Republic of the Philippines

DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

MIDTERM EXAMINATION Tracing No.________

Instructions: Choose the best answer. Write the letter (in an upper-case form) of your final answer
on the answer sheet provided using ball pen (friction pen not allowed). Erasures are considered
wrong.

1. Net income computed using absorption costing can be reconciled to net income computed using
variable costing by computing the difference between
a. The gross profit under absorption costing and contribution margin under variable costing
b. The product costs per unit under the two costing methods
c. Inventoried fixed factory overhead costs in the beginning and ending finished goods
inventories
d. The selling prices under the two costing methods

2. A company prepares income statements using both the absorption and variable costing methods.
During the year, the income amounts under the two methods are not equal. The difference in income
figures could have been due to the following, except
a. A change in the finished goods inventory
b. A change in the selling price of the products
c. An excess of production volume over sales volume
d. An excess of sales volume over production volume

3. Throughput costing
a. Treats all costs as period costs except for direct materials
b. Is very suitable for companies where labor and overhead are variable costs
c. Results in higher income than does variable costing when production exceeds sales
d. Penalizes low production and rewards high production

4. When production exceeds sales

a. Income under variable costing is greater than income under absorption costing
b. Income under throughput costing is greater than income under variable costing
c. Income under throughput costing is greater than income under absorption costing
d. Throughput costing will show the least income among the three (absorption, variable, and
throughput) costing methods

5. Once a company has reduced inventories to zero,

a. Throughput costing income will be higher than variable costing income
b. Absorption costing income will be higher than throughput costing income
c. Absorption costing, variable costing, and throughput costing income will be equal
d. The company has reached its breakeven point

ITEMS 6 to 9 ARE BASED ON THE FOLLOWING INFORMATION:

The owners of Big Mom’s Daily Mart have been looking for ways to improve sales at the store. One of
the proposals is to have a weekly raffle with a total prize of P10,000 per week. For every P50 worth
of goods purchased, the customer shall receive a numbered ticket for the raffle. The variable cost
to print and distribute the tickets has been estimated at P5.00. Promotions and other fixed costs in
connection with the raffle, likewise, have been estimated at P15,000 per week. The current weekly
operating results of Kelsey are given below:
Sales P1,000,000
Variable costs 700,000
Fixed cost for the week 120,000

6. What is the sales revenue required to break-even without the raffle?

a. P180,000 c. P300,000
b. P171,428 d. P400,000

7. What is the sales revenue required to break-even with the raffle?

a. P725,000 c. P675,000
b. P483,333 d. P580,000

8. If the raffle can increase sales by 50% per week, profit will
a. Increase by P155,000 c. Decreased by P25,000
b. Increase by P25,000 d. Remain unchanged

9. If the company’s objective in conducting the weekly raffle is to double its present profit,
how much sales must be generated to attain this profit objective?
a. P2,525,000 c. P2,000,000
b. P1,625,000 d. P1,683,333

10. Newgate, Inc. sells three products, A, B and C. The company sells 3 units of C for each unit of
A and 2 units of B for each unit of C. Total fixed costs amount to P760,000. Product A’s
contribution margin per unit is P2, Product B’s is 150% of A’s and Product C’s is twice as much as
B’s. How many units of each product must be sold to break-even?
Product A Product B Product C
a. 2,000 12,000 6,000
b. 20,000 120,000 60,000
c. 29,231 58,462 79,692
d. 69,091 414,546 207,273

11. Cost-Value-Profit analysis is most essential in the determination of the

a. Relationship between revenues and costs at various levels of operations.
b. Volume of operation in order to break-even.
c. Variable costs necessary to equal fixed costs.
d. Production level that is equal to sales.

12. The conventional breakeven chart adopted by businessmen and accountant does not take for
granted that
a. Some costs are semi-variable.
b. Production is not equal to sales.
c. There is a significant amount of change in inventories.
d. The sales mix ratio of the products being sold changes within the relevant range.

13. It is the excess of sales price over the related variable cost, contributing to the recovery
of fixed expenses.
a. Gross margin c. Contribution margin
b. Margin of safety d. Gross profit

14. Which of the following is not correct?

At break even,
a. Profit equals zero.
b. Gross profit equals zero.
c. Sales equals total costs.
d. Fixed costs equals contribution margin.

15. The alternative that would increase the contribution margin per unit the most is a
a. 10% decrease in unit variable cost.
b. 10% increase in selling price.
c. 10% decrease in fixed costs.
d. 10%decrease in selling price.

16. X Drake Company produces a single product. Last year, the company’s net operating income
computed by the absorption costing method was P25,600, and its net operating income computed by the
variable costing method was P36,400. The company’s unit production cost was P18 under variable
costing and P20 under absorption costing. If the ending inventory consisted of 2,600 units, the
beginning inventory in units must have been:
a. 5,400
b. 2,800
c. 8,000
d. 13,400

17. Killer Company produces a single product. Last year, the company’s net operating income computed
by the absorption costing method was P36,400, and its net operating income computed by the variable
costing method was P25,600. The company’s unit product cost was P18 under variable costing and P20
under absorption costing. If the beginning inventory consisted of 8,000 units, the ending inventory
in units must have been:
a. 5,400
b. 2,800
c. 8,000
d. 13,400
18. Basil Hawkins Company produces a single product. Last year, the company’s net operating
income computed by the absorption costing method was P36,000, and its net operating income computed
by the variable costing method was P26,000. The company’s unit product cost was P18 under variable
costing. During the period, inventory changed by 5,000 units. The company’s unit product cost under
absorption costing was:
a. P20
b. P18
c. P16
d. P2

19. Jewelry Bonney Company produces a single product. Last year, the company’s net operating
income computed by the absorption costing method was P36,000. The company’s unit product cost was
P18 under variable costing and P22 under absorption costing. During the period, inventory increased
by 5,000 units. The company’s income under variable costing must have been:
a. P20,000
b. P56,000
c. P16,000
d. P41,000

20. Capone Bege Company produces a single product. Last year, the company’s net operating income
computed by the variable costing method was P30,000. The company’s unit product cost was P18 under
variable costing and P20 under absorption costing. During the period, inventory decreased by 8,000
units. The company’s income under variable costing must have been:
a. P30,000
b. P46,000
c. P14,000
d. P16,000

21. Statement 1: Contribution margin and segment margin mean the same thing.
Statement 2: The salary paid to a store manager is a traceable fixed expense of the store.
Which is (are) true?
a. Statement 1 b. Statement 2 c. Both Statement 1 & 2 d. Neither Statement 1 nor 2

22. Statement 1: Assuming that a segment has both variable expenses and traceable fixed expenses, an
increase in sales should increase profits by an amount equal to the sales times the segment margin
ratio.
Statement 2: Only those costs that would disappear over time if a segment were eliminated should
be considered traceable costs of the segment.

Which is (are) true?

a. Statement 1 b. Statement 2 c. Both Statement 1 & 2 d. Neither Statement 1 nor 2

23. Statement 1: Segmented statements for internal use should be prepared in the contribution
format.
Statement 2: In responsibility accounting, each segment in an organization should be charged with
the costs for which it is responsible and over which it has control plus its share of common
organizational costs.

Which is (are) false?

a. Statement 1 b. Statement 2 c. Both Statement 1 & 2 d. Neither Statement 1 nor 2
b.
24. Statement 1: Fixed costs that are traceable to a segment may become common if the segment is
divided into smaller units.
Statement 2: Allocations of corporate headquarters expenses to divisions used in return on
investment calculations should be limited to the cost of those actual services provided by central
headquarters which the divisions otherwise would have to provide for themselves.

Which is (are) false?

a. Statement 1 b. Statement 2 c. Both Statement 1 & 2 d. Neither Statement 1 nor 2

25. A segment of a business responsible for both revenues and expenses would be called:
a. a cost center.
b. an investment center.
c. a profit center.
d. residual income.

26. Roger Company’s only product has a contribution margin per unit of P55. Non-variable costs
associated with the production and sales of this product amounts to P742,500.
To improve the quality of this product, the company’s management will:
a. Replace a component part that costs P5 higher than the one presently being used and
b. Acquire an equipment that costs P200,000. If acquired, it will be depreciated over a 10pyear
period with no estimated salvage value. The straight-line method of depreciation will be used.

The company pays corporate income tax of 30% on net taxable income.
If the company desires to earn after-tax profit of P175,000 from the improved product, it must sell
a. 20,250 units c. 16,875 units
b. 18,650 units d. 19,850 units

ITEMS 27 to 29 ARE BASED ON THE FOLLOWING INFORMATION:

A company is planning to introduce a new product nex year. Base on the market research conducted
before the new product’s launching, the sales manager estimated that the company can sell about
50,000 units of the product at P50 each.
Other data about the new product are as follows:
Available productive capacity 40,000 units
Variable costs: Prime costs P15
Factory overhead 3
Selling exercises 2
Total: P20
Fixed Costs:
Manufacturing Costs, including P200,000 depreciation of new manufacturing equipment. P700,000
Selling and administrative expenses P200,000
Total: P900,000

27. The maximum amount of profit that can be earned by the company form the sales of the new
product next year is
a. P600,000 c. P100,000
b. P300,000 d. P500,000

28. The company’s management laid down a policy that it will not approve the manufacturer and
sale of new products unless it would earn a profit ratio of at least 20%

The unit selling prices to achieve this target profit must be

a. P56.25 c. P10
b. P60 d. P53.125

29. Assume that it is not possible for the company to change the new product’s selling price and
cost structure. Considering the policy mentioned in Item 48, will the production and sale of the new
product next year be approved by the management?
a. Yes, because there will be profit of P450,000.
b. No, because the company cannot possibly produce the required sales in units.
c. No, because the company cannot possibly sell the required sales in units to earn the desired
profit.
d. Yes, because the criteria set in the said policy can easily be met with the introduction of
the new product.

30. Which of the following are benefits of decentralization?

I. Giving a manager of a division greater decision-making control over his/her division provides
vital training for a manager who is on the rise in the company.
II. Managers at corporate headquarters have greater control in seeing that the goals of the company
are realized.
III. Added decision-making authority and responsibility often leads to increased job satisfaction
and often persuades a manager to put forth his/her best efforts.
a. Only I and II.
b. Only II and III.
c. Only I and III.
d. Only I.

31. Vivi Company consists of two divisions, A and B. Vivi Company reported a contribution margin of
$50,000 for Division A and had a contribution margin ratio of 30% in Division B, when sales in
Division B were $200,000. Net income for the company was $25,000 and traceable fixed expenses were
$40,000. Vivi Company's common fixed expenses were:
a. $85,000.
b. $70,000.
c. $45,000.
d. $40,000.
32. Carue Company has two divisions, L and M. During July, the contribution margin in Division L
was $60,000. The contribution margin ratio in Division M was 40% and its sales were $250,000.
Division M's segment margin was $60,000. The common fixed expenses were $50,000 and the company net
income was $20,000. The segment margin for Division L was:
a. $0.
b. $10,000.
c. $50,000.
d. $60,000.

33. During April, Division D of Pell Company had a segment margin ratio of 15%, a variable expense
ratio of 60% of sales, and traceable fixed expenses of $15,000. Division D's sales were closest to:
a. $100,000.
b. $60,000.
c. $33,333.
d. $22,500.

34. Crocodile Retail Company consists of two stores, A and B. Store A had sales of $80,000 during
March, a contribution margin ratio of 30%, and a segment margin of $11,000. The company as a whole
had sales of $200,000, a contribution margin ratio of 36%, and segment margins for the two stores
totaling $31,000. If net income for the company was $15,000 for the month, the traceable fixed
expenses in Store B must have been:
a. $16,000.
b. $20,000.
c. $31,000.
d. $28,000.

35. Shirahoshi Company has two divisions, A and B, that reported the following results for October:

Division A Division B
Sales .................... $90,000 $150,000
Variable expenses as a
percentage of sales .... 70% 60%
Segment margin ........... $ 2,000 $ 23,000

If common fixed expenses were $31,000, total fixed expenses must have been:
a. $31,000.
b. $62,000.
c. $93,000.
d. $52,000.

36. Which of the following changes in cost-volume-profit factors will reduce the break-even
point?
a. A decrease in total fixed costs
b. A decrease in selling price
c. An increase in unit variable cost
d. An increase in total fixed costs

37. Which of the following statements is not correct?

All other things remaining the same,
a. Equal percentage increases in both the selling price and variable cost per unit will cause
the break-even point in sales pesos to remain unchanged.
b. Equal percentage increases in both the selling price and variables cost per unit will cause
the contribution margin ratio to remain unchanged.
c. Equal peso increases in both the selling price and variable cost per unit will cause the
break0even point in pesos to remain unchanged.
d. Equal peso increases in both the selling price and variable cost per unit will cause the
break-even point in pesos to remain unchanged.

38. The margin of safety is a key concept of CVP analysis. Which of the following is not a
correct description of margin of safety?
a. It is the amount of sales which may be reduced without resulting into a loss.
b. It is the difference between budgeted sales and break0even sales.
c. It may be expressed in terms of units or in pesos.
d. Its presence means that the company earns profit.

39. Which of the following statements is false?

a. If product 1 has a higher unit contribution margin than Product 2 then Product 1 will always
have a higher CM ratio than Product 2.
b. If the product mix changes, the break-even point may change.
c. For a given increase in peso sales, a high CM ratio will result in a greater increase in
profits than will a low CM ration.
d. If a company’s cost structure shifts toward greater fixed costs and lower variables costs,
one would expect the company’s CM ratio to rise.

40. As company’s sales move father from its break-even point, one would expect the degree of
operating leverage to
a. Increase
b. Decrease
c. Remain unchanged
d. Vary in direct proportion to changes in the activity level.

ITEMS 41 AND 42 ARE BASED ON THE FOLLOWING INFORMATION:

Trafalgar Law Corporation’s records for the year 200B show the following data:
Net sales (6,000 units) P21,000
Cost of goods manufactured (7,000 units):
Variable 9,450
Fixed 4,725
Operating expenses:
Variable 1,470
Fixed 2,100

There was no finished goods inventory at the beginning of the period. Neither was there any work-in-
process inventory at the beginning and end of the year.

41. Trafalgar Law Corporation’s finished goods inventory costs at the end of 200B under both the
absorption and variable costing methods:
Absorption Costing Variable Costing
a. P1,350 P2,025
b. 2,535 1,560
c. 2,025 1,350
d. 1,560 2,535
42. Trafalgar Law Corporation’s operating income figures during the year under both costing
methods (absorption and variable costing) were:
Absorption Costing Variable Costing
a. P 5,280 P 4,605
b. 11,430 8,850
c. 8,850 11,430
d. 4,605 5,280

ITEMS 43 AND 44 ARE BASED ON THE FOLLOWING INFORMATION:

Eustass Kid Corporation produces and sells a single product. In 200A, its first year of operation,
planned and actual production was 80,000 units. It sold 75,000 of these units for P30 per unit.

Planned and actual costs in 200A were as follows:

Manufacturing Non-manufacturing
Variable P480,000 P400,000
Fixed 320,000 240,000

43. Using absorption costing, the company’s operating income in 200A would be
a. P860,000
b. P840,000
c. P1,500,000
d. P1,400,000

44. Using variable costing, the company’s operating income in 200A would be
a. P860,000
b. P840,000
c. P1,500,000

45. Marshall D Teach Corporation planned and actually produced 100,000 units of its only product
in 200A, its first year of operations. Variable production costs was P60 per unit of production.
Planned and actual fixed production costs was P800,000 and marketing and administrative costs
totaled P500,000 in 200A. Roz Corporation sold 80,000 units of the product in 200A at a selling
price of P80 per unit.

What is the cost of the ending inventory assuming variable costing is used?
a. P1,360,000
b. P1,460,000
c. P6,000,000
d. P1,200,000

46. Jinbei Company operates two plants, Plant A and Plant B. Jinbei Company reported for the year
just ended a contribution margin of $50,000 for Plant A. Plant B had sales of $200,000 and a
contribution margin ratio of 30%. Net income for the company was $20,000 and traceable fixed costs
for the two plants totaled $50,000. Jinbei Company's common fixed costs for last year were:
a. $50,000.
b. $70,000.
c. $40,000.
d. $90,000.

47. Shanks Company has two divisions, O and E. During the year just ended, Division O had a segment
margin of $9,000 and variable costs equal to 70% of sales. Traceable fixed costs for Division E were
$19,000. Shanks Company as a whole had a contribution margin of 40%, a segment margin of $25,000,
and sales of $200,000. Given this data, the sales for Division E for last year were:
a. $50,000.
b. $150,000.
c. $87,500.
d. $116,667.

48. Net operating income is defined as:

a. sales minus variable expenses.
b. sales minus variable expenses and traceable fixed expenses.
c. contribution margin minus traceable and common fixed expenses.
d. net income plus interest and taxes.

49. A good example of a common cost which normally could not be assigned to products on a segmented
income statement except on an arbitrary basis would be:
a. product advertising outlays.
b. salary of a corporation president.
c. direct materials.
d. the product manager's salary.

50. All other things being equal, if a division's traceable fixed expenses increase:
a. the division's contribution margin ratio will decrease.
b. the division's segment margin ratio will remain the same.
c. the division's segment margin will decrease.
d. the overall company profit will remain the same.

“When the world shoves you around, you just gotta stand up and shove back. It’s not like somebody is
gonna save you if you start babbling excuses.” – Ronoroa Zoro

Prepared by:

Camille G. Garcia, CPA

Noted by:

Jayson Carreon, CPA

Program Chairperson

Approved by:

Luisito B. Reyes, MBA, CBA

Dean, College of Business Studies