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CPAR
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila

MANAGEMENT ADVISORY SERVICES SEPTEMBER 22 AND 25

Final Pre-board Examination

Instructions: Choose the BEST answer for each of the following items.

1. Incremental cost is
a. the difference in total costs that results from selecting one choice
instead of another.
b. the profit foregone by selecting one choice instead of another.
c. a cost that continues to be incurred in the absence of activity.
d. a cost common to all choices in question and not clearly or feasibly
allocable to any of them.

2. When a decision is made in an organization, it is selected from a group

of alternative courses of action. The loss associated with choosing the
alternative that does not maximize the benefit is the
a. net realizable value
b. expected value
c. opportunity cost
d. incremental cost

ITEMS 3 AND 4 ARE BASED ON THE FOLLOWING INFORMATION:

Believing that its traditional costing system may be providing misleading
information, an organization is considering an activity-based costing
(ABC) approach. It now employs a full-cost system and has been
applying its manufacturing overhead on the basis of machine hours.
Budgeted Budgeted
Activity Cost Driver Activity Cost
Materials handling No. of parts handled 6,000,000 P 720,000
Setup costs No. of setups 750 315,000
Machining costs Machine hours 30,000 540,000
Quality control No. of batches 500 225,00
P1,800,000
Costs, sales, and production data for one of the organization’s products
for the coming year are as follows:
Prime costs:
Direct materials cost per unit P4.40
Direct labor cost per unit (0.50 DLH @ P15/DLH) 0.75
Total P5.15
Sales and production data:
Expected sales 20,000 units
Batch size 5,000 units
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Setup 2 per batch

Total parts per finished unit 5 parts
Machine hours required 80 MH per batch

3. If the organization uses the full-cost system, the cost per unit for this
product for the coming year will be
a. P5.39
b. P5.55
c. P6.11
d P6.95

P1,800,000/30,000MH = P60/MH 80MH per batch/5,000 units per batch = 0.016MH per unit.
Prime cost P5.15
Overhead (P60 x 0.016) 0.96
Cost per unit P6.11

4. If the organization employs an activity-based costing system, the cost

per unit for the product described for the coming year will be
a. P6.00
b. P6.08
c. P6.21
d. P6.30

Prime cost P 5.15

Overhead cost:
Materials handling (5 x P0.12) P0.600
Setup costs (20,000/5,000 = 4 batches
4 batches x 2 setups per batch = 8 setups
(8 setups x P420) ÷ 20,000 units 0.168
Machining (4 batches x 80MH per batch x P18/MH) = P5,760
P5,760 ÷ 20,000 units 0.288
Quality control (4 bathes x P450 = P1,800)
P1,800 ÷ 20,000 units 0.090 1.146
Cost per unit P6.296

5. Which combination of changes in asset turnover and income as a

percentage of sales will maximize the return on investment?
Asset Turnover Income as a Percentage of Sales
a. Increase Decrease
b. Increase Increase
c. Decrease Increase
d. Decrease Decrease
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6. The major objectives of any budget system are to

a. define responsibility centers, provide a framework for performance
evaluation, and promote communication and coordination among
organization segments.
b. define responsibility centers, facilitate the fixing of blame for
missed budget predictions, and ensure goal congruence between
superiors and subordinates.
c. foster the planning of operations, provide a framework for
performance evaluation, and promote communication and
coordination among organization segments.
d. foster the planning of operations, facilitate the fixing of blame for
missed budget predictions, and ensure goal congruence between
superiors and subordinates.

7. A manufacturing firm wants to obtain a short-term loan and has

approached several lending institutions. All of the potential lenders are
offering the same nominal interest rate, but the terms of the loans vary.
Which of the following combinations of loan terms will be most attractive
for the borrowing firm?
a. Simple interest, no compensating balance.
b. Discount interest, no compensating balance.
c. Simple interest, 20% compensating balance required.
d. Discount interest, 20% compensating balance required.

8. The Jet Company manufactures components for use in producing one of

its finished products. When 12,000 units are produced, the full cost per
unit is P35, computed as follows:
Direct materials P5
Direct labor 15
Variable overhead 10
Fixed overhead 5

The Bennyvic Company has offered to sell 12,000 components to Jet

Company for P37 each. If Jet accepts the offer, some of the facilities
currently being used to manufacture the components can be rented as
warehouse space for P40,000. However, P3 of the fixed overhead
currently applied to each component would have to be covered by Jet’s
other products. What is the differential cost to the Jet Company of
purchasing the components from the Bennivic Company?
a. P8,000
b. P20,000
c. P24,000
d. P44,000

Cost to purchase (12,000 x P37) P444,000

Less rental income 40,000
Net cost to purchase P404,000
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Cost to manufacture (12,000 x {P35-P3}) 384,000

Differential cost P 20,000

cost/mgrl acctng 11th ed p 196 # 19

9. A company needs a special switch, a component part of one of its

products. The equipment to make the switch can be rented for P100,000
for one year, but the company can buy the switch and avoid the rental
cost. Because the demand for the switch may be high (60% probability)
low and contributions margin may vary, the company prepared the
following decision tree:

Total Contribution Margin

High (60%) P200,000
Demand
Make Low (40%) P125,000

H High (60%) P100,000

Demand
Buy Low (40%) P 25,000

Which of the following statements is true?

a. The expected value of making is P170,000.
b. The expected value of buying is P70,000.
c. Making the switch is the best choice.
d. Buying the switch is the best choice.

[(P200,000 x 60%) + P125,000 x 40%)] – P100,000 = P70,000

ITEMS 10 and 11 are based on the following information:

A corporation reported these data at year end:
Pre-tax operating income P4,000,000
Current assets 4,000,000
Long term assets 16,000,000
Long-term liabilities 5,000,000
Equity capital 13,000,000

The long term debt has an interest rate of 8%, and its fair value equaled
its book value at year-end. The fair value of equity capital is P2 million
greater than its book value. The income tax rate is 30%, and its cost of
equity capital is 12%.

10. What is the weighted average cost of capital to be used in the economic value added (EVA)
calculation?
a. 7.70% c. 11%
b. 17.6% d. 10.40%

Debt (8% x 70%) x 5/20 1.40%

Equity capital 12% x 15/20 9.00%
WaCC 10.40%
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11. The economic value added (EVA) is

a. P2,800,000 c. P1,872,000
b. P2,128,000 d P 928,000

After tax operating income (4 million x 70%) P2,800,000

Desired income (P20,000,000 – P2,000,000 CL) x 10.4% 1,872,000
Economic value added P 928,000

Current liabilities = (P4 million + P16 million) – P13 million – P5 million = P2 million

12. A continuous (rolling) budget

a. presents planned activities for a period but does not present a firm
commitment.
b. presents the plan for only one level of activity, and does not adjust
to changes in the level of activity.
c. presents the plan for a range of activity so that the plan can be
adjusted for changes in activity.
d. drops the current month or quarter and adds a future month or
quarter as the current month or quarter is completed.

13. When applying the cost-benefit approach to a decision, the primary

criterion is how well management goals will be achieved in relation to
costs. Costs include all expected
a. variable costs for the courses of action but not expected fixed
costs because only the expected variable costs are relevant.
b. incremental out-of-pocket costs as well as all expected continuing
costs that are common to all alternative courses of action.
c. future costs that differ among the alternative courses of action
plus all qualitative factors that cannot be measured in numerical
terms.
d. historical and future costs relative to the courses of action
including all qualitative factors that cannot be measured in
numerical terms.

14. An auto parts store must maintain inventory of a wide variety of parts to
satisfy its diverse customer base. As a result, the store’s inventory has a
high risk of obsolescence. Which of the following features would be most
desirable to the store’s creditors during a financial review of the auto
part store?
a. A high quick ratio
b. A high debt ratio
c. A high number of days sales outstanding in ending trade
receivable.
d. A low inventory turnover ratio.

A high quick ratio means that the company has a large amount of liquid assets available to pay debt.
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15. During Year 1, Brownout Corporation experienced the following power

outages:
Number of Power
Outages per Month Number of Months
0 3
1 2
2 4
3 3
12

Each power outage results in out-of-pocket costs of P400. For P500 per
month, Brownout can lease an auxiliary generator to provide power
during outages. Assume that the power outages in Year 1 are repeated
in Year 2. If Brownout leases an auxiliary generator in Year 2, the
estimated savings (or additional expenditures) for Year 2 would be
a. P(3,600)
b. P(1,200)
c. P1,600
d. P1,900
Out-of-pocket cost [(1x2) + (2x4) + (3x3)] x P400 P7,600
Annual lease expense (P500 x 12) 6,000
Savings if the company leases a generator P1,600

ITEMS 16 to 19 are based on the following information:

In order to increase production capacity, Atheena Company is
considering replacing an existing production machine with a new
technology-improved machine effective January 1. The following
information is being considered by the company:
1. The new machine would be purchased for P160,000 in cash.
Shipping, installation, and testing would cost an additional
P30,000.
2. The new machine is expected to increase annual sales by
20,000 units at a sales price of P40 per unit. Incremental
operating costs include P30 per unit in variable costs and total
fixed costs of P40,000 per year.
3. The investment in the new machine will require an immediate increase in working capital of P35,000
4. Atheena uses straight-line depreciation for financial reporting
and tax reporting purposes. The new machine has an estimated
useful life of 5 years and zero salvage value.
5. Atheena is subject to a 40% income tax rate.

Atheena uses the net present value method to analyze investments and
will employ the following factors and rates:

Present Value Present Value of an Ordinary

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Period of P1 at 10% Annuity of P1 at 10%

1 0.909 0.909
2 0.826 1.736
3 0.751 2.487
4 0.683 3.170
5 0.621 3.791

16. Atheena’s net cash outflow in a capital budgeting decision is

a. P 90,000
b. P195,000
c. P204,525
d. P225,000

P160,000 + P30,000 + P35,000 = P225,000

17. Atheena’s discounted annual depreciation tax shield for Year 1 is

a. P13,817
b. P16,762
c. P20,725
d. P22,800

(P160,000 + P30,000) ÷ 5 years = P38,000 x 40% x 0.909 = P13,817

18. The overall discounted cash flow impact of Atheena’s working capital
investment for the new production machine would be
a. P(7,959)
b. P(10,080)
c. P(13,265)
d. P(35,000)

(P35,000) – [P35,000 x 0.621) = P(13,265)

19. The acquisition of the new production machine by Atheena will

contribute a discounted net of tax contribution margin of
a. P242,624
b. P303,280
c. P363,936
d. P454,920

20,000 units x P10 = P200,000 x 60% = P120,000 x 3.791 = P454,920

cost/mgrl acctng 11th ed p 354 #s 21 to 24

20. The bailout payback method

a. incorporates the time value of money.
b. equals the recovery period from normal operations.
c. eliminates the disposal value from the payback calculation.
d. measures the risk if a project is terminated.
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21. Hugo Enterprises uses 84,000 units of Part A in manufacturing activities

over a 300-day work year. The usual lead time for the part is six days;
occasionally, however, the lead time has gone as high as 8 days. The
company now desires to adjust its safety stock policy. The increase in
safety stock size and the likely effect on stockout costs and carrying
costs, respectively, would be:
a. 560 units, decrease, increase.
b. 560 units, decrease, decrease.
c. 1,680 units, decrease, increase.
d. 2,240 units, increase, decrease.

84,000/300 = 280 x 2 = 560.

22. A company is evaluating the following information in an effort to

determine which of two products, A or B, it should manufacture during
the coming year. Disregard income tax effects.

PRODUCT A PRODUCT B
Expected Expected
Sales Probability Sales Probability
7,000 0.60 9,000 0.75
8,000 0.40 10,000 0.25

Product A Product B
Selling price P20 P15
Variable cost per unit 10 8
Annual fixed manufacturing costs (all cash) 50,000 40,000
Annual company non-manufacturing expenses
(all cash) 20,000 20,000

If the company uses the expected value approach, which product should
it manufacture?
a. Product B because its total profit will be P3,000 higher than that of
Product A.
b. Product B because the expected value of its sales in units is 1,850
higher than that of Product A.
c. Product A because the expected value of its contribution margin is
higher than that of Product A.
d. Product B because its expected value is higher than that of Product
A.
Product A Product B
Units 7,000 8,000 9,000 10,000
Contribution margin P70,000 P80,000 P63,000 P70,000
Fixed costs 70,000 70,000 60,000 60,000
Profit P 0 P10,000 P3,000 P10,000
Probability 0.60 0.40 0.75 0.25
Expected value P 0 P 4,000 P2,250 P 2,500
Total expected value P4,000 P4,750
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23. The following information applies to a project:

Activity Time (days) Immediate Predecessor
A 5 None
B 3 None
C 4 A
D 2 B
E 6 C, D

The earliest completion time for the project is:

a. 11 days
b. 14 days
c. 15 days
d. 20 days

24. An investment project is expected to yield P10,000 in annual revenues,

will incur P2,000 in fixed costs per year, and required an initial
investment of P5,000. Given a cost of goods sold of 60% of sales and
ignoring taxes, what is the payback period in years?
a. P2.50
b. 5.00
c. 2.00
d. 2.50

Annual revenue P10,000

Less cost of goods sold (60%) 6,000
Gross profit P 4,000
Less fixed costs 2,000
Annual net cash inflow P 2,000

Payback period = P5,000 ÷ P2,000 = 2.50 years

25. A company recently completed and sold an order of 50 units that had
the following costs:
Direct materials P 1,500
Direct labor (1,000 hours @ P8.50) 8,500
Variable overhead (1,000 hours @ P4.00)* 4,000
Fixed overhead** 1,400
Total P15,400

* Applied on the basis of direct labor hours

** Applied at the rate of 10 percent of variable cost
The company has now been requested to prepare a bid for 150 units of
the same product.
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If a 70 percent learning curve is applicable, the company’s total cost on

this order would be estimated at
a. P46,200
b. P27,126
c. P17,766
d. P18,150

50 (1,000 ÷50) 20 1,000

100 (20 x 70%) 14 1,400
200 (14 x 70%) 9.8 1,960

Total time for 150 units = 1,960 – 1,000 = 960.

Materials (150 x P30) P 4,500

Labor (960 x P8.50) 8,160
Variable overhead (960 x P4) 3,840
Fixed overhead (P16,500 x 10%) 1,650
Total cost of 150 units P18,150

26. A company uses flexible budgeting for cost control. It produced 11,000
units of product during August, incurring an indirect materials cost of
P21,000. Its master budget for the year reflected an indirect materials
cost of P288,000 at a production volume of 144,000 units. A flexible
budget for August production should reflect indirect materials cost of
a. P24,000
b. P21,000
c. P22,000
d. P12,000
P288,000/144,000 = P2 x 11,000 = P22,000

27. A company plans to tighten its credit policy. The new policy will decrease the average number of days in
implemented. The firm’s short term interest cost is 10%. Projected sales
for the coming year are P50million. Assume a 360-day year.
What is the peso impact on accounts receivable of this proposed change
in credit policy?
a. P3,819,445 decrease
b. P6,500,000 decrease
c. P3,333,334 decrease
d. P18,749,778 increase

Present Policy New Policy

Total sales P50,000,000 (P50,000,000 x 95%) P47,500,000
Accounts receivable (70%) 35,000,000 (60%) 28,500,000
÷ Number of days in a year 360 360
Average A/R per day P97,222.22 P79,166.67
x collection period in days 75 50
Balance of accounts receivable P7,291,667 P3,958,333

Decrease in balance of accounts receivable P3,333,334

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28. A business needs a computer application that can be either developed internally or purchased. Suitable softw
If the software is developed internally, a systems analyst would be
assigned full time, and a contractor would assume the analyst’s
responsibilities. The hourly rate for the regular analyst is P25. The hourly
rate for the contractor is P22. The contractor would occupy an empty
office. The office has 100 square feet, and occupancy cost is P45 per
square foot.
Other related data are as follows. Computer time is charged using
predetermined rates. The organization has sufficient excess computer
capacity for either software development or modification/testing of the
purchased software.
Internal Purchased
Development Software
Systems analyst time in hours:
Development 1,000 N/A
Modifications and testing N/A 40
Computer charges P800 P250
Additional hardware purchases P3,200 N/A
Incidental supplies P500 P200
Based solely on the cost figures presented, the cost of developing the
computer application will be
a. P3,500 less than acquiring the purchased software package.
b. P500 less than acquiring the purchased software package.
c. P1,550 more than acquiring the purchased software package.
d. P3,550 more than acquiring the purchased software package.
Purchase cost P29,000
Cost to develop:
Supplies (P500 – P200) P300
Cost of contractor (1,000hrs x P22) 22,000
Additional hardware purchases 3,200 25,500
Difference P 3,500

Computer charges – transfer price, do not require addition expenditure, given idle capacity.
Use of idle office is irrelevant.
Systems analyst’s work on the new software is irrelevant – it is part of the regular workload.

29. If a firm is offered credit terms of 2/10, net 30 on its purchases, sound
cash management practices would mean that the firm would pay the
account on which of the following days?
a. Day 2 and 30
b. Day 2 and 10
c. Day 10
d. Day 30
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30. A company has provided the following data from its activity-based
costing system:
Activity Cost Pool Total Cost Total Activity
Assembly P313,490 29,000 machine-hours
Processing orders P49,476 1,400 orders
Inspection P73,882 1,060 inspection-hours

The company makes 490 units of its product a year, requiring a total of
1,080 machine-hours, 60 orders, and 20 inspection-hours per year.
The product's direct materials cost is P46.42 per unit and its direct labor
cost is P20.22 per unit.
According to the activity-based costing system, the average cost of the
product is closest to:
a. P97.64 per unit
b. P66.64 per unit
c. P93.31 per unit
d. P94.79 per unit

Assembly (P313,490 ÷ 29,000) x 1,080 P11,764.80

Processing orders (P49,476 ÷ 1,400) x 60 2,120.40
Inspection (P73,882 ÷ 1,060) x 20 1,394
Total indirect costs P15,189.70
÷ Production 490
Indirect cost per unit P31.00
Add materials cost per unit 46.42
Labor cost per unit 20.22
Average product cost per unit P97.64

31. Which of the following would probably be the most accurate measure of
activity to use for allocating the costs associated with a factory's
purchasing department?
a. Machine-hours
b. Direct labor-hours
c. Number of orders processed
d. Cost of materials purchased
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ITEMS 32 TO 34 ARE BASED ON THE FOLLOWING INFORMATION:

A company will open a new store on January 1. Based on experience
from its other retail outlets, the company is making the following sales
projections:
Cash Sales Credit Sales
January P60,000 P40,000
February P30,000 P50,000
March P40,000 P60,000
April P40,000 P80,000

The company estimates that 70% of the credit sales will be collected in
the month following the month of sale, with the balance collected in the
second month following the month of sale.

32. Based on these data, the balance in accounts receivable on January 31

will be:
a. P40,000
b. P28,000
c. P12,000
d. P58,000

The whole amount of January credit sales.

33. The March 31 balance in accounts receivable will be:

a. P100,000
b. P60,000
c. P95,000
d. P75,000

From February credit sales (P50,000 x 30%) P15,000

From March credit sales 60,000
March 31 balance in Accounts Receivable P75,000

34. In a cash budget for the month of April, the total cash receipts will be:
a. P74,000
b. P57,000
c. P114,000
d. P97,000

April cash sales P40,000

Collection of accounts receivable:
From February credit sales (P50,000 x 30%) P15,000
From March credit sales (P60,000 x 70%) 42,000 57,000
Total cash receipts for April P97,000
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35. Xander Corporation, which has no current debt, has a beta of 0.95 for its
current stock. Management is considering a change in the capital
structure to 30% debt and 70% equity. This change would increase the
beta on the stock to 1.05, and the after-tax cost of debt will be 7.5%.
The expected return on equity is 16%, and the risk-free rate is 6%.
Should Xander’s management proceed with the capital structure change?
a. No, because the cost of equity capital will increase.
b. Yes, because the cost of equity capital will increase.
c. Yes, because the weighted average cost of capital will decrease.
d. No, because the weighted average cost of capital will increase.

36. The POLAND CORP. makes three products. The cost data for these three
products is as follows:
Product A Product B Product C
Selling price P10 P20 P40
Variable costs 7 12 16
Total annual fixed costs are P840,000. The firm's experience has been that about 20 percent
of dollar sales come from product A, 60 percent from B, and 20 percent from C.
What is the units’ sale of Product C in order to break even?
A. 10,000 C. 40,000
B. 110,000 D. 16,471

SOLUTION:
WACMR: (30% x 20%) + (40% x 60%) + (60% x 20%) = 42%

Total Breakeven Sales: (P840,000 ÷ 42%) = P2,000,000

BEP in units:
Product A [(P2,000,000 x 20%) ÷ P10] = 40,000 units
Product B [(P2,000,000 x 60%) ÷ P20] = 60,000 units
Product C [(P2,000,000 x 20%) ÷ P40] = 10,000 units

37. S1: Financial accounting emphasizes reliability rather than relevance

even though they are qualitative characteristics under the conceptual
framework.
S2: Managerial accounting reports are detailed rather than aggregated.
Which of the statements is incorrect?
A. S1 only C. Both statements
B. S2 only D. None from the statements

Use the following information in answering the next item(s):

MORPHLING CORP. is engaged in producing and selling 2 types of furniture, DELUXE and
SUPREME. The two products are sold in a ratio of 2 units of DELUXE to 3 units of SUPREME.
Data concerning these products are as follows:
DELUXE SUPREME
Selling Price P12 P28
Unit Variable Cost 3 16
MORPHLING CORP. has a total fixed cost of P600,000 per year and faces a tax rate of 30%.
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38. Compute the volume of sales in units of DELUXE if the company plans to earn 10 percent on
sales revenue in before-tax income.
A. 27,778 units C. 50,000 units
B. 41,667 units D. 32,143 units

SOLUTION:
Sales Mix in Units: Deluxe = (2/5 or 40%); Supreme = (3/5 or 60%)

WAUCM: (P9 x 40%) + ( P12 x 60%) = P10.8

WASP: (P12 x 40%) + (P28 x 60%) = P21.60
WACMR: (P10.80 ÷ P21.60) = 50%

Total required sales: [P600,000 ÷ (50% - 10%)] = P1,500,000

Total required unit sales: (P1,500,000 ÷ P21.60) = 69,444 units
DELUXE: (69,444 units x 40%) = 27,778 units
SUPREME: (69,444 units x 60%) = 41,667 units

39. Compute the necessary peso sales of SUPREME to breakeven.

A. P933,333 C. P480,000
B. P266,667 D. P720,000

SOLUTION:
Total breakeven sales: (P600,000 ÷ 50%) = P1,200,000
Total BEP in units (P1,200,000 ÷ P21.60) = 55,556 units
DELUXE: (55,556 units x 40%) = 27,222 units
SUPREME: (55,556 units x 60%) = 33,334 units

Breakeven Sales per Product:

DELUXE: (27,222 units x P12) = P326,664
SUPREME: (33,334 units x P28) = P933,520

40. HELCURT CORP. is determining the cost behavior of several items in order to budget for the
upcoming year. Past trends have indicated the following dollars were spent at three different
levels of output:
Unit Levels
10,000 12,000 15,000
Cost A P25,000 P29,000 P35,000
Cost B 10,000 15,000 15,000
Cost C 15,000 18,000 22,500

In establishing a budget for 14,000 units, HELCURT should treat Costs A, B, and C,
respectively, as
A. Semivariable, fixed, and variable.
B. Variable, fixed, and variable.
C. Semivariable, semivariable, and semivariable.
D. Variable, semivariable, and semivariable.
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41. FARAMIS CORP. uses a standard cost system. Direct materials statistics for the month of
May, 2021 are summarize below:
Standard unit price P90.00
Actual units purchased 40,000
Standard units allowed for actual production 36,250
Materials price variance- favorable P6,000
What was the actual purchase price per unit?
a. P75.00 c. P88.50
b. P85.89 d. P89.85

42. The MAJOR challenge when planning fixed overhead

A. is calculating total costs.
B. is calculating the cost-allocation rate.
C. is choosing the appropriate level of capacity.
D. is choosing the appropriate planning period.

43. Which of the following factors should not be considered when deciding whether to
investigate a variance?
a. Magnitude of the variance and the cost of investigation.
b. Trend of the variances over time.
c. Likelihood than an investigation will eliminated future occurrences of the variance.
d. Whether the variance is favorable or unfavorable.

44. The flexible budget for the month of May 1993 was for 9,000 units at a direct materials cost
of P15 per unit. Direct labor was budgeted at 45 minutes per unit for a total of P81,000.
Actual output for the month was 8,500 units with P127,500 indirect materials and P77,775 in
direct labor expense. The direct labor standard of 45 minutes was maintained throughout
the month. Variance analysis of the performance for the month of May would show a(n)
a. Favorable materials usage variance of P7,500.
b. Favorable direct labor efficiency variance of P1,275.
c. Unfavorable direct labor efficiency variance of P1,275.
d. Unfavorable direct labor price variance of P1,275.

Answer (D) is correct. The standard cost of materials for 8,500 units is P127,500 (8,500
x P15). Thus, no variance arose with respect to materials. Because labor for 9,000 units
was budgeted at P81,000, the unit labor cost is P9. Thus, the labor budget for 8,500
units is P76,500, and the total labor variance is P1,275 (P77,775 - P76,500). Because the
actual cost is greater than the budgeted amounts, the P1,275 variance is unfavorable.
Given that the actual time per unit (45 minutes) was the same as that budgeted, no
labor efficiency variance was incurred. Hence, the entire P1,275 unfavorable variance
must be attributable to the labor rate (or price) variance.
Answer (A) is incorrect because there is no materials variance; the actual cost was equal
to the budgeted cost for materials. Answer (B) is incorrect because no labor efficiency
variance occurred. Budgeted hours were identical to actual hours for 8,500 units.
Answer (C) is incorrect because no labor efficiency variance occurred. Budgeted hours
were identical to actual hours for 8,500 units.
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45. Which of the following statements is most correct? (M)

a. The cash balances of most firms consist of transactions, compensating, precautionary,
and speculative balances. The total desired cash balance can be determined by
calculating the amount needed for each purpose and then summing them together.
b. The easier a firm’s access to borrowed funds the higher its precautionary balances will
be, in order to protect against sudden increases in interest rates.
c. For some firms, holding highly liquid marketable securities is a substitute for holding
cash because the marketable securities accomplish the same objective as cash.
d. Firms today are more likely to rely on cash than on reserve borrowing power or
marketable securities for speculative purposes because of the need to move quickly.

46. An unfavorable variable overhead spending variance indicates that

a. variable overhead items were not used efficiently.
b. the price of variable overhead items was more than budgeted.
c. the variable overhead cost-allocation base was not used efficiently.
d. the denominator level was not accurately determined.

47. A basic concept of variable 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. Allocation of period costs is arbitrary at best and could lead to
erroneous decision by management.
D. Because period costs will occur whether production occurs, it is
improper to allocate these costs to production and defer a current
cost of doing business.

48. Endless Love Company had income of P65,000 using absorption costing for a given period.
Beginning and ending inventories for that period were 13,000 units and 18,000 respectively.
Ignoring income taxes, if the fixed overhead application rate were P2.50 per unit, what
would the income have been using variable costing?
A. P 20,000 C. P 60,000
B. P 52,500 D. P 77,500
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49. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:
Selling price P85
Units in beginning inventory 0
Units produced 2,900
Units sold 2,700
Units in ending inventory 200
Variable costs per unit:
Direct materials P22
Direct labor P13
Variable manufacturing overhead P3
Variable selling and administrative P5
Fixed manufacturing overhead P46,400
Fixed selling and administrative P51,300

What is the net operating income for the month under variable costing?
A. P 3,200 C. P15,700
B. P 8,100 D. P18,900

50. For internal uses, managers are more concerned with receiving information that is:
A. completely objective and verifiable.
B. completely accurate and precise.
C. relevant, flexible, and immediately available.
D. relevant, completely accurate, and precise.

51. Which of the following will cost the breakeven point to increase?
I. Decrease in variable cost per unit
II. Decrease in margin of safety
III. Increase in income tax rates.
A. I and II D. I, II and III
B. II and III E. Answer not given
C. I and III

52. Quality Products, Inc. plans to increase its sales volume and make bigger
profits. Last year, the company sold 25,000 units of Product 101 at P10
per unit. The profits were modest because of the small difference
between the selling price and the variable cost per unit and the relatively
low sales volume. The fixed costs amount to P28,000 a year. Cost per
unit of product is P8. If the selling price is reduced to P9.60, the
company feels that sales can be increased to 30,000 units a year and
thereby increase, too, its profits. What profit before tax can be
generated with the reduced selling price and the increased sales
volume?
A. P20,000 C. P28,000
B. P22,000 D. P48,000
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53. What is the difference between a correlation equal to –1 and a

correlation equal to 0?
A. A correlation equal to –1 means two alternatives are moving in the same direction,
whereas a correlation of 0 means they are moving in opposite directions
B. A correlation equal to –1 means two alternatives are moving in the same direction,
whereas a correlation of 0 means they are unrelated
C. A correlation equal to –1 means two alternatives are moving in opposite directions,
whereas a correlation of 0 means they are moving in the same direction
D. A correlation equal to –1 means two alternatives are moving in opposite directions,
whereas a correlation of 0 means they are unrelated
E. There is no difference.

54. Supply costs at RAIGOR CORP.’s chain of gyms are listed below:
Client Visits Supply Cost
March 12,855 P23,598
April 12,283 23,278
May 13,104 23,742
June 12,850 23,607
July 12,493 23,415
August 12,794 23,562
September 12,686 23,496
October 12,765 23,541
November 13,018 23,687

Management believes that supply cost is a mixed cost that depends on client-visits. Using the
high-low method to estimate the variable and fixed components of this cost, those estimates
would be closest to:
A. P1.85 per client-visit; P23,547 per month
B. P1.77 per client-visit; P557 per month
C. P0.55 per client-visit; P16,579 per month
D. P0.57 per client-visit; P16,273 per month

SOLUTION:
Variable cost = Change in cost ÷ Change in activity
= (P23,742 − P23,278) ÷ (13,104 − 12,283) = P0.57
Fixed cost element = Total cost − Variable cost element
= P23,742 − (P0.57 × 13,104) = P16,273
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55. VINCENT CORP., which has only one product, has provided the following data concerning its
most recent month of operations:
Units sold @ P120 per unit 1,500
Units produced 1,800
Beginning inventory 0

Costs Variable Cost Fixed Cost

Direct materials P40
Direct labor 42
Manufacturing overhead 2 P 7,200
Selling and administrative expenses 9 28,500

What is the total period cost for the month under the variable costing approach?
A. P7,200 C. P42,000
B. P35,700 D. P49,200

SOLUTION:
Selling and administrative expenses:
Variable (1,500 units x P9) P13,500
Fixed 28,500
Fixed factory overhead 7,200
Total period costs – variable costing P49,200

56. JULIA CORP. shows the following results of operation on Dec. 31, 2021.
Direct materials used P 512,500
Direct labor 575,000
Variable manufacturing overhead 400,000
Fixed manufacturing overhead 212,500
For the year 2021, JULIA produced 170,000 units and sold 150,000 units. No beginning and
ending inventory of work in process and no beginning inventory of finished goods. The value
assigned to finished goods under direct costing is
A. P175,000 C. P226,667
B. P200,000 D. P350,000

SOLUTION:
Direct materials used P 512,500
Direct labor 575,000
Variable manufacturing overhead 400,000
Total P1,487,500
Unit produced ÷ 170,000 units
Unit product cost – variable costing P8.75 per unit
Ending inventory in units (170,000 – 150,000) 20,000 units
Cost of ending inventory – variable costing P175,000
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57. OREGON CORP. manufactures televisions. The following direct labor information relates to
the manufacture of televisions.
Number of workers 60
Number of productive hours per week, per worker 40
Hours required to make 1 unit 3
Weekly wages per worker P600
Employee benefits treated as direct labor costs 20% of wages

What is the standard direct labor cost per unit? (M)

A. P54 C. P30
B. P36 D. P18

SOLUTION:
The hourly wage per worker is P15.00 (P600 ÷ 40 hours). The direct labor cost per hour
is P18.00 [P15.00 x (1.0 + benefits equal to 20% of wages)]. Consequently, the
standard direct labor cost per unit is P54 (P18 x 3 hours).

58. A recent fire devastated the records of MARYLAND CORP. In relation to its direct labor for
the current year, the following data were gathered:
Actual production 4,000 units
Standard hours per unit 3
Rate variance 500 F
Efficiency variance 2,000 UF
Standard direct labor cost per unit P15

How many hours were used by the company for the current year in producing the 4,000
units?
A. 11,600 hrs.
B. 12,400 hrs.
C. 12,800 hrs.
D. Cannot be computed; limited information

SOLUTION:
Variance in hours (2,000/5) 400 hours ACTUAL HOURS (SH + VARIANCE) [(4K units x 3)
+ 400] = 12,400 hrs.
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59. The company expected to sell 45,000 units next year with the following results:
Sales P900,000
Variable costs 540,000
Contribution margin 360,000
Fixed costs 150,000
Income before taxes 210,000
Income taxes 84,000
Net income P126,000

If the company wants an after-tax return on sales of 15% on its expected volume of 45,000
units, what price must it charge?
A. 19.96 C. 20.22
B. 20.44 D. 22.22

SOLUTION:
Before tax ROS (15% / 60%) = 25% (NOTE: Tax rate is 40%)
Total VC P540,000
Total FC 150,000
Total cost P690,000
Total sales: (P690,000 ÷ 75%) = P920,000
Selling price: (P920,000 ÷ 45,000 units) = P20.44 per unit

60. SPAIN CORP. has fixed costs of P90,300. At a sales volume of P360,000, return on sales is
10%; at a P600,000 volume, return on sales is 20%. What is the break-even volume?
A. P225,000 C. P258,000
B. P240,000 D. P301,000

SOLUTION:
CMR = Change in operating income ÷ Change in sales
@ P360,000 sales @ P600,000 sales
Operating income P36,000 P120,000
CMR: (P120,000 – P36,000) ÷ (P600,000 – P360,000)] = 35%
Breakeven Sales: (P90,300 ÷ 35%) = P258,000

61. PORTUGAL CORP. earns an after-tax profit of P2,400 on sales of P88,000. The average tax rate of the
company is 25%. The only product in this operation sells for P20, of which P15 is in variable cost.
You were asked to analyze the break-even point of this project and its sensitivities to change in cost
levels and of product price. A decrease in variable costs of P1.00 per unit and an increase in fixed
costs of P6,000 would bring the break-even point to
A. no change at all. C. P82,660
B. a lower level. D. P45,000

SOLUTION:
CMR: (P5 ÷ P20) = 25%
Old total FC:
Total CM (P88,000 x 25%) P22,000
Total FC (SQUEEZE) (18,800)
Operating income (P2,400 ÷ 75%) 3,200

New CMR: [(P20 – P14) / P20] = 30%

New BEP: [(P18,800 + P6,000) ÷ 30%] = P82,660
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62. Cost-volume-profit analysis cannot be used if which of the following occurs?

A. Costs cannot be properly classified into fixed and variable costs
B. The total fixed costs change
C. The per unit variable costs change
D. Per unit sales prices change

63. Reducing reliance on human workers and instead investing heavily in computers and online
technology will
A. reduce fixed costs and increase variable costs.
B. reduce variable costs and increase fixed costs.
C. have no effect on the relative proportion of fixed and variable costs.
D. make the company less susceptible to economic swings.

64. Y = P575,000 + P8.50X represents the behavior of maintenance costs (Y) as a function of
machine hours (X). Thirty (30) monthly observations were used to develop the foregoing
regression equation. The related coefficient of determination was 0.90. If 2,500 machine
hours are worked in one month, the related point estimate of total variable maintenance
costs would be
A. P19,125 C. P23,000
B. P21,250 D. P25,250

SOLUTION:
(P8.50 x 2,500) = P21,250

65. Determine whether the following statements are true or false:

I. The major variable cost in a manufacturing company is factory overhead.
II. A multiple regression equation uses more than one driver to predict costs.
III. As volume increases, the per-unit amount of a mixed cost increases.
A. Only I is true. C. Only III is false.
B. Both I and III are false. D. Only II is false.

66. Which of the following is a weakness of the quick-and-dirty scattergraph method of analyzing
mixed cost?
A. It is impossible to determine variable cost per unit.
B. Only two data points are used and the rest are ignored in drawing the scattergraph.
C. Different people will have different answers even though they are analyzing the same
set of data.
D. Both B and C above.

67. Managerial performance can be measured in many different ways, including return on
investment (ROI) and residual income (RI). A good reason for using RI instead of ROI is that
A. RI can be computed without regard to identifying an investment base.
B. goal congruence is more likely to be promoted by using RI.
C. RI is well understood and often used in the financial press.
D. ROI does not take into consideration both the investment turnover ratio and return-on-
sales percentage.
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68. Division A makes a part with the following characteristics:

Production capacity in units 15,000 units
Selling price to outside customers P25
Variable cost per unit P18
Total fixed costs P60,000
Division B, another division of the same company, would like to purchase 5,000 units of the
part each period from Division A. Division B is now purchasing these parts from an outside
supplier at a price of P24 each.
Suppose that Division A is operating at capacity and can sell all of its output to outside
customers at its usual selling price. If Division A sells the parts to Division B at P24 per unit
(Division B’s outside price), the company as a whole will be:
A. better off by P5,000 each period.
B. worse off by P15,000 each period,
C. worse off by P5,000 each period.
D. there will be no change in the status of the company as a whole.

SOLUTION:
Division A
Incremental sales (5,000 units x P24) P120,000
Incremental cost:
Variable cost (5,000 units x P18) 90,000
Opportunity cost [5,000 lost units x (P25 – P18)] 35,000
Incremental profit (P5,000)

There is no impact on DIVISION B’s profit since the purchase price from DIVISION A and outside party is the
same.

69. The customer perspective of the balanced scorecard approach

A. is the most traditional view of the company.
B. evaluates the internal operating processes critical to the success of the organization.
C. evaluates how well the company develops and retains its employees.
D. evaluates how well the company is performing from the viewpoint of those people who
buy its products and services.
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70. MARS COMPANY keeps careful track of the time required to fill orders. The times recorded for
a particular order appear below:
Hours
Move time 3.2
Wait time 10.9
Queue time 5.1
Process time 1.2
Inspection time 0.2

The manufacturing cycle efficiency (MCE) was closest to:

A. 0.89 C. 0.29
B. 0.06 D. 0.12

SOLUTION:
Value adding time (process time) 1.2
Throughput time ÷ 9.7
MCE 0.12 or 12%

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