MANAGEMENT ADVISORY SERVICES

1. Capital budgeting techniques are least likely to 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 by a basketball team
d. Adoption of a new method of allocating non-traceable costs to product lines

2. Movers, Inc. is planning to purchase equipment to make its operations more efficient. This equipment
has an estimated useful life of six years. As part of this acquisition, a P150,000 investment in working
capital is required. In a discounted cash flow analysis, this investment in working capital should be
a. Amortized over the useful life of the equipment.
b. Disregarded because no cash is involved.
c. Treated as a recurring annual cash flow that is recovered at the end of six years.
d. Treated as an immediate cash outflow that is recovered at the end of six years.

3. To approximate annual cash inflow, depreciation is

a. Added back to net income because it is an inflow of cash.
b. Subtracted from net income because it is an outflow of cash.
c. Subtracted from net income because it is an expense.
d. Added back to net income because it is not an outflow of cash.

4. In an income statement prepared as an internal report using the direct (variable) costing method,
fixed selling and administrative expenses would
a. Not be used
b. Be used in the computation of the contribution margin
c. Be used in the computation of operating income but not in the computation of the
contribution margin
d. Be treated the same as variable selling and administrative expenses

5. Which of the following statements is correct?

a. When production is higher than sales, absorption costing profit is lower than variable costing
profit
b. If all the products manufactured during the period are sold in that period, variable costing
profit is equal to absorption costing profit
c. When production is lower than sales, variable costing profit is lower than absorption costing
profit
d. When production and sales level are equal, variable costing profit is lower than absorption
costing profit

6. Which of the following statements is true?

a. A company changes its total income when it changes the bases used to allocate indirect
costs.
b. A company should select an allocation basis so as to raise or lower reported income on given
products
c. A company's total income will remain unchanged no matter how indirect costs are allocated.
d. Costs should be allocated on an "ability-to-bear" basis.
 7. Which of the following costs is LEAST likely to appear on the performance report for the foreman
of a production department?
a. Wages of direct laborers.
b. Rent on machinery used in department.
c. Repairs to machinery used in department.
d. Cost of materials used.

8. At the break-even point:

A. net income will increase by the unit contribution margin for each additional item sold above
break-even.
B. the total contribution margin changes from negative to positive
C. fixed costs are greater than contribution margin
D. the contribution margin ratio begins to increase

Answer: a

At break-even point, revenues are equal to expenses. For each unit sale, the net income will increase by
the unit contribution margin for each additional item sold.

9. Which of the following methods of evaluating capital investment projects do not use a
percentage as a measurement unit?

A. Payback period and net present value

B. Accounting rate of return and payback period
C. Net present value and internal rate of return
D. Internal rate of return and payback period

Answer: a

Payback period and net present value result in absolute peso amounts.

10. In analyzing manufacturing overhead variances, the volume variance is the difference between
the:

A. Amount shown in the flexible budget and the amount shown in the debit side of the overhead
control account
B. Predetermined overhead application rate and the flexible budget application rate times actual
hours worked
C. Budget allowance based on standard hours allowed for actual production for the period and
the amount budgeted to be applied during the period
D. Actual amount spent for overhead items during the period and the overhead amount applied
to production during the period

Answer: c

Choice c is the formula for the volume variance

11. Ian Company has sales of P400,000 with variable costs of P300,000, fixed costs of P120,000, and
an operating loss of P20,000. How much increase in sales would Ian need to make in order to
achieve a target operating income of 10% of sales?

A. P400,000 C. P500,000
B. P462,000 D. P800,000

Answer: a

Total peso sales required 120,000 ÷ (0.25 – 0.1) 800,000*

Less prior sales 400,000
Required increase in sales 400,000

*Peso sales required to earn profit stated as percentage of sales (ROS):

S = [FC + (ROSS)]  CMR
(CMR S) = [FC + (ROSS)]
(CMR S) - (ROSS) = FC
(CMR – ROS) S = FC
S = FC  (CMR – ROS)

12. The following data are the actual results for Negre Company for the month of May:

Actual output 4,500 units

Actual variable overhead P360,000
Actual fixed overhead P108,000
Actual machine time 14,000 MH

Standard cost and budget information for Negre Company follows:

Standard variable overhead rate P6.00 per MH
Standard quantity of machine hours 3 hours per unit
Budgeted fixed overhead P777,600 per year
Budgeted output 4,800 units per month

The overhead efficiency variance is

A. P3,000 Favorable C. P3,000 Unfavorable
B. P5,400 Favorable D. P5,400 Unfavorable

Answer: c

Efficiency variance = (AH – SH) x SVOHR (14,000 – 13,500) 6 = 3,000 UNF

Standard hours: 4,500 x 3 13,500
13. The balance sheet and income statement data for Nigel Factory indicate the following:

Bonds payable, 10% (issued 2018 due 2022) P1,000,000

Preferred 5% stock, P100 par (no change during year) 300,000
Common stock, P50 par (no change during year) 2,000,000
 Income before income tax for year 350,000
Income tax for year 80,000
Common dividends paid 50,000
Preferred dividends paid 15,000

Based on the data presented above, what is the number of times bond interest charges were earned
(round to one decimal point)?
A. 3.7 C. 4.5
B. 4.4 D. 3.5

Answer: c

Interest Expense: P1M x 0.1 P100,000

Income before interest expense: P350,000 + P100,000 P450,000
Times interest earned: (P450,000 ÷ P100,000) 4.5 times
14. Segment A generated sales revenues of P400,000 and variable operating expenses of P180,000.
Its controllable fixed expenses were P40,000. It was assigned 20% of P200,000 of fixed costs
controlled by others. The common fixed costs were P25,000. What was Segment A's
controllable segment profit margin?

A. P220,000 C. P140,000
B. P180,000 D. P160,000

Answer: b

Controllable segment profit margin = Revenue - (Segment's variable operating costs +

Controllable fixed costs).
(P400,000 – P180,000 – P40,000) P180,000
15. Carlyle Company had the following information pertaining to 2005:

Profit P100,000
Sales P1,000,000
Asset Turnover ratio 2 times

The desired minimum rate of return is 15 percent.

What is the ROI?

A. 10 percent C. 20 percent
B. 5 percent D. 15 percent

Answer: c

ROI = Operating Profit ÷ Average investment

Average Operating assets: (P1,000,000 ÷ 2) = P500,000

ROI: (P100,000 ÷ P500,000) = 20%

 16. An appropriate transfer price between two divisions of the Reno Corporation can be
determined from the following data:

Fabrication Division
Market price of subassembly P50
Variable cost of subassembly P20
Excess capacity (in units) 1,000
Assembling Division
Number of units needed 900

What is the natural bargaining range for the two divisions?

A. Between P20 and P50 C. Between P50 and P70
B. Any amount less than P50 D. P50 is the only acceptable price

Answer: A
The Fabrication division has excess capacity, therefore the division can transfer the units at a
minimum transfer price of P20
17. Family Enterprises has two divisions: Davy and Johnny. Davy Division has a capacity to produce
2,000 units and is expecting to sell 1,500 units. Johnny Division wants to purchase 100 units of a
product Davy produces. Davy sells the product at a selling price of P100 per unit, the variable cost
per unit is P25 and the fixed costs total P30,000. The minimum transfer price that Davy will
accept is?

A. P100 C. P43.75
B. P45 D. P25
Answer: d

Questions 17 through 19 are based on the following information.

The following information is available for X Co. for its first year of operations:
Sales in units 5,000
Production in units 8,000
Manufacturing costs:
Direct labor P3 per unit
Direct material 15 per unit
Variable overhead 1 per unit
Fixed overhead P100,000
Net income (absorption method) P30,000
Sales price per unit P40

18. What would X Co. have reported as its income before income taxes if it had used variable
costing?
A. P30,000 C. P67,500
 B. (P7,500) D. (P30,000)

19. What was the total amount of SG&A expense incurred by X Co.?
A. P30,000 C. P6,000
B. P62,500 D. P36,000

20. Based on variable costing, what would X Co. show as the value of its ending inventory?
A. P120,000 C. P27,000
B. P64,500 D. P24,000

A company sells two products, X and Y. The sales mix consists of a composite unit of two units of X for every
five units of Y (2:5). Fixed costs are P49,500. The unit contribution margins for X and Y are P2.50 and P1.20,
respectively

21. Considering the company as a whole the number of composite units to breakeven is
A. 1,650 B. 4,500 C. 8,250 D. 22,500

22. If the company had a profit of P22,000, the unit sales must have been
Product X Product Y
A. 5,0000 12,500
B. 13,000 32,500
C. 23,800 59,500
D. 32,500 13,000

23. In the development of accounting data for decision-making, relevant costs are
A. Historical costs which are the best available basis for estimating future costs
B. Future costs which will differ under each alternative course of action
C. Budgetary costs authorized for the administrative year
D. Standard costs developed by time and motion experts

24. The term relevant cost applies to all of the following decision situations except the
A. Acceptance of special product order
B. Manufacture of purchase of component part
C. Determination of product price
D. Replacement of equipment

The Sampaguita Steam Laundry bought a laundry truck that can be used for 5 years. The cost of the truck
is P225,000 with a salvage value of P35,000. Since the truck is not working efficiently, management has
thought of selling the truck immediately and buy a delivery wagon which will serve the company’s purposes
more properly. The estimated net returns of the truck for 5 years is P150,000. If the truck is sold,
management can only recover P175,000. (In all calculations, uses the straight-line method of depreciation)

25. The neg gain(loss) that will arise if the Company decides to sell the truck is
A. P(50,000) C. P75,000
 B. P(75,000) D. P140,000

26. If the firm decides to keep this truck, the net gain (loss) over the 5-year period is
A. P(40,000) C. P50,000
B. P(75,000) D. P140,000

27. The Table Top Model Corp. produces three products. “Tic”, “Tac”, and “Toc.” The owner desires
to reduce production load to only one product line due to prolonged absence of the production
manager. Depreciation expense amounts to P600,000 annually. Other fixed operating expenses
amount to P660,000 per year. The sales and variable costs data of the three products are (000’s
omitted)
Tic Tac Toc
Sales P6,600 P5,300 P10,800
Variable costs 3,900 1,700 8,900

Which product must be retained and what is the opportunity cost of selecting such product line?
A. Retain product “Tac”; opportunity cost is P4.6 million
B. Retain product “Tac”; opportunity cost is P3.14 million
C. Retain product “Tic”; opportunity cost is P4.04 million
D. Retain product “Toc”; opportunity cost is P4.84 million

For questions 28 to 35

The Burgos Corporation is considering investing in a project. It requires an immediate cash outlay of
P100,000. It has a life of four years and will be depreciated on a straight-line basis (no salvage value). The
firm’s tax rate is 25% and requires a return of 10%. Income before depreciation is projected to be:

YEAR 1 2 3 4
Income before depreciation P30,000 P30,000 P40,000 P40,000
The present value factors for P1 at 10% is
Year 1 2 3 4
Present Value Factor 0.909 0.826 0.751 0.683

28. The net cash flow for year 1 is

A. P25,850 C. P31,250
B. P28,750 D.P34,450

29. The net cash flow for year 4 is

A. P35,850 C. P30,150
B. P35,950 D. P36,250

30. The payback period for the project is

A. 3 years C. 3.5 years
B. 3.17 years D. 4 years
31. The accounting rate of return of the project is
A. 7% B. 9% C. 12% D. 15%

32. The present value of year two’s cash flow is

A. P23,747.50 C. P26,100.75
B. P25,856.25 D. P29,750.75

33. The present value of the project’s net cash flow is

A. P95,650.15 C. P101,863.75
B. P98,151.25 D. P104,750.25

34. The profitability index of the project (rounded to the nearest hundredth) is
A. 0.96 B. 0.98 C. 1.02 D. 1.05

35. The project would be accepted on the basis of the

A. Payback and present value results
B. Accounting rate of return and profitability index results
C. Payback results only
D. A and B combined

36. Sta. Elena Merchandising Company plans to sell in December 15,000 units of its product at a unit
price of P20. The estimated gross profit is 25% of sales. The inventory will be increased in
December in anticipation of higher sales volume for Christmas. The increase will be about
P100,000. Amounts payable to trade creditors will also increase by P25,000. Estimate of payment
to be made during the month of December for merchandise is
A. P300,000 C. P150,000
B. P250,000 D. P100,000

37. Harrison Company has budgeted its operations for August. No change in the inventory level
during the month is planned. Selected data based on estimated amounts are as follows:
Net loss P(120,000)
Increase in accounts payable 48,000
Depreciation expense 42,000
Decrease in gross amounts of trade accounts receivable 72,000
Purchase of equipment on 90-day credit terms 18,000
Provision for estimated warranty liability 12,000

What is the expected change in the cash position during August?

A. P18,000 decrease C. P36,000 increase
B. P30,000 decrease D. P54,000 increase

38. This budgeting system places the burden of proof on the manager to justify authority to spend
any money whether or not there was spending in the previous period. Different ways of
 performing the same activity and different levels of effort for the activity is evaluated. This
system is called
A. Scenario budgeting
B. Zero-based budgeting
C. Budgeting by alternatives
D. Budgeting by responsibility and authority

39. In zero-based budgeting, which of the following statements are True?

1. All activities in the company are organized into break-up units called packages
2. All costs have to be justified every budgeting period
3. The process is not time consuming since justification of costs can be done as a routine matter
A. All three statements C. Statement 1 only
B. Statements 1 and 2 only D. Statements 2 and 3 only

40. The amount of cash that a firm keeps on hand in order to take advantage of any bargain
purchases that may arise is referred to as its
A. Transactions balance C. Precautionary balance
B. Compensating balance D. Speculative balance