TQM

Productivity is defined as the ratio of output of a production process to the input that are
used. Consider a process that currently produces 2,000 units of output with 500 hours of
labor per day. This process can be redesigned to produce 2,520 units of output requiring
600 hours per day. The percentage change in productivity from redesigning the process is?
5%

Comparing one's own product, service, or practice with the best known similar activity is?
Benchmarking

Yahoo Corporation is a highly automated manufacturing firm. The Vice-President of

Finance, Ferdinand, has decided that traditional standards are inappropriate for performance
measures in an automated environment. Labor is insignificant in terms of the total cost of
production and tends to be fixed. Materials quality are considered more important than
minimizing material cost, and customer satisfaction is the number one priority. As a result,
delivery performance measures have been chosen to evaluate performance. The following
information is considered typical of the time involved to complete orders:
Wait time:
from order being placed to start of production 10.0 days
from start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 2.5 days
What is the delivery cycle time for this order?
22 days

Which of the following is a type of costing that relates to the continuous accumulation of
small betterment activities rather than innovative improvements?
Kaizen costing

The series of activities in which customer usefulness is added to the product is the definition
of?
A value chain

Product-quality related costs are part of a total quality control program. A product-quality
related cost incurred in detecting individual products that do not conform to specifications is
an example of a(n)?
Appraisal cost

Under a total quality management (TQM) approach?

Measurement occurs throughout the process and errors are caught and corrected at
the source
Nonfinancial performance measures are important to engineering and operations managers
in assessing the quality levels of their products Which of the following indicators can be
used to measure product quality?
I. Returns and allowances.
II. Number and types of customer complaints.
III. Production cycle time.
I and II only

A company’s Accounts Receivable Department processed 33,000 invoices during a 6-month

period with a billing error rate of 3%. Each billing error cost P110 to correct. In addition,
15% of contract cancellations during this period were attributed to billing errors, resulting in
estimated lost total contribution margin of P75,000 from dissatisfied customers who
cancelled their contracts. If the number of invoices issued and the costs per billing error
remain unchanged, the annual savings available for funding of a quality improvement
program to lower the company’s billing error rate by 1% (i.e., from 3% to 2%) would be?
P122,600

The cost of statistical quality control in a product quality cost system is categorized as a(n)?
Appraisal cost

The management of a company is attempting to build a reputation as a world-class

manufacturer of quality products. On which of the four costs should it spend the majority of
its funds?
Prevention costs

Yahoo Corporation is a highly automated manufacturing firm. The Vice-President of

Finance, Ferdinand, has decided that traditional standards are inappropriate for performance
measures in an automated environment. Labor is insignificant in terms of the total cost of
production and tends to be fixed. Materials quality are considered more important than
minimizing material cost, and customer satisfaction is the number one priority. As a result,
delivery performance measures have been chosen to evaluate performance. The following
information is considered typical of the time involved to complete orders:
Wait time:
from order being placed to start of production 10.0 days
from start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 2.5 days
What is the manufacturing cycle efficiency for this order?
25.0%

In which of the following organizational structures does total quality management (TQM)
work best?
Teams of people from different specialties

If a company is customer-centered, its customers are defined as?

Anyone external to the company and those internal who rely on its product to get
their job done.
One of the main reasons total quality management (TQM) can be used as a strategic
weapon is that?
The cumulative improvement from a company’s TQM efforts cannot readily be copied
by competitors

The most important component of quality control is?

Ensuring goods and services conform to the design specifications.

A company produces stereo speakers for automobile manufacturers. The automobile

manufacturers emphasize total quality control (TQC) in their production processes and reject
approximately 3% of the stereo speakers received as being of unacceptable quality. The
company inspects the rejected speakers to determine which ones should be reworked and
which ones should be discarded. The discarded speakers are classified as?
Spoilage

Focusing on customers, promoting innovation, learning new philosophies, driving out fear,
and providing extensive training are all elements of a major change in organizations. These
elements are aimed primarily at
Focusing on the total quality of products and services

The primary reason for adopting total quality management is to achieve

Greater customer satisfaction.

A manufacturing cell's partial productivity can be measured using data on?

Direct materials usage

The Plan-Do-Check-Act (PDCA) Cycle is a quality tool devised by W.E. Deming. It is best
described as?
A “management by fact” approach to continuous improvement.

Quality is achieved more economically if the company focuses on?

Prevention costs

A traditional quality control process in manufacturing consists of mass inspection of goods

only at the end of a production process. A major deficiency of the traditional control process
is that?
It does not focus on improving the entire production process.

The quantity of output divided by the quantity of one input equals?

Partial productivity

A company has recently introduced total quality management (TQM). The company’s top
management wants to determine a new and innovative approach to foster total participation
throughout the company. Management should?
Bring the employees together for a brainstorming session.
All of the following would generally be included in a cost-of-quality report except:
Lost contribution margin
Management of a company is attempting to build a reputation as a world-class manufacturer
of quality products. Which of the following measures would not be used by the firm to
measure quality?
The number parts shipped per day

In a quality control program, which of the following is(are) categorized as internal failure
costs?
I. Rework.
II. Responding to customer complaints.
Statistical quality control procedures
I only

The four categories of costs associated with product quality costs are
External failure, internal failure, prevention, and appraisal

One of the main reasons that implementation of a total quality management program works
better through the use of teams is?
Teams are natural vehicle for sharing ideas, which leads to process improvement.

Management of a company is attempting to build a reputation as a world-class manufacturer

of quality products. Which of the four costs would be the most damaging to its ability to build
a reputation as a world-class manufacturer?
External failure costs

The International Standards Organization (ISO) has developed standards for ring networks
that include fault management, configuration management, accounting management,
security management, and performance monitoring. Which of the following controls is
included in the performance-monitoring standards?
Compiling statistics on the number of times that application software is used

The cost of scrap, rework and tooling changes in a product quality cost system is
categorized as a(an)?
Internal failure cost

The quantity of output divided by the quantity of one input equals?

Partial productivity

Management of a company is attempting to build a reputation as a world-class manufacturer

of quality products. Which of the four costs would be the most damaging to its ability to build
a reputation as a world-class manufacturer?
External failure costs

Which of the following is not a characteristic of an innovative manufacturing company?

Emphasis on existing products
Quality costs indices are often used to measure and analyze the cost of maintaining a given
level quality. One example of a quality cost index, which uses a direct labor base, is
computed as
Quality cost index = (Total quality costs / Direct labor costs) x 100
The following quality costs data were collected for May and June:
May
June
Prevention costs
P 4,000
P 5,000
Appraisal costs
6,000
5,000
Internal failure costs
12,000
15,000
External failure costs
14,000
11,000
Direct labor costs
90,000
100,000
Based upon these cost data, the quality cost index
Decrease 4 points from May to June
Fundamental principles in strategic investment management

The capital budget is a (n)

Plan that assesses the long-term needs of the company for plant and equipment
purchases.

Of the following decisions, capital budgeting techniques would least likely be used in
evaluating the
Adoption of a new method of allocating nontraceable costs to product lines.

In capital budgeting decisions, the following items are considered among others:
1. Cash outflow for the investment.
2. Increase in working capital requirement.
3. Profit on sale of old asset.
4. Loss on write-off of old asset.
For which of the above items would taxes be relevant?
Items 3 and 4 only.

In equipment-replacement decisions, which one of the following does not affect the
decision-making process?
Original fair market value of the old equipment.

Malen Movers, Inc. is planning to purchase equipment to make its operations more efficient.
This equipment has an estimated useful life of six years. As part of this acquisition, a
P150,000 investment in working capital is required. In a discounted cash flow analysis, this
investment in working capital?
Should be treated as an immediate cash outflow that is recovered at the end of six
years.

All of the following are methods that aid management in analyzing the expected result of
capital budgeting decisions, except:
Future value cash flow.

High-Tech Industries is considering the acquisition of a new state-of-the-art manufacturing

machine to replace a less efficient machine. Hi-Tech has completed a net present value
analysis and found it to be favorable. Which one of the following factors should not be of
concern to Hi-Tech in its acquisition considerations?
The investment tax credit.

In capital expenditures decisions, the following are relevant in estimating operating costs
except:
Historical costs
The consulting firm of Magaling Corporation is considering the replacement of their computer
system. Taking into account the income tax effect and considering the carrying value of the
old system (CVOS) and the residual value of the new system (RVNS), which combination
below applies to the decision making process?
CVOS, irrelevant and RVNS, relevant.
Capital budgeting is concerned with
Analysis of long-range decisions.

As a capital budgeting technique, the payback period considers depreciation expense (DE)
and time value of money (TVM) as follows:
DE, irrelevant and TVM, irrelevant.

Capital budgeting is used for the decision analysis of

All of the answers are correct.

Capital budgeting techniques are least likely to be used in evaluating the

Adoption of a new method of allocating non-traceable cost to product lines.
Project evaluation techniques

Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks
have a useful life of 8 years and cost a total of $500,000. Henderson expects its net increase
in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and
$100,000 in each of the remaining years.
Assume the net cash flow to be $130,000 a year. What is the payback time for the fleet of
trucks?
3.85 years

Willis Inc. has a cost of capital of 15% and is considering the acquisition of a new machine
which costs $400,000 and has a useful life of 5 years. Willis projects that earnings and cash
flow will increase as follows:
Net After-Tax
Year
Earnings
Cash Flow
1
$100,000
$160,000
2
100,000
140,000
3
100,000
100,000
4
100,000
100,000
5
200,000
100,000
What is the payback period of this investment?
3.00 years

The accounting rate of return

Focuses on income as opposed to cash flows
Jorelle Company's financial staff has been requested to review a proposed investment in
new capital equipment. Applicable financial data is presented below. There will be no
salvage value at the end of the investment's life and, due
to realistic depreciation practices, it is estimated that the salvage value and net book value
are equal at the end of
each year. All cash flows are assumed to take place at the end of each year. For investment
proposals, Jorelle uses a 12% after-tax target rate of return.
Discounted Factors for a 12% Rate of Return
Present Value of an Present Value of $1.00 Annuity of $1.00

Received at the End

Received at the
Year
of Each Period
End of Each Period
1 .89 .89
2 .80 1.69
3 .71 2.40
4 .64 3.04
5 .57 3.61
6 .51 4.12
The accounting rate of return on the average investment proposal is
34.4%

The payback reciprocal can be used to approximate a project’s

Internal rate of return if the cash flow pattern is relatively stable.

Yipann Corporation is reviewing an investment proposal. The initial cost as well as other
related data for each year are presented in the schedule below. All cash flows are assumed
to take place at the end of the year. The salvage value of the investment at the end of each
year is equal to its net book value, and there will be no salvage value at the end of the
investment's life.
2.250 years

The bailout payback method

Measures the risk if a project is terminated.

All of the following items are included in discounted cash flow analysis, except:
The future assets depreciation.

Which one of the following statements about the payback method of investments analysis is
correct?
Does not consider the time value of money.

MS Trucking is considering the purchase of a new piece equipment that has a net initial
investment with a present value of $300,000. The equipment has an estimated useful life of
3 years. For tax purposes, the equipment will be fully depreciated at rates of 30%, 40%, and
30% in years one, two, and three, respectively. The new machine is expected to have a
$20,000 salvage value. The machine is expected to save the company $170,000 per year in
operating expenses. MS Trucking has a 40% marginal income tax rate and a 16% cost of
capital. Discount rates for a 16% rate are:
2.09 years or 2.08

When using one of the discounted cash flow methods to evaluate the desirability of a capital
budgeting project, which of the following factors generally is not important?
The method of financing the project under consideration.

Which one of the following methods of evaluating potential capital projects would take into
account depreciation expense that was nondeductible for tax purposes?
Accounting rate of return approach.

A project has an initial outlay of P1,000. The projected cash inflows earned evenly over each
year are:
Year 1
P200
Year 2
200
Year 3
400
Year 4
400
What is the investment's payback period?
3.5 years

The method that divides a project’s annual after tax profit by the average investment cost to
measure the estimated performance of a capital investment is the
Accounting rate of the return method.

The payback reciprocal can be used to approximate a project's.

Internal rate of return if the cash flow pattern is relatively stable.

The payback capital budgeting technique considers

Income over entire life of Project Time value of money
No, no
Given these data:
· Net after tax inflows are: P24,000 for year 1, P30,000 for year 2, P36,000 for year 3,
and P30,000 for year 4.
· Initial investment outlay is P60,000.
Cost of capital is 18%.
Determine the payback period for this investment:
2.17 years
A proposed investment is not expected to have any salvage value at the end of its 5-year
life. For present value purposes, cash flows are assumed to occur at the end of each year.
The company uses a 12% after-tax target rate of return.
2.23 years

The “inflation element” refers to the

Future deterioration of the general purchasing power of the monetary unit.

McLean Inc. is considering the purchase of a new machine that will cost $160,000. The
machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base
will be depreciated in the first year, 40% in the second year, and 30% in the third year. The
new machine will have a $10,000 resale value at the end of its estimated useful life. The
machine is expected to save the company $85,000 per year in operating expenses. McLean
uses a 40% estimated income tax rate and a 16% hurdle rate to evaluate capital projects.
Discount rates for a 16% rate are as follows:

Present Value of $1
Present Value of an Ordinary Annuity of $1
Year 1
.862
.862
Year 2
.743
1.605
Year 3
.641
2.246
The payback period for this investment would be?
2.23 years

The length of time required to recover the initial cash outlay of a capital project is determined
by using the
Payback method.

Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks
have a useful life of 8 years and cost a total of $500,000. Henderson expects its net increase
in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and
$100,000 in each of the remaining years.
Ignoring the time value of money, how long will it take Henderson to recover the amount of
investment?
3.5 years

A proposed project has an expected economic life of eight years. In the calculation of the
net present value of the proposed project, residual value would be
Included as a cash inflow at the present value of the estimated residual value.

Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks
have a useful life of 8 years and cost a total of $500,000. Henderson expects its net increase
in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and
$100,000 in each of the remaining years.
Assume the net cash flow to be $130,000 a year. What is the payback time for the fleet of
trucks?
3.85 years

Nakane Company is planning to purchase a new machine for P500,000. The new machine
is expected to produce cash flows from operations, before income taxes, of P135,000 a year
in each of the next five years. Depreciation of P100,000 a year will be charged to income for
each of the next five years. Assume that the income tax rate is 40%. The payback period
would be approximately
4.1 years.

Logg Company is planning to buy a coin-operated machine costing P40,000. For tax
purposes, this machine will be depreciated over a five-year period using the straight-line
method and no residual value. Assume that the investment tax credit is not applicable to this
purchase. Logg estimates that this machine will yield an annual cash inflow, net of
depreciation and income taxes, of P12,000. At the following discount rates, the net present
values of the investment are:
Logg’s desired rate of return on its investment is 12%.
Logg’s expected payback period for its investment in this machine is
3.3 years

A company invested in a new machine that will generate revenues of P35,000 annually for
seven years. The company will have annual operating expenses of P7,000 on the new
machine. Depreciation expense, included in the operating expenses, is P4,000 per year. The
expected payback period for the new machine is 5.2 years. What amount did the company
pay for the new machine?
P166,400

The method that divides a project's annual after-tax net income by the average investment
cost to measure the estimated performance of a capital investment is the
Accounting rate of return method.

Tam Co. is negotiating for the purchase of equipment that would cost P100,000, with the
expectation that P20,000 per year could be saved in after-tax cash costs if the equipment is
acquired. The equipment's estimated useful life is 10 years, with no residual value, and it
would be depreciated by the straight-line method. Tam's predetermined minimum desired
rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present
value of 1 due in 10 periods at 12% is .322.
The accrual accounting rate of return based on the initial investment is
10%

The “inflation element” refers to the

Future deterioration of the general purchasing power of the monetary unit.

Which of the following is necessary in order to calculate the payback period for a project?
Annual cash flow.

The method that divides a project’s annual after tax profit by the average investment cost to
measure the estimated performance of a capital investment is the
Accounting rate of the return method.

The bailout payback method:

Measures the risk if a project is terminated.
Time value of money

Which of the following “tools” are likely to be used in financial management?

Time Value of Money
Interest Rate Concepts
Balance of Payment Accounts
Yes, No, No

A loan is to be repaid in eight annual installments of $1,875. The interest rate is 10%. The
present value of an ordinary annuity for eight periods at 10% is 5.33. Identify the
computation that approximates the outstanding loan balance at the end of the first year.
$1,875 x 5.33 = $9,994; $1,875 - $999 = $876; $9,994 - $876 = $9,118

Present value, amount of $1, and ordinary annuity information are presented below. All
values are for four periods with an interest rate of 8%.
Amount of $1 .36
Present value of $1 0.74
Amount of an ordinary annuity of $1 4.51
Present value of an ordinary annuity of $1 3.31
Jim Green decides to create a fund to earn 8% compounded annually that will enable him to
withdraw $5,000 per year each June 30, beginning in year 5 and continuing through year 9.
Jim wishes to make equal contributions on June 30 of each of the years, year 1 through year
4. Which equation would be used to compute the balance which must be in the fund on June
30, year 4 for Jim to satisfy his objective?
$X = $5,000 x 3.31

Present value, amount of $1, and ordinary annuity information are presented below. All
values are for four periods with an interest rate of 8%.
Amount of $1 .36
Present value of $1 0.74
Amount of an ordinary annuity of $1 4.51
Present value of an ordinary annuity of $1 3.31
Jones wants to accumulate $50,000 by making equal contributions at the end of each of 4
succeeding years. Which equation would be used to compute Jones's annual contribution to
achieve the $50,000 goal at the end of the fourth year?
$X = $50,000 ・4.51
An individual received an inheritance from a grandparent’s estate. The money can be
invested and the individual can either (a) receive a P20,000 lump-sum amount at the end of
10 years or (b) receive P1,400 at the end of each year for the next 10 years. The individual
wants a rate of return of 12% and uses the following information:
1. Present value of P1 = 0.322
2. Present value of annuity of P1 = 5.650.
What is the preferred investment option and what is its net present value?
Option b, P7,910

What is the time value of money?

Interest

Pole Co. is investing in a machine with a three-year life. The machine is expected to reduce
annual cash operating costs by P30,000 in each of the first two years and by P20,000 in
year 3. 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?
P62,900

What is the yield to maturity on Fox Inc.'s bonds if its after-tax cost of debt is 9% and its tax
rate is 34%?
13.64%

A company plans to purchase a machine with the following conditions:

ｷ Purchase price = $300,000.
ｷ The down payment = 10% of purchase price with remainder financed at an annual interest
rate of 16%.
ｷ The financing period is 8 years with equal annual payments made every year.
ｷ The present value of an annuity of $1 per year for 8 years at 16% is 4.3436.
ｷ The present value of $1 due at the end of 8 years at 16% is .3050.
The annual payment (rounded to the nearest dollar) is?
$62,160

Which of the following is a series of equal payments at equal intervals of time when each
payment is received at the beginning of each time period?
Annuity due

Roger Retailer sells $20,000 of merchandise to Bob Buyer. Bob offers Roger two payment
options for the merchandise. The first option is Bob will pay Roger $20,000 in a lump sum 1
year from the date of purchase. The second option is Bob will pay Roger $750 every 2
weeks for 1 year, starting 2 weeks after the date of purchase (a total of 26 bi-weekly
payments). If Roger's relevant discount rate is 0.5% per bi-weekly period, which option
should Roger accept?
Bi-weekly payments, as they have a higher present value by $675.
Essex Corporation is evaluating a lease that takes effect on March 1. The company must
make eight equal payments, with the first payment due on March 1. The concept most
relevant to the evaluation of the lease is
Basic time value of money concepts concern
Interest Factors, Risk, Cost of Capital
Yes, Yes, No

A pension fund is projecting the amount necessary today to fund a retiree's pension benefits.
The retiree's first annual pension check will be in 10 years. Payments are expected to last for
a total of 20 annual payments. Which of the following best describes the computation of the
amount needed today to fund the retiree's annuity?
Present value of $1 for nine periods, times the present value of an ordinary annuity of
20 payments, times the annual annuity payment.

Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one
of the company's employees, for $5,000. Crown and Parsons have been discussing
alternative financing arrangements for the sale. The information in the opposite column is
pertinent to these discussions.
Present Value of an Ordinary Annuity of $1
Payments
5%, 6%, 7%, 8%
1 0.952, 0.943,0.935, 0.926
2 1.859, 1.833, 1.808, 1.783
3 2.723, 2.673, 2.624, 2.577
4 3.546, 3.465, 3.387, 3.312
5 4.329, 4.212, 4.100, 3.993
6, 5.076, 4.917, 4.767, 4.623
7 5.786, 5.582, 5.389, 5.206
8 6.463, 6.210, 5.971, 5.747
Crown Corporation has offered to accept a $1,000 down payment and set up a note
receivable for Bob Parsons that calls for a $1,000 payment at the end of each of the next 4
years. If Crown uses a 6% discount rate, the present value of the note receivable would be?
$3,465

Your real estate agent mentions that homes in your price range require a payment of
approximately $800 per month over 30 years at 10% interest. What is the approximate size
of the mortgage with these terms?
$91,200

What is the time value of money?

Interest

What is the yield to maturity on Fox Inc.'s bonds if its after-tax cost of debt is 9% and its tax
rate is 34%?
13.64%
The use of an accelerated method instead of the straight-line method of depreciation in
computing the net present value of a project has the effect of
Increasing the present value of the depreciation tax shield.

How long must one wait (to the nearest year) for an initial investment to triple in value if the
investment earns 9% compounded annually?
13

Which one of the following sets of interest (or discount) rates will give the greater present
value of P1.00 and greater future value of P1.00?
Greater Greater
Present Value Future Value
8% 10%

Crown Corporation has agreed to sell some used computer equipment to Bob Parsons, one
of the company's employees, for $5,000. Crown and Parsons have been discussing
alternative financing arrangements for the sale. The information in the opposite column is
pertinent to these discussions.
Present Value of an Ordinary Annuity of $1
Payments
5%, 6%, 7%, 8%
1 0.952, 0.943,0.935, 0.926
2 1.859, 1.833, 1.808, 1.783
3 2.723, 2.673, 2.624, 2.577
4 3.546, 3.465, 3.387, 3.312
5 4.329, 4.212, 4.100, 3.993
6, 5.076, 4.917, 4.767, 4.623
7 5.786, 5.582, 5.389, 5.206
8 6.463, 6.210, 5.971, 5.747
If Bob Parsons borrowed the $5,000 at 8% interest for 4 years from his bank and paid Crown
Corporation the full price of the equipment immediately, Crown could invest the $5,000 for 3
years at 7%. The future value of this investment (rounded) would be
$6,127

What is the yield to maturity on Fox Inc.'s bonds if its after-tax cost of debt is 9% and its tax
rate is 34%?
13.64%
The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies
have submitted bids to Cliff Kraven, the postal inspector responsible for choosing a machine.
A cash flow analysis of the two machines indicates the following:
Year Machine A Machine B
0 -$30,000 -$30,000
1 0 13,000
2 0 13,000
3 0 13,000
4 60,000 13,000
If the cost of capital for the Postal Service is 8%, which of the two mail sorters should Cliff
choose and why?
Machine A, because NPVA > NPVB, by $1,044.

Pole Co. is investing in a machine with a three-year life. The machine is ex

pected to reduce annual cash operating costs by P30,000 in each of the first two years and
by P20,000 in year 3. 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?
P62,900

Which of the following changes would result in the highest present value?
A P100 decrease in taxes each year for four years.

Present value, amount of $1, and ordinary annuity information are presented below. All
values are for four periods with an interest rate of 8%.
Amount of $1 .36
Present value of $1 0.74
Amount of an ordinary annuity of $1 4.51
Present value of an ordinary annuity of $1 3.31
Jim Green decides to create a fund to earn 8% compounded annually that will enable him to
withdraw $5,000 per year each June 30, beginning in year 5 and continuing through year 9.
Jim wishes to make equal contributions on June 30 of each of the years, year 1 through year
4. Which equation would be used to compute the balance which must be in the fund on June
30, year 4 for Jim to satisfy his objective?
$X = $5,000 x 3.31

Your real estate agent mentions that homes in your price range require a payment of
approximately $800 per month over 30 years at 10% interest. What is the approximate size
of the mortgage with these terms?
$91,200
An actuary has determined that a company should have $90,000,000 accumulated in its
pension fund 20 years from now in order for the fund to be able to meet its obligations. An
interest rate of 8% is considered appropriate for all pension fund calculations involving an
interest component. The company wishes to calculate how much it should contribute to the
pension fund at the end of each of the next 20 years in order for the pension fund to have its
required balance in 20 years. Assume you are given the following two factors from present
value and future value tables:
1) Factor for present value of an ordinary annuity for n=20, i=8%
2) Factor for future value of an ordinary annuity for n=20, i=8%.Which of the following sets
of instructions correctly describes the procedures necessary to compute the annual amount
the company should contribute to the fund?
Divide $90,000,000 by the factor for future value of an ordinary annuity for n=20, i=8%.

The relationship between the present value of a future sum and the future value of a present
sum can be expressed in terms of their respective interest factors. If the present value of
$100,000 due at the end of 8 years, at 10%, is $46,650, what is the approximate future value
of $100,000 over the same length of time and at the same rate?
$214,360

Assume your uncle recorded his salary history during a 40-year career and found that it had
increased ten-fold. If inflation averaged 5% annually during the period, how would you
describe his purchasing power, on average?
He "beat" inflation by nearly 1% annually.

The present value of the following cash flows is known to be $6,774; $500 in 1 year, $2,000
in 2 years, and $5,000 in 3 years. What discount rate is being used?
4%

The net present value and internal rate of return methods of capital budgeting are superior to
the payback method in that they: (M)
consider the time value of money.

A company purchased some large machinery on a deferred payment plan. The contract calls
for $20,000 down on January 1st and $20,000 at the beginning of each of the next 4 years.
There is no stated interest rate in the contract, and there is no established exchange price
for the machinery. What should be recorded as the cost of the machinery?
Present value of an annuity due for 5 years at an imputed interest rate.

Essex Corporation is evaluating a lease that takes effect on March 1. The company must
make eight equal payments, with the first payment due on March 1. The concept most
relevant to the evaluation of the lease is?
The present value of an annuity due.

Future value is best described as?

The value of a dollar-in at a future time adjusted for any compounding effect and the
value of a dollar-out at a future time adjusted for any compounding effect.
Which one of the following sets of interest (or discount) rates will give the greater present
value of P1.00 and greater future value of P1.00?
Greater Greater
Present Value Future Value
8% 10%

The use of an accelerated method instead of the straight-line method of depreciation in

computing the net present value of a project has the effect of
Increasing the present value of the depreciation tax shield.

Use the following 8% interest rate factors for this question.

Future Value of
Period Future Value of $1 Annuity of $1
1 1.08 1.00
2 1.17 2.08
3 1.26 3.25
4 1.36 4.51
The Suellen Company has $150,000 in a bank account as of December 31, 2001. If the
company plans to deposit $8,000 in the account at the end of each of the next 3 years
(2002, 2003, and 2004), and all amounts in the account earn 8% per year, what will the
account balance be at December 31, 2004? Ignore the effect of income taxes.
$215,000

Present value, amount of $1, and ordinary annuity information are presented below. All
values are for four periods with an interest rate of 8%.
Amount of $1 .36
Present value of $1 0.74
Amount of an ordinary annuity of $1 4.51
Present value of an ordinary annuity of $1 3.31
Jones wants to accumulate $50,000 by making equal contributions at the end of each of 4
succeeding years. Which equation would be used to compute Jones's annual contribution to
achieve the $50,000 goal at the end of the fourth year?
$X = $50,000 ・4.51

If the amount to deposit today to be able to replace an asset at a specified time in the future
is to be determined, which formula should be used?
FV
PV = -------
(1 + i)・
Which formula is used to determine the future value that will be available if a given amount
of money is invested?
A(1 + i)

Amaro Hospital, a nonprofit institution not subject to income taxes, is considering the
purchase of new equipment costing P20,000, in order to achieve cash savings of P5,000 per
year in operating costs. The equipment’s estimated useful life is ten years, with no residual
value. Amaro’s cost of capital is 14%. For ten periods of 14%, the present value of P1 is
0.270, while the present value of an ordinary annuity of P1 is 5.216.
What factor contained in or developed from the above information should be used in
computing the internal rate of return for Amaro’s proposed investment in the new
equipment?
4.000

Basic concepts underlying variance analysis and investigation

DIGITAL Products produces a product, Digit, and uses standard costing methods. The
standard direct labor cost of Digit is one and one-half hours at P180 per hour. During
October, 19x7, 500 Digit units were produced in 1,000 hours at P176 per hour. The direct
labor efficiency variance is a favorable (an unfavorable)
P(45,000)
The variance in an absorption costing system that measures the departure from the
denominator level of activity that was used to set the fixed overhead rate is the
Production volume variance.

The standard direct labor cost to produce one pound of output for a company is presented
below. Related data regarding the planned and actual production activities for the current
month for the company are also given below:
NOTE: DLH = Direct labor hours
Direct labor standard: 0.4 DLH @ P12.00 per DLH
P 4.80
Planned production
15,000 pounds
Actual production
15,500 pounds
Actual direct labor costs (6,250 DLH)
P 75,250
The company's direct labor efficiency variance for the current month is?
P600 unfavorable

Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable labor efficiency variance?
The mix of workers assigned to the particular job was heavily weighted towards the
use of highly paid experienced individuals.

Jackson Industries, which employs a standard cost system in which direct materials
inventory is carried at standard cost. Jackson has established the following standards for
the prime costs of one unit of product. During May, Jackson purchased 125,000 pounds of
direct materials at a total cost of P475,000. The total factory wages for May were P364,000,
90% of which were for direct labor.
Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.
Standard Quantity Standard Price Standard Cost
Direct materials 5 pounds P3.60/pound P18.00
Direct labor 1.25 hours P12.00/hr. 15.00
P33.00
The direct labor price (rate) variance for May is?
P8,400 favorable

An organization that specializes in reviewing and editing technical magazine articles. It set
the following standards for evaluating the performance of the professional staff:
Annual budgeted fixed costs for normal capacity level of 10,000 articles reviewed and edited
P600,000
Standard professional hours per 10 articles 200 hours
Flexible budget of standard labor costs to process 10,000 articles P 10,000,000
The following data apply to the 9,500 articles that were actually reviewed and edited during
the current year.
Total hours used by professional staff 192,000 hours
Flexible costs P 9,120,000
Total cost 9,738,000
The labor efficiency variance for the year is?
P100,000 unfavorable

The efficiency variance for either labor or materials can be divided into a
Yield variance and a mix variance.

Ipil-ipil Woods Inc. grants bonus to its plant employees equal to 50% pay for the time saved
in production. The company has set up a standard rate of production of 200 units of cutting
board per hour. The standard pay per labor hour is P8. Factory overhead varies at the rate
of P2.50 per hour.
During the month of June, the employees worked a total of 25,000 direct labor hours and
produced 6,000,000 units of cutting boards. The total variable factory overhead amounted to
P62,500. Bonus checks are issued to employees in the month following the month in which
the standards are exceeded.
The total net savings to the company for the month of June after deducting the bonus is?
P32,500

Below are Russel Corporation’s standard costs to produce one concrete table:
Direct raw materials 2 kgs.@ P375 per kg
Direct labor 30 minutes @ 31.25 per hour
In September, Russel produced 250 concrete tables. Five hundred twenty (520) kgs of raw
materials were used at a total costs of P193,440. A total of 128 direct labor hours were used
at a cost of P4,096. The direct labor rate variance is:
P96.00

Yola Co. manufactures one product with a standard labor cost of 4 hours at P12.00 per hour.
During June 1,000 units were produced using 4,100 hours at P12.20 per hour. The
unfavorable direct labor efficiency variance was?
P1,200

The standard direct labor cost to produce one pound of output for a company is presented
below. Related data regarding the planned and actual production activities for the current
month for the company are also given below:
NOTE: DLH = Direct labor hours
Direct labor standard: 0.4 DLH @ P 4.80
P12.00 per DLH
Planned production 15,000 pounds
Actual production 15,500 pounds
Actual direct labor costs (6,250 DLH) P 75,250
The company's direct labor efficiency variance for the current month is?
P600 unfavorable

Based on a month’s normal volume of 50,000 units (100,000 direct labor hours), Raff’s
standard cost system contains the following overhead costs:
Variable P6 per unit
Fixed 8 per unit
The following information pertains to the month of March 2013:
Units actually produced 38,000
Actual direct labor hours worked 80,000
Actual overhead incurred:
Variable P250,000
Fixed 384,000
For March 2013, the fixed overhead volume variance was
P96,000 unfavorable.

Water Control Inc. manufactures water pumps and uses a standard cost system. The
standard factory overhead costs per water pump are based on direct labor hours and are as
follows:
Variable overhead (4 hours of P8/hour) P 32
Fixed overhead (4 hours at P5*/per hour 20
Total overhead cost per unit P 52
* Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
Ø 22,000 pumps were produced although 25,000 had been scheduled for production.
Ø 94,000 direct labor hours were worked at a total cost of P940,000.
Ø The standard direct labor rate is P9 per hour.
Ø The standard direct labor time per unit is 4 hours.
Ø Variable overhead costs were P740,000.
Ø Fixed overhead costs were P540,000.
The direct labor efficiency variance for November was
P54,000 unfavorable

Under the two-variance method for analyzing factory overhead, the difference between the
actual factory overhead and the factory overhead applied to production is the
Net overhead variance.

SUPERIOR Mfg. Co., using a standard cost system, furnished information on direct labor
cost as follows:

Standard direct labor hours 75,000

Actual direct labor hours 72,500
Total payroll P 275,500
Unfavorable rate variance 14,500
Favorable efficiency variance 10,000
What was SUPERIOR’s actual direct labor rate per hour?
P3.80

Ipil-ipil Woods Inc. grants bonus to its plant employees equal to 50% pay for the time saved
in production. The company has set up a standard rate of production of 200 units of cutting
board per hour. The standard pay per labor hour is P8. Factory overhead varies at the rate
of P2.50 per hour.
During the month of June, the employees worked a total of 25,000 direct labor hours and
produced 6,000,000 units of cutting boards. The total variable factory overhead amounted to
P62,500. Bonus checks are issued to employees in the month following the month in which
the standards are exceeded.
The labor bonus for the production in June is?
P20,000

Below are Russel Corporation’s standard costs to produce one concrete table:
Direct raw materials
2 kgs.@ P375 per kg
Direct labor
30 minutes @ 31.25 per hour
In September, Russel produced 250 concrete tables. Five hundred twenty (520) kgs of raw
materials were used at a total costs of P193,440. A total of 128 direct labor hours were used
at a cost of P4,096. The direct labor rate variance is:
P96.00

A manager prepared the following table by which to analyze labor costs for the month:
Actual Hours at Actual Rate P10,000
Actual Hours at Standard Rate P 9.800
Standard Hours at Standard Rate P 8,820
What variance was P980?
Labor efficiency variance

SanBox Company is choosing new cost drivers for its accounting system. One driver is
labor hours; the other is a combination of machine hours for unit variable costs and number
of setups for a pool of batch-level costs. Data for the past year follow.
Budget Actual
Labor hours 200,000 200,000
Machine hours 360,000 450,000
Number of setups 3,000 3,300
Unit variable cost pool $1,600,000 $2,000,000
Batch-level cost pool $900,000 $990,000
Assume that both cost pools are combined into a single pool, and labor hours is the driver.
The total flexible budget for the actual level of labor hours and the total variance for the
combined pool are:
1) Flexible Budget
2) Variance
1) $2,500,000 2) $490,000U

Yola Company manufactures a product with standards for direct labor of 4 direct labor-hours
per unit at a cost of P12.00 per direct labor-hour. During June, 1,000 units were produced
using 4,100 hours at P12.20 per hour. The direct labor efficiency variance was:
P1,200 unfavorable

A company manufactures a machine component called Omega. The following relates to

manufacturing operations in May.
Planned production 2,000 units of Omega
Actual production 2,100 units of Omega
Standard costs per unit of Omega
Direct materials P 20 (5 lbs. @ P4)
Direct labor P 10 (1 hr. @ P10)
Actual costs incurred
Direct materials purchased and used P 44,772 (10,920 lbs. @ P4.10)
Direct labor P 20,500 (2,000 hr. @ P10.25)
The direct materials efficiency variance was?
P1,680 unfavorable

Lab Corp. uses a standard cost system. Direct labor information for Product CER for the
month of October follows:
Standard direct labor rate P 6.00 per hour
Actual direct labor rate paid P 6.10 per hour
Standard hours allowed for actual production 1,500 hours
Labor efficiency variance--unfavorable P600
What are the actual hours worked?
1,600

Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable labor efficiency variance?
The mix of workers assigned to the particular job was heavily weighted towards the
use of highly paid experienced individuals.

ACE Company’s operations for the month just ended originally set up a 60,000 direct labor
hour level, with budgeted direct labor of P960,000 and budgeted variable overhead of
P240,000. The actual results revealed that direct labor incurred amounted to P1,148,000
and that the unfavorable variable overhead variance was P40,000. Labor trouble caused an
unfavorable labor efficiency variance of P120,000, and new employees hired at higher rates
resulted in an actual average wage rate of P16.40 per hour. The total number of standard
direct labor hours allowed for the actual units produced is?
P62,500

The Willard Manufacturing Co., Inc. uses standard cost systems in accounting for
manufacturing costs. On June 1, 19x9, it started the manufacture of a new product known
as “Whippy.” The standard costs of a unit of “Whippy” are:
Raw materials 3 kilos @ P1.00 per kilo P 3.00
Direct labor 1 hour @ P4.00 per hour 4.00
Overhead 75% of direct labor cost 3.00
P 10.00
The following data were obtained from Willard’s records for the month of June:
Actual production of “Whippy” 2,000 units
Units sold of “Whippy” 1,250 units

Debit Credit
Sales P 25,000
Purchases P 13,650
Materials price variance 650
Materials quantity variance 500
Direct labor rate variance 380
Direct labor efficiency variance 400
Manufacturing overhead total variance 250
The amount shown above for the materials price variance is applicable to raw materials
purchased during June.
The actual direct labor rate for the month of June is?
P4.20

Under the two-variance method for analyzing factory overhead, the budget allowance based
on standard hours allowed is used in the computation of the

Controllable Volume
(budget) variance variance
Yes Yes

Arrow Industries employs a standard cost system in which direct materials inventory is
carried at standard cost. Arrow has established the following standards for the prime costs of
one unit of product.
Standard Quantity Standard Price Standard Cost
Direct materials 8 pounds P1.80 per pound P 14.40
Direct labor 25 hour 8.00 per hour 2.00
P 16.40
During November, Arrow purchased 160,000 pounds of direct materials at a total cost of
P304,000. The total factory wages for November were P42,000, 90% of which were for
direct labor. Arrow manufactured 19,000 units of product during November using 142,500
pounds of direct materials and 5,000 direct labor hours.
The direct materials usage (quantity) variance for November is?
P17,100 favorable

The materials yield variance equals

(Inputs allowed –Inputs used) x budgeted weighted-average materials unit price for
the planned mix.

Water Control Inc. manufactures water pumps and uses a standard cost system. The
standard factory overhead costs per water pump are based on direct labor hours and are as
follows:
Variable overhead (4 hours of P8/hour) P 32
Fixed overhead (4 hours at P5*/per hour 20
Total overhead cost per unit P 52
* Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
Ø 22,000 pumps were produced although 25,000 had been scheduled for production.
Ø 94,000 direct labor hours were worked at a total cost of P940,000.
Ø The standard direct labor rate is P9 per hour.
Ø The standard direct labor time per unit is 4 hours.
Ø Variable overhead costs were P740,000.
Ø Fixed overhead costs were P540,000.
The direct labor efficiency variance for November was
P54,000 unfavorable

Which of the following is the most probable reason a company would experience an
unfavorable labor rate variance and a favorable labor efficiency variance?
The mix of workers assigned to the particular job was heavily weighted towards the
use of highly paid experienced individuals

Tub Co. uses a standard cost system. The following information pertains to direct labor for
product B for the month of October:
Standard hours allowed for actual production 2,000
Actual rate paid per hour P 8.40
Standard rate per hour P 8.00
Labor efficiency variance P 1,600 U
What were the actual hours worked?
2,200

Under the two-variance method for analyzing factory overhead, the difference between the
actual factory overhead and the factory overhead applied to production is the
Net overhead variance.
Which department is customarily held responsible for an unfavorable materials usage
variance?
Production

Water Control Inc. manufactures water pumps and uses a standard cost system. The
standard factory overhead costs per water pump are based on direct labor hours and are as
follows:
Variable overhead (4 hours of P8/hour) P 32
Fixed overhead (4 hours at P5*/per hour 20
Total overhead cost per unit P 52
* Based on a capacity of 100,000 direct labor hours per month.
The following additional information is available for the month of November.
Ø 22,000 pumps were produced although 25,000 had been scheduled for production.
Ø 94,000 direct labor hours were worked at a total cost of P940,000.
Ø The standard direct labor rate is P9 per hour.
Ø The standard direct labor time per unit is 4 hours.
Ø Variable overhead costs were P740,000.
Ø Fixed overhead costs were P540,000.
The direct labor efficiency variance for November was
The direct labor price variance for November was?
P94,000 unfavorable

The U. R. Good Company manufactures a product, using standard costs as follows:

1. Standard costs per unit:
Material 7 kilos at P3.50 per kilo
Labor 8 hours at P1.75 per hour
Overhead: Fixed P1.15 per hour or P9.20 per unit
Variable P0.85 per hour or P6.80 per unit
2. Overhead applied on direct labor hours
3. Actual performance (one month)
a) Volume produced 800
b) Labor hours 6,300
c) Overhead P13,200
d) Material cost P3.45 per kilo
e) Labor cost P1.80 per hour
f) Material used 4,800 kilos
Labor rate variance is?
P315 unfavorable

Jackson Industries, which employs a standard cost system in which direct materials
inventory is carried at standard cost. Jackson has established the following standards for
the prime costs of one unit of product. During May, Jackson purchased 125,000 pounds of
direct materials at a total cost of P475,000. The total factory wages for May were P364,000,
90% of which were for direct labor.
Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.
Standard Quantity Standard Price Standard Cost
Direct materials 5 pounds P3.60/pound P18.00
Direct labor 1.25 hours P12.00/hr. 15.00
P33.00
The direct labor usage (efficiency) variance for May is?
P6,000 unfavorable

Arrow Industries employs a standard cost system in which direct materials inventory is
carried at standard cost. Arrow has established the following standards for the prime costs of
one unit of product.
Standard Quantity Standard Price Standard Cost
Direct materials 8 pounds P1.80 per pound P 14.40
Direct labor 25 hour 8.00 per hour 2.00
P 16.40
During November, Arrow purchased 160,000 pounds of direct materials at a total cost of
P304,000. The total factory wages for November were P42,000, 90% of which were for
direct labor. Arrow manufactured 19,000 units of product during November using 142,500
pounds of direct materials and 5,000 direct labor hours.
The direct labor price (rate) variance for November is?
P2,200 favorable

Under a standard cost system, labor price variances are usually not attributable to
Union contracts approved before the budgeting cycle.

X’OR Co. uses a standard cost system, and data for its direct labor costs are summarized
below:
Actual direct labor hours 72,500
Standard direct labor hours 75,000
Total direct labor payroll P 275,500
Direct labor rate variance – favorable 14,500
Direct labor efficiency variance - favorable 10,000
The standard direct labor rate per hour is?
P4.00

A company manufactures a machine component called Omega. The following relates to

manufacturing operations in May.
Planned production 2,000 units of Omega
Actual production 2,100 units of Omega
Standard costs per unit of Omega
Direct materials P 20 (5 lbs. @ P4)
Direct labor P 10 (1 hr. @ P10)
Actual costs incurred
Direct materials purchased and used P 44,772 (10,920 lbs. @ P4.10)
Direct labor P 20,500 (2,000 hr. @ P10.25)
The direct labor flexible budget variance was?
P500 favorable

The total budgeted direct labor cost of a company for the month was set at P75,000 when
5,000 units were planned to be produced. The following standard cost, stated in terms of
direct labor hours (DLH), was used to develop the budget for direct labor cost:
1.25 DLH x P12.00/DLH = P15.00/unit produced
The actual operating results for the month were as follows:
Actual units produce 5,200
Actual direct labor hours worked 6,600
Actual direct labor cost P 77,220
The direct labor efficiency variance for the month would be?
P1,200 unfavorable

The direct labor standards for producing a unit of a product are two hours at P10 per hour.
Budgeted production was 1,000 units. Actual production was 900 units, and direct labor cost
was P19,000 for 2,000 direct labor hours. The direct labor efficiency variance was:
P2,000 unfavorable

The following information is available from the Faith Company:

Actual factory overhead P15,000
Fixed overhead expenses, actual P7,200
Fixed overhead expenses, budgeted P7,000
Actual hours 3,500
Standard hours 3,800
Variable overhead rate per DLH P2.50

Assuming that Faith uses a three-way analysis of overhead variances, what is the spending
variance?
P750 favorable.

DIGITAL Products produces a product, Digit, and uses standard costing methods. The
standard direct labor cost of Digit is one and one-half hours at P180 per hour. During
October, 19x7, 500 Digit units were produced in 1,000 hours at P176 per hour. The direct
labor efficiency variance is a favorable (an unfavorable)
P(45,000)
One of the items produced by a manufacturer of lawn and garden tools is a chain saw. The
direct labor standard for assembling and testing a chain saw is 2.5 hours at P8 per hour.
Budgeted production for October was 1,200 units. Actual production during the month was
1,000 units, and direct labor cost was P27,840 for 3,200 hours. Using a two-variance
system, what is the direct labor efficiency variance?
P5,600 unfavorable

Ipil-ipil Woods Inc. grants bonus to its plant employees equal to 50% pay for the time saved
in production. The company has set up a standard rate of production of 200 units of cutting
board per hour. The standard pay per labor hour is P8. Factory overhead varies at the rate
of P2.50 per hour.
During the month of June, the employees worked a total of 25,000 direct labor hours and
produced 6,000,000 units of cutting boards. The total variable factory overhead amounted to
P62,500. Bonus checks are issued to employees in the month following the month in which
the standards are exceeded.
The labor bonus for the production in June is?
P20,000

The Dillon Company makes and sells a single product and uses a flexible budget for
overhead to plan and control overhead costs. Overhead costs are applied on the basis of
direct labor-hours. The standard cost card shows that 5 direct labor-hours are required per
unit. The Dillon Company had the following budgeted and actual data for March:
Actual Budgeted
Units produced 33,900 30,800
Direct labor-hours 161,800 154,000
Variable overhead costs $140,500 $123,200
Fixed overhead costs $80,000 $77,000
The fixed overhead volume variance for March is:
P7,750 F.

For the month of April, Thorp Co.'s records disclosed the following data relating to direct
labor:
Actual cost
P 10,000
Rate variance
P 1,000 favorable
Efficiency variance
P 1,500 unfavorable
For the month of April, actual direct labor hours amounted to 2,000. In April, Thorp's
standard direct labor rate per hour was:
P5.50.
BINGO Co. uses a standard cost system. Direct labor statistics for the month of May, 19x7
follows:
Actual rate per hour P 152.50
Standard rate per hour P 150.00
Labor efficiency variance – unfavorable P 15,000
Standard hours allowed for actual production 37,500
What was the actual number of hours worked?
37,600

One of the items produced by a manufacturer of lawn and garden tools is a chain saw. The
direct labor standard for assembling and testing a chain saw is 2.5 hours at P8 per hour.
Budgeted production for October was 1,200 units. Actual production during the month was
1,000 units, and direct labor cost was P27,840 for 3,200 hours. Using a two-variance
system, what is the direct labor efficiency variance?
P5,600 unfavorable

The Willard Manufacturing Co., Inc. uses standard cost systems in accounting for
manufacturing costs. On June 1, 19x9, it started the manufacture of a new product known
as “Whippy.” The standard costs of a unit of “Whippy” are:
Raw materials 3 kilos @ P1.00 per kilo P 3.00
Direct labor 1 hour @ P4.00 per hour 4.00
Overhead 75% of direct labor cost 3.00
P 10.00
The following data were obtained from Willard’s records for the month of June:
Actual production of “Whippy” 2,000 units
Units sold of “Whippy” 1,250 units
Debit Credit
Sales P 25,000
Purchases P 13,650
Materials price variance 650
Materials quantity variance 500
Direct labor rate variance 380
Direct labor efficiency variance 400
Manufacturing overhead total variance 250
The amount shown above for the materials price variance is applicable to raw materials
purchased during June.
The actual hours worked for the month of June is?
1,900 hours
The total budgeted direct labor cost of a company for the month was set at P75,000 when
5,000 units were planned to be produced. The following standard cost, stated in terms of
direct labor hours (DLH), was used to develop the budget for direct labor cost:
1.25 DLH x P12.00/DLH = P15.00/unit produced
The actual operating results for the month were as follows:
Actual units produced 5,200
Actual direct labor hours worked 6,600
Actual direct labor cost P 77,220
The direct labor efficiency variance for the month would be?
P1,200 unfavorable

The direct labor standards for producing a unit of a product are two hours at P10 per hour.
Budgeted production was 1,000 units. Actual production was 900 units, and direct labor cost
was P19,000 for 2,000 direct labor hours. The direct labor efficiency variance was:
P2,000 unfavorable

The following information is available from the Faith Company:

Actual factory overhead P15,000
Fixed overhead expenses, actual P7,200
Fixed overhead expenses, budgeted P7,000
Actual hours 3,500
Standard hours 3,800
Variable overhead rate per DLH P2.50
Assuming that Faith uses a three-way analysis of overhead variances, what is the spending
variance?
P750 favorable.

DIGITAL Products produces a product, Digit, and uses standard costing methods. The
standard direct labor cost of Digit is one and one-half hours at P180 per hour. During
October, 19x7, 500 Digit units were produced in 1,000 hours at P176 per hour. The direct
labor efficiency variance is a favorable (an unfavorable)
P(45,000)

One of the items produced by a manufacturer of lawn and garden tools is a chain saw. The
direct labor standard for assembling and testing a chain saw is 2.5 hours at P8 per hour.
Budgeted production for October was 1,200 units. Actual production during the month was
1,000 units, and direct labor cost was P27,840 for 3,200 hours. Using a two-variance
system, what is the direct labor efficiency variance?
P5,600 unfavorable

If factory overhead is applied on the basis of units of output, the variable factory overhead
efficiency variance will be
Zero.
MAXIM MFG CO., which uses a standard cost system, manufactures one product with the
following standard costs:
Direct materials 2 Kilos at P10 P 20.00
Direct labor 1 hour at P8 8.00
Factory overhead 80% of direct labor 6.40
TOTAL STANDARD UNIT COST P 34.40
Total production in units 10,000 units
Direct materials purchased 22,000 kilos at P11
Actual quantity of materials used 21,000 kilos
Actual labor cost 9,500 at P7.50
Factory overhead total variance P1,000 unfavotable
The direct labor efficiency variance for April was?
P800

The Dillon Company makes and sells a single product and uses a flexible budget for
overhead to plan and control overhead costs. Overhead costs are applied on the basis of
direct labor-hours. The standard cost card shows that 5 direct labor-hours are required per
unit. The Dillon Company had the following budgeted and actual data for March:
Actual Budgeted
Units produced 33,900 30,800
Direct labor-hours 161,800 154,000
Variable overhead costs $140,500 $123,200
Fixed overhead costs $80,000 $77,000
The fixed overhead volume variance for March is:
$7,750 F.

Ardmore Enterprises uses a standard cost system in its small appliance division. The
standard cost of manufacturing one unit of Zeb is as follows:
Materials = 60 pounds at P1.50 per pound P 90
Labor = 3 hours at P12 per hour 36
Factory overhead – 3 hours at P8 per hour 24
Total standard cost per unitP150
The budgeted variable factory overhead rate is P3 per labor hour, and the budgeted fixed
factory overhead is P27,000 per month. During May, Ardmore produced 1,650 units of Zeb
compared with a normal capacity of 1,800 units. The actual cost per unit was as follows:
Materials (purchased and used) 58 pounds at P1.65 per pound) P 95.70
Labor = 3.1 hours at P12 per hour 37.20
Factory overhead – P39,930 per 1,650 units 24.20
Total actual cost per unit P 157.10
The labor rate variance for May is?
P0
MAXIM MFG CO., which uses a standard cost system, manufactures one product with the
following standard costs:
Direct materials
2 Kilos at P10 P 20.00
Direct labor 1 hour at P8 8.00
Factory overhead 80% of direct labor 6.40
TOTAL STANDARD UNIT COST P 34.40
Total production in units 10,000 units
Direct materials purchased 22,000 kilos at P11
Actual quantity of materials used 21,000 kilos
Actual labor cost 9,500 at P7.50
Factory overhead total variance P1,000 unfavotable
The direct labor efficiency variance is?
P4,000 favorable
Refinements in capital budgeting

A widely used approach that is used to recognize uncertainty about individual economic
variables while obtaining an immediate financial estimate of the consequences of possible
prediction errors is
Sensitivity analysis

The tax impact of equipment depreciation affects capital budgeting decisions. Currently, the
Modified Accelerated Cost Recovery System (MACRS) is used as the depreciation method
for most assets for tax purposes.
When employing the MACRS method of depreciation in a capital budgeting decision, the use
of MACRS as compared with the straight-line method of depreciation will result in?
Equal total depreciation for both methods.

In order to increase production capacity, Rovic Industries is considering replacing an existing

production machine with a new technologically improved machine effective January 1, 2014.
The following information is being considered by Gunning Industries:
· The new machine would be purchased for P160,000 in cash. Shipping and
installation would cost an additional P30,000.
· The new machine is expected to increase annual sales by 20,000 units at a sales
price of P40 per unit. Incremental operating costs include P30 per unit in variable cost and
total fixed costs of P40,000 per year.
· The investments in the new machine will require an immediate increase in working
capital of P35,000. This cash outflow will be recovered at the end of year 5.
· Rovic uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero residual value.
· Rovic is subject to a 40% corporate income tax rate.
Rovic uses the net present value method to analyze investments and will employ the
following factors and rates:
Present Value of an Ordinary
Period Present Value of P1 at 10% Annuity of P1 at 10%
1 909 909
2 826 1.736
3 751 2.487
4 683 3.170
5 621 3.791
The overall discounted cash flow impact of Rovic Industry’s working capital investments for
the new production machine would be
P(13,265)
Rohan Transport is considering two alternative busses to transport people between cities
that are in the Southeastern U.S., such as Baton Rouge and Gainesville. A gas-powered bus
has a cost of $55,000, and will produce end-of-year net cash flows of $22,000 per year for 4
years. A new electric bus will cost $90,000, and will produce cash flows of $28,000 per year
for 8 years. The company must provide bus service for 8 years, after which it plans to give
up its franchise and to cease operating the route. Inflation is not expected to affect eiter
costs or revenues during the next 8 years. If Rohan Transport's cost of capital is 17 percent,
by what amount will the better project increase the company's value?
$27,801

Mega Inc., a large conglomerate with operating divisions in many industries, uses
risk-adjusted discount rates in evaluating capital investment decisions. Consider the
following statements concerning Mega's use of risk-adjusted discount rates.
I. Mega may accept some investments with internal rates of return less than Mega's overall
average cost of capital
II. Discount rates vary depending on the type of investment.
III. Mega may reject some investments with internal rates of return greater than the cost of
capital.
IV. Discount rates may vary depending on the division.
Which of the above statements are correct?
I, II, III, and IV

A firm with an 18% cost of capital is considering the following projects (on January 1, 2014):
January 1, 2014
December 31, 2010
Cash Outflow Cash Inflow Project Internal
(000’s Omitted) (000’s Omitted) Rate of Return
Project A P 3,500 P 7,400 16%
Project B 4,000 9,950 ?
Present value of P1 Due at the End of “N” Periods
C 12% 14% 15% 16% 18% 20% 22%
4 .6355 .5921 .5718 .5523 .5158 .482.4230
5 .5674 .5194 .4972 .4371 .4371 .4019 .3411
6 .5066 .4556 .4323 .4101 .3704 .3349 .2751
Project B’s internal rate of return is closest to
20%
In order to increase production capacity, Rovic Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1, 2014.
The following information is being considered by Gunning Industries:
· The new machine would be purchased for P160,000 in cash. Shipping and
installation would cost an additional P30,000.
· The new machine is expected to increase annual sales by 20,000 units at a sales
price of P40 per unit. Incremental operating costs include P30 per unit in variable cost and
total fixed costs of P40,000 per year.
· The investments in the new machine will require an immediate increase in working
capital of P35,000. This cash outflow will be recovered at the end of year 5.
· Rovic uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero residual value.
· Rovic is subject to a 40% corporate income tax rate.
Rovic uses the net present value method to analyze investments and will employ the
following factors and rates:
Present Value of an Ordinary
Period Present Value of P1 at 10% Annuity of P1 at 10%
1 909 909
2 826 1.736
3 751 2.487
4 683 3.170
5 621 3.791
Rovic Industries’ discounted annual depreciation tax shield for the year 2014 is?
P13,817

Logg Company is planning to buy a coin-operated machine costing P40,000. For tax
purposes, this machine will be depreciated over a five-year period using the straight-line
method and no residual value. Assume that the investment tax credit is not applicable to this
purchase. Logg estimates that this machine will yield an annual cash inflow, net of
depreciation and income taxes, of P12,000. At the following discount rates, the net present
values of the investment are:
Discount Net present
rate value
12% + P3,258
14%+ 1,197
16% - 708
18% - 2,474
Logg’s desired rate of return on its investment is 12%.
Logg’s expected internal rate of return on its investment in this machine is?
15.3%

For capital budgeting purposes, management would select a high hurdle rate of return for
certain projects because management
Wants to factor risk into its consideration of projects.
If income tax considerations are ignored, how is depreciation handled by the following capital
budgeting techniques?
Internal Accounting
Rate of Return Rate of Return Payback
Excluded, Included, Excluded

Suzie owns a computer reselling business and is expanding her business. Suzie is
presented with one proposal, Proposal A, such that the estimated investment for the
expansion project is $85,000, and it is expected to produce cash flows after taxes of $25,000
for each of the next 6 years. An alternate proposal, Proposal B, involves an investment of
$32,000 and after-tax cash flows of
$10,000 for each of the next 6 years. The cost of capital that would make Suzie indifferent
between these two proposals lies betwee
16% and 18%

The use of an accelerated method instead of the straight-line method of depreciation in

computing the net present value of a project has the effect of
Increasing the present value of the depreciation tax shield.

The proper discount rate to use in calculating certainty equivalent net present value is the?
Risk-free rate.

When determining net present value in an inflationary environment, adjustments should be

made to
Increase the estimated cash inflows and increase the discount rate.

The rankings of mutually exclusive investments determined using the internal rate of return
method (IRR) and the net present value method (NPV) may be different when?
Multiple projects have unequal lives and the size of the investment for each project is
different.
In order to increase production capacity, Rovic Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1, 2014.
The following information is being considered by Gunning Industries:
· The new machine would be purchased for P160,000 in cash. Shipping and
installation would cost an additional P30,000.
· The new machine is expected to increase annual sales by 20,000 units at a sales
price of P40 per unit. Incremental operating costs include P30 per unit in variable cost and
total fixed costs of P40,000 per year.
· The investments in the new machine will require an immediate increase in working
capital of P35,000. This cash outflow will be recovered at the end of year 5.
· Rovic uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero residual value.
· Rovic is subject to a 40% corporate income tax rate.
Rovic uses the net present value method to analyze investments and will employ the
following factors and rates:
Present Value of an Ordinary
Period Present Value of P1 at 10% Annuity of P1 at 10%
1 909 909
2 826 1.736
3 751 2.487
4 683 3.170
5 621 3.791
Rovic Industries’ net cash outflow in a capital budgeting decision is?
P225.000

A company that annually reviews its investment opportunities and selects appropriate capital
expenditures for the coming year is presented with two projects, called Project A and Project
B. Best estimates indicate that the investment outlay for Project A is P30,000 and for Project
B is P1 million. The projects are considered to be equally risky. Project A is expected to
generate cash inflows of P40,000 at the end of the first 2 years. Project B is expected to
generate cash inflows of P700,000 at the end of the first year and P500,000 at the end of the
second year. The company has a cost of capital of 8%.
100%

For capital budgeting purposes, management would select a high hurdle rate of return for
certain projects because management
Wants to factor risk into its consideration of projects.
A company that annually reviews its investment opportunities and selects appropriate capital
expenditures for the coming year is presented with two projects, called Project A and Project
B. Best estimates indicate that the investment outlay for Project A is P30,000 and for Project
B is P1 million. The projects are considered to be equally risky. Project A is expected to
generate cash inflows of P40,000 at the end of the first 2 years. Project B is expected to
generate cash inflows of P700,000 at the end of the first year and P500,000 at the end of the
second year. The company has a cost of capital of 8%.
What is the net present value (NPV) of each project when the cost of capital is zero?
Project A Project B
P 50,000 P 200,000

An office equipment representative has a machine for sale or lease. If you buy the machine,
the cost is P7,596. If you lease the machine, you will have to sign a non-cancelable lease
and make 5 payments of P2,000 each. The first payment will be paid on the first day of the
lease. At the time of the last payment you will receive title to the machine. The present
value of an ordinary annuity of P1 is as follows:
Number of Present value
Periods 10% 12% 16%
1 0.909 0.8983 0.862
2 1.7361.690 1.605
3 2.487 2.402 2.246
4 3.170 3.037 2.798
5 3.791 3.6053.274
The interest rate implicit in this lease is approximately
16%

On January 1, 2014, FD Company issued ten-year bonds with a face value of P1,000,000
and a started interest rate of 8% per year payable semiannually July 1 and January 1. The
bonds were sold to yield 10%. Present value factors are as follows:
Present value of 1 for 10 periods at 10% .386
Present value of 1 for 20 periods at 5% .377
Present value of an annuity of 1 for 10 periods at 10% 6.145
Present value of an annuity of 1 for 20 periods at 5% 12.462
The total issue price of the bonds is?
P 875,480
In order to increase production capacity, Rovic Industries is considering replacing an existing
production machine with a new technologically improved machine effective January 1, 2014.
The following information is being considered by Gunning Industries:
· The new machine would be purchased for P160,000 in cash. Shipping and
installation would cost an additional P30,000.
· The new machine is expected to increase annual sales by 20,000 units at a sales
price of P40 per unit. Incremental operating costs include P30 per unit in variable cost and
total fixed costs of P40,000 per year.
· The investments in the new machine will require an immediate increase in working
capital of P35,000. This cash outflow will be recovered at the end of year 5.
· Rovic uses straight-line depreciation for financial reporting and tax reporting purposes.
The new machine has an estimated useful life of five years and zero residual value.
· Rovic is subject to a 40% corporate income tax rate.
Rovic uses the net present value method to analyze investments and will employ the
following factors and rates:
Present Value of an Ordinary
Period Present Value of P1 at 10% Annuity of P1 at 10%
1 909 909
2 826 1.736
3 751 2.487
4 683 3.170
5 621 3.791
The acquisition of new production machine by Rovic Industries will contribute a discounted
net-tax contribution margin of?
P454,920

Union Electric Company must clean up the water released from its generating plant. The
company's cost of capital is 11 percent for average projects, and that rate is normally
adjusted up or down by 2 percentage points for high- and low-risk projects. Clean-Up Plan A,
which is of average risk, has an initial cost of $10 million, and its operating cost will be $1
million per year for its 10-year life. Plan B, which is a high-risk project, has an initial cost of
$5 million, and its annual operating cost over Years 1 to 10 will be $2 million. What is the
approximate PV of costs for the better project?
$15.9 million

Sensitivity analysis is used in capital budgeting to?

Determine the amount that a variable can change without generating unacceptable
results

Sensitivity analysis, if used with capital projects,

Is a "what-if" technique that asks how a given outcome will change if the original
estimates of the capital budgeting model are changed.
A project requires an initial cash investment at its inception of $10,000, and no other cash
outflows are necessary. Cash inflows from the project over its 3-year life are $6,000 at the
end of the first year, $5,000 at the end of the second year, and $2,000 at the end of the third
year. The future value interest factors for an amount of $1 at the cost of capital of 8% are
Period
1234
1.080 1.166 1.260 1.360
The present value interest factors for an amount of $1 for
three periods are as follows:
Interest Rate
8% 9% 10% 12% 14%
.794 .772 .751 .712 .675
The modified IRR (MIRR) for the project is closest to
12%

When the risks of the individual components of a project’s cash flows are different, an
acceptable procedure to evaluate these cash flows is to
Discount each cash flow using a discount rate that reflects the degree of risk.