MANAGEMENT SERVICES AND CONTROL

Qualifying Round:

Easy

1. Hagia Sophia Telephone has been forced by competition to drastically cut operating costs which
has resulted in a change from static budgeting to flexible budgeting. Which one of the following
steps will not help Hagia Sophia Telephone gain maximum acceptance of the proposed budgeting
system?

a. Implementing the change quickly.

b. Focusing departmental reports only on items that are under managers' control.
c. Demonstrating top management support for the change.
d. Ensuring that variances highlight good performances as well as pinpoint
weaknesses.

Answer: A
Any changes in a budget should, like any organizational change, be properly
communicated to all affected employees to reduce fear of personal, social, or economic
adjustments. A participative approach to effecting change should avoid arbitrary,
capricious, or prejudicial actions; provide ample notice, including information about the
reasons for the change, its precise nature, and the expected results; allow maximum
participation in the implementation of the change; and anticipate and, to the extent
possible, accommodate the needs of those involved. Accordingly, a rapid change in a
budget system is not recommended because employees may not be able to understand
the need for or benefits of the new system.

2. A Gantt chart

a. Shows the critical path for a project

b. Is issued for determining an optimal product mix
c. Shows only the activities along the critical path of a network
d. Does not necessarily show the critical path through a network

Answer: D
A Gantt or bar chart is sometimes used in conjunction with PERT or CPM to show the
progress of a special project. Time is shown on the horizontal axis, the length of a bar
equals the length of an activity, and shading indicates the degree of completion. However,
the Gantt chart is not as sophisticated as PERT or CPM in that it does not reflect the
relationships among the activities or define a critical path.

3. The rational decision-making process is most often typified by

a. Perfect information
b. Bounded rationality
c. Selection of optimum decisions
d. Choice of the least risky solution

Answer: A
Rational decision making is almost always subject to limitations that make the certain
determination of the optimal decision impossible. A very risk-averse decision maker may
react to such uncertainty by satisficing, that is, choosing an adequate course of action
that is perceived to be safe. Satisficing thus leads to decisions that are not only less than
optimal but also less than the less available.
4. When using the net present value method for capital budgeting analysis, the required rate of
return is called all of the following except the

a. Risk-free rate
b. Cost of capital
c. Discount rate
d. Cutoff rate

Answer: A
The rate used to discount future cash flows is sometimes called the cost of capital, the
discount rate, the cutoff rate or the hurdle rate. A risk-free rate is the rate available on
risk-free investments such as government bonds. The risk-free rate is not equivalent to the
cost of capital because the latter must incorporate a risk premium.

5. Stonehenge Company is planning to acquire a ₱250,000 machine that will provide increased
efficiencies, thereby reducing annual operating costs by ₱80,000. The machine will be
depreciated by the straight-line method over a 5-year life with no salvage value at the end of 5
years. Assuming a 40% income tax rate, the machine's payback period is

a. 3.13 years
b. 3.21 years
c. 3.68 years
d. 4.81 years

Answer: C
The payback period is the number of years required to complete the return of the original
investment. This measure is computed by dividing the net investment required by the
average expected net cash inflow to be generated. The first step is to determine the annual
cash flow. The ₱80,000 cost reduction will be offset by the tax expense on the savings. The
full ₱80,000, however, will not be taxable because depreciation can be deducted before
computing income taxes. Allocating the ₱250,000 cost evenly over 5 years produces an
annual depreciation expense of ₱50,000. Thus, taxable income will be ₱30,000 (₱80,000 -
₱50,000). At a 40% tax rate, the tax on ₱30,000 is ₱12,000. The net annual cash inflow is
therefore ₱68,000 (₱80,000 - ₱12,000), and the payback period is 3.68 years (₱250,000
investment ÷ ₱68,000).

6. The management of an organization has stated that two members of the same family may not be
employed in the same department. Identify the component of organizational planning that is being
demonstrated by management’s action.

a. A strategy
b. A policy
c. An objective
d. A mission statement

Answer: B
Top management establishes policies as guides to middle- and lower-management
decision making. Policies are relatively broad guidelines for making routine decisions
consistent with overall objectives or goals. They channel thinking in a certain direction but
allow for some managerial discretion.
7. Which one of the following may be considered an independent item in the preparation of the
master budget?

a. Ending inventory budget

b. Capital investment budget
c. Pro forma income statement
d. Pro forma statement of financial position

Answer: B
The capital investment budget may be prepared more than a year in advance, unlike the
other elements of the master budget. Because of the long-term commitments that must be
made for some types of capital investments, planning must be done far in advance and is
based on needs in future years as opposed to the current year's needs.

8. The recommended technique for evaluating projects when capital is rationed and there are no
mutually exclusive projects from which to choose is to rank the projects by

a. Accounting rate of return

b. Payback
c. Internal rate of return
d. Profitability index

Answer: D
The profitability index (PI) is often used to decide among investment alternatives when
more than one is acceptable. The profitability index is the ratio of the present value of
future net cash inflows to the initial net cash investment. The PI, although a variation of
the net present value method, facilitates comparison of different-sized investments.

9. Costs that arise from periodic budgeting decisions that have no strong input-output relationship
are commonly called

a. Committed costs
b. Discretionary costs
c. Opportunity costs
d. Differential costs

Answer: B
Discretionary costs are characterized by uncertainty about the relationship between input
(the costs) and the value of the related output. Advertising and research are examples.
They should be contrasted with engineered costs, that is, costs having a clear
input-output relationship (e.g., the cost of direct materials).

10. The manufacturing (work-in-process) account is

a. Neither a real nor a nominal account.

b. An inventory account indicating the beginning and ending inventory of goods being
processed.
c. A hybrid account (both a real and a nominal account).
d. A nominal account to which indirect costs are charged as incurred and credited as
these costs are charged to production.
Answer: B
The manufacturing account is an inventory account to which direct materials, direct labor,
and factory overhead costs are charged as they are incurred in the production process.
The sum of these costs plus the cost of BWIP is the total production cost to be accounted
for in any one period. The total is allocated to goods completed during the period, i.e., to
finished goods, and to EWIP. The manufacturing account may also be credited for
abnormal spoilage.
Average

1. For capital budgeting purposes, management would select a high hurdle rate of return for certain
projects because management

a. Wants to use equity funding exclusively

b. Believes too many proposals are being rejected
c. Believes bank loans are riskier that capital investments
d. Wants to factor risk into its consideration of projects

Answer: D
Risk analysis attempts to measure the likelihood of the variability of future returns from
the proposed investment. Risk can be incorporated into capital budgeting decisions in a
number of ways, one of which is to use a hurdle rate higher than the firm's cost of capital,
that is, a risk-adjusted discount rate. This technique adjusts the interest rate used for
discounting upward as an investment becomes riskier. The expected flow from the
investment must be relatively larger or the increased discount rate will generate a negative
net present value, and the proposed acquisition will be rejected.

2. Which statement best describes Total Quality Management (TQM)?

a. TQM emphasizes reducing the cost of inspection.

b. TQM emphasizes participation by all employees in the decision-making process.
c. TQM emphasizes encouraging cross-functional teamwork.
d. TQM emphasizes doing each job right the first time.

Answer: D
TQM establishes quality as an organizational objective and views it as a major component
of the organization's service to its customers. It emphasizes employee training and
commitment, product/service design and production, and customer service. Ordinarily, the
quality of a product or service is as important to customers as cost and timeliness.
Superior product quality is not attained merely through more inspection, better statistical
quality control, and cross-functional teamwork. Manufacturers must make fundamental
changes in the way they produce products and do each job right the first time.

3. The simple economic production lot size model will only apply to situations in which the
production

a. Rate equals the demand rate.

b. Rate is less than the demand rate.
c. Rate is greater than the demand rate.
d. For the period covered equals the projected sales for the period.

Answer: C
This model is the same as the basic EOQ model, with the production quantity (lot)
substituted for the EOQ and the cost of a production run for the order cost. In the basic
model, the production rate (or time to fill an order) is deemed to be instantaneous,
whereas demand is assumed to occur at a constant rate over some period of time.
4. Santorini Fabricators is building a corporate planning model to predict cash flows. The company
maintains end-of-month inventories that cover 20% of the following month’s sales. Merchandise
costs average 55% of selling prices and payment is made at the time of purchase. An appropriate
formula for total cash payments in June for merchandise purchase is

a. 11% of sales in July

b. 11% of sales in May
c. 44% of sales in June + 11% of sales in July
d. 44% of sales in June + 11% of sales in May

Answer: C
Cost of sales for July equals 55% of July sales. Because ending inventory for June must
equal 20% of the cost of sales for July, the cost of the ending inventory, which is paid for
in June, is 11% of July sales. Furthermore, 80% of the inventory sold in the current month
is purchased and paid for in the current month. If June’s cost of sales equals 55% of sales,
cash payments for inventory purchased and sold in June equal 44% of June sales. Hence,
total monthly cash payments for merchandise in June equal 44% of June sales plus 11% of
July sales.

5. Emerald Isle Manufacturing is approached by a German customer to fulfill a one-time-only special

order for a product similar to one offered to domestic customer. Emerald Isle Manufacturing has
excess capacity. The following per unit data apply for sales to regular customers:

Variable costs:
Direct material ₱40
Direct labor 20
Manufacturing support 35
Marketing costs 15
Fixed costs:
Manufacturing support 45
Marketing costs 15
Total costs 170
Markup (50%) 85
Targeted selling price ₱255

What is the change in operating profits if the one-time-only special order for 1,000 units is
accepted for ₱180 a unit by Emerald Isle?

a. ₱70,000 increase in operating profits

b. ₱10,000 increase in operating profits
c. ₱10,000 decrease in operating profits
d. ₱75,000 decrease in operating profits

Answer: A
Special price ₱180
Less variable cost (₱40+₱20+₱35+₱15) 110
CM per unit 70
Multiplied by number of units 1000
Increase in profit ₱70,000
6. Swiss Alps Company is considering eliminating Model AE2 from its camera line because of
losses over the past quarter. The past three months of information for Model AE2 are
summarized below:

Sales ₱300,000
Manufacturing costs:
Direct materials 150,000
Direct labor (P15 per hour) 60,000
Overhead 100,000
Operating loss (₱10,000)

Overhead costs are 70% variable and the remaining 30% is depreciation of special equipment for
model AE2 that has no resale value. If Model AE2 is dropped from the product line, operating
income will:

a. increase by ₱10,000
b. decrease by ₱20,000
c. increase by ₱30,000
d. decrease by ₱10,000

Answer: B
Sales ₱300,000
Less avoidable costs
Direct materials 150,000
Direct labor 60,000
Overhead (₱100,000 x 70%) 70,000
Contribution ₱20,000

7. Cinque Tierre is a nonprofit organization that supplies electric fans during the summer for
individuals in need. Fixed costs are ₱200,000. The fans cost ₱20.00 each. The organization has
a budgeted appropriation of ₱480,000. How many people can receive a fan during the summer?

a. 12,000 people
b. 14,000 people
c. 24,000 people
d. 34,000 people

Answer: B
Let N = Number of people who can receive a fan.
₱480,000 - ₱20N - ₱200,000 = ₱0
N = 14,000

8. Scottish Highlands, Inc. is expanding its manufacturing plant, which requires an investment of
₱4,000,000 in new equipment and plant modifications. Lawson’s sales are expected to increase
by ₱3,000,000 per year as a result of the expansion. Cash investment in current assets averages
30% of sales; accounts payable and other current liabilities are 10% of sales. What is the
estimated total investments for this expansion?

a. ₱3,400,000
b. ₱4,300,000
c. ₱4,600,000
d. ₱4,900,000
 Answer: C
The investment required includes increases in working capital (e.g., additional receivables
and inventories resulting from the acquisition of a new manufacturing plant). The
additional working capital is an initial cost of the investment, but one that will be
recovered (i.e., it has a salvage value equal to its initial cost). Scottish Highlands can use
current liabilities to fund assets to the extent of 10% of sales. Thus, the total initial cash
outlay will be ₱4,600,000 {₱4,000,000 + [(30% - 10%) x ₱3,000,000 sales]}.

9. The use of financial statement analysis, quality control procedures and employee performance
evaluations are all examples of

a. Concurrent controls
b. Feedback controls
c. Feedforward controls
d. Preventive controls

Answer: B
A feedback control operates to provide information about processes that have already
occurred. The listed controls are post-action of feedback controls

10. Angkor Wat has the following cost components for 100,000 units of product for the year:

Raw materials ₱200,000

Direct labor 100,000
Manufacturing overhead 200,000
Selling/administrative expense 150,000

All costs are variable except for ₱100,000 of manufacturing overhead and ₱100,000 of selling
and administrative expenses. The total costs to produce and sell 110,000 units for the year are:

a. ₱650,000
b. ₱715,000
c. ₱695,000
d. ₱540,000

Answer: C
Raw materials unit costs are strictly variable at ₱2 (₱200,000 ÷ 100,000 units). Similarly,
direct labor has a variable unit cost of ₱1 (₱100,000 ÷ 100,000 units). The ₱200,000 of
manufacturing overhead for 100,000 units is 50%. The variable unit cost is ₱1. Selling
costs are ₱100,000 fixed and ₱50,000 variable for production of 100,000 units, and the
variable unit selling expenses is ₱0.50 (₱50,000 ÷ 100,000 units). The total unit variable
cost is therefore ₱4.50 (₱2 + ₱1 + ₱1 + ₱0.5). Fixed costs are ₱200,000. At a production
level of 110,000 units, variable costs are ₱495,000 (₱4.5 x 110,000 units). Hence, total costs
are ₱695,000 (₱495,000 + ₱200,000).
Difficult

1. El Nido Co. is negotiating for a purchase of equipment that would cost ₱100,000, with the
expectation that ₱20,000 per year could be saved in after-tax cash costs if the equipment were
acquired. The equipment’s estimated useful life is ten years, with no residual value, and it would
be depreciated by the straight-line method. El Nido’s predetermined minimum desired rate of
return is 12%. The present value of an annuity of 1 at 12% for ten periods is 5.65. The present
value of 1 due in ten periods at 12% is 0.322. Accrual accounting rate of return based on the
initial investment is

a. 30%
b. 20%
c. 12%
d. 10%
Answer: D
Annual savings in after-tax cash costs ₱20,000
Annual depn (₱100,000/10 years) (10,000)
Increase in annual net income ₱10,000
÷ Investment cost 100,000
Acctg rate of return 10%

2. Vienna Co. is budgeting sales of 53,000 units of product Kern for October 2018. The manufacture
of one unit of Kern requires four kilos of chemical Loire. During October 2018, Vienna plans to
reduce the inventory of Loire by 50,000 kilos and increase the finished goods inventory of Kern by
6,000 units. There is no work in process inventory. How many kilos of Loire is Vienna budgeting
to purchase in October 2018?

a. 138,000
b. 162,000
c. 186,000
d. 238,000

Answer: C
Sales 53,000
Increase in inventory 6,000
Budgeted production 59,000
Multiplied by materials per unit 4
Production needs 236,000
Decrease in inventory (50,000)
Budgeted purchase 186,000

3. Marshall owns a computer reselling business and is expanding his business. Marshall is
presented with one proposal, P1, such that the estimated investment for the expansion project is
₱85,000 and it is expected to produce cash flows after taxes of ₱25,000 for each of the next 6
years. An alternate proposal, P2, involves an investment of ₱32,000 and after-tax cash flows of
₱10,000 for each of the next 6 years. The present value factors for an annuity of P1 for 1 to 6
years are as follows:

n 10% 12% 14% 16% 18% 20%

1 0.909 0.893 0.877 0.862 0.847 0.833
2 1.736 1.690 1.647 1.605 1.566 1.528
3 2.487 2.402 2.322 2.246 2.174 2.106
4 3.170 3.037 2.914 2.798 2.690 2.589
5 3.791 3.605 3.433 3.274 3.127 2.991
6 4.355 4.111 3.889 3.685 3.498 3.326
 The cost of capital that would make Marshall indifferent between these two proposals lies
between

a. 10% and 12%

b. 14% and 16%
c. 16% and 18%
d. 18% and 20%

Answer: C
Indifference point is when the NPVs of the two proposals are equal.
Let x = present value factor for a cost of capital for 6 years
85,000 - 25,000 = 32,000 - 10,000x
x = 3.533 which is between 16% and 18%

4. Lake Anjikuni, Inc. wants to use discounted cash flow techniques when analyzing its capital
investment projects. The company is aware of the uncertainty involved in estimating future cash
flows. A simple method some companies employ to adjust for the uncertainty inherent in their
estimates is to

a. Prepare a direct analysis of the profitability of outcome.

b. Use accelerated depreciation.
c. Adjust the minimum desired rate of return.
d. Increase the estimates of the cash flows.

Answer: C
Uncertainty can be compensated for by adjusting the desired rate of return. If projects
have relatively uncertain returns, a higher rate should be required. A lower rate of return
may be acceptable given greater certainty. The concept is that with increased risk should
come increased rewards, i.e., a higher rate of return.

5. Amsterdam, Inc. pays bonuses to its managers based on operating income. The company uses
absorption costing, and overhead is applied on the basis of direct labor hours. To increase
bonuses, Amsterdam’s managers may do all of the following, except

a. Produce those products requiring the most direct labor.

b. Defer expenses such as maintenance to a future period.
c. Increase production schedules independent of customer demands.
d. Decrease production of those items requiring the most direct labor.

Answer: D
Under an absorption-costing system, income can be manipulated by producing more
products than are sold because more fixed manufacturing overhead will be allocated to
the ending inventory. When inventory increases, some fixed costs are capitalized rather
than expensed. Decreasing production, however, will result in lower income because more
of the fixed manufacturing overhead will be expensed.
6. Assume that two companies, Company X and Company Y, are alike in all respects, except the
market value of the outstanding common shares of Company X is greater than the market value
of Company Y shares. This may indicate that

a. Company X’s investors expect higher dividend growth than Company Y’s investors.
b. Company X’s investors expect lower dividend growth than Company Y’s investors.
c. Company X’s investors have longer expected holding periods than Company Y’s
investors.
d. Company X’s investors have shorter expected holding periods than Company Y’s
investors.

Answer: A
If investors expect a higher dividend growth rate, the market value of the common shares
will be greater.

7. An organization is using capital budgeting techniques to compare two independent projects. It

could accept one, both, or neither of the projects. Which of the following statements is true about
the use of net present value (NPV) and internal rate of return (IRR) methods for evaluating these
two projects?

a. NPV and IRR criteria will always lead to the same accept or reject decision for two
independent projects.
b. If the first project’s IRR is higher than the organization’s cost or capital, the first
project will be accepted but the second project will not.
c. If the NPV criterion leads to accepting or rejecting the first project, one cannot predict
whether the IRR criterion will lead to accepting or rejecting the first project.
d. If the NPV criterion leads to accepting the first project, the IRR criterion will never
lead to accepting the first project.

Answer: A
NPV and IRR criteria will always lead to the same accept or reject decision.

8. An oligopolist faces a “kinked” demand curve. This terminology indicates that

a. When an oligopolist lowers its price, the other firms in the oligopoly will match the
price reduction, but if the oligopolist raises its price, the other firms will ignore the
price change.
b. An oligopolist faces a nonlinear demand for its product, and price changes will have
little effect on demand for that product.
c. An oligopolist can sell its product at any price, but after the “saturation point” another
oligopolist will lower its price and, therefore, shift the demand curve to the left.
d. Consumers have no effect on the demand curve, and an oligopolist can shape the
curve to optimize its own efficiency.

Answer: A
An oligopolist faces a kinked demand curve because competitors will often match price
decreases but are hesitant to match price increases.
9. At what stage of the capital budgeting process would management most likely apply present
value techniques?

a. Identification stage
b. Search stage
c. Selection stage
d. Financing stage

Answer: C
Present value techniques will most likely to be used in the selection stage in which
management evaluates various alternatives.

10. Under frost-free conditions, Cal Cultivators expects its strawberry crop to have a ₱60,000 market
value. An unprotected crop subject to frost has an expected market value of ₱40,000. If Cal
protects the strawberries against frost, then the market value of the crop is still expected to be
₱60,000 under frost-free conditions and ₱90,000 if there is a frost. What must be the probability
of a frost for Cal to be indifferent to spending ₱10,000 for frost protection?

a. 0.167
b. 0.200
c. 0.250
d. 0.333

Answer: B
Frost Frost-free
₱90,000 ₱60,000
Protected
Market value Market value
₱40,000 ₱60,000
Unprotected
Market value Market value

The difference between the market value of protected and unprotected strawberries if a
frost were to occur is ₱50,000. Since we want to determine the probability of a frost when
the expected value of the loss from frost damage is ₱10,000, this probability can be
calculated as follows:

Loss from damage x Probability of frost = Expected value of loss

₱50,000 x P = ₱10,000
P = ₱10,000 ÷ ₱50,000
P = 0.200
Final Round:

Easy

1. Which of the following actions normally requires shareholder approval?

a. Appointing the chief executive officer.

b. Issuing a dividend.
c. The corporate strategic plan.
d. Changing the nature of the corporation.

Answer: D
Changing the nature of the corporation requires approval by the shareholders.

2. Which of the following components is considered the foundation of the internal controls
established by an organization?

a. Control activities.
b. Monitoring.
c. The control environment.
d. The audit committee.

Answer: D
The control environment is considered the foundation of all of the other components of
internal control.

3. Which of the following is considered a component of a local area network?

a. Program flowchart.
b. Loop verification.
c. Transmission media.
d. Input routine.

Answer: C
A local area network requires that data be transmitted from one computer to another
through some form of transmission media.

4. Which one of the following would cause the demand curve for a commodity to shift to the left?

a. A rise in the price of a substitute product.

b. A rise in average household income.
c. A rise in the price of a complementary commodity.
d. A rise in the population.

Answer: C
A shift in the demand curve to the left would be indicative of a decrease in demand for the
product, and an increase in the price of a complementary commodity would cause such a
shift.
5. Which of the following expresses the relationship between risk and return?

a. Inverse relationship.
b. Direct relationship.
c. Negative relationship.
d. No relationship.

Answer: B
There is a direct (positive) relationship between risk and return. Higher returns are
associated with higher degrees of risk.

6. The discount rate (hurdle rate of return) must be determined in advance for the

a. Payback period method.

b. Time-adjusted rate of return method.
c. Net present value method.
d. Internal rate of return method.

Answer: C
The net present value method calculates the expected net monetary gain or loss from a
project by discounting all expected future cash inflows and outflows to the present using
some predetermined minimum desired rate of return (hurdle rate).

7. A depreciation tax shield is

a. An after-tax cash outflow.

b. A reduction in income taxes.
c. The cash provided by recording depreciation.
d. The expense caused by depreciation.

Answer: B
The benefit of depreciation in cash flow analysis is the resulting tax savings (reduction in
income taxes).

8. Which of the following is considered a component of a local area network?

a. Program flowchart.
b. Loop verification.
c. Transmission media.
d. Input routine.

Answer: C
A local area network requires that data be transmitted from one computer to another
through some form of transmission media.

9. To determine the inventory reorder point, calculations normally include the

a. Ordering cost.
b. Carrying cost.
c. Average daily usage.
d. Economic order quantity.
 Answer: C
Calculation of the reorder point includes consideration of the average daily usage, average
delivery time, and stock-out costs.

10. Which of the following is not one of the four perspectives of the balanced scorecard?

a. Investment in resources perspective.

b. Customer perspective.
c. Learning and growth perspective.
d. Financial perspective.

Answer: C
Investment in resources is not a perspective of the balanced scorecard. The balanced
scorecard deals with performance measurement.
Average

1. Which one of the following variances is of least significance from a behavioral control
perspective?

a. Unfavorable material quantity variance amounting to 20% of the quantity allowed for
the output attained.
b. Unfavorable labor efficiency variance amounting to 10% more than the budgeted
hours for the output attained.
c. Favorable labor rate variance resulting from an inability to hire experienced workers
to replace retiring workers.
d. Fixed overhead volume variance resulting from management's decision midway
through the fiscal year to reduce its budgeted output by 20%.

Answer: D
Most variances are of significance to someone who is responsible for that variance.
However, a fixed overhead volume variance is often not the responsibility of anyone other
than top management. The fixed overhead volume variance equals the difference between
budgeted fixed overhead and the amount applied (standard rate x standard input allowed
for the actual output). It can be caused by economic downturns, labor strife, bad weather,
or a change in planned output. Thus, a fixed overhead volume variance resulting from a
top management decision to reduce output has fewer behavioral implications than other
variances.

2. In its first year of operations, Regina Manufactures had the following costs when it produced
100,000 and sold 80,000 units of its only product

Manufacturing costs Fixed P180,000

Variable P170,000
Selling and Administrative costs Fixed P80,000
Variable P50,000

How much lower would Regina’s net income be if it used variable costing instead of full
absorption costing?

a. P36,000
b. P54,000
c. P68,000
d. P94,000

Answer: A
P20,000 x 180,000 / 100,000 = P36,000
3. Jansport Corporation has developed the following flexible budget formula for monthly overhead:
For output of less than 200,000 units: P36,600 + P.80(units)
For output of 200,000 units or more: P43,000 + P.80(units)
How much overhead should Jansport expect if the firm plans to produce 200,000 units?

a. P52,600
b. P59,000
c. P196,600
d. P203,000

Answer: D
P43,000 + P0.80(200,000) = P43,000 + P160,000 = P203,000

4. Bicol Company is a manufacturer of industrial product and employs a calendar year for financial
reporting purposes. Assume that total quick assets exceeded total current liabilities both before
and after the transaction. Further assume that Bicol has positive profits during the year and a
credit balance throughout the year in its retained earnings account. The collection of a current
accounts receivable of P17,000 would

a. Increase the current ratio

b. Decrease the current ratio and quick ratio
c. Increase the quick ratio
d. Not affect the current ratio or quick ratio

Answer: D
Collection of accounts receivable has no effect on the quick or current ratio because both
cash and accounts receivable are part of the numerator of both ratios.

5. Kode Co. manufactures a major product that gives rise to a by-product called May. May’s only
separable cost is a P1 selling cost when a unit is sold for P4. Kode accounts for May’s sales by
deducting the P3 net amount from the cost of goods sold of the major product. There are no
inventories. If Kode were to change its method of accounting for May from a by-product to a joint
product, what would be the effect on Kode’s overall gross margin?

a. No effect.
b. Gross margin increases by P1 for each unit of May sold.
c. Gross margin increases by P3 for each unit of May sold.
d. Gross margin increases by P4 for each unit of May sold.

Answer: B
The difference between treating the product named “May” as a joint product versus a
by-product would be that under by-product treatment, the selling cost is netted against
May’s selling price thus reducing gross margin whereas under joint-product accounting,
the selling cost would be deducting below the gross margin line as a selling expense.
Thus, if the change to joint-product accounting were made, gross margin would increase.
6. A manufacturing company prepares income statements using both absorption and variable
costing methods. At the end of a period actual sales revenues, total gross profit, and total
contribution margin approximated budgeted figures, whereas net income was substantially
greater than the budgeted amount. There were no beginning or ending inventories. The most
likely explanation of the net income increase is that, compared to budget, actual

a. Manufacturing fixed costs had increased.

b. Selling and administrative fixed expenses had decreased.
c. Sales prices and variable costs had increased proportionately.
d. Sales prices had declined proportionately less than variable costs.

Answer: B
Because the question states that actual sales revenue, total gross profit, and total
contribution margin approximated budgeted figures, CGS and variable expenses must
have also approximated budgeted figures. Net income is substantially greater, therefore,
because selling and administrative fixed expenses had decreased. If manufacturing fixed
costs had increased, gross margin would have decreased. If sales prices and variable
costs had increased proportionately, the contribution margin would have increased by the
same percentage. If sales prices had declined proportionately less than variable costs, the
contribution margin would have again increased.

7. Which of the following statements regarding transfer pricing is false?

a. When idle capacity exists, there is no opportunity cost to producing intermediate

products for another division.
b. Market-based transfer prices should be reduced by any costs avoided by selling
internally rather than externally.
c. No contribution margin is generated by the transferring division when variable
cost-based transfer prices are used.
d. The goal of transfer pricing is to provide segment managers with incentive to
maximize the profits of their divisions.

Answer: D
The goal of transfer pricing is to encourage managers to make transfer decisions which
maximize profits of the company as a whole. Some transfers may not be profitable to a
particular division, but would effect a cost savings to the company by avoiding costs of
purchasing externally. For example, when a division is already operating at full capacity
and uses variable cost transfer prices, additional production for internal transfer would
result in a loss for the transferring division because no contribution margin is earned to
cover the differential fixed costs incurred. Conversely, internal production may be cheaper
to the corporate entity than purchasing the product, in which case the division should
accept the order. However, the division manager is likely to engage in suboptimization by
rejecting the order to enhance the division’s performance, while adversely affecting overall
company performance.
8. MCA Products has received proposals for several banks to establish a lockbox system to speed
up receipts. MCA receives an average of 700 checks per day averaging P1,800 each, and its cost
of short term funds is 7% per year. Assuming that all proposals will produce equivalent
processing results and using a 360-day year, which one of the following proposals is optimal for
MCA?

a. A P0.50 fee per check

b. A flat fee of P125,000 per year
c. A fee of 0.03% of the amount collected
d. A compensating balance of P1,750,000

Answer: D
The number of checks issued during the year is determined by multiplying 700 times 360
days, which results in a total of 252,000 checks. The total amount of collections is equal to
P453,600,000 (252,000 checks × P1,800 per check). Answer (d) is correct because it results
in the lowest cost of P122,500 (P1,750,000 × 7%), which is the cost of maintaining the
compensating balance.

9. Managers of the Doggie Food Co. want to add a bonus component to their compensation plan.
They are trying to decide between return on investment (ROI) and residual income (RI) as the
performance measure they will use. If Doggie adopts the RI performance measure, the relevant
required rate of return would be 18%. One segment of Doggie is the Good Treats division, where
the manager has invested in new equipment. The operating results from this equipment are as
follows:
Revenues P80,000
Cost of goods sold 45,000
General and administrative expenses 15,000
Assuming that there are no income taxes, what would be the ROI and RI, respectively, for this
equipment, which has an average value of P100,000?

a. P2,000, 20%
b. 35%, P3,600
c. P3,600, 35%
d. 20%, P2,000

Answer: D
The ROI is equal to 20% [(P80,000 – P45,000 – P15,000) ÷ P1,000], and RI is equal to P2,000
[(P80,000 – P45,000 – P15,000) – (P100,000 × 18%)].
10. The accountant for Champion Brake, Inc. applies overhead based on machine hours. The
budgeted overhead and machine hours for the year are P260,000 and 16,000, respectively. The
actual overhead and machine hours incurred were P275,000 and 20,000. The cost of goods sold
and inventory data compiled for the year is as follows:
Direct Materials P 50,000
COGS 450,000
WIP (units) 100,000
Finished Goods (units) 150,000
What is the amount of over/underapplied overhead for the year?

a. P15,000
b. P50,000
c. P65,000
d. P67,000

Answer: B
The amount of overapplied overhead is P50,000. Overhead is applied at a rate of P16.25
per machine hour (P260,000 budgeted overhead ÷ 16,000 budgeted machine hours).
Therefore, P325,000 overhead was applied (P16.25 application rate × 20,000 actual hours),
and the overapplied overhead is equal to P50,000 (P325,000 applied overhead – P275,000
actual overhead).
Difficult

1. The internal auditor of a bank has developed a multiple regression model which has been used
for a number of years to estimate the amount of interest income from commercial loans. During
the current year, the auditor applies the model and discovers that the r2 value has decreased
dramatically, but the model otherwise seems to be working okay. Which of the following
conclusions are justified by the change?

a. Changing to a cross-sectional regression analysis should cause r2 to increase.

b. Regression analysis is no longer an appropriate technique to estimate interest
income.
c. Some new factors, not included in the model, are causing interest income to change.
d. A linear regression analysis would increase the model’s reliability.

Answer: C
The requirement is to provide an explanation for a drop in r2. The coefficient of
determination (r2) provides a measure of amount of variation in the dependent variable
(interest income) explained by the independent variables. If there is a dramatic decrease in
the coefficient of determination, the implication is that there are some new factors that are
causing interest income to change.

2. A company enters into an agreement with a firm who will factor the company’s accounts
receivable. The factor agrees to buy the company’s receivables, which average P100,000 per
month and have an average collection period of 30 days. The factor will advance up to 80% of the
face value of receivables at an annual rate of 10% and charge a fee of 2% on all receivables
purchased. The controller of the company estimates that the company would save P18,000 in
collection expenses over the year. Fees and interest are not deducted in advance. Assuming a
360-day year, what is the annual cost of financing?

a. 10%
b. 14%
c. 16%
d. 17.5%

Answer: D
The total amount paid to the factor would be (P100,000 × 80%) × 10% + (P100,000 × 12) ×
2% = P32,000. The net cost is equal to P14,000 (P32,000 – P18,000 cost savings).
Therefore, the annual interest cost is equal to P14,000/P80,000 = 17.5%.

3. Selected data from Perry Corporation's year-end financial statements are as follows.
Current ratio 2.0
Quick ratio 1.5
Current liabilities P120,000
Inventory turnover (using a cost of sales 8 times
base)
Gross profit margin 40%
Perry Corporation's net sales for the year were

a. P800,000
b. P480,000
c. P1,200,000
d. P240,000
 Answer: A
Inventory is the difference between quick assets and current assets. Since current
liabilities are P120,000, and the current ratio is 2.0, current assets must be P240,000. Quick
assets (current assets - inventory) are 1.5 times current liabilities, or P180,000. Therefore,
inventory must be P60,000 (P240,000 - P180,000). Since inventory turnover was eight, cost
of goods sold was eight times inventory, or P480,000 (8 x P60,000). Cost of goods sold is
apparently 60% of sales (gross profit is 40% of sales). Net sales were thus P800,000
P480,000 CGS/60%).

4. One control objective of the financing/treasury cycle is the proper authorization of company
transactions dealing with debt and equity instruments. Which of the following controls would best
meet this objective?

a. Separation of responsibility for custody of funds from recording of the transaction.

b. Written company policies requiring review of major funding/repayment proposals by
the board of directors.
c. Use of an underwriter in all cases of new issue of debt or equity instruments.
d. The company serves as its own registrar and transfer agent.

Answer: B
The control objective of authorization concerns the proper execution of transactions in
accordance with management's wishes. One means of achieving this control objective is
the establishment of policies as guides to action. When a decision affects the
capitalization of the entity, a policy should be in force requiring review at the highest level.

5. A Certified Internal Auditor, employed by a large department store, performed an audit of the
store's cash function. Which of the following actions would be deemed lacking in due professional
care?

a. A flowchart of the entire cash function was developed but only a sample of
transactions were tested.
b. The report included a well-supported recommendation for the reduction in staff
although it was known that such a reduction would adversely impact morale.
c. Because of a highly developed system of internal controls over the cash function, the
audit report assured top management that no irregularities existed.
d. The auditor informed appropriate authorities within the organization about suspected
wrongdoing. No report was made to external authorities.

Answer: B
Internal auditors do not guarantee the absence of fraud. They are responsible for
exercising due professional care, which includes evaluating the control systems that
prevent or detect fraud and being alert to the possibility of intentional wrongdoing, errors
and omissions, waste, and conflicts of interest. However, internal auditors cannot give
absolute assurance that irregularities do not exist.
6. The human resource department of an organization observed that accounting staff turnover was
unusually high. Exit interviews indicated that the accounting department work schedule was
highly restrictive for accountants who had young children. To improve the retention of skilled
employees in the accounting department, the best solution would be to

a. Implement a program of job rotation within the accounting department.

b. Promote job enlargement for the positions experiencing the greatest turnover.
c. Provide job sharing and flextime opportunities for accounting department employees.
d. Enrich the jobs of accounting department employees.

Answer: C
Job sharing and flextime allow employees to adjust their work schedules and hours to
better achieve personal objectives. These programs can increase worker loyalty and
motivation.

7. Trumbull Company budgeted sales on account of P120,000 for July, P211,000 for August, and
P198,000 for September. Collection experience indicates that 60% of the budgeted sales will be
collected the month after the sale, 36% will be collected the second month, and 4% will be
uncollectible. The cash receipts from accounts receivable that should be budgeted for September
would be

a. P169,800
b. P147,960
c. P197,880
d. P194,760

Answer: A
The budgeted cash collections for September are P169,800 [(36% x P120,000 July sales) +
(60% x P211,000 August sales)].

8. A company obtained a short-term bank loan of P250,000 at an annual interest rate of 6%. As a
condition of the loan, the company is required to maintain a compensating balance of P50,000 in
its checking account. The company's checking account earns interest at an annual rate of 2%.
Ordinarily, the company maintains a balance of P25,000 in its checking account for transaction
purposes. What is the effective interest rate of the loan?

a. 6.44%
b. 7.00%
c. 5.80%
d. 6.66%

Answer: A
The P50,000 compensating balance requirement is partially satisfied by the company's
practice of maintaining a P25,000 balance for transaction purposes. Thus, only P25,000 of
the loan will not be available for current use, leaving P225,000 of the loan usable. At 6%
interest, the P250,000 loan would require an interest payment of P15,000 per year. This is
partially offset by the 2% interest earned on the P25,000 incremental balance, or P500.
Subtracting the P500 interest earned from the P15,000 of expense results in net interest
expense of P14,500 for the use of P225,000 in funds. Dividing P14,500 by P225,000
produces an effective interest rate of 6.44%.
9. In the current year, Griffin Inc. had P15 million in sales, while total fixed costs were held to P6
million. The firm's total assets at year-end were P20 million and the debt/equity ratio was
calculated at 0.60. If the firm's EBIT is P3 million, the interest on all debt is 9%, and the tax rate is
40%, what is the firm's return on equity?

a. 11.16%
b. 14.4%
c. 18.6%
d. 24.0%

Answer: A
The first step is to determine the amount of equity. If the debt/equity ratio is .6, then the
calculation is .6E + E = P20 million. Thus, E (equity) equals P12.5 million. Debt is therefore
P7.5 million. At 9%, interest on P7.5 million of debt is P675,000. Earnings before taxes are
P2,325,000. At a 40% tax rate, taxes are P930,000, which leaves a net income of
P1,395,000. Return on equity is calculated by dividing the P1,395,000 by the P12,500,000 of
equity capital, giving an ROE of 11.16%.

10. The following information was taken from Kay Company’s accounting records for the year ended
December 31, 2017:

Increase in raw materials inventory P 15,000

Decrease in finished goods inventory 35,000
Raw materials purchased 430,000
Direct manufacturing labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000
There was no work in process inventory at the beginning or end of the year. Kay’s 2017 cost of
goods sold is

a. P950,000
b. P965,000
c. P975,000
d. P995,000

Answer: A
Raw materials purchased P430,000
Less: Increase in raw materials inventory 15,000
Raw materials used P415,000
(2) Beginning WIP --
Raw materials used (from above) 415,000
Direct manufacturing labor 200,000
Factory overhead 300,000
Cost to account for P915,000
Less: Ending WIP --
Cost of goods manufactured P915,000
(3) Cost of goods manufactured P915,000
Add: Decrease in finished goods inventory 35,000
Cost of goods sold P950,000