ACCOUNTING 16

Management Advisory
Services Semester of A.Y.
2021-2022

FINAL EXAMINATION
Andrea Florence G. Vidal BSA 4

TRUE OR FALSE. Theory

F 1. There are as many direct materials purchases budgets as there are products.
T 2. The output of the Cost of Goods Sold Budget is entered into the pro forma income statement
T 3. In preparing the direct labor budget, the wage rate anticipated for each worker must be used.
T 4. The master budget is composed of operating budgets and financial budgets.
F 5. The direct labor budget includes: units to be produced, direct labor time needed, and the beginning
inventory
T 6. The standard cost per unit of output for a particular input is calculated by multiplying the standard
price per unit by the standard number of units produced.
F 7. Ideal standards allow for machine breakdowns, slack, or momentary lack of skill.
T 8. Before-the-fact flexible budgets are especially useful for comparing expected costs with actual costs.
T 9. A static budget is used to measure the efficiency of a manager whereas a flexible budget is used to
measure the effectiveness of a manager.
T 10. In a decentralized company, overall profit margins can mask inefficiencies within the various
subdivisions.
F 11. Decreasing inventories leads to a reduction in return on investment (ROI).
F 12. Short-run decision making only involves short-run decisions that have nothing to do with the firm's
overall strategy.
T 13. A sunk cost is never relevant
F 14. Resources that are acquired in advance of usage are flexible resources.
F 15. Flexible resources may have unused capacity
F 16. A segment margin is always greater than or equal to zero
F 17. Bellair Company produces a product that has manufacturing cost of $30 per unit. Bellair's policy is to
charge a price equal to cost plus 30%. The 30% is pure profit to Bellair.
F 18. Fixed costs are never relevant.
T 19. Sometimes firms require riskier projects to have shorter payback periods.
F 20. The payback period considers the profitability of a project over its entire life span.
F 21. One drawback to the internal rate of return model is that cash inflows must occur evenly over the life
of the investment
F 22. The activity from the balance sheet to be presented in the financing activities section of the statement
of cash flows is based on an analysis of stockholders' equity only
T 23. A decrease in accounts payable is deducted from net income in the operating activities section of the
statement of cash flows prepared under the indirect method.
T 24. The quick ratio should be smaller than the current ratio.
T 25. Jill's Market has an inventory turnover of 120 times. Scott's Market has a turnover of 128 times.
Scott's is more effective in managing inventory.
MULTIPLE CHOICE. Theory

1. Which of the following is a use of budgets for control?

a. plans can be made for the future.
b. if conditions change between the formation of the budget and the current time, budgets can be
quickly
adapted.
c. budgets set a standard against which results can be compared.
d. communication is improved.
e. All of these

2. Direct materials needed for production is calculated by:

a. multiplying units to be produced by direct materials per unit.
b. subtracting units to be produced from direct materials per unit.
c. dividing units to be produced by direct materials per unit.
d. adding units to be produced to direct materials per unit.

3. Which of the following statements is true?

a. The overhead budget is typically composed of variable overhead and fixed overhead.
b. The direct labor budget uses an average wage rate for direct labor.
c. The production budget is not converted into dollars.
d. The sales budget includes both units and dollars.
e. All of these.

4. Bank loan officers would find which of the following budgets to be most important in determining whether or not to
give a company a loan?
a. sales budget
b. production budget
c. budgeted income statement
d. budgeted balance sheet
e. cash budget

5. A company anticipates selling $200,000 of goods, of which $15,000 will probably be uncollectible. Which of the
following statements is true?
a. $15,000 does not appear on the cash budget
b. $215,000 is added to the cash budget
c. $15,000 is subtracted from the cash budget
d. $185,000 appears as a disbursement on the cash budget
e. none of these

6. Price standards are based on

a. the amount of input that should be used per unit of output.
b. the amount that should be paid for the total quantity of input to be used.
c. the amount that should be paid per unit of output.
d. the amount that should be paid per unit of input purchased.
e. none of these.

7. Standard cost systems are adopted

a. to improve planning and control.
b. to facilitate product costing.
c. to improve planning and control, and to facilitate product costing.
d. to enhance the operational control of firms that emphasize continuous improvement.
e. for all of these reasons.

8. The materials usage variance is calculated by the equation

a. (Standard Price x Actual Quantity) - (Standard Price x Standard Quantity).
b. (Standard Price x Standard Quality) - (Standard Price x Actual Quantity).
c. (Actual Price x Actual Quantity) - (Standard Price x Actual Quantity).
 d. (Actual Price x Standard Quantity) - (Actual Quantity x Standard Price).
e. None of these.

9. Which of the following is not true regarding the use of labor variance information?
a. The actual wage rate is almost always different from the standard rate.
b. Unexpected overtime can cause variation in the labor rate.
c. An average wage rate is chosen as the labor rate standard.
d. The production manager controls the use of labor.
e. The actual wage rate is used in determining the labor rate variance.

10. Assume that SQ = Standard Quantity, SP = Standard Price, AQ = Actual Quantity, and AP = Actual Price. The
correct entry along with the equation to record the issuance and usage of materials, assuming a favorable materials
usage variance, is as follows
a. Work in Process SQ x SP
Materials Usage Variance (AQ - SQ)SP
Materials AQ x SP
b. Work in Process SQ x SP
Materials Usage Variance (AQ - SQ)SP
Materials AQ x SP
c. Work in Process AQ x AP
Materials Usage Variance (AQ - SQ)SP
Materials AQ x SP
d. Work in Process AQ x AP
Materials Usage Variance (AQ - SQ)SP
Materials AQ x SP
e. None of these.

11.To create a meaningful performance report,

a. actual costs are compared with the expected costs found in the static budget.
b. actual costs are calculated as a percentage of sales.
c. actual costs are compared with the prior year's actual costs.
d. expected costs of the static budget are compared with the expected costs of the flexible budget.
e. actual costs are compared with the expected costs at the same level of activity.

12.A static budget is best used to

a. measure whether or not a manager accomplishes his or her goals
b. compare expected costs at the actual level of activity with the actual costs
c. assess how well costs were controlled during the year
d. determine managerial efficiency
e. none of these

13.The practice of delegating decision-making authority to the lower levels of management in a company is
a. centralization.
b. decentralization.
c. performance evaluation.
d. authorization.
e. hierarchy flattening.

14.A positive result that stems from the use of return on investment (ROI) is that it encourages managers to focus on
a. the relationship among sales, expenses, and investment.
b. cost efficiency.
c. operating asset efficiency.
d. the efficient use of resources in generating income.
e. all of these.

15. Division A had ROI of 15% last year. The manager of Division A is considering an additional investment for the
coming year. What step will the manager likely choose to take?
 a. accept the investment as long as it provides positive operating income
b. accept the investment as long as its ROI is positive
c. reject the investment if it returns more than 15% ROI
d. reject the investment if it returns less than 15% ROI
e. reject the investment if it returns an ROI equal to 15%

16.If the selling division is operating at less than full capacity, the floor of the bargaining range would most probably set at
a. market price.
b. full manufacturing cost.
c. average price of all products sold by the selling division.
d. manufacturing cost plus some percentage for profit.
e. variable cost of manufacturing.

17. A segment of Mega, Inc., manufactures and sells blankets. The various models of blankets are produced in a single
factory using stable technology. They are sold by the sales department, also located in the factory. The segment is
most probably accounted for as a(n)
a. cost center.
b. revenue center.
c. profit center.
d. investment center.
e. none of these.

18.The act of choosing among alternatives with an immediate or limited end in view is termed
a. assessing feasible alternative.
b. strategic decision making.
c. constructing a decision model.
d. short-run decision making.
e. none of these.

19.When managers are considering the optimal product mix, they are most concerned with
a. maximizing revenue.
b. minimizing cost.
c. maximizing profit.
d. minimizing selling and administrative expense.
e. balancing productive capacity.

20.Depreciation of equipment is an example of a(n)

a. relevant cost.
b. opportunity cost.
c. sunk cost.
d. variable cost.
e. none of these.

21.Future costs that differ across alternatives are

a. opportunity costs.
b. sunk costs.
c. relevant costs.
d. variable costs.
e. product costs.

22.Which of the following is true of capital investment decision making?

a. It is used only for independent projects
b. It is used only for mutually exclusive projects
c. It requires that funding for a project must come from sources with the same opportunity cost of
funds
d. It is used to determine whether or not a firm should accept a special order
e. none of these
23.Which of the following is a drawback of the payback period?
a. it ignores a project's total profitability
b. it uses a set discount rate
c. it considers total profitability, requiring the forecasting of all future cash flows
d. it uses before-tax cash flows rather than after-tax cash flows
e. it uses operating income rather than cash flows

24.Which of the following is true regarding the internal rate of return for a project?
a. If the internal rate of return is less than the required rate of return, the project will be rejected.
b. If the internal rate of return is equal to the required rate of return, the net present value of the
project is zero.
c. If the internal rate of return is more than the required rate of return, the project will be accepted.
d. Many managers may believe that the internal rate of return is the compounded rate of return earned
by the initial investment.
e. all of these

25.The acquiring of land by issuing common stock is

a. only reported if the statement of cash flows is prepared using the direct method.
b. a cash transaction that is reported in the investing section in the body of the statement of cash
flows.
c. a noncash transaction that is reported in the operating section in the body of the statement of cash
flows.
d. a noncash transaction that is disclosed in a supplementary schedule attached to the statement of
cash flows.

26.Which one of the following affects cash during a period?

a. Payment of an account payable.
b. Declaration of a cash dividend.
c. Write-off of an uncollectible account receivable.
d. Recording depreciation expense.

27. In calculating net cash from operating activities using the indirect method, an increase in prepaid expenses during a
period is
a. deducted from net income.
b. added to net income.
c. ignored because it does not affect income.
d. ignored because it does not affect expenses.

28.Which one of the following is not a characteristic generally evaluated in ratio analysis?
a. liquidity.
b. profitability.
c. leverage.
d. marketability.

29.Short-term creditors are usually most interested in assessing

a. leverage.
b. liquidity.
c. marketability.
d. profitability.

30.A high accounts receivable turnover ratio indicates

a. customers are making payments quickly.
b. a large portion of the company's sales are on credit.
c. many customers are not paying their receivables.
d. the company's sales have increased.
MULTIPLE CHOICE. Short Problems
1. A company has provided a sales budget for the next four months (January, February, March, and April). It bases its
production budget on the sales budget, and has a policy that each month's ending inventory of finished product must
be equal to 25% of the following month's sales needs. The direct materials purchase budget is based on the
production budget. The company's policy for each month's ending inventory of raw materials is that they must be
equal to 10% of the following month's production needs for raw materials. Given this information, the company can
prepare direct materials purchases budgets for how many months?
a. One
b. Two
c. Three
d. Four
e. Five

2. Ressen Company finds that typically 30% of a month's sales are for cash. Payments on accounts receivable are 60%
in the month of sale and 38% in the month following sale. Budgeted sales for June are $100,000, for July $140,000,
and for August $120,000. What are the total cash receipts budgeted for July?
a. $127,400
b. $85,400
c. $122,000
d. $262,000

3. During the month of March, Baker's Express purchased 10,000 pounds of flour at $1 per pound. At the end of March,
Baker's Express found that it had an unfavorable materials price variance of $500. The standard cost per pound
must be
a. $1.95
b. $1.00
c. $1.05
d. $0.95

4. During June, Cisco Company produced 12,000 chainsaw blades. The standard quantity of material allowed per unit
was 1.5 pounds of steel per blade at a standard cost of $8 per pound. Cisco determined that it had a favorable
materials usage variance of $1,000 for June. Calculate the actual quantity of materials Cisco used.
a. 17,875 pounds
b. 12,125 pounds
c. 11,875 pounds
d. 18,125 pounds

Lawson, Inc. produces plastic grocery bags. Lawson has developed a static budget for the month of July based on
8,000 direct labor hours. During the quarter, the actual activity was 9,000 direct labor hours. Data for July are
summarized as follows:

Static budget Actual costs

(8,000 hours) (9,000 hours)
Direct Materials $ 96,000 $118,000
Power 40,000 47,000
Salary of plant supervisor 6,000 6,000
Total $142,000 $171,000

5. Refer to Figure Lawson, Inc. Comparing the static budget to the actual costs, we can conclude that:
a. the manager spent more than should have been spent.
b. immediate action is needed to reduce costs.
c. the plant manager was clearly not efficient.
d. the plant manager should be dismissed.
e. none of these.

6. Refer to Lawson, Inc. What is the flexible budget for July?

a. $142,000
b. $159,000
c. $171,000
 d. $165,000
e. none of these

7. Refer to Lawson, Inc. What is the flexible budget variance for July?
a. $12,000 U
b. $12,000 F
c. $29,000 U
d. $29,000 F

8. Shandling Company had operating income of $70,000, sales of $218,750, and turnover of 0.5. What is Shandling's
ROI?
a. 32%
b. 50%
c. 16%
d. 64%
e. cannot be determined from this information

The manager of Alpha Division projects the following for next year:

Sales $100,000
Operating income $ 30,000
Operating assets $200,000

The manager can invest in an additional project that would require $30,000 investment in additional assets and would
generate $4,200 of additional income. The company's minimum rate of return is 12%.
9. Refer to Alpha Division. What is the residual income for Alpha Division without the additional investment?
a. $30,000
b. $24,000
c. $6,600
d. $4,200
e. $6,000

10.Refer to Alpha Division. What is the residual income for Alpha Division with the additional project?
a. $30,000
b. $6,000
c. $6,600
d. $4,200
e. $27,600

11.Refer to Alpha Division. Which of the following statements is true?

a. If the manager invests in the additional project, ROI of the division will increase
b. The residual income of the project is less than the residual income of the division without the
project, therefore the project will be rejected.
c. Average investment for Alpha Division will decrease if the project is accepted for investment.
d. If the manager invests in the additional project, residual income of the division will increase.
e. none of these is true.

Beta Division had the following information:

Asset base in Beta Division $400,000

Net income in Beta Division $ 50,000
Cost of capital 12%
Target ROI 15%
Margin for Beta Division 20%

12.If the asset base is decreased by $100,000, with no other changes, the return on investment of Beta Division will be
a. 100.0%.
b. 16.7%.
c. 600.0%.
d. 62.5%.
13.If the margin of 0.3 stayed the same and the turnover ratio of 5.0 increased by 10 percent, the ROI would
a. increase by 10 percent.
b. decrease by 10 percent.
c. increase by 15 percent.
d. remain the same.

14. Raffles Company routinely bids on construction jobs. Raffles first determines the budgeted product cost of the job
and then applies a markup of 50%. If a bid of $15,000 is submitted for a new job, which of the following is true?
a. budgeted product cost is $15,000
b. $5,000 is pure profit
c. all costs pertaining to the job total $15,000
d. $5,000 includes fixed overhead, selling and administrative expense, and profit
e. $5,000 includes selling and administrative expense, and profit

15. Walloon Company produced 150 defective units last month at a unit manufacturing cost of $30. The defective units
were discovered before leaving the plant. Walloon can sell them as is for $20 or can rework them at a cost of $15
and sell them at the regular price of $50. The total relevant cost of reworking the defective units is:
a. $4,500
b. $6,750
c. $7,500
d. $3,000
e. $2,250

Elegance Bath Products, Inc. (EBP) makes a variety of ceramic sinks and tubs. EBP has just developed a line of
sinks and tubs made from a mixture of glass and ceramic. The sinks sell for $150 each and have variable costs of
$80. The tubs sell for $600 and have variable cost of $450. The glass and ceramic sinks and tubs require the use of
specialized molding equipment. The specialized molding equipment has 4,050 hours of capacity per year. A sink
uses an average of 2 hours of specialized molding equipment time; a tub uses an average of 5 hours of specialized
molding equipment time.
16. Refer to Elegance Bath Products, Inc. What is the contribution margin per hour of specialized molding equipment
time for sinks?
a. $35.00
b. $33.33
c. $70.00
d. $200.00
e. $68.33

17. Refer to Elegance Bath Products, Inc. Assume that EBP can sell as many as 1,000 sinks and 500 tubs per year. How
many tubs should EBP produce?
a. 1,000
b. 500
c. 410
d. 675
e. zero

18. Refer to Elegance Bath Products, Inc. Assuming that specialized molding equipment time is the only constrained
resource, and that EBP can sell as many tubs and sinks as it can produce, how many sinks should be sold?
a. 2,050
b. 2,025
c. zero
d. 4,050
e. 810

A division manager is choosing between two mutually exclusive projects.

Project A Project B
Net present value $235,000 $210,000
Internal rate of return 13% 15%

19. The company requires any project to earn at least 12%. The manager believes that cash inflows from the project can
be reinvested at the rate of 12%. Which project will the manager likely choose?
a. Project B
 b. Project A
c. both Projects A and B
d. neither Project A nor B

20. Elena Wallace invested $150,000 in a project that pays her an even amount per year for 10 years. The payback
period is 6 years. What are Elena's yearly cash inflows from the project?
a. $150,000
b. $15,000
c. $25,000
d. $90,000
e. cannot be determined from this information

21. Elizabeth Myers invested in a project that required an initial amount of $1,560, and returned one cash inflow of
$12,000 at the end of the 18th year. A partial table of the present value of an annuity of $1 in arrears is as follows:

Year 2% 4% 6% 8% 10% 12% 14% 16%

18 0.700 0.494 0.350 0.250 0.180 0.130 0.095 0.069

What is the internal rate of return for this investment?

a. 8%
b. 10%
c. 12%
d. 14%
e. 16%

Tracy Company reported the following information at the end of 2010 and 2011:

2010 2011
Land $ 35,000 $ 90,000
Common Stock 200,000 255,000

22. An analysis of the company's records indicated that there were no cash flow effects resulting from the changes in the
two accounts presented above. How should Tracy report the changes in these accounts on a statement of cash
flows?
a. The company should report $55,000 for the acquisition of land as an investing activity and $55,000
for the issuance of stock as a financing activity.
b. The company should report $55,000 as a noncash investing and financing activity for the
acquisition of land by issuing common stock.
c. The company should report the issuance of common stock to acquire land in the financing activity
section with a net cash flow effect of zero.
d. The company should report the acquisition of land by issuing common stock in the investing activity
section with a net cash flow effect of zero.

23. Moore Company's net income last year was $56,000 and cash dividends declared and paid to the company
stockholders was $31,000. Changes in selected balance sheet accounts for the year appear below:

Increases
(Decreases)
Debit balances:
Accounts receivable $ (8,000)
Inventory (6,000)
Prepaid expenses 12,000

Credit balances:
Accumulated Depreciation 23,000
Accounts payable (10,000)
Accrued liabilities 7,000
Taxes payable 5,000
Bonds payable 40,000

Based solely on this information, the net cash flows from operating activities under the indirect method on the
statement of cash flows would be:
 a. $79,000.
b. $102,000.
c. $29,000.
d. $83,000.

24.Presented below are selected data from the financial statements of DeBruce Corp. for 2011 and 2010

2011 2010
Net income $110,000 $123,000
Cash dividends paid on common stock $ 42,000 $ 38,000
Market price per share of common stock at the end of the year $16.00 $13.00
Earnings per share $ 0.84 $ 0.74
Shares of common stock outstanding 140,000 100,000

The dividend payout ratio for 2011 is

a. 38.2%
b. 5.0%
c. 2.8%
d. 50.0%

25. Pine Hardware Store had net credit sales of $3,900,000 and cost of goods sold of $3,000,000 for the year. The
Accounts Receivable balances at the beginning and end of the year were $600,000 and $700,000, respectively. The
accounts receivable turnover ratio was
a. 5.6 times
b. 6.5 times
c. 4.6 times
d. 6 times

LONG PROBLEM
1. Allison Company adopted a standard cost system several years ago. The standard costs for the prime costs of its single
product follow:

Material: 10 kilograms @ $4.50 per kilogram $45.00

Labor: 6 hours @ $8.50 per hour $51.00

The following operating data were taken from the records for November:

1. Units completed: 5,800 units

2. Budgeted output: 6,000 units
3. Materials purchased: 60,000 kilograms
4. Total actual labor costs: $306,600
5. Actual hours of labor: 36,500 hours
6. Material usage variance: $2,250 unfavorable
7. Total material variance: $450 unfavorable

Compute the following:

A. Labor rate variance

B. Labor efficiency variance
C. Actual kilograms of material used in the production process
D. Actual cost paid per kilogram of material
 Present value of an Annuity of $1 in Arrears

Periods 4% 6% 8% 10% 12% 14%

1 0.962 0.943 0.926 0.909 0.893 0.877
2 1.886 1.833 1.783 1.736 1.690 1.647
3 2.775 2.673 2.577 2.487 2.402 2.322
4 3.630 3.465 3.312 3.170 3.037 2.914
5 4.452 4.212 3.993 3.791 3.605 4.433
6 5.242 4.917 4.623 4.355 4.111 3.889
7 6.002 5.582 5.206 4.868 4.564 4.288
8 6.733 6.210 5.747 5.335 4.968 4.639
9 7.435 6.802 6.247 5.759 5.328 4.946
10 8.111 7.360 6.710 6.145 5.650 5.216

2. Refer to Present value of an Annuity of $1 in Arrears. Aragon Company is considering an investment in equipment that
will have an initial cost of $560,290 yield annual net cash inflows of $90,000. Yearly depreciation will be $56,000. The
equipment is expected to be useful for 10 years, then it will be scrapped. Aragon requires a minimum rate of return of
10%.

A. What is the payback period?

B. What is the accounting rate of return?
C. What is the net present value?
D. What is the approximate internal rate of return?