MAS REVIEWER

1. The budgeting process should be one that motivates managers and employees to work toward
organizational goals. Which one of the following is least likely to motivate managers?
A. having top management set budget levels.
B. use of management by exception.
C. holding subordinates accountable for the items they control.
D. participation by subordinates in the budgetary process.

2. Which of the following items is not directly reflected in the basic EOQ model?
a. Inventory obsolescence.
b. quantity discounts lost on inventory purchases.
c. public warehouse rental charges.
d. interest on invested capital.

3. In responsibility accounting a center's performance is measured by controllable costs.

Controllable costs are best described as including
a. only discretionary costs.
b. only those costs that the manager can influence in the current time period.
c. direct materials and labor only.
d. those costs about which the manager is knowledgeable and informed

4. If a company is profitable and is effectively using leverage, which one of the following ratios is
likely to be the largest?
a. return on total equity
b. return on total assets.
c. return on operating assets.
d. return on ordinary equity

5. A company has current assets of P400,000 and current liabilities of P500,000. Its current ratio
would be increased by
a. refinancing a P100,000 long-term loan with short-term debt.
b. the purchase of P100,000 inventory on account.
c. the payment of P100,000 of accounts payable.
d. the collection of P100,000 of accounts receivable

6. For a profitable company, the amount by which sales can decline before losses occur is known
as the
a. sales volume variance.
b. margin of safety .
c. hurdle rate.
d. variable sales ratio.

7. All of the following items are included in discounted cash flow analysis except
a. the future asset depreciation expenses.
 b. the current asset disposal price.
c. the tax effects of future asset depreciation.
d. future operating cash savings.

8. The difference between the sales price and total variable costs is
a. net profit.
b. breakeven point.
c. gross operating profit.
d. contribution margin.

9. In equipment replacement decisions, which one of the following does not affect the decision-
making process?
a. operating costs of the old equipment.
b. original fair market value of the old equipment.
c. cost of the new equipment.
d. current disposal price of the old equipment.

10. Which of the following would not be considered a carrying cost associated with inventory? .
a. cost of obsolescence.
b. cost of capital invested in the inventory
c. insurance costs.
d. shipping costs.

11. The breakeven point in units increases when unit costs.

a. decrease and sales price increases.
b. decrease and sales price remains unchanged.
c. increase and sales price remains unchanged.
d. remain unchanged and sales price increases.

12. Which method of inventory costing treats direct manufacturing costs and manufacturing
overhead costs, both variable and fixed, as inventoriable costs?
a. conversion costing.
b. variable costing.
c. absorption costing.
d. direct costing.

Note: Absorption (full) costing considers all manufacturing costs to be inventoriable as product costs.
These costs include variable and fixed manufacturing costs, whether direct or indirect. The alternative to
absorption is known as variable (direct) costing.

13. In a decision analysis situation, which one of the following costs is not likely to contain a variable
cost component?
ANS: Depreciation.

14. The technique used to evaluate all possible capital projects of different peso amounts and then
rank them according to their desirability is the
a. profitability index method.
b. net present value method.
c. discounted cash flow method.
d. payback method.

Note! The profitability index (excess present value index) of an investment is the ratio of the present
value of the future net cash flows (or only cash inflows) to the net initial investment; that is, the
figures are those used to calculate the net present value (NPV), but the numbers are divided rather
than subtracted. This variation of the NPV method facilitates comparison of different-sized
investments. It provides an optimal ranking in the absence of capital rationing.

15. In a standard cost system, the investigation of an unfavorable material usage variance should
begin with the
a. production manager or the purchasing manager.
b. treasurer only.
c. production manager only.
d. plant controller only.

Note!  An unfavorable materials quantity variance is usually caused by waste, shrinkage, or theft.
Alternatively, an unfavorable variance could be attributable to the purchasing departments not
buying the proper quality Thus, either the production manager or the purchasing manager could be
responsible for a material usage variance.

16. The capital budgeting model that is ordinarily considered the best model for long-range
decision-making is the
a. discounted cash flow model
b. unadjusted rate of return model.
c. payback model.
d. accounting rate of return model.

Note! The capital budgeting methods that are generally considered the best for long-range decision
making are the internal rate of return and net present value methods. These are both discounted
cash flow methods.

17. The relevance of a particular cost to a decision is determined by the

a. Size of the cost
b. Riskiness of the decision
c. Potential effects on the decision
d. Accuracy and verifiability of the cost

18. The internal rate of return is the

a. rate of return generated from the operational cash flows.
b. rate of interest for which the net present value is greater than 1.0.
c. hurdle rate.
d. rate of interest for which the net present value is equal to zero.
 19. What is the breakeven point in units for a product that sells for P10 if fixed costs are P4,000 and
variable costs are 20%?
a. 2000
b. 250
c. 800
d. 500

20. In theory, the optimal method for establishing a transfer price is

a. flexible budget cost.
b. budgeted cost with or without markup.
c. market price.
d. incremental cost.

Note! Transfer prices should promote congruence of subunit goals with those of the organization,
subunit autonomy, and managerial effort. Although no rule exists for determining the transfer price that
meets these criteria in all situations, a starting point is to calculate the sum of the additional outlay costs
and the opportunity cost to the supplier. Given no idle capacity and a competitive external market (all
goods transferred internally can be sold externally), the sum of the outlay and opportunity costs will be
the market price.

21. The average collection period for a firm measures the number of days .
a. after a typical credit sale is made until the firm receives the payment.
b. before a typical account becomes delinquent
c. for a typical check to clear through the banking system.
d. beyond the end of the credit period before a typical customer payment is received.

Note! The average collection period measures the number of days between the date of
sale and the date of collection. It should be related to a firms credit terms. For example, a firm that
allows terms of 2/15, net 30, should have an average collection period of somewhere between 15 and
30 days.

22. Of the following decisions, capital budgeting techniques would least likely be used in evaluating
the

A. Acquisition of new aircraft by a cargo company.

B. Design and implementation of a major advertising program.
C. Trade for a star quarterback by a football team.
D. Adoption of a new method of allocating nontraceable costs to product lines.

Note! Capital budgeting is the process of planning expenditures for investments on which the returns
are expected to occur over a period of more than 1 year. Thus, capital budgeting concerns the
acquisition or disposal of long-term assets and the financing ramifications of such decisions. The
adoption of a new method of allocating nontraceable costs to product lines has no effect on a
company�s cash flows does not concern the acquisition of long-term assets, and is not concerned with
financing. Hence, capital budgeting is irrelevant to such a decision.
 23. The relevance of a particular cost to a decision is determined by
a. number of decision variables.
b. potential effect of the decision.
c. amount of the cost.
d. riskiness of the decision.

24. The cash receipts budget includes

a. extinguishment of debt.
b. funded depreciation
c. operating supplies.
d. loan proceeds.

NOTE! A cash budget may be prepared monthly or even weekly to facilitate cash
planning and control. The purpose is to anticipate cash needs while
minimizing the amount of idle cash. The cash receipts section of the
budget includes all sources of cash. One such source is the proceeds of
loans.

25. A measure of long-term debt-paying ability is a company's

a. length of operating cycle.
b. return on assets.
c. inventory turnover ratio.
d. times-interest ratio.

Note! The times interest earned ratio is one measure of a firm�s ability to pay the interest on its debt
obligations out of current earnings. This ratio equals earnings before interest and taxes divided by
interest expense.

26. The responsibility for safeguarding financial assets and arranging financing is given to the
a. Accountant.
b. Treasurer
c. Chief Financial Officer
d. Controller

27. The ratio of sales to working capital is a measure of

a. collectibility.
b. financial leverage
c. profitability
d. liquidity.

28. Inventoriable costs"

a. include only the conversion costs of manufacturing a product
b. are expensed when products become part of finished goods inventory.
c. Include only the prime costs of manufacturing a product.
d. are regarded as assets before the products are sold.
 29. Research and development costs for new products are
a. sunk costs.
b. conversion costs.
c. avoidable costs.
d. relevant costs.

30. Which one of the following best describes direct labor?"

a. prime cost.
b. period cost
c. Both a product cost and a prime cost
d. a product cost

31. An accounting system that collects financial and operating data on the basis of the underlying
nature and extent of the drivers is
a. variable costing
b. activity-based costing
c. direct costing
d. cycle time costing

32. Individual budget schedules are prepared to develop an annual comprehensive or master
budget. The budget schedule that would provide the necessary input data for the direct labor
budget would be

a. production budget.
b. sales forecast.
Note:  Once the production budget has been completed, the next step is to prepare the direct labor, raw
material, and overhead budgets. Thus, the production budget provides the data for the completion of
the direct labor budget.
33. A fixed cost that would be considered a direct cost is
a. a cost accountant's salary when the cost object is a unit of product
b. board of directors' fees when the cost object is the marketing department.
c. the rental cost of a warehouse to store inventory when the cost object is the Purchasing
department.
d. a production supervisor's salary when the cost object is the production department.
Note: A direct cost is one that can be specifically associated with a single cost
objective in an economically feasible way. Thus, a production
supervisor�s salary can be directly associated with the department (s)he
supervises.

34. A company has no capital rationing constraint and is analyzing many independent investment
alternatives. It should accept all investment proposals
a. that provides returns greater than the before-tax cost of debt.
b. that has positive net present value.
c. if debt financing is available for them.
d. that has positive cash flows
Note: A company should accept any investment proposal, unless some are mutually exclusive, that has a
positive net present value or an internal rate of return greater than the company �s desired rate of
return.

35. The term that refers to costs incurred in the past that are not relevant to a future decision is
a. sunk cost
b. discretionary cost.
c. indirect cost
d. full absorption cost

36. Return on investment may be calculated by multiplying total asset turnover by

a. fixed-charge coverage.
b. profit margin.
c. average collection period.
d. debt ratio.

Note: Return on investment is calculated as the net income of the company divided by the average total
assets. The profit margin is calculated as net income divided by net sales. Total asset turnover is
calculated as net sales divided by average total assets. Putting all of the formulas together, if we multiply
the total asset turnover by the profit margin we eliminate the net sales figure from the numerator of the
one ratio and the denominator of the others, we are left with the formula for return on investment: net
income divided by average total assets.

37. The breakeven point in units sold of a company is 44,000. If fixed costs are too equal to
P880,000 annually and variable costs are P10 per unit, what is the contribution margin per unit?
a. P0.05
b. P44.00
c. P86.00
d. P20.00

Note: FixedCosts/UCM=Breakevenpoint in units

880,000/UCM=44,000
UCM=$20

38. Motivation is
a. the extent of the attempt to accomplish a specific goal.
b. the desire and the commitment to achieve a specific goal.
c. the extent to which individuals have the authority to make decisions.
d. the sharing of goals by supervisors and subordinates.
39. Costs that are usually included as fixed overhead are
a. prime costs.
b. opportunity costs.
c. joint costs.
d. committed costs.

40. What type of ratio is earnings per share?

a. liquidity ratio
b. leverage ratio.
 c. profitability ratio.
d. activity ratio

41. A high sales-to-working capital ratio could indicate

a. the firm is undercapitalized
b. the firm is not susceptible to liquidity problems.
c. sales are not adequate relative to available working capital.
d. unprofitable use of working capital.

Note:  A high sales-to-working-capital ratio is usually favorable because working capital, by itself, is an
unprofitable use of resources. A firm does not earn money by holding cash, inventory, or receivables.
Such assets should be minimized. However, a high ratio of sales to working capital may indicate either
very high sales (a good situation) or a low supply of working capital (a potentially bad situation). Thus, a
high ratio could indicate that a firm is undercapitalized and does not have the resources to invest in
working capital.

42. A firm earning a profit can increase its return on investment by

a. decreasing sales revenue and operating expenses by the same percentage.
b. increasing investment and operating expenses by the same peso amount
c. increasing sales revenue and operating expenses by the same peso amount
d. increasing sales revenue and operating expenses by the same percentage.

Note: ROI equals income divided by invested capital. If a company is already profitable, increasing sales
and expenses by the same percentage will increase ROI. For example, if a company has sales of $100 and
expenses of $80, its net income is $20. Given invested capital of $100, ROI is 20% ($20 � $100). If sales
and expenses both increase 10% to $110 and $88, respectively, net income increases to $22. ROI will
then be 22% ($22 � $100).

43. The most direct way to prepare a cash budget for a manufacturing firm is to include
a. projected sales and purchases, percentages of collections, and terms of payments
b. projected purchases, percentages of purchases paid, and net income
c. projected net income, depreciation, and goodwill amortization
d. projected sales, credit terms, and net income.

Note: The most direct way of preparing a cash budget requires incorporation of sales projections and
credit terms, collection percentages, estimated purchases and payment terms, and other cash receipts
and disbursements. In other words, preparation of the cash budget requires consideration of both
inflows and outflows.

44. In a responsibility accounting system, a feedback report that focuses on the difference between
budgeted amounts and actual amounts is an example of
a. management by exception.
b. ignoring other variables for which the budgeted goals were met
c. assessing blame.
d. granting rewards to successful managers.

Note: A responsibility accounting system should have certain controls that provide for feedback reports
indicating deviations from expectations. Management may then focus on those deviations (exceptions)
for either reinforcement or correction.
 45. The use of activity-based costing normally results in
a. decreased setup costs being charged to low-volume products.
b. substantially lower unit costs for low-volume products than reported by traditional
product costing
c. substantially greater unit costs for low-volume products than is reported by traditional
product costing
d. equalizing setup costs for all product lines

Note: ABC differs from traditional product costing because it uses multiple allocation bases and
therefore allocates overhead more accurately. The result is that ABC often charges low-volume products
with more overhead than a traditional system. For example, the cost of machine setup may be the same
for production runs of widely varying sizes. This relationship is reflected in an ABC system that allocates
setup costs on the basis of the number of setups. However, a traditional system using an allocation base
such as machine hours may underallocate setup costs to low-volume products. Many companies
adopting ABC have found that they have been losing money on low-volume products because costs
were actually higher than originally thought.

46. The contribution to income that is foregone by not using a limited resource in its best
alternative use is called
a. marginal cost.
b. potential cost.
c. incremental cost.
d. opportunity cost.
47. The segment margin of an investment center after deducting the imputed interest on the assets
used by the investment center is known as "
a. residual income.
b. operating income.
c. return on investment
d. return on assets

Note: Residual income is the excess of the amount of return on investment (ROI) over a targeted
amount equal to an imputed interest charge on invested capital. The rate used to impute the interest is
usually the weighted-average cost of capital. The advantage of using residual instead of a percentage.
Managers are encouraged to accept projects with returns exceeding the cost of capital even if the
investments reduce the percentage ROI.

48. Which budget is most likely to facilitate variance analysis?

a. continuous budget
b. static budget.
c. fixed budget
d. flexible budget.

49. If an investment project has a profitability index of 1.15, the

a. net present value of the project's is positive.
b. project's internal rate of return is 15%
c. project's cot of capital is greater than the internal rate of return.
d. project's internal rate of return exceeds its net present value.
Note:  The requirement is to identify the implications of a profitability index of 1.15. Answer (d) is
correct because the profitability index is the net present value of future cash flows divided by the
amount of the initial investment. If the index is greater than 1.00, the net present value of the
investment is positive.

50. The number of days sales in receivables is a measure of

a. profitability
b. sales performance
c. asset value.
d. liquidity,
51. The technique used to evaluate all possible capital projects of different peso amounts and then
rank them according to their desirability is the
a. profitability index method.
b. payback method.
c. net present value method
d. discounted cash flow method.

Note: The profitability index (excess present value index) of an investment is the ratio of the present
value of the future net cash flows (or only cash inflows) to the net initial investment; that is, the figures
are those used to calculate the net present value (NPV), but the numbers are divided rather than
subtracted. This variation of the NPV method facilitates comparison of different-sized investments. It
provides an optimal ranking in the absence of capital rationing.

52. The format for internal reports in a responsibility accounting system is prescribed by
a. the financial accounting standards board.
b. management.
c. generally accepted accounting principles
d. The philippine institute of certified public accountants.
53. A decrease in inventory order costs will
a. increase the reorder point
b. increase the EOQ
c. decrease the EOQ
d. decrease the holding cost percentage.

54. The sum of the cost necessary to effect a one-unit increase in the activity level is a(n)
a. marginal cost.
b. incremental cost.
c. margin of safety.

55. Which one of the following provides a spontaneous source of financing for a firm?
a. accounts receivable.
b. mortgage bonds.
c. accounts payable
d. debentures

Note: Trade credit is a spontaneous source of financing because it arises automatically as part of a
purchase transaction. Because of its ease in use, trade credit is the largest source of short-term financing
for many firms both large and small.
 56. A favorable materials price variance coupled with an unfavorable materials 1 point usage
variance would most likely result from
a. the purchase and use of higher than standard quality materials
b. product mix production changes.
c. the purchase of lower than standard quality materials.
d. machine efficiency problems,

Note: A favorable materials price variance is the result of paying less than the standard price for
materials. An unfavorable materials usage variance is the result of using an excessive quantity of
materials. If a purchasing manager were to buy substandard materials to achieve a favorable price
variance, an unfavorable quantity variance could result from using an excessive amount of poor quality
materials.

57. Which of the following describes the role of top management in the budgeting process? Top
management
a. needs to be involved, including using the budget process to communicate goals.
b. needs to separate the budgeting process and the business planning process into two
separate processes.
c. should be involved only in the approval process.
d. locks the detailed knowledge of the daily operations and should limit their involvement.

Note:  Among other things, the budget is a tool by which management can communicate goals to lower-
level employees. It is also a tool for motivating employees to reach those goals. For the budget to
function in these communication and motivating roles, top management must be involved in the
process. This involvement does not extend to dictating the exact numerical contents of the budget since
top management lacks a detailed knowledge of daily operations.