17th Regional Mid-Year Convention

RMYC Cup 2
Management Advisory Services

EASY

1. Morrison, Inc., which uses a process-cost accounting system, passes

completed production from Department A to Department B for further
manufacturing. The journal entry to record completed production in
Department A requires:
A. a debit to Work-in-Process Inventory and a credit to Finished-Goods
Inventory.
B. a debit to Finished-Goods Inventory and a credit to Work-in-Process
Inventory.
C. a debit to Work-in-Process Inventory: Department A and a credit to
Work-in-Process Inventory: Department B.
D. a debit to Work-in-Process Inventory: Department B and a credit to
Work-in-Process Inventory: Department A.

Answer: D. a debit to Work-in-Process Inventory: Department B and a credit to

Work-in-Process Inventory: Department A.

2. Hayward applies overhead at $5 per machine hour. During March it worked

10,000 hours and overapplied overhead by $3,000. Actual overhead was
A. $53,000.
B. $50,000.
C. $47,000.
D. none of the above.

Answer: C. $47,000

3. Process costing is used to account for:

A. large numbers of identical products that are produced in a continuous
manufacturing environment.
B. small numbers of products that are produced in batches.
C. raw materials that are converted directly to finished goods.
D. finished goods that are refined and processed further.

Answer: A. large numbers of identical products that are produced in a

continuous manufacturing environment.

4. Ingram Co. manufactures office furniture. During the most productive

month of the year, 3,500 desks were manufactured at a total cost of
P84,400. In its slowest month, the company made 1,100 desks at a cost
of P46,000. Using the suitable method of cost estimation, total fixed
cost is ____________.

Answer: P28,400

5. Which of the following would take place if a company were able to

reduce its variable cost per unit?
Contribution Break-even
Margin Point
A. Increase Increase
B. Increase Decrease
C. Decrease Increase
D. Decrease Decrease
E. Increase No effect
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Answer: B. Increase, Decrease

6. Hamilton, which uses a process-costing system, had a balance in its

Work-in-Process account of $68,000 on January 1. The account was
charged with direct materials, direct labor, and manufacturing overhead
of $450,000 throughout the year. If a review of the accounting records
determined that $86,000 of goods were still in production at year-end,
Hamilton should make a journal entry on December 31 that includes:
A. a debit to Cost of Goods Sold for $432,000.
B. a credit to Finished-Goods Inventory for $432,000.
C. a credit to Work-in-Process Inventory for $432,000.
D. a debit to Finished-Goods Inventory for $86,000.
E. a credit to Work-in-Process Inventory for $86,000.

Answer: C. a credit to Work-in-Process Inventory for $432,000.

7. A manufacturing company applies factory overhead based on direct labor

hours. At the beginning of the year, it estimated that factory overhead
costs would be P360,000 and direct labor hours would be 45,000. Actual
manufacturing overhead costs incurred were P377,200, and actual direct
labor hours were 46,000. The entry to apply the factory overhead costs
for the year would include a
A. debit to factory overhead for P360,000.
B. credit to factory overhead for P368,000.
C. debit to factory overhead for P377,200.
D. credit to factory overhead for P360,000.

Answer: B. credit to factory overhead for P368,000.

8. Compute conversion costs given the following data:

Direct Materials, P352,700;
Direct Labor, 196,300;
Factory Overhead, 177,600.

Answer: P373,900

9. Gyro Gear Company produces a single product, a special gear used in

automatic transmissions. Each gear sells for P28, and the company sells
500,000 gears each year. Unit cost data are presented below:
Variable Fixed
Direct material P6.00
Direct labor P5.00
Manufacturing overhead P2.00 P7.00
Selling & administrative P4.00 P3.00
The unit product cost of gears under variable costing is:
A. 18
B. 13
C. 11
D. 17

Answer: B. 13
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10. Given the following cost and activity observations for Wondrous
Companys utilities, use the high-low method to calculate Wondrous
variable utilities costs per machine hour.
Cost Machine Hours
March P3,100 15,000
April 2,700 10,000
May 2,900 12,000
June 3,500 18,000

Answer: P0.10

Average
1. A manufacturing company that produces a single product has provided the
following data concerning its most recent month of operations:
Selling price P103

Units in beginning inventory 0

Units produced 1,700
Units sold 1,400
Units in ending inventory 300

Variable costs per unit:

Direct materials P39
Direct labor P32
Variable manufacturing overhead P6
Variable selling and administrative P5

Fixed costs:
Fixed manufacturing overhead P6,800
Fixed selling and administrative P8,400
What is the net operating income for the month under absorption
costing?
Answer: P15,400

2. Zenkoy Corporation uses a standard costing system in which variable

manufacturing overhead is assigned to production on the basis of the
number of machine setups. The following data pertain to one month's
operations:
Variable manufacturing overhead cost incurred: P 70,000
Total variable overhead variance: P 4,550 F
Standard machine setups allowed for actual production: 3,550
Actual machine setups incurred: 3,500
The standard variable overhead rate per machine setup is:
A. P19
B. P18
C. P17
D. P21

Answer: D. P21
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3. What is the formula for calculating the profitability index of a
project?
A. Subtract actual after-tax net income from the minimum required return
in dollars.
B. Divide the present value of the annual after-tax cash flows by the
original cash invested in the project.
C. Divide the initial investment for the project by the net annual cash
inflow.
D. Multiply net profit margin by asset turnover.

Answer: B. Divide the present value of the annual after-tax cash flows by the
original cash invested in the project.

4. Which of the following statements is correct regarding the weighted-

average cost of capital (WACC)?
A. One of a company's objectives is to minimize the WACC.
B. A company with a high WACC is attractive to potential shareholders.
C. An increase in the WACC increases the value of the company.
D. WACC is always equal to the company's borrowing rate.

Answer: A. One of a company's objectives is to minimize the WACC.

5. An increase in which of the following should cause management to reduce

the average inventory?
A. The cost of placing an order.
B. The cost of carrying inventory.
C. The annual demand for the product.
D. The lead time needed to acquire inventory.

Answer: B. The cost of carrying inventory.

6. Card Bicycle Co. has prepared production and raw materials budgets for
next year. At the end of this year, the finished product inventory is
expected to include 1,800 bicycles, and raw material inventory is
expected to include 3,700 bicycle tires. Each finished bicycle requires
two tires. The marketing department provided the following data from
the sales budget for the first quarter:
January February March
Expected bicycle sales (units) 14,000 18,000 16,000

The company inventory policy is to have finished product inventory

equal to 10% of the following month's sales requirements, and raw
material equal to 20% of the following month's production requirements.
In the February budget for finished goods, how many bicycles are
expected to be produced?

Answer: 17,800 bicycles

Required Units in Finished Goods for February 1,600
Add: Expected Sales in February 18,000
Required Units Available for Sale 19,600
Less: Expected Beginning Inventory of Finished Goods 1,800
Required Production for February 17,800
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7. Why would a firm generally choose to finance temporary assets with
short-term debt?
A. Matching the maturities of assets and liabilities reduces risk.
B. Short-term interest rates have traditionally been more stable than
long-term interest rates.
C. A firm that borrows heavily long term is more apt to be unable to repay
the debt than a firm that borrows heavily short term.
D. Financing requirements remain constant.

Answer: A. Matching the maturities of assets and liabilities reduces risk.

8. During May 1990, La Mercedes Company completed 50,000 units costing

$600,000, exclusive of spoilage allocation. Of these completed units,
25,000 were sold during the month. An additional 10,000 units, costing
$80,000, were 50 percent complete at May 31. All units are inspected
between the completion of manufacturing and transfer to finished goods
inventory. Normal spoilage for the month was P20,000, and abnormal
spoilage of P50,000 was also incurred during the month. The portion of
total spoilage that should be charged against revenue in May is ______.

Answer: P60,000.

9. The target capital structure of Asyumingatbos Corp. is 50% debt, 10%

preferred equity, and 40% common equity. The interest rate on debt is
6%, the yield on the preferred is 7%, the cost of common equity is
11.5%, and the tax rate is 40%. Traggle does not anticipate issuing any
new stock. What is Asyumingatbos's weighted-average cost of capital?
(Express your answers in two decimal percentage.)

Answer: 7.10%

10. Sang Gano, Inc. had operating income of $5,000,000 before interest and
taxes. Sang Gano's net book value of plant assets at January 1 and
December 31 were P22,000,000 and P18,000,000, respectively. Sang Gano
achieved a 25 percent return on investment for the year, with an
investment turnover of 2.5. What were Sang Gano's sales for the year?
A. P55,000,000
B. P50,000,000
C. P45,000,000
D. P20,000,000

Answer: B. P50,000,000

DIFFICULT

1. Fabro, Inc. produced 1,500 units of Product RX-6 last week. The inputs
to the production process for Product RX- 6 were as follows.
450 pounds of Material A at a cost of $1.50 per pound.
300 pounds of Material Z at a cost of $2.75 per pound.
300 labor hours at a cost of $15.00 per hour.
What is the best productivity measure for the first-line supervisor in
Fabro, Inc.'s production plant?
A. 5.00 units per labor hour.
B. 0.33 units per dollar input.
C. 2.00 units per pound.
D. $15.00 per labor hour.
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Answer: A. 5.00 units per labor hour.

2. Brilye Electronics Co. is developing a new product, surge protectors

for high-voltage electrical flows. The following cost information
relates to the product.
Unit Costs
Direct materials P3.25
Direct labor 4.00
Distribution .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. If the selling price is P14 per unit, what is the breakeven
point in units (rounded to the nearest hundred) for surge protectors?

Answer: 20,000 units [120,000/(14-3.25-4-.75)]

3. Beldingkutu Co. has the opportunity to introduce a new product.

Beldingkutu expects the product to sell for P60 and to have per-unit
variable costs of P40 and annual cash fixed costs of P3,000,000.
Expected annual sales volume is 250,000 units. The equipment needed to
bring out the new product costs P5,000,000, has a four-year life and no
salvage value, and would be depreciated on a straight-line basis.
Beldingkutu's cost of capital is 10% and its income tax rate is 40%.
What is the increase in annual after-tax cash flows for this
opportunity?

Answer: P1,700,000
Income before taxes, 250,000 x ($60 - $40)
- $3,000,000 - $5,000,000/4 $ 750,000
Income tax (300,000)
----------
Net income $ 450,000
Plus depreciation 1,250,000
----------
Net cash flow $1,700,000
==========
4. Quality programs that demand compliance with the most rigorous
standards apply the concept of
A. Goalpost conformance.
B. Absolute conformance.
C. Conforming costs.
D. Nonconforming costs.

Answer: B. Absolute conformance.

5. Selected information from the accounting records of Cruise Company are

as follows:
Net Accounts Receivable at December 31, 2010 $ 900,000
Net Accounts Receivable at December 31, 2011 $ 1,000,000
Accounts Receivable Turnover 5 times
Inventories at December 31, 2010 $ 1,100,000
Inventories at December 31, 2011 $ 1,200,000
Inventory Turnover 4 times
All turnovers are computed based on the average balances of the balance
sheet accounts. The gross margin for 2011 is _______________.
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Answer: P150,000
Sales {[(900,000+1,000,000)/2] X 5} $ 4,750,000
Cost of sales {[(1,100,000+1,200,000)/2] X 4} 4,600,000
Gross profit $ 150,000

6. Honey Companys sales are forecasted to increase from P1,000,000 in

2011 to P2,100,000 in 2012. Honeys balance sheet as of December 31,
2011 is shown on the below:
BALANCE SHEET

Assets Liabilities and Equity

Cash 100,000.00 Accounts Payable 50,000.00
Accounts Receivable 200,000.00 Notes Payable 150,000.00
Inventory 200,000.00 Accruals 50,000.00
Current Assets 500,000.00 Current Liabilities 250,000.00
Fixed Assets 500,000.00 Long-term Debt 400,000.00
Common Stock 100,000.00
Retained Earnings 250,000.00
Total Assets 1,000,000.00 Total Liabilities and Equity 1,000,000.00

Honeys fixed assets were used to only 50 percent of capacity during

2011, but its current assets were at their proper levels. All assets
and spontaneous liabilities increase at the same rate as sales. Honeys
after-tax profit margin is forecasted to be 5 percent, and its dividend
payout ratio will be 60 percent.
In the companys pro-forma financial statements for 2012, what amount
would appear in the balance sheet as the balance of Fixed Assets
account?
A. P500,000
B. P1,050,000
C. P525,000
D. P550,000

Answer: C. P525,000
Expected increase in sales P 2,100,000
Sales at full capacity (1,000,000/50%) 2,000,000
Sales in excess of full capacity P 100,000
Divide: Full capacity 2,000,000
Percentage of increase in fixed assets 5%
Multiply: Current Fixed Assets P 500,000
Increase in fixed assets P 25,000
Add: Current Fixed Assets cost 500,000
Amount that would appear in PFFS P 525,000

7. McAyilo Car Corp. wants to calculate its weighted average cost of

capital (WACC). The companys CFO has collected the following
information:
The companys long-term bonds currently offer a yield to maturity of 8
percent.
The companys stock price is P32 per share.
The company recently paid a dividend of P2 per share.
The dividend is expected to grow at a constant rate of 6 percent a
year.
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The company pays a 10 percent flotation cost whenever it issues new

common stock.
The companys target capital structure is 75 percent equity and 25
percent debt.
The companys tax rate is 40 percent.
The company anticipates issuing new common stock during the upcoming
year.
What is McAyilos weighted average cost of capital? (Answer round off
to two decimal percentage.)

Answer: 11.22%
kd = i X (1 - T)
kd = 8% X (1 - 40%)
kd = 8% X 60%
kd = 4.80%

kn = (D1 / Np) + g
kn = ((2 X 1.06) / (32 X (1 - 10%)) + 6%
kn = (2.12 / 28.80) + 6%
kn = 7.36% + 6%
kn = 13.36%

WACC = (25% X kd) + (75% X kn)

WACC = (25% X 4.80%) + (75% X 13.36%)
WACC = 11.22%

8. The sales-mix variance will be unfavorable when

A. the actual sales mix shifts toward the less profitable units.
B. the composite unit for the actual mix is greater than for the budgeted
mix.
C. actual unit sales are less than budgeted unit sales.
D. the actual contribution margin is greater than the static-budget
contribution margin.

Answer: A. the actual sales mix shifts toward the less profitable units.

9. The following ratios and other data pertain to the financial statements
of the Cansa Nasya Company for the year ended December 31, 2013.
Current Ratio 1.75 : 1
Acid-test Ratio 1.27 : 1
Net Working Capital P 33,000.00
Fixed Assets to Equity Ratio 0.625 : 1
Inventory Turnover (based on cost of closing 4x
inventory)
Gross Profit Margin 40%
Earnings per Share P 0.50
Average Age of Outstanding Accounts Receivable 73 days
(based on a 365-day calendar year)
Share Capital Outstanding 20,000 no par value
Earnings for the Year as a Percentage of Share 25%
Capital
What is the cost of the entitys inventory as of December 31, 2013?
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Answer: P21,120
Net Working Capital P33,000
Divide: NWC Rate to CL (1.75-1) .75
Current Liabilities P44,000
Multiply: Inventory Rate (1.75-1.27) .48
Cost of Inventory P21,120

10. Buzz Urro Printing Company is considering the purchase of a new

printing press. The total installed cost of the press is P2.2 million.
This outlay would be partially offset by the sale of an existing press.
The old press has zero book value, cost P1 million 10 years ago, and
can be sold currently for P1.2 million before taxes. As a result of
acquisition of the new press, sales in each of the next 5 years are
expected to increase by P1.6 million, but product costs (excluding
depreciation) will represent 50% of sales. The new press will not
affect the firms net working capital requirements. The new press will
be depreciated using straight line method. The firm is subject to a 40%
tax rate on both ordinary income and capital gains. Buzz Urro Printing
Companys cost of capital is 11%. What is the initial cost of
investment for this printing press?

Answer: P1,480,000
Installed Cost of New Asset 2,200,000.00
Less: After-Tax Proceeds from Sale
of Old Assets
Proceeds 1,200,000.00
Less: Taxes:
Capital Gains Tax 80,000.00
Tax on Recaptured Depreciation 400,000.00 480,000.00 720,000.00
Initial Investment 1,480,000.00