Management Advisory Services

Easy

1. Return on investment can be increased by

a. Increasing operating assets.

b. Decreasing operating assets.
c. Decreasing revenues.
d. Both b. and c.

Answer: B

One way of measuring ROI is return on assets (ROA). The formula is net income/total assets. Answer
B is correct since if operating assets decrease (the denominator in ROI), then ROI would decrease.

2. In the cost of quality, costs incurred in detecting individual units of product that do not conform
to specifications are

a. Prevention costs.
b. Appraisal costs.
c. Internal failure costs.
d. External failure costs.

Answer: B

Answer B is correct because appraisal costs are costs associated with quality control and include
testing and inspection.

3. Hana Company has been offered credit terms of 3/10, net 30. Using a 365-day year, what is the
nominal cost of not taking advantage of the discount if the firm pays on the 35th day after the
purchase?

a. 14.2%
b. 32.2%
c. 37.6%
d. 45.2%

Answer: D

The discount percentage is 3%, the total pay period is 35 days, and the discount period is 15 days.
Therefore, the nominal cost is calculated as follows:

3% x 365 days = 45.20%

100%- 35 days-
3% 10days

4. The length of time between the acquisition of inventory and payment for it is called the

a. Operating cycle.
b. Inventory conversion period.
c. Accounts receivable period.
d. Accounts payable deferral period.

Answer: D

Answer D is correct because the payables deferral period is the average length of time between the
purchase of materials and the payment of cash for them.

5. Bien Co. is budgeting sales of 53,000 units of product Nous for October 2016. The manufacture of
one unit of Nous requires four kilos of chemical Loire. During October 2016, Bien plans to reduce the
inventory of Loire by 50,000 kilos and increase the finished goods inventory of Nous by 6,000 units.
There is no Nous work in process inventory. How many kilos of Loire is Mien budgeting to purchase
in October 2016?

a. 138,000
b. 162,000
c. 186,000
d. 238,000

Answer: C

The requirement is to determine the number of kilos of chemical Loire that Bien is planning to
purchase in October.

The first step is to prepare a production budget for product Nous.

Sales 53,000
Increase in ending inventory 6,000
Total units needed 59,000

Next, a purchases budget for raw material Loire should be prepared.

Production needs (59,000 × 4) 236,000
Decrease in ending inventory (50,000)
Total kilos needed 186,000

Note that the production needs for Loire equal the number of units of Nous to be produced times the
number of kilos of Loire needed per unit (4).

6. Ral Co. sells 20,000 radios evenly throughout the year. The cost of carrying one unit in inventory
for one year is P8, and the purchase order cost per order is P32. What is the economic order
quantity?

a. 625
b. 400
c. 283
d. 200

Answer: B

7. All of the following capital budgeting analysis techniques use cash flows as the primary basis for
the calculation except for the

a. Net present value.

b. Payback period.
c. Discounted payback period.
d. Accounting rate of return.

Answer: D

Answer d is correct because the accounting rate of return uses accrual basis net income. All of the
other techniques use cash flows as the primary basis for the calculation.

8. Which of the following is not a source of capital used to finance long-term projects?

a. Common stock.
b. Long-term debt.
c. Preferred stock.
d. Line of credit.

Answer: D

Line of credit is a short-term financing source. Common stock, Long-term debt and Preferred stock
are possible sources of financing for long-term projects.

9. 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.

Answer: D

If the price of a complementary good decreases, demand for the joint commodity will increase. This is
due to the fact that the total cost of using the two products decreases. If demand for a product
increases the demand curve will shift to the right.

10. Jones Company has P5,000,000 of average inventory and cost of sales of P30,000,000. Using a
365-day year, calculate the firm’s inventory conversion period.

a. 30.25 days.
b. 60.83 days.
c. 45.00 days.
d. 72.44 days.

Answer: B
The inventory conversion period is calculated as average inventory/(cost of sales per day). Answer b
is correct because P5,000,000/(P30,000,000/365) = 60.83 days.

11. Ark Co. had the following 2012 financial statement relationships:

Asset turnover 5
Profit margin on sales 0.02
What was Select’s 2012 percentage return on assets?

a. 0.1%
b. 0.4%
c. 2.5%
d. 10.0%

Answer: D

Return on assets, also referred to as return on investment

(ROI) is calculated as follows:
ROI = Profit margin × Asset turnover
ROI = 0.02 × 5
ROI = 0.10, or 10%

12. Which of the following is not a component of the balanced scorecard?

a. Strategic objectives.
b. Targets.
c. Strategy initiatives.
d. Assessment of human resources.

Answer: D

A statement of strategic objectives, targets for performance and strategy initiatives are components of
a balanced scorecard.

13. Given the following data, what is the marginal propensity to consume?

Level of Disposable income Consumption

P40,000 P38,000
48,000 44,000

a. 1.33
b. 1.16
c. 0.95
d. 0.75

Answer: D.

The marginal propensity to consume is calculated by dividing the change in consumption by the
change in disposable income. Therefore, the marginal propensity to consume would be .75
[(P44,000–P38,000)/(P48,000 – P40,000)].

14. When calculating the cost of capital, the cost assigned to retained earnings should be

a. Zero.
b. Lower than the cost of external common equity.
c. Equal to the cost of external common equity.
d. Higher than the cost of external common equity.

Answer: B

Newly issued or “external” common equity is more costly than retained earnings because the
company incurs issuance costs when raising new funds.

15. Costs are accumulated by responsibility center for control purposes when using
 Job order costing Process costing
a. Yes Yes
b. Yes No
c. No No
d. No Yes

Answer: A

A responsibility center is any point within an organization where control exists over cost incurrence,
revenue generation, and/or the use of investment funds. A responsibility center can be an operation,
a department, a division, or even an individual. The key point to note for this question is that no
matter what product costing method is used, the responsibility center is always used for control
purposes.

Average

1. The balanced scorecard perspective that addresses concerns about organizational growth is the:

a. learning and growth perspective c. customer value perspective

b. internal business perspective d. financial perspective

Answer: D

Balanced scorecard addresses the concern about financial perspective

2. The value chain

a. reflects the production of goods within an organizational context.

b. is concerned with upstream suppliers, but not downstream customers.

c. results when all non-value-added activities are eliminated from a production process.

d. is the foundation of strategic resource management.

Answer: D

The value of chain is the foundation of strategic resource management.

3. A variance represents the difference between a budgeted and an actual cost. Thus, the variance
measures

a. only controllable cost differences.

b. only uncontrollable cost differences.

c. both uncontrollable and controllable cost differences.

d. the effectiveness of management.

Answer: C

The variance measures both uncontrollable and controllable cost differences.

4. A short-run measure of activity that represents a firm’s anticipated activity level for an upcoming
period based upon expected demand is referred to as:

a. theoretical capacity c. normal capacity

b. practical capacity d. expected capacity

Answer: D

Expected capacity is a short-run measure of activity that represents a firm’s anticipated activity level for
an upcoming period based upon expected demand.

5. The Du Pont model measures ROI as it is affected by

a. contribution margin and asset turnover.

b. profit margin and asset turnover.

c. asset turnover.

d. profit margin.

Answer: B

ROI as it is affected by profit margin and asset turnover .

6. Residual income is used as a performance measure in

a. profit centers.

b. cost centers.

c. investment centers.

d. revenue centers.

Answer: C

Residual income is used in investment centers.

7. If a new project generates a positive residual income, the

a. project's return on investment is less than the target rate.

b. project's return on investment is greater than the target rate.

c. project's return on investment is equal to the target rate.

d. relationship between the project's return on investment and the target rate cannot
necessarily be determined.

Answer: B

Positive residual income results to greater ROI than target rate.

8. A prospective project under consideration by the Telephone Division of Communications Corporation.

has an estimated residual income of P(20,000). If the project requires an investment of P400,000, the

a. project generates a negative return on investment.

b. project's return on investment is zero.

c. project's return on investment is 5% less than the company's target rate.

d. company's target rate is 15%

Answer: C

9. In a discounted cash flow analysis, which of the following would not be consistent with adjusting a
project's cash flows to account for higher-than-normal risk?

a. increasing the expected amount for cash outflows

b. increasing the discounting period for expected cash inflows

c. increasing the discount rate for cash outflows

d. decreasing the amount for expected cash inflows

Answer: C

An increasing the discount rate for cash outflows would not be consistent with adjusting a project's cash
flows to account for higher-than-normal risk .

10. In a decentralized company in which divisions may buy goods from one another, the transfer pricing
system should be designed primarily to

a. increase the consolidated value of inventory.

b. allow division managers to buy from outsiders.

c. minimize the degree of autonomy of division managers.

d. aid in the appraisal and motivation of managerial performance.

Answer: D

Transfer pricing system aid in the appraisal and motivation of managerial performance in a decentralized
company.

11. Debt in the capital structure could be treated as if it were common equity in computing the
weighted average cost of capital if the debt were

a. callable.

b. participating.

c. cumulative.

d. convertible.

Answer: D

Convertible could be treated as if it were common equity in computing the weighted average cost of
capital.

12. Denison Company's cost of compliance is P58,000. Appraisal cost is P21,000 and failure cost is
P32,000. The company's total quality cost is

a. P53,000.

b. P79,000.

c. P90,000.

d. P111,000.

Answer: C

Cost of compliance P58,000

Failure cost 32,000

Total quality cost P90,000

======

13. An investment project is expected to yield P10,000 in annual revenues, has P2,000 in fixed costs
per year, and requires an initial investment of P5,000. Given a cost of goods sold of 60 percent of sales,
what is the payback period in years?
a. 2.50

b. 5.00

c. 2.00

d. 1.25

Answer: A

Net cash flow = P10,000 - P6,000 - P2,000

Net cash flow = P2,000

P5,000/P2,000 = 2.50 years

14. A project has an initial cost of P100,000 and generates a present value of net cash inflows of
P120,000. What is the project's profitability index?

a. .20

b. 1.20

c. .80

d. 5.00

Answer: B

Profitability Index = P120,000/P100,000 = 1.20

15. Green Company started 9,000 units in February. The company transferred out 7,000 finished
units and ended the period with 3,500 units that were 40 percent complete as to both material and
conversion costs. Beginning Work in Process Inventory units were

a. 500.

b. 600.

c. 1,500.

d. 2,000.

Answer: C
Beginning Work in Process 1,500

Add: Units Started 9,000

Deduct: Units Transferred Out 7,000

Ending Work in Process 3,500

Difficult

1. The standard cost of Product 245 manufactured by Starr Company includes 2 pounds of direct
materials at ₱5.00 per pound. During September, 40,000 pounds of direct materials are purchased
at a cost of ₱4.80 per pound, and 37,000 pounds of direct materials are used to produce 19,000
units of Product 245. Compute for the materials price and quantity variance.

Materials Price Variance Materials Quantity Variance

a. ₱8,000F ₱5,000U
b. ₱5,000F ₱8,000U
c. ₱8,000U ₱5,000F
d. ₱5,000U ₱8,000F

Answer: C
Materials Price Variance:
₱192,000 – ₱200,000 = ₱8,000 F
(40,000 × ₱4.80) (40,000 × ₱5.00)

Materials Quantity Variance:

₱185,000 – ₱190,000 = ₱5,000 F
(37,000 × ₱5.00) *(38,000 × ₱5.00)
*19,000 × 2 pounds = 38,000

2. Lankford Company's standard labor cost of producing one unit of product is 2 hours at the rate of
₱14.00 per hour. During February, 38,500 hours of labor are incurred at a cost of ₱13.80 per hour
to produce 19,000 units of product. Compute the labor price and quantity variances.

Labor Price Variance Labor Quantity Variance

a. ₱7,000F ₱7,700U
b. ₱7,700F ₱7,000U
c. ₱7,000U ₱7,700F
d. ₱7,700U ₱7,000F

Answer: A
Labor Price Variance:

₱531,300 – ₱539,000 = ₱7,700 F

(38,500 × ₱13.80) (38,500 × ₱14.00)

Labor Quantity Variance:

₱539,000 – ₱532,000 = ₱7,000 U
 (38,500 × ₱14.00) (38,000 × ₱14.00)

3. Dannon Company manufactures and sells two products. Relevant per unit data concerning each
product are given below:
Product
Standard Deluxe
Selling price ₱42 ₱48
Variable costs ₱16 ₱18
Machine hours 4 5

If 1,000 additional machine hours are available, which product should be manufactured?

a. Standard only
b. Deluxe only
c. Both Standard and Deluxe
d. None of the above

Answer: A
Product
Standard Deluxe
Contribution margin per unit (a) ₱26 ₱30
Machine hours required (b) 4 5
Contribution margin per unit of limited resource (a) ÷ (b) ₱6.50 ₱6.00

The Standard product should be manufactured because it results in the highest contribution
margin per machine hour.

4. Barker Company sells three models of dishwashing machines. Selling price and variable costs for
the three models are as follows:

Economy Standard Deluxe

Unit selling price ₱600 ₱700 ₱800
Unit variable costs ₱330 ₱420 ₱450
Expected sales volume in units 1,000 600 400

What are the units of each product that must be sold at break-even point.

Economy Standard Deluxe

a. 1,000 600 400
b. 500 300 200
c. 200 300 500
d. 0 0 1000

Answer: B
Economy Standard Deluxe
Determine the unit contribution margin
Unit selling price ₱600 ₱700 ₱800
Unit variable costs ₱330 ₱420 ₱450
Contribution margin (a) ₱270 ₱280 ₱350

Determine weighted contribution margin

Expected sales volume in units 1,000 600 400
Sales mix ratio (b) 10 6 4
Weighted contribution margin (a) × (b) ₱2,700 ₱1,680 ₱1,400
 Determine the weighted average contribution margin

₱2,700 + ₱1,680 + ₱1,400

———————————— = ₱289
20
₱289,000
Break-even sales in units = ———— = 1,000 units
₱289

Product Unit Sales × Unit CM Total CM

Economy (50% × 1,000) 500 ₱270 ₱135,000
Standard (30% × 1,000) 300 280 84,000
Deluxe (20% × 1,000) 200 350 70,000
1,000 ₱289,000

5. Alder Company produced and sold 30,000 units of product and is operating at 80% of plant
capacity. Unit information about its product is as follows:

Sales Price ₱70

Variable manufacturing cost ₱45
Fixed manufacturing cost (₱300,000 ÷ 30,000) 10 55
Profit per unit ₱15

The company received a proposal from a foreign company to buy 6,000 units of Alder Company's
product for ₱50 per unit. This is a one-time only order and acceptance of this proposal will not
affect the company's regular sales. The president of Alder Company is reluctant to accept the
proposal because he is concerned that the company will lose money on the special order. What is
the effect on income if the special order is accepted.

a. Increase by ₱300,000
b. Decrease by ₱300,000
c. Increase by ₱30,000
d. Decrease by ₱30,000

Answer: C

ALDER COMPANY

Incremental Analysis
Proposal to buy 6,000 units at ₱50

Net Income
Reject Order Accept Order Increase (Decrease)
Revenues (6,000 × ₱50) ₱ -0- ₱300,000 ₱300,000
Costs (6,000 × ₱45) -0- (270,000) (270,000)
Net Income ₱ -0- ₱ 30,000 ₱ 30,000

Alder Company would increase its income by ₱30,000 in accepting the special order.

6. The following information was taken from the financial statements of Larkin Company:

2003
Gross profit on sales ................................................. ₱900,000
Income before income taxes ..................................... 280,000
Net income ................................................................ 240,000
Net income as a percentage of net sales ................. 8%
 Compute cost of goods sold for the year.

a. ₱3,000,000
b. ₱2,100,000
c. ₱3,900,000
d. ₱1,200,000

Answer: B

To calculate net sales divide the net income by the percentage of net income to net sales.

2003
Net Sales ₱240,000 ÷ 8% = ₱3,000,000

Using the net sales information from (a) and the gross profits given, it is possible to calculate the
cost of goods sold.

2003
Net Sales ₱3,000,000
Less: Gross profit 900,000
Cost of goods sold ₱2,100,000

7. Brewer & Carr, PSC is an architectural firm that uses activity-based costing. The three activity cost
pools used by Brewer & Carr are: Salaries and Wages, Travel Expense, and Plan Reproduction
Expense. The firm has provided the following information concerning activity and costs:
Salaries and wages ₱360,000
Travel expense 80,000

Plan reproduction expense 120,000

Total ₱560,000

Activity Cost Pools

Project Business
Assignment Development Other
Salaries and wages 60% 30% 10%
Travel expense 40% 40% 20%

Plan reproduction expense 30% 40% 30%

Calculate the total cost to be allocated to Business Development.

a. ₱284,000
b. ₱188,000
c. ₱88,000
d. ₱180,000

Answer: B
Activity Cost Pools
Project Business
Assignment Development Other Total
Salaries and wages ₱216,000 ₱108,000 ₱36,000 ₱360,000
Travel expense 32,000 32,000 16,000 80,000
Plan reproduction expense 36,000 48,000 36,000 120,000
Total ₱284,000 ₱188,000 ₱88,000 ₱560,000

8. Yunoh! Company reports the following results for the month of November:

Sales (12,000 units) ₱600,000

Variable costs 450,000
Contribution margin 150,000
Fixed costs 110,000
Net income ₱ 40,000

Management is considering the following independent courses of action to increase net

income.
1. Increase selling price by 10% with no change in total variable costs.
2. Reduce variable costs to 67% of sales.
3. Reduce fixed costs by ₱30,000.

If maximizing net income is the objective, which is the best course of action?

a. 1
b. 2
c. 3
d. Either 1 or 3

Answer: A

1. Current selling price is: ₱600,000 ÷ 12,000 units = ₱50

Increase ₱50 by 10%: ₱50 × 1.10 = ₱55

Revised sales ₱660,000

Variable costs 450,000
Contribution margin 210,000
Fixed costs 110,000
Net income ₱100,000

2. Sales ₱600,000
Variable costs (reduce variable costs to 67% of sales) 402,000
Contribution margin 198,000
Fixed costs 110,000
Net income ₱ 88,000

3. Sales ₱600,000
Variable costs 450,000
Contribution margin 150,000
Fixed costs (reduce fixed costs by ₱30,000) 80,000
Net income ₱ 70,000

Increasing the price will increase net income from ₱40,000 to ₱100,000. Option (2) will only
increase net income to ₱88,000, while option (3) will increase net income to only ₱70,000.
9. Grange Company had a net loss of ₱100,000 in 2016 when the selling price per unit was ₱20, the
variable costs per unit were ₱12, and the fixed costs were ₱400,000. Management expects per unit
data and total fixed costs to be the same in 2017. Management has set a goal of earning net income
of ₱100,000 in 2017.

Assume that Grange Company sells the same number of units in 2017 as they did in 2016. What
would the selling price have to be in order to reach the target net income?

a. ₱8
b. ₱12.67
c. ₱25.33
d. ₱20.67

Answer: C

Units sold in 2016 Fixed costs – Net loss

= ————————————
Contribution margin per unit

₱400,000 – ₱100,000
= ——————————
₱20 - ₱12

= ₱300,000 ÷ ₱8 = 37,500 units

Selling price needed in 2017 Variable costs + Fixed costs + Net income
= ———————————————————
37,500 units

37,500(₱12) + ₱400,000 + ₱100,000

= ————————————————
37,500 units

₱950,000
= ———— = ₱25.33
37,500

10. In 2016, Green Company had a break-even point of ₱800,000 based on a selling price of ₱10 per
unit and fixed costs of ₱320,000. In 2017, the selling price and variable costs per unit did not
change, but the break-even point increased to ₱950,000.

Compute the increase in fixed cost in 2017.

a. ₱80,000
b. ₱380,000
c. ₱120,000
d. ₱60,000

Answer: D
Fixed Costs
Unit contribution margin = ————————————
Break-even Sales in units

₱320,000
= ————————
(₱800,000 ÷ ₱10)

₱320,000
= ————— = ₱4.00
 80,000

Variable cost per unit = ₱10 – ₱4 = ₱6

Contribution margin ratio = ₱4 ÷ ₱10 = 40%

Fixed costs = Break-even Sales × CM Ratio

= ₱950,000 × 40% = ₱380,000

Therefore, fixed costs increased ₱60,000 (₱380,000 – ₱320,000).

Items 11 to 13 are based on the following information:

Dolan Company developed the following information for 2002:

Selling and Administrative Expenses
Variable $30,000
Fixed $50,000
Units in beginning inventory -0-
Units sold 24,000
Direct materials used $75,000
Direct labor $95,000
Units produced 30,000
Manufacturing overhead
Variable $100,000
Fixed $90,000

11. What would be the amount of the cost of goods sold under the absorption costing approach?

a. ₱216,000
b. ₱288,000
c. ₱360,000
d. ₱270,000

12. What would be the cost of the ending inventory under the variable costing approach?

a. ₱72,000
b. ₱54,000
c. ₱36,000
d. ₱27,000

13. Which approach would show the greater income for 2002 and by how much?

a. ₱28,000
b. ₱26,000
c. ₱14,000
d. ₱18,000

Answer:
Absorption Costing Variable Costing
Direct materials ............................................................... $ 75,000 $ 75,000
Direct labor ...................................................................... 95,000 95,000
Variable manufacturing overhead ................................... 100,000 100,000
Fixed manufacturing overhead ........................................ 90,000 —
Total manufacturing costs incurred ................................. $360,000 $270,000
 Production in units ........................................................... 30,000 30,000
Production unit cost ......................................................... $12 $9

11. B
Cost of goods sold under the absorption costing approach would be $288,000 (24,000 units × $12).

12. B
Cost of ending inventory under the variable costing approach would be $54,000 (6,000 units × $9).

13. D
Absorption costing income in 2002 would be greater by $18,000 (6,000 units × $3).

Items 14 and 15 are based on the following information:

Landis Company uses a job order cost system in each of its two manufacturing departments. Manufacturing
overhead is applied to jobs on the basis of direct labor cost in Department A and machine hours in
Department B.

In establishing the predetermined overhead rates for 2002, the following estimates were made for the year:
Department
A B
Manufacturing overhead $2,100,000 $1,600,000
Direct labor cost 1,200,000 1,200,000
Direct labor hours 100,000 100,000
Machine hours 200,000 400,000

During January, the job cost sheet showed the following costs and production data:
Department
A B
Direct materials used $195,000 $128,000
Direct labor cost 100,000 110,000
Manufacturing overhead incurred 180,000 135,000
Direct labor hours 8,000 8,400
Machine hours 16,000 34,000

14. Compute the total manufacturing cost assigned to jobs in January in each department.

Department A Department B
a. ₱374,000 ₱470,000
b. ₱470,000 ₱374,000
c. ₱350,000 ₱272,000
d. ₱272,000 ₱350,000

15. Compute the balance in the Manufacturing Overhead account at the end of January and indicate
whether overhead is over- or underapplied.

a. ₱4,000 Under applied

b. ₱4,000 Over Applied
c. ₱6,000 Under Applied
d. ₱6,000 Over Applied

Answer:
14. B

15. A

Predetermined overhead rates:

Department A (using direct labor cost): $2,100,000 ÷ $1,200,000 = 175%
Department B (using machine hours): $1,600,000 ÷ 400,000 = $4 per machine hour

Total manufacturing costs by department:

Department A:
Direct materials $195,000
Direct labor cost 100,000
Manufacturing overhead applied ($100,000 × 175%) 175,000
Total manufacturing costs $470,000

Department B:
Direct materials $128,000
Direct labor cost 110,000
Manufacturing overhead applied (34,000 hrs. × $4) 136,000
Total manufacturing costs $374,000

MANUFACTURING OVERHEAD
Dept. A 180,000 Dept. A 175,000
Dept. B 135,000 Dept. B 136,000
315,000 311,000
Bal. Underapplied 4,000