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PROBLEMS 1. A company has the following cost components for 100,000 Materials Labor Manufacturing overhead Selling and administrative expenses
units of product for the year: P200,000 100,000 200,000 150,000
All costs are variable except for P100,000 of manufacturing overhead and P100,000 of selling and administrative expenses. The total costs to produce and sell 110,000 units for the year are: a. P540,000 c. P715,000 b. P695,000 d. P650,000 Answer: B Variable cost: Materials and labor [(P200,000+P100,000)/ [(P200,000+P100,000)/100,000] 100,000] x 110,000 Overhead (P100,000/100,000) x 110,000 110,000 Selling and adm. expenses (P50,000/100,000) x 110,000 Fixed cost (P100,000 + P100,000) Total
P330,000 55,000 200,000 P695,000
2. A manufacturing company employs variable costing for internal reporting and analysis purposes. However, it converts its records to absorption costing for external reporting. The accounting department always reconciles the two operating income figures to assure that no errors have occurred in the conversion. Financial data for the year are presented below. The fixed manufacturing overhead cost per unit was based on the planned level of production of 480,000 units. Budgeted and Actual Levels for Sales and Production Budget Actual Sales (in units) 495,000 510,000 Production (in units) 480,000 500,000 Standard Unit Manufacturing Costs Variable Costing Variable costs cost s P10.00 Fixed manufacturing overhead 0 Total unit manufacturing costs P10.00
Absorption Costing P10.00 6.00 P16.00
The difference between the operating income calculated under the variable costing method and the operating income calculated under the absorption costing method would be a. P120,000 c. P60,000 b. P90,000 d. P57,600 Answer: C Change in inventory (500,000 – 510,000) x Fixed overhead cost per unit Difference in income
10,000 P6 P60,000
5. A manufacturer can sell its single product for P660. Below are the cost data for the product: Direct materials P170 Direct labor 225 Manufacturing overhead 90
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The relevant margin amount when beginning a theory of constraints (TOC) analysis is a. P175 c. P345 b. P265 d. P490 Answer: D Selling price Less direct materials Margin Items 6 and 7
P660 170 P490
are based on the following information:
Blackhall Corporation produces chemicals used in the cleaning industry. During the previous month, Blackhall incurred P300,000 of joint costs in producing 60,000 units of AR-01 and 40,000 units of JZ-02. Blackhall uses the units-of-production method to allocate joint costs. Currently, AR-01 is sold at split-off for P3.50 per unit. Franck Corporation has approached Blackhall to purchase all of the production of AR-01 after further processing. The further processing will cost Blackhall P90,000. 6. Concerning AR-01, which one of the following alternatives is most advantageous? a. Blackhall should process further and sell to Franck if the selling price is greater than P3.00, which covers the joint costs. b. Blackhall should continue to sell at split-off unless Franck offers at least P4.50 per unit after further processing, which covers Blackhall’s total costs. c. Blackhall should process further and sell to Franck if the selling price is greater than P5.00. d. Blackhall should process further and sell to Franck if the selling price is greater than P5.25, which maintains the same gross profit percentage. Answer: C Selling price at split off Add further processing cost (P90 ,000÷60,000) Break-even price
P3.50 1.50 P5.00
7. Assume that Blackhall Corporation agreed to sell AR-01 to Franck Corporation at P5.50 per unit after further further processing. During the first month of production, Blackhall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AR-01, which one of the following statements state ments is true? a. The operating profit last month was P50,000, and the inventory value is P15,000. b. The operating profit last month was P50,000, and the inventory value is P45,000. c. The operating profit last month was P125,000, and the inventory value is P30,000. d. The operating profit last month was P200,000, and the inventory value is P30,000. Answer: B Selling price Less costs: Joint cost (P300,000 ÷ 100,000) Further processing cost Profit Profit (50,000 x P1.00) Inventory (10,000 x P4.50)
P5.50 P3.00 1.50
4.50 P1.00 P50,000 P45,000
8. Meemon Manufacturing, which is subject to a 40% income tax rate, had the following operating data for the period just ended: Selling price per unit P60 Variable costs per unit P22 Fixed costs P504,000 Management plans to improve quality of its sole product by (1) replacing ta component that costs P3.50 with a higher-grade unit that costs P5.50, and (2) acquiring a P180,000
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packaging machine. Meemon will depreciate the machine over a 10-year life with no estimated salvage value by the straight-line method of depreciation. If the company wants to earn after-tax income of P172,800 in the upcoming period, it must sell a. 19,300 units. c. 22,500 units. b. 21,316 units. d. 23,800 units. Answer: C Fixed cost [P504,000 + (P180,000÷10)] Desired profit (P172,800 ÷ 60%) Contribution margin ÷ Contribution margin per unit (P60 –
) Required sales in units
P522,000 288,000 P810,000 P36 22,500
9. Given the following data, what is the marginal propensity to consume? Level of Disposable income P40,000 48,000 a. 1.33 b. 1.16
Level of Consumption P38,000 44,000 c. 0.95 d. 0.75
Answer: D Change in consumption (P44,000 – P88,000) ÷ Change in disposable income (P48,000 – P40,000) Marginal propensity to consume
Items 10 and 11
P6,000 8,000 0.75
are based on the following information:
JSR Manufacturing has assembled the data appearing below pertaining to two products. Past experience has shown that the unavoidable fixed manufacturing factory overhead included in the cost per machine hour averages P10. JSR has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Total machine capacity is 50,000 hours. Blender Electric Mixer Direct materials P 6 P11 Direct labor 4 9 Manufacturing overhead at P16/hr 16 32 Cost if purchased from outside supplier 20 38 Annual demand (units) 20,000 28,000 10. If JSR Manufacturing desires to follow an optimal strategy, it should produce a. 25,000 electric mixers and purchase all other units as needed. b. 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed. c. 20,000 blenders and purchase all other units as needed. d. 28,000 electric mixers and purchase all other units as needed. Answer: B Blender Relevant cost to make: Materials and labor (P6 + P4) Overhead (P16 – P10*) Total Purchase price Savings if made ÷ Hours per unit (P16÷P16) Savings per hour
P10 6 P16 20 P4 1 P4
Electric Mixer (P11+P9) (P32 – P20*)
(P32÷P16)
*Fixed overhead (P10 x 1 hr/unit = P10; P10 x 2hrs/unit = P20)
P20 12 P32 38 P6 2 P3
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Blender’s savings per hour is higher than that of Mixer. The available 50,000 hrs should be used to produce 20,000 units of Blenders and 15,000 units [(50,000 – 20,000) ÷ 2 hours] of Electric mixers.
11. With all other things constant, if JSR Manufacturing is able to reduce the direct materials for an electric mixer to P6 per unit, the company should a. produce 25,000 electric mixers and purchase all other units as needed. b. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as needed. c. produce 20,000 blenders and purchase all other units as needed. d. purchase all units as needed. Answer: A Blender Relevant cost to make: Materials and labor (P6 + P4) Overhead (P16 – P10*) Total Purchase price Savings if made ÷ Hours per unit (P16÷P16) Savings per hour
P10 6 P16 20 P4 1 P4
Electric Mixer (P6+P9) (P32 – P20*)
P15 12 P27 38 P11 2 P5.5
(P32÷P16)
*Fixed overhead (P10 x 1 hr/unit = P10; P10 x 2hrs/unit = P20) Mixer’s savings per hour is higher than that of Blender. The available 50,000 hrs should be used to produce 25,000 units of Mixers (50,000 hrs ÷ 2 hrs/unit) and purchase all the other additional units required.
12. Listed below are selected line items from the Cost of Quality Report for Watsup Products for last month: Rework P 725 Equipment maintenance 1,154 Product testing 786 Product repair 695 What is Watsup’s total prevention and appraisal cost for last month? a. P786 c. P1,940 b. P1,154 d. P2,665 Answer: C Prevention cost (preventive equipment maintenance) Appraisal cost (product testing ) Total prevention and appraisal cost
13. Donnie Auto has developed the following production plan: January February March April
P1,154 786 P1,940
10,000 8,000 9,000 12,000
Each unit contains 3 kilograms of direct materials. The desired direct materials ending inventory each month is 120% of the next month’s production, plus 500 kilograms. (The beginning inventory meets this requirement.) Donnie has developed the following direct labor standards for production of these units. Department 1 Department 2 Hours per unit 2.0 0.5 Hourly rate P7.25 P12.00 Donnie Auto’s total budgeted direct labor pesos for February usage should be a. P164,000. c. P184,500. b. P174,250. d. P221,400.
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Answer: A February production Labor cost per unit [(2 x P7.25) + (0.5 x P12)] Budgeted labor cost
8,000 P20.50 P164,000
14. Based on past experience, a company has developed the following budget formula for estimating its shipping expenses. The company’s shipments average 12 kg. per shipment: Shipping costs = P16,000 + (P0.50 x kg. shipped) The planned and actual activities regarding order and shipments for the current month are given in the following schedule: Plan Actual Sales orders 800 780 Shipments 800 820 Units shipped 8,000 9,000 Sales P120,000 P144,000 Total kilograms shipped 9,600 12,300 The actual shipping costs for the month amounted to P21,000. The appropriate monthly flexible budget allowance for shipping costs for the purpose of performance evaluation would be a. P20,680. c. P20,800. b. P20,920. d. P22,150. Answer: C Variable cost (12,300 kgs. x P0.50) Fixed cost Flexible budget
15.
P 6,150 16,000 P22,150
Ebony Company has the following expected pattern of collections on credit sales: 70 percent collected in the month of sale, 15 percent in the month after the month of sale, and 14 percent in the second month after the month of sale. The remaining 1 percent is never collected. At the end of May, Ebony Company has the following accounts receivable balances: From April sales P21,000 From May sales 48,000 Ebony's expected sales for June are P150,000. What were total sales for April? a. P150,000 c. P 70,000 b. P 72,414 d. P140,000 Answer: D April sales P21,000 ÷ 15% = P140,000
16. The following information is given for the Alpha Sales Var. cost of goods sold Fixed manufacturing costs Variable selling Fixed admin. (50% allocated) Fixed selling (20% allocated) Assets at cost Accumulated depreciation
Division of Sorority Corporation. P600,000 200,000 50,000 30,000 20,000 50,000 800,000 200,000
If Sorority Corporation uses ROI to evaluate division managers and uses historical cost as the investment base, the ROI for Alpha Division is: a. 31.25% c. 41.67% b. 33.75% d. 45.00%
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Answer: B Sales Var. cost of goods sold Fixed manufacturing costs Variable selling Fixed admin. (50%x P20,000) Fixed selling (80% x P50,000) Total cost Division profit ÷ Asset at cost Division ROI
P600,000 200,000 50,000 30,000 10,000 40,000 P330,000 P270,000 800,000 33.75%
17. In the two following constraint equations, X and Y represent two products (in units) produced by the Uncommon Products Corporation. Constraint 1: 3X + 5Y < 4,200 Constraint 2: 5X + 2Y > 3,000 What is the maximum number of units of Product X that can be produced? a. 4,200 c. 600 b. 3,000 d. 1,400 Answer: D If Y = 0, X = 1,400 for constraint 1 and 600 for constraint 2. Take the higher value (1,400).
18. The projected sales price for a new product (which is still in the development stage of the product life cycle) is P50. The company has estimated the life-cycle cost to be P30 and the first-year cost to be P60. On this type of product, the company requires a P12 per unit profit. What is the target cost of the new product? a. P60 c. P38 b. P30 d. P43 Answer: C Projected sales price of P50 less required profit of P12 = Target cost of P38.
19. 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. P 500 c. P2,500 b. P2,000 d. P 0 Answer: A EOQ =
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>.?)(1+ )@ $%&&& '()*+ ./; 3/:;/;: 467%,&& A 67%&&&8 # 6,&&
20. Ning Company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution margin of P50, and Product Y has a contribution margin of P64. Product X requires 5 hours of machine time, and Product Y requires 8 hours of machine time. If Ning Company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of a. P250,000. c. P210,000. b. P240,000. d. P200,000.
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Answer: B Product X P50 5 P10
Contribution margin per unit ÷ Machine hours per unit Contribution margin per hour
Product Y P64 8 P8
Product X has the higher contribution margin per hour, so 80% of the available time must be used to produce 4,000 units of X [(25,000 x 80%) ÷ 5 hrs/unit]. the remaining time should be used to produce 625 units of Product Y [(25,000 x 20%) ÷ 8 hrs/unit. Number of units to produce x CM per unit Total contribution margin
4,000 P50 P200,000
625 P64 P40,000
=
P240,000
21. Mangit Company is currently operating at a loss of P15,000. The sales manager has received a special order for 5,000 units of product, which normally sells for P35 per unit. Costs associated with the product are: direct material, P6; direct labor, P10; variable overhead, P3; applied fixed overhead, P4; and variable selling expenses, P2. The special order would allow the use of a slightly lower grade of direct material, thereby lowering the price per unit by P1.50 and selling expenses would be decreased by P1. If Mangit wants this special order to increase the total net income for the firm to P10,000, what sales price must be quoted for each of the 5,000 units? a. P23.50 c. P27.50 b. P24.50 d. P34.00 Answer: A Desired profit per unit [(P15,000) + P10,000] ÷ 5,000 units Add relevant costs (P6 – P1.50) + P10 + P3 + ( P2 – P1) Selling price
P 5.00 18.50 P23.50
22. Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price being less than the target price of P2,200,000. Briar’s actual costs incurred were P1,920,000. How much should Briar receive from the contract? a. P2,060,000 c. P2,156,000 b. P2,112,000 d. P2,200,000 Answer: c Actual costs incurred Multiply by 110% (cost + 10%) Formula price Target price Savings
!
1.10
P1,920,000 x 110% P2,112,000 2,200,000 P 88,000
Amount to be received = (P88,000 x 50%) + 2,112,000 = P2,156,000
23. The following is a summarized income statement of Carr Co.’s Profit Center No. 43 for March 2013: Contribution margin P70,000 Period expenses: Manager’s salary P20,000 Facility depreciation 8,000 Corporate expense allocation 5,000 33,000 Profit center income P37,000 Which of the following amounts would most likely be subject to the control of the profit center’s manager? a. P70,000 c. P37,000 b. P50,000 d. P33,000 Answer: A
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The manager of Carr Co.’s Center No. 43 would be most likely to control the Center’s contribution margin of P70,000. The period expenses shown in the problem would not be subject to the manager’s control and thus are irrelevant items
24. The budget for Edwin Auto Repair Shop for the year is as follows: Direct labor per hour P30 Total labor hours 10,000 Overhead costs: Materials handling and storage P10,000 Other (rent, utilities, depreciation, insurance) P120,000 Direct materials cost P500,000 Edwin allocates materials handling and storage costs per peso of direct materials cost. Other overhead is allocated based on total labor hours. In addition, Edwin adds a charge of P8 per labor hour to cover profit margin. Cargo Trucking Co. has brought one of its trucks to Edwin for an engine overhaul. If the overhaul requires twelve labor hours and P800 parts, what price should Edwin charge Cargo for these repair services? a. P1,160 c. P1,416 b. P1,256 d. P1,472 Answer: C Materials Materials handling [P800 x (P10,000÷P500,000)] Labor, other overhead, and profit [P30+(P120,000÷10,000) + P8] x 12 hrs Selling price Items 25 to 29
P 800 16 600 P1,416
are based on the following information:
The following information pertains to a product for a ten-week budget period: Sales price P11 per unit Materials P3 per unit Manufacturing conversions costs: Fixed P210,000 Variable P2 per unit Selling and administrative costs: Fixed P45,000 Variable P1 per unit Beginning accounts payable for materials P40,000 Manufacturing and sales of 70,000 units are expected to occur evenly over the period. Materials are paid for in the week following use. There are no beginning inventories. 25. What amount should be budgeted for cash payments to material suppliers during the period? a. P189,000 c. P229,000 b. P 40,000 d. P250,000 Answer: C Beginning accounts payable Purchases (70,000 x P3) Ending accounts payable – tenth week (P210,000 x 1/10) Cash payments to suppliers
P 40,000 210,000 (21,000) P229,000
26. Using variable costing, what is the budgeted income for the period? a. P 95,000 c. P420,000 b. P350,000 d. P210,000 Answer: A Contribution margin [70,000 x (P11 - )] Less Fixed costs (P210,000 + P45,000) Profit
27. Using absorption costing, what is the budgeted income for the period?
P350,000 255,000 P 95,000
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a. P 95,000 b. P350,000
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c. P420,000 d. P210,000
Answer: A Production = Sales Absorption Income = Variable Costing Income
28. Actual results are as budgeted, except that only 60,000 of the 70,000 units produced were sold. Using absorption costing, what is the difference between the reported income and the budgeted net income? a. P50,000 c. P110,000 b. P30,000 d. P 20,000 Answer: D Decrease in contribution margin (10,000 x P5) Less fixed overhead to be charged to inventory [10,000 x (P210,000/70,000) Difference in income (reported income versus budgeted)
P50,000 30,000 P20,000
29. If a special order for 4,000 units would cause a loss of 1,000 regular sales, what minimum amount of revenue must be generated from the special order so that net income is not reduced? (All cost relationships remain unchanged.) a. P 5,000 c. P24,000 b. P29,000 d. P20,000 Answer: B Decrease in CM from regular sales (1,000 x P5) Add variable cost [4,000 x (P3+P2+P1 )] Required minimum amount of revenue
P 5,000 24,000 P29,000
30. Lifelong Company has been asked to evaluate the profitability of a product that it manufactured and sold from Year 7 through Year 10. The product had a one-year warranty from date of sale. The following information appears in the financial records: Research, development, and design cost, Years 5 & 6 Manufacturing and distribution costs, Years 7 to 10 Warranty costs, Years 7 to 10 Warranty cost, Year 11 The life-cycle cost for this product is a. P10,000,000. b. P12,000,000.
P5,000,000 7,000,000 200,000 100,000
c. P12,200,000. d. P12,300,000.
Answer: D Research, development, and design cost, Years 5 & 6 Manufacturing and distribution costs, Years 7 to 10 Warranty costs, Years 7 to 10 Warranty cost, Year 11 Life-cycle cost
P 5,000,000 7,000,000 200,000 100,000 P12,300,000
31. Yellow Co. is considering the purchase of a new machine that costs P450,000. The new machine will generate net cash flow of P150,000 per year and net income of P100,000 per year for five years. Yellow’s desired rate of return is 6%. The present value factor for a five-year annuity of P1, discounted at 6%, is 4.212. The present value factor of P1, at compound interest of 6% due in five years, is 0.7473. What is the new machine’s net present value? a. P450,000 c. P181,800 b. P373,650 d. P110,475
Answer: C
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Present value of net cash inflow (P150,000 x 4.212) Less cost of investment Net present value
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P631,800 450,000 P181,800
ITEMS 32 AND 33 ARE BASED ON THE FOLLOWING INFORMATION: Assume that Micky Industries is considering investing in a project with the following characteristics: Initial investment P500,000 Additional investment in working capital 10,000 Cash flows before income taxes for years 1 through 5 140,000 Yearly tax depreciation 90,000 Terminal value of investment 50,000 Cost of capital 10% Present value of P1 received after 5 years discounted at 10% 0.621 Present value of an ordinary annuity of P1 for 5 years at 10% 3.791 Marginal tax rate 30% Investment life 5 years Assume that all cash flows come at the end of the year. 32. What is the amount of the after-tax cash flows in year 2? a. P140,000 c. P 98,000 b. P125,000 d. P 70,000 Answer: B Cash flow after tax but before depreciation (P140,000 x 70%) Add tax savings due to depreciation (P90,00 0 x 30%) After tax cash flows
P 98,000 27,000 P125,000
33. What is the net present value of the investment? a. P175,000 c. P 1,135 b. P 58,000 d. P (12,340) Answer: C Present value of cash flows from operations (P125,000 x 3.791) Present value of working capital (P10,000 x 0.621) Present value of terminal value (P50,000 x 0.621) Total present value of cash inflows Less cost of investment (P500,000 + P10,000) Net present value
P473,875 6,210 31,050 P511,135 510,000 P 1,135
34. A company with P4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by P720,000. The company’s average collection period for new customers is expected to be 75 days, and the payment behavior of the existing customers is not expected to change. Variable costs are 80% of sales. The firm’s opportunity cost is 20% before taxes. Assuming a 360-day year, what is the company’s benefit (loss) from the planned change in credit terms? a. P0 c. P144,000 b. P 28,800 d. P120,000 Answer: D Incremental contribution margin (P720,000 x 20%) Less opportunity cost ( x 75 days x 20%)
P144,000 24,000
Benefit from the change in credit terms
P120,000
ITEMS 35 AND 36 ARE BASED ON THE FOLLOWING INFORMATION:
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NOSIGNAL Telecom is considering a project for the coming year that will cost P50 million. NOSIGNAL plans to use the following combination of debt and equity to finance the investment. •
Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par.
• Use P35 million of funds generated from earnings. The equity market is expected to earn 12%. Treasury bills are currently yielding 5%. The beta coefficient for NOSIGNAL is estimated to be 0.60. NOSIGNAL is subject to an effective corporate income tax rate of 40%. 35. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital. a. 10.50% c. 9.50% b. 8.50% d. 6.30% Answer: A Proceeds from issuance of bonds [P15,000,000 x (101% – 2%) Retained earnings Total capital
P14,850,000 35,000,000 P49,850,000
Weighted average cost of capital = [(7% x P14,850/P49,850) + (12% x 35,000/49,850) = 10.50%
36. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the risk-free rate of return to the incremental yield of the expected market return that is adjusted by the company’s beta. Compute NOSIGNAL’s expected rate of return. a. 9.20% c. 7.20% b. 12.20% d. 12.00% Answer: A Rate of return = 5% + 0.60(12% - 5%) = 9.20%
ITEMS 37 AND 38 ARE BASED ON THE FOLLOWING INFORMATION: The following information is available for Armstrong Enterprises for 2013: Net operating profit (income) after taxes Depreciation expense Change in net working capital Capital expenditures Invested capital (total assets – current liabilities) Weighted-average cost of capital 37.
P36,000,000 15,000,000 10,000,000 12,000,000 100,000,000 10%
What is the amount of the economic value added (EVA)? a. P20,000,000 c. P15,000,000 b. P26,000,000 d. P36,000,000 Answer: B Profit after tax Less capital charge on invested capital (P100,000,000 x 10%) Economic value added
38. What is the free cash flow for 2013? a. P36,000,000 b. P30,000,000
c. P29,000,000 d. P26,000,000
P36,000,000 10,000,000 P26,000,000
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Answer: C Net operating profit after taxes + Depreciation expense – Change in net working capital – Capital expenditures Free cash flow
P36,000,000 15,000,000 (10,000,000) (12,000,000) P29,000,000
39. A 2013 cash budget is being prepared for the purchase of Toytoy, a merchandise item. Budgeted data are Cost of goods sold for 2013 P300,000 Accounts payable 1/1/13 20,000 Inventory—1/1/13 30,000 12/31/13 42,000 Purchases will be made in twelve equal monthly amounts and paid for in the following month. What is the 2013 budgeted cash payment for purchases of Toytoy? a. P295,000 c. P306,000 b. P300,000 d. P312,000 Answer: C Accounts payable, 1/1/13 2013 purchases [P312,000* – (P312,000/12)] Budgeted cash payment for purchases
Cost of goods sold Add increase in inventory (P42,000 – P30,000) *Purchases
P 20,000 286,000 P306,000
P300,000 12,000 P312,000
40. Product Kitty has sales of P200,000, a contribution margin of 20%, and a margin of safety of P80,000. What is Kitty’s fixed cost? a. P16,000 c. P80,000 b. P24,000 d. P96,000 Answer: B Sales Less margin of safety Break-even sales x CM ratio Fixed costs
P200,000 80,000 P120,000 20% P 24,000
At break even, fixed costs = contribution margin.
41. Hector Corporation uses an activity-based costing system with the following three activity cost pools: Activity Cost Pool Fabrication Order processing Other
Total Activity 20,000 machine-hours 200 orders Not applicable
The Other activity cost pool is used to accumulate costs of idle capacity and organizationsustaining costs. The company has provided the following data concerning its costs: Wages and salaries Depreciation Occupancy Total
P480,000 120,000 200,000 P800,000
The distribution of resource consumption across activity cost pools is given below:
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Wages and salaries Depreciation Occupancy
Fabrication 55% 10% 25%
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Order Processing 20% 45% 40%
Other 25% 45% 35%
Total 100% 100% 100%
The activity rate for the Order Processing activity cost pool is closest to: a. P1,400 per order c. P1,150 per order b. P1,600 per order d. P800 per order Answer: C Wages and salaries (P480,000 x 20%) Depreciation (P120,000 x 45%) Occupancy (P200,000 x 40%) Total ÷ Number of orders Rate per order
P 96,000 54,000 80,000 P230,000 200 P 1,150
42. The following information relates to Snowball Corporation: Sales at the break-even point P312,500 Total fixed expenses P250,000 Net operating income P150,000 What is Snowball's margin of safety? a. P62,500 b. P187,500
c. P100,000 d. P212,500
Answer: B Sales (P250,000 + P150,000) Less break even sales Margin of safety
P400,000 312,500 P187,500
USE THE FOLLOWING TO ANSWER QUESTIONS 43-47: The Ben Company uses standard costing for the single product the company makes and sells. The following data are for the month of April: • Actual cost of direct material purchased and used: P62,400 • Material price variance: P4,800 unfavorable • Total materials variance: P14,400 unfavorable • Standard cost per pound of material: P6 • Standard cost per direct labor hour: P8 • Actual direct labor hours: 3,800 hours • Labor efficiency variance: P1,600 favorable • Standard number of direct labor hour per unit of product: 2 • Total labor variance: P680 unfavorable 43. The total number of units produced during April was: a. 8,000 c. 2,000 b. 12,000 d. 3,800 Answer: C 44. The standard quantity of material allowed to produce one unit of product was: a. 1 pound c. 6 pounds b. 4 pounds d. 2 pounds Answer: B 45. The actual material cost per pound was: a. P6.50 b. P6.00
c. P5.00 d. P7.20
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Answer: A 46. The actual direct labor rate per hour was: a. P16.00 b. P 6.50
c. P8.00 d. P8.60
Answer: D 47. The labor rate variance was: a. P2,280 favorable b. P2,280 unfavorable
c. P920 favorable d. P920 unfavorable
Answer: B SOLUTION TO Numbers 43 to 47: Materials: Actual cost (9,600 x P6.50) Actual quantity used at standard price (9,600 x P6) Std. cost (8,000 x P6)
P62,400 57,600 48,000
Price variance P4,800 unfavorable Quantity variance 9,600 unfavorable
P32,680 30,400 32,000
Rate variance Time variance
Standard quantity per unit = 8,000 ÷ 2,000 = 4 Labor: Actual cost (3,800 x P8.60) Actual time x Std. rate (3,800 x P8) Std. cost (4,000 x P8)
2,280 unfavorable 1,600 favorable
Actual production = 4,000 hours ÷ 2 = 2,000 units
48. The Nut House, Inc., sells three types of nuts: almonds, cashews, and walnuts. Ten thousand cans of nuts were sold in 2011, and the amount of walnuts sold were twice as much as the number of cans of cashews, whereas almond sales were one-half the amount of cashew sales. Fixed costs were P37,680, and the unit sales prices and unit variable costs were as follows: Product Almonds Cashews Walnuts
Unit Sales Price P8 10 6
Unit Variable Cost P4 5 4
The company plans to earn profit of P6,280. The overall break-even unit sales is: a. 10,000 c. 12,000 b. 14,000 d. 6,857 Answer: C Contribution margin per unit x sales mix ratio Weighted contribution margin
Almond P4 "
P2
Cashew P1 1 P5
Walnut P2 2 P4
Total 3.50 P11
Weighted average contribution margin = P11/3.50 = P3.14 Over-all break even unit sales = P37,680 ÷ P3.14 = 12,000
49. Jacob 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 P103.40 per unit. Sales volume (units) 5,000 6,000 Cost of sales P315,500 P378,600 Selling, general, and administrative costs P162,500 P177,600
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The best estimate of the total contribution margin when 5,300 units are sold is: a. P 56,710 c. P 41,340 b. P133,560 d. P213,590 Answer B Cost of sales Selling, general, and administrative costs Total Sales volume (units) Selling price Variable cost per unit (P78,200 ÷ 1,000) Contribution margin per unit x number of units Contribution margin
Low P315,500 P162,500 P478,000
High P378,600 P177,600 P556,200
Difference
5,000
6,000
1,000
P78,200
P103.40 78.20 P 25.20 5,300 P133,560
50. Steady Company produces a single product. Last year, the company's net operating income computed by the absorption costing method was P6,400, and its net operating income computed by the variable costing method was P9,100. The company's unit product cost was P17 under variable costing and P20 under absorption costing. If the ending inventory consisted of 2,100 units, the beginning inventory in units must have been: a. 1,200 c. 3,000 b. 2,100 d. 4,800 Answer C Difference in income (P9,100 – P6,400) ÷ Fixed overhead cost per unit (20 – P17) Decrease in inventory* Add ending inventory Beginning inventory
P2,700 3.00 900 2,100 3,000
*Inventory decreased. Absorption costing income is less than variable costing income.
51. Big Tool Company has a production capacity of 1,500 units per month, but current production is only 1,250 units. The manufacturing costs are P60 per unit and marketing costs are P16 per unit. Small Hall offers to purchase 250 units at P76 each for the next five months. Should Big accept the one-time-only special order if only absorption-costing data are available? a. Yes, good customer relations are essential. b. No, the company will only break even. c. No, since only the employees will benefit. d. Yes, since operating profits will most likely increase. Answer D Since the P60 absorption cost per unit is most likely not all variable costs and since the entire P16 per unit of marketing costs may not be incurred, operating profits will most likely increase.
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 51 THROUGH 53:
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Konrado’s Engine Company manufactures part TE45 used in several of its engine models. Monthly production costs for 1,000 units are as follows: Direct materials Direct labor Variable overhead costs Fixed overhead costs Total costs
P 40,000 10,000 30,000 20,000 P100,000
It is estimated that 10% of the fixed overhead costs assigned to TE45 will no longer be incurred if the company purchases TE45 from the outside supplier. Konrado’s Engine Company has the option of purchasing the part from an outside supplier at P85 per unit. 51. If Konrado’s Engine Company accepts the offer from the outside supplier, the monthly avoidable costs (costs that will no longer be incurred) total: a. P 82,000 c. P 50,000 b. P 98,000 d. P100,000 Answer A P40,000 + P10,000 + P30,000 + (P20,000 x 10%) = P82,000
52. If Konrado’s Engine Company purchases 1,000 TE45 parts from the outside supplier per month, then its monthly operating income will: a. increase by P2,000 c. decrease by P3,000 b. increase by P80,000 d. decrease by P85,000 Answer C Avoidable costs = P82,000 – (P85 x 1,000 units) = decrease of P3,000
53. The maximum price that Konrado’s Engine Company should be willing to pay the outside supplier is: a. P80 per TE45 part c. P98 per TE45 part b. P82 per TE45 part d. P100 per TE45 part Answer B Avoidable costs P82,000 / 1,000 unit s = P82 per part
54. King Company produces a single product. During March, the company had net operating income under absorption costing that was P3,500 lower than under variable costing. The company sold 7,000 units in March, and its variable costs were P7 per unit, of which P3 was variable selling expense. If fixed manufacturing overhead was P2 per unit under absorption costing, then how many units did the company produce during March? a. 5,250 units c. 6,500 units b. 8,750 units d. 6,125 units Answer A Sales in units Less change in inventory (P3,500 ÷ P2) Production
7,000 1,750 5,250
55. XYZ Company believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there will be no change in uncollectible accounts. The company’s budgeted credit sales for the coming year are P27,000,000, and short-term interest rates are expected to average 8%. To make the changes in collection procedures cost beneficial, the minimum savings in collection costs (using a 360-day year) for the coming year would have to be a. P360,000 b. P180,000
c. P36,000 d. P30,000
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Answer C [(P27million/360 days) x (34-28)] x 8% = P36,000
56. Presented below are excerpts from the income statements of Jesse Company for the years ended December 31, 2013 and 2012: Sales Cost of goods sold Gross profit
2013
2012
P1,584,000 928,000 P 656,000
P1,600,000 960,000 P 640,000
The 2013 selling price was 10% lower than in 2012. The change in gross profit due to the change in the numbers of units sold is: a. P17,600 unfavorable c. P128,000 favorable b. P160,000 unfavorable d. P64,000 favorable Answer D Sales variance: 2013 sales 2013 units at 2012 sales price (P1,584,000 ÷ 90%) 2012 sales
P1,584,000 1,760,000 Price variance P176,000 1,600,000 Volume variance 160,000
unf fav
% change in volume = P160,000 ÷ P1,600,000 = 10% increase Cost variance: 2013 cost of sales 2013 units x 2012 cost price (P960,000 x 110%) 2012 cost of sales
P928,000 1,056,000 960,000
Price variance P128,000 fav Volume variance 96,000 unf
Change in gross profit due to change in volume or units sold = (P160,000 fav - P96,000 unf) = P64,000 fav
57. Sanrok Company makes a household appliance with model number RSR1914. The goal for 2013 is to reduce direct materials usage per unit. No defective units are currently produced. Manufacturing conversion costs depend on production capacity defined in terms of RSR1914 units that can be produced. The industry market size for appliances increased 5% from 2012 to 2013. The following additional data are available for 2012 and 2013:
Units of RSR1914 produced and sold Selling price Direct materials (square feet) Direct material costs per square foot Manufacturing capacity for RSR1914 (units) Total conversion costs Conversion costs per unit of capacity
2012
2013
10,000 P100 30,000 P10 12,500 P250,000 P20
10,500 P95 29,000 P11 12,000 P240,000 P20
What is the revenue effect of the growth component? a. P2,500 unfavorable c. P52,500 unfavorable b. P47,500 favorable d. P50,000 favorable Answer D (10,500 - 10,000)
! P100
= P50,000 F
58. Labor Day, Inc. is considering a 10-year capital investment project with forecasted revenues of P40,000 per year and forecasted cash operating expenses of P29,000 per year. The initial cost of the equipment for the project is P23,000 and Labor Day expects to sell the equipment for P9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of P7,000 at
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its inception and another P5,000 at the end of year 5. Assuming a 40% income tax rate, the expected net cash flow from the project in the tenth year is a. P32,000 c. P20,000 b. P24,000 d. P11,000 Answer B Cash flow from operations, net of tax (P40,000 – P29,000) x 60% Salvage value, net of tax (P9,000 x 60%) Working capital to be recovered (P7,000 + P5,000) Cash flow, tenth year
P 6,600 5,400 12,000 P24,000
59. Apple Enterprises is experiencing a growth rate of 9% with a return on assets of 12%. If the debt ratio is 36% and the market price of the stock is P38 per share, what is the return on equity? a. 18.75% c. 9.0% b. 12.0% d. 7.68% Answer A Assume that the firm has P100 in assets, with debt of P36 and equity of P64. Income (return) is P12. The return on equity is (P12 ÷ P64) 18.75%.
60. A vendor offered Tanya Company P25,000 in compensation for losses resulting from faulty raw materials. Alternatively, a lawyer offered to represent Tanya in a lawsuit against the vendor for a P12,000 retainer and 50% of any reward over P35,000. Possible court awards with their associated probabilities are as follows: Award P75,000 0
Probability 60% 40%
Compared with accepting the vendor’s offer, the expected value for Tanya to litigate the matter to a verdict provides a a. P38,000 gain c. P8,000 gain b. P21,000 gain d. P4,000 loss Answer D Proceeds if award is P75,000 = P75,000 – [P12,000 + ( x 50%)] = P43,000 Tanya’s loss if award is zero = P12,000 retainer’s fee. Expected value if award is P75,000= (43,000 x 60%) + (-12,000 x 40%) = Proceeds from vendor Loss if the case is litigated to a verdict
P21,000 25,000 P 4,000
THEORIES 1. Management accounting: a. focuses on estimating future revenues, costs, and other measures to forecast activities and their results b. provides information about the company as a whole c. reports information that has occurred in the past that is verifiable and reliable d. provides information that is generally available only on a quarterly or annual basis Answer: A
2. The terms direct costs and indirect costs are commonly used in accounting. A particular cost might be considered a direct cost of a manufacturing department but an indirect cost
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of the product produced in the manufacturing department. Classifying the cost as either direct or indirect depends upon a. Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken. b. The cost object to which the cost is being related. c. Whether the cost is expensed in the period in which it is incurred. d. The behavior of the cost in response to volume changes. Answer: B 3. Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is purpose of cost allocation? a. Aiding in variable costing for internal reporting. b. Budgeting cash and controlling expenditures. c. Measuring income and assets for external reporting. d. Evaluating revenue center performance. Answer: C 4. Which of the following is correct regarding a relevant range? a. The relevant range cannot be changed after being established. b. Actual fixed costs usually fall outside the relevant range. c. Total fixed cost will not change. d. Total variable costs will not change. Answer: C 5. “Discretionary costs” are costs that a. will be unaffected by current managerial decisions. b. are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity. c. are likely to respond to the amount of attention devoted to them by a specified manager. d. management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by the customers. Answer: A 6. An imputed cost is a. a cost that continues to be incurred even though there is no activity. b. a cost that does not entail any peso outlay but is relevant to the decision-making process. 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. Answer: B 7. An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is a. Variable costing c. Activity-based costing b. Cycle-time costing d. Direct costing Answer: C 8. A difference between standard costs used for cost control and budgeted costs a. cannot exist because they should be the same amounts.
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b. can exist because budgeted costs are historical costs, whereas standard costs are based on engineering studies. c. can exist because standard costs represent what costs should have been, whereas budgeted costs represent expected actual costs. d. can exist because standard costs must be determined after the budget is completed. Answer: C 9. A standard costing system is most often used by a firm in conjunction with a. flexible budgets c. target (hurdle) rates of return b. participative management programs d. management by objectives Answer: A 10. The a. b. c.
use of activity-based costing (ABC) normally results in equalizing set-up costs for all product lines. decreased set-up costs being charged to low volume products. substantially lower unit costs for low-volume products than is reported by traditional product costing. d. substantially greater unit costs for low-volume products than is reported by traditional product costing.
Answer: D 11. Which of the following statements is true regarding absorption costing and variable costing? a. Gross margins are the same under both costing methods. b. Variable manufacturing costs are lower under variable costing. c. If finished goods inventory increases, absorption costing results in higher income. d. Overhead costs are treated in the same manner under both costing methods. Answer: C 12. A firm that is deploying just-in-time manufacturing for the first time will a. acquire considerable computer processing capability to manage the demands of the data-dependent kanban inventory management system. b. maintain a carefully calibrated safety stock since interruptions in supply are inevitable. c. establish contracts with a few carefully chosen suppliers since an interruption in supply is extremely disruptive of the production process. d. establish contracts with many suppliers since an interruption in supply is extremely disruptive of the production process. Answer: C 13. Each organization plans and budgets its operations for slightly different reasons. Which one of the following is not a significant reason for planning? a. Checking progress toward the objectives of the organization. b. Ensuring profitable operations. c. Forcing managers to consider expected future trends and conditions. d. Providing a basis for controlling operations. Answer: B 14. Which of the following statements concerning approaches for the budget development process is correct?
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a. Since department managers have the most detailed knowledge about organizational operations, they should use this information as the building blocks for the operating budget. b. With the information technology available, the role of budgets as an organizational communication device has declined. c. To prevent ambiguity, once departmental budgeted goals have been developed, they should remain fixed even if the sales forecast upon which they are based proves to be wrong in the middle of the fiscal year. d. The top-down approach to budgeting will ensure adherence to strategic organizational goals. Answer: A 15. When compared with ideal standards, practical standards a. serve as a better motivating target for manufacturing personnel. b. incorporate very generous allowance for spoilage and worker inefficiencies. c. result in a less desirable basis for the development of budgets. d. produce lower per-unit product costs. Answer: A 16. The correlation coefficient that indicates the weakest linear association between two variables is a. 0.35 c. -0.11 b. 0.12 d. -0.73 Answer: C 16. Through the use of decision models, managers thoroughly analyze many alternatives and decide on the best alternative for the company. Often, the actual results achieved from a particular decision are not what was expected when the decision was made. In addition, an alternative that was not selected would have actually been the best decision for the company. The appropriate technique to analyze the alternatives by using expected inputs and altering them before a decision is mad is a. Program Evaluation Review Technique c. Linear programming b. Sensitivity analysis d. Expected value analysis Answer: B 17. Which of the following may be used to estimate how inventory warehouse costs are affected by both the number of shipments and the weight of materials handled? a. Economic order quantity analysis c. Correlation analysis b. Probability analysis d. Multiple regressions analysis Answer: D 18. Breakeven analysis assumes that over the relevant range a. unit revenues are non-linear. c. total costs are unchanged. b. unit variable costs are unchanged. d. total fixed costs are non-linear. Answer: B 19. Division A is considering a project that will earn a rate of return which is greater than the imputed interest charge for invested capital, but less than the division’s historical return on invested capital. Division B is considering a project that will earn a rate of return that is greater than the division’s historical return on invested capital. if the objective is to maximize residual income, should these divisions accept or reject their projects?
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a. b. c. d.
A Accept Reject Reject Accept
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B Accept Accept Reject Reject
Answer: D 20. Which measures would be useful in evaluating the performance of a manufacturing system? I. Throughput time II. Total setup for time machines/Total production time III. Number of rework units/Total number of units completed a. I and II only b. II and III only
c. I and III only d. I, II, and III only
Answer: D 21. The discount rate (hurdle rate of return) must be determined in advance for the a. Payback period method. c. Net present value method. b. Time-adjusted rate of return method. d. Internal rate of return method Answer: C 22. To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes. Which of the following attributes would that selected sales volume reflect? a. The midpoint of the range. c. The greatest probability. b. The median. d. The expected value. Answer: C 23. If everything else remains constant and a firm increases its cash conversion cycle, its profitability will likely a. Increase. c. Decrease. b. Increase if earnings are positive. d. Not be affected. Answer: C 24. In considering cost of quality methodology, quality circles are associated with a. Prevention. c. Internal failure. b. Appraisal. d. External failure. Answer: A 25. Management of organizations that engage in business process management view business processes as a. Requirements for good control over the organization. b. Systems that provide information for good management. c. Strategic assets that must be understood, managed and improved. d. Mechanisms that keep employees from shirking. Answer: C 26. The balanced scorecard has been adopted by many corporations. Which of the following best describes the balanced scorecard?
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a. b. c. d.
A A A A
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strategy that meets management’s objectives. diagram illustrating cause and effect relationships. table of key actions to achieve strategic objectives. strategic performance measurement and management framework.
Answer: D 27. The a. b. c. d.
most likely strategy to reduce the breakeven point, would be to Increase both the fixed costs and the contribution margin. Decrease both the fixed costs and the contribution margin. Decrease the fixed costs and increase the contribution margin. Increase the fixed costs and decrease the contribution margin.
Answer: C 28. A technique that is often used in project management to identify tasks where attention should be focused because they are the most critical is referred to as a. ABC Analysis. c. Work breakdown analysis. b. Milestone analysis. d. Tasking. Answer: A 29. Which of the following statements regarding transfer pricing is false? a. When idle capacity exists, there is no opportunity cost to producing intermediate products for another division. b. Market-based transfer prices should be reduced by any costs avoided by selling internally rather than externally. c. No contribution margin is generated by the transferring division when variable costbased transfer prices are used. d. The goal of transfer pricing is to provide segment managers with incentive to maximize the profits of their divisions. Answer: D 30. Another name for return on investment is the: a. net present value c. residual income b. accounting rate of return d. internal rate of return Answer: B 31. A manager would like to see a decreasing trend in all of the following operating measures except: a. Customer complaints as a percentage of units sold. b. Scrap as a percentage of total cost. c. Setup time. d. Manufacturing cycle efficiency Answer: D 32. Which of the following would produce a labor rate variance? a. Poor quality materials causing breakage and work interruptions. b. Use of persons with high hourly wage rates in tasks that call for low hourly wage rates. c. Excessive number of hours worked in completing a job. d. An unfavorable variable overhead spending variance. Answer: B
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33. XIAN Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves annually. Currently XIAN produces 40,000 valves and is thinking about increasing production to 45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit manufacturing costs given this change? a. Total manufacturing costs will increase and unit manufacturing costs will stay the same. b. Total manufacturing costs will increase and unit manufacturing costs will decrease. c. Total manufacturing costs will stay the same and unit manufacturing costs will stay the same. d. Total manufacturing costs will stay the same and unit manufacturing costs will decrease. Answer: B 34. Project Noble has an expected cash flow of P500,000 at the end of year 5. Project Heroic has expected cash flows of P100,000 to be received at the end of each year for the next five years. What can be said of the net present value of Project Noble compared to Project Heroic? a. They are the same because both cash flows total P500,000 over the lives of the projects. b. Project Noble is preferred because of the largest lump-sum payment in year 5. c. Project Heroic is preferred because of the periodic payments made consistently throughout the years and are made earlier. d. Both Project Noble and Project Heroic have the same internal rate of return and either should be accepted. Answer: C 35. At Key Enterprises, the controller is responsible for directing the budgeting process. In this role, the controller has significant influence with executive management as individual department budgets are modified and approved. For the current year, the controller was instrumental in the approval of a particular line manager’s budget without modification , even though significant reductions were made to the budgets submitted by other line managers. As a token of appreciation, the line manager has given the controller a gift certificate for a popular local restaurant. In considering whether or not to accept the certificate, the controller should refer to which section of IMA’s Statement of Ethical Professional Practice ? a. Competence c. Integrity b. Confidentiality d. Credibility Answer: C 36. Inventoriable costs are a. include only the prime costs of manufacturing a product. b. include only the conversion costs of manufacturing a product. c. are expensed when products become part of finished goods inventory. d. are regarded as assets before the products are sold. Answer: D 37. Which of the following items would have to be included for a company preparing a schedule of cash receipts and disbursements for calendar Year 1? a. A purchase order issued in December Year 1 for items to be delivered in February Year 2. b. Dividend declared in November Year to be paid in January Year 2 to shareholders of record as of December Year 1.
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c. The amount of uncollectible accounts for Year 1. d. The borrowing of funds from a bank on a note payable taken out in June Year 1 with an agreement to pay the principal and interest in June Year 2. Answer: D 38. As a business owner you have determined that the demand for your product is inelastic. Based upon this assessment you understand that a. Increasing the price of your product will increase total revenue. b. Decreasing the price of your product will increase total revenue. c. Increasing the price of your product will have no effect on total revenue. d. Increasing the price of your product will increase competition. Answer: A 39. What technology is needed in order to convert a paper document into a computer file? a. Optical character recognition. c. Bar-coding scanning. b. Electronic data interchange. d. Joining and merging. Answer: A 40. In a make-versus-buy decision, the relevant costs include variable manufacturing costs, as well as a. factory management costs c. avoidable fixed costs. b. general office costs. d. depreciation costs. Answer: C
- end SOURCES:
Cost Acctng, a Manageral Emphasis by Horngren, 14th ed. Gleim, CMA Parts 1 and 2, 16 th Edition Gleim, Cost/Managerial Accounting, 10 th Edition Wiley, CPA Exam Review 13the Edition