
Questions 154 & 155 are based on the following information.
Brown Company is considering to replace its old equipment with a new one. The old equipment
151. Alpha Company is considering replacing a machine with a book value of
had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year. The
P100,000, a remaining useful life of 4 years, and annual straight-line old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year life.
depreciation of P25,000. The existing machine has a current market value of Cash savings on operating expenses before taxes amount to P50,000 per year.
P80,000. The replacement machine would cost P160,000, have a 4year life,
and save P50,000 per year in cash operating costs. If the replacement machine 154.What is the amount of investment in the new equipment?
would be depreciated using the straight-line method and the tax rate is 40%, A. P160,000 C. P72,000
what would be the increase in annual income taxes and annual net cash flow if B. P80,000 D. P68,000
the company replaces the machine?
A. B. C. D. 155.How much annual after-tax cash savings (inflow) would the new equipment provide?
Income Tax P14,000 P14,000 P 4,000 P 4,000 A. P36,000 C. P37,200
Net Cash Flow 36,000 46,000 46,000 36,000 B. P46,000 D. P14,000
April 16, 2005 Page 40 of 67

Payback Period
36. Which of the following is(are) closely relevant to Payback Method? (M) 158.Biloxi Beluga is considering an investment in a new cheese-cutting machine to replace its
A. Intermediate cash flows are reinvested at zero percent. existing cheese cutter. Information on the existing machine and the replacement machine
B. The use of cash inflows instead of profit. follow.
C. Avoidance of too much risk of uncertainty. Cost of the new machine P40,000
D. Explicit considerations of timing of cash flows. Net annual savings in operating costs 9,000
E. Prevention of excessive liquidity problems. Salvage value now of the old machine 6,000
F. Cost of capital Salvage value of the old machine in 8 years 0
A. All of these C. A, B, C, E Salvage value of the new machine in 8 years 5,000
B. A, C, E, F D. B, C, E Estimated life of the new machine 8 years
What is the expected payback period for the new machine?
35. The relationship between payback period and IRR is that (E) A. 4.44 years C. 8.50 years
A. a payback period of less than one-half the life of a project will yield an IRR lower than the B. 2.67 years D. 3.78 years
target rate.
B. the payback period is the present value factor for the IRR. Bailout Period
C. a project whose payback period does not meet the company's cutoff rate for payback will 159.A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
not meet the company's criterion for IRR. and salvage value:
D. none of the above Year Net cash inflow Salvage value
1 500,000 800,000
156.Energy Company is planning to spend P84,000 for a new machine, to be depreciated on the 2 500,000 600,000
straight-line basis over ten years with no salvage value. The related cash flow from operations, 3 600,000 500,000
net of income taxes, is expected to be P10,000 a year for each of the first six years and 4 800,000 400,000
P12,000 for each of the next four years. What is the payback period? 5 700,000 300,000
A. 4.4 years C. 7.8 years What is the bailout period for the project?
B. 7.6 years D. 8.0 years A. 3.25 yrs C. 2.73 yrs
B. 2.5 yrs D. 2.4 yrs
157.Salve Company is considering an investment in a new cheese-cutting machine to replace its
existing cheese cutter. Information on the existing machine and the replacement machine Discounted Cash Flow
follow: 160.If Sol Company expects to get a one-year loan to help cover the initial financing of capital
Cost of the new machine P100,000 project, the analysis of the project should
Net annual savings in operating costs 20,000 A. offset the loan against any investment in inventory or receivable required by the project
Salvage value now of the old machine 10,000 B. show the loan as an increase in the investment
Salvage value of the old machine in 8 years 0 C. show the loan as a cash outflow in the second year of the projects life
Salvage value of the new machine in 8 years 20,000 D. ignore the loan
Estimated life of the new machine 8 years
What is the expected payback period for the new machine? 161.Why do the NPV method and the IRR method sometimes produce different rankings of
A. 4.00 years C. 4.50 years mutually exclusive investment projects?
B. 4.33 years D. 5.00 years
April 16, 2005 Page 41 of 67
A. The NPV method does not assume reinvestment of cash flows while the IRR method PV of 1 0.90909 0.82645 0.75131 0.68301 0.62092
assumes the cash flows will be reinvested at the internal rate of return. Assuming that the company faces a marginal tax rate of 40%, and has a cost of capital of
B. The NPV method assumes a reinvestment rate equal to me discount rate while the IRR 10%, what is the net advantage (in present value) in using one method over the other one in
method assumes a reinvestment rate equal to the internal rate of return. computing depreciation?
C. The IRR method docs riot assume reinvestment of the cash flow while the NPV assumes A. P7,196 C. P2,879
the reinvestment rate is equal to the discount rate. B. P0 D. P6,342
D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while
the IRR method assumes a reinvestment rate equal to the discount rate. 165.Silliman Corporation purchased a new machine for P450,000. The new machine has an
estimated useful life of five years with no salvage value. The machine is expected to produce
162.The advantage of the Net Present Value method over the Internal Rate of Return method for cash flows from operations, net of 40 percent income taxes, as follows:
screening investment projects is that it: First year P160,000
A. does not consider the time value of money Second year 140,000
B. implicitly assumes that the company is able to reinvest cash flows from the project at the Third year 180,000
companys discount rate Fourth year 120,000
C. implicitly assumes that the company is able to reinvest cash flows from the project at the Fifth year 100,000
internal rate of return Silliman will use the sum-of-the-years-digits method to depreciate the new machine as
D. fails to consider the timing of cash flows follows:
First year P150,000
163.Which of the following combinations is possible? Second year 120,000
Profitability Index NPV IRR Third year 90,000
Greater than 1 Positive Equal cost of capital Fourth year 60,000
Greater than 1 Negative Less than cost of capital Fifth year 30,000
Less than 1 Negative Less than cost of capital The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12
Less than 1 Positive Less than cost of capital percent at end of each period are: End of: Period 1 0.8928, Period 2 - 0.79719, Period 3
- 0.71178, Period 4 - 0.63552, Period 5 - 0.56743
38. B Company is considering two alternative ways to depreciate a proposed investment. The The net advantage (in present value) of using the Sum-of-the-Years-Digits method over the
investment has an initial cost of P100,000 and an expected 5 year life. The two alternative straight-line method at a discount rate of 12 percent is
depreciation schedules follow: A. P14,620 C. P 7,340
Method 1 Method 2 B. P12,188 D. P 9,750
Year 1 depreciation P40,000 P20,000
Year 2 depreciation P30,000 P20,000 Net Present Value
Year 3 depreciation P20,000 P20,000 40. The King of Hearts, Inc. is considering to replace its old equipment with a more efficient one.
Year 4 depreciation P10,000 P20,000 The old equipment was purchased two years ago for P720,000. Though the old equipment will
Year 5 depreciation P 0 P20,000 be used for eight years, the company elected to depreciate it ever 6 years. If the company
would keep and use the old equipment during its remaining useful life, the annual cash
Present value of annuity of 1 for 5 periods at 10% , 3.79079.
operating expenses will be P640,000. The old equipment can be sold for P380,000.
Present value of 1, end of periods:
The new equipment costs the company P900,000. The new equipment will be depreciated
Period 1 2 3 4 5 over its useful life of six years without any salvage value. The use of the new equipment will
April 16, 2005 Page 42 of 67
decrease the company's cash operating expenses by P175,000, The company is consistently Present value of P1 at 10% .909 .826 .751 .683 .621
using straight-line method of depreciation with 32% income tax. The company uses 16% cost Present value of an annuity of P1 at 10% .909 1.736 2.487 3.170 3.791
of capital. Future amount of P1 at 10% 1.100 1.210 1.331 1.464 1.611
The purchase of the new equipment will result to net present value of: (D) Future amount of an annuity of P1 at 10% 1.00 2.100 3.310 4.641 6.105
A. P127,351 C. P19,901 How much will the machine cost?
B. P(14,143) D. P11,922 A. P32,220 C. P 75,820
B. P62,100 D. P122,100
Profitability Index
166.A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are 168.Gene, Inc. invested in a machine with a useful life of six years and no salvage value. The
P20,505 on an investment of P50,000. The profitability index for tins project is machine was depreciated using the straight-line method. It was expected to produce annual
A. 1.367 C. 2.438 cash inflow from operations, net of income taxes, of P2,000. The present value of an ordinary
B. 3.333 D. 1.300 annuity of P1 for six periods at 10% is 4.355. The present value of P1 for six periods at 10% is
0.5464. Assuming that Gene used a time adjusted rate of return of 10%, what was the amount
41. Sulu Company is considering to acquire a machine in order to reduce its direct labor costs. of the original investment?
This machine shall last for 4 years with no salvage value. His initial analysis indicated that the A. P5,640 C. P9,000
time-adjusted rate of return is 15 percent. At 12 percent (cost of capital to finance the purchase B. P8,710 D. P11,280
of the machine), the company expects net present value of P5,470,80.
The present value of 1 for four periods at 12 percent is 3.03735 and at 15 percent is 2.85499. 169.Fordem Co. is considering an investment in a machine that would reduce annual labor costs
Ignoring income tax considerations, the profitability index is (D) by P30,000. The machine has an expected life of 10 years with no salvage value. The
A. 1.064 C. 1.047 machine would be depreciated according to the straight-line method over its useful life. The
B. 1.183 D. 1.250 companys marginal tax rate is 30%. Assume that the company will invest in the machine of it
generates a pre-tax internal rate of return of 16%. What is the maximum amount the company
Internal Rate of Return can pay for the machine and still meet the internal rate of return criterion?
37. A weakness of the internal rate of return method for screening investment projects is that it: (E) A. P180,000 C. P187,500
A. does not consider the time value of money B. P210,000 D. P144,996
B. implicitly assumes that the company is able to reinvest cash flows from the project at the
company's discount rate Unit sales
C. implicitly assumes that the company is able to reinvest cash flows from the project at the 42. King of Kings Company has been renting equipment during peak season in addition to its own
internal rate of return equipment in handling standard materials. The rental cost averages P9,000 a year. The
D. fails to consider the timing of cash flows company's Investment Committee is evaluating the possibility of buying additional equipment
at a cost of P225,000 with an estimated useful life of 5 years and with no salvage value at the
Net Investment end of 5 years. The committee estimates that it can save P0.25 per unit of material by using its
167.The Forest Company is planning to invest in a machine with a useful life of five years and no own equipment. Also, it estimates that 270,000 units can be handled \n each of the 5 years, A
salvage value. The machine is expected to produce cash flow from operations, net of income 15% discounted rate of return is considered appropriate, ignoring income tax. Present value of
taxes, of P20,000 in each of the five years. Forest's expected rate of return is 10%. Information annuity of 1, at 15% for 5 years, is 3,352.
on present value and future amount factors is as follows. What is the approximate number of units at which the investment can just meet the 15% return
PERI0D requirement? (D)
1 2 3 4 5 A. 232,496 C. 304,496
April 16, 2005 Page 43 of 67
B. 268,496 D. 256,428 Internal rate of return 11% 13% 14% 15%
Selling price Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
42. Moorman Products Company is considering a new product that will sell for P100 and have a amount of funds?
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500,000 No Budget Restriction P600,000 Available Funds P300,000 Available Funds
and having a five-year useful life and no salvage value is needed, and will be depreciated A. Projects 2, 3, & 4 Projects 3 & 4 Projects 3
using the straight-line method. The machine has cash operating costs of P20,000 per year. B. Projects 1, 2, & 3 Projects 2, 3 & $ Projects 3 & 4
The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present C. Projects 1, 3 & 4 Projects 2 & 3 Projects 2
value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4
3.60478.
Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling
Financial Statement Analysis
price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?
Horizontal Analysis
A. 81.00 C. P70.00
172.Sales for a three year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0
B. 86.00 D. P90.00
million. Using year 1 as the base year, the respective percentage increase in sales in year 2
and 3 are
Operating Cash Flow Before Tax
A. 115% and 125% C. 115% and 130%
170.Payback Company is considering the purchase of a copier machine for P42,825. The copier
B. 115% and 109% D. 87% and 80%
machine will be expected to be economically productive for 4 years. The salvage value at the
end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of
Liquidity & Activity Ratios
return. The company is subject to 40 percent income tax rate.
37. Which ratio is most helpful in appraising the liquidity of current assets?
The present value of an ordinary annuity of 1 for 4 periods is 2.85498.
A. current ratio C. debt ratio
In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflows to
B. acid-test ratio D. accounts receivable turnover
be provided b the machine?
A. P17,860 C. P25,000
173.The days sales-in-receivable ratio will be understated if the company
B. P15,000 D. P35,700
A. Uses a natural business year for its accounting period
B. Uses a calendar year for its accounting period
Investment Decisions
C. Uses average receivable in the ratio calculation
171.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
D. Has high sales at the end of the year
analysis for four projects for the upcoming year:
Project 1 Project 2 Project 3 Project 4 174.Baguio Company's accounts receivable were P600,000 at the beginning of the year and
Initial cash outlay P200,000 P298,000 P248,000 P272,000 P800,000 at the end of the year. Cash sales for the year were P300,000. The accounts
Annual net cash inflows receivable turnover for the year was 5 times. Baguio Company's total sales for the year were:
Year 1 P65,000 P100,000 P80,000 P95,000 A. P 800,000 C. P3,300,000
Year 2 70,000 135,000 95,000 125,000 B. P1,300,000 D. P3,800,000
Year 3 80,000 90,000 90,000 90,000
Year 4 40,000 65,000 80,000 60,000 40. The following financial data have been taken from the records of Lotion Company:
Net present value (3.798) 4,276 14,064 14,662 Accounts receivable P200,000
Profitability index 98% 101% 106% 105%
April 16, 2005 Page 44 of 67
Accounts payable 80,000 B. P42,000 D. P66,000

Bonds payable, due in 10 years 500,000
Cash 100,000 Other Ratios
Interest payable, due in three months 25,000 177.Recto Co. has a price earnings ratio of 7, earnings per share of P2.20, and a pay out ratio of
Inventory 440,000 80%. The dividend yield is
Land 800,000 A. 80.0% C. 11.4%
Notes payable, due in six months 250,000 B. 39.3% D. 31.4%
What will happen to the ratios below if Lotion Company uses cash to pay 50 percent of its
accounts payable? 178.The following were reflected from the records of War Freak Company:
A. B. C. D. Earnings before interest and taxes P1,250,000
Current Ratio Increase Decrease Increase Decrease Interest expense 250,000
Acid-test Ratio Increase Decrease Decrease Increase Preferred dividends 200,000
Payout ratio 40 percent
Profitability Ratios Shares outstanding throughout 2003
175.Selected financial data for May on Company appear below: Preferred 20,000
Common 25,000
Account Balances
Income tax rate 40 percent
Beginning of Year End of Year Price earnings ratio 5 times
Preferred stock P125,000 P125,000 The dividend yield ratio is
Common stock 300,000 400,000 A. 0.50 C. 0.12
Retained earnings 75,000 185,000 B. 0.40 D. 0.08
During the year, the company paid dividends of P10,000 on its preferred stock. The company's
net income for the year was P120,000. The company's return on common stockholders' equity 39. The Delta Company projects the following for the upcoming year:
for the year is closest to: Earnings before interest and taxes P40 million
A. 17% C. 23% Interest expense P 5 million
B. 19% D. 25% Preferred stock dividends P 4 million
Common stock dividend payout ratio 20%
Solvency Ratios Average number of common shares outstanding 2 million
176.A firms financial risk is a function of how it manages and maintains its debt. Which one of the Effective corporate income tax rate 40%
following sets of ratios characterizes the firm with the greatest amount of financial risk? The expected dividend per share of common stock is
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity A. P1.70 C. P2.10
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity B. P1.86 D. P1.00
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity 39. Strada Corporation was organized on January 1 with the following capital structure:
10% cumulative preferred stock, par and liquidation value of P110; authorized, issued and
38. The times interest earned ratio of Maxi Company is 4.5 times. The interest expense for the outstanding 2,000 shares P200,000
year was P20,000, and the companys tax rate is 40%. The companys net income is: Common stock, par value, P5; authorized 40,000 shares;
A. P22,000 C. P54,000 Issued and outstanding 20,000 shares 100,000
April 16, 2005 Page 45 of 67
Adventures net income for the first year ended December 31 was P1,880,000, but no A. P1,788,000 C. P2,046,000
dividends were declared. How much was Adventures book value per common share at B. P1,980,000 D. P858,000
December 31?
A. P97 C. P99 40. Assume you are given the following relationships for the Marhya Company:
B. P98 D. P120 Sales/total assets 1.5X
Return on assets (ROA) 3%
41. The Dawson Corporation projects the following for the year 2003. Return on equity (ROE) 5%
Earnings before interest and taxes P35 million The Marhya Companys debt ratio is
Interest expense P 5 million A. 40% C. 35%
Preferred stock dividends P 4 million B. 60% D. 65%
Common stock dividend payout ratio 30%
Common shares outstanding 2 million 181.Selected data from Shyr Companys year-end financial statements are presented below. The
Effective corporate income tax rate 40% difference between average and ending inventory is immaterial.
The expected common stock dividend per share by Dawson Corporation for 1995 is Current ratio 2.0
A. P2.34 C. P1.80 Quick ratio 1.5
B. P2.70 D. P2.10 Current liabilities P120,000
Inventory turnover (based on cost of sales) 8 times
Integrated Ratios Gross profit margin 40%
28. Calumpang Company has a total assets turnover of 0.30 and a profit margin of 10 percent. Shyrs net sales from the year were
The president is unhappy with the current return on assets, and he thinks it could be doubled. A. P800,000 C. P480,000
This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by B. P1,200,000 D. P672,000
increasing the total assets turnover. What new asset turnover ratio, along with the 12 percent
profit margin, is required to double the return on assets? 182.Salami Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The
A. 25% C. 50% president is unhappy with the current return on assets, and he thinks it could be doubled. This
B. 36% D. 60% could be accomplished (1) by increasing the profit margin to 15 percent, and (2) by increasing
the total assets turnover. What new asset turnover ratio, along with the 15 percent profit
179.JayR has debt ratio of 0.50, a total asset turnover of 0.25, and a profit margin of 10%. The margin, is required to double the return on assets?
president is unhappy with the current return on equity, and he thinks it could be doubled. This A. 35% C. 40%
could be accomplished: (1) by increasing the profit margin to 14%; and, (2) by increasing debt B. 45% D. 50%
utilization. Total asset turnover will not change.
What new debt ratio, along, with 14% profit margin is required to double the return on equity? 42. Delo Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%.
A. 0.75 C. 0.65 The president is unhappy with the current return on equity, and he thinks it could be doubled.
B. 0.70 D. 0.55 This could be accomplished (1) by increasing the profit margin to 14% and (2) increasing debt
utilization. Total assets turnover will not change. What new debt ratio, along with the 14%
180.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The profit margin, is required to double the return on equity?
dividend payout rate is 60%. Beginning stockholders equity was P850,000 and current A. 0.75 C. 0.65
liabilities are projected to be P300,000 at the end of 2002. What are the total equities available B. 0.70 D. 0.55
if the ratio of long-term debt to stockholders equity is 60%?
April 16, 2005 Page 46 of 67
Working Capital Finance 186.Gear Inc. has a total annual cash requirement of P14,700,000 which are to be paid uniformly.
Working Capital Financing Policy Gear has the opportunity to invest the money at 24% per annum. The company spends, on the
Conservative Financing Policy average, P40 for every cash conversion to marketable securities.
183.As a company becomes more conservative with respect to working capital policy, it would tend What is the optimal cash conversion size?
to have a(n). A. P50,000 C. P80,000
A. Increase in the ratio of current liabilities to noncurrent liabilities. B. P62,500 D. P70,000
B. Decrease in the operating cycle
C. Increase in the operating cycle 187.Morr Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly.
D. Increase in the ratio of current assets to noncurrent liabilities Morr has the opportunity to invest the money at 24% per annum. The company spends, on the
average, P40 for every cash conversion to marketable securities.
Aggressive Financing Policy What is the optimum average cash balance?
184.Jekel Company follows and aggressive financing policy in its working capital management A. P60,000 C. P43,000
while Michael Corporation follows a conservative financing policy. Which one of the following B. P55,000 D. P27,500
statements is correct?
A. Jekel has low ratio of short-term debt to total debt while Michael has a high ratioof short- Total cost of keeping cash
term debt to total debt 188.Ocampo Co. estimates its total annual cash requirements at about P600,000. It costs the
B. Jekel has a low current ratio while Michael has a high current ratio company P25 to convert cash from marketable securities and vice versa. Ocampos yield on
C. Jekel has less liquidity risk while Michael has more liquidity risk its temporary investments is 12%. What is the total costs of keeping Ocampos cash?
D. Jekel finances short-term assets with long-term debt while Michael finances short-term A. P2,846 C. P6,000
assets with short-term debt. B. P1,897 D. P3,242
185.Nutty Co. has total fixed assets of P100,000 and no current liabilities. The table below displays Lockbox System
its wide variation in current asset components. 189.The Alabang Company has a daily average collection of checks of P250,000. It takes the
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter company 4 days to convert the checks to cash. Assume a lockbox system would have a net
Cash P16,000 P10,000 P11,000 P18,000 cost of P25,000 per year, but any additional funds made available could be invested to net 8
Accounts receivable 70,000 30,000 40,000 90,000 percent per year. Should Alabang adopt the lockbox system?
Inventory 20,000 60,000 70,000 10,000 A. Yes, the system would free P250,000 in funds
Total P106,000 P100,000 P121,000 P118,000 B. Yes, the benefits of the lock-box system exceed the costs
If Nuttys policy is to finance all fixed assets and half the permanent current assets with long- C. No, the benefit is only P10,000
term financing and rest with short time-financing, what is the maximum level of short-term D. No, the firm would lose P5,000 per year if the system were used
financing?
A. P68,000 C. P150,000 Receivables Management
B. P50,000 D. P71,000 Credit policy
190.It is held that the level of accounts receivable that a firm has or holds reflects both the volume
Cash Management of a firms sales on account and a firms credit policies. Which one of the following items is not
Optimal cash conversion size considered as part of a firms credit policy?
A. The maximum risk group to which credit should be extended.
B. The extent (in terms of money) to which a firm will go to collect an account.
April 16, 2005 Page 47 of 67
C. The length of time for which credit is extended. B. P3,125,000 D. P5,000,000

D. The size of the discount that will be offered.
Inventory Management
Incremental investment in receivables Economic Order Quantity
191. Lipa Company currently has annual sales of P2,000,000. Its average collection period is 40 195.Gerstein Company manufactures a line of deluxe office fixtures. The annual demand for its
days, and bad debts are 5 percent of sales. The credit and collection manager is considering miniature oak file is estimated to be 5,000 units. The annual cost of carrying one unit in
instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total inventory is P10, and the cost to initiate a production run is P1,000. There are no miniature oak
sales, and the average collection period would fall to 30 days. However, sales would also fall files on hand, and Gerstein has scheduled four equal production runs of the miniature oak file
by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of for the coming year, the first of which is to be rum immediately. Gerstein has 250 business
carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year. days per year. Assume that sales occur uniformly throughout the year and that production is
What would be the incremental investment in receivables if the change were made? instantaneous.
A. P(16,667) C. P(48,611) The number of production runs per year of the miniature oak files that would minimize the sum
B. P(27,167) D. P(45,833) of carrying costs and setup costs for the coming year is
A. 7 C. 4
Increase in accounts receivable B. 2 D. 5
192.Matang-Lawins budgeted sales for the coming year are P48,000,000 of which 80% are
expected to be credit sales at a terms of n/30. Matang-Lawin estimates that a proposed 196.Gleim Company, which manufactures a line of appliances, has an annual demand for its HD
relaxation of credit standards would increase credit sales by 30 percent and increase the washing machine estimated at 7,500 units. The annual cost of carrying one unit of inventory is
average collection period from 30 days to 45 days. Based on a 360-day year, the proposed P200, and the cost to initiate a production run is P5,000. There are no HD washing machine
relaxation of credit standards would result in an expected increase in the accounts receivable on hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the
balance of coming year. Gleim has 250 business days per year. Assume that sales occur uniformity
A. P3,440,000 C. P3,040,000 throughout the year and that production is instantaneous.
B. P1,440,000 D. P960,000 If Gleim does not maintain a safety stock, the estimated total carrying costs and total set-up
costs for the coming year are:
193.Relax Companys budgeted sales for the coming year are P40,500,000 of which 80% are A. B. C. D.
expected to be credit sales at terms of n/30. Relax estimates that a proposed relaxation of Carrying Costs P150,000 P300,000 P150,000 P300,000
credit standards will increase credit sales by 20% and increase the average collection period Set-up Costs 25,000 25,000 5,000 5,000
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
standards will result in an expected increase in the average accounts receivable balance of Annual cost of keeping inventory
A. P540,000 C. P900,000 197.The Cindy Fashion uses about 200,000 yards of a particular fabric each year. The fabric costs
B. P2,700,000 D. P1,620,000 P150 per yard. The current policy is to order the fabric 8 times a year. Incremental ordering
costs ate about P900 per order, and incremental carrying costs are about P0.75 per yard,
194.Real Companys budgeted sales for the coming year are P50,000,000 of which 75% are much of which represents the opportunity cost of the funds tied up in inventory. How much
expected to be credit sales at terms of n/30. Real estimates that a proposed relaxation of total annual costs are associated with the current inventory policy?
credit standards will increase credit sales by 20% and increase the average collection period A. P16,575 C. P25,950
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit B. P18,750 D. P9,200
standards will increase average accounts receivable balance by:
A. P1,200,000 C. P1,875,000 Opportunity cost
April 16, 2005 Page 48 of 67
198.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the Stockout Cost
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of 202.Which of the following items is irrelevant for a company that is attempting to minimize the cost
P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could not of the stockout?
guarantee this delivery schedule. In order to ensure availability of these components, Luzon is A. Cost of placing an order C. Storage cost of inventory
considering the purchase of all 60,000 units at the beginning of the year. Assuming Luzon can B. Contribution margin on lost sales D. Size of the safety stock
invest cash at 8%, the companys opportunity cost of purchasing the 60,000 units at the
beginning of the year is Optimal Safety Stock Level
A. P132,000 C. P150,000 203.Each stockout of a product sold by FM Co. costs P1,750 per occurrence. The companys
B. P144,000 D. P264,000 carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
product 20 times a year at a cost of P100 per order. The probability of a stockout at various
Service level levels of safety stock are:
199.The sales office of Hermit Company has developed the following probability distributed for Units of Safety Stock Probability of Stockout
daily sales of a perishable product. 0 0.50
X (Units Sold) P(Sales-X) 100 0.30
200 0.2 200 0.14
250 0.5 300 0.05
300 0.2 The optimal safety stock level for the company based on the units of safety stock level above
350 0.1 is
The product is restocked at the start of each day. If the company desires a 90% service level in A. 0 units C. 300 units
satisfying sales demand, the initial stock balance for each day should be B. 100 units D. 400 units
A. 245 C. 315
B. 300 D. 220 Trade Credit
204.If a firm purchases raw materials from its supplier on a 2/10, n/50 term, the equivalent annual
Safety Stock & Reorder Point interest (using 360-day year) of giving up a cash discount and making payment on the 60th
200.When a specified level of safety stock is carried for an item in inventory, the average inventory day is
level for that item A. 14.73% C. 14.69%
A. decreased by the amount of the safety stock B. 18.37% D. 12.29%
B. is one-half the level of the safety stock
C. Increases by one-half the amount of the safety stock 205.If a retailers term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of
D. Increases by the amount of the safety stock not taking the discount? Assume a 360-day year.
A. 24.00% C. 24.74%
201.The Glimpse Corporation purchases 60,000 headbands per year. The average purchase lead B. 37.11% D. 31.81%
time is 20 working days. Maximum lead time is 27 working days. The corporation works 240
days per year. The appropriate safety stock level and the reorder point for the company are: 206.Calvin Lopez regularly purchases from Jackson at terms of 3/10, n/45. What is the simple
A. B. C. D. nominal cost of foregoing the discount if Calvin pays on the 55th day?
Safety Stock 1,750 1,750 1,167 1,167 A. 24.74% C. 20.24%
Reorder Point 6,750 5,250 6,750 5,250 B. 31.81% D. 24.49%
April 16, 2005 Page 49 of 67

207.If a firm purchases raw materials from its supplier on a 3/10, n/50 term, the approximate and the company will pay P2.675 at the end of the current year. Mickey should pay P2.50
annual interest rate (using 360-day year) of giving up a cash discount and making payment on flotation cost.
the 60th day is What is the expected returns on retained earnings for Mickey Company?
A. 22.27 percent C. 18.37 percent A. 17.77 percent C. 18.45 percent
B. 27.84 percent D. 14.69 percent B. 18.89 percent D. 19.72 percent
Short-term Financing 213.The Mints Companys last dividend was P4.50; its growth rate is 6 percent and the stock now
208.The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate sells for P60. Flotation cost is P5.00
of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking What is Mint Companys cost of new common stock?
account. Assuming Dean would normally maintain a zero balance in its checking account , the A. 8.67 percent C. 14.18 percent
effective interest rate on the loan is B. 14.67 percent D. 13.50 percent
A. 8.0% C. 11.11%
B. 10.0% D. 6.4% 214.Miladym Inc. paid cash dividend to its common shareholders over the past twelve months of
P2.20 per share. The current market value of the common stock is P40 per share and
209.Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per investors are anticipating the common dividend to grow at a rate of 6% per annum. The cost to
annum. The bank requires 10 percent of loan as compensating balance in its new checking issue new common stock will be 5 percent of the market value. The cost of retained earnings
account. The loan is payable at the end of 6 months. The effective interest rate if this loan is and new common stock, respectively, are
A. 28.21% C. 14.29% A. B. C. D.
B. 27.27% D. 15.38% Retained earnings 12.14% 11.83% 11.79% 12.14%
Common stock 11.83% 12.14% 12.14% 11.79%
210.Bratas Company is negotiating for a 4-month discounted loan for P200,000 at 12% per annum.
The negotiated loan requires a 20% compensating balance. What is the effective interest rate Capital Asset Pricing Model
of the loan? 215.The Capital Asset Pricing Model (CAPM) computes the expected return on a security by
A. 17.65% C. 15.59% adding the risk-free rate of return to the incremental yield of the expected market return which
B. 15.79% D. 15.00% is adjusted by the company's beta. What is MNO's expected rate of return if the equity market
is expected to earn 12 percent; the treasury bonds are currently yielding 5 percent. The beta
Cost of Capital coefficient for MNO is estimated to be 0.60. MNO is subject to an effective corporate income
Cost of Debt tax rate of 40 percent.
211. The Medium Companys bonds have 10 years remaining to maturity. Interest is paid annually; A. 12.00 percent C. 9.20 percent
the bonds have a P1,000 face value; and the coupon interest rate is 9 percent. B. 12.20 percent D. 7.20 percent
What is the estimated yield to maturity of the bonds at their current market price of P900?
A. 10.64 percent C. 8.53 percent 216.Based on the following data, compute the market return for Boxs stock:
B. 10.00 percent D. 7.50 percent Required return on Box common 15 percent
Beta coefficient 1.5
Dividend Growth Model Risk-free rate 9.0 percent
212.The dividends and stock price of Mikey Company are expected to grow at 7 percent per year A. 13.0 percent C. 25.0 percent
after this year. Mickeys common stock sells for P25 per share, its last dividend was P2.50 b. 18.0 percent D. 16.0 percent
April 16, 2005 Page 50 of 67

Weighted-Average Cost of Capital P600,000 P1,600,000

217.A firm maintains a debt/equity ratio of 1.0. The debt consists of bonds with a before tax cost of A. 11.75% 11.35%
9%. The equity consists of common stock with a cost of 18%. The marginal corporate tax rate B. 11.60% 11.35%
is 40%. What is the weighted average cost of capital? C. 11.75% 11.75%
A. 8.1% C. 10.8% D. 11.55% 11.55%
B. 9.9% D. 11.7%
Retained Earnings Breakpoint
Marginal Cost of Capital 231.Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current
218.Raiders, Inc. just paid P3.00 cash dividend per share. Over the past 5 years, Raiders capital structure is 40% debt and 60% common equity, The director of capital budgeting has
dividends averaged an 8 percent growth. The common share of Raiders currently sells at determined that the optimal capital spending for next year is P1,200,000. If Resi follows a strict
P62.50; flotation cost on common shares is P2.50 per share. residual dividend policy, what is the expected dividend payout ratio for next year?
What is the marginal cost of capital for new issues of common shares? A. 80.0% C. 40.0%
A. 13.0 percent C. 13.2 percent B. 66.7% D. 10.0%
B. 13.4 percent D. 12.8 percent
Quantitative Methods
219.The Beta Corporation asks you to determine its marginal cost of capital. Betas current capital Linear Programming
structure consists of 45 percent debt, 15 percent preferred stock and 40 percent common 232.Anderson Co. manufactures two different products, A and B. The company has 100 pounds of
equity. The separate marginal costs of the various components of the capital structure are as raw materials and 300 direct labor hours available for production. The time requirement and
follows: debt, after-tax 5.0 percent; preferred stock, 9 percent; retained earnings, 12 percent; contribution margins per unit are as follows:
and new common stock, 13.5 percent. If Beta has P15 million investible retained earnings, A B
and Beta has an opportunity to invest in an attractive project that costs P60 million, what is
Raw materials per unit (lbs) 1 2
the marginal cost of capital of Beta Corporation?
Direct labor hours per unit 4 2
A. 8.40 percent C. P9.00 percent
Contribution margin per unit P4 P5
B. 8.63 percent D. P9.88 percent
The objective function for maximizing profits and the equation for the constrain on raw
materials are:
230.The Cardinal Company sets the following capital structure for 2003:
Debt 50.0% Objective Function Constraint on raw materials
Preferred equity 10.0% A. Max P1A + P2B 4A + 2B=100
Common Equity 40.0% B. Max P4A + P5B 1A + 2B=100
The company is planning to invest in a project that requires the company P4,000,000 costs. C. Max P4A + P2B 4A + 5B=100
At the size of the new funds required, the estimated individual marginal cost of capital are: D. Min P4A + P5B 4A + 5B=300
Debt (after tax) 9.00 percent
Preferred 12.50 percent PERT-CPM
Retained earnings 14.00 percent 233.AGL Builders uses the critical path method to monitor construction jobs. The company is
Common shares 15.00 percent currently 2 weeks behind schedule on Job 501, which is the subject to P10,500 per week
What are the marginal weighted average cost of capital for Cardinal Company if it has completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and critical
available retained earnings of P600,000 and P1,600,000 respectively? path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be
Available Retained Earnings crashed
April 16, 2005 Page 51 of 67
Activities Cost to Crash 1 week Cost to Crash 2 weeks The following activities can be crashed.
BC P8,000 P15,000 Activities Cost to Crash 1 Week Cost to Crash 2 Weeks
DE P10,000 P19,600 B-C P 8,000 P15,000
EF P8,800 P18,500 D-E 10,000 19,600
AGL desires to reduce the normal completion time of Job 501 and, at the same time, report the E-F 8,800 19,500
highest possible income for the year. AGL should crash Castle desires to reduce the normal completion time of Job WW and, at the same time, report
A. Activity BC 1 week and activity EF 1 week the highest possible income for the year. Castle should crash
B. Activity BC 2 weeks A. activity B-C 1 week and activity EF 1 week
C. Activity EF 2 weeks B. activity B-C 2 weeks
D. Activity DE 1 week and activity EF 1 week C. activity D-E 1 week and activity B-C 1 week
D. activity D-E 1 week and activity E-F 1 week
234.Castle Building Company uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-per- Probabilities
week completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and 235.CTV Company has three sales departments. Department FA process about 50 percent of
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. CTVs sales, Department TA about 30 percent, and Department PA about 20 percent. In the
past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent, and 2.5
percent, respectively. A random audit of the sales records yields a recording error of sufficient
magnitude to distort the companys results. The probability that Department FA is responsible
for this error is
A. .50 C. .02
B. .33 D. .25
Expected Value
236.The following table represents payoffs for farm products for three different sales levels. Which
one of the products would be illogical if only three products can be produced?
Demand Product A Product B Product C Product D
Sales 1 (10,000) 6,000 8,000 (12,000)
Sales 2 26,000 19,000 22,000 17,000
Sales 3 31,000 38,000 33,000 37,000
A. Product A C. Product C
B. Product B D. Product D
237.MOYMOY, Inc. has been operating the concession stands at the university football stadium.
The university has had successful football teams for many years; as a result the stadium is
always full. The university is located in an area that suffers no rain during the football season.
From time to time, MOYMOY has found itself very short of hotdogs and at other times it has
April 16, 2005 Page 52 of 67

had many left. A review of the records of sales of the past five seasons revealed the following Decision Tree
frequency of hot dogs sold: 240.Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that
Total Games silver worth of P15 million can be sold. There is a 20% probability that the silver will only be
10,000 hot dogs 5 times worth P500,000. What is the maximum Express would be willing to spend to develop the
20,000 hot dogs 10 times mine?
30,000 hot dogs 20 times A. P10,000,000 C. P3,100,000
40,000 hot dogs 15 times B. P5,000,000 D. P0
50 total games
Hotdogs sell for P5.00 and cost MOYMOY P3 each. Unsold hotdogs are given to a local Learning Curve
orphanage without charge. 241.Soft, Inc. has a target total labor cost of P1,500 for the first four batches of a product. Labor is
You have started and completed constructing a payoff table (conditional profits) as follows: paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
batch take?
Stocking Actions
A. 150 hours. C. 96.0 hours
Demand 10,000 20,000 30,000 40,000
B. 58.6 hours D. 24.0 hours
10,000 P20,000 P(10,000) P(40,000) P(70,000)
20,000 20,000 40,000 10,000 (20,000)
242.Taal Company manufactures specialty components for the electronics industry in a highly labor
30,000 20,000 40,000 60,000 30,000
intensive environment. May on Company has asked Taal to bid on a component that Taal
40,000 20,000 40,000 60,000 80,000
made for May on last month. The previous order was for 80 units and required 120 hours of
What are the expected payoff of stocking 30,000 hotdogs and the expected value of perfect direct labor to manufacture. Mayon would now like 240 additional components. Taal
information? experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed
A. B. C. D. for Taal to complete 240 additional components is
Payoff of stocking 40,000 P18,000 P40,000 P40,000 P18,000 A. 360.0 C. 307.2
EV of Perfect Information P18,000 P18,000 P40,000 P40,000 B. 187.2 D. 76.8
Questions 238 & 239 are based on the following information. 243.Moss Point Manufacturing recently completed and sold an order of 50 units that had the
A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks following costs:
and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the Direct materials P 1,500
stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be Direct labor (1,000 hours @ P8.50) 8,500
P2,000. The probability of cold weather on a given day at this time is 60%. Variable overhead (1,000 hours at P4.00) *4,000
Fixed overhead **1,400
238.The expected payoff if the vendor has perfect information is *Appiied on the basis of direct labor hoars.
A. P3,900 C. P1,360 **Applrcd at the rate of 10% of variable cost
B. P2,200 D. P1,960 The company has now been requested to prepare a bid for 150 units of fee some product
If an 80 percent learning curve is applicable, Moss Point's total cost on this order would be
239.The expected payoff for selling coffee is estimated at
A. P1,360 C. P3,900 A. P26,400 C. P37,950
B. P2,200 D. P1,960 B. P31,790 D. P38,500
April 16, 2005 Page 53 of 67

244.Moss Point Manufacturing recently completed and sold an order of 50 units that had the C. A single handling of data is desired
following costs: D. Master file data are accessed randomly
Direct materials P1,500
Direct labor (1,000 hours @ P8.50) 8,500 248.Which of the following comprises all of the data components of the data processing cycle?
Variable overhead (1,000 hours at P4.00) *4,000 A. Batching, processing, output.
Fixed overhead **1,400 B. Collection, refinement, processing, maintenance, output.
P15,400 C. Input, classifying, Batching, verification, transmission
*Applied on the basis of direct labor hours. D. Collection, refinement, storing, output.
**Applied at the rate of 10% of variable costs.
The company has now been requested to prepare a bid for 350 units of the same product. 249.All activity related to a particular application in a manual system is recorded in a journal. The
If an 80 percent learning curve is applicable, Moss Points total costs on this order would be name of the corresponding item in a computerized system is a
estimated at A. master file C. transaction file
A. P26,400 C. P37,950 B. year-to-date file D. current balance file
B. P31,790 D. P54,120
250.The process of monitoring, evaluating and modifying a system as needed is referred to as
Information Systems system
245.Which of the following is not a characteristic of a batch processing system? A. Design C. Review
A. The collection of like transactions which are sorted and processed sequentially against a B. Analysis D. Maintenance
master file
B. Keypunching of transactions, followed by machine processing 5. The proper sequence of activities in the systems development life cycle is
C. The production of numerous printouts A. Design, analysis, implementation, and operation.
D. The posting of transaction, as it occurs, to several files without intermediate printouts. B. Design, implementation, analysis, and operation.
C. Analysis, design, implementation, and operation.
246.The batch processing of business transactions can be the appropriate mode when D. Programming, analysis, implementation, and operation.
A. the sequence of master file records is not relevant
B. timeliness is a major issue 251.The process of developing specifications for hardware, software, personnel hours, data
C. a single handling of the data is desired resources, and information products required to develop a system is referred to as
D. economy of scale can be gained because of high volume of transactions A. systems analysis C. systems design
B. systems feasibility D. systems maintenance
43. The least risky strategy for converting from a manual to a computerized accounts receivable
system would be a 252.The process of monitoring, evaluating, and modifying a system as needed is referred to as
A. direct conversion C. parallel conversion systems
B. pilot conversion D. data base conversion A. Analysis C. Maintenance
B. Design D. Implementation
247.The real-time processing system of business transactions cannot be the appropriate mode
when 253.An integrated set of computer programs that facilitates the creation, manipulation, and
A. Economy of scale can be gained because of high volume of transactions querying of integrated files is called
B. Timeless is a major issue A. A translator C. An operating system
April 16, 2005 Page 54 of 67
B. A Database management system D. A flat file system B. Conversion to a database system is inexpensive and can be accomplished quickly.
C. Multiple occurrences of data items are useful for consistency checking.
254.One of the first steps in the creation of a database is to D. Backup and recovery procedures are minimized.
A. define common variables and fields used throughout the firm
B. increase the secondary storage capacity,
C. obtain software that will facilitate data retrieval. Situational
D. integrate the accounting system into the data base. Cost-Volume-Profit Analysis
Questions 260 through 265 are based on the following:
255.A system with several computers that are connected for communication and data transmission Pullman Company is a small but growing manufacturer of telecommunications equipment. The
purposes but that permits each computer to process its own data is a company has no sales force of its own; rather, it relies completely on independent sales agents to
A. distributed data processing network C. decentralized network market its products. These agents are paid a commission of 15% of selling price for all items sold.
B. centralized network D. multidrop network Maui Soliman, Pullmans controller, has just prepared the companys budgeted income statement
for next year. The statement follows:
256.A major advantage of obtaining a package of application software from software vendor is
A. The likelihood of reducing the time span from planning to implementation Pullman Company
B. The ability to more easily satisfy the unique needs of users Budgeted Income Statement
C. Greater operating efficiency from the computer For the Year Ended December 31
D. The assurance the programs will be written in a high-level language. Sales P16,000,000
Manufacturing costs:
257.A major advantage of obtaining a package of applications programs from a software vendor is Variable P7,200,000
A. the likelihood of reducing the time span from planning to implementation. Fixed overhead 2,340,000 9,540,000
B. the ability to more easily satisfy the unique needs of users Gross margin 6,460,000
C. greater operating efficiency from the computer Selling and administrative costs:
D. the assurance that the programs will be written in a high-level language Commissions to agents 2,400,000
Fixed marketing costs *120,000
258.The least risky strategy for converting from a manual to a computerized accounts receivable Fixed administrative costs 1,800,000 4,320,000
system would be a Net operating income 2,140,000
A. direct conversion C. pilot conversion Less fixed interest cost 540,000
B. parallel conversion D. database conversion Income before income taxes 1,600,000
Less income tax (30%) 480,000
259.Turnaround document Net income P 1,120,000
A. Generally circulate only within the computer center *Primarily depreciation on storage facilities
B. Can be read and processed only by the computer
C. Are generated by the computer and eventually return to it As Maui handed the statement to Kim Viceroy, Pullmans president, she commented, I went ahead
D. Are only used internally in an organization and used the agents 15% commission rate in completing these statements, but weve just learned
that they refuse to handle our products next year unless we increase the commission rate to 20%.
4. Of the following, the greatest advantage of a database architecture is Thats the last straw, Kim replied angrily. Those agents have been demanding more and more,
A. Data redundancy can be reduced. and this time theyve gone too far. How can they possibly defend a 20% commission rate?
April 16, 2005 Page 55 of 67
They claim that after paying for advertising, travel, and the other costs of promotion, theres
nothing left over for profit, replied Maui. 263.Assume that Pullman Company decides to continue selling through agents and pays the 20%
I say its just plain robbery, retorted Kim. And I also say its time we dumped those guys and got commission rate. The volume of sales that would be required to generate the same net
our own sales force Can you get your people to work up some cost figures for us to look at? income as contained in the budgeted income statement for next year would be:
Weve already worked them up, said Maui. Several companies we know about pay a 7.5% A. P18,285,714 C. P19,225,000
commission to their own salespeople, along with a small salary. Of course, we would have to B. P18,368,421 D. P20,414,714
handle all promotion costs, too. We figure our fixed costs would increase by P2,400,000 per year,
but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on 264.The volume of sales at which net income would be equal regardless of whether Pullman
agents commissions. Company sells through agents (at a 20% commission rate) or employs its own sales force:
The breakdown of the P2,400,000 cost figure follows: A. P11,625,000 C. P19,200,000
Salaries: B. P12,000,000 D. P18,600,000
Sales manager P 100,000
Salespersons 600,000 265.At a sales volume level of 2,250 units, Luzon Companys contribution margin is one and one-
Travel and entertainment 400,000 half of the fixed costs of P36,000. Contribution margin is 30% How many units must be sold by
Advertising 1,300,000 the company to breakeven?
Total P2,400,000 A. 1,250 C. 2,2580
B. 1,500 D. 2,520
Super, replied Kim. And I note that the P2,400,000 is just what were paying the agents under
the old 15% commission rate. Questions 45 through 50 are based on the following information:
Its even better than that, explained Maui. We can actually save P75,000 a year because thats San Carlos operates a general hospital but rents space and beds to separate entities for
what were having to pay the auditing firm now to check out the agents reports. So our overall specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges each
administrative costs would be less. separate entity for common services to its patients like meals and laundry and for all administrative
Pull all of these number together and well show them to the executive committee tomorrow, said services such as billings, collections, etc. All uncollectible accounts are charged directly to the
Kim. With the approval of the committee, we can move on the matter immediately. entity. Space and bed rentals are fixed for the year.
For the entire year ended June 30, the Pediatrics Department at San Carlos Hospital charged each
260.What is the breakeven point in pesos for next year assuming that the agents commission rate patient an average of P650 per day, had a capacity of 60 beds, operated 24 hours per day for 365
remains unchanged at 15%? days, and had revenue of P10,676,250.
A. P10,650,000 C. P 9,000,000 Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
B. P12,000,000 D. P10,750,000 Basis of Allocation
Patient Days Bed Capacity
261.What is the breakeven point in pesos for next year assuming that the agents commission rate Dietary P 328,500
is increased to 20%? Janitorial P 118,400
A. P13,171,000 C. P13,714,286 Laundry 197,100
B. P15,000,000 D. P12,750,000 Lab, other than direct charges to patients 410,625
Pharmacy 410,625
262.What is the breakeven point in pesos for next if the company employs its own sales force? Repairs and maintenance 65,700 66,045
A. P15,000,000 C. P13,090,909 General administrative services 1,218,780
B. P12,954,545 D. P15,157,895 Rent 2,546,710
April 16, 2005 Page 56 of 67
Billings and collections 689,850 47. The number of patient days needed to cover total costs is
Bad debt expense 246,375 A. 14,780 C. 15,820
Others 114,975 240,315 B. 15,140 D. 16,080
Total P2,463,750 P4,190,250
The only personnel directly employed by the Pediatrics Department are supervising nurses, 48. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
nurses, and aides. The hospital has minimum personnel requirements based on total annual same as in the past year, what would be the increase in revenue?
patient days. Hospital requirements beginning at the minimum, expected level of operation follow: A. P994,500 C. P1,054,500
B. P877,500 D. P 897,500
Annual Patient Days Aides Nurses Supervising Nurses
10,000 14,000 21 11 4 49. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
14,001 17,000 22 12 4 per patient day is
17,001 23,725 22 13 4 A. P229,350 C. P229,650
23,726 25,550 25 14 5 B. P229,500 D. P239,350
25,551 27,375 26 14 5
27,376 29,200 29 16 6 50. What is the increased fixed cost applied for bed capacity, given the increased number of beds?
A. P1,396,750 C. P1,470,000
The staffing levels above represent full-time equivalents, and it should be assumed that the B. P1,187,238 D. P1,520,000
Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel. Questions 41 through 45 are based on the following:
Anilao Ski Company recently expanded its manufacturing capacity to allow it to product up to
Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses, 15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The
P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising nurses, sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of
nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively. either product this year. Because the models are very similar, Anilao Ski will produce only one of
the two models. The information below was compiled by the accounting department.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than Mountaineering Touring
capacity and even went as high as 20 patients more on some days. The hospital has an additional Selling price per unit P88.00 P80.00
20 beds available for rent for the coming fiscal year. Variable cost per unit 52.00 52.80
45. The contribution margin per patient day is Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if
A. P400.00 C. P500.00 the touring model is produced. Anilao Ski Company is subject to a 40% income tax rate.
B. P450.00 D. P525.00
41. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs of touring
46. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory model skis will the company have to sell?
nurses? A. 13,118 C. 13,853
A. 9,500 C. 10,250 B. 12,529 D. 4,460
B. 9,820 D. 12,000
42. The total sales revenue at which Anilao Ski Company would make the same profit or loss
April 16, 2005 Page 57 of 67
regardless of the ski model it decided to produce is Dietary P42,952

A. P880,000 C. P924,000 Janitorial P12,800
B. P422,400 D. P686,400 Laundry 28,000
Lab. Other than direct charges to patients 47,800
43. How much would the variable cost per unit of the touring model have to change before it had Pharmacy 33,800
the same breakeven point in units as the mountaineering model? Repairs and maintenance 5,200 7,140
A. P2.68/unit increase C. P5.03/unit decrease General administrative services 131,760
B. P4.53/unit increase D. P2.97/unit decrease Rent 275,320
Billings and collections 40,000
44. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring Bad debt expense 47,000
skis increases by 10%, the new breakeven point will be Other 18,048
A. 10,730 pairs P262,800 P453,000
B. 13,007 pairs
C. 12,812 pairs The only personnel directly employed by the Pediatrics Department are supervising nurses,
D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting nurses, and aides. The hospital has minimum personnel requirements based on total annual
patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
45. If the Anilao Ski Company sales department could guarantee the annual sale of 12,000 skis of Annual Patient Days Aides Nurses Supervising Nurses
either model, Anilao would 10,000 14,000 21 11 4
A. Produce touring skis because they have a lower fixed cost. 14,001 17,000 22 12 4
B. Produce only mountaineering skis because they a lower breakeven point. 17,001 23,725 22 13 4
C. Produce mountaineering skis because they are more profitable. 23,726 25,550 25 14 5
D. Be indifferent as to which model is sold because each model has the same variable cost 25,551 27,375 26 14 5
per unit. 27,376 29,200 29 16 6
Questions 266 through 272 are based on the following information:
The staffing levels above represent full-time equivalents, and it should be assumed that the
Calamba Hospital operates a general hospital but rents space and beds to separate entities fro
Pediatrics Department always employs only the minimum number of required full-time equivalent
specialized treatment such as pediatrics, maternity, psychiatrics, etc. Calamba charges each
personnel.
separate entity for common services to its patients like meals and laundry and for all administrative
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
entity. Space and bed rentals are fixed for the year.
and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses and
aides was P72,000, P169,000 and P111,000, respectively.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
days, and had revenge of P1,138,800.
estimated that during 90 of these capacity days, the demand average 17 patients more than
capacity and even went as high as 20 patients more on some days. The hospital has an additional
Expense charged by the hospital to the Pediatrics Department for the year ended June 30 were:
20 beds available for rent for the coming fiscal year.
Basis of Allocation
Patients Days Bed Capacity
April 16, 2005 Page 58 of 67
266.The variable expense per patient day is 272.What is the increased fixed cost applied for bed capacity, given the increased number of beds?
A. P15.08 C. P15.00 A. P151,000 C. P147,000
B. P12.50 D. P50.00 B. P173,950 D. P152,000
267.The contribution margin per patient day is Questions 273 thru 275 are based on the following information.
A. P49.92 C. P50.00 Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400
B. P52.50 D. P52.00 per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent. An
268.How many patient days are necessary to cover fixed costs for bed capacity and for supervisory outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays
nurses? P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash.
A. 9,500 C. 12,500 Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms.
B. 11,500 D. 10,500 Casserole increased her business between 1998 and 2001. Profits have more than doubled since
1998. Ms. Casserole does not understand why profits have increased faster than volume.
269.The number of patient days needed to cover total costs is
A. 14,200 C. 15,820 A projected income statement for the year ended December 31, 2002, prepared by the accountant
B. 15,200 D. 14,220 is shown below.
Sales P95,000
270.If the Pediatrics Department rented an additional 20 beds and all other factors remain the Cost of food sold P28,500
same as in the past year, what would be the increase in revenue? Wages & fringe benefits:
A. P99,450 C. P105,450 Restaurant help 8,150
B. P87,750 D. P89,750 Delivery help 17,300
Rent 4,800
271.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied Accounting services 3,600
per patient day is Depreciation:
A. P22,935 C. P22,965 Delivery equipment 5,000
B. P22,950 D. P23,935 Restaurant equipment 3,000
Utilities 2,325
Supplies 1,200 73,875
Net income before taxes P21,125
Income taxes (40%) 8,450
Net income P12,675
273.What is the tax shield on the non-cash fixed costs?

A. P3,200 C. P3,400
B. P14,950 D. P5,400
April 16, 2005 Page 59 of 67

274.What is the breakeven point in number of pizzas that must be sold?

A. 25,929 C. 18,150 276.For next year, the vice president would like to reduce the unit setting price by 20%. She is
B. 23,569 D. 42,114 certain that this would fill the plant to capacity. What would be the profit if the plan is
implemented?
275.What is the cash flow breakeven point in number of pizzas that must be sold? A. P 2,750 C. P 1,250
A. 19,529 C. 12,990 B. P(6,250) D. P(4,000)
B. 21,284 D. 10,773
277.For next year, the sales manager would like to increase the unit selling price by 20%, increase
Questions 276 through 280 should be answered independent of each other. They should be the sales commission to 9% of sales, and increase advertising by P100,000. Based on
answered based the following most recent income statement for OPMACO COMPANY that marketing studies, he is confident this would increase sales by one-third. What would be the
appears below: profit under this plan?
OPMACO Company A. P50,200 C. P108,000
Income Statement B. P79,000 D. P 800
For the Year Ended December 31
Sales 45,000 units @ P10 P450,000 278.The president believes it would be a mistake to change the unit selling price. Instead, he wants
Less cost of goods sold: to use less costly materials in manufacturing units of products, thereby reducing unit costs by
Direct materials P90,000 P0.70. How many units would have to be sold next year to earn a target profit of P30,200?
A. 51,220 C. 44,780
Direct labor 78,300
B. 48,000 D. 32,000
Manufacturing overhead 98,500 266,800
Gross margin 183,200 279.OPMACO Company's board of directors believes that the company's problem lies in
Less operating expenses: inadequate promotion. By how much can advertising be increased and still allow the company
Selling expenses: to earn a target return of 4.5% on sales of 60,000 units?
Variable: A. P 32,000 C. P39,200
Sales commissions P27,000 B. P152,000 D. P59,000
Shipping 5,400 32,400
Fixed (advertising, salaries) 120,000 280.The company has been approached by an overseas distributor who wants to purchase 9,500
Administrative: units on a special price basis. There would be no sales commission on these units. However,
shipping costs would be increased by 50% and variable administrative costs would be reduced
Variable (billing and other) 1,800
by 25%. In addition, a P5,700 special insurance fee would have to be paid by OPMACO
Fixed (salaries and other) 48,000 202,200
Company to protect the goods in transit. Regular business would not be disturbed by this
Net loss P(19,000) special order.
All variable expenses in the company vary in terms of unit sold, except for sales commissions, What unit price would have to be quoted on the 9,500 units by OPMACO Company to allow
which are based on peso sales. Variable manufacturing overhead is 30 centavos per unit. the company to earn a profit of P14,250 on total operations?
There were no beginning or ending inventories. OPMACO Company's plant has a capacity of A. P8.35 C. P7.35
75,000 units per year. B. P6.35 D. P9.35
The company has been operating at a loss for several years. Management is studying several
possible courses of action to determine what should be done to make next year profitable. Questions 43 through 47 are based on the following information.
April 16, 2005 Page 60 of 67
The Statement of Income of Sana, Inc., which represents the operating results for the current fiscal program costing P61,500 annually would need to be undertaken for the next two or three
year ending December 31, had sales of 1,800 tons of product during the current year. The years In addition, a P25 per ton sales commission over and above the current commission to
manufacturing capacity of Sana's facilities is 3,000 tons of product. Consider each question's the sales force in the new territory would be required. How many tons would have to be sold in
situation separately. the new territory to maintain Sana's current after-tax income of P94,500? (M)
Sales P900,000 A. 307.5 C. 273.33
Variable costs B. 1,095 D. 1,545
Manufacturing P315,000
Selling costs 180,000 47. Without prejudice to preceding questions, assume that Sana estimates that the per ton selling
Total variable costs P495,000 price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs
Contribution margin P405,000 will not change. What sales volume in pesos will be required to earn an after-tax net income of
Fixed costs P94,500 next year? (M)
Manufacturing P90,000 A. P1,140,000 C. P1,500,000
Setting 112,500 B. P825,000 D. P1,350,000
Administration 45,000
Total fixed costs P247,500 Variable & Absorption Costing
Net income before income taxes P157,500 Question Nos. 48 through 50 are based on the following information.
Income taxes (40%) (63,000) This makes no sense at all, said Tom, President of Horizon, Inc. "We sold the
Net income after income taxes P94,500 same number of units this year as we did fast year, yet our profits have more than
doubled. Who made the goof - the computer or the people who operate it?" The
43. The breakeven volume in tons of product for the year is (E) statements to which Tom was referring are shown below (absorption costing
A. 420 C. 495 basis):
B. 1,100 D. 550
2004 2005
44. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs Sales (20,000 units each year) P700,000 P700,000
stay at the same levels and amounts next year, the after-tax net income that Sana can expect Less cost of goods sold 460,000 400,000
for next year is (E) Gross margin 240,000 300,000
A. P135,000 C. P283,500 Less: Operating expenses 200,000 200,000
B. P110,250 D. P184,500 Profit P40,000 P100,000
45. Sana has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Sana's costs would be at the same levels and rates as last year. What net
income after taxes would Sana make if it took this order and rejected some business from
regular customers so as not to exceed capacity? (M)
A. P297,500 C. P211,500
V. P252,000 D. P256,500
46. Without prejudice to your answers to previous questions, and assume that Sana plans to
market its product in a new territory, Sana estimates that an advertising and promotion
April 16, 2005 Page 61 of 67
The statements above show the results of the first two years of operation. In the first year (2004), On your way to work this morning, the papers were laying on the seat of your new, red convertible. As
the company produced and sold 20,000 units. In 2005, the company again sold 20,000 units, but it you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew
increased production in order to have a stock of units on hand, as shown below: them over the edge of the bridge and into the stream below. You managed to retrieve only one
2004 2005 page, which contains the following information:
Production in units 20,000 25,000 Standard Cost Summary
Sales in unite 20,000 20,000 Direct materials, 6 pounds at P3 P18.00
Direct labor, 0.8 hours at P5 4.00
Variable production cost per unit P8 P3
Variable overhead, 0.8 hours at P3 2.40
Fixed manufacturing OH costs (total) P300,000 P300,000
Fixed overhead, 0.8 hours at P7 5.60
Horizon produces a single product. Fixed manufacturing overhead costs are applied to the product P30.00
on the basis of each years production, (Thus, a new fixed manufacturing overhead rate is
computed each year) Variable selling and administrative expense are P1 per unit sold.
Total VARIANCES REPORTED
Standard Price Spending Quantity or
48. Had the company used variable costing, the profit for each year , 2004 and 2005, would have
Cost * or Rate Or Budget Efficiency Volume
been: (E)
Direct materials P405,000 P6,900 F P9,000 U
A. P40,000, P100,000 C. P100,000, P100,000
Direct labor 90,000 4,850 U 7,000 U
B. P100,000, P40,000 D. P40,000, P40,000
Variable overhead 54,000 P1,300 F ?@
Fixed overhead 126,000 500 F P14,000 U
49. Using the absorption costing, the products unit cost for 2004 and 2005, respectively, are: (E)
* Applied to Work in process during the period
A. B. C. D. @
Figure obliterated.
2004 P8 P23 P23 P8
2005 P8 P23 P20 P9 You recall that manufacturing overhead cost is applied to production on the basis of direct labor-
hours and that all of the materials purchased during the period were used in production. Since the
50. If JIT has been in use during 2005, what would the companys net income have been under company uses JIT to control work flows, work in process inventories are insignificant and can be
absorption costing? (M) ignored.
A. P100,000 C. P20,000 It is now 8:30 A.M. The executive committee meeting starts in just one hour; you realize that to
B. P40,000 D. P60,000 avoid looking like a bungling fool you must somehow generate the necessary backup data for the
variances before the meeting begins. Without backup data it will be impossible to lead the
Standard Costing & Variance Analysis discussion or answer any questions.
Questions No. 45 through 50 are based on the following information:
You have recently graduated from a university and have accepted a position with Villar Company, the 45. How many pounds of direct materials were purchased and used in production?
manufacturer of a popular consumer product. During your first week on the job, the vice president A. 138,000 lbs. C. 132,000 lbs.
has been favorably impressed with your work. She has been so impressed, in fact, that yesterday B. 135,000 lbs. D. 137,300 lbs.
she called you into her office and asked you to attend the executive committee meeting this
morning for the purpose of leading a discussion on the variances reported for last period. Anxious 46. What was the actual cost per pound of material?
to favorably impress the executive committee, you took the variances and supporting data home A. P3.00 C. P3.05
last night to study. B. P2.95 D. P3.10
April 16, 2005 Page 62 of 67

47. How many actual direct labor hours were worked during the period? B. 1,100 D. 550
A. 18,000 C. 16,600
B. 19,400 D. 18,970 282.If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax net income that Ilongo can expect
48. How much actual variable manufacturing overhead cost was incurred during the period? for 2004 is
A. P55,300 C. P58,200 A. P135,000 C. P283,500
B. P56,900 D. P59,500 B. P110,250 D. P184,500
49. What is the total fixed manufacturing overhead cost in the companys flexible budget? 283.Ilongo has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
A. P112,500 C. P140,000 Assume that all of Ilongos costs would be at the same levels and rates as last year. What net
B. P139,500 D. P125,500 income after taxes would Ilongo make if it took this order and rejected some business from
regular customers so as not to exceed capacity?
50. What were the denominator hours for last period? A. P297,500 C. P211,500
A. 18,000 hours C. 22,000 hours B. P252,000 D. P256,500
B. 20,000 hours D. 25,000 hours
284.Ignore the facts presented in the previous questions, and assume that Ilongo plans to market
Relevant Costing its product in a new territory. Ilongo estimates that an advertising and promotion program
Questions 281 through 286 are based on the Statement of Income of Ilongo, Inc. which represents costing P61,500 annually would need to be undertaken for the next two or three years. In
the operating results for the current fiscal year ending December 31, 2003. Ilongo had sales of addition, a P25 per ton sales commission over and above the current commission to the sales
1,800 tons of product during the current year. The manufacturing capacity of Ilongos facilities is force in the new territory would be required. How many tons would have to be sold in the new
3,000 tons of product. Consider each questions situation separately. territory to maintain Ilongos current after-tax income of P94,500?
Sales P900,000 A. 307.5 C. 273.33
Variable costs B. 1,095 D. 1,545
Manufacturing P315,000
Selling costs 180,000 285.Ilongo is considering replacing a highly labor-intensive process with an automatic machine.
Total variable costs P495,000 This change would result in an increase of P58,500 annually in manufacturing fixed costs. The
Contribution margin P405,000 variable manufacturing costs would decrease P25 per ton. The new breakeven volume in tons
Fixed costs would be
Manufacturing P 90,000 A. 990 C. 1,854
Selling 112,500 B. 1,224 D. 612
Administration 45,000
Total fixed costs P247,500 286.Ignoring the facts presented in Question 285, assume that Ilongo estimates that the per ton
Net income before income taxes P157,500 selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed
Income taxes (40%) (63,000) costs will not change. What sales volume in pesos will be required to earn an after-tax net
Net income after income taxes P 94,500 income of P94,500 next year?
A. P1,140,000 C. P1,500,000
281.The breakeven volume in tons of product for the 2003 is B. P825,000 D. P1,350,000
A. 420 C. 495
April 16, 2005 Page 63 of 67
Questions 287 through 291 are based on the following information: 288.Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each
Adrenal Company has a single product called a CAD. The company normally produces and sells year. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on the
60,000 CADS each year at a selling price of P32 per unit. The companys unit costs at this level of CADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only
activity are given below: selling costs that would be associated with the order would be P3.20 per unit shipping cost.
Direct materials P10.00 What is the break-even price on this order?
Direct labor 4.50 A. P23.35 C. P28.65
Variable manufacturing overhead 2.30 B. P22.15 D. P21.70
Fixed manufacturing overhead (P300,000 total ) 5.00
Variable selling expenses 1.20 289.The company has 1,000 CADS on hand that have some irregularities and are therefore
Fixed selling expenses (P210,000 total) 3.50 considered to be seconds. Due to the irregularities, it will be impossible to sell these units at
Total cost per unit P26.50 the normal price through regular distribution channels. What unit cost figure is relevant for
setting a minimum selling price?
287.Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each year A. P16.80 C. P18.00
without any increase in fixed manufacturing overhead costs. The company could increase its B. P4.70 D. P1.20
sales by 25% above the present 60,000 units each year if it were willing to increase the fixed
selling expenses by P180,000. The increase in income if the production is increased by 25% is 290.Due to a strike in its suppliers plant, Adrenal Company is unable to purchase more material for
A. P30,000 C. P10,833 the production of CADS. The strike is expected to last for two months. Adrenal Company has
B. P2,500 D. P208 enough material on hand to continue to operate at 30% of normal levels for the two months. If
the plant were closed, fixed overhead costs would continue at 60% of their normal level during
the two-month period; the fixed selling costs would be reduced by 20% while the plant was
closed. How much is the advantage or disadvantage of closing the plant for the two-month
period?
A. Disadvantage, P144,000 C. Advantage, P144,000
B. Disadvantage, P15,000 D. Advantage, P15,000
291.An outside manufacturer had offered to produce CADS for Adrenal Company and to ship them
directly to Adrenals customers. If Adrenal Company accepts this offer, the facilities that it uses
to produce CADS would be idle; however, fixed overhead costs would be reduced by 75% of
their present level. Since the outside manufacturer would pay for all the costs of shipping, the
variable selling costs would be only two-thirds of their present amount. What is the unit cost
figure that is relevant for comparison to whatever quoted price is received from the outside
manufacturer?
A. P20.95 C. P21.35
B. P20.55 D. P16.80
Standard Costing & Variance Analysis

Questions 292 thru 297 are based on the following information.
You have recently graduated from a university and have accepted a position with Villar Company,
April 16, 2005 Page 64 of 67
the manufacturer of a popular consumer product. During your first week on the job, the vice B. 135,000 lbs. D. 137,300 lbs.
president has been favorably impressed with your work. She has been so impressed, in fact, that
yesterday she called you into her office and asked you to attend the executive committee meeting 293.What was the actual cost per pound of material?
this morning for the purpose of leading a discussion on the variances reported for last period. A. P3.00 C. P3.05
Anxious to favorably impress the executive committee, you took the variances and supporting data B. P2.95 D. P3.10
home last night to study.
On your way to work this meaning, the papers were laying on the seat of your new, red convertible. 294.How many actual direct labor hours were worked during the period?
As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew A. 18,000 C. 16,600
them over the edge of the bridge and into the stream below. You managed to retrieve only one B. 19,400 D. 18,970
page, which contains the following information:
Standard Cost Summary 295.How much actual variable manufacturing overhead cost was incurred during the period?
Direct materials, 6 pounds at P3 P18.00 A. P55,300 C. P58,200
Direct labor, 0.8 hours at P5 4.00 B. P56,900 D. P59,500
Variable overhead, 0.8 hours at P3 2.40
Fixed overhead, 0.8 hours at P7 5.60 296.What is the total fixed manufacturing overhead cost in the company's flexible budget?
P30.00 A. P112,500 C. P140,000
Total VARIANCES REPORTED B. P139,500 D. P125,500
Standard Price or Spending Quantity or Volume
Cost* Rate Or Efficiency 297.What were the denominator hours for last period?
Budget A. 18,000 hours C. 22,000 hours
Direct materials P405,000 P6,900 F P9,000 U B. 2.0,000 hours D. 25,000 hours
Direct labor 90,000 4,850 U 7,000 U
Variable overhead 54,000 P1,300 F ?@ Capital Budgeting
Fixed overhead 126,000 500 F P14,000 U Questions 298 through 301 are based on the following information:
Pinewood Craft Company is considering the purchase of two different items of equipment, as
* Applied to Work in process during the period
described below:
@ Figure obliterated.
You recall that manufacturing overhead cost is applied to production on the basis of direct Machine A. A compacting machine has just come onto the market that would permit Pinewood
labor-hours and that all of the materials purchased during the period were used in production. Craft Company to compress sawdust into various shelving products. At present the sawdust is
Since the company uses JIT to control work flows, work in process inventories are insignificant disposed of as a waste product. The following information is available on the machine:
and can be ignored. A. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-
It is now 8:30 A.M. The executive committee meeting starts in just one hour, you realize that to year useful life. The company uses straight-line depreciation and considers salvage value in
avoid looking like a bungling fool you must somehow generate the necessary "backup" data for computing depreciation deductions.
the variances before the meeting begins. Without backup data it will be impossible to lead the B. The shelving products manufactured from use of the machine would generate revenues of
discussion or answer any questions. P300.000 per year. Variable manufacturing costs would be 20% of sales.
C. Fixed expenses associated with the new shelving products would be (per year): advertising,
292.How many pounds of direct materials were purchased and used in production? P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800.
A. 138,000 lbs. C. 132,000 lbs.
April 16, 2005 Page 65 of 67
Machine B. A second machine has come onto the market that would allow Pinewood Craft Emong de Leon, the nervous accountant, spilled a cup of coffee over the annual financial
Company to automate a sanding process that is now done largely by hand. The following statements for Bathala Company. Luckily, though the content of the financial statements were
information is available. unreadable, the notes that he had developed had been still intact.
A. The new sanding machine would cost P234,000 and would have no salvage value at the end He recalled that the balance sheet contained his favorite numbers (the first two digits) that
of its 13-year useful life. The company would use straight-line depreciation on the new suggested his ages when he got married, when he passed the CPA examination, and his present
machine. age, respectively, as follows:
B. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a
scrap value of P9,000. Current Liabilities P320,000
C. The new sanding machine would provide substantial annual savings in cash operating costs. It Sales P4,200,000
would require an operator at an annual salary of P16,350 and P3,400 in annual maintenance Interest expense P80,000
costs. The current, hand-operated sanding procedure costs the company P78,000 per year in
total. The following additional information were among the notes that he had developed when he had
finalized the financial statements:
Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases.
Also, the company will not purchase equipment unless the equipment has a payback period of 4.0 1. All sales during the year were on account.
years or less. (In all the following questions, please ignore income tax effect)
2. There was no change in the number of shares of common stock outstanding during the year.
298.The expected income each year from the new shelving products (Machine A) is:
A. P52,500 C. P240,000 3. The interest expense on the income statement relates to the bonds payable; the amount of
B. P84,000 D. P 92,500 bonds outstanding did not change during the year.
299.The annual savings in cost if Machine B is purchased is 4. Selected balances at the beginning of the current fiscal year were:
A. P56,250 C. P43,250 Accounts receivable P 270,000
B. P38,250 D. P21,750 Inventory 360,000
Total assets 1,800,000
300.The simple rates (%) of return for Machine A and Machine B are: 5. Selected financial ratios computed from the unreadable financial statements for the
A. B. C. D. current year are:
Machine A 12.5 20.0 12.5 20.0 Earnings per share P2.30
Machine B 17.0 17.0 16.4 16.4 Debt-to-equity ratio 0.875 to 1
Accounts receivable turnover 14.0 times
301.The payback periods (years) for Machine A and Machine B are: Current ratio 2,75 to 1
A. B. C. D. Return on total assets (using net Operating income) 18.0%
Times interest earned 6.75 times
Machine A 4.5 5.0 4.5 5.0
Acid test ratio 1.25 to 1
Machine B 4.0 4.0 4.2 4.2
Inventory turnover 6.5 times
Financial Statement Analysis The selected balances and amounts that are to be included in the balance sheet and income
Questions 46 thru 50 are based on the following information. statement for the current year are:
April 16, 2005 Page 66 of 67
46. Accounts receivable

A. 300,000 C. 330,000
B. 270,000 D. 240,000
47. Inventory
A. 360,000 C. 420,000
B. 320,000 D. 480,000
48. Total liabilities

A. 1,120,000 C. 2,400,000
B. 1,280,000 D. 800,000
49. Cost of goods sold

A. 2,730,000 C. 2,420,000
B. 1,470,000 D. 2,940,000
50. Total assets

A. 2,100,000 C. 3,000,000
B. 2,400,000 D. 4,200,000
April 16, 2005 Page 67 of 67

CPA Review School of the Philippines Final Pre-board Examination

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MANAGEMENT ADVISORY SERVICES CPA Review School of the Philippines Final Pre-board Examination

Overview 3. The following are characteristics of financial accounting, except?

April 16, 2005 Page 1 of 67

10. Examples of unit level activities are Just-in-Time Manufacturing System

B. P1.67 D. P5.00 A. Graph 2 C. Graph 4

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April 16, 2005 Page 5 of 67

Setups 1,000 80 results:

April 16, 2005 Page 7 of 67

Variable Fixed Variable costs P600,000

Total period costs incurred .70,000 Direct labor 40

D. Engineering standards based on attainable performance A. P430,200 C. P555,200

Direct materials Variable Overhead

A. P18.75 C. P16.25 Materials price variance unfavorable (based on purchases) P 3,600

Budgeted output 4,800 unit per month

A. P1,900 Unfavorable C. P700 Unfavorable Sale in units 10,000 9,500

December 85,000 Basic Concepts

A. rate of return on stockholders equity C. income from operations

Excess Capacity Other information

April 16, 2005 Page 33 of 67

April 16, 2005 Page 34 of 67

End-of-life Cash Flow

April 16, 2005 Page 40 of 67

B. 268,496 D. 256,428 Internal rate of return 11% 13% 14% 15%

Accounts payable 80,000 B. P42,000 D. P66,000

C. The length of time for which credit is extended. B. P3,125,000 D. P5,000,000

April 16, 2005 Page 49 of 67

April 16, 2005 Page 50 of 67

Weighted-Average Cost of Capital P600,000 P1,600,000

April 16, 2005 Page 52 of 67

April 16, 2005 Page 53 of 67

regardless of the ski model it decided to produce is Dietary P42,952

273.What is the tax shield on the non-cash fixed costs?

April 16, 2005 Page 59 of 67

274.What is the breakeven point in number of pizzas that must be sold?

April 16, 2005 Page 62 of 67

Standard Costing & Variance Analysis

46. Accounts receivable

48. Total liabilities

49. Cost of goods sold

50. Total assets

April 16, 2005 Page 67 of 67

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