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MANAGEMENT ADVISORY SERVICES

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Overview
Management advisory services
1. The primary purpose of management advisory services is to
A. conduct special studies, preparation of recommendations, development of plans and
programs, and provision of advice and assistance in their implementation.
B. provide services or to fulfill some social need.
C. improve the client's use of its capabilities and resources to achieve the objectives of the
organization.
D. earn the best rate of return on resources entrusted to its care with safety of investment
being taken into account and consistent with the firm's social and legal responsibilities.
1. The following characterize management advisory services except
A. involve decision for the future
B. broader in scope and varied in nature
C. utilize more junior staff than senior members of the firm
D. relate to specific problems where expert help is required
2. Which of the following is not classifiable as a management advisory service by CPA?
A. Systems design.
C. Make or buy analysis.
B. Project feasibility study.
D. Assistance in budget preparation.
2. Which of the following statement is false?
A. CPAs provide management services to go around the ethical constraints as mandated by
the Accountancy Act.
B. Businesses hire management consultants to help define specific problems and develop
solutions
C. Included in the practice of consulting is the provision of confidential service in which the
identity of the client is concealed
D. CPAs performing management services may be considered to be in the practice of
management consulting
Management accounting & financial accounting
1. Which of the following characteristics is inherent to management accounting?
A. Reporting of historical information
B. Compliance to generally accepted accounting principles
C. Contribution approach income statement
D. External users of financial report
April 16, 2005

Final Pre-board Examination

3. The following are characteristics of financial accounting, except?


A. Reporting of historical information
B. Compliance to generally accepted accounting principles
C. Contribution approach income statement
D. External users of financial report
4

The following are inherent to either management accounting or financial accounting:


1. External report
2. Historical information
3. Contribution approach income statement
4. Generally accepted accounting principles
5. Prospective financial statements
Which of the foregoing are related to management accounting and financial accounting
respectively?
A.
B.
C.
D.
Management Accounting
1, 2, 5
3, 5
2, 3
3
Financial Accounting
3, 4
1, 2, 4
1, 4, 5
1, 2, 4, 5

5. The costing method that is properly classified for both external and internal repotting purposes
is
External reporting
Internal reporting
Activity-based costing
Yes
Yes
Variable costing
Yes
No
Process costing
No
Yes
Standard costing
Yes
No
Quality Costs
6. The cost of statistical quality control in a product quality cost system is
A. training cost
C. appraisal cost
B. internal failure cost
D. prevention cost
Activity-based Costing
7. The last step in activity-based costing is to
A. identity the major activities that pertain to the manufacture of specific products
B. allocate manufacturing overhead costs to activity cost pools
C. Identify the cost drivers that accurately measure each activitys contribution to the finished
product
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D. Assign manufacturing overhead costs for each activity cost pool to products

12. McMd's standard cost card indicates that it takes three hours of direct labor to produce one
unit of product. A recently conducted time and motion study revealed that it should take one
hour to produce the same unit. Labor cost is P150 per hour.
McMd's value-added, and non value-added costs would be
A. P150 and P0
C. P150 and P300
B. P0 and P150
D. P450 and P0

8. Designing and redesigning are activities that are classified as


A. Facility level
C. Unit level
B. Batch level
D. Product level
9. The examples of activities at the product level include
A. scheduling, setting up, and moving
C. heating, lighting, and security
B. designing, changing, and advertising
D. cutting, painting, and packaging
1. Examples of activities at the batch level of costs include
A. scheduling, setting up, and moving
C. heating, lighting, and security
B. designing, changing, and advertising
D. cutting, painting, and packaging
2. Scheduling, setting up, and moving are examples of activities that are classified as
A. Batch level
C. Unit level
B. Product level
D. Facility level
10. Examples of unit level activities are
A. scheduling, setting up, and receiving
B. designing, changing, and advertising

C. heating, lighting, and security


D. cutting, painting, and packaging

3. An example of a nonvolume-related overhead base would be:


A. Direct materials cost
C. Direct Labor cost
B. Machine hours
D. Number of inspections
11. Classify the following as volume (unit) base or non-volume (activity) base:
1. Number of purchase orders issued
2. Direct labor hours
3. Number of machine hours
4. Number of set ups
5. Number of receiving reports issued
6. Direct material cost
A.
B.
C.
Volume (Unit) Base
1, 4, 5, 6
1, 4, 5
1, 2, 3, 4, 5
Non-volume (Activity) Base
2, 3
2, 3, 6
6

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Final Pre-board Examination

13. Moon Company makes two products, Alpha and Beta. Alpha is being introduced this period,
whereas Beta has been in production for 2 years. For the period about to begin, 1,000 units of
each product are to be manufactured. The only relevant overhead item is the cost of
engineering change orders. Alpha and Beta are expected to require eight and two change
orders, respectively. Alpha and Beta are expected to require 2 and 3 machine hours,
respectively. The cost of a change order is P600.
If Moon is using direct tracing, the amount of overhead per unit that will be assigned to Alpha
and Beta, respectively, are
A. P2.40 and P3.60, respectively
C. P4.80 and P1.20, respectively
B. P3.60 and P2.40, respectively
D. P1.20 and P4.80, respectively
Just-in-Time Manufacturing System
14. Which of the following is not a typical characteristic of a just-in-time (JIT) production
environment?
A. Lot sizes equal to one
C. Push-through system
B. Insignificant set up times and costs
D. Balanced and level workloads
Cost Behavior
Variable Costs
6. Total production costs for Jordan, Inc. are budgeted at P2,300,000 for 50,000 units of
budgeted output and P2,800,000 for 60,000 units of budgeted output. Because of the need for
additional facilities, budgeted fixed costs for 60,000 units are 25 percent more than budgeted
fixed costs for 50,000 units. How much is Jordans budgeted variable cost per unit of output?
A. P 7.50
C. P30.00
B. P16.00
D. P62.50

D.
2, 3, 6
1, 4, 5

15. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for
P50,000 units. How much is Careras budgeted variable cost per unit of output?
A. P1.60
C. P3.00
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B. P1.67

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D. P5.00

3. Total production costs for Laguna, Inc. are budgeted at P230,000 for 50,000 units of budgeted
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for
50,000 units. How much is Lagunas total budgeted variable cost at 60,000 units?
A. P96,000
C. P180,000
B. P100,200
D. P100,000
16. Mulvey Company derived the following cost relationship from a regression analysis of its
monthly manufacturing overhead cost:
C = P80,000 + P12M
Where C = monthly manufacturing overhead cost
M = machine hours
The standard error of the estimate of the regression is P6,000.
The standard time required to manufacture one six-unit case of Mulvey's angle product is 4
machine hours. Mulvey applies manufacturing overhead to production on the basis of machine
hours and its normal annual production is 50,000 cases
Mulvey's estimated variable manufacturing overhead cost for a month in which scheduled
production is 5,000 cases would be
A. P80,000
C. P240,000
B. P320,000
D. P360,000
1. Which of the following graphs illustrates the behavior of a total variable cost? (E)
Graph 1
Graph 2

Total units produced

Total units produced

Graph 3

Graph 4

Total units produces

Total units produced

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A. Graph 2
B. Graph 3

Final Pre-board Examination


C. Graph 4
D. Graph 1

Fixed Costs
9. Parts Company wishes to determine the fixed portion of its maintenance expense (a semivariable expense), as measured against direct labor hours for the first three months of the
year. The inspection costs are fixed; the adjustments necessitated by errors found during
inspection account for the variable portion of the maintenance costs. Information for the first
quarter is as follows:
Direct Labor Hours
Maintenance Costs
January
34,000
P61,000
February
31,000
58,500
March
34,000
61,000
What is the fixed portion of Parts Companys maintenance expense, rounded to the nearest
pesos?
A. P28,330
C. P37,200
B. P32,780
D. P40,800
5. Largo Company wishes to determine the fixed portion of its maintenance expense (a semivariable expense), as measured against direct labor hours for the first three months of the
year. Information for the first quarter is as follows:
Direct Labor Hours
Maintenance Costs
January
25,000
P210,000
February
30,000
240,000
March
27,000
222,000
What is the fixed portion of Largo Companys maintenance expense?
A. P60,000
C. P90,000
B. P30,000
D. P120,000
Total Costs
17. Molds Corporation has developed the following flexible budget formula for annual indirect labor
costs:
Total Cost = P300,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 18,000 machine hours of planned
machine time.
Indirect labor costs included in this planning budget are:
A. P300,000
C. P 90,000
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B. P390,000

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D. P115,000

8. Arens Corporation has developed the following flexible budget formula for annual indirect labor
costs:
Total Cost = P480,000 + P5.00 per machine hour
Operating budgets for the current month are based upon 20,000 machine hours of planned
machine time. Indirect labor costs included in this planning budget are:
A. P 48,333
C. P100,000
B. P580,000
D. P140,000
2. Boy & Millie Company uses an annual cost formula for overhead of P72,000 + P1.60 for each
direct labor hour worked. For the upcoming month Karla plans to manufacture 96,000 units.
Each unit requires five minutes of direct labor. Boy & Millies budgeted overhead for the month
is
A. P12,800
C. P 84,800
B. P18,800
D. P774,000
2. Saldua Company uses a monthly cost formula for overhead of P50,000 + P30.00 for each
direct labor hour worked. For the coming year, Saldua plans to manufacture 200,000 units.
Each unit requires five minutes of direct labor. Salduas total budgeted overhead for the
coming year is
A. P 550,000
C. P1,200,000
B. P1,100,000
D. P 650,000
6. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Costs
Cost Function
Electricity
P100 + P20 per direct labor hour
Maintenance
P200 + P30 per direct labor hour
Supervisors salaries
P10,000 per month
Indirect materials
P16 per direct labor hour
If July production is expected to be 1,000 units requiring 1,500 direct labor hours, estimated
manufacturing overhead costs would be
A. P109,300
C. P76,300
B. P99,000
D. P10,366
7. El Noche, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average,
70% of the rooms are occupied each day. The companys operating costs are P21 per
occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure
April 16, 2005

Final Pre-board Examination

contains both variable and fixed cost elements. During October, the occupancy dropped to
only 45%. A total of P792,000 in operating cost was incurred during the month.
What would be the expected operating costs, assuming that the occupancy rate increases to
60% during November?
A. P1,056,000
C. P846,000
B. P756,000
D. P829,500
Cost-Volume-Profit Relationship
Basic Concepts
2. With the aid of computer software, managers can vary assumptions regarding selling prices,
costs, and volume and can immediately see the effects of each change on the break-even
point and profit. Such an analysis is called: (E)
A. "What if" or sensitivity analysis
C. computer aided analysis
B. vary the data analysis
D. data gathering
Breakeven Analysis Single Product
Sales Amount
20. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
volume?
A. P120,000
C. P225,000
B. P200,000
D. P450,000
Units Sold
18. At a sales volume level of 2,250 units, Luzon Companys contribution margin is one and onehalf of the fixed costs of P36,000. Contribution margin is 30%. How many units must be sold
by the company to breakeven?
A. 1,250
C. 2,580
B. 1,500
D. 2,520
8. At 40,000 units of sales, Snail Company had an operating loss of P3.00 per unit. When sales
were 70,000 units, the company had a profit of P1.20 per unit. The number of units to
breakeven is
A. 35,000
C. 52,500
B. 45,000
D. 57,647
9. Gala Company sold 100,000 units of its product at P20 per unit. Variable costs are P14 per
unit, consisting of manufacturing costs of P11 and selling costs of P3. Fixed costs, which are
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incurred uniformly throughout the year, amount to P792,000 (manufacturing costs of P500,000
and selling expenses of P292,000). There are no beginning inventories.
If labor costs are 50% of variable costs and 20% of fixed costs, a 10% increase in wages and
salaries would increase the number of units required to breakeven to
A. 152,423
C. 175,617
B. 143,875
D. 129,938
10. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Selling price per pair of sunglasses
P25.00
Variable costs per pair of sunglasses:
Raw materials
P11.00
Direct labor
5.00
Manufacturing overhead
2.50
Selling expenses
1.30
Total variable costs per unit
P19.80
Annual fixed costs:
Manufacturing overhead
P192,000
Selling and administrative
276,000
Total fixed costs
P468,000
Forecasted annual sales volume (120,000 pairs)
P3,000,000
Income tax rate
40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units
C. 83,572 units
B. 101,740 units
D. 86,250 units
22. Madel Company manufactures a single electronic product called Walastik. Walastik sells for
P900 per unit. In 2000, the following variable costs were incurred to produce each Walastik
device.
Direct labor
P180
Direct materials
240
Factory overhead
105
Selling costs
75
Total variable costs
P600
Madel is subject to 40 percent income tax rate, and annual fixed cost are P6,600,000. Except
for an operating loss incurred in the year of incorporation, the firm has been profitable over the
last five years.
April 16, 2005

Final Pre-board Examination

In 2001, a significant change in Madels production technology caused a 10% increase in


annual fixed cost and a 20% unit cost increase in the direct labor component as a result of
higher skilled direct labor. However, this change permitted the replacement of a costly
imported component with a local component. The effect was to reduce unit material costs by
25%. There has been no change in the Walastik selling price.
The annual sales units required for Madel to breakeven are:
A.
B.
C.
D.
2000
22,000
22,000
14,000
14,000
2001
20,840
22,407
22,407
20,840
Selling Price
8. The BEDANs is planning its annual Riverboat Extravaganza. The Extravaganza committee
has assembled the following expected costs for the event:
Dinner per person
P
70
Programs and souvenir per person
30
Orchestra
15,000
Tickets and advertising
7,000
Riverboat rental
48,000
Floor show and strolling entertainment
10,000
The committee members would like to charge P300 per person for the evenings activities.
Assuming that only 250 persons are expected to attend the extravaganza, what ticket price
must be charged to breakeven?
A. P420
C. P350
B. P320
D. P390
Breakeven Analysis Multiple Product
23. In calculating the break-even point for a multi-product company, which of the following
assumptions are commonly made when variable costing is used?
I. Sales volume equals production volume
II. Variable costs are constant per unit
III. A given sales mix is maintained for all volume changes
A. I and II
C. II and III
B. I and III
D. I, II, and III
Unit Sales
3. Phipps Co. sells two products, Arks and Bins. Last year. Phipps sold 12,000 units of Arks and
28,000 units of Bins, Related data are:
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Product
Unit Selling Price
Unit Variable Cost
Unit Contribution Margin
Arks
P120
P80
P40
Bins
80
60
20
Assuming that last year's fixed costs totaled P910,000, what was Phipps Co.'s break-even
point in units? (E)
A. 40,000
C. 35,000
B. 12,000
D. 28,000
Sales Amount
24. Bush Electronics, Inc. had the following sales results for 2004:
TV sets
CD player
Peso sales component ratio
0.30
0.30
Contribution margin ratio
0.40
0.40
Bush Electronics, Inc. had fixed costs of P2,400,000.
The break even sales in pesos for Bush Electronics, Inc. are:
A.
B.
C.
TV sets
P1,800,000
P1,800,000
P1,500,000
CD player
P1,800,000
P1,800,000
P1,500,000
Radios
P3,600,000
P1,600,000
P2,000,000
4. The manager of Salvacion Store reviewed the following data:
Fruits
Meat
Contribution margin ratio
40%
50%
Sales mix in pesos
20%
30%
Fixed costs, P1,290,000 per month.
The breakeven sales for each month is
A. P1,677,000
C. P4,500,000
B. P3,000,000
D. P6,000,000

Radios
0.40
0.60

D.
P1,531,915
P1,531,915
P2,042,553

Canned Products
40%
50%

Breakeven Analysis Cash Basis


16. BE&H Co. is considering dropping a product. Variable costs are $6.00 per unit. Fixed
overhead costs, exclusive of depreciation, have been allocated at a rate of $3.50 per unit and
will continue whether or not production ceases. Depreciation on the equipment is P20,000 a
year. If production is stopped, the equipment can be sold for P18,000, if production continues,
however, it will be useless at the end of 1 year and will have no salvage value. The selling
price is P10 a unit. Ignoring taxes, the minimum units to be sold in the current year to break
even on a cash flow basis is
April 16, 2005

A. 4,500 units
B. 5,000 units

Final Pre-board Examination


C. 1,800 units
D. 36,000 units

11. Ms Makiling started a canteen in 2002. For this purpose a space was rented for P4,000 per
month. Two women were hired to work full time at the canteen and six college students were
hired to work 30 hours per week delivering value meals. This level of employment has been
consistent. An outside accountant was hired for tax and bookkeeping purposes, for which Ms.
Makiling pays P3,000 per month. The necessary canteen equipment and delivery car were
purchased with cash. Ms. Makiling has noticed that expenses for utilities and supplies have
been rather constant. Ms. Makiling increased her business between 2002 and 2005. Profits
have more than doubled since 2002. Ms. Makiling does not understand why profits have
increased faster than volume.
A projected income statement for the year ended December 31, 2005, prepared by the
accountant, is shown below:
Sales (each P25)
P950,000
Cost of food sold
P285,000
Wages & fringe benefits:
Restaurant help
81,500
Delivery help
173,000
Rent
48,000
Accounting services
36,000
Depreciation:
Delivery equipment
50,000
Restaurant equipment
30,000
Utilities
23,250
Supplies
12,000
738,750
Net income before taxes
P211,250
Income taxes (40%)
84,500
Net income
P126,750
What is the cash flow breakeven point sales that must be sold?
A. P488,215
C. P324,750
B. P533,929
D. P269,325
Breakeven Analysis - ABC
15. Perla Company had the following information.
Activity Driver
Unit Variable Cost
Units sold
P40

Level of Activity Driver


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Setups
Engineering hours
Other data:
Total fixed costs (traditional)
Total fixed costs (ABC)
Unit selling price
What is the breakeven point using ABC?
A. 10,000 units.
B. 15,000 units.

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1,000
60

80
2,000
P400,000
P150,000
P80

C. 5,000 units.
D. 8,750 units.

Profit Planning
Selling Price
21. Glow Co. wants to sell a product at a gross margin of 20%. The cost of the product is P2.00.
The selling price should be
A. P1.60
C. P2.40
B. P2.10
D. P2.50
22. Purvis Company manufactures a product that has a variable cost of P50 per unit. Fixed costs
total P1,000,000 and are allocated on the basis of the number of units produced. Selling price
is computed by adding a 10% markup to full cost. How much should the selling price be per
unit for 100,000 units?
A. P55.
C. P61
B. P60.
D. P66
29. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and
slogans, Last year, the shirts sold for P7.50 each, and the variable cost to manufacture them
was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income
last year was P5,040. Donnelly's expectation for the coming year include the following:
The sales price of the T-shirts will be P9
Variable cost to manufacture will increase by one-third
Fixed costs will increase by 10%
The income tax rate of 40% will be uncharged
The selling price that would maintain the same contribution margin rate as last year is
A. P9.00
C. P10.00
B. P8.25
D. P9.75
23. Larz Company produces a single product. It sold 25,000 units last year with the following
April 16, 2005

Final Pre-board Examination

results:
Sales
P625,000
Variable costs
P375,000
Fixed costs
150,000
525,000
Net income before taxes
P100,000
Income taxes
40,000
Net income
P 60,000
In an attempt to improve its product in the coming year, Larz is considering replacing a
component part in its product that has a cost of P2.50 with a new and better part costing P4.50
per unit. A new machine will also be needed to increase plant capacity. The machine would
cost P18,000 with a useful life of 6 years and no salvage value. The company uses straightline depreciation on all plant assets.
If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
what selling price per unit of product must it charge next year to cover the increased material
costs?
A. P27.00
C. P32.50
B. P25.00
D. P28.33
Additional unit sales
25. In 2001 Lucia Company had a net loss of P8,000. The company sells one product with a
selling price of P80 and a variable cost per unit of P60. In 2002, the company would like to
earn a before-tax profit of P40,000. How many additional units must the company sell in 2002
than it sold in 2001? Assume that the tax rate is 40 percent.
A. 1,600
C. 2,400
B. 2,000
D. 5,400
Unit sales
36. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
P225,000.
If fixed costs will increase by 30 percent, what amount of peso sales would be necessary to
generate an operating profit of P48,000?
A. P1,350,000
C. P1,135,000
B. P486,425
D. P910,000
10. Tip Company wishes to market a new product for P15.00 a unit. Fixed costs to manufacture
this product are P1,000,000 for less than 500,000 units and P1,500,000 for 500,000 or more
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units. The contribution margin is 20%. How many units must be sold to realize net income
from this product of P1,000,000?
A. 266,667
C. 833,333
B. 533,333
D. 666,667
18. Lindsay Company reported the following results from sales of 5,000 units of product A for
June:
Sales
P200,000
Variable costs
(120,000)
Fixed costs
( 60,000)
Operating income
P 20,000
Assume that Lindsay increases the selling price of product A by 10% on July. How many units
of product A would have to be sold in July to generate an operating income of P20,000?
A. 4,000
C. 4,500
B. 4,300
D. 5,000
20. Brunei Corp. is developing a new product, surge protectors for high-voltage electrical flows.
The cost information for the product are: Direct materials, P3.25 per unit; Direct labor, P4.00
per unit; Distribution, P0.75 per unit. The company will also be absorbing P120,000 of
additional fixed costs associated with this new product. A corporate fixed charge of P20,000
currently absorbed by other products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must Brunei sell at a selling
price of P14 per unit to increase after-tax income by P30,000? (effective income tax rate is
40%)
A. 10,700
C. 20,000
B. 12,100
D. 28,300
41. Siberian Ski Company recently expanded its manufacturing capacity, which will allow it to
produce up to 15,000 pairs of cross-country skis of the mountaineering model or the touring
model. The Sales Department assures management that it can sell between 9,000 pars and
13,000 pairs of either product this year. Because the models are very similar, Siberian Ski will
produce only one of the two models.
The following information was compiled by the Accounting Department.
Per Unit (Pairs) Data
Mountaineering
Touring
Selling price
P88.00
P80.00
Variable costs
52.80
52.80
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Final Pre-board Examination

Fixed cost will total P369,600 if the mountaineering model is produced but will be only
P316,800 if the touring model is produced. Siberian ski is subject to a 40% income tax rate.
If Siberian Ski Company desires an after tax net income of P24,000, how many pairs of touring
model skis will the company have to sell?
A. 13,118
C. 13,853
B. 12,529
D. 4,460
Sales amount
5. DJH Company has sales of P360,000, variable costs of P216,000, and fixed costs of
P150,000. To earn a 10% return on sates, DJH must have sales of (E)
A. P375,000
C. P440,000
B. P470,000
D. P500,000
26. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be
necessary to generate an operating profit of P48,000?
A. P1,350,000
C. P1,135,000
B. P486,425
D. P910,000
32. Mount Park, Inc. had the following economic information for the year 2002:
Sales (50,000 units @ P20)
P1,000,000
Variable manufacturing costs
400,000
Fixed costs
250,000
Income tax rate
40 percent
Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
2002?
A. P1,125,000
C. P1,187,500
B. P1,325,000
D. P1,387,500
27. Mount Park, Inc. had the following economic information for the year 2002:
Sales(50,000 units @ P20)
Variable manufacturing costs
Fixed costs
Income tax rate

P1,000,000
400,000
250,000
40 percent
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Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
maintain its sales target for 2003.
What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
2002?
A. P1,125,000
C. P1,187,500
B. P1,325,000
D. P1,387,500
26. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
estimated at P41,600. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that
60percent of its Sunday sales to customers would be made on other days if the stores were no
open on Sundays. The one-day volume of Sunday sales that would be necessary for Six-Two
to attain the same weekly operating income as the current six-day week is
A. P6,000
C. P7,500
B. P5,000
D. P8,000
5. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are
estimated at P39,000. Six-Twos gross margin on sales is 25 percent. Six-Two estimates that
60 percent of its Sunday sales to customers would be made on other days if the stores were
not open on Sundays. The one-day volume of Sunday sales that would be necessary for SixTwo to attain the same weekly operating income as the current six-day week is
A. P6,000
C. P7,500
B. P5,000
D. P4,500
10. Camay Company is a grocery store that is currently open only Monday through Saturday.
Camay Company is considering opening on Sundays. The annual incremental costs of
Sunday openings are estimated at P31,200. Camays gross margin on sales is 25 percent.
Camay estimates that 75 percent of its Sunday sales to customers would be made on other
days if the store were not open on Sundays.
The one-day volume of Sunday sales that would be necessary for Camay to attain the same
weekly operating as the current six-day week is
A. P2,400
C. P9,600
B. P3,200
D. P9,984
28. Donnelly Corporation manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to manufactures them
April 16, 2005

Final Pre-board Examination

was P2.25 per unit. The company needed to sell 20,000 shirts to break even. The net income
last year was P5,040. Donnellys expectation for the coming year include the following:
The sales price of the T-shirts will be P9
Variable cost to manufacture will increase by one-third
Fixed costs will increase by 10%
The income tax rate of 40% will be unchanged
If Donnelly wishes to earn P22,500 in net income for the coming year, the companys sales
volume in pesos must be
A. P213,750
C. P207,000
B. P257,625
D. P229,500
25. Madden, Company has projected its income before taxes for next year as shown below.
Madden is subject to a 40% income tax rate.
Sales (160,000 units)
P8,000,000
Cost of sales
Variable costs
P 2,000,000
Fixed costs
3,000,000
5,000,000
Income before taxes
P 3,000,000
Maddens net assets are P36,000,000. The peso sales that must be achieved for Madden to
earn a 10 percent after tax return on assets would be
A. P8,800,000
C. P12,000,000
B. P16,000,000
D. P6,880,000
Unit variable cost
31. Story Manufacturing incurs an annual fixed cost of P250,000 in producing and selling "Tales"
Estimated unit sales for 2000 are 125,000. An after-tax income of P75,000 is desired by
management. The company projects its income tax rate at 40%. What is the maximum amount
that Story can expend for variable costs per unit and still meet its profit objective if the sale
price per unit is projected at P6?
A. P3.37
C. P3.00
B. P3.59
D. P3.70

Unit Contribution Margin


28. The following relates to Gloria Corporation, which produced and sold 50,000 units during a
recent accounting period:
Sales
P850,000
Income tax rate
40%
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Variable
Fixed
Manufacturing cost
140,000
210,000
Selling & administrative expense
45,000
300,000
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. P1.00.
C. P3.10
B. P13.30.
D. P7.30
Contribution Margin Ratio
29. Last year, the marginal contribution rate of Lamesa Company was 30%. This year, fixed costs
are expected to be P120,000, the same as last year, and sales are forecasted at P550,000 a
10% increase over last year. For the company to increase income by P15,000 in the coming
year, the marginal contribution margin rate must be
A. 20%
C. 40%
B. 30%
D. 70%
Total Fixed Costs
30. The Ship Company is planning to produce two products, Alt and Tude. Ship is planning to sell
100,000 units of Alt at P4 a unit and 200,000 units of Tude at P3 a unit. Variable costs are
70% of sales for Alt and 80% of sales for Tude. In order to realize a total profit of P160,000,
what must the total fixed costs be?
A. P80,000
C. P240,000
B. P90,000
D. P600,000
Operating income
32. A manufacturer produces a product that sells for P10 per unit. Variable costs per unit are P6
and total fixed costs are P12,000. At this selling price, the company earns a profit equal to
10% of total peso sales. By reducing its selling price to P9 per unit, the manufacturer can
increase its unit sales volume by 25%. Assume that there are no taxes and that total fixed
costs and variable costs per unit remain unchanged. If the selling price were reduced to P9
per unit, the profit would be
A. P3,000
C. P5,000
B. P4,000
D. P6,000
33. Wilson Co. prepared the following preliminary forecast concerning product G for next year
assuming no expenditure for advertising:
Selling price per unit
P
10
Units sales
100,000
April 16, 2005

Final Pre-board Examination

Variable costs
P600,000
Fixed costs
P300,000
Based on a market study in December of this year, Wilson estimated that it could increase the
unit selling price by 15% and increase the unit sales volume by 10% if P100,000 were spent
on advertising. Assuming that Wilson incorporates these changes in its forecast, what should
be the operating income from product G?
A. P175,000
C. P205,000
B. P190,000
D. P365,000
27. Below is an income statement for Bender Co. for 2000:
Sales
P400,000
Variable costs
(125,000)
Contribution margin
P275,000
Fixed costs
(200,000)
Profit before tax
P75,000
Assuming that the fixed costs are expected to remain at P200,000 for 2001, and the sales
price per unit and variable costs per unit are also expected to remain constant, how much
profit before tax will be produced if the company anticipates 2001 sales rising to 130% of the
2000 level?
A. P97,000
B. P195,000
C. P157,500
D. A prediction cannot be made from the information
34. Shoes, Unlimited operates a chain of shoe stores around the country. The stores carry many
styles of shoes that are all sold at the same price. To encourage sales personnel to be
aggressive in their sales efforts, the company pays a substantial sales commission on each
pair of shoes sold. Sales personnel also receive a small basic salary.
The following cost and revenue data relate to Store 21 and are typical of the companys many
sales outlets:
Selling price
P 800
Variable expenses:
Invoice costs
P360
Sales commission
140
500
Fixed expenses per year:
Rent
P1,600,000
Advertising
3,000,000
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Salaries
1,400,000
Total
P6,000,000
The company is considering paying the store manager a P60 commission on each pair of
shoes sold in excess of break-even point. If this change were made, what will be the stores
before tax profit or loss assuming 23,500 pairs of shoes are sold in a year?
A. P(360,000)
C. P840,000
B. P2,930,000
D. P1,330,000
Change in operating income
30. Machan Co.s year-end income statement is as follows:
Sales (20,000 units)
P360,000
Variable costs
220,000
Contribution margin
P140,000
Fixed costs
105,000
Net income
P35,000
Management is unhappy with the results and plans to make some changes for next year. If
management implements a new marketing program, fixed costs are expected to increase by
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by
15 percent. What is the effect on income if the foregoing changes are implemented?
A. decrease of P21,200
C. increase of P13,800
B. increase of P1,800
D. increase of P14,800
31. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000,
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and
sales price per unit to remain the same in 2001, however total sales are expected to jump by
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
2000 by
A. 100%
C. 20%
B. 80%
D. 50%
Sensitivity Analysis
Change in breakeven point
19. The following data relate to Homer Company which sells a single product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firms salespersons would like to change their compensation from a 10 percent
April 16, 2005

Final Pre-board Examination

commission to a 5 percent commission plus P20,000 per month in salary. They now receive
only commission.
The change in compensation plan should change the monthly breakeven point by
A. 1,071 Increase
C. 1,538 Increase
B. 1,071 Decrease
D. 1,538 Decrease
Contribution margin
34. If fixed costs increase while variable cost per unit remains constant, the contribution margin
will be
A. Lower
C. Unchanged
B. Higher
D. Unpredictable
21. Paperbacks Publishing Co. projected the following information for next year:
Selling price per unit
Variable cost per unit
Total fixed costs
What is the profit when one unit more than the breakeven point is sold?
A. P500
C. P5,000,500
B. P200
D. P2,000,200

P500
P300
P2,000,000

Fixed costs
4. DSP Company earned P100,000 on sales of P1,000,000. It earned P130,000 on sales of
P1,100,000. Total fixed costs are (M)
A. P 0
C. P420,000
B. P200,000
D. P900,000
35. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units.
During the current month when the units sales are expected to be only 45,000, there is a loss
of P1.25 per unit. Both the variable cost per unit and total costs remain constant.
The fixed costs amounted to
A. P80,000
C. P247,500
B. P360,000
D. P210,000
6. Aloha, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70
percent of the rooms are occupied each day. The companys operating costs are P21 per
occupied room per day at this occupancy level, assuming a 30-day month. This P21 figure
contains both variable and fixed cost elements. During October, the occupancy dropped to
only 45 percent. A total of P792,000 in operating cost was incurred during the month.
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What would be the expected operating costs, assuming that the occupancy rate increases to
60 percent during November?
A. P1,056,000
C. P846,000
B. P 756,000
D. P829,500
Change in fixed costs
33. The following data apply to Cross Corporation for the year 2004:
Total variable cost per unit
P3.50
Contribution margin/sales
30%
Breakeven sales (present volume)
P1,000,000
Cross wants to sell an additional 50,000 units at the same selling price and contribution
margin. By how much can fixed costs increase to generate a gross margin equal to 10% of the
sales value of the additional 50,000 units to be sold?
A. P50,000
C. P67,500
B. P57,500
D. P125,000
9. Santos Company is planning its advertising campaign for next year and has prepared the
following budget data based on a zero advertising expenditure:
Normal plant capacity
200,000 units
Sales
150,000 units
Selling price
P25 per unit
Variable manufacturing costs
P15 per unit
Fixed manufacturing costs
P800,000
Fixed selling and adm costs
P700,000
An advertising agency claims that an aggressive advertising campaign would enable Santos to
increase its unit sales by 20%. What is the maximum amount that Santos Company can pay
for advertising and have an operating profit of P200,000 next year?
A. P100,000
C. P300,000
B. P200,000
D. P550,000
37. The Rizal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving their
place of business to the downtown area. Likewise it is anticipating that the selling price per unit
and the variable expense will not change. At present, the sales volume necessary to
breakeven is P750,000 but with the expected increase in fixed costs, the sales volume
necessary to breakeven would go up to P975,000. Based on these projections, what would be
the total fixed costs after the increase of P78,750?
A. P341,250
C. P183,750
B. P262,500
D. P300,000
April 16, 2005

Final Pre-board Examination

38. MS operates a chain of shoe stores around the metropolitan city. MS stores carry many styles
of shoes that are all sold at the same price. To encourage sales personnel to be aggressive in
their sales efforts, the company pays a substantial sales commissions on each pair of shoes
sold. Sales personnel also receive a minimum basic salary.
The following cost and revenue data typical of the companys many sales outlets:
Selling price
P800
Variable expenses:
Invoice costs
P360
Sales commission
140
P500
Fixed expenses per year:
Rent
P1,600,000
Advertising
3,000,000
Salaries
1,400,000
Total
P6,000,000
The company is considering paying the store manager a P60 commission on each pair of
shoes sold in excess of break-even point. If this change were made, what will be the stores
before tax profit or loss assuming 23,000 pairs of shoes are sold in a year?
A. P 720,000
C. P 920,000
B. P(480,000)
D. P(680,000)
7. Candyman Company is a wholesale distributor of candy. The company services grocery,
convenience, and drug stores in Metro Manila. Small but steady growth in sales has been
achieved by the company over the past few years while candy prices have been increasing.
The company is formulating its plans for the coming fiscal year. Presented below are the data
used to project the current years after-tax net income of P110,400.
Average selling price
P4.00 per box
Average variable costs
Cost of candy
P2.00 per box
Selling expenses
0.40 per box
Total
P2.40 per box
Annual fixed costs
Selling
P160,000
Administrative
280,000
Total fixed costs
P440,000
Expected annual sales volume (390,000 boxes)
P1,560,000
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Manufacturers of candy have announced that they will increase prices of their products an
average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts,
etc.) and labor costs. Candyman Company expects that all other costs will remain at the same
rates or levels as the current year. Candyman is subject to 40 percent tax rate.
If net income after taxes is to remain the same after the cost of candy increases but no
increase in the sales price is made, how many boxes of candy must Candyman sell?
A. 480,000
C. 503,225
B. 423,385
D. 443,871
Indifference Point
Units sold
40. Dulce, Inc. owns and operates a chain of food centers. The management is considering
installing machines that will make popcorn on the premises. These machines are available in
two different sizes with the following details.
Economy
Regular
Annual capacity
20,000
50,000
Costs: Annual machine rental
P60,000.00
P82,500.00
Popcorn cost per box
3.90
3.90
Cost of each box
0.80
0.80
Other variable cost per box
6.60
4.20
The level of output in boxes at which the Economy and the Regular would earn the same profit
(loss) is
A. 20,000 boxes
C. 9,375 boxes
B. 15,000 boxes
D. 12,500 boxes
13. The following data relate to Homer Company which sells a single product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firms salespersons would like to change their compensation from a 10 percent
commission to a 5 percent commission plus P20,000 per month in salary. They now receive
only commissions.
At what sales volume would the two compensation plans be indifferent?
A. 12,500
C. 20,000
B. 22,222
D. 22,860

Final Pre-board Examination

Sales amount
39. BM Motors Inc. employs 40 sales personnel to market its line of luxury automobiles. The
average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
is considering a change to a commission arrangement that would pay each salesperson a
salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
The amount of total car sales at which BM Motors would be indifferent as to which plan to
select is
A. P22,500,000
C. P24,000,000
B. P30,000,000
D. P12,000,000
10. Blue Ski Company recently expanded its manufacturing capacity to allow it to produce up to
15,000 pairs of cross-country skis of either the mountaineering model or the touring model.
The sales department assures management that it can sell between 9,000 and 13,000 pairs
(units) of either product this year. Because the models are very similar, Blue Ski will produce
only one of the two models. The information below was compiled by the accounting
department.
Mountaineering
Touring
Selling price per unit
P880.00
P800.00
Variable costs per unit
P528.00
P528.00
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only
P3,168,000 if the touring model is produced. Blue Ski is subject to a 40% income tax rate.
The total sales revenue at which Blue Ski Company would make the same profit or loss
regardless of the ski model it decided to produce is
A. P8,800,000
C. P4,224,000
B. P9,240,000
D. P6,864,000
Margin of Safety
9. The following information pertains to Dove Corporation for the year ending December 31,
2000:
Budgeted sales
P1,000,000
Breakeven sales
700,000
Budgeted contribution margin
600,000
Cashflow breakeven
200,000
Doves margin of safety is
A. P300,000
C. P500,000
B. P400,000
D. P800,000
Breakeven point

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42. Russini, Inc. had the following economic data for 2004:
Net sales
Contribution margin
Margin of safety
What is Russini's breakeven point in 2004?
A. P360,000
C. P288,000
B. P320,000
D. P 80,000

CPA Review School of the Philippines


P400,000
P160,000
P 40,000

Current sales
6. If a business had a margin of safety ratio of 20%. variable costs of 75% of sales, fixed costs of
P240,000, a break-even point of P960,000 and operating income of P60,000 for the current
year, what are the current year's sales? (M)
A. P1,200,000
C. P1,260,000
B. P1,040,00
D. P1,020,000
6. Pansipit Company had a 25 percent margin of safety. Its after-tax return on sales is 6 percent,
and tax rate of 40 percent. If fixed costs amount to P320,000, how much sales did Pansipit
make for the year?
A. P1,066,667
C. P1,000,000
B. P1,280,000
D. P 800,000
Fixed costs
7. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio
of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales and
fixed costs constant every month. If the tax rate is 40 percent, how much is the annual fixed
costs? (M)
A. P36,000
C. P432,000
B. P90,000
D. P360,000

A.
B.
C.
D.

Final Pre-board Examination

Firm D will lose more profit than Firm S.


Firm S will lose more profit than Firm D.
Firm D and Firm S will lose the same amount of profit.
Neither Firm D nor Firm S will lose profit.

44. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income
for 2002 can be expected to increase by what amount over 2001?
A. P250,000
C. P500,000
B. 200 percent
D. 40 percent
46. Signal Co. manufactures a single product. For 2000, the company had a sales of P90,000,
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and
sales price per unit to remain the same in 2001, however total sales are expected to jump by
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in
2000 by
A. 100%
C. 20%
B. 80%
D. 50%
Absorption Costing & Variable Costing
Variable Costing
47. Which of the following statements is true for a firm that uses variable (direct) costing?
A. The cost of a unit of product changes because of changes in the number of units
manufactured
B. Profits fluctuate with sales
C. An idle facility variation is calculated
D. Product costs include direct (variable) administrative costs

Operating Leverage
43. A very high operating leverage indicates that a firm
A. has high fixed cost
C. has high variable costs
B. has high net income
D. is operating close to its breakeven point

48. Which of the following is not true of variable costing?


A. Profits may increase though sales decrease
B. Profits fluctuate with sales
C. The cost of the product consists of all variable production costs
D. The income statement under variable costing does not include overhead volume variance.

45. Firm D and Finn S are competitors within the same industry. Firm D produces its product using
large amounts of direct tabor. Firm S has replaced direct labor with investment in machinery.
Projected sales for both firms are fifteen percent less than in the prior year. Which statement
regarding projected profits is true?

21. The following information was extracted from the first year of absorption-based accounting
records of NOLI Co.
Total fixed costs incurred
.P100,000
Total variable costs incurred
50,000

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Total period costs incurred


.70,000
Total variable period costs incurred
30,000
Units produced
20,000
Units sold
12,000
Unit sales Price
P
12
Based on variable costing, if NOLI Company had sold 12,001 units instead of 12,000, its
income before taxes would have been
A. P 9.50 higher
C. P8.50 higher
B. P11.00 higher
D. P8.33 higher
49. Coo Company manufactures a single product using standard costing. Variable production
costs; are P12 and fixed production costs are P125,000. Coo uses a normal activity of 12,500
units to set its standard costs. Coo began the year with 1,000 unite in inventory, produced
11,000 units, and sold 11,500 units.
The standard cost of goods sold under variable costing would be
A. P115,000
C. P242,000
B. P138,000
D. P253,000
Absorption Costing
15. When a firm prepares financial reports by using absorption costing
A. profits will always increase with increase in sales
B. profits will always decrease with decreases in sales
C. profits may decrease with increased sales even if there is no change in selling prices and
costs
D. decreased output and constant sales result in increased profits
18. West Co.s 2000 manufacturing costs were as follows:
Direct materials and direct labor
P 700,000
Other variable manufacturing costs
100,000
Depreciation of factory building and manufacturing equipment
80,000
Other fixed and manufacturing overhead
18,000
What amount should be considered product cost for external reporting purposes?
A. P 700,000
C. P880,000
B. P800,000
D. P898,000
16. Toshiba Company incurred the following costs in manufacturing desk calculators:
Direct materials
Indirect materials (variable)
April 16, 2005

. P70
20

Final Pre-board Examination

Direct labor
Indirect labor (variable)
Other variable factory overhead
Fixed factory overhead
Variable selling expenses
Fixed selling expenses
During the period, the company produced and sold 1,000 units.
What is the inventory cost per unit using absorption costing?
A. P520
C. P420
B. P350
D. P310

40
30
50
140
100
70

50. Colger Company manufacture a single product using standard costing. Variable production
costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of
12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory,
produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under
absorption costing would be
A. P115,000
C. P242,000
B. P132,000
D. P253,000
51. The Trinkets Company estimated the following data for the coming year:
Fixed manufacturing costs
Variable production costs per peso of sales
Materials
Direct labor
Variable overhead
Variable selling costs per peso of sales
Trinkets estimates its sales for the coming year to be P2,000,000.
The expected costs of goods sold for the coming year is
A. P1,265,000
C. P1,115,000
B. P1,565,000
D. P700,000

P565,000
P0.125
0.150
0.075
0.150

52. Alma Company budgeted that factory overhead for 2004 and 2005 would be P60,000 for each
year. The predicted and actual activity for 2004 and 2005 were 30,000 and 20,000 direct labor
hours, respectively.
2004
2005
Sales in units
25,000
25,000
Selling price per unit
P10
P10
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Direct materials and direct labor per unit


P5
P5
The company assumes that the long-run production level is 20,000 direct labor hours per year.
The actual factory overhead cost for the end of 2004 and 2005 was P60,000. Assume that it
takes one direct labor hour to make one finished unit.
When the annual estimated factory overhead rate is used, the gross profits for 2004 and 2005,
respectively, are
A. P75,000 and P75,000
C. 75,000 and P55,000
B. P125,000 and P125,000
D. P75,000 and P50,000
14. Apo Companys variable costing income statement for August appears below:
Sales (P15 per unit)
P600,000
Less variable costs:
Variable cost of goods sold:
Beginning inventory
P 72,000
Add variable cost of goods manufactured
315,000
Goods available for sale
387,000
Less ending inventory
27,000
Variable cost of goods sold
360,000
Variable selling expenses
80,000
Total variable costs
440,000
Contribution margin
160,000
Fixed costs:
Fixed manufacturing
P 105,000
Fixed selling and administrative
35,000
Total fixed costs
140,000
Net income
P 20,000
The company produces 35,000 units each month. Variable production costs per unit and total
fixed costs have remained constant over the past several months.
Using the absorption costing method, the peso value of the companys inventory on August 31
and the absorption income, respectively, would be
A.
B.
C.
D.
Inventory Value
P27,000
P27,000
P36,000
P36,000
Absorption Income
P35,000
P 5,000
P 5,000
P35,000
54. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is
from the financial records of the company for the year.
Total manufacturing costs were P2,500,000
April 16, 2005

Final Pre-board Examination

Costs of goods of manufactured was P2,425,000


Applied factory overhead was 30 percent of total manufacturing costs
Factory overhead was applied to production at a rate of 80% of direct labor cost
Work-in-process inventory at January 1 was 75% of work-in-process inventory at
December 31
What are the amounts/value of the following cost elements and inventory?
Direct labor
Direct materials
Work-in-process inventory
A.
P750,000
P750,000
P225,000
B.
P937,500
P812,500
P225,000
C.
P937,500
P812,500
P300,000
D.
P750,000
P750,000
P300,000

Variable & Absorption Costing


55. Lord Industries manufactures a single product. Variable production costs are P10 and fixed
production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard
costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units.
The volume variance under each product costing are:
A.
B.
C.
D.
Under Absorption Costing
P3,750
P3,750
P7,500
P7,500
Under Variable Costing
0
7,500
3,750
0
56. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its
products are as follows:
Direct Materials
P4.00
Direct labor
6.00
Factory overhead
Variable
3.00
Fixed (based on a normal capacity of 10,000 units)
2.00
Total
15.00
Beginning inventory
Production
Units sold (selling price P50)
Actual costs:
Direct materials
Direct labor

2,000 units
8,000 units
7,000 units
P35,000
50,000
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Variable overhead
23,000
Fixed
18,000
Variable selling and adm.
60,000
Fixed selling and adm.
35,000
Variances are closed to cost of sales monthly
How much are the net income under absorption costing and variable costing methods?
A.
B.
C.
D.
Absorption
P144,000
P143,000
P144,000
P142,000
Variable
P143,000
P144,000
P142,000
P144,000
Variable vs. Absorption Costing
8. Absorption costing differs from variable costing in that (M)
A. standards can be used with absorption costing/ but not with variable costing.
B. absorption costing inventories are more correctly valued,
C. production influences income under absorption costing, but not under variable costing.
D. companies using absorption costing have lower fixed costs.
12. A manufacturing firm presently has total sales of P1,000,000. If its sales rise, its
A. net income based on variable costing will go up more than its net income based on
absorption costing.
B. net income based on absorption costing will go up more than its net income based on
variable costing.
C. fixed costs will also rise.
D. per unit variable costs will rise.
9. Which of the following is(are) closely related to variable costing than to absorption costing? (M)
1. Predetermined fixed overhead
5. Gross margin
2. Unit sales
6. Volume variance
3. Production units
7. Cost behavior
4. Contribution margin
8. Management accounting
A. 1, 2, 4, 6, 7, 8
C. 1, 3, 4, 7, 8
B. 2, 4, 7, 8
D. 1, 3, 5, 6
57. The level of production affects income; under which of the following methods?
A. Absorption costing
C. both absorption and variable costing
B. variable costing
D. neither absorption nor variable costing
April 16, 2005

Final Pre-board Examination

10. Under which inventory costing method could increases or decreases in income from
operations be misinterpreted to be the result of operating efficiencies or inefficiencies? (M)
A. Variable costing
C. Incremental costing
B. Absorption costing
D. Differential costing
Reconciliation of Variable & Absorption Costing Income
11. York Company had P200,000 income using absorption costing. York has no variable
manufacturing costs. Beginning inventory was P15,000 and ending inventory was P22,000.
Income under variable costing would have been (M)
A. P178,000
C. P193,000
B. P200,000
D. P207,000
58. Simple Corp. produces a single product. The following cost structure applied to their first year
of operations, 2000:
Variable costs:
SG&A
P2.00 per unit
Production
4.00 per unit
Fixed Costs (total cost incurred for the year)
SG&A
P14,000
Production
P20,000
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800 There was no
beginning or ending work-in-process inventory. How much larger or smaller would Simple
Corp.'s income be if it uses absorption rather than variable costing?
A. The absorption costing income would be P6,000 larger
B. The absorption costing income would be P6,000 smaller
C. The absorption costing income would be P4,800 larger
D. The absorption costing income would be P4,000 smaller
59. The following information has been extracted from P Co.s financial records for its first year of
operations:
Units produced
10,000
Units sold
7,000
Variable cost per unit:
Direct materials
P8
Direct labor
9
Factory overhead
3
SG&A
4
Fixed costs:
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Manufacturing overhead
P70,000
SG&A
30,000
Based on absorption costing, P Co.s income in its first year of operations will be
A. P21,000 higher than it would be under variable costing
B. P70,000 higher than it would be under variable costing
C. P30,000 higher than it would be under variable costing
D. Higher than it would be under variable costing, but the exact difference cannot be
determinable from this information
60. Valyn Corporation employs an absorption costing system for internal reporting purposes;
however, the company is considering using variable costing. Data regarding Valyn's planned
and actual operations for the 2001 calendar year are presented below.
Planned activity
Actual activity
Beginning finished goods inventory in units
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000

The planned per unit cost figures shown in the next schedule were based on
the estimated production and sale of 140,000 units in 2001. Valyn uses a
predetermined manufacturing overhead rate for applying manufacturing
overhead to its product; thus, a combined manufacturing overhead rate of
P9.00 per unit was employed for absorption costing purposes in 2001. Any
over-or under applied manufacturing overhead is closed to the cost of goods
sold account at the end of the repotting year.
Planned costs
Incurred
Per unit
Total
Costs
Direct materials
P12.00
P1,680,000
P1,560,000
Direct labor
9.00
1,260,000
1,170,000
Variable manufacturing overhead
4.00
560,000
520,000
Fixed manufacturing overhead
5.00
700,000
715,000
Variable selling expenses
8.00
1,120,000
1,000,000
Fixed selling expenses
7.00
980,000
980,000
Variable administrative expenses
2.00
280,000
250,000
Fixed administrative expenses
3.00
420,000
425,000
Total
P50.00
P7,000,000
P6,620,000
The 2001 beginning finished goods inventory for absorption costing purposes was valued at
the 1998 planned unit manufacturing cost, which was the same as the 2001 planned unit
April 16, 2005

Final Pre-board Examination

manufacturing cost. There are no work-in-process inventories at either the beginning or the
end of the year. The planned and actual unit selling price for 2001 was P70.00 per unit
The difference between Valyn Corporations 2001 operating income calculated on the
absorption costing basis and calculated on the variable costing basis was
A. P65,000
C. P40,000
B. P25,000
D. P90,000
Standard Costing & Variance Analysis
Basic Concepts
12. Normal costing and standard costing differ in that (M)
A. the two systems can show different overhead budget variances.
B. only normal costing can be used with absorption costing.
C. the two systems show different volume variances if standard hours do not equal actual
hours.
D. normal costing is less appropriate for multiproduct firms.
62. Which of the following is a difference between a static budget and a flexible budgets?
A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static budget
does not
D. There is no difference between the two.
Standard Setting
63. Which of the following statements about the selection of standards is true?
A. Ideal standards tend to extract higher performance levels since they give employees
something to live up to.
B. Currently attainable standards may encourage operating inefficiencies.
C. Currently attainable standards discourage employees from achieving their full
performance potential.
D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
causing a decline in performance.
64. The best basis upon which costs standards should be set to measure controllable production
inefficiencies is
A. Engineering standards based on ideal standards
B. Normal capacity
C. Recent average historical performance
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D. Engineering standards based on attainable performance

A. P430,200
B. P551,500

Final Pre-board Examination


C. P555,200
D. 408,800

65. To measure controllable production inefficiencies, which of the following is the best basis for a
company to use in establishing the standard hours allowed for the output of one unit of
product?
A. Average historical performance for the last several years.
B. Engineering estimates based on ideal performance.
C. Engineering estimates based on attainable performance.
D. The hours per unit that would be required for the present workforce to satisfy expected
demand over the long run.

67. Derby Co. uses a standard costing system in connection with the manufacture of a line of Tshirts. Each unit of finished products contains 2 yards of direct material. However, a 20 percent
direct material spoilage calculated on input quantities occurs during the manufacturing
process. The cost of the direct materials is P120 per yard.
The standard direct material cost per unit of finished products is
A. P192
C. P240
B. P288
D. P300

Direct materials
14. Dahl Company, a clothing manufacturer uses a standard costing system. Each unit of a
finished product contains 1.6 yards of cloth. However there is unavoidable waste of 20%
calculated on input quantities, when the cloth is cut for assembly. The cost of the cloth is P3
per yard. The standard direct material cost for cloth per unit of finished product is: (M)
A. P4.80
C. P7.00
B. P6.00
D. P7.50

Variable Overhead
21. The per-unit standard cost for variable overhead is normally based on which of the following:
A. The standard quantity of an input factor used in a unit of product.
B. The actual variable overhead cost incurred at the achieved level of production.
C. The budgeted total cost for variable overhead divided by the number of units expected to
be produced.
D. The ratio of fringe benefits to the basic cost of labor.

16. Each finished unit of Spring contains 60 pounds of raw material. The manufacturing process
must provide for a 20% waste allowance. The raw material can be purchased for P2.50 a
pound under terms of 2/10, n/30. The company takes all cash discounts. The standard direct
material cost for each unit of Spring is
A. P180.00
C. P183.75
B. P187.50
D. P176.40

Total Overhead
68. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of
30,000 direct labor hours.
Direct materials
P800,000
Direct labor
600,000
Variable manufacturing overhead
360,000
Fixed manufacturing overhead
288,000
What is the total manufacturing overhead application rate id the Relevant Company has to
operate at 80 percent of the stated capacity?
A. P24.00
C. P24.60
B. P27.00
D. P21.60

17. Agusan Company uses a standard costing system in connection with manufacture of a one
size fits all article of clothing. Each unit of finished product contains 2 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 P150 per yard. The standard direct
material cost per unit of finished product is
A. P240
C. P360
B. P300
D. P375
66. T Company purchased 340,000 pounds of material at a cost of P510,000. The materials price
variance was unfavorable by P34,000. During the year, 300,000 pounds of this material was
requisitioned for production. The materials quantity variance was unfavorable by P11,200. The
standard cost of materials that should have been used in production was
April 16, 2005

69. ABC Company is preparing a flexible budget for 2004 and the following maximum capacity
estimates for the manufacturing division are available:
Direct labor hours
60,000 hours
Variable factory overhead
P600,000
Fixed manufacturing overhead
P300,000
Assume that ABCs expected capacity is 80% of maximum capacity. What would be the total
factory overhead rate, based on direct labor hours, in a flexible budget at expected capacity?
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A. P18.75
B. P14.25

CPA Review School of the Philippines


C. P16.25
D. P15.00

19. Serafin Company is preparing a flexible budget for 2004 and the following maximum capacity
estimates for Assembly Department are available:
Direct labor hours
80,000 hours
Variable factory overhead
P640,000
Fixed manufacturing overhead
P300,000
Assume that Serafins expected capacity is 75% of maximum capacity. What would be the
total factory overhead rate, based on direct labor hours, in a flexible budget at expected
capacity?
A. P13.00
C. P11.75
B. P15.67
D. P11.00
Materials Variance
Price variance
70. Information on Energys direct material costs for October is as follows:
Actual quantity of direct materials purchased and used
Actual cost of direct materials
Unfavorable direct materials usage variance
Standard quantity of direct materials allowed for May production
For the month of October, Energys direct materials price variance was:
A. P3,000 favorable
C. P2,000 unfavorable
B. P2,000 favorable
D. P2,000 favorable
11. Information on Mirriams direct material costs for May is as follows:
Actual quantity of direct materials purchased and used
Actual cost of direct materials
Unfavorable direct materials usage variance
Standard quantity of direct materials allowed for May production
For the month of May, Mirriams direct materials price variance was:
A. P2,800 favorable
C. P6,000 unfavorable
B. P2,800 unfavorable
D. P6,000 favorable

30,000 lbs.
P92,000
P 3,000
29,000 lbs

30,000 lbs.
P84,000
P 3,000
29,000 lbs

Quantity Variance
15. Cox Company's direct material costs for the month of January were as follows:
Actual quantity purchased
18,000 kilograms
Actual unit purchase price
P 3.60 per kilogram
April 16, 2005

Final Pre-board Examination

Materials price variance unfavorable (based on purchases)


P 3,600
Standard quantity allowed for actual production
16,000 kilograms
Actual quantity used
15,000 kilograms
For January there, was a favorable direct material quantity variance of: (M)
A. P3,360
C. P3,400
B. P3,375
D. P3,800
Standard quantity
71. Ramie has a standard price of P5.50 per pound for materials. July's results showed an
unfavorable material price variance of P44 and a favorable quantity variance of P209. If 1,066
pounds were used in production, what was the standard quantity allowed for materials?
A. 1,104
C. 1,074
B. 1,066
D. 1,100
18. The Bohol Company uses standard costing. The following data are available for October:
Actual quantity of direct materials used
23,500 pounds
Standard price of direct materials
P2 per pound
Material quantity variance
P1,000 unfavorable
The standard quantity of material allowed for October production is
A. 23,000 lbs
C. 24,500 lbs
B. 24,000 lbs
D. 25,000 lbs
Units produced
72. Silver Company has a standard of 15 parts of Component R costing P1.50 each. Silver
purchased 14,910 units of R for P22,145. Silver generated a P220 favorable price variance
and a P3,735 favorable usage variance. If there were no changes in the component of
inventory, how many units of finished product were produced?
A. 994 units
C. 1,725 units
B. 1,160 units
D. 828 units
Mix & Yield Variance
73. Xtra Klean manufactures a cleaning solvent. The company employs both skilled and unskilled
workers. Skilled workers class C are paid P12 per hour, while unskilled workers class D are
paid P7 per hour. To produce one 55-gallon drum of solvent requires 4 hours of skilled labor
and 2 hours of unskilled labor. The solvent requires 2 different materials: A and B. The
standard and actual material information is given below:
Standard:
Material A: 30.25 GALLONS @ P1.25 per gallon
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Material B: 24.75 gallons @ P2.00 per gallon


Actual:
Material A: 10,716 gallons purchased and used @ P1.50 gallon
Material B: 17,484 gallons purchased and used @ P1.90 per gallon
Skilled labor hours: 1,950 @ P11.90 per hour
Unskilled labor hours: 1,300 @ P7.15 per hour
During the current month Xtra Klean manufactured five hundred 55-gallon drums. (Round all
answers to the nearest whole peso)

What are the total materials mix variance and material yield variance?
Mix
Yield

A.
P3,596 U
P1,111 U

B.
P3,596 F
P1,111 F

C.
P4,864 F
P2,670 F

D.
P4,864 U
P2,670 U

Labor Variance
Labor rate variance
74. The flexible budget for the month of May 2002 was for 9,000 units with direct material at P15
per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000. Actual output
for the month was 8,500 units with P127,500 in direct material and P77,775 in direct labor
expense. Direct labor hours of 6,375 were actually worked during the month. Variance analysis
of the performance for the month of May would show a(n)
A. favorable material quantity variance of P7,500
B. unfavorable direct labor efficiency variance of P1,275
C. unfavorable material quantity variance of P7,500
D. unfavorable direct labor rate variance of P1,275
Actual hours
16. The standards for direct labor for a product are 2.5 hours at P8 per hour. Last month, 9,000
units of the product were made and the labor efficiency variance was P8,000 F. The actual
number of hours worked during the past period was: (M)
A. 23,500
C. 20,500
B. 22,500
D. 21,500
75. Stars Company uses a standard cost system. Information about its direct labor costs for
Product Mars for the month of April follows:
Standard hours allowed for actual production
1,500
Actual hourly rate paid
P61.00
April 16, 2005

Final Pre-board Examination

Standard hourly rate


Labor efficiency variance, Favorable
How many direct labor hours were actually worked during the month of April?
A. 1,400
C. 1,498
B. 1,402
D. 1,600
76. Information on Ulan Companys direct labor costs is as follows:
Standard direct labor rate
Actual direct labor rate
Standard direct labor hours
Direct labor usage variance unfavorable
What were the actual hours worked, rounded to the nearest hour?
A. 21,914
C. 21,120
B. 20,714
D. 21,200
12. Information on Rita Companys direct labor costs is as follows:
Standard direct labor rate
Actual direct labor rate
Standard direct labor hours
Direct labor usage variance unfavorable
What were the actual hours worked, rounded to the nearest hour?
A. 11,914
C. 11,120
B. 10,714
D. 11,200

P60.00
P6,000

P7.50
P7.00
20,000
P8,400

P 3.75
P 3.50
10,000
P 4,200

Standard hours allowed


13. The Carrera Corporation makes a variety of leather goods. It uses standards costs and a
flexible budget to aid planning and control. Budgeted variable overhead at a 45,000-direct
labor hour level is P27,000.
During April material purchases were P241,900. Actual direct-labor costs incurred were
P140,700. The direct-labor usage variance was P5,100 unfavorable. The actual average
wage rate was P0.20 lower than the average standard wage rate.
The company uses a variable overhead rate of 20% of standard direct-labor cost for flexible
budgeting purposes. Actual variable overhead for the month was P30,750.
What were the standard hours allowed during the month of April?
A. 50,250
C. 48,550
B. 58,625
D. 37,520
Standard rate
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77. Anne had a P750 unfavorable direct labor rate variance and an P800 favorable efficiency
variance. Anne paid P7,150 for 800 hours of labor. What was the standard direct labor wage
rate?
A. P8.94
C. P7.94
B. P8.00
D. P7.80
Two-Way Overhead Variance
Budget or Controllable Variance
22. Which of the following are considered controllable variance?
A.
B.
VOH Spending
Yes
No
Total Overhead Budget
Yes
No
Volume
Yes
Yes

C.
No
Yes
No

D.
Yes
Yes
No

78. If actual overhead is P14,000, overhead applied is P13,400, and overhead budgeted for the
standard hours allowed is P15,600, then the overhead controllable variance is
A. P600 F
C. P1,600 F
B. P2,200 U
D. P1,600 U
17. The standard costs and actual costs for factory overhead for the manufacture of 2,500 units of
actual production are as follows:
Standard cost
Fixed overhead (based on 10,000 hours)
3 hours @ P.80 per hour
Variable overhead
3 hours @ P2 per hour
Actual cost
Total variable cost
P18,000
Total fixed cost
P8,000
The amount of the factory overhead controllable variance is (M)
A. P2,000 unfavorable
C. P0
B. P3,000 favorable
D. P3,000 unfavorable
15. GMA Company employs a standard absorption system for product costing. The standard cost
of its product is as follows:
Direct materials
P14.50
Direct labor (2 direct labor hours at P8)
16.00
Manufacturing overhead ( 2 DLH at P11)
22.00
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Joker planned to produce 25,000 units each month during the year. The budgeted
April 16, 2005

Final Pre-board Examination

annual manufacturing overhead is:


Variable
P3,600,000
Fixed
3,000,000
During November, GMA produced 26,000 units. GMA used 53,500 direct labor hours in
November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000
fixed and P325,000 variable.
The manufacturing overhead controllable variance for November is
A. P13,000 unfavorable
C. P3,000 favorable
B. P10,000 favorable
D. P4,000 favorable
79. Calma Company uses a standard cost system. The following budget, at normal capacity, and
the actual results are summarized for the month of December:
Direct labor hours
24,000
Variable factory OH
P 48,000
Fixed factory OH
P108,000
Total factory OH per DLH
P 6.50
Actual data for December were as follows:
Direct labor hours worked
22,000
Total factory OH
P147,000
Standard DLHs allowed for capacity attained
21,000
Using the two-way analysis of overhead variance, what is the controllable variance for
December?
A. P3,000 Favorable
C. P 9,000 Favorable
B. P5,000 Favorable
D. P10,500 Unfavorable
Volume Variance
13. The unfavorable volume variance may be due to all but which of the following factors? (M)
A. failure to maintain an even flow of work
B. machine breakdowns
C. unexpected increases in the cost of utilities
D. failure to obtain enough sales orders
20. How will a favorable volume variance affect net income under each of the following methods?
A.
B.
C.
D.
Absorption
Reduce
Reduce
Increase
Increase
Variable
No effect
Increase
No effect
Reduce
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80. The fixed overhead application rate is a function of a predetermined "normal" activity level. If
standard hours allowed for good output equal this predetermined activity level for a given
period, the volume variance will be
A. zero
B. favorable
C. unfavorable
D. either favorable or unfavorable, depending on the budgeted overhead
18. The standard factory overhead rate is P7.50 per machine hour (P6.20 for variable factory
overhead and P1.30 for fixed factory overhead) based on 100% capacity of 80,000 machine
hours. The standard cost and the actual cost of factory overhead for the production of 15,000
units during August were as follows:
Actual:
Variable factory overhead
P360,000
Fixed factory overhead
104,000
Standard hours allowed for units produced:
60,000 hours at P7.50
450,000
What is the amount of the factory overhead volume variance? (M)
A. P12,000 unfavorable
C. P14,000 unfavorable
B. P12,000 favorable
D. P26,000 unfavorable
81. Hero Company uses a flexible budget system and prepared the following information for the
year:
Percent of Capacity
80 Percent
90 Percent
Direct labor hours
24,000
27,000
Variable factory overhead
P 54,000
P 60,750
Fixed factory overhead
P108,000
P 108,000
Total factory overhead rate per DLH
P6.75
P6.25
Hero operated at 80 percent of capacity during the year, but applied factory overhead based
on the 90 percent capacity level.
Assuming that actual factory overhead was equal to the budgeted amount of overhead, how
much was the overhead volume variance for the year?
A. P12,000 unfavorable
C. P16,750 unfavorable
B. P12,000 favorable
D. P16,750 favorable
82. Meteor Company employs a standard absorption system for product costing. The standard
cost of its product is as follows:
April 16, 2005

Final Pre-board Examination

Direct materials
P14.50
Direct labor (2 direct labor hours at P9)
18.00
Manufacturing overhead ( 2 DLH at P12)
24.00
The manufacturing overhead rate is based upon the annual normal activity level of 600,000
direct labor hours. Meteor planned to produce 25,000 units each month during the year. The
budgeted annual manufacturing overhead is:
Variable
P4,200,000
Fixed
3,000,000
During November, Meteor produced 26,000 units. Meteor used 53,500 direct labor hours in
November at a cost of P433,350. Actual manufacturing overhead for the month was P250,000
fixed and P325,000 variable.
The manufacturing overhead volume variance for November is
A. P10,000 unfavorable
C. P5,000 unfavorable
B. P10,000 favorable
D. P5,000 favorable
Budgeted Overhead
83. Karla Company use an annual cost formula for overhead of P72,000 + P1.60 for each direct
labor hour worked. For the upcoming mouth Karla plans to manufacture 96,000 units. Each
unit requires five minutes of direct labor. Karla's budgeted overhead for the month is
A. P12,800
C. P84,800
B. P18,800
D. P774,000
Budgeted fixed costs
84. CTV Company has a standard feed cost of P6 per unit. At an actual production of 8,000 units a
favorable volume variance of P 12,000 resulted. What were total budgeted fixed costs?
A. P36,000
C. P60,000
B. P48,000
D. P75,000
23. The Arayat Company makes and sells a single product and uses standard costing. During
January, the company actually used 8,700 direct labor-hours (DLHs) and produced 3,000 units
of product. The standard cost card for one unit of product includes the following:
Variable factory overhead:
3.0 DLHs @ P4.00 per DLH.
Fixed factory overhead:
3.0 DLHs @ P3.50 per DLH
For January, the company incurred P22,000 of actual fixed overhead costs and recorded a
P875 favorable volume variance.
The budgeted fixed overhead overhead cost for January is
A. P31,500
C. P32,375
B. P30,625
D. P33,250
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Normal Capacity
85. South Company has total budgeted fixed costs of P75,000. Actual production of 19,500 units
resulted in a P3,000 favorable volume variance. What normal capacity was used to determine
the fixed overhead rate?
A. 16,500
C. 20,313
B. 18,750
D. 20,325
Questions 86 & 87 are based on the following information.
Lucky Company sets the following standards for 2003:
Direct labor cost (2 DLH @ P4.50)
P9.00
Manufacturing overhead (2 DLH @ P7.50)
15.00
Lucky Company plans to produce its only product equally each month. The annual budget for
overhead costs are:
Fixed overhead
P150,000
Variable overhead
300,000
Normal activity in direct labor hours
60,000
In March, Lucky Company produced 2,450 units with actual direct labor hours used of 5,050. Actual
overhead costs for the month amounted to P37,245 (Fixed overhead is as budgeted.)
86. The amount of overhead volume variance for Lucky Company is
A. P250 unfavorable
C. P750 unfavorable
B. P500 unfavorable
D. P375 unfavorable
87. The controllable overhead variance was
A. P505 favorable
B. P505 unfavorable

C. P245 favorable
D. P245 favorable

Three-Way Overhead Variance


88. The following data are the actual results for Bustos Company for the month of May:
Actual output
4,500 units
Actual variable overhead
P360,000
Actual fixed overhead
P108,000
Actual machine time
14,000 MH
Standard cost and budget information for Bustos Company follows:
Standard variable overhead rate
P6.00 per MH
Standard quantity of machine hours
3 hours per unit
Budgeted fixed overhead
P777,600 per year
April 16, 2005

Budgeted output
The overhead efficiency variance is
A. P3,000 Favorable
B. P3,000 Unfavorable

Final Pre-board Examination


4,800 unit per month
C. P5,400 Favorable
D. P5,400 Unfavorable

26. The Suez Company has standard variable costs as follows:


Materials, 3 pounds at P4.00 per pound
P12.00
Labor, 2 hours P10.00 per hour
20.00
Variable overhead, P7.50 per labor hour
15.00
Total
P47.00
During September Suez Company produced 6,000 units, using 11,560 labor hours at a total
wage of P113,870 and incurring P88,600 in variable overhead. The variable overhead
variances are:
A.
B.
C.
D.
Spending
P1,900 F
P1,900 U
P1,400 F
P1,400 U
Efficiency
P3,300 U
P3,300 F
P1,900 F
P1,900 F
Questions 24 & 25 are based on the following information.
Richard Company employs a standard absorption system for product costing. The standard cost of
its product is as follows:
Raw materials
P14.50
Direct labor (2 DLH x P8)
16.00
Manufacturing overhead (2 DLH x P11)
22.00
Total standard cost
P52.50
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct labor
hours. Richard planned to produce 25,000 units each month during the year. The budgeted
annual manufacturing overhead is:
Variable
P3,600,000
Fixed
3,000,000
P6,600,000
During November, Richard produced 26,000 units. Richard used 53,500 direct labor hours in
November at a cost of P433,350. Actual manufacturing overhead for the month was P260,000
fixed and P315,000 variable. The total manufacturing overhead applied during November was
P572,000.
24. The fixed manufacturing overhead volume variance for November is
A. P10,000 favorable
C. P3,000 unfavorable
B. P10,000 unfavorable
D. P22,000 favorable
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25. The total variance related to efficiency of the manufacturing operation for November is
A. P9,000 unfavorable
C. P21,000 unfavorable
B. P12,000 unfavorable
D. P11,000 unfavorable
Three-Way Overhead Variance (Variable OH Spending, Fixed OH Budget, Volume)
89. Arlene had an P18,000 unfavorable volume variance, a P25,000 unfavorable variable
overhead spending variance, and P2,000 total under applied overhead. The fixed overhead
budget variance is
A. P41,000 favorable
C. P41,000 unfavorable
B. P45,000 favorable
D. P45,000 unfavorable
Four-Way Overhead Variance
Variable overhead spending variance
18. Baltimore, Inc. analyzes manufacturing overhead in the production of its only one product, Blu.
The following set of information applies to the month of May, 2003:
Budgeted
Actual
Units produced
40,000
38,000
Variable manufacturing overhead
P4/DLH
P16,400
Fixed manufacturing overhead
P20/DLH
P88,000
Direct labor hours
6 minutes/unit
4,200 hours
How much was the variable overhead spending variance?
A. P400 Favorable
C. P1,200 Favorable
B. P400 Unfavorable
D. P1,200 Unfavorable
Questions 19 & 20 are based on the following information.
The Clark Company makes a single product and uses standard costing. Some data concerning this
product for the month of May follow:
Labor rate variance
P7,000 F
Labor efficiency variance
P12,000 F
Variable overhead efficiency variance
P4,000 F
Number of units produced
10,000
Standard" labor rate per direct labor hour
P12
Standard variable overhead rate per direct labor hour:
P4
Actual labor hours used:
14,000
Actual variable manufacturing overhead costs:
P58,290
19. The variable overhead spending variance for May was: (M)
A. P2,290 F
C. P2,290 U
April 16, 2005

B. P1,710 F

Final Pre-board Examination


D. P1,710 U

20. The standard hours allowed to make one unit of finished product are: (M)
A. 1.0
C. 1.5
B. 1.2
D. 1.3
Variable overhead efficiency variance
90. Franklin Glass Works, production budget for the year ended November 30, 2001 was based
on 200,000 units. Each unit requires two standard hours of labor for completion. Total
overhead was budgeted at P900,000 for the year, and the fixed overhead rate was estimated
to be P3.00 per unit. Both fixed and variable overhead are assigned to the product on The
basis of direct labor hours. The actual data for the year ended November 30,2001 are
presented below.
Actual production in units
198,000
Actual direct labor hours
440,000
Actual variable overhead
P 352,000
Actual freed overhead
P 575,000
Franklin's variable overhead efficiency variance for the year ended November 30, 2001 is
A. P33,000 unfavorable
C. P66,000 unfavorable
B. P35,520 favorable
D. P33,000 favorable
Fixed overhead spending variance
91. Long Company analyzes its manufacturing overhead in the production of its only one product,
Shorts. The following set of information applies to the month of January 2004:
Budgeted
Actual
Units produced
40,000
38,000
Variable manufacturing overhead
P4/DLH
P16,400
Fixed manufacturing overhead
P20/DLH
P85,000
Direct labor hours
6 minutes/unit
4,000 hours
What is the fixed overhead spending variance?
A. P5,000 Favorable
C. P1,600 Unfavorable
B. P1,600 Favorable
D. P5,000 Unfavorable
17. Bravo Corporations master budget calls for the production of 5,000 units of product monthly.
The annual master budget includes indirect labor of P144,000 annually. Bravo considers
indirect labor to be a variable cost. During the month of April, 4,500 units of product were
produced, and indirect labor costs of P10,100 were incurred. A performance report utilizing
flexible budgeting would report a budget variance for indirect labor of
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A. P1,900 Unfavorable
B. P1,900 Favorable

CPA Review School of the Philippines


C. P700 Unfavorable
D. P700 Favorable

Applied fixed manufacturing overhead


92. Fixed manufacturing overhead was budgeted at P500,000 and 25,000 direct labor hours were
budgeted. If the fixed overhead volume variance was P12,000 favorable and the fixed
overhead spending variance was P16,000 unfavorable, fixed manufacturing overhead applied
must be
A. P516,000
C. P504,000
B. P512,000
D. P496,000
Comprehensive
Questions 93 thru 95 are based on the following information.
The Lustre Company produces its only product. Kool Chewing Gum. The standard overhead costs
for one pack of the product follows:
Fixed overhead (1.50 hours at P18.00)
P27.00
Variable overhead (1.50 hours at P10.00)
15.00
Total application rate
P42.00
Lustre uses expected volume of 20,000 units. During the year, Lustre used 31,500 direct labor
hours for the production of 20,000 units. Actual overhead costs were P545,000 fixed and P308,700
variable.
93. The amount of variable overhead spending variance is
A. P6,300 Favorable
C. P6,300 Unfavorable
B. P8,700 Favorable
D. P8,700 Unfavorable
94. The total overhead controllable variance is
A. P13,700 Favorable
B. P8,700 Favorable

C. P13,700 Unfavorable
D. P8,700 Unfavorable

95. The overhead efficiency variance is


A. P22,500 Favorable
B. P15,000 Favorable

C. P22,500 Unfavorable
D. P15,000 Unfavorable

Gross Profit Variation Analysis


96. Vicki Division operates as a revenue center and sells only one product. Data for May 2000 are
as follows:
Actual
Expected
April 16, 2005

Sale in units
10,000
Selling price per unit
P11
Variable expense per unit
What are the price variance and price volume variance?
A.
B.
Sales Price Variance
P10,000 F
P5,000 F
Price Volume Variance
P5,000 F
P10,000 U

Final Pre-board Examination


9,500
P10
P6
C.
P5,000 U
P10,000 F

D.
P10,000 U
P5,000 U

Master Budget
Basic Concepts
97. The basic difference between a master budget and a flexible budget is that a
A. Flexible budget considers only variable costs but a master budget considers all costs.
B. Flexible budget allows management latitude in meeting goals whereas a master budget is
based on a fixed standard.
C. Master budget is for an entire production facility but a flexible budget is applicable to
single department only.
D. Master budget is based on one specific level of production and a flexible budget can be
prepared for any production level within a relevant range
98. Zero-base budgeting requires managers to
A. Justify expenditures that are increases over the prior periods budget amount
B. Justify all expenditures, not just increases over last years amount.
C. Maintain a full-year budget intact at all times.
D. Maintain a budget with zero increases over the prior period.
99. A systematized approach known as zero-based budgeting
a Presents the plan for only one level of activity and does not adjust to changes in the level
of activity.
B. Presents a statement of expectations for a period of time but does not present a firm
commitment.
C. Divides the activities of individual responsibility centers into a series of packages which
are ranked ordinally.
D. Classifies budget requests by activity and estimates the benefits arising from each activity.
23. Budget slack is a condition in which
A. Demand is low at various times of the year
B. Excess machine capacity exists in some areas of the plant
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C. There is an intentional overestimate of expenses or an underestimate of revenues


D. Managers grant favored employees extra time-off
100.When preparing the series of annual operating budgets, management usually starts the
process with the
A. Cash budget
C. Sales budget
B. Production budget
D. Capital budget
Production Budget
101.Isabelle, Industries plans to sell 200,000 units of Batik products in October and anticipates a
growth in sales of 5 percent per month. The target ending inventory in units of the product is
80 percent of the next months estimated sales. There are 150,000 units in inventory as of the
end of September. The production requirement in units of Batik for the quarter ending
December 31 would be
A. 670,560
C. 665,720
B. 691,525
D. 675,925
Purchasing Budget
102.The Jung Corporation's budget calls for the following production:
Quarter 1
45,000 units
Quarter 2
38,000 units
Quarter 3
34,000 units
Quarter 4
48,000 units
Each unit of product requires three pounds of direct material. The company's policy is to begin
each quarter with an inventory of direct materials equal to 30% of that quarters direct material
purchase requirements. Budgeted direct materials purchases for the third quarter would be
A. 114,600 pounds
C. 38,200 pounds
B. 89,400 pounds
D. 29,800 pounds
25. Plainfield Company prepares its budgets on annual basis. The following beginning and ending
inventory unit levels are planned for the fiscal year of June 1, 2002 through May 31, 2003.
June 1, 2002
May 31, 2003
Raw material*
40,000
50,000
Work-in-process
10,000
10,000
Finished goods
80,000
50,000
*Two (2) units of raw material are needed to produce each unit of finished product.
If 500,000 finished units were to be manufactured during the 2000-2001 fiscal year by
Plainfield Company, the units of raw material needed to be purchased would be
April 16, 2005

A. 1,000,000 units
B. 1,020,000 units

Final Pre-board Examination


C. 1,010,000 units
D. 990,000 units

Cash Budget
105.At the beginning of the current month, Rose had P100,000. Cash disbursements were
P2,600,000 and cash collections were P2,850,000. Rose invests all excess cash in a money
market fund and has a line of credit to cover cash deficiencies.
If Rose wishes to start the next month with P150,000, Rose must
A. invest P200,000
C. invest P350,000
B. borrow P400,000
D. do nothing
103.The Mango Company is preparing its cash budget for the month of May. The following
information is available concerning its accounts payable:
Estimated credit sales for May
P200,000
Actual credit sales for April
150,000
Estimated collections in May for credit sales in May
20%
Estimated collections in May for credit sales in April
70%
Estimated collections in May for credit sales prior to April
P12,000
Estimated write-offs in May for uncollectible credit sales
8.000
Estimated provision for bad debts in May for credit sales in May
7,000
What are the estimated cash receipts from accounts receivable collections in May?
A. P142,000
C. P150,000
B. P149,000
D. P157,000
26. The Queen Company has the following historical pattern on its credit sales.
percent collected in month of sale
percent collected in the first month after sale
percent collected in the second month after sale
percent collected in the third month after sale
percent uncollectible
The sales on open account have been budgeted for the last six months of 2003 are shown
below:
July
P 60,000
August
70,000
September
80,000
October
90,000
November
100,000
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December
85,000
The estimated total cash collections during the fourth calendar quarter from sales made on
open account during the fourth calendar quarter would be
A. P172,500
C. P230,000
B. P265,400
D. P251,400
104.The Magic Company is preparing its cash budget for the month ending January 31. The
following information pertains to Peaces past collection experience from its credit sales:
Current months sales
12%
Prior months sales
75%
Sales two months prior to current month
6%
Sales three months prior to current month
4%
Cash discounts (2/30, net/90)
2%
Doubtful accounts
1%
Credit sales:
January estimated
P2,000,000
December
1,800,000
November
1,600,000
October
1,900,000
How much is the estimated credit to Accounts Receivable as a result of collections expected
during January?
A. P1,730,200
C. P1,762,000
B. P1,757,200
D. P1,802,000
106.The Mango Company is preparing its cash budget for the month of May. The following
information is available concerning its accounts payable:
Estimated credit sales for May
P200,000
Actual credit sales for April
150,000
Estimated collections in May for credit sales in May
25%
Estimated collections in May for credit sales in April
70%
Estimated collections in May for credit sales prior to April
P15,000
Estimated write-offs in May for uncollectible credit sales
8,000
Estimated provision for bad debts in May for credit sales in May
7,000
What are the estimated cash receipts from accounts receivable collections in May?
A. P142,000
C. P157,000
B. P149,000
D. P170,000
Responsibility Accounting & Transfer Pricing
April 16, 2005

Final Pre-board Examination

Basic Concepts
27. What term identifies an accounting system in which the operations of the business are broken
down into reportable segments and the control functions of a foreperson, sales managers, or
supervisor is emphasized?
A. Responsibility accounting
C. Control accounting
B. Operations-research accounting
D. Budgetary accounting
107.Controllable costs are
A. Costs that are likely to respond to the amount of attention devoted to them by a specified
manager.
B. Costs that are governed mainly by past decisions that established the present levels of
operating and organizational capacity and that only change slowly in response to small
changes in capacity
C. Costs that will be unaffected by current managerial decisions.
D. Costs that fluctuate in total in response to small change in the rate of utilization of
capacity.
108.The CEO of a rapidly growing high-technology firm has exercised centralized authority over all
corporate functions. Because the company now operates in four geographically dispersed
locations, the CEO is considering the advisability of decentralizing operation control over
production and sales. Which of the following conditions probably would result from and be a
valid reason for decentralizing?
A. Greater local control over compliance with government regulations.
B. More efficient use of headquarters staff officials and specialists.
C. Quicker and better operating decisions.
D. Greater economies in purchasing.
109.The least complex segment of area of responsibility for which costs ate allocated is a(n)
A. profit center
C. contribution center
B. investment center
D. cost center
110. Which of the following does not apply to the content of managerial reports?
A. Reporting standard is relevant to the decision to be made
B. May extend beyond double-entry accounting system
C. Pertains to subunits of the entity and may be very detailed
D. Pertains to the entity as a whole and is highly aggregated.
29. The best measure of managerial efficiency in the use of investments in assets is: (M)
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A. rate of return on stockholders equity
B. investment turn over

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C. income from operations
D. inventory turnover

Return on Investment
111. If the investment turnover decreased by 10 percent and ROS decreased by 30 percent, the
ROI would
A. increase by 30%
C. decrease by 37%
B. decrease by 10%
D. decrease by 33.3%
112. The following information pertains to Pluto Company's Satellite Division for 2004:
Sales
P311,000
Variable cost.
250,000
Traceable fixed costs
50,000
Average invested capital
40,000
Imputed interest rate
10%
Satellite's return on investment was
A. 10.00%
C. 27.50%
B. 13.33%
D. 30.00%
30. The following data relate to the Happy Division of Euphoria Company:
Sales
Variable costs
Direct fixed costs
Invested capital
Allocated actual interest costs
Capital charge
The divisional return on investment is:
A. 15 percent
C. 25 percent
B. 13 percent
D. 20 percent

P10,000,000
3,000,000
5,000,000
8,000,000
800,000
12%

31. Two divisions of Halloway Company (Divisions X and Y) have the same profit margins.
Division X's investment turnover is larger than that of Division Y (1.2 to 1.0). Income from
operations for Division X is P50,000, and income from operations for Division Y is P38,000.
Division X has a higher return on investment than Division Y by: (M)
A. using income from operations as a performance measure
B. comparing income from operations
C. applying a negotiated price measure
D. using its assets more efficiently in generating sales
April 16, 2005

Final Pre-board Examination

Residual Income
32. Stevenson Corporation had P550,000 in invested assets, sales of P660,000, income from
operations amounting to P99,000, and a desired minimum rate of return of 15%, The residual
income for Stevenson is: (E)
A. P0
C. P14,850
B. P17,820
D. P16,500
113. Scotch Co. has the following results for the year:
Sales
P740,000
Variable expenses
260,000
Fixed expenses
300,000
Total divisional assets average P1,000,000. The companys minimum required rate of return is
14 percent.
The residual income and return on investment for Scotch are:
A.
B.
C.
D.
Residual Income
P36,000
P40,000
P36,000
P40,000
Return on Investment
36%
18%
18%
36%
114. Ylagan Company is a highly decentralized company. It evaluates the performance of each
segment using both the Return on Investments, as well as Residential Income provided by
each segment. Ylagan Company requires each segment to provide at least 20 percent return
on all its investments.
The following data are typical of the operations of North Division, one of the leading segments
of Ylagan Company.
Sales
P24,000,000
Variable costs
10,000,000
Fixed costs
8,000,000
Share on headquarters costs
3,000,000
Average investment
25,000,000
What are the Norths Return on Investments and Residual Income, respectively?
A. 12.00 percent and P(2,000,000)
C. 24.00 percent and P1,000,000
B. 12.00 percent and P1,000,000
D. 24.00 percent and P(2,000,000)
115. The Global Division of Sun Company expects the following result for 2004:
Unit sales
Unit selling price
Unit variable cost

70,000
P
10
P
4
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Total fixed costs


P300,000
Total investment
P500,000
The minimum required ROI is 15 percent, and divisions are evaluated on residual income. A
foreign customer has approached Globals manager with an offer to buy 10,000 units at P7
each. If Global accepts the order, it would not lose any of the 70,000 units at the regular price.
Accepting the order would increase fixed costs by P10,000 and investment by P40,000.
What is the minimum price that Global could accept for the order and still maintain its expected
residual income?
A. P5.00
C. P4.75
B. P5.60
D. P9.00
116. The following data ate available for the South Division of Banawe Company and the single
product it makes:
Unit setting price
P20
Variable cost per unit
P12
Annual fixed costs
P280,000
Average operating assets
P1,500,000
If South wants a residual income of P50,000 and the minimum required rate of return is 10%,
the annual turnover will have to be:
A. 0.32
C. 1.25
B. 0.80
D. 1.50
117. The following information relates to two projects of Rica Corporation.
Project A
Project B
Operating income
P2,500,000
P600,000
Residual income
P 500,000
P200,000
ROI
10%
12%
Return on residual investment
2%
4%
A bonus of P 50,000 will be paid to the manager whose project contributed most to the
performance of the firm. The P50,000 bonus should go to the manager of
A. Project A because the residual income is higher
B. Project E because the return on investment is higher
C. Project A because it was a larger, mote complex project
D. Project B because the return on residual investment is higher
32. Division Alpha is considering a project that will earn a rate of return which is greater than the
imputed interest charge for invested capital, but less than the divisions historical return on
invested capital. Division Beta is considering a project that will earn a rate of return which is
April 16, 2005

Final Pre-board Examination

greater than the divisions historical return on invested capital, but less than the imputed
interest charge for invested capital. If the objective is to maximize residual income, should
these divisions accept or reject their projects?
A.
B.
C.
D.
Alpha
Accept
Reject
Reject
Accept
Beta
Accept
Accept
Reject
Reject
Segment Reporting
118. Stellar Industries has two divisions: North Division and South Division. Information relating to
the divisions for the year just ended is as follows:
North
South
Units produced and sold
30,000
40,000
Selling price per unit
P 8.00
P 15.00
Variable expenses per unit
P 3.00
P 5.00
Direct fixed expanse
P48.000
P110,000
Common fixed expenses
P40,000
P 40,000
Common fixed expenses have been allocated equally to each of the two division.
Stellar's contribution and segment margin for North Division are:
A. P150,000 and P102,000
C. P150,000 and P72,000
B. P400,000 and P290,000
D. P400,000 and P250,000
Transfer Pricing
119. To avoid waste and maximize efficiency when transferring products among segments is a
competitive economy, a large diversified entity should base transfer prices on
A. Bargained price
C. Market price
B. Dual transfer price
D. Full cost
30. The worst transfer-pricing method is to base the prices on (M)
A. market prices
C. budgeted total costs.
B. budgeted variable costs
D. actual total costs.
120.Universal Company has intracompany service transfers from Internal Division, a cost center to
World Division, a profit center. Under stable economic conditions, which of the following
transfer prices is likely to be most conducive to evaluating whether both divisions have met
their responsibilities?
A. Actual cost
C. Market price
B. Standard variable cost
D. Negotiated price
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121.An appropriate transfer price between two divisions of the Star Corporation can be determined
from the following data:
Fabrication Division
Market price of subassembly
P50
Variable cost of subassembly
P20
Excess capacity (in units)
1,000
Assembling Division
Number of units needed
900
What is the natural bargaining range for the two divisions?
A. Between P20 and P50
C. Any amount less than P50
B. Between P50 and P70
D. P50 is the only acceptable price
122.Clara Industries is a decentralized company that evaluates its divisions based on ROI. The
Ibarra Division has the capacity to make 1,000 units of a component. The Ibarra Division's
variable costs are P40 per unit. Ibarra can sell all that it produces for P100 each.
The Simoun Division can use the component in one of its products. The Simoun Division
would incur P50 of variable costs to convert the component into its own product which sells for
P160. Simoun needs 100 units.
What are the minimum transfer price that Ibarra is willing to accept and the maximum price
that Simoun is willing to pay for the goods?
A.
B.
C.
D.
Ibarras Minimum Price
P40
P40
P100
P100
Simouns Maximum Price
P100
P110
P110
P100
Excess Capacity
33. Materials used by Aro-Products Inc. in producing Division 3's product are currently purchased
from outside suppliers at a cost of P5 per unit. However, the same materials are available from
Division 6. Division 6 has unused capacity and can produce the materials needed by Division
3 at a variable cost of P3 per unit. A transfer price of P3.20 per unit is established, arid 40,000
units of material are transferred, with no reduction in Division 6s current sales. How much
would Aro-Products total income from operations increase? (M)
A. P32,000
C. P80,000
B. P72,000
D. P8,000
30. Pasig Division of River Company sells 80,000 units of part Z to the outside market. Part Z
sells for P10.00 and has a variable cost of P5.50 and a fixed cost per unit of P2.50. Pasig has
a capacity to produce 100,000 units per period. Marikina Division currently purchases 10,000
April 16, 2005

Final Pre-board Examination

units of part Z from Pasig for P10.00. Marikina has been approached by an outside supplier
who is willing to supply the former part Z for P9.00. What are the effects on Rivers overall
profit if:
Marikina Buys Outside at P9.00
Marikina Buys from Pasig at P9.00
A. No change
P35,000 decrease in profit
B. P35,000 decrease in profit
P35,000 increase in profit
C. P35,000 decrease in profit
No change
D. P35,000 increase in profit
No change
Partial Excess Capacity
123.Plastic Division makes and sells a single product. Presently it sells 12,000 units per year to
outside customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to
make each unit is P16. All selling expenses are fixed. Light Division would like to buy 10,000
units a year from Plastic Division. The unit price that Plastic Division should charge Light
Division, according to the transfer pricing formula, is
A. P24.00
C. P17.60
B. P21.40
D. P16.00
Full Capacity
124.The High Division of Para Company produces a high quality kite. Unit production costs (based
on capacity production of 100,000 units per year) follow:
Direct materials
P 60
Direct labor
25
Overhead (20% variable)
15
Other information
Sales price
120
Selling expenses (15% variable)
20
The High Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a transfer price to the
Recreation Division on which no variable period costs would be incurred?
A. P120
C. P 91
B. P 88
D. P117
31. The Red Division of Colour Company produces a high quality marker. Unit production costs
(based on capacity production of 100,000 units per year) follow:
Direct materials
P 60
Direct labor
25
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Overhead (20% variable)


15
Other information
Sales price
120
The Red Division is producing and selling at capacity.
What is the minimum selling price that the division would consider as a transfer price to the
Violet Division on which no variable period costs would be incurred?
A. P120
C. P 91
B. P 88
D. P117
Questions 32 and 33 are based on the following information.
Blade Division of Dana Company produces hardened steel blades. One-third of the Blades
Divisions output is sold to the Lawn Products Division of Dana; the remainder is sold to outside
customers. The Blade Divisions estimated sales and standard costs data for the fiscal year ending
June 30 are as follows:
Lawn Products
Outsiders
Sales
P15,000
P40,000
Variable costs
(10,000)
(20,000)
Fixed costs
(3,000)
(6,000)
Gross |margin
P 2,000
P14,000
Unit sales
10,000
20,000
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an
outside supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division
cannot sell any additional products to outside customers.
32. Should Dana allow its Lawn Products Division to purchase the blades from the outside
supplier, and why?
A. Yes, because buying the blades would save Dana Company P500.
B. No, because making the blades would save Dana Company P1,500.
C. Yes, because buying the blades would save Dana Company P2,500.
D. No, because making the blades would save Dana Company P2,500
33. Assume the Blade Division is now at capacity and sufficient demand exist to sell all production
to outsiders at present prices. What is the differential cost (benefit) of producing the blade
internally?
A. P2,500 benefit
C. P7,500 cost
B. P0 differential cost
D. P10,000 cost
Decision
April 16, 2005

Final Pre-board Examination

125.Barangay Division of Community Company sells 80,000 units of part Z to the outside market.
Part Z sells for P10.00 and has a variable cost of P150 and a fixed cost per unit of P2.50.
Barangay has a capacity to produce 100,000 units per period. Municipal Division currently
purchases 10,000 units of part Z from Barangay for P10.00. Municipal has been approached
by an outside supplier who is willing to supply the former part Z for P9.00. What are the effects
on Community Company's overall profit if:
Municipal buys outside at P9.00
Municipal buys from Barangay at P9.00
No change
P35,000 decrease in profit
No change
P35,000 increase in profit
P35,000 decrease in profit
No change
P35,000 increase in profit
P35,000 decrease in profit
Product Pricing
126.In a cost-based pricing system the markup should cover
I. Selling and administrative expenses
II. Desired profit
III. Manufacturing cost
A. I, II, and III
C. I and III only
B. I and II only
D. II and III only
Relevant Costing
Basic Concepts
21. A cost that will not be affected by later decisions is termed a(n): (E)
A. historical cost
C. sunk cost
B. differential cost
D. replacement cost
127.The Auto Division of Fly Insurance employs three claims processors capable of processing
5,000 claims each. The division currently processes 12,000 claims. The manager has recently
been approached by two sister divisions. Division A would like the auto division to process
approximately 2,000 claims. Division B would like the auto division to process approximately
5,000 claims. The Auto Division would be compensated Division A or Division B for processing
these claims. Assume that these are mutually exclusive alternatives. Claims processor salary
cost is relevant for
A. division A alternative only
B. division B alternative only
C. both Division A and Division B alternatives
D. neither Division A nor Division B alternatives
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Final Pre-board Examination

128.For the year ended December 31, 2004, Earth Company incurred direct costs of P500,000
based on a particular course of action during the year. If a different course of action had been
taken, direct costs would have been P400,000. In addition, Earth's 2004 fixed costs were
P90,000. the incremental cost was
A. P10,000
C. P100,000
B. P90,000
D. P190,000

23. Niva Co. Manufactures three products: Bales; Tales and Wales. The selling prices are: 55; 78;
and 32 respectively. The variable costs for each product are: 20; 50: and 15, respectively.
Each product must go through the same processing in a machine that is limited to 2,000 hours
per month. Bales take 7 hours to process, Tales take 4 hours, and Wales take 1 hour.
Assuming that Niva Co. can sell ail of the products they can make, what is the maximum
contribution margin they can earn per month? (E)
A. P64,000
C. P56,000
B. P70,000
D. P34,000

Opportunity Cost
129.The potential benefit that may be obtained from following an alternative course of action is
called
A. Opportunity benefit
C. Relevant cost
B. Opportunity cost
D. Sunk cost

30. The Hingis Corporation manufactures two products: X and Y. Contribution


margin per unit is determined as follows:

31. An important concept in decision making is described as the contribution to income that is
forgone by not using a limited resources in its best alternative use. This concept is called
A. Marginal cost
C. Potential cost
B. Incremental cost
D. Opportunity cost
130.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of
P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could
not guarantee this delivery schedule. In order to ensure availability of these components,
Luzon is considering the purchase of all 60,000 units at the beginning of the year. Assuming
Luzon can invest cash at 8%, the companys opportunity cost of purchasing the 60,000 units at
the beginning of the year is
A. P132,000
C. P150,000
B. P144,000
D. P264,000
Profit Maximization
131.Fe Company has only 25,000 hours of machine time each month to manufacture its two
products. Product X has a contribution margin of P50 and Product Y has a contribution margin
of P64. Product X requires 5 machine hours and Product Y, 8 hours. If Fe wants to dedicate
80% of its machine time to the product that will provide the most income, Fe will have a total
monthly contribution margin of
A. P250,000
C. P210,000
B. P240,000
D. P200,000
April 16, 2005

Product Xf
Product Y
Revenue
P130
P80
Variable costs
70
P38
Contribution margin
P 60
P42
Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours is a scarce
resource. 42,000 machine hours are available during the year. Product X requires 6 machine
hours per unit while product Y requires 3 machine hours per unit.
How many units of X and Y should Hingis Corporation produce?
A.
B.
C.
D.
Product X
16,000
8,000
7,000
3,000
Product Y
-04,000
-08,000
132.Geary Manufacturing has assembled the following data pertaining to two popular products.
Blender
Electric mixer
Direct materials
P6
P11
Direct labor
4
9
Factory overhead @ P16 per hour
16
32
Cost if purchased from an outside supplier
20
38
Annual demand (units)
20,000
28,000
Past experience has shown that the fixed manufacturing overhead component included in the
cost per machine hour averages P10. Geary has a policy of filling, all sales orders, even if it
means purchasing units from outside suppliers.
If 50,000 machine hours are available, and Geary Manufacturing desires to follow an optimal
strategy, it should
A. produce 25,000 electric mixers, and purchase all other units as needed
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B. produce 20,000 blenders and 15,000 electric mixers, and purchase all other units as
needed
C. produce 20,000 blenders and purchase all other units as needed
D. produce 28,000 electric mixers and purchase all other units as needed
133.The Pato Company produces three products with the following costs and selling prices:
A
B
C
Selling price per unit
P16
P21
P21
Variable cost per unit
7
11
13
Contribution margin per unit
P9
P10
P8
Direct labor hours per unit
1
1.5
2
Machine hours per unit
4.5
2
2.5
In what order should the three products be produced if either the direct labor-hours or the
machine hours are the company's production constraint?
A.
B.
C.
D.
Direct labor hours
A,B,C
B,C,A
B,C,A
A,B,C
Machine hours
B,C,A
B,C,A
A,C,B
A,C,B
24. Bear Valley produces three products: A, B, and C, One machine is used to produce the
products, The contribution margins, sales demands, and time on the machine (in minutes) are
as follows:
Demand
CM
Time on machine
A
100
P25
10
B
80
18
5
C
150
30
10
There are 2400 minutes available on the machine during the week. How many units should be
produced and sold to maximize the weekly contribution? (E)
A.
B.
C.
D.
A
100
50
90
100
B
80
80
0
80
C
150
150
150
100
Sell as is or Process Further
134.Indicate which of the following costs would be avoided if a segment is eliminated.
1. variable manufacturing costs
2. direct fixed costs
April 16, 2005

3.
4.
5.
6.
A.
B.

common fixed costs


variable selling costs
direct listed selling costs
common fixed setting costs
2, 3, 5, 5
1, 2, 4, 3

Final Pre-board Examination

C. 2, 3, 4, 5
D. 1, 4, 5, 6

22. Jones Co. can further process Product B to produce Product C. Product B is currently selling
for P30 per pound and costs P28 per pound to produce. Product C would sell for P60 per
pound and would require an additional cost of P24 per pound to produce. What is the
differential cost of producing Product C? (E)
A. P30 per pound
C. P28 per pound
B. P24 per pound
D. P 6 per pound
135.The cost to manufacture an unfinished unit is P40 (P30 variable and P10 fixed). The selling
price per unit is P50. The company has unused production capacity and has determined that
units could be finished and sold for P65 with an increase in variable costs of 40%. What is the
additional net income per unit to be gained by finishing the unit?
A. P3
C. P15
B. P10
D. P12
136.Ottawa Corporation produces two products from a joint process. Information about the two
joint products follows:
Product X
Product Y
Anticipated production
2,000 lbs
4,000 lbs
Selling price lb at split-off
P30
P16
Additional processing costs/lb after Split-off (all variable)
P15
P30
Selling prices/lb after further processing
F40
P50
The cost of the joint process is P85,000.
Ottawa currently sells both products at the split-off point. If Ottawa makes decisions which
maximizes profit, Ottawa's profit will increase by
A. P16,000
C. P50,000
B. P4,000
D. P10,000
137.BEA Industries produces two products. Information about the products is as follows:
Item 38B
Item 40F
Units produced and sold
1,000
4,000
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Selling price per unit


P 25
P 20
Variable expenses per unit
P 15
P12
The company's fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
dropped and P25,000 can be avoided if Item 40F is dropped. Product margin for Item 40F is
A. P3,200
C. P(2,000)
B. P7,000
D. P10,000
38. Green Companys unit cost of manufacturing and selling a given item at an activity level of
10,000 units per month are:
Manufacturing costs
Direct materials
P24
Direct labor
8
Variable overhead
5
Fixed overhead
6
Selling expenses
Variable
11
Fixed
8
The company has an inventory of 3,000 of this item left over from last years model. These
must be sold through regular channels at reduced prices. The inventory will be valueless
unless sold this way. What unit cost is relevant for establishing the minimum selling price of
these 3,000 units?
A. P11
C. P48
B. P37
D. P62
Special Order
27. Pueblo Company sells a product for P60. Variable cost is P32. Pueblo could accept a special
order for 1,000 units at P46. If Pueblo accepted the order, how many units could it lose at the
regular price before the decision became unwise? (M)
A. 1,000
C. 200
B. 500
D. 2,000
24. Climate Co. has considerable excess manufacturing capacity. A special job orders cost sheet
includes the following applied manufacturing overhead costs:
Fixed costs
.P21,000
Variable costs
. 33,000
The fixed costs include a normal P3,700 allocation for in-house design costs, although no inhouse design will be done. Instead the job will require the use of external designers costing
April 16, 2005

Final Pre-board Examination

P7,750. What is the total amount to be included in the calculation to determine the minimum
acceptable price for the jobs?
A. P36,700
C. P54,000
B. P40,750
D. P58,050
25. KC Industries manufactures a product with the following costs per unit at the expected
production of 30,000 units.
Direct materials
.P 4
Direct labor
. 12
Variable manufacturing overhead
. 6
Fixed manufacturing overhead
. 8
The company has the capacity to produce 40,000 units. The product regularly sells for P40. A
wholesaler has offered to pay P32 a unit for 2,000 units.
If the firm is at capacity and the special order is accepted, the effect on operating income
would be
A. a P20,000 increase
C. a P4,000 increase
B. a P16,000 decrease
D. P0
28. Dary Co, Produces a single product. Its normal selling price is P28 per unit. The variable costs
are P18 per unit. Fixed costs are P20,000 for a normal production run of 5,000 units per
month. Dary received a request for a special order that would not interfere with normal sales.
The order was for 1,500 units and a special price of P17.50 per unit. Dary Co. has the capacity
to handle the special order, and for this order a variable selling cost of P2 per unit would be
eliminated. If the order is accepted, what would be the impact on net income? (M)
A. decrease of 750
C. increase of P2,250
B. decrease of P3,750
D. increase of P1,500
37. Fiesta Companys unit cost of manufacturing and selling a given item at an activity level of
10,000 units per month are:
Manufacturing costs
Direct materials
P39
Direct labor
6
Variable overhead
8
Fixed overhead
9
Selling expenses
Variable
30
Fixed
11
The company desires to seek an order for 5,000 units from a foreign customer. The variable
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selling expenses will be reduced by 40%, but the fixed costs for obtaining the order will be
P20,000. Domestic sales will not be affected by the order.
The minimum break-even price per unit to be considered on this special sale is
A. P71
C. P69
B. P75
D. P84
Make or Buy
138.For the past 12 years, the Blue Company has produced the small electric motors that fit into its
main product line of dental drilling equipment. As material costs have steadily increased, the
controller of the Blue Company is reviewing the decision to continue to make the small motors
and has identified the following facts:
1. The equipment used to manufacture the electric motors has a book value of P150,000.
2. The space now occupied by the electric motor manufacturing department could be used
to eliminate the need for storage space now being rented.
3. Comparable units can be purchased from an outside supplier for P59.75
4. Four of the persons who work in the electric motor manufacturing department would be
terminated and given eight weeks severance pay
5. A P10,000 unsecured note is still outstanding on the equipment used in the manufacturing
process.
Which of the items above are relevant to the decision that the controller has to make?
A. 1, 3, and 4
C. 2, 3, 4, and 5
B. 2, 3, and 4
D. 1, 2, 4, and 5
144.AFM, Inc. manufactures jet engines for an aircraft assembler on a cost plus basis. The cost of
a particular jet engine that the company manufactures is shown below:
Direct materials
P20,000,000
Direct labor
15,000,000
Overhead:
Supervisors salary
2,000,000
Fringe benefits on direct labor
1,500,000
Depreciation
1,200,000
Rent
1,100,000
Total
P40,800,000
If production of this engine were discontinued, the production capacity would be idle, and the
supervisor would be laid off. When asked to bid on the next contract for the engine, the
minimum unit price that AFM Inc should bid is
A. P38,500,000
C. 36,500,000
B. P40,800,000
D. 39,700,000
April 16, 2005

Final Pre-board Examination

139 Buena Corporation operates a plant with a productive capacity to manufacture 10,000 units of
its product a year. The following information pertains to the production costs at capacity:
Variable costs
P80,000
Fixed costs
120,000
Total costs
P200,000
A supplier has offered to sell 8,000 units to Buena annually. Assume no change in the fixed
costs.
What is the price per unit that makes Buena indifferent between the Make and Buy options?
A. P8
C. P20
B. P12
D. P10
25. Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units
of its product a year. The follow information pertains to the production costs at capacity:
Variable costs
P160,000
Fixed costs
240,000
Total costs
P400,000
A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed
costs. What is the price per unit that makes Medford indifferent between the "make" and "buy"
options? (E)
A. P8
C. P20
B. P12
D. P40
140.Elly Industries is a multi-product company that currently manufacture 30,000 units of Part
MR24 each month for use in production. The facilities now being used to produce Part MR24
have a fixed monthly costs of P150,000 and a capacity to produce 84,000 units per month. If
Elly were to buy Part MR24 from an outside supplier, the facilities would be idle, but its fixed
costs would continue at 40 percent of their present amount. The variable production costs of
Part MR24 are P11 per unit.
If Elly Industries is able to obtain Part MR24 each month, it would realize a net benefit by
purchasing Part MR24 from an outside supplier only if the suppliers unit price is less than
A. P14.00
C. P16.00
B. P11.00
D. P13.00
141.The following are details of the monthly unit cost to manufacture and sell a particular product
for Grace Company:
Manufacturing Costs:
Direct materials
P3.00
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Direct labor
Variable indirect
Fixed indirect

CPA Review School of the Philippines


4.00
2.00
1.50

Marketing Costs:
Variable
2.00
Fixed
1.00
Grace must decide to continue making the product or buy it from an outside supplier. The
supplier has offered to make the product at the same level of quality that the company can
make it. Fixed marketing costs would be unaffected, but variable marketing costs would be
reduced by 25% if the company were to accept the proposal. What is the maximum amount
per unit that Grace can pay the suppliers without decreasing its operating income?
A. P 9.50
C. P 9.00
B. P10.50
D. P11.00
142.Savage Industries is a multi-product company that currently manufactures 30,000 units of Part
QS42 each month for use in production. The facilities now being used to produce Part QS42
have fixed monthly cost of P150,000 and a capacity to produce 84,000 units per month. If
Savage were to buy Part QS42 from an outside supplier, the facilities would be idle, but its
fixed costs would continue at 40 percent of their present amount. The variable production
costs of Part QS42 are P11 per unit.
If Savage Industries is able to obtain Part QS42 from an outside supplier at a unit purchase
price of P12,875, the monthly usage at which it will be indifferent between purchasing and
making Part QS42 is
A. 30,000 units
C. 80,000 units
B. 32,000 units
D. 48,000 units
143.Classic Company currently manufactures all components parts used in the manufacture of
various hand tools. A steel handle is used in three different tools. The 2001 budget for 20,000
handles has the following unit cost:
Direct material
P6.00
Direct labor
4.00
Variable overhead
1.00
Fixed overhead
2.00
Total unit cost
P13.00
Modern Steel has offered to supply 20,000 handles to Classic for P12.50 each delivered. If
Classic Co. currently has idle capacity that cannot be used, accepting the offer will
A. Decrease the handle unit cost by P0.50 C. Decrease the handle unit cost by P1.50
April 16, 2005

B. Increase the handle unit cost by P1.50

Final Pre-board Examination


D. Increase the handle unit cost by P0.50

26. The Connell Company uses 5,000 units of part 501 each year. The cost of manufacturing one
unit part 501 at this volume is as follows:
Direct materials
..
P2.50
Direct labor
. 3.50
Variable overhead
1.50
Fixed overhead
.
1.00
Total.
P8.50
An outside supplier has offered to sell Connell unlimited quantities of part 501 at a unit cost of
P7.75. If Connell accepts this offer, it can eliminate 50 percent of the fixed costs assigned to
part 501. Furthermore, the space devoted to the manufacture of part 501 would be rented to
another company for P6,000 per year. If Connell accepts the offer of the outside supplier,
annual profits will
A. Increase by P13,500
C. increase by P11,000
B. increase by P7,250
D. increase by P1,250
26. A business is operating at 90% of capacity and is currently purchasing a part used in its
manufacturing operations for P15 per unit. The unit cost for the business to make the part is
P20, including fixed costs, and P12, not including fixed costs. If 30,000 units of the part are
normally purchased during the year but could be manufactured using unused capacity, what
would be the amount of differentials cost increase or decrease from making the part rather
than purchasing it? (M)
A. P150,000 cost increase
C. P150,000 cost increase
B. P90,000 cost decrease
D. P90,000 cost increase
33. The Rural Cooperative, Inc. produces 1,000 units of Part M per month. The total
manufacturing costs of the part are as follows:
Direct materials
P10,000
Direct labor
5,000
Variable overhead
5,000
Fixed overhead
30,000
Total manufacturing cost
P50,000
An outside supplier has offered to supply the part at P30 per unit. It is estimated that 20% of
the fixed overhead assigned to Part M will no longer be incurred if the company purchases the
part from the outside supplier. If Rural Cooperative purchases 1,000 units of Part M from the
outside supplier per month, then its monthly operating income will
A. decrease by P4,000
C. decrease by P14,000
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B. increase by P4,000

CPA Review School of the Philippines


D. increase by P14,000

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

2. direct fixed costs


3. common fixed costs

5. direct fixed selling costs


6. common fixed selling costs

A. 2, 3, 5, 6
B. 1, 2, 4, 5

C. 2, 3, 4, 5
D. 1, 4, 5, 6

cost per

P6
30
12
16
P64
The Tray Company has offered to sell 20,000 units of part No. 498 to Reno for P60 per unit.
Reno will make the decision to buy the part from Tray if there is a savings of P25,000 for
Reno. If Reno accepts Trays offer, P9 per unit of the fixed overhead applied would be totally
eliminated. Furthermore, Reno has determined that the released facilities could be used to
save relevant costs in the manufacture of part No. 575. In order to have a savings of P25,000,
the amount of the relevant costs that would be saved by using the released facilities in the
manufacture of part No. 575 would have to be
A. P80,000
C. P125,000
B. P85,000
D. P140,000

34. Bulacan Company manufactures part G for use in its production cycle. The costs per unit for
10,000 units of part G are as follows:
Direct materials
P 3
Direct labor
15
Variable overhead
6
Fixed overhead
8
Total
P32
Pampanga Company has offered to sell Bulacan 10,000 units of part G for P30 per unit. If
Bulacan accepts Pampangas offer, the released facilities could be used to save P45,000 in
relevant costs in the manufacture of part H. In addition, P5 per unit of the fixed overhead
applied to part G would continue.
What alternative is more desirable and by what amount?
A.
B.
C.
D.
Alternative
Manufacture
Manufacture
Buy
Buy
Amount
P10,000
P15,000
P15,000
P10,000
Keep-or-Drop a Segment
27. Indicate which of the following costs would be avoided if a segment is eliminated.
1. variable manufacturing costs
4. variable selling costs
April 16, 2005

Final Pre-board Examination

32. Banahaw Company plans to discontinue a department that has a contribution margin of
P240,000 and P480,000 in fixed costs. Of the fixed costs, P210,000 can be avoided. The
effect of this discontinuance on Banahaws overall net operating income would be a(an)
A. decrease of P30,000
C. decrease of P10,000
B. increase of P30,000
D. increase of P10,000
34. Mina Co. mines three products. Gold Ore sells for P1,000,000 per ton, variable costs are
P600,000 per ton, and fixed mining costs are P6,000,000. The segment margin for 2003 was
P(1,200,000). The management of Mina Co. was considering dropping the mining of Gold
Ore. Only one-half of the fixed expenses are direct and would be eliminated if the segment
was dropped. If Gold Ore were dropped, net income for Arayat Mining would
A. Increase by P2,000,000
C. Increase by P1,200,000
B. Decrease by P2,000,000
D. Decrease by P1,200,000
28. BEA Industries produces two products. Information about the products is as follows:
Item 38B
Item 40F
Units produced and sold
1,000
4,000
Selling price per unit
P 25
P 20
Variable expenses per unit
P 15
P 12
The companys fixed costs totaled P40,000, of which P8,000 can be avoided if Item 38B is
dropped and P25,000 can be avoided if Item 40F is dropped.
Product margin for Item 40F is
A. P3,200
C. P(2,000)
B. P7,000
D. P10,000
Capital Budgeting
Basic Concepts
145.When compared Net Present Value method to Internal Rate of Return in terms of reinvestment
of cash flows, NPV is better than IRR. What are the reinvestment rate for each method?
Net Present Value Method
Internal Rate of Return Method
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A.
B.
C.
D.

Discount Rate
Discount Rate
IRR
IRR

CPA Review School of the Philippines


Discount Rate
IRR
IRR
Discount Rate

Accounting Rate of Return


Net investment
39. The Zambales Company is planning to purchase a new machine which it will depreciate, for
book purposes, on a straight-line basis over a ten-year period with no salvage value and a full
years depreciation taken in the year of acquisition. The new machine is expected to produce
cash flow from operations, net of income taxes, of P175,000 a year in each of the next ten
years. The accounting (book value) rate of return on the average investment is expected to be
15%. How much will the new machine cost?
A. P1,000,000
C. P1,666,667
B. P 700,000
D. P1,800,000
Differential income
146.Maxwell Company has an opportunity to acquire a new machine to replace one of its present
machines. The new machines would cost P90,000, have a five-year life, and no estimated
salvage value. Variable operating costs would be P100,000 per year. The present machine has
a book value of P50,000 and a remaining life of five years. Its disposal value now is P5,000,
but it would be zero after five years. Variable operating costs would be P125,000 per year.
Ignore present value calculations and income taxes.
Considering the five years in total, what would be the difference in profit before income taxes
by acquiring the new machine as opposed to retaining the present one?
A. P10,000 decrease
C. P35,000 increase
B. P15,000 decrease
D. P40,000 increase
Operating cash flow before tax
37. The Mutya ng Pasig Company, a calendar company, purchased a new machine for P280,000
on January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The
accounting (book value) rate of return (ARR) is expected to be 20% on the initial increase in
required investment. On the assumption of a uniform cash inflow, this investment is expected
to provide annual cash flow from operations, before 30 percent income taxes, of
A. P80,000
C. P115,000
B. P91,000
D. P175,000
ARR based on average investment
April 16, 2005

Final Pre-board Examination

41. Water Lily Foundation (WLF), a tax-exempt organization, invested P200,000 in a five-year
project at the beginning of the year. WLF estimates that the annual cash savings from this
project will amount to P65,000. Tax and book depreciation on the project will be P40,000 per
year for five years. On investments of this type, WLFs desired adjusted rate of return is 12%.
Information on present value factors is as follows:
At 12%
At 14%
At 16%
Present value of P1 for 5 periods
0.57
0.52
0.48
Present value of an annuity of 1 for 5 periods
3.6
3.4
3.3
For the projects first year, WLFs accounting rate of return, based on the projects average
book value would be
A. 14.4%
C. 12.5%
B. 13.9%
D. 25.0%
Cash Flows
Net Investment
147.Big City Motors is trying to decide whether it should keep its existing cash washing machine or
purchase a new one that has technological advantages (which translate into cost savings)
over the existing machine. Information on each machine follows:
Existing Machine
New Machine
Original cost
P9,000
P20,000
Accumulated depreciation
5,000
0
Annual cash operating costs
9,000
4,000
Current salvage value in 10 years
2,000
1,000
Remaining life
10 years
10 years
The incremental cost to purchase the new machine is
A. P11,000
C. P13,000
B. P20,000
D. P18,000
148.Gray Company is considering replacing a machine with a book value of P200,000, a remaining
useful-life of 5 years, and annual straight-line depreciation of P40,000. The existing machine
has a current market value of P200,000. The replacement machine would cost P350,000, have
a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%, what would be
the net investment required to replace to the existing machine?
A. P90,000
C. P150,000
B. P210,000
D. P350,000
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Operating Cash Flow After Tax


34. Which of the following is NOT relevant in calculating annual net cash flows for an investment?
(M)
A. Interest payments on funds borrowed to finance the project.
B. Depreciation on fixed assets purchased for the project.
C. The income tax rate.
D. Lost contribution margin if sales of the product invested in will reduce sales of other
products.
149.The Hills Company, a calendar year company, purchased a new machine for P280,000 on
January 1. Depreciation for tax purposes will be P35,000 annually for eight years. The
accounting (book value) rate of return (ARR.) is expected to be 15% on the initial increase in
required investment. On the assumption of a uniform cash inflow, this investment is expected
to provide annual cash flow from operations, net of income taxes, of
A. P35,000
C. P42,000
B. P40,250
D. P77,000
150.A company is considering replacing a machine with one that will save P40,000 per year in
cash operating costs and have P10,000 more depreciation expense per year than the existing
machine. The tax rate is 40%. Buying the new machine will increase annual net cash flows of
the company by
A. P28,000
C. P18,000
B. P24,000
D. P6,000

151. Alpha Company is considering replacing a machine with a book value of


P100,000, a remaining useful life of 4 years, and annual straight-line
depreciation of P25,000. The existing machine has a current market value of
P80,000. The replacement machine would cost P160,000, have a 4year life,
and save P50,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%,
what would be the increase in annual income taxes and annual net cash flow if
the company replaces the machine?
Income Tax
Net Cash Flow
April 16, 2005

A.
P14,000
36,000

B.
P14,000
46,000

C.
P 4,000
46,000

D.
P 4,000
36,000

Final Pre-board Examination

End-of-life Cash Flow


152.Acme is considering the sale of any of the two machines, Machine A or Machine B. Machine A
has a book value of P50,000, 3 years remaining it its useful life with P15,000 annual straightline depreciation. Its market value is P75,000. Machine B has a book value of P75,000, 3years remaining in its life, with P25,000 annual straight-line depreciation. Its current market
value is P50,000. What are the cash flows from selling any of the two machines if the tax rate
is 40%?
A.
B.
C.
D.
Machine A
P65,000
P65,000
P45,000
P45,000
Machine B
P40,000
P60,000
P60,000
P40,000
Comprehensive
153.Bata Company is considering replacing a machine with a book value of P100,000, a remaining
useful life of 5 years, and annual straight-line depreciation of P20,000. The existing machine
has a current market value of P100,000. The replacement machine would cost P150,000, have
a 5-year life, and save P50,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method arid the tax rate is 40%, what would be
the economic values relevant to me decision?
A.
B.
C.
D.
Net Investment
P50,000
P50,000
P150,000
P150,000
Net Incremental Cash Flow
P34,000
P42,000
P34,000
P42,000
Net Incremental Annual Income Taxes
P16,000
P16,000
P3,000
P8,000
Questions 154 & 155 are based on the following information.
Brown Company is considering to replace its old equipment with a new one. The old equipment
had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year. The
old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year life.
Cash savings on operating expenses before taxes amount to P50,000 per year.
154.What is the amount of investment in the new equipment?
A. P160,000
C. P72,000
B. P80,000
D. P68,000
155.How much annual after-tax cash savings (inflow) would the new equipment provide?
A. P36,000
C. P37,200
B. P46,000
D. P14,000
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Payback Period
36. Which of the following is(are) closely relevant to Payback Method? (M)
A. Intermediate cash flows are reinvested at zero percent.
B. The use of cash inflows instead of profit.
C. Avoidance of too much risk of uncertainty.
D. Explicit considerations of timing of cash flows.
E. Prevention of excessive liquidity problems.
F. Cost of capital
A. All of these
C. A, B, C, E
B. A, C, E, F
D. B, C, E
35. The relationship between payback period and IRR is that (E)
A. a payback period of less than one-half the life of a project will yield an IRR lower than the
target rate.
B. the payback period is the present value factor for the IRR.
C. a project whose payback period does not meet the company's cutoff rate for payback will
not meet the company's criterion for IRR.
D. none of the above
156.Energy Company is planning to spend P84,000 for a new machine, to be depreciated on the
straight-line basis over ten years with no salvage value. The related cash flow from operations,
net of income taxes, is expected to be P10,000 a year for each of the first six years and
P12,000 for each of the next four years. What is the payback period?
A. 4.4 years
C. 7.8 years
B. 7.6 years
D. 8.0 years
157.Salve Company is considering an investment in a new cheese-cutting machine to replace its
existing cheese cutter. Information on the existing machine and the replacement machine
follow:
Cost of the new machine
P100,000
Net annual savings in operating costs
20,000
Salvage value now of the old machine
10,000
Salvage value of the old machine in 8 years
0
Salvage value of the new machine in 8 years
20,000
Estimated life of the new machine
8 years
What is the expected payback period for the new machine?
A. 4.00 years
C. 4.50 years
B. 4.33 years
D. 5.00 years
April 16, 2005

Final Pre-board Examination

158.Biloxi Beluga is considering an investment in a new cheese-cutting machine to replace its


existing cheese cutter. Information on the existing machine and the replacement machine
follow.
Cost of the new machine
P40,000
Net annual savings in operating costs
9,000
Salvage value now of the old machine
6,000
Salvage value of the old machine in 8 years
0
Salvage value of the new machine in 8 years
5,000
Estimated life of the new machine
8 years
What is the expected payback period for the new machine?
A. 4.44 years
C. 8.50 years
B. 2.67 years
D. 3.78 years
Bailout Period
159.A project costing P1,800,000 is expected to produce the following annual cash flows (after tax)
and salvage value:
Year
Net cash inflow
Salvage value
1
500,000
800,000
2
500,000
600,000
3
600,000
500,000
4
800,000
400,000
5
700,000
300,000
What is the bailout period for the project?
A. 3.25 yrs
C. 2.73 yrs
B. 2.5 yrs
D. 2.4 yrs
Discounted Cash Flow
160.If Sol Company expects to get a one-year loan to help cover the initial financing of capital
project, the analysis of the project should
A. offset the loan against any investment in inventory or receivable required by the project
B. show the loan as an increase in the investment
C. show the loan as a cash outflow in the second year of the projects life
D. ignore the loan
161.Why do the NPV method and the IRR method sometimes produce different rankings of
mutually exclusive investment projects?
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A. The NPV method does not assume reinvestment of cash flows while the IRR method
assumes the cash flows will be reinvested at the internal rate of return.
B. The NPV method assumes a reinvestment rate equal to me discount rate while the IRR
method assumes a reinvestment rate equal to the internal rate of return.
C. The IRR method docs riot assume reinvestment of the cash flow while the NPV assumes
the reinvestment rate is equal to the discount rate.
D. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while
the IRR method assumes a reinvestment rate equal to the discount rate.
162.The advantage of the Net Present Value method over the Internal Rate of Return method for
screening investment projects is that it:
A. does not consider the time value of money
B. implicitly assumes that the company is able to reinvest cash flows from the project at the
companys discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the
internal rate of return
D. fails to consider the timing of cash flows
163.Which of the following combinations is possible?
Profitability Index
NPV
Greater than 1
Positive
Greater than 1
Negative
Less than 1
Negative
Less than 1
Positive

IRR
Equal cost of capital
Less than cost of capital
Less than cost of capital
Less than cost of capital

38. B Company is considering two alternative ways to depreciate a proposed investment. The
investment has an initial cost of P100,000 and an expected 5 year life. The two alternative
depreciation schedules follow:
Method 1
Method 2
Year 1 depreciation
P40,000
P20,000
Year 2 depreciation
P30,000
P20,000
Year 3 depreciation
P20,000
P20,000
Year 4 depreciation
P10,000
P20,000
Year 5 depreciation
P
0
P20,000
Present value of annuity of 1 for 5 periods at 10% , 3.79079.
Present value of 1, end of periods:
Period
1
2
3
4
5
April 16, 2005

Final Pre-board Examination

PV of 1
0.90909
0.82645
0.75131
0.68301
0.62092
Assuming that the company faces a marginal tax rate of 40%, and has a cost of capital of
10%, what is the net advantage (in present value) in using one method over the other one in
computing depreciation?
A. P7,196
C. P2,879
B. P0
D. P6,342
165.Silliman Corporation purchased a new machine for P450,000. The new machine has an
estimated useful life of five years with no salvage value. The machine is expected to produce
cash flows from operations, net of 40 percent income taxes, as follows:
First year
P160,000
Second year
140,000
Third year
180,000
Fourth year
120,000
Fifth year
100,000
Silliman will use the sum-of-the-years-digits method to depreciate the new machine as
follows:
First year
P150,000
Second year
120,000
Third year
90,000
Fourth year
60,000
Fifth year
30,000
The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12
percent at end of each period are: End of: Period 1 0.8928, Period 2 - 0.79719, Period 3
- 0.71178, Period 4 - 0.63552, Period 5 - 0.56743
The net advantage (in present value) of using the Sum-of-the-Years-Digits method over the
straight-line method at a discount rate of 12 percent is
A. P14,620
C. P 7,340
B. P12,188
D. P 9,750
Net Present Value
40. The King of Hearts, Inc. is considering to replace its old equipment with a more efficient one.
The old equipment was purchased two years ago for P720,000. Though the old equipment will
be used for eight years, the company elected to depreciate it ever 6 years. If the company
would keep and use the old equipment during its remaining useful life, the annual cash
operating expenses will be P640,000. The old equipment can be sold for P380,000.
The new equipment costs the company P900,000. The new equipment will be depreciated
over its useful life of six years without any salvage value. The use of the new equipment will
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decrease the company's cash operating expenses by P175,000, The company is consistently
using straight-line method of depreciation with 32% income tax. The company uses 16% cost
of capital.
The purchase of the new equipment will result to net present value of: (D)
A. P127,351
C. P19,901
B. P(14,143)
D. P11,922
Profitability Index
166.A project has a NPV of P15,000 when the cutoff rate is 10%. The annual cash flows are
P20,505 on an investment of P50,000. The profitability index for tins project is
A. 1.367
C. 2.438
B. 3.333
D. 1.300
41. Sulu Company is considering to acquire a machine in order to reduce its direct labor costs.
This machine shall last for 4 years with no salvage value. His initial analysis indicated that the
time-adjusted rate of return is 15 percent. At 12 percent (cost of capital to finance the purchase
of the machine), the company expects net present value of P5,470,80.
The present value of 1 for four periods at 12 percent is 3.03735 and at 15 percent is 2.85499.
Ignoring income tax considerations, the profitability index is (D)
A. 1.064
C. 1.047
B. 1.183
D. 1.250
Internal Rate of Return
37. A weakness of the internal rate of return method for screening investment projects is that it: (E)
A. does not consider the time value of money
B. implicitly assumes that the company is able to reinvest cash flows from the project at the
company's discount rate
C. implicitly assumes that the company is able to reinvest cash flows from the project at the
internal rate of return
D. fails to consider the timing of cash flows
Net Investment
167.The Forest Company is planning to invest in a machine with a useful life of five years and no
salvage value. The machine is expected to produce cash flow from operations, net of income
taxes, of P20,000 in each of the five years. Forest's expected rate of return is 10%. Information
on present value and future amount factors is as follows.
PERI0D
1
2
3
4
5
April 16, 2005

Present value of P1 at 10%


.909
.826
Present value of an annuity of P1 at 10% .909 1.736
Future amount of P1 at 10%
1.100 1.210
Future amount of an annuity of P1 at 10% 1.00 2.100
How much will the machine cost?
A. P32,220
C. P 75,820
B. P62,100
D. P122,100

Final Pre-board Examination


.751
2.487
1.331
3.310

.683
3.170
1.464
4.641

.621
3.791
1.611
6.105

168.Gene, Inc. invested in a machine with a useful life of six years and no salvage value. The
machine was depreciated using the straight-line method. It was expected to produce annual
cash inflow from operations, net of income taxes, of P2,000. The present value of an ordinary
annuity of P1 for six periods at 10% is 4.355. The present value of P1 for six periods at 10% is
0.5464. Assuming that Gene used a time adjusted rate of return of 10%, what was the amount
of the original investment?
A. P5,640
C. P9,000
B. P8,710
D. P11,280
169.Fordem Co. is considering an investment in a machine that would reduce annual labor costs
by P30,000. The machine has an expected life of 10 years with no salvage value. The
machine would be depreciated according to the straight-line method over its useful life. The
companys marginal tax rate is 30%. Assume that the company will invest in the machine of it
generates a pre-tax internal rate of return of 16%. What is the maximum amount the company
can pay for the machine and still meet the internal rate of return criterion?
A. P180,000
C. P187,500
B. P210,000
D. P144,996
Unit sales
42. King of Kings Company has been renting equipment during peak season in addition to its own
equipment in handling standard materials. The rental cost averages P9,000 a year. The
company's Investment Committee is evaluating the possibility of buying additional equipment
at a cost of P225,000 with an estimated useful life of 5 years and with no salvage value at the
end of 5 years. The committee estimates that it can save P0.25 per unit of material by using its
own equipment. Also, it estimates that 270,000 units can be handled \n each of the 5 years, A
15% discounted rate of return is considered appropriate, ignoring income tax. Present value of
annuity of 1, at 15% for 5 years, is 3,352.
What is the approximate number of units at which the investment can just meet the 15% return
requirement? (D)
A. 232,496
C. 304,496
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B. 268,496

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D. 256,428

Selling price
42. Moorman Products Company is considering a new product that will sell for P100 and have a
variable cost of P60. Expected volume is 20,000 units. New equipment costing P1,500,000
and having a five-year useful life and no salvage value is needed, and will be depreciated
using the straight-line method. The machine has cash operating costs of P20,000 per year.
The firm is in the 40 percent tax bracket and has cost of capital of 12 percent. The present
value of 1, end of five periods is 0.56743; present value of annuity of 1 for 5 periods is
3.60478.
Suppose the 20,000 estimated volume is sound, but the price is in doubt. What is the selling
price (rounded to nearest peso) needed to earn a 12 percent internal rate of return?
A. 81.00
C. P70.00
B. 86.00
D. P90.00
Operating Cash Flow Before Tax
170.Payback Company is considering the purchase of a copier machine for P42,825. The copier
machine will be expected to be economically productive for 4 years. The salvage value at the
end of 4 years is negligible. The machine is expected to provide 15 percent internal rate of
return. The company is subject to 40 percent income tax rate.
The present value of an ordinary annuity of 1 for 4 periods is 2.85498.
In order to realize the IRR of 15 percent, how much is the estimated before-tax cash inflows to
be provided b the machine?
A. P17,860
C. P25,000
B. P15,000
D. P35,700
Investment Decisions
171.Investors, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following
analysis for four projects for the upcoming year:
Project 1
Project 2
Project 3
Project 4
Initial cash outlay
P200,000
P298,000
P248,000
P272,000
Annual net cash inflows
Year 1
P65,000
P100,000
P80,000
P95,000
Year 2
70,000
135,000
95,000
125,000
Year 3
80,000
90,000
90,000
90,000
Year 4
40,000
65,000
80,000
60,000
Net present value
(3.798)
4,276
14,064
14,662
Profitability index
98%
101%
106%
105%
April 16, 2005

Internal rate of return

Final Pre-board Examination


11%

13%

14%

15%

Which project(s) should Investors, Inc. select during the upcoming year under each budgeted
amount of funds?
No Budget Restriction P600,000 Available Funds P300,000 Available Funds
A.
Projects 2, 3, & 4
Projects 3 & 4
Projects 3
B.
Projects 1, 2, & 3
Projects 2, 3 & $
Projects 3 & 4
C.
Projects 1, 3 & 4
Projects 2 & 3
Projects 2
D.
Projects 3 & 4
Projects 2 & 4
Projects 2 & 4
Financial Statement Analysis
Horizontal Analysis
172.Sales for a three year period are: Year 1, P4.0 million, Year 2, P4.6 million, and Year 3, P5.0
million. Using year 1 as the base year, the respective percentage increase in sales in year 2
and 3 are
A. 115% and 125%
C. 115% and 130%
B. 115% and 109%
D. 87% and 80%
Liquidity & Activity Ratios
37. Which ratio is most helpful in appraising the liquidity of current assets?
A. current ratio
C. debt ratio
B. acid-test ratio
D. accounts receivable turnover
173.The days sales-in-receivable ratio will be understated if the company
A. Uses a natural business year for its accounting period
B. Uses a calendar year for its accounting period
C. Uses average receivable in the ratio calculation
D. Has high sales at the end of the year
174.Baguio Company's accounts receivable were P600,000 at the beginning of the year and
P800,000 at the end of the year. Cash sales for the year were P300,000. The accounts
receivable turnover for the year was 5 times. Baguio Company's total sales for the year were:
A. P 800,000
C. P3,300,000
B. P1,300,000
D. P3,800,000
40. The following financial data have been taken from the records of Lotion Company:
Accounts receivable
P200,000
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Accounts payable
80,000
Bonds payable, due in 10 years
500,000
Cash
100,000
Interest payable, due in three months
25,000
Inventory
440,000
Land
800,000
Notes payable, due in six months
250,000
What will happen to the ratios below if Lotion Company uses cash to pay 50 percent of its
accounts payable?
A.
B.
C.
D.
Current Ratio
Increase
Decrease
Increase
Decrease
Acid-test Ratio
Increase
Decrease
Decrease
Increase
Profitability Ratios
175.Selected financial data for May on Company appear below:
Account Balances
Beginning of Year
End of Year
Preferred stock
P125,000
P125,000
Common stock
300,000
400,000
Retained earnings
75,000
185,000
During the year, the company paid dividends of P10,000 on its preferred stock. The company's
net income for the year was P120,000. The company's return on common stockholders' equity
for the year is closest to:
A. 17%
C. 23%
B. 19%
D. 25%
Solvency Ratios
176.A firms financial risk is a function of how it manages and maintains its debt. Which one of the
following sets of ratios characterizes the firm with the greatest amount of financial risk?
A. High debt-to-equity ratio, high interest coverage ratio, volatile return on equity
B. High debt-to-equity ratio, high interest coverage ratio, stable return on equity
C. Low debt-to-equity ratio, low interest coverage ratio, volatile return on equity
D. High debt-to-equity ratio, low interest coverage ratio, volatile return on equity
38. The times interest earned ratio of Maxi Company is 4.5 times. The interest expense for the
year was P20,000, and the companys tax rate is 40%. The companys net income is:
A. P22,000
C. P54,000
April 16, 2005

B. P42,000

Final Pre-board Examination


D. P66,000

Other Ratios
177.Recto Co. has a price earnings ratio of 7, earnings per share of P2.20, and a pay out ratio of
80%. The dividend yield is
A. 80.0%
C. 11.4%
B. 39.3%
D. 31.4%
178.The following were reflected from the records of War Freak Company:
Earnings before interest and taxes
Interest expense
Preferred dividends
Payout ratio
Shares outstanding throughout 2003
Preferred
Common
Income tax rate
Price earnings ratio
The dividend yield ratio is
A. 0.50
C. 0.12
B. 0.40
D. 0.08
39. The Delta Company projects the following for the upcoming year:
Earnings before interest and taxes
Interest expense
Preferred stock dividends
Common stock dividend payout ratio
Average number of common shares outstanding
Effective corporate income tax rate
The expected dividend per share of common stock is
A. P1.70
C. P2.10
B. P1.86
D. P1.00

P1,250,000
250,000
200,000
40 percent
20,000
25,000
40 percent
5 times

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

39. Strada Corporation was organized on January 1 with the following capital structure:
10% cumulative preferred stock, par and liquidation value of P110; authorized, issued and
outstanding 2,000 shares P200,000
Common stock, par value, P5; authorized 40,000 shares;
Issued and outstanding 20,000 shares 100,000
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Adventures net income for the first year ended December 31 was P1,880,000, but no
dividends were declared. How much was Adventures book value per common share at
December 31?
A. P97
C. P99
B. P98
D. P120
41. The Dawson Corporation projects the following for the year 2003.
Earnings before interest and taxes
P35 million
Interest expense
P 5 million
Preferred stock dividends
P 4 million
Common stock dividend payout ratio
30%
Common shares outstanding
2 million
Effective corporate income tax rate
40%
The expected common stock dividend per share by Dawson Corporation for 1995 is
A. P2.34
C. P1.80
B. P2.70
D. P2.10
Integrated Ratios
28. Calumpang Company has a total assets turnover of 0.30 and a profit margin of 10 percent.
The president is unhappy with the current return on assets, and he thinks it could be doubled.
This could be accomplished (1) by increasing the profit margin to 12 percent, and (2) by
increasing the total assets turnover. What new asset turnover ratio, along with the 12 percent
profit margin, is required to double the return on assets?
A. 25%
C. 50%
B. 36%
D. 60%
179.JayR has debt ratio of 0.50, a total asset turnover of 0.25, and a profit margin of 10%. The
president is unhappy with the current return on equity, and he thinks it could be doubled. This
could be accomplished: (1) by increasing the profit margin to 14%; and, (2) by increasing debt
utilization. Total asset turnover will not change.
What new debt ratio, along, with 14% profit margin is required to double the return on equity?
A. 0.75
C. 0.65
B. 0.70
D. 0.55
180.Glo expects sales for 2002 to be P2,000,000, resulting in a return on sales of 10%. The
dividend payout rate is 60%. Beginning stockholders equity was P850,000 and current
liabilities are projected to be P300,000 at the end of 2002. What are the total equities available
if the ratio of long-term debt to stockholders equity is 60%?
April 16, 2005

A. P1,788,000
B. P1,980,000

Final Pre-board Examination


C. P2,046,000
D. P858,000

40. Assume you are given the following relationships for the Marhya Company:
Sales/total assets
Return on assets (ROA)
Return on equity (ROE)
The Marhya Companys debt ratio is
A. 40%
C. 35%
B. 60%
D. 65%

1.5X
3%
5%

181.Selected data from Shyr Companys year-end financial statements are presented below. The
difference between average and ending inventory is immaterial.
Current ratio
2.0
Quick ratio
1.5
Current liabilities
P120,000
Inventory turnover (based on cost of sales)
8 times
Gross profit margin
40%
Shyrs net sales from the year were
A. P800,000
C. P480,000
B. P1,200,000
D. P672,000
182.Salami Company has a total assets turnover of 0.30 and a profit margin of 10 percent. The
president is unhappy with the current return on assets, and he thinks it could be doubled. This
could be accomplished (1) by increasing the profit margin to 15 percent, and (2) by increasing
the total assets turnover. What new asset turnover ratio, along with the 15 percent profit
margin, is required to double the return on assets?
A. 35%
C. 40%
B. 45%
D. 50%
42. Delo Co. has a debt ratio of 0.50, a total assets turnover of 0.25, and a profit margin of 10%.
The president is unhappy with the current return on equity, and he thinks it could be doubled.
This could be accomplished (1) by increasing the profit margin to 14% and (2) increasing debt
utilization. Total assets turnover will not change. What new debt ratio, along with the 14%
profit margin, is required to double the return on equity?
A. 0.75
C. 0.65
B. 0.70
D. 0.55
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Working Capital Finance


Working Capital Financing Policy
Conservative Financing Policy
183.As a company becomes more conservative with respect to working capital policy, it would tend
to have a(n).
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Decrease in the operating cycle
C. Increase in the operating cycle
D. Increase in the ratio of current assets to noncurrent liabilities
Aggressive Financing Policy
184.Jekel Company follows and aggressive financing policy in its working capital management
while Michael Corporation follows a conservative financing policy. Which one of the following
statements is correct?
A. Jekel has low ratio of short-term debt to total debt while Michael has a high ratioof shortterm debt to total debt
B. Jekel has a low current ratio while Michael has a high current ratio
C. Jekel has less liquidity risk while Michael has more liquidity risk
D. Jekel finances short-term assets with long-term debt while Michael finances short-term
assets with short-term debt.
185.Nutty Co. has total fixed assets of P100,000 and no current liabilities. The table below displays
its wide variation in current asset components.
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
Cash
P16,000
P10,000
P11,000
P18,000
Accounts receivable
70,000
30,000
40,000
90,000
Inventory
20,000
60,000
70,000
10,000
Total
P106,000
P100,000
P121,000
P118,000
If Nuttys policy is to finance all fixed assets and half the permanent current assets with longterm financing and rest with short time-financing, what is the maximum level of short-term
financing?
A. P68,000
C. P150,000
B. P50,000
D. P71,000
Cash Management
Optimal cash conversion size
April 16, 2005

Final Pre-board Examination

186.Gear Inc. has a total annual cash requirement of P14,700,000 which are to be paid uniformly.
Gear has the opportunity to invest the money at 24% per annum. The company spends, on the
average, P40 for every cash conversion to marketable securities.
What is the optimal cash conversion size?
A. P50,000
C. P80,000
B. P62,500
D. P70,000
187.Morr Co. has a total annual cash requirement of P9,075,000 which are to be paid uniformly.
Morr has the opportunity to invest the money at 24% per annum. The company spends, on the
average, P40 for every cash conversion to marketable securities.
What is the optimum average cash balance?
A. P60,000
C. P43,000
B. P55,000
D. P27,500
Total cost of keeping cash
188.Ocampo Co. estimates its total annual cash requirements at about P600,000. It costs the
company P25 to convert cash from marketable securities and vice versa. Ocampos yield on
its temporary investments is 12%. What is the total costs of keeping Ocampos cash?
A. P2,846
C. P6,000
B. P1,897
D. P3,242
Lockbox System
189.The Alabang Company has a daily average collection of checks of P250,000. It takes the
company 4 days to convert the checks to cash. Assume a lockbox system would have a net
cost of P25,000 per year, but any additional funds made available could be invested to net 8
percent per year. Should Alabang adopt the lockbox system?
A. Yes, the system would free P250,000 in funds
B. Yes, the benefits of the lock-box system exceed the costs
C. No, the benefit is only P10,000
D. No, the firm would lose P5,000 per year if the system were used
Receivables Management
Credit policy
190.It is held that the level of accounts receivable that a firm has or holds reflects both the volume
of a firms sales on account and a firms credit policies. Which one of the following items is not
considered as part of a firms credit policy?
A. The maximum risk group to which credit should be extended.
B. The extent (in terms of money) to which a firm will go to collect an account.
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C. The length of time for which credit is extended.


D. The size of the discount that will be offered.
Incremental investment in receivables
191. Lipa Company currently has annual sales of P2,000,000. Its average collection period is 40
days, and bad debts are 5 percent of sales. The credit and collection manager is considering
instituting a stricter collection policy, whereby bad debts would be reduced to 2 percent of total
sales, and the average collection period would fall to 30 days. However, sales would also fall
by an estimated P250,000 annually. Variable costs are 60 percent of sales and the cost of
carrying receivables is 12 percent. Assume a tax rate of 40 percent and 360 days per year.
What would be the incremental investment in receivables if the change were made?
A. P(16,667)
C. P(48,611)
B. P(27,167)
D. P(45,833)
Increase in accounts receivable
192.Matang-Lawins budgeted sales for the coming year are P48,000,000 of which 80% are
expected to be credit sales at a terms of n/30. Matang-Lawin estimates that a proposed
relaxation of credit standards would increase credit sales by 30 percent and increase the
average collection period from 30 days to 45 days. Based on a 360-day year, the proposed
relaxation of credit standards would result in an expected increase in the accounts receivable
balance of
A. P3,440,000
C. P3,040,000
B. P1,440,000
D. P960,000
193.Relax Companys budgeted sales for the coming year are P40,500,000 of which 80% are
expected to be credit sales at terms of n/30. Relax estimates that a proposed relaxation of
credit standards will increase credit sales by 20% and increase the average collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to
standards will result in an expected increase in the average accounts receivable balance of
A. P540,000
C. P900,000
B. P2,700,000
D. P1,620,000
194.Real Companys budgeted sales for the coming year are P50,000,000 of which 75% are
expected to be credit sales at terms of n/30. Real estimates that a proposed relaxation of
credit standards will increase credit sales by 20% and increase the average collection period
from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit
standards will increase average accounts receivable balance by:
A. P1,200,000
C. P1,875,000
April 16, 2005

B. P3,125,000

Final Pre-board Examination


D. P5,000,000

Inventory Management
Economic Order Quantity
195.Gerstein Company manufactures a line of deluxe office fixtures. The annual demand for its
miniature oak file is estimated to be 5,000 units. The annual cost of carrying one unit in
inventory is P10, and the cost to initiate a production run is P1,000. There are no miniature oak
files on hand, and Gerstein has scheduled four equal production runs of the miniature oak file
for the coming year, the first of which is to be rum immediately. Gerstein has 250 business
days per year. Assume that sales occur uniformly throughout the year and that production is
instantaneous.
The number of production runs per year of the miniature oak files that would minimize the sum
of carrying costs and setup costs for the coming year is
A. 7
C. 4
B. 2
D. 5
196.Gleim Company, which manufactures a line of appliances, has an annual demand for its HD
washing machine estimated at 7,500 units. The annual cost of carrying one unit of inventory is
P200, and the cost to initiate a production run is P5,000. There are no HD washing machine
on hand, and Gleim has scheduled 5 equal production runs of HD washing machines for the
coming year. Gleim has 250 business days per year. Assume that sales occur uniformity
throughout the year and that production is instantaneous.
If Gleim does not maintain a safety stock, the estimated total carrying costs and total set-up
costs for the coming year are:
A.
B.
C.
D.
Carrying Costs
P150,000
P300,000
P150,000
P300,000
Set-up Costs
25,000
25,000
5,000
5,000
Annual cost of keeping inventory
197.The Cindy Fashion uses about 200,000 yards of a particular fabric each year. The fabric costs
P150 per yard. The current policy is to order the fabric 8 times a year. Incremental ordering
costs ate about P900 per order, and incremental carrying costs are about P0.75 per yard,
much of which represents the opportunity cost of the funds tied up in inventory. How much
total annual costs are associated with the current inventory policy?
A. P16,575
C. P25,950
B. P18,750
D. P9,200
Opportunity cost
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198.Luzon Fabricators, Inc. estimates that 60,000 special components will be used in the
manufacture of a specialty steel window for the whole next year. Its supplier quoted a price of
P60 per component. Luzon prefer to purchase 5,000 units per month, but its supplier could not
guarantee this delivery schedule. In order to ensure availability of these components, Luzon is
considering the purchase of all 60,000 units at the beginning of the year. Assuming Luzon can
invest cash at 8%, the companys opportunity cost of purchasing the 60,000 units at the
beginning of the year is
A. P132,000
C. P150,000
B. P144,000
D. P264,000
Service level
199.The sales office of Hermit Company has developed the following probability distributed for
daily sales of a perishable product.
X (Units Sold)
P(Sales-X)
200
0.2
250
0.5
300
0.2
350
0.1
The product is restocked at the start of each day. If the company desires a 90% service level in
satisfying sales demand, the initial stock balance for each day should be
A. 245
C. 315
B. 300
D. 220
Safety Stock & Reorder Point
200.When a specified level of safety stock is carried for an item in inventory, the average inventory
level for that item
A. decreased by the amount of the safety stock
B. is one-half the level of the safety stock
C. Increases by one-half the amount of the safety stock
D. Increases by the amount of the safety stock
201.The Glimpse Corporation purchases 60,000 headbands per year. The average purchase lead
time is 20 working days. Maximum lead time is 27 working days. The corporation works 240
days per year. The appropriate safety stock level and the reorder point for the company are:
A.
B.
C.
D.
Safety Stock
1,750
1,750
1,167
1,167
Reorder Point
6,750
5,250
6,750
5,250
April 16, 2005

Final Pre-board Examination

Stockout Cost
202.Which of the following items is irrelevant for a company that is attempting to minimize the cost
of the stockout?
A. Cost of placing an order
C. Storage cost of inventory
B. Contribution margin on lost sales
D. Size of the safety stock
Optimal Safety Stock Level
203.Each stockout of a product sold by FM Co. costs P1,750 per occurrence. The companys
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
product 20 times a year at a cost of P100 per order. The probability of a stockout at various
levels of safety stock are:
Units of Safety Stock
Probability of Stockout
0
0.50
100
0.30
200
0.14
300
0.05
The optimal safety stock level for the company based on the units of safety stock level above
is
A. 0 units
C. 300 units
B. 100 units
D. 400 units
Trade Credit
204.If a firm purchases raw materials from its supplier on a 2/10, n/50 term, the equivalent annual
interest (using 360-day year) of giving up a cash discount and making payment on the 60th
day is
A. 14.73%
C. 14.69%
B. 18.37%
D. 12.29%
205.If a retailers term of trade are 3/10, net 45 with supplier, what is the cost on an annual basis of
not taking the discount? Assume a 360-day year.
A. 24.00%
C. 24.74%
B. 37.11%
D. 31.81%
206.Calvin Lopez regularly purchases from Jackson at terms of 3/10, n/45. What is the simple
nominal cost of foregoing the discount if Calvin pays on the 55th day?
A. 24.74%
C. 20.24%
B. 31.81%
D. 24.49%
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Final Pre-board Examination

207.If a firm purchases raw materials from its supplier on a 3/10, n/50 term, the approximate
annual interest rate (using 360-day year) of giving up a cash discount and making payment on
the 60th day is
A. 22.27 percent
C. 18.37 percent
B. 27.84 percent
D. 14.69 percent

and the company will pay P2.675 at the end of the current year. Mickey should pay P2.50
flotation cost.
What is the expected returns on retained earnings for Mickey Company?
A. 17.77 percent
C. 18.45 percent
B. 18.89 percent
D. 19.72 percent

Short-term Financing
208.The Dean Company has an outstanding 1 year bank loan of P800,000 at a stated interest rate
of 8%. In addition, Dean is required to maintain a 20% compensating balance in its checking
account. Assuming Dean would normally maintain a zero balance in its checking account , the
effective interest rate on the loan is
A. 8.0%
C. 11.11%
B. 10.0%
D. 6.4%

213.The Mints Companys last dividend was P4.50; its growth rate is 6 percent and the stock now
sells for P60. Flotation cost is P5.00
What is Mint Companys cost of new common stock?
A.
8.67 percent
C. 14.18 percent
B. 14.67 percent
D. 13.50 percent

209.Alice Company borrows from a bank a certain loan at a stated discount rate of 12 percent per
annum. The bank requires 10 percent of loan as compensating balance in its new checking
account. The loan is payable at the end of 6 months. The effective interest rate if this loan is
A. 28.21%
C. 14.29%
B. 27.27%
D. 15.38%
210.Bratas Company is negotiating for a 4-month discounted loan for P200,000 at 12% per annum.
The negotiated loan requires a 20% compensating balance. What is the effective interest rate
of the loan?
A. 17.65%
C. 15.59%
B. 15.79%
D. 15.00%
Cost of Capital
Cost of Debt
211. The Medium Companys bonds have 10 years remaining to maturity. Interest is paid annually;
the bonds have a P1,000 face value; and the coupon interest rate is 9 percent.
What is the estimated yield to maturity of the bonds at their current market price of P900?
A. 10.64 percent
C. 8.53 percent
B. 10.00 percent
D. 7.50 percent
Dividend Growth Model
212.The dividends and stock price of Mikey Company are expected to grow at 7 percent per year
after this year. Mickeys common stock sells for P25 per share, its last dividend was P2.50
April 16, 2005

214.Miladym Inc. paid cash dividend to its common shareholders over the past twelve months of
P2.20 per share. The current market value of the common stock is P40 per share and
investors are anticipating the common dividend to grow at a rate of 6% per annum. The cost to
issue new common stock will be 5 percent of the market value. The cost of retained earnings
and new common stock, respectively, are
A.
B.
C.
D.
Retained earnings
12.14%
11.83%
11.79%
12.14%
Common stock
11.83%
12.14%
12.14%
11.79%
Capital Asset Pricing Model
215.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 which
is adjusted by the company's beta. What is MNO's expected rate of return if the equity market
is expected to earn 12 percent; the treasury bonds are currently yielding 5 percent. The beta
coefficient for MNO is estimated to be 0.60. MNO is subject to an effective corporate income
tax rate of 40 percent.
A. 12.00 percent
C. 9.20 percent
B. 12.20 percent
D. 7.20 percent
216.Based on the following data, compute the market return for Boxs stock:
Required return on Box common
Beta coefficient
Risk-free rate
A. 13.0 percent
C. 25.0 percent
b. 18.0 percent
D. 16.0 percent

15 percent
1.5
9.0 percent

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Weighted-Average Cost of Capital


217.A firm maintains a debt/equity ratio of 1.0. The debt consists of bonds with a before tax cost of
9%. The equity consists of common stock with a cost of 18%. The marginal corporate tax rate
is 40%. What is the weighted average cost of capital?
A. 8.1%
C. 10.8%
B. 9.9%
D. 11.7%
Marginal Cost of Capital
218.Raiders, Inc. just paid P3.00 cash dividend per share. Over the past 5 years, Raiders
dividends averaged an 8 percent growth. The common share of Raiders currently sells at
P62.50; flotation cost on common shares is P2.50 per share.
What is the marginal cost of capital for new issues of common shares?
A. 13.0 percent
C. 13.2 percent
B. 13.4 percent
D. 12.8 percent
219.The Beta Corporation asks you to determine its marginal cost of capital. Betas current capital
structure consists of 45 percent debt, 15 percent preferred stock and 40 percent common
equity. The separate marginal costs of the various components of the capital structure are as
follows: debt, after-tax 5.0 percent; preferred stock, 9 percent; retained earnings, 12 percent;
and new common stock, 13.5 percent. If Beta has P15 million investible retained earnings,
and Beta has an opportunity to invest in an attractive project that costs P60 million, what is
the marginal cost of capital of Beta Corporation?
A. 8.40 percent
C. P9.00 percent
B. 8.63 percent
D. P9.88 percent
230.The Cardinal Company sets the following capital structure for 2003:
Debt
50.0%
Preferred equity
10.0%
Common Equity
40.0%
The company is planning to invest in a project that requires the company P4,000,000 costs.
At the size of the new funds required, the estimated individual marginal cost of capital are:
Debt (after tax)
9.00 percent
Preferred
12.50 percent
Retained earnings
14.00 percent
Common shares
15.00 percent
What are the marginal weighted average cost of capital for Cardinal Company if it has
available retained earnings of P600,000 and P1,600,000 respectively?
Available Retained Earnings
April 16, 2005

A.
B.
C.
D.

Final Pre-board Examination


P600,000
11.75%
11.60%
11.75%
11.55%

P1,600,000
11.35%
11.35%
11.75%
11.55%

Retained Earnings Breakpoint


231.Resi, Inc. expects net income of P800,000 for the next fiscal year. Its targeted and current
capital structure is 40% debt and 60% common equity, The director of capital budgeting has
determined that the optimal capital spending for next year is P1,200,000. If Resi follows a strict
residual dividend policy, what is the expected dividend payout ratio for next year?
A. 80.0%
C. 40.0%
B. 66.7%
D. 10.0%
Quantitative Methods
Linear Programming
232.Anderson Co. manufactures two different products, A and B. The company has 100 pounds of
raw materials and 300 direct labor hours available for production. The time requirement and
contribution margins per unit are as follows:
A
B
Raw materials per unit (lbs)
1
2
Direct labor hours per unit
4
2
Contribution margin per unit
P4
P5
The objective function for maximizing profits and the equation for the constrain on raw
materials are:
Objective Function
Constraint on raw materials
A.
Max P1A + P2B
4A + 2B=100
B.
Max P4A + P5B
1A + 2B=100
C.
Max P4A + P2B
4A + 5B=100
D.
Min P4A + P5B
4A + 5B=300
PERT-CPM
233.AGL Builders uses the critical path method to monitor construction jobs. The company is
currently 2 weeks behind schedule on Job 501, which is the subject to P10,500 per week
completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and critical
path A-D-E-F-G-H-I has a normal completion time of 22 weeks. The following activities can be
crashed
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Activities
Cost to Crash 1 week
Cost to Crash 2 weeks
BC
P8,000
P15,000
DE
P10,000
P19,600
EF
P8,800
P18,500
AGL desires to reduce the normal completion time of Job 501 and, at the same time, report the
highest possible income for the year. AGL should crash
A. Activity BC 1 week and activity EF 1 week
B. Activity BC 2 weeks
C. Activity EF 2 weeks
D. Activity DE 1 week and activity EF 1 week
234.Castle Building Company uses the critical path method to monitor construction jobs. The
company is currently 2 weeks behind schedule on Job WW, which is subject to a P10,500-perweek completion penalty. Path A-B-C-F-G-H-I has a normal completion time of 20 weeks, and
critical path A-D-E-F-G-H-I has a normal completion time of 22 weeks.

Final Pre-board Examination

The following activities can be crashed.


Activities
Cost to Crash 1 Week
Cost to Crash 2 Weeks
B-C
P 8,000
P15,000
D-E
10,000
19,600
E-F
8,800
19,500
Castle desires to reduce the normal completion time of Job WW and, at the same time, report
the highest possible income for the year. Castle should crash
A. activity B-C 1 week and activity EF 1 week
B. activity B-C 2 weeks
C. activity D-E 1 week and activity B-C 1 week
D. activity D-E 1 week and activity E-F 1 week
Probabilities
235.CTV Company has three sales departments. Department FA process about 50 percent of
CTVs sales, Department TA about 30 percent, and Department PA about 20 percent. In the
past, Departments FA, TA, and PA had error rates of about 2 percent, 5 percent, and 2.5
percent, respectively. A random audit of the sales records yields a recording error of sufficient
magnitude to distort the companys results. The probability that Department FA is responsible
for this error is
A. .50
C. .02
B. .33
D. .25
Expected Value
236.The following table represents payoffs for farm products for three different sales levels. Which
one of the products would be illogical if only three products can be produced?
Demand
Product A
Product B
Product C
Product D
Sales 1
(10,000)
6,000
8,000
(12,000)
Sales 2
26,000
19,000
22,000
17,000
Sales 3
31,000
38,000
33,000
37,000
A. Product A
C. Product C
B. Product B
D. Product D
237.MOYMOY, Inc. has been operating the concession stands at the university football stadium.
The university has had successful football teams for many years; as a result the stadium is
always full. The university is located in an area that suffers no rain during the football season.
From time to time, MOYMOY has found itself very short of hotdogs and at other times it has

April 16, 2005

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Final Pre-board Examination

had many left. A review of the records of sales of the past five seasons revealed the following
frequency of hot dogs sold:
Total Games
10,000 hot dogs
5 times
20,000 hot dogs
10 times
30,000 hot dogs
20 times
40,000 hot dogs
15 times
50 total games
Hotdogs sell for P5.00 and cost MOYMOY P3 each. Unsold hotdogs are given to a local
orphanage without charge.
You have started and completed constructing a payoff table (conditional profits) as follows:
Stocking Actions
Demand
10,000
20,000
30,000
40,000
10,000
P20,000
P(10,000)
P(40,000)
P(70,000)
20,000
20,000
40,000
10,000
(20,000)
30,000
20,000
40,000
60,000
30,000
40,000
20,000
40,000
60,000
80,000
What are the expected payoff of stocking 30,000 hotdogs and the expected value of perfect
information?
A.
B.
C.
D.
Payoff of stocking 40,000
P18,000
P40,000
P40,000
P18,000
EV of Perfect Information
P18,000
P18,000
P40,000
P40,000

Decision Tree
240.Express Co. is developing a silver mine at a cost of P5 million. There is a 20% probability that
silver worth of P15 million can be sold. There is a 20% probability that the silver will only be
worth P500,000. What is the maximum Express would be willing to spend to develop the
mine?
A. P10,000,000
C. P3,100,000
B. P5,000,000
D. P0

Questions 238 & 239 are based on the following information.


A beverage stand can sell either softdrinks or coffee on any given day. If the stand sells softdrinks
and the weather is hot, it will make P2,500; if the weather is cold, the profit will be P1,000. If the
stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold, the profit will be
P2,000. The probability of cold weather on a given day at this time is 60%.

243.Moss Point Manufacturing recently completed and sold an order of 50 units that had the
following costs:
Direct materials
P 1,500
Direct labor (1,000 hours @ P8.50)
8,500
Variable overhead (1,000 hours at P4.00)
*4,000
Fixed overhead
**1,400
*Appiied on the basis of direct labor hoars.
**Applrcd at the rate of 10% of variable cost
The company has now been requested to prepare a bid for 150 units of fee some product
If an 80 percent learning curve is applicable, Moss Point's total cost on this order would be
estimated at
A. P26,400
C. P37,950
B. P31,790
D. P38,500

238.The expected payoff if the vendor has perfect information is


A. P3,900
C. P1,360
B. P2,200
D. P1,960
239.The expected payoff for selling coffee is
A. P1,360
B. P2,200
April 16, 2005

C. P3,900
D. P1,960

Learning Curve
241.Soft, Inc. has a target total labor cost of P1,500 for the first four batches of a product. Labor is
paid P10 an hour. If Soft expects an 80% learning curve, how many hours should the first
batch take?
A. 150 hours.
C. 96.0 hours
B. 58.6 hours
D. 24.0 hours
242.Taal Company manufactures specialty components for the electronics industry in a highly labor
intensive environment. May on Company has asked Taal to bid on a component that Taal
made for May on last month. The previous order was for 80 units and required 120 hours of
direct labor to manufacture. Mayon would now like 240 additional components. Taal
experiences an 80% learning curve on all of its jobs. The number of direct labor hours needed
for Taal to complete 240 additional components is
A. 360.0
C. 307.2
B. 187.2
D. 76.8

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244.Moss Point Manufacturing recently completed and sold an order of 50 units that had the
following costs:
Direct materials
P1,500
Direct labor (1,000 hours @ P8.50)
8,500
Variable overhead (1,000 hours at P4.00)
*4,000
Fixed overhead
**1,400
P15,400
*Applied on the basis of direct labor hours.
**Applied at the rate of 10% of variable costs.
The company has now been requested to prepare a bid for 350 units of the same product.
If an 80 percent learning curve is applicable, Moss Points total costs on this order would be
estimated at
A. P26,400
C. P37,950
B. P31,790
D. P54,120
Information Systems
245.Which of the following is not a characteristic of a batch processing system?
A. The collection of like transactions which are sorted and processed sequentially against a
master file
B. Keypunching of transactions, followed by machine processing
C. The production of numerous printouts
D. The posting of transaction, as it occurs, to several files without intermediate printouts.
246.The batch processing of business transactions can be the appropriate mode when
A. the sequence of master file records is not relevant
B. timeliness is a major issue
C. a single handling of the data is desired
D. economy of scale can be gained because of high volume of transactions
43. The least risky strategy for converting from a manual to a computerized accounts receivable
system would be a
A. direct conversion
C. parallel conversion
B. pilot conversion
D. data base conversion
247.The real-time processing system of business transactions cannot be the appropriate mode
when
A. Economy of scale can be gained because of high volume of transactions
B. Timeless is a major issue
April 16, 2005

Final Pre-board Examination

C. A single handling of data is desired


D. Master file data are accessed randomly
248.Which of the following comprises all of the data components of the data processing cycle?
A. Batching, processing, output.
B. Collection, refinement, processing, maintenance, output.
C. Input, classifying, Batching, verification, transmission
D. Collection, refinement, storing, output.
249.All activity related to a particular application in a manual system is recorded in a journal. The
name of the corresponding item in a computerized system is a
A. master file
C. transaction file
B. year-to-date file
D. current balance file
250.The process of monitoring, evaluating and modifying a system as needed is referred to as
system
A. Design
C. Review
B. Analysis
D. Maintenance
5. The proper sequence of activities in the systems development life cycle is
A. Design, analysis, implementation, and operation.
B. Design, implementation, analysis, and operation.
C. Analysis, design, implementation, and operation.
D. Programming, analysis, implementation, and operation.
251.The process of developing specifications for hardware, software, personnel hours, data
resources, and information products required to develop a system is referred to as
A. systems analysis
C. systems design
B. systems feasibility
D. systems maintenance
252.The process of monitoring, evaluating, and modifying a system as needed is referred to as
systems
A. Analysis
C. Maintenance
B. Design
D. Implementation
253.An integrated set of computer programs that facilitates the creation, manipulation, and
querying of integrated files is called
A. A translator
C. An operating system
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B. A Database management system

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D. A flat file system

254.One of the first steps in the creation of a database is to


A. define common variables and fields used throughout the firm
B. increase the secondary storage capacity,
C. obtain software that will facilitate data retrieval.
D. integrate the accounting system into the data base.
255.A system with several computers that are connected for communication and data transmission
purposes but that permits each computer to process its own data is a
A. distributed data processing network
C. decentralized network
B. centralized network
D. multidrop network
256.A major advantage of obtaining a package of application software from software vendor is
A. The likelihood of reducing the time span from planning to implementation
B. The ability to more easily satisfy the unique needs of users
C. Greater operating efficiency from the computer
D. The assurance the programs will be written in a high-level language.
257.A major advantage of obtaining a package of applications programs from a software vendor is
A. the likelihood of reducing the time span from planning to implementation.
B. the ability to more easily satisfy the unique needs of users
C. greater operating efficiency from the computer
D. the assurance that the programs will be written in a high-level language
258.The least risky strategy for converting from a manual to a computerized accounts receivable
system would be a
A. direct conversion
C. pilot conversion
B. parallel conversion
D. database conversion
259.Turnaround document
A. Generally circulate only within the computer center
B. Can be read and processed only by the computer
C. Are generated by the computer and eventually return to it
D. Are only used internally in an organization
4. Of the following, the greatest advantage of a database architecture is
A. Data redundancy can be reduced.
April 16, 2005

Final Pre-board Examination

B. Conversion to a database system is inexpensive and can be accomplished quickly.


C. Multiple occurrences of data items are useful for consistency checking.
D. Backup and recovery procedures are minimized.
Situational
Cost-Volume-Profit Analysis
Questions 260 through 265 are based on the following:
Pullman Company is a small but growing manufacturer of telecommunications equipment. The
company has no sales force of its own; rather, it relies completely on independent sales agents to
market its products. These agents are paid a commission of 15% of selling price for all items sold.
Maui Soliman, Pullmans controller, has just prepared the companys budgeted income statement
for next year. The statement follows:
Pullman Company
Budgeted Income Statement
For the Year Ended December 31
Sales
Manufacturing costs:
Variable
Fixed overhead
Gross margin
Selling and administrative costs:
Commissions to agents
Fixed marketing costs
Fixed administrative costs
Net operating income
Less fixed interest cost
Income before income taxes
Less income tax (30%)
Net income
*Primarily depreciation on storage facilities

P16,000,000
P7,200,000
2,340,000
2,400,000
*120,000
1,800,000

9,540,000
6,460,000

4,320,000
2,140,000
540,000
1,600,000
480,000
P 1,120,000

As Maui handed the statement to Kim Viceroy, Pullmans president, she commented, I went ahead
and used the agents 15% commission rate in completing these statements, but weve just learned
that they refuse to handle our products next year unless we increase the commission rate to 20%.
Thats the last straw, Kim replied angrily. Those agents have been demanding more and more,
and this time theyve gone too far. How can they possibly defend a 20% commission rate?
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They claim that after paying for advertising, travel, and the other costs of promotion, theres
nothing left over for profit, replied Maui.
I say its just plain robbery, retorted Kim. And I also say its time we dumped those guys and got
our own sales force Can you get your people to work up some cost figures for us to look at?
Weve already worked them up, said Maui. Several companies we know about pay a 7.5%
commission to their own salespeople, along with a small salary. Of course, we would have to
handle all promotion costs, too. We figure our fixed costs would increase by P2,400,000 per year,
but that would be more than offset by the P3,200,000 (20% x P16,000,000) that we would avoid on
agents commissions.
The breakdown of the P2,400,000 cost figure follows:
Salaries:
Sales manager
P 100,000
Salespersons
600,000
Travel and entertainment
400,000
Advertising
1,300,000
Total
P2,400,000
Super, replied Kim. And I note that the P2,400,000 is just what were paying the agents under
the old 15% commission rate.
Its even better than that, explained Maui. We can actually save P75,000 a year because thats
what were having to pay the auditing firm now to check out the agents reports. So our overall
administrative costs would be less.
Pull all of these number together and well show them to the executive committee tomorrow, said
Kim. With the approval of the committee, we can move on the matter immediately.
260.What is the breakeven point in pesos for next year assuming that the agents commission rate
remains unchanged at 15%?
A. P10,650,000
C. P 9,000,000
B. P12,000,000
D. P10,750,000
261.What is the breakeven point in pesos for next year assuming that the agents commission rate
is increased to 20%?
A. P13,171,000
C. P13,714,286
B. P15,000,000
D. P12,750,000
262.What is the breakeven point in pesos for next if the company employs its own sales force?
A. P15,000,000
C. P13,090,909
B. P12,954,545
D. P15,157,895
April 16, 2005

Final Pre-board Examination

263.Assume that Pullman Company decides to continue selling through agents and pays the 20%
commission rate. The volume of sales that would be required to generate the same net
income as contained in the budgeted income statement for next year would be:
A. P18,285,714
C. P19,225,000
B. P18,368,421
D. P20,414,714
264.The volume of sales at which net income would be equal regardless of whether Pullman
Company sells through agents (at a 20% commission rate) or employs its own sales force:
A. P11,625,000
C. P19,200,000
B. P12,000,000
D. P18,600,000
265.At a sales volume level of 2,250 units, Luzon Companys contribution margin is one and onehalf of the fixed costs of P36,000. Contribution margin is 30% How many units must be sold by
the company to breakeven?
A. 1,250
C. 2,2580
B. 1,500
D. 2,520
Questions 45 through 50 are based on the following information:
San Carlos operates a general hospital but rents space and beds to separate entities for
specialized treatment such as pediatrics, maternity, psychiatric, etc. San Carlos charges each
separate entity for common services to its patients like meals and laundry and for all administrative
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
entity. Space and bed rentals are fixed for the year.
For the entire year ended June 30, the Pediatrics Department at San Carlos Hospital charged each
patient an average of P650 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenue of P10,676,250.
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patient Days
Bed Capacity
Dietary
P 328,500
Janitorial
P 118,400
Laundry
197,100
Lab, other than direct charges to patients
410,625
Pharmacy
410,625
Repairs and maintenance
65,700
66,045
General administrative services
1,218,780
Rent
2,546,710
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Billings and collections


689,850
Bad debt expense
246,375
Others
114,975
240,315
Total
P2,463,750
P4,190,250
The only personnel directly employed by the Pediatrics Department are supervising nurses,
nurses, and aides. The hospital has minimum personnel requirements based on total annual
patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
Annual Patient Days
10,000 14,000
14,001 17,000
17,001 23,725
23,726 25,550
25,551 27,375
27,376 29,200

Aides
21
22
22
25
26
29

Nurses
11
12
13
14
14
16

Supervising Nurses
4
4
4
5
5
6

The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Annual salaries for each class of employee follow: supervising nurses, P180,000; nurses,
P130,000; and aides, P50,000. Salary expense for the year ended June 30 for supervising nurses,
nurses, and aides was P720,000, P1,560,000, and P1,100,000, respectively.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than
capacity and even went as high as 20 patients more on some days. The hospital has an additional
20 beds available for rent for the coming fiscal year.
45. The contribution margin per patient day is
A. P400.00
B. P450.00

C. P500.00
D. P525.00

46. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory
nurses?
A. 9,500
C. 10,250
B. 9,820
D. 12,000
April 16, 2005

Final Pre-board Examination

47. The number of patient days needed to cover total costs is


A. 14,780
C. 15,820
B. 15,140
D. 16,080
48. If the Pediatrics Department rented an additional 20 beds and all other factors remain the
same as in the past year, what would be the increase in revenue?
A. P994,500
C. P1,054,500
B. P877,500
D. P 897,500
49. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
per patient day is
A. P229,350
C. P229,650
B. P229,500
D. P239,350
50. What is the increased fixed cost applied for bed capacity, given the increased number of beds?
A. P1,396,750
C. P1,470,000
B. P1,187,238
D. P1,520,000
Questions 41 through 45 are based on the following:
Anilao Ski Company recently expanded its manufacturing capacity to allow it to product up to
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. The
sales department assures management that it can sell between 9,000 and 13,000 pairs (units) of
either product this year. Because the models are very similar, Anilao Ski will produce only one of
the two models. The information below was compiled by the accounting department.

Selling price per unit


Variable cost per unit

Mountaineering
P88.00
52.00

Touring
P80.00
52.80

Fixed costs will total P369,600 if the mountaineering model is produced but will be only P316,800 if
the touring model is produced. Anilao Ski Company is subject to a 40% income tax rate.
41. If Anilao Ski Company desires an after-tax net income of P24,000, how many pairs of touring
model skis will the company have to sell?
A. 13,118
C. 13,853
B. 12,529
D. 4,460
42. The total sales revenue at which Anilao Ski Company would make the same profit or loss
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regardless of the ski model it decided to produce is


A. P880,000
C. P924,000
B. P422,400
D. P686,400
43. How much would the variable cost per unit of the touring model have to change before it had
the same breakeven point in units as the mountaineering model?
A. P2.68/unit increase
C. P5.03/unit decrease
B. P4.53/unit increase
D. P2.97/unit decrease
44. If the variable cost per unit of touring skis decreases by 10%, and the total fixed cost of touring
skis increases by 10%, the new breakeven point will be
A. 10,730 pairs
B. 13,007 pairs
C. 12,812 pairs
D. Unchanged from 11,648 pairs because the cost changes are equal and offsetting
45. If the Anilao Ski Company sales department could guarantee the annual sale of 12,000 skis of
either model, Anilao would
A. Produce touring skis because they have a lower fixed cost.
B. Produce only mountaineering skis because they a lower breakeven point.
C. Produce mountaineering skis because they are more profitable.
D. Be indifferent as to which model is sold because each model has the same variable cost
per unit.
Questions 266 through 272 are based on the following information:
Calamba Hospital operates a general hospital but rents space and beds to separate entities fro
specialized treatment such as pediatrics, maternity, psychiatrics, etc. Calamba charges each
separate entity for common services to its patients like meals and laundry and for all administrative
services such as billings, collections, etc. All uncollectible accounts are charged directly to the
entity. Space and bed rentals are fixed for the year.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365
days, and had revenge of P1,138,800.
Expense charged by the hospital to the Pediatrics Department for the year ended June 30 were:
Basis of Allocation
Patients Days
Bed Capacity
April 16, 2005

Dietary
Janitorial
Laundry
Lab. Other than direct charges to patients
Pharmacy
Repairs and maintenance
General administrative services
Rent
Billings and collections
Bad debt expense
Other

Final Pre-board Examination


P42,952
P12,800
28,000
47,800
33,800
5,200
40,000
47,000
18,048
P262,800

7,140
131,760
275,320

P453,000

The only personnel directly employed by the Pediatrics Department are supervising nurses,
nurses, and aides. The hospital has minimum personnel requirements based on total annual
patient days. Hospital requirements beginning at the minimum, expected level of operation follow:
Annual Patient Days
Aides
Nurses
Supervising Nurses
10,000 14,000
21
11
4
14,001 17,000
22
12
4
17,001 23,725
22
13
4
23,726 25,550
25
14
5
25,551 27,375
26
14
5
27,376 29,200
29
16
6
The staffing levels above represent full-time equivalents, and it should be assumed that the
Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses and
aides was P72,000, P169,000 and P111,000, respectively.
The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
estimated that during 90 of these capacity days, the demand average 17 patients more than
capacity and even went as high as 20 patients more on some days. The hospital has an additional
20 beds available for rent for the coming fiscal year.
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266.The variable expense per patient day is
A. P15.08
B. P12.50
267.The contribution margin per patient day is
A. P49.92
B. P52.50

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C. P15.00
D. P50.00
C. P50.00
D. P52.00

268.How many patient days are necessary to cover fixed costs for bed capacity and for supervisory
nurses?
A. 9,500
C. 12,500
B. 11,500
D. 10,500
269.The number of patient days needed to cover total costs is
A. 14,200
C. 15,820
B. 15,200
D. 14,220
270.If the Pediatrics Department rented an additional 20 beds and all other factors remain the
same as in the past year, what would be the increase in revenue?
A. P99,450
C. P105,450
B. P87,750
D. P89,750
271.Continuing to consider the 20 additional rented beds, the increase in total variable cost applied
per patient day is
A. P22,935
C. P22,965
B. P22,950
D. P23,935

Final Pre-board Examination

272.What is the increased fixed cost applied for bed capacity, given the increased number of beds?
A. P151,000
C. P147,000
B. P173,950
D. P152,000
Questions 273 thru 275 are based on the following information.
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400
per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent. An
outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays
P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash.
Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms.
Casserole increased her business between 1998 and 2001. Profits have more than doubled since
1998. Ms. Casserole does not understand why profits have increased faster than volume.
A projected income statement for the year ended December 31, 2002, prepared by the accountant
is shown below.
Sales
P95,000
Cost of food sold
P28,500
Wages & fringe benefits:
Restaurant help
8,150
Delivery help
17,300
Rent
4,800
Accounting services
3,600
Depreciation:
Delivery equipment
5,000
Restaurant equipment
3,000
Utilities
2,325
Supplies
1,200
73,875
Net income before taxes
P21,125
Income taxes (40%)
8,450
Net income
P12,675
273.What is the tax shield on the non-cash fixed costs?
A. P3,200
C. P3,400
B. P14,950
D. P5,400

April 16, 2005

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274.What is the breakeven point in number of pizzas that must be sold?


A. 25,929
C. 18,150
B. 23,569
D. 42,114
275.What is the cash flow breakeven point in number of pizzas that must be sold?
A. 19,529
C. 12,990
B. 21,284
D. 10,773
Questions 276 through 280 should be answered independent of each other. They should be
answered based the following most recent income statement for OPMACO COMPANY that
appears below:
OPMACO Company
Income Statement
For the Year Ended December 31
Sales 45,000 units @ P10
P450,000
Less cost of goods sold:
Direct materials
P90,000
Direct labor
78,300
Manufacturing overhead
98,500
266,800
Gross margin
183,200
Less operating expenses:
Selling expenses:
Variable:
Sales commissions
P27,000
Shipping
5,400
32,400
Fixed (advertising, salaries)
120,000
Administrative:
Variable (billing and other)
1,800
Fixed (salaries and other)
48,000
202,200
Net loss
P(19,000)
All variable expenses in the company vary in terms of unit sold, except for sales commissions,
which are based on peso sales. Variable manufacturing overhead is 30 centavos per unit.
There were no beginning or ending inventories. OPMACO Company's plant has a capacity of
75,000 units per year.
The company has been operating at a loss for several years. Management is studying several
possible courses of action to determine what should be done to make next year profitable.
April 16, 2005

Final Pre-board Examination

276.For next year, the vice president would like to reduce the unit setting price by 20%. She is
certain that this would fill the plant to capacity. What would be the profit if the plan is
implemented?
A. P 2,750
C. P 1,250
B. P(6,250)
D. P(4,000)
277.For next year, the sales manager would like to increase the unit selling price by 20%, increase
the sales commission to 9% of sales, and increase advertising by P100,000. Based on
marketing studies, he is confident this would increase sales by one-third. What would be the
profit under this plan?
A. P50,200
C. P108,000
B. P79,000
D. P 800
278.The president believes it would be a mistake to change the unit selling price. Instead, he wants
to use less costly materials in manufacturing units of products, thereby reducing unit costs by
P0.70. How many units would have to be sold next year to earn a target profit of P30,200?
A. 51,220
C. 44,780
B. 48,000
D. 32,000
279.OPMACO Company's board of directors believes that the company's problem lies in
inadequate promotion. By how much can advertising be increased and still allow the company
to earn a target return of 4.5% on sales of 60,000 units?
A. P 32,000
C. P39,200
B. P152,000
D. P59,000
280.The company has been approached by an overseas distributor who wants to purchase 9,500
units on a special price basis. There would be no sales commission on these units. However,
shipping costs would be increased by 50% and variable administrative costs would be reduced
by 25%. In addition, a P5,700 special insurance fee would have to be paid by OPMACO
Company to protect the goods in transit. Regular business would not be disturbed by this
special order.
What unit price would have to be quoted on the 9,500 units by OPMACO Company to allow
the company to earn a profit of P14,250 on total operations?
A. P8.35
C. P7.35
B. P6.35
D. P9.35
Questions 43 through 47 are based on the following information.
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The Statement of Income of Sana, Inc., which represents the operating results for the current fiscal
year ending December 31, had sales of 1,800 tons of product during the current year. The
manufacturing capacity of Sana's facilities is 3,000 tons of product. Consider each question's
situation separately.
Sales
P900,000
Variable costs
Manufacturing
P315,000
Selling costs
180,000
Total variable costs
P495,000
Contribution margin
P405,000
Fixed costs
Manufacturing
P90,000
Setting
112,500
Administration
45,000
Total fixed costs
P247,500
Net income before income taxes
P157,500
Income taxes (40%)
(63,000)
Net income after income taxes
P94,500
43. The breakeven volume in tons of product for the year is (E)
A. 420
C. 495
B. 1,100
D. 550
44. If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax net income that Sana can expect
for next year is (E)
A. P135,000
C. P283,500
B. P110,250
D. P184,500

Final Pre-board Examination

program costing P61,500 annually would need to be undertaken for the next two or three
years In addition, a P25 per ton sales commission over and above the current commission to
the sales force in the new territory would be required. How many tons would have to be sold in
the new territory to maintain Sana's current after-tax income of P94,500? (M)
A. 307.5
C. 273.33
B. 1,095
D. 1,545
47. Without prejudice to preceding questions, assume that Sana estimates that the per ton selling
price will decline 10% next year. Variable costs will increase P40 per ton and the fixed costs
will not change. What sales volume in pesos will be required to earn an after-tax net income of
P94,500 next year? (M)
A. P1,140,000
C. P1,500,000
B. P825,000
D. P1,350,000
Variable & Absorption Costing
Question Nos. 48 through 50 are based on the following information.

This makes no sense at all, said Tom, President of Horizon, Inc. "We sold the
same number of units this year as we did fast year, yet our profits have more than
doubled. Who made the goof - the computer or the people who operate it?" The
statements to which Tom was referring are shown below (absorption costing
basis):
Sales (20,000 units each year)
Less cost of goods sold
Gross margin
Less: Operating expenses
Profit

2004
P700,000
460,000
240,000
200,000
P40,000

2005
P700,000
400,000
300,000
200,000
P100,000

45. Sana has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Sana's costs would be at the same levels and rates as last year. What net
income after taxes would Sana make if it took this order and rejected some business from
regular customers so as not to exceed capacity? (M)
A. P297,500
C. P211,500
V. P252,000
D. P256,500
46. Without prejudice to your answers to previous questions, and assume that Sana plans to
market its product in a new territory, Sana estimates that an advertising and promotion
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The statements above show the results of the first two years of operation. In the first year (2004),
the company produced and sold 20,000 units. In 2005, the company again sold 20,000 units, but it
increased production in order to have a stock of units on hand, as shown below:
2004
2005
Production in units
20,000
25,000
Sales in unite
20,000
20,000
Variable production cost per unit
P8
P3
Fixed manufacturing OH costs (total)
P300,000
P300,000
Horizon produces a single product. Fixed manufacturing overhead costs are applied to the product
on the basis of each years production, (Thus, a new fixed manufacturing overhead rate is
computed each year) Variable selling and administrative expense are P1 per unit sold.
48. Had the company used variable costing, the profit for each year , 2004 and 2005, would have
been: (E)
A. P40,000, P100,000
C. P100,000, P100,000
B. P100,000, P40,000
D. P40,000, P40,000
49. Using the absorption costing, the products unit cost for 2004 and 2005, respectively, are: (E)
A.
B.
C.
D.
2004
P8
P23
P23
P8
2005
P8
P23
P20
P9
50. If JIT has been in use during 2005, what would the companys net income have been under
absorption costing? (M)
A. P100,000
C. P20,000
B. P40,000
D. P60,000
Standard Costing & Variance Analysis
Questions No. 45 through 50 are based on the following information:
You have recently graduated from a university and have accepted a position with Villar Company, the
manufacturer of a popular consumer product. During your first week on the job, the vice president
has been favorably impressed with your work. She has been so impressed, in fact, that yesterday
she called you into her office and asked you to attend the executive committee meeting this
morning for the purpose of leading a discussion on the variances reported for last period. Anxious
to favorably impress the executive committee, you took the variances and supporting data home
last night to study.
April 16, 2005

Final Pre-board Examination

On your way to work this morning, the papers were laying on the seat of your new, red convertible. As
you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew
them over the edge of the bridge and into the stream below. You managed to retrieve only one
page, which contains the following information:
Standard Cost Summary
Direct materials, 6 pounds at P3
P18.00
Direct labor, 0.8 hours at P5
4.00
Variable overhead, 0.8 hours at P3
2.40
Fixed overhead, 0.8 hours at P7
5.60
P30.00
Total
VARIANCES REPORTED
Standard
Price
Spending Quantity or
Cost *
or Rate
Or Budget
Efficiency Volume
Direct materials
P405,000 P6,900 F
P9,000 U
Direct labor
90,000
4,850 U
7,000 U
Variable overhead
54,000
P1,300 F
?@
Fixed overhead
126,000
500 F
P14,000 U
* Applied to Work in process during the period
@
Figure obliterated.
You recall that manufacturing overhead cost is applied to production on the basis of direct laborhours and that all of the materials purchased during the period were used in production. Since the
company uses JIT to control work flows, work in process inventories are insignificant and can be
ignored.
It is now 8:30 A.M. The executive committee meeting starts in just one hour; you realize that to
avoid looking like a bungling fool you must somehow generate the necessary backup data for the
variances before the meeting begins. Without backup data it will be impossible to lead the
discussion or answer any questions.
45. How many pounds of direct materials were purchased and used in production?
A. 138,000 lbs.
C. 132,000 lbs.
B. 135,000 lbs.
D. 137,300 lbs.
46. What was the actual cost per pound of material?
A. P3.00
C. P3.05
B. P2.95
D. P3.10
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47. How many actual direct labor hours were worked during the period?
A. 18,000
C. 16,600
B. 19,400
D. 18,970
48. How much actual variable manufacturing overhead cost was incurred during the period?
A. P55,300
C. P58,200
B. P56,900
D. P59,500
49. What is the total fixed manufacturing overhead cost in the companys flexible budget?
A. P112,500
C. P140,000
B. P139,500
D. P125,500
50. What were the denominator hours for last period?
A. 18,000 hours
C. 22,000 hours
B. 20,000 hours
D. 25,000 hours
Relevant Costing
Questions 281 through 286 are based on the Statement of Income of Ilongo, Inc. which represents
the operating results for the current fiscal year ending December 31, 2003. Ilongo had sales of
1,800 tons of product during the current year. The manufacturing capacity of Ilongos facilities is
3,000 tons of product. Consider each questions situation separately.
Sales
P900,000
Variable costs
Manufacturing
P315,000
Selling costs
180,000
Total variable costs
P495,000
Contribution margin
P405,000
Fixed costs
Manufacturing
P 90,000
Selling
112,500
Administration
45,000
Total fixed costs
P247,500
Net income before income taxes
P157,500
Income taxes (40%)
(63,000)
Net income after income taxes
P 94,500
281.The breakeven volume in tons of product for the 2003 is
A. 420
C. 495
April 16, 2005

B. 1,100

Final Pre-board Examination


D. 550

282.If the sales volume is estimated to be 2,100 tons in the next year, and if the prices and costs
stay at the same levels and amounts next year, the after-tax net income that Ilongo can expect
for 2004 is
A. P135,000
C. P283,500
B. P110,250
D. P184,500
283.Ilongo has a potential foreign customer that has offered to buy 1,500 tons at P450 per ton.
Assume that all of Ilongos costs would be at the same levels and rates as last year. What net
income after taxes would Ilongo make if it took this order and rejected some business from
regular customers so as not to exceed capacity?
A. P297,500
C. P211,500
B. P252,000
D. P256,500
284.Ignore the facts presented in the previous questions, and assume that Ilongo plans to market
its product in a new territory. Ilongo estimates that an advertising and promotion program
costing P61,500 annually would need to be undertaken for the next two or three years. In
addition, a P25 per ton sales commission over and above the current commission to the sales
force in the new territory would be required. How many tons would have to be sold in the new
territory to maintain Ilongos current after-tax income of P94,500?
A. 307.5
C. 273.33
B. 1,095
D. 1,545
285.Ilongo is considering replacing a highly labor-intensive process with an automatic machine.
This change would result in an increase of P58,500 annually in manufacturing fixed costs. The
variable manufacturing costs would decrease P25 per ton. The new breakeven volume in tons
would be
A.
990
C. 1,854
B. 1,224
D. 612
286.Ignoring the facts presented in Question 285, assume that Ilongo estimates that the per ton
selling price will decline 10% next year. Variable costs will increase P40 per ton and the fixed
costs will not change. What sales volume in pesos will be required to earn an after-tax net
income of P94,500 next year?
A. P1,140,000
C. P1,500,000
B. P825,000
D. P1,350,000
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Questions 287 through 291 are based on the following information:


Adrenal Company has a single product called a CAD. The company normally produces and sells
60,000 CADS each year at a selling price of P32 per unit. The companys unit costs at this level of
activity are given below:
Direct materials P10.00
Direct labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
(P300,000 total )
5.00
Variable selling expenses
1.20
Fixed selling expenses
(P210,000 total)
3.50
Total cost per unit
P26.50
287.Assume that Adrenal Company has sufficient capacity to produce 90,000 CADS each year
without any increase in fixed manufacturing overhead costs. The company could increase its
sales by 25% above the present 60,000 units each year if it were willing to increase the fixed
selling expenses by P180,000. The increase in income if the production is increased by 25% is
A. P30,000
C. P10,833
B. P2,500
D. P208

Final Pre-board Examination

288.Assume again that Adrenal Company has sufficient capacity to produce 90,000 CADS each
year. A customer in a foreign market wants to purchase 20,000 CADS. Import duties on the
CADS would be P1.70 per unit, and costs for permits and licenses would be P9,000. The only
selling costs that would be associated with the order would be P3.20 per unit shipping cost.
What is the break-even price on this order?
A. P23.35
C. P28.65
B. P22.15
D. P21.70
289.The company has 1,000 CADS on hand that have some irregularities and are therefore
considered to be seconds. Due to the irregularities, it will be impossible to sell these units at
the normal price through regular distribution channels. What unit cost figure is relevant for
setting a minimum selling price?
A. P16.80
C. P18.00
B. P4.70
D. P1.20
290.Due to a strike in its suppliers plant, Adrenal Company is unable to purchase more material for
the production of CADS. The strike is expected to last for two months. Adrenal Company has
enough material on hand to continue to operate at 30% of normal levels for the two months. If
the plant were closed, fixed overhead costs would continue at 60% of their normal level during
the two-month period; the fixed selling costs would be reduced by 20% while the plant was
closed. How much is the advantage or disadvantage of closing the plant for the two-month
period?
A. Disadvantage, P144,000
C. Advantage, P144,000
B. Disadvantage, P15,000
D. Advantage, P15,000
291.An outside manufacturer had offered to produce CADS for Adrenal Company and to ship them
directly to Adrenals customers. If Adrenal Company accepts this offer, the facilities that it uses
to produce CADS would be idle; however, fixed overhead costs would be reduced by 75% of
their present level. Since the outside manufacturer would pay for all the costs of shipping, the
variable selling costs would be only two-thirds of their present amount. What is the unit cost
figure that is relevant for comparison to whatever quoted price is received from the outside
manufacturer?
A. P20.95
C. P21.35
B. P20.55
D. P16.80
Standard Costing & Variance Analysis
Questions 292 thru 297 are based on the following information.
You have recently graduated from a university and have accepted a position with Villar Company,

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the manufacturer of a popular consumer product. During your first week on the job, the vice
president has been favorably impressed with your work. She has been so impressed, in fact, that
yesterday she called you into her office and asked you to attend the executive committee meeting
this morning for the purpose of leading a discussion on the variances reported for last period.
Anxious to favorably impress the executive committee, you took the variances and supporting data
home last night to study.
On your way to work this meaning, the papers were laying on the seat of your new, red convertible.
As you were crossing a bridge on the highway, a sudden gust of wind caught the papers and blew
them over the edge of the bridge and into the stream below. You managed to retrieve only one
page, which contains the following information:
Standard Cost Summary
Direct materials, 6 pounds at P3
P18.00
Direct labor, 0.8 hours at P5
4.00
Variable overhead, 0.8 hours at P3
2.40
Fixed overhead, 0.8 hours at P7
5.60
P30.00
Total
VARIANCES REPORTED
Standard
Price or Spending Quantity or
Volume
Cost*
Rate
Or
Efficiency
Budget
Direct materials
P405,000
P6,900 F
P9,000 U
Direct labor
90,000
4,850 U
7,000 U
Variable overhead
54,000
P1,300 F
?@
Fixed overhead
126,000
500 F
P14,000 U
* Applied to Work in process during the period
@ Figure obliterated.
You recall that manufacturing overhead cost is applied to production on the basis of direct
labor-hours and that all of the materials purchased during the period were used in production.
Since the company uses JIT to control work flows, work in process inventories are insignificant
and can be ignored.
It is now 8:30 A.M. The executive committee meeting starts in just one hour, you realize that to
avoid looking like a bungling fool you must somehow generate the necessary "backup" data for
the variances before the meeting begins. Without backup data it will be impossible to lead the
discussion or answer any questions.
292.How many pounds of direct materials were purchased and used in production?
A. 138,000 lbs.
C. 132,000 lbs.
April 16, 2005

B. 135,000 lbs.

Final Pre-board Examination


D. 137,300 lbs.

293.What was the actual cost per pound of material?


A. P3.00
C. P3.05
B. P2.95
D. P3.10
294.How many actual direct labor hours were worked during the period?
A. 18,000
C. 16,600
B. 19,400
D. 18,970
295.How much actual variable manufacturing overhead cost was incurred during the period?
A. P55,300
C. P58,200
B. P56,900
D. P59,500
296.What is the total fixed manufacturing overhead cost in the company's flexible budget?
A. P112,500
C. P140,000
B. P139,500
D. P125,500
297.What were the denominator hours for last period?
A. 18,000 hours
C. 22,000 hours
B. 2.0,000 hours
D. 25,000 hours
Capital Budgeting
Questions 298 through 301 are based on the following information:
Pinewood Craft Company is considering the purchase of two different items of equipment, as
described below:
Machine A. A compacting machine has just come onto the market that would permit Pinewood
Craft Company to compress sawdust into various shelving products. At present the sawdust is
disposed of as a waste product. The following information is available on the machine:
A. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12year useful life. The company uses straight-line depreciation and considers salvage value in
computing depreciation deductions.
B. The shelving products manufactured from use of the machine would generate revenues of
P300.000 per year. Variable manufacturing costs would be 20% of sales.
C. Fixed expenses associated with the new shelving products would be (per year): advertising,
P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800.
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Machine B. A second machine has come onto the market that would allow Pinewood Craft
Company to automate a sanding process that is now done largely by hand. The following
information is available.
A. The new sanding machine would cost P234,000 and would have no salvage value at the end
of its 13-year useful life. The company would use straight-line depreciation on the new
machine.
B. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a
scrap value of P9,000.
C. The new sanding machine would provide substantial annual savings in cash operating costs. It
would require an operator at an annual salary of P16,350 and P3,400 in annual maintenance
costs. The current, hand-operated sanding procedure costs the company P78,000 per year in
total.
Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases.
Also, the company will not purchase equipment unless the equipment has a payback period of 4.0
years or less. (In all the following questions, please ignore income tax effect)

Final Pre-board Examination

Emong de Leon, the nervous accountant, spilled a cup of coffee over the annual financial
statements for Bathala Company. Luckily, though the content of the financial statements were
unreadable, the notes that he had developed had been still intact.
He recalled that the balance sheet contained his favorite numbers (the first two digits) that
suggested his ages when he got married, when he passed the CPA examination, and his present
age, respectively, as follows:
Current Liabilities
Sales
Interest expense

P320,000
P4,200,000
P80,000

The following additional information were among the notes that he had developed when he had
finalized the financial statements:
1. All sales during the year were on account.
2. There was no change in the number of shares of common stock outstanding during the year.

298.The expected income each year from the new shelving products (Machine A) is:
A. P52,500
C. P240,000
B. P84,000
D. P 92,500

3. The interest expense on the income statement relates to the bonds payable; the amount of
bonds outstanding did not change during the year.

299.The annual savings in cost if Machine B is purchased is


A. P56,250
C. P43,250
B. P38,250
D. P21,750
300.The simple rates (%) of return for Machine A and Machine B are:
A.
B.
C.
Machine A
12.5
20.0
12.5
Machine B
17.0
17.0
16.4

D.
20.0
16.4

301.The payback periods (years) for Machine A and Machine B are:


A.
B.
C.
Machine A
4.5
5.0
4.5
Machine B
4.0
4.0
4.2

D.
5.0
4.2

Financial Statement Analysis


Questions 46 thru 50 are based on the following information.
April 16, 2005

4. Selected balances at the beginning of the current fiscal year were:


Accounts receivable
P 270,000
Inventory
360,000
Total assets
1,800,000
5. Selected financial ratios computed from the unreadable financial statements for the
current year are:
Earnings per share
P2.30
Debt-to-equity ratio
0.875 to 1
Accounts receivable turnover
14.0 times
Current ratio
2,75 to 1
Return on total assets (using net Operating income)
18.0%
Times interest earned
6.75 times
Acid test ratio
1.25 to 1
Inventory turnover
6.5 times
The selected balances and amounts that are to be included in the balance sheet and income
statement for the current year are:
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46. Accounts receivable


A. 300,000
B. 270,000

C. 330,000
D.
240,000

47. Inventory
A. 360,000
B. 320,000

C. 420,000
D. 480,000

48. Total liabilities


A. 1,120,000
B. 1,280,000

C. 2,400,000
D. 800,000

49. Cost of goods sold


A. 2,730,000
B. 1,470,000

C. 2,420,000
D. 2,940,000

50. Total assets


A. 2,100,000
B. 2,400,000

C. 3,000,000
D. 4,200,000

April 16, 2005

Final Pre-board Examination

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