FORMULA: UNDERSTANDING EXPENSES Unit Contribution Margin= unit sales price – unit

variable cost
High Low Method (high – low)
Break-even Point
1. Compute for variable cost rate
BEP (units) = TFC / UCM
VCR= in costs / in units
FC= BEP units x UCM
Legend: UCM= FC / BEP units
= change
Units= direct labor hours, machine hours, units BEP (pesos) = FC / CMR
produced, direct labor costs, set-up hours, etc.
Profit= Margin of Safety x CM rate
2. Compute for total fixed cost
Average UCM= Σ (Product UCM x Sales mix ration in
Total fixed cost= total cost – total variable cost units)

Total variable cost= No. of machine hours x VCR Average CMR= Σ (Product CMR x Sales mix ratio
in amount)
3. Estimate the costs of a given level of activity

TC= TFC + unit variable cost

Scatter graph Method

Y= a + bx

B= change in cost / change in units

B= (y1 – y2) / (x1 – x2)
B= Y / X
Y= Ctotal cost
A= fixed cost
B= variable cost
X= no. of units sold (or other basis)

Least-Square Equations
Equation 1. Y = a + bx

Equation 2. ΣY= na + bΣx

Equation 3. ΣXY= Σxz + bΣx2

Coefficient of Correlation (r) and Coefficient of

Determination (r2)

R= Σ (x - x̄) (y - ȳ)
√ Σ(x- x̄)2 Σ (y - ȳ)2 =Composite CM / Composite Sales

Standard error Composite BEP (units) = FC / Average UCM1

S1= Σ( Y- Y1)2 / n-2 Composite BEP (pesos) = FC / Average CMR2

Standard Variance

SV= (t-values) (s1) 1 + 1/n + (X- x̄)2 / Σ (X- x̄)2

Standard error of Estimate

s1=Σ(Y-Y1) / n-2

CVP ANALYSIS

Contribution margin = Sales – Variable cost

= fixed cost + profit
= units sold x UCM
= sales x contri. margin rate
Profit = CM – fixed costs

Variable cost rate= Variable cost / Sales

=CM / sales
CM Rate= CM / Sales % Change in EBIT= % change in sales x DOL
=Unit CM / unit sales price
=100% - VC ratio Degree of Operating Leverage= % in EBIT
% Cin sales
C
 STANDARD COSTING AND VARIANCE ANALYSIS
Standard fixed overhead rate= Budgeted FOH / Normal
Capacity
Standard materials input= Standard materials input /
(100 – loss rate)
Standard Material Cost= Standard Materials Input x
Standard net price
Standard direct labor hours= Standard output time /
(100 – loss rate)
Standard direct labor costs= Standard direct labor time
x standard labor rate
Materials Price Variance= (Actual price – standard
price) x Actual quantity
Fixed Spending Variance= Actual Fixed Overhead –
Budgeted Fixed Overhead
Variable Spending Variance= Actual Variance Overhead
– (Actual Hours x Variable OR)
Variable Efficiency Variance= Budgeted Allowance on
Actual Hours – Budgeted Allowance on Standard Hours
Volume Variance= Budgeted Allowance on Standard
Hours – Standard Factory Overhead
Capacity Variance= Budgeted Allowance on Actual
Hours – (Actual Hours x Standard OR)
Fixed Efficiency Variance= Actual Hours – (Standard
Hours x Fixed Overhead Rate per Hour)
Average Materials Output Cost= Total Standard
Material Cost / Standard Production Output

Materials Quantity Variance= (Actual quantity – Average Materials Input Cost= Total Standard Material
Standard Quantity) x Standard price Cost / Total Standard Material Input

Joint Materials Variance= (Actual price – Standard Material Price Variances= Actual Direct Material Cost –
price) x (Actual quantity – Standard quantity) Actual Materials Input @standard price

Material Purchase-Price Variance= (Actual price –
Standard price) x Actual quantity purchased
Labor Rate Variance= (Actual rate - Standard price) x
Actual Hours
Labor Efficiency Variance= (Actual hours – Standard
hours) x Standard rate
Joint Labor Variance= (Actual Rate – Standard rate) x
(Actual Hours – Standard hours)
VOH Efficiency Variance= (Actual hours – standard
hours) x Standard VOH Rate
Material Mix Variance= Actual Materials Input
@Average Materials – Actual Materials Input @Ave.
Mat.
Yield Variances= Actual Materials Input @AMIC – Actual
Output @ Average Materials Output
Standard Yield Rate= Output / Input
Materials Yield Variance= Actual Materials Quantity –
(Standard Materials Quantity x Standard Input Cost)
Materials Quantity Variance= Material Mixed Variance
+ Materials Yield Variance

VOH Spending Variance= (Actual VOH rate – Standard

VOH rate) x Actual hours

Volume Variance= (Normal hours – Standard hours) x

Standard FOH rate
=Capacity variance + Fixed efficiency
variance

Budgeted FOH= Normal capacity x Standard FOH

Standard Variable OH= Standard hours x Standard

variable OH rate

Controllable Variance= Actual Factory Overhead –

Budgeted Allowance on Standard Hours
Volume Variance= Budgeted Allowance on Standard
Hours – Standard Factory Overhead
Budgeted Fixed Overhead = Normal Capacity x
Standard Fixed OH Rate 
Standard Variable Overhead= Standard Hours x
Standard Variance OR
Spending (Budget) Variance= Actual Factory Overhead
– Budgeted Allowance on Actual Hours
Efficiency Variance= Budgeted on Actual Hours –
Budgeted Allowance on Standard Hours
Volume Variance= Budgeted Allowance on Standard
Hours – (Standard Hours x Standard Rate)
QUIZZES 3. Note Corporation has developed the following
flexible budget formula for annual indirect labor costs: 
Understanding Expenses
Total Cost = 480,000 + 5.00 per machine hour 
1. The controller of Nema Company has requested a
quick estimate of the manufacturing supplies that it Operating budgets for the current month are based
needs for the month of July when the expected upon 20,000 machine hours of planned machine time.
production are 470,000 units. Below are the actual data Indirect labor costs included in this planning budget
from the prior three months of operations.  are….

Monthly fixed costs 480,00-/12 40,000

March  Production in units Manufacturing Supplies
Variable 20,000 x 5 100,000
450,000  P723,060
Total 140,000

April  540,000  853,560 4. In the equation Y = 4,000 + 3X; Y is the cost of

May  480,000  766,560
Using these data and the high-low method, what is the
reasonable estimate of the cost of manufacturing
supplies that would be needed for July?
B= (853,560 – 723,060) / (540,000 – 450,000)
= 130,500 / 90,000 1.45
A= 853,560 – (540,000 x 1.45) 70,560
workers’ compensation insurance and X is direct labor
hours. According to this equation, a 100-hour change in
total direct labor hours will change the cost of workers
compensation insurance by…
Y= 100 x 3
= 300
Within a relevant range, the amount of total fixed cost
remains constant at 4,000. The only cost that will
change in total is variable cost because every additional
hour will add 3 to total cost.

Y= 70,560 + 1.45b 752,060 Its incurrence depends on the decision of the

=70,560 + (470,000 x 1.45)
manager. *
2. The following activity and cost data that were a. Avoidable costs
provided by Hoyy Corporation would help in estimating b. Controllable costs
its future maintenance costs:  c. Conversion costs
d. Common costs
Units  Maintenance Cost 
Used in making a decision. *
3  450 a. Estimated costs
b. Irrelevant costs
7  530 c. Relevant costs
d. Prime costs

11  640 Cost behavior is a study of how a firm's

costs *
15  700 a. relate to competitor's costs.
b. relate to the general price level changes.

Using the least-squares regression method to estimate

c. respond to changes in activity levels within
the company.
the cost formula, the expected total cost for an activity
d. respond to changes in the gross national
level of 10 units would be closest to… product.

ΣX= 36 2,320= 4a + 36b The term "relevant range" as used in cost

ΣY= 2,320 22,600= 36a + 404b
ΣXY= 22,600 20,880 = 36a + 324b accounting means the range over which: *
ΣX²= 404 1,720 = 80b a. costs may fluctuate
B = 21.50 b. cost relationships are valid
ΣY= na + b ΣX c. production may vary
ΣXY= Σxa + b ΣX² 2,320 = 4a + (36 x 21.50) d. relevant costs are incurred
2,320 = 4a + 774
4a = 1,546 Which of the following describes the behavior
a = 386.50
of the variable cost per unit? *
Y = 386.50 + 21.50X a. varies in increasing proportion with changes
Y = 386.50 + (10 x 21.50) in the activity level
Y = 601.50 b. varies in decreasing proportion with changes
in the activity level
 c. remains constant with changes in the activity Are benefits given up in favor of another
level
choice. *
d. varies in direct proportion with the activity
level a. Opportunity costs
b. Imputed costs
A cost that remains constant on a per unit
These costs represent a total increase in
basis in a given period despite changes in the
costs. *
level of activity should be considered a(an): *
a. variable cost
a. Incremental costs

b. prime cost
b. Marginal costs

c. fixed cost
Inventoriable costs *
d. overhead cost a. Include only the prime costs of
manufacturing a product.
When the number of units manufactured b. Include only the conversion costs of
increases, the most significant change in unit manufacturing a product.
cost will be reflected as a(n): * c. Are expensed when products become part of
finished goods inventory.
a. increase in fixed element
b. decrease in the variable element
d. Are regarded as assets before the products
are sold.
c. increase in the mixed element
d. decrease in the fixed element The term prime costs refers to *
a. All costs associated with manufacturing
As volume increases, * other than direct labor costs and raw
a. total fixed costs remain constant and per-unit materials costs.
fixed costs increase. b. Costs that are predetermined and should be
b. total fixed costs remain constant and per-unit attained.
fixed costs decrease. c. The sum of direct labor costs and all factory
c. total fixed costs remain constant and per-unit overhead costs.
fixed costs remain constant. d. The sum of raw materials costs and direct
d. total fixed costs increase and per-unit fixed labor costs.
costs increase.
The term that refers to costs incurred in the
Which of the following best describes a fixed past that are not relevant to a future
cost? * decision. *
a. It may change in total when such change is a. Discretionary costs
unrelated to changes in production.
b. Full absorption costs
b. It may change in total when such change is
related to changes in production. c. Under allocated indirect costs
c. It is constant per unit of change in d. Sunk costs
production.
d. It may change in total when such change The salaries that you could be earning by
depends on production within the relevant working rather than attending college are an
range.
example of *
Which of the following methods may be used a. Outlay costs

to segregate costs? *
b. Misplaced costs

a. High-low method
c. Sunk costs

b. Scattergraph method
d. Opportunity costs

c. Least-squares method
Out-of-pocket costs *
d. All of the given choices a. are not recoverable

Costs that are expected to be incurred at the

b. are under the influence of a superviser
c. require expenditure of cash
level of activity used in preparing the master
d. are committed and unavoidable
budget. *
a. Budgeted costs The relevant cost to be considered in a special
b. Standard costs decision problem are *
a. sunk cost
These are theoretical costs, assumed and are
b. an average of past costs
not recognized in the accounting books. * c. controllable prime costs
a. Explicit cost d. those costs that will change if the decision is
b. Implicit cost made

Variable Costing
A basic tenet of direct costing is that period
costs should be currently expensed. What is
the rationale behind this procedure? *
a. Period costs are uncontrollable and should
not be charged to a specific product.
b. Period costs are generally immaterial in
amount and the cost of assigning the
amounts to specific products would outweigh
the benefits.
c. Variable costing net income exceeds
absorption costing net income when units
produced equal units sold.
d. Absorption costing net income exceeds
variable costing net income when units
produced are greater than units sold.
Which of the following 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. Because period costs will occur whether or

c. An idle facility variation is calculated.
not production is made, it is improper to d. Product costs include "direct" (variable)
allocate these costs to production and defer administrative costs.
the current costs of doing business.
d. Allocation of period costs is arbitrary at best When absorption costing is used, all of the
and could lead to erroneous decisions by following costs are considered product costs
management.
except: *
In a variable costing system, product costs a. direct labor

includes * b. variable overhead

a. direct materials, direct labor, variable c. variable selling and administrative costs
overhead d. fixed overhead
b. direct materials, direct labor, fixed overhead
c. direct labor, variable overhead, fixed
The primary difference between variable and
overhead absorption costing is the inclusion of: *
d. direct materials, variable overhead, fixed a. fixed selling expenses in the product costs
overhead b. variable factory overhead in period costs
c. variable selling expenses in product costs
Variable costing can be used for *
d. fixed factory overhead in product costs
a. external reporting
b. internal reporting Variable costing net income is *
c. either external reporting or internal reporting a. higher than absorption net income when
d. neither external reporting nor internal more units are sold than produced.
reporting b. lower than absorption net income when more
units are produced than sold.
When variable costing is used, fixed c. the same as absorption net income when all
manufacturing overhead is recognized as an units produced are sold.
expense when the: * d. all of the given choices
a. cost is incurred
At its present level of operations, a small
b. product is completed
c. product is sold
manufacturing firm has total variable costs
d. product is inventoried equal to 75% of sales and total fixed costs
equal to 15% of sales. Based on variable
Which of the following is an argument against costing, if sales change by P1.00, income will
the use of variable costing? * change by *
a. Absorption costing overstates the balance
a. P 0.12
sheet value of inventories.
b. Variable factory overhead is a period cost.
b. P 0.25

c. Fixed factory overhead is difficult to allocate

c. P 0.75
properly. d. P 0.10
d. Fixed factory overhead is necessary for the
production of a product.

Which of the following statements is true? *

a. Absorption costing net income exceeds
variable costing net income when units
produced and sold are equal.
b. Variable costing net income exceeds
absorption costing net income when units
produced exceed units sold.
What are the unit product costs under TCM 750,000.00

absorption and variable costing methods, 2. Breakeven volume in units and pesos
respectively? * BEU = TFC/UCM
BEU = 600,000/30
a. 5.10 ; 3.80 BEU = 20,000
b. 4.40 ; 3.50
c. 3.50 ; 4.40 BEP = TFC/CMR
d. 3.80 ; 5.1 BEP = 600,000/0.375
BEP = 1,600,000.00 peso
Moon Company had income of P65,000 using
3. Margin of safety in unita, pesos and ratio
absorption costing for a given period. Units Pesos Rate
Beginning and ending inventories for that Bugdgeted sales 25,000 2,000,000.00 100%
period were 13,000 units and 18,000 Breakeven point 20,000 1,600,000.00 80%
Margin of safety 5,000 400,000.00 20%
respectively. Ignoring income taxes, if the
fixed overhead application rate were P2.50 4. Degree of operating leverage
per unit, what would the income have been DOL = CM / EBIT
= 750,000/150,000
using variable costing? * DOL = 5
a. P 52,500
b. P 20,000 5. Number of units required to earn a 15% return on
c. P 60,000 sales.
d. P 77,500 Sales 100% TS = FC / %FC
VC 62.50% = 600,000/22.5%
What is the value of ending inventory using CM 37.50% TS = 2,666,666.67
FC 22.50% (SQUEEZE) USP 80.00
the variable costing method? * EBIT 15% Units Required 33,333

6. Selling price that Merced should charge to raise the

operating profit by 50% based on the given cost
structure, still selling 25,000.

Increase in operating profit = 150,000 * 50%

Change in OP = 75,000.00
Units sold = 25,000
Change in sellin price 3.00
Original Price 80.00
New Price 83.00

7. Assuming Merced is to pay 40% income tax, how

much sales in units are required to:
7A. Breakeven?
a. 195,000 Answer. No change still 20,000 units
b. 125,000
7B. Earn P150,000 of net income?
c. 155,000
d. 100,000 Sales 2,266,666.67 (850,000/37.5%) (SQUEEZE)
VC
CM 850,000.00 37.50%
CVP ANALYSIS FC 600,000.00
Problem 1. The following data are available for EBIT 250,000.00 (150,000/60%)
Merced Company’s one product.   Tax 100,000.00
NI 150,000.00
Unit selling price 80 Unit variable cost: 

Manufacturing 28 Selling and Administrative 22 Fixed Sales 2,266,666.67

costs  USP 80.00
U.Required 28,333
Manufacturing 480,000 Selling and Administrative
120,000 Unit Volume 25,000 
Problem 3. After its cost structure and potential
Requirements: Using the above data, determine  market, Babes Company established what is considered
to be a reasonable selling price. The company expected
1. Total Contribution margin
to sell 20,000 units per month and planned its monthly
USP 80.00
results as follows: 
UVC 50.00
UCM 30.00 Sales 1,000,000 Variable costs 600,000 Contribution
Units sold 25,000 margin 400,000 Fixed costs 180,000 Income before
taxes 220,000 Income taxes 88,000 Net income Units sales 20,000
132,000  ∆ Price 1.00
Original Price 50.00
On the basis of the preceding information, answer New Price 51.00
the following independent questions.  
8. The company is considering offering its salespeople a
1. What is the break-even point in units?
5% commission on sales. What would the total sales, in
pesos, have to be in order to implement the
BEU = TFC / UCM
commission plan and still earn the planned before-tax
= 180,000 / 20
income of 220,000?
BEU = 9,000
OLD NEW
2. If the company determined that a particular
Per unit Rate Per unit Rate
advertising campaign has a high probability of
Sales 50 100% 50 100%
increasing sales by 4,000 units, how much could it pay
VC 30 60% 32.5 65%
for such campaign without reducing its planned profits?
CM 20 40% 17.5 35%
Total Sales = CM / %CM
∆ CM (4,000 * 20) 80,000.00
= 400,000 / 35%
∆ FC 80,000.00
Total Sales = 1,142,857
∆ NI -0-
9. If the company wants its before tax profit higher
3. If the company wants a 240,000 before-tax profit,
than the planned amount by 60,000, compute the
how many units must it sell?
required increase in peso sales.
US = (Desired Profit + FC) / UCM
∆ EBIT 60,000.00
= (240,000 + 180,000) /20
CMR (/) 40%
US = 21,000
∆ Sales 150,000.00
4. If the company wants a 25% before-tax return on
sales, what level of sales, in pesos, does it need?
Standard Costing and Variance Analysis
CMR 40%
FC 15% (SQUEEZE) The following standard costs were developed for one of
ROS 25% the products of LT Inc.  

Total sales = TFC / %FC Materials: 2.5 lbs. x P6 per lb. P 15 
= 180,000 / 15%
Direct labor 1.5 hours x P12 per hour 18 
TS = 1,200,000.00
Variable Overhead 1.5 hours x P4 per hour 6 
5. If the company wants a 150,000 after-tax profit, how
many units must it sell? Fixed Overhead 1.5 hours x P8 per hour 12 

After tax profit 150,000.00 Total standard cost per unit P 51 
EBIT 250,000.00 (150,000/60%)
The following information is available regarding the
FC 180,000.00
company’s operations for the period: 
Required CM 430,000.00
UCM (divide) 20.00 Units produced: 52,000 
Units sold 21,500
Materials purchased: 150,000 lbs. @ P5.90 per lb. 
6. If the company wants an after-tax return on sales of
18%, how many units must it sell? Materials used: 136,000 lbs.  

Direct labor: 80,000 hours costing 944,000 

CMR 40%
FC 10% (SQUEEZE) Manufacturing OH incurred: 
EBIT 30% (18%/60%)
Variable P 325,000 
Total sales = FC / %FC
= 180,000 / 10% Fixed P 640,000 
Total sales = 1,800,000.00
Budgeted fixed manufacturing overhead for the period
USP (divide) 50.00
is P600,000, and the standard fixed overhead  rate is
Units sold 36,000
based on expected capacity of 75,000 direct labor
hours.  
7. If the company wants an after-tax profit of 144,000
on its expected sales volume of 20,000 units, what price 1. Materials price variance 
must it charge?
MPV = (AP – SP) * AQ 
AT - Profit 144,000.00
= (5.90 - 6) * 150,000 
Net of Tax rate (/) 60%
BT - Profit 240,000.00 = (15,000) F 
Planned EBIT 220,000.00
∆ EBIT 20,000.00
 VOHEV 8,000 UF 
2. Materials usage variance 
FOHSV 40,000 UF 
MUV = (AQ - SQ) * SR 
∙ Controllable variance 53,000 UF 
= (136,000 – 130,000) * 6 
∙ FOHVV (Uncontro) (24,000) F 
= 36,000 UF 
TOTAL 29,000 UF
3. Direct labor rate variance 

DLRV = (AR – SR) * AH 

= (11.8 – 12) * 80,000 

= (16,000) F 

4. Direct labor efficiency variance 

DLEV = (AH – SH) * SR 

= (80,000 – 78,000) * 12 

= 24,000 UF 

5. Total overhead variance 

Actual Overhead 965,000

Applied Overhead 936,000
Total overhead variance 29,000 UF 
8. Four-Way Variance Analysis 
MAJOR EXAMS 1st SEM.
VOHRV = (AR – SR) * AH 
PRELIM
= 325,000 – 320,000 

= 5,000 UF 
The variable costing format is often more
useful to managers than the absorption
∙ VOHEV = (AH – SH) * SR 
costing format because *
= (80,000 – 78,000) * 4  a. costs are always lower
b. it justifies higher prices
= 8,000 UF 
c. it is required for external reporting
d. costs are classified by their behavior

∙ FOHSV = Actual FOH – Budgeted FOH The relationship between cost and activity is
= 640,000 – 600,000 
termed: *
= 40,000 UF 
a. cost prediction
∙ FOHVV = Budgeted FOH – Applied FOH b. cost behavior
= 600,000 – 624,000 
c. cost estimation
= (24,000) F 
d. cost analysis
7. Three-Way Variance Analysis 
The difference between fixed costs and
VOHRV 5,000 UF  variable cots is that *
a. variable costs per unit vary within the
FOHSV 40,000 UF 
relevant range, while fixed costs per unit
remain constant within the relevant range.
∙ Spending variance 45,000 UF 
b. variable costs per unit change in direct
∙ VOHEV 8,000 UF  proportion to changes in activity, while total
fixed costs.
∙ FOHVV (24,000) F  c. variable costs per unit are constant within
the relevant range, while fixed costs per unit
TOTAL 29,000 UF  vary within the relevant range.
d. variable costs per unit and fixed costs per
6. Two-Way Variance Analysis  unit remain constant within the relevant
range.
VOHRV 5,000 UF 
It refers to the additional benefits that arise by than buying it from an outside supplier is
using an additional unit of the managerial considered a (an) *
control variable. * a. fixed cost
a. Opportunity costs b. sunk cost
b. Incremental revenues c. opportunity cost
c. Contribution margin d. future cost
d. Marginal benefit
Net profit under absorption costing may differ
The management of a company computes net from net profit determined under direct
income using both the absorption and variable costing. How is this difference calculated? *
costing approach to product costing. This a. Change in the quantity of all units produced
times the relevant variable cost per unit.
year, the net income under the variable
b. Change in the quantity of all units in
costing approach was greater than the net inventory times the relevant fixed costs per
income under the absorption costing unit.
c. Change in the quantity of all units in
approach. This difference is most likely the inventory times the relevant variable cost per
result of * unit.
a. Inflationary effects on overhead costs. d. Change in the quantity of all units produced
b. Sales volume exceeding the production times the relevant fixed costs per unit.
volume.
c. A decrease in the variable marketing Under the direct costing, which is classified as
expenses. product costs? *
d. An increase in the finished goods inventory. a. Only variable production costs.
b. All variable and fixed production costs.
A fixed cost is relevant if it is * c. Only direct costs.
a. a product cost d. All variable costs.
b. future cost
c. sunk If a firm produces more units than it sells,
d. avoidable absorption costing, relative to variable costing,
Which of the following must be known about will result in *
a. lower income but higher assets
production process in order to institute a
b. higher income but lower assets
variable costing system? * c. higher income and assets
a. Contribution margin and breakeven point for d. lower income and assets
all goods in production.
b. Standard production rates and times for all The relevant range is that range of activity: *
elements of production.
a. where units produced equal units sold
c. The variable and fixed components of all
costs related to production. b. where the firm will earn a profit
d. The controllable and noncontrollable c. where a company achieves its maximum
components of all costs related to efficiency
production. d. where management expects the firm to
operate
Which of the following is a cost that requires a
Package Express, Inc., operates a small
future outlay of cash and is relevant for future
package delivery service in the Jacksonville
decision-making? *
a. Incremental revenue suburbs. If the company uses a regression
b. Out-of-pocket cost equation to forecast total operating costs, the
c. Relevant benefits coefficient of the equation's independent
d. Opportunity cost variable would correspond to the: *
a. fixed operating costs
The major objective of preparing a scatter-
b. total variable operating costs
diagram is to * c. variable operating cost per delivery
a. determine the relevant range d. total operating costs
b. find the high and low points to use for the
high-low method of estimating costs. A company observed a decrease in the cost
c. develop an equation to predict future costs
per unit. All other things being equal, which of
d. perform regression analysis on the results
the following is probably true? *
The cost of not receiving rent from a space a. The company is studying a variable cost,
and total volume has decreased.
because you decide to make the part rather
 b. The company is studying a fixed cost, and company plans to manufacture 96,000 units.
total volume has increased.
Each unit requires five minutes of direct labor.
c. The company is studying a fixed cost, and
total volume has decrease. Harem Company's budgeted overhead for the
d. The company is studying a variable cost, month is *
and total volume has increased. a. 774,000
b. 12,800
The high-low method is criticized because it *
c. 18,800
a. is a mathematical method
d. 84,800
b. is not a graphical method
c. does not provide reasonable estimates What is the value of a perpetual stock that
d. ignores much of the available data by
concentrating on only the extreme points
pays the holder 81,000 at the end of each
year when the interest rate is 2 percent? *
Which one of the following considers the a. 4,050,000
impact of fixed overhead costs? * b. 157,266.44
a. Full absorption costing c. 84,272.40
b. Direct costing d. 79,412.40
c. Marginal costing
d. Variable costing Assume that anticipated and actual production
totaled 40,000 units, and that 36,000 units
When graphed, a typical total variable cost were sold during November. Compute the
appears as: * contribution margin that would be reported on
a. a diagonal line that slopes downward to the
a variable costing income statement. *
right
b. a horizontal line
c. a vertical line
d. a diagonal line that slopes upward to the
right.

As production decreases, one would expect

the variable cost per unit to *
a. 1,240,000
a. decrease and then increase
b. increase b. 1,132,000
c. decrease c. 1,120,000
d. remain unchanged d. 1,100,000

Calculate the company's absorption-costing Pekora Company is being sold for 420,000.
net income. * The company’s income statement indicates
current profits of 15,000, which have yet to be
paid out as dividends. Assuming the company
will remain a “going concern” indefinitely and
that the interest rate will remain constant at 12
percent, at what constant rate does the owner
believe that profits will grow? *
a. 8%
a. 152,083
b. 6%
b. 169,583
c. 9%
c. 167,083
d. 7%
d. 154,583
What is the maximum amount you would pay
Given the cost formula Y = 17,500 + 4x, at
for an asset that generates an income of
what level of activity will total cost be
200,000 at the end of each of 10 years if the
42,500? *
opportunity cost of using funds is 10
a. 5,250 units
b. 10,625 units percent? *
c. 4,375 units a. 1,345,687
d. 6,250 units b. 77,100
c. 1,200,000
Harem Company uses an annual cost formula d. 1,228,920
for overhead of 72,000 + 1.60 for each direct
labor worked. For the upcoming month the
Irma Company manufactures office furniture. Use the following information for the next four
During the most productive month of the year, questions:
3,500 desks were manufactured at a total cost
of 84,400. In its slowest month, the company
made 1,100 desks at a cost of 46,000. Using
the high-low method of cost estimation, total
fixed costs in August are: *
a. 28,400
b. 17,600
c. 38,400
d. 56,000

Fixed manufacturing costs expensed on the

Oscar Corporation has fixed manufacturing
income statement (excluding adjustments for
cost of 12 per unit. Absorption-costing net
variances) total *
income totaled 320,000 in a period when
a. P3,600
finished goods inventory levels rose by 7,000
b. P4,800
units. How much income would Oscar report c. P6,000
under variable costing? * d. Zero
a. 320,000
b. 236,000  
c. 404,000 Fixed manufacturing costs included in ending
d. 327,000 inventory total *
a. P1,200
During July, the store will be open for 580 b. P1,500
hours. Predict the store's utility cost for July c. P900
using the high-low method. * d. Zero

The production-volume variance is *

a. P2,000
b. P1,500
c. P2,400
d. Zero

 
Operating income using absorption costing will
a. 1,660.00
be _________ than operating income if using
b. 1,672.60
c. 1,645.00 variable costing. *
d. 1,689.25 a. P2,400 higher
b. P2,400 lower
Use the least-squares regression to estimate c. P900 higher
the cost behavior of company's maintenance d. P3,600 lower

costs. Express the behavior in equation The next two questions are based on the
form. * following selected budgeted data of ABC
Company.

a. Y = 112,500 + 99x
b. Y = 4,350 + 1634x
c. Y = 4,395 + 870x
d. Y = 1,639 + 99x

MIDTERM
What is the breakeven in units? *
a. 35,000
b. 37,500
 c. 40,000 per unit. Total fixed costs for the period were
d. none of these P154,000, and the operating profit was
What is the margin of safety ratio? * 26,000. The variable cost per unit for June
15% was *
20% a. P4.50
25% 
b. P5.00
30%  c. P6.00

Green Corporation expects to sell 3,000 plants

d. P7.17

a month. Its operation manager estimated the The level of output in boxes at which the
following monthly costs: Variable costs are Economy and the Regular would earn the
P7,500 and Fixed costs are P15,000. What same profit (loss) is *
sales price per plant does it need to
breakeven if it sells the estimated number of
plants per month? *
a. P5.00
b. P7.50 
c. P7.51
d. P2.50

Curry Rice Company produces a product that

sells for P60. The variable manufacturing a. 20,000 boxes
costs are P30 per unit. The fixed b. 12,455 boxes
manufacturing costs is P10 per unit based on c. 9,375 boxes
the current level of activity, and fixed selling d. 15,000 boxes

and administrative costs are P8 per unit. A Federer Company plans to sell 400,000
selling commission of 10% of the selling price laundry hangers. The fixed costs are 600,000,
is paid on each unit sold. The contribution and the variable cost is 60% of the selling
margin per unit is: * price. If the company wants to realize a profit
a. P36
b. P24  of P120,000, the selling price of each laundry
c. P54 hanger must be *
d. P30 a. P2.50
b. P3.75
Seal Yard Ornaments sells lawn ornaments c. P4.50
for P15 each. Seal's contribution margin ratio d. P5.00
is 40%. Fixed costs are P32,000. Should fixed
The selling price that would maintain the same
costs increase by 30%, how many additional
contribution margin rate as last year is *
units will Seal have to produce and sell
without affecting the current amount of
profit? *
a. 6,933
b. 5,333
c. 1,600
d. 1,067

At a break-even point of 5,000 units sold,

variable expenses were P10,000 and fixed
expenses were P50,000. The profit from the a. P 8.25
5,001st unit would be * b. P 10.00
a. P10 c. P 9.00
b. P50 d. P 9.75
c. P15
The total number of units that MultiFrame
d. P12
needs to produce and sell in order to
During the month of June, Arama Corporation breakeven is? *
produced 12,000 units and sold them for P20
 to be used as a basis, the revised budget
estimate for the total number of units to be
sold during this year would be *
a. 240,000
b. 360,000
c. 300,000
d. 200,000

Cost-volume-profit analysis assumes all of the

following EXCEPT: *
a. Units manufactured equal units sold
a. 100,000 units b. Total variable costs remain the same over
b. 150,000 units the relevant range
c. 300,000 units c. All costs are variable or fixed
d. Total fixed costs remain the same over the
d. 153,947 units
relevant range

The following four questions are based on the
following annual flexible budget which has
been prepared for use in making decisions
relating to Product X.
If blurred, click
here: https://drive.google.com/file/d/1kd_ers3sCF5SRP5Oq
3RqKMlK0UAG34vH/view?usp=sharing
The contribution income statement: *
a. Categorizes costs as either direct or indirect
b. Is allowed for external reporting to
shareholders
c. Can be used to predict future profits at
different levels of activity
d. Reports gross margin
Assuming a company has net income, which
of the following statements is true regarding
the contribution margin per unit? *
a. It indicates the amount that variable costs
will decrease with the sale of each additional
unit
b. It will decrease as the number of units sold
decreases
c. It will decrease as the number of units sold
increases
d. It indicates the amount that net income will
increase with the sale of each additional unit

The amount of fixed factory costs applied to

product during the first six months under At the break-even point, fixed cost is always *
absorption costing would be * a. Less than the contribution margin
b. Equal to the contribution margin
a. underapplied by P80,000
c. More than the contribution margin
b. underapplied by P40,000
d. More than the variable costs
c. overapplied by P20,000
d. equal to the fixed costs incurred The peso amount of sales needed to attain a
desired profit is calculated by dividing the
Reported net income (or loss) for the first six
contribution margin ratio into *
months under absorption costing would be * a. Fixed cost
a. P160,000   b. Desired profit plus fixed cost
b. P (40,000) c. Desired profit
c. P 80,000 d. Desired profit less fixed cost
d. P 40,000  
One of the first steps to take when using CVP
Reported net income (or loss) for the first six analysis to help make decisions is: *
months under direct costing would be * a. Finding out where the total costs line
a. P -0- intersects with the total revenues line on a
graph
b. P 72,000
b. Estimating how many products will have to
c. P (36,000) be sold to make a decent profit
d. P144,000 c. Calculation of the degree of operating
leverage for the company
Assuming that 90,000 units of Product X were d. Identifying which costs are variable and
which costs are fixed
sold during the first six months and that this is
Which of the following would decrease The contribution margin ratio always increases
contribution margin per unit the most? * when the *
a. A 15% increase in selling price a. variable costs as a percentage of net sales
b. A 15% increase in variable expenses decrease 
c. A 15% decrease on variable expenses b. breakeven point increases
d. A 15% decrease in selling price
c. breakeven point decreases
Breakeven analysis assumed over the d. variable costs as a percentage of net sales
increase
relevant range that *
a. Selling prices are nonlinear After the level of volume exceeds the
b. Variable costs are nonlinear breakeven point *
c. Total costs are linear a. the total contribution margin exceeds the
d. Fixed costs are nonlinear   total fixed costs
b. the contribution margin ratio increases
A company’s breakeven point in peso sales c. total fixed costs per unit will remain constant
may be affected by equal percentage d. the total contribution margin will turn from
increases in both selling price and variable negative to positive

cost per unit (assume all other factors are
equal within the relevant range). The equal
percentage changes in selling price and
variable cost per unit will cause the breakeven
point in peso sales to *
a. Increase by less than the percentage
increase in selling price
b. Remain unchanged
c. Decrease by less than the percentage
increase in selling price
d. Decrease by more than the percentage
increase in the selling price
In CVP analysis, focusing on target net
income rather than operating income: *
a. does not allow calculation of breakeven point
b. will increase the breakeven point
c. will not change the breakeven point
d. will decrease the breakeven point
What is the margin of safety ratio based on
the sale of 40,000 units? *

If a company’s variable costs are 70% of

sales, which formula represents the
computation of peso sales that will yield a
profit equal to 10% of the contribution margin
a. 150.00%
when P equals sales in pesos for the period
b. 100.00%
and FC equals total fixed costs for the c. 50.00%
period? * d. 60.00%  
a. P = FC/0.27  
b. P = FC/0.2 A digitized music tuner has been a stable in
c. P = 0.2/FC Smooth Sounds’ product line for several
d. P = 0.27/FC years. Annual fixed costs of production and
  administration related to this product in the
Cost-volume-profit analysis is a key factor in past have been P643,500. Variable costs of
many decisions, including choice of product production and sales have been P17 per unit.
lines, pricing of products, marketing strategy, The selling price in the past has been P28 per
and utilization of productive facilities. A unit. For the year just ended, the company
calculation used in CVP analysis is the sold 100,000 units. In the coming year, based
breakeven point. Once the breakeven point on the appearance of competing products on
has been reached, operating income will the market, the company expects a decrease
increase by the * of 10 percent in unit sales. Assuming that the
a. Variable costs per unit for each additional company wants a profit before tax of
unit sold P405,000, what is the required selling price if
b. Gross margin per unit for each additional
unit sold
it expects to sell 90,000 units? *
c. Fixed costs per unit for each additional unit a. P28.65
sold b. P25.60
d. Contribution margin per unit for each c. P27.95
additional unit sold   d. P30.80  
Minor Company has a 30% contribution b. P144,000
margin percentage and fixed costs of c. P66,000
d. P24,000
P30,000. To earn a 10% return on sales, what
peso sales should Minor make? * The Makoto Company is expecting an
a. P111,111 increase of fixed costs by P78,750 upon
b. P100,000
moving their place of business to the
c. P300,000
downtown area. Likewise, it is anticipating that
d. P150,000
the selling price per unit and the variable
Flame Company had a 25 percent margin of
expenses will not change. At present, the
safety. Its after-tax return on sales is 6
sales volume necessary to breakeven is
percent, and tax rate of 40 percent. What is
P750,000 but with the expected increase in
Flame’s contribution margin ratio? *
a. 40.00% fixed costs, the sales volume necessary to
b. 15.00% breakeven would go up to P975,000. Based
c. 10.00% on these projections, what was the total fixed
d. 24.00% costs before the increase of P78,750? *
DEF Company earned P50,000 on sales of a. P341,250
P800,000. It earned P110,000 on sales of b. P262,500
1,000,000. Compute the total fixed costs. * c. P420,000
a. P300,000 d. P498,750
b. P190,000
Thomas Co. sells products X, Y, and Z.
c. P240,000
d. P200,000
Thomas sells three units of X for each unit of
Z, and two units of Y for each unit of X. The
Machine A has fixed costs of P450,000 and a contribution margins are P1.00 per unit of X,
variable cost of P20. Machine B has fixed P1.50 per unit of Y, and P3.00 per unit of Z.
costs of P600,000 and a variable cost of P14. Fixed costs are P600,000. How many units of
What is the indifference point, in units? * X would Thomas sell at the breakeven point? *
a. 30,000 a. 266,666
b. 42,857 b. 400,000
c. 22,500 c. 120,000
d. 25,000 d. 80,000

As projected net income increases the *

a. Contribution margin ratio goes up
b. Degree of operating leverage declines
How much will be contributed to profit before c. Margin of safety stays constant
income taxes by the 1,001st unit sold? * d. Break-even point goes down

The amount by which sales revenue could

drop until a loss occurs is referred to as the: *
a. Sales volume variance
b. Product contribution rate
c. Margin of safety
d. Degree of operating leverage

MAJOR EXAMS 2nd SEM

a. P150 PRELIM
b. P250
c. P500 1. What is the primary goal of financial management? 
d. P350 a. Increase earnings 
b. Maximizing cash flow 
At a sales level of P90,000, Violeta c. Maximizing shareholders’ wealth 
Company’s contribution margin is P24,000. If d. Minimizing risk of the firm 
the degree of operating leverage is 6 at a 2. There are three major types of decisions that the
P90,000 sales level, what must be the net Finance Manager of a modern business firm will be
involved  but which of the following is not? 
income? *
a. P4,000   a. Investment decisions 
 b. Operating decisions  a. Absolute numbers would be most meaningful
c. Financing decisions  for both the large and small firm. 
d. Dividend decisions  b. Absolute numbers would be most meaningful in
the large firm; relative numbers would be most
3. Financing decisions are concern with  meaningful in the small firm. 
c. Relative numbers would be most meaningful for
a. Those which determine how scarce or limited
the large firm; absolute numbers would be most
resources in terms of funds of the business
meaningful for the small firm. 
firms are  committed to projects.  
d. Relative numbers would be most meaningful for
b. Assert that the mix of debt and equity chosen to
both the large and small firm. 
finance investment should maximize the value
of  investments made.  10. Ratios are used as tools in financial analysis 
c. Concerned with the determination of quantum
of profits to be distributed to the owners, the a. Instead of horizontal and vertical analysis 
frequency  of such payments and the amounts b. Because they can provide information that may
to be retained by the firm.  not be apparent from inspection of the
d. To maximize the firm’s wealth.  individual  components of a particular financial
statements. 
4. The following areas are examples of investing c. Because even single ratio by itself is quite
responsibility of a finance manager but which of the meaningful.  
following is  the exception?  d. Because they are prescribed by PFRS. 
a. Evaluation and selection of capital investment 11. Which of the following statements regarding
proposal  horizontal analysis is false? 
b. Prioritization of investment alternative  
c. Evaluation of alternative sources of funds  a. Horizontal analysis can include more than two
d. Funds allocation and its rationing  years of financial data. 
b. Horizontal analysis is facilitated by computing
5. The following areas are examples of operating peso and percentage changes in financial
responsibility of a finance manager but which of the statement  items. 
following is  the exception?  c. Horizontal analysis analyzes ratio differences
occurring between companies.  
a. The credit policy 
d. Horizontal analysis can include the statement of
b. The level of cash, securities and inventory that
cash flows. 
should be kept on hand. 
c. Determination of fixed assets to be acquired.  12. To perform vertical analysis 
d. Financing purchases of goods. 
a. Items on the balance sheet need to be restated
6. Stockholders of corporations enjoy an advantage over to their fair market values. 
owner of sole proprietorship and partners of b. Items in the balance sheet need to be indexed
partnership  by  for inflation.  
c. Common-size financial statements need to be
a. Limited liability 
prepared. 
b. Control over operations 
d. Horizontal analysis should have been done
c. Control over management
already. 
d. d. Enjoyment of returns 
13. In which of the following cases may a percentage
7. The primary concern of short-term creditors when
change be computed? 
assessing the strength of a firm is the entity’s 
a. The trend of the amounts is decreasing but all
a. Short-term liquidity
amounts are positive. 
b. b. Market price of stock 
b. There is no amount in the base year. 
c. Profitability 
c. There is a negative amount in the base year and
d. d. Leverage
a negative amount in the subsequent year. 
8. Which of the following statements regarding financial d. There is a negative amount in the base year and
analysis is true?  a positive amount in the subsequent year. 

a. Financial analysis will show how a company is 14. Which of the following is a measure of the liquidity
guaranteed to perform in the future. position of a corporation?  
b. Financial analysis should not be relied upon as
a. Earnings per share
an indicator of future performance. 
b. Current ratio 
c. Financial analysis should be performed only by
c. Debt ratio 
managers and creditors. 
d. Times interest earned 
d. Financial analysis provides supplemental
information not provided directly by the 15. Which of the following reasons should not be
financial statements.  considered in order to explain why the receivables
appear to be  abnormally high? 
9. Suppose you are comparing two firms in the steel
industry. One firm is large and the other is small. Which a. Sales volume decreases materially late in the
type  of numbers would be most meaningful for year. 
statement analysis? 
 b. Receivables have collectability problems and 21. A firm with a total asset turnover lower than the
possibly some should have been written off.  industry standard and a current ratio which meets
c. Material amount of receivables are on the industry  standard might have excessive  
installment basis. 
d. Sales volume expanded materially late in the a. Accounts receivable
year. b. Debt  
c. Fixed assets
16. Primera Inc. has recently calculated the accounts d. Inventory 
receivable turnover for the current year to be 15. In
prior  years, the same ratio was always higher. Which of 22. Tyner Company had P250,000 of current assets and
the following statements would be the best P90,000 of current liabilities before borrowing P60,000
interpretation for  the reason for the ratio’s change?  from  the bank with a 3-month note payable. What
effect did the borrowing transaction have on Tyner
a. The company had less sales in the current year Company’s  current ratio? 
than in prior years. 
b. The company had more sales in the current year a. The ratio remained unchanged. 
than in prior years.  b. The change in the current ratio cannot be
c. The company had fewer accounts receivables in determined. 
the current year than in prior years. c. The ratio decreased. 
d. The company took longer to collect on their d. The ratio increased. 
accounts receivables in the current year than in
23. Assume that Clone Inc. reported a net loss of
prior years. 
P50,000 in 2009 and net income of P250,000 in 2010.
17. Toledo Inc. has recently calculated the inventory The increase  in net income of P300,000: 
turnover for the current year to be 30. In prior years,
a. Can be stated as 0%
the same  ratio was always lower. Which of the
b. cannot be stated as a percentage
following statements would be the best interpretation
c. Can be stated as 100% increase
for the reason for  the ratio’s change? 
d. can be stated as 200% increase
a. The company had less sales in the current year
24. Cave Corporation had net income of P2 million in
than in prior years. 
2009. Using the 2009 financial elements as the base
b. The company purchased less inventory in the
data, net  income decreased by 70% in 2010 and
current year than in prior years. 
increased by 175% in 2011. 
c. The company took fewer days to sell its
inventory in the current year than in prior years. The respective net income reported by Cave
d. The company took more days to sell its Corporation for 2010 and 2011 are? 
inventory in the current year than in prior
years.  a. P600,000 and P3,500,000
b. P1,400,000 and P3,500,000 
18. Which of the following would best indicate that the c. P600,000 and P5,500,000
firm is carrying excess inventory? d. P1,400,000 and P5,500,000
a. A decline in the current ratio  25. Austin & Company has a debt ratio of 0.5, a total
b. Stable current ratio with declining quick ratios  assets turnover ratio of 0.25, and a profit margin of
c. A decline in days’ sales in inventory  10 percent.  The Board of Directors is unhappy with
d. A rise in total asset turnover.  the current return on equity (ROE), and they think it
could be doubled.  This could be accomplished (1)
19. If a company has an acid-test ratio of 1.2:1, what
by increasing the profit margin to 12 percent and
respective effects will the borrowing of cash in short-
(2) by increasing debt  utilization. Total assets
term debt  and collection of accounts receivable have
turnover will not change. What new debt ratio,
on the ratio? 
along with the new 12 percent profit  margin,
Short-term Borrowing Collection of Receivable  would be required to double the ROE?  
a. 55%
a. Increase No effect  b. 65% 
b. Increase Increase  c. 60%
c. Decrease No effect  d. 70% 
d. Decrease Decrease 
The next two questions are based on the data taken
20. Renant Inc. has determined that it needs to increase from the balance sheet of Circle Company at the end of
its current ratio in order to comply with a creditor’s the current  year: 
loan  agreement. All else being equal, which of the
Accounts Payable  145,000
following ways would be best for increasing their
current ratio?  Accounts Receivable  110,000
a. Increasing long-term assets
Accrued Liabilities  4,000
b. Decreasing current liabilities 
c. Decreasing current assets Cash  80,000
d. Increasing long-term liabilities 
Income Tax Payable  10,000

Inventory  140,000
 Operating income
Marketable Securities  250,000
(EBIT) 1,400,000  
Notes payable, short term  85,000 Interest 400,000  
Taxable income
Prepaid Expenses  15,000 (EBT) 1,000,000  
Taxes (40%)
26. The amount of working capital for the company is? 
400,000  
a. 351,000
Net income
b. 211,000 
600,000 
c. 361,000
d. 336,000  The company’s interest cost is 10 percent, so the
company’s interest expense each year is 10 percent of
27. The company’s acid-test ratio as of the balance
its total  debt. 
sheet date is? 
a. 1.80:1 While the company’s financial performance is quite
b. 2.02:1  strong, its CFO (Chief Financial Officer) is always
c. 2.40:1 looking for  ways to improve. The CFO has noticed that
d. 1.76:1  the company’s inventory turnover ratio is considerably
28. Centrum Corporation’s books disclosed the weaker than  the industry average, which is 6.0. As an
following information for the year ended December 31, exercise, the CFO asks what the company’s ROE would
2010.  have been last year if the following had occurred: 
 The company maintained the same sales,
Net credit sales  1,500,000 but was able to reduce inventories
enough to achieve the industry average
Net cash sales  240,000
inventory turnover ratio (Sales/Inventory). 
Accounts receivable at beginning of 200,000  The cash that was generated from the
year  reduction in inventories was used to reduce
part of the company’s outstanding debt. So,
Accounts receivable at end of year  400,000 the company’s total debt would have been $4
million less the freed-up  cash from the
Centrum’s accounts receivable turnover is? 
improvement in inventory policy. The
a. 3.75 times
company’s interest expense would have been
b. 5.00 times 
10  percent of new total debt. 
c. 4.35 times
d. 5.80 times   Assume equity does not change. (The company
pays all net income as dividends.) 
29. Assume you are given the following relationships for
Under this scenario, what would have been the
the Camp Company: 
company’s ROE last year?  
Sales/Total Assets  1.5X
a. 27.0%
Return on Assets  3% b. 30.3% 
c. 29.5%
Return on Equity  5% d. 31.5% 
The Camp Company’s debt ratio is 
a. 40%
b. 35% 
c. 60%
d. 65%
30. Georgia Electric reported the following income 31. House of Contratista Company had the following
statement and balance sheet for the previous year:   financial statistics for 2010: 
Balance Sheet:
Interest Expense  35,000 
Cash 100,000  
Inventories 1,000,000   Net Income  48,000 
Accounts receivable 500,000 
Current assets 1,600,000   Income Tax  46,000
What was the times-interest earned for 2010? 
Net fixed assets 4,400,000
a. 11.4 times
Total assets 6,000,000
b. 3.1 times 
c. 3.3 times
Total debt 4,000,000  
d. 3.7 times 
Total equity 2,000,000
Total claims 6,000,000  32. Crayon Co. has a price earnings ratio of 10, earnings
per share of P2.20, and a pay-out ratio of 75%. The
Income dividend yield is 
Statement a. 25.0%
Sales 3,000,000  b. 7.5% 
Operating c. 22.0%
costs1,600,000   d. 10.0%
33. The times interest earned ratio of Creek Company What is the effect of implementing this new system of
is 4.5 times. The interest expense for the year was collection through bank network to Yuma Corporation?
P20,000,  and the company’s tax rate is 40%. The
company’s net income is:  a. Net advantage of 75,000
a. P22,000 b. Net disadvantage of 45,000
b. P54,000  c. Net disadvantage of 16,200
c. P42,000 d. Net advantage of 12,600
d. P66,000  Refer to the problem below for the next three
Use the following information for the next two questions.
questions: 
The KFP Company currently has a centralized billing
Cherry Corporation had net income of P200,000 and system. Payments are made by all customers to the
paid dividends to common stockholders of P40,000 central billing location. It requires, on average, five days
in 2010. The  weighted-average number of shares for customers’ mailed payments to reach the central
outstanding in 2010 was 50,000 shares. Cherry location. An additional two days are required to process
Corporation’s common stock is  selling for P60 per payments, before a deposit can be made. The firm has a
share in the local stock exchange.  daily average collection of P600,000. The company has
recently investigated the possibility of initiating a
34. Cherry Corporation’s price-earnings ratio is  lockbox system. It has estimated that with such a
a. 3.8 times system, customers’ mailed payments would reach the
b. 18.8 times  receipt location four days sooner. Further, the
c. 15 times processing time could be reduced by one additional day,
d. 6 times  because each lockbox would pick up mailed deposits
twice daily.
35. Cherry Corporation’s payout ratio for 2010 is 
a. P4 per share 4. Determine the reduction in cash float that can be
b. 20.0 percent  achieved through the use of a lockbox system.
c. 12.5 percent
d. 25.0 percent  a. 3,000,000
b. 2,400,000
MIDTERM c. 4,200,000
Refer to the problem below for the next three d. 1,200,000
questions.
5. Determine the opportunity cost of the present
The Yuma Corporation opened two more dealerships in system, assuming a 12% return on short-term
Bogo City and Danao City. All payments by these dealers investments.
are in check, sent by mail, averaging about P420,000 per
a. 360,000
week. At present, these payments become available to
b. 288,000
Yuma Corporation on the sixth day, on the average,
c. 504,000
after the check is written.
d. 144,000
1. How much money is tied up during the float period?
6. If the annual cost of the lockbox system will be
a. 420,000 P125,000, what will be the effect of initiating such a
b. 2,520,000 system to the company?
c. 360,000
a. Net disadvantage of 485,000
d. 2,160,000
b. Net advantage of 235,000
c. Net advantage of 163,000
d. Net disadvantage of 269,000
2. The company is considering weekly pick-ups from the
dealers to reduce the delay. In all, two cars will be 7. Akukin Corporation has two dates where it receives
needed and two additional people hired for a total cost cash inflows: June 15 and November 15. On each of
of P60,000 per year. This would reduce the delay by these dates, it expects to receive P80 million in
four days. The present opportunity cost of funds to the revenues. Cash expenditures are expected to be steady
company is the average money market rate of 24% per throughout the subsequent 6 months. Presently, the
year. return on investment in marketable securities is 8% per
annum, and the cost of transfer from securities to cash
What is the effect of weekly pick-ups to the company? is P125 each time a transfer occurs. What is the optimal
transfer size?
a. Net advantage of 40,800
b. Net disadvantage of 2,600 a. 500,000
c. Net disadvantage of 31,200 b. 707,107
d. Net disadvantage of 2,400 c. 1,000,000
d. 353,553
3. A commercial bank with a large branch network
offered to do the collection for the company through its 8. Oozora Corporation is a franchiser of automatic car
Bogo City and Danao City branches. This procedure will washes in the southeast. The company has 4,240
reduce the delay by 2 days and will cost the company franchisees that operates 7 days per week. The average
about 45,000 annually in telecommunications and gross revenue for each location is P500 per day. The
collection charges. company collects 25% of the gross revenue as its
franchise fee. Each franchisee mails a check each day to 20%. The company expects to spend an incremental
the company headquarter in Makati. The check is collection cost of P200,000 to undertake this change in
supposed to be mailed by noon each day. Many of the credit policy. The prevailing average market rate of
franchisees are lax, however, and payments are investments is 15% per annum. Customers’ defaults in
forwarded an average of 2 days late. Once mailed, the payments are expected to reach 3% on total sales as
checks take an average of 1 1⁄2 days in the mail and compared from a minimal 1.5% based on the present
another 3 days to be processed in the company’s credit terms.
receivables department. Management is considering a
change in the company’s cash collection method and is 11. What is the incremental cost of carrying
considering to use local messenger services to collect receivables?
and mail checks. This will save the 2 days of late check
a. 825,000
forwarding. The messenger service costs P20,000 per
b. 1,375,000
year. The company has a 15% before-tax opportunity.
c. 1,100,000
Compute the annual change in the company’s before-
d. 1,031,250
tax income that will result from the new proposal.
12. How much is the incremental contribution margin?
a. Net advantage of 59,500
b. Net disadvantage of 6,500 a. 1,800,000
c. Net advantage of 139,000 b. 7,200,000
d. Net advantage of 70,000 c. 6,875,000
d. 9,000,000
9. An aggressive credit manager has taken over
Shirakami Corporation. Currently, sales are about P21.6 13. What is the effect in the before-tax profit, if the
million a year. company implements this new credit period?
The credit manager believes that by establishing credit a. (395,000)
terms of 2/10, net 30, he can reduce the collection b. 4,730,000
period from 60 days to 20 days, on average. The credit c. (670,000)
manager expects that 80% of the total credit customers d. 3,830,000
will take advantage of the discount and that all of the
funds received from the receivables can be invested at 14. Lolo Inc. purchased an item on credit with terms of
15 percent. The variable cost ratio is maintained at 60%. 3/10 net 45. Based on a 360-day year, the company’s
Moreover, the company expects to reduce its collection annual interest cost of foregoing the cash discounts and
costs by P90,000 a year on this new credit policy. What making payment on the last day of the credit period is:
is the net advantage (disadvantage) of the new credit
policy? a. 24.00%
b. 31.81%
a. 104,400 c. 24.74%
b. (39,600) d. 30.86%
c. 450,000
d. 306,000 15. The official terms of purchases of U Tang & Co. are
2/10 net 30 but generally the company does not pay
10. Flare Company is planning to increase its level of until 40 days after the invoice date. The purchases total
collection expenditures from the current P250,000 to P3,600,000 per year. Assuming 360 days a year, the
P400,000, on credit sales of P24 million. This move is approximate cost of the non-free trade credits amounts
expected to accelerate payments and increase turnover to
of receivables from 8 to 12 times and cut bad debts
from two percent to one percent of credit sales. The a. 18.40%
opportunity cost of funds is 12 percent. The company b. 24.50%
uses a 360-day year in financial planning and c. 21.90%
controlling. Compute the net advantage (disadvantage) d. 19.40%
of the new collection policy.
16. An invoice of a P100,000 purchase has credit terms
a. (270,000) of 1/10, n/40. A bank loan for 8 percent can be
b. 210,000 arranged at anytime. When should the customer pay
c. (30,000) the invoice?
d. 450,000
a. Pay on the 1st
For the next three questions, refer to the problem b. Pay on the 10th
below. c. Pay on the 40th
d. Pay on the 60th
The Usada Company presently gives terms of net 30
days. It has P60 million in sales, and its average 17. A company plans to tighten its credit policy. The
collection period is 45 days. To stimulate demand, the new policy will decrease the average number of days in
company may give terms of net 60 days. If this policy is collection from 75 to 50 days and reduce the ratio of
implemented, sales are expected to increase by 15%. credit sales to total sales from 70% to 60%. The
After the change, average collection period is expected company estimates that projected sales would be 5%
to be at 75 days, with no difference in payment habits less if the proposed new credit policy were
between old and new customers. Variable costs are implemented. The firm’s short-term interest cost is
P0.80 for every P1.00 of sales, and the company’s 10%. Projected sales for the coming year are P50
required rate of return on investment in receivables is million. Assuming a 360-day year, calculate the peso
impact on accounts receivable of this proposed change 23. Supporting working capital with long-term financing
in credit policy. is

a. P3,819,445 decrease a. Risky but inexpensive

b. P3,333,334 decrease b. Conservative but expensive
c. P6,500,000 decrease c. Expensive and risky
d. P18,749,778 increase d. Conservative and inexpensive

Refer to the problem below for the next three
questions.
Sony Company is considering changing its credit terms
from 2/15, net 30 to 3/10, net 30 in order to speed up
collections.
At present, 40 percent of Sony Company’s customers
take the 2 percent discount. Under the new term,
discount customers are expected to rise to 50 percent.
Regardless of the credit terms, half of the customers
who do not take the discount are expected to pay on
time, whereas the remainder will pay 10 days late. The
change does not involve a relaxation of credit
standards; therefore, bad debts losses are not expected
to rise above their present 2 percent level.
However, the more generous cash discount terms are
expected to increase sales from P2 million to P2.6
million per year. Sony Company’s variable cost ratio is
75 percent, the interest rate on funds invested in
accounts receivable is 9 percent, and the firm’s income
tax rate is 40 percent.
18. What are the days sales outstanding (DSO) before
and after the change of credit policy?
a. 27.0 days and 22.5 days
b. 22.5 days and 27.0 days
c. 27.0 days and 25.0 days
d. 25.0 days and 21.5 days
19. The incremental carrying cost on receivable is
a. 843.75
b. 1,125.00
c. 643.75
d. 6,667.00
24. Collection float:
a. Is more desirable to firms than disbursement
float.
b. Is fully eliminated by the installation of a
lockbox system.
c. Exists when a firm’s available balance exceeds
its book balance.
d. Can be eliminated if all collections could be
received electronically.
25. Which of the following credit and collections
decisions would typically not increase the accounts
receivable balance?
a. Extending credit to less creditworthy customers.
b. Increasing the discount offered for prompt
payment.
c. Extending the time allowed for payment of a
customer’s bill.
d. Delaying collection letters from the credit
department.
26. Relaxation of credit policy results in
a. An increase in credit sales
b. A decrease in credit expenses
c. A decrease in investment receivables
d. B and C
27. Which one of the following will increase a firm’s
investment in accounts receivable?
a. A decrease in the number of days for which
credit is granted.
b. A decrease in credit sales.
c. An increase in average daily credit sales.
d. A decrease in the average collection period.

20. The incremental after tax profit from the change in 28. The practice of and procedures for moving cash
credit terms is from multiple banks into a firm’s centralized bank
account is known as:
a. 65,640
b. 68,493 a. Cash concentration
c. 60,615 b. Strategic cash disbursement
d. 75,694 c. Transfer flotation
d. Float management
21. Seasonal peaks in business are supported by:
29. The speculative motive is the need to hold cash:
a. Permanent working capital
b. Long-term financing a. To pay outstanding checks
c. Temporary financing b. To maintain a firm’s daily operations
d. Discretionary financing c. To invest in opportunities which may arise
d. To compensate a bank for services rendered
22. An aggressive working capital policy would include
30. The procedures followed by the firm for ensuring
a. Using short term financing to finance only peak payment of its accounts receivables are called its
temporary working capital.
b. Using short term financing to finance all a. Discount policy
temporary working capital. b. Collection policy
c. Using short term financing to finance all c. Credit policy
temporary and some permanent working d. Payables policy
capital.
d. Both a and b above describe aggressive working SEMI-FINALS
capital policies.
 The following four questions are based on the Leniel Corporation makes available the following
following:    information relative to its Raw Material B1.
Genny plans to borrow 1,000,000 from MetroBank,
which offers to lend the money at a 20 percent Annual demand 30,000 units
nominal or stated  rate on a 1-year loan.  
Working days in a year 300 days
1. What is the effective interest rate if the loan is a
Normal lead time 12 days
discounted loan?  25%
Maximum lead time 19 days
2. What is the effective interest rate if the loan is
an add-on interest loan with 12 monthly Maximum usage per working day 125 units
payments?  36.92%
Economic order size 6,000 units
3. What is the effective interest rate if the loan is
a discount loan with a 10 percent compensating
balance?  28.57%
Required: Calculate the following:  
4. Under the terms of no. 3, how much would
13. Lead time quantity  1,200
you have to borrow to have the use of
1,000,000?  1,428,571.43 14. Safety stock quantity 1,000

5. Honey Company obtained a short-term bank loan for 15. Reorder point  2,200
1,500,000 at an annual interest rate of 12%. As a
condition of  the loan, Honey required to maintain a 16. Average inventory  4,000
compensating balance of 250,000 in its checking 17. Maximum inventory level 7,000 
account. The checking  account earns interest at an
annual rate of 5%. Honey maintains 80,000 in its 18. Minimum inventory level 1,000
checking account. Honey’s effective  interest rate of
the loan is?  12.89%

6. Messy Incorporation can issue three-month notes with a
face value of 500,000 for 485,000. The annualized
effective interest cost of financing would be?  12.37 %
7. April Partnership was recently quoted terms on a
commercial bank loan of 12 percent discounted interest
with a 10  percent compensating balance. The term of
the loan is one year. The effective cost of borrowing
is?  15.38%
8. Lina Manufacturing has a part with a unit cost of P40.
It costs P53 to place, process and receive an order.
The  carrying cost of the inventory is approximately
20% of the part’s peso value per year. The firm uses
2,000 of the  parts each year. What order quantity
minimizes total inventory cost?  163
9. A firm buy on terms 2/10, net 30, but generally does not
pay until 45 days after the invoice date. Its purchases
total  1,080,000 per year. What is the approximate cost
of the “non-free” trade credit?  20.99%
10. What is the effective interest rate of the source of
credit in no. 9?  23.10%
1. To reduce production start-up costs, Sangria
Corporation may manufacture longer runs of the same
track. Estimated savings from the increase in efficiency
are 260,000 per year. However, inventory turnover will
decrease from 8 times a year to six times a year. Cost of
goods sold are 48 million on an annual basis. The
company would have to finance the extra inventory at a
cost of 10%. What would be the effect on income if the
company will implement the new production plan
considering that the rate of return on investments in
inventories is 15%?
a. 60,000 increase
b. 300,000 increase
c. 40,000 decrease
d. 460,000 increase
2. Beezy Company manufactures wood figurines. Set-up
costs are P2.00. Beezy manufactures 4,000 figurines
evenly throughout the year. Using the economic order
quantity approach, the optimal production run would
be 2,000 figurines. Determine the cost of carrying one
bookcase.

11. Company A maintains a safety stock of 6,000 pounds a. 0.4

of Raw Material B7. Its average inventory is 18,000 b. 0.04
pounds.  What is the order quantity of Raw Material c. 0.004
B7?  24,000 d. 0.0004

12. Francia Designer Company uses about 700,000 yards

of a particular fabric each year. The fabric costs P20
per yard.  The current policy is to order fabric four 3. A company incurred a cost of P200 per order for the
times a year. Incremental ordering costs are about trucking, delivery and relevant clerical cost, and an
P360 per order, and  incremental carrying cost are annual carrying cost of 20% of average inventory.
about P1.25 per year, much of which represents the Monthly usage at cost amount to P3,000. What is the
opportunity costs of the funds  tied up in inventory. economic order to be placed each year?
The company also maintains a safety stock of 50,000 a. 2,467
yards. How much total annual costs are  associated b. 2,449
with the current inventory policy?  173,315 c. 8,485
Use the information below for the next six questions:    d. 9,452
4. Pan Company sells 60,000 units of product X a. 1,040
annually. Sales are fairly uniform throughout the year. b. 1,400
Normal lead c. 77,040
d. 77,400
time for the item is 12 days. Assume 300 working days
during the year, what is the lead time usage? 9. Which order size gives the lowest relevant inventory
costs?
a. 2,000 units
b. 2,400 units a. 2,000 units
c. 2,800 units b. 1,000 units
d. 3,000 units c. 500 units
d. 250 units
5. The Cat Company uses about 10,000 units of material
Z during a 250-day production year. Maximum and 10. The Lilipad Corporation currently purchases its raw
minimum usages are 55 and 25 units per day, materials at economic order level. The materials cost is
respectively. Normal lead time is 20 days from the date P50 per unit and the company carries its average
a purchases is initiated. inventory at 10% per unit cost. It incurs cost per order
at P30 and uses 67,500 raw materials annually. Its
Compute the lead time quantity. supplier has offered a 3% discounts on all purchases if
a. 500 units the company buys on a quarterly basis. Compute the
b. 1,100 units increase in total relevant inventory costs if purchases
c. 400 units are made on a quarterly basis.
d. 800 units a. 37,780.50
6. Vivi Corporation orders 50,000 units of products a b. 37,870.50
year. Its average carrying cost per unit is P4 and its cost c. 37,807.50
per order is P2.50. Determine the economic order d. 37,087.50
quantity assuming a supplier give Vivi a 5% cash 11. Base on the information above, determine the net
discount on merchandise purchases. savings if Lilipad Corporation accepts the supplier’s offer
a. 256 units to buy on a quarterly basis.
b. 244 units a. 29,692.50
c. 250 units
b. 63,442.50
d. 248 units c. 67,500.00
7. Based on the information above, recalculate the d. 101,250.00
economic order quantity assuming a supplier will give
12. Mars Company buys 600 boxes of item XYZ every
5% volume discount on merchandise purchases instead
two months. Order costs are P400 per order; carrying
of a cash discount.
costs are P1.50 per unit and vary directly with inventory
a. 256 units investment. Currently the company purchases the item
b. 244 units for P5 each.
c. 250 units
Determine the total ordering and carrying costs under
d. 248 units
the current policy.

a. 2,850.00
Use the information below for the next two questions.
b. 2,530.00
Dilly Company buys 4,000 units of product Rags per c. 2,280.43
year. It pays P10 per order and carries its inventories at d. 2,700.00
P2 per unit per annum. Dilly buys product Rags at P20
per unit. A supplier is offering Dilly the following
quantity discount: 13. Product B-145 will be ordered 5 times per year,
stock carrying cost is P3 per unit and stockout cost per
occurrence is P80. Available options are:
Order size (units) Quantity discount

4,000 10%
Units of safety stock Probability of running out of safety
2,000 - 3,999 7% stock

1,000 - 1,999 5% 10 50%

500 - 999 4% 20 40%

200 – 499 3% 30 30%

100 – 199 2% 40 20%

1 - 99 nil 50 10%

8. Compute the total relevant inventory cost at 1,000 Compute the optimal safety stock level.
units.
 a. 20 20. Determine the estimated annual effective interest
b. 30 rate for Venus Company if it borrows from MetroBank
c. 40 an amount of P200,000 at a term of 5 percent add-on
d. 50 interest, payable monthly for one year.

14. With regards to inventory management, an increase a. 4.76%

in the frequency of ordering will normally? b. 5.26%
c. 9.23%
a. Reduce the total cost d. 12.50%
b. Have no impact on ordering costs
c. Reduce the total carrying costs 21. The approximate cost of foregoing the cash discount
d. Have no impact on total carrying costs on credit term of 3/10, n/60 is

15. State whether the following statements are true or a. 3.0%

false. b. 16.5%
c. 19.7%
Statement 1 – The two main types of inventory costs d. 22.3%
relevant to inventory decision making are carrying cost
and ordering costs. 22. Saturn Corporation buys on terms 3/15, net 60, but
generally does not pay until 75 days after the invoice
Statement 2 – The optimal ordering quantity in the EOQ date. The company needs to raise 1,000,000 for 9
model occurs at the point where the sum of the carrying months to increase its working capital by foregoing cash
costs and ordering costs are minimized. discounts. What is the approximate cost of the non-free
trade credit?
a. Statement is False; Statement 2 is True
b. Statement is True; Statement 2 is False a. 18.54%
c. Statement is False; Statement 2 is False b. 19.43%
d. Statement is True; Statement 2 is True c. 24.72%
d. 24.27%
16. You computed the economic order quantity of the
main raw material of Jupiter Co., at 10,000 units. 23. Using the information above, calculate the effective
However, the chief purchasing officer decided to order interest rate.
in quantities of 12,000 units. What is the probable effect
of this decision on the company’s annual purchase a. 14.68%
order cost compared with those amounts had the order b. 19.57%
been made at the economic order quantity? c. 26.71%
d. 20.03%
a. Lower purchase order cost and higher carrying
cost. 24. Nene Corporation received a 450,000 line of credit
b. Lower purchase order cost and lower carrying at an interest rate of 12% from LandBank and drew
cost. down the entire amount. The line of credit agreement
c. Higher purchase order cost and lower carrying requires that an amount equal to 9% of the loan be
cost. deposited into a compensating balance account, what is
d. Higher purchase order cost and higher carrying the effective annual cost of credit for this loan
cost. arrangement.

17. An increase in inventory holding costs will a. 15.19%

b. 12.00%
a. Have no effect on the economic order quantity. c. 13.19%
b. Increase the economic order quantity. d. 14.12%
c. Decrease the number of orders issued per year.
d. Decrease the economic order quantity.

18. For inventory management, ignoring safety stock, 25. Polka Company obtained a short-term bank loan for
the valid computation of the reorder point is 200,000 at an annual interest rate of 12%. As a
condition of the loan, Polka is required to maintain a
a. Economic order quantity 20% compensating balance in its checking account. The
b. EOQ multiplied by the expected demand during checking account earns at an annual rate of 4%. Polka
lead time would otherwise maintain only 10,000 in its checking
c. Anticipated demand during lead time account in the normal course of business. Calculate
d. Square root of the anticipated demand during Polka’s effective interest cost.
lead time
a. 13.41%
19. Mantis Company borrows P400,000 on a 6 percent b. 14.00%
discounted loan with a 10 percent compensating c. 15.00%
balance for 3 months, calculate the effective interest d. 14.12%
rate.

a. 7.14%
b. 6.00%
c. 6.78%
d. 6.44%