Easy

1. An approach to developing new ways to perform existing activities is called

a. Process value analysis. c. Caveat analysis.
b. Re-engineering. d. Benchmarking.

2. The cost to rebuild a race car engine is P1,500, and a buyer offers to buy four engines for P6,000.
Assuming a cumulative learning curve of 90% as production doubles, the incremental cost of the third and
fourth items will be
A. P0 C. P2,160
B. P 600 D. P1,250
Answer: C
Cumulative average after completing 4 units:
1,500 × .9 × .9 P1,215

Total costs of 4 units 4 x P1,215 P4,860

Less total costs of first 2 units 1,500 x 0.9 x 2 2,700

Additional costs P2,160

3. Uniformly assigning the costs of resources to cost objects when those resources are actually used in a
nonuniform way is called
a. overcosting. c. peanut-butter costing.
b. undercosting. d. department costing.

4. Which of the following is not a type of sustaining activity?

a. Capacity-sustaining. c. Distribution-channel sustaining.
b. Customer-sustaining. d. Unit-sustaining.

5. Total production costs for Jordan, Inc. are budgeted at P2,300,000 and P2,800,000 for 50,000 and 60,000
units of budgeted output, respectively. Because of the need for additional facilities, budgeted fixed costs
for 60,000 units are 25 percent more than budgeted fixed costs for 50,000 units. How much is Jordan’s
budgeted variable cost per unit of output?
A. P 7.50 B.P16.00 C. P30.00 D. P62.50
Answer: C
The solution can be made using an equation approach:
a = y – bX
(P2,300,000 – 50,000X)1.25 = P2,800,000 – 60,000X
2,875,000 – 62,500X = 2,800,000 – 60,000X
2,500X = 75,000
X = P30
6. To apply direct costing method it is necessary that you know
a. Standard production rate and times of production elements
b. Contribution margin and break even point in production
c. Variable and fixed cost related to production
d. Controllable and uncontrollable cost of production

7. An advantage of the net present value method over the internal rate of return model in discounted cash
flow analysis is that the net present value method
a. Computes a desired rate of return for capital projects.
b. Can be used when there is no constant rate of return required for each year of the project.
c. Uses a discount rate that equates the discounted cash inflows with the outflows.
d. Uses discounted cash flows whereas the internal rate of return model does not.
Use the following simple regression results based on the data from the Madrigal Corporation to answer Question
Nos. 3 and 4.
Dependent variable – Machine maintenance costs
Independent variable – Machine hours
Computed values
Intercept P3,500
Coefficient on independent variable P 3.50
Coefficient of correlation 0.856
2
R 0.733

8. What percentage of the variation in maintenance costs is explained by the independent variable?
A. 85.6% C. 47.3%
B. 95.2% D. 73.3%
Answer: D
The question does not require a computation. R2 (goodness of fit) indicates the percentage of the variation
in the dependent variable (cost) that is explained by variation in the independent variable (activity). The
adjusted R2 varies from zero to 100%, and the higher the percentage, the better.
9. What is the total maintenance cost for an estimated activity level of 20,000 machine hours?
A. P73,500 C. P82,300
B. P78,400 D. P84,750
Answer: A
Variable cost 20,000 x 3.5 P70,000
Fixed cost 3,500
Total cost P73,500

10. All of the following statements are correct except:

a. The matching of asset and liability maturities is considered desirable because this strategy
minimizes interest rate risk.
b. Default risk refers to the inability of the firm to pay off its maturing obligations.
c. The matching of assets and liability maturities lowers default risk.
d. An increase in the payables deferral period will lead to a reduction in the need to non-spontaneous
funding.

Average
1. Which of the following is NOT a trait of a traditional cost management system?
a. unit-based drivers c. allocation intensive
b. focus on managing activities d. narrow and rigid product costing

2. Your company is purchasing a transport equipment as part of its territorial expansion strategy. The technical
services department indicated that this equipment needs overhauling in year 4 or year 5 of its useful life. The
overhauling cost will be expected during the year the overhauling is done. The finance officer insists that the
overhauling be done in year 4, not in year 5. The most likely reason is
a. There is lower tax rate in year 5. c. The time value of money is considered
b. There is higher tax rate in year 5 d. Due statements A and C above

3. Which of the following would increase risk?

a. Increase the level of working capital.
b. Change the composition of working capital to include more liquid assets.
c. Increase the amount of short-term borrowing.
d. Increase the amount of equity financing.

4. In budgeting, which of the following statements is false?

a. Budgeting provides a measuring device to which subsequent performances are compared and evaluated.
b. Planning and control are the essential features of the budgeting process
c. Budget preparation is not the sole responsibility of any one department and is prepared by combining the
efforts of many individuals
d. Capital expenditures budget shows the availability of idle cash for investment
Questions 5 through 7 are based on the following information.
Pinewood Craft Company is considering the purchase of two different items of equipment, as described below:

Machine A. A compacting machine has just come onto the market that would permit Pinewood Craft Company
to compress sawdust into various shelving products. At present the sawdust is disposed of as a waste product.
The following information is available on the machine:

a. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-year useful
life. The company uses straight-line depreciation and considers salvage value in computing depreciation
deductions.
b. The shelving products manufactured from use of the machine would generate revenues of P300,000 per
year. Variable manufacturing costs would be 20% of sales.
c. Fixed expenses associated with the new shelving products would be (per year): advertising, P40,000;
salaries, P110,000; utilities, P5,200; and insurance, P800.

Machine B. A second machine has come onto the market that would allow Pinewood Craft Company to automate
a sanding process that is now done largely by hand. The following information is available:

a. The new sanding machine would cost P234,000 and would have no salvage value at the end of its 13-year
useful life. The company would use straight-line depreciation on the new machine.
b. Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value
of P9,000.
c. The new sanding machine would provide substantial annual savings in cash operating costs. It would
require an operator at an annual salary of P16,350 and P5,400 in annual maintenance costs. The current,
hand-operated sanding procedure costs the company P78,000 per year in total.

Pinewood Craft Company requires a simple rate of return of 15% on all equipment purchases. Also, the company
will not purchase equipment unless the equipment has a payback period of 4.0 years or less.
(In all the following questions, please ignore income tax effect)

5. The expected income each year from the new shelving products (Machine A) is:
A. P 52,500 C. P 84,000
B. P240,000 D. P 92,500
Answer: A
Annual revenues 300,000
Variable expenses 60,000
Contribution margin 240,000
Fixed expenses
Advertising 40,000
Salaries 110,000
Utilities 5,200
Insurance 800 156,000
Annual cash income 84,000
Less Depreciation 420,000 x 0.90 ÷ 12 31,500
Annual Income 52,500

6. The annual savings in cost if Machine B is purchased is

A. P56,250 C. P38,250
B. P43,250 D. P21,750
Answer: A
Current operating costs – old machine 78,000
Deduct Operating costs – Machine B
Annual salary of operator 16,350
Annual maintenance cost 5,400 21,750
Annual cash savings 56,250
7. The simple rate (%) of return for Machine A is:
A. 12.5 percent C. 25.0 percent
B. 20.0 percent D. 18.0 percent
Answer: A
Simple Rate of Return = Net Income ÷ Initial Investment
52,500 ÷ 420,000 = 12.50 %

8. The “inflation element” refers to the

A. Impact that future price increases will have on the original cost of a capital expenditure.
B. Fact that the real purchasing power of a monetary unit usually increases over time.
C. Future deterioration of the general purchasing power of the monetary unit.
D. Future increases in the general purchasing power of the monetary unit.

9. Palm, Inc. has a total of 2,000 rooms in its nationwide chain of hotels. On the average, 70 percent of the rooms
are occupied each day. The company’s operating cost is P21 per occupied room per day at this occupancy
level, assuming a 30-day month. This P21 figure contains both variable and fixed cost elements. During
October, the occupancy dropped to only 45 percent. A total of P792,000 in operating costs were incurred
during the month.
What would be the expected operating costs, assuming that the occupancy rate increases to 60 percent during
November?
A. P1,056,000 C. P 756,000
B. P 846,000 D. P 829,500
10. 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.

Hard
1. An objective of activity-based management is to
a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above

2. Which is not a primary function of an AIS transaction processing system?

A. converting economic events into financial transactions
B. distributing financial information to operations personnel to support their daily operations
C. monitoring external economic events
D. recording financial transactions in the accounting records

Use the following to answer questions 3-4:

Hampton Textile Co., manufactures a variety of fabrics. All materials are introduced at the beginning of
production; conversion cost is incurred evenly through manufacturing. The Weaving Department had 2,000
units of work in process on April 1 that were 30% complete as to conversion costs. During April, 9,000 units
were completed and on April 30, 4,000 units remained in production, 40% complete with respect to conversion
costs.

3. The equivalent units of direct materials for April total:

A. 9,000. B. 13,000. C. 13,600. D. 14,400.

4. The equivalent units of conversion for April total:

A. 9,000. B. 10,600. C. 11,200. D. 12,000.
5. The scatter diagram method of cost estimation
A. is influenced by extreme observations
B. requires the use of judgment
C. uses the least-squares method
D. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs

6. The distinction between avoidable and unavoidable costs is similar to the distinction between
a. variable costs and fixed costs. c. step-variable costs and fixed costs.
b. variable costs and mixed costs. d. discretionary costs and committed costs.

7. For P450,000, Maleen Corporation purchased a new machine with an estimated useful life of five years with
no salvage value. The machine is expected to produce cash flow from operations, net of 40 percent income
taxes, as follows:
First year P160,000
Second year 140,000
Third year 180,000
Fourth year 120,000
Fifth year 100,000
Maleen will use the sum-of-the-years-digits’ method to depreciate the new machine as follows:
First year P150,000
Second year 120,000
Third year 90,000
Fourth year 60,000
Fifth year 30,000
The present value of 1 for 5 periods at 12 percent is 3.60478. The present values of 1 at 12 percent at end of each
period are:
End of:
Period 1 0.89280
Period 2 0.79719
Period 3 0.71178
Period 4 0.63552
Period 5 0.56743

Had Maleen used straight-line method of depreciation instead of declining method, what is the difference in
net present value provided by the machine at a discount rate of 12 percent?
A. Increase of P 9,750 C. Decrease of P24,376
B. Decrease of P 9,750 D. Increase of P24,376

Answer: B
SYD SL Difference Present Value
1 150,000 90,000 60,000 53,568
2 120,000 90,000 30,000 23,916
3 90,000 90,000 - 0
4 60,000 90,000 (30,000) (19,066)
5 30,000 90,000 (60,000) (34,046)
Total of present values of depreciation 24,372
Tax rate 40%
Present value of net advantage 9,749
SYD method provides a higher present value on tax benefits because of less amount of tax during year 1 & 2.
In year 4 and 5, the use of SYD requires higher taxes but their equivalent present values are lower already.

8. Value-added activities
A. should be reduced or eliminated.
B. involve resource usage that customers are willing to pay for.
C. add cost to a product without affecting the selling price.
D. cannot be differentiated from nonvalue-added activities.
9. Diliman Corporation includes the following quarterly budget for production:
Quarter Production
First 60,000 units
Second 45,000 units
Third 40,000 units
Fourth 65,000 units
Each unit of product requires 2.5 kilograms of direct materials. The company begins each quarter with
inventory of direct materials equal to 25 percent of the total quarter’s material requirements.
What is the budgeted purchases of materials for the second quarter?
A. 113,750 C. 46,250
B. 109,375 D. 112,500

Answer: B
Materials required by 2nd Quarter’s production 45,000 x 2.5 kgs. 112,500
Add: Materials inventory, end: 40,000 x 2.5 x0.25 25.000
Total materials required 137,500
Less: Materials inventory, beginning: 112,500 x 0.25 28,125
Total budget purchases in kilograms 109,375

10. Which of the following is a difference between a static budget and a flexible budgets?
A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static budget does not.
D. There is no difference between the two.