May 2018 MAS Preweek Lectures
May 2018 MAS Preweek Lectures
BASIC CONCEPTS
1. The primary objective of management accounting is
A. to provide stockholders and potential investors with useful information for decision making.
B. to provide banks and other creditors with information useful in making credit decisions.
C. to provide management with information useful for planning and control of operations.
D. to provide supervising government agencies with information about the company’s management
affairs.
4. Managerial accounting activity adds value to an organization by pursuing five major objectives, which
include
A. providing information for decision making and planning.
B. measuring the performance of activities within an organization.
C. assisting managers in directing and controlling operational activities.
D. all of them
7. For internal uses, managers are more concerned with receiving information that is:
A. completely objective and verifiable.
B. completely accurate and precise.
C. relevant, flexible, and immediately available.
D. relevant, completely accurate, and precise.
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9. The following characterize management advisory services except
A. It involves decision for the future
B. It broader in scope and varied in nature
C. It utilizes more junior staff than senior members of the firm
D. It relates to specific problems where expert help is required
14. The major reporting standard for presenting managerial accounting information is
A. relevance
B. generally accepted accounting principles
C. the cost principle
D. the current tax law
15. With respect to the time dimension, how does managerial decision compare with external performance
evaluation?
A. B. C. D.
Managerial Decision Making Past Past Future Future
External Performance Past Future Past Future
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18. Which of the following activities is not usually performed by a management accountant?
A. Assisting managers to interpret data in managerial accounting reports.
B. Designing systems to provide information for internal and external reports.
C. Gathering data from sources other than the accounting system.
D. Deciding the best level of inventory to be maintained.
19. Which of the following statements correctly distinguishes financial and managerial accounting?
A. managerial accounting reports on the whole organization
B. financial accounting is oriented toward the future
C. financial accounting is primarily concerned with providing information for internal users
D. managerial accounting is oriented more toward the planning and control aspects of management
20. How does managerial decision making compare with external performance evaluation?
Managerial Decision Making External Performance Evaluation
A. Detailed Detailed
B. Detailed More aggregated
C. More aggregated Detailed
D. More aggregated More aggregated
21. The role of the managerial accountant in today’s corporate world includes all of the following except:
A. interpreting financial information C. financial modeling
B. financial planning D. bookkeeping
23. Which statement about the extent of detail in a management accounting report is true?
A. It may depend on the frequency of the report.
B. It depends on the type of manager receiving the report.
C. It depends on the level of the manager receiving the report.
D. All of the above.
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Answer: A
b = (720 – 640) ÷ (600 - 200)
80 ÷ 400 P0.20
2. In the equation Y = P4,000 + P3X; Y is the cost of workers' compensation insurance and X is direct
labor hours. According to this equation, a 100-hour change in total direct labor hours will change the
cost of workers compensation insurance by
A. P4,000. C. P4,300.
B. P 300. D. none of the above amounts.
Answer: B
∆Y = 100 x 3 P300
Within a relevant range, the amount of total fixed cost remains constant at P4,000. The only cost that
will change in total is variable cost because every additional hour will add P3 to total costs.
3. Using multiple regression, you have identified P12,000 of unit level costs for 3,000 units, P1,000 of
product level costs for 40 products, and P3,500 of customer-level costs for ten customers. The cost of
Job 002 which used 800 unit level activities, 4 product level activities, and one customer-level
activities amounts to
A. P3,650 C. P3,050
B. P3,250 D. P2,950
Answer: A
Unit level costs: P12000 ÷ 3000 x 800 P3,200
Product level costs: P1,000 ÷ 40 x 4 100
Customer level costs: P3,500 ÷ 10 350
Cost of Job 002 P3,650
Within a relevant range, the amount of fixed cost remain constant at P4,000. The only cost that will charge
in total is variable cost between every additional hour will be accompanied by an increase of P3.
4. It takes a worker 10 minutes to assemble a toy. With a learning curve of 70% as production doubles, the
average time (per unit) needed to make 8 units would be
A. 4.90 minutes C. 3.33 minutes
B. 3.43 minutes D. 3.23 minutes
Answer: B
Total number of minutes used after completing 8 units:
(10 × .7 × .7 × .7) 3.43
5. 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 C. P2,160
B. P 600 D. P1,250
Answer: C
Cumulative average after completing 4 units:
1,500 × .9 × .9 P1,215
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6. At a sales level of P300,000, Jamaica Company's gross margin is P15,000 less than its contribution
margin, its net income is P50,000, and its selling and administrative expenses total P120,000. At this
sales level, its contribution margin would be:
A. P250,000. C. P170,000.
B. P155,000. D. P185,000.
Answer: D
Net income P 50,000
Add: selling and admin. Expense 120,000
Gross Margin 170,000
Add: excess of contribution margin over gross margin 15,000
Contribution Margin P185,000
7. The Shepherd Company’s president would like to know the estimated fixed and variable components of
a particular cost. Actual data for this cost for four recent periods appear below.
Activity Cost
Period 1 24 P174
Period 2 25 179
Period 3 20 165
Period 4 22 169
Using the least-squares regression method, what is the cost formula for this cost?
A. Y = P 0.00 + P7.55X C. Y = P103.38 + P3.00X
B. Y = P110.44 + P2.70X D. Y = P113.35 + P0.89X
Answer: B
∑X = 91
∑Y = 687
∑XY = 15,669
∑X2 = 2,085
687 = 4a + 91b
15,669 = 91a + 2,085b
15,629.25 = 91a + 2,070.25b
39.75 = 14.75b
b = P2.70
Y = P110.44 + P2.70X
8. 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. C. P2.80.
B. P2.57. D. P2.85.
Answer: C
Variable OH rate P 2.00
Fixed OH rate (340,000 ÷ 425,000) 0.80
Total OH rate P 2.80
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9. The Overland Company wants to develop a cost estimating equation for its monthly cost of electricity.
It has the following data:
Month Electricity Cost Direct Labor Hours
January P6,750 1,500
April 7,500 1,700
July 8,500 2,000
October 7,250 1,600
Using the high-low method, what is the best equation?
A. Y = P 750 + P5.00X C. Y = P 750 + P3.50X
B. Y = P1,500 + P3.50X D. Y = P1,500 + P5.00X
Answer: B
b = (8,500 – 6,750) ÷ ( 2,000 – 1,500)
= 1,750 ÷ 500
b = 3.50
a = 8,500 – (2,000 x 3.5)
a = 1,500
y = 1,500 + 3.50X
10. During 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 C. P6.00
B. P5.00 D. P7.17
11. Data to be used in applying the high-low method shows the highest cost of P69,000 and the lowest cost
of P52,000. The data shows P148,000 as the highest level of sales and P97,000 as the lowest level.
What is the variable cost per peso sales?
A. P0.33. C. P0.54.
B. P0.47. D. P3.00
Answer: B
Contribution margin per unit:
(P154,000 + P26,000) ÷ 12,000 units P15.00
Variable cost per unit: P20.00 – P15.00 P 5.00
Answer: B
∑X = 1,150,000
∑Y = 3,110,000
∑XY = 770,900 Million
∑X2 = 307, 100 Million
I. Since all the observations are included, all the values are summed up:
∑Y = na + b∑X
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II. To minimize distortion, the first equation is made bigger by multiplying it by ∑X.
∑XY = a∑X + b∑X2
13. Tomas Ocampo has just been appointed chairperson of the Accountancy Department of ADEB College.
In reviewing the department’s cost records, Tomas has found the following total cost associated with
MAS Part 2 subject over the last several terms:
Semester/Term Number of Subjects Offered Total Cost
AY2004, First Semester 4 P10,000
AY2004, Second Semester 6 14,000
AY2004, Summer 2 7,000
AY2005, First Semester 5 13,000
AY2005, Second Semester 3 9,500
Tomas knows that there are some variable costs, such as amounts paid to student assistants, associated with
the course. He would like to have variable and fixed cost components separated for planning purposes.
Using the least-squares method, what is the variable cost per section of MAS?
A. P1,750 C. P1,200
B. P1,500 D. P 900
Answer: A
∑X = 20
∑Y = 53,500
∑XY = 231,500
∑X2 = 90
53,500 = 5a + 20b
231,500 = 20 + 90b
214,000 = 20a + 80b
17,500 = 10b
b = P1,750
14. At a sales level of P300,000, Java Company's gross margin is P15,000 less than its contribution margin,
its net income is P50,000, and its selling and administrative expenses total P120,000. At this sales level,
its contribution margin would be:
A. P250,000. C. P170,000.
B. P155,000. D. P185,000.
Answer: D
Net income P 50,000
Add Fixed Costs:
Manufacturing P 15,000
Selling and administrative 120,000 135,000
Total Contribution Margin P185,000
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Direct labor hours 50,000 75,000
Total factory overhead costs P14,250,000 P17,625,000
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has
analyzed these costs at the 50,000-hour level of activity as follows:
Indirect materials (V) P 5,000,000
Rent (F) 6,000,000
Maintenance (M) 3,250,000
Total factory overhead costs P14,250,000
15. How much of the P17,625,000 factory overhead cost at the high level of activity consist of
maintenance cost?
A. P4,125,000 C. P4,450,000
B. P4,220,000 D. P4,525,000
Answer: A
Maintenance cost at high level:
Total factory overhead P17,625,000
Less: Indirect materials (variable) 75,000 x P100 ( 7,500,000)
Rent (fixed) ( 6,000,000)
Amount of maintenance cost P 4,125,000
16. What total factory overhead costs would you expect the company to incur at an operating level of
70,000 direct labor hours?
A. P16,950,000 C. P13,000,000
B. P13,950,000 D. P10,950,000
Answer: A
Analysis of maintenance cost
b = (P4,125,000 – P3,250,000) ÷ (75,000 – 50,000)
b = 875,000 ÷ 25,000
b = P35
Cost-Volume-Profit Analysis
Question Nos. 1 through 3 are based on the following:
Ms. Sharkey started a pizza restaurant in 2003. For this purpose a building was rented for P40,000 per month.
Two women were hired to work full time at the restaurant and six college students were hired to work 30 hours
per week delivering pizza. This level of employment has been consistent. An outside accountant was hired for
tax and bookkeeping purposes, for which Ms. Sharkey pays P30,000 per month. The necessary restaurant
equipment and delivery cars were purchased with cash. Ms. Sharkey has noticed that expenses for utilities and
supplies have been rather constant. Ms. Sharkey increased her business between 2003 and 2006. Profits have
more than doubled since 2003. Ms. Sharkey does not understand why profits have increased faster than volume.
A projected income statement for the year ended December 31, 2007, prepared by the accountant, is shown
below:
Sales P9,500,000
Cost of food sold P2,850,000
Wages & fringe benefits:
Restaurant help 815,000
Delivery help 1,730,000
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Rent 480,000
Accounting services 360,000
Depreciation:
Delivery equipment 500,000
Restaurant equipment 300,000
Utilities 232,500
Supplies 120,000 7,387,500
Net income before taxes P2,112,500
Income taxes (40%) 845,000
Net income P1,267,500
Note: The average pizza sells for P250.
Answer: A
Tax shield in non cash expenses
40% x 800,000 = P320,000
Answer: A
Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75) = 25,929
3. What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529 C. 12,990
B. 21,284 D. 10,773
Answer: A
Breakeven in number of pizzas (traditional)
4,537,500/(250 – 75) = 25,929
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Selling and administrative
Commissions P2,000,000
Other expenses (fixed) 100,000 2,100,000
Income before taxes P 1,900,000
Income tax (30%) 570,000
Net income P 1,330,000
Timex’s management is considering the possibility of employing full-time sales personnel. Three individuals
would be required, at an estimated annual salary of P30,000 each, plus commissions of 5 percent of sales. In
addition, a sales manager would be employed at a fixed annual salary of P160,000. All other fixed costs, as well
as the variable cost percentages, would remain the same as the estimates in the 2007 budgeted income statement.
4. How much is the estimated break-even point in peso sales for the year ending December 31, 2007,
based on the budgeted income statement prepared by the controller?
A. P500,000 C. P250,000
B. P400,000 D. P125,000
Answer: A
Breakeven sales based on 20% commission:
P100,000 ÷ 0.20 P500,000
5. How much is the estimated break-even point in peso sales for the year ending December 31, 2007, if
the company employs its own sales personnel?
A. P 542,857 C. P 875,000
B. P 742,857 D. P1,000,000
Answer: D
Breakeven sales if the company employs its own salesmen:
(P350,000 ÷ 0.35) P1,000,000
6. How much volume in peso sales would be required for the year ending December 31, 2007, to yield the
same net income as projected in the budgeted income statement, if Timex continues to use the
independent sales agents and agrees to their demand for a 25 percent sales commission?
A. P 8,000,000 C. P10,000,000
B. P 9,533,333 D. P13,333,333
Answer: D
The required peso sales to earn net income of P1,330,000 if the commission is raised to 25%:
7. How much is the estimated volume in peso sales that would generate an identical net income for the
year ending December 31, 2007, regardless of whether Timex employs its own sales personnel or
continues to use the independent sales agents and pays them a 25 percent commission?
A. P1,000,000 C. P1,500,000
B. P1,250,000 D. P1,800,000
Answer: B
The indifference point, the level of sales where the alternatives will have equal profits:
.15S- 100,000 = .35S – 350,000
2S = 250,000
S = P1,250,000
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Question Nos. 8 through 11 are based on the following data:
Step Company produces toys and other items for use in beach and resort areas. A small, inflatable toy has come
onto the market that the company is anxious to produce and sell. Enough capacity exists in the company’s plant
to produce 16,000 units of the toy each month. Variable costs to manufacture and sell one unit would be P12.50,
and fixed costs associated with the toy would total P350,000 per month.
The company’s Marketing Department predicts that demand for the new toy will exceed the 16,000 units that
the company is able to produce. Additional manufacturing space can be rented from another company at a fixed
cost of P10,000 per month. Variable costs in the rented facility would total P14 per unit, due to somewhat less
efficient operations than in the main plant. The new toy will sell for P30 per unit.
Answer: C
The problem illustrates a calculation of breakeven point for a company with a step variable and step fixed
cost.
Alternative Solution:
9. How many units should the company need to sell in order to earn a before-tax profit of P150,000?
A. 9,143 C. 31,875
B. 30,375 D. 35,000
.Answer: B
The units that will generate the desired profit of P150,000 for the company, contributes P16 each. These
units are the excess of 21,000 units to breakeven.
10. If the sales manager receives a bonus of P1.00 for each unit sold in excess of the break-even point, how
many units must be sold each month to earn a return of 25% on the monthly investment in fixed costs?
A. 23,344 C. 29,833
B. 27,000 D. 30,000
Answer: B
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The bonus plan of P1.00 per unit on sales made in excess of breakeven point (21,000 units) will necessarily
decrease the contribution margin to P15.
11. Assuming that Step Company will just rent a manufacturing space for a month in order to produce
special order for 8,000 toys. What is the acceptable minimum selling price to Step Company for the
special sale?
A. P14.00 C. P22.00
B. P15.25 D. P24.00
Answer: B
In determining the minimum selling price for the 8,000 units should consider the increased variable cost per
unit and the additional fixed cost. Any cost and losses on the first 16,000 units are irrelevant:
Variable cost per unit P14.00
Additional fixed cost per unit (10,000 ÷ 8,000) 1.25
Minimum selling price P15.25
A new equipment has come onto the market that would allow Bolton Company to automate a portion of its
operations. Variable costs would be reduced by P9 per unit. However, fixed costs would increase to a total of
P225,000 each month.
12. How much income for the month would the company earn if the new equipment is purchased?
A. P45,000 C. P60,000
B. P30,000 D. P75,000
.Answer: A
The net income for the month if the new equipment is acquired:
Contribution margin based on the present system P135,000
Add increase in contribution margin due to
decrease in variable cost (15,000 x 9) 135,000
Increased contribution margin 270,000
Less Increased fixed costs 225,000
13. How many units are required as increase or decrease in breakeven point if the new equipment is
purchased?
A. Zero C. 3,200 units
B. 2,500 units D. 4,000 units
Answer: B
The increase in breakeven point would be:
(12,500 – 10,000) 2,500 units
Breakeven, present (P90,000 ÷ P9) 10,000 units
Breakeven, proposed (P225,000 ÷ P18) 12,500 units
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14. The degree of operating leverage during the month where the new equipment is used is:
A. 3.0 times C. 6.0 times
B. 4.5 times D. 9.0 times
Answer: C
The degree of operating leverage (DOL)
during the month that the new
equipment would be used: (270,000 ÷ 45,000) 6X
15. Refer to the original data. Rather than purchase a new equipment, the president is thinking about
changing the company’s marketing method. Under the new method, sales would increase by 20% each
month and net income would increase by one-third. Fixed costs could be slashed to only P48,000 per
month. Compute the break-even point for the company after the change in marketing method.
A. 8,000 units C. 9,000 units
B. 12,500 units D. 10,000 units
Answer: A
Breakeven units if there is a change in marketing method:
P48,000 ÷ 6 8,000 units
16. Assuming that during the month following the month new equipment has been started in use, the unit
sales increased by 4,500 units. The variable expenses per unit and the monthly fixed costs as affected
by the acquisition of the new equipment are expected to remain constant.
Answer: B
The percentage increase in profit can be calculated by multiplying the degree of operating leverage (DOL)
by the percentage increase in sales during the second month.
The sales increased by 30% (P4,500 ÷ P15,000) and therefore the profit percentage increased by 180% (6 x
30%).
Variance Analysis
Flexible budget
(Standard input allowed for actual output achieved x the budgeted rate)
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Variable overhead P 90,000
Applied
(Standard input allowed for actual output achieved x the budgeted rate)
Fixed overhead P125,000
Variable overhead spending variance 1,200 F
Production volume variance 5,000 U
1. If the budgeted rate for applying variable manufacturing overhead was P20 per direct labor hour, how
efficient or inefficient was Tiny Bubbles in terms of using direct labor hours as an activity base?
A. 100 direct labor hours inefficient C. 100 direct labor hours efficient
B. 440 direct labor hours inefficient D. 440 direct labor hours efficient
Answer: D
Total variable overhead variance (80,000 – 90,000) 10,000 favorable
Variable overhead spending variance 1,200 favorable
Variable overhead efficiency variance 8,800 favorable
8,800 ÷ 20 440 Favorable
Answer: D
Fixed overhead volume variance is a more meaningful variance in evaluating the use of the capacity.
Questions 3 and 4 are based on a monthly normal volume of 50,000 units (100,000 direct labor hours). Raff
Co.’s standard cost system contains the following overhead costs:
Variable P6 per unit
Fixed P8 per unit
Answer: B
Actual variable OH P250,000
Budgeted VOH at actual hours (80,000 x P3) 240,000
Unfavorable VOH spending variance P 10,000
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B. P96,000F D. P80,000F
Answer: A
(38,000 units – 50,000 units) x P8 P96,000
5. Edney Company employs standard absorption system for product costing. The standard cost of its
product is as follows:
Raw materials P14.50
Direct labor (2 DLH x P8) 16.00
Manufacturing overhead (2 DLH x P11) 22.00
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor hours.
Edney planned to produce 25,000 units each month during the year. The budgeted annual manufacturing
overhead is
Variable P3,600,000
Fixed 3,000,000
During November, Edney produced 26,000 units. Edney used 53,500 direct labor hours in November at a
cost of P433,350. Actual manufacturing overhead for the month was P260,000 fixed and P315,000
variable. The total manufacturing overhead applied during November was P572,000.
The variable manufacturing overhead variances for November are:
Spending Efficiency
A. P9,000 unfavorable P3,000 unfavorable
B. P6,000 favorable P9,000 unfavorable
C. P4,000 unfavorable P1,000 favorable
D. P9,000 favorable P12,000 unfavorable
Answer: B
Spending [P315,000 – (53,500 x P6)] P(6,000)
Efficiency [(53,500 – 52,000) x P6] P 9,000
Answer: B
Spending [P260,000 – (P3M ÷ 12)] P10,000U
Volume [(26,000 – 25,000) x P10] P10,000F
The following information will be used to answer Question Nos. 7 through 10:
Garch, Inc. analyzes manufacturing overhead in the production of its only one product, CD. The following set
of information applies to the month of May, 2006:
Budgeted Actual
Units produced 40,000 38,000
Variable manufacturing OH P 4/DLH P16,400
Fixed manufacturing overhead P20/DLH P88,000
Direct labor hours 6 min/unit 4,200 hr
7. What is the fixed overhead spending variance?
A. P4,000 Favorable C. P8,000 Unfavorable
B. P8,000 Favorable D. P4,000 Unfavorable
Answer: C
Actual fixed overhead P88,000
Budget fixed overhead (4,000 hrs @ P20) 80,000
Unfavorable fixed OH Spending variance P 8,000
Budgeted (denominator) hours (40,000 units x 6 ÷ 60) 4,000
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B. P4,000 Unfavorable D. P8,000 Unfavorable
Answer: B
Budget fixed overhead P80,000
Applied fixed overhead (38,000 x 0.10 x P20) 76,000
Unfavorable volume variance P 4,000
Answer: A
Actual variable overhead P 16,400
Budget at actual hours (4,200 x P4) 16,800
Favorable variable OH spending variance P ( 400)
10. How much overhead efficiency variance resulted for the month of May?
A. P1,600 Favorable C. P1,600 Unfavorable
B. P 800 Favorable D. P800 Unfavorable
Answer: C
Unfavorable Efficiency Variance: (AH – SH) SVOHR
(4,200 – 3,800) x P4 = 1,600 UNF
SH allowed (38,000 units x 1 ÷ 10) = 3,800 hours
Questions 11 through 14 are based on Darf Company, which applies overhead on the basis of direct labor
hours. Two direct labor hours are required for each product unit. Planned production for the period was set at
9,000 units. Manufacturing overhead is budgeted at P135,000 for the period, of which 20% of this cost is fixed.
The 17,200 hours worked during the period resulted in production of 8,500 units. Variable manufacturing
overhead cost incurred was P108,500 and fixed manufacturing overhead cost was P28,000. Darf Company uses
a four variance method for analyzing manufacturing overhead.
11. The variable overhead spending variance for the period is
A. P5,300 unfavorable C. P6,300 unfavorable
B. P1,200 unfavorable D. P6,500 unfavorable
Answer: A
Actual variable overhead 108,500
Budgeted VOH at actual hours (17,200 x 6) 103,200
Variable overhead spending variance, UNF 5,300
VOH rate per hour (135,000 x 0.80) ÷ 18,000 hours P6.00
12. The variable overhead efficiency variance (quantity) variance for the period is
A. P5,300 unfavorable C. P1,200 unfavorable
B. P1,500 unfavorable D. P6,500 unfavorable
Answer: C
The computation of variable overhead efficiency variance involves the comparison of the actual hours and
standard hours allowed by actual production.
(17,200 – 17,000) x P6 1,200 UNF
Standard hours allowed: 8,500 x 2 17,000
13. The fixed overhead budget (spending) variance for the period is
A. P6,300 unfavorable C. P2,500 unfavorable
B. P1,500 unfavorable D. P1,000 unfavorable
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Answer: D
The amount of fixed overhead budget (spending) variance is calculated by subtracting from the actual fixed
overhead the amount of budgeted fixed overhead.
Actual fixed overhead 28,000
Budgeted fixed overhead (135,000 x 0.2) 27,000
Unfavorable fixed overhead budget variance 1,000
14. The fixed overhead volume (denominator) variance for the period is
A. P 750 unfavorable C. P2,500 unfavorable
B. P1,500 unfavorable D. P1,000 unfavorable
Answer: B
The amount of volume variance (denominator or over/underapplied fixed overhead variance) is calculated
by comparing the budgeted fixed overhead and fixed overhead applied to production.
Budgeted fixed overhead (135,000 x 0.2) 27,000
Applied fixed overhead (8,500 x 3) 25,500
Underapplied (unfavorable) volume variance 1,500
Alternative calculation: (9,000 – 8,500) x 3 1,500
Fixed overhead per unit (27,000 ÷ 9,000) 3
RESPONSIBILITY ACCOUNTING
Segmented income statements
1. Segmented income statements are most meaningful to managers when they are prepared
A. on an absorption cost basis C. on a cost behavior basis
B. on a cash basis D. in a multi-step format
Performance evaluation
2. The criteria used for evaluating performance
A. should be designed to help achieve goal congruence
B. can be used only with profit centers and investment centers
C. should be used to compare past performance with current performance
D. motivate people to work in the company’s best interest
3. Of most relevance in deciding how or which costs should be assigned to a responsibility center is the
degree of
A. Avoidability C. Causality
B. Controllability D. Variability
4. Internal reports prepared under the responsibility accounting approach should be limited to which of
the following costs?
A. Only variable costs of production
B. Only conversion costs
C. Only controllable costs
D. Only costs properly allocable to the cost center under generally accepted accounting principles
5. 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.
6. When used for performance evaluation, periodic internal reports based on a responsibility accounting
system should not
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A. be related to the organization chart
B. include allocated fixed overhead
C. include variances between actual and budgeted controllable costs
D. distinguish between controllable and noncontrollable costs
7. the most desirable measure of departmental performance for evaluating the departmental manager is
departmental
A. Revenue less controllable departmental expenses
B. Net income
C. Contribution to indirect expenses
D. Revenue less departmental variable expenses
Performance measures
Return on Investment
9. Return on investment (ROI) is calculated as
A. divisional operating income/divisional investment
B. divisional investment – divisional income
C. divisional investment/divisional operating income
D. divisional income – (divisional investment x required rate of return)
10. The return on investment calculation only considers the following components:
S = Sales
I = Investment
NI = Net Income
Which of the following formulas best describes the return on investment calculation?
A. (I/S) x (S/NI) = I/NI C. (S/I) x (NI/S) = NI/I
B. (I/S) x (NI/S) = (Ix NI) x (S x S) D. (S/I) x (S/NI) = (S x S)/(I x NI)
13. A measure frequently used to evaluate the performance of the manager of an investment center is
A. the amount of profit generated.
B. the rate of return on funds invested in the center.
C. the percentage increase in profit over the previous year.
D. departmental gross profit.
DuPont Model
15. C company’s return on investment is affected by a change in
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A. B. C. D.
Capital turnover Yes Yes No No
Profit margin on sales Yes No No Yes
16. Return on investment for divisions and other company segments is a function of
A. assets employed and expected future cash flows.
B. contribution margin and invested capital.
C. investment turnover and profit margin on sales.
D. physical sales volume, prices, variable costs, and fixed costs.
Residual Income
17. Using residual income for evaluating performance
A. penalizes managers whose segments have low ROIs
B. penalizes managers of relatively large segment
C. encourages managers to maximize pesos of profit after a required ROI has been achieved
D. encourage managers to maximize ROI for the company
19. When a firm uses residual income to make decisions, the firm should favor those projects whose
residual income
A. is closest to the firm’s minimum capital rate
B. is lowest
C. is highest
D. exceeds a specific target amount
TRANSFER PRICING
Minimum selling price
1. Matipid Division of Expenditures Company expects the following results for 2007:
Unit sales 70,000
Unit selling price P 10
Unit variable cost P 4
Total fixed costs P300,000
Total investment P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A foreign
customer has approached Matipid’s manager with an offer to buy 10,000 units at P7 each. If Matipid
accepts the order, it would not lose any of the 70,000 units at the regular price. Accepting the order
would increase fixed costs by P10,000 and investment by P40,000.
What is the minimum price that Matipid could accept for the order and still maintain its expected residual
income?
A. P5.00 C. P5.60
B. P4.75 D. P9.00
Answer: C
Unit variable cost P4.00
Incremental unit fixed cost (P10,000/10) 1.00
Minimum return per P1 of additional asset requirement 40,000 x 0.15 /10,000 0.60
Minimum selling price P5.60
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2. 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. 2,333 C. 3,333
B. 2,667 D. 3,667
Answer: A
Contribution provided by 10,000 units
10,000 x (7.00 – 5.60) 14,000
Divided by regular contribution margin per unit ÷ 6
Maximum decrease in regular sales 2,333
Answer: C
The income under absorption costing is higher by P10,000 because the amount of fixed overhead that
related to unsold units was deferred and was included as cost of finished goods inventory. The variable
costing income statement immediately wrote the entire fixed overhead that was incurred during the year as
period cost.
Fixed overhead deferred as product cost: 5,000 x P2 P10,000
Absorption income (P50,000 + P10,000) P60,000
Answer: C
Absorption income 65,000
Less Fixed Overhead in decrease in inventory (18,000 – 15,000) x 2.50 12,500
Income, Variable costing 52,500
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of Soulmate Co.
Total fixed costs incurred P100,000
Total variable costs incurred 50,000
Total period costs incurred 70,000
Total variable period costs incurred 30,000
Units produced 20,000
Units sold 12,000
Unit sales Price P 12
Based on variable costing, if Soulmate Co. had sold 12,001 units instead of 12,000, its income before
taxes would have been
A. P 9.50 higher C. P11.00 higher
B. P 8.50 higher D. P 8.33 higher
Answer: B
CMR per unit = Selling Price – Unit variable cost
P8.50 = P12.00 – P3.50
Variable Cost Per unit
Product: (50,000 – 30,000) / 20,000 = P1.00
Selling & Adm. (variable period costs) 30,000/12,000 2.50
Total variable cost/unit P3.50
* Total variable costs – variable period cost
(selling & adm.) = variable product cost.
4. At its present level of operations, a small manufacturing firm has total variable costs equal to 75% of
sales and total fixed costs equal to 15% of sales. Based on variable costing, if sales change by
P1.00, income will change by
A. P 0.25 C. P 0.75
B. P 0.12 D. P 0.10
Answer: A
1.00 - (1.00 x .75) = P0.25
Answer: A
The only relevant information to compute the effect of dropping the mining of gold ore is the negative
segment margin. If the product line is dropped, the company can avoid the negative margin of P1
million.
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6. Aging Company plans to discontinue a segment with a P32,000 segment margin. Common expenses
allocated to the segment amounted to P45,000, of which P20,000 cannot be eliminated if the segment
were closed. The effect of closing down the segment on Aging Company’s before tax profit would
be
A. P12,000 decrease C. P 7,000 decrease
B. P12,000 increase D. P 7,000 increase
Answer: C
Avoidable common expenses P 25,000
Segment margin lost 32,000
Decrease in profit P( 7,000)
Answer: A
Revenues P29,000
Variable cost (P29,000 x 0.57) 16,530
Contribution margin 12,470
Less Short-term controllable fixed cost 4,200
Short-term controllable margin 8,270
Long-term controllable fixed cost 3,800
Long-term controllable margin P 4,470
Answer: B
Revenues P48,000
Variable cost (P48,000 x 0.59) 28,320
Contribution margin 19,680
Short-term controllable fixed cost 5,200
Short-term controllable margin – Div B P14,480
Questions 9 through 12 are based on the following annual flexible budget which has been prepared for use in
making decisions relating to Product X.
Budgeted units 100,000 150,000 200,000
Sales Volume P800,000 P1,200,000 P1,600,000
Manufacturing costs:
Variable P300,000 P 450,000 P 600,000
Fixed 200,000 200,000 200,000
P500,000 P 650,000 P 800,000
Selling expenses:
Variable P200,000 P 300,000 P 400,000
Fixed 160,000 160,000 160,000
P360,000 P 460,000 P 560,000
Income (or loss) (P60,000) P 90,000 P 240,000
The 200,000-unit budget has been adopted and will be used for allocating fixed manufacturing costs to units of
Product X. At the end of the first six months the following information is available:
Units
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Production completed 120,000
Sales 60,000
All fixed costs are budgeted and incurred uniformly throughout the year and all costs incurred coincide with the
budget.
Over- and underapplied fixed manufacturing costs are deferred until year-end. Annual sales have the following
seasonal pattern:
Portion of Annual Sales
First quarter 10%
Second quarter 20%
Third quarter 30%
Fourth quarter 40%
100%
9. The amount of fixed factory costs applied to product during the first six months under absorption
costing would be
A. Overapplied by P20,000. C. Underapplied by P40,000.
B. Equal to the fixed costs incurred. D. Underapplied by P80,000
Answer: A
Budgeted actual fixed overhead (0.5 x P200,000) P100,000
Applied fixed overhead (120,000 x P1.00) 120,000
Overapplied fixed overhead (favorable volume variance) P 20,000
10. Reported net income (or loss) for the first six months under absorption costing would be
A. P160,000 C. P 80,000
B. P 40,000 D. P (40,000)
Answer: B
Sales (60,000 x P8) P480,000
Cost of goods sold (60,000 x P4) 240,000
Gross profit 240,000
Selling and other expenses (60,000 x 2) + P80,000 200.000
Absorption profit P 40,000
11. Reported net income (or loss) for the firs six months under direct costing would be
A. P144,000. C. P 72,000
B. P0 D. P(36,000)
Answer: B
Total contribution margin (60,000 x P3) P180,000
Less: Fixed manufacturing OH P100,000
Fixed selling and other expenses 80,000 180,000
Variable costing profit NIL
CM per unit (P1.6M – P0.6M – P0.4M) ÷ 200,000) P3.00
12. Assuming that 90,000 units of Product X were sold during the first six months and that this is to be
used as a basis, the revised budget estimate for the total number of units to be sold during this year
would be
A. 360,000. C. 240,000
B. 200,000. D. 300,000
Answer: D
The sales pattern indicated that sales for the first semester was 30%. The assumption was that the pattern
was still valid. Therefore the assumed 90,000 units would be 30 percent of expected annual sales.
(90,000 ÷ 0.3) = 300,000 units
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BUDGETING
Comprehensive
Question Nos. 1 through 4 are based on the following information:
Apollo Merchandiser asks your services to develop cash and other budget information for the first quarter of
2007. In December 31, the store had the following balance:
Cash P 55,000
Accounts receivable 4,370,000
Inventories 3,094,000
Accounts payable 1,330,550
Purchases:
1. Fifty four percent of all purchases and selling, general, and administrative expenses are paid in the
month purchased and the remainder in the following month.
2. Each month’s units of ending inventory is equal to one hundred thirty percent of the next month’s
units of sales.
3. The cost of each unit of inventory is P200.
4. Selling, general, and administrative expenses, of which P20,000 is depreciation, are equal to
fifteen percent of the current month’s sales.
1. The respective amounts of budgeted purchases for the months of January and February are:
A. P2,418,000 and P2,360,000 C. P2,250,000 and P2,436,000
B. P2,380,000 and P2,280,000 D. P3,570,000 and P3,420,000
Answer: C
January February
Budgeted sales 11,900 11,400
Add: Ending inventory (130%) 14,820 15,600
Total 26,720 27,000
Less: Beginning inventory 15,470 14,820
Budgeted purchases (units) 11,250 12,180
Unit purchase price 200 200
Budgeted peso purchases P2,250,000 P2,436,000
Budgeted inventories:
December 31 130% x 11,900 15,470
January 31 130% x 11,400 14,820
February 28 130% x 12,000 15,600
March 31 130% x 12,200 15,860
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Answer: D
Payments for:
February purchases 54% x P2,436,000 P1,315,440
January purchases 46% x P2,250,000 1,035,000
Total payments for purchases P2,350,440
Selling, general and administrative expenses:
February: [(P3,420,000 x 0.15) – P20,000]0.54 266,220
January: [(P3,570,000 x 0.15) – P20,000]0.46 237,130
Total cash disbursements P2,853,790
3. The amount of cash collected from sales during the month of January is:
A. P3,338,760 C. P3,404,100
B. P3,551,160 D. P3,556,560
Answer: A
Billings of December 31:
Collections with 3% discount P3,630,000 x 0.6 x 0.97 P2,112,660
Collections end of January P3,630,000 x 0.25 907,500
Billings of November 30: P3,540,000 x 0.09 318,600
Total collections P3,338,760
Answer: B
Budgeted March sales 12,000
Add: Ending inventory units 15,860
Total units required 27,860
Less: Beginning inventory units 15,600
Budgeted purchases in units, March 12,260
Rajah Enterprises is a growing retailer of home care products. During the first four months of the following
year, it forecasts the following sales and purchases:
Sales Purchases
January P7,200,000 P4,200,000
February 6,600,000 4,800,000
March 6,000,000 3,600,000
April 7,800,000 5,400,000
Rajah collects 70% of sales is collection during the month of sale, 20% the following month and 9% in the
second month. 1% of sales are deemed uncollectible.
In order to fully avail of the 2% discount, Rajah pays all the purchases by the tenth of the month following
the month of purchase.
Sales for the month of May are expected to be P6,600,000 and the amount of purchases are P6,000,000.
Operating expenses to be paid during the month of May will be P1,440,000 and the cash balance by May 1 is
P2,200,000.
The Atlanta Corporation has forecast the following sales for the first seven months of the year:
Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total
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material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labor costs
will run P60,000 per month, and fixed overhead is P30,000 per month. Interest payments on the debt will be
P45,000 for both March and June. Finally, Atlanta’s sales force will receive a 3 percent commission on total
sales for the first six months of the year, to be paid on June 30.
5. How much will be paid in the month of January for the purchase of materials?
A. P 27,200 C. P137,856
B. P117,200 D. P 33,600
Answer: A
Payments for purchases in the month of:
December (0.2 x P120,000 x 0.6) P14,400
January (0.2 x P160,000 x 0.4) 12,800
Total January disbursements for purchases P27,200
Answer: C
Payments for purchases:
May purchase (0.2 x P200,000 x 0.6) P24,000
June purchase (0.2 x P220,000 x 0.4) 17,600
Total 41,600
Labor costs 60,000
Fixed Overhead 30,000
Interest payments 45,000
Commission (0.03 x P1,020,000) 30,600
Total disbursements P207,200
CAPITAL BUDGETING
1. 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.
2. When disposing of an old asset and replacing it with a new one, tax effect on
A. gain on sale of the old asset reduces the basis of the new asset
B. gain on sale of the old asset increases the basis of the new asset
C. loss on sale of the old asset reduces the basis of the new asset
D. b and c
3. Bruell 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 C. P 80,000
B. P 72,000 D. P 68,000
4. If an asset costs P35,000 and is expected to have a P5,000 salvage value at the end of its ten-year life, and
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generates annual net cash inflows of P5,000 each year, the cash payback period is
A. 8 years C. 6 years
B. 7 years D. 5 years
5. It is the start of the year and Agudelo Company plans to replace its old grinding equipment. The following
information are made available by the management:
Old New
Equipment cost P70,000 P120,000
Current salvage value 14,000 -
Salvage value, end of useful 5,000 16,000
life
Annual operating costs 44,000 32,000
Accumulated depreciation 55,300 -
Estimated useful life 10 years 10 years
The company is not subject to tax and its cost of capital is 12%. What is the present value of all the
relevant cash flows at time zero?
A. (P 54,000) C. (P106,000)
B. (P120,000) D. (P124,700)
There are two cash flows at time zero: P120,000 outflow and P14,000 inflow.
Net cash outflow (120,000 – 14,000) = 106,000
b. Document flowcharting
d. Systems survey
2. The main components of the Central Processing Unit (CPU) of a computer include only
a. Control, arithmetic and logic, and memory
3. How is an Accounting Information System (AIS) distinguished from a management Information System
(MIS)?
a. An AIS maybe either manual or computer-based and MIS is computer-based.
d. An AIS deals with financial information and MIS handles all other information.
4. Feedback, feed forward and preventive are important types of control systems and procedures for
accounting information systems. Which of the following is in the correct order of feedback, feed forward
and preventive control systems?
a. Inventory control, capital budgeting and cash budgeting.
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b. Cost accounting variances, separation of duties and cash planning.
5. Bench Corp. operates in several regions, with each region performing its data processing in a region data
center. The corporate Management Information System staff has developed a database management system
to handle customer service and billing. The Director of MIS recommended that the new system be
implemented in the Region 4 to ascertain if the system operates in a satisfactory manner. This type of
conversion is called a
a. Crash conversion
b. Parallel conversion
c. Pilot conversion
d. Direct conversion
b. Cassette tape
c. Disk
d. Hard disk
7. Important types of control systems and procedures for accounting information systems are feedback, feed
forward and preventive. Which one of the following is in the correct order of feedback, feed forward and
preventive control systems?
a. Cost accounting variances, separation of duties and cash planning.
8. Which one of the following represents a lack of internal control in a computer-based information systems?
a. The design and implementation is performed in accordance with management’s specific authorization.
b. Any and all changes in application programs have been authorization and approval of management.
c. Provisions exist to ensure the accuracy and integrity of computer processing of all files and reports.
d. Both computer operators and programmers have unlimited access to the programs and data files.
9. An Executive Information System (EIS) focuses on long-range objectives and gives immediate information
about an organization’s critical success factors. It can be used on computers of all sizes. It is commonly
used by all executives at the highest levels within the organization. All of the following statements apply to
EIS except:
a. It is likely to be one of the most widely used and the largest of the information subsystems in a
business organization.
b. It provides top executives with immediate and easy access to information in ahighly interactive format.
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d. It helps executives monitor business conditions in general and assist in strategic planning to control
and operate the entity.
b. Packaged software
c. On-line systems
d. Microsystems
11. To control purchasing and accounts payable, an information system must include certain source documents.
For a manufacturing concern like fruit processors, Inc., these documents should include
a. Purchase requisitions, purchase orders, receiving reports and suppliers invoices.
c. Purchase requisitions, purchase orders, inventory reports of goods needed and supplier’s invoices.
3. Credit management
6. Risk management
7. Economic appraisal
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Which of the following are the functions of the controller?
a. All eight items
13. To distinguish between management accounting and financial accounting, the following statements are
correct except:
a. Management accounting in view of its various integrated recipients should have a separate data
recording and retrieval system from financial accounting.
b. Financial accounting is bound by Generally Accepted Accounting Principles (GAAP), and management
accounting need not be in conformity with GAAP.
c. Financial accounting can be regarded as the process while management accounting can be regarded as
the product of that process.
d. Management accounting output must be released on time so as not to erode its usefulness; Financial
accounting output can still be useful even when delayed.
14. The activities in a management system’s control can be grouped into four
1. Measurement of actual performance
b. 3, 1, 4, 2
c. 1, 3, 4, 2
d. 3, 4, 1, 2
16. When a balance sheet amount is related to an income statement amount in computing a ratio,
a. The balance sheet amount should be converted to an average for the year.
b. The income statement amount should be converted to an average for the year.
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d. Comparisons with industry ratios are not meaningful.
17. On December 31, 19x0 the Balance Sheet of Belle Co. disclosed total assets of P8, 000,000, current
liabilities of P1, 500,000 and long-term debt of P2, 400, 000. Common stock outstanding amounted to
500,000 shares, while 100,000 shares of P10 par value preferred stock were outstanding. The retained
earnings account indicated a deficit balance of P2, 000, 000. Belle’s book value per share of common stock
as of December 31, 19x0 is
a. P16.00
b. P6.20
c. P12.20
d. P8.20
18. How are dividends per share for common stock used in the calculation of the following?
Dividend per-share Earnings
Payout ratio per share
a. Denominator denominator
d. Numerator Numerator
19. During 19x5, Reuel Company purchased P1, 920, 000 of inventory. The cost of goods sold for 19x5 was
P1, 800, 000 and the ending invenotyr at December 31, 19x5 was P360, 000. What was the inventory turn-
over for 19x5?
a. 5.0 b. 5.3 c. 6.0 d. 6.4
COMPREHENSIVE BUDGETING
20. For May 19x1, Young Company has budgeted its cash receipts at P125, 000 and its cash disbursements at
P138, 000. The company’s cash balance on May 1 is P17, 000. If the desired May 31 cash balance is P20, 000,
then how much cash must the company borrow during the month (before considering any interest payments)?
a. P4, 000 b. P8, 000 c. P12, 000 d. P16, 000
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23. Beta Market has 3 stores: P, Q and R. During 19x8, Store P had a contribution margin of P24, 000 and a
contribution margin ratio of 30%. Store Q had variable costs of P48, 000 and a contribution margin ratio of
40%. Store R had variable costs of P84, 000 which represented 70% of sales in the store. For 19x8, Star
Market’s total sales were
a. P320, 000
b. P360, 000
c. P440, 000
d. P280, 000
24. Khi Company has two divisions J and K. During 19x2, the contribution margin in J was P30, 000. The
contribution margin ration in K during 19x2 was 40%, its sales were P125, 000 and its segment margin was P32,
000. The common fixed expenses in the company were P40, 000 and the company’s net income for the year was
P18, 000. The segment margin for Division J for 19x2 was
a. P26, 000
b. P32, 000
c. P8, 000
d. P58, 000
QUANTITATIVE METHODS
26. A small company makes only two products with the following two production constraints representing two
machines and their maximum availability:
2 X + 3 Y < 18
2 X + Y < 10
b. P21
c. P18
d. P24
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27. Which of the following characteristics are generally associated with a “conservative” financial policy?
a. High current assets relative to sales and high current liabilities relative to total assets.
b. High current assets relative to sales and low current liabilities relative to total assets.
c. Low current assets relative to sales and high current liabilities relative to total assets.
d. Low current assets relative to sales and low current liabilities relative to total assets.
28. The Manila Commercial Bank and Rap Corp. signed a loan agreement subject to the following terms.
a. Stated interest rate of 18% on a one-year discounted loan; and
b. 15% compensating non-interest bearing checking account balance to be maintained by Rap with Manila
Commercial Bank.
The net proceeds of the loan was P1 million. The principal amount of the loan was
a. P1, 176, 471
29. Three suppliers of East Corporation offer different credit terms. West Co. offers terms of 1 ½ / 15, net 30.
North Corp. offers terms of 1/10. Net 30. South Inc. offers terms of 2/10, net 60. East Corp. would have to
borrow from a bank at an annual rate of 12% in order to take any cash discounts. Which one of the following
would be the most attractive for Ma Corp.? (Assume 360 days a year).
a. Purchase from West Co., pay in 15 days and borrow any money needed from the bank.
b. Purchase from West Co., pay in 30 days and borrow any money needed from the bank.
c. Purchase from South Inc., pay in 60 days and borrow any money needed from the bank.
b. 14%
c. 13.50%
d. 12.67%
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31. Fabella Company budgeted sales on account of P120, 000 for July, P211, 000 for August and P198, 000 for
September. Collection experience indicates that 60% of the budgeted sales will be collected the amount after the
sale, 36% the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that
should be budgeted for September would be
a. P169, 800
b. P147, 960
c. P197, 880
d. P194, 760
RECEIVABLES MANAGEMENT
32. Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30 will generally
a. Increase the average collection period and increase sales
33. If a firm purchases raw materials from its supplier on a 2/10, net/60 cash discount basis, the equivalent
annual interest rate (using a 360-day year) of foregoing the cash discount and making payment on the 60th day is
a. 14.7%
b. 73.5%
c. 12.2%
34. If a firm’s credit terms require payment within 45 days but allow a discount of 2% if paid within 15 days
(using a 360-day year), the approximate cost/benefit of the trade credit terms is
a. 2%
b. 16%
c. 48%
d. 24%
35. When a company offers credit terms of 2/10, net/30, the annual interest cost, based on a 360-day year, is
a. 24.0%
b. 24.5%
c. 35.3%
d. 36.7%
INVENTORY MANAGEMENT
36. The size of safety stocks for inventory is important for most firms. Though several factors can be cited as
contributing to the determination of the size of safety stocks that a firm should carry, the issue can often be
reduced to a single factor. Which one of the following statements best summarizes the factor that affects the
level of safety stock that a firm will carry?
a. The amount of idle cash management believes it has to invest in safety stock.
b. The rapidity with which the inventory position will turn over.
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c. The level of production the firm’s bank is willing to finance.
d. The level of uncertainty with respect to an out-of-stock condition that management is willing to accept.
CAPITAL BUDGETING
Questions 52 and 53 are based on the following data:
Allo foundation, a tax exempt organization, invested P200, 000 in a five-year project at the beginning of 19x5.
Allo estimates that the annual cash savings from this project will amount to P65, 000. The P200, 000 of assets
will be depreciated over their five-year life on the straight line basis. On investments of this type, Allo’s desired
rate of return is 12%.
39. Under the time-adjusted rate of return capital budgeting technique, it is 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
40. Rano Co. has the opportunity to invest in a two-year project which is expected to produce cash flow from
operation, net of income taxes, of P100, 000 in the first year and P200, 000 in the second year. Rano has a cost
of capital of 20%. For this project, Rano should be willing to invest immediately a maximum of
a. P283, 300
b. P249, 900
c. P222, 100
d. P208, 200
41. The net present value capital budgeting technique can be used when cash flows from period to period are:
Uniform Uneven
a. No Yes
b. No No
c. Yes No
d. Yes Yes
42. It is assumed that cash flows are reinvested at the rate actually earned by the investment in which of the
following capital budgeting techniques?
Time-adjusted rate of return Net present value
a. Yes Yes
b. Yes No
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c. No No
d. No Yes
43. If income tax considerations are ignored, how is straight line depreciation expense used in the following
capital budgeting techniques?
Time-adjusted rate of return Net present value
a. Excluded Excluded
b. Excluded Included
c. Included Excluded
d. Included Included
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Questions 45 and 46 are based on the following
Consideration is being given to the possible purchase of a P30, 000 machine for Alo, 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).
45. For the new machine, the simple rate of return based on initial investment would be
a. 12%
b. 20%
c. 30%
d. 40%
46. If income taxes are ignore, 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
FINANCING DECISIONS
47. For 19x9, Nelson Industries increased earnings before interest and taxes by 17%. During the same period,
net income after tax increased by 42%. The degree of financial leverage that existed during 19x9 is
a. 1.70
b. 4.20
c. 2.47
d. 5.90
49. Among the following major parts of a project feasibility study, which grouping is considered critical?
a. Management, financial and social returns
b. Technical. Financial and environmental aspects
c. Economic benefits, management, financial
d. Marketing, engineering or technical and financial
50. The statements below about project feasibility studies are the true except:
a. Any change which can materially alter the assumptions used in the preparation of the forecast will
render it useless
b. It is important for government agencies in order to determine entitlement to government incentives
c. It also covers the social desirability aspects of a proposed undertaking
d. Since data gathering is a basic step in its preparation, all the necessary and required information will
always be available.
ECONOMICS
51. Which one would not be included in the calculation of GDP?
a. Purchase of a new home
b. An automotive worker’s wges
c. A doctor’s fee
d. Purchase of common stock
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52. The difference between GNP and GDP is that
a. GDP measures what is produced and earned by a nation’s people and property and GNP measures what
is produced and earned in the domestic economy.
b. GDP emphasizes ownership and GNP emphasizes location.
c. GNP measures what is produced and earned by a nation’s people and property and GDP measures what
is produced and earned in the domestic economy.
d. GDP includes depreciation and GNP does not.
54. The most effective fiscal 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. Decrease taxes and increase government spending
d. Increase taxes and decrease government spending
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