Management Accounting

Easy

1. All of the following are true EXCEPT that indirect costs:

a. may be included in prime costs
b. are not easily traced to products or services
c. vary with the selection of the cost object
d. may be included in manufacturing overhead

Answer: A

Indirect costs are part of manufacturing overhead and can never be treated as prime costs.

2. Dharma Company manufactures computer stands. What is the beginning balance of Finished
Goods Inventory if Cost of Goods Sold is P107,000; the ending balance of Finished Goods
Inventory is P20,000; and Cost of Goods Manufactured is P50,000 less than Cost of Goods Sold?
a. P70,000
b. P77,000
c. P157,000
d. P127,000

Answer: A

Beg Fin Goods Invy + Cost of Goods Manufactured - Ending Fin Goods Invy = COGS
X + P57,000 - P20,000 = P107,000

X = P70,000
3. Little Mix Corporation has developed the following flexible budget formula for monthly overhead:

For output of less than 200,000 units: P36,600 + P.80(units)

For output of 200,000 units or more: P43,000 + P.80(units)

How much overhead should Little Mix expect if the firm plans to produce 200,000 units?
a. P52,600
b. P59,000
c. P196,600
d. P203,000

Answer: D

P43,000 + P0.80(200,000) = P43,000 + P160,000 = P203,000

4. Krissy Company produces 50,000 units of Product Q and 6,000 units of Product Z during a
period. In that period, four set-ups were required for color changes. All units of Product Q are
black, which is the color in the process at the beginning of the period. A set-up was made for
1,000 blue units of Product Z; a set-up was made for 4,500 red units of Product Z; a set-up was
made for 500 green units of Product Z. A set-up was then made to return the process to its
standard black coloration and the units of Product Q were run. Each set-up costs P500. If set-up
cost is assigned on a volume basis for the department, what is the approximate per-unit set-up
cost for Product Z?
a. P.010
b. P.036
c. P.040
d. None of the above
Answer: B

Total setup cost: P500 x 4 = P2,000

P2,000/56,000 = P0.0357
5. Hale Company has 15,000 units in inventory that had a production cost of P3 per unit. These
units cannot be sold through normal channels due to a significant technology change. These units
could be reworked at a total cost of P23,000 and sold for P28,000. Another alternative is to sell
the units to a junk dealer for P8,500. The relevant cost for Hale to consider in making its decision
is
a. P45,000 of original product costs.
b. P23,000 for reworking the units.
c. P68,000 for reworking the units.
d. P28,000 for selling the units to the junk dealer.

Answer: B

Only the actual reworking costs are relevant. Original purchase costs are irrelevant.

6. The Motor Division of Itchy Worms Corporation uses 5,000 carburetors per month in its
production of automotive engines. It presently buys all of the carburetors it needs from two
outside suppliers at an average cost of P100. The Carburetor Division of Itchy Worms
Corporation manufactures the exact type of carburetor that the Motor Division requires. The
Carburetor Division is presently operating at its capacity of 15,000 units per month and sells all of
its output to a foreign car manufacturer at P106 per unit. Its cost structure (on 15,000 units) is:

Variable production costs P70

Variable selling costs 10
All fixed costs 10
Assume that the Carburetor Division would not incur any variable selling costs on units that are
transferred internally. What is the maximum of the transfer price range for a transfer between the
two divisions?
a. P106
b. P100
c. P90
d. P70

Answer: B

P100 represents the price at which the good could be obtained externally.

7. 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. 0.20
b. 1.20
c. 0.80
d. 5.00

Answer: B

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

8. Freestyle Industries is considering the purchase of a P100,000 machine that is expected to result
in a decrease of P15,000 per year in cash expenses. This machine, which has no residual value,
has an estimated useful life of 10 years and will be depreciated on a straight-line basis. For this
machine, the accounting rate of return would be
a. 10 percent.
 b. 15 percent.
c. 30 percent.
d. 35 percent.

Answer: C

P15,000/(P100,000/2) = 30%

9. Side A Corporation produces quality jewelry items for various retailers. For the coming year, it
has estimated it will consume 500 ounces of gold. Its carrying costs for a year are P2 per ounce.
No safety stock is maintained. If the EOQ is 100 ounces, what would be the estimate for Side A’s
total carrying costs for the coming year?
a. P200
b. P250
c. P100
d. P1,000

Answer: C

500 oz/100 oz = 5 orders per year * P20 per order cost = P100

10. A division of Bondoc Corporation reported a return on investment of 20% for a recent period. If
the division's asset turnover was 5, its profit margin must have been
a. 100%
b. 4%
c. 25%
d. 2%

Answer: B

ROI = Profit Margin x Asset Turnover

.20 = PM x 5
PM = ROI/Asset Turnover
PM = .04 or 4%
11. The Calla Corporation reported the following information for its Lily Division:
Revenues P2,000,000
Operating costs 1,200,000
Taxable income 400,000
Operating assets 1,000,000
Income is defined as operating income. What is the Lily Division's investment turnover ratio?
a. 2.00
b. 3.33
c. 2.50
d. 0.80

Answer: A

P2,000,000/P1,000,000 = 2

12. If Brian Company has a safety stock of 320 units and the average daily demand is 20 units, how
many days can be covered if the shipment from the supplier is delayed by 12 days?
a. 24.0 days
b. 20.0 days
c. 16.0 days
d. 13.4 days
Answer: C

320/20 = 16 days

13. Rework is an example of:

a. prevention costs
b. appraisal costs
c. internal failure costs
d. external failure costs

Answer: C

Rework cost is an internal failure cost.

14. Sponge Company has a production capacity of 3,000 units per month, but current production is
only 2,500 units. Total manufacturing costs are P60 per unit and marketing costs are P16 per
unit. Bob Cola offers to purchase 500 units at P76 each for the next five months. Should Sponge
accept the one-time-only special order if only absorption-costing data are available?
a. Yes, good customer relations are essential.
b. No, the company will only break even.
c. No, since only the employees will benefit.
d. Yes, since operating profits will most likely increase.

Answer: D

Since the P60 absorption cost per unit is most likely not all variable costs and since the entire
P16 per unit of marketing costs may not be incurred, operating profits will most likely increase.

15. JJ Abrams planned to use P164 of material per unit but actually used P160 of material per unit,
and planned to make 1,200 units but actually made 1,000 units. The flexible-budget amount is:
a. P160,000
b. P164,000
c. P192,000
d. P196,800

Answer: B

1,000 units × P164 = P164,000

Average

1. A managerial accountant who prepares clear reports and recommendations after analyzing
relevant facts is exercising which of the following standards?

a. objectivity
b. integrity
c. competence
d. confidentiality

Answer: C
He/she exercises competence.

2. Assume your goal in life is to retire with three million dollars. How much would you need to save
at the end of each year if interest rates average 5% and you have a 25-year work life?

a. P49,110
 b. P55,596
c. P62,658
d. P67,508

Answer: C
Look up annuity factor in table or use function on a calculator.
Let X be your savings at the end of each year.
X (47.727) = P3,000,000
X = P62,857.50

3. Stewart Company's actual manufacturing overhead is P2,800,000. Overhead is allocated on the

basis of direct labor hours. The direct labor hours were 50,000 for the period. What is the
manufacturing overhead rate?

a. P47.00
b. P56.00
c. P75.00
d. None of the above are correct.

Answer: B
P2,800,000/50,000 = 56,000

4. The unique feature of an ABC system is the emphasis on:

a. Costing individual jobs

b. Department indirect-cost rates
c. Multiple-cost pools
d. Individual activities

Answer: D
Individual activities.

5. To gain the benefits of budgeting ________ must understand and support the budget.
a. senior management
b. middle management
c. line employees
d. All of these answers are correct.

Answer: D
All of these answers are correct.

For Nos. 6 & 7

The following information pertains to the January operating budget for Casey Corporation, a retailer:

Budgeted sales are P200,000 for January

Collections of sales are 50% in the month of sale and 50% the next month
Cost of goods sold averages 70% of sales
Merchandise purchases total P150,000 in January
Marketing costs are P3,000 each month
Distribution costs are P5,000 each month
Administrative costs are P10,000 each month
6. For January, budgeted gross margin is:

a. P100,000
b. P140,000
c. P60,000
d. P50,000

Answer: C
P200,000 - (.70 × P200,000) = P60,000

7. For January, the amount budgeted for the nonmanufacturing costs budget is:

a. P78,000
b. P10,000
c. P168,000
d. P18,000

Answer: D
P3,000 + P5,000 + P10,000 = P18,000

8. Which of the following does NOT represent cause-and-effect relationship?

a. Material costs increase as the number of units produced increases.

b. A company is charged 40 cents for each brochure printed and mailed.
c. Utility costs increase at the same time that insurance costs increase.
d. It makes sense that if a complex product has a large number of parts it will take longer to
assemble than a simple product with fewer parts.

Answer: C
Utility costs increase at the same time that insurance costs increase.

9. The cost components of a heater include P35 for the compressor, P12 for the sheet molded
compound frame, and P80 per unit for assembly. The factory machines and tools cost is P55,000.
The company expects to produce 1,500 heaters in the coming year. What cost function best
represents these costs?

a. y = 1,500 + 127X
b. y = 1,500 +55,000X
c. y = 55,000 + 1,500X
d. y = 55,000 +127X

Answer: D
y = 55,000 +127X

10. Sales for a three-year period are: Year 1, P2.0 million, Year 2, P4.0 million, and Year 3, P5.0
million. Using year 1 as the base year, the respective percentage increase in sales in year 2 and
3 are

a. 200% and 250%

b. 200% and 125%
c. 200% and 255%
 d. 50% and 40%

Answer: A
Horizontal analysis involves comparison of figures shown in the financial statements of two or
more consecutive periods.
Percentage increase in Year 2 = 4.0 million ÷ 2.0 million = 200%
Percentage increase in Year 3 = 5.0 million ÷ 2.0 million = 250%

11. During October, Mustard Corporation produced and sold 50,000 units of product. Manufacturing
and selling costs incurred during October were:
Direct materials and direct labor Php 500,000
Variable factory overhead Php 250,000
Fixed factory overhead Php 100,000
Variable selling costs Php 150,000

The product’s unit cost under variable costing was:

a. 18
b. 15
c. 20
d. 17

Answer: B
Product cost per unit under variable costing:
Direct materials and direct labor Php 500,000
Variable factory overhead Php 250,000
Total product cost Php 750,000
÷ Units produced 50,000
Product cost per unit – variable costing Php 15

12. The length of time it takes for the initial cash outflows for goods and services to be realized as cash
inflows from sales is called

a. product life cycle

b. vicious cycle
c. cash conversion cycle
d. manufacturing cycle

Answer: C
Cash conversion cycle (or operating cash conversion cycle or cash flow cycle) is the length of time
it takes for the initial cash outflows for goods and services to be realized as cash inflows from sales.

13. Which of the following statements about TQM is correct?

a. In TQM, the organizational structure involves teams of people from different specialties.
b. In TQM, the organizational structure involves teams of people from the same specialties.
c. In TQM, it is advisable that specialist in the organization work individually rather than as a
team.
d. TQM is characterized by a hierarchical organizational structure.

Answer: A
In TQM, it is advised that the traditional hierarchical structure be replaced with teams of people
from different specialties.

14. The salaries of the factory janitorial and maintenance staff could be classified as:
a. direct labor cost
b. period cost
 c. prime cost
d. factory overhead cost

Answer: D
The salaries of the factory janitorial and maintenance staff is an indirect manufacturing cost
chargeable to factory overhead cost.

15. Three of the basic measurements used by the Theory of Constraints (TOC) are

a. Gross margin (or gross profit), return on assets, and total sales.
b. Number of constraints (or subordinates), number of nonconstraints, and operating
leverage.
c. Throughput (or throughput contribution), inventory (or investments), and operational
expense.
d. Fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross
margin (or gross profit).

Answer: C
Theory of Constraints focuses on throughput contribution, investment (or inventory), and
operational expense (operating costs).

Difficult

1. If a firm's net income does not change as its volume changes, the firm('s)
a. must be in the service industry. c. sales price must equal P0.
b. must have no fixed costs. d. sales price must equal its variable costs.

ANSWER: D

2. Jhuniane, the chief paraprofessional of the clinic, has estimated that the clinic will average 140
professional hours per month. If the clinic is to be operated as a nonprofit organization, how much will
it need to charge per professional hour?
a. P97.81 c. P82.77

b. P87.06 d. P22.60

ANSWER: B

Variable cost (140 x P22.60) P 3,164

Fixed cost 9,025

Total cost P12,189

÷ number of hours 140

Cost per hour P 87.06

3. AGR Computer System designs and develops specialized software for companies and use a normal
costing system. The following data are available for 2017:
 Budgeted

Overhead P600,000

Machine hours 24,000

Direct labor hours 75,000

Actual

Units produced 100,000

Overhead P603,500

Prime costs P900,000

Machine hours 25,050

Direct labor hours 75,700

Overhead is applied on the basis of direct labor hours.

What is the unit cost for the year?

a. P15.03 c. P15.09

b. P15.06 d. P15.00

ANSWER B

Prime costs P 900,000

Applied overhead (P600,000/75,000 DLH x 75,700) 605,600
Total cost P1,505,600
÷ Units produced 100,000
Unit cost P 15.06

4. SWCF Hospital plans to use the activity-based costing to assign hospital indirect costs to the care of
patients. The hospital has identified the following activities and activity rates for the hospital indirect
costs:
Activity Activity Rate

Room and meals P150 per day

Radiology P95 per image

Pharmacy P28 per physician order

Chemistry lab P85 per test

Operating room P550 per operating room hour

The records of two representative patients were analyzed, using the activity rates. The activity
information associated with the two patients are as follows:
 Patient 1 Patient 2
Number of days 7 3

Number of images 4 2

Number of physician orders 5 1

Number of tests 6 2

Number of operating room hours 4.5 1

Determine the activity cost associated with Patient 2.

a. P1,388 c. P1,816

b. P 908 d. P4,555

ANSWER A

Activity costs, Patient 2:

Room and meals (3 x P150) P 450
Radiology (2 x P95) 190
Pharmacy (1 x P28) 28
Chemistry lab (2 x P85) 170
Operating room (1 x P550) 550
Total P1,388

5. If activity-based costing is implemented in an organization without any other changes being effected,
total overhead costs will
a. be reduced because of the elimination of non-value-added activities.

b. be reduced because organizational costs will not be assigned to products or services.

c. be increased because of the need for additional people to gather information on cost drivers
and cost pools.

d. remain constant and simply be spread over products differently.

ANSWER D

6. Tuguegarao Company manufactures a single product. In the prior year, the company had sales of
P90,000, variable costs of P50,000, and fixed costs of P30,000. Tuguegarao expects its cost structure
and sales price per unit to remain the Tuguegaraoe in the current year, however total sales are
expected to increase by 20 percent. If the current year projections are realized, net income should
exceed the prior year’s net income by:
a. 100 percent. c. 20 percent.
b. 80 percent. d. 50 percent.

ANSWER B

Increase in profit (P40,000 x 20%) P 8,000

÷ Present profit:

Contribution margin P40,000

Less fixed costs 30,000 10,000

 % change in profit 80%

7. Hunhun Company is considering introducing a new product that will require a P250,000 investment of
capital. The necessary funds would be raised through a bank loan at an interest rate of 8%. The fixed
operating costs associated with the product would be P122,500 while the variable cost ratio would be
58%. Assuming a selling price of P15 per unit, determine the number of units (rounded to the nearest
whole unit) Hunhun would have to sell to generate earnings before interest and taxes (EBIT) of 32% of
the amount of capital invested in the new product.
a. 35,318 units c. 32,143 units
b. 25,575 units d. 23,276 units

ANSWER C

Fixed cost P122,500

Add desired profit (P250,000 x 32%) 80,000

Total P202,500

÷ CM per unit [P15 x (100% - 58%)] 6.30

Required sales in units 32,143

8. The materials mix variance for a product is P450 unfavorable and the materials yield variance is P150
unfavorable. This means that
a. the materials price variance is P600 unfavorable.
b. the materials quantity variance is P600 unfavorable
c. the total materials cost variance is definitely P600 unfavorable.
d. the materials price variance is also unfavorable, but the amount cannot be determined from the
given information.

ANSWER B

Mix variance P450 U

Yield variance 150 U
Quantity variance P600 U

9. Variance analysis would be appropriate to measure performance in

a. profit centers c. cost centers
b. investment centers d. all of the above

ANSWER D

10. Youth Company uses a standard costing system in the production of its only product. The 84,000 units
of raw materials inventory were purchased for P126,000 and 4 units of raw materials are required to
produce one unit of final product. In October, the company produced 14,400 units of product. The
standard cost allowed for materials was P72,000, and there was an unfavorable usage variance of
P3,000.

The materials price variance for the units used in October was
a. P15,000 unfavorable. c. P3,000 unfavorable.
b. P15,000 favorable. d. P3,000 favorable.

ANSWER A
 Total standard cost P72,000

÷ Std qty for actual production (14,400 x 4) 57,600

Standard price per unit of materials P1.25

The usage variance is P3,000 unfavorable. The standard price is P1.25. Using the formula for Usage
variance, the difference in quantity may be computed as follows:

Usage variance =Difference in quantity x Std. price

3,000 U = Difference in quantity x P1.25

Difference in quantity = 3,000 ÷ P1.25

= 2,400 unfavorable

If the difference in quantity is unfavorable, the actual quantity is greater than the standard quantity:

Standard quantity (14,400 x 4) 57,600

Add unfavorable difference in quantity 2,400

Actual quantity used 60,000 units

Price Variance = (AP – SP) x AQ

= ([P126,000 ÷ 84,000] – P1.25) x 60,000

= P15,000 unfavorable

11. The standard direct materials cost to produce a unit of a product is four meters of materials at P2.50
per meter. During June, 2017, 4,200 meters of materials costing P10,080 were purchased and used to
produce 1,000 units of the product. What was the materials price variance for June, 2017?
a. P480 unfavorable c. P400 favorable
b. P 80 unfavorable d. P420 favorable

ANSWER D

Actual price (P10,080 ÷ 4,200) P2.40

Standard price 2.50

Difference in prices - favorable P 0.10

 X actual quantity purchased 4,200

Price variance – favorable P 420

12. Bethel 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. If Bethel 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
a. P250,000. c. P210,000.
b. P240,000. d. P200,000.

ANSWER B
Product X Product Y
CM per unit P 50 P 64
÷ hours per unit 5 8
CM per hour P 10 P 8

80% of capacity must be applied to Product X, the product with the higher CM per hour.

Product X (25,000 x 80%) ÷ 5 = 4,000 units x P50 P 200,000

Product Y (25,000 x 20%) ÷ 8 = 625 units x P64 40,000

Total contribution margin P240,000

13. Dothy Company has 3 divisions: R, S, and T. Division R's income statement shows the following for
the year ended December 31:
Sales P1,000,000
Cost of goods sold (800,000)
Gross profit P 200,000
Selling expenses P100,000
Administrative expenses 250,000 (350,000)
Net loss P (150,000)

Cost of goods sold is 75 percent variable and 25 percent fixed. Of the fixed costs, 60 percent are
avoidable if the division is closed. All of the selling expenses relate to the division and would be
eliminated if Division R were eliminated. Of the administrative expenses, 90 percent are applied from
corporate costs. If Division R were eliminated, Dothy’s income would
a. increase by P150,000. c. decrease by P155,000.
b. decrease by P 75,000. d. decrease by P215,000.

ANSWER C

Avoidable sales P1,000,000

Avoidable costs:

Var. CGS (P800,000 x 75%) P600,000

Fixed CGS (P800,000 – P600,000) x 60% 120,000

Selling expenses 100,000

 Admin. exps. (P250,000 x 10%) 25,000 845,000

Decrease in income P155,000

14. Genesis Corporation issued preferred stocks for P120 per share. The issue price is P20 more than the
stock’s par value. The company incurred underwriting fees of P10 per share. The stocks will earn
annual dividends of P12 per share. If the tax rate is 30%, the cost of capital (preferred stocks) is
a. 10% c. 7.42%
b. 12% d. 10.91%

ANSWER D

15. A small manufacturing company recently stated its sales goal for a period was P100,000. At this level
of activity, its budgeted expenses were P80,000. Its actual sales were P100,000, but its actual
expenses were P85,000. This company operated
a. effectively and efficiently. c. effectively but not efficiently.
b. neither effectively nor efficiently. d. efficiently but not effectively.

ANSWER C