Final Exam in Managerial Accounting 3

Name: Instructor:
Section: Score:

Part I. True or False. Write T if the statement is True, F if the statement is False (1 point each)
1. Management is defined as the determination of set of actions to organize the entity’s resources to achieve an objective and
the people in charge of determining such set of actions.
2. Anything that will be the focus of cost reports and information is called cost driver.
3. In basic accounting, recording manufacturing transactions were discussed on the perspective of using actual costing,
meaning all costs incurred in relation to the manufacturing process are recorded at standard cost.
4. A projects salvage value, realizable at the end of life of the project, is considered in the computation of the net investments
for decision-making purposes.
5. The payback period emphasizes the profitability of a capital project while the accounting rate of return, on the other hand,
emphasizes the project’s liquidity.
6. Annual cash inflows from the capital projects are measured in terms of income before depreciation but after taxes.
7. The salary you would otherwise earn by working rather than attending your ManAcc classes is a good example of a sunk
cost.
8. An opportunity cost is usually relevant, but is not part of traditional accounting records.
9. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is
the fixed cost of the component.
10. If there is excess capacity, the minimum acceptable price for a special order must cover variable manufacturing costs plus
contribution margin foregone on lost regular units.
11. If the margin that will be lost by dropping a product line is more than the fixed costs that will be avoided, then the line
should be dropped.
12. If the IRR on an investment is Zero, its annual cash flows equal its required investment.
13. The net present value method assumes that the project’s cash flows are reinvested at the cost of capital.
14. A standard is a benchmark or “norm".
15. A standard cost system may be used in both job order and process costing system.
16. One of the users of the standard costs are manufacturing firms.
17. A standard is the difference between actual costs and standard costs.
18. The standards for variable manufacturing costs are computed in the same manner as the standards for labor costs are
computed. The quantity and price factors used are time (hours) and fixed overhead rate per hour.
19. In management by objectives only those variances that are material or significant in amount, whether favorable or
unfavorable, should be investigated.
20. Ideal standards are the ones normally used for product costing and cash budgeting purposes.

Part II. Problems. Show your solutions. Box your final answers.

Problem I.
Aray Co. has been buying Mahal na product in lots of 1,250 units which represents a three month’s supply. The cost per unit is P220,
the cost per order is P900 and the annual inventory carrying cost per unit is P25. Assume that the units will be required evenly
throughout the year. (2 points each)

Based on the above data, determine the following:

a. Economic order quantity
b. Number of orders each year
c. Average inventory if no safety stock
d. Average inventory if safety stock is 100 units
e. Total carrying cost, ordering costs and total cost at EOQ

Problem II.
DQZ Telecom is considering a project for the coming year that will cost P50 million. DQZ plans to use the following combination of
debt and equity to finance the investment. (2 points each)

 Issue P15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par.
 Use P35 million of funds generated from earnings.

The equity market is expected to earn 12%. Treasury bills are currently yielding 5%. The beta coefficient for DQZ is estimated to be
0.60. DQZ is subject to an effective corporate income tax rate of 40%.
Required:
a. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted-average cost of capital.
b. The Capital Asset Pricing (CAPM) computes the expected return on a security by adding the risk-free rate of return to the
incremental yield of the expected market return that is adjusted by the company’s beta. Compute DQZ’s expected rate of
return.

Problem III.
The following information is available for Nesting Enterprises for 2017: (2 points each)

Net operating profit (income) after taxes P36 million

Depreciation expense 15 million
Change in net working capital 10 million
Capital expenditures 12 million
Total assets 105 million
Current liabilities 5 million
Weighted-average cost of capital 10%

Required:
a. What is the amount of the economic value added (EVA)?
b. What is the free cash flow for 2017?

Problem IV.
Ethan Inc. has seasonal demand for its products and management is considering whether level production or seasonal production
should be implemented. The firm’s short term interest cost is 8%, and management has developed the following information to
make the decision: (2 points each)
Alternative 1 Alternative 2
Level Production Seasonal Production
Average Inventory P2 million P1.5 million
Production costs P6 million P6.050 million

Required:
a. Which alternative should be accepted?
b. How much is saved over the other alternative?
c. At what rate of short-term interest would the two alternatives have the same cost?

Problem V.
Ning company has only 25,000 hours of machine time each month to manufacture its two products. Product X has a contribution
margin of P50, and Product Y has a contribution margin of P64. Product X requires 5 hours of machine time, and product Y requires
8 hours of machine time. ( 2 points)

Required:
If Ning company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company
will have a total contribution margin of?

Problem VI.
Erin Tanada Co. sells Pagbabago perfume at a price of P28,000 per unit. The costs per unit are:
Direct Materials 8,000
Direct Labor 6,000
Variable Overhead 4,000
Fixed Overhead 2,000
TOTAL P20,000
A special order for 1,000 units was received from Mar Roxas, a well-known dealer in Angeles City. Additional shipping costs for this
sale is P7,000 per unit. (2 points each)

Required: What is the minimum selling price per unit for the special order if:
a. Erin Tanada Co. is operating at full capacity?
b. Erin Tanada has excess capacity?