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Introduction to Management Accounting

- HILARIO

THEORIES 1. Management accounting focuses primarily on providing data for: a. External uses by stockholders and creditors. b. External uses by the Internal Revenue Service. c. External uses by the Securities and Exchange Commission. d. Internal uses by managers. 2. Managerial accounting: a. Tends to summarize information more than financial accounting. b. Is primarily concerned with providing information to external users. c. Is more concerned with precision than timeliness. d. Is more future oriented than financial accounting. 3. In comparing financial and management accounting, which of the following more accurately describes management accounting information? a. Historical, precise, useful b. Budgeted, informative, adaptable c. Required, estimated, internal d. Comparable, verifiable, monetary 4. Compared to financial accounting, managerial accounting places more emphasis on: a. The flexibility of information. b. The precision of information. c. The timeliness of information. d. Both A and C above. 5. The function of management that compares planned results to actual results is known as: a. Planning b. Directing and motivating c. Controlling d. Decision making 6. Which of the functions of management involves overseeing day-to-day activities? a. Planning b. Controlling c. Decision making d. Directing and motivating 7. Which of the following is not one of the three basic activities of a manager? a. Planning b. Controlling c. Directing and motivating d. Compiling management accounting reports 8. The management function that requires management to look ahead and establish objectives is: a. Controlling b. Directing

c. Planning d. Evaluating. 9. All of the following are distinguishing features of managerial accounting except: a. Internal users. b. Reports pertaining to subunits of the entity. c. Independent audits. d. To provide special-purpose information. 10. The delegation of decision making to lower levels in an organization is known as: a. The planning and control cycle. b. Controlling. c. Decentralization. d. None of these. 11. Which of following would normally be found on a manufacturing company's organization chart? a. The layout of the factory assembly lines. b. A list of the materials needed to produce each of the company's products. c. The informal lines of reporting and communication. d. None of the above. 12. For a hospital, what type of position (line or staff) is each of the following? Emergency Room Manager Human Resources (Personnel) Manager a. Staff Staff b. Staff Line c. Line Staff d. Line Line 13. A detailed financial plan for the future is known as a: a. Budget b. Performance report c. Organization chart d. Segment 14. A performance report is: a. A detailed report comparing budgeted data to actual data for a specific time period. b. A formal statement of plans for the upcoming period. c. Required to be filed monthly by the Securities and Exchange Commission. d. Not used in decentralized organizations. 15. All activities associated with providing a product or service is referred to as: a. Total quality management systems. b. Just-in-time inventory methods. c. The value chain. d. Activity-based costing. 16. The goal of TQM is: a. To manage the value chain. b. To reduce inventory levels. c. To reduce defects in finished products.

d. To produce products untouched by human hands. 17. A clustering of two or more machines at a single workstation is referred to as: a. A manufacturing cell b. An activity center c. A functional layout d. A setup 18. A focused factory is: a. A plant layout in which all machines needed to make a particular product are brought together in one location. b. A factory that makes only a single product. c. A factory that performs a single step in the production process and subcontracts the other steps. d. Required to bid for defense contracts. 19. Large work in process inventories: a. Are essential for efficient operations. b. Reduce defect rates. c. Are a key part of Just-In-Time systems. d. Increase throughput time. 20. Ideally, how many units should be produced in a just-in-time manufacturing system? a. Budgeted customer demand for the current week. b. Budgeted customer demand for the following week. c. Maximum production capacity for the current week. d. Actual customer demand for the current week. 21. After careful planning, Jammu Manufacturing Corporation has decided to switch to a just-in-time inventory system. At the beginning of this switch, Jammu has 30 units of product in inventory. Jammu has 2,000 labor hours available in the first month of this switch. These hours could produce 500 units of product. Customer demand for this first month is 400 units. If just-in-time principles are correctly followed, how many units should Jammu plan to produce in the first month of the switch? a. 470 b. 430 c. 400 d. 370 22. Process Reengineering includes all of the following steps except: a. Constructing a diagram flowcharting the current process. b. Redesigning the process. c. Elimination of non-value-added activities. d. Elimination of all constraints. 23. According to the Theory of Constraints, improvement efforts should usually be focused on: a. Work centers that are not constraints. b. The work center with the highest total cost. c. The work center with the most obsolete equipment. d. The work center that is the constraint

24. Which of the following is true regarding the theory of constraints? a. The theory of constraints does not apply to companies with multiple products because of capacity measurement difficulties. b. In any profit-seeking company, there must be at least one constraint. c. Constraints or bottlenecks stop organizations from selling an infinite number of units or services. d. Both B and C above. 25. Pizza World makes forty-three kinds of pizza for takeout and delivery. Which of the following could be the constraint at Pizza World? a. The person who makes the pizza crust. b. The person who puts toppings on the pizzas. c. The pizza oven. d. Any of the above could be the constraint. 26. The Standards of Ethical Conduct for Management Accountants developed by the Institute of Management Accountants contain a policy regarding confidentiality that requires management accountants to refrain from disclosing confidential information acquired in the course of their work: a. Except when authorized by management. b. In all situations. c. Except when authorized by management, unless legally obligated to do so. d. In all cases not prohibited by law. 27. Wide-spread adherence to ethical standards in an advanced market economy tends to result in all of the following except: a. Higher quality goods and services b. Greater variety of goods and services available for sale c. Safer products d. Higher prices 28. The Institute of Management Accountants (IMA) has developed ethical standards for management accountants. What four categories has the IMA classified these standards into? a. Reliability, Objectivity, Commitment, and Competence b. Objectivity, Integrity, Commitment, and Confidentiality c. Competence, Objectivity, Integrity, and Confidentiality d. Observation, Integrity, Closure, and Competence e. Reliability, Understandability, Flexibility, and Integrity 29. Samantha Galloway is a managerial accountant in the accounting department of Mustang Industries, Inc. Samantha has just discovered evidence that some of the corporation's marketing managers have been wrongfully inflating their expense reports in order to obtain higher reimbursements from the firm. According to the Institute of Management Accountants' Standards of Ethical Conduct, what should Samantha do upon discovering this evidence? a. Ignore the evidence because she is not part of the Marketing Department. b. Notify the marketing managers involved. c. Notify the president of the corporation. d. Notify the controller.

30. On average, the smallest component of total manufacturing cost is: a. Direct materials b. Direct labor c. Manufacturing overhead d. Factory overhead

Cost Concept and Classification – ESCOTO THEORIES 1. An item or event that has a cause-effect relationship with the incurrence of a variable cost is called a a. Mixed cost. c. Direct cost. b. Cost driver. d. Predictor 2. A cost that remains constant on a per unit basis in a given period despite changes in the level of activity should be considered a(an): a. Variable cost. c. Fixed cost. b. Prime cost. d. Overhead cost. 3. Which of the following methods estimates costs by identifying costs as variable or fixed based on qualitative analysis? a. Regression analysis b. high-low method c. Engineering method d. Account analysis 4. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n) a. Fixed cost b. Expired cost c. Variable cost. d. Mixed cost. 5. Kang Company’s average cost per unit is the same at all levels of volume. Which of the following is true? a. Kang’s cost structure cannot be determined from this information b. Kang must have only fixed costs c. Kang must have some fixed costs and some variable costs d. Kang must have only variable costs. 6. A security guard’s wages at a factory would be an example of: Indirect labor a. Yes b. No c. Yes d. No

Fixed Manufacturing overhead Yes No No Yes

7. Manufacturing overhead includes: a. All direct material, direct labor, and administrative costs b. All manufacturing costs except direct labor c. All selling and administrative costs d. All manufacturing costs except direct labor and direct materials

8. Materials used in the operation of a factory, such as cleaning supplies, that are not an integral part of the final product should be classified as: a. Direct materials b. A period cost c. Administrative expense d. Manufacturing overhead 9. The one cost that would be classified as part of both prime cost and conversion cost would be: a. Indirect material b. Direct Material c. Direct labor d. Indirect labor 10. Direct costs: a. Are incurred to benefit a particular accounting period b. Are incurred due to specific decision c. Are the variable cost of producing a product d. Can be easily traced to particular cost object 11. The annual insurance premium for the factory building would be a: a. Fixed cost, period cost, and indirect cost with regard to units of the product b. Fixed cost, product cost, and direct cost with regard to units of the product c. Fixed cost, product cost, indirect cost with regards to unit of product d. Variable cost, product cost, direct cost with regards to unit of product 12. Which of the following is NOT a period cost? a. Cost of a seminar concerning tax law updates that was attended by the company’s controller b. Salary of a billing clerk c. Insurance on a company showroom, where current and potential customers can view new products d. Monthly depreciation of the equipment in a fitness room used by factory workers 13. All of the following are examples of product costs except? a. Insurance on the factory equipment b. Salary of the plant manager c. Depreciation on the company’s retail outlets d. Rental costs of the factory facility 14. Which of the following is an example of a period cost? a. Fabric used to produce men’s pants b. Monthly depreciation of production equipment c. Factory supervisor’s salary? d. Advertising cost for a new product campaign 15. Inventoriable (ie., product) cost that have become expenses can be found in: a. Period cost b. Selling expenses c. Administrative expenses d. Cost of goods sold PROBLEMS Question Nos. 1 through 4 are based on the following: 1. A local church wants to rent a hall for P3,000 a day to hold a Bingo fundraiser. Every session of bingo

requires a caller for P200. There are supplies that are needed that cost P3 per person playing bingo. On an average each bingo player spends P20 and 1,000 people attend each session. P10,000 in prizes are awarded each session. 16. The total costs for 1 session can be classified as: A. B. C. D. Fixed Costs P 13,200 P 3,000 P 13,200 P 10, 00 Variable Costs P3 P 13,200 P 3,000 P 3,200 2. The church conducts 1 Bingo session per month. Over the course of the year, which cost would not act as a variable cost based on just holding one more session? a. Hall rental b. Caller salary c. Cost of supplies d. Prize money 3. If the church conducts 12 sessions and 1,000 people attend each session, the average cost per session is?a. P9,600 b. P16,200 c. P15, 200 d. P14,700 4. The church is thinking of holding 2 Bingo session per day with 1,000 people attending each session. If they hold the 2 sessions, the average cost per session is? a. P9,600 b. P15,200 c. P14,700 d. P16,20 5. The following costs were incurred in July: Direct Materials P35,000 Direct Labor P13,000 Manufacturing overhead P15,000 Selling expenses P14,000 Administrative expenses P30,000 The prime costs during the month totaled: a. P107,000 b. P28,000 c. P48,000 d. P63,000 6. Uy Company’s manufacturing overhead is 20% of its total conversion costs. If the direct labor is P38,000 and if direct materials are P47,000 the manufacturing overhead is: a. P152, 000 b. P9,500 c. P21,250 d. P11, 750 7. During the month of July, direct labor cost totaled P12,000 and direct labor cost was 30% of prime cost. If total manufacturing costs during July were P86,000, the manufacturing overhead was: a. P74,000

b. P40,000 c. P28,000 d. P46,00 8. Mercado Manufacturing Corporation rents a building for P8,000 per month and uses it for a number of different purposes. The building space is utilized by the various activities as follows: Receiving and storing raw materials 5% Production operations 70% Sales offices 15% Administrative offices 10% a. P5,600 b. P7,200 c. P6,800 d. P6,000 9. Hal Inc. is a merchandising company. Last month the company’s cost of goods sold was P68,000. The company’s beginning merchandise inventory was P11,000 and its ending merchandise inventory was P17,000. What was the total amount of the company’s merchandise purchases for the month? a. P96,000 b. P62,000 c. P74,000 d.P68,000 10. The following data have been provided for the most recent month’s operation: Direct materials P8,000 Direct labor P25,000 Manufacturing overhead P9,000 Total Manufacturing costs ? Beginning work in process inventory ? Ending work in process inventory P8,000 Cost of goods manufactures P45,000 The beginning work in process inventory is: a. P53,000 b. P42,000 c. P11,000 d. P37,000 11. Last year there was no change in either the raw materials or the work in process beginning and ending inventories. However, finished goods, which had a beginning balance of P25,000, increased by P15,000. If the manufacturing costs incurred totaled P600,000 during the year, the cost of goods available for sale must have been: a. P585,000 b. P600,000 c.P610,000 d. P625,000 12. Nite Corporation has developed the following flexible budget formula for annual indirect labor costs: Total Cost = P480,000 + P5.00 per machine hour Operating budgets for the current month are based upon 20,000 machine hours of planned machine time. Indirect labor costs included in this planning budget are:

P48,333 b. P100,000 c. P580,000 d. P140,00 13. Harem 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. Harem Company’s budgeted overhead for the month is a.P12,800 b. P 84,800 c. P774,000 d. P18,800 14. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000 units of budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s budgeted variable cost per unit of output? a. P 7.50 b. P16.00 c. 62.50 d. P30.00 15. The following data pertain to a recent period’s operations: Sales ? Beg. Finished goods inventory P12,000 Cost of goods manufactured P36,000 Ending. Finished goods inventory P6,000 Cost of goods sold ? Gross margin 40% of Sales Administrative and selling expense P10,000 Net operating income ? Net operating income was: a. P14,000 b. P10,000 c. P18,000 d. P46,000

Cost Behavior – BALINAS THEORIES 1. A is a fixed cost; B is a variable cost. During the current year the level of activity has decreased but is still within the relevant range. We would expect that: a. The cost per unit of B has remained unchanged. b. The cost per unit of B has decreased. c. The cost per unit of A has decreased. d. The cost per unit of A has remained unchanged. 2. In the standard cost formula Y = a + bX, what does the “b” represent? a. Total cost b. Variable cost per unit

c. Total variable cost d. Total fixed cost 3. The costs which will change with an increase in activity within the relevant range? a. Unit fixed cost and total fixed cost b. Unit variable cost and total variable cost c. Unit fixed cost and total variable cost d. Unit fixed cost and unit variable cost 4. For an automobile manufacturer, the cost of a driver's side air bag purchased from a supplier and installed in every automobile would best be described as a: a. Fixed cost b. Mixed cost c. Variable cost d. Step-variable cost 5. With respect to a fixed cost, an increase in the activity level within the relevant range results in: a. An increase in fixed cost per unit. b. A proportionate increase in total fixed costs. c. An unchanged fixed cost per unit. d. A decrease in fixed cost per unit. 6. Which of the following would usually be considered a discretionary fixed cost for a soft drink bottling company? a. The cost of fire insurance on its factory building b. Depreciation on its manufacturing equipment c. Both a and b above d. The cost of advertising its products 7. In the following statements, which best describes a fixed cost? a. It may change in total when such change is related to changes in production. b. It may change in total when such change is unrelated to changes in production. c. It is constant per unit of change in production. d. It may change in total when such change depends on production within the relevant range. 8. In the Contribution approach, the contribution margin is computed as sales revenue minus: a. Fixed expenses b. Variable expenses c. Cost of goods sold d. Cost of goods manufactured 9. The term “relevant range” as used in cost accounting means the range over which a. Costs may fluctuate b. Production may vary c. Cost relationships are valid

d. Relevant costs are incurred 10. Durn Conversion Company purchases ordinary Cadillacs, cuts them in half, and then adds a middle section to the vehicles to create stretch limousines. With respect to the number of cars converted, the cost of the Cadillacs purchased for conversion by Durn Conversion Company would best be described as a: a. Fixed cost b. Mixed cost c. Step-variable cost d. Variable cost 11. Which of the following approaches to preparing an income statement calculates gross margin? a. b. c. d.

Traditional Approach YES NO NO YES

Contribution Approach YES YES NO NO

12. Most operating decisions by management focus on a narrow range of activity which is called the: a. Tactical operating level of production. b. Optimal level of production. c. Strategic level of production. d. Relevant range of production. 13. Cost behavior analysis is a study of how a firm's costs a. Relate to competitors' costs. b. Relate to general price level changes. c. Respond to changes in the gross national product. d. Respond to changes in activity levels within the company. 14. The increased use of automation and less use of the work force in companies has caused a trend towards an increase in a. Both variable and fixed costs. b. Variable costs and a decrease in fixed costs. c. Fixed costs and a decrease in variable costs. d. Variable costs and no change in fixed costs. 15. Which of the following describes the behavior of the variable cost per unit? Variable cost: a. Varies in increasing proportion with changes in the activity level. b. Varies in increasing proportion with changes in the activity level. c. Varies in direct proportion with the activity level. d. Remains constant with changes in the activity level.

PROBLEMS 1. Sky Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $127.20 per unit. The best estimate of the total contribution margin when 5,300 units are sold is: a. $230,020 b. $51,410 c. $146,810 d. $32,330 2. The clerical costs in the billing department of Craig Company are a mixture of variable and fixed components. Records indicate that average unit processing costs are $0.50 per account processed at an activity level of 32,000 accounts. When only 22,000 accounts are processed, the total cost of processing is $12,500. Assuming that this activity is within the relevant range, at a budgeted level of 25,000 accounts: a. Processing costs are expected to total $8,750. b. Fixed processing costs are expected to be $10,400. c. The variable processing costs are expected to be $0.35 per account processed. d. Processing costs are expected to total $14,975. 3. Iron Brothers, Inc., used the high-low method to derive its cost formula for electrical power cost. According to the cost formula, the variable cost per unit of activity is $3 per machine-hour. Total electrical power cost at the high level of activity was $7,600 and at the low level of activity was $7,300. If the high level of activity was 1,200 machine hours, then the low level of activity was: a. 800 machine hours b. 900 machine hours c. 1,000 machine hours d. 1,100 machine hours 4. The following costs are budgeted for Ghana Corporation for next year: Total Variable costs …………….. 350,000 Total Fixed costs ……………….. 240,000 Total costs ………………………. 590,000 The costs above are based on a level of activity of 10,000 units. Assuming that this activity is within the relevant range, what would total costs be for Ghana if the level of activity was 12,000 units? a. $590,000 b. $638,000 c. $660,000 d. $708,000 5. At a volume of 20,000 direct labor hours, Tirso Company incurs $50,000 in factory overhead costs, including $10,000 in fixed costs. Assuming that this activity is within the relevant range, if

volume increases to 25,000 direct labor hours, Tirso Company would expect to incur total factory overhead costs of: a. $50,000 b. $60,000 c. $62,500 d. $72,500 6. T Minute, a retail store, had sales for the year amounting to $250,000. Net operating income totaled $30,000 and cost of goods sold was $110,000. If the contribution margin was $100,000, total variable selling and administrative expenses must have been: a. $40,000 b. $100,000 c. $70,000 d. $150,000 7. K Corporation reports that at an activity level of 9,900 units, its total variable cost is $919,116 and its total fixed cost is $259,974. What would be the total cost, both fixed and variable, at an activity level of 10,100 units? Assume that this level of activity is within the relevant range. a. $1,197,658 b. $1,191,000 c. $1,179,090 d. $1,202,910 8. Star Company's gross margin exceeded its contribution margin by $25,000. If sales totaled $175,000 when net operating income equaled $20,000 and total selling and administrative expenses equaled $55,000, then the contribution margin equaled: a. $75,000 b. $80,000 c. $30,000 d. $50,000 9. Sy Company is a retailer. At a sales level of $450,000, Sy Company's gross margin is $90,000 less than its contribution margin, its net operating income is $30,000, and its selling and administrative expenses total $140,000. The company's total fixed expenses are: a. $360,000 b. $230,000 c. $190,000 d. $280,000 10. Co Company is a merchandising company. During the next month, the company expects to sell 450 units. The company has the following revenue and cost structure: Selling price per unit ………. 230 Cost per unit ……………….. 120 Sales commission ………….. 12% of sales Advertising expense ……….. 18,000 per month

Administrative expense ……. 32,500 per month What is the expected contribution margin next month? a. $66,420 b. $37,080 c. $50,500 d. $53,000 11. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms are occupied each day. The company’s operating cost is P21 per occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure contains both variable and fixed cost elements. During October, the occupancy dropped to only 45 percent. A total of P792,000 in operating costs were incurred during the month. What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during November? a. P1,056,000 b. P 756,000 c. P 829,500 d. P 846,000 12. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for P6,000. Assuming a cumulative learning curve of 90% as production doubles, the incremental cost of the third and fourth items will be a. P 0 b. P 600 c. P2,160 d. P1,250 13. Sams Company. wants to develop a single predetermined overhead rate. The company's expected annual fixed overhead is P340,000 and its variable overhead cost per machine hour is P2. The company's relevant range is from 200,000 to 600,000 machine hours. Sams Company expects to operate at 425,000 machine hours for the coming year. The plant's theoretical capacity is 850,000. The predetermined overhead rate per machine hour should be a. P2.40 b. P2.57 c. P2.85 d. P2.80 14. In the month of June, Behold Corporation produced 12,000 units and sold them for P20 per unit. Total fixed costs for the period were P154,000, and the operating profit was P26,000. Based on the foregoing information, the variable cost per unit for the month of June was a. P4.50 b. P5.00 c. P6.00 d. P7.17

15. G Manufacturing Company, at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range. If 110,000 machine hours of activity are projected for the next period, total expected overhead cost would be: a. P263,500. b. P306,625. c. P256,000. d. P242,500. Cost-Volume Profit Analysis – MANALO THEORIES 1. To which function of management is CVP analysis most applicable? a. Organizing b. Planning c. Directing d. Controlling 2. The systematic examination of the relationship among selling prices, volume of sales and production, costs, and profits is termed: a. Contribution margin analysis b. Budgetary analysis c. Cost-volume-profit analysis d. Gross profit analysis 3. As projected net income increases a. Margin of safety stays constant b. Degree of operating leverage declines c. Break-even point goes down d. Contribution margin ration goes down 4. The amount by which sales revenues could drop until a loss occurs is referred to as the a. Sales volume variance b. Product contribution rate c. Margin of safety d. Degree of operating leverage 5. As the variable cost increases but the selling price remains constant, the a. Breakeven point goes down b. Degree of operating leverage declines c. Margin of safety stays constant d. Contribution margin ratio goes up 6. A very high degree of operating leverage (DOL) indicates that a firm a. is operating at a level close to its breakeven point

b. has high fixed costs c. has a high net income d. has high variable costs 7. A CVP graph reflects relationship a. that are expected to hold over the relevant range b. of results over the past few years c. that the company’s managers would like to have happen d. likely to prevail for the industry 8. Which of the following is a true statement about sales mix? a. Profits may decline with an increase in total peso of sales if the sales mix shifts to sell more of the high contribution margin product b. Profits will remain constant with an increase in total peso of sales if the total sales in units remain constant c. Profits will remain constant with a decrease in total peso of sales if the sales mix also remains constant d. Profits may decline with an increase in total peso sales if the sales mix shifts to sell more of the lower contribution margin product 9. Which of the following is not a limiting factor of CVP analysis a. The process assumes a liner relationship among the variables b. Efficiency is assume to be constant c. Inventory levels are assumed to not change d. The process assumes variable costs per unit are variable 10. The most useful information derived from a breakeven chart is the a. Amount of sales revenue needed to cover enterprise variable costs b. Amount of sales revenue needed to cover enterprise fixed costs c. Relationship among revenues, variable costs and fixed costs at various levels of activity d. Volume or output level at which the enterprise breaks even 11. An increase in the income tax rate a. Raises the breakeven point b. Increases sales required to earn a particular after tax profit c. Decreases sales required to earn a particular after tax profit d. Lowers the breakeven point 12. Operating leverage measures how sensitive the profit is to a change in a. Fixed costs b. Sales price per unit c. In tax rates d. Sales volume 13. Target costing is a. A substitute for CVP analysis b. Used by companies that cannot classify their costs by behavior c. Inappropriate if a company has already established a target profit d. Used in a decision to offer a new product or enter a new market 14. As fixed costs for a firm rises, all other things held constant, the breakeven point will a. Decrease

b. Increase c. Be unchanged d. Not be affected by fixed costs 15. Which of the following would not affect the breakeven point? a. Variable cost per unit b. Total fixed costs c. Sales price per unit d. Number of units sold PROBLEMS 1. An organization’s breakeven point is 4,000 units at a sales price of P50 per unit, variable costs of P30 per unit, and total fixed costs of P80, 000. If the company sells 500 additional units, by how much will its profit increase? a. P25, 000 b. P10, 000 c. P15, 000 d. P12, 000 2. Seal Yard Ornaments sells lawn ornaments for P15 each. Seal’s contribution margin ratio is 40%. Fixed costs are P32, 000. Should fixed costs increase by 30%, how many additional units will Seal have to produce and sell without affecting the current amount of profit? a. 5,333 b. 9,333 c. 1067 d. 1600 3. At a breakeven point of 5,000 units sold, variable expenses were P10, 000 and fixed expenses were P50, 000. The profit from the 5,001st unit would be? a. P12 b. P10 c. P15 d. P50 4. J Company has fixed costs of P100, 000 and breakeven sales of P800, 000. Based on this relationship, what is its projected profit at P1, 200,000 sales? a. P50, 000 b. P150, 000 c. P200, 000 d. P400, 000 5. The Hard Company sells widgets. The company breaks even at an annual sales volume of 80,000 units. At an annual sales volume of 100,000 units the company reports a profit of P220, 000. The annual fixed costs for the Hard Company are: a. P800, 000 b. P1, 000,000 c. P880, 000 d. P1, 100,000 6. ABC Company earned P50, 000 on sales of P400, 000. It earned P70, 000 on sales of P450, 000. The amount of total fixed costs for ABC Company is:

a. P0 b. P50, 000 c. P110, 000 d. P180, 000 7. Mars Company had a margin of safety ratio of 20%, variable costs of 60% of sales, fixed costs of P240,000, a breakeven point of P600,000, and an operating income of P60,000 for the current year. What are the current year sales? a. P450, 000 b. P500, 000 c. P600, 000 d. P750, 000 8. S Inc. sells product Dulce for P5 per unit. The fixed costs are P210, 000 and the variable costs are 60% of the selling price. What would be the amount of sales if S Inc. is to realize a profit of 10% of sales? a. P700, 000 b. P472, 000 c. P525, 000 d. P420, 000 9. At a sales volume level of 2,250 units, Manila Company’s contribution margin is one and one-half of the fixed costs of P36, 000. Contribution margin is 30%. How much peso sales should the Manila Company sell to earn 10% of sales? a. P270, 000 b. P180, 000 c. P360, 000 d. P540, 000 10. Yoon Company’s product mix includes P720, 000 in sale of Product X and P640, 000 in sales of product Y. Product X’s contribution margin is 60% and Product Y is 40% of sales. Total fixed costs amount to P505, 880. Product Y’s sales at breakeven point should amount to: a. P640, 000 b. P720, 000 c. P529, 488 d. P470, 600 11. D Company has revenues of P500, 000, variable costs of P300, 000, and pretax profit of P150, 000. If the company increases the sales price per unit by 10%, reduces fixed costs by 20%, and leaves variable cost per unit unchanged, what would be the new breakeven point in pesos? a. P88, 000 b. P80, 000 c. P100, 000 d. P125, 000 12. Kat sells loose biscuits for P5 per unit. The fixed costs are P210, 000 and the variable costs are 45% of the selling price. What would be the amount of sales if Kat were to realize a profit of 15% of sales? a. P700, 000 b. P472, 500 c. P525, 000 d. P420, 000

13. At 40,000 units of sales, Benevolent Company had an operating loss of P3.00 per unit. When sales were 70,000 units, the company had a profit of P1.20 per unit. The number of units to breakeven is a. 35,000 b. 57,647 c. 45,000 d. 52,789 14. Yuri Corporation had sales of P120, 000 for the month of May. It has a margin of safety ratio of 25% and an after tax return on sales of 6%. The company assumes its sales being constant every month. If the tax rate is 40%, how much is the annual fixed costs? a. P36, 000 b. P90, 000 c. P360, 000 d. P432, 000 15. Z Company is a manufacturer of its only one product line. It had sales of P400, 000 for 2010 with a contribution margin ratio of 20%. Its margin of safety was 10%. What are the company’s fixed costs? a. P72, 000 b. P80, 000 c. P288, 000 d. P320, 000

Cost-Volume Profit Analysis – QUIAMBAO THEORIES 1. The elements of CVP analysis include the following, except a. Total Fixed costs b. Unit Variable Costs c. Relevant Costs d. Volume or Number of Units 2. In CVP Analysis, it is assumed that a. All costs are classified as either direct or indirect costs b. Selling prices per unit and market conditions remain unchanged c. Cost and revenue relationships are predictable and linear over any range of activity d. Total fixed costs are constant over the relevant range, but fixed costs per unit vary directly with the cost driver or volume 3. At break-even, which of the following is not correct? a. Profit equals zero b. Gross profit equals zero c. Sales equals total costs d. Fixed costs equals contribution margin 4. A calculation used in CVP analysis is the break-even point. At this point, total revenue equals total costs. Beyond the break-even point, operating income will increase by the a. Contribution margin per unit for each additional unit b. Selling price per unit for each additional unit c. Variable cost per unit for each additional unit d. Gross profit per unit for each additional unit 5. Cost-volume-profit analysis is most essential in the determination of the

a. Production level that is equal to sales b. Volume of operation in order to break-even c. Variable costs necessary to equal fixed costs d. Relationship between revenues and costs at various levels of operations 6. A high degree of operating leverage: a. Will have a more significant shift in income as sales volume changes b. Have lower fixed costs c. Have low contribution margin ratios d. Are less dependent in volume to add profits 7. In order for the break-even computation to be meaningful to management, sales mix should be computed using the a. Least desirable mix b. Expected mix c. Most desirable mix d. Traditional mix 8. The most likely strategy to reduce the breakeven point would be to a. Increase both the fixed costs and the contribution margin b. Decrease both the fixed costs and the contribution margin c. Decrease the fixed costs and increase the contribution margin d. Increase the fixed costs and Decrease the contribution margin 9.If a company is operating at a loss, a. Fixed costs are greater than sales b. Selling price is less than the average total cost per unit c. Selling price is lower than a variable cost per unit d. Fixed cost per unit is greater than variable cost per unit 10.XYZ Company has a higher degree of operating leverage than JKL Company. Which of the following is true? a. XYZ has a higher variable expense b. XYZ is more profitable than JKL c. XYZ is more risky than JKL Company is d. XYZ’s profits are less sensitive to percentage change in sales 11. The conventional break-even chart adopted by businessmen and accountants does not take for granted that a. There is significant amount of change in inventories b. Production is not equal to sales c. Some costs are semi-variable d. The sales mix 12. It is the excess of sales price over the related variable cost, contributing to the recovery of fixed expenses a. Gross Margin b. Contribution Margin c. Margin of Safety d. Gross Profit

13. What alternative would increase the contribution margin per unit the most? a. 10% decrease in unit variable cost b. 10% decrease in fixed costs c. 10% decrease in selling price d. 10% increase in selling price 14. In a contribution income statement a. Costs are classified as to function b. Fixed costs are shown separately from variable costs c. Fixed and variable manufacturing costs are combined as one level item d. Fixed manufacturing costs are shown separately from variable manufacturing costs, but fixed and variable operating costs are combined as one line item 15. CVP analysis can be used by management to determine the relative profitability of a product by a. Keeping all costs to an absolute minimum b. Assigning costs to a product in such a way that the contribution margin is maximized c. Determining the unit contribution margin and the projected profits at various levels of production d. Controlling the physical production of the products PROBLEMS 1. She Company has fixed costs of P90,300. At a sales volume of P360,000, return on sales is 10%; at a P600,000 volume, return on sales is 20%. What is the breakeven volume? a. P225,000 b. P301,000 c. P258,000 d. P240,000 2. Q Company has fixed costs of P200,000 and variable costs per unit of P6. It plans on selling 40,000 units in the coming year. If the entity pays income taxes on its income at a rate of 40%, what sales price must the firm use to obtain an after-tax profit of P24,000 on the 40,000 units? a. P12.00 b. P11.36 c. P11.60 d. P12.50 3. Lois Company estimated the following data for the coming year: Fixed Manufacturing Costs P565,000 Variable Costs per Peso Sales Materials P 0.125 Direct Labor P 0.150 Variable Overhead P 0.075 Variable Selling Costs P 0.150 The company estimates its sales for the coming year to be P2,000,000. Lois Company’s expected cost of goods sold for the coming year is a. P700,000 b. P1,115,000 c. P1,565,000 d. P1,265,000

4. MJ Company would like to market a new product at a selling price of P15 per unit. Fixed costs for this product are P1,000,000 for less than 500,000 units of output and P1,500,000 for 500.000 or more units of output. The contribution margin percentage is 35%. How many units of this product must be sold to earn a target operating income of P1 Million? a. 366,667 b. 380,952 c. 476,190 d. 256,410 5. Mr. Alex sells two products, AB and BA. Last year, Mr. Alex sold 12,000 units of AB and 24,000 units of BA. Related data for the last year are: Product AB BA

Unit Selling Price P120 P80

Unit Variable Cost P80 P60

Unit Contribution Margin P40 P20

Mr. Alex’s last year’s fixed costs totalled P910,000, what was his composite break-even point? a. 34,125 b. 11,375 c. 27,302 d. 9,101 ABC Corp. Produces and sells a single product. The selling price is P25 and the variable cost is P15 per unit. The corporation’s fixed cost is P100,000 per month. Average monthly sales is 11,000 units. 6. The break-even point is a. P10,000 b. 250,000 units c. 10,000 units or P250,000 d. 250,000 units or P10,000 7. What is the contribution margin per unit and as a percent of sales (CMR) is a. P10 per unit, 60% b. P40 per unit, 160% c. 10 units, 40% d. P10 per unit, 40% 8. How much sales in pesos must be generated to earn profit that is 8% of such sales a. P270,000 b. P208,333.33 c. P312,500 d. P230,000 9. If fixed costs will increase by P20,000, the break-even point in units will increase (decrease) by a.12,000 b. 2,000 c. 50,000 d. 10,000 10. With an average monthly sales of 11,000 units, the corporation’s margin of safety is a. P10,000

b. 11,000 units or P275,000 c. 10,000 units or P250,000 d. 1,000 units or P25,000 SQ sells two products, AA and BB. The sales mix consists of a composite unit of 5 units of AA for every 3 units of BB (5:3). Fixed Costs amounts to P202,500. The unit contribution margins are P4.80 for AA and P10 for BB. 11. The number of composite units to breakeven is a. 13,682 b. 1,710 c. 30,000 d. 18,750 12. If the sales mix ratio is changed from 5:3 to 3:5, which of the following is not true? a. the WaUCM will increase to P8.05 b. The weighted average UCM will not change c. Total fixed costs will remain the same d. The BEP will decrease to 25,155.28 composite units In 2018, the company’s sales was P500,000. Its fixed costs amounts to P100,000 per year. In 2019, sales was 20% higher, while profit was P30,000 higher than the 2018 figures. For 2020, the company expects to have sales that is twice as much as the 2018 sales. The expected increase in production to meet the sales demand in 2020 will not require the company to exceed its normal capacity. 13. What is the company’s contribution margin ratio? a. 70% b. 60% c. 10% d. 30% 14. How much profit does the company expect to earn in 2020? a. P100,000 b. P160,000 c. P200,000 d. P150,000 15. What is the company’s break-even point in units? a. P333,333 b. 333,333 units c. 500,000 d. Cannot be determined from the given information

Marginal Analysis - ALLAM THEORIES 1. Marginal cost a. Is the income or benefit forgone when the next best alternative is chosen. b. Is the difference between relevant costs. c. Is a sunk cost. d. Is the additional cost of producing one additional item.

2. A marginal revenue is a. The change in total revenue associated with producing and selling one more unit. b. Greater than price in pure competition. c. The change in total revenue associated with increasing prices. d. Equal to price in monopolistic competition. 3. The law of diminishing marginal utility states that a. Total utility will decline as a consumer acquires additional units of a specific product b. Declining units cause the demand curve to slope upward c. Marginal utility will decline as a consumer acquires additional units of a specific product d. Consumers’ wants diminish with the passage of time. 4. This is the decision to keep or drop products or services involves a strategic consideration of the: a. Potential impact on remaining products or services b. Impact on employee morale c. Growth potential of the firm d. All of the given answers are correct 5. A marginal cost curve is the supply curve for the firm in a. Pure competition b. Pure monopoly c. Monopolistic competition d. Oligopoly 6. Incremental analysis would not be appropriate for a (an): a. Make or buy decision b. Allocation of limited resource decision c. Elimination of an unprofitable segment d. Analysis of manufacturing cost variances 7. The incremental revenue is: a. A difference in cost between two decisions b. A concession based on competitive influences c. Additional revenue across decision choices from potential sales d. Then difference between selling price and variable costs 8. The incremental analysis is the process of identifying the financial data that: a. Do not change under alternative courses of action b. Are mixed under alternative courses of action c. Change under alternative courses of action d. No correct answer is given 9. An incremental analysis is most useful: a. In evaluating the master budget b. In developing relevant information for management decisions

c. In choosing between the net present value method and the internal rate of return method d. As a replacement technique for variance analysis 10. When making a special order decision, management should: a. Compute a reasonable sales price for items not normally produced b. Consider additional overhead cost c. Consider normal and relevant costs d. All of the given choices 11. Which of the following factors should be considered in deciding whether to accept a special order? a. The sales price of the product and the service b. The production capacity of the capacity c. The impact on regular customers d. All of the given choices 12. Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than 100% capacity, and the addiktional business will not use up the remainder of the plant capacity? a. Direct material cost per unit b. Direct labor cost per unit c. Variable selling expenses d. Fixed selling expenses 13. The production of a special order will increase gross profit when the additional revenue from the special order is greater than the amount of: a. Nonvariable costs incurred in producing the order b. Direct material and labor costs in producing the order c. Marginal cost of producing the order d. Fixed costs incurred in producing the order 14. In considering a special order that will enable a company to make a use of presently idle capacity, which of the following costs would be irrelevant. a. Materials b. Depreciation c. Direct labor d. Variable OH 15. A major accounting contribution to the managerial decision-making process in evaluating possible courses of action is to: a. Provide relevant revenue and cost data about each course of action b. Assign responsibility for the decision c. Determine the amount of money that should be spent on a project d. Decide which action should the management would consider PROBLEMS

1. For the year ended April 30, 2009, Dela Joya Company incurred direct costs of 800,000 based on a particular course of action. Had a different course of action been taken, direct costs would have been P650,000. In addition, Dela Joya’s fixed costs during the fiscal year were P110,000. The incremental (decremental) cost was: a. P40,000 b. P(40,000) c. P150,000 d. P(150,000) 2. Balagtas & Company expects to incur the following costs at the planned production level of 10,000 units: Direct materials P 100,000 Direct Labor 120,000 Variable Overhead 60,000 Fixed Overhead 30,000 The selling price is P50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased to 13,000 units by working overtime. Variable costs would increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged when overtime operations occur. Balagtas has received a special order from Florante, Inc. who has offered to buy 2,000 units at P45 each. What is the incremental cost associated with this special order? a. P42,000 b. P31,000 c. P62,000 d. P84,000 3. You have been approached by a foreign customer who wants to place an order for 15,000 units of Product C at P22.50 a unit. You currently sell this item for P39 a unit, and the time has a cost of P29 a unit. Further analysis reveals that you will not be paying sales commission of P2.50 a unit on this sales and its packaging requirement will save you an additional P1.50 per unit. However, the additional graphics required on this job will cost you P30,000. Note also that fixed costs amounting to P400,000 for the production of 50,000 units will not change. You decided to ccept this order but another customer who buys an average of P2,000 units for the period wants to pay you P22.50 rather than the regular price of P39 a unit. Accepting the special order, the amount of profit will: a. Increase by P16,500 b. Increase by P52,500 c. Increase by P19,500 d. Decrease by P52,500 4. The cost to produce 24,000 units at 70% capacity consists of: Direct Materials

P360,000

Direct Labor Factory Overhead, All fixed Selling expense (35% variable, 65% fixed)

540,000 290,000 240,000

What unit price would the company have to charge to make P22,500 on a sale of 1,500 additional units that would be shipped out of the normal market area? a. P 51 b. P 41 c. P 56 d. P 50 5. Simlong Company manufacture a product with a unit variable cost of P50 and a unit sales price of P88. Fixed manufacturing costs were P240,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 3,000 units at P70 each in a foreign market. This special sale would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows: a. Income would decrease by P 12,000 b. Income would increase by P 12,000 c. Income would increase by P 210,000 d. Income would decrease by P 60,000 6. The Dahilig Company sells a product for P20 with variable cost of P8 per unit. Dahilig could accept a special order for 1,000 units at P14. If Dahilig accepted the order, how many units could it lose at the regular price before the decision become unwise? a. 1,000 units b. 200 units c. 500 units d. 0 units 7. ALANGILAN Industries manufactures a product with the following costs per unit at the expected production of 30,000 units. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead

P4 12 6 8

The company has the capacity to produce 40,000 units. The product regularly sells for P40. A wholesaler has offered to pay P32 a unit for 2,000 units. If the firm accepts the special order the effect on its operating income would be a: a. P 0 b. P 4,000 increase c. P 16,000 decrease d. P 20,000 increase

The following data apply to items 23-25. No. of workers 10 11 12

Total Product Units 20 25 28

Average Selling Price P50.00 P49.00 P47.50

8. The marginal physical product when one worker is added to a team of ten workers is: a. 1 unit b. 8 units c. 5 units d. 25 units 9. A marginal revenue per unit when one worker is added to a team of 11 workers is: a. P35.00 b. P225.00 c. P105.00 d. P47.50 10. The marginal revenue product when one worker is added to a team of 11 workers is: a. P42.00 b. P225.00 c. P105.00 d. P47.50 The following data apply to items 26 and 27. Total Units of Products Average Fixed Cost Average Total Cost 6 P15.00 7 P12.86 8 P11.25 9 P10.00 11. The total cost of producing seven units is: a. P90.02 b. P168.00 c. P258.02 d. P280.00 12. The marginal cost of producing the ninth unit is: a. P23.50 b. P23.75 c. P25.75 d. P33.75

Average Variable Cost P25.00 P24.00 P23.50 P23.75

P40.00 P36.86 P34.75 P33.75

13. The out and cost information for a firm is presented below. Output Total Variable Cost Total Cost 0 P-0P100 1 P150 P250 2 P260 P360 3 P350 P450 The marginal cost of the second unit of output is: a. P100 b. P150 c. P110 d. P180 The following data apply to items 29 and 30. Mumble Company is selling in a purely competitive margin and has the following cost data. Output Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 1 P600 P100 P700 P100 2 P300 P75 P375 P 50 3 P200 P70 P270 P 60 4 P150 P73 P223 P 80 5 P120 P70 P190 P110 6 P100 P90 P190 P190 7 P86 P105 P191 P200 8 P76 P119 P195 P230 9 P67 P138 P205 P290 10 P60 P160 P220 P360 14. If the market price of Mumble’s product is P190, this firm should produce: a. 5 units at an economic loss of P70 b. 6 units and breakeven c. 8 units and breakeven d. 8 units at an economic profit of P74 15. If the market price for Mumble’s product is P290, this firm should produce a. 7 units at an economic profit of P707 b. 9 units at an economic profit of P765 c. 8 units at an economic profit of P760 d. 10 units at an economic profit of P700 Marginal Analysis - BANAG THEORIES 1. Additional output that results in a positive difference between differential revenues and differential costs is beneficial to a company if and only if: A. Other unit costs are increased and idle capacity is decreased. B. Other sales are unaffected but other unit costs are increased. C. Other sales are affected.

D. Other sales are unaffected and other unit costs are unaffected. 2. The costing method used to determine the lowest price that could be quoted for a special order that would use idle capacity within a production area is: A. Process B. Standard C. Direct D. Absorption 3. Whether deciding to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run decision is: A. Direct labor B. Variable factory overhead C. Fixed factory overhead that will be avoided if the part is bought from an outside vendor. D. Fixed factory overhead that will continue even if the part is bought from an outside vendor. 4. Faced with a long-run make-or-buy decision, the manager should do all of the following except: A. Compare the making of the parts with alternative uses that could be made of the firm's own facilities if the parts are purchased. B. Compare the cost of making the parts with the cost of buying them. C. Consider differences in the required capital investment and the timing of cash flows. D. Use a cost study with only the differential costs and with no allocation of existing fixed overhead or profit. 5. An opportunity cost is: A. A cost that may be shifted to the future with little or no effect on current operations. B. The profit foregone by selecting one alternative instead of another. C. A cost that cannot be avoided because it has already been incurred. D. The difference in total costs that results from selecting one alternative instead of another. 6. The term "differential cost" refers to: A. The profit foregone by selecting one alternative instead of another. B. A cost that does not entail any dollar outlay but that is relevant to the decision-making process. C. The difference in total costs that results from selecting one alternative instead of another. D. A cost common to all alternatives in question and not clearly or practically allocable to any of the alternatives. 7. In a make-or-buy decision: A. Only variable costs are relevant. B. Fixed costs that can be avoided in the future are relevant. C. Only prime costs are relevant. D. Fixed costs that will continue regardless of the decision are relevant. 8. For the past 12 years, the Jolt Company has produced the small electric motors that fit into its main product line of dental drilling equipment. As materials costs have steadily increased, the controller of the Jolt 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 $150,000. 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. 4. 5.

Comparable units can be purchased from an outside supplier for $59.75. Four of the people who work in the Electric Motor Manufacturing Department would be terminated and given eight weeks of severance pay. A $10,000 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, 2, 4, and 5 B. 1, 3, 4, and 5 C. 2, 3, and 4 D. 2, 3, 4, and 5 9. Production of a special order will increase the contribution margin when the additional revenue from the special order is greater than: A. The non-variable costs incurred in producing the order. B. The direct materials and labor costs in producing the order. C. The fixed costs incurred in producing the order. D. The marginal cost in producing the order. 10. In considering a special order that will enable a company to make use of present idle capacity, which of the following costs would be irrelevant? A. Fixed factory overhead that can be avoided. B. Depreciation of the factory building. C. Materials D. Direct labor 11. Whether deciding to manufacture a part or buy it from an outside vendor, a cost that is relevant to the short-run decision is: A. Direct labor B. Variable overhead C. Fixed overhead that will be avoided if the part is bought from an outside vendor. D. All of the above 12. If there is one unique optimal solution to a linear programming problem, that solution would be found at: A. The highest point on the y-axis. B. A corner point. C. The origin. D. The objective function. 13. An iterative, stepwise procedure that is used to solve linear programming problems is the: A. Graphical technique B. Simplex method C. Cost minimization problem D. Identity matrix 14. Linear programming is an operations research technique that allocates resources. Mathematical expressions are used to describe the problem. The measure of effectiveness that is to be maximized or minimized is called the: A. Constraints B. Derivative of the function

C. Nonlinear function D. Objective function 15. The term "constraints" in a linear programming model generally describes: A. Inefficiencies B. Dependent variables C. Scarce resources D. The objective function

PROBLEMS 1. The effect of discontinuing a department with a contribution to overhead of $30,000 and allocated overhead of $48,000, of which $26,000 cannot be eliminated, would be to: A. Increase profit by $8,000. B. Decrease profit by $26,000. C. Decrease profit by $ 8,000. D. Decrease profit by $22,000. 2. Gizmo Manufacturing is considering dropping a product line. It currently produces a multipurpose woodworking clamp in a simple manufacturing process that uses special equipment. Variable costs amount to $6.00 per unit. Fixed factory overhead costs, exclusive of depreciation, have been allocated to this product at a rate of $3.50 a unit and will continue whether or not production ceases. Depreciation on the special equipment amounts to $20,000 a year. If production of the clamp is stopped, the special equipment can be sold for $18,000; if production continues, however, the equipment will be useless for further production at the end of one year and will have no salvage value. The clamp has a unit sales price of $10. Ignoring income tax effects, the minimum number of units that would have to be sold in the current year to make it worthwhile to keep the equipment (on a cash-flow basis) is: A. 20,000 B. 5,000 C. 3,000 D. 4,500 3. Ely Electronics has the following standard costs and other data: Direct materials................................................................................. Direct labor....................................................................................... Factory overhead.............................................................................. Unit standard cost.............................................................................

Part A4 $ .40 1.00 4.00 $ 5.40

Part B5 $ 8.00 4.70 2.00 $ 14.70

Units needed per year....................................................................... Machine hours per unit..................................................................... Unit cost if purchased.......................................................................

6,000 4 $ 5.00

8,000 2 $ 15.00

In past years, Ely 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 $1.00 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 of available machine time are to be scheduled so that Ely realizes maximum potential cost savings. The relevant unit production costs that should be considered in the decision to schedule machine time are: A. $5.40 for A4 and $14.70 for B5 B. $5.00 for A4 and $15.00 for B5 C. $3.00 for A4 and $13.50 for B5 D. $1.40 for A4 and $12.70 for B5 4. A company owns equipment that is used to manufacture important parts for its production process. The company plans to sell the equipment for $10,000 and to select one of the following two alternatives: (1) acquire new equipment for $80,000, or (2) purchase the important parts from an outside company at $4 per part. To select the best alternative, the company should compare the cost of manufacturing the parts: A. Plus $80,000 to the cost of buying the parts. B. To the cost of buying the parts less $10,000. C. Less $10,000 to the cost of buying the parts. D. None of the above. 5. The following standard costs pertain to a component part manufactured by Rob Co.: Direct materials............................................................................................................. Direct labor................................................................................................................... Factory overhead........................................................................................................... Standard cost per unit....................................................................................................

$ 4 10 40 $ 54

Factory overhead is applied at $1 per standard machine hour. Fixed capacity cost is 60% of applied factory overhead and is not affected by any make-or-buy decision. It would cost $49 per unit to buy the part from an outside supplier. In the decision to make or buy, what is the total relevant unit manufacturing cost? A. $54 B. $38 C. $30 D. $5 6.

The Reno Company manufactures Part No. 498 for use in its production cycle. The cost per unit for 20,000 units of Part No. 498 are as follows: Direct materials............................................................................................................. Direct labor................................................................................................................... Variable overhead......................................................................................................... Fixed overhead applied................................................................................................. ............................................................................................................................

$ 6 30 12 16 $ 64

The Tray Company has offered to sell 20,000 units of Part No. 498 to Reno for $60 per unit. Reno will make the decision to buy the part from Tray if there is a savings of $25,000 for Reno. If Reno accepts Tray's offer, $9 per unit of the fixed overhead applied would be totally eliminated. Furthermore, Reno has determined that the released facilities could be used to save relevant costs in the manufacture of Part No. 575. In order to have a savings of $25,000, the amount of relevant costs that would be saved by using the released facilities in the manufacture of Part No. 575 would have to be: A. $60,000

B. $80,000 C. $85,000 D. $140,000 7. At December 31, Zar Co. had a machine with an original cost of $84,000, accumulated depreciation of $60,000, and an estimated salvage value of zero. On December 31, Zar was considering the purchase of a new machine having a five-year life, costing $120,000, and having an estimated salvage value of $20,000 at the end of the five years. In its decision concerning the possible purchase of the new machine, how much should Zar consider to be a sunk cost at December 31? A. $4,000 B. $24,000 C. $100,000 D. $120,000 8. Stewart Industries has been producing two bearings, components B12 and B18, for use in production. Data regarding these two components are: ......................................................................................... Machine hours required per unit...................................................... Standard cost per unit Direct material......................................................................... Direct labor.............................................................................. Manufacturing overhead Variable1........................................................................... Fixed2............................................................................... .........................................................................................

B12 2.5

B18 3.0

$ 2.25 4.00

$ 3.75 4.50

2.00 3.75 $ 12.00

2.25 4.50 $ 15.00

1

Variable manufacturing overhead is applied on the basis of direct labor hours.

2

Fixed manufacturing overhead is applied on the basis of machine hours.

Stewart's annual requirement for these components is 8,000 units of B12 and 11,000 units of B18. Recently, Stewart's management decided to devote additional machine time to other product lines resulting in only 41,000 machine hours per year that can be dedicated to the production of the bearings. An outside company has offered to sell Stewart the annual supply of the bearings at prices of $11.25 for B12 and $13.50 for B18. Stewart wants to schedule the otherwise idle 41,000 machine hours to produce bearings so that the company can minimize its costs (maximize its net benefits). The net benefit (loss) per machine hour that would result if Stewart Industries accepts the supplier's offer of $13.50 per unit for component B18 is: A. $1.50 B. $(1.75) C. $.50 D. $(1.00) 9. If plant capacity for cutting time and shaping time is 80 hours and 100 hours, respectively, and it takes four hours to cut and two hours to shape a standard model and two hours to cut and five hours to shape a deluxe model, the maximum number of standard and deluxe models that can be produced are: A. 50 standard and 40 deluxe. B. 20 standard and 20 deluxe.

C. 40 standard and 20 deluxe. D. 20 standard and 40 deluxe 10. Pleasant Valley Company makes two ceramic products, vases (V) and bowls (B). Each vase requires two pounds of material and three hours of labor. Each bowl requires two pounds of material and one hour of labor. During the next production week, there will be 100 pounds of material and 60 hours of labor available to make vases and bowls. Each pound of material costs $4 and each hour of labor costs $10. All factory overhead is fixed; it is estimated to be $200 for this production process for a week. Pleasant Valley sells vases for $50 each and bowls for $35 each. The objective function for Pleasant Valley would be: A. Maximize Z = $50V +$35B B. Maximize Z = $12V +$17B = 200 C. Minimize Z = $38V +$18B D. Maximize Z = $12V +$17B 11. The effect of discontinuing a department with a contribution to overhead of $30,000 and allocated overhead of $48,000, of which $26,000 cannot be eliminated, would be to: A. Decrease profit by $8,000 B. Increase profit by $26,000 C. Decrease profit by $ 8,000 D. Decrease profit by $30,000 12. Z Inc. has some material that originally cost $73,500. The material has a scrap value of $45,600 as is, but if reworked at a cost of $6,600, it could be sold for $58,100. What would be the incremental effect on the company's overall profit of reworking and selling the material rather than selling it as is as scrap? A. -$22,000 B. -$67,600 C. $51,500 D. $5,900 13. Yehle Inc. regularly uses material Y51B and currently has in stock 460 liters of the material for which it paid $2,530 several weeks ago. If this were to be sold as is on the open market as surplus material, it would fetch $4.55 per liter. New stocks of the material can be purchased on the open market for $5.45 per liter, but it must be purchased in lots of 1,000 liters. You have been asked to determine the relevant cost of 720 liters of the material to be used in a job for a customer. The relevant cost of the 720 liters of material Y51B is: A. $3,276 B. $5,450 C. $3,510 D. $3,924 14. Bosques Corporation has in stock 35,800 kilograms of material L that it bought five years ago for $5.55 per kilogram. This raw material was purchased to use in a product line that has been discontinued. Material L can be sold as is for scrap for $1.67 per kilogram. An alternative would be to use material L in one of the company's current products, Q08C, which currently requires 2 kilograms of a raw material that is available for $9.15 per kilogram. Material L can be modified at a cost of $0.78 per kilogram so that it can be used as a substitute for this material in the production of product Q08C. However, after modification, 4 kilograms of material L is required for every unit of product Q08C that is produced. Bosques Corporation has now received a request from a company that could use material L in its production process. Assuming that Bosques Corporation could use all of its stock of material L to make

product Q08C or the company could sell all of its stock of the material at the current scrap price of $1.67 per kilogram, what is the minimum acceptable selling price of material L to the company that could use material L in its own production process? A) $1.67 B) $5.36 C) $2.13 D) $3.80 15. Mankus Inc. is considering using stocks of an old raw material in a special project. The special project would require all 120 kilograms of the raw material that are in stock and that originally cost the company $816 in total. If the company were to buy new supplies of this raw material on the open market, it would cost $7.25 per kilogram. However, the company has no other use for this raw material and would sell it at the discounted price of $6.75 per kilogram if it were not used in the special project. The sale of the raw material would involve delivery to the purchaser at a total cost of $50.00 for all 120 kilograms. What is the relevant cost of the 120 kilograms of the raw material when deciding whether to proceed with the special project? A) $810 B) $870 C) $816 D) $760

Financial Statement Analysis – PANGAN THEORIES 1. A limitation in calculating ratios in financial statement analysis is that a. Some account balances may reflect a typical data at year end. b. It requires a calculator. c. No one other than the management would be interested in them. d. They seldom identify problem areas in company. 2. Which of the following is not a limitation of financial statement analysis? a. The cost basis. b. The use of estimates. c. The diversification of firms. d. The availability of information. 3. Management is a user of financial analysis. Which of the following comments does not represent a fair statement as to the management perspective? a. Management is interested in the view of the investors b. Management is interested in the financial structure of the entity c. Management is interested in the asset structure of the entity d. Management is always interested in maximum profitability 4. The percent of property, plant and equipment to total assets is an example of: a. Solvency analysis b. Profitability analysis c. Vertical analysis d. Horizontal analysis 5. Statements in which all items are expressed only in relative terms (percentages of a base) are termed: a. Vertical statements

b. Horizontal statements c. Funds statements d. Common-Size statements 6. Vertical analysis is a technique that expresses each item in a financial statement a. In pesos and centavos b. As a percent of the item in the previous year c. Starting with the highest value down to the lowest value d. As a percent of a base amount 7. The percentage analysis of increases and decreases in individual items in comparative financial statements is called: a. Vertical analysis b. Solvency analysis c. Horizontal analysis d, Profitability analysis 8. In which of the following cases may a percentage change be computed? a. There is no amount in the base year b. The trend of the amounts is decreasing but all amounts are positive c. There is a negative amount in the base year and a negative amount in the subsequent year d. There is a negative amount in the base year and a positive amount in the subsequent yearUMArana 9. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a. That has been arranged from the highest number to the lowest number b. That has been arranged from the lowest number to the highest number c, To determine which items are in error d. To determine the amount and/or percentage increase or decrease that has taken place 10. The primary concern of short-term creditors when assessing the strength of a firm is the entity’s a. Profitability b. Market price of stock c. Short-term liquidity d. Leverage 11. Short-term creditors are usually most interested in assessing a. Solvency b. Marketability c. Profitability d. Liquidity 12. A weakness of the current ratio is a. That it does not take into account the composition of the current assets b. The difficulty of the calculation c. That it is rarely used by sophisticated analysis d. That it can be expressed as a percentage, as a rate, or as a proportion 13. Which one of the following would not be considered a liquidity ratio? a. Current ratio b. Inventory turnover c. Quick ratio d. Return of assets

14. A general rule to use in assessing the average collection period is a. That it should not generally exceed the credit term period b. That it should not greatly exceed the discount period c. It can be any length as long as the customer continues to buy merchandise d. That it should not exceed 30 days 15. Asset turnover measures a. How often a company replaces its assets b. The portion of the assets that have been financed by creditors c. The overall rate of return on assets d. How efficiently a company uses its assets to generate sales

PROBLEMS 1. Kline Corporation had net income of P2 million in 2006. Using the 2006 financial elements as the base data, net income decreased by 70 percent in 2007 and increased by 175 percent in 2008. The respective net income reported by Kline Corporation for 2007 and 2008 are: a. P5,500,000 and P600,000 b. P1,400,000 and P3,500,000 c. P1,400,000 and P5,500,000 d. P 600,000 and P5,500,000 2. The selected information from the accounting records of Petals Company is as follows: Net sales for 2007 P900,000 Cost of goods sold for 2007 600,000 Inventory at December 31, 2006 180,000 Inventory at December 31, 2007 156,000 Petal’s inventory turnover for 2007 is a. 5.77 times b. 3.85 times c. 3.57 times d. 3.67 times 3. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. what is the ending total asset balance? a. P2,000,000 b. P2,800,000 c. P1,200,000 d. P1,600,000 4. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: a. P22,000 b. P54,000 c. P42,000 d. P66,000 5. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of P3,000,000, and a market/book ratio of 3.5?

a. P8.57 b. P30.00 c. P85.70 d. P105.00 6. On December 31, 2006 and 2007, Renegade Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information: Stockholders’ equity at 12/31/07 P4,500,000 Net income year ended 12/31/07 1,200,000 Dividends on preferred stock year ended 12/31/07 300,000 Market price per share of common stock 12/31/07 144 The price-earnings ratio on common stock at December 31, 2007, was a. 10 to 1 b. 16 to 1 c. 14 to 1 d. 12 to 1 7. The Board of Directors is dissatisfied with last year’s ROE of 15%. If the profit margin and asset turnover remain unchanged at 8% and 1.25 respectively, by how much must the total debt ratio increase to achieve 20% ROE? a. Total debt ratio must increase by .5 b. Total debt ratio must increase by 5 c. Total debt ratio must increase by 50% d. Total debt ratio must increase by 5% 8. Recto Co. has a price earnings ratio of 10, earnings per share of P2.20, and a pay-out ratio of 75%. The dividend yield is a. 25.0% b. 22.0% c. 10.0% d. 7.5% 9. M. corporation’s stockholders’ equity at December 31, 2007 consists of the following: 6% cumulative preferred stock, P100 par, liquidating value was P110 per share; issued and outstanding 50,000 shares P5,000,000 Common stock, par, P5 per share; issued and outstanding, 400,000 shares 2,000,000 Retained earnings 1,000,000 Total P8,000,000 Dividends on preferred stock have been paid through 2006. At December 31, 2007, M Corporation’s book value [er share was a. P5.50 b. P6.25 c. P6.75 d. P7.50 10. Selected financial data of Alexander Corporation for the year ended December 31,2007 is presented below: Operating income P900,000

Interest expense Income before income taxes Income tax Net income Preferred stock dividend Net income available to common stockholders Common stock dividends were P120,000. The payout ratio is: a. 66.7 percent b. 25.0 percent c. 71.4 percent d. 42.9 percent

(100,000) 800,000 (320,000) 480,000 (200,000) 280,000

11. Jordan Manufacturing reports the following capital structure: Current liabilities P100,000 Long-term debt 400,000 Deferred income taxes 10,000 Preferred stock 80,000 Common stock 100,000 Premium on common stock 180,000 Retained earnings 170,000 What is the debt ratio? a. 0.48 b. 0.93 c. 0.96 d. 0.49 12. House of Fashion Company had the following financial statistics for 2006: Long-term debt (average rate of interest is 8%) P400,000 Interest expense 35,000 Net income 48,000 Income tax 46,000 Operating income 107,000 What is the times interest earned for 2006? a. 11.4 times b. 3.3 times c. 3.1 times d. 3.7 times 13. Brava Company reported the following on its income statement: Income before taxes P400,000 Income tax expense 100,000 Net income P300,000 An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s times interest earned (TIE) was a. 4 times b. 3.5 times c. 3 times d. 5 times

14. The balance sheet and income statement data for Candle Factory indicate the following: Bonds payable, 10% (issued 1998 due 2022) P1,000,000 Preferred 5% stock, P50 par (no change during year) 300,000 Common stock, P50 par (no change during year) 2,000,000 Income before income tax for year 350,000 Income tax for year 80,000 Common dividends paid 50,000 Preferred dividends paid 15,000 Based on the data presented above, what is the number of times bond interest charges were earned (round to one decimal point)? a. 3.7 b. 4.4 c. 4.5 d. 3.5 15. Orchard Company’s capital stock at December 31 consisted of the following: Common stock, P2 par value; 100,000 shares authorized, issued, and outstanding. 10% noncumulative, nonconvertible preferred stock, P100 par value; 1,000 shares authorized, issued, and outstanding. Orchard’s common stock which is listed on a major stock exchange, was quoted at P4 per share on December 31. Orchard’s net income for the year ended December 31 was P50,000. The yearly preferred dividend was declared. No capital stock transactions occurred. What was the price earnings ratio on Orchard’s common stock at December 31? a. 6 to 1 b.10 to 1 c.16 to 1 d. 8 to 1

Financial Statement Analysis – RECEDE THEORIES 1. Which ratio is most helpful in appraising the liquidity of current assets? a. Current ratio c. Debt ratio b. Acid-test ratio d. Accounts receivable turnover 2. 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 3. The following financial data have been taken from the records of Lotion Company: Accounts receivable P200,000 Accounts payable 80,000 Bonds payable, due in 10 years 500,000 Cash 100,000 Interest payable, due in three months 25,000 Inventory 440,000

Land 800,000 Notes payable, due in six months 250,000 What will happen to the ratios below if Lotion Company uses cash to pay 50 percent of its accounts payable? a. b. c. d. Current Ratio Increase Decrease Increase Decrease Acid-test Ratio Increase Decrease Decrease Increase 4. 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 5. Which of the following is not a limitation of financial statement analysis? a. The cost basis. c. The diversification of firms. b. The use of estimates. d. The availability of information 6. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time a. That has been arranged from the highest number to the lowest number. b. That has been arranged from the lowest number to the highest number. c. To determine which items are in error. d. To determine the amount and/or percentage increase or decrease that has taken place. 7. Which of these statements is false? a. Many companies will not clearly fit into any one industry. b. A financial service uses its best judgment as to which industry the firm best fits. c. The analysis of an entity's financial statements can be more meaningful if the results are compared with industry averages and with results of competitors. d. A company comparison should not be made with industry averages if the company does not clearly fit into any one industry. 8. Which of the following is the most of interest to a firm’s suppliers? a. Profitability c. Asset utilization b. Debt d. Liquidity 9. Which ratio is most helpful in appraising the liquidity of current assets? a. Current ratio c. Acid-test ratio b. Debt ratio d. Accounts receivable turnover 10, A measure of how efficiently a company uses its assets to generate sales is the a. Asset turnover ratio. c. Profit margin ratio. b. Cash return on sales ratio. d. Return on assets ratio. 11. Long-term creditors are usually most interested in evaluating a. Liquidity. c. profitability. b. Marketability. d. solvency 12. The ratio that indicates a company’s degree of financial leverage is the a. Cash debt coverage ratio. c. Free cash flow ratio.

b. Debt to total assets.

d. Times-interest earned ratio.

13. Which of the following would be most detrimental to a firm's current ratio if that ratio is currently 2.0? a. Buy raw materials on credit b. Sell marketable securities at cost c. Pay off accounts payable with cash d. Pay off a portion of long-term debt with cash 14. Recently the M&M Company has been having problems. As a result, its financial situation has deteriorated. M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit. Which of the following actions would do the most to improve the ratio in the short run? a. Using some cash to pay off some current liabilities. b. Collecting some of the current accounts receivable. c. Paying off some long-term debt. d. Purchasing additional inventory on credit (accounts payable). 15. Which of the following actions will increase a firm's current ratio if it is now less than 1.0? a. Convert marketable securities to cash. b. Pay accounts payable with cash. c. Buy inventory with short term credit (i.e. accounts payable). d. Sell inventory at cost.

PROBLEMS 1. The following financial data have been taken from the records of Ratio Company: Accounts receivable P200,000 Accounts payable 80,000 Bonds payable, due in 10 years 500,000 Cash 100,000 Interest payable, due in three months 25,000 Inventory 440,000 Land 800,000 Notes payable, due in six months 250,000 What will happen to the ratios below if Ratio Company uses cash to pay 50 percent of its accounts payable? a. b. c. d. Current ratio Increase Decrease Increase Decrease Acid-test ratio Increase Decrease Decrease Increase 2. Selected information from the accounting records of Petals Company is as follows: Net sales for 2007 P900,000 Cost of goods sold for 2007 600,000 Inventory at December 31, 2006 180,000 Inventory at December 31, 2007 156,000 Petals’ inventory turnover for 2007 is a. 5.77 times c. 3.67 times b. 3.85 times d. 3.57 times

3. Milward Corporation’s books disclosed the following information for the year ended December 31, 2007: Net credit sales P1,500,000 Net cash sales 240,000 Accounts receivable at beginning of year 200,000 Accounts receivable at end of year 400,000 Milward’s accounts receivable turnover is a. 3.75 times c. 5.00 times b. 4.35 times d. 5.80 times 4. Based on the following data for the current year, what is the inventory turnover? Net sales on account during year P 500,000 Cost of merchandise sold during year 330,000 Accounts receivable, beginning of year 45,000 Accounts receivable, end of year 35,000 Inventory, beginning of year 90,000 Inventory, end of year 110,000 a. 3.3 c. 3.7 b. 8.3 d. 3.0 5. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset turnover is 3.0. What is the ending total asset balance? a. P2,000,000. c. P2,800,000. b. P1,200,000. d. P1,600,000 6. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book value of equity of P3,000,000, and a market/book ratio of 3.5? a. P8.57 c. P85.70 b. P30.00 d. P105.00 7. Selected information for Ivano Company as of December 31 is as follows:

2006 2007 Preferred stock, 8%, par P100, nonconvertible, noncumulative P250,000 P250,000 Common stock 600,000 800,000 Retained earnings 150,000 370,000 Dividends paid on preferred stock for the year 20,000 20,000 Net income for the year 120,000 240,000 Ivano’s return on common stockholders’ equity, rounded to the nearest percentage point, for 2007 is a. 17% c. 21% b. 19% d. 23% 8. M Corporation’s stockholders’ equity at December 31, 2007 consists of the following: 6% cumulative preferred stock, P100 par, liquidating value was P110 per share; issued and outstanding 50,000 shares P5,000,000 Common stock, par, P5 per share; issued and outstanding, 400,000 shares 2,000,000 Retained earnings 1,000,000

Total Dividends on preferred stock have been paid through 2006. At December 31, 2007, M Corporation’s book value per share was a. P5.50 c. P6.75 b. P6.25 d. P7.50

P8,000,000

9. The times interest earned ratio of Mikoto Company is 4.5 times. The interest expense for the year was P20,000, and the company’s tax rate is 40%. The company’s net income is: a. P22,000 c. P54,000 b. P42,000 d. P66,000 Use the following information for question Nos. 10 and 11: Terry Corporation had net income of P200,000 and paid dividends to common stockholders of P40,000 in 2007. The weighted-average number of shares outstanding in 2007 was 50,000 shares. Terry Corporation’s common stock is selling for P60 per share in the local stock exchange. 10. Terry Corporation’s price-earnings ratio is a. 3.8 times c. 18.8 times b. 15 times d. 6 times 11. Terry Corporation’s payout ratio for 2007 is a. P4 per share c. 25.0 percent b. 12.5 percent d. 20.0 percent 12. Brava Company reported the following on its income statement: Income before taxes P400,000 Income tax expense 100,000 Net income P300,000 An analysis of the income statement revealed that interest expense was P100,000. Brava Company’s times interest earned (TIE) was a. 5 times c. 3.5 times b. 4 times d. 3 times 13. House of Fashion Company had the following financial statistics for 2006: Long-term debt (average rate of interest is 8%) P400,000 Interest expense 35,000 Net income 48,000 Income tax 46,000 Operating income 107,000 What is the times interest earned for 2006? a. 11.4 times c. 3.1 times b. 3.3 times d. 3.7 times 14. Selected information from the accounting records of Eternity Manufacturing Company follows: Net sales P3,600,000 Cost of goods sold 2,400,000 Inventories at January 1 672,000 Inventories at December 31 576,000 What is the number of days’ sales in average inventories for the year?

a. 102.2 b. 94.9

c. 87.6 d. 68.1

15. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007 was P900,000, and the ending inventory at December 31, 2007 was P180,000. What was the inventory turnover for 2007? a. 6.4 c. 5.3 b. 6.0 d. 5.0

Capital Budgeting – FLORES THEORIES 1. Which of the following does not affect the net present value of an investment proposal? a. The timing of the future cash flows b. The discount rate used by the investor c. The cost of the investment d. Opportunity costs 2. A weakness in the concept of return on average investment is that: a. It fails to consider the timing of future cash flows. b. It fails to consider the profitability over the entire life of the investment. c. The amount of average investment cannot be determined until the investment has been fully depreciated. d. Management has no way of determining whether a given rate is satisfactory. 3. If the discount rate used in discounting cash flows from proposed new investments is the minimum rate of return required by the investor: a. The annual cash flow will decrease to zero over the estimated life of a proposed investment. b. The investment will have a net present value if it provides a rate of return greater than the discount rate. c. The annual cash flow will ordinarily be less than the net income from the proposed investment during the first year. d. The present value of each year’s cash flow will be the same amount. 4. Capital budgeting can be defined as the process of: a. Determining the amounts of capital that will be needed for plant operations. b. Preparing the cash budget for the year. c. Limiting monthly cash expenditures to the amount of monthly cash receipts. d. Planning and evaluating proposals for investment in plant assets. 5. In a capital budgeting decision, the cost of capital (discount rate) must be specified in advance for a. The time-adjusted rate of return method. b. The net present value method. c. The internal rate of return method. d. Both (a) and (b) above.

6. The time-adjusted rate of return capital budgeting technique assumed that cash flows are reinvested at the a. Cost of capital b. Hurdle rate of return c. Rate earned by the investment d. There is no assumption about reinvestment of cash flows. 7. The relevance of a particular cost to a decision is determined by a. Amount of the cost b. Riskiness of the decision c. Potential effect on the decision d. Number of decision variables 8. Which of the following methods measures the cash flows and outflows of a project as if they occurred at a single point in time? a. Cashflow based payback method b. Capital budgeting c. Payback method d. Discounted cash flow 9. For a project such as a plant investment, the return that should leave the market price of the firm’s stock unchanged is known as the a. Net present value b. Payback c. Cost of capital d. Discounted rate of return 10. Payback method measures: a. The cash flow from an investment. b. The economic life of an investment. c. The profitability of an investment. d. How quickly investment pesos may be recovered. 11. It is a capital budgeting method that divides a project’ annual incremental net income by the initial investment is the: a. Internal rate of return method b. The simple (or accounting) rate of return method c. The payback method d. The net present value method 12. A term that refers to costs incurred in the past that are not relevant to a future decision a. Sunk cost b. Discretionary cost c. Full absorption cost d. Underallocated indirect cost

13. You have determined the profitability of a planned project by finding the present value of all the cash flows from that project. Which of the following would cause the project to look less appealing, that is, have a lower present value? a. The cash flows are extended over a longer period of time b. The cash flows are accelerated and the project life is correspondingly shortened c. The discount rate increases d. The investment cost decreases without affecting the expected income and life of the project 14. Which of the following is not an example of a cash inflow? a. Salvage value b. Reduction in cost c. Release of working capital d. Incremental operating costs 15. Of all the following, which does not constitute capital budgeting problems? a. Lease or buy b. Inventory valuation c. Equipment replacement d. Plant expansion PROBLEMS 1. The Lakers Company is interested in buying a piece of equipment that it needs. The following data have been assembled concerning this equipment: Cost of required equipment P250,000 Working capital required P100,000 Annual operating cash inflows 80,000 Cash repair at end of 4 years 40,000 Salvage value at end of 6 years 90,000 This equipment is expected to have a useful life of 6 years. At the end of the sixth year the working capital would be released for other investments. The company’s cost of capital is 10%. Use the net present value method to answer the following questions. The present value of the initial outlay for working capital for this investment is a. P(82,600) b. P(90,900) c. P(100,000) d. P(350,000) 2. The present value of all future operating cash inflows is a. P45,120 b. P278,710 c. P348,400 d. P617,280

3. Jackson Company project requires an initial investment of P70,000 and has a profitability index of 1.141. The present value of the future cash inflows from this investment is a. P61,350 b. P68,920 c. P75,210 d. P79,870 4. Consideration is being given to the possible purchase of a P30,000 machine for Verb, which is expected to result in a decrease of P12,000 per year in cash operating expenses. This machine, which has no residual value, has an estimated useful life of five years and will be depreciated on a straight-line basis. (Ignore income taxes). For the new machine, the simple rate of return based in initial investment would be a. 40% b. 30% c. 20% d. 12% 5. If income taxes are ignored, the payback period for the new machine would be a. 1.67 years b. 2.50 years c. 4.17 years d. 5.00 years 6. K Company is considering a project that would have a ten-year life and would require a P1,000,000 investment in equipment. At the end of ten years, the project would terminate and the equipment would have no salvage value. The project would provide net income each year as follows: Sales……………………………………………………. Less variable expenses…………………………………. Contribution margin……………………………………. Less fixed expenses ……………………………………. Net income …………………...………………………...

P2,000,000 1,400,000 600,000 400,000 200,000

__________________________________________________________________________________________________________

All of the above items, except for depreciation of P100,000 a year, represent cash flows. The depreciation is included in the fixed expenses. The company’s required rate of return is 12%. The project’s net present value is a. P1,300,000 b. P700,000 c. P695,000 d. P650,000 7. What is the project’s internal rate of return? (Interpolate to the nearest tenth of a percent.)

a. 12.5% b. 23.78% c. 25.5% d. 27.3% 8. The project’s payback period is a. 2.75 years b. 3 years c. 3.33 years d. 4.33 years 9. What is the project’s simple rate of return? a. 15.0% b. 17.5% c. 18.0% d. 20.0% 10. Information about a company that Sweetie Company is considering follows: Investment P300,000 Revenues P190,000 Variable Costs P50,000 Fixed out-of-pocket costs P25,000 Weighted average cost of capital 8% Tax rate 40% The property is considered 5-year property for tax purposes. The company plans to dispose of the property at the end of the third year. Salvage value at that time is expected to be P60,000. Assume all cash flows occur at the end of the year (round to the nearest peso). Annual after-tax cash inflows from operations is a. P114,000 b. P84,000 c. P72,000 d. P69,000 11. Tax savings from depreciation in year 2 is a. P24,000 b. P32,400 c. P38,400 d. P41,200 12. An after-tax cash inflow from disposal is a. P84,000 b. P82,080 c. P93,060 d. P86,250

13. Net present value of the project is a. P7,336 b. P7,314 c. P7,264 d. P7,188 14. A company has the opportunity to invest in a two-year project which is expected to produce cash flows from operation, net of income taxes, of P100,000 in the first year and P200,000 in the second year. It has a cost of capital of 20%. For this project, the company should be willing to invest immediately a maximum of a. P222,100 b. P249,900 c. P283,300 d. P288,200 15. The Habagat Inc. Is planning to spend P600,000 for a machine that it will depreciate on a straight-line basis over a ten-year period with no terminal disposal price. The machine will generate cash flow from operations of P120,000 a year. Ignoring income taxes, what is the accounting rate of return on the net initial investment? a. 5% b. 12% c. 10% d. 15% Capital Budgeting – CABALLERO THEORIES 1. It is the first step in the decision-making process. a. Determine and evaluate possible courses of action. b. Identify the problem and assign responsibility. c. Make a decision. d. Review results of the decision. 2. The cost of capital is the a. Amount the company must pay for its plant assets. b. Dividends a company must pay on its equity securities. c. Cost the company must incur to obtain its capital resources. d. Cost the company is charged by investment bankers who handle the issuance of equity or long-term debt securities. 3. XYZ Co. is adopting just-in-time principles. When evaluating an investment project that would reduce inventory, how should XYZ treat the reduction? a. Ignore it. b. Decrease the cost of the investment and decrease cash flows at the end of the project’s life. c. Decrease the cost of the investment. d. Decrease the cost of the investment and increase the cash flow at the end of the project’s life.

4. When a firm has the opportunity to add a project that will utilize factory capacity that is currently not being used, which costs should be used to determine if the added project should be undertaken? a. Opportunity costs b. Historical costs c. Net present costs d. Incremental costs 5. The major difference between an investment in working capital and one in depreciable assets is that a. An investment in working capital is never returned, while most depreciable assets have some residual value. b. An investment in working capital is returned in full at the end of a project’s life, while an investment in depreciable assets has no residual value. c. An investment in working capital is not tax-deductible when made, nor taxable when returned, while an investment in depreciable assets does allow tax deductions. d. Because an investment in working capital is usually returned in full at the end of the project’s life, it is ignored in computing the amount of the investment required for the project. 6. What is the proper treatment of an investment in receivables and inventory? a. Ignore it. b. Add it to the required investment in fixed assets. c. Add it to the required investment in fixed assets and subtract it from the annual cash flows. d. Add it to the investment in fixed assets and add the present value of the recovery to the present value of the annual cash flows. 7. The only future costs that are relevant to deciding whether to accept an investment are those that will a. Be deductible for tax purposes. b. Be saved if the project is accepted rather than rejected. c. Be different if the project is accepted rather than rejected. d. Affect net income in the period that they are incurred. 8. The primary advantages of the average rate of return method are its ease of computation and the fact that: a. It is especially useful to managers whose primary concern is liquidity. b. There is less possibility of loss from changes in economic conditions and obsolescence when the commitment is short-term. c. It emphasizes the amount of income earned over the life of the proposal. d. Rankings of proposals are necessary. 9. The cash payback technique: a. Should be used as a final screening tool. b. Can be the only basis for the capital budgeting decision. c. Is relatively easy to compute and understand. d. Considers the expected profitability of a project. 10. In capital budgeting, sensitivity analysis is used a. To determine whether an investment is profitable. b. To see how a decision would be affected by changes in variables. c. To test the relationship of the IRR and NPV. d. To evaluate mutually exclusive investments.

11. If the internal rate of return on an investment is zero: a. Its NPV is positive. b. Its annual cash flows equal its required investment. c. It is generally a wise investment. d. Its cash flows decrease over its life. 12. NPV indicates a project is deemed desirable (acceptable) when the NPV is a. Greater than or equal to the risk-adjusted cost of capital. b. Less than zero. c. Greater than or equal to zero. d. Less than or equal to the risk-adjusted cost of capital. 13. In choosing from among mutually exclusive investments the manager should normally select the one with the highest a. Internal Rate of Return. b. Net Present Value. c. Profitability index. d. Book rate of return. 14. The NPV and IRR methods give a. Different rankings of projects with unequal lives. b. The same choice from among mutually exclusive investments. c. The same decision (accept or reject) for any single investment. d. The same rankings of projects with different required investments. 15. If other things are equal, as cost of capital increases a. More capital projects will probably be acceptable. b. Fewer capital projects will probably be acceptable. c. The number of capital projects that are acceptable will change, but the direction of the change is not determinable just by knowing the direction of the change in cost of capital. d. The company will probably want to borrow money rather than issue stock.

PROBLEMS 1. Z Company is considering to replace its old equipment with a new one. The old equipment had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year. The old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year life. Cash savings on operating expenses before 40% taxes amount to P50,000 per year. What is the amount of investment in the new equipment? a. P160,000 b. P 72,000 c. P 80,000 d. P 68,000 2. Fall Company is considering the purchase of a machine that promises to reduce operating costs by equal amounts every year of its 6-year useful life. The machine will cost P840,000 and has no salvage value. The machine has a 20% internal rate of return. Fall Company is subject to 40% income tax rate. The present value of 1 for 6 periods at 20% is 3.326, and at the end of 6 periods is 0.3349. The approximate annual cash savings before tax is closest to: a. P252,555 b. P112,555 c. P187,592

d. P327,592 3. G Company has made an investment in video and recording equipment that costs P106,700. The equipment is expected to generate cash inflows of P20,000 per year. How many years will the equipment have to be used to provide the company with a 10 percent average accounting rate of return on its investment? a. 7.28 years b. 5.55 years c. 9.05 years d. 4.75 years 4. If an asset costs P3,000 and is expected to have a P5,000 salvage value at the end of its ten-year life, and generates annual net cash inflows of P5,000 each year, the cash payback period is a. 8 years b. 7 years c. 6 years d. 5 years 5. The Leisure Company is considering the purchase of electronic pinball machines to place in amusement houses. The machines would cost a total of P300,000, have an eight-year useful life, and have a total salvage value of P20,000. Based on experience with other equipment, the company estimates that annual revenues and expenses associated with the machines would be as follows: Revenues form use P200,000 Less operating expenses Commissions to amusement houses P100,000 Insurance 7,000 Depreciation 35,000 Maintenance 18,000 160,000 Net income P 40,000 Ignoring the effect of income taxes, the payback period for the pinball machines would be a. 3.73 years b. 3.23 years c. 4.0 years d. 7.5 years 6. Bo Hernandez plans to buy a haymaker. It costs P175,000 and is expected to last for five years. He presently hires 6 workers at P10,000 per month for each of the three harvesting months each year. The equipment would eliminate the need for two workers. Hernandez uses straight-line depreciation and projects a salvage value of P25,000. His tax rate is 25% and opportunity cost of funds is 12.0%. The present value of 1discounted at 12 percent at the end of 5 periods is 0.56743 and the present value of an annuity of 1 for 5 periods is 3.60478. Which of the following is true? a. The present value of cash flows in year 5 is P22,710 b. NPV is P28,436 c. NPV is P15,250 d. NPV is P14,186 7. AM Aggregates, Inc. plans to replace one of its machines with a new efficient one. The old machine has a net book value of P120,000 with remaining economic life of 4 years. This old machine can be sold for P80,000. If the new machine were acquired, the cash operating expenses will be reduced from P240,000 to P160,000 for each of the four years, the expected economic life of the new machine. The new machine will cost AM a cash payment to the dealer of P300,000. The company is subject to 32

percent tax and for this kind of investment, a marginal cost of capital of 9 percent. The present value of annuity of 1 and the present value of 1 for 4 periods using 9 percent are 3.23972 and 0.70843, respectively. The net present value to be provided by the replacement of the old machine is a. P 28,493 b. P 15,693 c. P 46,794 d. P 59,594 8. The Pambansang Kamao Corporation has to replace its completely damaged boiler machine with a new one. The old machine has a net book value of P100,000 with zero market value; therefore it will give a tax shield, based on 35% tax rate if replaced, by P35,000. The company has a 10 percent cost of capital. Understandably, the new machine, through a uniform decrease in cash operating costs, will give a positive net present value, because this machine will provide an internal rate of return of 12 percent. The present values at 10% and 12%, respectively, are: 10% 12% Annuity of 1, 6 periods 4.355264.11141 1 end of 6 periods 0.564470.50663 If the machine were to be depreciated using straight-line method for 6 years without any salvage value, the estimated profitability index is: a. 1.20 b. 1.07 c. 1.06 d. Cannot be determined from the information 9. KK Company has invested in a project that has an eight-year life. It is expected that the annual cash inflow from the project will be P20,000. Assuming that the project has an internal rate of return of 12%, how much was the initial investment in the project if the present value of annuity of 1 for 8 periods is 4.968 and the present value of 1 is 0.404? a. P160,000 b. P 99,360 c. P 80,800 d. P 64,640 10. Yaya Products Company is considering a new product that will sell for P100 and has a variable cost of P60. Expected sales volume is 20,000 units. New equipment costing P1,500,000 with a five-year useful life and no terminal salvage value is needed. The machine will be depreciated using the straight-line method. The machine has cash operating costs of P200,000 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 sales 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. P 81.00 b. P 90.00 c. P 70.00 d. P 95.00 11. Par Company has decided to invest in some new equipment. The equipment will have a three-year life and will produce a uniform series of cash savings. The net present value of the equipment is P1,750, using a discount rate of 8 percent. The internal rate of return is 12 percent. Present values at 8% and 12% respectively: 8%: Annuity – 2.5771; end of 3 periods, 0.7938

12%: Annuity – 2,4018; end of 3 periods, What is the amount of annual cash inflow? a. P 23,240 b. P 21,342 c. P 9,980 d. P 12,351

0.7118

12. Sy Inc., is considering investing in automated equipment with a ten-year useful life. Managers at Sy have estimated the cash flows associated with the tangible costs and benefits of automation, but have been unable to estimate the cash flows associated with the intangible benefits. Using the company’s 10% discount rate, the net present value of the cash flows associated with just the tangible costs and benefits is a negative P184,350. The present value of annuity of 1 at 10 percent for ten years is 6.145 while the present value of 1 is 0.386. How large would the annual net cash inflows from the intangible benefits have to be to make this a financially acceptable investment? a. P 18,435. b. P 30,000. c. P 35,000. d. P 37,236. 13. Mar Co. is considering the purchase of a new ocean-going vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost P500,000 and would be fully depreciated by the straight-line method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Mar Co.’s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10-year life, how much do the annual savings in labor costs need to be to generate a net present value of P0 on the project? Use the following PV: annuity of 1, 10 periods at 12% - 5.6502; end of 10th period – 0.32197. a. P 68,492 b. P 147,487 c. P 114,154 d. P 88,492 14. Rose Company invested in a machine with a useful life of six years and no salvage value. The machine was depreciated using the straight-line method. It was expected to produce annual cash inflow from operations, net of income taxes, of P6,000. The present value of an ordinary annuity of P1 for six periods at 10% is 4.355. The present value of P1 for six periods at 10% is 0.564. Assuming that Rose used a time- adjusted rate of return of 10%, what was the amount of the original investment? a. P 10,640 b. P 29,510 c. P 22,750 d. P 26,130 15. Wade Company is planning to buy a coin-operated machine costing P400,000. For book and tax purposes, this machine will be depreciated P80,000 each year for five years. Wade estimates that this machine will yield an annual inflow, net of depreciation and income taxes, of P120,000. Wade’s desired rate of return on its investments is 12%. At the following discount rates, the NPVs of the investment in this machine are: Discount Rate NPV 12% +P3,258 14% + 1,197 16% - 708

18% - 2,474 Wade’s expected IRR on its investment in this machine is a. 3.25% b. 12.00% c. 16.00% d. 15.30%

Budgeting – BITUN THEORIES 1. Budgets are related to which of the following management functions? a. Planning b. Performance evaluation c. Control d. All of these

2. The concept of “management by exception” refers to management’s consideration of a. samples selected at random. b. only rare events. c. only those items that vary materially from expectations d. only significant unfavorable deviations. 3. Which of the following is not an attribute of a budget? a. The budget is a guideline for operations. b. The budget is an organization’s operating plan. c. The budget is a motivating device. d. The budget is a guarantee of actual results. 4. A budgeting process in which information is constantly updated to provide a glance at a future twelve-month plans is referred to as: a. Continuous budgeting b. Participative budgeting c. On-going budgeting d. Joint budgeting 5. The ideal financial planning process would be a. top-down planning. b. bottom-up planning. c. a combination of top-down and bottom-up planning. d. none of the given choices 6. The most important budget in the master budget is likely the: a. Personnal budget b. Capital budget c. Cash budget d. Purchase budget

7. In preparing a cash budget, which of the following is normally the starting point for projecting cash requirements? a. Fixed assets b. Sales c. Accounts receivable d. Inventories 8. If a company wishes to establish a factory overhead budget system in which estimated costs can be derived directly from estimates of activity levels, it should prepare a a. manufacturing budget b. flexible budget c. discretionary budget d. program budget 9. Which of the following statements is correct regarding budgeting? a. It is primarily focused on past performance. b. It is primarily a bookkeeping task. c. It should be built from the ground up each year. d. It involves input from a broad range of managers. 10. Which of the following is least likely a reason why a company prepares its budget? a. To provide basis for comparison of actual performance b. To communicate the company’s plans throughout the entire business organization. c. To control income and expenditure in a particular period. d. To make sure the company expands its operations 11. A budgeting process in which information flows top down and bottom up is referred to as: a. Participative budgeting b. Perpetual budgeting c. Joint budgeting d. Continuous budgeting 12. The process of developing a budget estimates by requiring all levels of management to estimate sales, production, and other operating data as though operations were being initiated for the first time is referred to as: a. Program budgeting b. Forecasting c. Zero-based budgeting d. Continuous budgeting 13. A budget built from the ground up each year rather than by simply adding a percentage increase to last year’s numbers is called a a. Zero-based budget. b. Master budget. c. Static budget. d. Flexible budget.

14. A budget that includes costs for the actual number of units produced is called a: a. Flexible budget b. Static budget c. Summary cash budget d. Master budget 15. A continuous budget a. is a budget that is revised monthly or quarterly. b. is a medium term plan that consists of more than 2 years’ projections. c. is appropriate only for use of a not-for-profit entity. d. works best for an entity that can reliably forecast events a year or more into the future PROBLEMS 1. The management of Isner Company has prepared a graph showing the total costs of operating branch warehouses throughout the country. The cost line crosses the vertical axis at P400,000. The total cost of operating one branch is P650,000. The total cost of operating ten branches is P2,900,000. For purposes of operating a flexible budget based on the number of branch warehouses in operation, what formula would be used to determine budgeted costs at various levels of activity? a. Y = P650,000 + P400,000X b. Y = P650,000 + P250,000X c. Y = P400,000 + P250,000X d. Y = P400,000 + P290,000X

2. Silvestre Company estimated its overhead to produce 80,000 units at P1,000,000 (60 percent is variable). If the estimate changes, and Silvestre now expects to produce 100,000 units, what would the budgeted overhead be if the cost behavior remains the same? a. P1,250,000 b. P1,050,000 c. P1,450,000 d. P1,150,000 3. Prism Design, Inc. sells a variety of porcelain products including porcelain sinks. In December 31, the company had 1,000 sinks in inventory. The company’s policy is to maintain a sink inventory equal to 5 percent of next month’s sales. The company expects the following sales activity for the first quarter of the year as: January February March

15,000 sinks 20,000 sinks 23,000 sinks

What is the projected production for February? a. 19,850 b. 21,150 c. 22,150 d. 20,150

4. Shoeline Company manufactures a single product. It keeps its inventory of finished goods at 75% of the coming month’s budgeted sales. It also keeps its inventory of raw materials at 50% of the coming month’s budgeted production requirement. Each unit of product requires two pounds of materials. The production budget in units: May, 1,000; June, 1,200; July, 1,300; August, 1,600. Raw material purchases in July would be: a. 2,550 b. 3,050 c. 1,525 d. 2,900 5. Clover Company desires an ending inventory of P140,000. It expects sales of P800,000 and has a beginning inventory of P130,000. Cost of sales is 65% of sales. Budgeted purchases are a. P790,000 b. P810,000 c. P1,070,000 d. P530,000 6. ABS Co. has projected its sales to be P600,000 in January, P750,000 in February, and P800,000 in March. ABS wants to have 50% of next month’s sales needs on hand at the end of each month. If ABS has an average gross profit of 40%, what are the February purchases? a. P775,000 b. P428,000 c. P465,000 d. P310,000 7. Coach Company budgeted purchases of P100,000. Cost of sales was P120,000 and the desired ending inventory was P42,000. The beginning inventory was a. P20,000 b. P32,000 c. P42,000 d. P62,000 8. The payment schedule of purchases made on account is: 60% during the month of purchase, 30% in the following month, and 10% in the subsequent month. Total credit purchases were P200,000 in May, and P100,000 in June. Total payments on credit purchases were P140,000 in June. What were the credit purchases in the month of April? a. P145,000 b. P100,000 c. P200,000 d. P215,000 9. If there were 30,000 pounds of raw material on hand on January 1, 60,000 pounds are desired for inventory at December 31, and 180,000 pounds are required for annual production, how many pounds of raw material should be purchased during the year? a. 240,000 pounds b. 210,000 pounds

c. 150,000 pounds d. 120,000 pounds 10. If the required direct materials purchases are 8,000 pounds and the direct materials required for production is three times the direct material puchases, and the beginning direct materials are three and a half times the direct materials purchases, what are the desired ending direct materials in pounds? a. 4,000 b. 12,000 c. 20,000 d. 32,000 11. Lopez Company has a collection schedule of 60% during the month of sales, 15% the following month, and 15% subsequently. The total credit sales in the current month of September were P80,000 and total collections in September were P57,000. What were the credit sales in July? a. 90,000 b. 45,000 c. 32,000 d. 30,000 12. Selerum Company has P299,000 in accounts receivable on January 1, 2019. Budgeted sales for January are P860,000. Selerum expects to sell 20% of its merchandise for cash. Of the remaining sales, 75% are expected to be collected in the month of sale and the remainder the following month. The January cash collections from sales are: a. P815,000 b. P691,000 c. P471,000 d. P987,000 13. Barat Company began its operations on January 1 of the current year. Budgeted sales for the first quarter are P240,000, P300,000, and P420,000, respectively, for January, February, and March. Barat Company expects 20% of its sales on cash and the remainder on account. Of the sales on account, 70% are expected to be collected in the month of sale, 25% in the month following the sale, and the remainder in the following month. How much should Barat receive from sales in March? a. P294,000 b. P295,200 c. P304,800 d. P388,800 14. Violin Company manufactures a single product. It keeps its inventory of finished goods at twice the coming month’s budgeted sales and inventory of raw materials at 150% of the coming

month’s budgeted production requirements. Each unit of product requires two pounds of materials. The production budgets in units consist of the following: May June July August

1,000 1,200 1,300 1,600

Raw material purchases in June would be a. 1,800 pounds b. 2,400 pounds c. 2,600 pounds d. 2,700 pounds 15. Florida Company plans to sell 400,000 units of finished product in July and anticipates a growth rate in sales of 5% per month. The desired monthly ending inventory in units of finished product is 80% of the next month’s estimated sales. There are 300,000 finished units in the inventory on June 30. Each unit of finished product requires four pounds of direct materials at cost of P2.50 per pound. There are 800,000 pounds of direct materials in the inventory on June 30. How many units should be produced for the three-month period ending September 30? a. 1,328,000 b. 1,424,050 c. 1,260,000 d. 1,331,440 Budgeting – TIGLAO THEORIES 1. A budgeting is a. The process of creating a formal plan and translating goals into a quantitative format. b. A technique for coparing actual costs with standard costs. c. A technique for determining the cost of manufactured products. d. A means of product costing that emphasizes activities as basic cost objects. 2. Which of the following statements is correct? a. Budgets ensure goal congruence between superiors and subordinates. b. Budgets define responsibility centers and promote communication and coordination among the organization segments. c. Budgets foster the planning of operations and facilitate the fixing of blame for missed budget predictions. d. Budgets foster the planning of operations, provide a framework for performance evaluation, and promote communication and coordination among organization segments. 3. Budgets are related to the following management functions, except a. Planning c. Performance evaluation b. Control d. None of the above

4. It involves the forecasting of realizable results over a definite period or periods, the planning and coordination of the various operations and functions of the business to attain realizable results, and control of variations from the approved plan. a. Cost control c. Internal control b. Budgeting d. Vouching 5. Which of the following is not a primary purpose of preparing a budget? a. To communicate the company's plans throughout the entire business organization b. To provide a basis for comparison of actual performance c. To control revenues and expenses during a given period d. To make sure that company expands its operations 6. A budget is a control technique that, among the other things, establishes a performance standard. However, a natural reaction of a manager whose efforts are to be evaluated is to incorporate slack into the budget. Which of the following about budgetary slack is incorrect? a. Budgetary slack eliminates the likelihood that a manager will receive the personal rewards that follow from meeting the expectations of superiors. b. Budgetary slack can best be described as the planned overestimation of budgeted expenses. c. The use of budgetary slack prohibits the use of the budget to control subordinate performance. d. From the perspective of corporate management, the use of budgetary slack increases the likelihood of inefficient resource allocation. 7. The master budget a. Shows a comparison of forecasted and actual results. b. Reflects only those costs controllable by the individual manager. c. Is composed of the operating and financial budgets. d. Is the budget of the master of the firm. 8. The budget element(s) included in the financial budget process are the following, except the a. Budgeted balance sheet b. Capital budget c. Budget variance d. Cash budget and budgeted statement of cash flows 9. The following are parts of the operating budget, except a. Sales budget c. Capital budget b. Materials cost budget d. Production budget 10. The starting point in preparing a comprehensive budget is a. The cash budget b. The budgeted income statement c. The sales forecast d. The production budget 11. In the budgeting process, top management should a. Limit their involvement because they lack the detailed knowledge of the daily operations. b. Be involved, including using the budget process to communicate goals. c. Separate the budgeting process and the business planning process into two separate processes. d. Be involved only in the approval process.

12. A continuous or rolling budget a. Drops the current month or quarter and adds a future month or quarter as the current month or quarter is completed. b. Presents the budgeted amounts for a range of activities so that the amounts can be adjusted for changes in activity. c. Works best for a firm that can reliably forecast events a year or more in the future. d. Assumes the continuous improvement of products and processes. 13. Which of the following statements about flexible budgets is false? A flexible budget a. Is a series of budgets prepared for various levels of activity. b. Accommodates changes in activity levels so that actual results can be compared with meaningful budget amounts. c. Assumes that total fixed costs and unit variable costs are constant within the relevant range. d. Is used to evaluate capacity use. 14. Zero-based budgeting (ZBB) is budgetary process a. in which the budget is largely based on the expenditures of the previous year. b. that presents planned activities for a period of time, but does not present a firm commitment. c. where the budget variance is always equal to zero. d. that divides the activities of individual responsibility centers into a series of packages that are prioritized after being evaluated from a cost-benefit perspective. 15. In this budgeting process, the budget is based not on the existing system, but on changes or improvements that are to be made. It assumes the continuous improvement of products and processes. a. Zenkal Budgeting c. Keizan Budgeting b. Kaizen Budgeting d. Zankel Budgeting

PROBLEMS 1. Erny Trading Co. budgeted merchandise purchases of 40,000 units next month. The expected beginning inventory is 12,000 units and the desired inventory at the end of next month is 15,000 units. Budgeted sales in units for next month is a. 37,000 c. 55,000 b.52,000 d. 43,000 2. SYG Corporation has the following sales budget for the second quarter of 2017: April P 988,000 May 1,248,000 June 1,664,000 Other budget estimates are as follows: Merchandise is to be sold at its invoice cost plus 30% markup. Beginning inventory of each month is to be 40% of that month's projected cost of goods sold. The budgeted merchandise purchases for the month of May is a. 990,080 c. 1,088,000 b.960,000 d. 832,000 3. Bugnot Corporation's budget includes the following data: Budgeted sales 7,200 Inventories: Beginning Finished goods 300

Ending 400

Work-in-process in equivalent units

60

160

How many equivalent units should Bugnot Corporation plan to produce during the budget period? a. 7,300 c. 7,000 b. 7,200 d. 7,400 4. Hershey Company has budgeted sales of 90,000 units in January, 120,000 units in February; and 180,000 units in March. The company has 20,000 units on hand on January 1. Hershey Company requires an ending inventory of finished goods equal to 20% of the following month's sales. The budgeted production during February should be a. 96,000 c. 120,000 b.108,000 d. 132,000 5. TAP Company has budgeted sales of 90,000 units in January; 120,000 units in February; and 180,000 in March. The company has 20,000 units of finished goods and 35,000 pieces of materials on hand on January 1. Each unit of product requires 5 pieces of materials. The desired inventory of finished goods and materials at the end of each month is as follows: Finished goods 20% of next month's sales Materials 25% of next month's production needs How many pieces of materials should the company plan to purchase in January? a. 468,000 c. 600,000 b. 567,000 d. 552,500 6. Fame Company has the following budget formula for factory overhead costs: FOH = P5,000,000 per month + P300 per unit of product If the company plans to produce 50,000 units in January, how much is the budgeted factory overhead cost? a. P15,000,000 c. P5,000,000 b. P5,050,300 d. P20,000,000 7. Rollers, Inc. uses a continuous or rolling budget. The month of March is about to end, so the company is now preparing estimates for April. Figures for the period January to March pertaining to factory supplies are as follows: Production Factory Supplies Januar 90,000 144,612 February 108,000 170,712 March 96,000 153,312 If the budgeted production for April is 94,000 units, how much should the budgeted factory supplies be? a.130,500 c. 136,300 b.151,040 d. 150,412 Items 23 to 25 are based on the following information: Pine Corporation is preparing its factory overhead cost budget for the third quarter of 2017. The management plans to produce 200,000 units for the said quarter. Past experience has shown that the company's product is produced at the rate of 4 units per hour. Variable rates per direct labor hour are as follows:

Indirect materials and supplies Power Repairs and maintenance Other variable overhead Total

P 0.76 1.36 2.80 0.96 P5.88

Total fixed overhead cost is budgeted at P147,200. For product costing purposes, a fixed factory overhead rate of P3.20 per direct labor hour has been established. 8. How much is the total budgeted factory overhead for the quarter? a. P417,680 c. P441,200 b. P454,000 d. P294,000 9. Total factory overhead cost per unit of product is a. P 1.47 c. P36.32 b. P11.35 d. P 2.27 10. How much is the expected capacity variance? a. P12,800 unfavorable c. P12,800 favorable b. P11,776 unfavorable d. P11,776 favorable 11. Gold Corporation sells ball pens. For the month of June, its master budget shows the following: Sales (300,000 units) P4,500,000 Materials P1,500,000 Variable costs: Labor 600,000 Factory overhead 900,000 Selling/administrative 300,000 3,300,000 Contribution margin P1,200,000 Fixed costs: Factory overhead 600,000 Selling/administrative 200,000 800,000 Operating Income P 400,000 During June, actual sales was 350,000 units of ball pen. The expected operating income based on a flexible budget at the sales level of 350,000 units is a. P400,000 c. P466,667 b. P200,000 d. P600,000 12. Edi Producers, Inc. will start its commercial operations on January 1, 2017. The sales forecast per the sales manager's estimates for its first year of operations is 50,000 units. However, the production manager estimated that only 80% of the sales forecast can be produced with the available workforce and equipment. The product will be sold for P20 per unit. The budgeted peso sales for Edi Producers, Inc.'s initial year of operations is a. P 50,000 c. P 800,000 b. P1,000,000 d. P 40,000 Items 28 to 30 are based on the following information: Bags, Inc. manufactures leather bags with 3 zipper-type pockets. The company outsources the zippers at P8 per unit. Each bag requires 5 direct labor hours to produce at a rate of P10 per hour. Budgeted sales of bags for the first quarter of the year and the first month of the following are as follows:

January February March April

900 units 1,000 units 1,500 units 1,800 units

Inventory data are as follows: January 1: Leather bags Zipper

360 1,620

End of each month: Leather bags - 40% of the following month's budgeted sales Zipper - 60% of the following month's production requirement 13. What is the budgeted production of leather bags for the first quarter? a. 3,400 c. 4,400 b. 3,040 d. 3,760 14. The budgeted purchases of zipper for February is a. 2,844 c. 4,356 b. 1,956 d. 3,600 15. What is the total budgeted zipper and labor costs for the month of March? a. P55,080 c. P122,472 b. P29,160 d. P119,880

Variable Costing – SUNDIANG THEORIES 1.What term is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and factory overhead cost? a. Standard costing b. Variable costing c. Direct costing d. Absorption costing 2. What term is commonly used to describe the concept whereby the cost of manufactured products is composed of direct materials cost, direct labor cost, and variable factory overhead cost? a. Absorption costing b. Differential costing c. Standard costing d. Variable costing 3. It is the other name for variable costing is: a. Indirect costing b. Direct costing c. Process costing d. Differential costing 4. In the case of absorption costing, which of the following costs would not be included in finished goods inventory? a. Hourly wages of assembly worker

b. Advertising costs for a furniture manufacturer c. Overtime wages paid factory workers d. Straight-line depreciation on factory equipment 5. In the case of variable costing, which of the following costs would be included in finished goods inventory? a. Advertising costs b. Wages of carpenters in a furniture factory c. Salary of vice-president of finance d. Straight-line depreciation on factory equipment 6. The amount of income under absorption costing will equal the amount of income under variable costing when units manufactured: a. Exceed units sold b. Are less than units sold c. Equal units sold d. Are equal to or greater than units sold 7. Which of the following statements is correct using the direct costing concept? a. All manufacturing costs are included in the calculation of cost of goods manufactured b. Only fixed costs are included in the calculation of cost of goods manufactured while variable costs are considered period costs. c. All manufacturing costs are considered period costs. d. Only variable costs are included in the calculation of cost of goods manufactured while fixed costs are considered period costs. 8. In the variable costing income statement, deduction of variable selling and administrative expenses from manufacturing margin yields: a. Differential margin b. Contribution margin c. Gross profit d. Marginal expenses 9. On the variable costing income statement, the figure representing the difference between manufacturing margin and contribution margin is the: a. Fixed manufacturing costs b. Variable selling and administrative expenses c. Fixed selling and administrative expenses d. Variable cost of goods sold 10. Which of the following would be included in the cost of a product manufactured according to variable costing? a. Sales commissions b. Property taxes on factory buildings c. Interest expense d. Direct materials 11. The amount of income under absorption costing will be less than the amount of income under variable costing when units manufactured: a. Exceed units sold b. Equal units sold

c. Are less than units sold d. Are equal to or greater than units sold 12. Contribution margin analysis focuses on the effects of: a. The quantity factor b. The unit cost factor c. The unit sales price factor d. A, B, and C 13. Which of the following types of firms would it be appropriate to prepare contribution margin reporting and analysis? a. Boat manufacturing b. A chain of beauty salons. c. Home building d. A, B, and C 14. The systematic examination of the differences between planned and actual contribution margin is termed: a. Gross profit analysis b. Sales mix analysis c. Contribution margin analysis d. Volume variance analysis 15. Which of the following would not be an appropriate activity base for cost analysis in a service firm? a. Lawns mowed. b. Haircuts given c. Customers served. d. Inventory produced 16. In contribution margin analysis, the quantity factor is computed as: a. The increase or decrease in unit sales price or unit cost multiplied by the planned number of units to be sold. b. The increase or decrease in the number of units sold multiplied by the planned unit sales price or unit cost. c. The increase or decrease in the number of units sold multiplied by the actual unit sales price or unit cost. d. The increase or decrease in the unit sales price or unit cost multiplied by the actual number of units sold. 17. In contribution margin analysis, the quantity factor is computed as: a. The difference between actual unit price or unit cost and the planned unit price or cost, multiplied by the planned quantity sold. b. The difference between the actual quantity sold and the planned quantity sold, multiplied by the planned unit sales price or unit cost. c. The difference between actual unit price or unit cost and the planned unit price or cost, multiplied by the actual quantity sold. d. The difference between the actual quantity sold and the planned quantity sold, multiplied by the actual unit sales price or unit cost. 18. The effect of a change in the number of units sold, assuming no change in unit sales price or unit cost in contribution margin analysis, is referred to as the:

a. Sales factor b. Cost of goods sold factor c. Quantity factor d. Price factor 19. Sales territory profitability analysis can determine profit differences between territories due to a. Pricing, variable costs, and selling costs b. Variable costs, selling costs, and types of products sold c. Sales volumes, pricing, and variable costs d. Pricing, selling costs, and type of products sold 20. Contribution margin reporting can be beneficial for analyzing the following: a. Sales personal b. Products c. Sales Territory d. All of the above. 21. Management should concentrate its sales and production efforts on the product or products with: a. The highest sales b. The lowest costs c. The highest contribution margin d. The highest contribution margin per unit 22. The relative distribution of sales among various products sold is referred to as the: a. By-product mix b. Joint product mix c. Sales mix d. Profit mix 23. Management will use both variable and absorption costing in the following activities except: a. Controlling Costs b. Product Pricing c. Planning of Production d. Controlling Inventory Levels

PROBLEMS 1. If variable cost of goods sold totaled $90,000 for the year (18,000 units at $5 each) and the planned variable cost of goods sold totaled $88,000 (16,000 units at $5.50 each), the effect of the quantity factor on the change in variable cost of goods sold is: a. $2,000 decrease b. $11,000 increase c. $9.000 increase d. $9,000 decrease 2. A business operated at 100% of capacity during its first month and incurred the following costs: Production costs (20,000 units): Direct materials $180,000 Direct labor 240,000 Variable factory overhead 280,000 Fixed factory overhead 100,000 $800,000

Operating expenses: Variable operating expenses Fixed operating expenses

$130,000 50,000180,000

If 1,600 units remain unsold at the end of the month, what is the amount of inventory that would be reported on the variable costing balance sheet? a. $56,000 b. $64,000 c. $66,400 d. $68,000 3. Cola Inc. operated at 100% of capacity during its first month and incurred the following costs: Production costs (10,000 units): Direct materials $ 90,000 Direct labor 120,000 Variable factory overhead 140,000 Fixed factory overhead 50,000$400,000 Operating expenses: Variable operating expenses $ 65,000 Fixed operating expenses 25,00090,000 If 800 units remain unsold at the end of the month, what is the amount of inventory that would be reported on the absorption costing balance sheet? a. $34,000 b. $28,000 c. $33,200 d. $32,000 4. Di Kinaya Co. operated at 100% of capacity during its first month, with the following results: Sales (160 units) $160,000 Production costs (200 units): Direct materials $100,000 Direct labor 20,000 Variable factory overhead 10,000 Fixed factory overhead 4,000 134,000 Operating expenses: Variable operating expenses Fixed operating expenses

$ 12,000 2,000 14,000

What is the amount of the manufacturing margin that would be reported on the variable costing income statement? a. $30,000 b. $56,000 c. $38,800 d. $44,000

5. If variable selling and administrative expenses totaled $120,000 for the year (80,000 units at $1.50 each) and the planned variable selling and administrative expenses totaled $120,900 (78,000 units at $1.55 each), the effect of the unit cost factor on the change in variable selling and administrative expenses is: a. $900 decrease b. $4,000 decrease c. $3,100 decrease d. $3,100 increase 6. Mama’s Chocolate had planned to sell their chocolate covered strawberries for $3.00 each. Due to various factors the actual price was $2.75. Mama’s was able to sell 1,000 more strawberries than anticipated to 4,000. What is the a) quantity factor and b) the price factor for sales? a. a) ($3,000) b) ($2,000) b. a) $3,000, b) $2,000 c. a) $1,000 b) $2,000 d. a) $3,000, b) ($1,000) 7. If sales totaled $800,000 for the year (80,000 units at $10 each) and the planned sales totaled $819,000 (78,000 units at $10.50 each), the effect of the quantity factor on the change in sales is: a. $19,000 decrease b. $21,000 increase c. $21,000 decrease d. $40,000 decrease

Variable Costing – DIMABUYU THEORIES 1. How would the following costs be classified (product or period) under variable costing at a retail clothing store? Cost of purchasing clothing a. Product b. Period c. Product d. Period

Sales commissions Product Product Period Period

2. The principal difference between variable costing and absorption costing centers on a. Whether variable manufacturing costs should be included as product costs. b. Whether fixed manufacturing costs and fixed selling and administrative costs should be included as product costs. c. Whether fixed manufacturing costs should be included as product costs. d. None of these. 3. Assuming that direct labor is a variable cost, the primary difference between the absorption and variable costing is that: a. Variable costing treats only direct materials and direct labor as product cost while absorption costing treats direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

b. Variable costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs while absorption costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs. c. Variable costing treats only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs. d. Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs while absorption costing treats direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs. 4. The costing method that treats all fixed costs as period costs is: a. Absorption costing. b. Job-order costing. c. Variable costing. d. Process costing. 5. In its first year of operations, Bronfren Corporation produced 800,000 sets and sold 780,000 sets of artificial tan lines. What would have happened to net operating income in this first year under the following costing methods if Bronfren had produced 20,000 fewer sets? (Assume that Bronfren has both variable and fixed production costs.) Variable costing Absorption costing a. Increase Increase b. No effect Decrease c. Decrease No effect d. Decrease Decrease 6. When sales are constant, but the production level fluctuates, net operating income determined by the variable costing method will: a. Fluctuate in direct proportion to changes in production. b. Fluctuate inversely with changes in production. c. Be greater than net operating income under absorption costing. d. Remain constant. 7. Under the variable costing method, which of the following is always expensed in its entirety in the period in which it is incurred? a. Fixed manufacturing overhead cost b. Fixed selling and administrative expense c. Variable selling and administrative expense d. All of the above 8. Which of the following will usually be found on an income statement prepared using the absorption costing method? Contribution Margin Gross Margin

a. Yes b. Yes c. No d. No

Yes No No Yes

9. Net operating income under variable and absorption costing will generally: a. Always be equal. b. Never be equal. c. Be equal only when production and sales are equal. d. Be equal only when production exceeds sales. 10. When production exceeds sales, net operating income reported under variable costing generally will be: a. Greater than net operating income reported under absorption costing. b. Equal to net operating income reported under absorption costing. c. Higher or lower because no generalization can be made. d. Less than net operating income reported under absorption costing. 11. Net operating income under absorption costing may differ from net operating income determined under variable costing. How is this difference calculated? a. Number of units produced during the period times the fixed manufacturing overhead rate per unit. b. Change in the quantity of units in inventory times the variable manufacturing cost per unit. c. Change in the quantity of units in inventory times the fixed manufacturing overhead rate per unit. d. Number of units produced during the period times the variable manufacturing cost per unit. 12. When sales are constant, but the production level fluctuates, net operating income determined by the absorption costing method will: a. Tend to remain constant. b. Tend to fluctuate inversely with fluctuations in the level of production. c. Be greater than net operating income under variable costing. d. Tend to fluctuate in the same direction as fluctuations in the level of production. 13. A reason why absorption costing income statements are sometimes difficult for the manager to interpret is that: a. They shift portions of fixed manufacturing overhead from period to period according to changing levels of inventories. b. They omit variable expenses entirely in computing net operating income. c. They include all fixed manufacturing overhead on the income statement each year as a period cost. d. They ignore inventory levels in computing income charges. 14. Which of the following costs at a manufacturing company would be treated as a product cost under the variable costing method? a. Direct material cost

b. Property taxes on the factory building c. Sales manager's salary d. All of the above 15. In theory of constraints (TOC), which of the following is treated as a period cost? Direct labor Direct material a. Yes Yes b. Yes No c. No Yes d. No No PROBLEMS 1. Fleet Corporation produces a single product. The company manufactured 700 units last year. The ending inventory consisted of 100 units. There was no beginning inventory. Variable manufacturing costs were $6.00 per unit and fixed manufacturing costs were $2.00 per unit. What would be the change in the dollar amount of ending inventory if variable costing was used instead of absorption costing? a. $0 b. $800 decrease c. $200 increase d. $200 decrease 2. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Units in beginning inventory Units produced Units sold Units in ending inventory

0 7,100 7,000 100

Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative

$33 $53 $1 $7

Fixed costs: Fixed manufacturing overhead Fixed selling and administrative

$170,400 $7,000

What is the unit product cost for the month under variable costing? a. $87 b. $94 c. $111 d. $118

3. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Units in beginning inventory Units produced Units sold Units in ending inventory

0 1,900 1,700 200

Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative

$33 $32 $2 $6

Fixed costs: Fixed manufacturing overhead Fixed selling and administrative

$72,200 $6,800

What is the unit product cost for the month under absorption costing? a. $105 b. $67 c. $111 d. $73 4. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price Units in beginning inventory Units produced Units sold Units in ending inventory

$79 0 6,600 6,300 300

Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative

$14 $30 $4 $8

Fixed costs: Fixed manufacturing overhead Fixed selling and administrative

$46,200 $88,200

What is the total period cost for the month under the variable costing approach? a. $184,800

b. $134,400 c. $46,200 d. $138,600 5. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price Units in beginning inventory Units produced Units sold Units in ending inventory

$97 0 2,200 2,100 100

Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative

$32 $25 $2 $9

Fixed costs: Fixed manufacturing overhead Fixed selling and administrative

$8,800 $37,800

What is the total period cost for the month under the absorption costing approach? a. $56,700 b. $65,500 c. $8,800 d. $37,800 6. Mullee Corporation produces a single product and has the following cost structure: Number of units produced each year Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expense Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense The unit product cost under absorption costing is: a. $149 b. $65 c. $63

7,000 $51 $12 $2 $5 $441,000 $112,000

d. $128 7. Yes Corporation produces a single product and has the following cost structure: Number of units produced each year Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expense Fixed costs per year: Fixed manufacturing overhead Fixed selling and administrative expense

4,000 $50 $72 $6 $3 $296,000 $76,000

The unit product cost under variable costing is: a. $131 b. $125 c. $128 d. $202 8. Beamish Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative expense Fixed costs: Fixed manufacturing overhead Fixed selling and administrative expense

8,000 $37 $56 $4 $2 $312,000 $448,000

There were no beginning or ending inventories. The unit product cost under absorption costing was: a. $93 b. $97 c. $194 d. $136 9. Kay Inc., which produces a single product, has provided the following data for its most recent month of operations: Number of units produced Variable costs per unit: Direct materials

3,000 $91

Direct labor Variable manufacturing overhead Variable selling and administrative expense Fixed costs: Fixed manufacturing overhead Fixed selling and administrative expense

$13 $7 $6 $237,000 $165,000

There were no beginning or ending inventories. The unit product cost under variable costing was: a. $110 b. $190 c. $111 d. $117 10. A manufacturing company that produces a single product has provided the following data concerning its most recent month of operations: Selling price Units in beginning inventory Units produced Units sold Units in ending inventory

$135 0 6,400 6,200 200

Variable costs per unit: Direct materials Direct labor Variable manufacturing overhead Variable selling and administrative

$49 $38 $6 $11

Fixed costs: Fixed manufacturing overhead Fixed selling and administrative

$108,800 $74,400

The total contribution margin for the month under the variable costing approach is: a. $192,200 b. $260,400 c. $155,000 d. $83,400 11. Swifton Company produces a single product. Last year, the company had net operating income of $40,000 using variable costing. Beginning and ending inventories were 22,000 and 27,000 units, respectively. If the fixed manufacturing overhead cost was $3.00 per unit, what was the income using absorption costing? a. $15,000 b. $25,000

c. $40,000 d. $55,000 12. XY Company produces a single product. Last year, XY's net operating income under absorption costing was $3,600 lower than under variable costing. The company sold 10,000 units during the year, and its variable costs were $9 per unit, of which $1 was variable selling expense. If production cost was $11 per unit under absorption costing, then how many units did the company produce during the year? a. 8,200 units b. 8,800 units c. 11,200 units d. 11,800 units 13. Pungent Corporation manufactures and sells a spice rack. Shown below are the actual operating results for the first two years of operations: Units (spice racks) produced Units (spice racks) sold Absorption costing net operating income Variable costing net operating income

Year 1 Year 2 40,000 40,000 37,000 41,000 $44,000 $52,000 $38,000 ???

Pungent's cost structure and selling price were the same for both years. What is Pungent's variable costing net operating income for Year 2? a. $48,000 b. $50,000 c. $56,000 d. $54,000 14. Sy Corporation manufactures a variety of products. Last year, the company's variable costing net operating income was $90,900. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $21,900. What was the absorption costing net operating income last year? a. $112,800 b. $69,000 c. $21,900 d. $90,900 15. Last year, Kirsten Corporation's variable costing net operating income was $63,400. Fixed manufacturing overhead costs released from inventory under absorption costing amounted to $10,700. What was the absorption costing net operating income last year? a. $10,700 b. $74,100 c. $63,400 d. $52,700

Activity-Based Costing – MERCADO THEORIES 1. A system that focuses on the management of activities with the objective of improving the value received by the customer and the profit received by providing this value a. Activity-based management c. Contemporary cost control b. Traditional cost management system d. Standard cost system 2. Activity-based management (ABM) is a. A costing system in which multiple overhead cost pools are allocated using bases that include one or more nonvolume related factors b. A base used to allocate the cost of a resource to the different activities using it c. A base used to allocate the cost of an activity to products and customers d. The use of information obtained from ABC to make improvements in the firm 3. Which of the following is not a distinction between the traditional and ABC costing systems a. The number of overhead cost pools tends to be higher in abc systems b. The number allocation bases tend to be higher in abc system c. Costs within an abc cost pool tend to be more homogeneous than the costs within a traditional system’s cost pool d. All abc systems are one-stage costing systems, while traditional systems may be one- or two-stage 4. The primary benefit of using ABC is that it provides a. Better management decisions. b. Enhanced control over overhead costs. c. More accurate product costing. d. More cost pools. 5. A least likely reason to use activity-based overhead rates is that a. Some departments are labor-intensive, some are machine-intensive. b. Significant amounts of overhead are driven by different factors. c. Rates calculated for some departments are much higher than for other departments. d. All jobs require about the same amounts of cost-driving activities. 6. All of the following statements are correct except that a. Activity-based costing has been widely adopted in service industries. b. A larger proportion of overhead costs are company-wide costs in service industries. c. The objective of installing abc in service firms is different than it is in a manufacturing firm. d. The general approach to identifying activities and activity cost pools is the same in a service company as in a manufacturing company. 7. ABC should be used in which of the following situations? a. Single-product firms with multiple steps b. Multiple-product firms with only a single process

c. Multiple-product firms with multiple processing steps d. In all manufacturing firms 8. Each of the following is a limitation of activity-based costing system except that: a. It can be expensive to use. b. It is more complex than the traditional costing. c. Some arbitrary allocations still continue. d. More cost pools are used. 9. An activity-based costing system uses which of the following procedures? a. Overhead costs are traced to departments, then costs are traced to products. b. Overhead costs are traced to activities, then costs are traced to products. c. Overhead costs are traced directly to products. d. All overhead costs are expensed as incurred. 10. The first step in activity-based costing is to a. Assign manufacturing overhead costs for each activity cost pool to products. b. Compute the activity-based overhead rate per cost driver. c. Identify and classify the major activities involved in the manufacture of specific products. d. Identify the cost driver that has a strong correlation to the activity cost pool. 11. Activity-based overhead rates are more useful than a single plant-wide rate if a. Direct labor cost varies significantly from department to department. b. All products require about the same amounts of all activities. c. Manufacturing overhead costs are nearly all fixed. d. Overhead costs are driven by several activities. 12. In activity-based costing, preliminary cost allocations assign costs to a. Departments. b. Activities. c. Processes. d. Products. 13. Successful activity-based costing (ABC) implementation depends upon the firm having: a. Top management support b. ABC linked to its competitive strategy c. Adequate resources d. All of the above 14. A base used to allocate the cost of a resource to the different activities using that resource is a. Resource driver c. Activity driver c. Final cost object d. Driver

15. Total activity cost is the sum of a. Resource driver assigned costs and activity driver assigned costs b. Direct and indirect costs c. Opportunity costs and realized costs d. Directly traceable resource costs and resource driver assigned costs PROBLEMS 1. One of Alien Company’s activity cost pools is machine setups, with estimated overhead of P300,000. Alien produces slacks (400 setups) and shirts (600 setups). How much of the machine setup cost pool should be assigned to slacks? a. P 0 b. P150,000 c. P120,000 d. P180,000 2. The overhead rate for Machine Setups is P100 per setup. Products A and B have 80 and 60 setups, respectively. The overhead assigned to each product is a. Product A P8,000, Product B P8,000 b. Product A, P6,000, Product B P6,000 c. Product A P8,000, Product B P6,000 d. Product A, P6,000, Product B P8,000 3. Sylvia Company has identified an activity cost pool to which it has allocated estimated overhead of P1,920,000 and determined the expected use of cost drivers per that activity to by 160,000 inspections. Widgets require 40,000 inspections, Gadgets 30,000 inspections, and Targets, 90,000 inspections. The overhead assigned to each product is a. Widgets P40,000, Gadgets P30,000, Targets P90,000 b. Widgets P480,000, Gadgets P360,000, Targets P1,080,000 c. Widgets P360,000, Gadgets P480,000, Targets P1,080,000 d. Widgets P480,000, Gadgets P360,000, Targets P1,080,000 4. EMPIRE Company makes two products, E and M. E is being introduced this period, whereas M has been in production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. The only relevant overhead item is the cost of engineering change orders. E and M are expected to require eight and two change orders, respectively. E and M are expected to require 2 and 3 machine hours, respectively. The cost of a change order is P600. If EMPIRE applies engineering change order cost on the basis of machine hours, the overhead cost per unit to be assigned to E and M, respectively, are a. P3.60 and P4.80, respectively b. P4.80 and P3.60, respectively c. P3.60 and P2.40, respectively d. P2.40 and P3.60, respectively 5. Ray Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed as follows: Maintenance P510,000

Material handling 250,000 Setups 60,000 Inspection 210,000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labor hours. 100,000 direct labor hours are budgeted for next year. The company has been asked to submit a bid for a proposed job. The plant manager feels that obtaining this job would result in a new business in future years. Usually bids are based upon full manufacturing costs plus 10 percent. Estimates for the proposed job are as follows: Direct materials P30,000 Direct labor (8,000 hours) P24,000 Number of material moves 100 Number of inspections 120 Number of setups 24 Number of machine hours 4,000 The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers. Expected activity for the four activity drivers that would be used are: Machine hours 60,000 Material moves 20,000 Setups 3,000 Quality inspections 12,000 What is the total cost of the proposed job if Ray Manufacturing uses direct labor hours as its only activity driver? a. P144,000 b. P112,400 c. P136,400 d. P106,400 Questions 6 & 7 are based on the following information. Gilmore Company produces two products in a single factory. The following production and cost information has been determined: Model 1 Model 2 Units produced 1,000 200 Material moves (total) 100 40 Testing time (total) 250 125 Direct labor hours per unit 1 5 The controller has determined total overhead to be P480,000. P140,000 relates to material moves; P150,000 relates to testing; the remainder is related to labor time. 6. If Gilmore uses direct labor hours to allocate overhead to each model, what would overhead per unit be for Model 2? a. P 158.33 c. P 950.00 b. P1,200.00 d. P 400.00 7. If Gilmore uses activity-based costing to allocate overhead to each model, what would overhead per unit be for Model 2? a. P158.33 c. P415.93 b. P925.00 d. P815.00

8. Toylandia Company manufactures two products, X-MAN and Machman. Toylandia's overhead costs consist of setting up machines, P400,000; machining, P900,000; and inspecting, P300,000. Information on the two products is: X-MAN Machman Direct labor hours 15,000 25,000 Machine setups 600 400 Machine hours 24,000 26,000 Inspections 800 700 Overhead applied to Machman using activity-based costing is a. P 640,000 c. P 832,000. b. P1,000,000. d. P 768,000. Questions 9 & 10 are based on the following information. 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 The total number of expected machine hours for all jobs during the year is 25,000, and the total expected number of inspections is 1,500. 9. Using activity-based costing system and the appropriate activity drivers, the total cost of the potential job would be a, P2,400 c. P7,750 b. P3,600 d. P7,400 10. Using direct labor hours to assign overhead, the total cost of the potential job would be a. P 5,000 c. P 8,000 b. P11,000 d. P 9,000 Question Nos. 11 through 12 are based on the following: Special Products recently installed an activity-based relational data base. Using the information contained in the activity relational table, the following pool rates were computed: P200 per purchase order P12 per machine hour, process A P15 per machine hours, process B P40 per engineering hour

Two products are produced by Special Products: A and B. Each product has an area in the plant that is dedicated to its production. The plant has two manufacturing processes, process A and process B. Other processes include engineering, product handling, and procurement. The product relational table for Special is as follows: Activity Usage Activity Driver # and Name Product A: Product B: 1 Units 200,000 25,000 2 Purchase orders 250 125 3 Machine hours 80,000 10,000 4 Engineering hours 1,250 1,500 11. How much overhead cost will be assigned to product B using process B? a. P1,200,000 c. P150,000 b. P960,000 d. P120,000 12. What is the unit cost of Product A? a. P4.71 c. P4.80 b. P252.00 d. P5.30 Use the following data to respond to questions 13 through 15 Consider the following facts for NM Company which produces product N and M Activity Setups Ordering Receiving Product Dev. Gen Mgt Security Materials Labor

Cost Driver N’s share # of set ups 10 # of orders 5 # of receipts 22 # of parts 180 #, labor hrs 2,900 Area covered 3,200 # of units produced 400 # of DLH 1,700

40 10 12 120 4,100 5,400 800 3,100

M’s shareUnused 5 P 5,500 5 3,200 6 2,400 100 2,800 1,000 7,200 400 9,000 120,000 1,200 56,000

13. Set up cost chargeable per unit of M accounting for unused capacity amounts to a. 2.50 c. 5.00 b. 2.75 d. 5.50 14. Ordering cost chargeable per unit of N ignoring unused capacity amounts to a. 2.00 c. 3.00 b. 4.00 d. 2.67 15. The cost of unused capacity excluding labor costs amounts to a. 11,260 c. 14,856 b. 11,460 d. 11,856 Activity-Based Costing – JOSE THEORIES

Cost

1. In this costing system, the various activities performed in a business segment or in the entire organization are identified, costs are collected on the basis of the underlying nature and extent of such activities, and then assigned to the products or services on consumption of such activities by the products or services. a. Operating costing system b. Activity-based costing system c. Job-order costing system d. Process costing system 2. It is a comprehensive understanding of how an organization generates its output. It involves the determination of which activities are value-adding or non-value-adding and how the latter may be reduced or eliminated. It is a key component of ABC Management that links product costing and continuous improvement. a. ABC system b. Process value analysis c. Backflush Z d. JIT system 3. Which of the following statements is not correct? a. ABC tends to increase the number of cost pools and cost drivers used. b. Design of an ABC system starts with process value analysis, a comprehensive understanding of how an organization generates its output. c. In ABC system, homogenizing cost pools minimizes broad averaging of costs that have different drivers. d. ABC’s philosophy is to accumulate heterogeneous cost pools. 4. In ABC system, costs are grouped in cost pools and then allocated by a common allocation base, which ordinarily is the cost’s cost driver. Such allocation base is the common denominator for systematically correlating indirect costs and a cost object. In a homogeneous cost pool, the allocation base should a. Be a non-financial measure so that the allocation may be more objective. b. Have a cause-and-effect relationship with the cost items in the cost pool. c. Be a financial measure so that the allocation may be more objective. d. Assign the costs in the pool uniformly to cost objects even if the cost objects do not use resources uniformly. 5. Which of the following statements is false? a. Under ABC, a product is allocated only those costs that pertain to its production, hence, the products are not cross-subsidized. b. In ABC, the activities determined serve as cost objects. Costs for each activity are accumulated in a cost pool and then allocated using the appropriate activity base or cost driver. c. ABC is useful for allocating production costs, as well as marketing and distribution costs. d. If a firm manufactures only one product, rather than multiple products, ABC is more likely to result in major differences from the traditional costing systems.

6. ABC differs from the traditional product costing because it uses multiple allocation bases and therefore, allocates costs (such as overhead costs) more accurately. This normally results in a. Equalizing setup costs for all product lines. b. Lower setup costs being charged to low volume products. c. Substantially greater unit costs for low-volume products than is reported by traditional production costing systems. d. Decreased unit costs for low-volume products than is reported by traditional product costing systems. 7. Costs that are common to many different activities within an organization are known as ____ costs. a. Production or process level b. Unit-level c. Batch-level d. Organizational level 8. These activities are needed to support an entire product line regardless of the number of units and batches produced. a. Batch-level Activities b. Unit-level Activities c. Facility-level Activities d. Product-level Activities 9. In allocating variable costs to products, a. A company should never use more than one cost driver. b. A volume-based cost driver should be used. c. A company should always use the same allocation base that it uses for fixed costs. d. Direct labor hours should always be used as the allocation base. 10. Traditional overhead allocations results in which of the following allocations? a. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead. b. Low-volume products are assigned too much, and high-volume products are assigned too little overhead. c. The resulting allocations cannot be used for financial reports. d. Overhead costs are assigned as period costs to manufacturing operations. 11. Traditionally, overhead has been assigned based on direct labor hours or machine hours. What effect does this have on the cost of a high-volume product? a. Under-costs the product b. Has no effect on the product cost c. Cost per unit is unaffected by product volume d. Over-costs the product 12. Relative to traditional product costing, activity-based costing differs in the way costs are a. Incurred.

b. Benchmarked. c. Processed. d. Allocated. 13. In allocating fixed costs to products in activity-based costing, a. Direct labor hours should always be used as the allocation base. b. A cost driver that is not volume related should be used. c. A company should use the same allocation base that it uses for variable costs. d. Machine hours should always be used. 14. Of the following, which is the best reason for using activity-based costing? a. To assign indirect overhead costs to different overhead pools. b. To better assign overhead costs to products. c. To keep better track of overhead costs. d. To more accurately assign overhead costs to cost pools so that these costs are better controlled. 15. Process value analysis is a key component of activity-based management that links continuous improvement and a. Decrease in the number of cost pools. b. Overhead rates computed using peanut butter costing. c. Accumulation of heterogeneous cost pools. d. Product costing. PROBLEMS 1. Mich Roxa Corp. Produces and sells two products, A and B. data about the two products are as follows: Product A Product B Budgeted production 3,000 units 3,000 units Direct labor hours 9,000 hours 15,000 hours Number of setups 4 6 Cost per setup P1,800 If Mich applies the setup cost on the basis of direct labor hours, the cross subsidy per unit arising from this peanut-butter costing approach is a. P1.20 b. P3.00 c. P1.50 d. P0.15 2. Bisikleta Company has two product lines - the Whole Bike Line and the Replacement Parts Line. The company’s customer support department entertains customer inquiries and complaints through telephone calls. Last month, the department handled 5,000 calls and incurred costs of P175,000. If 3,550 of these calls were for the company’s Whole Bike Line, costs allocated to the Replacement Parts Line were a. P124,250 b. P175,000

c. P35 d. P50,750 Questions 18 to 19 are based on the following information. The cost accountant of L. Rosales, Inc. Is considering to use the ABC system in determining the cost of its products. At present, the company uses the traditional costing system wherein factory overhead costs are allocated based on direct labor hours. The cost accountant believes that the present system may be providing misleading cost information, hence, the plan to change to the ABC sysrem. For the coming period, the company is planning to use 5,000 direct labor hours, and its total budgeted factory overhead amounts to P90,000 broken down as follows: Activity Setup costs Production monitoring Quality control Total overhead cost

Cost Driver Budgeted Activity Budgeted Cost Number of setups 40 P20,000 Number of batches 20 40,000 Number of inspections 1,000 30,000 90,000

Projected data for one of the company’s products, Product X, for the coming period are as follows: Production and sales 1,000 units Direct labor hours 2,000 hours Units per batch 500 Number of setups 4 Number of inspections 200 Direct materials cost P10 per unit Direct labor rate P20 per hour 3. If the company will use the traditional full cost system, the cost per unit of product X for the coming period will be a. P36. b. P86. c. P50. d. P68. 4. If the company will use the ABC system, the cost per unit of product X for the coming year will be a. P50. b. P62. c. P86. d. P12. 5. A time-and-motion study revealed that it should take 1 hour to produce a product that currently takes 3 hours to produce. Labor is $8 per hour. Nonvalue-added costs are

a. $16 b. $8 c. $24 d. $0 6. Setup time for a product is six hours. A firm that uses JIT and produces the same product has reduced setup time to 30 minutes. Setup labor is $24 per hour. Value-added costs are a. $144 b. $132 c. $24 d. $12 7. Each unit of product requires 8 gallons of raw material. Due to scrap and rework, each unit has been averaging 9 gallons of raw material. The raw material costs $4 per gallon. Value-added costs are a. $2 b. $4 c. $36 d. $32 8. A company keeps 20 days of raw materials inventory on hand to avoid shutdowns due to raw materials shortages. Carrying costs average $2,000 per day. A competitor keeps 10 days of inventory on hand the competitor’s carrying costs average $1,000 per day. Value-added costs are a. $0 b. $20,000 c. $10,000 d. $40,000 9. New Rage Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality control costs more equitably, New Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen. Activity Cost Driver Cost Rates Quantity for Satin Sheen Incoming material inspection Type of material $11.50 per type 12 types In-process inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77 per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing is a. $88.64 per order. b. $525.50 lower than the cost using the traditional system. c. $525.50 higher than the cost using the traditional system. d. $8,500.50 Questions 10 to 12 are based on the following information.

Dierich Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity based costing system: Costs: Manufacturing overhead $600,000 Selling and admin. expenses $220,000 Total $820,000 Distribution of resource consumption: Activity Cost Pools Order Size Customer Support Other Total Manufacturing overhead 15% 75% Selling and admin. Expenses 60% 20%

10% 100% 20% 100%

The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools. 10. How much cost, in total, would be allocated in the first-stage allocation to the Order Size activity cost pool? a. $123,000 b. $307,500 c. $222,000 d. $492,000 11. In total, how much cost should NOT be allocated to orders and products in the second stage of the allocation process if the activity-based costing system is used for internal decisionmaking? a. $82,000. b. $104,000. c. $0. d. $164,000. 12. How much cost, in total, would be allocated in the first-stage allocation to the Customer Support activity cost pool? a. $389,500 b. $615,000 c. $494,000 d. $164,000 Questions 13 to 15 are based on the following information. Zebra Corporation has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering:

Salaries $150,000 Equipment 80,000 Supplies 20,000 Total $250,000 The equipment is used for two activities: improving processes and designing tooling. Thirty-five percent of the equipment’s time is used for improving processes and sixty-five percent is used for designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns $50,000. The $100,000 engineer spends 40% of his time training employees in new processes and 60% of his time on improving processes. The remaining engineer spends equal time on all activities. Supplies are consumed in the following proportions: Creating BOMs 25% Studying capabilities 10% Improving processes 20% Training employees 25% Designing tooling 20% 13. What is the cost assigned to the creating BOMs activity? a. $62,500 b. $87,500 c. $250,000 d. $15,000 14. The cost assigned to the improving processes activity is a. $250,000 b. $50,000 c. $102,000 d. $87,500 15. The cost assigned to the training employees activity is a. $250,000 b. $62,500 c. $55,000 d. $162,500 Standard Costing – TONGOL THEORIES 1. The variance that is most useful in assessing the performance of the purchasing department manager is: a. The materials quantity variance. b. The labor rate variance. c. The materials price variance d. The labor efficiency variance.

2. The production department should generally be responsible for material price variances that resulted from: a. Purchases made in uneconomical lot-sizes. b. Purchase of the wrong grade of materials. c. Rush orders arising from poor scheduling. d. Changes in the market prices of raw materials. 3. A debit balance in the labor efficiency variance account indicates that: a. Actual hours exceed standard hours b. Standard hours exceed actual hours c. Standard rate and standard hours exceed actual rate and actual hours. d. Actual rate and actual hours exceed standard rate and standard hours. 4. When the actual wage rate paid to direct labor workers exceeds the standard wage rate, the journal entry would include: a. Debit to wages payable; credit to labor rate variance b. Debit to work-in-process; credit to labor rate variance c. Debit to wages payable; debit to labor rate variance d. Debit to work-in-process; debit to labor rate variance 5. Which of the following will increase a company's manufacturing cycle efficiency (MCE)? decrease in process time decrease in wait time a. Yes , Yes b. Yes , No c. No , Yes d. No, No 6. To measure controllable production inefficiencies, which of the following is the best basis 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 attainable performance. c. Engineering estimates based on ideal performance d. The hours per unit that would be required for the present workforce to satisfy expected demand over the long run. 7. What would Poorly trained workers have an unfavorable effect on the following variances, Labor Rate Variance and Materials Quantity Variance respectively a. Yes, Yes b. Yes, No c. No, No d. No, Yes 8. When the actual price paid on credit for a raw material exceeds its standard price, the journal entry would include: a. Credit to raw materials; Credit to Materials price variance b. Credit to accounts payable; Credit to materials price variance

c. Credit to raw materials; Debit to materials price variance d. Credit to accounts payable; Debit to materials price variance 9. The journal entry below: Work in Process 25,000 dr Direct Labor Efficiency Variance 1,200 dr Direct Labor Rate Variance 2,000 cr Accrued Wages Payable 24,200 cr indicates that: a. The total labor variance was $800, unfavorable. b. Employees received an unexpected rate increase during the period. c. More labor time was required to complete the output of the period than was allowed at standard. d. Responses a and b are both correct. 10. During a recent lengthy strike at Morell Manufacturing Company, management replaced striking assembly line workers with office workers. The assembly line workers were being paid $18 per hour while the office workers are only paid $10 per hour. What is the most likely effect on the labor variances in the first month of this strike? Labor Rate Variance Labor Efficiency Variance a. Unfavorable, No effect b. No effect, Unfavorable c. Unfavorable, Favorable d. Favorable, Unfavorable 11. Which of the following will increase a company's manufacturing cycle efficiency (MCE)? Decrease in Process Time Decrease in Wait Time a. Yes Yes b. Yes No c. No Yes d. No No 12. The Ideal standards do not allow for machine breakdowns and other normal inefficiencies. The standard price per unit for direct materials should reflect the final, delivered cost of the materials, net of any discounts taken. a.1st statement is true, 2nd is false b.1st statement is false, 2nd is true c. Both true d. Both false 13. When the material price variance is recorded at the time of purchase, raw materials are recorded as inventory at actual cost. Inspection Time is generally considered to be value-added time. a.1st statement is true, 2nd is false b.1st statement is false, 2nd is true

c. Both true d. Both false 14. A manufacturing cycle efficiency (MCE) of greater than one is impossible. Waste on the production line will result in a materials price variance. a.1st statement is true, 2nd is false b.1st statement is false, 2nd is true c. Both true d. Both false 15. If improvement in a performance measure on a balanced scorecard should lead to improvement in another performance measure, but does not, then employees must work harder. If standard costs exceed actual costs, a credit entry would be made in the appropriate variance account to record the variance. a. 1st statement is True, 2nd is False b. 1st statement is False, 2nd is True c. Both True d. Both False PROBLEMS 1. SY Corporation is developing standards for its products. One product requires an input that is purchased for $82.00 per kilogram from the supplier. By paying cash, the company gets a discount of 2% off this purchase price. Shipping costs from the supplier's warehouse amount to $6.55 per kilogram. Receiving costs are $0.47 per kilogram. The standard price per kilogram of this input should be: a. $76.62 b. $87.38 c. $90.66 d. $82.00 2. Maya Corporation is developing standards for its products. Each unit of output of the product requires 0.92 kilogram of a particular input. The allowance for waste and spoilage is 0.02 kilogram of this input for each unit of output. The allowance for rejects is 0.11 kilogram of this input for each unit of output. The standard quantity in kilograms of this input per unit of output should be: a. 0.90 a. 0.92 b. 0.79 c. 1.05 3. ABY Corporation is developing direct labor standards. A particular product requires 0.71 direct laborhours per unit. The allowance for breaks and personal needs is 0.04 direct labor-hours per unit. The allowance for cleanup, machine downtime, and rejects is 0.12 direct labor-hours per unit. The standard direct labor-hours per unit should be: a. 0.71 b. 0.67 c. 0.87 d. 0.55 4. Lion Company's direct labor costs for the month of January were as follows:

Actual total direct labor-hours 20,000 Standard total direct labor-hours 21,000 Direct labor rate variance—unfavorable $3,000 Total direct labor cost $126,000 What was Lion's direct labor efficiency variance? a. $6,000 favorable b. $6,450 favorable c. $6,300 favorable d. $6,150 favorable 5. Mat Company uses a standard cost system. Information for raw materials for Product RBI for the month of October follows: Standard price per pound of raw materials $1.60 Actual purchase price per pound of raw materials $1.55 Actual quantity of raw materials purchased 2,000 pounds Actual quantity of raw materials used 1,900 pounds Standard quantity allowed for actual production 1,800 pounds What is the materials purchase price variance? a. $90 favorable b. $90 unfavorable c. $100 favorable d. $100 unfavorable 6. The following materials standards have been established for a particular product: Standard quantity per unit of output 2.6 meters Standard price $10.55 per meter The following data pertain to operations concerning the product for the last month: Actual materials purchased 6,000 meters Actual cost of materials purchased $59,400 Actual materials used in production 5,600 meters Actual output 2,200 units What is the materials quantity variance for the month? a. $4,220 U b. $1,188 F c. $1,266 F d. $3,960 U 7. The standards for direct materials in making a certain product are 20 pounds at $0.75 per pound. During the past period, 56,000 units of product were made and the material quantity variance was $30,000 U. The number of pounds of direct material used during the period amounted to: a. 1,080,000 b. 1,200,000 c. 1,160,000 d. 784,000 8. The standard cost card for one unit of a finished product shows the following:

Standard Quantity or Hours and Standard Price or Rate Direct materials 12 feet and ? per foot Direct labor 1.5 hours and $12 per hour Variable manufacturing overhead 1.5 hours and $8 per hour if the total standard variable cost for one unit of finished product is $78, then the standard price per foot for direct materials is: a. $2 b. $3 c. $4 d. $5 9. A small component is purchased for the use in the production of a major product. The standard price of the component is $0.85. During a recent period, 6,800 units of the small component were purchased and the materials price variance was $544 unfavorable. The standard number of units of the small component allowed for the actual output of the period was 5,440 units. What was the actual purchase price per unit? a. $0.93 b. $0.95 c. $0.75 d. $0.77 10. Fly Company should work 1,000 direct labor-hours to produce 250 units of product. During October the company worked 1,250 direct labor-hours and produced 300 units. The standard hours allowed for October would be: a. 1,250 hours b. 1,000 hours c. 1,200 hours d. it is impossible to determine from the data given. 11. The following labor standards have been established for a particular product: Standard labor-hours per unit of output 1.1 hours Standard labor rate $11.60 per hour The following data pertain to operations concerning the product for the last month: Actual hours worked 9,400 hours Actual total labor cost $107,630 Actual output 8,600 units What is the labor rate variance for the month? a. $687 F b. $2,106 F c. $1,410 F d. $2,106 U 12. EB Company makes and sells a single product. Last period the company's labor rate variance was $14,400 U. During the period, the company worked 36,000 actual direct labor-hours at an actual cost of $338,400. The standard labor rate for the product in dollars per hour is: a. $9.40 b. $9.00 c. $8.50

d. $8.10 13. Tubb Co. uses a standard cost system. The following information pertains to direct labor for product B for the month of October: Actual rate paid $8.40 per hour Standard rate $8.00 per hour Standard hours allowed for actual production 2,000 hours Labor efficiency variance $1,600 unfavorable What were the actual hours worked during October? a. 1,800 b. 1,810 c. 2,200 d. 2,190 14. Warp Manufacturing Corporation uses a standard cost system to collect costs related to the production of its ski lift chairs. Warp uses machine hours as an overhead base. The variable overhead standards for each chair are 1.2 machine hours at a standard cost of $18 per hour. During the month of September, Warp incurred 34,000 machine hours in the production of 32,000 ski lift chairs. The total variable overhead cost was $649,400. What is Warp's variable overhead spending variance for the month of September? a. $84,040 unfavorable b. $79,200 favorable c. $41,800 favorable d. $37,400 favorable 15. Hane Company has a standard costing system. Variable manufacturing overhead is applied on the basis of direct labor-hours. The following data are available for January: Actual variable manufacturing overhead: $25,500 Actual direct labor-hours worked: 5,800 Variable overhead spending variance: $600 Favorable Variable overhead efficiency variance: $2,475 Unfavorable The standard hours allowed for January production is: a. 5,975 hours b. 5,800 hours c. 5,425 hours 5,250 hours

Standard Costing – MONAR THEORIES 1. Which of the following is a purpose of standard costing? a. Determine “breakeven” production level b. Allocate cost with more accuracy c. Eliminate the need for subjective decisions by management d. Control costs

2. When evaluating the operating performance management sometimes uses the difference between expected and actual performance. This refers to: a. Management by deviation b. Management by control c. Management by objective d. Management by exception 3. A company employing very tight (high) standards in a standard cost system should expect that a. Most variances will be unfavorable b. No incentive bonus will be paid c. Employees will be strongly motivated to attain the standard d. Costs will be controlled better than if lower standards were used 4. 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 attainable performance c. Engineering estimates based on ideal performance d. The hours per unit that would be required for the present workforce to satisfy expected demand over the long run 5. A difference between standard costs used for cost control and the budgeted costs representing the same manufacturing effort can exist because a. Standard costs represent what costs should be while budgeted costs represent expected actual costs b. Standard costs must be determined after the budget is completed c. Budgeted costs are historical costs while standard costs are based on engineering studies d. Budgeted costs include some “slack” or “padding” while standard costs do not 6. The absolute minimum cost possible under the best conceivable operating conditions is a description of which type of standard? a. Currently attainable (expected) b. Normal c. Theoretical d. Practical

7. Standards that represent levels of operation that can be attained with reasonable effort are called:

a. Theoretical standards b. Ideal standards c. Variable standards d. Normal standards 8. 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 9. The variance least significant for purposes of controlling costs is the: a. Material usage variance b. Variable overhead efficiency variance c. Fixed overhead volume variance d. Fixed overhead spending variance 10. Assuming that the standard fixed overhead rate is based on full capacity, the cost of available but unused productive capacity is indicated by the: a. Factory overhead cost controllable variance b. Direct labor cost efficiency variance c. Direct labor cost rate variance d. Factory overhead cost volume variance 11. The choice of production volume as a denominator for calculating its factory overhead rate a. Has no effect on the fixed factory overhead rate for applying costs to production b. Has an effect on the variable factory overhead rate for applying costs to production c. Has no effect on the fixed factory overhead budget variance d. Has no effect on the fixed factory overhead production volume variance 12. Which of the following should be least considered when deciding whether to investigate a variance? a. Trend of the variances over time b. Significance of the variance c. Cost of investigating the variance d. Whether the variance is favorable or unfavorable

13. Favorable volume variances may be harmful when: a. Machine repairs cause work stoppages b. There are insufficient sales orders to keep the factory operating at normal capacity c. Production in excess of normal capacity cannot be sold d. Supervisors fail to maintain an even flow of work 14. Favorable fixed overhead volume variance occurs if: a. There is a favorable labor efficiency variance b. There is a favorable labor rate variance c. Production is less than planned d. Production is greater than planned 15. Which of the following unfavorable cost variances would be directly affected by the relative position of a production process on a learning curve? a. Materials mix b. Materials price c. Labor rate d. Labor efficiency PROBLEMS 1. El Andre Co. uses a standard costing system in connection with the manufacture of a line of Tshirts. Each unit of finished product contains 2.25 yards of direct material. However, a 25 percent direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct materials is P150 per yard. The standard direct material cost per unit of finished product is a. P253 b. P450 c. P422 d. P405 2. Each finished unit of Product EM contains 60 pounds of raw material. The manufacturing process must provide for a 20% waste allowance. The raw material can be purchased for P2.50 a pound under terms of 2/10, n/30. The company takes all cash discounts. The standard direct material cost for each unit of EM is: a. P180.00 b. P176.40 c. P187.50 d. P183.75 3. Double M company is a chemical manufacturer that supplies various products to industrial users. The company plans to introduce a new chemical solution called Bysap, for which it needs to develop a standard product cost. The following labor information is available on the production of Bysap.

•The product, which is bottled in 10-liter containers, is primarily a mixture of Byclyn, Salex, and Protet. •The finished product is highly unstable, and one 10-liter batch out of six is rejected at final inspection. Rejected batches have no commercial value and are thrown out. •It takes a worker 35 minutes to process one 10-liter batch of Bysap. Employees work on eighthour a day, including one hour per day for rest breaks and cleanup. What is the standard labor time to produce one 10-liter batch of Bysap? a. 35 minutes b. 40 minutes c. 45 minutes d. 48 minutes 4. In a standard cost system, the materials quantity variance was recorded at P1,970 unfavorable, the materials price variance was recorded at P3,740 favorable, and the Goods in Process was debited for P51,690. Ninety-six thousand units were completed. What was the per unit price of the actual materials used? a. P0.53 each b. P0.52 each c. P0.54 each d. P0.51 each 5. Jin Company uses a standard costing system in the manufacture of its single product. The 35,000 units of raw material in inventory were purchased for P105,000, and two units of raw material are required to produce one unit of final product. In November, the company produced 12,000 units of product. The standard allowed for material was P60,000, and there was an unfavorable quantity variance of P2,500. The materials price variance for the units used in November was a. P2,500 U b. P11,000 U c. P12,500 U d. P3,500 F 6. Sheridan Company has a standard of 15 parts of component BB costing P1.50 each. Sheridan purchased 14,910 units of component BB for P22,145. Sheridan generated a P220 favorable price variance and a P3,735 favorable quantity variance. If there were no changes in the component inventory, how many units of finished product were produced? a. 994 units b. 1,090 units c. 1,000 units d. 1,160 units 7. The standard hourly rate was P4.10. Standard hours for the level of production are 4,000. The actual rate was P4.27. The labor rate variance was P654.50, unfavorable. What were the actual labor hours? a. 3,700 b. 4,150

c. 3,850 d. 4,000 8. V Company’s direct labor costs for the month of January were as follows: Actual direct labor hours 20,000 Standard direct labor hours 21,000 Direct labor rate variance – U P3,000 Total payroll P126,000 What was V’s direct labor efficiency variance? a. P6,150 favorable b. P6,300 favorable c. P6,000 favorable d. P6,450 favorable 9. RM Corporation makes a variety of leather goods. It uses standards costs and a flexible budget to aid planning and control. Budgeted variable overhead at a 45,000-direct labor hour level is P27,000. During April material purchases were P241,900. Actual direct-labor costs incurred were P140,700. The direct-labor usage variance was P5,100 unfavorable. The actual average wage rate was P0.20 lower than the average standard wage rate. The company uses a variable overhead rate of 20% of standard direct-labor cost for flexible budgeting purposes. Actual variable overhead for the month was P30,750. What were the standard hours allowed during the month of April? a. 50,250 b. 48,550 c. 58,625 d. 37,520 10. Information on Barber Company’s direct labor costs for the month of January is as follows: Actual direct labor hours 34,500 Standard direct labor hours 35,000 Total direct labor payroll P241,500 Direct labor efficiency variance – F P3,200 What is Barber’s direct labor rate variance? a. P17,250 U b. P21,000 F c. P21,000 U d. P20,700 U 11. Calma Company uses a standard cost system. The following budget, at normal capacity, and the actual results are summarized for the month of December: Direct labor hours 24,000 Variable factory OH P48,000 Fixed factory OH P108,000 Total factory OH per DLH P6.50 Actual data for December were as follows:

Direct labor hours worked 22,000 Total factory OH P147,000 Standard DLHs allowed for capacity attained 21,000 Using the two-way analysis of overhead variance, what is the controllable variance for December? a. P10,500 Unfavorable b. P9,000 Favorable c. P5,000 Favorable d. P3,000 Favorable 12. CPA Company uses a predetermined factory O/H application rate based on direct labor cost. For the year ended December 31, CPA’s budgeted factory O/H was P600,000, based on a budgeted volume of 50,000 direct labor hours, at a standard direct labor rate of P6 per hour. Actual factory O/H amounted to P620,000, with actual direct labor cost of P325,000. For the year, over-applied factory O/H was a. P20,000 b. P25,000 c. P30,000 d. P50,000 13. The following information is available from the Tyro Company: Actual factory overhead P15,000 Fixed overhead expenses, actual P7,200 Fixed overhead expenses, budgeted P7,000 Actual hours 3,500 Standard hours 3,800 Variable overhead rate per DLH P2.50 Assuming that Tyro uses a three-way analysis of overhead variances, what is the spending variance? a. P950 F b. P750 U c. P750 F d. P1,500 U 14. Wala Company applies overhead on a direct labor hour basis. Each unit of product requires 5 direct labor hours. Overhead is applied on a 30 percent variable and 70 percent fixed basis; the overhead application rate is P16 per hour. Standards are based on a normal monthly capacity of 5,000 direct labor hours. During September, Wala produced 1,010 units of product and incurred 4,900 direct labor hours. Actual overhead cost for the month was P80,000. What is total annual budgeted fixed overhead cost? a. P 56,000 b. P56,560 c. P678,720 d. P672,000

15. The Sacto Co.’s standard fixed overhead cost is P3 per direct labor hour based on budgeted fixed costs of P300,000. The standard allows 2 direct labor hours per unit. During the year, Sacto produced 55,000 units of product, incurred P315,000 of fixed overhead costs, and recorded P106,000 actual hours of direct labor. What are the fixed overhead variances? Spending variance Volume variance a. P15,000 U P18,000 F b. P33,000 U P30,000 F c. P15,000 U P30,000 F d. P33,000 U P18,000 F Financial Management (Short Term) – CALDERON THEORIES 1. The salary or wage that you could be earning while you are taking this test is a. An incremental cost. b. A sunk cost. c. An opportunity cost. d. A joint cost. 2. The kind of cost that can be ignored in short-term decision making is a. A differential cost. b. An opportunity cost. c. A sunk cost. d. A relevant cost. 3. A product should be dropped if a. Dropping it will increase the total profit of the company. b. It has a negative contribution margin. c. It has a negative incremental profit. d. It is not essential to the company's product line. 4. From its refining process an oil company obtains three products, one of which can be processed further into a different product, the other two of which can be sold after further refining. The refining process is a. A process whose costs should be allocated to the resulting products. b. A mixed cost process. c. An unavoidable process. d. A joint process. 5. A manufacturing process that invariably produces two or more products a. Is a joint process. b. Is a complementary process. c. Normally has only fixed costs. d. Usually has primarily variable costs. 6. In a make-or-buy decision, which of the following is true? a. Variable costs are the only relevant costs.

b. Alternative uses of space and machinery are relevant. c. Allocated fixed costs are relevant. d. Making is the correct decision when there is idle capacity. 7. An opportunity cost commonly associated with a special order is a. The variable costs of the order. b. The contribution margin on lost sales. c. Additional fixed costs related to the increased output. d. Any of the above. 8. The variable cost of a unit of product made yesterday is a. An incremental cost. b. An opportunity cost. c. A sunk cost. d. A differential cost. 9. The working capital financing policy that subjects the firm to the greatest risk of being unable to meet the firm’s maturing obligations is the policy that finances a. Fluctuating current assets with long-term debt. b. Permanent current assets with long-term debt. c. Permanent current assets with short-term debt. d. Fluctuating current assets with short-term debt. 10. A lock-box system a. Accelerates the inflow of funds. b. Provides security for late night deposits. c. Reduces the risk of having checks lost in the mail. d. Reduces the need for compensating balances. 11. A precautionary motive for holding excess cash is a. To enable a company to have cash to meet emergencies that may arise periodically. b. To enable a company to avail itself of a special inventory purchase before prices rise to higher levels. c. To enable a company to meet the cash demands from the normal flow of business activity. d. To avoid having to use the various types of lending arrangements available to cover projected cash deficits. 12. The amount of cash that a firm keeps on hand in order to take advantage of any bargain purchases that may arise is referred to as its a. Transactions balance. b. b. Compensating balance. c. Speculative balance. d. Precautionary balance.

13. When managing cash and short-term investments, a corporate treasurer is primarily concerned with a. Maximizing rate of return. b. Minimizing taxes. c. Investing in treasury bonds since they have no default risk. d. Liquidity and safety. 14. The economic order quantity (EOQ) formula can be adapted in order for a firm to determine the optimal mix between cash and marketable securities. The EOQ model assumes all of the following except: a. The cost of a transaction is independent of the dollar amount of the transaction and interest rates are constant over the short run. b. An opportunity cost is associated with holding cash, beginning with the first dollar. c. Cash flow requirements are random. d. The total demand for cash is known with certainty. 15. In assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory that is work-in-process because a. WIP inventory is relatively easy to sell because it does not represent a raw material or a finished product. b. WIP generally has the lowest marketability of the various types of inventories. c. WIP inventory usually has the highest loan value of the different inventory types. d. WIP represents a lower investment by a corporation as opposed to other types. PROBLEMS 1. BlK Oak Company makes and sells oak boxes for a price of $60 each. Unit costs based on anticipated monthly sales of 1,000 boxes are as follows: Direct material cost $15 Direct labor cost 12 Variable manufacturing overhead 3 Variable selling overhead 5 Fixed costs 2 A chain store has offered to buy 100 boxes per month at $58 each. To accept this special order, BlK Oak will have to restrict its sales to regular customers to only 900 boxes per monthly because its production capacity cannot be expanded in the short run. However, no variable selling expenses will be incurred for this special order. If BlKs Oak accepts the chain store's offer, its profit will a. Decrease by $200. b. Increase by $500. c. Increase by $300. d. Decrease by $500. 2. MD 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 $160,000 Fixed costs 240,000 -------Total costs $400,000 ========= A supplier has offered to sell 4,000 units to MD annually. Assume no change in the fixed costs. What is the price per unit that makes MD indifferent between the "make" and "buy" options? a. $12 b. $8 c. $20 d. $0 3. DJH Company produces 1,000 units of Part X per month. The total manufacturing costs of the part are as follows: Direct materials Direct labor Variable overhead Fixed overhead

$10,000 15,000 5,000 30,000 ------Total manufacturing cost $60,000 ======= An outside supplier has offered to supply the part at $40 per unit. It is estimated that 20% of the fixed overhead assigned to Part X will no longer be incurred if the company purchases the part from the outside supplier. What is the maximum price that DJH Company should be willing to pay the outside supplier? a. $60 b. $40 c. $36 d. $25 4. Gen Company produces three products from a joint process costing $100,000. The following information is available:

Units ----A 2,000 B 3,000 C 5,000

Selling Price at Split-off -----------$25 $30 $40

Costs to Selling Price Process After Further Further Processing --------------$60,000 $50 $60,000 $45 $80,000 $60

Which products should be sold without further processing? a. B only. b. B and c. c. A and b. d. A, b, and c. 5. Ener, Inc.'s current capital structure is shown below. This structure is optimal, and the company wishes to maintain it. Debt 25% Preferred equity 5% Common equity 70% Ener's management is planning to build a $75 million facility that will be financed according to this desired capital structure. Currently, $15 million of cash is available for capital expansion. The percentage of the $75 million that will come from a new issue of common shares is a. 50.00%. b. 56.25%. c. 70.00%. d. 56.00%. 6. Bobo LLC's has an asset base of $1 million. After a dividend payment of $40,000, Bobo added $50,000 to retained earnings. What is Bobo's internal growth rate? a. 1% b. 4% c. 9% d. 5% 7. It is the policy of Franz Corp. that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are P400,000 and the present current ratio is 2 to 1. How much is the maximum level of new short-term loans it can secure without violating the policy? a. P300,000 b. P400,000 c. P266,667 d. P800,000 8. BY Corporation purchases raw materials on July 1. It converts the raw materials into inventory by September 30. However, BY pays for the materials on July 20. On October 31, it sells the finished goods inventory. Then, the firm collects cash from the sale 1 month later on November 30. If this sequence accurately represents the average working capital cycle, what is the firm's cash conversion cycle in days? a. 92 days. b. 133 days. c. 123 days. d. 153 days.

9. What is the opportunity cost of keeping a cash balance of $2 million, if the daily interest rate is 0.02% and the average transaction cost of investing money overnight is $50? a. $50 b. $40,000 c. $400 d. $350 10. Haku Inc. sells on terms of 3/10, net 30 days. Gross sales for the year are P2,400,000 and the collections department estimates that 30% of the customers pay on the 10th day and take discounts; 40% pay on the 30th day; and the remaining 30% pay, on the average, 40 days after the purchase. Assuming 360 days per year, what is the average collection period. a. 40 days. b. 15 days. c. 20 days d. 27 days. 11. If the average cash balance for the company during the year is $20,916.50, the opportunity cost of holding cash for the year will be a. $4,183.30 b. $2,091.65 c. $8,750.00 d. $17,500.00 12. What are the expected annual savings from a lockbox system that collects 200 checks per day averaging $500 each, and reduces mailing and processing times by 2.0 and 0.5 days, respectively, if the annual interest rate is 6%? a. $250,000 b. $12,000 c. $6,000 d. $15,000 13. A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lock box service whereby the bank that offers this service will reduce the company’s collection time by four days at a monthly fee of $2,500. If money market rates average 4% during the year, the additional annual income (loss) from using the lock box service would be a. $(6,000). b. $6,000. c. $12,000. d. $(12,000). 14. QRST makes large cash payments averaging P17,000 daily. The company changed from using checks to sight drafts which will permit it to hold unto its cash for one extra day. If QRST can use the extra cash to earn 14% annually, what annual peso return will it earn? a. P652.10

b. P6,521.00 c. P6.52 d. P2,380 15. Ten Q’s Inc. has an inventory conversion period of 60 days, a receivable conversion period of 35 days, and a payment cycle of 26 days. If its sales for the period just ended amounted to P972,000, what is the investment in accounts receivable? (Assume 360 days a year.) a. P85,200 b. P72,450 c. P94,500 d. P79,600 Financial Management (Short Term) – ARBOTANTE THEORIES 1. Which one of the following provides a spontaneous source of financing for a firm? a. Debentures b. Accounts receivable c. Mortgage bonds d. Accounts payable 2. The following responses are advantages to a corporation that uses the commercial paper market for short-term financing, except a. The market provides more funds at lower rates than other methods provide b. The borrower avoids the expense of maintaining a compensating balance with a commercial bank c. There are no restrictions as to the type of corporation that can enter into the market d. The market provides a broad distribution for borrowing 3. Trade credit is a. Not an important source of financing for small firms b. A source of long-term financing to the seller c. Usually an inexpensive source of external financing d. Subject to risk of buyer default 4. A short-term interest rates are a. Usually lower than long term-term rates b. Usually higher than long term-rates c. Lower than long-term rates during periods of high inflation only d. Not significantly related to long-term rates 5. The following practices will impact the cash flow of the company. Which will result to better cash flow? I. Sales personnel are unequivocally responsible for collecting their credit sales II. Sales commissions are based on collected invoices III. Statement of accounts receivable are reconciled

IV. Automatic transfer of funds is arranged with banks regarding deposits of branches a. All statements b. I, III and IV c. III and IV d. IV only 6. An automated clearing house (ACH) electronic transfer is a/an a. Check that must be immediately cleared by the Bangko Sentral ng Pilipinas b. Electronic payment to a company’s account at a concentration bank c. Computer-generated deposit ticket verifying deposit of funds d. Check like instrument drawn against the payer and not against the bank 7. A precautionary motive for holding excess cash is a. To enable a company to have cash to meet emergencies that may arise periodically b. To enable company to meet the cash demands from the normal flow of business activity c. To enable a company to avail itself of a special purchase before prices rise to higher levels d. To avoid having to use the various types of lending arrangements available to cover projected cash deficits 8. Which one of the following statements is most correct if a seller extends credit to a purchaser for a period of time longer than the purchaser’s operating cycle? The seller a. Will have a lower of accounts receivable than those companies whose credit period is shorter than the purchaser’s operating cycle b. Can be certain that the purchaser will be able to convert the inventory into cash before payment is due c. Has no need for a stated discount rate or credit period d. Is, in effect, financing more than just the purchaser’s inventory needs 9. It is held that the level of accounts receivable that the 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 the firm’s credit policies? a. The minimum 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 10. The goal of credit policy is to a. Minimize bad debts losses b. Minimize collection expenses c. Extend credit to the point where marginal profits equal marginal costs d. Maximize sales

11. A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction in the investment in accounts receivables, and a reduction in the number of doubtful accounts. Based on this information we know that a. The average collection period has decreased b. The net profit has increased c. The bad debt percentage has increased d. The size of the discount offered has decreased 12. In assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory that is work-in-process because a. WIP inventory is relatively easy to sell because it does not represent a raw materials or a finished product b. WIP generally has the lowest marketability of the various types of inventories c. WIP inventory usually has the highest loan value of the different inventory types d. WIP represents lower investments by a corporation as opposed to other types of inventories 13. Order-filling costs, as opposed to order-getting costs, include all but which of the following items? a. Credit check of new customs b. Packing and shipping of sales order c. Collection of payments for sales order d. Mailing catalogs to current customer 14. A decrease in inventory cost will a. Decrease the economic order quantity b. Increase the reorder point c. Have no effect on the economic order quantity d. Decrease the holding cost percentage 15. The economic order quantity (EOQ) formula assumes that a. Purchase costs per unit differ because of quantity discounts b. Costs of placing an order vary with quantity order c. Periodic demand for the good is unknown d. Erratic usage rates are cushioned by safety stocks PROBLEMS 1. MM Corporation had income before taxes of P60,000 for the year 2019. Included in this amount was depreciation P5,000, a charge of P6,000 for the amortization of bond discounts, and P4,000 for interest expense. The estimated cash flow for the period is a. P60,000 b. P71,000 c. P66,000 d. P49,000 2. Bing and Bong’s Store is on the cash basis of preparing it funds statement. Decrease in working capital P50,000

Depreciation P13,000 Increase in cash P25,000 Repairs and maintenance P19,500 Total uses of cash P454,000 Calculate the total sources of cash of Bing and Bong’s Store. a. P467,000 b. P472,500 c. P492,000 d. P479,000 3. Assume that each day a company writes and received checks totaling P10,000. If it takes 5 days for the checks to clear and be deducted from the company’s account, and only 4 days for the deposits to clear, what is the float? a. P0 b. P50,000 c. (P10,000) d. P10,000 4. A firm has daily cash receipts of P100,000 and collection time of 2 days. A bank has offered to reduce the collection time on the firm’s deposits by 2 days for a monthly fee of P500. If money market rates are expected to average 6% during the year, the net annual benefit/loss from having this service is a. P6,000 b. P3,000 c. P12,000 d. P0 5. On September 15, 2019, DJ Corporation accepted from a customer a P100,000, 90-day 20% interest bearing note dated on the same day. On October 15, 2019, DJ discounted the note at the Western Bank at a 23% discount rate. The customer paid the note at maturity. Based on a 360day, what amount should DJ report as net interest revenue from the note transaction? a. P20,000 b. P975 c. P5,000 d. P4,025 6. Ant, Inc. purchased an item on credit with terms of 3/10 net 45. Based on a 360-day year, the company’s annual interest cost of foregoing the cash discounts and making payment on the last day of the credit period is a. 24.00% b. 24.74% c. 31.18% d. 30.86% 7. Simba Corporation whose gross sales amounted to P1,200,000 sold on terms of 3/10, net 30. The collections manager estimated that 30% of the customers pay on the 10th day and take

discounts; 40% on the 30th days; and remaining 30% pay, on the average, 40 days after the purchase. If management would toughen on its collection policy and require that all non-discount customers pay on the 30th day, how much would be the receivables balance? a. P0 b. P50,000 c. P70,000 d. P80,000 8. O Company’s budgeted sales for the coming year are P96 million, of which 80% are expected to be credit sales at terms of n/30. The company estimates that a proposed relaxation of credit standards would increase credit sales by 30% 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 to an increase in accounts receivable balance of a. P6,080,000 b. P6,880,000 c. P2,880,000 d. P1,920,000 9. Scholas Company uses 840,000 units of component R4 in manufacturing P444 over a 300-day work year. The usual lead-time for the part is six days, however at times, the lead time has gone high as eight days. Scholas now desires to adjust its safety stock policy. The increase in safety stock is a. 6,800 units b. 2,800 units c. 7,200 units d. 5,600 units 10. M & L Company has the following information on inventory. Sales 20,000 units per year Order quantity 4,000 units Safety stock 2,600 units Lead-time 4 weeks What is the re-order point? (For calculation purposes, use 50-week year) a. 4,200 units b. 5,600 units c. 2,600 units d. 1,600 units 11. Red Company sells 20,000 radios evenly throughout the year. The cost of carrying one unit of inventory for one year is P8, and the purchase order cost per order is P32. What is the economic order quantity? a. 200 b. 283 c. 400 d. 625

12. Jeff Company sells 10,000 RTW pants evenly throughout the year. The cost of carrying one unit in inventory for one year is P6.00 and the purchase cost is P108.00 per order. What is economic order quantity? a. 468 b. 1,000 c. 1,208 d. 600 13. A firm often factors its accounts receivable. Its finance company requires a 6% reserve and charges a 1.4% commission on the amount of the receivables. The remaining amount to be advanced is further reduced by an annual interest charge of 15%. What proceeds (rounded to the nearest peso) will the firm receive from the finance company at the time P100,000 account due in 60 days is factored? a. P90,285 b. P85,000 c. P92,600 d. P96,135 14. Assuming a 360-day year, the current price of a P100 Treasury bill due in 180 days on a 6% discount basis is a. P100 b. P93 c. P94 d. P97 15. If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the equivalent annual interest rate (using 360-day year) of foregoing the cash discount and making payment on the 40th day is a. 2% b. 24.49% c. 18.36% d. 36.72% Financial Management (Long Term) – MACATANGAY THEORIES 1. A decrease in debt ratio will least likely affect a. Business risk b. Financial risk c. Systematic or market risk d. Total risk 2. The mix of debt, preferred stock, and common equity with which the firm plans to raise capital is called: a. financial risk b. business risk c. target capital structure

d. operating leverage 3. Which of the following changes would tend to decrease the company cost of capital for a traditional firm? a. Increase the market value of the debt. b. Decrease the proportion of equity financing c. Decrease the market value of the equity. d. Decrease the proportion of debt financing 4. Most commonly held view of capital structure is that the weighted average cost of capital: a. does not change with leverage. b. increases proportionately with increases in leverage. c. increases the moderate amounts of leverage and then falls. d. falls first with moderate levels of leverage and then increases. 5. Mix of debt and equity that minimizes the cost of capital is the: a. optimal operating leverage b. target financial structure c. optimal capital structure d. optimal degree of combined leverage 6. Financial risk refers to the a. risk of owning equity securities b. general business risk of the firm c. possibility that interest rates will increase d. risk faced by equity holders when debt is issued 7. It refers to management strategy of financing assets with borrowed capital; such an extensive use raise the entity risk thereby impacting on the return on common stockholders’ equity to be above or below the rate of return on total assets a. Factoring b. Leverage c. Mortgage d. Restructuring

8. The use of financial leverage by the firm has a potential impact on which of the following? (1) The risk associated with the firm (2) The return experienced by the shareholder (3) The variability of the net income (4) The degree of operating leverage (5) The degree of financial leverage a. 1, 3, 5 b. 2, 3, 4, 5

c. 1, 2, 3, 5 d. 1, 2, 5 9. When establishing their optimal capital structure, firms should strive to: a. Minimize the amount of debt financing used b. Maximize the marginal cost of capital c. Maximize the amount of debt financing d. Minimize the weighted average cost of capital 10. Which of the following is a key determinant of operating leverage? a. Level of debt b. Cost of debt c. Capital structure d. Technology 11. All of the following are correct except; a. Default risk refers to the inability of the firm to pay off its maturing obligations. b. The matching of assets and liability maturities lowers default risk. c. The matching of asset and liability maturities is considered desirable because this strategy minimizes interest rate risk. d. An increase in the payables deferral period will lead to a reduction in the need to nonspontaneous funding. 12. 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, low interest coverage ratio, volatile return on equity. b. Low debt-to-equity ratio, high interest coverage ratio, stable return on equity. c. High debt-to-equity ratio, high interest coverage ratio, stable return on equity. d. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity. 13. Cost of capital is a. The amount the company must pay for its plant assets. b. The dividends a company must pay on its equity securities. c. The cost the company is charged by investment bankers who handle the issuance of equity or long-term debt securities. b. The cost of company must incur to obtain its capital resources 14. Management knowledge of the cost of capital is useful for each of the following except: a. Making capital investment decisions. b. Managing working capital. c. Evaluating performance. d. Setting the maximum rate or return on new investment 15. If a P1,000 bond sells for P1,125, which of the following statements are correct? I. The market rate of interest is greater than the coupon rate on the bonds. II. The coupon rate on the bond is greater than the market rate of interest.

III. The coupon rate and the market rate are equal. IV. The bond sells at a premium V. The bond sells at a discount a. I and IV. b. II and IV. c. I and V. d. II and V. PROBLEMS 1. ABC corporation has a capital structure that consists of 65% equity and 35% debt. The company expects to report P100 million in net income for this year, and 67.5% of the net income will be paid out as dividends. How large can the firm’s capital budget be this year without it having to include the cost of new common stock in its cost of capital analysis? a. P100.0 million b. P 67.5 million c. P 50.0 million d. P 32.5 million 2. Theo Company expects next year’s after-tax income to be P7,500,000. The firm’s debt ratio is currently 40 percent. Theo Company 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. 75.0 percent b. 48.0 percent c. 25.0 percent d. 52.0 percent 3. A company expects P30 million in earning next year. Its dividend payout ratio is 40 percent, and its equity to asset ratio is 40 percent. The company uses no preferred stock. At what amount of financing will there be a break point in its cost of capital? a. P45 million b. P20 million c. P30 million d. P18 million 4. Calculate the Degree of Financial Leverage for a firm with EBIT of P6,000,000, interest expense of P1,000,000, preferred stock dividends of 800,000, and a 40 percent tax rate. a. 6.0 b. 9.0 c. 1.43 d. 1.64 5. If the pro forma balance sheet shows that total assets must increase by P400,000 while retaining a debt-equity ratio of .75 then: a. equity must increase by P100,000. b. debt must increase by P171,148 c. equity must increase by the full P400,000. d. debt must increase by P300,000.

6. The Salvage Company project the following for the upcoming year: Earnings before interest and taxes Interest expense Preferred stock dividends Common stock dividend payout ratio Average number of common shares outstanding Effective corporate income tax rate

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

The expected dividend per share of common stock is a. P1.86 b. P2.10 c. P1.70 d. P1.00 7. Chiz Co. has an equity cost of capital of 17%. The debt to equity ratio is 1.5 and a cost of debt is 11%. What is the weighted average cost of capital of the firm? (Assume a tax rate of 33%) a. 3.06% b. 16.97% c. 15.52% d. 13.04% 8. How much will a firm need in cash flow before tax and interest to satisfy debt holders and equity holders if the tax rate is 40%, there is P10 million in common stock requiring a 12% return, and P6 million in bonds requiring an 8% return? a. P1,392,000 b. P1,488,000 c. P2,480,000 d. P2,800,000 9. A firm is expected to generate P1.5 million in operating oncome and pay P250,000 in interest. Ignoring taxes, this will generate P12.50 earnings per share. What will happen to EPS id operating income increases to P2.0 million? a. EPS increase to P17.50. b. EPS increase to P20.00. c. EPS increase to P15.63. d. EPS increase to P16.67 10. Elis Company expects to generate P10 million internally which could be available for financing part of its P12 million capita; budget for this coming year. Elis’ 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. P4,000,000 b. P8,571,429 c. P2,800,000 d. P1,428,571 11. A company’s capital structure with 30 percent debt (all long-term bonds) and 70 percent common equity. The yield to maturity on the company’s long-term bonds is 8 percent, the firm estimates that its overall composite WACC is 10 percent. The risk-free rate of interest is 5.5 percent, the market risk

premium is 5 percent, and the company’s tax rate is 40 percent. The company uses the CAPM to determine its cost of equity. What is the beta on the company’s stock? a. 1.35 b. 1.07 c. 1.48 d. 0.10 12. For a firm with a degree of operating leverage of 3.5, an increase in sales of 6% will a. Increase pre-tax profits by 3.5%. b. Decrease pre-tax profits by 3.5%. c. Increase pre-tax profits by 21% d. Increase pre-tax profits by 1.71%. 13. During the past five years, Pena Company has consistently paid 50% of earnings available to common as dividends. Next year, the Pena Company projects its net income, before the P1.2 million preferred dividends, at P6 million. The capital structure for the company is maintained at: Debt………………..25.5% Preferred stock…….15.0% Common equity……60.0% What is the retained earnings break-point next year? a. P5,760,000 b. P4,800,000 c. P6,000,000 d. P4,000,000 14. This year, Nelson Industries increased earnings before interest and taxes (EBIT) by 17%. During the same period, net income after tax increased by 42%. The degree of financial leverage that existed during the year is a. 1.70 b. 4.20 c. 5.90 d. 2.47 15. An entity has P1 million in shareholders’ equity and P2 million in debt (8% bonds). Its after tax weighted-average cost of capital is 12% but it uses 15% as the hurdle rate in capital budgeting decisions. During the past year, its operating income before tax and interest was P500,000. Its tax rate is 40%. What is the company’s cost of equity capital? a. 8% b. 26.4% c. 12% d. 15%

Financial Management (Long Term) – OCAMPO THEORIES 1. Which of these statements are pertinent to cost of capital? I. It is the return that investors demand for a given level of risk.

II. It may be employed as a benchmark for the evaluation of performance. III. For investment decisions, it must be based on the current or prospective cost of the various capital components rather that their historical costs. IV. It may also be used in acquisition analysis, liquidation studies and source of financing decisions. V. It may differ from the hurdle rate used to reflect the alternative risk attributed to a specific project, decision, or business unit. a. I, II, III only b. I, II, III, and IV only c. I, II, IV, and V only d. I, II, III, IV, V 2. LOEY Company has made the decision to finance next year’s capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be a. The cost of equity financing. b. The after-tax cost of new-debt financing. c. The before-tax cost of new-debt financing. d. The weighted-average cost of capital. 3. The minimum return that a project must earn for a company in order to leave the value of the company unchanged is the a. Current borrowing rate. b. Discount Rate. c. Cost of Capital. d. Capitalization rate. 4. A firm must select from among several methods of financing arrangement when meeting its capital requirements. To acquire additional growth capital while attempting to maximize earnings per share, a firm should normally a. Select debt over equity initially, even through increased debt is accompanied by interest cost and a degree of risk. b. Attempt to increase both debt and equity in equal proportions, which preserves a stable capital structure and maintains investor confidence. c. Discontinue dividends and use current cash flow, which avoids the cost and risk of increased debt and the dilution of EPS through increased equity. d. Select equity over debt initially, which minimizes risk and avoids interest costs. 5. A firm’s optimal capital structure a. Maximizes the price of the firm’s stock. b. Maximizes the firm’s degree of financial leverage. c. Minimizes the firm’s tax liability. d. Minimizes the firm’s risk. 6. The three elements needed to estimate the cost of equity capital for use in determining a firm’s weighted-average cost of capital are

a. Current dividends per share, expected growth rate in dividends per share, and current book value per share of common stock. b. Current earnings per share, expected growth rate in dividends per share, and current market price per share of common stock. c. Current dividends per share, expected growth rate in dividends per share, and current market price per share of common stock. d. Current earnings per share, expected growth rate in earnings per share, and current book value per share of common stock. 7. The explicit cost of debt financing is the interest expense. The implicit cost(s) of debt financing is (are) the a. Increase in the cost of debt as the debt-to-equity ratio increases. b. Increase in the cost of equity as the debt-to-equity ratio decreases, c. Increase in the cost of debt and equity as the debt-to-equity ratio increases. d. Decrease in the weighted-average cost of capital as the debt-to-equity ratio increases. 8. Which of the following is not example of imputed cost? a. The use of the firm’s internal cash funds to purchase assets. b. Decelerated depreciation. c. Assets that are considered obsolete that maintain a net book value. d. The stated interest paid on a bank loan. 9. In general, it is more expensive for a company to finance with equity capital than with debt capital because a. Long-term bonds have a maturity date and must therefore be repaid in the future. b. Investors are exposed to greater risk with equity capital. c. Equity capital is in greater demand than debt capital. d. Dividends fluctuate to a greater extent than interest rates. 10. If MS Corporation’s bonds are currently yielding 8% in the marketplace, why is the firm’s cost of debt lower? a. Market interest rates have increased. b. Interest is deductible for tax purposes. c. Additional debt can be issued more cheaply than the original debt. d. There should be no difference; cost of debt is the same as the bond’s market yield. 11. When a company has a higher dividend-payout ratio, then, if all else are equal, it will have a. A lower investment opportunity schedule. b. A lower marginal cost of capital. c. A higher investment opportunity schedule. d. A higher marginal cost of capital. 12. Which of the changes in leverage would apply to a company that substantially increases its investments in fixed assets as a proportion of total assets and replaces some of its long-term debt with equity? a. Increase in financial leverage and decrease in operating leverage.

b. Increase in financial and operating leverage. c. Decrease in financial and operating leverage. d. Decrease in financial leverage and increase in operating leverage. 13. If two companies, company JI and SH, are alike in all respects except that company JI employs more debt financing and less equity financing than company SH does, which of the following statements is true? a. Company JI has more operating earnings variability than company SH. b. Company JI has more net earnings variability than company SH. c. Company JI has less operating earnings variability than company SH. d. Company JI has less financial leverage than company SH. 14. XO Products has announced that in plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the following corporate objectives is consistent with this announcement? a. Maximize earnings per share. b. Maximize the net worth of the firm. c. Minimize the cost of debt. d. Minimize the cost of equity. 15. Assume that the nominal interest rates just increased substantially but that the expected future dividends for a company over the long run were not affected. As a result of the increase in normal interest rates, the company’s stock price should a. Change, but not in no obvious direction. b. Stay constant. c. Increase d. Decrease PROBLEMS 1. Loveshot, Inc. paid cash dividends to its ordinary shareholders over the past 12 months at P2.20 per share. The current market value of the common stock is P40 per share, and investors are anticipating the common dividends to grow at a rate of 6% annually. The cost to issue new common stocks will be 5% of the market value. The cost of a new common stock issue will be a. 11.50% b. 11.79% c. 11.83% d. 12.14% 2. KKB, Inc. is planning to use retained earnings to finance anticipated capital expenditures. The beta coefficient for KKB’s stock is 1.15. The risk-free rate of interest is 8.5%, and the market return is estimated at 12.4%. If a new issue of ordinary share were used in this model, the flotation cost would be 7%. By using the capital asset pricing model (CAPM), the cost of using retained earnings to finance the capital expenditures is a. 13.21% b. 12.40% c. 12.99%

d. 14.26% 3. JM Inc. has the following mix of funds and costs: Debt: P150,000, 0.18% Preference Share: P500,000, 0.15% Ordinary Equity: 700,000, 0.12% What is JM’s cost of capital? a. 12.22% b. 13.78% c. 15.22% d. 13.22% 4. BBH Telecom is considering a project for the coming year that will cost P50 million. BBH plans to use the following combination of debt and equity to finance the investment. a) Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation cost of 2% of par. b) Use of P35 millions of funds generated from earnings. c) The equity market is expected to earn 12%. Philippine Treasury bills are currently yielding 5%. The beta coefficient for BBH’s estimated to be .60. BBH is subject to an effective corporate income tax rate of 40% The before-tax cost of BBH’s planned debt financing, net of flotation costs, in the first year is a. 8.08% b. 10% c. 11.60% d. 7.92% 5. X Company currently sells 400,000 bottles of perfume each year. Each bottle costs P0.84 to produce and sells for P1.00. Fixed costs are P28,000 per year. The firm has annual interest expense of P6,000, preference share dividends of P2,000 per year, and a 40% tax rate. What is the degree of operating leverage of X Company? a. 1.78 b. 2.40 c. 2.13 d. 1.12 6. Young Company currently sells 400,000 bottles of perfume each year. Each bottle costs P0.84 to produce and sells for P1.00. Fixed costs are P28,000 per year. The firm has annual interest expense of P6,000, preference share dividends of P2,000 per year, and a 40% tax rate. What is the degree of financial leverage of JD Company? a. 2.4 b. 1.78 c. 1.11 d. 1.35

7. A firm has P50,000 fixed operating cost in its first year of operation. It sold 10,000 units at a P10 unit price and incurred variable cost of P4 per unit. If all prices and costs will be the same in the second year and sales are projected to rise to 25,000 units, what will the degree of operating leverage (the extent to which fixed costs are used in the firm’s operations) be in the second year? a. 1.50 b. 1.25 c. 2.00 d. 6.00 8. Calculate the required rate of return for Loki, Inc. assuming that the investors expect a 5% rate of inflation in the future. The real risk-free rate is equal to 3% and the market risk premium in 5%. Loki has a beta of 2%, and its realized rate of return has averaged 15% over the last 5 years. a. 15% b. 16% c. 17% d. 18% 9. If DK’s stock has a required rate of return of 13.75%, the risk-free rate is 5%, and the market risk premium is 7%, what is the beta? a. 1.20 b. 1.25 c. 1.37 d. 1.68 10. The Storm Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager, Papa P plans to issue preferred stock with a perpetual annual dividend of P15 per share and a par value of P30. If the required rate of return on this stock is currently 20%, what should be the stock’s market value? a. P150 b. P100 c. P75 d. P50 11. B company’s stock sells for P50 per share, its last dividend was P2.00. Its growth rate is a constant 5%, and the company will incur a flotation cost of 15% if it sells new common stock. What is the firm’s cost of new equity? a. 9.94% b. 10.50% c. 11.75% d. 12.68% 12. The common stock of Coco, Inc. has a beta of 1.20. The risk-free rate is 5% and the market risk premium is 6%. Assume the firm will be able to use retained earnings to fund the equity portion of its capital budget. What is the company’s cost of retained earnings? a. 7.2%

b. 11% c. 12.2% d. 15% 13. Z.Lay Industries finances its projects with 40% debt, 10% preferred stock, and 50% common stock a) The company can issue bonds at a yield to maturity of 8.4%. b) The cost of preferred stock is 9%. c) The risk-free rate is 6.57%. d) The market risk premium is 5%. e) Z. Lay Industries beta is equal to 1.3. f) Assume that the firm will be able to use retained earnings to fund the equity portion of its capital budget. g) The company’s tax rate is 30%. What is the company’s weighted average cost of capital? a. 8.33% b. 8.85% c. 9% d. 9.79% 14. KMS Corporation has the following information: Cost of ordinary equity: 13% Dividend per common share last period: P8.00 Growth rate: 6% Flotation cost: 5% What is the net market price per share? a. P105.72 b. P112.41 c. P121.14 d. P134.21 15. JD Company is interested in measuring its overall cost of capital. JD gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments. a) JD can raise cash by selling P1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of P30 per bond would be received, and the firm must pay flotation cost of P30 per bond. The after tax cost of funds is estimated to be 4.8%. b) JD can sell 8% preferred stock at P105 per share. The cost of issuing and selling the preferred stock is expected to be P5 per share. c) JD’s common stock is currently selling for P100 per share. The firm expects to pay cash dividends of P7 per share next year, and the dividends are expected to remain constant. The stock will be underpriced by P3 per share, and the flotation costs are expected to amount to P5 per share.

d) JD expected to have available P100,000 of retained earnings in the coming year. Once these retained earnings are exhausted, the firm uses ordinary share as the form of ordinary equity financing. e) JD’s preferred capital structure is: Long-term debt: 30% Preferred stock: 20% Common stock: 50% f) The applicable tax rate is 40% What is the cost of funds from the sale of ordinary share for JD Company? a. 7% b. 7.6% c. 8.1% d. 9.5% Microeconomics – PANGILINAN THEORIES 1. All of the following are complementary goods except a. Cameras and rolls of film b. VCRs and video cassettes c. Margarine and butter d. Razors and razor blades 2. A decrease in the price of a complementary good will a. Shift the demand curve of the joint commodity to the right b. Shift the demand curve of the joint commodity to the left c. Increase the price paid for a substitute good d. Shift the supply curve of the joint commodity to the left 3. The local video store’s business increased by 12% after the movie theater raised its price from P6.50 to P7.00. This is an example of a. Superior goods b. Complementary goods c. Substitute goods d. Public goods 4. The demand curve for a normal good is a. Upward sloping because firms produce more at higher prices b. Upward sloping because higher-priced goods are of higher quality c. Downward sloping because of the income and substitution effects of price changes d. Vertical 5. Which one of the following would cause the demand curve for a normal good to shift to the left? a. A rise in the price of a substitute product b. A rise in average household income

c. A change in consumers’ tastes in flavor of the commodity d. A rise in the price of a complementary commodity 6. The movement along the demand curve from one price-quantity combination to another is called a(n) a. Change in demand b. Shift the demand curve c. Change in the quantity demanded d. Increase in demand 7. In a competitive market for labor in which is demand is stable, if workers try to increase their wage, a. Government must set a maximum wage below b. Employment must fall c. Firms in the industry must become smaller d. Product supply must decrease 8. If a diabetic must have insulin no matter what the cost, the diabetic’s demand is considered to be a. Perfectly elastic b. Perfectly inelastic c. Relatively elastic d. Relatively inelastic 9. If a product has a price elasticity of demand of 2.0, the demand is considered to be a. Perfectly elastic b. Relatively elastic c. Perfectly inelastic d. Relatively inelastic 10. A supply curve will illustrate the relationship between a. Price and quantity supplied b. Price and consumer taste c. Price and quantity demanded d. Supply and demand 11. Price ceiling a. Are illustrated by government price support programs in agriculture b. Create prices greater than equilibrium prices c. Result in persistent surpluses d. Create prices below equilibrium prices 12. The competitive model of supply and demand predicts that a surplus can arise only if there is a a. Maximum price above the equilibrium price b. Maximum price below the equilibrium price c. Minimum price above the equilibrium price

d. Minimum price below the equilibrium price 13. Marginal revenue is a. Equal to price in monopolistic competition b. The change in total revenue associated with increasing prices c. Greater than price in pure competition d. The change in total revenue associated with producing and selling one or more unit 14. An increase in the market supply of beef would result in a(n) a. Increase in the price of beef b. Increase in the quantity of beef demanded c. Increase in the price of pork d. Decrease in the demand for beef 15. If both the supply and the demand for a good increase, the market price will a. Rise only in the case of an inelastic supply function b. Not be predictable with only these facts c. Fall only in the case of an inelastic supply function d. Rise only in the case of an inelastic demand function 16. In microeconomics, the distinguishing characteristic of the long run on the supply side is that a. Only supply factors determine price and output b. All inputs are variable c. Only demand factors determine price and output d. Firms are not allowed to enter to exist in the industry 17. In any competitive market, an equal increase in both demand and supply can be expected to always a. Increase both price and market-clearing quantity b. Increase market-clearing quantity c. Decrease both price and market-clearing quantity d. Increase price 18. Economic rent is the total price for land and other natural resources when there is a(n) a. Artificial market price b. Fixed demand schedule c. Completely elastic supply function d. Completely fixed total supply 19. A perfectly inelastic supply curve in a competitive market a. Exists when firms cannot vary input usage b. Implies a vertical demand curve c. Implies a horizontal market supply curve d. Can exist only in the long run 20. The firm’s short-run supply curve is derived from the

a. Average total cost curve b. Fixed cost curve c. Marginal cost curve d. Total cost curve 21. In the theory of demand, the marginal utility per peso of a product a. Increase when consumption expands b. Decrease when consumption expands c. Explains why short-run supply curves are upward sloping d. Increases a more units of a variable input are added to the production process 22. The measurement of using resources now in lieu of alternative uses of the resources is a. Economic efficiency b. Comparative advantage c. Opportunity cost d. Absolute advantage PROBLEMS 1. If the price elasticity of demand for a normal good is estimated to be 2.5, a 5% reduction in its price causes a. Total revenue to fall by 5% b. Quantity demanded to rise by 12.5% c. Total revenue to fall by 12.5% d. Quantity demanded to decrease by 5% 2. As the price for a particular change, the quality of the product demanded changes according to the following schedule Total Quality Demanded 100 150 200 225 230 232

Price per Unit P50 45 40 35 30 25

The price elasticity of demand for this product when the price decreases from P50 to P45 is a. 0.20 b. 3.80 c. 10.00 d. 0.10 3. The output and cost information for a firm is presented below Output 0

Total Variable Cost P -0-

Total Cost P 100

1 2 3

150 260 350

250 360 450

The marginal cost of the second unit of output is a. P100 b. P150 c. P110 d. P180 Questions 4 through 6 are based on the following information. Number of Workers Total Product Units 10 20 11 25 12 28

Average Selling Price P50.00 49.00 47.50

4. The marginal physical product when one worker is added to a team of 10 workers is a. 1 unit b. 8 units c. 5 units d. 25 units 5. The marginal revenue per unit one worker is added to a team of 11 workers is a. P225.00 b. P105.00 c. P35.00 d. P47.50 6. The marginal revenue product when one worker is added to a team of 11 workers is a. P42.00 b. P225.00 c. P105.00 d. P47.50 Questions 7 through 8 are based on the following information. Total Units of Product Cost 6 7 8 9

Average Fixed Cost P 15.00 12.86 11.25 10.00

7. The total cost of producing seven units is a. P90.02

Average Variable Cost

Average Total

P 25.00 24.00 23.50 23.75

P40.00 36.86 34.75 33.75

b. P168.00 c. P258.02 d. P280.00 8. The marginal cost of producing the ninth unit is a. P23.50 b. P23.75 c. P25.75 d. P33.75 Microeconomics – DENIEGA THEORIES 1. The concept of opportunity cost can be applied to the analysis of ________ decision-making processes. a. only economy-wide b. only global c. any d. only-small-scale 2. That which we forgo, or give up, when we make a choice or a decision is known as a. equity. b. causation. c. correlation. d. opportunity cost. 3. If you own a condo and you decide to lease it to your cousin a. there is no opportunity cost of leasing the condo because you own it. b. there is an opportunity cost of leasing the condo because you could have chosen to live in it. c. there is no opportunity cost of leasing the condo because you collect rent from your cousin. d. the only cost relevant to this decision is the price you paid for the condo. 4. Sunk costs a. the sum of all opportunity costs. b. are costs which cannot be avoided but have yet to be incurred. c. the sum of all marginal costs. d. are costs which have been incurred. 5. If information is more costly and less easily available, then usually this a. makes markets more efficient. b. makes markets less efficient. c. decreases profit opportunities. d. decreases the opportunity cost of acquiring more information. 6. Which of the following is an example of a normative question? a. how will an increase in the price of diesel fuel affect truck drivers? b. what fraction of an income-tax rebate check will be spent on consumer goods? c. how will an increase in the minimum wage affect migrant workers? d. should the government provide free prescription drugs to lower-income citizens?

7. In response to news reports that drinking a glass of red wine each day can reduce an individualʹs risk of heart disease, there will most likely be a(n) A. decrease in the supply of red wine. B. increase in the demand for red wine. C. increase in the supply of red wine. D. increase in the quantity demanded of red wine. 8. You have noticed that there is an increase in the number of homeless people in your city and at the same time you observe that there are a number of vacant apartments. You believe that if landlords were required to rent their apartments for less than they are currently charging, the government could reduce the number of homeless people . This policy recommendation would be motivated by concerns over a. economic growth. b. stability. c. equity. d. profitability. 9. A change in the ________ of a good or service leads to a change in ________ that leads to a ________. a. price; quantity demanded; movement along the demand curve b. demand; quantity demanded; change in supply c. supply; demand; change in price d. quantity; supply; change in demand 10. If a society is producing at a point along its production possibility frontier, then the society a. is fully employing its resources so it must be allocatively efficient. b. is fully employing its resources, but not necessarily being allocatively efficient. c. is underallocating resources so it must be inefficient. d. is overallocating resources so efficiency is indeterminant. 11. Suppose an economy produces cell phones and GPS devices in perfectly competitive industries. The economy is currently operating at a point on its production possibility frontier. The economy will most likely move to a less-desirable point on the production possibility frontier if a. more firms enter the gps device industry. b. more firms enter the cell phone industry. c. more firms enter both the gps device industry and the cell phone industry. d. a single firm gains control over the production of cell phones. 12. In college you could barely afford to dine in restaurants. Now you earn $80,000 a year. and dine out at least three times per week. We can safely conclude that you consider restaurant meals to be a(n) a. inferior good. b. normal good. c. substitute good. d. complementary good. 13. An increase in demand for laptop computers would likely be caused by a. an increase in the price of laptop computers.

b. an increase in the price of a substitute good. c. an increase in the price of a complementary good. d. a decrease in the price of laptop computers. 14-15 Refer to the information provided in Figure 3.7 below to answer the following questions. Figure 3.7

14. Assume the market is initially at Point B and that pizza is a normal good. An increase in income would cause the market to move from Point B on demand curve D2 to a. Point A on demand curve D2. b. Point C on demand curve D2. c. demand curve D1. d. demand curve D3. 15. If pizza and burritos are substitutes, a decrease in the price of burritos will cause a movement from Point B on demand curve D2 to a. demand curve D3. b. demand curve D1. c. Point A on demand curve D2. d. Point C on demand curve D2.

PROBLEMS For Nos 1 and 2. Refer to the information provided in Table 3.1 below to answer the questions that follow.

1. Refer to Table 3.1. This market will be in equilibrium if the quantity of pizzas supplied per

month is a. 900. b. 750. c. 700. d. 800. 2. In Table 3.1, if the price per pizza is $6, there is a(n) a. Excess supply of 1,000 units. b. Excess demand of 300 units. c. Excess demand of 200 units. d. Excess supply of 700 units. For Nos. 3 and 4. Refer to the information provided in Figure 5.2 below to answer the questions that follow.

3. Refer to Figure 5.2. If the price of a hamburger is increased from $8 to $10, the price elasticity of demand equals ________. Use the midpoint formula. a. ‐0.33 b. ‐3.0 c. ‐30 d. ‐300 4. Refer to Figure 5.2. If the price of a hamburger is increased from $6 to $8, the price elasticity of demand equals ________. Use the midpoint formula. a. ‐0.24 b. ‐1.4 c. ‐1.0 d. ‐2.0 For Nos. 5 - 7. Refer to the information provided in Figure 5.3 below to answer the questions that follow.

5. Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger is increased from $8 to $10, the price elasticity of demand equals ________ and demand is ________ . a. 4.5; elastic b. ‐0.5; inelastic c. ‐4.5; elastic d. ‐9.0; inelastic 6. Refer to Figure 5.3. Use the midpoint formula. If the price of a gardenburger is increased from $6 to $8, the price elasticity of demand equals ________ and demand is ________ . a. -0.57; inelastic b. ‐1.9; inelastic c. ‐1.75; elastic d. ‐2.0; elastic 7. Refer to Figure 5.3. Using the midpoint formula, if the price of a gardenburger is decreased from $7 to $6, the price elasticity of demand equals ________ and the decrease results in a(n) ________ in total revenue. a. ‐.13; decrease b. ‐.69; increase c. ‐13; increase d. ‐1.44; increase 8. If the quantity demanded of tea increases by 2% when the price of coffee increases by 6%, the cross‐price elasticity of demand between tea and coffee is a. -3. b. 0.33. c. 3. d. 12. 9. If the quantity demanded of bagels decreases by 8% when the price of croissants decreases by 16%, the cross‐price elasticity of demand between bagels and croissants is A) ‐5. B) 0.5. C) ‐2. D) 2. 10. If the quantity demanded of peanut butter increases by 4% when the price of jelly decreases by 2%, the cross‐price elasticity of demand between peanut butter and jelly is A) -4.

B) ‐2. C) -0.5. D) 2. 11. An individual’s marginal propensity to save is 0.60. This means that if his savings changed by P720, his income should have changed by a. P432 b. P1,200 c. P1,800 d. P1,152 12. VD’s marginal propensity to consume is 0.70. This means that if his disposable income Increased by P10,000, his consumption should have increased by a. P14,285 b. P3,000 c. P7,000 d. P33,333 For Nos. 13-15. Refer to the information provided in Figure 6.8 below to answer the questions that follow.

13. The marginal utility of the first movie rental is A) 40. B) 25. C) 15. D) 0. 14. The marginal utility of the fourth movie rental is A) 28. B) 3. C) 0. D) 25. 15. The total utility of the third movie is ________ and its marginal utility is ________. A) 15; 0 B) 25; 10

C) 28; 3 D) 28; 0

Macroeconomics – ARANAS THEORIES 1. A prevailing view among many monetarist is that monetary policy should be conducted a. Through the adoption of a monetary rule that would increase the money supply at a constant annual rate. b. By Congress alone because its members are elected while the Board of Governors of the Bangko Sentral ng Pilipinas is appointed. c. At the discretion of the Board of Governors of the Bangko Sentral ng Pilipinas because it has sufficient knowledge to help stabilize the economy. d. In a way that keeps the money supply and the velocity of circulation approximately equal. 2. Assume an economy in which the marginal propensity to consume is 90%. Based on the multiplier effect, if there is an increase in government spending of P100, by what amount would equilibrium gross domestic product increase? a. P100 b. P1000 c. P90 d. P190 3. Assume an economy in which the marginal propensity to consume is 90%. Based on the tax multiplier, if there is an increase in taxes of P100, by what amount would equilibrium gross domestic product decrease? a. P100 b. P1000 c. P10 d. P900 4. The narrow definition of money supply, M1, consists only of a. Current and demand deposits b. Currency, demand deposits, and small time deposits c. Currency, demand deposits, other checkable deposits and traveler’s check d. Currency, demand deposits, small time deposits, and Market Mutual Fund balances. 5. All of the following are functions of the Federal Reserve System except a. Acting as a lender of last resort to the business community. b. Supplying the economy with proper money in the form of Federal Reserve notes. c. Accepting deposits and making loans to commercial banks. d. Providing for the collection of checks. 6. Which of the following instruments of monetary policy is the most important means by which the money supply is controlled. a. Changing the reserve ratio. b. Manipulation of government spending. c. Changing the discount rate.

d. Open-market operations. 7. In order for the BSP to increase the money supply, the appropriate policy would be to a. Encourage banks to increase their holdings of excess reserves b. Engage in open market purchases of government securities c. Increase the discount rate d. Raise margin requirements on stock market purchases 8. The BSP’s reserve ratio is a. The rate that the central bank charges for loans granted to commercial banks b. The ratio excess reserves to legal reserves that are deposited in the central bank c. The specified percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank d. The specified percentage of a commercial bank’s demand deposits to total liabilities 9. Given a deposit expansion model in which the required reserve ratio is 12.5%, a P100,000 purchase of government securities by the BSP will result in a maximum increase(decrease) in the money supply of a. P0 b. P12,500 c. P87,500 d. P800,000 10. If the BSP Monetary Board wanted to implement an expansionary policy, which one of the following actions would the Monetary Board take? a. Raise the reserve requirement and the discount rate b. Purchase additional Philippine government securities and lower the discount c. Reduce the reserve requirement and raise the discount rate d. Raise the discount rate and sell Philippine government securities 11. The discount rate of the BSP is a. The specified percentage of a commercial bank’s deposit liabilities that must be deposited in the central bank b. The rate that commercial banks charge for loans granted to the public c. The rate that the central bank charges for loans granted to commercial banks d. The ratio of excess reserve to legal reserves that are deposited in the central bank 12. The creation of deposit money by the Philippine commercial bank increases the a. Real wealth of the Philippines b. Real Philippine national income c. Philippine money supply d. Purchasing power of the Philippine peso 13. The discount rate set by the BSP is the a. Required percentage of reserves deposited in the central bank b. Rate that commercial banks charge for loans to each other

c. Rate that the central bank charges for loans to commercial banks d. Rate that the central bank charges for loans to the general public 14. Unemployment that is caused by a mismatch between the composition of the labor force in terms of skills, occupation, industries, or geographic location and the makeup of the demand for labor is called a. Real wage unemployment b. Deficient-demand unemployment c. Frictional unemployment d. Structural unemployment 15. The rate of unemployment caused by changes in the composition of employment opportunities over time is referred to as a. Frictional unemployment rate b. Cyclical unemployment rate c. Structural unemployment d. Full unemployment rate 16. A nation’s unemployment rate increased from 5% to 6%. The economic cost of this increase in unemployment can be described as the amount by which a. Actual gross domestic product falls short of potential gross domestic product b. Aggregate expenditures fall short of the full-employment level of net domestic product c. Aggregate spending exceeds the full-employment level of net domestic product d. Merchandise imports exceeds exports 17. The most effective fiscal policy program to help reduce demand-pull inflation would be to a. Decrease the rate of growth of the money supply b. Increase both taxes and government spending c. Increase taxes and decrease government spending d. Decrease taxes and increase government spending 18. The formula for calculating a price index for the year 2007, using the year 1990 as a reference period, is Price of 1990 market basket ∈2007 x 100 a. Priceof 1990 market basket ∈1990 Price of 2007 market basket ∈2007 x 100 b. Price of 1990 market basket ∈1990 Price of 2007 market basket ∈2007 x 100 c. Priceof 2007 market basket ∈1990 Priceof 1990 market basket ∈1990 x 100 d. Price of 1990 market basket ∈2007

19. If nominal income increases the price level, real income will List A List B

a. Slower than b. Faster than c. At the same rate as d. At the same rate as

Rise Rise Full Rise

20. A period or rising inflation a. Increases the price level, which is negatively related to the purchasing power of money b. Increases the price level, which benefits those who are entitled to receive specific amounts of money c. Will not be affected by contracts that include the indexing of payments d. Enhance the positive relationship between the price level and the purchasing power of money 21. Two examples of direct taxes are a. Taxes on business and rental property and personal income taxes b. Sales taxes and Social Security taxes paid by employees c. Sales taxes and excise taxes d. Social Security taxes paid by employees and personal income taxes 22. Which of the following is not an advantage of the value-added tax? a. It provides an incentive for cost control b. It provides an incentive for saving c. It is simple to calculate and enforce d. It is benefit to new businesses 23. Government spending is known to affect the economy. The crowding out effect refers to the impact of an expansionary fiscal policy on List A List B a. Positive The money multiplier b. Positive Investment c. Negative Investment d. Negative The money multiplier 24. Government borrowing to finance large deficits increases the demand for lendable funds and a. Increases the supply of lendable funds b. Exerts downward pressure on interest rates c. Has no impact on interest rates d. Puts upward pressure on interest rates 25. Government transfer payments a. Increase aggregate demand for private sector goods and services b. Reallocate the consumption of goods and services in the public sector c. Decrease aggregate demand for private sector goods and services d. Reallocate the consumption of goods and services in the private sector 26. A societal advantage of the national government’s levying emission charges on manufacturers in order to control pollution is that such charges would

a. Become a cost of production and cause a firm to consider the cost of pollution b. Help equalize and even out the use of the environment, while encouraging industrial dispersion c. Set national standards that all firms would have to follow d. Discourage firms from moving to areas where local emission standards are lower 27. The Laffer Curve predicts that a. If tax rates are too high and they are lowered, tax revenues will decrease b. If tax rates are too low and they are lowered, tax revenues will increase c. If tax rates are too high and they are raised, tax revenues will decrease d. The equilibrium rate will be 59% 28. Assume that, for a particular economy, income tax revenues are P100 billion when marginal tax rates are 60%. According to the Laffer Curve, what will income tax revenues are if the marginal tax rate is cut to 55%? a. P105 billion b. P95 billion c. P84.85 billion d. Cannot determine from information given 29. A banking system with a reserve ratio of 20% and a change in reserves of P1,000,000 can increase its total demand deposits by a. P5,000,000 b. P1,000,000 c. P800,000 d. P200,000 30. The money supply in a nation’s economy will decrease following a. Open-market purchases by the nation’s central bank b. A decrease in the discount rate c. An increase in the reserve ratio d. A decrease in the margin requirement Macroeconomics – REYES THEORIES 1. One of the following below would not be included in the calculation of the gross domestic product (GDP) under the income approach a. A doctor’s fee b. An automotive worker’s wage c. Purchase of common stock d. Purchase of a new home 2. As measured under the income approach, gross domestic product (GDP) equals: a. Wages + Rents + Interest + Profits b. Depreciation charge and indirect business taxes + Wages + Rents + Interest + Profits – Net Philippine Income earned abroad

c. Depreciation charges and indirect business taxes + Wages + Rents – Interest + Profits d. Wages + Rents + Interest – Profits + Net Philippine Income earned abroad 3. A surplus of capital goods in an economy exceeding the capital consumption allowance means the economy has experienced a. Positive net investment b. Equilibrium investment c. Positive gross investment d. Negative net investment 4. When gross investment depreciation, the capital stock of the economy is List A List B a. Exceeds Shrinking b. Equals Shrinking c. Equals Growing d. Is less than Shrinking 5. In National Income terms, aggregate demand is the a. Demand that is needed if a country’s economy is to operate at optimum level and the level of investment is to be raised b. Total expenditure on consumer goods and investment, including government and foreign expenditure during a given period c. Demand for money by the community in a period of full employment d. Total expenditure on capital goods by entrepreneurs during a period of full employment 6. A given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a(n) a. Decrease in aggregate demand b. Increase in aggregate supply c. Increase in aggregate demand d. Decrease in aggregate supply 7. A trough of a business cycle is generally characterized by a. Unused productive capacity and an unwillingness to risk new investments b. Rising productive capacity but an unwillingness to risk new investments c. Shortage of raw materials and rising costs d. Increasing purchasing power and increasing capital investments 8. During the recessionary phase of a business cycle a. The purchasing power of money is likely to decline rapidly b. Actual national income will exceed potential national income c. The natural rate of unemployment will increase dramatically d. Potential national income will exceed actual national income 9. Which of the following may provide a leading indicator of a future increase in domestic product? a. A reduction in the money supply

b. A decrease in the issuance of building permits c. An increase in the timeliness of delivery by vendors d. An increase in the average hours worked per week of production workers 10. The Keynesian analysis of monetary and fiscal policy a. Assumes the economy is stable and self-regulating b. Assumes that velocity is stable c. Focuses on the aggregate d. Places primary emphasis on monetary policy 11. Economists and economic policy makers are interested in the multiplier effect because the multiplier explains why a. The velocity of money is less than 1 b. Consumption is always a multiple of savings c. The money supply increases when deposits in the banking system increase d. A small change in investment can have a much larger impact on gross domestic product 12. The national government budget deficit is the a. Excess of national and local spending over their revenues b. Total accumulation of the government’s surpluses and deficits c. Amount by which the national government’s expenditures exceed its revenues in a given year d. Amount by which liabilities exceed assets on the national government’s balance sheet 13. When economists are concerned about the liquidity preference function, they are interested in a. The preference for a currency of gold b. A bank’s desire for accounts receivable as collateral c. The proportion of liquid (cash) reserves maintained by commercial banks d. The relationship of the demand for money and the rate of interest 14. If a government were to use only fiscal policy to stimulate the economy from a recession, it would a. Raise consumer taxes and increase government spending b. Lower consumer taxes and increase government spending c. Increase the money supply and increase government spending d. Lower money taxes and government spending 15. The movement of migrant workers from a poor country to a rich causes which one of the following effects on the receiving country a. Average wage levels will increase b. Business incomes will decrease c. GDP will increase d. Labor force will increase 16. A country’s currency foreign exchange rate is least likely affected by that country’s

a. Tax rate b. Interest rate c. Inflation rate d. Political stability 17. The rate of unemployment caused by contractions of the economy is referred to as a. Full-employment unemployment rate b. Frictional unemployment rate c. Cyclical unemployment rate d. Structural unemployment rate 18. Exchange rates are determined by a. The United Nations (UN) b. The International Monetary Fund (IMF) c. The Central Banks Monetary Board d. Supply and Demand in the foreign currency market 19. The difference between real and nominal interest rate is called a. Credit risk b. Market risk c. Inflation Premium d. Default Premium 20. A country that imports more than it exports a. Has negative net exports b. Has negative net imports c. Experiences an income boom d. Suffers from inflation 21. The rate that the central bank charges for loans to commercial banks is called a. Reserve requirement b. Compensating balance requirement c. Discount rate d. Inflation rate 22. Which of the following is the most restrictive barrier to exporting to a country? a. Tarrifs b. Value added tax c. Quotas d. Embargoes 23. Which of the following is not an instrument of monetary policy by which the money supply is controlled? a. Changing the discount rate b. Changing the reserve ratio c. Manipulation of government spending

d. Open-market operations PROBLEMS 1.Assume that real gross domestic product (GDP) measured in 2006 pesos, rose from Php 3,000 billion in 2006 to Php 4,500 billion in 2008. Assume also that the price index rose from 100 X 200 during the same period. The GDP for 2006 expressed in terms of 2008 prices is a. Php 1,500 billion b. Php 3,000 billion c. Php 4,500 billion d. Php 6,000 billion 2. Given the following data, what is the marginal propensity to consume? Level of Disposable Income Level of Consumption Php 40,000 Php 38,000 Php 48,000 Php 44,000 a. 1.33 b. 1.26 c. 0.95 d. 0.75 3. A consumer has the following consumption patterns at different income levels Level of Income Consumption Php 250 Php 130 Php 300 Php 160 Php 350 Php 190 At an income level of Php 300, the consumer has the marginal propensity to consume of and an average propensity to save of List A List B a. 0.60 0.47 b. 0.60 0.53 c. 0.40 0.47 d. 0.40 0.53 4. If an increase in government purchases of goods and services of Php 20 billion causes equilibrium GDP to rise by 80 billion and if total taxes and investment are constant then the marginal propensity to consume out of disposable income is a. 0.75 b. 0.25 c. 1.25 d. 4.00 5. If personal consumption expenditures increase from Php 720 billion to Php 760 billion and disposable income increases from Php 900 billion to Php 950 billion, the marginal propensity to consume equals a. 0.60

b. 0.80 c. 0.40 d. 0.20 6. What is the marginal propensity to save when personal consumption expenditures increase from Php 720 billion to Php 760 billion and disposable income increases from Php 900 billion to Php 950 billion a. 0.60 b. 0.80 c. 0.40 d. 0.20 7. An increase in government purchases of goods and services of Php 30 billion causes equilibrium GDP to rise by Php 120 billion, and if total taxes, investment, consumption, and net exports are constant, the marginal propensity to save is a. 4.00 b. 0.25 c. 1.33 d. 0.75 Relevant Costing – SANCHEZ THEORIES 1. The term relevant cost applies to all of the following decision situations except the a. Acceptance of special product order. b. Manufacture or purchase of a component part. c. Determination of product price. d. Replacement of equipment. 2. The relevance of a particular cost to a decision is determined by the a. Size of the cost. b. Riskiness of the decision. c. Potential effect(s) on the decision. d. Accuracy and verifiability of the cost. 3. Relevant or differential cost analysis a. Takes all variable and fixed cost into account to analyze decision alternatives. b. Considers only variable cost as they change with each decision alternative. c. Considers the change in reported profit for each alternative to arrive at the optimum decision for the company. d. Considers all variable and fixed cost as they change with each decision alternative. 4. Which one of the following is most relevant to a manufacturing equipment-replacement decision? a. Original cost of the old equipment. b. Gain or loss on the disposal of the old equipment. c. A lump-sum write-off amount from the disposal of the old equipment.

d. Disposal price of the old equipment. 5. Total unit costs are a. Relevant for cost-volume-profit analysis. b. Needed for determining product contribution. c. Independent of the cost system used to generate them. d. Irrelevant in marginal analysis. 6. In a manufacturing environment, the best short-term profit-maximizing approach is to a. Maximize unit gross profit times the number of units sold. b. Maximize contribution per unit times the number of units sold. c. Minimize fixed overhead cost per unit produced at full capacity. d. Minimize variable costs per unit times the number of units produced. 7. Among the costs relevant to a make-or-buy decision, include variable manufacturing costs as well as a. Unavoidable costs. b. Plant depreciation. c. Real estate taxes. d. Avoidable fixed cost. 8. In determining whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run decision is a. Direct labor. b. Fixed overhead that will continue even if the part is bought from an outside vendor. c. Fixed overhead that will be avoided if the part is bought from an outside vendor. d. Variable overhead. 9. What is the opportunity cost of making a component part in factory given no alternative use of the capacity? a. The total manufacturing cost of the equipment b. The variable manufacturing cost of the equipment c. The fixed manufacturing cost of the equipment d. Zero 10. Cost relevant to an insourcing vs. outsourcing decision include variable manufacturing costs as well as a. Factory management costs. b. Factory depreciation. c. Property taxes. d. Avoidable fixed costs. 11. A company's approach to an insourcing vs. outsourcing decision a. Involves an analysis of avoidable costs. b. Depends on whether the company is operating at or below normal volume. c. Should use absorption (full) costing.

d. Should use activity-based costing. 12. Idle capacity in the interim (normally temporary) will generate short-term benefit in accepting sales at price that a. Positively motivate employees. b. Increase total fixed costs. c. Reduce the overall operating income to sales ratio. d. Result in less than normal contribution margin. 13. In considering a special order situation that will enable a company to make use of presently idle capacity, which of the following costs would be irrelevant? a. Variable overhead b. Depreciation c. Materials d. Direct labor 14. When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that a. Manufacturing fixed and variable costs are linear. b. Selling and administrative fixed and variable costs are linear. c. Acceptance of the order will not cause unit selling and administrative variable costs to increase. d. Acceptance of the order will not affect regular sales. 15. Which of the following cost allocation methods is used to determine the lowest price that can be quoted for special order that will use idle capacity within a production area? a. Job order b. Process c. Standard d. Variable PROBLEMS 1. Great Electronics is operating at 70% capacity. The plant manager is considering making component 501 now being purchased for P110 each, a price that is projected to increase in the near future. The plant has the equipment and labor force required to manufacture the component. The design engineer estimates that each component requires P40 of direct materials and P30 of direct labor. The plant overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost. A decision to manufacture component 501 will result in a gain or (loss) for each component of a. P28 b. P16 c. P(20) d. P4

2. Syanton manufactures a particular computer component. Manufacturing costs per unit are as follows: Direct Materials = P 50, Direct Labor = P 500, Variable Overhead = P 250, and Fixed Overhead = P 400. TOTAL COST PER UNIT = P 1,200. Fredix, Inc. has contacted Syanton with an offer to sell 10,000 of the component for P 1,100 per unit. If Syanton accepts the proposal, P 2,500,000 of the fixed overhead will be eliminated. Should Syanton make or buy the component and why? a. Buy due to savings of P 1,000,000. b. Make due to savings of P 3,000,000. c. Buy due to savings of P 2,500,000. d. Make due to savings of P 500,000. 3. Union Co. manufactures plugs used in its electrical gadgets at a cost of P108 per unit that includes P24 of fixed overhead. It needs 30,000 of these plugs yearly, and Divisive Corp. offers to sell these items to Union at P99 per unit. If Union decides to purchase the plugs, P 180,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs. If Union purchases the plugs but does not rent the unused facility, the company would a. Save P 6.00 per unit. b. Lose P 18.00 per unit. c. Save P 9.00 per unit. d. Lose P 9.00 per unit. 4. Picnic Items, Inc. manufactures coolers of 10,000 units that contain a freezable ice bag. For an annual volume of 10,000 units, fixed manufacturing costs of P 500,000 are incurred. Variable Costs per unit amount are: Direct Materials = P 80, Direct Labor = P 15, and Variable Overhead = P 20. Bags Corp. offered to supply the assembled ice bag for P40 with a minimum order of 5,000 units. If Picnic accepts the offer, it will be able to reduce variable labor and overhead for 50%. The direct materials for the freezable bag will cost Picnic P20 if it will produce it. Considering Bags Corp. offer, Picnic should a. Buy the freezable ice bag due to P 50,000 advantage. b. Produce the freezable ice bag due to P 225,000 advantage. c. Produce the freezable ice bag due to P 25,000 advantage. d. Buy the freezable ice bag due to P 150,000 advantage. 5. Part BX is a component that Motors & Engines Co. uses in the assembly of motors. The cost to produce one BX is presented below: Direct Materials P 4,000 Materials handling (20% of Direct materials ) P 800 Direct Labor P 32,000 Overhead (150% of Direct Labor) P 48,000 Total Manufacturing Costs P 84,800 Materials handling which is not included in manufacturing overhead, represent the direct variable costs of the receiving department that are applied to direct materials and purchased

components on the basis of their cost. The company’s annual overhead budget is one-third variable and two-thirds fixed. Precasts Co. offers to supple BX at a unit price of P 60,000. Should the company buy or manufacture BX? a. Buy, due to advantage of P 24,800 per unit. b. Manufacture, due to advantage of P 7,200. c. Buy, due to advantage of P 12,800 per unit. d. Manufacture, due to advantage of P 19,200 per unit. 6. Tagaytay Open-air flea market is along the highway leading to Taal Vista Lodge. Arnel has a stall which specializes in hand-crafted fruit baskets that sells for P60 each. Daily fixed costs are P15,000 and variable costs are P30 per basket. An average of 750 baskets is sold each day. Arnel has a capacity of 800 baskets per day. By closing time yesterday, a bus load of teachers who attended a seminar at the Development Academy of the Philippines stopped by Arnel’s stall. Collectively, they offered Arnel P 1,500 for 40 baskets. Arnel should have a. Rejected the offer since he could have lost P500. b. Rejected the offer since he could have lost P900. c. Accepted the offer since he could have P700 contribution margin. d. Accepted the offer since he could have P300 contribution margin. 7. Ax Co. has considerable excess manufacturing capacity. A special job order’s cost sheet include the following applied manufacturing overhead costs: Fixed Costs P 21,000 Variable CostsP 33,000 The fixed costs include a normal P3,700 allocation for in-house design costs, although no inhouse design will be done. Instead the job will require the use of external designers costing P 7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job? a. P 36,700 b. P 40,750 c. P 54,000 d. P 58,050 8. Jay Company budgeted sales of 400,000 plastic guns at P40 per unit for 2012. Variable manufacturing costs were budgeted at P16 per unit, and fixed manufacturing costs at P10 per unit. A special order offering to buy 40,000 plastic guns for P23 each was received by Jay in March 2012. Jay has sufficient plant capacity to manufacture the additional quantity; however, the production would have to be done on an overtime basis at an estimated additional cost of P3 per plastic guns. Acceptance of the special order would not affect Jay’s normal sales and no selling expenses would be incurred. What would be the effect on operating profit if the special order were accepted? a. P 240,000 decrease b. P 120,000 decrease c. P 160,000 increase d. P 280,000 increase

9. W Division of Decision Experts Corporation is being evaluated for elimination. It has contribution margin of P 400,000. It receives an allocated overhead of P1 million, 10% of which cannot be eliminated. The elimination of W Division would affect pre-tax income by a. P 500,000 decrease b. P 400,000 increase c. P 400,000 decrease d. P 500,000 increase 10. Nor Milling Co. has a plant capacity of 40,000 units per month. Unit costs at capacity are: Direct Materials P 100 Direct Labor 150 Variable Overhead 75 Fixed overhead 75 Marketing Fixed Costs 175 Marketing Variable Costs 90 Present monthly sales are 39,000 units at P630 each. Josh Corporation contacted Nor about purchasing 40,000 units at P600 each. The present sales would not be affected by the special order. Nor should: a. Accept the special order due to P 215,000 incremental income. b. Accept the special order due to P 110,000 incremental income. c. Accept the special order due to P 185,000 incremental income. d. Accept the special order due to P 10,000 incremental income. 11. Chow foods operate a cafeteria for its employees. The operations of the cafeteria require fixed costs of P 470,000 per month and variable costs of 40% of sales. Cafeteria sales are currently averaging P 1,200,000 per month. The company has the opportunity to replace the cafeteria with vending machines. Gross customer spending at the vending machine is estimated to be 40% greater than the current sales because the machine is available all hours. By replacing the cafeteria with vending machines, the company would receive 16% of the gross customer spending and avoid all cafeteria costs. A decision to replace the cafeteria with vending machines will result in a monthly increase/(decrease) in operating income of a. P 182,000 b. P 258,800 c. P (588,000) d. P 18,800 12. X Co. has a limited number of machine hours that it can use for manufacturing two products, A and B. Each product has a selling price of P160 per unit but product A has 40% contribution margin and product B has a 70% contribution margin. One unit of B takes twice as many machine hours to make as a unit of A. Assume either product can be sold in whatever quantity is produced. Which product or products should the limited number of machine hours be used for? a. A b. Both A and B c. Either A and B d. B

13. MB Inc. has excess production capacity. At times, it buys the same product from third party. Below are pertinent information: Selling Price per unit P 70.00 Fixed Cost per unit* P 20.00 Variable Cost per unit P 35.00 *at present utilized capacity The most it should pay for buying this product it currently makes would be the a. Selling price of P 70. b. Total variable cost of producing the product of P35.00 per unit. c. Total variable cost per unit of P35.00 plus the reduced fixed cost per unit after accounting for the effects of the added volume. d. Total cost of production or P 55.00 per unit. 14. Gata Company plans to discontinue a department with P48, 000 contribution to overhead, and allocated overhead of P 96,000, of which 42,000 cannot be eliminated. What would be the effect of this discontinuance on Gata’s pretax profit? a. Increase of P 48, 000 b. Decrease of P 48, 000 c. Decrease of P 6,000 d. Increase of P 6,000 15. A Product has a contribution margin of P80 per unit, a contribution margin ratio of 50% and requires 4 machine hours to produce. B Product has a contribution margin of P 120 per unit, a contribution margin ratio of 40% and requires 5 machine hours to produce. If the company has limited machine hours available, then it should produce and sell a. B Product since it has the higher contribution margin per unit. b. A Product since it requires fewer machine hours per unit than does B Product. c. B Product since it has the higher contribution margin per machine hour. d. A Product since it has the higher contribution margin per machine hour Relevant Costing – CARREON THEORIES 1. In the development of accounting data for decision-making, relevant costs are a. Historical costs which are the best available basis for estimating future costs. b. Future costs which will differ under each alternative course of action. c. Budgetary costs authorized for the administrative year. d. Standard costs developed by time and motion experts. 2. When only differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that a. Manufacturing fixed and variable costs are linear. b. Selling and administrative fixed and variable costs are linear. c. Acceptance of the order will not cause unit selling and administrative variable costs to increase. d. Acceptance of the order will not affect regular sales.

3. There is a market for both product X and product Y. Which of the following costs and revenues would be most relevant in deciding whether to sell product X or process it further to make product Y? a. Total cost of making X and the revenue from sale of X and Y. b. Total cost of making Y and the revenue from sale of Y. c. Additional cost of making X, given the cost of making Y, and additional revenue from Y. d. Additional cost of making Y, given the cost of making X, and additional revenue from Y. 4. A fixed cost is relevant if it is a. Avoidable. b. A future cost. c. Sunk. d. A product cost. 5. Management accountants are concerned with incremental unit costs. These costs are similar to the following except a. The economic marginal cost. b. The variable cost c. The cost to produce an additional unit. d. The manufacturing unit cost. 6. The type of cost vital to decision making but not recorded in the accounting records a. Sunk costs b. Direct costs c. Opportunity costs d. Out of pocket costs 7. The Mark X Corp. contemplates the temporary shutdown of its plant facilities in a provincial area which is economically depressed due to natural disasters. Below are certain manufacturing and selling expenses. 1. Depreciation 2. Property tax 3. Interest expense 4. Insurance of facilities 5. Sales commissions 6. Delivery expenses 7. Security of premises Which of the following expenses will continue during the shutdown period? a. All expenses in the list. b. Items 1,2 and 3 only. c. All except 5 and 6. d. Items 1,2,3,4,6 and 7 only. 8. In analyzing whether to build another regional service office, the salary of the Chief Executive

Officer (CEO) at the corporate headquarters is a. Relevant because salaries are always relevant. b. Irrelevant because it is future cost that will not differ between the alternatives under consideration. c. Relevant because this will probably change if the regional service office is build. d. Irrelevant since another imputed costs for the same will be considered. 9. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of each product. Production capacity is unlimited. The company should produce the product (or products) that has (have) the highest a. Contribution margin per hour of machine time. b. Gross margin per unit. c. Sales price per unit. d. Contribution margin per unit. 10. When there is one scarce resource, the product that should be produced first is the product with a. The highest contribution margin per unit b. The highest sales price per unit of scarce resource c. The highest demand d. The highest contribution margin per unit of the scarce resource 11. Fixed costs are ignored in allocating scarce resources because a. They are sunk. b. There are no fixed costs associated with scarce resources. c. Fixed costs only apply to long-run decisions. d. They are unaffected by the allocation of scarce resources 12. The product should be dropped if a. It has negative incremental profit. b. It has a negative contribution margin. c. Dropping it will increase the total profit of the company. d. It is not essential to the company’s product line. 13. In a make or buy decision, the opportunity cost of capacity could a. Be considered to decrease the cost of units manufactured by the company. b. Be considered to decrease the price of units purchased from suppliers. c. Be considered to increase the price of units purchased from suppliers. d. Not be considered since opportunity costs are not part of the accounting records. 14. Which of the following activities within an organization would be least likely to be outsourced? a. Accounting b. Transportation

c. Data processing d. Product design 15. Which of the following costs are relevant to a make-or-buy decision? a. Original cost of the production equipment b. Annual depreciation of the equipment c. The cost of direct materials purchased last month and used to manufacture the component d. The amount that would be received if the production equipment were sold. PROBLEMS 1. A proprietor who just inherited a building is considering using it in a new business venture. Projections for the business are: revenue of $100,000, fixed cost of $30,000, and variable cost of $50,000. If the business is not started, the owner will work for a company for a wage of $23,000. Also, there have been two offers to rent the building, one for $1,000 per month and one for $1,200 per month. What are the expected annual net economic profits (losses) to the owner if the new business is started? a. $(17,400) b. $20,000 c. $(3,000) d. $(15,000) 2. Bol Co. estimates that 60,000 special zipper will be used in the manufacture of industrial bags during the next year. Sure Zipper Co. has quoted a price of P6 per zipper. Bol would prefer to purchase 5,000 units per month but Sure is unable to guarantee this delivery schedule. In order to ensure the availability of these zippers, Bol is considering the purchase of all 60,000 units at the beginning of the year. Assuming that Bol can invest cash at 12%, the company’s opportunity cost of purchasing the 60,000 units are the beginning of the year is a. P21,600 b. P43,200 c. P19,800 d. P39,600 3.Chow Inc. has its own cafeteria with the following annual costs Food P400,000 Labor P300,000 Overhead P440,000 Capital P1,140,000 The overhead is 40% fixed. Of the fixed overhead, P100,000 is the salary of the cafeteria supervisor. The remainder of the fixed overhead has been allocated from total company overhead. Assuming the cafeteria supervisor will remain and that Chow will continue to pay said salary, the maximum cost Chow will be willing to pay an outsider firm to service the cafeteria is a.P1,140,000 b.P1,040,000 c.P700,000 d.P964,000 4. Savage Industries is a multi-product company that currently manufactures 30,000 units of Part QS42 each month for use in production. The facilities now being used to produce Part QS42 have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40% of

their present amount. The variable production costs of Part QS42 are P11 per unit. If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase price of P12.875, the monthly usage at which it will be indifferent between purchasing and making Part QS42 is a. 30,000 units b. 32,000 units c. 80,000 d. 48,000 5. Panghulo Company manufactures part H for use in its production cycle. The cost per unit for 3,000 units of Part N are Direct labor P50 Fixed overhead P30 Direct material P10 Variable overhead P20 Quebadia Company has offered to sell Panghulo 3,000 units of part H for P100 per unit. If Panghulo accepts Quebada’s offer, the released facilities could be used to save P70,000 in relevant costs in its manufacture of Part I. In addition, P15 per unit of fixed overhead applied to Part H would be totally eliminated. The alternative that is more desirable and the corresponding net cost savings is Alternative Net cost savings a. Manufacture P10,000 b. Manufacture P20,000 c. Buy P55,000 d. Buy P85,000 6. T Company currently sells 1,000 units of product M for $1 each. Variable costs are $0.40 and avoidable fixed costs are $400. A discount store has offered $0.80 per unit for 400 units of product M. The managers believe that if they accept the special order, they will lose some sales at the regular price. Determine the number of units they could lose before the order become unprofitable. a. 267 units. b. 500 units. c. 600 units. d. 750 units. 7. The Blue Plate Co. is operating at 50% capacity producing 100,000 units of ceramic plates a year. With the economic boom that the country is expected to have in the coming year, the company plans to utilize 75% capacity. Part of the manufacturing process is hand-painting which has a variable cost of material at P4.50 and labor at P5.50 per plate. This painting process has variable overhead at P1.00 which is 40% of total variable factory overhead. Total factory overhead is P500 per 100 plates. No increase in fixed factory overhead is expected even with the substantial increase in production. An offer to sub-contract the incremental hand-painting job was given at P10.50 per plate but the company will have to lease an equipment at P10,000 annual rental. The plates sell for P50.00 per plate a piece at the contribution margin rate of 45%. Should Blue Plate Company sub-contract? Why? a. No, because the company will lose P135,000. b. Yes, because the company will save P65,000. c. Yes, because the company will earn P15,000 more. d. No, because there is no benefit for the company. 8. Pi Co. produces Component 6417 for use in one of its electronic gadgets. Normal annual production for the item is 100,000 units. The cost per unit lot of the part are as follows: Direct material P520

Direct labor 200 Manufacturing overhead Variable 240 Fixed 320 Total manufacturing costs per 100 units P1,280 Bobbie Inc. has offered to sell Pi all 100,000 units it will need during the coming year for P1,200 per 100 units. If Pi accepts the offer from Bobbie, the facilities used to manufacture Component 6417 could be used in the production of Component 8275. This change would save Pi P180,000 in relevant costs. In addition, a P200,000 cost item included in fixed overhead is specifically related to Part 6417 and would be eliminated. Pi should a. Buy Component 6417 because of P300,000 savings. b. Buy Component 6417 because of P140,000 savings. c. Continue producing Component 6417 because of P40,000 savings. d. Continue producing Component 6417 because of P60,000 savings. 9. ABC Company receives a one-time special order for 5,000 units of Kleen. Acceptance of this order will not affect the regular sales of 80,000 units. The cost to manufacture one unit of this particular product is: Variable costs (per unit) Fixed costs (per year) Direct materials $1.50 Direct labor 2.50 Overhead 0.80 $100,000 Selling and administrative 3.00 50,000 Variable selling costs for each of these 5,000 units will be $1.00. What is the differential cost to ABC Company of accepting this special order? a.$39,000 b.$34,000 c.$29,000 d.$30,250 10. PQR Company expects to incur the following costs at the planned production level of 10,000 units: Direct materials P100,000 Direct labor 120,000 Variable overhead 60,000 Fixed overhead 30,000 The selling price is P50 per unit. The company currently operates at full capacity of 10,000 units. Capacity can be increased to 13,000 units by operating overtime. Variable costs increase by P14 per unit for overtime production. Fixed overhead costs remain unchanged when overtime operations occur. PQR Company has received a special order from a wholesaler who has offered to buy 2,000 units at P45 each. What is the incremental cost associated with this special order? a.P62,000 b.P31,000 c.P84,000 d.P42,000 11. Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating cost of P1,850,000 (all cash items except depreciation of P350,000). The company is considering the purchase of a new machine costing P1,200,000 per year. The new machine would increase (1) revenues to P2,900,000; (2) operating cost to P2,050,000; and (3) depreciation to P500,000 per year. Assuming a 35% income tax rate, Arlene’s annual incremental after-tax cash flows from the machine would be a.P330,000

b.P300,000 c.P292,500 d.P345,000 12. Julius International produces weekly 15,000 units of Product JI and 30,000 units of JII for which P800,000 common variable costs are incurred. These two products can be sold as is or processed further. Further processing of either product does not delay the production of subsequent batches of the joint products. Below are some information: JI JII Unit selling price without further processing P24 P18 Unit selling price with further processing P30 P22 Total separate weekly variable costs of further processing P100,000 P90,000 To maximize Julius’ manufacturing contribution margin, the total separate variable costs of further processing that should be incurred each week are a.P95,000 b.P190,000 c.P100,000 d.P90,000 13. A manufacturing company's primary goals include product quality and customer satisfaction. The company sells a product, for which the market demand is strong, for $50 per unit. Due to the capacity constraints in the Production Department, only 300,000 units can be produced per year. The current defective rate is 12% (i.e., of the 300,000 units produced, only 264,000 units are sold and 36,000 units are scrapped). There is no revenue recovery when defective units are scrapped. The full manufacturing cost of a unit is $29.50, including Direct materials $17.50 Direct labor 4.00 Fixed manufacturing overhead 8.00 The company's designers have estimated that the defective rate can be reduced to 2% by using a different direct material. However, this will increase the direct materials cost by $2.50 per unit to $20 per unit. The net benefit of using the new material to manufacture the product will be a.$750,000 b. $(120,000) c.$120,000 d.$1,425,000 14. The Table Top Model Corp. produces three products. “Tic,” “Tac.”, and “Toc.” The owner desires to reduce production load to only one product line due to prolonged absence of the production manager. Depreciation expense amounts to P600,000 annually. Other fixed operating expenses amount to P660,000 per year. The sales and variable cost data of the three products are (000’s omitted) Tic Tac Toc Sales P6,600 P5,300 P10,800 Variable costs 3,900 1,700 8,900 Which product must be retained and what is the opportunity cost of selecting such product line? a. Retain product “Tic”; opportunity cost is P4.04 million. b.Retain product “Tac”; opportunity cost is P3.14 million. c.Retain product “Tac”; opportunity cost is P4.6 million. d.Retain product “Toc”; opportunity cost is P4.84 million.

15. A company produces and sells three products:

Sales Separable (product) fixed costs Allocated fixed costs Variable costs

C $200,000 60,000 35,000 95,000

Products J $150,000 35,000 40,000 75,000

P $125,000 40,000 25,000 50,000

The company lost its lease and must move to a smaller facility. As a result, total allocated fixed costs will be reduced by 40%. However, one of its products must be discontinued in order for the company to fit in the new facility. Because the company's objective is to maximize profits, what is its expected net profit after the appropriate product has been discontinued? a.$25,000 b.$15,000 c.$20,000 d.$10,000

Responsibility Accounting and Balance Score Card – SANTOS THEORIES 1. Why would a company decentralize? a. To allow division managers to concentrate on strategic planning. b. To focus top management’s attention to operating decisions. c. To train and motivate division managers. d. All of the above. 2. Advantages of decentralization include all of the following except a. Divisional management is able to react to changing market conditions more rapidly than top management. b. Divisional management is a source of personnel for promotion to top management positions. c. Decentralization can motivate divisional managers. d. Decentralization permits divisional management to concentrate on company-wide problems and long-range planning. 3. In a company with a decentralized approach to responsibility accounting, lower-level managers typically a. Make key decisions only. b. Both make and implement key decisions. c. Implement key decisions only. d. Review the outcomes of key decisions only. 4. Consistency between goals of the firm and the goals of its employees is: a. Goal optimization b. Goal conformance c. Goal compensation d. Goal congruence

5. Goal congruence is most likely to result when a. Reports to managers include all costs. b. Managers’ behavior is affected by the criteria used to judge their performance. c. A manager knows the criteria used to judge his or her performance. d. Performance evaluation criteria encourage behavior in the company’s best interests as well as in the manager’s best interests. 6. A management decision may be beneficial for a given profit center, but not for the entire company. From the overall company viewpoint, this decision would lead to a. Suboptimization b. Goal congruence c. Centralization d. Maximization 7. An emphasis on obtaining goal congruence is consistent with a broad managerial approach called a. Management by crisis b. Management by objectives c. Management through goal congruence d. Just-in-time philosophy 8. Responsibility accounting is a system whose attributes include a. Responsibility, liability, and culpability b. Liability, accountability, and performance evaluation c. Culpability, liability, and accountability d. Performance evaluation, accountability, and responsibility 9. Some basic elements of responsibility accounting are a. Chart of accounts classification b. Budgeting system c. Control-based reports d. All of the above 10. The best measure of the performance of the manager of a profit center is the a. Rate of return on investment. b. Success in meeting budgeted goals for controllable costs. c. Amount of controllable margin generated by the profit center. d. Amount of contribution margin generated by the profit center. 11. In responsibility accounting the most relevant classification of costs is a. Fixed and variable b. Controllable and noncontrollable c. Discretionary and committed d. Incremental and nonincremental

12. Of most relevance in deciding how or which costs should be assigned to a responsibility center is the degree of a. Avoidability b. Controllability c. Causality d. Variability 13. In the formula for roi, idle plant assets are a. Included in the calculation of controllable margin. b. Excluded in the calculation of operating assets. c. Included in the calculation of operating assets. d. Excluded from total assets. 14. How can an investment center improve its return on investment (roi)? a. Increase margin, increase investments b. Decrease margin, decrease turnover c. Increase margin, increase turnover d. Decrease margin, increase investments 15. The other things remaining constant, if a division doubles its investment turnover, its roi will a. Decrease b. Increase c. Double d. Remain constant PROBLEMS 1. The following information pertains to SHARAPOVA corporation: Beginning inventory Ending inventory Direct labor per unit Direct materials per unit Variable overhead per unit Fixed overhead per unit Variable selling costs per unit Fixed selling costs per unit

0 units 5,000 units P10 8 2 5 6 8

What is the value of ending inventory using the variable costing method? a. P155,000 b. P125,000 c. P100,000 d. P195,000 2. ABC company manufactures a single product for its customers by contracting in advance of production. Therefore, ABC only produces units that will be sold by the end of each period. During the last period, the following sales were made and costs incurred:

Sales Direct materials Direct labor Rent (9/10 factory, 1/10 office) Depreciation on factory equipment Supervision (2/3 factory, 1/3 office) Salespeople’s salaries Insurance (2/3 factory, 1/3 office) Office supplies Advertising Depreciation on office equipment Interest on loan

P40,000 9,050 6,000 3,000 2,000 1,500 1,300 1,200 750 700 500 300

Based on the above data, the gross margin percentage for the last period (rounded to nearest percent) was a. 41% b. 44% c. 46% d. 49% 3. XYZ Company had income of P50,000 using direct costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 units, respectively. Ignoring income taxes, if the fixed overhead application rate were P2.00 per unit, what would the income have been using absorption costing? a. P40,000 b. P50,000 c. P60,000 d. Cannot be determined from the information given. 4. Luna company had income of P65,000 using absorption costing for a given period. Beginning and ending inventories for that period were 13,000 units and 18,000 respectively. Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what would the income have been using variable costing? a. P 77,500 b. P 60,000 c. P 20,000 d. P 52,500 5. During may, Roy co. Produced 10,000 units of product x. Costs incurred by Roy during may were as follows Direct materials Direct labor Variable manufacturing overhead Variable selling and general Fixed manufacturing overhead Fixed selling and general

P10,000 20,000 5,000 3,000 9,000 4,000

Total

P51,000

What are the unit costs under absorption and variable costing methods, respectively? a. P5.10; P3.80 b. P3.80; P5.10 c. P3.50: P4.40 d. P4.40; P3.50 6. Mar company that had current operating assets of one million and net income of P200,000 had an opportunity to invest in a project that requires an additional investment of P250,000 and increased net income by P40,000. The company's required rate of return is 12%. After the investment, the company's residual income will amount to a. 80,000 b. 85,000 c. 90,000 d. 95,000 7. Y company is highly decentralized. Division X, which is operating at capacity, produces a component that it currently sells in a perfectly competitive market for P13 per unit. At the current level of production, the fixed cost of producing this component is P4 per unit and the variable cost is P7 per unit. Division Z would like to purchase this component from division X. What would be the price that division x should charge division Z? a. P13 b. P7 c. P11 d. P9 8. An appropriate transfer price between two divisions of the reno 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 b. P50 is the only acceptable price c. Between P50 and P70 d. Any amount less than P50 9. DJ enterprises has two divisions: Davy and Johnny. Davy division has a capacity to produce 2,000 units and is expecting to sell 1,500 units. Johnny division wants to purchase 100 units of a product Davy produces. Davy sells the product at a selling price of P100 per unit, the variable cost per unit is P25 and the fixed costs total P30,000. The minimum transfer price that Davy will accept is?

a. P100 b. P25 c. P43.75 d. P45 10. C company transfers a product from division n to division r. Variable cost of this product is anticipated to be P40 a unit and total fixed costs amount to P8,000. A total of 100 units are anticipated to be produced. Actual cost, however, amounts to P50 for variable costs. Fixed costs were same as budget. However, actual output was twice as many. Actual cost per unit amounts to a. P90 b. P92 c. P115 d. P120 11. The Dela Merced company’s household products division reported in 2007 sales of P15,000,000, an asset turnover ratio of 3.0, and a rate of return on average assets of 18 percent. The percentage of net income to sales is a. 3 percent. b. 12 percent. c. 6 percent. d. 5 percent. 12. The current income for a subunit is P36,000. Its current invested capital is P200,000. The subunit is considering purchasing for P20,000 equipment that will increase annual income by an estimated P2,800. The firm's cost of capital is 12%. If the equipment is purchased, the residual income of the subunit will a. Increase by P2,800 b. Increase by P16,000 c. Increase by P400 d. Increase by 4% 13. Magastos division of expenditures company expects the following results for 2006: Unit sales 70,000 Unit selling price P 10 Unit variable cost P 4 Total fixed cost Total fixed costs P 300,000 Total investment P 500,000 The minimum required roi is 15 percent, and divisions are evaluated on residual income. A foreign customer has approached magastos’ manager with an offer to buy 10,000 units at P7 each. Magastos division has capacity of 75,000 units and the foreign customer will not accept fewer than 10,000 units. Accepting the order would increase fixed costs by P10,000 and investment by P40,000.

At the price of P7 offered by foreign customer, what is the maximum number of units in regular sales that magastos division could sacrifice and still maintain its expected residual income? a. 3,667 b. 2,667 c. 3,333 d. 2,333 14. A, is segment generated sales revenues of P400,000 and variable operating expenses of P180,000. Its controllable fixed expenses were P40,000. It was assigned 20% of P200,000 of fixed costs controlled by others. The common fixed costs were P25,000. What was segment a's controllable segment profit margin? a. P180,000 b. P220,000 c. P140,000 d. P160,000 15. The valve division of industrial company produces a small valve that is used by various companies as a component part in their products. Industrial company operates its divisions as autonomous units, giving its divisional manager great discretion in pricing and other decisions. Each division is expected to generate a rate of return of at least 14 percent on its operating assets. The valve division has average operating assets of P700,000. The valves are sold for P5 each. Variable costs are P3 per valve, and fixed costs total P462,000 per year. The division has a capacity of 300,000 units. How many valves must the valve division sell each year to generate the desired rate of return on its assets? a. 355,385 b. 350,000 c. 280,000 d. 265,000 Responsibility Accounting and Balance Score Card – VALERIO THEORIES 1. It is a subdivision of managerial accounting which relates reporting or performance directly with the person who has the responsibility for its control. a. Accounting systems design and installation b. Responsibility accounting c. Standard cost accounting d. Cost accounting 2. It relates accounting to the budgetary system, thus acting as a control device. Management reports give details of budgeted and actual performances and show responsibilities at all levels of management. a. Programming b. Responsibility accounting c. Accounting system d. Budgeting 3. Which of the following statements is correct?

a. The direct cost of a particular department is always a controllable cost. b. All managers within an organization have equal authority and responsibility. c. Internal reports prepared under responsibility accounting system should be limited to variable manufacturing costs. d. Responsibility accounting identifies costs, revenues, and even capital investments with individuals, (e.g. managers) and thus provides for more control and evaluation of performance. 4. B Company uses an accounting system that charges costs to the manager who has been given the authority to make the decisions regarding the incurrence of such costs. For example, if the Production Manager was not able to monitor the efficiency of the workers in his department, such that he was forced to ask them to work overtime to finish a specific job on time, the additional cost of working overtime is charged to such Manager or his department. This accounting system is known as: a. Responsibility accounting b. Transfer price accounting c. Functional accounting d. Cost accounting 5. In a responsibility accounting system, costs are classified as controllable or non-controllable costs, which imply that some revenues and costs can be changed through effective management. Controllable costs include a. Discretionary costs only b. Only those costs that the manager can influence in the current time period c. Prime costs only d. All the costs that are directly traceable to the responsibility center 6. The basic purpose of responsibility accounting is: a. Variance analysis b. Authority c. Motivation d. Budgeting 7. The cost center is: a. An area of responsibility where the manager has the authority to make decisions concerning markets and sources of supply b. A responsibility center that is accountable for revenues (markets), costs (sources of supply), and invested capital c. The least complex type of segment or area of responsibility that is accountable only for costs d. An organizational unit that is responsible for revenues and variable costs, but not invested capital 8. A service center is a segment of an organization which has the: a. Authority to provide specialized support or service to other units within the organization b. Responsibility of rendering services to outside customers c. Responsibility to incur manufacturing costs to produce company’s products d. Authority to make decisions concerning revenues and costs 9. Management by objectives is a concept related to responsibility accounting. It can be described as: a. The process of preparing a series of multiple budgets for varying levels of production of sales b. The process of managing personnel c. A means of evaluating long-term investments d. A behavioral, communications-oriented responsibility approach to self-direction

10. Responsibility accounting works best in decentralized firms where the organization is structured into responsibility centers. A responsibility center that is most like an independent business is called a: a. Profit center b. Revenue center c. Cost center d. Investment center 11. The format for internal reports in a responsibility accounting system is prescribed by: a. The Philippine Institute of Certified Public Accountants b. Generally Accepted Accounting Principles c. Management d. The Board of Accountancy 12. A statement among the four below is incorrect. Which is it? a. Controllability is the only appropriate basis for delegation of responsibility. b. A successful responsibility accounting reporting system is dependent upon the proper delegation of responsibility and authority. c. Fixed costs can also be controllable, and some costs not controllable may need to be assigned to a responsibility center. d. The salary of the department manager is a direct cost of his department, but not controllable by such manager. 13. Y Company uses responsibility costing system for planning, control, and performance. Just recently, the company’s personnel department set the conditions for working and paying overtime. During the month, the sales department accepted a rush order from an important customer, and forwarded the production request to the production department which processed the order and finished the same on time, although its staff worked overtime. The overtime costs generated by the rush order should be charged to: a. The sales department b. The personnel department c. The production department staff d. The accounting department 14. When used for performance evaluation, periodic internal reports based on responsibility accounting system should not: a. Be related to the organizational chart b. Include variances between actual and budgeted controllable costs c. Distinguish between controllable and non-controllable costs d. Include allocated fixed costs 15. The following costs may be controllable at certain levels of management within a manufacturing concern, except: a. Insurance costs of plant and equipment b. Basic salary of factory workers c. Power rates imposed by the electric cooperative or the power supplier in the area d. Month maintenance costs of factory equipment covered by an annual contract

PROBLEMS 1 & 2 are based on the following information: The Ladies’ Belt Division of Leather Goods Corp. is classified as an investment center. For the month of November, it had the following operating statistics:

Sales P 675,000 Cost of Goods Sold 400,000 Operating Expenses 237,500 Total Assets 750,000 Weighted-Average Cost of Capital 4% Leather Goods Corp.’s average stockholders’ equity is P300,000. It is subject to an income tax rate of 40%. 1. What is the Ladies’ Belt Division’s return on investment? a. 4% b. 3% c. 7.5% d. 5% 2. The Ladies’ Belt Division’s residual income amounts to: a. P30,000 b. P25,000 c. P7,500 d. (P7,500) 3 & 4 are based on the following information: The Quezon City Division of Luzonian Company is treated as an investment center for performance measurement purposes. Selected financial information for such division for last year is given below: Net Sales P 200,000 Cost of Goods Sold 176,250 General and Administrative Expenses 3,750 Average Working Capital 31,250 Average Plant and Equipment 68,750 Desired Rate of Return 15% 3. The Quezon City Division’s return on investment for last year is: a. 29.09% b. 15.00% c. 20.00% d. 53.33% 4. If you compute last year’s residual income, it would result to: a. P9,687.50 b. P5,000.00 c. P8,750.00 d. P14,375.00 5 & 6 are based on the following information: Gulgol is the manager of the Home Care Products Division of Care Corporation. As a manager of an investment center, Gulgol’s performance is measured using the residual income method. For the coming year, Gulgol wants to achieve a residual income target of P100,000 using an imputed interest charge of 20%. Other forecasted figures for the coming year are as follows: Working capital P 90,000 Plant and equipment 860,000 Costs and expenses 1,210,000

5. How much should revenues be next year to achieve the residual income target? a. P1,482,000 b. P1,300,000 c. P1,500,000 d. P1,464,000 6. By what percent would the division’s ROI next year exceed the desired rate of return? a. 30.50% b. 10.50% c. 20.00% d. 9.50% 7. X Corporation has the following year-end data: Earnings before interest and taxes P 800,000 Current assets 800,000 Non-current assets 3,200,000 Current liabilities 400,000 Non-current liabilities 1,000,000 X Corporation pays an income tax rate of 30%. Its weighted-average cost of capital is 10%. What is X Corporation’s Economic Value Added (EVA)? a. P200,000 b. P160,000 c. P440,000 d. P400,000 8. Z Company has the following year-end data: Current assets Non-current assets Current liabilities Non-current liabilities (8% interest rate) Stockholders’ equity

P

Book Value 800,000 3,200,000 400,000 1,000,000 2,600,000

Fair Value

1,000,000 3,000,000

During the year, the company earned income before interest and taxes of P800,000. It pays income tax at the rate of 25%. Its cost of capital is 12%. Z Company’s Economic Value Added (EVA) is: a. P222,000 b. P240,000 c. P180,000 d. P422,000 9. Nate Company provided the following information: Budgeted input 35,100 kilos Actual input 32,220 kilos Budgeted production 18,000 units Actual production 35,442 units What is the partial productivity ratio? a. 1.95 units per kilo b. 0.91 units per kilo

c. 1.01 units per kilo d. 1.10 units per kilo Items 10 to 12 are based on the following information: JZ Company manufactures power tools. Because all its managers have engineering backgrounds, they prefer nonfinancial information for their decision-making models. Therefore, they require the accountants gather data to assist in the examination of nonfinancial results of operations. The following information relates to the manufacture of a paver: 2012 2013 Units produced and sold 7,000 6,000 Direct labor hours 13,000 11,000 Direct materials used (in kilos) 28,000 25,000 Direct labor rate per hour P20 P30 Direct materials cost per kilo P40 P44 10. JZ Company’s partial productivity for direct materials for 2012 is: a. 0.24 b. 0.25 c. 0.538 d. 0.545 11. What is the partial productivity for direct manufacturing labor for 2013? a. 0.25 b. 0.24 c. 0.538 d. 0.545 12. The total factor productivity for 2013 is: a. 0.005 b. 197 c. 0.004 d. 238 Items 13 to 15 are based on the following information: Following a strategy of product differentiation, Apple Corporation makes a high-end electronic toothbrush, ARZ. Apple Corp. presents the following data for the years 2012 and 2013: 2012 2013 Units of ARZ produced and sold 10,000 10,500 Selling price P200 P240 Direct materials (kilos) 30,000 30,500 Direct materials costs per kilo P80 P85 Manufacturing capacity for ARZ (units) 20,000 20,000 Conversion costs P2,000,000 P2,200,000 Apple Corp. produces no defective units but it wants to reduce direct materials usage per unit of ARZ in 2013. Manufacturing conversion costs in each year depend on production capacity defined in terms of ARZ units that can be produced. 13. The revenue effect of the growth component is: a. P100,000 U b. P120,000 F c. P100,000 F

d. P120,000 U 14. Cost effect of the growth component is: a. P127,500 F b. P127,500 U c. P120,000 F d. P120,000 U 15. Net effect on operating income as a result of the growth component is: a. P220,000 F b. P220,000 U c. P20,000 U d. P20,000 F

Quantitative Techniques – UMALI THEORIES 1. A decrease in inventory order costs will a. Have no effect on the economic order quantity b. Increase the reorder point. c. Decrease the economic order quantity. d. Decrease the holding cost percentage. 2. An inventory control system which employs mathematical models as an aid in making inventory decision is known as a. Order cycling system b. Mini-max system c. Two-bin system d. Statistical inventory control system 3. For inventory management, ignoring safety stocks, which of the following is a valid computation of the reorder point? a. The economic order quantity. b. The anticipated demand per day during lead time times lead time in days. c. The economic order quantity times the anticipated demand during the lead time. d. The square root of the anticipated demand during the lead time. 4. Quantitative technique used for selecting the combination of resources that maximize profits or minimize costs is a. Curvilenear analysis b. Queuing theory c. Dynamic programming d. Linear programming 5. Which formula describes the learning curve? a. x = ayb b. y = abx c. y = ax-b d. y = axb

6. AB Woods Co. is planning to expand its production facilities, which is at present, a constraint. You are asked to review the linear programming model. Among the items in the model, which will not be found? a. Constraints b. Networks c. Independent and dependent variables d. Slack variables 7. An increase in inventory holding costs will a. Have no effect on the economic order quantity. b. Decrease the economic order quantity. c. Increase the economic order quantity. d. Decrease the number of orders issued per year. 8. The selling price of the product is relatively high and the purchase cost of the product is relatively low. In this situation a. Management must increase the price to cover the cost of carrying higher inventory. b. The EOQ model will indicate frequent large orders. c. The selling price has nothing to do with the EOQ of the product. d. The EOQ of the product is affected by the selling price. 9. Change from the FIFO (first-in, first-out) inventory valuation method to the LIFO (last-in, first-out) method would a. Increase the EOQ in times of rising prices. b. Decrease the EOQ in times of rising prices. c. Increase the EOQ in times of falling prices. d. Not affect the EOQ. 10. In a PERT network, the critical path is the path that a. has the most number of activities.

b. requires the longest time to complete. c. requires the shortest time to complete. d. has the most slack. 11. One of the following statements is correct? a. MAS is confined only to such areas as financial accounting, auditing, and tax services. b. Because the MAS practitioner must be independent, he must not allow the client to participate in any phase of his engagement. c. Although MAS extends beyond the traditional accounting services, CPAs in the MS practice are still bound by the rules of professional ethics in the practice of accounting in general. d. CPAs provide management services to go around the ethical constraints as mandated by the Accountancy Act. 12. Which of the following is used to describe the practice of adding resources to shorten selected activity time on the critical path of a project? a. Making adjustments. b. Slack time.

c. Reengineering. d. Project crashing. 13. When using a graphical solution to a linear programming problem, the optimal solution will lie in an area commonly known as the:  a. region of maximization. b. objective region c. constraint region. d. feasible region. 14. In the cost of quality, liability claims are examples of a. Prevention costs b. External failure costs c. Appraisal costs d. Internal failure costs

15. Which condition justifies accepting a low inventory turnover ratio? a. High carrying costs. b. Low inventory order costs. c. Short inventory order lead times. d. High stock-out costs. 16. Order-filling costs, as opposed to order-getting costs, include all but which of the following items? a. Credit check of new customers. b. Packing ad shipping of sales orders. c. Collection of payments for sales orders. d. Mailing catalogs to current customers. 17. A characteristic of the basic economic order quantity (EOQ) model is that it a. Is relatively insensitive to error. b. Should not be used when carrying costs are large in relation to procurement costs. c. Is used when product demand, lead-time, and ordering costs are uncertain. d. Should not be used in conjunction with computerized perpetual inventory systems. 18. The ______________ would not affect the economic order quantity. a. company's weighted average cost of capital b. cost of purchase requisition forms c. cost of a stockout d. cost of insuring inventory 19. Various tools are employed to control large scale projects. They include all of the following except: a. PERT. b. CPM. c. Gantt charts. d. Statistical process control.

20. For (CPM) Critical Path Method it is a technique for analyzing, planning, and scheduling large, complex projects by determining the critical path from a single time estimate for each event in a project. The critical path: a. Is the shortest path from the first event to the last event for a project. b. Is an activity within the path that requires the most number of time. c. Has completion that reflects the earliest time to complete the project. d. Is the maximum amount of time an activity may be delayed without delaying the total project beyond its target completion time. PROBLEMS Sampaguita Company makes corsages that it sells through salespeople on the streets. Each sells for P2 and has variable production costs of P0.80. The salespeople receive a P0.50 commission on each corsage they sell, and the company must spend P0.05 to get rid of each unsold corsage. The corsages last for only one week and cannot be carried in inventory. The manager of the firm had estimated demand per week and associated probabilities as follows: Demand Probability 100,000 0.20 120,000 0.20 140,000 0.30 160,000 0.30 1. The optimal weekly production of the corsage is a. 120,000 b. 134,000 c. 140,000 d. 145,000 2. Value of perfect information is a. P22,100 b. P16,000 c. P23,800 d. P14,400 Just-in-Time At the beginning of 2007, Silang Company installed a JIT purchasing and manufacturing system. The following information has been gathered about one of the company's products Theoretical annual capacity Actual production Production hours available On-time deliveries Total deliveries Scrap (lbs.)

4,000 3,800 2,500 1,500 1,600 400

Materials used (lbs.) Number of defective units

12,800 20

3. Defective units as a percentage of total units produced is a. 5% b. 1.05% c. 2.5% d. 0.53% 4. An organization has an inventory order quantity of 10,000 units and a safety stock of 2,000 units. The cost per unit of inventory is $5, and the carrying cost is 10% of the average value of inventory. The annual inventory carrying cost for the organization is a. $3,000 b. $3,500 c. $5,000 d. $6,000 5. King Corporation operates its factory 300 days per year. Its annual consumption of Material Y is 1,200,000 gallons. It carries a 10,000 gallon safety stock of Material Y and its lead time is 12 business days. What is the order point for Material Y? a. 10,000 gallons b. 38,000 gallons c. 48,000 gallons d. 58,000 gallons The school canteen can sell either halo-halo or mami (hot noodle soup) on any given day. The contribution margin that the canteen could earn from halo-halo and mami is affected by the weather, as follows: Item sold CONTRIBUTION MARGIN Hot Weather Cold Weather Halo-Halo P15,000 P 6,000 Mami 11,400 12,000 6. If the probability of hot weather on a given day at this time is 60%, which item(s) should the company sell? a. Halo-Halo, because this item is salable when weather is hot. b. Mami, because it has the higher expected payoff. c. Halo-Halo and mami, so the canteen could maximize contribution margin. d. 60% halo-halo and 40% mami. Mr. Javee owns a piece of land that is adjacent to a big area of a vacant lot owned by the city government. Recently, Mr. Javee heard that the city government has plans about the vacant lot. He inquired about such plans and he was given the following, including each plan’s probability of occurrence: Plan A – Lease the lot to a businessman who will construct a mall on the lot B – Construct a theme park on the vacant lot C – Construct a building that will house some of the city government’s offices

60% 30% 10%

Mr. Javee knows that the value of his land, which he acquired ten years ago at a cost of only P500 per square meter, will increase depending on which plan would materialize. His estimates are as follows: Plan A – P5,000 per square meter B – 2,000 C – 1,000 7. What is the expected value of the land? a. 5,000 b. 3,000 c. 2,667 d. 3,700 8. Su Company has decided to introduce a new product. The company estimates that there is a 30% probability that the product will contribute P700,000 to profits, a 30% probability that it will contribute P200,000, and a 40% probability that the contribution will be a negative P400,000. The expected contribution of the new product is a. 500,000 b. 110,000 c. 166,667 d. 380,000 Bahalana Company produces and sells Product Z. Each unit of Product Z contributes P5 to the recovery of fixed costs and generation of profit. Total fixed costs amounts to P200,000 per period. Selling price of Product Z is P20 per unit. For the coming period, the company believes that there is a 70% chance that the sales of Product Z will be 80,000 units, and a 30% chance that sales will equal 10,000 units. 9. What is the expected profit from Product Z for the coming period? a. 295,000 b. 250,000 c. 80,000 d. 95,000 10. A company annually consumes 10,000 units of Part C. The carrying cost of this part is P2 per year and the ordering costs are P100. The company uses an order quantity of 500 units. By how much could the company reduce its total costs if it purchased the economic order quantity instead of 500 units? a. 500 b. 2,000 c. 2,500 d. 0

Quantitative Techniques – SALAS THEORIES 1. Which of the following inventory items would be the most frequently reviewed in an ABC inventory control system? a. Expensive, frequently used, high stock-out cost items with short lead times. b. Expensive, frequently used, low stock-out cost items with long lead times. c. Inexpensive, frequently used, high stock-out cost items with long lead time. d. Expensive, frequently used, high stock-out cost items with long lead time.

2. The materials control method that is based on physical observation that an order point has been reached is the: a. cycle review method b. min-max method c. two-bin method d. ABC plan 3. The underlying philosophy of “just-in-time” inventory system is that a. The status of quantities on hand must be periodically reviewed where high-value items or critical items are examined more frequently than low-cost or non-critical items. b. The quantities of most stock items are subject to definable limits. c. It is a quest toward continuous improvement in the environmental conditions that necessitates inventories. d. It is impractical to give equal attention to all stock items, hence the need to classify and rank them according to their cost significance. 4. Companies that adopt just-in-time purchasing systems often experience a. An increase in carrying costs. b. A greater need for inspection of goods as the goods arrive. c. Fewer deliveries from suppliers. d. A reduction in the number of suppliers. 5. Which of the following is used in determining the economic order quantity (EOQ)? a. Regression analysis. b. Queuing theory. c. Markov process. d. Calculus. 6. In inventory management, the problem of avoiding excessive investment in inventories and at the same time avoiding inventory shortages can be solved by applying a quantitative technique known as a. Payback analysis b. Economic order quantity c. Probability analysis d. High-low point method 7. In the Economic Order Quantity (EOQ) model, some of the underlying assumptions are a. Unlimited production capacity, declining demand, decreasing ordering cost, decreasing carrying cost, and unlimited inventory capacity. b. Constant demand, constant ordering cost, constant carrying cost, unlimited production and inventory capacity. c. Limited production capacity, declining demand, constant ordering cost, constant carrying cost, and unlimited inventory capacity. d. Increasing demand, limited production capacity, increasing ordering cost, increasing carrying cost, and limited inventory capacity. 8. The simple economic production lot size model will only apply to situations in which the production a. Rate equals the demand rate. b. Rate is less than the demand rate. c. Rate is greater than the demand rate. d. For the period covered equals the projected sales for the period.

9. Which one of the following items is not directly reflected in the basic economic order quantity (EOQ) model? a. Interest on invested capital. b. Inventory obsolescence. c. Public warehouse rental charges. d. Quantity discounts lost on inventory purchases. 10. The economic order quantity is the order quantity that results in a. the maximum total annual inventory costs. b. no inventory shortages. c. the minimum total annual inventory costs. d. minimum ordering costs. 11. Which one of the following statements best describes a difference between basic PERT and the Critical Path Method (CPM) of network analysis? a. PERT determines the least-cost path through a network while CPM determines the least time path through a network. b. PERT does not allow for slack times on the activities while CPM does. c. PERT considers only activity cost while CPM considers only activity time. d. PERT uses probability distribution on the activity times while CPM uses point estimates for the activity times. 12. ABC Company has correctly computed its economic order quantity as 500 units. However, management feels it would rather order quantities of 600 units. How should ABC’s total annual purchaseorder costs and total annual carrying cost for an order quantity of 600 units compare to the respective amounts for an order quantity of 500 units? a. Higher purchase-order cost and lower carrying cost. b. Higher purchase-order cost and higher carrying cost. c. Lower purchase-order cost and higher carrying cost. d. Lower purchase-order cost and lower carrying cost. 13. The economic order quantity is not affected by the a. Estimate of the annual material consumption. b. Cost of insuring a unit of inventory for a year. c. Safety stock level d. Cost of purchase-order forms. 14. The ordering costs associated with inventory management include a. Insurance costs, purchasing costs, shipping costs, and obsolescence. b. Obsolescence, set up costs, quantity discounts lost, and storage costs. c. Purchasing costs, shipping costs, set-up costs, and quantity discounts lost. d. Quantity discounts lost, storage costs, handling costs, and interest on capital invested. 15. If one optimizes the inventory turnover ratio, which costs will not increase? a. Total reorder costs b. Carrying costs c. Unit reorder costs d. Stock-out cost

PROBLEMS

1. A wine maker must decide whether to harvest grapes now or in four weeks. Harvesting now will yield 100,000 bottles of wine netting P2 per bottle. If the wine maker waits and the weather turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle. If the weather does not turn cold, the yield will depend on rain. With rain (probability 0.5), a full yield netting P4 per bottle will result. Without rain (probability 0.5), there will still be a full 100,000-bottle yield, but the net will be only P3 per bottle. The optimal expected value is a. P310,000 b. P200,000 c. P350,000 d. P400,000 2. Green Co. is considering the sale of banners in an exhibit fair. Green Co. could purchase these banners for P7.50 each. Unsold banners would be unreturnable and worthless after the exhibit. Green would have to rent a booth at the stadium for P4,000. Green estimates sales of 2,000 banners at P20.00 each. If Green’s prediction proves to be incorrect and only 1,500 banners were sold, the cost of this prediction error would be: a. P 6,250 b. P10,000 c. P 4,750 d. P 3,750 3. The manager of Batanes Company has developed the following probability distribution of dairy sales of a highly perishable product. The company restocks the product each morning: X (Units Sold) P (Sales =X) 150 0.20 175 0.40 200 0.15 225 0.10 250 0.10 275 0.05 If the company desires an 85% service level in satisfying sales demand, what should the initial balance be for each day? a. 191 b. 234 c. 225 d. 250 4. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs P2 and sells for P3 through regular stores. Any boxes not sold through regular stores are sold through Dough’s thrift store for P1. Dough assigns the following probabilities to selling additional boxes: Additional sales Probability 60 0.6 100 0.4 What is the expected value of Dough’s decision to buy 100 additional boxes of muffins? a. P28 b. P40 c. P68 d. P52 5. Karen Company has three sales departments. Department A processes about 50 percent of sales, Department B about 30 percent, and Department C about 20 percent. In the past, Departments A, B, and

C 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 A is responsible for this error is A. 0.50 B. 0.25 C. 0.20 D. 0.33 6. A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be P2,000. The probability of cold weather on a given day at this time is 60%. The expected payoff if the vendor has perfect information is a. P2,200 b. P1,360 c. P3,900 d. P1,960 7. The Teeners’ Club sells fresh hot cider at Recto football games. The frequency distribution of the demand for cups of hot cider per game is presented below: Unit sales volume Probability 10,000 0.10 20,000 0.15 30,000 0.15 40,000 0.40 50,000 0.20 The hot cider is sold for P35.00 a cup and the cost per cup is P20.00. Any unsold hot cider is discarded because it will spoil before the next game. What is the estimated demand for hot cider at the next football game if a deterministic approach based on the most likely outcome is used? a. 34,500 b. 16,000 c. 40,000 d. 50,000 8. The Big Company plans to begin production of a new product on July 1. An 80% learning curve is applicable to Big Company’s manufacturing operations. If it is expected to take 1,000 direct labor hours to produce the first unit, how many direct labor hours should it take to produce the third and fourth units? a. 640 b. 1,600 c. 960 d. 2,560 9. A construction company has just completed a bridge over the Visayan area. This the first bridge the company ever built and it required 100 weeks to complete. Now having hired a bridge construction crew with some experience, the company would like to continue building bridges. Because of the investment in heavy machinery needed continuously by this crew, the company believes it would have to bring the average construction time to less than one year (52 weeks) per bridge to earn a sufficient return on investment. The average construction time will follow an 80% learning curve. To bring the average construction time (over all bridges constructed) below one year per bridge, the crew would have to build approximately

a. 7 additional bridges. b. 2 additional bridges. c. 3 additional bridges. d. 8 additional bridges. 10. Moss Point Manufacturing recently completed and sold an order of 50 units that had the following costs: Direct materials P 1,500 Direct labor (1,000 hours @ P8.50) 8,500 Variable overhead (1,000 hours at P4.00) 4,000 Fixed overhead 1,400___ P15,400 *Applied on the basis of direct labor hours. *Applied at the rate of 10% of variable cost. The company has now been requested to prepare a bid for 150 units of the same product. If an 80 percent learning curve is applicable, Moss Point’s total cost on this order would be estimated at a. P38,500 b. P37,950 c. P31,790 d. P26,400 11. Ron Bagley is contemplating whether to investigate a labor efficiency variance in the Assembly Department. It will cost $6,000 to undertake the investigation and another $18,000 to correct operations if the department is found to be operating improperly. If the department is operating improperly and Bagley fails to investigate, operating costs from the various inefficiencies are expected to amount to $33,000. Bagley will be indifferent between investigating and not investigating the variance if the probability of improper operation is a. 0.29 b. 0.60 c. 0.40 d. 0.71 12. The auditor is attempting to evaluate the potential dollar effect of a control breakdown in the sales cycle. Two controls are involved. The probability that control A will fail is 10%, and the probability that control B will fail is 5%. The controls are independent such that the failure of one does not affect the failure of the other. In evaluating the potential exposure to the organization, the auditor determines that the cost of control A's failure is $10,000, the cost of control B's failure is $25,000, and the cost of failure of both control procedures at the same time is an additional $200,000. If the control procedures are not made more effective, the expected cost to the organization is a. $1,000 b. $32,250 c. $3,250 d. $2,250 13. The economic order quantity is the size of the order that minimizes total inventory costs, including ordering and carrying costs. If the annual demand decreases by 36%, the optimal order size will a. Increase by 6%. b. Increase by 20%. c. Decrease by 20%. d. Decrease by 6%.

14. CJ, the night manager at a local fast food restaurant, has had problems with his employees not arriving on time. After doing some research, he discovered that, if his employees were on time the night before, the probability that they would arrive on time again is .7. On the other hand, if they were late the night before, the probability that they would arrive on time the following day is .4. What is the probability that an employee will arrive on time the fourth day if they arrived on time the first day? a. .575 b. .583 c. .61 d. .7 15. Scholas Co. uses 840,000 units of component R4 in manufacturing R444 over a 300-day work year. The usual lead time for the part is six days. However, at times, the lead time has gone as high as eight days. Scholas now desires to adjust its safety stock policy. The increase in safety stock size is a. 16,800 units. b. 2,800 units. c. 7,200 units. d. 5,600 units.