CPAR

CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

MANAGEMENT ADVISORY SERVICES SEPTEMBER, 2022

PREWEEK MATERIAL – BATCH 92

ITEMS 1 TO 6 ARE BASED ON THE FOLLOWING:

A company has developed two new products but has only enough plant
capacity to introduce one product during the current year. The following data
will assist management in deciding which product should be selected.

The company’s fixed overhead includes rent and utilities, equipment

depreciation, and supervisory salaries. Selling and administrative expenses
are not allocated to products.

PRODUCT A PRODUCT B
Raw materials ₱ 44.00 ₱ 36.00
Machining @ ₱12/hour 18.00 15.00
Assembly @ ₱10/hour 30.00 10.00
Variable overhead @ ₱/hour 36.00 18.00
Fixed overhead @ ₱4/hour 18.00 9.00
Total cost ₱146.00 ₱ 88.00

Suggested selling price ₱ 169.95 ₱ 99.98

Actual R & D costs ₱240,000 ₱175,000
Proposed advertising and
Promotion costs ₱500,000 ₱350,000

1. For the company’s Product A, the unit costs for raw materials, machining,
and assembly represent
a. Conversion costs c. Prime costs
b. Separable costs d. Common costs

2. The difference between the ₱99.98 suggested selling price for the company’s
Product B and its total unit costs of ₱88.00 represent
a. Contribution margin ratio c. Contribution
b. Gross profit d. Gross profit margin ratio

3. The total overhead cost of ₱27.00 for the company’s Product B is a

a. Carrying cost c. Mixed cost
b. Sunk cost d. Committed cost

4. Research and development costs for the company’s two new products are
a. Conversion costs c. Relevant costs
b. Sunk costs d. Avoidable costs
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5. The advertising and promotion costs for the product selected by the
company will be
a. Discretionary costs c. Prime costs
b. Opportunity costs d. Incremental costs

6. The costs included in the company’s fixed overhead are

a. Joint costs c. Opportunity costs
b. Committed costs d. Prime costs

7. A manufacturing company planned to manufacture and sell 100,000 units of

product during the year at a variable cost per unit of ₱4 and a fixed cost per
unit of ₱2. The firm fell short of its goal and only manufactured 80,000 units
at a total incurred costs of ₱515,000. The firm’s manufacturing costs variance
was
a. ₱85,000 favorable c. ₱5,000 favorable
b. ₱35,000 unfavorable d. ₱5,000 unfavorable

8. During the current accounting period, a manufacturing company purchased

₱70,000 of raw materials, of which ₱50,000 of direct materials and ₱5,000
of indirect materials were used in production. The company also incurred
₱45,000 of total labor costs and ₱20,000 of other manufacturing overhead
costs. An analysis of the work in process control account revealed ₱40,000
of direct labor costs.

Based upon the above information, what is the total amount accumulated in
the overhead control account?
a. ₱25,000 c. ₱45,000
b. ₱30,000 d. ₱50,000

9. A company has no work in process or finished goods inventories at year end.

The balances of the company’s accounts include the following:

Cost of goods sold ₱2,040,000

General selling and administrative expenses 900,000
Sales 3,600,000
Manufacturing overhead control 700,000
Manufacturing overhead applied 648,000

The company’s pretax income for the year is:

a. ₱608,000 c. ₱ 712,000
b. ₱660,000 d. ₱1,508,000

10. A company had the following information relating to Year 1:

Budgeted manufacturing overhead ₱74,800

Actual manufacturing overhead ₱78,300
Applied manufacturing overhead ₱76,500
Estimated direct labor hours 44,000
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If the company decides to use the actual results from year 1 to determine
the Year 2 overhead rate, what is the Year 2 overhead rate?
a. ₱1.700 c. ₱1.740
b. ₱1.738 d. ₱1.780

11. A Corp. has two divisions – Manila and Quezon City. Manila has a job costing
system and manufactures machinery on special order for unrelated
customers. Quezon City has a process costing system and manufactures
Product Xan, which is sold to Manila as well as to unrelated companies.
Manila’s work in process account on April 30 included the following:

Balance, April 1 ₱24,000

Direct materials (including transferred-in costs) 80,000
Direct labor 60,000
Manufacturing overhead 54,000
Transferred to finished goods (200,000)

Manila applies manufacturing overhead at 90% of direct labor cost. Job No.
130, which was the only job in process on April 30, has been charged with
manufacturing overhead of ₱4,500. Quezon City’s cost to manufacture
Product Xan is ₱3 per unit, which is sold to Manila for ₱5 per unit and to
unrelated customers for ₱6 per unit.

How much is the transfer price for Product Xan?

a. ₱2 c. ₱5
b. ₱3 d. ₱6

12. A cosmetics manufacturer has used a traditional cost accounting system to

apply quality control costs uniformly to all products at a rate of 14.5% of
direct labor cost. Monthly direct labor cost for makeup is ₱27,500. In an
attempt to distribute quality control costs more equitably, the manufacturer
is considering activity-based costing. The monthly data shown in the chart
below have been gathered for makeup.
Quantity
Activity Cost Driver Cost Rates of Makeup
Incoming material inspection Type of material used ₱11.50 per type 12 types
In-process inspection Number of units ₱ 0.14 per unit 17,500 units
Product certification Per order ₱77 per order 25 orders

The monthly quality control cost assigned to makeup using activity-based

costing (ABC) is
a. ₱88.64 per order
b. ₱525.50 lower than the cost using the traditional system.
c. ₱8,500.50.
d. ₱525.50 higher than the cost using the traditional system.

13. The following information relates to a corporation, which produced and sold
50,000 units during a recent accounting period:
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Sales ₱850,000
Manufacturing costs:
Fixed 210,000
Variable 140,000
Selling and administrative costs:
Fixed 300,000
Variable 45,000
Income tax rate 40%

For the next accounting period, if production and sales are expected to be
40,000 units, the company should anticipate a contribution margin per unit
of
a. ₱1.86 c. ₱ 7.30
b. ₱3.10 d. ₱13.30

ITEMS 14 AND 15 ARE BASED ON THE FOLLOWING:

A company sells its sole product for ₱10 per unit, with a unit contribution
margin of ₱6. The fixed manufacturing cost rate per unit is ₱2 based on a
denominator capacity of 1 million units, and fixed marketing costs are ₱1.5
million.

14. If 900,000 units are produced, the variable costing breakeven point in units
is
a. 425,000 c. 900,000
b. 583,333 d. 1,000,000

15. If 900,000 units are produced, the absorption costing breakeven point in units
sold is
a. 425,000 c. 900,000
b. 583,333 d. 1,000,000

16. A not-for-profit social agency provides home health care assistance to as

many patients as possible. Its budgeted appropriation (X) for next year must
cover fixed costs of ₱5M, and the annual per patient cost (Y) of its services.
However, the agency is preparing for a possible 10% reduction in its
appropriation that will lower the number of patients served from 5,000 to
4,000. The reduced appropriation and the annual per patient cost equal

Reduced Per Patient

Appropriation Annual Cost
a. ₱ 5,000,000 ₱4,000
b. ₱ 8,333,333 ₱ 833
c. ₱ 9,000,000 ₱1,000
d. ₱10,000,000 ₱5,000
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17. A manufacturer is considering dropping a product line. It currently produces

a multi-purpose woodworking clamp in a simple manufacturing process that
uses special equipment. Variable costs amount to ₱6 per unit. Fixed
overhead costs, exclusive of depreciation, have been allocated to this
product at a rate of ₱3.50 a unit and will continue whether or not production
ceases. Depreciation on the special equipment amounts to ₱20,000 year.
Other fixed costs are ₱18,000. The clamp has a selling price of ₱10 a unit.
Ignoring tax effects, the number of units that would have to be sold in the
current year to breakeven on a cash flow basis is
a. 4,500 units c. 20,000 units
b. 5,000 units d. 36,000 units

18. A company has P450,000 a year of fixed production costs, of which P150,000
are noncash outlays. The variable cost per unit is P15, and the unit selling
price is P25. The breakeven volume in sales units for this company would be
a. 18,000 units c. 45,000 units
b. 30,000 units d. 60,000 units

ITEMS 19 AND 20 ARE BASED ON THE FOLLOWING:

A company sells two products, J and C. The sales mix consists of a composite
unit of 2 units of J for every 5 units of C (2:5). Fixed costs are ₱49,500. The
unit contribution margins for J and C are ₱2.50 and ₱1.20, respectively.

19. Considering the company as a whole, the number of composite units to

breakeven is
a. 1,650 composite units c. 8,250 composite units
b. 4,500 composite units d. 22,500 composite units

20. If the company had an operating income of ₱22,000, the unit sales must
have been
a. 5,000 units of J and 12,500 units of C
b. 13,000 units of J and 32,500 units of C
c. 23,800 units of J and 59,500 units of C
d. 28,600 units of J and 71,500 units of C

21. A company is considering the purchase of a new machine that costs

₱450,000. The new machine will generate net cash flow of ₱150,000 per
year and net income of ₱100,000 per year for five years. The company’s
desired rate of return is 6%. The present value factor for a five-year annuity
of ₱1, discounted at 6%, is 4.212. The present value factor of ₱1, 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

22. A corporation obtains a loan of P200,000 at an annual rate of 12%. The

corporation must keep a compensating balance of 20% of any amount
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borrowed on deposit at the bank, but normally does not have a cash balance
account with the bank. What is the effective cost of the loan?
a. 12.0% c. 15.0%
b. 13.3% d. 16.0%

23. A company has the following target capital structure:

Proportion of
Capital Structure
Debt 30%
Common stock 60%
Preferred stock 10%

The costs of Debt, Common Stock, and Preferred Stock are 10%, 12%, and
10%, respectively, all of which are still unadjusted for tax effect. The
company’s marginal tax rate is 30%. What is the company’s weighted-
average cost of capital?
a. 7.84% c. 10.30%
b. 9.30% d. 11.20%

ITEMS 24 AND 25 ARE BASED ON THE FOLLOWING INFORMATION:

A company has seasonal demand for its products and management is

considering whether level production or seasonal production should be
implemented. The firms’ short term interest cost is 8%, and management
has developed the following information to make the decision:

Alternative 1 Alternative 2
Level Production Seasonal Production

Average inventory ₱2,000,000 ₱1,500,000

Production costs ₱6,000,000 ₱6,050,000

24. Which alternative should be accepted and how much is saved over the other
alternative?
a. Alternative 1 with P500,000 in savings.
b. Alternative 2 with P50,000 in savings.
c. Alternative 2 with P10,000 in savings.
d. Alternative 1 with P10,000 in savings.

25. At what rate of short-term interest rate would the two alternatives have the
same cost?
a. 6% c. 10%
b. 9% d. 12%
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ITEMS 26 AND 27 ARE BASED ON THE FOLLOWING INFORMATION:

AA Telecom is considering a project for the coming year that will cost ₱50
million. AA plans to use the following combination of debt and equity to
finance the investment.

• Issue ₱15 million of 20-year bonds at a price of 101, with a coupon rate of
8%, and flotation costs of 2% of par.

• Use ₱35 million of funds generated from earnings.

The equity market is expected to earn 12%. Treasury bills are currently
yielding 5%. The beta coefficient for AA is estimated to be 0.60. AA is subject
to an effective corporate income tax rate of 40%.

26. 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%

27. 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
AA’s expected rate of return.
a. 9.20% c. 7.20%
b. 12.20% d. 12.00%

28. A 2023 cash budget is being prepared for the purchase of a merchandise
item being sold by the company. Budgeted data are

Cost of goods sold for 2023 ₱300,000

Accounts payable 1/1/23 20,000
Inventory—1/1/23 30,000
12/31/23 42,000

Purchases will be made in twelve equal monthly amounts and paid for in the
following month. What is the 2023 budgeted cash payment for purchases of
the merchandise?
a. ₱295,000 c. ₱306,000
b. ₱300,000 d. ₱312,000

29. A company budgeted sales on account of ₱120,000 for July, ₱211,000 for
August, and ₱198,000 for September. Collection experience indicates that
60% of the budgeted sales will be collected the month after the sale, 36%
the second month, and 4% will be uncollectible. The cash from accounts
receivable that should be budgeted for September would be
a. ₱169,800 c. ₱197,880
b. ₱194,760 d. ₱198,600
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30. The following is a summarized income statement of a company’s profit center

No. 5 for September:

Contribution margin ₱70,000

Period expenses:
Manager’s salary ₱20,000
Facility depreciation 8,000
Corporate expense allocation 5,000
₱33,000
Profit center income ₱37,000

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

31. A company uses a standard costing system in connection with the

manufacture of a “one size fits all” article of clothing. Each unit of finished
product contains two yards of direct material. However, a 20% direct
material spoilage calculated on input quantities occurs during the
manufacturing process. The cost of the direct material is ₱3 per yard. The
standard direct material cost per unit of finished product is
a. ₱4.80 c. ₱7.20
b. ₱6.00 d. ₱7.50

32. Based on potential sales of 500 units per year, a new product has estimated
traceable costs of ₱990,000. What is the target price to obtain a 15% profit
margin on sales?
a. ₱2,329 c. ₱1,980
b. ₱2,277 d. ₱1,935

33. After careful planning, a company has decided to switch to a just-in-time

inventory system effective on July 1 of the current year. As of July 1, the
corporation has 70 units of product in inventory. It has 1,000 labor hours
available for the month of July. These hours could produce 250 units of
product. Customer demand for July is 200 units. If just-in-time principles
are correctly followed, how many units should the company plan to produce
in July?
a. 200 c. 180
b. 130 d. 250

34. A company is reviewing the following data relating to an energy saving

investment proposal:

Cost ₱50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57
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What would be the annual savings needed to make the investment realize a
12% yield?
a. P 8,189 c. P12,306
b. P11,111 d. P13,889

35. A company is investing in a machine with a three-year life. The machine is

expected to reduce annual cash operating costs by ₱30,000 in each of the
first two years and by ₱20,000 in year three. Present values of an annuity of
P1 at 14% are

Period 1 0.88
2 1.65
3 2.32

Using a 14% cost of capital, what is the present value of these future savings?
a. ₱59,600 c. ₱62,900
b. ₱60,800 d. ₱69,500

36. An individual receives an income of ₱3,000 per month and spends ₱2,500.
An increase in income of ₱500 per month occurs, and the individual spends
₱2,800. The individual’s marginal propensity to save is
a. 0.20 c. 0.60
b. 0.40 d. 0.80

ITEMS 37 TO 40 ARE BASED ON THE FOLLOWING INFORMATION:

An organization has four investment proposals with the following costs and
expected cash inflows:
Expected Cash Inflows
Project Cost End of End of End of
year 1 year 2 year 3
A Unknown ₱10,000 ₱10,000 ₱10,000
B ₱20,000 5,000 10,000 15,000
C 25,000 15,000 10,000 5,000
D 30,000 20,000 Unknown 20,000

NOTE: round present value factors to four (4) decimal places.

37. If Project A has an internal rate of return (IRR) of 15%, then it has a cost of
a. ₱ 8,696 c. ₱24,869
b. ₱22,832 d. ₱27,232

38. If the discount rate is 10%, the net present value (NPV) of Project B is
a. ₱ 4,079 c. ₱ 9,869
b. ₱ 6,789 d. ₱39,204

39. The payback period of Project C is

a. 0 years. c. 2 years.
b. 1 year. d. 3 years.
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40. If the discount rate is 5% and the discounted payback period of Project D is
exactly two years, then the year two cash inflow for Project D is
a. ₱ 5,890 c. ₱12,075
b. ₱10,000 d. ₱14,301

41. A company is budgeting sales of 53,000 units of Product A for November

2022. The manufacture of one unit Product of A requires four kilos of
chemical X. During November 2022, the company plans to reduce the
inventory of chemical X by 50,000 kilos and increase the finished goods
inventory of Product A by 6,000 units. There is no Product A work in process
inventory. How many kilos of chemical X is the company budgeting to
purchase in November 2022?
a. 138,000 c. 186,000
b. 162,000 d. 238,000

42. A company incurred the following costs on Job A05 for the manufacture of
200 motors:
Original cost accumulation:
Direct materials P 660
Direct labor 800
Overhead (150% of direct labor) 1,200
P2,660
Direct costs of reworking 10 units:
Direct materials P100
Direct labor 160
P260

The rework costs were attributable to the exacting specifications of Job A05,
and the full rework costs were charged to this specific job. What is the cost
per finished unit of Job A05?
a. P13.30 c. P14.60
b. P13.80 d. P15.80

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 43 AND 44:

A corporation produces a part that is used in the manufacture of one of its

products. The costs associated with the production of 10,000 units of this part
are as follows:

Direct materials ₱ 45,000

Direct labor 65,000
Variable factory overhead 30,000
Fixed factory overhead 70,000
Total costs ₱210,000

Of the fixed factory overhead costs, ₱30,000 is avoidable.

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43. Another Company has offered to sell 10,000 units of the same part to the
corporation for ₱18 per unit. Assuming there is no other use for the facilities,
the corporation should:
a. make the part, as this would save ₱3 per unit
b. buy the part, as this would save ₱3 per unit
c. buy the part, as this would save the company ₱30,000
d. make the part, as this would save ₱1 per unit

44. Assuming no other use of their facilities, the highest price that the
corporation should be willing to pay for 10,000 units of the part is:
a. ₱210,000 c. ₱170,000
b. ₱140,000 d. ₱180,000

45. A’s Rockers manufactures two models, Standard and Premium. Weekly
demand is estimated to be 100 units of the Standard Model and 70 units of
the Premium Model. The following per unit data apply:

Standard Premium
Contribution margin per unit ₱18 ₱20
Number of machine-hours required 3 4

If there are 496 machine-hours available per week, how many rockers of
each model should Jim Helmer produce to maximize profits?
a. 100 units of Standard and 49 units of Premium
b. 72 units of Standard and 70 units of Premium
c. 100 units of Standard and 70 units of Premium
d. 85 units of Standard and 60 units of Premium

46. Pampic Company is considering eliminating Model AE2 from its camera line
because of losses over the past quarter. The past three months of
information for Model AE2 are summarized below:

Sales (1,000 units) ₱300,000

Manufacturing costs:
Direct materials 150,000
Direct labor (₱15 per hour) 60,000
Overhead 100,000
Operating loss (₱10,000)

Overhead costs are 70% variable and the remaining 30% is depreciation of
special equipment for Model AE2 that has no resale value.

If Model AE2 is dropped from the product line, operating income will:
a. increase by ₱10,000 c. increase by ₱30,000
b. decrease by ₱20,000 d. decrease by ₱10,000
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47. A company manufactures two products, facial soap and bath soap, in two
departments, the Mixing Department and the Packaging Department. The
Mixing Department has 800 hours per month available, and the Packaging
Department has 1,200 hours per month available. Production of the two
products cannot exceed 36,000 kilos. Data on the two products follow:

CONTRIBUTION MARGIN HOURS PER 100 KILOS

(per 100 kilos) Mixing(M) Packaging(P)
Facial soap (F) ₱200 5.0 3.6
Bath soap (B) 150 2.4 6.0

The objective function for the linear program Jem would use to determine
the optimal monthly production of each soap would be:
a. Z = 150F + 200B c. 2F + 1.5B < 36,000
b. 2F +1.5B > 36,000 d. Z = 200F + 150B

48. A company has decided to introduce a new product. The company estimates
that there is a 30% probability that the product will contribute ₱700,000 to
profits, a 30% probability that it will contribute ₱200,000, and a 40%
probability that the contribution will be a negative ₱400,000.

The expected contribution of the new product is

a. ₱500,000 c. ₱166,667
b. ₱110,000 d. ₱380,000

49. In its first year of operations, a company had the following costs when it
produced 100,000 and sold 80,000 units of its only product:

Manufacturing costs:
Fixed ₱180,000
Variable 160,000
Selling and admin. costs:
Fixed 90,000
Variable 40,000
How much lower would the company’s net income be if it used variable
costing instead of full absorption costing?
a. ₱36,000 c. ₱68,000
b. ₱54,000 d. ₱94,000

ITEMS 50 AND 51 ARE BASED ON THE FOLLOWING:

Karpets, Inc. is holding a two-week carpet sale at Presyongdivi, a local

warehouse store. Karpets, Inc. plans to sell carpets for ₱500 each. The
company will purchase the carpets from a local distributor for ₱350 each,
with the privilege of returning any unsold units for a full refund. Presyongdivi
has offered Karpets, Inc. two payment alternatives for the use of space.

Option 1 - A fixed payment of ₱5,000 for the sale period.

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Option 2 - 10% of total revenues earned during the sale period.

50. Assume Karpets, Inc. will incur no other costs. At what level of revenues will
Karpets, Inc. be indifferent between the two payment options?
a. ₱50,000 c. ₱10,000
b. ₱17,000 d. 0

51. At a sales level of 100 units, the degree of operating leverage under Option
2 is
a. 1.50 c. 1.00
b. 5.00 d. 5.50

52. Selected information concerning the operations of a company for the year
ended December 31 is as follows:

Units produced 20,000

Units sold 18,000
Direct materials used ₱80,000
Direct labor incurred ₱40,000
Fixed factory overhead ₱50,000
Variable factory overhead ₱24,000
Fixed selling and administrative expenses ₱60,000
Variable selling and administrative expenses ₱ 9,000

Work-in-process inventories at the beginning and end of the year were zero.
What was the company's finished goods inventory cost at December 31
under the variable (direct) costing method?
a. ₱23,900 c. ₱17,000
b. ₱19,400 d. ₱14,400

53. A company's cost of compliance is ₱58,000. Appraisal cost is ₱21,000 and

failure cost is ₱32,000. The company's total quality cost is
a. ₱53,000 c. ₱ 90,000
b. ₱79,000 d. ₱111,000

54. To measure inventory management performance, a company monitors its

inventory turnover ratio. Listed below are selected data from the company's
accounting records:
Current year Prior year
Annual sales ₱2,525,000 ₱2,125,000
Gross profit percent 40% 35%

Beginning finished goods inventory for the current year was 15% of the
prior-year's annual sales volume at cost, and ending finished goods inventory
was 22% of the current-year's annual sales volume at cost.

What was the company's inventory turnover at the end of the current period?
a. 4.55 c. 6.51
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b. 5.61 d. 6.81

55. Sprinter Manufacturing Company estimates that it will consume 400,000

units of Part 101 in the coming year. The ordering cost for this unit is P3.20.
What would be the carrying costs per unit if the EOQ model indicates that it
is optimal to place exactly 50 orders for the upcoming year?
a. P320 c. P0.04
b. P1,024 d. P25

56. A corporation had sales of P2,000,000, a profit margin of 11%, and assets
of P2,500,000. The company decided to reduce its debt ratio to 0.40 from
0.50 by selling new common stock and using the proceeds to repay principal
on some outstanding long-term debt.

After the refinancing, what is the company’s return on equity?

a. 3.5 percent c. 14.7 percent
b. 5.3 percent d. 22.9 percent

57. The management of a firm does not want to violate a working capital
restriction contained in its bond indenture. If the firm’s current ratio falls
below 2.0 to 1, it will be in technical default. The firm’s current ratio is now
2.2 to 1. If current liabilities are ₱200 million, the maximum new commercial
paper that can be issued to finance inventory expansion is
a. ₱20 million c. ₱40 million
b. ₱240 million d. ₱180 million

58. Using the data presented below, calculate the cost of sales for the
corporation for the year just ended.

Current ratio 3.5

Acid test ratio 3.0
Current liabilities at year-end ₱600,000
Beginning inventory ₱500,000
Inventory turnover 8.0

a. ₱1,600,000 c. ₱3,200,000
b. ₱2,400,000 d. ₱6,400,000

59. Last year’s asset turnover ratio for a company was 2.5. This year, sales
increased by 20% and the average total assets increased by 10%. What is
the current turnover ratio?
a. 2.50 c. 2.73
b. 2.59 d. 3.00

60. A corporation’s present year Return on Equity (ROE) remained at last year’s
14% level, while the profit margin was reduced from 8% to 4% and the
leverage ratio increased from 1.2 to 1.5. The effects on asset turnover were
to
a. remain constant c. decrease from 14.58 to 2.33
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b. increase from 1.46 to 2.33 d. increase from 4.76 to 9.60

THEORIES

1. During the recessionary phase of a business cycle

a. The purchasing power of money is likely to decline rapidly.
b. The natural rate of unemployment will increase dramatically.
c. Potential national income will exceed actual national income.
d. Actual national income will exceed potential national income.

2. For a given level of tax collections, prices, and interest rates, a decrease in
governmental purchases will result in a(n)
a. Increase in aggregate demand.
b. Increase in aggregate supply.
c. Decrease in aggregate demand.
d. Decrease in aggregate supply.

3. In national income terms, aggregate demand is the

a. Demand for money by the community in a period of full employment.
b. Total expenditure on capital goods by entrepreneurs during a period of
full employment.
c. Demand that is needed if a country’s economy is to operate at optimum
level and the level of investment is to be raised.
d. Total expenditures on consumer goods and investment, including
government and foreign expenditures, during a given period.

4. Which one of the following would not be included in the calculation of the
gross domestic product (GDP)?
a. Purchase of a new home. c. A doctor’s fee.
b. An automotive worker’s wages. d. Purchase of common
stock.

5. An upturn in economic activity is indicated by all of the following, except

a. Increased housing starts.
b. Reduction in the quantity of unemployment claims.
c. Increase in personal travel.
d. Reduction in the amount of luxury purchases.

6. The return paid for the use of borrowed capital is referred to as

a. Cash dividends. c. Interest.
b. Stock dividends. d. Principal payment.

7. Short-term interest rates are

a. Usually lower than long-term rates.
b. Usually higher than long-term rates.
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c. Lower than long-term rates during periods of high inflation only.

d. Not significantly related to long-term rates.

8. When a firm finances each asset with a financial instrument of the same
approximate maturity as the life of the asset, it is applying
a. Working capital management.
b. Return maximization.
c. Financial leverage.
d. A hedging approach.

9. All of the following capital budgeting analysis techniques use cash flows as
the primary basis for the calculation except for the
a. Net present value.
b. Payback period.
c. Discounted payback period.
d. Accounting rate of return.

10. The segmented income statement for a retail company with three product
lines is presented below:
Total Product Product Product
Company Line 1 Line 2 Line 3
Volume (in units) 20,000 28,000 50,000
Sales revenue ₱2,000,000 ₱800,000 ₱700,000 ₱500,000
Costs and expenses:
Administrative ₱ 180,000 ₱ 60,000 ₱ 60,000 ₱ 60,000
Advertising 240,000 96,000 84,000 60,000
Commissions 40,000 16,000 14,000 10,000
Cost of sales 980,000 360,000 420,000 200,000
Rent 280,000 84,000 140,000 56,000
Salaries 110,000 54,000 32,000 24,000
Total costs and expenses ₱1,830,000 ₱670,000 ₱ 750,000 ₱410,000
Operating profit (loss) ₱ 170,000 ₱130,000 ₱ (50,000) ₱ 90,000

The company buys the goods in the three product lines directly from
manufacturers’ representatives. Each product line is directed by a manager
whose salary is included in the administrative expenses. Administrative
expenses are allocated to the three product lines equally because the
administration is spread evenly among the three product lines. Salaries
represent payments to the workers in each product line and therefore are
traceable costs of each product line. Advertising promotes the entire
company rather than the individual product lines. As a result, the advertising
expense is allocated to the three product lines in proportion to the sales
revenue. Commissions are paid to the salespersons in each product line
based on 2% of gross sales. Rent represents the cost of the retail store and
warehouse under a lease agreement with 5 years remaining. The product
lines share the retail and warehouse space, and the rent is allocated to the
three product lines based on the square footage occupied by each of the
product lines. The segmented income statement for this retail company does
not facilitate performance evaluation because it does not distinguish
between controllable and uncontrollable costs.
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The only costs and expenses controllable at the product-line level for this
retail company are:
a. Administration, advertising, and rent
b. Commissions, cost of sales, and rent
c. Commissions, cost of sales, and salaries
d. Advertising, cost of sales, and salaries

11. Which of the following expresses the relationship between risk and return?
a. Inverse relationship. c. Negative relationship.
b. Direct relationship. d. No relationship.

12. If an investment project has a profitability index of 1.15, then the

a. Project’s internal rate of return is 15%.
b. Project’s cost of capital is greater than its internal rate of return.
c. Project’s internal rate of return exceeds its net present value.
d. Net present value of the project is positive.

13. Which tool would most likely be used to determine the best course of action
under conditions of uncertainty?
a. Cost-volume-profit analysis.
b. Expected value (EV).
c. Program evaluation and review technique (PERT).
d. Scattergraph method.

14. Which type of economic market structure is characterized by a few large

sellers of a product or service, engaging primarily in nonprice competition?
a. Monopoly. c. Perfect competition.
b. Oligopoly. d. Monopolistic competition.

15. The balanced scorecard generally uses performance measures with four
different perspectives. Which of the following performance measures would
be part of those used for the internal business processes perspective?
a. Cycle time.
b. Employee satisfaction.
c. Hours of training per employee.
d. Customer retention.

16. Alta Manufacturing Co. has had a problem with its product quality. The
company has had a large amount of costs related to product recalls. In
considering cost of quality methodology, if the company wants to reduce
these costs, the most likely place to incur costs would be for
a. Prevention. c. Internal failure.
b. Appraisal. d. External failure.

17. Jayson Co. is considering a project that will use 2,000 square feet of storage
space at one of its facilities to store used equipment. What will determine
Jayson’s opportunity cost?
a. The net present value of the project.
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b. The internal rate of return of the project.

c. The value of the next best use of the space.
d. The depreciation expense on the space.

18. The ABC Company is trying to decide between keeping an existing machine
and replacing it with a new machine. The old machine was purchased just
two years ago for ₱50,000 and had an expected life of 10 years. It now costs
₱1,000 a month for maintenance and repairs due to a mechanical problem.
A new machine is being considered to replace it at a cost of ₱60,000. The
new machine is more efficient and it will only cost ₱200 a month for
maintenance and repairs. The new machine has an expected life of 10 years.
In deciding to replace the old machine, which of the following factors,
ignoring income taxes, should ABC not consider?
a. Any estimated salvage value on the old machine.
b. The original cost of the old machine.
c. The estimated useful life of the new machine.
d. The lower maintenance cost on the new machine.

19. Which of the following statements is correct regarding financial decision

making?
a. Opportunity cost is recorded as a normal business expense.
b. The accounting rate of return considers the time value of money.
c. A strength of the payback method is that it is based on profitability.
d. Capital budgeting is based on predictions of an uncertain future.

20. Which of the following topics is the focus of managerial accounting?

a. Financial statements and other financial reports.
b. Historical cost principles.
c. The needs of creditors.
d. The needs of the organization's internal parties.

21. The primary reason for adopting total quality management is to achieve
a. greater customer satisfaction
b. reduced delivery charges
c. greater employee participation
d. reduced delivery time

22. A company will produce 20,000 units of product A at a unit variable cost of
₱7 and a unit selling price of ₱13. Fixed costs are ₱40,000. However, the
company will still have 40% idle capacity. The company can use this idle
capacity to produce 6,000 units of a different product B, which it can sell for
₱7 per unit. The incremental variable cost of producing a unit of B is ₱6.
Present fixed costs that will be allocated to B amount to ₱10,000. To decide
whether to produce B, the company should use
a. Markov chain analysis c. Information economics
b. Differential cost analysis d. Regression analysis
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23. When the number of units manufactured increases, the most significant
change in average unit cost will be reflected as
a. an increase in the semivariable element
b. an increase in the no variable element
c. a decrease in the variable element
d. a decrease in the no variable element

24. The IMA Statement of Ethical Professional Practice includes an integrity

standard, which requires an IMA member to
a. refuse gifts from anyone.
b. disclose confidential information when authorized by his/her firm or
required under the law.
c. report any relevant information that could influence users of financial
statements.
d. identify and make known anything that may hinder his/her judgment
or prevent satisfactory completion of any duties.

25. Jay Manufacturing Co. prepares income statements using both standard
absorption and variable costing methods. For Year 2, unit standard costs
were unchanged from Year 1. In Year 2, the only beginning and ending
inventories were finished goods of 5,000 units. How would Jay’s ratios using
absorption costing compare with those using variable costing?

Current Ratio Return on Equity

a. Greater Smaller
b. Greater Same
c. Same Smaller
d. Same Same

26. A company’s net income recently increased by 30% while its inventory
increased to equal a full year’s sales requirements. Which of the following
accounting methods would be most likely to produce the favorable income
results?
a. Standard direct costing c. Direct costing
b. Variable costing d. Absorption costing

27. When standard costs are used in a process costing system, how, if at all, are
equivalent units of production (EUP) involved or used in the cost report at
standard?
a. The standard equivalent units are multiplied by the actual cost per unit.
b. The actual equivalent units are multiplied by the standard cost per unit.
c. Equivalent units are computed using a special approach.
d. Equivalent units are not used.

28. Which of one of the following variances is of least significance from a

behavioral control perspective?
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a. Fixed factory overhead volume variance resulting from management’s

decision midway through the fiscal year to reduce its budgeted
output by 20%.
b. Favorable materials price variance obtained by purchasing raw
materials from a new vendor.
c. Unfavorable labor efficiency variance amounting to 10% more than
the budgeted hours for the output attained.
d. Unfavorable materials quantity variance amounting to 20% of the
quantity allowed for the output attained.

29. Using the balanced scorecard approach, an organization evaluates

managerial performance based on
a. multiple financial measures only
b. multiple nonfinancial measures only
c. multiple financial and nonfinancial measures
d. a single ultimate measure of operating results, such as residual
income

30. A company has two divisions, A and B, each operated as a profit center. A
charges B ₱35 per unit for each unit transferred to B. Other data follow:
A’s variable cost per unit ₱30
A’s fixed costs 10,000
A’s annual sales to B - units 5,000
A’s sales to outsiders – units 50,000

A is planning to raise its transfer price to ₱50 per unit. Division B can
purchase units at ₱v40 each from outsiders, but doing so would idle A’s
facilities now committed to producing units for B. Division A cannot increase
its sales to outsiders. From the perspective of the company as a whole, from
whom should Division B acquire the units, assuming B’s market is
unaffected?
a. Division A, despite the increased transfer price.
b. Division A, but only until after fixed costs covered, then from outside
vendors.
c. Outside vendors
d. Division A, but only at the variable cost per unit.

31. The following information is available for Ports Company for its past two
fiscal years:
Year 1 Year 2
Statistical process control ₱ 70,000 ₱ 100,000
Quality audits 35,000 50,000
Training 40,000 80,000
Inspection and testing 100,000 150,000
Rework 90,000 50,000
Spoilage 80,000 55,000
Warranties 180,000 80,000
Estimated customer losses 800,000 450,000
Net sales 3,000,000 3,200,000
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In its cost of quality report for Year 2, Ports will disclose that the ratio of
a. conformance costs to net sales equaled 8.17% in Year 2.
b. nonconformance costs to net sales equaled 19.84% in Year 1
c. nonconformance costs to total quality costs increased from 62.56%
in Year 1 to 82.44% in Year 2.
d. Conformance costs to total quality costs increased from 17.56% in
Year 1 to 37.44% in Year 2.

32. All of the following are ways that companies in developed countries generally
may compete with companies in developing countries except
a. Technology. c. Quality.
b. Customer service. d. Low-cost resources.

33. Bell Co. changed from a traditional manufacturing philosophy to a just-in-

time philosophy. What are the expected effects of this change on Bell’s
inventory turnover and inventory as a percentage of total assets reported on
Bell’s balance sheet?

Inventory turnover Inventory percentage

a. Decrease Decrease
b. Decrease Increase
c. Increase Decrease
d. Increase Increase

34. Which of the following events would decrease the internal rate of return of
a proposed asset purchase?
a. Decrease tax credits on the asset.
b. Decrease related working capital requirements.
c. Shorten the payback period.
d. Use accelerated, instead of straight-line depreciation.

35. 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

36. 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 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.
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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.

37. 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.

38. 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.

39. 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.

40. 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

41. A difference between standard costs used for cost control and budgeted
costs
a. cannot exist because they should be the same amounts.
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.

42. A standard costing system is most often used by a firm in conjunction with
a. flexible budgets
b. participative management programs
c. target (hurdle) rates of return
d. management by objectives

43. The use of activity-based costing (ABC) normally results in

a. equalizing set-up costs for all product lines.
b. decreased set-up costs being charged to low volume products.
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c. 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.

44. 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.

45. In macroeconomic terms, aggregate demand is the

a. Demand for money by the community in a period of full employment.
b. Total expenditure on capital goods by entrepreneurs during a period
of full employment.
c. Demand that is needed if a country’s economy is to operate at
optimum level and the level of investment is to be raised.
d. Total expenditures on consumer goods and investment, including
government and foreign expenditures, during a given period.

46. In a decentralized company in which divisions may buy goods from one
another, the transfer pricing system should be designed primarily to
a. increase the consolidated value of inventory.
b. allow division managers to buy from outsiders.
c. minimize the degree of autonomy of division managers.
d. aid in the appraisal and motivation of managerial performance.

47. A management decision may be beneficial for a given profit center, but not
for the entire company. From the overall company viewpoint, this decision
would lead to
a. goal congruence c. suboptimization
b. centralization d. maximization

48. Which of the following is an advantage of equity financing in comparison to

debt financing?
a. Issuance costs are greater than for debt.
b. Ownership is given up with respect to the issuance of common stock.
c. Dividends are not tax deductible by the corporation whereas interest
is tax deductible.
d. The company has no firm obligation to pay dividends to common
shareholders.

49. The term cost driver refers to

a. any activity that can be used to predict cost changes.
b. the attempt to control expenditures at a reasonable level.
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c. the person who gathers and transfers cost data to the management
accountant.
d. any activity that causes costs to be incurred.

50. Of the following, which is the best reason for using activity-based costing?
a. to keep better track of overhead costs
b. to more accurately assign overhead costs to cost pools so that these
costs are better controlled
c. to better assign overhead costs to products
d. to assign indirect service overhead costs to direct overhead cost
pools

51. The budgeting technique that focuses on different phases of a product such
as planning and concept design, testing, manufacturing, and distribution and
customer service is known as:
a. integrative budgeting. c. comprehensive budgeting.
b. base budgeting. d. life-cycle budgeting.

52. Which of the following statements represents a similarity between financial

and managerial accounting?
a. Both are useful in providing information for external users.
b. Both are governed by GAAP.
c. Both rely heavily on published financial statements.
d. Both draw upon data from an organization’s accounting system.

53. Leo Corporation will evaluate a potential investment in an advanced

manufacturing system by use of the net-present-value (NPV) method. Which
of the following system benefits is least likely to be omitted from the NPV
analysis?
a. Savings in operating costs.
b. Greater flexibility in the production process.
c. Improved product quality.
d. Shorter manufacturing cycle time.

54. A company produces and sells bottled fruit juices. The processes involved
in producing the product are done in the following departments:

Department Capacity per week

Juice extraction 8,000 bottles
Mixing 5,000 bottles
Bottling 10,000 bottles

Demand for the company’s product is about 6,000 bottles per week.
If the company wants to improve its contribution margin and applies the
Theory of Constraints, improvement efforts should be focused on
a. juice extraction department. c. bottling department.
b. mixing department. d. sales department.
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55. It describes how an organization matches its own capabilities with the
opportunities in the marketplace to accomplish its overall objectives.
a. Planning c. Learning and growth perspective
b. Strategy d. Customer perspective

56. Which of the following statement(s) is(are) true?

1. MAS relates to the future.
2. MAS covers a wider area than the usual audit and tax work.
3. Because of the broad scope covered by MAS, a wider variety of
assignments are usually encountered.
4. MAS engagements require highly qualified staff.

a. All the statements are true.

b. Only three statements are true.
c. Only two statements are true.
d. Only one statement is true.

57. A company’s rate of return on investment (ROI) is equal to the

a. Percentage of profit on sales divided by the capital employed
turnover rate.
b. Percentage of profit on sales multiplied by the capital employed
turnover rate.
c. Investment capital divided by the capital employed turnover rate.
d. Investment capital multiplied by the capital employed turnover rate.

58. Management accounting and cost accounting

a. are required for recordkeeping as are financial accounting and tax
accounting.
b. provide cost information about products and services, as well as
information for internal decision making.
c. require an entirely separate group of accounts than financial
accounting.
d. focus solely on the determination of costs to produce a product or
provide a service.

59. Which of the following is a sign that an ABC system may be useful?
a. There are small amounts of indirect costs.
b. Products make diverse demands on resources because of differences
in volume, process steps, batch size, or complexity.
c. Products a company is less suited to produce and sell show small
profits.
d. Operations staff agrees with accountants about the costs of
manufacturing and marketing products and services.

60. Systematic evaluation of the trade-offs between product functionality and

product cost while still satisfying customer needs is the definition of
a. Activity-based management.
b. Theory of constraints.
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c. Total quality management.

d. Value engineering.

ANSWERS - THEORIES

1. C 11. B 21. A 31. D 41. C 51. D

2. C 12. D 22. B 32. D 42. A 52. D
3. D 13. B 23. D 33. C 43. D 53. A
4. D 14. B 24. D 34. A 44. A 54. B
5. D 15. A 25. A 35. A 45. D 55. B
6. C 16. A 26. D 36. B 46. D 56. A
7. A 17. C 27. B 37. C 47. C 57. B
8. D 18. B 28. A 38. C 48. D 58. B
9. D 19. D 29. C 39. B 49. D 59. B
10. C 20. D 30. A 40. C 50. C 60. D

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