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CPA Review Batch 42 October 2021 CPA Licensure Exam Week No. 5
WRAP-UP EXERCISES
1. Identify the best description for relevant costs in decision-making process.
a. Past costs that are expected to be different under each alternative
b. Past costs that are expected to be the same under each alternative
c. Future costs that are expected to be different under each alternative
d. Future costs that are expected to be the same under each alternative
2. A cost incurred in the past and hence irrelevant for current decision making is a:
a. Sunk cost c. Direct cost
b. Fixed cost d. Discretionary cost
3. Which of the following costs is generally considered irrelevant in decision-making process?
a. Direct labor c. Fixed factory overhead
b. Direct materials d. Variable factory overhead
4. Which of the following cost classification schemes is most relevant to decision making?
a. Fixed vs. variable c. Joint vs. common
b. Direct vs. common d. Avoidable vs. unavoidable
5. A company has a space that it occupies to make a component. It could rent out the same space to another
company. The rent is
a. A sunk cost c. An opportunity cost
b. A joint cost d. An unavoidable cost
6. An opportunity cost is usually:
a. Relevant and part of traditional accounting records
b. Relevant, but not part of traditional accounting records
c. Irrelevant, but part of traditional accounting records
d. Irrelevant and not part of traditional accounting records
7. In a make-or-buy decision
a. Only variable costs are relevant
b. Only conversion costs are relevant
c. Fixed costs that can be avoided in the future are relevant
d. Fixed costs that will continue regardless of the decision are relevant
8. In a make-or-buy decision, the cost to buy is compared with the
a. Total cost to make c. Variable manufacturing costs
b. Relevant cost to make d. Variable selling & administrative expenses
9. What is the opportunity cost of making a component part in a factory given that there is no alternative
use of the capacity?
a. Zero c. Variable costs of the component
b. Fixed costs of the component d. Total manufacturing costs of the component
10. In an accept-or-reject decision, which cost is usually considered to be irrelevant?
a. Fixed cost of the product c. Direct fixed costs associated with the order
b. Variable cost of the product d. Opportunity costs of the temporary idle capacity
11. If there is an excess capacity, then the minimum acceptable price for a special order must cover
a. Usual fixed manufacturing costs
b. Variable and usual fixed manufacturing costs
c. Variable and incremental fixed costs associated with the special order
d. Variable manufacturing costs plus contribution margin foregone on lost regular units.
12. If a company is operating at maximum or full capacity, the minimum special order price must cover
a. Variable costs associated with the special order
b. Variable and incremental fixed costs associated with the special order
c. Variable and fixed manufacturing costs associated with the special order
d. Variable costs and incremental fixed costs associated with the special order plus
contribution margin foregone on regular units not produced.
13. If the margin lost by dropping a product line is higher than avoidable fixed costs, then the product line
a. Operates at a loss c. Shall be shutdown
b. Shall be continued d. Has no impact on company profit
14. If there are no shutdown costs, then shutdown point is
a. Nil or zero c. Above its break-even point
b. Below its break-even point d. Equal to its break-even point
15. Which is usually considered irrelevant in ‘sell or process further’ decision making?
a. Joint costs c. Sales value at the split-off point
b. Further processing costs d. Sales value after further processing
16. A company that has a limited number of machine hours and abundant labor hours should produce first
the product that has the highest
a. Demand in units c. Contribution margin per labor hour
b. Contribution margin per unit d. Contribution margin per machine hour
17. In linear programming, the expression “Maximize Z = 1A + 2B” is most likely a (an)
a. Constraint function c. Cost function
b. Objective function d. Restriction function
18. The term ‘constraints’ in a linear programming model generally refers to:
a. Committed costs c. Scarce resources
b. Inefficiencies d. Decision variables
1. In the development of the accounting data for decision-making purposes, a relevant cost is defined as:
B a. Changes in variable cost under each alternative course of action.
b. Future costs which will differ under each alternative course of action.
c. Historical costs which are the best available basis for estimating future costs.
d. Standard costs which are developed by time-and-motion-study techniques because of their
relevance to managerial control.
2. In a decision analysis situation, which one of the following costs is generally NOT relevant to the decision?
D a. Incremental cost c. Avoidable cost
b. Differential cost d. Historical cost
3. The relevance of a particular cost to a decision is determined by the
C a. Size of the cost c. Potential effects on the decision
b. Risk level of the decision d. Accuracy and verifiability of the cost
4. The kind of cost that can be ignored in short-term decision making is a(n):
C a. Differential cost c. Sunk cost
b. Incremental cost d. Relevant cost
5. In determining whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run
decision is
D a. Prime costs
b. Variable overhead
c. Fixed overhead that will be avoided if the part is bought from an outside vendor
d. Fixed overhead that will continue even if the part is bought from an outside vendor
6. In a make-or-buy decision, the relevant costs include variable manufacturing costs as well as
C a. Factory management costs c. Avoidable fixed costs
b. General office costs d. Depreciation costs
7. Turkey Technology manufactures a particular computer component. Currently, the costs per unit are as follows:
Direct materials, P 50; direct labor, P 500; variable overhead, P 250; fixed overhead, P 400.
Pakistan Inc. has obtained Turkey with an offer to sell 10,000 units of the component for P 1,100 per unit. If Turkey
accepts the proposal, P 2,500,000 of the fixed overhead will be eliminated. Should Turkey make or buy the component?
D a. Make due to savings of P 3,000,000 c. Buy due to savings of P 1,000,000
b. Buy due to savings of P 2,500,000 d. Make due to savings of P 500,000
8. Saudi, Inc. is operating at 70% capacity and considers making Part A5 now being purchased from outside suppliers for
P 110 each, which is projected to increase in the near future. Saudi has the equipment and labor force required to
manufacture Part A5. The design engineer estimates that each part requires P 40 of direct materials and P 30 of direct
labor. The plant overhead is 200% of direct labor peso cost, and 40% of the overhead is fixed cost. A decision to
manufacture Part A5 will result in a gain or (loss) for each component of:
D a. P 26 c. (P 20)
b. P 16 d. P 4
9. The Blade Division of Baghdad Corporation produces hardened steel blades. One-third of the Blade Division’s output is
sold to the Lawn Products Division of Baghdad; the remainder is sold to outside customers. The Blade Division’s
estimated sales and cost data for the fiscal year are as follows:
Lawn Products Outsiders
Sales P 15,000 P 40,000
Variable costs (10,000) (20,000)
Fixed costs (3,000) (6,000)
Profit P2,000 P 14,000
Unit sales 10,000 units 20,000 units
The Lawn Products Division has an opportunity to purchase 10,000 identical quality blades from an outside supplier at a
cost of P 1.25 per unit. Assume that the Blade Division cannot sell any additional products to outside customers. Should
Baghdad allow its Lawn Products Division to purchase the blades from the outside supplier?
D a. Yes, because buying the blades would save Baghdad Company P 500
b. No, because making the blades would save Baghdad Company P 1,500
c. Yes, because buying the blades would save Baghdad Company P 2,500
d. No, because making the blades would save Baghdad Company P 2,500
10. Cairo Manufacturing uses 10 units of Part Number KJ45 each month in the production of radar equipment. The unit cost
to manufacture one unit of KJ45 is presented below.
Direct materials P 1,000
Materials handling (20% of direct material cost) 200
Direct labor 8,000
Manufacturing overhead (150% of direct labor) 12,000
Materials handling represents the direct variable costs of the Receiving Department that are applied to direct materials
and purchased components on their cost. This is a separate charge in addition to manufacturing overhead. Cairo’s
annual manufacturing overhead budget is one-third variable and two-thirds fixed. Egypt Suppliers, one of Cairo’s
reliable vendors, has offered to supply Part KJ45 at a unit price of P 15,000. If Cairo purchases the KJ45 units from
Scott, the capacity Cairo used to manufacture these parts would be idle. Should Cairo decide to purchase the parts
from Egypt, the unit cost of KJ45 would:
A a. Increase by P 4,800 c. Decrease by P 3,200
b. Decrease by P 6,200 d. Increase by P 1,800
NOTE: The relevant cost to buy must include 20% handling cost. (P 15,000 + P 3,000)
11. Yemen Company manufactures 20,000 units of a certain component per year. This component is used in the production
of a main product. The following are the costs to make the component per unit:
Direct materials P 11
Direct labor 14
Variable overhead 8
Fixed overhead 9
If Yemen buys the component from outside supplier the company can rent out the released facilities for P 20,000 a year.
The cost of the component per unit as quoted by the supplier is P 36. 60% of the fixed overhead applied in the
manufacture of the component will continue regardless of what decision is made. For all purchases made by the
company, freight and handling costs are applied at 1% of the purchase price. The direct materials cost is exclusive of
the freight and handling cost.
What is the economic advantage or disadvantage of buying the component? (NOTE: the relevant cost to buy both DM
and component must include 1% handling cost based on the purchase price)
B a. P 24,800 advantage c. P 27,000 disadvantage
b. P 27,000 advantage d. P 63,000 advantage
12. Iran Company needs 20,000 of a certain part to use in its production cycle. The following information is available:
Cost to Iran to make the part:
Direct materials P4
Direct labor 16
Variable overhead 18
Fixed overhead applied 10
P 48
Cost to buy the part from the Syria Company P 36
If Iran buys the part from Syria Co., Iran could not use the released facilities in another manufacturing activity. 60% of
the fixed overhead applied will continue regardless of what decision is made. In deciding whether to make or buy the
part, what are the total relevant costs to make the part?
D a. P 560,000 c. P 720,000
b. P 640,000 d. P 840,000
13. Accepting a special order will improve overall net operating income so long as revenue from the order exceeds
D a. The contribution margin on the order c. The variable costs associated with the order
b. The sunk costs associated with the order d. The incremental costs associated with the order
14. In considering a special order situation that will enable a company to make use of its idle capacity, which of the following
costs would be irrelevant?
B a. Materials c. Direct labor
b. Depreciation d. Variable overhead
15. Given the following target selling price for a unit of product:
Direct materials P 18
Direct labor 7
Overhead (20% variable) 15*
Cost of manufacture 40
Desired markup – 30% 12
Regular selling price P 52
* based on 25,000 units produced each year
A customer has offered to purchase 5,000 units at a special price of P 38 per unit. The company is selling only 20,000
units per year so it has idle capacity. Variable selling costs associated with the special order would be P 2 per unit. If
the special order is accepted, what will be the effect on the company’s overall net income?
A a. Increase by P 40,000 c. Increase by P 50,000
b. Decrease by P 10,000 d. Decrease by P 70,000
16. Iraq, Inc. sells a product for P 30. Variable cost is P 16. Iraq could accept a special order for 1,000 units at P 23. If
Iraq accepted the order, how many units could it lose at the regular price before the decision became unwise?
B a. 1,000 c. 200
b. 500 d. 0
Solution: (30 – 16) X = (23 – 16) 1,000 CM foregone on regular sales = CM earned on special order
17. Abu Company sells Product B at a selling price of P 21 per unit. Abu’s cost per unit based on the full capacity of 200,000
units is as follows:
Direct materials P 4.00
Direct labor 5.00
Overhead (2/3 fixed) 6.00
P 15.00
A special order offering to buy 20,000 units was received from a foreign distributor. The only selling cost that would be
incurred for this order would be P 3 per unit for shipping. Abu has sufficient existing capacity to manufacture the
additional units. In negotiating the price for the special order, Abu should consider that the minimum selling price per
unit should be:
A a. P 14 c. P 16
b. P 15 d. P 18
18. Delhi Co. operates at full capacity. The minimum selling price to be set for a special order must cover
C a. Fixed cost
b. Variable cost
c. Variable cost plus foregone contribution margin on lost regular sales
d. Fixed cost plus foregone contribution margin on lost regular sales
19. Mumbai Co. is a manufacturer of industrial components. One of their products used as a subcomponent in manufacturing
is KB-96. This product has the following financial structure per unit:
Selling price P 150
Direct materials P 20
Direct labor 15
Variable manufacturing overhead 12
Fixed manufacturing overhead 30
Shipping and handling 3
Fixed selling and administrative 10
Total costs P 90
Mumbai has received a special, one-time, order for 1,000 KB-96 parts. Assume that Mumbai is operating at full capacity
and that the contribution margin of the output that would be displaced by the special order is P 10,000. The minimum
price that is acceptable, using the original data, for this one-time special order is in excess of
A a. P 60 c. P 87
b. P 70 d. P 100
20. Dhabi Company’s regular selling price for its product is P 10 per unit. Variable costs are P 6 per unit. Fixed costs total
P 1 per unit based on 100,000 units and remain constant within the relevant range of 50,000 units to a total capacity of
200,000 units. After sales of 80,000 units were projected for 2021, a special order was received for an additional 10,000
units. To increase its operating income by a total of P 10,000, what price per unit should Dhabi charge for this special
order?
A a. P 7.00 c. P 10.00
b. P 8.00 d. P 11.00
21. In deciding whether or not to eliminate a branch or division, which of the following is considered relevant?
C a. All variable costs of the branch c. All direct costs of the branch
b. All fixed costs of the branch d. All indirect costs of the branch
22. Lebanon plans to discontinue a division with a P 20,000 contribution margin. Overhead allocated to the division is
P50,000, of which P 5,000 cannot be eliminated. What is the effect on Lebanon’s pretax income by this plan?
C a. P 5,000 decrease c. P 25,000 increase
b. P 20,000 decrease d. P 30,000 increase
23. Baghdad Company produces and sells 8,000 units of Product X each year. Each unit of Product X sells for P 10 and has
a contribution margin of P 6. It is estimated that if Product X is discontinued, P 50,000 of the P 60,000 in fixed costs
charged to Product X could be eliminated. These data indicate that if Product X is discontinued, overall company
operating income should
A a. Increase by P 2,000 per year c. Increase by P 38,000 per year
b. Decrease by P 2,000 per year d. Decrease by P 38,000 per year
24. Arab manages 5 upscale townhouses in Damascus. Shown below are the summary income statements for each unit :
ONE TWO THREE FOUR FIVE
Rent Income P 10,000 P 12,100 P 23,470 P 18,780 P 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit P 2,000 (P 900) (P 2,530) (P 5,220) (P 2,350)
Included in the expenses is P 12,000 of corporate overhead allocated to the townhouses based on rental income. The
townhouse unit(s) that the company should consider selling is (are):
C a. Two, Three, Four and Five c. Four and Five
b. Three, Four and Five d. Four
25. In analyzing whether to build another regional service office, the salary of the Chief Executive Officer (CEO) at the
corporate headquarters is:
D a. Relevant because salaries are always relevant
b. Irrelevant since another imputed cost for the same will be considered
c. Relevant because this will probably change if the regional service office is built
d. Irrelevant because it is a future cost that will not differ between the alternatives under consideration
26. The Uganda Company has two divisions – East and West. The divisions have the following revenues and expenses:
East West
Sales P 720,000 P 350,000
Variable costs 370,000 240,000
Traceable fixed costs 130,000 80,000
Allocated common corporate costs 120,000 50,000
Operating income (loss) P 100,000 (P 20,000)
The management at Uganda is pondering the elimination of the West division since it has shown an operating loss for
the past several years. If the West division were eliminated, its traceable fixed costs could be avoided. The total common
corporate costs would be unaffected by this decision. Given these data, the elimination of the West Division would
result in an overall company operating income of:
D a. P 120,000 c. P 80,000
b. P 100,000 d. P 50,000
27. The income statement of product Pabigat, one of the products being sold by Palugi Company is reproduced below:
Sales P 80,000
Costs and expenses 92,000
Net loss (P 12,000)
P 37,600 of the costs and expenses above are fixed, of which P 21,600 is unavoidable regardless of whether the product
will be dropped or not. What is the product elimination (shutdown) point?
B a. P 16,000 c. P 54,400
b. P 50,000 d. P 70,400
28. Temple Corporation contemplates the temporary shutdown of its plant facilities in a provincial area which are
economically depressed due to natural disasters. Below are certain manufacturing and selling expenses:
1) Depreciation 5) Sales commissions
2) Property tax 6) Security of premises
3) Interest expense 7) Delivery expenses
4) Insurance of facilities
Which of the above expenses will be considered in the computation of shutdown costs?
B a. All expenses in the list c. Items 1, 2 and 3 only
b. All except items 5 & 7 d. All except item 5
29. The indifference point is the level of volume at which a company
A a. Earns the same profit under different operating schemes.
b. Earns no profit
c. Earns its target profit
d. Any of the above
30. Bible Production, Inc. owns and operates a chain of movie theaters. The theaters in the chain vary from low volume,
small town to high volume, big city/downtown theaters. Management is considering installing machines that will make
popcorn on the premises. This proposed feature would be properly advertised and is intended to increase patronage at
the company’s theaters. These machines are available in two different sizes with the following details:
Economy poppers Regular poppers
Annual capacity 50,000 boxes 120,000 boxes
Costs:
Annual machine rental P 80,000 P 110,000
Popcorn cost per box 1.30 1.30
Cost of each box 0.80 0.80
Other variable costs per box 2.20 1.40
What level of output at which the Economy and Regular Poppers would earn the same profit (loss)?
C a. 50,000 boxes c. 37,500 boxes
b. 65,000 boxes d. 40,000 boxes
31. Desert Company produces three products from a joint process costing P 100,000. The following information is available:
Units Sales Price (Split-Off) Cost to Process Further Sales Price (After Further)
A 10,000 P 35 P 60,000 P 40
B 20,000 P 40 20,000 P 45
C 30,000 P 20 90,000 P 25
Which products should be processed further?
C a. A only c. B and C
b. A and B d. A, B and C
32. Aladdin Company has 100 units of obsolete part. The variable cost to produce them was P 40 per unit. They could now
be sold for P 30 each and it would cost P 60 to make them now. The parts can be reworked for P 80 each and sold for
P 170. What is the monetary advantage of reworking the parts over the next-best action?
C a. P 3,000 c. P 6,000
b. P 5,000 d. P 10,000
33. Middle East Corporation has 1,000 obsolete lanterns that are carried in inventory at a manufacturing cost of P 20,000.
If the lanterns are reworked for P 5,000, they could be sold for P 9,000. If the lanterns are scrapped, they could be sold
for P 1,000. What alternative is more desirable and what are the total relevant costs of the alternative?
A a. Rework, P 5,000 c. Scrap, P 20,000
b. Rework, P 25,000 d. Neither, both options result to losses
34. When a multiproduct plant operates at full capacity, quite often decisions must be made as to which products to
emphasize. These decisions are frequently made with a short-run focus. In making such decisions, managers should
select products with the
D a. Highest sales price per unit
b. Highest sales volume potential
c. Highest individual unit contribution margin
d. Highest contribution margin per unit of the constraining resource
35. Somalia Company produces three products, with costs and selling prices as shown below:
A . B . C .
Selling price per unit P 30 100% P 20 100% P 15 100%
Variable costs per unit 18 60% 15 75% 6 40%
Contribution margin per unit P 12 40% P5 25% 9 60%
A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A,
1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In
which order should it produce its products?
C a. C, A, B c. B, C, A
b. A, C, B d. The order of production doesn’t matter
36. Food Co. has a limited number of machine hours that it can use for manufacturing two products, X and Y. Each product
has a selling price of P 160 per unit but product X has 40% contribution margin and product Y has 70% contribution
margin. One unit of Y takes twice as many machine hours to make as a unit of X. Assuming unlimited demand, which
product(s) should the limited machine hours be used for?
A a. X c. Either X and Y
b. Both X and Y d. Y
37. Data regarding four different products manufactured by an organization are presented below. Direct material and direct
labor are readily available from the respective resource markets. However, the manufacturer is limited to a maximum
of 3,000 machine hours per month:
Product A Product B Product C Product D
Selling price per unit P 15 P 18 P 20 P 25
Variable cost per unit P7 P 11 P 10 P 16
Units produced per machine hour 3 4 2 3
What is the product that is the most profitable for the manufacturer in this situation?
B a. Product A c. Product C
b. Product B d. Product D
38. Sudan Company has three products: A, B and C. Three machines are used to produce the products. The contribution
margins, sales demands, and time on each machine (in minutes) are as follows:
Demand CM Time on Machine 1 Time on Machine 2 Time on Machine 3
A 100 P 30 10 mins 15 mins 12 mins
B 80 P 20 10 mins 5 mins 8 mins
C 60 P 30 5 mins 10 mins 5 mins
Assuming that there are 2,400 minutes available in each machine, which machine is the bottleneck (see page 1 for
definition of “Bottleneck Operations”)?
B a. Machine 1 c. Machine 3
b. Machine 2 d. No bottleneck operation
39. Assuming the same data in No. 38, how many units of A, B and C should be produced during the week?
B a. 93 of A, 60 of B, and 90 of C c. 60 of A, 60 of B, and 90 of C
b. 93 of A, 80 of B, and 60 of C d. 90 of A, 60 of B, and 90 of C
Items 40 and 41 are based on the following information
Guava Co. uses the following model to determine its product mix for metal (M) and scrap metal (S):
Max Z = P 30 M + P 70 S If: 3M + 2S 15, 2M + 4S 18, M & S are non-negative values
40. What are the two inequality functions?
D a. Contributions c. Conditions
b. Shadow prices d. Constraints
41. The point at which M = 2 and S = 3 would
C a. Minimize cost c. Be a feasible point
b. Lie in a corner d. Be an infeasible point
Items 42 and 43 are based on the following information
Strawberry Company manufactures two models, small and large. Each model is processed as follows:
Machining Polishing
Small model (X) 2 hours 1 hour
Large model (Y) 4 hours 3 hours
The available weekly hours to process the two models: 100 hours in the Machining Department and 90 hours in the
Polishing Department. The contribution margins are P 5 for small model (X) and P 7 for large model (Y).
42. How would the objective function be expressed?
A a. 5 X + 7 Y c. 5 X (3) + 7 Y (7) 190
b. 5 X + 7 Y 190 d. 12 X + 10 Y
43. How would the restriction (constraint) for the Machining Department be expressed?
C a. 2 X + 4 Y c. 2 X + 4 Y 100
b. 2 (5 X) + 4 (7 Y) 100 d. 5 X + 7 Y 100
44. Durian Manufacturing produces two products, X and Y. Product X requires six hours of time on machine 1 and twelve
hours of time on machine 2. Product Y requires 4 hours on machine 1 and no time on machine 2. Both machines are
available for 24 hours. Assuming that the objective function of the total contribution margin is 2X + 1Y, what product
mix will produce the maximum profit?
C a. 0 unit of X, 6 units of Y c. 2 units of X, 3 units of Y
b. 1 unit of X, 4 units of Y d. 4 units of X, 0 unit of Y
45. Lemon Company makes products X and Y, with the following production constraints representing two machines:
Machine 1: 2X + 3Y 18 Machine 2: 2X + Y 10.
If the profit equation is Z = 4 X + 2Y, then what is the maximum possible profit?
B a. P 18 c. P 21
b. P 20 d. P 24
46. If a cost has no influence on a decision, it
B a. Is a sunk cost c. Cannot be a future cost
b. Is not a relevant cost d. Is merely a differential cost
47. A relevant cost is a cost that is
D a. Optimal c. Important
b. Effective d. Pertinent to a decision
48. The salary you would otherwise earn by working rather than attending the CPA review is a good example of
B a. A sunk cost c. An incremental cost
b. An opportunity cost d. An out-of-pocket cost
49. Which type of cost is a vital part of decision-making process, but omitted from conventional accounting records?
C a. Sunk costs c. Opportunity costs
b. Direct costs d. Out-of-pocket costs
50. The role of sunk costs in decision-making can be summed up in which of the following sayings?
B a. No pain, no gain c. A penny saved is a penny earned
b. Bygones are bygones d. The love of money is the root of all evil