No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

MANAGEMENT ADVISORY SERVICES

PREWEEK LECTURE
SOURCES: AICPA/RPCPA/CMA/Various Test Banks

MULTIPLE CHOICE: Select the best answer from the choices provided

CAPITAL BUDGETING

1. Generally, the least expensive source of financing for a firm is

a. Bonded indebtedness
b. Preference shares
Retained earnings
d. Ordinary shares

NPV represents the value to the existing shareholders of the firm created by the project. Komisama Inc.
has no debt. Its assets will be worth P60 million in one year if the economy is strong, but only P30 million
is the economy is weak. Both events are equally likely. The market value today of Komisama’s assets is
P40 million

2. The expected return for Komisama’s stocks without leverage is close to

a. -25%
b. -17.5%
c. -12.5%
d. 12.5%

3. Suppose the risk-free interest rate is 4%. If Komisama borrows P15 million today at this rate and uses
the proceeds to pay an immediate cash dividend, then according to mark-to-market, the expected
return of Komisama’s stock just after the dividend is paid would be closest to
a. 17.5%
b. -17.5%
c. -12.5%
d. 12.5%

4. Suppose the risk-free interest rate is 4%. If Komisama borrows P15 million today at this rate and uses
the proceeds to pay an immediate cash dividend, then according to mark-to-market, the market value
of its equity after the dividend is paid would be closest to
a. P0 million
b. P15 million
c. P40 million
d. P25 million

5. A tax-exempt foundation, Sincerely Foundation, Inc. intends to invest P1 million in a five-year

project. The foundation estimates that the annual savings from the project will amount to
P315,000. The P1 million asset is depreciable over five (5) years on a straight-line basis. The
foundation’s hurdle rate is 12% and as a consultant of the foundation, you are asked to determine the
internal rate of return and advise if the project should be pursued.

To facilitate computations, below are present value factors:

N=5 12% 14% 16%

Present value of P1 0.57 0.52 0.48
Present value of an annuity of P1 3.60 3.40 3.30

Your advice is
a. To proceed due to an estimated IRR of more than 16%.
b. Not to proceed due to an estimated IRR of less than 12%.
c. To proceed due to an estimated IRR of less than 14% but not more than 12%.
d. To proceed due to an estimated IRR of less than 16% but not more than 14%.

1|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

6. Arthur Co. is reviewing the following data relating to an energy saving investment proposal:

Cost P50,000
Residual value at the end of 5 years 10,000
Present value of an annuity of 1 at 12% for 5 years 3.60
Present value of 1 due in 5 years at 12% 0.57

What would be the annual savings needed to make the investment realize a 12% yield?
a. P8,189
b. P12,306
c. P11,111
d. P13,889

Najimi Incorporated is a taxi operator. The company is considering to replace one of its unit with a new,
more efficient model. Information are available as follows:

OLD NEW
Original cost 100,000 90,000
Accumulated depreciation 50,000
Salvage value at present 5,000 90,000
Salvage value at the end of life – –
Annual cash operating costs 125,000 100,000
Remaining useful life 5 years 5 years

7. Ignoring tax effect, determine the advantage or disadvantage of purchasing the new taxi unit
a. 10,000 disadvantage
b. 35,000 advantage
c. 15,000 disadvantage
d. 40,000 advantage

8. Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If
the net present value of this proposal is greater than zero and the firm is not under the constraint of
capital rationing, then the firm should:
a. Calculate the payback period to ascertain that the initial cash outlay can be recovered within an
appropriate period of time
b. Calculate the project’s internal rate of return to ascertain whether it exceeds the marginal cost of
capital
c. Compare the profitability index of the project to other possible opportunities
d. Accept the proposal, since the acceptance of value-creating projects should increase
shareholder’s wealth

9. If capital is to be rationed for only the current period, a firm should probably first consider selecting
projects by descending order of
a. net present value
b. payback period
c. internal rate of return
d. profitability index

10. This method provides correct rankings of mutually exclusive projects, when the firm is not subject to
capital rationing
a. net present value
b. payback period
c. internal rate of return
d. profitability index

INVESTMENT, RISK AND RETURNS

1. Talpak Company has a large amount of variable rate financing due in one year. Management is
concerned about the possibility of increases in short-term rates. Which of the following would be most
viable action for the expected interest fluctuation and to hedge the investment risk?
a. Buy Treasury notes in the futures market
b. Sell Treasury notes in the futures market
c. Buy an option to purchase Treasury bonds
d. Sell an option to purchase Treasury bonds

2|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

2. Gambit Company has a large amount of variable rate financing due in one year. Management is
concerned about the possibility of decreases in short-term rates. Which of the following would be most
viable action for the expected interest fluctuation and to hedge the investment risk?
a. Buy Treasury notes in the futures market
b. Sell Treasury notes in the futures market
c. Buy an option to purchase Treasury bonds
d. Sell an option to purchase Treasury bonds

3. Diversification cannot reduce this risk

a. Systematic risk
b. Unsystematic risk
c. Market risk
d. Both A and C

4. As the number of investment increases in a portfolio, the effect of the diversification

a. Increases
b. Decreases
c. Remain unchanged
d. Cannot be determined

5. Which of the following is true regarding standard deviation and beta?

a. Beta is a statistical measure of security’s volatility, which indicates the tendency of the returns to
rise or fall drastically in a short period of time
b. Standard Deviation is a statistical measure which compares volatility of an individual fund or stocks
to its index or benchmark
c. Beta is a measure of market risk
d. None of the statements is false

6. Which of the following items has an negative relationship with risk?

a. Correlation
b. Returns
c. Standard deviations
d. Covariance

7. Which of the following investment models accounts for the volatility, price of underlying assets, the
strike price of the option, the time of expiration of the option and the risk-free rate to enable sellers to
set rational prices for the options available for sale?
a. Black-Sholes Model
b. Monte Carlo Simulation
c. Binomial Option Pricing Model
d. Capital Asset Pricing Model

8. This model is used to simulate the probability of different outcomes in a process that cannot easily be
predicted due to the intervention of random variables. This process focuses on constantly repeating
random samples to achieve certain results
a. Black-Sholes Model
b. Monte Carlo Simulation
c. Binomial Option Pricing Model
d. Capital Asset Pricing Model

9. This stock pricing model uses an iterative procedure, allowing for the specification of points in time
during the time span between valuation date and the option’s expiration date. This enable the user to
visualize the changes in asset price from period to period and evaluate the option based on decisions
made at different points in time.
a. Black-Sholes Model
b. Monte Carlo Simulation
c. Binomial Option Pricing Model
d. Capital Asset Pricing Model

10. Mihoyou Inc. has two investments, Stock A and Stock B. Stock A has a standard deviation 10% and
an expected return of 8%. Stock B has a standard deviation of 4% and an expected return of 6%.
Which of the investments is riskier relative to its expected rate of return?
a. Stock A
b. Stock B
c. Both investments have the same level of risk
d. Cannot be determined

3|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

WORKING CAPITAL MANAGEMENT AND SHORT-TERM FINANCING

1. A firm following an aggressive working capital strategy would

a. Hold substantial amount of fixed assets.
b. Minimize the amount of short-term borrowing.
c. Finance fluctuating assets with long-term financing.
d. Minimize the amount of funds held in very liquid assets.

2. Which of the following statements is most correct?

a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its
credit department.
b. If a firm that sells on terms of net 30 changes its policy and begins offering all customers terms
of 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO will probably
increase.
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would
probably show some past due accounts.
d. Statements a and c are correct.

3. A change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction
of the investment in accounts receivable, and a reduction in the number of doubtful accounts. Based
on this information, we know that:
a. Net profit has increased.
b. The average collection period has decreased.
c. Gross profit has declined.
d. The size of the discount offered has decreased.

4. It is held that the level of accounts receivable that the firm has or holds reflects both the volume of a
firm’s sales on account and a firm’s credit policies. Which one of the following items is not considered
as part of the firm’s credit policies?
a. The minimum risk group to which credit should be extended.
b. The extent (in terms of money) to which a firm will go to collect an account.
mailto:yannacruzz08@gmail.com
c. The length of time for which credit is extended.
d. The size of the discount that will be offered

5. Mohito Inc. has a total annual cash requirement of P7,500,000 which are to be paid uniformly. Mohito
has the opportunity to invest the money at 24% per annum. The company spends on the average P40
for every cash conversion to marketable securities. What is the optimal cash conversion size?
a. P45,000
b. P55,000
c. P30,000
d. P50,000

6. Shouko Incorporated currently uses a centralized collection system. An average of 8 days is required
for mailed checks to be received, 4 days for Shouko to process them, and 3 days for the checks to
clear through its bank. A proposed lockbox system would reduce the mailing time to 4 days and the
check-clearing time by 1 day. Supposing the average collection per day is P150,000, the average cash
balance of Shouko Incorporated will increase by
a. P450,000
b. P600,000
c. P750,000
d. P900,000

7. On July 1, 2021, Dunno Company obtained a P2,000,000 180-day bank loan at an annual rate of 12%.
The loan agreement requires Dunno to maintain a P400,000 compensating balance in its checking
account at the lending bank. Dunno would otherwise maintain a balance of only P200,000 in this
account. The checking account earns interest at an annual rate of 6%. Based on a 360-day year, the
effective interest rate on the borrowing is
a. 12%.
b. 13.33%.
c. 12.67%
d. 13.5%

4|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

8. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The credit terms
for these purchases are 2/10, net 30, and payment is made on the 30th day after each delivery. Thus,
the company is considering a 1-year bank loan for P9,800 (98% of the invoice amount). If the effective
annual interest rate on this loan is 12%, what will be the net peso savings over the year by borrowing
and then taking the discount on the materials?
a. P3,624
b. P1,176
c. P4,80
d. P1,224

9. The Canned company produces a specialty can and has the following information available concerning
its inventory items:
Relevant ordering costs per purchase order P150
Relevant carrying costs per year:
Required annual return on investment 10%
Required other costs per year P1.40

Annual demand is 10,000 packages per year. The purchase price per package is P16.

What are the relevant total costs at the economic order quantity?
a. P1,000
b. P3,000
c. P1,500
d. P3,500

10. Wasting Resource Co. has annual credit sales of P4 million. Its average collection period is 40 days
and bad debts are 5% of sales. The credit and collection manager is considering instituting a stricter
collection policy, whereby bad debts would be reduced to 2% of total sales, and the average collection
period would fall to 30 days. However, sales would also fall by an estimated P500,000 annually.
Variable costs are 60% of sales and the cost of carrying receivables is 12%. Assuming a tax rate of
35% and 360 days a year, the incremental change in the profitability of the company if stricter policy
would be implemented would be
a. Zero as the positive and negative effects offset each other.
b. A reduction in net income by P70,000.
c. A reduction in net income by P38,350.
d. A reduction in net income by P35,400.

FINANCIAL STATEMENT ANALYSIS

1. Which of the following statements is true?

a. As a general rule, management would want to reduce the firm’s average collection period.
b. As a general rule, management would want to reduce the firm’s accounts receivable turnover
ratio.
c. As a general rule, management would want to increase the firm’s average collection period.
d. As a general rule, a firm is not financially affected by the amount of time required to collect
its accounts receivable.

2. Which of the following is the best indicator of management's effectiveness at managing the firm’s
balance sheet?
a. Total asset turnover
b. Times-interest-earned
c. Operating profit margin
d. Debt ratio

3. Other things held constant, an increase in ______ will decrease the current ratio. Assume an initial
current ratio greater than 1.0.
a. Accruals
b. Common stock
c. Average collection period
d. Cash

5|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

4. Which of the following is not a limitation related to the usage of ratios when reviewing a firm’s
performance?
a. Ratios cannot be used to compare firms that are in the same industry if one firm’s sales are
higher than another firm’s.
b. Some firms operate in a variety of business lines, which makes it difficult to make
comparisons.
c. Accounting practices differ widely among firms.
d. Many firms experience seasonality in their operations.

5. If the total asset turnover decreases, then the return on equity will:
a. decrease.
b. increase.
c. not change.
d. change, but in an indeterminate way.

6. Assume that a particular firm has a total asset turnover ratio lower than the industry norm. In addition,
this firm’s current ratio and fixed asset turnover ratio also meet industry standards. Based on this
information, we can conclude that this firm must have excessive:
a. accounts receivable.
b. fixed assets.
c. debt.
d. inventory.

7. A firm is conducting an analysis of trends over time and discovers that its inventory turnover has
declined. This may be due to:
a. an increase in sales.
b. an increase in cost of goods sold.
c. a decrease in inventory purchases
d. an increase in inventory purchases.

8. Solo Star Plastics has assets of P100,000, Interest rate of 8.0%, debt ratio of 40.0%, total assets
turnover of 3.0, profit margin of 6.0%, and tax rate of 40%, What is the EBIT?
a. P12,000
b. P33,200
c. P18,000
d. P30,000

9. Given the following information, calculate the market price per share of CRAM Inc.

Net income = P200,000 Earnings per share = P2.00

Stockholders’ equity = P2,000,000 Market/Book ratio = 0.20

a. P20.00
b. P 8.00
c. P 4.00
d. P 2.00

10. Dumbledore Communications has a total asset turnover of 2.66, total liabilities of P1,004,162, and sales
revenues of P7,025,000. What is Dumbledore’s debt ratio?
a. 38.0%
b. 4.3%
c. 26.7%
d. 81.1%

6|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

11. Scamander Carpets, Inc. has asked you to calculate the company’s current ratio for 200A. All you have
is a partial balance sheet and some assumptions. Using the information provided, calculate
Scamander’s quick ratio for 200A.

Gross profit margin = 50%

Inventory turnover (COGS/Inv) = 5
200A sales = P3,000

Assets Liabilities & Equity

Cash ? Accounts payable P50
AR P40 Accruals ?
Inventory ? Long-term debt P400
Net fixed assets P500 Equity P250
Total assets P900 Total liab. & equity ?

a. 0.2
b. 0.4
c. 0.6
d. 0.8

12. The granting of share warrants would most likely result to

a. Increase in earnings per share
b. Increase in price-earnings ratio
c. Decrease financial leverage ratio upon exercise
d. Increases equity ratio at the date of grant

13. For 2021, Grindlewald Industries increased earnings before interest and taxes by 17%. During the
same period, net income after tax increased by 42%. The degree of financial leverage that existed
during 2021 is:
a. 1.70
b. 4.20
c. 2.47
d. 5.90

14. Positive financial leverage is an indication of:

a. The rate at which the earnings of a company are expected to grow
b. Liquidity and solvency are expressed as a single measure
c. Yield that shareholders can expect on their investment
d. The benefit obtained from the use of borrowed funds.

15. FS analysis is least associated with

a. Common-size financial statements
b. Solvency and performance evaluation
c. Variance analysis
d. Productivity

RESPONSIBILITY ACCOUNTING AND TRANSFER PRICING

1. The budgetary unit of an organization which is led by a manager who has both the authority over and
responsibility for the unit's performance is known as a:
a. control center
b. budgetary area
c. responsibility center
d. managerial department

2. Which is the best example of a decentralized operation?

a. One owner who prepares plans and makes decisions for the entire company.
b. Each unit is responsible for their own operations and decision making.
c. In a major company, operating decisions are made by top management.
d. None of the above. All are examples of a centralized management.

7|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

3. In evaluating the profit center manager, the income from operations should be compared:
a. across profit centers
b. to historical performance or budget
c. to the competition's net income
d. to the total company earnings per share

4. Which one of the following is NOT a measure that management can use in evaluating and controlling
investment center performance?
a. Rate of return on investment
b. Negotiated price
c. Residual income
d. Income from operations

5. Which of the following is not a commonly used approach to setting transfer prices?
a. Market price approach
b. Revenue price approach
c. Negotiated price approach
d. Cost price approach

6. When is it appropriate to use the market price approach when two related companies are providing
services or products to each other?
a. The production for the selling company is falling under full capacity and it needs to increase
its sales.
b. The purchasing company is currently purchasing a product at a price from an outside supplier
as it would from its related company that is operating at full capacity.
c. The purchasing company is considered a cost center and is not concerned with maximizing
profits for the company.
d. The policy of the parent company is that when a product is sold by an outside supplier and by
a related party, purchases must be made within the company.

The Megatron Corporation reported the following information for its Optimus Division: Revenues – P1.0M,
Operating Costs – P600,000; Taxable income – P200,000, and Operating Assets – P500,000. Income is
defined as operating income.

7. What is the Division's return on investment?

a. 80%
b. 50%
c. 40%
d. 60%

8. Shaun, Inc. is a highly automated manufacturing firm. The vice president of operations has decided
that traditional standards are inappropriate for performance measures in an automated environment.
Labor is insignificant in terms of the total cost of production and tends to be fixed. Material quality is
considered more important than minimizing material cost, and customer satisfaction is the number one
priority. As a result, delivery performance measures have been chosen to evaluate performance.

The following information is considered typical of the time involved to complete orders.
Wait time from order being placed to start of production 10.0 days
Wait time from start of production to completion 5.0 days
Inspection time 1.5 days
Process time 3.0 days
Move time 1.5 days
Queue time 1.0 day

What is the manufacturing cycle time and manufacturing cycle efficiency for this order?
a. 12 days and 25%
b. 22 days and 13.6%
c. 22 days and 25%
d. 17 days and 17.6%

9. The Alpha Division of a company, which is operating at capacity, produces and sells 1,000 units of a
certain electronic component in a perfectly competitive market. Revenue and cost data are as follows:
Sales P50,000
Variable costs 34,000
Fixed costs 12,000

The minimum transfer price that should be charged to the Omega Division of the same company for
each component is
a. P12
b. P46
c. P34
d. P50

8|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

10. Following a strategy of product differentiation, Liberty Company makes a high-end Appliance,
Mamajalin. Liberty Company presents the following data for the years 2020 and 2021:

2020 2021
Units of Mamajalin produced and sold 20,000 21,000
Selling price P200 P220
Direct materials (square feet) 60,000 61,500
Direct materials costs per square foot P20 P22
Manufacturing capacity in units of Mamajalin 25,000 25,000
Total conversion costs P1,000,000 P1,100,000
Conversion costs per unit of capacity P40 P44
Selling and customer-service capacity (customers) 60 58
Total selling and customer-service costs P360,000 P362,500
Selling and customer-service capacity cost per customer P6,000 P6,250

Liberty Company produces no defective units but it wants to reduce direct materials usage per unit of
Mamajalin in 2021. Manufacturing conversion costs in each year depend on production capacity defined in
terms of Mamajalin units that can be produced. Selling and customer-service costs depend on the number
of customers that the customer and service functions are designed to support. Liberty Company has 46
customers in 2020 and 50 customers in 2021. The industry market size for high-end appliances increased
5% from 2020 to 2021.

What is the net effect on operating income as a result of the price-recovery component?
a. P179,000 F
b. P179,000 U
c. P241,000 U
d. P420,000 F

COST BEHAVIOR

1. In describing the linear cost formula Y = a + bX, which of the following statements is correct?
a. “a” and “b” are valid for all levels of activity
b. “Y” is the independent variable
c. “a” is the variable rate
d. In the high-low method, “b” equals the change in cost (Y) divided by the change in activity (X)

2. Which of the following is NOT a method of splitting a semi-variable cost?

a. High and low point c. Scatter diagram
b. Least squares method d. Linear programming

3. Cheese Cake Company applies the high-low method of cost estimation to customer service data for
the last 4 months of 2021:

Month No. of Cost ( P )

Customer
September 1, 200 3, 120
October 1, 300 3, 185
November 1, 800 4, 320
December 1, 700 3, 895

What is the estimated variable cost component per order?

a. P2.00 c. P2.48
b. P2.42 d. P2.50

4. Macchiato, Inc. provides you with the following flexible budget of factory overhead at three different
capacity levels:

Capacity Factory Overhead

65% P100,000
70% 106,000
90% 120,000

What will be the flexible budget of factory overhead at 85% capacity?

a. P116,000 c. P130,769
b. P118,450 d. P120,645

9|P a g e JBUGATAN/JSARIPADA
 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : icarecpareview@gmail.com

5. Multiple regression analysis involves

a. One dependent variable and one independent variable
b. One dependent variable and many independent variables
c. Many dependent variables and one independent variable
d. Many dependent variables and many independent variables

COST-VOLUME-PROFIT ANALYSIS

1. Jov Company plans to market a new product. Based on its market studies, Jov estimates that it can
sell 6,000 units in 2022. The selling price will be P4 per unit. Variable cost is estimated to be 40% of
the selling price. Fixed cost is estimated to be P12,000. What is the breakeven point?
a. 3,750 units c. 5,500 units
b. 5,000 units d. 7,500 units

2. Cynth, Inc. prepared the following estimated cost data for the following year:

Variable Fixed
Direct materials 0.10x
Direct labor 0.25x
Factory overhead 0.15x 900,000
Selling expenses 0.09x 360,000
Administrative expenses 0.06x 140,000

If “x” represents the estimated sales, what would be the amount of peso sales at the break-even point?
a. P 2,250,000 c. P 4,000,000
b. P 3,500,000 d. P 5,300,000

3. Which of the following would cause the break-even point to change?

a. Sales increased
b. Total production decreased
c. Fixed costs increased owing to additional machinery in physical plant
d. Total variables costs increased as a function of higher production

4. Egla Electronics company is developing a new product, screen protectors for high-voltage electrical
flows. The cost information for this product is as follows:

Unit costs
Direct materials P3.25
Direct labor P2.00
Distribution P0.75

The company will also be absorbing P120,000 of additional fixed costs associated with this new
product. A corporate fixed charge of P20,000 currently absorbed by other products will be allocated to
this new product. Egla Electronics effective income tax rate is 40%. How many screen protectors must
Egla Electronics sell at a selling price of P14 per unit to increase after tax income by P30,000?
a. 10,700 units c. 21,250 units
b. 18,750 units d. 23,750 units

5. The following data pertain to the two products manufactured by Jubebeng Inc.

Per Unit
Product Selling Price Variable Cost
Eey P240 P140
Bii 1,000 P400

Fixed cost totals P 600,000 annually. The expected saled mix in units is 60% for Product Eey and 40%
for Product Bii. How many units of Bii must Jubengbeng sell to break-even?
a. 800 c. 2,000
b. 1,200 d. 2,459

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 No. 125 Brgy. San Sebastian
Lipa City, Batangas, Philippines
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PRODUCT COSTING

1. Which of the following must be known in order to institute a direct (variable) costing system?
a. A controllable and non-controllable component of all costs related to production
b. The variable and fixed components of all costs related to production
c. Standard production rates and times for all elements of production
d. Contribution margin and break-even point for all goods in production

2. Super variable costing treats which of the following costs as the only variable and product costs?
a. Direct labor
b. Direct materials
c. Straight-line depreciation of factory machine
d. Supervisory salary of an assembly line manager

3. During its first year of operations, a company produced 55,000 units and sold 50,000 units. The
following costs were incurred during the year:

Variable costs per unit

Direct materials P15.00
Direct labor 10.00
Manufacturing overhead 12.50
Selling and administrative 2.50
Total fixed cost
Manufacturing overhead P440,000
Selling and administrative 275,000

What is the difference between operating profit calculated on the absorption costing basis and on the
variable costing basis is that absorption costing operating profit?
a. P40,000 greater c. P65,000 greater
b. P44,000 greater d. P12,500 less

4. Direct costing and absorption costing will show the same incomes when there is no
a. Beginning and ending inventories c. Variable cost
b. Fixed costs d. Both A and B

5. A company’s production facility has an ideal capacity of 25,000 units, which was used as the basis for
the normal capacity of 20,000 units. The company was able to produce 21,000 units during the period.
Fixed manufacturing costs were P400,000 while variable manufacturing costs were also P400,000.
What was the volume or capacity variance for the production?
a. P20,000 favorable c. P40,000 favorable
b. P20,000 adverse d. P24,000 favorable

BUDGETING AND FINANCIAL PLANNING

1. Budgets are a necessary component of financial decision making because they provide a(n)
a. Efficient allocation of resources
b. Means to use all the firm’s resources
c. Means to check managerial discretion
d. Automatic corrective mechanism for errors

2. When management seeks to achieve personal departmental objectives that may work to the detriment
of the entire company, the manager is experiencing:
a. budgetary slack
b. padding
c. goal conflict
d. cushions

3. Budgets need to be fair and attainable for employees to consider the budget important in their normal
daily activities. Which of the following is not considered a human behavior problem?
a. Allowing employees, the opportunity to be a part of the budget process.
b. Setting goals among managers that conflict with one another.
c. Setting goals too tightly making it difficult to meet performance expectation.
d. Allowing goals to be so low that employees develop a “spend it or lose it” attitude.

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4. Which of the following is included in a firm’s financial budget?

a. Cash budget c. Sales budget
b. Capital budget d. Both A and B

5. The cash budget should help to ensure

a. That enough cash is on hand at all times to satisfy maximum cash requirements
b. That cash dividends can be paid every quarter
c. That sufficient cash is available to pay salaries, even if it means borrowing the money
d. Sufficient liquidity without an excess amount of idle cash

6. Budang company, a merchandising firm, is preparing its master and has gathered the following data to
help budget cash disbursements:

Budgeted data:
Cost of inventories to be sold P680,000
Desired decrease in inventories 50,000
Desired decrease in accounts payable 130,000

All of the accounts payables are for inventory purchases and all inventories are purchased on account.
What are the estimated cash disbursements for inventories for the budget period?
a. P600,000 c. P500,000
b. P550,000 d. P760,000

7. Vanilla keeps its inventory of finished goods at 75% of the current month’s budgeted sales and
inventory of raw materials at 50% of the next month’s budgeted production needs. Each unit of product
requires 2 pounds of materials. The sales budget in units: May, 1,000; June, 1,200; July, 1,300; August,
1,600. What would be the raw material purchases in June?
a. 1,350 pounds c. 2,500 pounds
b. 2,725 pounds d. 2,900 pounds

8. Vanilla keeps its inventory of finished goods at 75% of the current month’s budgeted sales and
inventory of raw materials at 50% of the next month’s budgeted production needs. Each unit of product
requires 2 pounds of materials. The production budget in units: May, 1,000; June, 1,200; July, 1,300;
August, 1,600. What would be the raw material purchases in July?
a. 1,350 pounds c. 2,500 pounds
b. 2,725 pounds d. 2,900 pounds

9. The Golden Monkey Company is preparing its cash budget for the month of October. The following
information is available concerning its accounts receivable:

Estimated credit sales for October P160,000

Actual credit sales for September 175,000
Estimated collections in October for credit sales in October 25%
Estimated collections in October for credit sales in September 60%
Estimated collections in October for credit sales prior to September P12,000
Estimated write-offs in October for uncollectible credit sales 5,000
Estimated provision for bad debts in October for credit sales in October 6,000

What are the estimated cash receipts from accounts receivable collections in October?
a. P149,000 c. P157,000
b. P142,000 d. P150,000

10. Hibiscus, Inc. projects the following activities related to its financial operations:
a. Issuance of shares of company’s own common stock: P165,000
b. Issuance of mandatorily redeemable preference shares: P35,000
c. Dividends to be paid to the company’s own shareholders: P27,000
d. Dividends to be paid to redeemable preference shares: P3,000
e. Dividends to be received from investments in other companies shares: P4,000
f. Interest to be paid on the company’s own bonds: P11,000
g. Repayment of principal on the company’s own bonds: P50,000
h. Proceeds from sale of the company’s used equipment: P23,000

In cash financial budget, the net cash used by financing activities should be projected to be
a. P158,000 c. P120,000
b. P123,000 d. P113,000

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STANDARD COSTING AND VARIANCE ANALYSIS

1. A company using very tight standards in standard cost system should expect that
a. Most variances will be unfavorable
b. No incentive bonus will be paid
c. Employees will be strongly motivated to attain the standards
d. Costs will be controlled better that if lower standards were used

2. Which level of capacity if used would result into the lowest fixed overhead application rate?
a. Theoretical capacity c. Normal capacity
b. Practical capacity d. Expected actual capacity

3. Setting standards
a. Is largely a matter of calculating rates and quantities
b. Should be done to make them as tight as possible
c. Has important behavioral implications
d. Is done only for manufacturing activities

4. Information on Honey Company’s overhead costs is as follows:

Actual overhead P36,000

Budgeted overhead based on actual direct labor hours allowed 34,000
Budgeted overhead based on standard direct-labor hours allowed 33,000
Standard applied overhead 30,000

What was the total overhead variance?

a. P 2,000 unfavorable c. P 4,000 favorable
b. P 3,000 favorable d. P 6,000 unfavorable

Items 5-10 are based on the following information

Joy Company produces a single product. The standard and budgeted cost data for the product follows:

Direct materials ( 4 pounds @ P 5 per pound ) P20

Direct labor ( 1.5 hours @ P 10 per hour ) P15
Variable manufacturing overhead ( 1.5 hours @ P 4 per hour ) P6
Fixed manufacturing overhead P12,000
Normal capacity (in labor hours) 1,500
Normal capacity (in units) 1,000

During a recent period, the company produced 1,200 units of product. Various costs associated with the
production of these units are given below:

Direct materials purchased ( 6,000 pounds ) P28,500

Direct materials used in production 5,000 pounds
Direct labor cost incurred ( 2,100 hours ) P17,850
Variable manufacturing overhead cost incurred P10,080
Fixed manufacturing overhead cost incurred P11,850

Any immaterial variances are ignored. Manufacturing overhead costs are applied to products on the basis
of direct labor hours.

5. What is the materials variance for the period?

a. P500 favorable c. P1,000 favorable
b. P1,500 favorable d. Cannot be determined

6. What is the labor variance for the period?

a. P150 favorable c. P2,880 unfavorable
b. P3,150 favorable d. P3,000 unfavorable

7. What is the variable overhead spending variance for the period?

a. P1,200 unfavorable c. P1,680 favorable
b. P1,860 unfavorable d. P1,680 unfavorable

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8. What is the conversion cost efficiency variance for the period?

a. P3,000 unfavorable c. P4,200 unfavorable
b. P1,200 unfavorable d. P4,000 unfavorable

9. What is the controllable variance for the period?

a. P2,730 favorable c. P2,880 unfavorable
b. P1,530 unfavorable d. P2,730 unfavorable

10. What is the volume variance for the period?

a. P2,400 unfavorable c. P2,730 unfavorable
b. P2,730 favorable d. P2,400 favorable

DIFFERENTIAL ANALYSIS

1. 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
a. Prime cost
b. Variable overhead
c. Fixed overhead that will be avoided if the part is bought from an outside vendor
d. Fixed overhead that will be avoided by the outside vendor in producing the product

2. Latte Company manufactures 10,000 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 P22

Direct labor 28
Variable overhead 16
Fixed overhead 18

If Latte buys the component from outside supplier the company can rent out the released facilities for
P20,000 a year. The cost of the component per unit as quoted by the supplier is P72. 40% of the fixed
overhead applied in the manufacture of the component will be eliminated if Latte opts to outsource the
product to the outside supplier. 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?

a. P24,800 advantage c. P27,000 advantage
b. P27,000 disadvantage d. P63,000 advantage

3. Accepting a special order will improve overall net operating income so long as revenue from the order
exceeds
a. The sunk costs associated with the order
b. The incremental costs associated with the order
c. The variable costs associated with the order
d. The incremental costs and opportunity costs associated with the order

4. Samgyup Company sells product Bii at a selling price of P21 per unit. Samgyup’s cost per unit based
on the full capacity of 200,000 units is as follows:

Direct materials P4.00

Direct labor 5.00
Overhead (1/3 direct) 6.00
P15.00

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 P3 per unit for shipping, which is P2 lower than the
selling cost usually incurred for existing customers. Samgyup only has 10,000 units as idle capacity. In
negotiating the price for the special order, Samgyup should consider that the minimum selling price per
unit should be:
a. P14.00 c. P25.00
b. P16.50 d. P28.00

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5. In analyzing whether to build another branch, the salary of the Controller at the central headquarters
is:
a. Relevant because salaries are always relevant
b. Relevant because this will probably change. If the regional service office is built
c. Irrelevant since another imputed cost for the same will be considered
d. Irrelevant because it is a future cost that will not differ between the alternatives under consideration

6. The Jlyn Company has two divisions - North and South. The divisions have the following revenues
and expenses:

North South
Sales P720,000 P350,000
Variable costs 370,000 240,000
Direct fixed costs 130,000 80,000
Organizational costs 120,000 50,000
Operating income(loss) P100,000 (P20,000)

The management at Jlyn is pondering the elimination of the South division since it has shown an
operating loss for the past several years. If the South division were eliminated, its traceable fixed costs
could be avoided and the sales of North would increase by 10%. The total common corporate costs
would be unaffected by this decision. Given these data, the elimination of the South Division would
result in an overall company operating income of:
a. P135,000 c. P30,000
b. P85,000 d. P5,000

7. Which of the following is a short-term approach to managing bottlenecks as it attempts to remove the
influence of bottlenecks on the production process?
a. Theory of constraints c. Rationalization
b. Reengineering d. Benchmarking

8. Data regarding four different products manufactured by an organization are presented below. Direct
materials and machinery are readily available from the respective resource markets. However, the
manufacturer is limited to a maximum of 3,000 direct labor hours per month:

Product I Product L Product Y Product 2

Selling price per unit P35 P48 P50 P55
Variable cost per unit 27 41 40 46
Units produced per DLH 3 4 2 3

What is the product that is the most profitable for the manufacturer in this situation?
a. Product I c. Product Y
b. Product L d. Product 2

9. Two bowls 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.) Rental Expenses 5.) Sales commissions
2.) Real Property tax 6.) Salary of factory accountant
3.) Light, Water, Power 7.) Delivery expenses
4.) Salary of factory workers

Which of the above expenses will be considered in the computation of shutdown costs?
a. All expenses in the list c. Items 1,2, 3 and 6 only
b. All except items 5 & 7 d. All except item 5

10. In a sell or process decision, which of the following is irrelevant?

a. Joint production costs
b. Additional costs to process further the product
c. Additional revenue to process further the product
d. Avoidable fixed production cost incurred after split-off

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GENERAL MANAGEMENT SERVICES CONCEPTS

1. Which of the following is not an important aspect of supply chain management?

a. Information technology
b. Customer relations
c. Communications
d. Accurate forecasts

2. It is a tool to achieve large, quick gains in effectiveness or efficiency through redesigning the execution
of specific business functions. It is a method of examining processes to identify and then eliminate,
reduce, or replace functions and processes that add little customer value to products or services. It is
designed to bring radical changes to an organization's operations.
a. Process Identification
b. Downsizing
c. Enterprise Resource Planning System
d. Business Process Reengineering

3. Ongoing efforts to reduce costs, increase product quality, and/or improve production process once
manufacturing has begun is known as
a. cost management
b. kaizen costing
c. target costing
d. life-cycle costing

4. Productivity is measured by the

a. total quantity of output generated from a limited amount of input during a time period.
b. quantity of good output generated from a specific amount of input during a time period.
c. quantity of good output generated from the quantity of good input used during a time period.
d. total quantity of input used to generate total quantity of output for a time period.

5. Which of the following best describes tactical profit plans?

a. Detailed, short term, broad responsibilities, qualitative.
b. Broad, short term, responsibilities at all levels, quantitative.
c. Detailed, short term, responsibilities at all levels, quantitative.
d. Broad, long term, broad responsibilities, qualitative.

ECONOMICS

1. If indirect business taxes were subtracted from net domestic product (NDP), the result would be
a. Disposable personal income.
b. Personal income.
c. National income.
d. Gross domestic product (GDP).

2. The marginal propensity to save is defined as that fraction of a

a. Given income that is saved.
b. Given income that is not saved.
c. Change in income that is saved.
d. Change in income that is not saved.

3. Economic growth can be depicted as an outward shift of the production possibilities curve. Which of
the following factors would result in such a shift?
a. A reduction in unemployment.
b. Increased use of plant capacity.
c. An increase in the quantity and/or quality of resources.
d. A reduction in inefficiency.

4. Which of the following instruments of monetary policy is the most important means by which the money
supply is controlled?
a. Open market operations.
b. Manipulation of government spending.
c. Changing the discount rate.
d. Changing tax rates.

5. Monetary theorists believe in the use of

a. A stable growth rate for the money supply.
b. Stable interest rates to stabilize the money supply.
c. Fiscal policy as the main stabilization tool.
d. A "stop-and-go" monetary policy for fine tuning the economy.

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6. During a recession the goal of government fiscal policy is to raise equilibrium output from P3 trillion to
P3.5 trillion. An appropriate governmental action in this situation would be to
a. Decrease government spending.
b. Increase government taxes.
c. Increase government spending.
d. Increase government taxes and decrease government spending by equal amounts

7. A decrease in the price of a complementary good will

a. Shift the demand curve of the joint commodity to the left.
b. Increase the price paid for a substitute good.
c. Shift the supply curve of the joint commodity to the left.
d. Shift the demand curve of the joint commodity to the right.

8. If a product is part of the consumers' basket of goods, and the Consumer Price Index increased 7% for
the year while the price of this normal good increased 3%, then
a. The supply curve will shift to the left.
b. Neither the demand curve nor the supply curve will be affected.
c. The demand curve will shift to the right.
d. The demand curve will shift to the left.

9. A high concentration ratio is

a. An indicator of monopolistic power.
b. An indicator of a highly competitive industry.
c. Consistent with the law of demand.
d. Consistent with monopolistic competition.

10. A supply curve illustrates the relationship between

a. Price and quantity supplied.
b. Price and consumer tastes.
c. Price and quantity demanded.
d. Supply and demand.

QUANTITATIVE TECHNIQUES

1. The economic order quantity for inventory is higher for an organization that has
a. lower annual unit sales.
b. higher fixed inventory ordering costs.
c. higher annual carrying costs as a percentage of inventory value.
d. a higher purchase price per unit of inventory.

2. When using a graphical solution to a linear programming problem, the optimal solution will lie in an area
commonly known as the:
a. region of maximization.
b. objective region.
c. feasible region.
d. constraint region.

3. Which of the following statements does not apply to decision tree analysis?
a. The sum of the probabilities of the events is less than one (1).
b. All of the events are mutually exclusive.
c. All of the events are included in the decision.
d. The branches emanate from a node from left to right.

(For the next two items): A beverage stand can sell either soft drinks or coffee on any given day. If the
stand sells soft drinks and the weather is hot, it will make P2,500; if the weather is cold, the profit will
be P1,000. If the stand sells coffee and the weather is hot, it will make P1,900; if the weather is cold,
the profit will be P2,000. The probability of cold weather on a given day at this time is 60%.

4. The expected payoff for selling coffee is

a. P1,360
b. P1,960
c. P2,200
d. P3,900

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5. The expected payoff if the vendor has perfect information is

a. P1,360
b. P1,960
c. P2,200
d. P3,900

(For the next two items): A company is preparing a bid to produce engines. it has experienced the following
costs:

Cumulative Total Cumulative Costs

Units Produced Materials Labor
10 P30,000 P60,000
20 60,000 96,000
40 120,000 153,600

At the company, variable overhead is applied on the basis of P0.50 per direct labor peso. Based on historical
costs, the company knows that the production of 40 engines will incur P50,000 of fixed overhead costs.
The bid request is for an additional 40 units; all companies submitting bids are allowed to charge a maximum
of 25% above full cost for each order.

6. The company’s rate of learning on the three-year engine contract is

a. 64% c. 80%
b. 100% d. 62.5%

7. The maximum bid price that the company can submit for the 40 units is:
a. P380,400
b. P442,900
c. P304,320
d. P354,320

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