Engineering Economics

 

PATTS REVIEW CENTER PATTS COLLEGE OF AERONAUTICS Lombos Ave., San Isidro, Parañaque

ENGINEERING ECONOMICS Reviewer: Engr. R. R. Renigen

Basic Economic Environment and Concept good s and  Economics - is the study or science of the production, distribution and consumption of goods  Economics services  Economy   - the cost or profit situation regarding a practical enterprise or project, as in economy  Economy studies, engineering economy, project economy.  Engineering  Engineer ing economy: economy: a. The discipline concerned with economic aspects of engineering; it involves the systematic evaluation of the costs and benefits be nefits of proposed technical projects;  b. application of engineering or mathematical andof synthesis to economic decisions; c. The A body of knowledge and concerned with the analysis evaluation the worth of commodities and services; d. The economic analysis of engineering alternatives.

Cost Terminology Fixed costs - are those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Typical fixed costs include insurance and taxes on facilities, general management and administrative salaries, license fees, and interest costs on  borrowed capital. Variable costs - are those associated with an operation that varies in total with the quantity of output or other measures of activity level. For example, the costs of material and labor used in a  product or service are variable costs co sts – because they vary in total with the number of output units  – even though the costs per unit stay the same.  Incremental cost, or incremental revenue - is the additional cost, or revenue, that results from  Incremental increasing the output of a system by one (or more) units. Incremental cost is often associated with “go/no go” decisions that involve a limited change in output or activity level.   Recurring costs   Recurring costs  - are those that are repetitive and occur when an organization produces similar goods or services on a continuing basis. Variable costs are also recurring costs, because they repeat with each unit of output. However, recurring costs are not limited to variable costs. A fixed cost that is paid on a repeatable basis is a recurring cost. For example, in an organization  providing architectural and an d engineering services, office space for rental – which is a fixed cost – is also a recurring cost.  Nonrecurring costs – are those that are not repetitive, even though the total expenditure may be  Nonrecurring cumulative over a relatively short period of time. Typically, nonrecurring costs involve

 

 Indirect costs  – are those that are difficult to attribute or allocate to a specific output or work activity. The term normally refers to type of costs that would involve too much effort to allocate directly to a specific output. In this usage, they are costs allocated through a selected formula (such as, proportional to direct labor hours, direct labor dollars, or direct material dollars to the outputs or work activities. For example, the costs of common tools, general supplies, and equipment maintenance in a plant are treated as indirect costs. Overhead   consists of plant operating costs that are not direct labor or direct material costs. Examples of overhead include electricity, general repairs, property taxes, and supervision.  Standard costs costs – are representative costs per unit of unit of output that are established in advance of actual production or service delivery. They are developed from the direct labor hours, materials, and support functions (with their established costs per unit) planned for the production or delivery process. Cash cost   – a cost that involves payment of cash (and results in a cash flow) to distinguish it from one that does not involve a cash transaction and is reflected in the accounting system as a noncash cost. This noncash cost is often referred to as a book cost .  Sunk cost  –  – is one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. Opportunity cost  –  – is the cost of the best rejected (i.e., foregone) opportunity and is often hidden or implied. It is incurred because of the use of limited resources, such that the opportunity to use those resources to monetary advantage in an alternative use is foregone. For example, suppose that a project involves the use of vacant warehouse space presently owned by a company. The cost for that space to the project should be the income or savings that possible alternative uses of the space may bring to the firm. In other words, the opportunity cost for the warehouse space should be the income derived from the best alternative use of the space.

  –this term refers to a summation of all costs, recurring and nonrecurring, related  Life-Cycle cost  –this  Life-Cycle to a product, structure, system, or service during its life span.

The General Economic Environment There are numerous general economic concepts that must be taken into account in engineering studies. In broad terms , economics economics deals with the interactions between people and wealth, and engineering is concerned with the cost-effective use of scientific knowledge to benefit mankind.

Consumer and Producer Goods and Services Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Food, clothing, homes, cars, television sets, haircuts, and medial services are examples.

Producer goods and services are used to produce consumer goods and services or other producer goods. Machine tools, factory building, buses, and farm machinery are example.

Measure of Economic Worth Goods and services are produced and desired because directly or indirectly they have utility – the

 

 purchased in somewhat the same quantity even though the price varies considerably. Luxuries  are those products or services that are desired by humans and will be purchase if money is available after the required necessities have been obtained. Obviously, these terms are relative,  because, for most goods and services, what one person considers a necessity may be considered a luxury by another. For example, a person living in one community may find that an automobile is a necessity to get to and from work. If the same person lived and worked in a different city, adequate public transportation might be available, and an automobile would be a luxury. For all goods and services, there is a relationship between the price that must be paid and the quantity that will be demanded or purchased. As the selling price per unit ( p) is increased, there will be less demand ( D  D) for the product, and as the selling price is decreased, the demand will increase. The relationship between price and demand can be expressed as linear function:  p = a – bD 

for 0 ! D  D ! a /b, a > 0, b > 0

Eqn. 1

where a is the intercept on the price axis and – b is the slope. Thus, b is the amount by which demand increases for each unit decrease in p. Both a and b are constants. It follows that, a  -  p 

(b " 0)

 D =

Eqn. 2

b  Demand   is the need, want or desire for a product backed by the money to purchase it. In economic analysis, demand is always based on “willingness and ability to pay” for a product, not merely want or need for the product.

The demand for a product is inversely proportional to its selling price, i.e., as the selling price is increased, there will be less demand for the product; and as the selling price is decreased, the demand will increase.  Supply is the amount of a product made available for sale.

If the capital selling in price for to a product is high, more producers will be willing harderdeclines, and risk more order reap more profit. However, if the selling price to forwork a product capitalists will not produce as much because of the smaller profit they can obtain for their labor and risk. Therefore, the relationship between price and supply is that they are directly proportional, i.e., the bigger the selling price, the more supply; and the smaller the selling price, the less is the supply. THE LAW OF SUPPLY AND DEMAND The law of supply and demand may be stated as follows:

“Under conditions of perfect competition, the price at which any given product will be supplied and purchased is the price that will result in the supply and the demand being equal.”

Competition

 

the vendor in terms of the availability and price of the product. Perfect monopolies rarely occur in practice, because (1) few products are so unique that substitutes cannot be used satisfactorily, and (2) governmental regulations prohibit monopolies if they are unduly restrictive.

The Total Revenue Function The total revenue, TR that will result from a business venture during a given period is the  product of the selling price per unit, p, and the number of units sold, D. Thus TR = price X demand = p ( D  D)

Eqn. 3

If the relationship between price and demand as given in Eqn. 1 is used,  2

TR = (a - bD) D  D = aD - bD   for !  D D ! a /b, a > 0, b > 0

Eqn. 4

From calculus the demand,  !  that will produce maximum total revenue can be obtained by solving TR d TR = a - 2bD = 0

Eqn. 5

dD

Thus a  ! =

Eqn. 6 2b 

To guarantee that #  maximizes the total revenue, check the second derivative to be sure it is negative. 2

d  TR 2

= - 2b

dD Cost, Volume, and Breakeven Point Relationships Fixed costs remain constant over a wide range of activities as long as the business does not  permanently discontinue operations, but variable costs vary in total with the volume of output. Thus, at any demand D, total cost is

C T  = C   F  + C V  

Where:  C   F   = fixed costs V   = C V = variable costs

For the linear relationship assumed here,

Eqn. 7

 

Scenario 1. When total revenue and total cost, as given in Eqns. 7 and 8 are combined, tthe he typical results as a function of demand are depicted. At breakeven point  D’ 1, total revenue is equal to total cost, and an increase in demand will result in a profit for the operation. Then   at optimal demand,  D*, profit is  maximized (Eqn. 10). At breakeven point  D’ 2, total revenue and total cost are again equal, but additional volume will result in an operating loss instead of a  profit. Obviously, the conditions for which breakeven and maximum profit occurs are our  primary interest. First, at any volume (demand), D, Profit (loss) = total revenue - total costs = (aD - bD2) - (C  F  + C $D) 2

= - C  F  + (a - C ") D - bD

for 0 !  D D ! a/b 

Eqn. 9

In order for a profit to occur, and to achieve the typical results, two conditions must be met: 1. 1.   (a – C ") > 0; that is, the price per unit that will result in no demand has to be greater than the variable cost per unit (this avoids negative neg ative demand). 2. 2.   Total revenue (TR) must exceed total cost (C T ) for the period involved. If these conditions are met, we can find the optimal de4mand at which maximum profit will 2

occur by taking the first derivative of profit = - C  F  + (a – C ")  D  – – bD b D   with respect to  D  and it  equal to zero: d  (profit)  (profit)

=0 dD a  - C $   D* =

Eqn. 10 2b 

Where:  D* = optimal value of D that maximizes profit

To ensure that we have maximized profit (rather than minimized it); the sign of the second derivative must be negative. Checking this, we find that 2

d   (profit)

= - 2b  2

dD

 

which will be negative for b  > 0 (as earlier specified). (Also, recall that in cost minimization  problems a positive signed second derivative is necessary to guarantee a minimum – valued

 

 

Total revenue = total cost

(breakeven point)

2

aD – bD = C   F  + C " D  2

-bD  + (a – C ") D – C  F  = 0

Eqn. 11

Because Eqn. 11 is a quadratic equation with one unknown ( D), we can solve for the breakeven  points D’1 and D’ 2 (the roots of the equation).  %

2

- (a – C ") ± [(a – C ")  – 4(-b) (-C  F )]    D’  =

Eqn. 12 2(-b)

With the conditions for the profit satisfied (Eqn. 9), the quantity in the brackets of the numerator (the discriminant) in Eqn. 12 will be greater than zero. This will ensure that  D’ 1  and  D’ 2 have real positive and unequal values.  %

- (a – C ") + [(a – C ")2 – 4(-b) (-C  )]    F 

 D’ 1 =

2(-b) and

 %

- (a – C ") - [(a – C ")2 – 4(-b) (-C  F )]    D’2 =

2(-b) Scenario 2. When the price per unit (p) for a product or service can be represented more simply as being independent of demand (versus being a linear function of demand, as assumed in Eqn. 1) and is greater than the variable cost per unit ( C "), a single breakeven points results. Then  D). under the assumption that demand is immediately met, total revenue TR =  p ( D Problems:

1. 1.   Find the demand,  !  that maximizes total revenue if the equation for price is given by 50,000- 200 D? Ans.  ! = 125 units 2. 2.   A company produces an electronic time switch that is used in consumer and commercial  products made mad e by several other manufacturing firms. The fixed cost c ost ( C  F ) is $73,000 per month, and the variable cost (C ") is $83 per unit. The selling price per unit is p = $180 – 0.02 D, based on Eqn 1. For this situation (a) determine the optimal volume for this  product and confirm that a profit occurs (instead of o f loss) at this demand; and (b) find the volumes at which breakeven occurs; that is what is the range of profitable range?

 

Ans. (a) D* = 227 units per year 2

d   (profit)

(b)

2

= - 4.4

dD

4. 4.   A company produces circuit boards used to update outdated computer equipment. The fixed cost is $42,000 per month and the variable cost is $53 per circuit board. The selling  price per unit is  p  = $150 – 0.02 D. Maximum output of the plant is 4,000 units per month. (a)   Determine optimum demand for this product (a) (b)   What is the maximum profit per month? (b) (c)   What is the company’s range of profitable demand? (c) deman d? Ans. (a) D* = 2425 circuit boards per month (b) Max profit = $75,612.5 per month (c) 480 to 4,369 circuit boards per month 5. A company has established established that the relationship between the sales price for for one of its its  products and the quantity sold per month is approximately D = 780 – 10 p units ( D  D is the demand or quantity sold per month, and p is the price in dollars). The fixed cost is $800  per month, and the variable cost is $300 per unit produced. What number of units, D*, should be produced per month and sold to maximize net profit? What is the maximum  profit per month related to the product? Ans. D* = 240 units per month Maximum profit = $4,960 per month 6. A company estimates that as it increases its sales volume by decreasing the selling price 2

of its product, revenue = aD – bD  (where D represents the units of demand per month, with 0 ! D  D ! a/b). The fixed cost is $1,000 per month, and the variable cost is $4 per unit. If a = $6 and b = $0.001, determine the sales volume for maximum profit, and the maximum profit per month. Ans. D* = 1,000 units per month Maximum profit = $0 per month

Principles of Money – Time Relationship   Capital   – refers to wealth in the form of money or property that can be used to produce more wealth. Two basic categories of capital: 1.   Equity capital – capital – is that owned by individuals who have invested their money or property in a business project or venture in the hope of receiving a profit.   2. 2.    Debt capital   – often called borrowed capital, is obtained from lenders e.g., through the sale of bonds for investm investment. ent.

 

linear function over a period of time. This is usually used for short-term loans where the period of the loan is measured in days rather than years. It can be calculated using the following formula: I = Pin

Eqn. 13

where: P = principal/loan I = interest i = interest rate n = period The future amount of the principal may be calculated by adding the interest (I) to the principal (P). F=P+I or: F = P + Pin Thus, F = P(1+in)

Eqn. 14

There are two types of simple interest namely, ordinary interest and exact simple interest. Ordinary simple interest  is  is based on one banker’s year. A banker year is composed of 12 months of 30 days each which is equivalent to a total of 360 days in a year. The value of n that is used in the preceding formulas may be calculated as

d n=

Eqn. 15 360

where: d = number of days the principal was invested  Exact simple interest   is based on the exact number of days in a given year. A normal year has 365 days while a leap year (which occurs once every 4 years) has 366 days. Unlike the ordinary simple interest, the number of days in a month is based on the actual number of days each month contains in our Gregorian calendar.

To determine the year whether leap year or not, one has to divide the year by 4. If it is exactly divisible by 4, the year to be leap year otherwise it will be considered just a normal year with 36 365 5 days. However, if the year is a century year (ending with two zeros, e.g. 1700, 1800…), the year must be divided by 400 instead of 4 to determine the year whether or not a leap year. Hence, year 1600 and year 2000 are leap years. Under this method of computation of interest, it must be noted that under normal year, the month of February has 28 days while during leap years it has 29 days. Again, the values of n to be used

 

DISCOUNT Consider the following cases where discount is involved:

CASE 1: A person has a bond or financial security that is not due yet but payable in some future date, desires to exchange it into an immediate cash. In the process, he will accept an amount in cash smaller than the face value of the bond. The difference between the amount he receives in cash (present worth) and the face value of the bond or financial security (future worth) is known as discount.  The process of converting a claim on a future amount of money in the present is called discounting. CASE 2:  In a bank loan, a person borrows P100 for 1 year with an interest of 10%. The interest as computed is P10. The bank deducts the interest, which is P10 from the end of the year. The P10 that was deducted represent the interest paid in advance in this case, discount also represent the difference between the present worth (i.e. P90) and the future worth (i.e. P100). Discount = Future worth – present worth The rate of discount  is  is the discount on one unit of principal per unit time. 1 d=1-

Eqn. 18 1+i

d i=

Eqn. 19 1–d

where: d = rate of discount Problems:

1. If you borrow money from your friend with simple interest of 12%, find the present worth of P20,000, which is due at the end of nine months. Ans. P = P18,348.62 2. Mr. M. Dela Cruz borrowed money from a bank. He receives from the bank P1,340.00 and  promised to pay P1,500 at the end of 9 months. Determine the following: A. A.   Simple interest rate B. B.   The corresponding discount rate or often referred to as the “banker’s discount” Ans. A. i = 15.92% B. d = 13.73% 3. Susie buys a television set from a merchant who ask P1,250 at the end of 60 days. Susie wishes to pay immediately and the merchant offers to compute the cash price on the

 

5. Determine the exact simple interest on P5,000.00 P 5,000.00 invested for the period from January 15, 1996 to October 12, 1996, if the rate of interest is 18%. Ans. I = P666.39 6. The exact simple interest of P5,000.00 invested from June 21, 1995 to December 25, 1995 is P100.00. What is the rate of interest? Ans. i = 3.90% COMPOUND INTEREST   is defined as the interest of loan or principal which is based not only on the Compound interest  is original amount of the loan or principal but the amount of loan or principal plus the previous accumulated interest. This means that aside from the principal, the interest now earns interest as well. Thus, the interest charges grow exponentially expone ntially over a period of time.

Compound interest is frequently used in commercial practice than simple interest, more especially if it is a longer period which spans for more than a year. The future amount of the principal may be derived by the following tabulation: Period 1 2 3 n

Principal P P(1 + i) P(1 + i)2 

Interest Pi P(1 + i)i P(1 + i)2i

Total Amount P + Pi = P(1 + i) P(1 + i)(1 + i) = P(1 + i) P(1 + i)2(1 + i) = P(1 + i) 3  P(1 + i)n 

The tabulation above shows that the future amount (total amount) is just the value P(1 +i) with an exponent which is numerically equal to the period. It is also observed that compound interest is based on the principles of geometric progression and using such method, the total amount amoun t after each period are as follows: First term,

a1 = P(1 +i)

Eqn. 20

Second term,

a2 = P(1 +i)2

Eqn. 21

Third term,

a3 = P(1 + i)3 and so on.

Eqn. 22

Solving for the common ratio, a2  r= a1 P(1 + i)2  r =

 

Using the formula for nth term of a Geometric Ge ometric Progression (G.P.) an = a1r n-1 an = P(1 + i)(1 + i) n-1 an = P(1 + i)n

Eqn. 24

a. FUTURE AMOUNT, F:

F = P(1 + i) n

Eqn. 25

where: P = Principal i = interest per period (in decimal) n = number of interest periods n (1 + i) = single payment compound amount factor b. PRESENT WORTH, P:

F P=

Eqn. 26

n

(1 + i)   1 where:

= single payment present worth factor

n

(1 + i)  

CONTINUOUS COMPOUNDING The concept of continuous compounding is based on the assumption that cash payments occur once per year but compounding is continuous throughout the year.

The basic equation for future worth of compound interest is F = P(1 + i) n   but for m periods per year   mN

 NR

 

F =P 1 + m m let x =  NR 1 =

+

x(NR)N

 

 

 

1  but

x

Lim 1 +     x

x

= e 

!

Therefore, F = Pe(NR)N 

Eqn. 27

where: P = principal e = 2.71828…  NR = nominal rate e(NR)N = continuous compounding compound amount factor

The present worth of continuous compounding is

P=

F

Eqn. 28

 NR(N)

e

NOMINAL AND EFFECTIVE RATES OF INTEREST  Rate of interest   is the cost of borrowing money. It also refers to the amount earned by a unit  principal per unit time.

There are two types of rates of interest, namely the nominal rate of interest and the effective rate of interest.  Nominal rate of interest   is defined as the basic annual rate of interest while effective rate of   interest  is   is defined as the actual or the exact rate of interest earned on the principal during a oneyear period.

For example: A principal is invested at 5% compounded quarterly. In this statement, the nominal rate is 5% while the effective is greater than 5% because of the compounding which occurs four times a year. The following formula is used to determine the effective rate of interest: ER = (1 + i) m – 1 or  NR

ER = 1 +

Eqn. 29 m 

-1 m

where: m = number of interest period per year

 

Substituting the values of m and i: 0.05  ER = 1 +

4

4  

-1

ER = 0.0509 ER = 5.09% So, the actual interest rate is not just 5% but 5.09%. However, the effective rate and nominal rate are equal if the mode of compounding is per annum or annually. Problems:

1. A credit plan charges interest rate of o f 36% compounded monthly. Find its effective rate. Ans. ER = 42.57% 2. A master card compounds monthly mon thly and charges an interest of 1.5 1.5% % per month. What is the effective interest rate per year? Ans. ER = 19.56% 3. A man expects to receive P20,000.00 in 10 years. If interest is computed at 6% compounded quarterly, how much is it worth today? Ans. P = P11,025.25 4. Suppose you borrow P8,000 now, promising to repay the loan principal plus accumulated interest in four years at i = 10% per year. How much would you repay at the end of four years? Ans. F = P11,713 5. An investor (owner) has an option o ption to purchase a tract of land that will be worth P10,000 in six years. If the value of the land increases at 8% per year, how much should the investor be willing to pay now for his property? Ans. P = P6,302 6. How long will it take money mone y to triple itself if invested at 8% compounded annually? Ans. n = 14.27 years ANNUITY  Annuity  is defined as a series of equal payments occurring at equal interval of time. When an  Annuity  annuity has a fixed time span, it is known as annuity certain. The following are annuity certain.

1. Ordinary annuity is a type of annuity where the payments are made at the end of each

 

 

a3 = A(1 + i)2  a4 = A(1 + i)3 

Annuity is based on the principles of compound c ompound interest. Hence, computation of the sum of annuity may be done d one using the formulas for geometric progression. Solving for common ratio: a2  r= a1  A(1 + i) r=

= 1+i A

Solving for the sum: n 1 S = a (r   – 1) r–1

A[(1 + i)4 - 1] S= 1+i–1 A[(1 + i)4 - 1 S= i a.  SUM OF ORDINARY ANNUITY:

A[(1 + i)n -1] F=

Eqn. 30 i

where:

i = interest per period n = number of periods A = uniform payment

[(1 + i)n -1] = uniform series compound amount factor i b. PRESENT WORTH OF ORDINARY ANNUITY:

Using compound sentence formula:

 

A[(1 + i)n - 1]

  P=

Eqn. 31 n

i(1 +i)   where:

A[(1 + i)n - 1] = uniform series present worth factor i(1 +i)n

2. Annuity due is a type of annuity where the payments are made at the beginning of each  period starting from the first period. period. 3. Deferred annuity is a type of annuity where the first payment dose not begin until some later date in the cash flow. When an annuity does not have a fixed time span but continues indefinitely, then it is referred to as a perpetuity. The sum of a perpetuity pe rpetuity is an infinite value.

PRESENT WORTH OF PERPETUITY: A

P = i

where: i = interest per period A = uniform payment Problems:

1. An enterprising student is planning to have personal savings totaling P1,000,000 when she retires at age 65. She is now 20 years old. If the ann annual ual interest rate will average 7% over the next 45 years on her savings account, what equal end-of-year amount must she save to accomplish her goal? Ans. A = P3,500 2. Suppose that you have P10,000 cash today and can invest it at 8 % compound interest each year. How many years will it take you to become a millionaire? Ans. n = 60 years 3. If P500.00 is invested at the end of each year for 6 years, at an annual interest rate of 7%, what is the total peso amount available upon the deposit of the sixth payment? Ans. F = P3,576.64 4. How much money must you invest today in order to withdraw P1,000.00 per year for 10 years

 

  Depreciation Concepts and Terminology  Depreciation  Deprecia tion  is the decrease in value of physical properties with the passage of time and use. More specifically, depreciation is an accounting concept   that establishes an annual deduction against before-tax income such that the effect of time and use on an asset’s value can be reflected in a firm’s financial statements. Annual depreciation deductions are intended to “match” the yearly fraction of value used by an asset in the production of income over the asset’s actual economic life. The actual amount of depreciation can never be established until the asset is retired from service. Because depreciation is a noncash cost that affects income taxes, we must consider it properly when making after-tax engineering economy studies.  Depreciable property is property for which depreciation is allowed under federal, state,  Depreciable or municipal income tax laws and regulations. To determine if depreciation deductions can be taken, the classification of various types of property must be understood. In general, property is depreciable if it meets the following basic requirements:

1. 1.   It must be used in business or held to produce income. 2. 2.   It must have a determinable useful life, and an d the life must be longer than one year. 3. 3.   It must be something that wears out, decays, gets used up, becomes obsolete, or loses from natural stock causes. 4. 4.   value It is not inventory, in trade, or o r investment property.  Depreciable property is classified as either tangible or intangible. Tangible property can be seen  Depreciable or touched, and it includes two main types called  personal property  and real property. Personal  property includes assets such as machinery, vehicles, equipment, furniture, and similar items. In contrast, real property is land and generally anything that is erected on, or attached to land. Land itself, however, is not depreciable because it does not have a d determinable eterminable life.  Intangible property property is personal property as a copyright, patent, or franchise. Engineering  projects rarely include this class of property. A company can begin to depreciate it owns when the property is  placed in service  for use in the business or for the production of income. Property is considered to be placed in service

when it is ready and available for a specific use, even if it is not actually used yet. Depreciation stops either when the cost of placing it in service has been recovered or it is retired from service. Depreciation Methods and Related Time Periods The depreciation methods permitted under the Internal Revenue Code have changed with time. In general, the following summary indicates the  primary methods used for property placed in  service during three distinct time periods.

The primary methods used were straight-line (SL), declining balance (DB), and sum-ofthe-digits (SYD). We will refer to these methods, collectively, as the classical or historical methods of depreciation.  Adjusted (cost) basis  – the original cost basis of the asset, adjusted by allowable increases or

decreases, is used to compute depreciation and depletion deductions. For example, the cost of any improvement to a capital asset with a useful life greater than one year increases the original cost basis, and a casualty or theft loss decreases it. If the basis is altered, the depreciation

 

remains invested in the property and must be recovered in the future through the accounting  process. The BV of a property may not be a useful measure of its market value.  Market value (MV) – the amount that will be paid by a willing seller for a property where each has equal advantage and is under no compulsion to buy or sell. The MV approximates the  present value of what will be received through ownership of the property, including the time value of money (or profit).  Recovery period   – – the number of years over which the basis of a property is recovered through the accounting process. For the classical methods of depreciation, this period is normally the useful life. Under the Modified Accelerated Cost Recovery System (MACRS), this period is the  property class  for the General Depreciation System (GDS), and it is the class life  for the Alternative Depreciation System (ADS).  Recovery rate rate – a percentage (expressed in decimal form) for each year of the MACRS recovery  period that is utilized to compute an annual depreciation deduction.  Salvage value – the estimated value of a property at the end of its useful life. It is the expected selling price of a property when the asset can no longer be used productively by its owner. The term net salvage value is used when the owner will incur expenses in disposing of the property,

and cashmethods outflows of must be deductedare from the cash to obtain a final net isSV. When the these classical depreciation applied, aninflows estimated salvage value initially established and used in the depreciation calculations. Under MACRS, the SV of depreciable  property is defined to be zero. Useful life – the expected (estimated) period of time that a property will be used in a trade or  business or to produce produc e income. It is not how long the property will last but how long the owner expects to productively use it. Useful life is sometimes referred to as depreciable life. Actual useful life of an asset, however, may be different than its depreciable life.

The Classical (Historical) Depreciation Method This section describes and illustrates the straight-line, declining balance, and sum-of-the-years digits methods of calculating depreciation deductions. These historical methods continue to apply, directly and indirectly, to the depreciation of property. Straight-Line (SL) Method Straight-line depreciation is the simplest depreciation method. It asumes that a constant amount is appreciated each year over the depreciable (useful) life of the asset. The following definitions are used in the equations below. If we define

n = depreciable life of the asset in years B = cost basis, including allowable adjustments dK  =  = annual depreciation deduction in year k (1 ! k ! n) BVk  =  = book value at end of year k   SVn = estimated salvage value at end of year n d * = cumulative depreciation through year k k 

then dk  =  = (B – SVn)/n 

Eqn. 32

 

 Note for this method you must have an estimate of the final SV, which will also be the final book value at the end of year n. In some cases, the estimated SV n  may not equal an asset’s actual terminal MV. Example no.1: A new electric saw for cutting small pieces of lumber in a furniture manufacturing plant has a cost basis of P4,000 and a 10-year depreciable life. The estimated SV of the saw is zero at the end of 10 years. Determine the annual depreciation amounts using the straight-line method. Tabulate the annual depreciation amounts and the book value of the saw at the end of each year. SOLUTION:

The depreciation amount, cumulative depreciation, and book value for each year are obtained by applying Equations 32, 33 and 34. Sample calculations for year five are shown below. P 4,000 – 0 d5 =

= P 400 10 5 (P4,000 – 0)

d5 =

= P 2,000 10 5 (P4,000 – 0)

BV5 =P 4,000 -

= P2,000 10

The depreciation and book value amounts for each year are shown below. EOY, k 0 1 2

dk   ------P400 400

BVk  P4,000 3,600 3,200

3 4 5 6 7 8 9 10

400 400 400 400 400 400 400 400

2,800 2,400 2,000 1,600 1,200 800 400 0

Declining Balance (DB) Method In the declining balance method, sometimes called the constant percentage method   or the  Matheson formula, it is assumed that the annual cost of depreciation is a fixed percentage of the BV at the beginning of the year. The ratio of the depreciation in any one year to the BV at the  beginning of the year is constant throughout the life of the asset and is designated by R (0!R !1). In this method, R= 2/ n when a 200% declining balance is being used (i.e., twice the straight line rate of 1/n), and n equals the depreciable (useful) life of an asset. If the 150%

 

BVk = B (1-R) k

Eqn. 38

BVn = B (1-R) n 

Eqn. 39

Example no. 2: Rework Example 1 with the declining balance method when (a)R = 2/n (200% declining balance method) and (b) R = 1.5/n (150% declining balance method). Again, tabulate the annual depreciation amount and book value for each year. Solution:

Annual depreciation, cumulative depreciation, and book value are determined by using Equations 36, 37, and 38, respectively. Sample calculations for year six are shown below. (a)

(b)

R = 2/n = 2/10 = 0.2 d6 = P4,000 (1- 0.2)5 (0.2) = P262.14 d6* = P4,000 [1 – (1 – 0.2)6] = P2,951.42 BV6 = P4,000 (1 – 0.2)6 = P1,048.58 = P4,000 1.5/n = (11.5/10 = 50.15 dR6 = 0.15) (0.15) = P266.22 * d6  = P4,000 [1 – (1 – 0.15)6 ] = P2,491.40 6 BV6 = P4,000 (1 (1 – 0.15)   = P1,508.60

The depreciation and book value amounts for each year, when R = 2/n = 0.2, are shown below: 200% Declinng Balance Method Only EOY, k 0 1 2 3 4 5 6 7 8 9 10

dk  ------P800 640 512

BVk  P4,000 3,200 2,560 2,048

409.60 327.68 262.14 209.72 167.77 134.22 107.37

1,638.40 1,310.72 1,048.58 838.86 671.09 536.87 429.50

Sum-of-the-Years-Digits (SYD) Method To compute the depreciation deduction by the SYD method, the digits corresponding to the number for each permissible year of life are first listed in reverse order. The sum of these digits is then determined. The depreciation factor for any year is the number from the reverse-ordered listing for that year divided by the sum of the digits. For example, for a property having a

depreciable (useful) life of five years, SYD depreciation factors are as follows: Number of the

 

 

The depreciation for any year is the product of the SYD depreciation factor for that year and the difference between the cost basis (B) and the estimated final SV. The general expression for the annual cost of depreciation for any year k, when N equals the depreciable life of an asset, is 2(n- k  +  + 1) dk  =  = (B – SVn)

Eqn. 40 n (n + 1)

The book value at the end of the year k is 2 (B – SVn) BVk  = B -

(B –SVn) k  +  + n(n + 1)

n

k  (  (k +1) +1)

Eqn. 41

and the cumulative depreciation through the k th th year is simply dk * = B – BVk  

Eqn. 42

Example no. 3: Rework example 1 using the sum-of-the-years-digits method. Tabulate the annual depreciation mount and book value for each year. Solution:

With Equations 40, 41, and 42, respectively, the annual depreciation, book value, and cumulative depreciation amounts are obtained. Sample calculations for year four are given below 2(10- 4 + 1) d4 = P4,000

= P509.09 10(10 + 1)

2 (P4,000) BV4 = P4,000 -

(P4,000) 4+ 10(10 +1)

10

d4* = P4,000 - P1,527.27 = P,472.73 Depreciation and book value amounts for each year are shown below. EOY, k 0 1 2

dk   ------P727.27 654.55

BVk  P4,000 3,272.73 2,618.18

3 4 5 6

581.82 509.09 436.36 363.64

2,036.36 1,527.27 1,090.91 727.27

4(5) = P1,527.27

 

MULTIPLE CHOICE QUESTIONS

1. The paper currency issued by the central Bank, which forms part of the country’s money supply. A. B. C. D.

Bank note * Check Coupon T-bills

2. Reduction in the level of national income and output usually accompanied by the fall in the general price level. A. Deflation * B. Depreciation C. Devaluation D. Inflation 3. It is a series of equal payments pa yments occurring at equal interval of time. A Amortization B. Annuity * C. Dept D. Deposit 4. The place where buyers and sellers come together. A. Business B. Buy and sell section C. Market * D. Recreation center 5. A market whereby there is only one buyer of an item for which there are no goods substitute. A. Monopoly B. Monopsony * C. Oligopoly D. Oligopsony 6. It is a series of equal payments pa yments occurring at equal interval of time where the first payment is made after several periods, after the beginning of o f the payment. A. Annuity due B. Deferred annuity * C. Ordinary annuity D. Perpetuity 7. The total income equals the total operating cost.

 

8. Kind of obligation which has no condition attached. A. Analytic B. Gratuitous * C. Private D. Pure 9. Direct labor costs incurred in the factory and direct material costs are the costs of all materials that go into production. The sum of o f these two direct costs is known as A. GS and A expenses B. Operating and maintenance costs C. O and M costs D. Prime cost * 10. An index of short term paying ability is called A. acid-test ratio * B. current ratio C. margin ratio D. profit receivable turn-over 11. An artificial expenses that spreads the purchase pu rchase price of an asset or another property over a number of years. A. Amnesty B. Bond C. Depreciation * D. Sinking fund 12. Estimated value at the end of the useful life. A. Book value B. Fair value C. Market value D. Salvage value * 13. Consists of the actual counting or determination of the actual quantity of the materials on hand as of a given date. A. Material count B. Material update C. Physical inventory * D. Technological assessment 14. Additional information of prospective bidders on contact documents issued prior to bidding date. *

 

15. A series of uniform accounts over an infinite period of time. A. Annuity B. Depreciation C. Inflation D. Perpetuity * 16. The quantity of a certain commodity that is offered for sale at a certain price at a given place and time. A. Demand B. Goods C. Stocks D. Supply * 17. Work-in process is classified as A. an asset * B. an expenses C. owner’s equity D. An a liability 18. What is the highest position in the corporation? A. Board of Directors B. Chairman of the Board * C. President D. Stockholders 19. Type of ownership in business where individuals exercise and enjoy the right in their own interest. A. Equitable B. Public C. Private * D. Pure 20. Decrease in the value of a physical property due to the passage of time. A. Depletion B. Depreciation * C. Inflation D. Recession 21. An association of two or more individuals for the purpose of operating a business as co-owners for profit. A. Company

 

22. We may classify an interest rate, which specifies the actual rate of interest on the principal for one year as A. effective rate * B. exact interest rate C. nominal rate D. rate of return 23. It is defined to be the capacity of a commodity to satisfy human want. A. Discount B. Luxury * C. Necessity D. Utility 24. It is the amount which a willing buyer will pay to a willing seller for a property where each has equal advantage and is under no compulsion to buy or sell. A. Book value B. value C. Fair Market value * D. Salvage value 25. This occurs in a situation where a commodity or service is supplied by a number of vendors and there is nothing to prevent additional vendors entering the market. A. Elastic demand B. Monopoly C. Oligopoly D. Perfect competition * 26. These are products or services that are desired by human and will be purchased if money is available after the required necessities have been obtained. A. Luxuries * B. Necessities C. Product goods and services D. Utilities 27. These are products or services that are required to support human life an and d activities that will  be purchased in somewhat the same quantity even though the price varies considerably. A. Luxuries B. Necessities * C. Product goods and services D. Utilities 28. A condition where only few individuals produce a certain product and that any action of one

 

29. Grand total of the assets and operational capability of a corporation. A. Authorized capital * B. Investment C. Money market D. Subscribed capital 30. The worth of the property equals to the original cost less depreciation. A. Book value * B. Face value C. Market value D. Scrap value 31. Money paid for the use of borrowed capital. A. Credit B. Interest * C. Discount D. Profit 32. Liquid assets such as cash and other assets that can be converted quickly into cash, such as accounts receivable and merchandise are called A. current assets * B. Fixed assets C. total assets D. None of the above 33. The length of time which the property may be operated at a point. A. Economic life * B. Operating life C. Physical life D. All of the above 34. The provision in the contract that indicates the possible adjustment of material cost and labor cost. A. Contingency clause B. Escalatory clause * C. Main clause D. Secondary clause 35. The present worth of all depreciation over the economic life of the item is called A. book value B. capital recovery *

 

37. Worth of the property as shown in the accounting records of an enterprise. A. Book value * B. Fair value C. Market value D. Salvage value 38. Those funds that are required to make the enterprise or project a going concern. A. Current accounts B. Initial investment C. Substantial capital D. Working capital * 39. A market situation where there is only on ly one seller with many buyer. A. Monopoly * B. Monopsony C. Oligopoly D. Oligopsony 40. A market situation where there are few sellers and few buyers. A. Bilateral oligopoly * B. Bilateral oligopsony C. Oligopoly D. Oligopsony 41. A market situation where there is one seller and one buyer. A. Bilateral monopoly * B. Bilateral monopsony C. Monopoly D. Monopsony 42. A market situation where there are only two buyers with many sellers. A. Duopoly B. Duopsony * C. Oligopoly D. OLigopsony 43. The cumulative effect of elapsed time on the money value of an event, based on the earning  power of equivalent invested funds capital should or will earn. A. Interest rate B. Present worth factor C. Time value of money *

 

45. The flow back of profit plus depreciation from a given project is called A. cash flow * B. capital recovery C. earning value D. economic return 46. The profit derived from a project or business enterprise without consideration of obligations to financial contributors or claims of other based on profit. A. Earning value B. Economic return * C. Expected yield D. Yield 47. The payment for the use of borrowed money is called A. interest * B. loan C. maturity value D. principal 48. The interest rate at which the present work of the cash flow on a project is zero of the interest earned by an investment. A. Effective rate B. Nominal rate C. Rate of return * D. Yield 49. The ratio of the interest payment to the principal for a given unit of time and usually expressed as a percentage of the principal. A. Interest B. Interest rate * C. Investment D. All of the above 50. The true value of interest rate computed by equations for compound interes interestt for a 1 year  period is known as A. effective interest * B. expected return C. interest D. nominal interest 51. The intangible item of value from the exclusive right of a company to provide a specific  product or service in a stated region of the country.

 

52. The recorded current value of an asset is known as A. book value * B. present value C. salvage value D. scrap value 53. Scrap value of an asset is sometimes known as A. book value B. future value C. replacement value D. salvage value * 54. Sometimes called second hand value. A. Book value B. Going value C. Salvage value * D. Scrap value 55. An intangible value which is actually operating concern has due to its operation. A. Book value B. Fair value C. Going value * D. Goodwill value 56. The value which a disinterested third party, different from the buyer and seller, will determine in order to establish a price acceptable acc eptable to both parties. A. Fair value * B. Franchise value C. Goodwill value D. Market value 57. A type of annuity where the payments are made at the end of each payment period starting from the first period. A. Annuity due B. Deferred annuity C. Ordinary annuity * D. Perpetuity 58. It is a series of equal payments occurring at equal intervals of time where the first payment is made after several periods, after the beginning of the payment. A. Deferred annuity *

 

59. A type of annuity where the payments are made at the start of each period, beginning from the first period. A. Annuity due * B. Deferred annuity C. Ordinary annuity D. Perpetuity 60. Which is NOT an essential element of an ordinary annuity? A. the amounts of all payments are equal. B. The payments are made at equal interval of time. C. The first payment is made at the beginning of each period. * D. Compound interest is paid on all amounts in the annuity. 61. A is a periodic payment and I is the interest rate, rate, then present worth of a perpetuity = A. Ai B. Ain  n

C. D. A A/i/i* 62. A mathematical expression also known as the present value of an annuity of one called A. demand factor B. load factor C. present worth factor* D. sinking fund factor 63. As applied to a capitalized asset, the distribution of the initial cost by a periodic changes to operation as in depreciation or the reduction of a dept by either periodic or irregular  prearranged program is called A. amortization* B. annuity C. annuity factor D. capital recovery 64. The reduction of the value of an asset due to constant use and passage of time. A. Book value B. Depletion C. Depreciation * D. Scrap value 65. A method of computing depreciation in which the annual charge is a fixed percentage of the depreciated book value at the beginning of the year to which the depreciation applies. *

 

66. A method of depreciation whereby the amount to recover is spread uniformly over the estimated life of the asset in terms of the periods or units u nits of output. A. Declining balance method B. Sinking fund method C. Straight line method * D SYD method 67. Which of the following depreciation methods cannot have a salvage value of zero? A. Declining balance method * B. Sinking fund method C. Straight line method D. SYD method 68. A method of depreciation where a fixed sum of money is regularly deposited at compound interest in a real or imaginary fund in order to accumulate an amount equal to the total depreciation of an asset at the end of the asset’s estimated life. A. Declining balance method B. Sinking fund method * C. Straight line method D. SYD method 69. The function of interest rate and an d time that determines the cumulative amount o off a sinking fund resulting from specific periodic deposits. A. Capacity factor B. Demand factor C. Present worth factor D. Sinking fund factor * 70. The first cost of any property prope rty includes A. the original purchase price and freight and transportation charges B. installation expenses C. initial taxes and permits fee D. all of the above * 71. In SYD method, the sum of years digit is calculated using which formula with n = number of useful years of the equipment. A. n(n-1) 2 B. n(n+1) * 2 C.  C.  n(n+1) D. D.   n(n-1)

 

73. The lessening of the value of an asset due to the decrease in the quantity available (referring to the natural resources, coal, oil, etc). A. Depletion * B. depreciation C. Incremental cost D. Depreciation 74. Is the simplest form of business organization. A. Corporation B. Enterprise C. Partnership D. Sole proprietorship * 75. An association of two or more persons for a purpose of engaging in a profitable business. A. Corporation B. Enterprise C. * D. Partnership Sole proprietorship 76. A distinct legal entity which can practically transact any business transaction which a real  person could do. A. Corporation * B. Enterprise C. Partnership D. Sole proprietorship 77. Double taxation is a disadvantage of which business organization? A. Corporation * B. Enterprise C. Partnership D. Sole proprietorship 78. Which is NOT a type of business organization? A. Corporation B. Enterprise * C. Partnership D. Sole proprietorship 79. What is the minimum number of incorporators in order that be organized? A. 3 B. 5 *

 

81. Which is TRUE about partnership? pa rtnership? A. It has a perpetual life. B. It will be dissolved if one of the partners ceases to be connected with the partnership. * C. It can be handed down from one generation of partners to another. D. Its capitalization must be equal for each partner. 82. Which is TRUE about corporation? A. It is not the best form of business organization. B. The minimum number of incorporators to start a corporation is three. C. Its life is dependent on the lives of the incorporators. D. The stockholders of the corporation are only liable to the extent of their investments. * 83. Represent ownership, and enjoys certain preferences than ordinary stock. A. Authorized capital stock B. Common stock C. Incorporator’s stock D. Preferred stock * 84. Represent the ownership of stockholders who have a residual claim on the assets of the corporation after all other claims have been settled. A. Authorized capital stock B. Common stock * C. Incorporator’s stock D. Preferred stock 85. The amount of company’s profits that the board of directors of the corporation co rporation decides to distribute to ordinary shareholders. A. Dividend * B. Par value C. Return D. Share stock 86. A certificate of indebtness of a corporation usually for a period not less than 10 years and guaranteed by a mortgage on certain assets of the corporation. A. Bond * B. Common stock C. Preferred stock D. T-bill 87. A form of fixed-interest security issued by central or local loca l government, companies, banks or other institutions. They are usually a form of long-term security, buy may be irredeemable, secured or unsecured.

 

88. A type of bond bon d where the corporation pledges securities which it owns (i.e., stocks, bonds of its subsidiaries). A. Collateral trust bond * B. Coupon bond C. Mortgage bond D. Registered bond 89. A type of bond which does not have security except a promise to pay by the issuing corporation. A. Collateral trust bond B. Debenture bond * C. Mortgage bond D. Registered bond 90. A type of bond issued jointly by two or more corporations. A. Collateral trust bond B. Debenture bond C. Joint bond * D. Registered bond 91. A type of bond whose guaranty is in lien on railroad equipments. A. Debenture bond B. Equipment obligations bond * C. Infrastructure bond D. Registered bond 92. If the security of the bond bon d is a mortgage on certain specified asset of a corporation, this bond is classified as A. coupon bond B. joint bond C. mortgage bond * D. registered bond 93. A type of bond where the corporation’s owners name are recorded and the interest is paid  periodically to the owners with their asking for it. A. Incorporated bond B. Preferred bond C. Registered bond * D. All of these 94. Bond to which are attached coupons indicating the interest due and the date when such interest is to be paid. A. Collateral trust bond *

 

96. The 72 rule of thumb is use to determine A. how many years money will triple B. how many years of money will double * C. how many years to amass 1 million D. how many years to quadruple the money 97. To triple the principal, one must use A. derivatives B. implicit functions C. logarithms * D. integration 98. A currency traded in a foreign exchange market for which the demand is consistently high in relation to its supply A. Certificate of deposit B. Hard currency * C. Money market D. Treasury bill 99. Everything a company owns and which has a money value is classified as an asset. Which of the following is classified as an asset? A. Fixed assets B. Intangible assets C. Trade investments D. All of these * 100. Which an example of an intangible asset? A. Cash B. Furnitures C. Investment in subsidiary companies D. Patents * 101. Lands, buildings, plant and machinery are examples of A. current assets B. fixed assets * C. intangible assets D. trade investments 102. An increase in the value of a capital asset is called A. capital expenditure B. capital gain*

 

104. It is a negotiable claim issued by a bank in lieu of a term deposit. A. Bond B. Capital gain C. Certificate of deposit * D. Time deposit 105. Any particular raw material or primary product (e.g. cloth, wood, flour, coffee…) is called A. commodity * B. necessity C. stock D. utility 106. It denotes the fall in the exchange rate of one currency in terms of others. The term usually applies to floating exchange rates. A. Currency appreciation B. Currency devaluation C. Currency depreciation * D. Currency float 107. The deliberate lowering of the price of a nation’s currency in terms of the accepted standard (Gold, American dollar or the British pound). A. Currency appreciation B. Currency devaluation * C. Currency depreciation D. Currency float 108. The residual value of a company’s assets after all outside liabilities (shareholders excluded) have been allowed for. A. Dividend B. Equity * C. Par value D. Return 109. A saving which takes place because goods are not available for consumption rather than the consumer really want to save. A. Compulsory saving B. Consumer saving C. Forced saving * D. All of these 110. A document that shows proof of legal ownership of a financial security. A. Bank note

 

112. It is the profit obtained by selling stocks at a higher price than its original purchase price. A. Capital gain * B. Debenture C. Goodwill D. Internal rate of return 113. The quantity of a certain commodity that is offered for sale at a certain price at a given time and place. A. Demand B. Market C. Supply * D. Utility 114. The quantity of a certain commodity that is bought at a certai8n price at a given time and  place. A. Demand * B. Market C. Supply D. Utility 115. “When one of o f the factors of production is fixed in qua quantity ntity or is difficult to increase, increasing the other factors of production will result in a less than proportionate increase in output”. A. Law of demand B. Law of diminishing return * C. Law of supply D. Law of supply and demand 116. “When free competition exists, the price p rice of a product will be that value where supply is equal to the demand”. A. Law of demand B. Law of diminishing return C. Law of supply D. Law of supply and demand * 117. An accounting term that represents an inventory account adjustment. A. Cost of good sold * B. Overhead C. Payback D. Variance 118. The simplest economic order quantity qua ntity (EOQ) model is based on which of the following

 

119. In economics, a “short-term” “ short-term” transaction usually has a lifetime of A. 3 months or less B. 1 year or less C. 5 years or less * D. 10 years or less 120. In the cash flow, expenses e xpenses incurred before time = 0 is ca called lled A. disbursements B. first costs C. receipts D. sunk costs * 121. An imaginary cost representing what will not no t be received if a particular strategy is rejected. A. Initial cost B. Opportunity cost * C. Replacement cost D. Sunk cost 122. In replacement studies, the existing process or o r piece of equipment is known as A. asset B. challenger C. defender * D. liability 123. In replacement studies, the new process or piece of equipment being considered for  purchase is known as A. asset B. challenger * C. defender D. liability 124. ______ means that the cost of the asset is divided into equal or unequal parts, and only one of these parts is taken as an expense each year. A. Artificial expense B. Capitalizing the asset * C. Depreciating the asset D. Expensing the asset 125. Indicate the CORRECT statement about depreciation. A. The depreciation is not the same each year in straight line method. B. The declining balance method can be used even if the salvage value is zero. - ’ +

 

127. The change in cost per unit variable change is known as A. fixed cost B. incremental cost * C. semi-variable cost D. sunk cost 128. What type of cost increases step-wise? A. Direct labor cost B. Operating and maintenance cost C. Semi-variable cost * D. Supervision cost 129. Which of the following is NOT a variable cost? A. Cost of miscellaneous supplies B. Income taxes C. Insurance cost * D. Payroll benefit costs 130. Which of the following is NOT a fixed cost? A. Depreciation expenses B. Janitorial service expenses C. Rent D. Supervision costs * 131. The annual costs that are incurred due to the functioning of a piece of equipment is known as A. General, selling and administrative expenses B. Operating and maintenance costs * C. Prime cost D. Total cost 132. The sum of the direct labor cost and the direct material cost is known as A. indirect manufacturing expenses B. marketing cost C. prime cost * D. total cost 133. Research and development costs and administrative expenses are added to the factory cost to give the ___________ of the product. A. manufacturing cost * B. marketing cost

 

  135. The manufacturing cost plus selling expenses e xpenses or marketing expanses equals A. administrative cost B. indirect production cost C. miscellaneous cost D. total cost * 136. Which of the following is NOT a direct labor expense? A. Assembly B. Inspection C. Supervision * D. Testing 137. All are administrative expense EXCEPT: A. Accounting B. Data processing C. Marketing * D. Office supplies 138. On of the following is NOT a selling or marketing expense. Which one? A. Advertising B. Commission C. Insurance * D. Transportation 139. Research and development expenses includes all EXCEPT one. Which one? A. Drafting B. Laboratory * C. Prototype D. Testing 140. Which is not a factory overhead expense? A. Expediting B. Pension, medical, vacation benefits C. Quality control and inspection D. Testing * 141. Bookkeeping consists of two steps, namely recording the transactions and categorization of transactions. Where are the transactions (receipts and disbursements) recorded? A. Columnar B. Journal *

 

  143. The journal and the ledger together are known simply as _____________ of the company. A. accounting system B. balance sheet C. bookkeeping system D. the books * 144. The basic accounting equation is A. Assets = Liability + Owner’s equity * B. Liability = Assets + Owner’s equity C. Owner’s equity = Assets + Liability D. Owner’s equity = Liability – Assets 145. The ability to convert conve rt assets to cash quickly is known as A. insolvency B. leverage C. liquidity * D. solvency 146. The ability to meet debts as they become due is known as A. insolvency B. leverage C. liquidity D. solvency * 147. What is considered as an index of short-term paying ability? A. Acid test ratio B. Current ratio * C. Gross margin D. Return of investment 148. An acid test ratio is a ratio of A. gross profit to net ratio B. net income before taxes to net sales C. net income to owner’s equity D. quick assets to current liabilities * 149. The ratio of the net income to the owner’s equity is known as A. gross margin B. price-earning ratio C. Profit margin ratio *

 

  151. A secondary book of accounts, the information of which is obtained from the journal. A. Balance sheet B. Ledger * C. Trial balance D. Worksheet 152. The present worth of cost c ost associated with an asset for an infinite period of time is referred to as A. annual cost B. capitalized cost * C. increment cost D. operating cost 153. A stock of a product which is held by a trade or government as a means of regulating the  price of that product. A. Buffer stock * B. Hoard stock C. Stock pile D. Withheld stock 154. A negotiable claim issued by a bank in lieu of a term deposit is called A. Certificate of deposit * B. Cheque C. Currency D. T-bills 155. A form of business firm which is owned and run by a group of individuals for their mutual  benefit. A. Cooperative * B. Corporation C. Enterprise D. Partnership 156. A document which shows the legal ownership of financial security and entitled to payments thereon. A. Bond B. Consol C. Contract D. Coupon * 157. A government bond which have an indefinite life rather than a specific maturity.

 

  158. Refers to the order quantity quan tity that minimizes the inventory cost per unit time. A. Economic order quantity * B. Private order quantity C. Public order quantity D. Social order quantity 159. What is referred to as an individual who organizes factors of production to u undertake ndertake a venture with a view to profit? A. Agent B. Commissioner C. Entrepreneur * D. Salesman 160. The money that is inactive and does not contribute to productive effort in an economy is known as A. frozen asset B. hard money C. idle money * D. soft money