MANAGEMENT COST AND CONTROL

1) Kumintang, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:

1. 1. unit-level activity.
   2. batch-level activity.
   3. product-sustaining activity.
   4. facility-level activity.

2. Gleason sells a single product at P14 per unit. The firm's most recent income statement revealed unit sales of 80,000, variable costs of P800,000, and fixed costs  of  P560,000.  Management  believes  that  a  P3  drop  in selling price will boost unit sales volume by 20%. Which of the following correctly depicts how these two changes will affect the company's break-even point?

Drop in Sales Price              Increase in Sales Volume

1. 1. Increase                                     Increase
   2. Increase                                     Decrease
   3. Increase                                     No effect
   4. Decrease                                     Increase

3. The following events took place when Managers A, B, and C were preparing budgets for the upcoming period:

1. Manager A increased property tax expenditures by 2% when she was informed of a recent rate hike by local authorities.
2. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new competitor.
3. Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget.

Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets?

1. 1. I only.                                c. III only.
   2. II only.              d. I and II.

4. Hotdog Distribution Company operates four hundred hotdog stands in the Greater Manila area. Depreciation expense for the four hundred carts amounts to P160,000 a year, or P400 per cart. Depreciation with regard to number of hotdog stands should be considered a
   1. fixed cost
   2. variable cost
   3. mixed cost
   4. discretionary cost

5. A cost leadership strategy emphasizes
   1. product features.
   2. low prices.
   3. just-in-time production capabilities.
   4. short-run opportunities for cost minimization.

6. Financial accounting and cost accounting are both highly concerned with
   1. preparing budgets.
   2. determining product cost.
   3. providing managers with information necessary for control purposes.
   4. determining performance standards.

7. Absorption costing differs from variable costing in all of the following except
   1. treatment of fixed manufacturing overhead.
   2. treatment of variable production costs.
   3. acceptability for external reporting.
   4. arrangement of the income statement.

8. The variance least significant for purposes of controlling costs is the
   1. material quantity variance.
   2. variable overhead efficiency variance.
   3. fixed overhead spending variance.
   4. fixed overhead volume variance.

9. A disadvantage of participatory budgets is that
   1. there is a high degree of acceptance of the goals and objectives by operating management.
   2. they are usually more realistic.
   3. they lead to better morale and higher motivation.
   4. they usually require more time to prepare.

10. Which of the following costs would not be accounted for in a company's recordkeeping system?
    1. an unexpired cost      c.  a product cost
    2. an expired cost            d.  an opportunity cost

11. A manager is attempting to determine whether a segment of the business should be eliminated. The focus of attention for this decision should be on
    1. the net income shown on the segment's income statement.
    2. sales minus total expenses of the segment.
    3. sales minus total direct expenses of the segment.
    4. sales minus total variable expenses and avoidable fixed expenses of the segment.

12. The distinction between avoidable and unavoidable costs is similar to the distinction between
    1. variable costs and fixed costs.
    2. variable costs and mixed costs.
    3. step-variable costs and fixed costs.
    4. discretionary costs and committed costs.

13. Which of the following costs would be relevant in short-term decision making?
    1. incremental fixed costs
    2. all costs of inventory
    3. total variable costs that are the same in the considered alternatives
    4. the cost of a fixed asset that could be used in all the considered alternatives
14. Return on investment (ROI) is a term most often used to express income earned on assets invested in a business unit. A company's return on investment would increase if sales
    1. increased by the same peso amount as expenses and total assets increased.
    2. remained the same and expenses were reduced by the same peso amount that total assets increased.
    3. decreased by the same peso amount that expenses increased.
    4. and expenses increased by the same percentage that total assets increased.

15. Process quality yield reflects the proportion of
    1. good units to bad units.
    2. time required to produce a good unit.
    3. total units manufactured that are good.
    4. total time spent to time available.

16. In capital budgeting, a firm's cost of capital is frequently used as the
    1. internal rate of return.
    2. accounting rate of return.
    3. discount rate.
    4. profitability index.

17. All other factors equal, which of the following would affect a project's internal rate of return, net present value, and payback period?
    1. an increase in the discount rate
    2. a decrease in the life of the project
    3. an increase in the initial cost of the project
    4. all of the above

18. As the economy becomes more and more depressed, a company's management decides to slash spending on research and development. What is the likely effect of this action on net income? Net income will be
    1. higher this period and lower in future periods.
    2. higher this period and higher in future periods.
    3. lower this period and higher in future periods.
    4. lower this period and lower in future periods.

19. The closeness of the relationship between the cost and the activity is called
    1. correlation.    c.   regression analysis.
    2. spurious.        d.   manufacturing overhead.

20. relate to an entire plant as a whole.
    1. Batch-level activities        c.  Facility-sustaining activities
    2. Sustaining activities           d. Unit-level activities

21. Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them further?
    1. The unavoidable costs of further processing.
    2. The avoidable costs of further processing.
    3. The variable cost of operating the joint process.
    4. The cost of materials used to make the joint products.

22. Which variance is LEAST likely to be affected by hiring workers with less skill than those already working?
    1. Material use variance.
    2. Labor rate variance.
    3. Material price variance.
    4. Variable overhead efficiency variance.

23. Martin and Beasley, an accounting firm,  provides  consulting  and  tax  planning  services.  A  recent  analysis found that 55% of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative cost (currently P270,000) has been allocated to services on this basis.

The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:

Staff support                                              P200,000

In-house computing charges                                                                                      50,000 Miscellaneous office costs                                                                           20,000

Total                                                                P270,000

A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in- house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions.

If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:

a.decrease by P32,500.

2. increase by P32,500.
3. decrease by P59,500.
4. change by an amount other than those listed above.

24. Wake Construction manufactures and installs standard and custom-made cabinetry for residential homes. Last year, the company incurred P200,000 in overhead costs. After implementing activity-based costing (ABC), the company's accountant identified the following related information:

The number of activities for standard and custom-made cabinets is as follows:

During the past year, Wake accepted a customer order for a set of custom-made cabinets that would require the following:

What is the manufacturing overhead costs for the above customer order?

 a.   P4,050             c. P3,360

b.   P   285                  d. P   975

25. A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost per unit amounted to P8 and P4, respectively. On the basis of this information, what amount of total cost would Parry anticipate at a volume of 85,000 units?

a.  P1,020,000.                 c.  P1,060,000.

b.  P1,040,000.                 d.  P1,080,000.

26. Roberts, which began business at the start of the current year, had the following data: Planned and actual production: 40,000 units

Sales: 37,000 units at P15 per unit Production costs:

Variable: P4 per unit Fixed: P260,000

Selling and administrative costs:

Variable: P1 per unit Fixed: P32,000

The gross margin that the company would disclose on an absorption-costing income statement is:

 a.   P97,500.                           c. P166,500.

b.  P147,000.                     d. P370,000.

27. Blake Manufacturing has the following product information available: Sales price             P75 per unit

Variable costs                              P25 per unit

Before-tax profit                        P180,000

If Blake has calculated that it needs to sell 20,000 units in order to earn an after-tax target profit of P126,000, what were Blake's fixed costs?

a.  P     54,000                     c. P  820,000

b.   P1,180,000                 d. P  874,000

28. Cielo's Hotdog Stand sells hotdogs for P25 each. The variable costs per hotdog are P10. Cielo's fixed costs are currently P8,000 per month. Charlie is considering expanding his business to three hotdog stands which will increase fixed costs per month by P12,000.

If Cielo does expand his business to three stands, how many additional hotdogs will need to be sold per year in order to break even?

a.   800                                      c. 9,600

b.  600                                     d. 7,200

29. Based on the following, compute the amount of sales: Profit margin before tax based on sales                                                      8 percent Margin of safety ratio                20 percent

Fixed costs                                                           P1,200,000

Variable cost of goods sold                         25 percent Variable selling and administrative expense                          ?

a.   P2,026,667                 c.  P6,080,000

b.  P3,750,000                  d.  P4,750,000

30. The Caterpillar Company is expecting an increase in fixed costs by P78,750  upon  moving  their  place  of business to the downtown area. Likewise it is anticipating that the selling price per unit and the variable expenses will not change. At present, the sales volume necessary to breakeven is P750,000 but the expected increase in fixed costs, the sales volume necessary to breakeven will go up to P975,000. Based on these projections, what would be the required peso sales to earn P70,000 in the coming year?

a.   P1,175,000                 c. P  425,000

b.  P  950,000                  d.  P1,150,000

31. Lockhart Products produces a single product. During 2014 the company incurred the following costs: Variable product costs         P8.00 per unit

Variable period costs                              P2.00 per unit

Total fixed product costs                      P21,000

Total fixed period costs                        P10,000

Lockhart had no units in beginning inventory. During 2014, 6,000 units were produced and 5,000 units were sold.

Which of the following statements is true when comparing net income  using  absorption  versus  variable costing?

1. 1. Net income will be P3,500 higher using absorption costing than using variable costing.
   2. Net income will be P3,500 lower using absorption costing than using variable costing.
   3. Net income will be P4,200 higher using absorption costing than using variable costing.
   4. Net income will be P4,200 lower using absorption costing than using variable costing.

32. A digitized music tuner has been a staple in Smooth Sounds' product line for several years. Annual fixed costs of production and administration related to this product in the past have been P643,500. Variable costs of production and sales have been P17 per unit. The selling price in the past has been P28 per unit. For the year just ended, the company sold 100,000 units.  In the coming year,  based on the  appearance of  competing products on the market, the company expects a decrease of 10 percent in unit sales.

Assuming that the company wants a profit before tax of P405,000, what is the required selling price if it expects to sell 90,000 units?

a.   P28.65             c.  P25.60

b.  P27.95             d.  P30.80

33. Mountaineer Products manufactures two types of tents: single-wall and double-wall. Selected data related to each type of tent is as follows:

Single-wall Double-wall

Total fixed overhead is P150,000. Most of the manufacturing process is done on specialized machines. For the upcoming year, there is a maximum of 9,000 machine hours available. Management  believes  there  is sufficient demand for 3,000 single-wall and 4,000 double-wall tents each year.

Refer to the Mountaineer Products information above. In order to maximize profits, how many of each type of tent should be produced?

1. 1. Single-wall: 3,000               Double-wall: 1,000
   2. Single-wall:    0      Double-wall: 3,000
   3. Single-wall: 1,800               Double-wall: 1,800
   4. Single-wall: 1,500               Double-wall: 4,000

34. Pale Products Company is considering the purchase of a new machine. The estimated cost of the machine is P250,000. The machine is not expected to have a residual value  at the end of four years.  The machine is expected to generate annual cash inflows for the next four years as follows:

Year                       Annual Cash Inflow 1                                           P150,000

2                                      P100,000

3                                      P 50,000

4                                      P 50,000

Pale Products requires a 12 percent return on this investment.  The present value of annuity of 1 at 12 percent for 4 periods is 3.03735. The present values of 1, end of each period, discounted at 12 percent follow:

Assuming that the company uses a discount rate of 12 percent, what is the expected net present value of the machine (ignore income taxes)?

a.   P 31,015                        c. P(27,570)

b.  P 15,765                        d. P 42,000

35. Grant Company is considering to invest in an equipment that costs P70,000.

The equipment would be depreciated over 7 years using straight-line method, no salvage value and full year’s depreciation to be recognized in the first year of the asset’s use.  The  present  value  of  annuity  of  1, discounted at 14 percent for 7 years is 4.28843, and the present value of 1 end of 7 years is 0.39963.

If the company has 40 percent tax rate and desires an after-tax rate of return of 14 percent on investments, the total present value of the tax shield is:

a.   P42,884                          c.  P25,731

b.  P27,972                         d.  P17,153

36. Paulina’s Products, Inc. is considering a new piece of equipment  that  costs  P75,000.  The  equipment  is expected to generate revenues before-tax cash inflows of P25,000 per year for five years. The equipment would be depreciated using straight-line method over its five-year life. Upon retirement,  the  machine  is expected to have a market  value of P8,000.   The company considers  the maximum  impact of income taxes  in all of its capital investment decisions. The company has a 35 percent income tax rate and desires an after-tax rate of return of 12 percent on its investment.

The present value of 1, end of 5 years at 12% is 0.56743 and for ordinary annuity is 3.60478.

The net present value of the equipment is:

a.  P  7,042                         c.  P 21,248

b.  P  4,539                         d. P  5,453

37. Mien Co. is budgeting sales of 53,000 units of product Nous for October 2011. The manufacture of one unit of Nous requires four kilos of chemical Loire. During October 2011, Mien 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 2011?

a.  138,000                          c. 186,000

b.  162,000                           d. 238,000

38. Dahl Co. uses a standard costing system in connection with the manufacture of a "one size fits all" article of clothing. Each unit of finished product contains two yards of direct material. However a 20% direct material spoilage calculated on input quantities occurs during the manufacturing  process.  The  cost  of  the  direct material is P3 per yard. The standard direct material cost per unit of finished product is

a.  P4.80                                c. P7.20

b.  P6.00                                d. P7.50

39. Interstate Merchandising anticipated selling 29,000 units of a major product and paying sales commissions of P6 per unit. Actual sales and sales commissions totaled 31,500  units  and  P182,700,  respectively.  If  the company used a static budget for performance evaluations, Interstate would report a cost variance of:

a.  P6,300U.                        c. P8,700U.

b.  P6,300F.                         d. P8,700F.

40. Rowe Corporation reported the following variances for the period just ended:

If Rowe desires to analyze variances that arose primarily from managers' expenditures in excess of anticipated amounts, the company should focus on variances that total:

a.  P50,000U.                    c.  P120,000U.

b.  P70,000U.                    d.  P178,000U.

41. Sound, Inc., reported the following results from the sale of 24,000 units of IT-54:

Rhythm Company has offered to purchase 3,000 IT-54s at P16 each. Sound has available capacity, and the president is in favor of accepting the order. She feels it would be profitable because no variable selling costs will be incurred. The plant manager is opposed because the "full cost" of production is P17. Which of the following correctly notes the change in income if the special order is accepted?

1. 1. P3,000 decrease.   c.  P12,000 decrease.
   2. P3,000 increase.    d.  P12,000 increase

42. Knox Company uses 10,000 units of a part in its production process. The costs to make a part are: direct material, P12; direct labor, P25; variable overhead, P13; and applied fixed overhead, P30. Knox has received a quote of P55 from a potential supplier for this part. If Knox buys the part, 70 percent of the applied fixed overhead would continue. Knox Company would be better off by

1. 1. P50,000 to manufacture the part
   2. P150,000 to buy the part
   3. P40,000 to buy the part
   4. P160,000 to manufacture the part

43. Based on potential sales of 500 units per year, a new product has estimated traceable costs of P990,000. What is the target price to obtain a 15% profit margin on sales?

a.  P2,329                             c. P1,980

b.  P2,277                             d. P1,935

44. A firm, with an 18% cost of capital, is considering the following projects (on January 1, 2016): Jan. 1, 2016, Cash outflow                               Dec. 31, 2020, Cash inflow                                IRR

P- A                                        P3,500,000                                              P7,400,000             15%

P- B                                       P4,000,000                                          P9,950,000                ?

Project B'5 internal rate of return is closest to

a.   15%                                   c. 20%

b.  18%                                   d. 22%

45. Machine A has fixed costs of P450,000 and a variable cost of P20. Machine B has fixed costs of P600,000 and a variable cost of P14. What is the indifference point, in units?

a.   22,500                             c.  42,858

b.  25,000                              d. 45,000

46. Benson Company has 200 units of an obsolete part. The variable cost to produce them was P4 per unit. They could now be sold for P3 each and it would cost P6 to make them now. The parts could be reworked for P8 each and sold for P17. What is the monetary advantage of reworking the parts over the next-best action?

a.  P  600.                               c.   P1,200.

b. P1,000.                             d.  P2,000.

47. Timing Corporation has provided the following data for one of its products: Process time         3 days

Queue time             4 days Inspection time                                         0.7 days Move time   0.3 days

Wait time                9 days

The delivery cycle time for this operation would be:

1. 1. 8 days.
   2. 3 days.
   3. 17 days.
   4. 7.7 days.

48. Paaralan Company has two sources of funds: long-term debt with a market and book value of P10 million issued at an interest rate of 12%, and equity capital that has a market value of P8 million (book value of P4 million). Paaralan Company has profit centers in the following locations with the following operating incomes, total assets, and current liabilities. The cost of equity capital is 12%, while the tax rate is 25%.

Operating Income     Assets         Current Liabilities

Unibersidad                     P 960,000         P 4,000,000                  P 200,000

Kolehiyo                          P1,200,000     P 8,000,000               P 600,000 Institusyon                                P2,040,000                                               P12,000,000 P1,200,000

What is the EVA for St. Louis?

a.   P255,740                      c.  P392,540

b.  P327,460                      d.  P135,580

49. Last year Wei Guan Inc. had P425 million of sales, and it had P270 million of fixed assets that were used at 65% of capacity. In millions, by how much could Wei Guan's sales increase before it is required to increase its fixed assets?

a.  P265.46

b.  P194.52

c.    P256.31

d.  P228.85

50. Last year Hart Inc. had P850 million of sales, and it had P425 million of fixed assets that were used at only 80% of capacity. What is the maximum sales growth rate the company could achieve before it had to increase its fixed assets?

a.  22.25%

b.  27.75%

c.    23.25%

d.  25.00%

51. GMR Corporation is preparing to issue common stock. The Chief Financial Officer is Attempting to estimate GMR’s cost of new common stock. The next dividend is expected to be P4.25 and will be paid one year from now. The current market price reflects an 18% expected annual return to investors. Dividends are expected to grow at a constant 8% per year.   Flotation costs on the new  issue will be P1.25 per share.   GMR’s cost of new common stock is nearest:

a.   18.30%                          c. 18.00%

b.   19.25%                          d. 19.44%

52. Using the Capital Asset Pricing Model (CAPM), the required rate of return for a firm with a beta of 1.25 when the market return is 14 percent and the risk-free rate is 6 percent is
    1. 14.0 percent                   c. 7.5 percent
    2. 6.0 percent                      d. 16.0 percent

53. Clayton Industries is planning its operations for next year, and Ronnie Clayton, the CEO, wants you to forecast the firm's additional funds needed (AFN). Data for use in your forecast are shown below. Based on the AFN equation, what is the AFN for the coming year? Pesos are in millions.

Last yr's sales       = S0                              P350

Sales growth rate   = g                      30%

Last yr's prof margin = M               5%

Last yr's accounts payable             P40

Last yr's notes payable                P50

Last yr's accruals                                P30

Target payout ratio                            60%

a.  P120.9

b.  P139.6

c.    P130.9

d.  P143.9

Operational budgets are used by a retail company for planning and controlling its business activities. Data regarding the company's monthly sales for the last 6 months of the year and its projected collection patterns are shown below.

The cost of merchandise averages 40% of its selling price. The company's policy is to maintain an inventory equal to 25% of the next month's forecasted sales. The inventory balance at cost is P80,000 as of June 30.

Forecasted Sales

Collection Pattern for Credit Sales

54. The budgeted cost of the company's purchases for the month of August would be

 a.  P302,500                      c. P307.500

b.  P305.000                      d. P858,750

55. The company's total cash receipts from sales and collections on account that would be budgeted for the month of September would be

a.  P757,500                      c. P793,800

b.  P771,000                      d. P856,500

56. Russell Inc. is evaluating four independent investment proposals. The expected returns and standard deviations for each of these proposals are presented below.