310944139-CPAR-MAS-Compilation.doc

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Overview Management advisory services 1. The primary purpose of management advisory services is to A. conduct special studies, preparation of recommendations, development of plans and programs, and provision of advice and assistance in their implementation. 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 organization. D. earn the best rate of return on resources entrusted to its care with safety of investment being taken into account and consistent with the firm's social and legal responsibilities. 1. The following characterize management advisory services except A. involve decision for the future B. broader in scope and varied in nature C. utilize more junior staff than senior members of the firm D. relate to specific problems where expert help is required 2. Which of the following is not classifiable as a management advisory service by CPA? A. Systems design. C. Make or buy analysis. B. Project feasibility study. D. Assistance in budget preparation. 2. Which of the following statement is false? A. CPA’s provide management services to go around the ethical constraints as mandated by the Accountancy Act. B. Businesses hire management consultants to help define specific problems and develop solutions C. Included in the practice of consulting is the provision of confidential service in which the identity of the client is concealed D. CPA’s performing management services may be considered to be in the practice of management consulting Management accounting & financial accounting 1. Which of the following characteristics is inherent to management accounting? A. Reporting of historical information B. Compliance to generally accepted accounting principles C. Contribution approach income statement D. External users of financial report April 16, 2005

Final Pre-board Examination

3. The following are characteristics of financial accounting, except? A. Reporting of historical information B. Compliance to generally accepted accounting principles C. Contribution approach income statement D. External users of financial report 4

The following are inherent to either management accounting or financial accounting: 1. External report 2. Historical information 3. Contribution approach income statement 4. Generally accepted accounting principles 5. Prospective financial statements Which of the foregoing are related to management accounting and financial accounting respectively? A. B. C. D. Management Accounting 1, 2, 5 3, 5 2, 3 3 Financial Accounting 3, 4 1, 2, 4 1, 4, 5 1, 2, 4, 5

5. The costing method that is properly classified for both external and internal repotting purposes is External reporting Internal reporting Activity-based costing Yes Yes Variable costing Yes No Process costing No Yes Standard costing Yes No Quality Costs 6. The cost of statistical quality control in a product quality cost system is A. training cost C. appraisal cost B. internal failure cost D. prevention cost Activity-based Costing 7. The last step in activity-based costing is to A. identity the major activities that pertain to the manufacture of specific products B. allocate manufacturing overhead costs to activity cost pools C. Identify the cost drivers that accurately measure each activity’s contribution to the finished product Page 1 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

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 hour to produce the same unit. Labor cost is P150 per hour. McMd's value-added, and non value-added costs would be A. P150 and P0 C. P150 and P300 B. P0 and P150 D. P450 and P0

8. Designing and redesigning are activities that are classified as A. Facility level C. Unit level B. Batch level D. Product level 9. The examples of activities at the product level include A. scheduling, setting up, and moving C. heating, lighting, and security B. designing, changing, and advertising D. cutting, painting, and packaging 1. Examples of activities at the batch level of costs include A. scheduling, setting up, and moving C. heating, lighting, and security B. designing, changing, and advertising D. cutting, painting, and packaging 2. Scheduling, setting up, and moving are examples of activities that are classified as A. Batch level C. Unit level B. Product level D. Facility level 10. Examples of unit level activities are A. scheduling, setting up, and receiving B. designing, changing, and advertising

C. heating, lighting, and security D. cutting, painting, and packaging

3. An example of a nonvolume-related overhead base would be: A. Direct materials cost C. Direct Labor cost B. Machine hours D. Number of inspections

6. Direct material cost

April 16, 2005

B. 1, 4, 5 2, 3, 6

C. 1, 2, 3, 4, 5 6

13. Moon Company makes two products, Alpha and Beta. Alpha is being introduced this period, 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 engineering change orders. Alpha and Beta are expected to require eight and two change orders, respectively. Alpha and Beta are expected to require 2 and 3 machine hours, 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 and Beta, respectively, are A. P2.40 and P3.60, respectively C. P4.80 and P1.20, respectively B. P3.60 and P2.40, respectively D. P1.20 and P4.80, respectively Just-in-Time Manufacturing System 14. Which of the following is not a typical characteristic of a just-in-time (JIT) production environment? A. Lot sizes equal to one C. Push-through system B. Insignificant set up times and costs D. Balanced and level workloads Cost Behavior Variable Costs 6. Total production costs for Jordan, Inc. are budgeted at P2,300,000 for 50,000 units of budgeted output and P2,800,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s budgeted variable cost per unit of output? A. P 7.50 C. P30.00 B. P16.00 D. P62.50

11. Classify the following as volume (unit) base or non-volume (activity) base: 1. Number of purchase orders issued 2. Direct labor hours 3. Number of machine hours 4. Number of set ups 5. Number of receiving reports issued A. Volume (Unit) Base 1, 4, 5, 6 Non-volume (Activity) Base 2, 3

Final Pre-board Examination

D. 2, 3, 6 1, 4, 5

15. Total production costs for Carera, 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 facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for P50,000 units. How much is Carera’s budgeted variable cost per unit of output? A. P1.60 C. P3.00 Page 2 of 67

MANAGEMENT ADVISORY SERVICES B. P1.67

CPA Review School of the Philippines D. P5.00

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 facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 50,000 units. How much is Laguna’s total budgeted variable cost at 60,000 units? A. P96,000 C. P180,000 B. P100,200 D. P100,000 16. Mulvey Company derived the following cost relationship from a regression analysis of its monthly manufacturing overhead cost: C = P80,000 + P12M Where C = monthly manufacturing overhead cost M = machine hours The standard error of the estimate of the regression is P6,000. The standard time required to manufacture one six-unit case of Mulvey's angle product is 4 machine hours. Mulvey applies manufacturing overhead to production on the basis of machine hours and its normal annual production is 50,000 cases Mulvey's estimated variable manufacturing overhead cost for a month in which scheduled production is 5,000 cases would be A. P80,000 C. P240,000 B. P320,000 D. P360,000 1. Which of the following graphs illustrates the behavior of a total variable cost? (E) Graph 1 Graph 2

Total units produced

Total units produced

Graph 3

Graph 4

Total units produces

Total units produced

April 16, 2005

A. Graph 2 B. Graph 3

Final Pre-board Examination C. Graph 4 D. Graph 1

Fixed Costs

9. Parts Company wishes to determine the fixed portion of its maintenance expense (a semi-variable expense), as measured against direct labor hours for the first three months of the year. The inspection costs are fixed; the adjustments necessitated by errors found during inspection account for the variable portion of the maintenance costs. Information for the first quarter is as follows: Direct Labor Hours Maintenance Costs January 34,000 P61,000 February 31,000 58,500 March 34,000 61,000 What is the fixed portion of Parts Company’s maintenance expense, rounded to the nearest pesos? A. P28,330 C. P37,200 B. P32,780 D. P40,800 5. Largo Company wishes to determine the fixed portion of its maintenance expense (a semivariable expense), as measured against direct labor hours for the first three months of the year. Information for the first quarter is as follows: Direct Labor Hours Maintenance Costs January 25,000 P210,000 February 30,000 240,000 March 27,000 222,000 What is the fixed portion of Largo Company’s maintenance expense? A. P60,000 C. P90,000 B. P30,000 D. P120,000 Total Costs 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. Indirect labor costs included in this planning budget are: Page 3 of 67

MANAGEMENT ADVISORY SERVICES A. P300,000 B. P390,000

CPA Review School of the Philippines C. P 90,000 D. P115,000

8. Arens Corporation has developed the following flexible budget formula for annual indirect labor costs: Total Cost = P480,000 + P5.00 per machine hour Operating budgets for the current month are based upon 20,000 machine hours of planned machine time. Indirect labor costs included in this planning budget are: A. P 48,333 C. P100,000 B. P580,000 D. P140,000 2. Boy & Millie Company uses an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Boy & Millie’s budgeted overhead for the month is A. P12,800 C. P 84,800 B. P18,800 D. P774,000 2. Saldua Company uses a monthly cost formula for overhead of P50,000 + P30.00 for each direct labor hour worked. For the coming year, Saldua plans to manufacture 200,000 units. Each unit requires five minutes of direct labor. Saldua’s total budgeted overhead for the coming year is A. P 550,000 C. P1,200,000 B. P1,100,000 D. P 650,000 6. The following cost functions were developed for manufacturing overhead

costs: Manufacturing Overhead Costs Cost Function Electricity P100 + P20 per direct labor hour Maintenance P200 + P30 per direct labor hour Supervisors’ salaries P10,000 per month Indirect materials P16 per direct labor hour If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated manufacturing overhead costs would be A. P109,300 C. P76,300 B. P99,000 D. P10,366 7. El Noche, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, April 16, 2005

Final Pre-board Examination

70% of the rooms are occupied each day. The company’s operating costs are P21 per occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure 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. What would be the expected operating costs, assuming that the occupancy rate increases to 60% during November? A. P1,056,000 C. P846,000 B. P756,000 D. P829,500 Cost-Volume-Profit Relationship Basic Concepts 2. With the aid of computer software, managers can vary assumptions regarding selling prices, costs, and volume and can immediately see the effects of each change on the break-even point and profit. Such an analysis is called: (E) A. "What if" or sensitivity analysis C. computer aided analysis B. vary the data analysis D. data gathering Breakeven Analysis – Single Product Sales Amount 20. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even volume? A. P120,000 C. P225,000 B. P200,000 D. P450,000

Units Sold 18. At a sales volume level of 2,250 units, Luzon Company’s contribution margin is one and onehalf of the fixed costs of P36,000. Contribution margin is 30%. How many units must be sold by the company to breakeven? A. 1,250 C. 2,580 B. 1,500 D. 2,520 8. At 40,000 units of sales, Snail Company had an operating loss of P3.00 per unit. When sales were 70,000 units, the company had a profit of P1.20 per unit. The number of units to breakeven is A. 35,000 C. 52,500 B. 45,000 D. 57,647 Page 4 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

9. Gala Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per 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 and selling expenses of P292,000). There are no beginning inventories. If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in wages and salaries would increase the number of units required to breakeven to A. 152,423 C. 175,617 B. 143,875 D. 129,938

Final Pre-board Examination

Madel is subject to 40 percent income tax rate, and annual fixed cost are P6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last five years. In 2001, a significant change in Madel’s production technology caused a 10% increase in annual fixed cost and a 20% unit cost increase in the direct labor component as a result of higher skilled direct labor. However, this change permitted the replacement of a costly imported component with a local component. The effect was to reduce unit material costs by 25%. There has been no change in the Walastik selling price. The annual sales units required for Madel to breakeven are: A. B. C. D. 2000 22,000 22,000 14,000 14,000 2001 20,840 22,407 22,407 20,840

10. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows: Selling price per pair of sunglasses P25.00 Variable costs per pair of sunglasses: Raw materials P11.00 Direct labor 5.00 Manufacturing overhead 2.50 Selling expenses 1.30 Total variable costs per unit P19.80 Annual fixed costs: Manufacturing overhead P192,000 Selling and administrative 276,000 Total fixed costs P468,000 Forecasted annual sales volume (120,000 pairs) P3,000,000 Income tax rate 40% Glareless Company estimates that its direct labor costs will increase 8 percent next year. How many units will Glareless have to sell next year to reach breakeven? A. 97,500 units C. 83,572 units B. 101,740 units D. 86,250 units

Selling Price 8. The BEDANs is planning its annual Riverboat Extravaganza. The Extravaganza committee has assembled the following expected costs for the event: Dinner per person P 70 Programs and souvenir per person 30 Orchestra 15,000 Tickets and advertising 7,000 Riverboat rental 48,000 Floor show and strolling entertainment 10,000 The committee members would like to charge P300 per person for the evening’s activities. Assuming that only 250 persons are expected to attend the extravaganza, what ticket price must be charged to breakeven? A. P420 C. P350 B. P320 D. P390

22. Madel Company manufactures a single electronic product called Walastik. Walastik sells for P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik device. Direct labor P180 Direct materials 240 Factory overhead 105 Selling costs 75 Total variable costs P600

Breakeven Analysis – Multiple Product 23. In calculating the break-even point for a multi-product company, which of the following assumptions are commonly made when variable costing is used? I. Sales volume equals production volume II. Variable costs are constant per unit III. A given sales mix is maintained for all volume changes A. I and II C. II and III B. I and III D. I, II, and III

Unit Sales April 16, 2005

Page 5 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

3. Phipps Co. sells two products, Arks and Bins. Last year. Phipps sold 12,000 units of Arks and 28,000 units of Bins, Related data are: Product Unit Selling Price Unit Variable Cost Unit Contribution Margin Arks P120 P80 P40 Bins 80 60 20 Assuming that last year's fixed costs totaled P910,000, what was Phipps Co.'s break-even point in units? (E) A. 40,000 C. 35,000 B. 12,000 D. 28,000

Sales Amount 24. Bush Electronics, Inc. had the following sales results for 2004: TV sets CD player Peso sales component ratio 0.30 0.30 Contribution margin ratio 0.40 0.40 Bush Electronics, Inc. had fixed costs of P2,400,000. The break even sales in pesos for Bush Electronics, Inc. are: A. B. C. TV sets P1,800,000 P1,800,000 P1,500,000 CD player P1,800,000 P1,800,000 P1,500,000 Radios P3,600,000 P1,600,000 P2,000,000 4. The manager of Salvacion Store reviewed the following data: Fruits Meat Contribution margin ratio 40% 50% Sales mix in pesos 20% 30% Fixed costs, P1,290,000 per month. The breakeven sales for each month is A. P1,677,000 C. P4,500,000 B. P3,000,000 D. P6,000,000

Radios 0.40 0.60

D. P1,531,915 P1,531,915 P2,042,553

Canned Products 40% 50%

Breakeven Analysis – Cash Basis 16. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and 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, however, it will be useless at the end of 1 year and will have no salvage value. The selling April 16, 2005

Final Pre-board Examination

price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break even on a cash flow basis is A. 4,500 units C. 1,800 units B. 5,000 units D. 36,000 units 11. Ms Makiling started a canteen in 2002. For this purpose a space was rented for P4,000 per month. Two women were hired to work full time at the canteen and six college students were hired to work 30 hours per week delivering value meals. This level of employment has been 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 purchased with cash. Ms. Makiling has noticed that expenses for utilities and supplies have been rather constant. Ms. Makiling increased her business between 2002 and 2005. Profits have more than doubled since 2002. Ms. Makiling does not understand why profits have increased faster than volume. A projected income statement for the year ended December 31, 2005, prepared by the accountant, is shown below: Sales (each P25) P950,000 Cost of food sold P285,000 Wages & fringe benefits: Restaurant help 81,500 Delivery help 173,000 Rent 48,000 Accounting services 36,000 Depreciation: Delivery equipment 50,000 Restaurant equipment 30,000 Utilities 23,250 Supplies 12,000 738,750 Net income before taxes P211,250 Income taxes (40%) 84,500 Net income P126,750 What is the cash flow breakeven point sales that must be sold? A. P488,215 C. P324,750 B. P533,929 D. P269,325 Breakeven Analysis - ABC 15. Perla Company had the following information. Page 6 of 67

MANAGEMENT ADVISORY SERVICES Activity Driver Unit Variable Cost Units sold P40 Setups 1,000 Engineering hours 60 Other data: Total fixed costs (traditional) Total fixed costs (ABC) Unit selling price What is the breakeven point using ABC? A. 10,000 units. C. 5,000 units. B. 15,000 units. D. 8,750 units.

CPA Review School of the Philippines Level of Activity Driver 80 2,000 P400,000 P150,000 P80

Profit Planning Selling Price 21. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00. The selling price should be A. P1.60 C. P2.40 B. P2.10 D. P2.50 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 is computed by adding a 10% markup to full cost. How much should the selling price be per unit for 100,000 units? A. P55. C. P61 B. P60. D. P66 29. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and 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 last year was P5,040. Donnelly's expectation for the coming year include the following:  The sales price of the T-shirts will be P9  Variable cost to manufacture will increase by one-third  Fixed costs will increase by 10%  The income tax rate of 40% will be uncharged The selling price that would maintain the same contribution margin rate as last year is A. P9.00 C. P10.00 B. P8.25 D. P9.75 April 16, 2005

Final Pre-board Examination

23. Larz Company produces a single product. It sold 25,000 units last year with the following results: Sales P625,000 Variable costs P375,000 Fixed costs 150,000 525,000 Net income before taxes P100,000 Income taxes 40,000 Net income P 60,000 In an attempt to improve its product in the coming year, Larz is considering replacing a 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 cost P18,000 with a useful life of 6 years and no salvage value. The company uses straightline depreciation on all plant assets. If Larz wishes to maintain the same contribution margin ratio after implementing the changes, what selling price per unit of product must it charge next year to cover the increased material costs? A. P27.00 C. P32.50 B. P25.00 D. P28.33

Additional unit sales 25. In 2001 Lucia Company had a net loss of P8,000. The company sells one product with a selling price of P80 and a variable cost per unit of P60. In 2002, the company would like to earn a before-tax profit of P40,000. How many additional units must the company sell in 2002 than it sold in 2001? Assume that the tax rate is 40 percent. A. 1,600 C. 2,400 B. 2,000 D. 5,400 Unit sales 36. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable 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 necessary to generate an operating profit of P48,000? A. P1,350,000 C. P1,135,000 B. P486,425 D. P910,000 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 Page 7 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

units. The contribution margin is 20%. How many units must be sold to realize net income from this product of P1,000,000? A. 266,667 C. 833,333 B. 533,333 D. 666,667 18. Lindsay Company reported the following results from sales of 5,000 units of product A for June: Sales P200,000 Variable costs (120,000) Fixed costs ( 60,000) Operating income P 20,000 Assume that Lindsay increases the selling price of product A by 10% on July. How many units of product A would have to be sold in July to generate an operating income of P20,000? A. 4,000 C. 4,500 B. 4,300 D. 5,000 20. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows. The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00 per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of 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. How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is 40%) A. 10,700 C. 20,000 B. 12,100 D. 28,300 41. Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring model. The Sales Department assures management that it can sell between 9,000 pars and 13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will produce only one of the two models. The following information was compiled by the Accounting Department. Per Unit (Pairs) Data Mountaineering Touring Selling price P88.00 P80.00 Variable costs 52.80 52.80 April 16, 2005

Final Pre-board Examination

Fixed cost will total P369,600 if the mountaineering model is produced but will be only P316,800 if the touring model is produced. Siberian ski is subject to a 40% income tax rate. If Siberian Ski Company desires an after tax net income of P24,000, how many pairs of touring model skis will the company have to sell? A. 13,118 C. 13,853 B. 12,529 D. 4,460

Sales amount 5. DJH Company has sales of P360,000, variable costs of P216,000, and fixed costs of P150,000. To earn a 10% return on sates, DJH must have sales of (E) A. P375,000 C. P440,000 B. P470,000 D. P500,000 26. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable 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 necessary to generate an operating profit of P48,000? A. P1,350,000 C. P1,135,000 B. P486,425 D. P910,000 32. Mount Park, Inc. had the following economic information for the year 2002: Sales (50,000 units @ P20) P1,000,000 Variable manufacturing costs 400,000 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 increased competition; hence, an additional P75,000 advertising costs is budgeted in order to maintain its sales target for 2003. What is the amount of peso sales needed for 2003 in order to equal the after-tax income in 2002? A. P1,125,000 C. P1,187,500 B. P1,325,000 D. P1,387,500 27. Mount Park, Inc. had the following economic information for the year 2002: Sales(50,000 units @ P20) Variable manufacturing costs Fixed costs Income tax rate

P1,000,000 400,000 250,000 40 percent Page 8 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

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 maintain its sales target for 2003. What is the amount of peso sales needed for 2003 in order to equal the after-tax income in 2002? A. P1,125,000 C. P1,187,500 B. P1,325,000 D. P1,387,500 26. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is considering opening on Sundays. The annual incremental fixed costs of Sunday openings are estimated at P41,600. Six-Two’s 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 open on Sundays. The one-day volume of Sunday sales that would be necessary for Six-Two to attain the same weekly operating income as the current six-day week is A. P6,000 C. P7,500 B. P5,000 D. P8,000 5. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is considering opening on Sundays. The annual incremental fixed costs of Sunday openings are estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two estimates that 60 percent of its Sunday sales to customers would be made on other days if the stores were not open on Sundays. The one-day volume of Sunday sales that would be necessary for SixTwo to attain the same weekly operating income as the current six-day week is A. P6,000 C. P7,500 B. P5,000 D. P4,500 10. Camay Company is a grocery store that is currently open only Monday through Saturday. Camay Company is considering opening on Sundays. The annual incremental costs of Sunday openings are estimated at P31,200. Camay’s gross margin on sales is 25 percent. Camay estimates that 75 percent of its Sunday sales to customers would be made on other days if the store were not open on Sundays. The one-day volume of Sunday sales that would be necessary for Camay to attain the same weekly operating as the current six-day week is A. P2,400 C. P9,600 B. P3,200 D. P9,984 28. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and slogans. Last year, the shirts sold for P7.50 each, and the variable cost to manufactures them April 16, 2005

Final Pre-board Examination

was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income last year was P5,040. Donnelly’s expectation for the coming year include the following:  The sales price of the T-shirts will be P9  Variable cost to manufacture will increase by one-third  Fixed costs will increase by 10%  The income tax rate of 40% will be unchanged If Donnelly wishes to earn P22,500 in net income for the coming year, the company’s sales volume in pesos must be A. P213,750 C. P207,000 B. P257,625 D. P229,500 25. Madden, Company has projected its income before taxes for next year as shown below. Madden is subject to a 40% income tax rate. Sales (160,000 units) P8,000,000 Cost of sales Variable costs P 2,000,000 Fixed costs 3,000,000 5,000,000 Income before taxes P 3,000,000 Madden’s net assets are P36,000,000. The peso sales that must be achieved for Madden to earn a 10 percent after tax return on assets would be A. P8,800,000 C. P12,000,000 B. P16,000,000 D. P6,880,000

Unit variable cost 31. Story Manufacturing incurs an annual fixed cost of P250,000 in producing and selling "Tales" Estimated unit sales for 2000 are 125,000. An after-tax income of P75,000 is desired by management. The company projects its income tax rate at 40%. What is the maximum amount that Story can expend for variable costs per unit and still meet its profit objective if the sale price per unit is projected at P6? A. P3.37 C. P3.00 B. P3.59 D. P3.70

Unit Contribution Margin 28. The following relates to Gloria Corporation, which produced and sold 50,000 units during a recent accounting period: Sales Income tax rate

P850,000 40% Page 9 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Variable Fixed Manufacturing cost 140,000 210,000 Selling & administrative expense 45,000 300,000 For the next accounting period, if production and sales are expected to be 40,000 units, the company should anticipate a contribution margin per unit of A. P1.00. C. P3.10 B. P13.30. D. P7.30

Contribution Margin Ratio 29. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a 10% increase over last year. For the company to increase income by P15,000 in the coming year, the marginal contribution margin rate must be A. 20% C. 40% B. 30% D. 70% Total Fixed Costs 30. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell 100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are 70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000, what must the total fixed costs be? A. P80,000 C. P240,000 B. P90,000 D. P600,000 Operating income 32. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6 and total fixed costs are P12,000. At this selling price, the company earns a profit equal to 10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed costs and variable costs per unit remain unchanged. If the selling price were reduced to P9 per unit, the profit would be A. P3,000 C. P5,000 B. P4,000 D. P6,000 33. Wilson Co. prepared the following preliminary forecast concerning product G for next year assuming no expenditure for advertising: Selling price per unit P 10 Units sales 100,000 April 16, 2005

Final Pre-board Examination

Variable costs P600,000 Fixed costs P300,000 Based on a market study in December of this year, Wilson estimated that it could increase the unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent on advertising. Assuming that Wilson incorporates these changes in its forecast, what should be the operating income from product G? A. P175,000 C. P205,000 B. P190,000 D. P365,000 27. Below is an income statement for Bender Co. for 2000: Sales P400,000 Variable costs (125,000) Contribution margin P275,000 Fixed costs (200,000) Profit before tax P75,000 Assuming that the fixed costs are expected to remain at P200,000 for 2001, and the sales price per unit and variable costs per unit are also expected to remain constant, how much profit before tax will be produced if the company anticipates 2001 sales rising to 130% of the 2000 level? A. P97,000 B. P195,000 C. P157,500 D. A prediction cannot be made from the information 34. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commission on each pair of shoes sold. Sales personnel also receive a small basic salary. The following cost and revenue data relate to Store 21 and are typical of the company’s many sales outlets: Selling price P 800 Variable expenses: Invoice costs P360 Sales commission 140 500 Fixed expenses per year: Rent P1,600,000 Advertising 3,000,000 Page 10 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Salaries 1,400,000 Total P6,000,000 The company is considering paying the store manager a P60 commission on each pair of shoes sold in excess of break-even point. If this change were made, what will be the store’s before tax profit or loss assuming 23,500 pairs of shoes are sold in a year? A. P(360,000) C. P840,000 B. P2,930,000 D. P1,330,000

Change in operating income 30. Machan Co.’s year-end income statement is as follows: Sales (20,000 units) P360,000 Variable costs 220,000 Contribution margin P140,000 Fixed costs 105,000 Net income P35,000 Management is unhappy with the results and plans to make some changes for next year. If management implements a new marketing program, fixed costs are expected to increase by P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by 15 percent. What is the effect on income if the foregoing changes are implemented? A. decrease of P21,200 C. increase of P13,800 B. increase of P1,800 D. increase of P14,800 31. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and 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 2000 by A. 100% C. 20% B. 80% D. 50% Sensitivity Analysis Change in breakeven point 19. The following data relate to Homer Company which sells a single product: Unit selling price P 20.00 Purchase cost per unit 11.00 Sales commission, 10% of selling price 2.00 Monthly fixed costs P80,000 The firm’s salespersons would like to change their compensation from a 10 percent April 16, 2005

Final Pre-board Examination

commission to a 5 percent commission plus P20,000 per month in salary. They now receive only commission. The change in compensation plan should change the monthly breakeven point by A. 1,071 Increase C. 1,538 Increase B. 1,071 Decrease D. 1,538 Decrease

Contribution margin 34. If fixed costs increase while variable cost per unit remains constant, the contribution margin will be A. Lower C. Unchanged B. Higher D. Unpredictable 21. Paperbacks Publishing Co. projected the following information for next year: Selling price per unit Variable cost per unit Total fixed costs What is the profit when one unit more than the breakeven point is sold? A. P500 C. P5,000,500 B. P200 D. P2,000,200

P500 P300 P2,000,000

Fixed costs 4. DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of P1,100,000. Total fixed costs are (M) A. P 0 C. P420,000 B. P200,000 D. P900,000 35. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. During the current month when the units sales are expected to be only 45,000, there is a loss of P1.25 per unit. Both the variable cost per unit and total costs remain constant. The fixed costs amounted to A. P80,000 C. P247,500 B. P360,000 D. P210,000 6. Aloha, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms are occupied each day. The company’s operating costs are P21 per occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure contains both variable and fixed cost elements. During October, the occupancy dropped to only 45 percent. A total of P792,000 in operating cost was incurred during the month. Page 11 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during November? A. P1,056,000 C. P846,000 B. P 756,000 D. P829,500

Change in fixed costs 33. The following data apply to Cross Corporation for the year 2004: Total variable cost per unit P3.50 Contribution margin/sales 30% Breakeven sales (present volume) P1,000,000 Cross wants to sell an additional 50,000 units at the same selling price and contribution margin. By how much can fixed costs increase to generate a gross margin equal to 10% of the sales value of the additional 50,000 units to be sold? A. P50,000 C. P67,500 B. P57,500 D. P125,000 9. Santos Company is planning its advertising campaign for next year and has prepared the following budget data based on a zero advertising expenditure: Normal plant capacity 200,000 units Sales 150,000 units Selling price P25 per unit Variable manufacturing costs P15 per unit Fixed manufacturing costs P800,000 Fixed selling and adm costs P700,000 An advertising agency claims that an aggressive advertising campaign would enable Santos to increase its unit sales by 20%. What is the maximum amount that Santos Company can pay for advertising and have an operating profit of P200,000 next year? A. P100,000 C. P300,000 B. P200,000 D. P550,000 37. The Rizal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their place of business to the downtown area. Likewise it is anticipating that the selling price per unit and the variable expense will not change. At present, the sales volume necessary to breakeven is P750,000 but with the expected increase in fixed costs, the sales volume necessary to breakeven would go up to P975,000. Based on these projections, what would be the total fixed costs after the increase of P78,750? A. P341,250 C. P183,750 B. P262,500 D. P300,000 April 16, 2005

Final Pre-board Examination

38. MS operates a chain of shoe stores around the metropolitan city. MS stores carry many styles of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in their sales efforts, the company pays a substantial sales commissions on each pair of shoes sold. Sales personnel also receive a minimum basic salary. The following cost and revenue data typical of the company’s many sales outlets: Selling price P800 Variable expenses: Invoice costs P360 Sales commission 140 P500 Fixed expenses per year: Rent P1,600,000 Advertising 3,000,000 Salaries 1,400,000 Total P6,000,000 The company is considering paying the store manager a P60 commission on each pair of shoes sold in excess of break-even point. If this change were made, what will be the store’s before tax profit or loss assuming 23,000 pairs of shoes are sold in a year? A. P 720,000 C. P 920,000 B. P(480,000) D. P(680,000) 7. Candyman Company is a wholesale distributor of candy. The company services grocery, convenience, and drug stores in Metro Manila. Small but steady growth in sales has been achieved by the company over the past few years while candy prices have been increasing. The company is formulating its plans for the coming fiscal year. Presented below are the data used to project the current year’s after-tax net income of P110,400. Average selling price P4.00 per box Average variable costs Cost of candy P2.00 per box Selling expenses 0.40 per box Total P2.40 per box Annual fixed costs Selling P160,000 Administrative 280,000 Total fixed costs P440,000 Expected annual sales volume (390,000 boxes) P1,560,000 Page 12 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Manufacturers of candy have announced that they will increase prices of their products an average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts, etc.) and labor costs. Candyman Company expects that all other costs will remain at the same rates or levels as the current year. Candyman is subject to 40 percent tax rate. If net income after taxes is to remain the same after the cost of candy increases but no increase in the sales price is made, how many boxes of candy must Candyman sell? A. 480,000 C. 503,225 B. 423,385 D. 443,871

Final Pre-board Examination

39. BM Motors Inc. employs 40 sales personnel to market its line of luxury automobiles. The average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors is considering a change to a commission arrangement that would pay each salesperson a salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson. The amount of total car sales at which BM Motors would be indifferent as to which plan to select is A. P22,500,000 C. P24,000,000 B. P30,000,000 D. P12,000,000

Indifference Point Units sold 40. Dulce, Inc. owns and operates a chain of food centers. The management is considering installing machines that will make popcorn on the premises. These machines are available in two different sizes with the following details. Economy Regular Annual capacity 20,000 50,000 Costs: Annual machine rental P60,000.00 P82,500.00 Popcorn cost per box 3.90 3.90 Cost of each box 0.80 0.80 Other variable cost per box 6.60 4.20 The level of output in boxes at which the Economy and the Regular would earn the same profit (loss) is A. 20,000 boxes C. 9,375 boxes B. 15,000 boxes D. 12,500 boxes

10. Blue Ski Company recently expanded its manufacturing capacity to allow it to produce up to 15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of either product this year. Because the models are very similar, Blue Ski will produce only one of the two models. The information below was compiled by the accounting department. Mountaineering Touring Selling price per unit P880.00 P800.00 Variable costs per unit P528.00 P528.00 Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only P3,168,000 if the touring model is produced. Blue Ski is subject to a 40% income tax rate. The total sales revenue at which Blue Ski Company would make the same profit or loss regardless of the ski model it decided to produce is 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 Purchase cost per unit 11.00 Sales commission, 10% of selling price 2.00 Monthly fixed costs P80,000 The firm’s salespersons would like to change their compensation from a 10 percent commission to a 5 percent commission plus P20,000 per month in salary. They now receive only commissions. At what sales volume would the two compensation plans be indifferent? A. 12,500 C. 20,000 B. 22,222 D. 22,860

Margin of Safety 9. The following information pertains to Dove Corporation for the year ending December 31, 2000: Budgeted sales P1,000,000 Breakeven sales 700,000 Budgeted contribution margin 600,000 Cashflow breakeven 200,000 Dove’s margin of safety is A. P300,000 C. P500,000 B. P400,000 D. P800,000

Sales amount April 16, 2005

Breakeven point 42. Russini, Inc. had the following economic data for 2004: Page 13 of 67

MANAGEMENT ADVISORY SERVICES Net sales Contribution margin Margin of safety What is Russini's breakeven point in 2004? A. P360,000 B. P320,000

CPA Review School of the Philippines P400,000 P160,000 P 40,000 C. P288,000 D. P 80,000

Current sales 6. If a business had a margin of safety ratio of 20%. variable costs of 75% of sales, fixed costs of 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) A. P1,200,000 C. P1,260,000 B. P1,040,00 D. P1,020,000 6. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent, and tax rate of 40 percent. If fixed costs amount to P320,000, how much sales did Pansipit make for the year? A. P1,066,667 C. P1,000,000 B. P1,280,000 D. P 800,000

Fixed costs 7. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales and fixed costs constant every month. If the tax rate is 40 percent, how much is the annual fixed costs? (M) A. P36,000 C. P432,000 B. P90,000 D. P360,000

Final Pre-board Examination

B. Firm S will lose more profit than Firm D. C. Firm D and Firm S will lose the same amount of profit. D. Neither Firm D nor Firm S will lose profit. 44. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a 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? A. P250,000 C. P500,000 B. 200 percent D. 40 percent 46. Signal Co. manufactures a single product. For 2000, the company had a sales of P90,000, variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and 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 2000 by A. 100% C. 20% B. 80% D. 50% Absorption Costing & Variable Costing Variable Costing 47. Which of the following statements is true for a firm that uses variable (direct) costing? A. The cost of a unit of product changes because of changes in the number of units manufactured B. Profits fluctuate with sales C. An idle facility variation is calculated D. Product costs include “direct” (variable) administrative costs

Operating Leverage 43. A very high operating leverage indicates that a firm A. has high fixed cost C. has high variable costs B. has high net income D. is operating close to its breakeven point

48. Which of the following is not true of variable costing? A. Profits may increase though sales decrease B. Profits fluctuate with sales C. The cost of the product consists of all variable production costs 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 large amounts of direct tabor. Firm S has replaced direct labor with investment in machinery. Projected sales for both firms are fifteen percent less than in the prior year. Which statement regarding projected profits is true? A. Firm D will lose more profit than Firm S.

21. The following information was extracted from the first year of absorption-based accounting records of NOLI Co. Total fixed costs incurred .P100,000 Total variable costs incurred 50,000 Total period costs incurred .70,000

April 16, 2005

Page 14 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Total variable period costs incurred 30,000 Units produced 20,000 Units sold 12,000 Unit sales Price P 12 Based on variable costing, if NOLI Company had sold 12,001 units instead of 12,000, its income before taxes would have been A. P 9.50 higher C. P8.50 higher B. P11.00 higher D. P8.33 higher 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 units to set its standard costs. Coo began the year with 1,000 unite in inventory, produced 11,000 units, and sold 11,500 units. The standard cost of goods sold under variable costing would be A. P115,000 C. P242,000 B. P138,000 D. P253,000 Absorption Costing 15. When a firm prepares financial reports by using absorption costing A. profits will always increase with increase in sales B. profits will always decrease with decreases in sales C. profits may decrease with increased sales even if there is no change in selling prices and costs D. decreased output and constant sales result in increased profits 18. West Co.’s 2000 manufacturing costs were as follows: Direct materials and direct labor P 700,000 Other variable manufacturing costs 100,000 Depreciation of factory building and manufacturing equipment 80,000 Other fixed and manufacturing overhead 18,000 What amount should be considered product cost for external reporting purposes? A. P 700,000 C. P880,000 B. P800,000 D. P898,000 16. Toshiba Company incurred the following costs in manufacturing desk calculators: Direct materials Indirect materials (variable) Direct labor April 16, 2005

. P70 20 40

Final Pre-board Examination

Indirect labor (variable) Other variable factory overhead Fixed factory overhead Variable selling expenses Fixed selling expenses During the period, the company produced and sold 1,000 units. What is the inventory cost per unit using absorption costing? A. P520 C. P420 B. P350 D. P310

30 50 140 100 70

50. Colger Company manufacture a single product using standard costing. Variable production costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of 12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under absorption costing would be A. P115,000 C. P242,000 B. P132,000 D. P253,000 51. The Trinkets Company estimated the following data for the coming year: Fixed manufacturing costs Variable production costs per peso of sales Materials Direct labor Variable overhead Variable selling costs per peso of sales Trinkets estimates its sales for the coming year to be P2,000,000. The expected costs of goods sold for the coming year is A. P1,265,000 C. P1,115,000 B. P1,565,000 D. P700,000

P565,000 P0.125 0.150 0.075 0.150

52. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each year. The predicted and actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor hours, respectively. 2004 2005 Sales in units 25,000 25,000 Selling price per unit P10 P10 Direct materials and direct labor per unit P5 P5 Page 15 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

The company assumes that the long-run production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2004 and 2005 was P60,000. Assume that it takes one direct labor hour to make one finished unit. When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005, respectively, are A. P75,000 and P75,000 C. 75,000 and P55,000 B. P125,000 and P125,000 D. P75,000 and P50,000 14. Apo Company’s variable costing income statement for August appears below: Sales (P15 per unit) P600,000 Less variable costs: Variable cost of goods sold: Beginning inventory P 72,000 Add variable cost of goods manufactured 315,000 Goods available for sale 387,000 Less ending inventory 27,000 Variable cost of goods sold 360,000 Variable selling expenses 80,000 Total variable costs 440,000 Contribution margin 160,000 Fixed costs: Fixed manufacturing P 105,000 Fixed selling and administrative 35,000 Total fixed costs 140,000 Net income P 20,000 The company produces 35,000 units each month. Variable production costs per unit and total fixed costs have remained constant over the past several months. Using the absorption costing method, the peso value of the company’s inventory on August 31 and the absorption income, respectively, would be A. B. C. D. Inventory Value P27,000 P27,000 P36,000 P36,000 Absorption Income P35,000 P 5,000 P 5,000 P35,000 54. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is from the financial records of the company for the year.  Total manufacturing costs were P2,500,000  Costs of goods of manufactured was P2,425,000  Applied factory overhead was 30 percent of total manufacturing costs April 16, 2005

Final Pre-board Examination

 Factory overhead was applied to production at a rate of 80% of direct labor cost  Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31 What are the amounts/value of the following cost elements and inventory? Direct labor Direct materials Work-in-process inventory A. P750,000 P750,000 P225,000 B. P937,500 P812,500 P225,000 C. P937,500 P812,500 P300,000 D. P750,000 P750,000 P300,000 Variable & Absorption Costing 55. Lord Industries manufactures a single product. Variable production costs are P10 and fixed production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units. The volume variance under each product costing are: A. B. C. D. Under Absorption Costing P3,750 P3,750 P7,500 P7,500 Under Variable Costing 0 7,500 3,750 0 56. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products are as follows: Direct Materials P4.00 Direct labor 6.00 Factory overhead Variable 3.00 Fixed (based on a normal capacity of 10,000 units) 2.00 Total 15.00 Beginning inventory Production Units sold (selling price P50) Actual costs: Direct materials Direct labor Variable overhead Fixed Variable selling and adm.

2,000 units 8,000 units 7,000 units P35,000 50,000 23,000 18,000 60,000 Page 16 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Fixed selling and adm. 35,000 Variances are closed to cost of sales monthly How much are the net income under absorption costing and variable costing methods? A. B. C. D. Absorption P144,000 P143,000 P144,000 P142,000 Variable P143,000 P144,000 P142,000 P144,000 Variable vs. Absorption Costing 8. Absorption costing differs from variable costing in that (M) A. standards can be used with absorption costing/ but not with variable costing. B. absorption costing inventories are more correctly valued, C. production influences income under absorption costing, but not under variable costing. D. companies using absorption costing have lower fixed costs. 12. A manufacturing firm presently has total sales of P1,000,000. If its sales rise, its A. net income based on variable costing will go up more than its net income based on absorption costing. B. net income based on absorption costing will go up more than its net income based on variable costing. C. fixed costs will also rise. D. per unit variable costs will rise. 9. Which of the following is(are) closely related to variable costing than to absorption costing? (M) 1. Predetermined fixed overhead 5. Gross margin 2. Unit sales 6. Volume variance 3. Production units 7. Cost behavior 4. Contribution margin 8. Management accounting A. 1, 2, 4, 6, 7, 8 C. 1, 3, 4, 7, 8 B. 2, 4, 7, 8 D. 1, 3, 5, 6 57. The level of production affects income; under which of the following methods? A. Absorption costing C. both absorption and variable costing B. variable costing D. neither absorption nor variable costing 10. Under which inventory costing method could increases or decreases in income from operations be misinterpreted to be the result of operating efficiencies or inefficiencies? (M) A. Variable costing C. Incremental costing B. Absorption costing D. Differential costing April 16, 2005

Final Pre-board Examination

Reconciliation of Variable & Absorption Costing Income 11. York Company had P200,000 income using absorption costing. York has no variable manufacturing costs. Beginning inventory was P15,000 and ending inventory was P22,000. Income under variable costing would have been (M) A. P178,000 C. P193,000 B. P200,000 D. P207,000 58. Simple Corp. produces a single product. The following cost structure applied to their first year of operations, 2000: Variable costs: SG&A P2.00 per unit Production 4.00 per unit Fixed Costs (total cost incurred for the year) SG&A P14,000 Production P20,000 Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800 There was no beginning or ending work-in-process inventory. How much larger or smaller would Simple Corp.'s income be if it uses absorption rather than variable costing? A. The absorption costing income would be P6,000 larger B. The absorption costing income would be P6,000 smaller C. The absorption costing income would be P4,800 larger D. The absorption costing income would be P4,000 smaller 59. The following information has been extracted from P Co.’s financial records for its first year of operations: Units produced 10,000 Units sold 7,000 Variable cost per unit: Direct materials P8 Direct labor 9 Factory overhead 3 SG&A 4 Fixed costs: Manufacturing overhead P70,000 SG&A 30,000 Based on absorption costing, P Co.’s income in its first year of operations will be A. P21,000 higher than it would be under variable costing Page 17 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

B. P70,000 higher than it would be under variable costing C. P30,000 higher than it would be under variable costing D. Higher than it would be under variable costing, but the exact difference cannot be determinable from this information 60. Valyn Corporation employs an absorption costing system for internal reporting purposes; however, the company is considering using variable costing. Data regarding Valyn's planned and actual operations for the 2001 calendar year are presented below. Planned activity Actual activity Beginning finished goods inventory in units 35,000 35,000 Sales in units 140,000 125,000 Production in units 140,000 130,000 The planned per unit cost figures shown in the next schedule were based on the estimated production and sale of 140,000 units in 2001. Valyn uses a predetermined manufacturing overhead rate for applying manufacturing overhead to its product; thus, a combined manufacturing overhead rate of P9.00 per unit was employed for absorption costing purposes in 2001. Any over-or under applied manufacturing overhead is closed to the cost of goods sold account at the end of the repotting year. Planned costs Incurred Per unit Total Costs Direct materials P12.00 P1,680,000 P1,560,000 Direct labor 9.00 1,260,000 1,170,000 Variable manufacturing overhead 4.00 560,000 520,000 Fixed manufacturing overhead 5.00 700,000 715,000 Variable selling expenses 8.00 1,120,000 1,000,000 Fixed selling expenses 7.00 980,000 980,000 Variable administrative expenses 2.00 280,000 250,000 Fixed administrative expenses 3.00 420,000 425,000 Total P50.00 P7,000,000 P6,620,000 The 2001 beginning finished goods inventory for absorption costing purposes was valued at the 1998 planned unit manufacturing cost, which was the same as the 2001 planned unit manufacturing cost. There are no work-in-process inventories at either the beginning or the end of the year. The planned and actual unit selling price for 2001 was P70.00 per unit The difference between Valyn Corporations 2001 operating income calculated on the absorption costing basis and calculated on the variable costing basis was A. P65,000 C. P40,000 B. P25,000 D. P90,000 April 16, 2005

Final Pre-board Examination

Standard Costing & Variance Analysis Basic Concepts 12. Normal costing and standard costing differ in that (M) A. the two systems can show different overhead budget variances. B. only normal costing can be used with absorption costing. C. the two systems show different volume variances if standard hours do not equal actual hours. D. normal costing is less appropriate for multiproduct firms. 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. B. A flexible budget includes all costs, a static budget includes only fixed costs. C. A flexible budget gives different allowances for different levels of activity, a static budget does not D. There is no difference between the two. Standard Setting 63. Which of the following statements about the selection of standards is true? A. Ideal standards tend to extract higher performance levels since they give employees something to live up to. B. Currently attainable standards may encourage operating inefficiencies. C. Currently attainable standards discourage employees from achieving their full performance potential. D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus causing a decline in performance. 64. The best basis upon which costs standards should be set to measure controllable production inefficiencies is A. Engineering standards based on ideal standards B. Normal capacity C. Recent average historical performance D. Engineering standards based on attainable performance 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 product? A. Average historical performance for the last several years. Page 18 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

B. Engineering estimates based on ideal performance. C. Engineering estimates based on attainable performance. D. The hours per unit that would be required for the present workforce to satisfy expected demand over the long run.

Direct materials 14. Dahl Company, a clothing manufacturer uses a standard costing system. Each unit of a finished product contains 1.6 yards of cloth. However there is unavoidable waste of 20% calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3 per yard. The standard direct material cost for cloth per unit of finished product is: (M) A. P4.80 C. P7.00 B. P6.00 D. P7.50 16. Each finished unit of Spring contains 60 pounds of raw material. The manufacturing process must provide for a 20% waste allowance. The raw material can be purchased for P2.50 a pound under terms of 2/10, n/30. The company takes all cash discounts. The standard direct material cost for each unit of Spring is A. P180.00 C. P183.75 B. P187.50 D. P176.40 17. Agusan Company uses a standard costing system in connection with manufacture of a “one size fits all” article of clothing. Each unit of finished product contains 2 yards of direct material. However, a 20% direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct material is P150 per yard. The standard direct material cost per unit of finished product is A. P240 C. P360 B. P300 D. P375 66. T Company purchased 340,000 pounds of material at a cost of P510,000. The materials price variance was unfavorable by P34,000. During the year, 300,000 pounds of this material was requisitioned for production. The materials quantity variance was unfavorable by P11,200. The standard cost of materials that should have been used in production was A. P430,200 C. P555,200 B. P551,500 D. 408,800 67. Derby Co. uses a standard costing system in connection with the manufacture of a line of Tshirts. Each unit of finished products contains 2 yards of direct material. However, a 20 percent April 16, 2005

Final Pre-board Examination

direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct materials is P120 per yard. The standard direct material cost per unit of finished products is A. P192 C. P240 B. P288 D. P300

Variable Overhead 21. The per-unit standard cost for variable overhead is normally based on which of the following: A. The standard quantity of an input factor used in a unit of product. B. The actual variable overhead cost incurred at the achieved level of production. C. The budgeted total cost for variable overhead divided by the number of units expected to be produced. D. The ratio of fringe benefits to the basic cost of labor. Total Overhead 68. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of 30,000 direct labor hours. Direct materials P800,000 Direct labor 600,000 Variable manufacturing overhead 360,000 Fixed manufacturing overhead 288,000 What is the total manufacturing overhead application rate id the Relevant Company has to operate at 80 percent of the stated capacity? A. P24.00 C. P24.60 B. P27.00 D. P21.60 69. ABC Company is preparing a flexible budget for 2004 and the following maximum capacity estimates for the manufacturing division are available: Direct labor hours 60,000 hours Variable factory overhead P600,000 Fixed manufacturing overhead P300,000 Assume that ABC’s expected capacity is 80% of maximum capacity. What would be the total factory overhead rate, based on direct labor hours, in a flexible budget at expected capacity? A. P18.75 C. P16.25 B. P14.25 D. P15.00 19. Serafin Company is preparing a flexible budget for 2004 and the following maximum capacity estimates for Assembly Department are available: Page 19 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Direct labor hours 80,000 hours Variable factory overhead P640,000 Fixed manufacturing overhead P300,000 Assume that Serafin’s expected capacity is 75% of maximum capacity. What would be the total factory overhead rate, based on direct labor hours, in a flexible budget at expected capacity? A. P13.00 C. P11.75 B. P15.67 D. P11.00 Materials Variance Price variance 70. Information on Energy’s direct material costs for October is as follows: Actual quantity of direct materials purchased and used Actual cost of direct materials Unfavorable direct materials usage variance Standard quantity of direct materials allowed for May production For the month of October, Energy’s direct materials price variance was: A. P3,000 favorable C. P2,000 unfavorable B. P2,000 favorable D. P2,000 favorable 11. Information on Mirriam’s direct material costs for May is as follows: Actual quantity of direct materials purchased and used Actual cost of direct materials Unfavorable direct materials usage variance Standard quantity of direct materials allowed for May production For the month of May, Mirriam’s direct materials price variance was: A. P2,800 favorable C. P6,000 unfavorable B. P2,800 unfavorable D. P6,000 favorable

30,000 lbs. P92,000 P 3,000 29,000 lbs

30,000 lbs. P84,000 P 3,000 29,000 lbs

Quantity Variance 15. Cox Company's direct material costs for the month of January were as follows: Actual quantity purchased 18,000 kilograms Actual unit purchase price P 3.60 per kilogram Materials price variance unfavorable (based on purchases) P 3,600 Standard quantity allowed for actual production 16,000 kilograms Actual quantity used 15,000 kilograms For January there, was a favorable direct material quantity variance of: (M) A. P3,360 C. P3,400 April 16, 2005

B. P3,375

Final Pre-board Examination D. P3,800

Standard quantity 71. Ramie has a standard price of P5.50 per pound for materials. July's results showed an unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066 pounds were used in production, what was the standard quantity allowed for materials? A. 1,104 C. 1,074 B. 1,066 D. 1,100 18. The Bohol Company uses standard costing. The following data are available for October: Actual quantity of direct materials used 23,500 pounds Standard price of direct materials P2 per pound Material quantity variance P1,000 unfavorable The standard quantity of material allowed for October production is A. 23,000 lbs C. 24,500 lbs B. 24,000 lbs D. 25,000 lbs

Units produced 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 and a P3,735 favorable usage variance. If there were no changes in the component of inventory, how many units of finished product were produced? A. 994 units C. 1,725 units B. 1,160 units D. 828 units Mix & Yield Variance 73. Xtra Klean manufactures a cleaning solvent. The company employs both skilled and unskilled 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 and 2 hours of unskilled labor. The solvent requires 2 different materials: A and B. The standard and actual material information is given below: Standard: Material A: 30.25 GALLONS @ P1.25 per gallon Material B: 24.75 gallons @ P2.00 per gallon Actual: Material A: 10,716 gallons purchased and used @ P1.50 gallon Material B: 17,484 gallons purchased and used @ P1.90 per gallon Page 20 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Skilled labor hours: 1,950 @ P11.90 per hour Unskilled labor hours: 1,300 @ P7.15 per hour During the current month Xtra Klean manufactured five hundred 55-gallon drums. (Round all answers to the nearest whole peso) What are the total materials mix variance and material yield variance? A. B. C. D. Mix P3,596 U P3,596 F P4,864 F P4,864 U Yield P1,111 U P1,111 F P2,670 F P2,670 U

76. Information on Ulan Company’s direct labor costs is as follows: Standard direct labor rate Actual direct labor rate Standard direct labor hours Direct labor usage variance – unfavorable What were the actual hours worked, rounded to the nearest hour? A. 21,914 C. 21,120 B. 20,714 D. 21,200

Labor Variance Labor rate variance 74. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual output for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor expense. Direct labor hours of 6,375 were actually worked during the month. Variance analysis of the performance for the month of May would show a(n) A. favorable material quantity variance of P7,500 B. unfavorable direct labor efficiency variance of P1,275 C. unfavorable material quantity variance of P7,500 D. unfavorable direct labor rate variance of P1,275

12. Information on Rita Company’s direct labor costs is as follows: Standard direct labor rate Actual direct labor rate Standard direct labor hours Direct labor usage variance – unfavorable What were the actual hours worked, rounded to the nearest hour? A. 11,914 C. 11,120 B. 10,714 D. 11,200

Actual hours 16. The standards for direct labor for a product are 2.5 hours at P8 per hour. Last month, 9,000 units of the product were made and the labor efficiency variance was P8,000 F. The actual number of hours worked during the past period was: (M) A. 23,500 C. 20,500 B. 22,500 D. 21,500 75. Stars Company uses a standard cost system. Information about its direct labor costs for Product Mars for the month of April follows: Standard hours allowed for actual production 1,500 Actual hourly rate paid P61.00 Standard hourly rate P60.00 Labor efficiency variance, Favorable P6,000 How many direct labor hours were actually worked during the month of April? A. 1,400 C. 1,498 B. 1,402 D. 1,600 April 16, 2005

Final Pre-board Examination P7.50 P7.00 20,000 P8,400

P 3.75 P 3.50 10,000 P 4,200

Standard hours allowed 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 labor hour level is P27,000. During April material purchases were P241,900. Actual direct-labor costs incurred were P140,700. The direct-labor usage variance was P5,100 unfavorable. The actual average wage rate was P0.20 lower than the average standard wage rate. The company uses a variable overhead rate of 20% of standard direct-labor cost for flexible budgeting purposes. Actual variable overhead for the month was P30,750. What were the standard hours allowed during the month of April? A. 50,250 C. 48,550 B. 58,625 D. 37,520 Standard rate 77. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage rate? A. P8.94 C. P7.94 B. P8.00 D. P7.80 Page 21 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Two-Way Overhead Variance Budget or Controllable Variance

The manufacturing overhead controllable variance for November is A. P13,000 unfavorable C. P3,000 favorable B. P10,000 favorable D. P4,000 favorable

22. Which of the following are considered controllable variance? VOH Spending Total Overhead Budget Volume

A. Yes Yes Yes

B. No No Yes

C. No Yes No

Final Pre-board Examination

D. Yes Yes No

78. If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the standard hours allowed is P15,600, then the overhead controllable variance is A. P600 F C. P1,600 F B. P2,200 U D. P1,600 U 17. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of actual production are as follows: Standard cost Fixed overhead (based on 10,000 hours) 3 hours @ P.80 per hour Variable overhead 3 hours @ P2 per hour Actual cost Total variable cost P18,000 Total fixed cost P8,000 The amount of the factory overhead controllable variance is (M) A. P2,000 unfavorable C. P0 B. P3,000 favorable D. P3,000 unfavorable 15. GMA Company employs a standard absorption system for product costing. The standard cost of its product is as follows: Direct materials P14.50 Direct labor (2 direct labor hours at P8) 16.00 Manufacturing overhead ( 2 DLH at P11) 22.00 The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours. Joker planned to produce 25,000 units each month during the year. The budgeted annual manufacturing overhead is: Variable P3,600,000 Fixed 3,000,000 During November, GMA produced 26,000 units. GMA used 53,500 direct labor hours in November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000 fixed and P325,000 variable. April 16, 2005

79. Calma Company uses a standard cost system. The following budget, at normal capacity, and the actual results are summarized for the month of December: Direct labor hours 24,000 Variable factory OH P 48,000 Fixed factory OH P108,000 Total factory OH per DLH P 6.50 Actual data for December were as follows: Direct labor hours worked 22,000 Total factory OH P147,000 Standard DLHs allowed for capacity attained 21,000 Using the two-way analysis of overhead variance, what is the controllable variance for December? A. P3,000 Favorable C. P 9,000 Favorable B. P5,000 Favorable D. P10,500 Unfavorable

Volume Variance 13. The unfavorable volume variance may be due to all but which of the following factors? (M) A. failure to maintain an even flow of work B. machine breakdowns C. unexpected increases in the cost of utilities D. failure to obtain enough sales orders 20. How will a favorable volume variance affect net income under each of the following methods? A. B. C. D. Absorption Reduce Reduce Increase Increase Variable No effect Increase No effect Reduce 80. The fixed overhead application rate is a function of a predetermined "normal" activity level. If standard hours allowed for good output equal this predetermined activity level for a given period, the volume variance will be A. zero B. favorable C. unfavorable Page 22 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

D. either favorable or unfavorable, depending on the budgeted overhead 18. The standard factory overhead rate is P7.50 per machine hour (P6.20 for variable factory overhead and P1.30 for fixed factory overhead) based on 100% capacity of 80,000 machine hours. The standard cost and the actual cost of factory overhead for the production of 15,000 units during August were as follows: Actual: Variable factory overhead P360,000 Fixed factory overhead 104,000 Standard hours allowed for units produced: 60,000 hours at P7.50 450,000 What is the amount of the factory overhead volume variance? (M) A. P12,000 unfavorable C. P14,000 unfavorable B. P12,000 favorable D. P26,000 unfavorable 81. Hero Company uses a flexible budget system and prepared the following information for the year: Percent of Capacity 80 Percent 90 Percent Direct labor hours 24,000 27,000 Variable factory overhead P 54,000 P 60,750 Fixed factory overhead P108,000 P 108,000 Total factory overhead rate per DLH P6.75 P6.25 Hero operated at 80 percent of capacity during the year, but applied factory overhead based on the 90 percent capacity level. Assuming that actual factory overhead was equal to the budgeted amount of overhead, how much was the overhead volume variance for the year? A. P12,000 unfavorable C. P16,750 unfavorable B. P12,000 favorable D. P16,750 favorable 82. Meteor Company employs a standard absorption system for product costing. The standard cost of its product is as follows: Direct materials P14.50 Direct labor (2 direct labor hours at P9) 18.00 Manufacturing overhead ( 2 DLH at P12) 24.00 The manufacturing overhead rate is based upon the annual normal activity level of 600,000 direct labor hours. Meteor planned to produce 25,000 units each month during the year. The budgeted annual manufacturing overhead is: April 16, 2005

Final Pre-board Examination

Variable P4,200,000 Fixed 3,000,000 During November, Meteor produced 26,000 units. Meteor used 53,500 direct labor hours in November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000 fixed and P325,000 variable. The manufacturing overhead volume variance for November is A. P10,000 unfavorable C. P5,000 unfavorable B. P10,000 favorable D. P5,000 favorable

Budgeted Overhead 83. Karla Company use an annual cost formula for overhead of P72,000 + P1.60 for each direct labor hour worked. For the upcoming mouth Karla plans to manufacture 96,000 units. Each unit requires five minutes of direct labor. Karla's budgeted overhead for the month is A. P12,800 C. P84,800 B. P18,800 D. P774,000 Budgeted fixed costs 84. CTV Company has a standard feed cost of P6 per unit. At an actual production of 8,000 units a favorable volume variance of P 12,000 resulted. What were total budgeted fixed costs? A. P36,000 C. P60,000 B. P48,000 D. P75,000 23. The Arayat Company makes and sells a single product and uses standard costing. During January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units of product. The standard cost card for one unit of product includes the following: Variable factory overhead: 3.0 DLHs @ P4.00 per DLH. Fixed factory overhead: 3.0 DLHs @ P3.50 per DLH For January, the company incurred P22,000 of actual fixed overhead costs and recorded a P875 favorable volume variance. The budgeted fixed overhead overhead cost for January is A. P31,500 C. P32,375 B. P30,625 D. P33,250

Normal Capacity 85. South Company has total budgeted fixed costs of P75,000. Actual production of 19,500 units resulted in a P3,000 favorable volume variance. What normal capacity was used to determine the fixed overhead rate? A. 16,500 C. 20,313 Page 23 of 67

MANAGEMENT ADVISORY SERVICES B. 18,750

CPA Review School of the Philippines D. 20,325

Questions 86 & 87 are based on the following information. Lucky Company sets the following standards for 2003: Direct labor cost (2 DLH @ P4.50) P9.00 Manufacturing overhead (2 DLH @ P7.50) 15.00 Lucky Company plans to produce its only product equally each month. The annual budget for overhead costs are: Fixed overhead P150,000 Variable overhead 300,000 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 overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.) 86. The amount of overhead volume variance for Lucky Company is A. P250 unfavorable C. P750 unfavorable B. P500 unfavorable D. P375 unfavorable 87. The controllable overhead variance was A. P505 favorable B. P505 unfavorable

C. P245 favorable D. P245 favorable

Three-Way Overhead Variance 88. The following data are the actual results for Bustos Company for the month of May: Actual output 4,500 units Actual variable overhead P360,000 Actual fixed overhead P108,000 Actual machine time 14,000 MH Standard cost and budget information for Bustos Company follows: Standard variable overhead rate P6.00 per MH Standard quantity of machine hours 3 hours per unit Budgeted fixed overhead P777,600 per year Budgeted output 4,800 unit per month The overhead efficiency variance is A. P3,000 Favorable C. P5,400 Favorable B. P3,000 Unfavorable D. P5,400 Unfavorable 26. The Suez Company has standard variable costs as follows: April 16, 2005

Final Pre-board Examination

Materials, 3 pounds at P4.00 per pound P12.00 Labor, 2 hours P10.00 per hour 20.00 Variable overhead, P7.50 per labor hour 15.00 Total P47.00 During September Suez Company produced 6,000 units, using 11,560 labor hours at a total wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead variances are: A. B. C. D. Spending P1,900 F P1,900 U P1,400 F P1,400 U Efficiency P3,300 U P3,300 F P1,900 F P1,900 F Questions 24 & 25 are based on the following information. Richard Company employs a standard absorption system for product costing. The standard cost of its product is as follows: Raw materials P14.50 Direct labor (2 DLH x P8) 16.00 Manufacturing overhead (2 DLH x P11) 22.00 Total standard cost P52.50 The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours. Richard planned to produce 25,000 units each month during the year. The budgeted annual manufacturing overhead is: Variable P3,600,000 Fixed 3,000,000 P6,600,000 During November, Richard produced 26,000 units. Richard used 53,500 direct labor hours in November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000 fixed and P315,000 variable. The total manufacturing overhead applied during November was P572,000. 24. The fixed manufacturing overhead volume variance for November is A. P10,000 favorable C. P3,000 unfavorable B. P10,000 unfavorable D. P22,000 favorable 25. The total variance related to efficiency of the manufacturing operation for November is A. P9,000 unfavorable C. P21,000 unfavorable B. P12,000 unfavorable D. P11,000 unfavorable Three-Way Overhead Variance (Variable OH Spending, Fixed OH Budget, Volume) Page 24 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

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 budget variance is A. P41,000 favorable C. P41,000 unfavorable B. P45,000 favorable D. P45,000 unfavorable Four-Way Overhead Variance Variable overhead spending variance

18.

Baltimore, Inc. analyzes manufacturing overhead in the production of its only one product, Blu. The following set of information applies to the month of May, 2003: Budgeted Units produced 40,000 Variable manufacturing overhead P4/DLH Fixed manufacturing overhead P20/DLH Direct labor hours 6 minutes/unit How much was the variable overhead spending variance? A. P400 Favorable C. P1,200 Favorable B. P400 Unfavorable D. P1,200 Unfavorable

Actual 38,000 P16,400 P88,000 4,200 hours

Questions 19 & 20 are based on the following information. The Clark Company makes a single product and uses standard costing. Some data concerning this product for the month of May follow: Labor rate variance P7,000 F Labor efficiency variance P12,000 F Variable overhead efficiency variance P4,000 F Number of units produced 10,000 Standard" labor rate per direct labor hour P12 Standard variable overhead rate per direct labor hour: P4 Actual labor hours used: 14,000 Actual variable manufacturing overhead costs: P58,290 19. The variable overhead spending variance for May was: (M) A. P2,290 F C. P2,290 U B. P1,710 F D. P1,710 U 20. The standard hours allowed to make one unit of finished product are: (M) A. 1.0 C. 1.5 April 16, 2005

B. 1.2

Final Pre-board Examination D. 1.3

Variable overhead efficiency variance 90. Franklin Glass Works, production budget for the year ended November 30, 2001 was based on 200,000 units. Each unit requires two standard hours of labor for completion. Total 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 basis of direct labor hours. The actual data for the year ended November 30,2001 are presented below. Actual production in units 198,000 Actual direct labor hours 440,000 Actual variable overhead P 352,000 Actual freed overhead P 575,000 Franklin's variable overhead efficiency variance for the year ended November 30, 2001 is A. P33,000 unfavorable C. P66,000 unfavorable B. P35,520 favorable D. P33,000 favorable Fixed overhead spending variance 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: Budgeted Actual Units produced 40,000 38,000 Variable manufacturing overhead P4/DLH P16,400 Fixed manufacturing overhead P20/DLH P85,000 Direct labor hours 6 minutes/unit 4,000 hours What is the fixed overhead spending variance? A. P5,000 Favorable C. P1,600 Unfavorable B. P1,600 Favorable D. P5,000 Unfavorable 17. Bravo Corporation’s master budget calls for the production of 5,000 units of product monthly. 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 produced, and indirect labor costs of P10,100 were incurred. A performance report utilizing flexible budgeting would report a budget variance for indirect labor of A. P1,900 Unfavorable C. P700 Unfavorable B. P1,900 Favorable D. P700 Favorable

Applied fixed manufacturing overhead Page 25 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

92. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied must be A. P516,000 C. P504,000 B. P512,000 D. P496,000

Comprehensive Questions 93 thru 95 are based on the following information. The Lustre Company produces its only product. Kool Chewing Gum. The standard overhead costs for one pack of the product follows: Fixed overhead (1.50 hours at P18.00) P27.00 Variable overhead (1.50 hours at P10.00) 15.00 Total application rate P42.00 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 variable. 93. The amount of variable overhead spending variance is A. P6,300 Favorable C. P6,300 Unfavorable B. P8,700 Favorable D. P8,700 Unfavorable 94. The total overhead controllable variance is A. P13,700 Favorable B. P8,700 Favorable

C. P13,700 Unfavorable D. P8,700 Unfavorable

95. The overhead efficiency variance is A. P22,500 Favorable B. P15,000 Favorable

C. P22,500 Unfavorable D. P15,000 Unfavorable

Gross Profit Variation Analysis 96. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are as follows: Actual Expected Sale in units 10,000 9,500 Selling price per unit P11 P10 Variable expense per unit P6 What are the price variance and price volume variance? April 16, 2005

Sales Price Variance Price Volume Variance

Final Pre-board Examination A. P10,000 F P5,000 F

B. P5,000 F P10,000 U

C. P5,000 U P10,000 F

D. P10,000 U P5,000 U

Master Budget Basic Concepts 97. The basic difference between a master budget and a flexible budget is that a A. Flexible budget considers only variable costs but a master budget considers all costs. B. Flexible budget allows management latitude in meeting goals whereas a master budget is based on a fixed standard. C. Master budget is for an entire production facility but a flexible budget is applicable to single department only. D. Master budget is based on one specific level of production and a flexible budget can be prepared for any production level within a relevant range 98. Zero-base budgeting requires managers to A. Justify expenditures that are increases over the prior period’s budget amount B. Justify all expenditures, not just increases over last year’s amount. C. Maintain a full-year budget intact at all times. D. Maintain a budget with zero increases over the prior period. 99. A systematized approach known as zero-based budgeting 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. 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. 23. Budget slack is a condition in which A. Demand is low at various times of the year B. Excess machine capacity exists in some areas of the plant C. There is an intentional overestimate of expenses or an underestimate of revenues D. Managers grant favored employees extra time-off 100.When preparing the series of annual operating budgets, management usually starts the process with the Page 26 of 67

MANAGEMENT ADVISORY SERVICES A. Cash budget B. Production budget

CPA Review School of the Philippines C. Sales budget D. Capital budget

Production Budget 101.Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a growth in sales of 5 percent per month. The target ending inventory in units of the product is 80 percent of the next month’s estimated sales. There are 150,000 units in inventory as of the end of September. The production requirement in units of Batik for the quarter ending December 31 would be A. 670,560 C. 665,720 B. 691,525 D. 675,925 Purchasing Budget 102.The Jung Corporation's budget calls for the following production: Quarter 1 45,000 units Quarter 2 38,000 units Quarter 3 34,000 units Quarter 4 48,000 units 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 purchase requirements. Budgeted direct materials purchases for the third quarter would be A. 114,600 pounds C. 38,200 pounds B. 89,400 pounds D. 29,800 pounds

25. Plainfield Company prepares its budgets on annual basis. The following beginning and ending inventory unit levels are planned for the fiscal year of June 1, 2002 through May 31, 2003. June 1, 2002 May 31, 2003 Raw material* 40,000 50,000 Work-in-process 10,000 10,000 Finished goods 80,000 50,000 *Two (2) units of raw material are needed to produce each unit of finished product. If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by Plainfield Company, the units of raw material needed to be purchased would be A. 1,000,000 units C. 1,010,000 units B. 1,020,000 units D. 990,000 units Cash Budget April 16, 2005

Final Pre-board Examination

105.At the beginning of the current month, Rose had P100,000. Cash disbursements were P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money 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 A. invest P200,000 C. invest P350,000 B. borrow P400,000 D. do nothing 103.The Mango Company is preparing its cash budget for the month of May. The following information is available concerning its accounts payable: Estimated credit sales for May P200,000 Actual credit sales for April 150,000 Estimated collections in May for credit sales in May 20% Estimated collections in May for credit sales in April 70% Estimated collections in May for credit sales prior to April P12,000 Estimated write-offs in May for uncollectible credit sales 8.000 Estimated provision for bad debts in May for credit sales in May 7,000 What are the estimated cash receipts from accounts receivable collections in May? A. P142,000 C. P150,000 B. P149,000 D. P157,000 26. The Queen Company has the following historical pattern on its credit sales.  percent collected in month of sale  percent collected in the first month after sale  percent collected in the second month after sale  percent collected in the third month after sale  percent uncollectible The sales on open account have been budgeted for the last six months of 2003 are shown below: July P 60,000 August 70,000 September 80,000 October 90,000 November 100,000 December 85,000 The estimated total cash collections during the fourth calendar quarter from sales made on open account during the fourth calendar quarter would be A. P172,500 C. P230,000 B. P265,400 D. P251,400 Page 27 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines B. Operations-research accounting

104.The Magic Company is preparing its cash budget for the month ending January 31. The following information pertains to Peace’s past collection experience from its credit sales: Current month’s sales 12% Prior month’s sales 75% Sales two months prior to current month 6% Sales three months prior to current month 4% Cash discounts (2/30, net/90) 2% Doubtful accounts 1% Credit sales: January – estimated P2,000,000 December 1,800,000 November 1,600,000 October 1,900,000 How much is the estimated credit to Accounts Receivable as a result of collections expected during January? A. P1,730,200 C. P1,762,000 B. P1,757,200 D. P1,802,000 106.The Mango Company is preparing its cash budget for the month of May. The following information is available concerning its accounts payable: Estimated credit sales for May P200,000 Actual credit sales for April 150,000 Estimated collections in May for credit sales in May 25% Estimated collections in May for credit sales in April 70% Estimated collections in May for credit sales prior to April P15,000 Estimated write-offs in May for uncollectible credit sales 8,000 Estimated provision for bad debts in May for credit sales in May 7,000 What are the estimated cash receipts from accounts receivable collections in May? A. P142,000 C. P157,000 B. P149,000 D. P170,000 Responsibility Accounting & Transfer Pricing Basic Concepts 27. What term identifies an accounting system in which the operations of the business are broken down into reportable segments and the control functions of a foreperson, sales managers, or supervisor is emphasized? A. Responsibility accounting C. Control accounting April 16, 2005

Final Pre-board Examination D. Budgetary accounting

107.Controllable costs are A. Costs that are likely to respond to the amount of attention devoted to them by a specified manager. B. Costs that are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity C. Costs that will be unaffected by current managerial decisions. D. Costs that fluctuate in total in response to small change in the rate of utilization of capacity. 108.The CEO of a rapidly growing high-technology firm has exercised centralized authority over all corporate functions. Because the company now operates in four geographically dispersed locations, the CEO is considering the advisability of decentralizing operation control over production and sales. Which of the following conditions probably would result from and be a valid reason for decentralizing? A. Greater local control over compliance with government regulations. B. More efficient use of headquarters staff officials and specialists. C. Quicker and better operating decisions. D. Greater economies in purchasing. 109.The least complex segment of area of responsibility for which costs ate allocated is a(n) A. profit center C. contribution center B. investment center D. cost center 110. Which of the following does not apply to the content of managerial reports? A. Reporting standard is relevant to the decision to be made B. May extend beyond double-entry accounting system C. Pertains to subunits of the entity and may be very detailed D. Pertains to the entity as a whole and is highly aggregated. 29. The best measure of managerial efficiency in the use of investments in assets is: (M) A. rate of return on stockholders’ equity C. income from operations B. investment turn over D. inventory turnover Return on Investment Page 28 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

111. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the ROI would A. increase by 30% C. decrease by 37% B. decrease by 10% D. decrease by 33.3% 112. The following information pertains to Pluto Company's Satellite Division for 2004: Sales P311,000 Variable cost. 250,000 Traceable fixed costs 50,000 Average invested capital 40,000 Imputed interest rate 10% Satellite's return on investment was A. 10.00% C. 27.50% B. 13.33% D. 30.00% 30. The following data relate to the Happy Division of Euphoria Company: Sales Variable costs Direct fixed costs Invested capital Allocated actual interest costs Capital charge The divisional return on investment is: A. 15 percent C. 25 percent B. 13 percent D. 20 percent

P10,000,000 3,000,000 5,000,000 8,000,000 800,000 12%

31. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins. Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from operations for Division X is P50,000, and income from operations for Division Y is P38,000. Division X has a higher return on investment than Division Y by: (M) A. using income from operations as a performance measure B. comparing income from operations C. applying a negotiated price measure D. using its assets more efficiently in generating sales Residual Income 32. Stevenson Corporation had P550,000 in invested assets, sales of P660,000, income from operations amounting to P99,000, and a desired minimum rate of return of 15%, The residual April 16, 2005

income for Stevenson is: (E) A. P0 B. P17,820

Final Pre-board Examination C. P14,850 D. P16,500

113. Scotch Co. has the following results for the year: Sales P740,000 Variable expenses 260,000 Fixed expenses 300,000 Total divisional assets average P1,000,000. The company’s minimum required rate of return is 14 percent. The residual income and return on investment for Scotch are: A. B. C. D. Residual Income P36,000 P40,000 P36,000 P40,000 Return on Investment 36% 18% 18% 36% 114. Ylagan Company is a highly decentralized company. It evaluates the performance of each segment using both the Return on Investments, as well as Residential Income provided by each segment. Ylagan Company requires each segment to provide at least 20 percent return on all its investments. The following data are typical of the operations of North Division, one of the leading segments of Ylagan Company. Sales P24,000,000 Variable costs 10,000,000 Fixed costs 8,000,000 Share on headquarters’ costs 3,000,000 Average investment 25,000,000 What are the North’s Return on Investments and Residual Income, respectively? A. 12.00 percent and P(2,000,000) C. 24.00 percent and P1,000,000 B. 12.00 percent and P1,000,000 D. 24.00 percent and P(2,000,000) 115. The Global Division of Sun Company expects the following result for 2004: Unit sales 70,000 Unit selling price P 10 Unit variable cost P 4 Total fixed costs P300,000 Total investment P500,000 The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached Global’s manager with an offer to buy 10,000 units at P7 Page 29 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

each. If Global accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order would increase fixed costs by P10,000 and investment by P40,000. What is the minimum price that Global could accept for the order and still maintain its expected residual income? A. P5.00 C. P4.75 B. P5.60 D. P9.00 116. The following data ate available for the South Division of Banawe Company and the single product it makes: Unit setting price P20 Variable cost per unit P12 Annual fixed costs P280,000 Average operating assets P1,500,000 If South wants a residual income of P50,000 and the minimum required rate of return is 10%, the annual turnover will have to be: A. 0.32 C. 1.25 B. 0.80 D. 1.50 117. The following information relates to two projects of Rica Corporation. Project A Project B Operating income P2,500,000 P600,000 Residual income P 500,000 P200,000 ROI 10% 12% Return on residual investment 2% 4% A bonus of P 50,000 will be paid to the manager whose project contributed most to the performance of the firm. The P50,000 bonus should go to the manager of A. Project A because the residual income is higher B. Project E because the return on investment is higher C. Project A because it was a larger, mote complex project D. Project B because the return on residual investment is higher 32. Division Alpha is considering a project that will earn a rate of return which is greater than the imputed interest charge for invested capital, but less than the division’s historical return on invested capital. Division Beta is considering a project that will earn a rate of return which is greater than the division’s historical return on invested capital, but less than the imputed interest charge for invested capital. If the objective is to maximize residual income, should these divisions accept or reject their projects? A. B. C. D. April 16, 2005

Alpha Beta

Final Pre-board Examination Accept Accept

Reject Accept

Reject Reject

Accept Reject

Segment Reporting 118. Stellar Industries has two divisions: North Division and South Division. Information relating to the divisions for the year just ended is as follows: North South Units produced and sold 30,000 40,000 Selling price per unit P 8.00 P 15.00 Variable expenses per unit P 3.00 P 5.00 Direct fixed expanse P48.000 P110,000 Common fixed expenses P40,000 P 40,000 Common fixed expenses have been allocated equally to each of the two division. Stellar's contribution and segment margin for North Division are: A. P150,000 and P102,000 C. P150,000 and P72,000 B. P400,000 and P290,000 D. P400,000 and P250,000 Transfer Pricing 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 A. Bargained price C. Market price B. Dual transfer price D. Full cost 30. The worst transfer-pricing method is to base the prices on (M) A. market prices C. budgeted total costs. B. budgeted variable costs D. actual total costs. 120.Universal Company has intracompany service transfers from Internal Division, a cost center to World Division, a profit center. Under stable economic conditions, which of the following transfer prices is likely to be most conducive to evaluating whether both divisions have met their responsibilities? A. Actual cost C. Market price B. Standard variable cost D. Negotiated price 121.An appropriate transfer price between two divisions of the Star Corporation can be determined from the following data: Fabrication Division Market price of subassembly P50 Page 30 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Variable cost of subassembly P20 Excess capacity (in units) 1,000 Assembling Division Number of units needed 900 What is the natural bargaining range for the two divisions? A. Between P20 and P50 C. Any amount less than P50 B. Between P50 and P70 D. P50 is the only acceptable price 122.Clara Industries is a decentralized company that evaluates its divisions based on ROI. The Ibarra Division has the capacity to make 1,000 units of a component. The Ibarra Division's variable costs are P40 per unit. Ibarra can sell all that it produces for P100 each. The Simoun Division can use the component in one of its products. The Simoun Division would incur P50 of variable costs to convert the component into its own product which sells for P160. Simoun needs 100 units. What are the minimum transfer price that Ibarra is willing to accept and the maximum price that Simoun is willing to pay for the goods? A. B. C. D. Ibarra’s Minimum Price P40 P40 P100 P100 Simoun’s Maximum Price P100 P110 P110 P100

Excess Capacity 33. Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased from outside suppliers at a cost of P5 per unit. However, the same materials are available from Division 6. Division 6 has unused capacity and can produce the materials needed by Division 3 at a variable cost of P3 per unit. A transfer price of P3.20 per unit is established, arid 40,000 units of material are transferred, with no reduction in Division 6’s current sales. How much would Aro-Products total income from operations increase? (M) A. P32,000 C. P80,000 B. P72,000 D. P8,000 30. Pasig Division of River Company sells 80,000 units of part Z to the outside market. Part Z sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Pasig has a capacity to produce 100,000 units per period. Marikina Division currently purchases 10,000 units of part Z from Pasig for P10.00. Marikina has been approached by an outside supplier who is willing to supply the former part Z for P9.00. What are the effects on River’s overall profit if: Marikina Buys Outside at P9.00 Marikina Buys from Pasig at P9.00 A. No change P35,000 decrease in profit April 16, 2005

B. C. D.

P35,000 decrease in profit P35,000 decrease in profit P35,000 increase in profit

Final Pre-board Examination P35,000 increase in profit No change No change

Partial Excess Capacity 123.Plastic Division makes and sells a single product. Presently it sells 12,000 units per year to 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 units a year from Plastic Division. The unit price that Plastic Division should charge Light Division, according to the transfer pricing formula, is A. P24.00 C. P17.60 B. P21.40 D. P16.00 Full Capacity 124.The High Division of Para Company produces a high quality kite. Unit production costs (based on capacity production of 100,000 units per year) follow: Direct materials P 60 Direct labor 25 Overhead (20% variable) 15 Other information Sales price 120 Selling expenses (15% variable) 20 The High Division is producing and selling at capacity. What is the minimum selling price that the division would consider as a “transfer price” to the Recreation Division on which no variable period costs would be incurred? A. P120 C. P 91 B. P 88 D. P117 31. The Red Division of Colour Company produces a high quality marker. Unit production costs (based on capacity production of 100,000 units per year) follow: Direct materials P 60 Direct labor 25 Overhead (20% variable) 15 Other information Sales price 120 The Red Division is producing and selling at capacity. What is the minimum selling price that the division would consider as a “transfer price” to the Page 31 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Violet Division on which no variable period costs would be incurred? A. P120 C. P 91 B. P 88 D. P117 Questions 32 and 33 are based on the following information.

Blade Division of Dana Company produces hardened steel blades. One-third of the Blades Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to outside customers. The Blade Division’s estimated sales and standard costs data for the fiscal year ending June 30 are as follows: Lawn Products Outsiders Sales P15,000 P40,000 Variable costs (10,000) (20,000) Fixed costs (3,000) (6,000) Gross |margin P 2,000 P14,000 Unit sales 10,000 20,000 The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division cannot sell any additional products to outside customers. 32. Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier, and why? A. Yes, because buying the blades would save Dana Company P500. B. No, because making the blades would save Dana Company P1,500. C. Yes, because buying the blades would save Dana Company P2,500. D. No, because making the blades would save Dana Company P2,500 33. Assume the Blade Division is now at capacity and sufficient demand exist to sell all production to outsiders at present prices. What is the differential cost (benefit) of producing the blade internally? A. P2,500 benefit C. P7,500 cost B. P0 differential cost D. P10,000 cost

Decision 125.Barangay Division of Community Company sells 80,000 units of part Z to the outside market. Part Z sells for P10.00 and has a variable cost of P150 and a fixed cost per unit of P2.50. Barangay has a capacity to produce 100,000 units per period. Municipal Division currently purchases 10,000 units of part Z from Barangay for P10.00. Municipal has been approached April 16, 2005

Final Pre-board Examination

by an outside supplier who is willing to supply the former part Z for P9.00. What are the effects on Community Company's overall profit if: Municipal buys outside at P9.00 Municipal buys from Barangay at P9.00 No change P35,000 decrease in profit No change P35,000 increase in profit P35,000 decrease in profit No change P35,000 increase in profit P35,000 decrease in profit Product Pricing 126.In a cost-based pricing system the markup should cover I. Selling and administrative expenses II. Desired profit III. Manufacturing cost A. I, II, and III C. I and III only B. I and II only D. II and III only Relevant Costing Basic Concepts 21. A cost that will not be affected by later decisions is termed a(n): (E) A. historical cost C. sunk cost B. differential cost D. replacement cost 127.The Auto Division of Fly Insurance employs three claims processors capable of processing 5,000 claims each. The division currently processes 12,000 claims. The manager has recently been approached by two sister divisions. Division A would like the auto division to process 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 these claims. Assume that these are mutually exclusive alternatives. Claims processor salary cost is relevant for A. division A alternative only B. division B alternative only C. both Division A and Division B alternatives D. neither Division A nor Division B alternatives 128.For the year ended December 31, 2004, Earth Company incurred direct costs of P500,000 based on a particular course of action during the year. If a different course of action had been taken, direct costs would have been P400,000. In addition, Earth's 2004 fixed costs were Page 32 of 67

MANAGEMENT ADVISORY SERVICES P90,000. the incremental cost was A. P10,000 B. P90,000

CPA Review School of the Philippines C. P100,000 D. P190,000

Opportunity Cost 129.The potential benefit that may be obtained from following an alternative course of action is called A. Opportunity benefit C. Relevant cost B. Opportunity cost D. Sunk cost 31. An important concept in decision making is described as “the contribution to income that is forgone by not using a limited resources in its best alternative use.” This concept is called A. Marginal cost C. Potential cost B. Incremental cost D. Opportunity cost 130.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could not guarantee this delivery schedule. In order to ensure availability of these components, Luzon is considering the purchase of all 60,000 units at the beginning of the year. Assuming Luzon can invest cash at 8%, the company’s opportunity cost of purchasing the 60,000 units at the beginning of the year is A. P132,000 C. P150,000 B. P144,000 D. P264,000 Profit Maximization 131.Fe Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50 and Product Y has a contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate 80% of its machine time to the product that will provide the most income, Fe will have a total monthly contribution margin of A. P250,000 C. P210,000 B. P240,000 D. P200,000 23. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78; and 32 respectively. The variable costs for each product are: 20; 50: and 15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour. April 16, 2005

Final Pre-board Examination

Assuming that Niva Co. can sell ail of the products they can make, what is the maximum contribution margin they can earn per month? (E) A. P64,000 C. P56,000 B. P70,000 D. P34,000 30. The Hingis Corporation manufactures two products: X and Y. Contribution margin per unit is determined as follows: Product Xf Product Y Revenue P130 P80 Variable costs 70 P38 Contribution margin P 60 P42 Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce 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. How many units of X and Y should Hingis Corporation produce? A. B. C. D. Product X 16,000 8,000 7,000 3,000 Product Y -04,000 -08,000 132.Geary Manufacturing has assembled the following data pertaining to two popular products. Blender Electric mixer Direct materials P6 P11 Direct labor 4 9 Factory overhead @ P16 per hour 16 32 Cost if purchased from an outside supplier 20 38 Annual demand (units) 20,000 28,000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages P10. Geary has a policy of filling, all sales orders, even if it means purchasing units from outside suppliers. If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal strategy, it should A. produce 25,000 electric mixers, and purchase all other units as needed B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed C. produce 20,000 blenders and purchase all other units as needed D. produce 28,000 electric mixers and purchase all other units as needed Page 33 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

133.The Pato Company produces three products with the following costs and selling prices: A B C Selling price per unit P16 P21 P21 Variable cost per unit 7 11 13 Contribution margin per unit P9 P10 P8 Direct labor hours per unit 1 1.5 2 Machine hours per unit 4.5 2 2.5 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? A. B. C. D. Direct labor hours A,B,C B,C,A B,C,A A,B,C Machine hours B,C,A B,C,A A,C,B A,C,B 24. Bear Valley produces three products: A, B, and C, One machine is used to produce the products, The contribution margins, sales demands, and time on the machine (in minutes) are as follows: Demand CM Time on machine A 100 P25 10 B 80 18 5 C 150 30 10 There are 2400 minutes available on the machine during the week. How many units should be produced and sold to maximize the weekly contribution? (E) A. B. C. D. A 100 50 90 100 B 80 80 0 80 C 150 150 150 100 Sell as is or Process Further 134.Indicate which of the following costs would be avoided if a segment is eliminated. 1. variable manufacturing costs 2. direct fixed costs 3. common fixed costs 4. variable selling costs 5. direct listed selling costs 6. common fixed setting costs A. 2, 3, 5, 5 C. 2, 3, 4, 5 April 16, 2005

B. 1, 2, 4, 3

Final Pre-board Examination D. 1, 4, 5, 6

22. Jones Co. can further process Product B to produce Product C. Product B is currently selling for P30 per pound and costs P28 per pound to produce. Product C would sell for P60 per pound and would require an additional cost of P24 per pound to produce. What is the differential cost of producing Product C? (E) A. P30 per pound C. P28 per pound B. P24 per pound D. P 6 per pound 135.The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling price per unit is P50. The company has unused production capacity and has determined that units could be finished and sold for P65 with an increase in variable costs of 40%. What is the additional net income per unit to be gained by finishing the unit? A. P3 C. P15 B. P10 D. P12 136.Ottawa Corporation produces two products from a joint process. Information about the two joint products follows: Product X Product Y Anticipated production 2,000 lbs 4,000 lbs Selling price lb at split-off P30 P16 Additional processing costs/lb after Split-off (all variable) P15 P30 Selling prices/lb after further processing F40 P50 The cost of the joint process is P85,000. Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which maximizes profit, Ottawa's profit will increase by A. P16,000 C. P50,000 B. P4,000 D. P10,000 137.BEA Industries produces two products. Information about the products is as follows: Item 38B Item 40F Units produced and sold 1,000 4,000 Selling price per unit P 25 P 20 Variable expenses per unit P 15 P12 The company's fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is A. P3,200 C. P(2,000) B. P7,000 D. P10,000 Page 34 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

38. Green Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are: Manufacturing costs Direct materials P24 Direct labor 8 Variable overhead 5 Fixed overhead 6 Selling expenses Variable 11 Fixed 8 The company has an inventory of 3,000 of this item left over from last year’s model. These must be sold through regular channels at reduced prices. The inventory will be valueless unless sold this way. What unit cost is relevant for establishing the minimum selling price of these 3,000 units? A. P11 C. P48 B. P37 D. P62 Special Order 27. Pueblo Company sells a product for P60. Variable cost is P32. Pueblo could accept a special 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) A. 1,000 C. 200 B. 500 D. 2,000 24. Climate Co. has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs: Fixed costs .P21,000 Variable costs . 33,000 The fixed costs include a normal P3,700 allocation for in-house design costs, although no inhouse design will be done. Instead the job will require the use of external designers costing P7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the jobs? A. P36,700 C. P54,000 B. P40,750 D. P58,050 25. KC Industries manufactures a product with the following costs per unit at the expected production of 30,000 units. April 16, 2005

Final Pre-board Examination

Direct materials .P 4 Direct labor . 12 Variable manufacturing overhead . 6 Fixed manufacturing overhead . 8 The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units. If the firm is at capacity and the special order is accepted, the effect on operating income would be A. a P20,000 increase C. a P4,000 increase B. a P16,000 decrease D. P0 28. Dary Co, Produces a single product. It’s normal selling price is P28 per unit. The variable costs are P18 per unit. Fixed costs are P20,000 for a normal production run of 5,000 units per month. Dary received a request for a special order that would not interfere with normal sales. The order was for 1,500 units and a special price of P17.50 per unit. Dary Co. has the capacity 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) A. decrease of 750 C. increase of P2,250 B. decrease of P3,750 D. increase of P1,500 37. Fiesta Company’s unit cost of manufacturing and selling a given item at an activity level of 10,000 units per month are: Manufacturing costs Direct materials P39 Direct labor 6 Variable overhead 8 Fixed overhead 9 Selling expenses Variable 30 Fixed 11 The company desires to seek an order for 5,000 units from a foreign customer. The variable 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. The minimum break-even price per unit to be considered on this special sale is A. P71 C. P69 B. P75 D. P84 Make or Buy Page 35 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

138.For the past 12 years, the Blue Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As material costs have steadily increased, the controller of the Blue Company is reviewing the decision to continue to make the small motors and has identified the following facts: 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 to eliminate the need for storage space now being rented. 3. Comparable units can be purchased from an outside supplier for P59.75 4. Four of the persons who work in the electric motor manufacturing department would be terminated and given eight weeks severance pay 5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing process. Which of the items above are relevant to the decision that the controller has to make? A. 1, 3, and 4 C. 2, 3, 4, and 5 B. 2, 3, and 4 D. 1, 2, 4, and 5 144.AFM, Inc. manufactures jet engines for an aircraft assembler on a cost –plus basis. The cost of a particular jet engine that the company manufactures is shown below: Direct materials P20,000,000 Direct labor 15,000,000 Overhead: Supervisor’s salary 2,000,000 Fringe benefits on direct labor 1,500,000 Depreciation 1,200,000 Rent 1,100,000 Total P40,800,000 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 minimum unit price that AFM Inc should bid is A. P38,500,000 C. 36,500,000 B. P40,800,000 D. 39,700,000 139 Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of its product a year. The following information pertains to the production costs at capacity: Variable costs P80,000 Fixed costs 120,000 Total costs P200,000 April 16, 2005

Final Pre-board Examination

A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed costs. What is the price per unit that makes Buena indifferent between the “Make” and “Buy” options? A. P8 C. P20 B. P12 D. P10 25. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units of its product a year. The follow information pertains to the production costs at capacity: Variable costs P160,000 Fixed costs 240,000 Total costs P400,000 A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed costs. What is the price per unit that makes Medford indifferent between the "make" and "buy" options? (E) A. P8 C. P20 B. P12 D. P40 140.Elly Industries is a multi-product company that currently manufacture 30,000 units of Part MR24 each month for use in production. The facilities now being used to produce Part MR24 have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If Elly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of their present amount. The variable production costs of Part MR24 are P11 per unit. If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by purchasing Part MR24 from an outside supplier only if the supplier’s unit price is less than A. P14.00 C. P16.00 B. P11.00 D. P13.00 141.The following are details of the monthly unit cost to manufacture and sell a particular product for Grace Company: Manufacturing Costs: Direct materials P3.00 Direct labor 4.00 Variable indirect 2.00 Fixed indirect 1.50 Marketing Costs: Variable

2.00 Page 36 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Fixed 1.00 Grace must decide to continue making the product or buy it from an outside supplier. The supplier has offered to make the product at the same level of quality that the company can make it. Fixed marketing costs would be unaffected, but variable marketing costs would be reduced by 25% if the company were to accept the proposal. What is the maximum amount per unit that Grace can pay the suppliers without decreasing its operating income? A. P 9.50 C. P 9.00 B. P10.50 D. P11.00 142.Savage Industries is a multi-product company that currently manufactures 30,000 units of Part 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 Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of their present amount. The variable production costs of Part QS42 are P11 per unit. If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price of P12,875, the monthly usage at which it will be indifferent between purchasing and making Part QS42 is A. 30,000 units C. 80,000 units B. 32,000 units D. 48,000 units

Final Pre-board Examination

Variable overhead 1.50 Fixed overhead . 1.00 Total. P8.50 An outside supplier has offered to sell Connell unlimited quantities of part 501 at a unit cost of P7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned to part 501. Furthermore, the space devoted to the manufacture of part 501 would be rented to another company for P6,000 per year. If Connell accepts the offer of the outside supplier, annual profits will A. Increase by P13,500 C. increase by P11,000 B. increase by P7,250 D. increase by P1,250 26. A business is operating at 90% of capacity and is currently purchasing a part used in its manufacturing operations for P15 per unit. The unit cost for the business to make the part is P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are normally purchased during the year but could be manufactured using unused capacity, what would be the amount of differentials cost increase or decrease from making the part rather than purchasing it? (M) A. P150,000 cost increase C. P150,000 cost increase B. P90,000 cost decrease D. P90,000 cost increase

143.Classic Company currently manufactures all components parts used in the manufacture of various hand tools. A steel handle is used in three different tools. The 2001 budget for 20,000 handles has the following unit cost: Direct material P6.00 Direct labor 4.00 Variable overhead 1.00 Fixed overhead 2.00 Total unit cost P13.00 Modern Steel has offered to supply 20,000 handles to Classic for P12.50 each delivered. If Classic Co. currently has idle capacity that cannot be used, accepting the offer will A. Decrease the handle unit cost by P0.50 C. Decrease the handle unit cost by P1.50 B. Increase the handle unit cost by P1.50 D. Increase the handle unit cost by P0.50

33. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total manufacturing costs of the part are as follows: Direct materials P10,000 Direct labor 5,000 Variable overhead 5,000 Fixed overhead 30,000 Total manufacturing cost P50,000 An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of the fixed overhead assigned to Part M will no longer be incurred if the company purchases the part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the outside supplier per month, then its monthly operating income will A. decrease by P4,000 C. decrease by P14,000 B. increase by P4,000 D. increase by P14,000

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: Direct materials .. P2.50 Direct labor . 3.50

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: Direct materials P6 Direct labor 30

April 16, 2005

Page 37 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Variable overhead Fixed overhead applied

12 16 P64 The Tray Company has offered to sell 20,000 units of part No. 498 to Reno for P60 per unit. Reno will make the decision to buy the part from Tray if there is a savings of P25,000 for Reno. If Reno accepts Tray’s 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 save relevant costs in the manufacture of part No. 575. In order to have a savings of P25,000, the amount of the relevant costs that would be saved by using the released facilities in the manufacture of part No. 575 would have to be A. P80,000 C. P125,000 B. P85,000 D. P140,000 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: Direct materials P 3 Direct labor 15 Variable overhead 6 Fixed overhead 8 Total P32 Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If Bulacan accepts Pampanga’s offer, the released facilities could be used to save P45,000 in relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead applied to part G would continue. What alternative is more desirable and by what amount? A. B. C. D. Alternative Manufacture Manufacture Buy Buy Amount P10,000 P15,000 P15,000 P10,000 Keep-or-Drop a Segment 27. Indicate which of the following costs would be avoided if a segment is eliminated. 1. variable manufacturing costs 4. variable selling costs 2. direct fixed costs 5. direct fixed selling costs 3. common fixed costs 6. common fixed selling costs A. 2, 3, 5, 6 B. 1, 2, 4, 5 April 16, 2005

C. 2, 3, 4, 5 D. 1, 4, 5, 6

Final Pre-board Examination

32. Banahaw Company plans to discontinue a department that has a contribution margin of P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The effect of this discontinuance on Banahaw’s overall net operating income would be a(an) A. decrease of P30,000 C. decrease of P10,000 B. increase of P30,000 D. increase of P10,000 34. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2003 was P(1,200,000). The management of Mina Co. was considering dropping the mining of Gold Ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment was dropped. If Gold Ore were dropped, net income for Arayat Mining would A. Increase by P2,000,000 C. Increase by P1,200,000 B. Decrease by P2,000,000 D. Decrease by P1,200,000 28. BEA Industries produces two products. Information about the products is as follows: Item 38B Item 40F Units produced and sold 1,000 4,000 Selling price per unit P 25 P 20 Variable expenses per unit P 15 P 12 The company’s fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is A. P3,200 C. P(2,000) B. P7,000 D. P10,000 Capital Budgeting Basic Concepts 145.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment of cash flows, NPV is better than IRR. What are the reinvestment rate for each method? Net Present Value Method Internal Rate of Return Method A. Discount Rate Discount Rate B. Discount Rate IRR C. IRR IRR D. IRR Discount Rate Accounting Rate of Return Net investment Page 38 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

39. The Zambales Company is planning to purchase a new machine which it will depreciate, for book purposes, on a straight-line basis over a ten-year period with no salvage value and a full year’s depreciation taken in the year of acquisition. The new machine is expected to produce cash flow from operations, net of income taxes, of P175,000 a year in each of the next ten years. The accounting (book value) rate of return on the average investment is expected to be 15%. How much will the new machine cost? A. P1,000,000 C. P1,666,667 B. P 700,000 D. P1,800,000

Differential income 146.Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines. The new machines would cost P90,000, have a five-year life, and no estimated salvage value. Variable operating costs would be P100,000 per year. The present machine has a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000, but it would be zero after five years. Variable operating costs would be P125,000 per year. Ignore present value calculations and income taxes. Considering the five years in total, what would be the difference in profit before income taxes by acquiring the new machine as opposed to retaining the present one? A. P10,000 decrease C. P35,000 increase B. P15,000 decrease D. P40,000 increase Operating cash flow before tax 37. The Mutya ng Pasig Company, a calendar company, purchased a new machine for P280,000 on January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The accounting (book value) rate of return (ARR) is expected to be 20% on the initial increase in required investment. On the assumption of a uniform cash inflow, this investment is expected to provide annual cash flow from operations, before 30 percent income taxes, of A. P80,000 C. P115,000 B. P91,000 D. P175,000 ARR based on average investment 41. Water Lily Foundation (WLF), a tax-exempt organization, invested P200,000 in a five-year project at the beginning of the year. WLF estimates that the annual cash savings from this project will amount to P65,000. Tax and book depreciation on the project will be P40,000 per year for five years. On investments of this type, WLF’s desired adjusted rate of return is 12%. Information on present value factors is as follows: At 12% At 14% At 16% Present value of P1 for 5 periods 0.57 0.52 0.48 April 16, 2005

Final Pre-board Examination

Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3 For the project’s first year, WLF’s accounting rate of return, based on the project’s average book value would be A. 14.4% C. 12.5% B. 13.9% D. 25.0% Cash Flows Net Investment 147.Big City Motors is trying to decide whether it should keep its existing cash washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows: Existing Machine New Machine Original cost P9,000 P20,000 Accumulated depreciation 5,000 0 Annual cash operating costs 9,000 4,000 Current salvage value in 10 years 2,000 1,000 Remaining life 10 years 10 years The incremental cost to purchase the new machine is A. P11,000 C. P13,000 B. P20,000 D. P18,000 148.Gray Company is considering replacing a machine with a book value of P200,000, a remaining useful-life of 5 years, and annual straight-line depreciation of P40,000. The existing machine has a current market value of P200,000. The replacement machine would cost P350,000, have a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is 40%, what would be the net investment required to replace to the existing machine? A. P90,000 C. P150,000 B. P210,000 D. P350,000

Operating Cash Flow After Tax 34. Which of the following is NOT relevant in calculating annual net cash flows for an investment? (M) A. Interest payments on funds borrowed to finance the project. B. Depreciation on fixed assets purchased for the project. C. The income tax rate. D. Lost contribution margin if sales of the product invested in will reduce sales of other Page 39 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

products. 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 accounting (book value) rate of return (ARR.) is expected to be 15% on the initial increase in required investment. On the assumption of a uniform cash inflow, this investment is expected to provide annual cash flow from operations, net of income taxes, of A. P35,000 C. P42,000 B. P40,250 D. P77,000 150.A company is considering replacing a machine with one that will save P40,000 per year in cash operating costs and have P10,000 more depreciation expense per year than the existing machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of the company by A. P28,000 C. P18,000 B. P24,000 D. P6,000 151.Alpha Company is considering replacing a machine with a book value of P100,000, a remaining useful life of 4 years, and annual straight-line depreciation of P25,000. The existing machine has a current market value of 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 would be depreciated using the straight-line method and the tax rate is 40%, what would be the increase in annual income taxes and annual net cash flow if the company replaces the machine? A. B. C. D. Income Tax P14,000 P14,000 P 4,000 P 4,000 Net Cash Flow 36,000 46,000 46,000 36,000

End-of-life Cash Flow 152.Acme is considering the sale of any of the two machines, Machine A or Machine B. Machine A has a book value of P50,000, 3 years remaining it its useful life with P15,000 annual straightline depreciation. Its market value is P75,000. Machine B has a book value of P75,000, 3years remaining in its life, with P25,000 annual straight-line depreciation. Its current market value is P50,000. What are the cash flows from selling any of the two machines if the tax rate is 40%? A. B. C. D. Machine A P65,000 P65,000 P45,000 P45,000 Machine B P40,000 P60,000 P60,000 P40,000 April 16, 2005

Final Pre-board Examination

Comprehensive 153.Bata Company is considering replacing a machine with a book value of P100,000, a remaining useful life of 5 years, and annual straight-line depreciation of P20,000. The existing machine has a current market value of P100,000. The replacement machine would cost P150,000, have a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method arid the tax rate is 40%, what would be the economic values relevant to me decision? A. B. C. D. Net Investment P50,000 P50,000 P150,000 P150,000 Net Incremental Cash Flow P34,000 P42,000 P34,000 P42,000 Net Incremental Annual Income Taxes P16,000 P16,000 P3,000 P8,000 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 had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year. The old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year life. Cash savings on operating expenses before taxes amount to P50,000 per year. 154.What is the amount of investment in the new equipment? A. P160,000 C. P72,000 B. P80,000 D. P68,000 155.How much annual after-tax cash savings (inflow) would the new equipment provide? A. P36,000 C. P37,200 B. P46,000 D. P14,000 Payback Period 36. Which of the following is(are) closely relevant to Payback Method? (M) A. Intermediate cash flows are reinvested at zero percent. B. The use of cash inflows instead of profit. C. Avoidance of too much risk of uncertainty. D. Explicit considerations of timing of cash flows. E. Prevention of excessive liquidity problems. F. Cost of capital A. All of these C. A, B, C, E B. A, C, E, F D. B, C, E Page 40 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

35. The relationship between payback period and IRR is that (E) A. a payback period of less than one-half the life of a project will yield an IRR lower than the target rate. B. the payback period is the present value factor for the IRR. C. a project whose payback period does not meet the company's cutoff rate for payback will not meet the company's criterion for IRR. D. none of the above 156.Energy Company is planning to spend P84,000 for a new machine, to be depreciated on the straight-line basis over ten years with no salvage value. The related cash flow from operations, net of income taxes, is expected to be P10,000 a year for each of the first six years and P12,000 for each of the next four years. What is the payback period? A. 4.4 years C. 7.8 years B. 7.6 years D. 8.0 years 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 follow: Cost of the new machine P100,000 Net annual savings in operating costs 20,000 Salvage value now of the old machine 10,000 Salvage value of the old machine in 8 years 0 Salvage value of the new machine in 8 years 20,000 Estimated life of the new machine 8 years What is the expected payback period for the new machine? A. 4.00 years C. 4.50 years B. 4.33 years D. 5.00 years 158.Biloxi Beluga 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 follow. Cost of the new machine P40,000 Net annual savings in operating costs 9,000 Salvage value now of the old machine 6,000 Salvage value of the old machine in 8 years 0 Salvage value of the new machine in 8 years 5,000 Estimated life of the new machine 8 years What is the expected payback period for the new machine? April 16, 2005

A. 4.44 years B. 2.67 years

Final Pre-board Examination C. 8.50 years D. 3.78 years

Bailout Period 159.A project costing P1,800,000 is expected to produce the following annual cash flows (after tax) and salvage value: Year Net cash inflow Salvage value 1 500,000 800,000 2 500,000 600,000 3 600,000 500,000 4 800,000 400,000 5 700,000 300,000 What is the bailout period for the project? A. 3.25 yrs C. 2.73 yrs B. 2.5 yrs D. 2.4 yrs Discounted Cash Flow 160.If Sol Company expects to get a one-year loan to help cover the initial financing of capital project, the analysis of the project should A. offset the loan against any investment in inventory or receivable required by the project B. show the loan as an increase in the investment C. show the loan as a cash outflow in the second year of the project’s life D. ignore the loan 161.Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects? A. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash flows will be reinvested at the internal rate of return. B. The NPV method assumes a reinvestment rate equal to me discount rate while the IRR method assumes a reinvestment rate equal to the internal rate of return. C. The IRR method docs riot assume reinvestment of the cash flow while the NPV assumes the reinvestment rate is equal to the discount rate. 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. 162.The advantage of the Net Present Value method over the Internal Rate of Return method for screening investment projects is that it: A. does not consider the time value of money Page 41 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

B. implicitly assumes that the company is able to reinvest cash flows from the project at the company’s discount rate C. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return D. fails to consider the timing of cash flows 163.Which of the following combinations is possible? Profitability Index NPV Greater than 1 Positive Greater than 1 Negative Less than 1 Negative Less than 1 Positive

IRR Equal cost of capital Less than cost of capital Less than cost of capital Less than cost of capital

Final Pre-board Examination

Third year 180,000 Fourth year 120,000 Fifth year 100,000 Silliman will use the sum-of-the-years-digits’ method to depreciate the new machine as follows: First year P150,000 Second year 120,000 Third year 90,000 Fourth year 60,000 Fifth year 30,000 The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 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 The net advantage (in present value) of using the Sum-of-the-Years’-Digits method over the straight-line method at a discount rate of 12 percent is A. P14,620 C. P 7,340 B. P12,188 D. P 9,750

38. B Company is considering two alternative ways to depreciate a proposed investment. The investment has an initial cost of P100,000 and an expected 5 year life. The two alternative depreciation schedules follow: Method 1 Method 2 Year 1 depreciation P40,000 P20,000 Year 2 depreciation P30,000 P20,000 Year 3 depreciation P20,000 P20,000 Year 4 depreciation P10,000 P20,000 Year 5 depreciation P 0 P20,000 Present value of annuity of 1 for 5 periods at 10% , 3.79079. Present value of 1, end of periods: Period 1 2 3 4 5 PV of 1 0.90909 0.82645 0.75131 0.68301 0.62092 Assuming that the company faces a marginal tax rate of 40%, and has a cost of capital of 10%, what is the net advantage (in present value) in using one method over the other one in computing depreciation? A. P7,196 C. P2,879 B. P0 D. P6,342

Net Present Value 40. The King of Hearts, Inc. is considering to replace its old equipment with a more efficient one. The old equipment was purchased two years ago for P720,000. Though the old equipment will 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 operating expenses will be P640,000. The old equipment can be sold for P380,000. The new equipment costs the company P900,000. The new equipment will be depreciated over its useful life of six years without any salvage value. The use of the new equipment will decrease the company's cash operating expenses by P175,000, The company is consistently using straight-line method of depreciation with 32% income tax. The company uses 16% cost of capital. The purchase of the new equipment will result to net present value of: (D) A. P127,351 C. P19,901 B. P(14,143) D. P11,922

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 cash flows from operations, net of 40 percent income taxes, as follows: First year P160,000 Second year 140,000

Profitability Index 166.A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are P20,505 on an investment of P50,000. The profitability index for tins project is A. 1.367 C. 2.438 B. 3.333 D. 1.300

April 16, 2005

Page 42 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

41. Sulu Company is considering to acquire a machine in order to reduce its direct labor costs. This machine shall last for 4 years with no salvage value. His initial analysis indicated that the time-adjusted rate of return is 15 percent. At 12 percent (cost of capital to finance the purchase 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. Ignoring income tax considerations, the profitability index is (D) A. 1.064 C. 1.047 B. 1.183 D. 1.250 Internal Rate of Return 37. A weakness of the internal rate of return method for screening investment projects is that it: (E) A. does not consider the time value of money B. implicitly assumes that the company is able to reinvest cash flows from the project at the company's discount rate C. implicitly assumes that the company is able to reinvest cash flows from the project at the internal rate of return D. fails to consider the timing of cash flows

Net Investment 167.The Forest Company is planning to invest in a machine with a useful life of five years and no salvage value. The machine is expected to produce cash flow from operations, net of income taxes, of P20,000 in each of the five years. Forest's expected rate of return is 10%. Information on present value and future amount factors is as follows. PERI0D 1 2 3 4 5 Present value of P1 at 10% .909 .826 .751 .683 .621 Present value of an annuity of P1 at 10% .909 1.736 2.487 3.170 3.791 Future amount of P1 at 10% 1.100 1.210 1.331 1.464 1.611 Future amount of an annuity of P1 at 10% 1.00 2.100 3.310 4.641 6.105 How much will the machine cost? A. P32,220 C. P 75,820 B. P62,100 D. P122,100 168.Gene, Inc. invested in a machine with a useful life of six years and no salvage value. The machine was depreciated using the straight-line method. It was expected to produce annual cash inflow from operations, net of income taxes, of P2,000. The present value of an ordinary April 16, 2005

Final Pre-board Examination

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 of the original investment? A. P5,640 C. P9,000 B. P8,710 D. P11,280 169.Fordem Co. is considering an investment in a machine that would reduce annual labor costs by P30,000. The machine has an expected life of 10 years with no salvage value. The machine would be depreciated according to the straight-line method over its useful life. The company’s 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 can pay for the machine and still meet the internal rate of return criterion? A. P180,000 C. P187,500 B. P210,000 D. P144,996

Unit sales 42. King of Kings Company has been renting equipment during peak season in addition to its own equipment in handling standard materials. The rental cost averages P9,000 a year. The 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 end of 5 years. The committee estimates that it can save P0.25 per unit of material by using its own equipment. Also, it estimates that 270,000 units can be handled \n each of the 5 years, A 15% discounted rate of return is considered appropriate, ignoring income tax. Present value of annuity of 1, at 15% for 5 years, is 3,352. What is the approximate number of units at which the investment can just meet the 15% return requirement? (D) A. 232,496 C. 304,496 B. 268,496 D. 256,428 Selling price 42. Moorman Products Company is considering a new product that will sell for P100 and have a variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500,000 and having a five-year useful life and no salvage value is needed, and will be depreciated using the straight-line method. The machine has cash operating costs of P20,000 per year. The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is 3.60478. Page 43 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling price (rounded to nearest peso) needed to earn a 12 percent internal rate of return? A. 81.00 C. P70.00 B. 86.00 D. P90.00

Operating Cash Flow Before Tax 170.Payback Company is considering the purchase of a copier machine for P42,825. The copier 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 return. The company is subject to 40 percent income tax rate. The present value of an ordinary annuity of 1 for 4 periods is 2.85498. In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflows to be provided b the machine? A. P17,860 C. P25,000 B. P15,000 D. P35,700 Investment Decisions 171.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year: Project 1 Project 2 Project 3 Project 4 Initial cash outlay P200,000 P298,000 P248,000 P272,000 Annual net cash inflows Year 1 P65,000 P100,000 P80,000 P95,000 Year 2 70,000 135,000 95,000 125,000 Year 3 80,000 90,000 90,000 90,000 Year 4 40,000 65,000 80,000 60,000 Net present value (3.798) 4,276 14,064 14,662 Profitability index 98% 101% 106% 105% Internal rate of return 11% 13% 14% 15% Which project(s) should Investors, Inc. select during the upcoming year under each budgeted amount of funds? No Budget Restriction P600,000 Available Funds P300,000 Available Funds A. Projects 2, 3, & 4 Projects 3 & 4 Projects 3 B. Projects 1, 2, & 3 Projects 2, 3 & $ Projects 3 & 4 C. Projects 1, 3 & 4 Projects 2 & 3 Projects 2 D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4 April 16, 2005

Final Pre-board Examination

Financial Statement Analysis Horizontal Analysis 172.Sales for a three year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0 million. Using year 1 as the base year, the respective percentage increase in sales in year 2 and 3 are A. 115% and 125% C. 115% and 130% B. 115% and 109% D. 87% and 80% Liquidity & Activity Ratios 37. Which ratio is most helpful in appraising the liquidity of current assets? A. current ratio C. debt ratio B. acid-test ratio D. accounts receivable turnover 173.The days sales-in-receivable ratio will be understated if the company A. Uses a natural business year for its accounting period B. Uses a calendar year for its accounting period C. Uses average receivable in the ratio calculation D. Has high sales at the end of the year 174.Baguio Company's accounts receivable were P600,000 at the beginning of the year and P800,000 at the end of the year. Cash sales for the year were P300,000. The accounts receivable turnover for the year was 5 times. Baguio Company's total sales for the year were: A. P 800,000 C. P3,300,000 B. P1,300,000 D. P3,800,000 40. The following financial data have been taken from the records of Lotion Company: Accounts receivable P200,000 Accounts payable 80,000 Bonds payable, due in 10 years 500,000 Cash 100,000 Interest payable, due in three months 25,000 Inventory 440,000 Land 800,000 Notes payable, due in six months 250,000 What will happen to the ratios below if Lotion Company uses cash to pay 50 percent of its accounts payable? A. B. C. D. Current Ratio Increase Decrease Increase Decrease Page 44 of 67

MANAGEMENT ADVISORY SERVICES Acid-test Ratio

Increase

CPA Review School of the Philippines Decrease

Decrease

Increase

Profitability Ratios 175.Selected financial data for May on Company appear below: Account Balances Beginning of Year End of Year Preferred stock P125,000 P125,000 Common stock 300,000 400,000 Retained earnings 75,000 185,000 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 for the year is closest to: A. 17% C. 23% B. 19% D. 25% Solvency Ratios 176.A firm’s financial risk is a function of how it manages and maintains its debt. Which one of the following sets of ratios characterizes the firm with the greatest amount of financial risk? A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity 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 38. The times interest earned ratio of Maxi Company is 4.5 times. The interest expense for the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: A. P22,000 C. P54,000 B. P42,000 D. P66,000 Other Ratios 177.Recto Co. has a price earnings ratio of 7, earnings per share of P2.20, and a pay out ratio of 80%. The dividend yield is A. 80.0% C. 11.4% B. 39.3% D. 31.4% 178.The following were reflected from the records of War Freak Company: Earnings before interest and taxes Interest expense April 16, 2005

P1,250,000 250,000

Preferred dividends Payout ratio Shares outstanding throughout 2003 Preferred Common Income tax rate Price earnings ratio The dividend yield ratio is A. 0.50 B. 0.40

Final Pre-board Examination 200,000 40 percent 20,000 25,000 40 percent 5 times C. 0.12 D. 0.08

39. The Delta Company projects the following for the upcoming year: Earnings before interest and taxes Interest expense Preferred stock dividends Common stock dividend payout ratio Average number of common shares outstanding Effective corporate income tax rate The expected dividend per share of common stock is A. P1.70 C. P2.10 B. P1.86 D. P1.00

P40 million P 5 million P 4 million 20% 2 million 40%

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 outstanding 2,000 shares – P200,000  Common stock, par value, P5; authorized 40,000 shares;  Issued and outstanding 20,000 shares – 100,000 Adventure’s net income for the first year ended December 31 was P1,880,000, but no dividends were declared. How much was Adventure’s book value per common share at December 31? A. P97 C. P99 B. P98 D. P120 41. The Dawson Corporation projects the following for the year 2003. Earnings before interest and taxes Interest expense Preferred stock dividends Common stock dividend payout ratio

P35 million P 5 million P 4 million 30% Page 45 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Common shares outstanding 2 million Effective corporate income tax rate 40% The expected common stock dividend per share by Dawson Corporation for 1995 is A. P2.34 C. P1.80 B. P2.70 D. P2.10 Integrated Ratios 28. Calumpang Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The president is unhappy with the current return on assets, and he thinks it could be doubled. This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by 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? A. 25% C. 50% B. 36% D. 60% 179.JayR has debt ratio of 0.50, a total asset turnover of 0.25, and a profit margin of 10%. The president is unhappy with the current return on equity, and he thinks it could be doubled. This could be accomplished: (1) by increasing the profit margin to 14%; and, (2) by increasing debt utilization. Total asset turnover will not change. What new debt ratio, along, with 14% profit margin is required to double the return on equity? A. 0.75 C. 0.65 B. 0.70 D. 0.55 180.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The dividend payout rate is 60%. Beginning stockholders’ equity was P850,000 and current liabilities are projected to be P300,000 at the end of 2002. What are the total equities available if the ratio of long-term debt to stockholders’ equity is 60%? A. P1,788,000 C. P2,046,000 B. P1,980,000 D. P858,000 40. Assume you are given the following relationships for the Marhya Company: Sales/total assets Return on assets (ROA) Return on equity (ROE) The Marhya Company’s debt ratio is A. 40% C. 35% B. 60% D. 65% April 16, 2005

1.5X 3% 5%

Final Pre-board Examination

181.Selected data from Shyr Company’s year-end financial statements are presented below. The difference between average and ending inventory is immaterial. Current ratio 2.0 Quick ratio 1.5 Current liabilities P120,000 Inventory turnover (based on cost of sales) 8 times Gross profit margin 40% Shyr’s net sales from the year were A. P800,000 C. P480,000 B. P1,200,000 D. P672,000 182.Salami Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The president is unhappy with the current return on assets, and he thinks it could be doubled. This 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 margin, is required to double the return on assets? A. 35% C. 40% B. 45% D. 50% 42. Delo Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%. The president is unhappy with the current return on equity, and he thinks it could be doubled. 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% profit margin, is required to double the return on equity? A. 0.75 C. 0.65 B. 0.70 D. 0.55 Working Capital Finance Working Capital Financing Policy Conservative Financing Policy 183.As a company becomes more conservative with respect to working capital policy, it would tend to have a(n). A. Increase in the ratio of current liabilities to noncurrent liabilities. B. Decrease in the operating cycle C. Increase in the operating cycle D. Increase in the ratio of current assets to noncurrent liabilities

Aggressive Financing Policy Page 46 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

184.Jekel Company follows and aggressive financing policy in its working capital management while Michael Corporation follows a conservative financing policy. Which one of the following statements is correct? A. Jekel has low ratio of short-term debt to total debt while Michael has a high ratioof shortterm debt to total debt B. Jekel has a low current ratio while Michael has a high current ratio C. Jekel has less liquidity risk while Michael has more liquidity risk D. Jekel finances short-term assets with long-term debt while Michael finances short-term assets with short-term debt. 185.Nutty Co. has total fixed assets of P100,000 and no current liabilities. The table below displays its wide variation in current asset components. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Cash P16,000 P10,000 P11,000 P18,000 Accounts receivable 70,000 30,000 40,000 90,000 Inventory 20,000 60,000 70,000 10,000 Total P106,000 P100,000 P121,000 P118,000 If Nutty’s policy is to finance all fixed assets and half the permanent current assets with longterm financing and rest with short time-financing, what is the maximum level of short-term financing? A. P68,000 C. P150,000 B. P50,000 D. P71,000 Cash Management Optimal cash conversion size 186.Gear Inc. has a total annual cash requirement of P14,700,000 which are to be paid uniformly. Gear 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. What is the optimal cash conversion size? A. P50,000 C. P80,000 B. P62,500 D. P70,000 187.Morr Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. 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. What is the optimum average cash balance? A. P60,000 C. P43,000 B. P55,000 D. P27,500 April 16, 2005

Final Pre-board Examination

Total cost of keeping cash 188.Ocampo Co. estimates its total annual cash requirements at about P600,000. It costs the company P25 to convert cash from marketable securities and vice versa. Ocampo’s yield on its temporary investments is 12%. What is the total costs of keeping Ocampo’s cash? A. P2,846 C. P6,000 B. P1,897 D. P3,242 Lockbox System 189.The Alabang Company has a daily average collection of checks of P250,000. It takes the company 4 days to convert the checks to cash. Assume a lockbox system would have a net cost of P25,000 per year, but any additional funds made available could be invested to net 8 percent per year. Should Alabang adopt the lockbox system? A. Yes, the system would free P250,000 in funds B. Yes, the benefits of the lock-box system exceed the costs C. No, the benefit is only P10,000 D. No, the firm would lose P5,000 per year if the system were used Receivables Management Credit policy 190.It is held that the level of accounts receivable that a firm has or holds reflects both the volume of a firm’s sales on account and a firm’s credit policies. Which one of the following items is not considered as part of a firm’s “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. C. The length of time for which credit is extended. D. The size of the discount that will be offered.

Incremental investment in receivables 191. Lipa Company currently has annual sales of P2,000,000. Its average collection period is 40 days, and bad debts are 5 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year. What would be the incremental investment in receivables if the change were made? A. P(16,667) C. P(48,611) B. P(27,167) D. P(45,833) Page 47 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Increase in accounts receivable 192.Matang-Lawin’s 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 relaxation of credit standards would increase credit sales by 30 percent and increase the average collection period from 30 days to 45 days. Based on a 360-day year, the proposed relaxation of credit standards would result in an expected increase in the accounts receivable balance of A. P3,440,000 C. P3,040,000 B. P1,440,000 D. P960,000 193.Relax Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. Relax estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period 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 A. P540,000 C. P900,000 B. P2,700,000 D. P1,620,000 194.Real Company’s budgeted sales for the coming year are P50,000,000 of which 75% are expected to be credit sales at terms of n/30. Real estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit standards will increase average accounts receivable balance by: A. P1,200,000 C. P1,875,000 B. P3,125,000 D. P5,000,000 Inventory Management Economic Order Quantity 195.Gerstein Company manufactures a line of deluxe office fixtures. The annual demand for its miniature oak file is estimated to be 5,000 units. The annual cost of carrying one unit in inventory is P10, and the cost to initiate a production run is P1,000. There are no miniature oak files on hand, and Gerstein has scheduled four equal production runs of the miniature oak file for the coming year, the first of which is to be rum immediately. Gerstein has 250 business days per year. Assume that sales occur uniformly throughout the year and that production is instantaneous. The number of production runs per year of the miniature oak files that would minimize the sum of carrying costs and setup costs for the coming year is April 16, 2005

A. 7 B. 2

Final Pre-board Examination C. 4 D. 5

196.Gleim Company, which manufactures a line of appliances, has an annual demand for its HD washing machine estimated at 7,500 units. The annual cost of carrying one unit of inventory is P200, and the cost to initiate a production run is P5,000. There are no HD washing machine on hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the coming year. Gleim has 250 business days per year. Assume that sales occur uniformity throughout the year and that production is instantaneous. If Gleim does not maintain a safety stock, the estimated total carrying costs and total set-up costs for the coming year are: A. B. C. D. Carrying Costs P150,000 P300,000 P150,000 P300,000 Set-up Costs 25,000 25,000 5,000 5,000

Annual cost of keeping inventory 197.The Cindy Fashion uses about 200,000 yards of a particular fabric each year. The fabric costs 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, much of which represents the opportunity cost of the funds tied up in inventory. How much total annual costs are associated with the current inventory policy? A. P16,575 C. P25,950 B. P18,750 D. P9,200 Opportunity cost 198.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could not guarantee this delivery schedule. In order to ensure availability of these components, Luzon is considering the purchase of all 60,000 units at the beginning of the year. Assuming Luzon can invest cash at 8%, the company’s opportunity cost of purchasing the 60,000 units at the beginning of the year is A. P132,000 C. P150,000 B. P144,000 D. P264,000 Service level 199.The sales office of Hermit Company has developed the following probability distributed for daily sales of a perishable product. Page 48 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Final Pre-board Examination

X (Units Sold) P(Sales-X) 200 0.2 250 0.5 300 0.2 350 0.1 The product is restocked at the start of each day. If the company desires a 90% service level in satisfying sales demand, the initial stock balance for each day should be A. 245 C. 315 B. 300 D. 220

Units of Safety Stock Probability of Stockout 0 0.50 100 0.30 200 0.14 300 0.05 The optimal safety stock level for the company based on the units of safety stock level above is A. 0 units C. 300 units B. 100 units D. 400 units

Safety Stock & Reorder Point 200.When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item A. decreased by the amount of the safety stock B. is one-half the level of the safety stock C. Increases by one-half the amount of the safety stock D. Increases by the amount of the safety stock

Trade Credit 204.If a firm purchases raw materials from its supplier on a 2/10, n/50 term, the equivalent annual interest (using 360-day year) of giving up a cash discount and making payment on the 60th day is A. 14.73% C. 14.69% B. 18.37% D. 12.29%

201. The Glimpse Corporation purchases 60,000 headbands per year. The average purchase lead 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: Safety Stock Reorder Point

A. 1,750 6,750

B. 1,750 5,250

C. 1,167 6,750

D. 1,167 5,250

Stockout Cost 202.Which of the following items is irrelevant for a company that is attempting to minimize the cost of the stockout? A. Cost of placing an order C. Storage cost of inventory B. Contribution margin on lost sales D. Size of the safety stock Optimal Safety Stock Level 203.Each stockout of a product sold by FM Co. costs P1,750 per occurrence. The company’s 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 levels of safety stock are: April 16, 2005

205.If a retailer’s term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of not taking the discount? Assume a 360-day year. A. 24.00% C. 24.74% B. 37.11% D. 31.81% 206.Calvin Lopez regularly purchases from Jackson at terms of 3/10, n/45. What is the simple nominal cost of foregoing the discount if Calvin pays on the 55th day? A. 24.74% C. 20.24% B. 31.81% D. 24.49% 207.If a firm purchases raw materials from its supplier on a 3/10, n/50 term, the approximate annual interest rate (using 360-day year) of giving up a cash discount and making payment on the 60th day is A. 22.27 percent C. 18.37 percent B. 27.84 percent D. 14.69 percent Short-term Financing 208.The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking account. Assuming Dean would normally maintain a zero balance in its checking account , the effective interest rate on the loan is Page 49 of 67

MANAGEMENT ADVISORY SERVICES A. 8.0% B. 10.0%

CPA Review School of the Philippines C. 11.11% D. 6.4%

209.Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per annum. The bank requires 10 percent of loan as compensating balance in its new checking account. The loan is payable at the end of 6 months. The effective interest rate if this loan is A. 28.21% C. 14.29% B. 27.27% D. 15.38% 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 of the loan? A. 17.65% C. 15.59% B. 15.79% D. 15.00% Cost of Capital Cost of Debt 211. The Medium Company’s bonds have 10 years remaining to maturity. Interest is paid annually; the bonds have a P1,000 face value; and the coupon interest rate is 9 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 B. 10.00 percent D. 7.50 percent Dividend Growth Model 212.The dividends and stock price of Mikey Company are expected to grow at 7 percent per year after this year. Mickey’s common stock sells for P25 per share, its last dividend was P2.50 and the company will pay P2.675 at the end of the current year. Mickey should pay P2.50 flotation cost. What is the expected returns on retained earnings for Mickey Company? A. 17.77 percent C. 18.45 percent B. 18.89 percent D. 19.72 percent 213.The Mint’s Company’s last dividend was P4.50; its growth rate is 6 percent and the stock now sells for P60. Flotation cost is P5.00 What is Mint Company’s cost of new common stock? A. 8.67 percent C. 14.18 percent B. 14.67 percent D. 13.50 percent April 16, 2005

Final Pre-board Examination

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 investors are anticipating the common dividend to grow at a rate of 6% per annum. The cost to issue new common stock will be 5 percent of the market value. The cost of retained earnings and new common stock, respectively, are A. B. C. D. Retained earnings 12.14% 11.83% 11.79% 12.14% Common stock 11.83% 12.14% 12.14% 11.79% Capital Asset Pricing Model 215.The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return which 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 coefficient for MNO is estimated to be 0.60. MNO is subject to an effective corporate income tax rate of 40 percent. A. 12.00 percent C. 9.20 percent B. 12.20 percent D. 7.20 percent 216.Based on the following data, compute the market return for Box’s stock: Required return on Box common Beta coefficient Risk-free rate A. 13.0 percent C. 25.0 percent b. 18.0 percent D. 16.0 percent

15 percent 1.5 9.0 percent

Weighted-Average Cost of Capital 217.A firm maintains a debt/equity ratio of 1.0. The debt consists of bonds with a before tax cost of 9%. The equity consists of common stock with a cost of 18%. The marginal corporate tax rate is 40%. What is the weighted average cost of capital? A. 8.1% C. 10.8% B. 9.9% D. 11.7% Marginal Cost of Capital 218.Raiders, Inc. just paid P3.00 cash dividend per share. Over the past 5 years, Raiders’ dividends averaged an 8 percent growth. The common share of Raiders currently sells at P62.50; flotation cost on common shares is P2.50 per share. What is the marginal cost of capital for new issues of common shares? Page 50 of 67

MANAGEMENT ADVISORY SERVICES A. 13.0 percent B. 13.4 percent

CPA Review School of the Philippines C. 13.2 percent D. 12.8 percent

219.The Beta Corporation asks you to determine its marginal cost of capital. Beta’s current capital structure consists of 45 percent debt, 15 percent preferred stock and 40 percent common equity. The separate marginal costs of the various components of the capital structure are as follows: debt, after-tax 5.0 percent; preferred stock, 9 percent; retained earnings, 12 percent; and new common stock, 13.5 percent. If Beta has P15 million investible retained earnings, and Beta has an opportunity to invest in an attractive project that costs P60 million, what is the marginal cost of capital of Beta Corporation? A. 8.40 percent C. P9.00 percent B. 8.63 percent D. P9.88 percent 230.The Cardinal Company sets the following capital structure for 2003: Debt 50.0% Preferred equity 10.0% Common Equity 40.0% The company is planning to invest in a project that requires the company P4,000,000 costs. At the size of the new funds required, the estimated individual marginal cost of capital are: Debt (after tax) 9.00 percent Preferred 12.50 percent Retained earnings 14.00 percent Common shares 15.00 percent What are the marginal weighted average cost of capital for Cardinal Company if it has available retained earnings of P600,000 and P1,600,000 respectively? Available Retained Earnings P600,000 P1,600,000 A. 11.75% 11.35% B. 11.60% 11.35% C. 11.75% 11.75% D. 11.55% 11.55% Retained Earnings Breakpoint 231.Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current capital structure is 40% debt and 60% common equity, The director of capital budgeting has determined that the optimal capital spending for next year is P1,200,000. If Resi follows a strict residual dividend policy, what is the expected dividend payout ratio for next year? A. 80.0% C. 40.0% April 16, 2005

B. 66.7%

Final Pre-board Examination D. 10.0%

Quantitative Methods Linear Programming 232.Anderson Co. manufactures two different products, A and B. The company has 100 pounds of raw materials and 300 direct labor hours available for production. The time requirement and contribution margins per unit are as follows: A B Raw materials per unit (lbs) 1 2 Direct labor hours per unit 4 2 Contribution margin per unit P4 P5 The objective function for maximizing profits and the equation for the constrain on raw materials are: Objective Function Constraint on raw materials A. Max P1A + P2B 4A + 2B=100 B. Max P4A + P5B 1A + 2B=100 C. Max P4A + P2B 4A + 5B=100 D. Min P4A + P5B 4A + 5B=300 PERT-CPM 233.AGL Builders uses the critical path method to monitor construction jobs. The company is currently 2 weeks behind schedule on Job 501, which is the subject to P10,500 per week completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be crashed Activities Cost to Crash 1 week Cost to Crash 2 weeks BC P8,000 P15,000 DE P10,000 P19,600 EF P8,800 P18,500 AGL desires to reduce the normal completion time of Job 501 and, at the same time, report the highest possible income for the year. AGL should crash A. Activity BC 1 week and activity EF 1 week B. Activity BC 2 weeks C. Activity EF 2 weeks D. Activity DE 1 week and activity EF 1 week 234.Castle Building Company uses the critical path method to monitor construction jobs. The Page 51 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-perweek completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.

Final Pre-board Examination

The following activities can be crashed. Activities Cost to Crash 1 Week Cost to Crash 2 Weeks B-C P 8,000 P15,000 D-E 10,000 19,600 E-F 8,800 19,500 Castle desires to reduce the normal completion time of Job WW and, at the same time, report the highest possible income for the year. Castle should crash A. activity B-C 1 week and activity EF 1 week B. activity B-C 2 weeks C. activity D-E 1 week and activity B-C 1 week D. activity D-E 1 week and activity E-F 1 week Probabilities 235.CTV Company has three sales departments. Department FA process about 50 percent of CTV’s 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 company’s 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

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Final Pre-board Examination

had many left. A review of the records of sales of the past five seasons revealed the following frequency of hot dogs sold: Total Games 10,000 hot dogs 5 times 20,000 hot dogs 10 times 30,000 hot dogs 20 times 40,000 hot dogs 15 times 50 total games Hotdogs sell for P5.00 and cost MOYMOY P3 each. Unsold hotdogs are given to a local orphanage without charge. You have started and completed constructing a payoff table (conditional profits) as follows: Stocking Actions Demand 10,000 20,000 30,000 40,000 10,000 P20,000 P(10,000) P(40,000) P(70,000) 20,000 20,000 40,000 10,000 (20,000) 30,000 20,000 40,000 60,000 30,000 40,000 20,000 40,000 60,000 80,000 What are the expected payoff of stocking 30,000 hotdogs and the expected value of perfect information? A. B. C. D. Payoff of stocking 40,000 P18,000 P40,000 P40,000 P18,000 EV of Perfect Information P18,000 P18,000 P40,000 P40,000

Decision Tree 240.Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that silver worth of P15 million can be sold. There is a 20% probability that the silver will only be worth P500,000. What is the maximum Express would be willing to spend to develop the mine? A. P10,000,000 C. P3,100,000 B. P5,000,000 D. P0

Questions 238 & 239 are based on the following information. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The probability of cold weather on a given day at this time is 60%.

243.Moss Point Manufacturing recently completed and sold an order of 50 units that had the following costs: Direct materials P 1,500 Direct labor (1,000 hours @ P8.50) 8,500 Variable overhead (1,000 hours at P4.00) *4,000 Fixed overhead **1,400 *Appiied on the basis of direct labor hoars. **Applrcd at the rate of 10% of variable cost 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 estimated at A. P26,400 C. P37,950 B. P31,790 D. P38,500

238.The expected payoff if the vendor has perfect information is A. P3,900 C. P1,360 B. P2,200 D. P1,960 239.The expected payoff for selling coffee is A. P1,360 B. P2,200 April 16, 2005

C. P3,900 D. P1,960

Learning Curve 241.Soft, Inc. has a target total labor cost of P1,500 for the first four batches of a product. Labor is paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first batch take? A. 150 hours. C. 96.0 hours B. 58.6 hours D. 24.0 hours 242.Taal Company manufactures specialty components for the electronics industry in a highly labor intensive environment. May on Company has asked Taal to bid on a component that Taal made for May on last month. The previous order was for 80 units and required 120 hours of direct labor to manufacture. Mayon would now like 240 additional components. Taal experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed for Taal to complete 240 additional components is A. 360.0 C. 307.2 B. 187.2 D. 76.8

Page 53 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

244.Moss Point Manufacturing recently completed and sold an order of 50 units that had the following costs: Direct materials P1,500 Direct labor (1,000 hours @ P8.50) 8,500 Variable overhead (1,000 hours at P4.00) *4,000 Fixed overhead **1,400 P15,400 *Applied on the basis of direct labor hours. **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. If an 80 percent learning curve is applicable, Moss Point’s total costs on this order would be estimated at A. P26,400 C. P37,950 B. P31,790 D. P54,120 Information Systems 245.Which of the following is not a characteristic of a batch processing system? A. The collection of like transactions which are sorted and processed sequentially against a master file B. Keypunching of transactions, followed by machine processing C. The production of numerous printouts D. The posting of transaction, as it occurs, to several files without intermediate printouts. 246.The batch processing of business transactions can be the appropriate mode when A. the sequence of master file records is not relevant B. timeliness is a major issue C. a single handling of the data is desired D. economy of scale can be gained because of high volume of transactions 43. The least risky strategy for converting from a manual to a computerized accounts receivable system would be a A. direct conversion C. parallel conversion B. pilot conversion D. data base conversion 247.The real-time processing system of business transactions cannot be the appropriate mode when A. Economy of scale can be gained because of high volume of transactions B. Timeless is a major issue April 16, 2005

Final Pre-board Examination

C. A single handling of data is desired D. Master file data are accessed randomly 248.Which of the following comprises all of the data components of the data processing cycle? A. Batching, processing, output. B. Collection, refinement, processing, maintenance, output. C. Input, classifying, Batching, verification, transmission D. Collection, refinement, storing, output. 249.All activity related to a particular application in a manual system is recorded in a journal. The name of the corresponding item in a computerized system is a A. master file C. transaction file B. year-to-date file D. current balance file 250.The process of monitoring, evaluating and modifying a system as needed is referred to as system A. Design C. Review B. Analysis D. Maintenance 5. The proper sequence of activities in the systems development life cycle is A. Design, analysis, implementation, and operation. B. Design, implementation, analysis, and operation. C. Analysis, design, implementation, and operation. D. Programming, analysis, implementation, and operation. 251.The process of developing specifications for hardware, software, personnel hours, data resources, and information products required to develop a system is referred to as A. systems analysis C. systems design B. systems feasibility D. systems maintenance 252.The process of monitoring, evaluating, and modifying a system as needed is referred to as systems A. Analysis C. Maintenance B. Design D. Implementation 253.An integrated set of computer programs that facilitates the creation, manipulation, and querying of integrated files is called A. A translator C. An operating system Page 54 of 67

MANAGEMENT ADVISORY SERVICES B. A Database management system

CPA Review School of the Philippines D. A flat file system

254.One of the first steps in the creation of a database is to A. define common variables and fields used throughout the firm B. increase the secondary storage capacity, C. obtain software that will facilitate data retrieval. D. integrate the accounting system into the data base. 255.A system with several computers that are connected for communication and data transmission purposes but that permits each computer to process its own data is a A. distributed data processing network C. decentralized network B. centralized network D. multidrop network 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 B. The ability to more easily satisfy the unique needs of users C. Greater operating efficiency from the computer D. The assurance the programs will be written in a high-level language. 257.A major advantage of obtaining a package of applications programs from a software vendor is A. the likelihood of reducing the time span from planning to implementation. B. the ability to more easily satisfy the unique needs of users C. greater operating efficiency from the computer D. the assurance that the programs will be written in a high-level language 258.The least risky strategy for converting from a manual to a computerized accounts receivable system would be a A. direct conversion C. pilot conversion B. parallel conversion D. database conversion 259.Turnaround document A. Generally circulate only within the computer center B. Can be read and processed only by the computer C. Are generated by the computer and eventually return to it D. Are only used internally in an organization 4. Of the following, the greatest advantage of a database architecture is A. Data redundancy can be reduced. April 16, 2005

Final Pre-board Examination

B. Conversion to a database system is inexpensive and can be accomplished quickly. C. Multiple occurrences of data items are useful for consistency checking. D. Backup and recovery procedures are minimized. Situational Cost-Volume-Profit Analysis Questions 260 through 265 are based on the following: Pullman Company is a small but growing manufacturer of telecommunications equipment. The company has no sales force of its own; rather, it relies completely on independent sales agents to market its products. These agents are paid a commission of 15% of selling price for all items sold. Maui Soliman, Pullman’s controller, has just prepared the company’s budgeted income statement for next year. The statement follows: Pullman Company Budgeted Income Statement For the Year Ended December 31 Sales Manufacturing costs: Variable Fixed overhead Gross margin Selling and administrative costs: Commissions to agents Fixed marketing costs Fixed administrative costs Net operating income Less fixed interest cost Income before income taxes Less income tax (30%) Net income *Primarily depreciation on storage facilities

P16,000,000 P7,200,000 2,340,000 2,400,000 *120,000 1,800,000

9,540,000 6,460,000

4,320,000 2,140,000 540,000 1,600,000 480,000 P 1,120,000

As Maui handed the statement to Kim Viceroy, Pullman’s president, she commented, “I went ahead and used the agents’ 15% commission rate in completing these statements, but we’ve just learned that they refuse to handle our products next year unless we increase the commission rate to 20%.” “That’s the last straw,” Kim replied angrily. “Those agents have been demanding more and more, and this time they’ve gone too far. How can they possibly defend a 20% commission rate?” Page 55 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

“They claim that after paying for advertising, travel, and the other costs of promotion, there’s nothing left over for profit,” replied Maui. “I say it’s just plain robbery,” retorted Kim. “And I also say it’s time we dumped those guys and got our own sales force Can you get your people to work up some cost figures for us to look at?” “We’ve already worked them up,” said Maui. “Several companies we know about pay a 7.5% commission to their own salespeople, along with a small salary. Of course, we would have to 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 agents’ commissions.” The breakdown of the P2,400,000 cost figure follows: Salaries: Sales manager P 100,000 Salespersons 600,000 Travel and entertainment 400,000 Advertising 1,300,000 Total P2,400,000 “Super,” replied Kim. “And I note that the P2,400,000 is just what we’re paying the agents under the old 15% commission rate.” “It’s even better than that,” explained Maui. “We can actually save P75,000 a year because that’s what we’re having to pay the auditing firm now to check out the agents’ reports. So our overall administrative costs would be less.” “Pull all of these number together and we’ll show them to the executive committee tomorrow,” said Kim. “With the approval of the committee, we can move on the matter immediately.” 260.What is the breakeven point in pesos for next year assuming that the agents’ commission rate remains unchanged at 15%? A. P10,650,000 C. P 9,000,000 B. P12,000,000 D. P10,750,000 261.What is the breakeven point in pesos for next year assuming that the agents’ commission rate is increased to 20%? A. P13,171,000 C. P13,714,286 B. P15,000,000 D. P12,750,000 262.What is the breakeven point in pesos for next if the company employs its own sales force? A. P15,000,000 C. P13,090,909 B. P12,954,545 D. P15,157,895 April 16, 2005

Final Pre-board Examination

263.Assume that Pullman Company decides to continue selling through agents and pays the 20% commission rate. The volume of sales that would be required to generate the same net income as contained in the budgeted income statement for next year would be: A. P18,285,714 C. P19,225,000 B. P18,368,421 D. P20,414,714 264.The volume of sales at which net income would be equal regardless of whether Pullman Company sells through agents (at a 20% commission rate) or employs its own sales force: A. P11,625,000 C. P19,200,000 B. P12,000,000 D. P18,600,000 265.At a sales volume level of 2,250 units, Luzon Company’s contribution margin is one and onehalf of the fixed costs of P36,000. Contribution margin is 30% How many units must be sold by the company to breakeven? A. 1,250 C. 2,2580 B. 1,500 D. 2,520 Questions 45 through 50 are based on the following information: San Carlos operates a general hospital but rents space and beds to separate entities for specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges each 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 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 patient an average of P650 per day, had a capacity of 60 beds, operated 24 hours per day for 365 days, and had revenue of P10,676,250. Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were: Basis of Allocation Patient Days Bed Capacity Dietary P 328,500 Janitorial P 118,400 Laundry 197,100 Lab, other than direct charges to patients 410,625 Pharmacy 410,625 Repairs and maintenance 65,700 66,045 General administrative services 1,218,780 Rent 2,546,710 Page 56 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Billings and collections 689,850 Bad debt expense 246,375 Others 114,975 240,315 Total P2,463,750 P4,190,250 The only personnel directly employed by the Pediatrics Department are supervising nurses, 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: Annual Patient Days 10,000 – 14,000 14,001 – 17,000 17,001 – 23,725 23,726 – 25,550 25,551 – 27,375 27,376 – 29,200

Aides 21 22 22 25 26 29

Nurses 11 12 13 14 14 16

Supervising Nurses 4 4 4 5 5 6

The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics Department always employs only the minimum number of required full-time equivalent personnel. Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses, P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively. 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 capacity and even went as high as 20 patients more on some days. The hospital has an additional 20 beds available for rent for the coming fiscal year. 45. The contribution margin per patient day is A. P400.00 B. P450.00

C. P500.00 D. P525.00

46. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory nurses? A. 9,500 C. 10,250 B. 9,820 D. 12,000 April 16, 2005

Final Pre-board Examination

47. The number of patient days needed to cover total costs is A. 14,780 C. 15,820 B. 15,140 D. 16,080 48. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as in the past year, what would be the increase in revenue? A. P994,500 C. P1,054,500 B. P877,500 D. P 897,500 49. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied per patient day is A. P229,350 C. P229,650 B. P229,500 D. P239,350 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 B. P1,187,238 D. P1,520,000 Questions 41 through 45 are based on the following: Anilao Ski Company recently expanded its manufacturing capacity to allow it to product up to 15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of 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.

Selling price per unit Variable cost per unit

Mountaineering P88.00 52.00

Touring P80.00 52.80

Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if the touring model is produced. Anilao Ski Company is subject to a 40% income tax rate. 41. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs of touring model skis will the company have to sell? A. 13,118 C. 13,853 B. 12,529 D. 4,460 42. The total sales revenue at which Anilao Ski Company would make the same profit or loss Page 57 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

regardless of the ski model it decided to produce is A. P880,000 C. P924,000 B. P422,400 D. P686,400 43. How much would the variable cost per unit of the touring model have to change before it had the same breakeven point in units as the mountaineering model? A. P2.68/unit increase C. P5.03/unit decrease B. P4.53/unit increase D. P2.97/unit decrease 44. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring skis increases by 10%, the new breakeven point will be A. 10,730 pairs B. 13,007 pairs C. 12,812 pairs D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting 45. If the Anilao Ski Company sales department could guarantee the annual sale of 12,000 skis of either model, Anilao would A. Produce touring skis because they have a lower fixed cost. B. Produce only mountaineering skis because they a lower breakeven point. C. Produce mountaineering skis because they are more profitable. D. Be indifferent as to which model is sold because each model has the same variable cost per unit. Questions 266 through 272 are based on the following information: Calamba Hospital operates a general hospital but rents space and beds to separate entities fro specialized treatment such as pediatrics, maternity, psychiatrics, etc. Calamba charges each 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 entity. Space and bed rentals are fixed for the year. 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 days, and had revenge of P1,138,800. Expense charged by the hospital to the Pediatrics Department for the year ended June 30 were: Basis of Allocation Patients Days Bed Capacity April 16, 2005

Dietary Janitorial Laundry Lab. Other than direct charges to patients Pharmacy Repairs and maintenance General administrative services Rent Billings and collections Bad debt expense Other

Final Pre-board Examination P42,952 P12,800 28,000 47,800 33,800 5,200 40,000 47,000 18,048 P262,800

7,140 131,760 275,320

P453,000

The only personnel directly employed by the Pediatrics Department are supervising nurses, 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: Annual Patient Days Aides Nurses Supervising Nurses 10,000 – 14,000 21 11 4 14,001 – 17,000 22 12 4 17,001 – 23,725 22 13 4 23,726 – 25,550 25 14 5 25,551 – 27,375 26 14 5 27,376 – 29,200 29 16 6 The staffing levels above represent full-time equivalents, and it should be assumed that the Pediatrics Department always employs only the minimum number of required full-time equivalent personnel. Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000; 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. 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 capacity and even went as high as 20 patients more on some days. The hospital has an additional 20 beds available for rent for the coming fiscal year. 266.The variable expense per patient day is Page 58 of 67

MANAGEMENT ADVISORY SERVICES A. P15.08 B. P12.50 267.The contribution margin per patient day is A. P49.92 B. P52.50

CPA Review School of the Philippines

Final Pre-board Examination

C. P15.00 D. P50.00

272.What is the increased fixed cost applied for bed capacity, given the increased number of beds? A. P151,000 C. P147,000 B. P173,950 D. P152,000

C. P50.00 D. P52.00

Questions 273 thru 275 are based on the following information. Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 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 outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms. 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.

268.How many patient days are necessary to cover fixed costs for bed capacity and for supervisory nurses? A. 9,500 C. 12,500 B. 11,500 D. 10,500 269.The number of patient days needed to cover total costs is A. 14,200 C. 15,820 B. 15,200 D. 14,220 270.If the Pediatrics Department rented an additional 20 beds and all other factors remain the same as in the past year, what would be the increase in revenue? A. P99,450 C. P105,450 B. P87,750 D. P89,750 271.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied per patient day is A. P22,935 C. P22,965 B. P22,950 D. P23,935

A projected income statement for the year ended December 31, 2002, prepared by the accountant is shown below. Sales P95,000 Cost of food sold P28,500 Wages & fringe benefits: Restaurant help 8,150 Delivery help 17,300 Rent 4,800 Accounting services 3,600 Depreciation: Delivery equipment 5,000 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

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

274.What is the breakeven point in number of pizzas that must be sold? A. 25,929 C. 18,150 B. 23,569 D. 42,114 275.What is the cash flow breakeven point in number of pizzas that must be sold? A. 19,529 C. 12,990 B. 21,284 D. 10,773

Questions 276 through 280 should be answered independent of each other. They should be answered based the following most recent income statement for OPMACO COMPANY that appears below: OPMACO Company Income Statement For the Year Ended December 31 Sales 45,000 units @ P10 P450,000 Less cost of goods sold: Direct materials P90,000 Direct labor 78,300 Manufacturing overhead 98,500 266,800 Gross margin 183,200 Less operating expenses: Selling expenses: Variable: Sales commissions P27,000 Shipping 5,400 32,400 Fixed (advertising, salaries) 120,000 Administrative: Variable (billing and other) 1,800 Fixed (salaries and other) 48,000 202,200 Net loss P(19,000) All variable expenses in the company vary in terms of unit sold, except for sales commissions, which are based on peso sales. Variable manufacturing overhead is 30 centavos per unit. There were no beginning or ending inventories. OPMACO Company's plant has a capacity of 75,000 units per year. 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. April 16, 2005

Final Pre-board Examination

276.For next year, the vice president would like to reduce the unit setting price by 20%. She is certain that this would fill the plant to capacity. What would be the profit if the plan is implemented? A. P 2,750 C. P 1,250 B. P(6,250) D. P(4,000) 277.For next year, the sales manager would like to increase the unit selling price by 20%, increase the sales commission to 9% of sales, and increase advertising by P100,000. Based on marketing studies, he is confident this would increase sales by one-third. What would be the profit under this plan? A. P50,200 C. P108,000 B. P79,000 D. P 800 278.The president believes it would be a mistake to change the unit selling price. Instead, he wants to use less costly materials in manufacturing units of products, thereby reducing unit costs by 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 B. 48,000 D. 32,000 279.OPMACO Company's board of directors believes that the company's problem lies in inadequate promotion. By how much can advertising be increased and still allow the company to earn a target return of 4.5% on sales of 60,000 units? A. P 32,000 C. P39,200 B. P152,000 D. P59,000 280.The company has been approached by an overseas distributor who wants to purchase 9,500 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 by 25%. In addition, a P5,700 special insurance fee would have to be paid by OPMACO Company to protect the goods in transit. Regular business would not be disturbed by this special order. What unit price would have to be quoted on the 9,500 units by OPMACO Company to allow the company to earn a profit of P14,250 on total operations? A. P8.35 C. P7.35 B. P6.35 D. P9.35 Questions 43 through 47 are based on the following information. Page 60 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

The Statement of Income of Sana, Inc., which represents the operating results for the current fiscal year ending December 31, had sales of 1,800 tons of product during the current year. The manufacturing capacity of Sana's facilities is 3,000 tons of product. Consider each question's situation separately. Sales P900,000 Variable costs Manufacturing P315,000 Selling costs 180,000 Total variable costs P495,000 Contribution margin P405,000 Fixed costs Manufacturing P90,000 Setting 112,500 Administration 45,000 Total fixed costs P247,500 Net income before income taxes P157,500 Income taxes (40%) (63,000) Net income after income taxes P94,500 43. The breakeven volume in tons of product for the year is (E) A. 420 C. 495 B. 1,100 D. 550 44. 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 Sana can expect for next year is (E) A. P135,000 C. P283,500 B. P110,250 D. P184,500

Final Pre-board Examination

program costing P61,500 annually would need to be undertaken for the next two or three years In addition, a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Sana's current after-tax income of P94,500? (M) A. 307.5 C. 273.33 B. 1,095 D. 1,545 47. Without prejudice to preceding questions, assume that Sana estimates that the per ton selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs will not change. What sales volume in pesos will be required to earn an after-tax net income of P94,500 next year? (M) A. P1,140,000 C. P1,500,000 B. P825,000 D. P1,350,000 Variable & Absorption Costing Question Nos. 48 through 50 are based on the following information. This makes no sense at all, “said Tom, President of Horizon, Inc. "We sold the 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 statements to which Tom was referring are shown below (absorption costing basis): 2004 2005 Sales (20,000 units each year) P700,000 P700,000 Less cost of goods sold 460,000 400,000 Gross margin 240,000 300,000 Less: Operating expenses 200,000 200,000 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

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

The statements above show the results of the first two years of operation. In the first year (2004), the company produced and sold 20,000 units. In 2005, the company again sold 20,000 units, but it increased production in order to have a stock of units on hand, as shown below: 2004 2005 Production in units 20,000 25,000 Sales in unite 20,000 20,000 Variable production cost per unit P8 P3 Fixed manufacturing OH costs (total) P300,000 P300,000 Horizon produces a single product. Fixed manufacturing overhead costs are applied to the product on the basis of each year’s production, (Thus, a new fixed manufacturing overhead rate is computed each year) Variable selling and administrative expense are P1 per unit sold. 48. Had the company used variable costing, the profit for each year , 2004 and 2005, would have been: (E) A. P40,000, P100,000 C. P100,000, P100,000 B. P100,000, P40,000 D. P40,000, P40,000 49. Using the absorption costing, the product’s unit cost for 2004 and 2005, respectively, are: (E) A. B. C. D. 2004 P8 P23 P23 P8 2005 P8 P23 P20 P9 50. If JIT has been in use during 2005, what would the company’s net income have been under absorption costing? (M) A. P100,000 C. P20,000 B. P40,000 D. P60,000 Standard Costing & Variance Analysis 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 manufacturer of a popular consumer product. During your first week on the job, the vice 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 this morning for the purpose of leading a discussion on the variances reported for last period. Anxious to favorably impress the executive committee, you took the variances and supporting data home last night to study. April 16, 2005

Final Pre-board Examination

On your way to work this morning, the papers were laying on the seat of your new, red convertible. As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew them over the edge of the bridge and into the stream below. You managed to retrieve only one page, which contains the following information: Standard Cost Summary Direct materials, 6 pounds at P3 P18.00 Direct labor, 0.8 hours at P5 4.00 Variable overhead, 0.8 hours at P3 2.40 Fixed overhead, 0.8 hours at P7 5.60 P30.00 Total V AR IAN C E S R E P O R TE D Standard Price Spending Quantity or Cost * or Rate Or Budget Efficiency Volume Direct materials P405,000 P6,900 F P9,000 U Direct labor 90,000 4,850 U 7,000 U Variable overhead 54,000 P1,300 F ?@ Fixed overhead 126,000 500 F P14,000 U * Applied to Work in process during the period @ Figure obliterated. You recall that manufacturing overhead cost is applied to production on the basis of direct laborhours and that all of the materials purchased during the period were used in production. Since the company uses JIT to control work flows, work in process inventories are insignificant and can be ignored. It is now 8:30 A.M. The executive committee meeting starts in just one hour; you realize that to 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 discussion or answer any questions. 45. How many pounds of direct materials were purchased and used in production? A. 138,000 lbs. C. 132,000 lbs. B. 135,000 lbs. D. 137,300 lbs. 46. What was the actual cost per pound of material? A. P3.00 C. P3.05 B. P2.95 D. P3.10 Page 62 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

47. How many actual direct labor hours were worked during the period? A. 18,000 C. 16,600 B. 19,400 D. 18,970 48. How much actual variable manufacturing overhead cost was incurred during the period? A. P55,300 C. P58,200 B. P56,900 D. P59,500 49. What is the total fixed manufacturing overhead cost in the company’s flexible budget? A. P112,500 C. P140,000 B. P139,500 D. P125,500 50. What were the denominator hours for last period? A. 18,000 hours C. 22,000 hours B. 20,000 hours D. 25,000 hours Relevant Costing Questions 281 through 286 are based on the Statement of Income of Ilongo, Inc. which represents the operating results for the current fiscal year ending December 31, 2003. Ilongo had sales of 1,800 tons of product during the current year. The manufacturing capacity of Ilongo’s facilities is 3,000 tons of product. Consider each question’s situation separately. Sales P900,000 Variable costs Manufacturing P315,000 Selling costs 180,000 Total variable costs P495,000 Contribution margin P405,000 Fixed costs Manufacturing P 90,000 Selling 112,500 Administration 45,000 Total fixed costs P247,500 Net income before income taxes P157,500 Income taxes (40%) (63,000) Net income after income taxes P 94,500 281.The breakeven volume in tons of product for the 2003 is A. 420 C. 495 April 16, 2005

B. 1,100

Final Pre-board Examination D. 550

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 for 2004 is A. P135,000 C. P283,500 B. P110,250 D. P184,500 283.Ilongo has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton. Assume that all of Ilongo’s costs would be at the same levels and rates as last year. What net income after taxes would Ilongo make if it took this order and rejected some business from regular customers so as not to exceed capacity? A. P297,500 C. P211,500 B. P252,000 D. P256,500 284.Ignore the facts presented in the previous questions, and assume that Ilongo plans to market its product in a new territory. Ilongo estimates that an advertising and promotion program costing P61,500 annually would need to be undertaken for the next two or three years. In addition, a P25 per ton sales commission over and above the current commission to the sales force in the new territory would be required. How many tons would have to be sold in the new territory to maintain Ilongo’s current after-tax income of P94,500? A. 307.5 C. 273.33 B. 1,095 D. 1,545 285.Ilongo is considering replacing a highly labor-intensive process with an automatic machine. This change would result in an increase of P58,500 annually in manufacturing fixed costs. The variable manufacturing costs would decrease P25 per ton. The new breakeven volume in tons would be A. 990 C. 1,854 B. 1,224 D. 612 286.Ignoring the facts presented in Question 285, assume that Ilongo estimates that the per ton selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs will not change. What sales volume in pesos will be required to earn an after-tax net income of P94,500 next year? A. P1,140,000 C. P1,500,000 B. P825,000 D. P1,350,000 Page 63 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Questions 287 through 291 are based on the following information: Adrenal Company has a single product called a CAD. The company normally produces and sells 60,000 CADS each year at a selling price of P32 per unit. The company’s unit costs at this level of activity are given below: Direct materials P10.00 Direct labor 4.50 Variable manufacturing overhead 2.30 Fixed manufacturing overhead (P300,000 total ) 5.00 Variable selling expenses 1.20 Fixed selling expenses (P210,000 total) 3.50 Total cost per unit P26.50 287.Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each year without any increase in fixed manufacturing overhead costs. The company could increase its 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 A. P30,000 C. P10,833 B. P2,500 D. P208

Final Pre-board Examination

288.Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each year. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on the CADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only selling costs that would be associated with the order would be P3.20 per unit shipping cost. What is the break-even price on this order? A. P23.35 C. P28.65 B. P22.15 D. P21.70 289.The company has 1,000 CADS on hand that have some irregularities and are therefore considered to be “seconds”. Due to the irregularities, it will be impossible to sell these units at the normal price through regular distribution channels. What unit cost figure is relevant for setting a minimum selling price? A. P16.80 C. P18.00 B. P4.70 D. P1.20 290.Due to a strike in its supplier’s plant, Adrenal Company is unable to purchase more material for the production of CADS. The strike is expected to last for two months. Adrenal Company has 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 Adrenal’s 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

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

the manufacturer of a popular consumer product. During your first week on the job, the vice 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 this morning for the purpose of leading a discussion on the variances reported for last period. Anxious to favorably impress the executive committee, you took the variances and supporting data home last night to study. On your way to work this meaning, the papers were laying on the seat of your new, red convertible. As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew them over the edge of the bridge and into the stream below. You managed to retrieve only one page, which contains the following information: Standard Cost Summary Direct materials, 6 pounds at P3 P18.00 Direct labor, 0.8 hours at P5 4.00 Variable overhead, 0.8 hours at P3 2.40 Fixed overhead, 0.8 hours at P7 5.60 P30.00 Total VARIANCES REPORTED Standard Price or Spending Quantity or Volume Cost* Rate Or Efficiency Budget Direct materials P405,000 P6,900 F P9,000 U Direct labor 90,000 4,850 U 7,000 U Variable overhead 54,000 P1,300 F ?@ Fixed overhead 126,000 500 F P14,000 U * Applied to Work in process during the period @ Figure obliterated. 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 company uses JIT to control work flows, work in process inventories are insignificant and can be ignored. It is now 8:30 A.M. The executive committee meeting starts in just one hour, you realize that to 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 discussion or answer any questions. 292.How many pounds of direct materials were purchased and used in production? A. 138,000 lbs. C. 132,000 lbs. April 16, 2005

B. 135,000 lbs.

Final Pre-board Examination D. 137,300 lbs.

293.What was the actual cost per pound of material? A. P3.00 C. P3.05 B. P2.95 D. P3.10 294.How many actual direct labor hours were worked during the period? A. 18,000 C. 16,600 B. 19,400 D. 18,970 295.How much actual variable manufacturing overhead cost was incurred during the period? A. P55,300 C. P58,200 B. P56,900 D. P59,500 296.What is the total fixed manufacturing overhead cost in the company's flexible budget? A. P112,500 C. P140,000 B. P139,500 D. P125,500 297.What were the denominator hours for last period? A. 18,000 hours C. 22,000 hours B. 2.0,000 hours D. 25,000 hours Capital Budgeting Questions 298 through 301 are based on the following information: Pinewood Craft Company is considering the purchase of two different items of equipment, as described below: Machine A. A compacting machine has just come onto the market that would permit Pinewood Craft Company to compress sawdust into various shelving products. At present the sawdust is disposed of as a waste product. The following information is available on the machine: A. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12year useful life. The company uses straight-line depreciation and considers salvage value in computing depreciation deductions. B. The shelving products manufactured from use of the machine would generate revenues of 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, P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800. Page 65 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

Machine B. A second machine has come onto the market that would allow Pinewood Craft Company to automate a sanding process that is now done largely by hand. The following information is available. A. The new sanding machine would cost P234,000 and would have no salvage value at the end of its 13-year useful life. The company would use straight-line depreciation on the new machine. B. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of P9,000. C. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of P16,350 and P3,400 in annual maintenance costs. The current, hand-operated sanding procedure costs the company P78,000 per year in total. 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 years or less. (In all the following questions, please ignore income tax effect)

Final Pre-board Examination

Emong de Leon, the nervous accountant, spilled a cup of coffee over the annual financial statements for Bathala Company. Luckily, though the content of the financial statements were unreadable, the notes that he had developed had been still intact. He recalled that the balance sheet contained his favorite numbers (the first two digits) that suggested his ages when he got married, when he passed the CPA examination, and his present age, respectively, as follows: Current Liabilities Sales Interest expense

P320,000 P4,200,000 P80,000

The following additional information were among the notes that he had developed when he had finalized the financial statements: 1. All sales during the year were on account. 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 B. P84,000 D. P 92,500

3. The interest expense on the income statement relates to the bonds payable; the amount of bonds outstanding did not change during the year.

299.The annual savings in cost if Machine B is purchased is A. P56,250 C. P43,250 B. P38,250 D. P21,750

300.

The simple rates (%) of return for Machine A and Machine B are: Machine A Machine B

301.

A. 12.5 17.0

B. 20.0 17.0

C. 12.5 16.4

D. 20.0 16.4

The payback periods (years) for Machine A and Machine B are: Machine A Machine B

A. 4.5 4.0

B. 5.0 4.0

Financial Statement Analysis Questions 46 thru 50 are based on the following information. April 16, 2005

C. 4.5 4.2

D. 5.0 4.2

4. Selected balances at the beginning of the current fiscal year were: Accounts receivable P 270,000 Inventory 360,000 Total assets 1,800,000 5. Selected financial ratios computed from the unreadable financial statements for the current year are: Earnings per share P2.30 Debt-to-equity ratio 0.875 to 1 Accounts receivable turnover 14.0 times Current ratio 2,75 to 1 Return on total assets (using net Operating income) 18.0% Times interest earned 6.75 times Acid test ratio 1.25 to 1 Inventory turnover 6.5 times The selected balances and amounts that are to be included in the balance sheet and income statement for the current year are: Page 66 of 67

MANAGEMENT ADVISORY SERVICES

CPA Review School of the Philippines

46. Accounts receivable A. 300,000 B. 270,000

C. 330,000 D. 240,000

47. Inventory A. 360,000 B. 320,000

C. 420,000 D. 480,000

48. Total liabilities A. 1,120,000 B. 1,280,000

C. 2,400,000 D. 800,000

49. Cost of goods sold A. 2,730,000 B. 1,470,000

C. 2,420,000 D. 2,940,000

50. Total assets A. 2,100,000 B. 2,400,000

C. 3,000,000 D. 4,200,000

April 16, 2005

Final Pre-board Examination

Page 67 of 67