CPAR MAS Preweek - May 2005 Edition

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. 2. 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 3. 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. Managerial Accounting 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? Management Accounting Financial Accounting A. 1, 2, 5 3, 4 B. 3, 5 1, 2, 4 C. 2, 3 1, 4, 5 D. 3 1, 2, 4, 5 Cost Behavior 5. Which of the following graphs illustrates the behavior of a total variable cost? (E) May 2005

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Graph 1

Graph 2

Total units produced

Total units produced

Graph 3

Graph 4

Total units produces

Total units produced

A. Graph 2 B. Graph 3

C. Graph 4 D. Graph 1

6. 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 B. P1.67 D. P5.00 Cost-Volume-Profit Analysis Breakeven Point 7. 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 8. 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 Page 1 of 47

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9. 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 10. 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 11. 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: TV sets CD player A. P1,800,000 P1,800,000 B P1,800,000 P1,800,000 C. P1,500,000 P1,500,000 D. P1,531,915 P1,531,915

Radios 0.40 0.60

Radios P3,600,000 P1,600,000 P2,000,000 P2,042,553

Profit Planning 12. 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 May 2005

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13. 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 14. 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

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MANAGEMENT ADVISORY SERVICES

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Incremental Analysis 15. 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 16. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. During the current month when the unit 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 fixed costs remain constant. The fixed costs amounted to A. P80,000 C. P247,500 B. P360,000 D. P210,000 Point of Indifference 17. 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 18. Ravine 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, Ravine 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. Ravine Ski is subject to a 40% income tax rate. The total sales revenue at which Ravine Ski Company would make the same profit or loss regardless of the ski model it decided to produce is A. P8,800,000 C. P9,240,000 B. P4,224,000 D. P6,864,000 May 2005

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19. Valley of Fire Corporation has one department that produces three replacement parts for the company. However, only one part can be produced in any month because of the adjustments that must be made to the equipment. The department can produce up to 15,000 units of any one of the three parts in each month. The company expresses the monthly after tax cost/volume/profit relationships for each part using an equation method. The format of the equations and the equation for each replacement part are given below: (ATR) X ((SP – VC) x (U) – FC) ATR = after-tax rate VC = variable cost FC = fixed costs SP = selling price U = units Part Part Equations AL45 .6 ((P4.00 – P1.25) (U) – P33,400) BT65 .6 ((P4.05 – P2.55) (U) – P15,000) GM17 .6 ((P4.10 - P2.00) (U) - P22,365) The production and unit sales volume level at which Valley will be indifferent as to whether Part BT62 or GM17 is produced is A. 7,365 C. 10,380 B. 4,092 D. 12,275 20. 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 21. Zapatero, Inc. 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. Page 3 of 47

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The following cost and revenue data relate to Store 9 and are 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 eliminating sales commissions entirely in its stores and increasing fixed salaries by P2,142,000 annually. If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be indifferent to commission basis? A. 25,300 C. 18,505 B. 15,300 D. 21,000 Sensitivity Analysis 22. 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 Pol Bobadilla 23. If fixed costs increase while variable cost per unit remains constant, the contribution margin will be A. lower C. unchanged B. higher D. unpredictable 24. Firm D and Firm S are competitors within the same industry. Firm D produces its product using large amounts of direct labor. 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. B. Firm S will lose more profit than Firm D. C. Firm D and Firm S will lose the same amount of profit. May 2005

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D. Neither Firm D nor Firm S will lose profit. 25. 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 26. 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 27. 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 Page 4 of 47

MANAGEMENT ADVISORY SERVICES B. 101,740 units

CPA Review School of the Philippines D. 86,250 units

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28. 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 Madel is subject to 40 percent income tax rate, and annual fixed costs 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 costs 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 29. The Liberal 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 expenses 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 were the total fixed costs before the increase of P78,750? A. P341,250 C. P183,750 B. P262,500 D. P300,000

May 2005

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 P 35,000 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 Page 5 of 47

MANAGEMENT ADVISORY SERVICES

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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. 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. 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. 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 P169,000 Administrative 280,000 Total P440,000 Expected annual sales volume (390,000 boxes) P1,560,000 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. 27,600 B. 400,000 D. 29,300 Margin of Safety 32. Russini, Inc. had the following economic data for 2004: Net sales Contribution margin Margin of safety What is Russini's breakeven point in 2004? A. P360,000 C. P288,000 B. P320,000 D. P 80,000 May 2005

P400,000 P160,000 P 40,000

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33. Claremont Company had is a manufacturer of its only one product line. It had sales of P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was 10 percent. What are the company’s fixed costs? A. P72,000 C. P288,000 B. P80,000 D. P320,000 34. 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 constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs? A. P36,000 C. P432,000 B. P90,000 D. P360,000 35. 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? A. P36,000 C. P432,000 B. P90,000 D. P360,000 36. 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? A. P1,200,000 C. P1,260,000 B. P1,040,00 D. P1,020,000 Degree of Operating Leverage 37. A very high operating leverage indicates that a firm A. has high fixed costs B. has a high net income C. has high variable costs D. is operating close to its breakeven point 38. 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% Page 6 of 47

MANAGEMENT ADVISORY SERVICES B. 80%

CPA Review School of the Philippines D. 50%

39. 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 Variable Costing Vs. Absorption Costing Absorption Costing 40. When a firm prepares financial reports by using absorption costing, it may find that A. profits will always increase with increase in sales. B. profits will always decrease with decreases in sales. C. profit may decrease with increased sales even if there is no change in selling price and costs. D. decreased output and constant sales result in increased profit. 41. 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 42. The Bush Company has provided information concerning its projections for the coming year as follows: Net sales P10,000,000 Fixed manufacturing costs P 1,000,000 Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in inventory, what will the projected cost of goods sold be? A. P5,000,000 C. P7,000,000 B. P6,000,000 D. P8,000,000 43. Colger Company manufactures 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 May 2005

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44. 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 cost of goods sold for the coming year is A. P1,265,000 C. P1,115,000 B. P1,565,000 D. P 700,000

P565,000 P0.125 0.150 0.075 0.150

45. 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.  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 46. Black Forest, Inc. began operations on January 3. Standard costs were established in early January assuming a normal production volume of 160,000 units. However, Black Forest produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and 40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and 50% were selling. Black Forest had no raw materials or work-in-process inventories at December 31. Actual input prices and quantities per unit of product were equal to standard. Using absorption costing, Black Forest’s income statement would show: Cost of Goods Sold at Standard Cost Overhead Volume Variance Page 7 of 47

MANAGEMENT ADVISORY SERVICES A. B. C. D.

P8,200,000 P7,200,000 P6,500,000 P7,000,000

CPA Review School of the Philippines P800,000 Unf P800,000 Fav P700,000 Unf P700,000 Fav

47. 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 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 Absorption Costing vs. Variable Costing 48. 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. 49. 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 Absorption Costing & Variable Costing May 2005

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50. 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 51. 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. Fixed selling and adm.

2,000 units 8,000 units 7,000 units P 35,000 50,000 23,000 18,000 60,000 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 P143,000 144,000 142,000 Variable 143,000 144,000 142,000 144,000 52. 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: Page 8 of 47

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Under Absorption Costing Under Variable Costing

A. P3,750 P 0

CPA Review School of the Philippines B. P3,750 P7,500

C. P7,500 P0

D. P7,500 P0

53. Simple Corp. produces a single product. The following cost structure applied to their first year of operations, 2000: Variable Costs per Unit Annual Fixed Costs SG&A P2.00 P14,000 Production 4.00 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 Standard Costing & Variance Analysis Basic Concepts 54. Which of the following is a difference between a static budget and a flexible budget? 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. 55. 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 56. 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. May 2005

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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. 57. 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. 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. Setting Standards 58. 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. 59. The per-unit standard cost for variable overhead is normally based on the A. standard quantity of an input factor used in a unit of product. B. actual variable overhead cost incurred at the achieved level of production. C. budgeted total cost for variable overhead divided by the number of units expected to be produced. D. ratio of fringe benefits to the basic cost of labor. 60. 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 61. Derby Co. uses a standard costing system in connection with the manufacture of a line of TPage 9 of 47

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shirts. Each unit of finished product contains 2 yards of direct material. However, a 20 percent 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 product is A. P192 C. P288 B. P240 D. P300 62. 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 if 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 63. ABC Company is preparing a flexible budget for 2005 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 Raw Materials Variances 64. 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 65. The standard usage for raw materials is 5 pounds at P40.00 per pound. Cave Company spent P131,200 in purchasing 3,200 pounds. Cave used 3,150 pounds to produce 600 units of May 2005

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finished product. The material quantity variance is A. P6,000 unfavorable C. P5,200 unfavorable B. P3,200 unfavorable D. P2,000 unfavorable 66. 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 B. P3,375 D. P3,800 67. 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 68. 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 Direct Labor Variance 69. 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 70. 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 Page 10 of 47

MANAGEMENT ADVISORY SERVICES B. 22,500

CPA Review School of the Philippines D. 21,500

71. 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

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Two-Way Overhead Variances 72. 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 D. either favorable or unfavorable, depending on the budgeted overhead 73. 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 74. Karla 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. Karla’s budgeted overhead for the month is A. P12,800 C. P84,800 B. P18,800 D. P774,000 75. 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. P600F C. P1,600F B. P2,200U D. P1,600U 76. Universal Company uses a standard cost system and prepared the following budget at normal capacity for January Direct labor hours 24,000 Variable factory OH P48,000 Fixed factory OH P108,000 Total factory OH per DLH P6.50 Actual data for January 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 January?

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MANAGEMENT ADVISORY SERVICES A. P3,000 F B. P5,000 F

CPA Review School of the Philippines C. P9,000 F D. P10,500 U

77. The Terrain Company has a standard absorption and flexible budgeting system and uses a two-way analysis of overhead variances. Selected data for the June production activity are: Budgeted fixed factory overhead costs P 64,000 Actual factory overhead 230,000 Variable factory overhead rater per DLH P 5 Standard DLH 32,000 Actual DLH 32,000 The budget (controllable) variance for June is A. P1,000 favorable C. P6,000 favorable B. P1,000 unfavorable D. P6,000 unfavorable 78. 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 Pol Bobadilla 79. 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 B. 18,750 D. 20,325 80. CTV Company has a standard fixed cost of P6 per unit. At an actual production of 8,000 units a favorable volume variance of P12,000 resulted. What were total budgeted fixed costs? A. P36,000 C. P60,000 B. P48,000 D. P75,000 81. The Pinatubo Company makes and sells a single product and uses standard costing. During May 2005

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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 cost for January is A. P31,500 C. P32,375 B. P30,625 D. P33,250 82. 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 Questions 83 & 84 are based on the following information. Lucky Company sets the following standards for 2003: Direct labor cost (2 DLH @ P4.50) P 9.00 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.) 83. The amount of overhead volume variance for Lucky Company is A. P250 unfavorable C. P750 Unfavorable B. P500 unfavorable D. P375 Unfavorable Page 12 of 47

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84. Using the preceding data for Lucky Company, the controllable overhead variance was A. P505 favorable C. P245 favorable B. P505 unfavorable D. P245 unfavorable Three-Way Overhead Variances 85. 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 Variances 86. 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 fixed 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 87. The Virgin Island Company has standard variable costs as follows: 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, Virgin Island 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 favorable P1,900 unfavorable P1,400 favorable P1,400 unfavorable Efficiency P3,300 unfavorable P3,300 favorable P1,900 favorable P1,900 favorable May 2005

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88. 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 89. 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 single 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 Questions 90 & 91 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 90. 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 91. The standard hours allowed to make one unit of finished product are: (M) Page 13 of 47

MANAGEMENT ADVISORY SERVICES A. 1.0 B. 1.2

CPA Review School of the Philippines C. 1.5 D. 1.3

Questions 92 thru 94 are based on the following information. The Lustre Company produces its only product, Kool Chewing Gum. The standard overhead cost 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. 92. The amount of variable overhead spending variance is A. P6,300 Favorable C. P6,300 Unfavorable B. P 8,700 Favorable D. P8,700 Unfavorable 93. The total overhead controllable variance is A. P13,700 Favorable B. P 8,700 Favorable

C. P13,700 Unfavorable D. P 8, 700 Unfavorable

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

Preboard & Preweek Materials C. P22,500 Unfavorable D. P15,000 Unfavorable

Gross Profit Variance Analysis 95. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are as follows: Actual Expected Sales in units 10,000 9,500 Selling price per unit P11 P10 Variable expense per unit P 6 What are the price variance and price volume variance? A. B. C. D. Sales Price Variance P10,000 F P 5,000 F P 5,000 U P10,000 U Price Volume Variance P 5,000 F P10,000 U P10,000 F P 5,000 U Responsibility Accounting & Transfer Pricing Basic Concepts 96. 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. 97. 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

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98. Controllable costs are costs that A. are likely to respond to the amount of attention devoted to them by a specified manager. B. 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. will be unaffected by current managerial decisions. Page 14 of 47

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D. fluctuate in total in response to small change in the rate of utilization of capacity. 99. 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. Pertain to subunits of the entity and may be very detailed. D. Pertains to the entity as a whole and is highly aggregated.* Return on Investment 100. 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 Pol Bobadilla 101. 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% 102. Return on investment (ROI) is a term often used to express income earned on capital invested in a business unit. A company’s ROI would be increased if sales A. increased by the same peso amount as expenses and total assets increased. B. remained the same and expenses were reduced by the same peso amount that total asset increased. C. decreased by the same peso amount that expenses increased. D. and expenses increased by the same percentage that total assets increased. 103. If the investment turnover increased by 30% and ROS decreased by 20%, the ROI would A. increase by 4% C. increase by 30% B. increase by 6% D. decrease by 50% 104. 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 May 2005

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105. 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. 27.30% B. 13.33% D. 30.00% Residual Income 106. 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 income for Stevenson is: (E) A. P0 C. P14,850 B. P17,820 D. P16,500 107. Jar Division of Handy, Inc. 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 Jar’s manager with an offer to buy 10,000 units at P7 each. If Jar 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 Jar could accept for the order and still maintain its expected residual income? A. P5.00 C. P4.75 B. P5.60 D. P9.00 Return on Investment & Residual Income 108. 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 Page 15 of 47

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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. 1.50 109. 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%

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110. 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 P50,000 will be paid to the manager whose project contributed most to the overall 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 B because the return on investment is higher C. project A because it was a larger, more complex project D. project B because the return on residual investment is higher* Transfer Pricing 111. 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 112. 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. 113. 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 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. 50 is the only acceptable price 114. Plastic Division makes and sells a single product. Presently it sells 12,000 units per year to

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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. P16.00 115. 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. P8,000 116. 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 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 A. No change P35,000 decrease in profit B. No change P35,000 increase in profit C. P35,000 decrease in profit No change D. P35,000 increase in profit P35,000 decrease in profit Product Pricing 117. 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

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Relevant Costing Basic Concepts 118. 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 119. 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 120.Opportunity costs: A. Are treated as period costs under variable costing. B. Have already been incurred as a result of past action. C. Are benefits that could have been obtained by following another course of action. D. Do not vary among alternative courses of action. 121. 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 122. 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 P90,000. the incremental cost was A. P10,000 C. P100,000 B. P90,000 D. P190,000 Sell as is or Process-Further 123. Jones Co. can further process Product B to produce Product C. Product B is currently selling

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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 124. 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 per lb. at split-off P30 P16 Additional processing costs/lb after split-off (all variable) P15 P30 Selling price/lb after further processing P40 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

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125. 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. 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. P34,000 126. 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 Product Mix Decision 127. 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 128. 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

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129. 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 150 150 150 100 130. Geary Manufacturing has assembled the following data pertaining to two popular products. Blender Electric mixer Direct materials P 6 P11 Direct labor 4 9 Factory overhead @ P16 per hour 16 32 Cost if purchased from an outside 20 38 supplier 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 produce A. 25,000 electric mixers, and purchase all other units as needed B. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed C. 20,000 blenders and purchase all other units as needed D. 28,000 electric mixers and purchase all other units as needed 131. ABC Electronics has the following standard costs and other data: Part Beta Direct materials P 4.00 Direct labor 10.00 May 2005

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Factory overhead 40.00 20.00 Unit standard cost P54.00 P147.00 Units needed per year 6,000 8,000 Machine hours per unit 4 2 Unit cost if purchased P50 P150.00 In past years, ABC has manufactured all of its required components; however, this year only 30,000 hours of otherwise idle machine time can be devoted to the production of components. Accordingly, some of the parts must be purchased from outside suppliers. In producing parts, factory overhead is applied at P10 per standard machine hour. Fixed capacity costs that will not be affected by any make-or-buy decision represent 60% of the applied overhead. The 30,000 hours available machine time are to be scheduled so that ABC realizes maximum potential cost savings. The relevant unit production costs that should be considered in the decision to schedule machine time are: A. P54.00 for Beta and P147.00 for Zeta C. P14.00 for Beta and P127.00 for Zeta B. P50.00 for Beta and P150.00 for Zeta D. P30.00 for Beta and P135.00 for Zeta Questions 132 & 133 are based on the following information. Brynles Manufacturing Company produces two products for which the following data have been tabulated. Fixed manufacturing cost is applied at a rate of P1.00 per machine hour. Per Unit XY-7 BD-4 Selling price P4.00 P3.00 Variable manufacturing cost P2.00 P1.50 Fixed manufacturing cost P0.75 P0.20 Variable selling cost P1.00 P1.00 The sales manager has had a P160,000 increase in the budget allotment for advertising and wants to apply the money to the most profitable product. The products are not substitutes for one another in the eyes of the company’s customers. The manager may devote the entire P160,000 to increased advertising for either XY-7 or BD-4. 132. The minimum increase in peso sales of either XY-7 or BD-4 required to offset the increased advertising is A. B. C. D. XY-7 P160,000 P640,000 P 80,000 P 80,000 BD-4 P320,000 P960,000 P960,000 P320,000

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133. Suppose Brynles has only 100,000 machine hours that can be made available to produce additional units of XY-7 and BD-4. If the potential increase in sales units for either product resulting from advertising is far in excess of this production capacity, which product should be advertised and what is the estimated increase in contribution margin earned? A. Product XY-7 should be produced, yielding a contribution margin of P75,000. B. Product XY-7 should be produced, yielding a contribution margin of P133,333. C. Product BD-4 should be produced, yielding a contribution margin of P187,500. D. Product BD-4 should be produced, yielding a contribution margin of P250,000. Special Order 134. An opportunity cost commonly associated with a special order is A. the contribution margin on lost sales B. the variable costs of the order C. additional fixed related to the increased output D. any of the above 135. 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. 2,000 136. Jap 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 May 2005

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137. 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 Make or Buy 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 5 139. 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 P 80,000 Fixed costs 120,000 Total costs P200,000 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 Page 20 of 47

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140. 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? A. P8 C. P20 B. P12 D. P40

B. P11.00

Preboard & Preweek Materials D. P13.00

141. The following ate 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 Vat table indirect 2.00 Fixed indirect 1.50 Marketing Costs. Variable 2.00 Fixed 1.00 Grace must decide to continue making the product or buy it front an outside supplier. The supplier has offered to make the product at the same level of totality 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. Elly Industries is a multi-product company that currently manufactures 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 May 2005

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143. Below are a company’s monthly unit costs to manufacture and market a particular product. Manufacturing Costs: Direct materials P2.00 Direct labor 2.40 Variable indirect 1.60 Fixed indirect 1.00 Marketing Costs: Variable 3.00 Fixed 1.50 The company 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 30% if the company were to accept the proposal. What is the maximum amount per unit that the company can pay the supplier without decreasing its operating income? A. P8.50 C. P7.75 B. P6.75 D. P6.90 144. Gretchen Corporation currently manufactures all component parts used in the manufacture of various hand tools. A steel handle is used in three different tools. The budget for these handles is 20,000 units with 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 Claudine Steel, Inc. has offered to supply 20,000 units of the handle to Gretchen for P12.50 each delivered. If Gretchen 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. 145. 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 May 2005

B. P90,000 cost decrease

Preboard & Preweek Materials D. P90,000 cost increase

146. Cable Company produces 1,000 units of Part W 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 costs 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 W will no longer be incurred if the company purchases the part from the outside supplier. If Cable Company purchases 1,000 units of Part W from the outside supplier per month, then its monthly operating income will A. decrease by P4,000 C. decrease by P20,000 B. increase by P1,000 D. increase by P20,000 147. 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 P20,000 B. increase by P1,000 D. increase by P20,000 Keep or Drop 148. 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 fixed selling costs 6. common fixed selling costs Page 22 of 47

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149. 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 Shut Down Point 150. Bulusan Company normally produces and sells 30,000 units of E14 each month. E14 is a small electrical relay used in the automotive industry as a component part in various products. The selling price is P22 per unit, variable costs are P14 per unit, fixed manufacturing overhead costs total P150,000 per month, and fixed selling costs total P30,000 per month. Employment-contract strikes in the companies that purchase the bulk of the E14 have caused Bulusan Company’s sales to temporarily drop to only 9,000 units per month. Bulusan Company estimates that the strikes will last for about two months, after which time sales of E14 should return to normal. Due to the current low level of sales, however, Bulusan Company is thinking about closing down its own plant during the two months that the strikes are on. If Bulusan Company does close down its plant, it is estimated that fixed manufacturing overhead costs can be reduced to P105,000 per month and that fixed selling costs can be reduced by 10%. Start-up costs at the end of the shutdown period would total P8,000. Since Bulusan Company uses just-in-time production method, no inventories are on hand. At what level of unit sales for the two-month period should Bulusan Company be indifferent between closing the plant or keeping it open? A. 11,000 C. 10,000 B. 24,125 D. 8,000 Capital Budgeting Basic Concepts 151. 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 May 2005

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C. show the loan as a cash outflow in the second year of the project’s life D. ignore the loan 152. 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 products. 153. 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 154. Tamaraw Company is negotiating to purchase equipment that would cost P200,000, with the expectation that P40,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no salvage value, and would be depreciated by the straight-line method. Tamaraw’s minimum desired rate of return is 12 percent. Present value of an annuity of 1 at 12 percent for 10 periods is 5.65. Present value of 1 due in 10 periods at 12 percent is 0.322. The average accrual accounting rate of return during the first year of asset’s use is A. 20.0 percent C. 10.0 percent B. 10.5 percent D. 40.0 percent 155. Green Meadows Foundation (GMF), a tax-exempt organization, invested P200,000 in a fiveyear project at the beginning of the year. GMF 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, GMF’s desired 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 Present value of an annuity of 1 for 5 periods 3.6 3.4 3.3 Page 23 of 47

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For the project’s first year, GMF’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. 12.0% 156. The Fields 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 P66,000 a year in each of the next ten years. The accounting (book value) rate of return on the initial investment is expected to be 12%. How much will the new machine cost? A. P300,000 C. P660,000 B. P550,000 D. P792,000 157. 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 Payback Period 158. 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 159. The payback method assumes that all cash inflows are reinvested to yield a return equal to A. zero C. the Time-Adjusted-Rate-of-Return B. the Discount Rate D. the Cost-of-Capital 160. The relationship between payback period and IRR is that (E) May 2005

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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 161. Brando 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 m 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? (E) A. 4.44 years C. 8.50 years B. 2.67 years D. 3.78 years Bailout Period 162. 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. B. 2.5 yrs

C. 2.73 yrs D. 2.4 yrs.

Net Present Value 163. 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 Page 24 of 47

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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

Third year Fourth year Fifth year

Preboard & Preweek Materials 90,000 60,000 30,000

164. Panama Insurance Company’s management is considering an advertising program that would require an initial expenditure of P165,500 and bring in additional sales over the next five years. The cost of advertising is immediately recognized as expense. The projected additional sales revenue in Year 1 is P75,000, with associated expenses of P25,000. The additional sales revenue and expenses from the advertising program are projected to increase by 10 percent each year. Panama Insurance Company’s tax rate is 40 percent. The present value of 1 at 10 percent, end of each period: Periods Present value Factory 1 0.90909 2 0.82645 3 0.75131 4 0.68301 5 0.62092 The net present value of the advertising program would be A. P37,064 C. P(37,064) B. P29,136 D. P(29,136) 165. For P450,000, Roxas Corporation purchased a new machine with an estimated useful life of five years with no salvage value. The machine is expected to produce cash flow from operations, net of 40 percent income taxes, as follows: First year P160,000 Second year 140,000 Third year 180,000 Fourth year 120,000 Fifth year 100,000 Roxas will use the sum-of-the-years-digits’ method to depreciate the new machine as follows: First year P150,000 Second year 120,000 May 2005

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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 Had Roxas used straight-line method of depreciation, what is the difference in net present value provided by the machine at a discount rate of 12 percent? A. Increase of P9,750 C. Decrease of P24,376 B. Decrease of P9,750 D. Increase of P24,376

168. 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

166. For P450,000, Miggs Corporation purchased a new machine with an estimated useful life of five years with no salvage value. The machine is expected to produce cash flow from operations, net of 40 percent income taxes, as follows: First year P160,000 Second year 140,000 Third year 130,000 Fourth year 120,000 Fifth year 100,000 Miggs 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 Had Miggs used straight-line method of depreciation, what is the difference in net present value provided by the machine at a discount rate of 12 percent? (M) A. Increase of P9,750 C. Decrease of P24,376 B. Decrease of P9,750 D. Increase of P24,376

Internal Rate of Return 169. 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

Profitability Index 167. 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 this project is A. 1.367 C. 2.438 B. 3.333 D. 1.300 May 2005

170. 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. P122,100 171. Hilltop Company is planning to invest P80,000 in a three-year project. Hilltop’s expected rate of return is 10%. The present value of P1 at 10% for one year is .909, for years is .826, and for three years is .751. The cash flow, net of income taxes, will be P30,000 for the first year (present value of P27,270) and P36,000 for the second year (present value of P29,736). Page 26 of 47

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Assuming the rate of return is exactly 10%, what will the cash flow, net of income taxes, be for the third year? A. P17,268 C. P22,994 B. P22,000 D. P30, 618 172. Care 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 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. 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. P81.00 C. P70.00 B. P85.00 D. P90.00

Preboard & Preweek Materials

173. 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 inflow to be provided by the machine? A. P17,860 C. P25,000 B. P15,000 D. P35,700 174. 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 Equipment Replacement 175. 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 expenses 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. P18,0000 B. P24,000 D. P6,000 176. Maxwell Company has an opportunity to acquire a new machine to replace one of its present machines. The new machine 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

May 2005

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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 Investment Decision 177. The NPV and IRR methods give A. the same decision (accept or reject) for any single investment B. the same choice from among mutually exclusive investments C. different rankings of projects with unequal lives D. the same rankings of projects with different required investments 178. In choosing from among mutually exclusive investments the manager should normally select the one with the highest A. NPV C. payback reciprocal B. IRR D. book rate of return 179. 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 B. implicitly assumes that the Compaq 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

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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 P 65,000 P100,000 P 80,000 P 95,000 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 P600,000Available Funds P300,000Available Funds A. Projects 2,3, & 4 Projects 3 & 4 Project 3 B. Projects 1, 2, & 3 Projects 2, 3 & 4 Projects 3 & 4 C. Projects 1, 3, & 4 Projects 2 & 3 Project 2 D. Projects 3 & 4 Projects 2 & 4 Projects 2 & 4

180. 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 the discount rate while the IRR method assumes a reinvestment rate equal to the internal rate of return.* C. The IRR method does not assume reinvestment of the cash flows 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. 181. Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year: May 2005

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IRR equals cost of capital less than cost of capital less than cost of capital* less than cost of capital

Master Budget Basic Concepts 183. Zero-base budgeting requires managers to A justify expenditures that are increases over the prior period’s budgeted 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. 184. 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. Production Budget 185. 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

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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. P1,802,000 187. 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

Cash Budget 186. The Magic Company is preparing its cash budget for the month ending January 31. The following information pertains to Magic's past collection experience from its credit sales: Current month's sales 12% May 2005

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188. 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 Financial Statement Analysis Horizontal Analysis 189. 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% Activity Ratios 190. 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 Solvency Ratios 191. The ratio that measures a firm’s ability to generate earnings is A. times interest earned. C. days’ sales in receivables. B. sales to working capital. D. operating asset turnover. Profitability Analysis 192. 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

A. 17% B. 19%

Preboard & Preweek Materials C. 23% D. 25%

Integrated Ratios 193. 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. P858,000 194. Selected data from Maui 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% Maui’s net sales for the year were A. P800,000 C. P672,000 B. P480,000 D. P1,200,000 195. Assume you are given the following relationships for the Bryan Company: Sales/total assets Return on assets (ROA) Return on equity (ROE) The Bryan Company’s debt ratio is A. 40% C. 60% B. 35% D. 65%

1.5X 3% 5%

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: May 2005

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196. The following data were obtained from the records of Trend, Inc.: Current ratio (at year end) 1.5 to 1 Inventory turnover based on sales and ending inventory 15 times Inventory turnover based on cost of goods sold and ending inventory 10.5 times Gross margin for 2002 P315,000 What was Trend, Inc.’s December 31, 2002 balance in the Inventory account? A. P138,000 C. P140,000 B. P 70,000 D. P135,000 197. The following were reflected from the records of War Freak Company: Earnings before interest and taxes Interest expense Preferred dividends Payout ratio Shares outstanding throughout 2003 Preferred Common Income tax rate Price earnings ratio The dividend yield ratio is A. 0.50 C. 0.12 B. 0.40 D. 0.08

P1,250,000 250,000 200,000 40 percent 20,000 25,000 40 percent 5 times

Sensitivity Analysis 198. Annette Company uses the direct write-off method to account for uncollectible accounts receivable. If the company subsequently collects an account receivable that was written off in a prior accounting period, the effect of the collection of the account receivable on Annette’s current ratio and total working capital would be A. B. C. D. Current Ratio None Increase Decrease None Working Capital None Increase Decrease Increase 199. Taylor company paid out one-half of its 2002 earnings in dividends. Taylor’s earnings increased by 20%, and the amount of its dividends increased by 15% in 2003. Taylor’s dividend payout ratio for 2003 was A. 75.0% C. 47.9% B. 52.3% D. 41.7% May 2005

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200. 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% 201. The board of directors of Contemporary Company was unhappy with the current return on common equity. Though the return on sales (profit margin) was impressively good at 12.5 percent, the asset turnover was only 0.75. The present debt ratio is 0.40. Atty. Tristan, the vice-president of corporate planning, presented a proposal as follows:  Profit margin should be raised to 15 percent.  The new capital structure will be revised by raising debt component.  The asset turnover will be maintained at 0.75. The proposed adjustment is estimated to raise return on equity by 50 percent. What debt ratio did Atty. Tristan propose in order to raise the return on equity (ROE) to 150 percent of the present level? A. 0.52 C. 0.61 B. 0.68 D. 0.72 Ratio Analysis 202. 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 203. 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*

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Working Capital Management Working Capital Policy 204. 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. decrease in the operating cycle. D. increase in the ratio of current assets to noncurrent liabilities.* 205. Wen Company follows and aggressive financing policy in its working capital management while Manong Corporation follows a conservative financing policy. Which one of the following statements is correct? A. Wen has low ratio of short-term debt to total debt while Manong has a high ratio of shortterm debt to total debt. B. Wen has a low current ratio while Manong has a high current ratio C. Wen has less liquidity risk while Manong has more liquidity risk. D. Wen finances short-term assets with long-term debt while Manong finances short-term assets with short-term debt. Cash Management 206. 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. P60,000 C. P80,000 B. P62,500 D. P70,000 207. 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 could be employed which would reduce the cash conversion period to 3 days. The 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. Marketable Securities Management May 2005

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208. 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 Receivables Management 209. 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. 210. 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. P1,620,000 211. 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. P960,000 212. 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 Page 32 of 47

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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)

Preboard & Preweek Materials

Inventory Management 213. 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 214. 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. 215. 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. P9,200 216. 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 uniformly 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 P 25,000 P 25,000 P 5,000 P 5,000

May 2005

217. 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: A. B. C. D. Safety Stock 1,750 1,750 1,167 1,167 Page 33 of 47

MANAGEMENT ADVISORY SERVICES Reorder Point

6,750

CPA Review School of the Philippines 5,250

6,750

5,250

218. The sales office of Hermit Company has developed the following probability distribution for daily sales of a perishable product. 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. 220 219. Each stockout of a product sold by AFM 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: Units of Safety Stock Probability of Stockout 0 0.50 100 0.30 200 0.14 300 0.05 400 0.01 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

the 60th day is A. 22.27 percent B. 27.84 percent

Preboard & Preweek Materials C. 18.37 percent D. 14.69 percent

Short-term Loans 222. 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 of this loan is A. 28.21% C. 14.29% B. 27.27% D. 15.38% 223. 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 A. 8.0% C. 11.11% B. 10.0% D. 6.4%

Trade Credit 220. 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% 221. 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 May 2005

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Cost Of Capital Cost of Debt 224. The Maru Company’s bonds have 5 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 P850? A. 10.64 percent C. 11.76 percent B. 13.20 percent D. 10.00 percent Capital Asset Pricing Model 225. Spec, Inc.’s stock is expected to generate a dividend and terminal value one year from now of P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6 percent, and the expected return market return is 11 percent. What should the equilibrium price of Spec’s stock in the market now? A. P50.67 C. P53.77 B. P51.35 D. P43.84 226. 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 Dividend Growth Model 227. Tiger Company’s stock is currently selling for P60 a share. The firm is expected to earn P5.40 per share and to pay a year-end dividend of P3.60. If investors require a 9 percent return, what rate of growth must be expected for Tiger? A. Zero growth C. 40.0 percent B. 3.0 percent D. 50.0 percent 228. The dividends and stock price of Mi Company are expected to grow at 7 percent per year after this year. Mi’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. Mi should pay P2.50 flotation cost. What is the expected returns on retained earnings for Mi Company? A. 17.7 percent C. 18.45 percent B. 18.89 percent D. 19.72 percent May 2005

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Dividend Policy 229. 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% B. 66.7% D. 10.0% 230. Galvez Company expects next year’s after-tax income to be P7,500,000. The firm’s debt ratio is currently 40 percent. Galvez has P6,000,000 of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual dividend policy, what is the expected dividend payout ratio next year? A. 52.0 percent C. 48.0 percent B. 75.0 percent D. 25.0 percent 231. Glenda Company expects to generate P10 million internally which could be available for financing part of its P12 million capital budget for this coming year. Glenda’s management believes that a debt-equity ratio of 40 percent is best for the firm. How much should be paid in dividends if the target debt-equity ratio is to be maintained? A. P2,800,000 C. P8,571,429 B. P1,428,571 D. P4,000,000 Quantitative Methods Learning Curve 232. 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 Probabilities 233. Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that silver worth 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 Page 35 of 47

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CPA Review School of the Philippines C. P3,100,000 D. P0

234. CTV Company has three sales departments. Department FA processes 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. .25 235. A beverage stand can sell either soft drinks or coffee on any given day. If the stand sells soft drinks 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%. The expected payoff for either selling coffee or soft drinks and the expected payoff if the vendor has perfect information are Coffee Soft drinks Perfect information A. P1,360 P1,600 P3,000 B. P1,960 P1,600 P2,200 C. P2,200 P1,900 P1,360 D. P3,900 P1,900 P1,960 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 PERT-CPM May 2005

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237. Castle Building Company uses the critical path method to monitor construction jobs. The company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-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. 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 Linear Programming 238. 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 Activity-Based Costing 239. A cost system that first traces costs to activities and then traces cost from activities to products A. Job order cost system. C. Activity-based cost system. B. Process cost system. D. Flexible cost system. Page 36 of 47

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240. The last step in activity-based costing is to A. identify 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 D. assign manufacturing overhead costs for each activity cost pool to products 241. 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 nonvalue-added costs would be A. P150 and P0 C. P150 and P300 B. P0 and P150 D. P450 and P0 242. Designing and redesigning are activities that are classified as A. facility level C. unit level B. batch level D. product level 243. 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 244. A company that uses activity-based costing to develop standard costs A. will usually have more than one variable overhead component in its standard costs B. cannot compute variable overhead efficiency variances C. will have less information about the profitability of individual products D. all of the above 245. Classify the following as volume (unit) base or nonvolume (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 6. Direct material cost Volume (Unit) Base Nonvolume (Activity) Base A. 1, 4, 5, 6 2, 3 B. 1, 4, 5 2, 3, 6 May 2005

C. D.

Preboard & Preweek Materials 1, 2, 3, 4, 5 2, 3, 6

6 1, 4, 5

246. The Oilfield plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance P100,000 Inspection 150,000 The plant currently applies overhead using direct labor hours and expected capacity of 50,000 direct labor hours. The following data have been assembled for use in developing a bid for a proposed job: Direct materials P1,000 Direct labor P4,000 Machine hours 500 Number of inspections 4 Direct labor hours 800 Total expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. Using activity-based costing and the appropriate activity drivers, the total cost of the potential job would be A. P2,400 C. P7,400 B. P3,600 D. P7,750 Quality Cost 247. 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 Information Systems 248. The process of learning how the current system, functions, determining the needs of users, and developing the logical requirements of a proposed system is referred to as A. systems maintenance C. systems feasibility study B. systems analysis D. systems design 249. 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 Page 37 of 47

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250. 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

B. systems feasibility

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251. 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 a transaction, as it occurs, to several files without intermediate printouts. 252. 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 253. 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 254. One of the first steps in the creation of a data base 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. 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 May 2005

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257. An integrated set of computer programs that facilitates the creation, manipulation, and querying of integrated files is called a(n) A. translator C. operating system B. database management system D. flat file system 258. Turnaround documents 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. Situational Questions 259 thru 265 are based on the following information: Calamba Hospital operates a general hospital but rents space and beds to separate entities for specialized treatment such as pediatrics, maternity, psychiatric, 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 revenue of P1,138,800. 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 42,952 Janitorial P 12,800 Laundry 28,000 Lab, other than direct charges to patients 47,800 Pharmacy 33,800 Repairs and maintenance 5,200 7,140 General administrative services 131,760 Rent 275,320 Billings and collections 40,000 Bad debt expense 47,000 Other 18,048 . P262,800 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 May 2005

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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 P110,000, 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. 259. The variable expense per patient day is A. P15.08 B. P12.50

C. P15.00 D. P50.00

260. The contribution margin per patient day is A. P49.92 B. P52.50

C. P50.00 D. P52.00

261. 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. 10,500 262. The number of patient days needed to cover total costs is A. 14,200 C. 15,820 B. 15,200 D. 14,220 263. 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? Page 39 of 47

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CPA Review School of the Philippines C. P105,450 D. P89,750

264. 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. P23,935 265. 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 Questions 266 thru 268 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. A projected income statement for the year ended December 31, 2002, prepared by the accountant, is shown below: Sales Cost of food sold Wages & fringe benefits: Restaurant help Delivery help Rent Accounting services Depreciation: Delivery equipment Restaurant equipment Utilities Supplies May 2005

P95,000 P28,500 8,150 17,300 4,800 3,600 5,000 3,000 2,325 1,200

73,875

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Net income before taxes Income taxes (40%) Net income Note: The average pizza sells for P2.50.

P21,125 8,450 P12,675

266. What is the tax shield on the noncash fixed costs? A. P3,200 C. P3,400 B. P14,950 D. P5,400 267. What is the breakeven point in number of pizzas that must be sold? A. 25,929 C. 18,150 B. 23,569 D. 42,114 268. 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 269 through 273 are based on the following information. 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 P94,500 269. The breakeven volume in tons of product for the year is (E) Page 40 of 47

MANAGEMENT ADVISORY SERVICES A. 420 B. 1,100

CPA Review School of the Philippines C. 495 D. 550

270. 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. P184,500 271. 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 B. P252,000 D. P256,500 272. 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 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. 1,545 273. 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 m 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 Questions 274 thru 279 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. May 2005

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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. 275. 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. 275. What was the actual cost per pound of material? A. P3.00 C. P3.05 Page 41 of 47

MANAGEMENT ADVISORY SERVICES B. P2.95

CPA Review School of the Philippines D. P3.10

276. How many actual direct labor hours were worked during the period? A. 18,000 C. 16,600 B. 19,400 D. 18,970 277. How much actual variable manufacturing overhead cost was incurred during the period? A. P55,300 C. P58,200 B. P56,900 D. P59,500 278. What is the total fixed manufacturing overhead cost in the company's flexible budget? A. P112,500 C. P140,000 B. P139,500 D. P125,500 279. 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 Question Nos. 280 through 282 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 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 May 2005

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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. 280. 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, P40,000 281. 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 282. 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 Questions 283 through 286 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. 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. Page 42 of 47

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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) 283. The expected income each year from the new shelving products (Machine A) is: A. P52,500 C. P240,000 B. P84,000 D. P 92,500 284. The annual savings in cost if Machine B is purchased is A. P56,250 C. P43,250 B. P38,250 D. P21,750 285. The simple rates (%) of return for Machine A and Machine B are: A. B. C. Machine A 12.5 20.0 12.5 Machine B 17.0 17.0 16.4 286. The payback periods (years) for Machine A and Machine B are: A. B. C. Machine A 4.5 5.0 4.5 Machine B 4.0 4.0 4.2 1. 2. 3. 4. 5. May 2005

31. 32. 33. 34. 35.

61. 62. 63. 64. 65.

91. 92. 93. 94. 95.

D. 20.0 16.4

D. 5.0 4.2 121. 122. 123. 124. 125.

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6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30.

36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90.

96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. 118. 119. 120.

126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150.

151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161.

181. 182. 183. 184. 185. 186. 187. 188. 189. 190. 191.

211. 212. 213. 214. 215. 216. 217. 218. 219. 220. 221.

241. 242. 243. 244. 245. 246. 247. 248. 249. 250. 251.

271. 272. 273. 274. 275. 276. 277. 278. 279. 280. 281. Page 43 of 47

MANAGEMENT ADVISORY SERVICES 162. 163. 164. 165. 166. 167. 168. 169. 170. 171. 172. 173. 174. 175. 176. 177. 178. 179. 180.

192. 193. 194. 195. 196. 197. 198. 199. 200. 201. 202. 203. 204. 205. 206. 207. 208. 209. 210.

CPA Review School of the Philippines 222. 223. 224. 225. 226. 227. 228. 229. 230. 231. 232. 233. 234. 235. 236. 237. 238. 239. 240.

251. 252. 254. 255. 256. 257. 258. 259. 260. 261. 262. 263. 264. 265. 266. 267. 268. 269. 270.

282. 283. 284. 285. 286.

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TRUE STATEMENTS 1. Standard cost can, if properly used, help motivate employees 2. A company would most likely have an unfavorable labor rate variance and a favorable labor efficiency if the mix of workers used in the production process was more experienced than the normal mix 3. The expected annual capacity level has traditionally been used to compute the fixed overhead application rate? 4. A favorable volume variance increases absorption costing net income; it does not affect variable costing net income. 5. The variable costing format is often more useful to managers than the absorption costing format because costs are classified by their behavior. 6. CVP analysis relies on the assumptions that costs are either strictly fixed or strictly variable. Consistent with these assumptions, as volume decreases total variable costs and total costs decrease while fixed costs remain constant. 7. A managerial preference for a very low degree of operating leverage might indicate that a decrease in sales volume is expected 8. Payback period potentially ignores part of a project’s relevant cash flows. 9. Payback method does not routinely rely on the assumption that all cash flows occur at the end of the period? 10. The payback method assumes that all cash inflows are reinvested to yield a return equal to zero 11. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, the method of financing the project under consideration is not an important factor? 12. In capital budgeting, a firm’s cost of capital is frequently used as the discount rate

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13. The net present value method assumes that all cash inflows can be immediately reinvested at the discount rate

26. Discretionary costs are those that management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers

14. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the after-tax rate of interest for bonds and stated annual dividend rate for preferred stock

27. If a firm orders raw materials in quantities larger than the optimum quantity obtained using the simple economic order quantity model in order to obtain a quantity discount, the company will experience carrying costs higher than ordering costs

15. The weighted average cost of capital that is used to evaluate a specific project should be based on the overall capital structure of the corporation

28. One of the primary purposes of using a standard cost system is to provide a distinct measure of cost control.

16. The weighted average cost of capital approach to decision making is not directly affected by the current budget for capital expansion

29. Favorable variances are not necessarily good variances.

17. At a profitability index of 1.0, the NPV is 0, and the IRR equals the discount rate used. If the PI is above 1.0, the NPV is positive and the IRR is higher than the discount rate used. 18. The profitability index is the ratio of the present value of cash flows to the original investment 19. The rate of interest that produces a zero net present value when a project’s discounted cash operating advantage is netted against its discounted net investment is the internal rate of return

30. Whether the variance is favorable or unfavorable is irrelevant to a need of investigating it. 31. The sum of the material price variance and materials quantity variance is not meaningful. 32. The fixed overhead variance would be the same irrespective of the capacity or denominator used. 33. The fixed overhead volume variance is the least significant variance for control purposes. However, it is the most useful variance in evaluating plant utilization.

20. Internal rate of return has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment.

34. Fixed overhead costs are mostly incurred to provide the capacity to produce and are best controlled on a total basis at the time they are originally negotiated.

21. As the marginal tax rate goes up, the benefit from the depreciation tax shield increases

35. In a standard cost system, when production is greater than the estimated unit or denominator level of activity, there will be a favorable volume variance.

22. Fixed cost is relevant if it is avoidable 23. When a scarce resource, such as space, exists in an organization, the criterion that should be used to determine production is contribution margin per unit of scarce resource 24. A cost driver is defined as a causal factor that increases the total cost of a cost objective 25. Committed costs are governed mainly by past decisions that established the current levels of operating and organizational capacity and that only change slowly in response to small changes in capacity May 2005

36. In analyzing factory overhead variances, volume variance is the difference between the budget allowance based on standard hours allowed for actual production for the period and the amount budgeted to be applied during the period. 37. The use of separate variable and fixed overhead rates is better than a combined rate because such a system is more effective in assigning overhead costs to products. 38. In a just-in-time inventory system, ideal standards become expected standards. 39. If a firm produces more units than it sells, absorption costing, relative to variable costing, will Page 45 of 47

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result in higher income and assets. 40. A firm presently has total sales of P100,000. If its sales rise by P1.00, its net income based on variable costing will go up more than its net income based on absorption costing.

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allocation of scarce resources. 53. A linear programming model must have only one objective function.

41. A company could never incur a loss that exceeded its total costs.

54. Strategic planning as assumed by top management is stating and establishing long-term plans.

42. At breakeven point the contribution margin equals fixed costs. After the level of volume exceeds the breakeven point, the total contribution margin exceeds the total fixed costs.

55. The master budget is a static budget because it is geared to only one level of production and sales.

43. As projected net income increases the degree of operating leverage declines.

56. The primary reason why managers impose a minimum cash balance in the cash budget is that it protects the organization from the uncertainty of the budgeting process.

44. A managerial preference for a very low degree of operating leverage might indicate that a decrease in sales volume is expected. 45. The time value of money is considered in long-range investment decisions by assigning greater value to more immediate cash flows. 46. For a project such as plant investment, the return that should leave the market price of the firm’s stock unchanged is known as the cost of capital. 46. Opportunity cost of capital is the highest rate of return that can be earned from the most attractive alternative capital project available to the firm. 47. If an analyst desires a conservative net present value estimate, he will assume that all cash inflows occur at year-end. 48. When a profitable corporation sells an asset at a loss, the after-tax cash flow on the sale will exceed the pre-tax cash flow on the sale. 49. Sensitivity analysis is an appropriate response to uncertainty in cash flow projections. 50. Relevant costs are anticipated future costs that will differ among various alternatives. 51. In a make or buy decisions, the opportunity cost of capacity could be considered to decrease the price of units purchased from suppliers. 52. Fixed costs are ignored in allocating scarce resources because they are unaffected by the May 2005

57. Slack in operating budgets is greater when managers are allowed to participate in the budgeting process. Budget slack refers to intentional overestimate of expenses or underestimate of revenues. 58. Performance measurements and a reward system are part of motivational element of cost management system. Focus on cost control and assessing core competencies are part of informational element of cost management system. 59. A decentralized company grows very quickly than a centralized one. 60. In a decentralized company, transfer pricing system is designed to aid in the appraisal and motivation of managerial performance. 61. Responsibility accounting refers to an accounting system in which the operations of the business are broken down into reportable segments and the control function of sales manager or supervisor is emphasized. 62. The most valid reason for using something other than a full-cost based transfer price between units of a company is because a full-cost price does not ensure the control of costs of a supplying unit. 63. A cost classified according to its activity-related behavior is a fixed cost. 64. The distinction between direct and indirect costs depends on whether a cost can be conveniently and physically traced to a cost object under consideration. Page 46 of 47

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65. An accounting system that focuses on transactions is a traditional accounting system.

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