Management Advisory Services

MANAGEMENT ADVISORY SERVICES

QUESTIONS AND ANSWERS

COMPILED BY: MA. CRISTINA P. OBESO, CPA

THEORY

Which of the following costs should consider the tax shield effect in computing the costs of capital?

A / A. / Cost of debt
B. / Cost of common stock
C. / Cost of preferred stock
D. / Cost of retained earnings

Which of the following is not considered in the cash conversion cycle?

B / A. / Receivable collection period
B. / Debt repayment period
C. / Inventory conversion period
D. / Payable deferral period

Cash flows from capital budgeting projects are assumed to be received

C / A. / At the beginning of the year
B. / Evenly during the year
C. / At the end of the year
D. / At a certain point of the year

In the absence of shutdown costs,

B / A. / Shutdown point is higher than breakeven point
B. / Shutdown point is equal to the breakeven point
C. / Shutdown point is lower than breakeven point
D. / One cannot determine the relationship between shutdown point and breakeven point

The balanced scorecard approach does not require looking at performance from which of the following perspectives?

C / A. / Customer
B. / Employees
C. / Competitor
D. / Internal business processes

Contribution margin ÷ profit after interests and preferred dividends =

C / A. / Degree of operation leverage
B. / Degree of financial leverage
C. / Degree of total leverage
D. / No meaningful amount

If anincrease in product price by 5% causes a decrease in quantity demanded by the same percentage, then the demand for the product is said to be

B / A. / Elastic
B. / Unit-elastic
C. / Inelastic
D. / Perfectly Elastic

Under the high-low method, the unit variable cost closely resembles the math concept of

C / A. / Y-intercept
B. / X-intercept
C. / Slope of the line
D. / Independent variable

Profit under variable costing fluctuates with

A / A. / Sales only
B. / Production only
C. / Both sales and production
D. / Neither sales nor production

The path that has the highest slack time in the PERT network is

C / A. / Critical path
B. / Longest path
C. / Shortest path
D. / Psychopath

11.Which of the following is an invalid measure of productivity?

C / A. / Partial operational
B. / Partial financial
C. / Total operational
D. / Total financial

12.Which of the following situations is among the concerns of a controller (as opposed to those of a treasurer)?

D / A. / The company is in need of financing from external sources.
B. / The company is already late in filing its monthly VAT returns.
C. / The company is guilty of unplanned material bank overdraft.
D. / The company is in default of its account payable to suppliers.

A firm’s working capital financing requirements may be divided into

B / A. / Aggressive and conservative
B. / Seasonal and permanent
C. / Current and non-current
D. / Internal and external

Dividend yield multiplied by price-earnings ratio

A / A. / Pay-out ratio
B. / Retention ratio
C. / Equity ratio
D. / Earnings per share

A term descriptive of managerial accounting.

C / A. / Historical financial statements
B. / Generally accepted accounting principles
C. / Discretionary
D. / Regulatory

Identify the term that does not belong to the group.

A / A. / Differential cost
B. / Prevention cost
C. / Appraisal cost
D. / Internal failure cost

Which of the following capital budgeting techniques is non-discounted?

A / A. / Simple rate of return
B. / Sophisticated rate of return
C. / Benefit-cost ratio
D. / Net present value

Identify the term that does not belong to the group.

A / A. / Probability analysis
B. / Regression analysis
C. / High-low method
D. / Scattergraph method

A system not used in inventory management.

A / A. / Lockbox system
B. / Economic order quantity
C. / Materials requirement planning system
D. / ABC system

A factor that is dealt with by both ‘linear programming’ and ‘best product combination.’

D / A. / Efficiency
B. / Productivity
C. / Solvency
D. / Scarcity

21.A(n) ______cost increases or decreases in intervals as activity changes.

a. / historical cost
b. / fixed cost
c. / step cost
d. / budgeted cost

ANS:C

22. which of the following is not a product cost component?

a. / rent on a factory building
b. / indirect production labor wages
c. / janitorial supplies used in a factory
d. / commission on the sale of a product

ANS:D

23.Which of the following always has a direct cause-effect relationship to a cost?

Predictor / Cost driver
a. / yes yes
b. / yes no
c. / no yes
d. / no no

ANS:C

24. The distinction between direct and indirect costs depends on whether a cost

a. / is controllable or non-controllable.
b. / is variable or fixed.
c. / can be conveniently and physically traced to a cost object under consideration.
d. / will increase with changes in levels of activity.

ANS:C

25. Costs that are incurred for monitoring and inspecting are:

a. / prevention costs / c. / appraisal costs
b. / detection costs / d. / failure costs

ANS:C

26. Costs that are incurred to preclude defects and improper processing are:

a. / prevention costs / c. / appraisal costs
b. / detection costs / d. / failure costs

ANS:A

27.Costs that are incurred when customers complain are:

a. / prevention costs / c. / appraisal costs
b. / detection costs / d. / failure costs

ANS:D

28. The estimated maximum potential activity for a specified time is:

a. / theoretical capacity / c. / normal capacity
b. / practical capacity / d. / expected capacity

ANS:A

29.Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200 and that this amount is material. What journal entry is needed to close the overhead account? (Round decimals to nearest whole percent.)

a. / Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450 and credit Overhead $37,200
b. / Debit Overhead $37,200 and credit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450
c. / Debit Work in Process $37,200 and credit Overhead $37,200
d. / Debit Cost of Goods Sold $37,200 and credit Overhead $37,200

ANS:A

WIP: 73,150/321,800 = $ 8,456
FG: 115,000/321,800 = $13,294
EI: 133,650/321,800 = $15,450

30. If a firm produces more units than it sells, absorption costing, relative to variable costing, will result in

a. / higher income and assets.
b. / higher income but lower assets.
c. / lower income but higher assets.
d. / lower income and assets.

ANS:A

31.A functional classification of costs would classify "depreciation on office equipment"

as a

a. / product cost.
b. / general and administrative expense.
c. / selling expense.
d. / variable cost.

ANS:B

32.If a firm uses variable costing, fixed manufacturing overhead will be included

a. / only on the balance sheet.
b. / only on the income statement.
c. / on both the balance sheet and income statement.
d. / on neither the balance sheet nor income statement.

ANS:B

33. The costing system that classifies costs by both functional group and behavior is

a. / process costing.
b. / job order costing.
c. / variable costing.
d. / absorption costing.

ANS:C

34.Unabsorbed fixed overhead costs in an absorption costing system are

a. / fixed manufacturing costs not allocated to units produced.
b. / variable overhead costs not allocated to units produced.
c. / excess variable overhead costs.
d. / costs that cannot be controlled.

ANS:A

35.A firm presently has total sales of $100,000. If its sales rise, its

a. / net income based on variable costing will go up more than its net income based on absorption costing.
b. / net income based on absorption costing will go up more than its net income based on variable costing.
c. / fixed costs will also rise.
d. / per unit variable costs will rise.

ANS:A

36. The term cost driver refers to

a. / any activity that can be used to predict cost changes.
b. / the attempt to control expenditures at a reasonable level.
c. / the person who gathers and transfers cost data to the management accountant.
d. / any activity that causes costs to be incurred.

ANS:D

37. The term cost driver refers to

ANS:D

38.Activity-based costing and activity-based management are effective in helping managers do all of the following except

a. / trace technology costs to products.
b. / promote excellence standards.
c. / identify only value-added activities.
d. / analyze performance problems.

ANS:C

39. The amount of time between the development and the production of a product is

a. / the product life cycle.
b. / lead time.
c. / production time.
d. / value-added time.

ANS:B

40.In the pharmaceutical or food industries, quality control inspections would most likely be viewed as

a. / non-value-added activities.
b. / business-value-added activities.
c. / value-added-activities.
d. / process-efficiency activities.

ANS:C

41. If a firm's net income does not change as its volume changes, the firm('s)

a. / must be in the service industry.
b. / must have no fixed costs.
c. / sales price must equal $0.
d. / sales price must equal its variable costs.

ANS:D

42. Cost-volume-profit analysis is a technique available to management to understand better the interrelationships of several factors that affect a firm's profit. As with many such techniques, the accountant oversimplifies the real world by making assumptions. Which of the following is not a major assumption underlying CVP analysis?

a. / All costs incurred by a firm can be separated into their fixed and variable components.
b. / The product selling price per unit is constant at all volume levels.
c. / Operating efficiency and employee productivity are constant at all volume levels.
d. / For multi-product situations, the sales mix can vary at all volume levels.

ANS:D

43. Consider the equation X = Sales - [(CM/Sales)  (Sales)]. What is X?

a. / net income
b. / fixed costs
c. / contribution margin
d. / variable costs

ANS:D

44.The contribution margin ratio always increases when the

a. / variable costs as a percentage of net sales increase.
b. / variable costs as a percentage of net sales decrease.
c. / break-even point increases.
d. / break-even point decreases.

ANS:B

45.In a multiple-product firm, the product that has the highest contribution margin per unit will

a. / generate more profit for each $1 of sales than the other products.
b. / have the highest contribution margin ratio.
c. / generate the most profit for each unit sold.
d. / have the lowest variable costs per unit.

ANS:C

46. If a company's fixed costs were to increase, the effect on a profit-volume graph would be that the

a. / contribution margin line would shift upward parallel to the present line.
b. / contribution margin line would shift downward parallel to the present line.
c. / slope of the contribution margin line would be more pronounced (steeper).
d. / slope of the contribution margin line would be less pronounced (flatter).

ANS:B

47. If a cost is irrelevant to a decision, the cost could not be

a. / a sunk cost.
b. / a future cost.
c. / a variable cost.
d. / an incremental cost.

ANS:D

48. The term incremental cost refers to

a. / the profit foregone by selecting one choice instead of another.
b. / the additional cost of producing or selling another product or service.
c. / a cost that continues to be incurred in the absence of activity.
d. / a cost common to all choices in question and not clearly or feasibly allocable to any of them.

ANS:B

49.Irrelevant costs generally include

Sunk costs / Historical costs / Allocated costs
a. / yes yes no
b. / yes no no
c. / no no yes
d. / yes yes yes

ANS:D

50. The potential rental value of space used for production activities

a. / is a variable cost of production.
b. / represents an opportunity cost of production.
c. / is an unavoidable cost.
d. / is a sunk cost of production.

ANS:B

51. In a make or buy decision, the reliability of a potential supplier is

a. / an irrelevant decision factor.
b. / relevant information if it can be quantified.
c. / an opportunity cost of continued production.
d. / a qualitative decision factor.

ANS:D

52.Which of the following costs is irrelevant in making a decision about a special order price if some of the company facilities are currently idle?

a. / direct labor
b. / equipment depreciation
c. / variable cost of utilities
d. / opportunity cost of production

ANS:B

53. 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

a. / the net income shown on the segment's income statement.
b. / sales minus total expenses of the segment.
c. / sales minus total direct expenses of the segment.
d. / sales minus total variable expenses and avoidable fixed expenses of the segment.

ANS:D

54. An increase in direct fixed costs could reduce all of the following except

a. / product line contribution margin.
b. / product line segment margin.
c. / product line operating income.
d. / corporate net income.

ANS:A

55.A linear programming problem can have

a. / no more than three resource constraints.
b. / only one objective function.
c. / no more than two dependent variables for each constraint equation.
d. / no more than three independent variables.

ANS:B

56. Contracting with vendors outside the organization to obtain or acquire goods and/or services is called

a. / target costing.
b. / insourcing.
c. / outsourcing.
d. / product harvesting.

ANS:C

57. An outside firm selected to provide services to an organization is called a

a. / contract vendor.
b. / lessee.
c. / network organization.
d. / centralized insourcer.

ANS:A

58. Which of the following costs would not be accounted for in a company's recordkeeping system?

a. / an unexpired cost
b. / an expired cost
c. / a product cost
d. / an opportunity cost

ANS:D

59.The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the

a. / pre-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
b. / pre-tax rate of interest for bonds and stated annual dividend rate for preferred stock.
c. / after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock.
d. / after-tax rate of interest for bonds and stated annual dividend rate for preferred stock.

ANS:D

60. All other factors equal, a large number is preferred to a smaller number for all capital project evaluation measures except

a. / net present value.
b. / payback period.
c. / internal rate of return.
d. / profitability index.

ANS:B

61.If investment A has a payback period of three years and investment B has a payback period of four years, then

a. / A is more profitable than B.
b. / A is less profitable than B.
c. / A and B are equally profitable.
d. / the relative profitability of A and B cannot be determined from the information given.

ANS:D

62. The time value of money is explicitly recognized through the process of

a. / interpolating.
b. / discounting.
c. / annuitizing.
d. / budgeting.

ANS:B

63. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important?

a. / method of financing the project under consideration
b. / timing of cash flows relating to the project
c. / impact of the project on income taxes to be paid
d. / amounts of cash flows relating to the project

ANS:A

64. When a project has uneven projected cash inflows over its life, an analyst may be forced to use ______to find the project's internal rate of return.

a. / a screening decision
b. / a trial-and-error approach
c. / a post investment audit
d. / a time line

ANS:B

65. In capital budgeting, a firm's cost of capital is frequently used as the

a. / internal rate of return.
b. / accounting rate of return.
c. / discount rate.
d. / profitability index.

ANS:C

66. The net present value method of evaluating proposed investments

a. / measures a project's internal rate of return.
b. / ignores cash flows beyond the payback period.
c. / applies only to mutually exclusive investment proposals.
d. / discounts cash flows at a minimum desired rate of return.

ANS:D

67.Strategic planning is

a. / planning activities for promoting products for the future.
b. / planning for appropriate assignments of resources.
c. / setting standards for the use of important but hard-to-find materials.
d. / stating and establishing long-term plans.

ANS:D

68. Chronologically, the first part of the master budget to be prepared would be the

a. / sales budget.
b. / production budget.
c. / cash budget.
d. / pro forma financial statements.

ANS:A

PROBLEMS

Jonlee Corporation reported sales of P 80,000 in 2006, P 96,000 in 2007 and P 112,000 in 2008. In an index analysis where 2007 is used as the base year, the respective sales percentages would be

B / A. / 80%; 96%; 112%
B. / 83%; 100%; 117%
C. / 80%; 100%; 120%
D. / 100%; 120%; 140%

Green Company plans to purchase new equipment costing P 140,000 plus freight and installation costs estimated at P 23,000. The purchase of the new equipment will prevent the company from having to incur costs of P 30,000 to repair equipment now in service. Depreciation on the new equipment has been estimated at P 20,000 each year. The income tax rate is 40%. The net investment in the new equipment for capital investment planning is

C / A. / P 173,000
B. / P 153,000
C. / P 145,000
D. / P 131,000

If the following data are estimated for next year, what unit sales would be needed to earn P 150,000 after taxes?

Forecast sales (P 30 per unit) / P 600,000
Variable costs / 240,000
Manufacturing fixed costs / 90,000
Administrative fixed costs / 120,000
Assumed tax rate / 40%
D / A. / 13,333 units
B. / 18,889 units
C. / 20,000 units
D. / 25,556 units

If the economy is facing demand-pull inflation, which of the following would be a logical action by the government?

A / A. / Increase income taxes
B. / Lower the discount rate
C. / Buy government securities
D. / Increase government spending

A supplier extends a credit term of 2/10, n/60 (EOM). The EOM (end-of-month) term has effectively extended credit period up to an average of 75 days from the last day of the discount period.

Using a 365-day year, what is the nominal annual cost of trade credit?

C / A. / 11.45%
B. / 11.30%
C. / 9.93%
D. / 9.80%

Red Company established a standard cost for raw materials at P25.00 per unit. During the year, a total of 10,000 units were purchased of which 50% was at P 24.70 each, 20% was at P24.90 each, and the balance, P 25.60 each. The raw materials cost variance is

A / A. / P 100 debit
B. / P 100 credit
C. / P 900 debit
D. / P 900 credit

On January 1, 2008, Brown Company has a receivable balance of P 1 M. During 2008, it generated sales amounting to P 20 M, of which 60% is made on credit. 2008 receivable collections amounted to P9,000,000. The accounts receivable turnover is

C / A. / 12.4 x
B. / 6.0 x
C. / 4.8 x
D. / 2.4 x

A careful study by a company’s cost analyst has determined that if a truck is driven 120,000 miles during a year, the average operating cost is P 11.6 per mile. If a truck is driven only 80,000 miles, the average operating cost increases to P 13.6 per mile. Using the high-low method, estimate the unit variable cost.

A / A. / 7.6
B. / 12.4
C. / 12.6
D. / 20,000

Pink Construction needs an on-site office for its Forbidden Kingdom Construction project. Pink can rent a house trailer for this purpose at a rate of P 100 per month. As an alternative, Pink can construct an on-site office. Pink estimates that the construction of an on-site office would require materials costing P 1,500 (20 percent of which are salvageable upon dismantling) and labor costing P 1,000. Ignoring interest and income tax effects, Pink will realize a net benefit by constructing its own on-site office of ForbiddenKingdomproject only if the length of the project is estimated to be at least:

C / A. / 18 months
B. / 20 months
C. / 22 months
D. / 25 months

Assuming P 20,000 net annual cash inflows from a 4-year P 59,120-capital investment project, the break-even rate of return (IRR) for the project is closest to

C / A. / 11.1%
B. / 12.2%
C. / 13.3%
D. / 14.4%

Assuming a current ratio of 3.5 and a quick ratio of 1.4, determine the amount inventory of a company whose current liabilities are P 120,000 and long-term liabilities P 480,000.

ANSWER: P 252,000