Strategic Cost Management

Coordinated Quiz 3
Name: ______________________ Year and Section: ________________ Date: ________
TEST l. THEORY (30%.) PART A: MULTIPLE CHOICES: USE CAPITAL LETTER
1. Most of the capital budgeting methods use
A. Accrual accounting numbers.
B. Cash flow numbers.
C. Net income.
D. Accrual accounting revenues.

2. The capital budgeting decision depends in part on the

A. Availability of funds.
B. Relationships among proposed projects.
C. Risk associated with a particular project.
D. All of these.

3. Capital budgeting is the process

A. Used in sell or process further decisions.
B. Of determining how much capital stock to issue.
C. Of making capital expenditure decisions.
D. Of eliminating unprofitable product lines.

4. An unrealistic budget is more likely to result when it:

A. Has been developed in a top down fashion.
B. Has been developed in a bottom up fashion.
C. Has been developed by all levels of management.
D. Is developed with performance appraisal usages in mind.

5. Budgetary slack can best be described as:

A. The elimination of certain expenses to enhance budgeted income.
B. The planned overestimation of budgeted expenses.
C. A plug number used to achieve a present level of operating come.
D. The planned underestimation of budgeted expenses.

6. In capital budgeting decisions, the following are considered among others:

1. Cash outflow for the investment
2. Increase in working capital requirement
3. Profit on sale of old asset
4. Loss on write-off of old asset

For which of the above items would taxes be relevant?

A. Items 1 and 3 only.
B. Items 3 and 4 only.
C. On all items.
D. Items 1, 3 and 4 only.

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7. Which one of the following organizational policies is most likely to result in undesirable management
behavior?
A. John Walker, the CEO of Walker Brewery, wrote a memorandum to his executives stating,
"Operating plans and contract should be met without fail".. .
B. The budgeting process at PARIS Disneyland starts with operating managers providing goals for
their respective departments.
C. Ace Hardware holds quarterly meeting of departmental managers to consider possible changes
in the budgeted targets due to changing conditions.
D. At Blue Jet Transportation, managers are expected to provide explanations for variances from
their departments

8. The master budget begins with a:

A. production budget
B. direct materials budget
C. sales budget
D. sales forecast

9. The financial budgets include the:

A. Cash budget and the selling and administrative expense budget.
B. Cash budget and the budgeted balance sheet.
C. Budgeted balance sheet and the budgeted income statement.
D. Cash budget and the production budget.

10. An overly optimistic sales budget may result in

A. Increases in selling prices late in the year.
B. Insufficient inventories.
C. increased sales during the year.
D. Excessive inventories.

Part B: Write A if the statement is correct and B if the statement is incorrect

11. The flow of input data in budgeting should be from the highest levels of responsibility to the lowest.
12. A budget can facilitate the coordination of activities among the segments of a large company.
13. The master budget reflects management's long-term plans encompassing five years or more.
14. Financial budgets must be completed before the operating budgets can be prepared.
15. The direct materials budget must be completed before the production budget because the quantity
of materials available for production must be known.
16. Budgets are statements of management's plans stated in financial terms.
17. A budget can be a means of communicating a company's objectives to external parties.
18. Proceeds from sale of the old asset that was sold at a loss is deducted in the computation of the
amount of the net investment
19. The "tax savings effect "of depreciation is the only use of depreciation in capital budgeting.
20. If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any
month.

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TEST II. PROBLEM SOLVING (60%)
Problem A. KARLO Corporation, a wholesaler, provided the following information:
Merchandise
Month Purchases Sales
January P142,000 P172,000
February 148,000 166,000
March 136,000 165,000
April 154,000 178,000
May 160,000 166,000
Customers pay 60% of their balances in the month of sale, 30% in the month following sale, and 10% in
the second month following the sale.
The company pays all invoices in the month following purchase and take advantage of a 3% discount on
all amounts due.
Cash payments for operating expenses in May will be P119,500; YELLOW's cash balance on May 1 was
P127,800.
1. What is the expected total cash collection during May?
2. What is the expected total cash disbursement during May?
3. What amount would be collected in May from February sales?
4. Given the above collection pattern, what is the balance of Accounts Receivable as of March 31?

Problem B: The KENDEL Corporation is considering buying a new machine that has a purchase price of
P750,000. Installation cost, freight and insurance that will be paid amounted to P20,000. Additional
investment in working capital amounting to P200,000 is needed to support the plan. The company
estimates that over the next four years this machine would save P700,000 a year in cash operating
expenses. At the end of four years, the machine would have P15,000 salvage value. The company's
hurdle rate of return is 16%.
If the new machine is purchased, the machine that is currently in use, which originally costs P180,000
but still has a carrying value of P60,000, could be sold for P50,000. This old machine has a salvage value
of P20,000.

COMPUTE:
5. The amount of net investment.
6. Annual cash returns after tax

Problem C: KALEB Marketing Co. is preparing its master budget for 2020. Relevant data pertaining to its
sales budget are as follows:
A. Sales for the year are expected to total 4,000,000 units. Quarterly sales are 25%, 30%, 36%, 15%, and
30%,respectively.
B. The sales price is expected to be P15 per unit for the first quarter and then to be increased by 10%
thereafter quarterly.

7. What is the amount of the budgeted sales for the second quarter ending?

Problem D: The following data is taken from the records of KARAMEL Company are presented to you:

The total pounds needed for production are 2 times the units to be produced. The desired ending
finished goods inventory is 20% of the current month's total units to be sold while the desired ending
raw materials inventory is equal to 10% of the next month's raw materials requirements.

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These inventory requirements were met at the beginning of the year.
Cost per pound of raw materials is P10.00.
Units to be sold: January- 80,000; February 120,000; March 200,000

For the month of FEBRUARY, COMPUTE:

8. Units to be produced
9. Units to be purchased
10. The budgeted cost of raw material requirements.

Problem E: The KONNOR Company is interested in buying a piece of equipment that it needs to expand
its operations. The following financial data had been presented to you:

Cost of the required equipment P100,000

Working Capital requirement 500,000
After-tax annual cash inflows 650,000
Salvage value at the end of 6 years 20,000
Tax rate 30%

COMPUTE:
11.Payback period.
12. Payback reciprocal
13. Accounting rate of return based on average investment

Problem F: KENJI SALES Inc., has sales of P500,000, P750,000 and P1,000,000 for January, February and
March, respectively. The company's typical collection pattern follows: 60% are collected in the month of
sales, 35% are collected in the following month and 5% become uncollectible. Fifty percent of credit
sales collected in the same month qualifies for a 2% prompt payment discount.

14. What is the company's total cash collection in March?

Problem G: KASSEY Corporation has a P3,000,000 asset investment and is subject to a 30% income tax
rate. Cash inflows are expected to average P600,000 before tax over the next ten years; in contrast,
average income before tax is anticipated to be P300,000.

15. What is the company's accounting rate of return based on initial investment?
16. What is the payback period?

Problem H: The following information was made available for KAMERON, Inc.:

June 30 cash balance, P902,000

Dividends paid in July, P240,000
Cash expenditures in July for operating expenses, P636,210
Depreciation expense in July P 90,000
Cash collections in July P1,780,550
Merchandise purchases paid in cash in July, P624,120
Purchased equipment for cash in July, P415,000

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It is the company's policy to maintain a minimum cash balance of P1,200,000.

17. What amount of cash would be loaned, if needed, to meet the minimum requirement should the
bank grants loan in the multiples of P50,000?

Problem I: The KERNELL Company had the following budgeted credit sales for the first half of the
current year:
January P500,000 May P800,000
February 550,000 June 850,000
March 600,000 July 900,000
The company is in the process of preparing a cash budget and must determine the expected cash
collections by month. To this end, the following information has been assembled:

Collections on sales: 40% in month of sale

50% in month for lowing sale
8% in second month following sale
balance is estimated to be uncollectible

The accounts receivable balance on January 1 of the current year was P620,000, of which 3/4 represents
uncollected December sales; balance from uncollected November sales.

18. What is the total estimated cash collection during the month of January?
19. What is the amount of the bad debts expense in February?
20. What is the total cash collection during the second calendar quarter from sales made during the
second calendar quarter?