ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

MS-14
MANAGEMENT SERVICES Aljon Lee  Elirie Arañas  Kenneth Manuel

VARIOUS TOPICS IN MANAGEMENT SERVICES

LEARNING CURVE
 LEARNING CURVE (a.k.a., Experience Curve, Productivity Curve, Efficiency Curve) is based on the
phenomenon that labor time decreases in a definite pattern as labor operations are repeated.
 Learning curve describes the efficiencies arising from experience -- with experience comes increased
productivity. This productivity increases with production size, but at a decreasing rate as diagrammed
below:
Units
produced  The time required to perform a given task becomes progressively shorter, but
per day this applies only to the early stages of production.
 The learning curve is based on statistical findings that as the cumulative
output doubles, the cumulative average labor input time required per unit will
,,

be reduced by some percentage, ranging between 10% and 40%.

 The learning curve is usually designated by the complement of the rate of
reduction -- if the rate of reduction is 20%, then there is an 80% learning
curve.
Cumulative Production

 NOTE: The learning curve-associated formula of “Y=aXb” is not applied for CPALE purposes since the exponent
‘b’ requires the use of non-basic calculators to solve logarithm functions.

ILLUSTRATIVE PROBLEM: A particular manufacturing job is subject to an estimated 80% learning or experience
curve. The first unit required 20 labor hours to complete.
1) What is the cumulative average time per unit after four (4) units are completed?
2) How many hours are required to produce a total of two (2) units?
3) How many hours are required to produce the second unit?
4) Which of the following unfavorable variances would be directly affected by the relative position of a
production process on the learning curve?
a. Material price c. Labor rate
b. Material usage d. Labor efficiency
MULTIPLE-CHOICE QUESTIONS (Learning Curve)
1. An 70% learning curve means that:
a. The incremental time for each unit is 70% of the time of the previous unit
b. The cumulative average time is 70% of the cumulative average time of the previous unit
c. As production doubles, the incremental time for a unit is 70% of the time at the previous doubling
point
d. As production doubles, the cumulative average time is 70% of the time at the previous doubling
point
2. The following information on the utilization of a new software package was collected:
Number of tasks Total time to perform all tasks Average time to perform each task
1 10 minutes 10 minutes
2 18 minutes 9 minutes
4 32.4 minutes 8.1 minutes
If this learning effect continues, what is the average time to perform each of the first eight (8) tasks?
a. 6.83 minutes c. 7.75 minutes
b. 7.29 minutes d. 8.10 minutes
3. Orange Company expects a 90% learning curve. The first batch of a new product required 100 hours. The
second batch should take:
a. 100 hours c. 80 hours
b. 90 hours d. 45 hours
4. Mango Company manufactured the first batch of product in 10 hours and the second batch in 4 hours. What
learning percentage occurred?
a. 100% c. 80%
b. 90% d. 70%
5. The average labor cost per unit for the first batch produced by a new process is P 120. The cumulative
average labor cost after the second batch is P 72 per product. Using a batch size of 100 and assuming the
learning curve continues, what is the total labor cost of four batches?
a. P 4,320 c. P 2,592
b. P 10,368 d. P 17,280
6. Banana, Inc. finds that production is affected by an 80% learning effect. The company has just produced 50
units of output at 100 hours per unit. Costs were as follows:
Materials @ P 20 P 1,000
Labor and labor-related costs:
Direct labor (100 hours at P 8) 800
Variable overhead (100 hours at P 2) 200
Total P 2,000
The company has just received a contract calling for another 50 units of production. It wants to add a 50%
markup to the cost of materials and labor and labor-related costs. Determine the contract price.
a. P 1,600 c. P 2,400
b. P 1,800 d. P 3,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
VARIOUS TOPICS in MANAGEMENT SERVICES MS-14
7. Fruit Manufacturing recently completed and sold an order of 50 units that had the following costs:
Direct materials P 1,500
Direct labor 8,500
Variable overhead* 4,000
Fixed overhead** 1,400
TOTAL P 15,400
* Applied on the basis of direct labor hours. ** Applied at the rate of 10% of variable cost.
The company has been requested to prepare a bid for 350 units of the same product. If an 80% learning
curve is applied, what is the total cost on the bid-order for 350 units?
a. P 26,400 c. P 37,950
b. P 31,790 d. P 54,120
8. What is the cost factor that is LEAST likely to be affected by the learning curve?
a. Materials c. Indirect labor
b. Direct labor d. Variable overhead

FINANCIAL MARKETS: CAPITAL MARKETS & MONEY MARKETS

 FINANCIAL MARKETS refer any marketplace (physical or cyberspace) where trading of securities occurs.
 Financial markets bring together INVESTORS (suppliers of funds) and INVESTEE (users of funds).
 Financial markets are diverse -- they include stock exchanges, corporate bond markets, government securities
market, money markets, OTC markets, foreign exchange markets, and derivatives exchanges.
 Financial markets may be broadly classified into MONEY MARKETS and CAPITAL MARKETS:
MONEY MARKETS
➢ A MONEY MARKET is a financial market where short-term debt instruments are traded.
➢ Money market instruments usually have maturity period of 1 year or less in the form of MARKETABLE
securities that have low default risk; they are hence usually considered as substitutes for cash.
➢ Money markets are DEALER-DRIVEN markets where a dealer acts as the principal in most transactions,
while a stockbroker acts merely as an agent.
➢ Common examples of money market securities include BSP Treasury Bills, Commercial Papers, Certificate
of Deposits, Banker’s Acceptance, Repurchase Agreements & Mutual Funds.
CAPITAL MARKETS
➢ A CAPITAL MARKET is a financial market in which long-term debt or equity securities are traded.
➢ A capital market can be either a PRIMARY market or a SECONDARY market.

Primary Market -- trade of new securities by mostly large investors

CAPITAL MARKET
Secondary Market -- trade of existing securities by mostly small investors

PRIMARY market SECONDARY market

✓ The investor deals directly with the company ✓ Securities are traded between entities after a
issuing the security (i.e., bonds or stocks). company has sold securities on the primary
✓ A company publicly sells securities for the first time markets.
thru an Initial Public Offering (IPO). ✓ Existing securities are sold and bought among
✓ The main entities seeking to raise long-term funds investors or traders, usually in a dealer or broker
on the primary capital markets are governments market.
(local/national) and business enterprises ✓ The existence of secondary markets increases the
(companies) -- governments issue only bonds, willingness of investors in primary markets, as they
while companies may issue both stocks and bonds. know they are likely to be able to swiftly cash out
✓ Entities purchasing the bonds or stock include their investments if the need arises.
pension funds, hedge funds, wealthy individuals ✓ There is no limit to the number of times a security
and investment banks trading on their own behalf. can be traded, and the process is usually very
✓ Each security can be sold only once, and the quick. Hence, most capital market transactions
process to create batches of new shares or bonds is take place on the secondary market.
often lengthy due to regulatory requirements.
➢ Capital markets are also classified into STOCK markets & BOND (Fixed-Income) markets.
➢ Investors in stock markets acquire ownership of entities; investors in bond markets become creditors.
➢ Stock markets (e.g., PSE or Philippine Stock Exchange) are where investors and banking institutions come
together to trade stocks, which represent a part ownership of a company.
➢ Stocks can be traded privately or publicly; they are used by companies as a means of raising capital.
➢ Individuals and entities invest in the stock market, hoping they will be able to get higher returns on their
savings, and companies use their investments for developing new products and services.
➢ Stock markets hold a very significant portion of the entire volume of trade in capital markets.
➢ Government usually raises long-term finance by selling bonds in the capital markets.
➢ BOND VALUATION is the process of determining the fair price or market value of bonds based on the
present value of the regular interest payments and the face value at the maturity date.
➢ STOCK VALUATION is the process of determining the theoretical value of companies and their stocks
based on different methods such as the Gordon Dividend Growth Model.
 FINANCIAL INTERMEDIARIES (e.g., banks, finance companies, insurance companies, pension funds,
investment bankers) are specialized firms that help create and exchange the instruments of financial markets
as they increase the efficiency of financial markets through better allocation of financial resources.
 Financial markets trade in all types of securities and are critical to the smooth operation of a capitalist society;
when financial markets fail, economic disruption including recession and unemployment can result.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
VARIOUS TOPICS in MANAGEMENT SERVICES MS-14
MULTIPLE-CHOICE QUESTIONS (Financial Markets)
1. Determine the false statement about FINANCIAL markets.
a. Financial markets bring together providers of capital and users of capital.
b. Financial markets refer broadly to any marketplace where trading of securities occurs.
c. Financial markets usually create assets for the borrower and liabilities for the investor.
d. Financial markets play a vital role in facilitating the smooth operation of capital economies
by allocating resources and creating liquidity for business and entrepreneurs.
2. Financial markets that are dealer-driven and trade debt securities with maturities of less than 1 year are
called:
a. Money markets c. Primary markets
b. Capital markets d. Secondary markets
3. A financial market specialist who facilitates exchanges by buying and selling securities from their own
holdings is called:
a. Dealer c. Investor
b. Broker d. Borrower
4. Which of the following financial instruments can be traded in money markets?
a. Mortgages c. BSP Treasury Bills
b. Preferred stocks d. BSP Treasury Bonds
5. Interest is usually paid in money market instruments:
a. Monthly c. Quarterly
b. Annually d. At maturity
6. The most important considerations with respect to short-term investments are
a. Return and value c. Return and risk
b. Risk and liquidity d. Growth and value
7. Financial markets in which equity and debt instruments with maturities greater than 1 year are traded
are called
a. Money markets c. Currency markets
b. Capital markets d. Private placements
8. In capital markets, the primary market is concerned with
a. New issues of bond and stock securities
b. Exchanges of existing bond and stock securities
c. Sales of forward or future commodities contracts
d. New issues of bond and stock securities and exchanges of existing bond and stock securities
9. The market for outstanding, listed common stock is called
a. Primary market c. Secondary market
b. New issue market d. Over-the-counter market
10. In capitalist countries, most capital market transactions take place in
a. Primary bond market c. Secondary bond market
b. Primary stock market d. Secondary stock market
11. Which of the following is a financial intermediary rather than a financial market?
a. Money markets c. Philippine Stock Exchange
b. Commercial banks d. Over-the-counter market
12. A firm has given the following information for its outstanding bonds:
Bond Face Value Annual Coupon Interest Years to Maturity Required Return
PSJ P 1,000 9% 5 6%
LMH P 100 10% 8 10%

What is the current value of Bond PSJ?

a. P 1,126 c. P 988
b. P 1,054 d. P 874
13. A firm has an issue of preferred stock outstanding that has a stated annual dividend of P 4. The required
return on the preferred stock has been estimated to be 16%.

What is the value of the preferred stock?

a. P 0.64 per share c. P 25 per share
b. P 16.00 per share d. P 64 per share
14. A firm has experienced a constant annual rate of dividend growth of 9% on its common stock and expects
the dividend per share in the coming year to be P 2.70. The firm can earn 12% on similar risk investments.
What is the value of the firm’s common stock?
a. P 9.00 per share c. P 30.00 per share
b. P 22.50 per share d. P 90.00 per share
15. A common stock currently has a beta of 1.7, the risk-free rate is 7 percent annually, and the market
return is 12 percent annually. The stock is expected to generate a constant dividend of P 6.70 per share.
A pending lawsuit has just been dismissed and the beta of the stock drops to 1.4.
What is the new equilibrium price of the stock?
a. P 43.23
b. P 47.86
c. P 55.83
d. Cannot be determined from the given information

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
VARIOUS TOPICS in MANAGEMENT SERVICES MS-14
STRATEGIC COST MANAGEMENT (This topic is no longer mentioned in the latest LECPA syllabus for MS)
 STRATEGIC COST MANAGEMENT (SCM) is the process of reducing total costs while improving the strategic
position of a business, accomplished by managing costs and aligning them to the business strategy.
 Three (3) generic strategies in order to achieve sustainable competitive advantage are:
1) COST LEADERSHIP – providing same or better value to customers at a cost lower than competitors’.
2) DIFFERENTIATION – strives to increase customer value by increasing what the customer receives.
3) FOCUS – a firm selects and emphasizes a customer segment in which to compete (i.e., market niche)
 SCM involves recognition of the importance of cost relationships among various activities in the VALUE CHAIN
(a sequence of activities required to design, develop, produce, market and deliver products and services to
customers) in relation to CUSTOMER VALUE (the difference between what is received and given up by the
customer when buying a product or service).
 LIFE-CYCLE COSTING determines the total cost of a product over its life cycle by dividing costs into:
✓ UPSTREAM or UPWARD costs (examples: R&D, design engineering, target costing, testing)
✓ Production costs
✓ DOWNSTREAM or DOWNWARD costs (examples: marketing, distribution, sales, customer service)
WHOLE-LIFE COSTS = LIFE-CYCLE COSTS + after-purchase costs incurred by the customers
Product’s life cycle (marketing viewpoint) is also based on: 1) introduction 2) growth 3) maturity 4) decline
 TARGET COSTING involves the determination of the desired product cost based on a given market price and
given desired profit. In target costing, a company may reduce its cost to reach the target level through VALUE
ENGINEERING, which involves a thorough examination of the value chain aimed at reducing product costs
without sacrificing customer satisfaction. [See MS-44D on Target Costing for more details]
 TOTAL QUALITY MANAGEMENT (TQM) is a management technique that integrates all organizational functions
(marketing, finance, design, engineering, production, and customer service) to focus on meeting customer
expectation and business objectives.
✓ TQM requires developing policies to ensure that products and services exceed customer’s expectations.
✓ TQM is a formal effort to ensure and improve quality throughout an entity’s value chain.
 QUALITY COSTS are incurred on quality related processes to prevent defects or incurred as a result of defects
occurring. Quality costs are classified into:
1) CONFORMANCE COSTS are incurred to keep defective products from falling into the hands of customers.
✓ Prevention Costs (examples: employee training, equipment maintenance, systems development)
✓ Appraisal Costs (examples: inspection and testing)
2) NON-CONFORMANCE COSTS are incurred because defects are produced despite efforts to avoid them.
✓ Internal Failure Costs (examples: scrap, spoilage, rework, downtime)
✓ Externa Failure Costs (examples: warranty repairs, product lawsuits)
 CONTINUOUS IMPROVEMENT is the constant effort to eliminate waste, reduce response time, simplify the
design of both products and processes, improve quality and enhance customer service. Continuous
improvement can be done in two ways:
1) KAIZEN is the gradual process of reducing costs during the manufacturing phase of an existing product
through small and continual improvements rather than through radical “big-time” changes.
2) BUSINESS PROCESS REENGINEERING (BPR) involves redesigning business process to reduce costs and
eliminate inefficiencies and opportunities for errors. Common features of BPR include:
✓ Radical, quick, significant and drastic approach to improvement
✓ Business process is diagrammed in details, analyzed and completely redesigned
✓ Simplification of business process
✓ Elimination of non-value-added activities.
 BENCHMARKING involves the three steps: 1) Identifying critical success factors 2) Studying the best practices
of other firms based on identified success factors 3) Implementing needed improvements to match or beat
the performance of other firms.
 THEORY OF CONSTRAINTS (TOC) emphasizes the importance of managing a company’s constraints that
hinder progress toward an objective. TOC is a perfect complement to TQM and BPR – it focuses improvement
efforts where they are likely to be most effective.
 JUST-IN-TIME (JIT) is a “demand-pull” system where inventories are purchased/produced only as needed for
production/sale, reduced to the minimum level and, in some cases, reduced to zero (i.e., elimination of non-
value-added costs). JIT can be classified into two categories:
✓ JIT Purchasing - raw materials are received just in time for production; goods for sale are received just
in time for delivery or sale.
✓ JIT Manufacturing – manufactured materials are completed just in time for production; products are
completed just in time for delivery.
JIT NON-JIT (Traditional/Conventional)
Demand-pull system Push-through system
Insignificant or zero inventories Significant inventories
Small supplier base Large supplier base
Long-term supplier contracts Short-term supplier contracts
Cellular structure (Manufacturing cells) Departmental structure (Process structure)
Multi-skilled labor Specialized labor
Decentralized services Centralized services
High employee involvement Low employee involvement
Facilitating management style Supervisory management style
Total quality management Acceptable quality level
Value-chain focus Value-added focus

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
VARIOUS TOPICS in MANAGEMENT SERVICES MS-14
MULTIPLE-CHOICE QUESTIONS (Strategic Cost Management) – with suggested answers
1. Which is NOT among the three (3) generic strategies for a company to achieve competitive advantage?
C a. Focus c. Market segmentation
b. Cost leadership d. Product differentiation
2. The unyielding and continuing improving effort by everyone in the organization to understand, meet and
exceed the customer expectations and uses front-line workers to solve problems systematically.
C a. Just-in-time manufacturing c. Total quality management
b. Conventional manufacturing d. Total quantity management
3. Total Quality Management (TQM) should be viewed as
C a. Goal centered and standard driven c. Customer centered and employee driven
b. Policy centered and procedure driven d. Management centered and technology driven
4. The primary reason for adopting TQM is to achieve
A a. Greater customer satisfaction c. Reduced delivery charges
b. Greater employee participation d. Reduced delivery time
5. Which of the following is at the core of the definition of total quality management (TQM)?
B a. Customer surveys c. Employee satisfaction
b. Continuous improvement d. Supplier inspections
6. A company desiring to achieve radical or drastic improvements in customer relationship management
would most likely undertake:
D a. Kaizen c. Total quality management
b. Benchmarking d. Business process reengineering
7. Which of the following quality tools is another term for gradual yet continuous improvement?
B a. Theory of constraints c. Six-sigma
b. Kaizen d. Lean manufacturing
8. “Kaizen costing” refers to
D a. Radical cost reductions during the design phase of a product
b. Radical cost reductions during the manufacturing phase of a product
c. Small, continual cost reductions during the design phase of a product
d. Small, continual cost reductions during the manufacturing phase of a product
9. What are the four categories of quality costs?
A a. Prevention, appraisal, internal failure, and external failure costs
b. Internal failure, external failure, carrying and ordering costs
c. Product liability, warranty, appraisal, and training costs
d. Training, testing, failure, and conformance costs
10. Identify the two (2) CONFORMANCE costs of quality.
A a. Prevention and appraisal costs c. Appraisal and internal failure costs
b. Internal and external failure costs d. Prevention and internal failure costs
11. Identify the two (2) NON-CONFORMANCE costs of quality.
B a. Prevention and appraisal costs c. Appraisal and internal failure costs
b. Internal and external failure costs d. Prevention and internal failure costs
12. Quality is achieved more economically if the company focuses on
B a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
13. A quality cost incurred to detect individual units that do not conform to specifications is an example of
A a. Appraisal cost c. Internal failure cost
b. Prevention cost d. External failure cost
14. These are quality costs incurred when company determines units that do not meet quality standards.
C a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
15. These are quality costs incurred when a unit of product fails to perform to customer expectations.
D a. Appraisal costs c. Internal failure costs
b. Prevention costs d. External failure costs
16. Following are items included in the quality cost report prepared for the last month:
Employee training costs P 50,000
Product testing P 20,000
Equipment maintenance P 80,000
Rework upon inspection P 25,000
B a. Appraisal cost is P 25,000 c. External failure cost is P 20,000
b. Prevention cost is P 130,000 d. Internal failure cost is P 105,000
NOTE: employee training (50,000) and equipment maintenance (80,0000) are preventive efforts.
17. The value chain is the sequence of business functions in which
D a. Products and services are evaluated with respect to their value to the supply chain
b. Value is proportionately added to the products or services of an organization
c. Value is deducted from the products or services of an organization
d. Usefulness is added to the products or services of an organization
18. R & D, production and customer service are business functions that are all included as part of
A a. Value chain c. Marketing
b. Benchmarking d. Supply chain
19. Which of the following activities would not be considered as adding value?
C a. Redesign of a product c. Rework of defective products
b. Quality assurance activities d. Client support services for product fulfillment

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
VARIOUS TOPICS in MANAGEMENT SERVICES MS-14
21. The concept of ‘value added’ is best described as
A a. Activities that convert resources into products and services consistent with external
customer requirements
b. A series of transactions between employees to deliver an end product to external customers
and external suppliers
c. A series of transactions between employees or between internal customers and internal
suppliers to deliver an end product
d. Activities that can be eliminated with no deterioration in product service, functionality,
performance or quality in the eyes of the end user
22. Which of the following determines the desired cost for a product based upon a given competitive price?
B a. Benchmarking c. Reengineering
b. Target costing d. Life-cycle costing
23. Determine the correct order of target costing process.
A a. Market price, desired profit, target cost, cost reduction thru value engineering
b. Cost reduction thru value engineering, target cost, desired profit, market price
c. Target cost, desired profit, market price, cost reduction thru value engineering
d. Market price, target cost, cost reduction thru value engineering, desired profit
24. Value engineering
D a. Is a basis for product costing and pricing
b. Determines the outcome and value added by each activity
c. Is a way of understanding how a company generates its output
d. Is a systematic approach to reaching a targeted cost level during a value chain analysis
without reducing customer satisfaction
25. In Business Process Reengineering (BPR), the main objectives are to simplify and to possibly eliminate
B a. Value-added activities c. Constraint
b. Non-value-added activities d. Non-constraint
26. The comparison of a company's practices and performance levels against those of other organizations (or
against the best possible level of performance) is most commonly known as
A a. Benchmarking c. Comparative analysis
b. Re-engineering d. Continuous improvement
27. The Theory of Constraints suggests that improvement efforts shall be focused on the company’s
C a. Value-added activities c. Constraints
b. Non-value-added activities d. Non-Constraints
28. The immediate goal of a TOC analysis is to
B a. Minimize direct materials cost
b. Maximize contribution margin through the constraint
c. Maximize the efficiency of the entire production process
d. Smooth production flow to eliminate backup in the system
29. The just-in-time manufacturing (JIT) system is also called the
D a. Job-in-training system c. Zero-cost system
b. Job-in-transit system d. Zero-inventories system
30. In JIT system, work is initiated only in response to customer orders. This practice is described as
A a. Demand-pull c. Supply-pull
b. Demand-push d. Supply-push
31. Just-in-time purchasing (demand-pull system) requires
A a. Smaller and more frequent purchase orders
b. Larger and more frequent purchase orders
c. Smaller and less frequent purchase orders
d. Larger and less frequent purchase orders
32. In a product’s life cycle, the first symptom of the decline stage is a decline in
B a. Product’s prices c. Product’s production cost
b. Product’s sales d. Firm’s inventory level
33. During the growth stage of a product’s life cycle,
B a. The quality of products is poor
b. New product models and features are introduced
c. There is little difference among competing products
d. The quality of the products becomes more variable and products are less differentiated
34. A company’s product has an expected 4-year life cycle from research, development, and design through
its withdrawal from the market. Budgeted costs are:
Upstream costs (R & D, design) P 2,000,000
Manufacturing costs 3,000,000
Downstream costs (marketing, distribution, customer service) 1,200,000
After-purchase costs 1,000,000
The company plans to produce 200,000 units and price the product at 125% of the whole-life unit cost.
Thus, what is the budgeted unit selling price?
D a. P 15 c. P 36
b. P 31 d. P 45
35. It refers to the efforts of a company to employ sustainable business practices regarding its employees
and environment.
D a. Value chain analysis c. Total quality management
b. Environmental accounting d. Corporate social responsibility

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