1.

Process value analysis is a key component of activity-based management

that links product costing and
a. Reduction of the number of cost pools.
b. Continuous improvement.
c. Accumulation of heterogeneous cost pools.
d. Overhead rates based on broad averages.
2. An approach to developing new ways to perform existing activities is called
a. Process value analysis. c. Caveat analysis.
b. Re-engineering. d. Benchmarking.
3. A(n) _______________ method first traces costs to a department and then to
products.
a. direct costing c. traditional costing
b. absorption costing d. activity-based costing
4. An objective of activity-based management is to
a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or
provide a service.

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c. institute responsibility accounting systems in decentralized organizations.

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d. all of the above

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5. Traditional overhead allocations result in which of the following situations?

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a. Overhead costs are assigned as period costs to manufacturing operations.
b. High-volume products are assigned too much overhead, and low-volume

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products are assigned too little overhead.
c. Low-volume products are assigned too much, and high-volume products are
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assigned too little overhead.
d. The resulting allocations cannot be used for financial reports.
6. Which of the following statements about activity-based costing is not true?
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a. Activity-based costing is useful for allocating marketing and distribution

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costs.
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b. Activity-based costing is more likely to result in major differences from

traditional costing systems if the firm manufactures only one product rather than
multiple products.
c. In activity-based costing, cost drivers are what cause costs to be incurred.
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d. Activity-based costing differs from traditional costing systems in that

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products are not cross-subsidized.

7. Book Co. uses the activity-based costing approach for cost allocation and
product costing purposes. Printing, cutting, and binding functions make up
the manufacturing process. Machinery and equipment are arranged in
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operating cells that produce a complete product starting with raw materials.
Which of the following are characteristic of Boo’s activity-based costing
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approach?
I. Cost drivers are used as a basis for cost allocation.
II. Costs are accumulated by department or function for purposes of product
costing.
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III. Activities that do not add value to the product are identified and reduced to
the extent possible.
a. I only. b. I and II. c. I and III. d. II and III.
8. A company’s current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the
beginning of the year. At the end of the year, the company has a current
ratio of 2.5 to 1 and a quick ratio of 0.8 to 0.1 Which of the following could

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 help explain the divergence in the ratios from the beginning to the end of the
year?
a. An increase in inventory levels during the year.
b. An increase in credit sales in relationship to sales
c. An increase in the use of payables during the current year.
d. An increase in the use of payables during the current year.
Which of the following generally is the most useful in analyzing companies of
different sizes?
A. comparative statements C. price-level accounting
B. common-sized financial statements D. profitability index

12.Statements in which all items are expressed only in relative terms (percentages
of a base) are termed:
A. Vertical statements C. Funds Statements
B. Horizontal Statements D. Common-Size Statements

10.The percent of property, plant and equipment to total assets is an example of:

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A. vertical analysis C. profitability analysis

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B. solvency analysis D. horizontal analysis

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9. Vertical analysis is a technique that expresses each item in a financial
statement

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A. in pesos and centavos.
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B. as a percent of the item in the previous year.
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C. as a percent of a base amount.
D. starting with the highest value down to the lowest value.
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10.In performing a vertical analysis, the base for prepaid expenses is

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A. total current assets. C. total liabilities.

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B. total assets. D. prepaid expenses in a previous year.

11.The percentage analysis of increases and decreases in individual items in

comparative financial statements is called:
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A. vertical analysis C. profitability analysis

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B. solvency analysis D. horizontal analysis

12.Horizontal analysis is also known as

A. linear analysis. C. trend analysis.
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B. vertical analysis. D. common size analysis.

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13.In which of the following cases may a percentage change be computed?

A. The trend of the amounts is decreasing but all amounts are positive.
B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative amount in the
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subsequent year.
D. There is a negative amount in the base year and a positive amount in the
subsequent year.

14.Horizontal analysis is a technique for evaluating a series of financial

statement data over a period of time

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 A. that has been arranged from the highest number to the lowest number.
B. that has been arranged from the lowest number to the highest number.
C. to determine which items are in error.
D. to determine the amount and/or percentage increase or decrease that has
taken place.
15. The following financial data have been taken from the records of Ratio Company:
Accounts receivable P200,000
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 Ratio Company uses cash to pay 50 percent of
its accounts payable?

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A. B. C. D.

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Current ratio Increase Decrease Increase Decrease

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Acid-test ratio Increase Decrease Decrease Increase

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16.Selected information from the accounting records of Petals Company is as
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follows:
Net sales for 2007 P900,000
Cost of goods sold for 2007 600,000
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Inventory at December 31, 2006 180,000

Inventory at December 31, 2007 156,000
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Petals’ inventory turnover for 2007 is

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17.Milward Corporation’s books disclosed the following information for the year
ended December 31, 2007:
Net credit sales P1,500,000
ed d

Net cash sales 240,000

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Accounts receivable at beginning of year 200,000

Accounts receivable at end of year 400,000
Milward’s accounts receivable turnover is
is
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Question Nos. 18 through 20 are based on the data taken from the balance sheet of
Nomad Company at the end of the current year:
Accounts payable P145,000
Accounts receivable 110,000
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Accrued liabilities 4,000

Cash 80,000
Income tax payable 10,000
Inventory 140,000
Marketable securities 250,000
Notes payable, short-term 85,000
Prepaid expenses 15,000

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 18. The amount of working capital for the company is:
19. The company’s current ratio as of the balance sheet date is:
20. The company’s acid-test ratio as of the balance sheet date is:

21.Selected information from the accounting records of the Blackwood Co. is as

follows:
Net A/R at December 31, 2006 P 900,000
Net A/R at December 31, 2007 P1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2006 P1,100,000
Inventories at December 31, 2007 P1,200,000
Inventory turnover 4 to 1
What was the gross margin for 2007?

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22. The Board of Directors is dissatisfied with last year's ROE of 15%. If the

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profit margin and asset turnover remain unchanged at 8% and 1.25

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respectively, by how much must the total debt ratio increase to
achieve 20% ROE?

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A. Total debt ratio must increase by .5
B. Total debt ratio must increase by 5
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C. Total debt ratio must increase by 5%
D. Total debt ratio must increase by 50%
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23.The following were reflected from the records of Salvacion Company:

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Earnings before interest and taxes P1,250,000

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Interest expense 250,000

Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2006
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Preferred 20,000
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Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times
The dividend yield ratio is
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A. 0.50 C. 0.40
B. 0.12 D. 0.08
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24.Additional information:
Stockholders’ equity at 12/31/07 P4,500,000
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Net income year ended 12/31/07 1,200,000

Dividends on preferred stock year ended 12/31/07 300,000
Market price per share of common stock at 12/31/07 144
The price-earnings ratio on common stock at December 31, 2007, was
A. 10 to 1 C. 14 to 1
B. 12 to 1 D. 16 to 1

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 25.The current assets of Mayon Enterprise consists of cash, accounts
receivable, and inventory. The following information is available:
Credit sales 75% of total sales
Inventory turnover 5 times
Working capital P1,120,000
Current ratio 2.00 to 1
Quick ratio 1.25 to 1
Average Collection period 42 days
Working days 360
The estimated inventory amount is:

26. New Rage Cosmetics has used a traditional cost accounting system to apply quality
control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly
direct labor cost for Satin Sheen makeup is $27,500. In an attempt to distribute quality
control costs more equitably, New Rage is considering activity-based costing. The
monthly data shown in the chart below have been gathered for Satin Sheen.

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Quantity for

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Activity Cost Driver Cost Rates Satin Sheen

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Incoming material inspection Type of material $11.50 per type 12 types
In-process inspection Number of units $0.14 per unit 17,500 units

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Product certification Per order $77per order 25 orders
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The monthly quality control cost assigned to Satin Sheen makeup using activity-based
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costing is
a. $88.64 per order.
b. $525.50 lower than the cost using the traditional system.
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c. $8,500.50
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d. $525.50 higher than the cost using the traditional system.

vi y re

27. ALF Co. is an assisted-living facility that provides services in the form of residential
space, meals, and other occupant assistance (OOA) to its occupants. ALF currently uses
a traditional cost account system that defines the service provided as assisted living, with
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service output measured in terms of occupant days. Each occupant is charged a daily rate
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equal to ALF’s annual cost of providing residential space, meals and OOA divided by
total occupant days. However, an activity-based costing (ABC) analysis has revealed that
occupant’s use of OOA varies substantially. This analysis determined that occupants
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could be grouped into three categories (low, moderate, and high usage of OOA) and that
the activity driver of OOA is nursing hours. The driver of the other activities is occupant
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days. The following quantitative information was also provided:

Occupant category Annual Occupant Days Annual Nursing Hours
Low Usage 36,000 90,000
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Medium Usage 18,000 90,000

High Usage 6,000 120,000
60,000 300,000
The total annual cost of OOA was $7.5 million, and the total annual cost of providing
residential space and meals was $7.2 million. Accordingly, the ABC analysis indicates that
the daily costing rate should be

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 a. $182.50 for occupants in the low-usage category.
b. $145.00 for occupants in the medium-usage category.
c. $245.00 for occupants in the high-usage category.
d. $620.00 for all occupants.

Zebra Corporation has the following activities: creating bills of materials (BOM), studying
manufacturing capabilities, improving manufacturing processes, training employees, and
designing tooling. The general ledger accounts reveal the following expenditures for
manufacturing engineering:
Salaries $150,000
Equipment 80,000
Supplies 20,000
Total $250,000
The equipment is used for two activities: improving processes and designing tooling. Thirty-five
percent of the equipment’s time is used for improving processes and sixty-five percent is used for

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designing tools. The salaries are for two engineers. One is paid $100,000, while the other earns
$50,000. The $100,000 engineer spends 40% of his time training employees in new processes

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and 60% of his time on improving processes. The remaining engineer spends equal time on all
activities. Supplies are consumed in the following proportions:

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Creating BOMs
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Studying capabilities 10%
Improving processes 20%
Training employees 25%
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Designing tooling 20%

28. What is the cost assigned to the creating BOMs activity?
aC s
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29. What is the cost assigned to the improving processes activity?

30. What is the cost assigned to the training employees activity?

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31. What is the cost assigned to the designing tooling activity?

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Alaire Corporation manufactures several different types of printed circuit boards: however, two
of the boards account for the majority of the company’s sales. The first of these boards, a
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television (TV) circuit board, has been a standard in the industry for several years. The market
for this type of board is competitive and therefore price-sensitive. Alaire plans to sell 65,000 of
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the TV boards in 1993 at a price of $150 per unit. The second high-volume product, a persona
computer (PC) circuit board, is a recent addition to Alaire’s product line. Because the PC board
incorporates the latest technology, it can be sold at a premium price, plans include the sale of
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40,000 PC boards at $300 per unit.

Alaire’s management group is meeting to discuss strategies for 1993, and the current topic of
conversation is how to spend the sales and promotion dollars for next year. The sales manager
believe that the market share for the TV board could be expanded by concentrating Alaire’s
promotional efforts in this area. In response to this suggestion, the production manager said,

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 “Why don’t you go after a bigger market for the PV board? The cost sheets that I get show a
premium price for the PC board, selling it should help overall profitability.”
Alaire uses a standard cost system, and the following data apply to the TV and PC boards.

PC Board

TV Board
Direct materials $80 $140
Direct labor 1.5 hours 4.0 hours
Machine time 0.5 hours 1.5 hours
Variable factory overhead is applied on the basis of direct labor hours. For 1993, variable factory
is budgeted at $1,120,000, and direct labor hours are estimated at 280,000. The hourly rates for
machine time and direct labor are $10 and $14, respectively. Alaire applies a material handling
charge at 10% of materials cost, thus materials handling charge is not included in variable
factory overhead. Total 1993 expenditures for materials are budgeted at $10,600,000.
Ed Watch, Alaire’s controller, believes that, the management group proceeds with the discussion

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about allocating sales and promotional dollars to individual products, they should consider the
activities involved in the production. As Welch explained to the group, “Activity-based costing

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integrates the cost of all activities, known as cost drivers, into individual product costs rather
than including these costs in overhead pools.” Welch has prepared the schedule shown below to

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help the management group understand this concept.
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“Using this information,” Welch explained, “we can calculate an activity-based cost for each TV
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board and each PC board and then compare it to the standard cost we have bee using. The only
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cost that remains the same for both cost methods is the cost of direct materials. The cost drivers
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will replace the direct labor, machine time, and overhead costs in the standard cost.”

Annual Activity
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Budgeted Cost Cost Driver for Cost Driver

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Materials overhead:
Procurement $400,000 No. of parts 4,000,000 parts
Production scheduling 220,000 No. of boards 110,000 boards
Packaging & shipping 440,000 No. of boards 110,000 boards
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$1,060,000
Variable overhead:
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Machine setup $446,000 No. of setups 278,750 setups

Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs.
Quality control 560,000 No. of inspections 160,000 inspect’ns
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General supplies 66,000 No. of boards 110,000 boards

$1,120,000
Manufacturing:
Machine insertion $1,200,000 No. of parts 3,000,000 parts
Manual insertion 4,000,000 No. of parts 1,000,000 parts
Wave soldering 132,000 No. of boards 110,000 boards

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 $5,332,000

Required per unit TV Board PC Boards

Parts 25 55
Machine insertions 24 35
Manual insertions 1 20
Machine setups 2 3
Hazardous waste 0.02 lbs. 0.35 lbs.
Inspections 1 2
32. On the basis of standard costs, the total contribution budgeted for the TV board is

33. On the basis of activity-based costs (ABC), the total contribution budgeted for the
TV board is

34. On the basis of standard costs, the total contribution budgeted for the PC board is

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35. On the basis of activity-based costs, the total contribution budgeted for the PC
board is

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aC s
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