CUP 5

COST ACCOUNTING AND MANAGEMENT ADVISORY SERVICES

Easy Round 1 point each Theory – 10 seconds

Problem – 15 seconds

1. Which one of the following items would not be considered a manufacturing cost?
a. Cream for an ice cream maker
b. Sales commission for a car manufacturer
c. Plant property taxes for an ice cream maker
d. Tires for an automobile manufacturer

ANSWER: b

2. Job-order costs are most useful for

a. Determining inventory valuation using LIFO.
b. Estimating the overhead costs included in transfer prices.
c. Controlling indirect costs of future production.
d. Determining the cost of a specific project.

ANSWER: d

3. Which of the following typically does not relate to the role of a controller?
a. A controller supervises the accounting department.
b. A controller safeguards an organization’s assets.
c. A controller oversees the preparation of reports required by governmental authorities.
d. A controller normally assumes a narrow role within the organization, often preventing the
individual’s rise to top management rank.

ANSWER: d

4. Due to erratic sales of its sole product – deflashed light, Kayakobato Company has been
experiencing difficulty for some time. The company’s income statement for the most recent month
is given below:
Sale (19,500 units @ P300) P 5,850,000
Less: Variable expenses 4,095,000_
Contribution margin P 1,755,000
Less: Fixed expenses 1,800,000_
Net income (loss) P (45,000)

The break-even in peso sales for Kayakobato Company is

a. P6,000,000
b. P2,571,000
c. P5,852,756
d. P7,500,000

ANSWER: a

5. Conversion costs do not include

a. Depreciation.
b. Direct materials.
c. Indirect labor.
d. Indirect materials.
ANSWER: b

6. The following are selected data from Fortune Company’s most recent financial statements:
Marketable securities, P10,000; Accounts receivable, P60,000; Inventory, P25,000; Supplies,
P5,000; Accounts payable, P40,000; Short-term debt payable, P10,000; Accruals, P5,000. What is
Fortune’s net working capital?
a. P35,000
b. P45,000
c. P50,000
d. P80,000

ANSWER: b

7. When a firm produces 10,000 units of output, its total variable cost is equal to P50,000. Also, it
experiences average fixed costs of P3 per unit. What are the total costs for producing 10,000 units?

ANSWER: P80,000

8. Which of the following would not affect the breakeven point?

a. Number of units sold
b. Variable cost per unit
c. Total fixed cost
d. Sales price per unit

ANSWER: a

9. Statement I: According to IFRS/IAS, absorption costing must be used for internal reporting.
Statement II: Variable costing must be used for internal reporting.
a. Both statements are true
b. No statement is true
c. Only Statement I is true
d. Only Statement II is true

ANSWER: b

10. A manufacturing company applies factory overhead based on direct labor hours. At the beginning of
the year, it estimated that factory overhead costs would be P360,000 and direct labor hours would
be 45,000. Actual manufacturing overhead costs incurred were P377,200, and actual direct labor
hours were 46,000. The entry to apply the factory overhead costs for the year would include a
a. debit to factory overhead for P360,000.
b. credit to factory overhead for P368,000.
c. debit to factory overhead for P377,200.
d. credit to factory overhead for P360,000.

ANSWER: b

EXTRA QUESTIONS:

11. Compute conversion costs given the following data: Direct Materials, P352,700; Direct Labor,
P196,300; Factory Overhead, P177,600.

ANSWER: P373,900
 12. Hayward applies overhead at P5 per machine hour. During March it worked 10,000 hours and
overapplied overhead by P3,000. Actual overhead was

ANSWER: P47,000

Average Round 3 points each Theory – 15 seconds

Problem – 30 seconds

1. Ryotel is conducting market research to determine whether or not to launch a new product.
Management believes there is a 60% probability the research will yield favorable results with a
40% probability the results will be unfavorable. If the results are favorable, there is a 70%
probability the product will be successful; if the results are unfavorable, the probability the product
will be unsuccessful is 75%. If the product is successful, Ryotel anticipates annual profits of
₱10,000,000, but if the product is unsuccessful, Ryotel will lose ₱4,000,000 each year. What is the
expected value of the new product’s annual profit?

ANSWER: P3,280,000

2. Ace Manufacturing plans to produce two products, Product C and Product F, on the following year,
with the following planned information:
Product C Product F
Selling price per unit P 10 P 15
Variable cost per unit P 8 P 10
Expected unit sales 20,000 5,000

Total projected fixed costs for the company are P30,000. Assume that the product mix would be the
same at the breakeven point as at the expected level of sales of both products. What is the projected
number of whole units of Product C to be sold at the breakeven point?

ANSWER: 9,231 units

3. Foovrezsca Pupanesca sells Hathee-Hathee-Hoe Candy for P20 a box. The manufacturing cost, all
variable, is P6 a box. The company is planning on renting an exhibition booth for both display and
selling purposes at the annual candy convention. The convention coordinator allows three options
for each participant. They are:
I. Paying a fixed booth fee of P10,000 plus a P10 registration fee, or
II. Paying an P8,400 fee plus 10% of revenue made at the convention, or
III. Paying 20% of revenue made at the convention

Which option should Foovrezsca choose assuming sales are expected to be 1,000 boxes?

ANSWER: Option III

4. Which of the following is false regarding activity-based costing (ABC)?

a. Companies that have a high potential for cost distortions are more likely to benefit from
ABC.
b. Opportunities for continuous improvement are rarely revealed by using ABC.
c. The cost of implementing ABC may outweigh the benefits.
d. Increased accuracy with budgeting resources is often realized.

ANSWER: b
 5. Net operating income under absorption costing may differ from net operating income determined
under variable costing. How is this difference calculated?
a. Change in the quantity of units in inventory times the fixed manufacturing overhead rate
per unit.
b. Number of units produced during the period times the fixed manufacturing overhead rate
per unit.
c. Change in the quantity of units in inventory times the variable manufacturing cost per unit.
d. Number of units produced during the period times the variable manufacturing cost per unit.

ANSWER: a

6. As part of a cost study, the cost accountant of Pagchur Corporation has recorded the cost of
operations at seven different levels of materials usage. The records show the following:
Kilos of Materials Costs of Operation
80 P 800
60 480
20 320
120 1,200
140 1,280
40 480
100 1,040

Using the high-low method, how much is the fixed cost for this operation?

ANSWER: P160

7. The Rest-a-Lot Chair Company manufacturers a standard recliner. During February, the firm's
Assembly Department started production of 75,000 chairs. During the month, the firm completed
80,000 chairs, and transferred them to the Finishing Department. The firm ended the month with
10,000 chairs in ending inventory. There were 15,000 chairs in beginning inventory. All direct
materials costs are added at the beginning of the production cycle and conversion costs are added
uniformly throughout the production process. The FIFO method of process costing is used by Rest-
a-Lot. Beginning work in process was 30% complete as to conversion costs, while ending work in
process was 80% complete as to conversion costs. Cost information are provided below:

Beginning inventory:
Direct materials P 24,000
Conversion costs P 35,000

Manufacturing costs added during the accounting period:

Direct materials P 168,000
Conversion costs P 278,000

What is the cost of the goods transferred out during February?

a. P417,750
b. P456,015
c. P476,750
d. P505,000
ANSWER: b

8. Card Bicycle Co. has prepared production and raw materials budgets for next year. At the end of
this year, the finished product inventory is expected to include 1,800 bicycles, and raw material
inventory is expected to include 3,700 bicycle tires. Each finished bicycle requires two tires. The
marketing department provided the following data from the sales budget for the first quarter:
January February March
Expected bicycle sales (units) 14,000 18,000 16,000

The company inventory policy is to have finished product inventory equal to 10% of the following
month's sales requirements, and raw material equal to 20% of the following month's production
requirements. In the February budget for finished goods, how many bicycles are expected to be
produced?

ANSWER: 17,800 units

9. Zenkoy Corporation uses a standard costing system in which variable manufacturing overhead is
assigned to production on the basis of the number of machine setups. The following data pertain to
one month's operations:
Variable manufacturing overhead cost incurred P 70,000
Total variable overhead variance P 4,550 F
Standard machine setups allowed for actual production 3,550
Actual machine setups incurred 3,500

The standard variable overhead rate per machine setup is:

a. P17
b. P18
c. P19
d. P21

ANSWER: d

10. At SOGIE Company, the controller is responsible for directing the budgeting process. In this role, the
controller has significant influence with executive management as individual department budgets
are modified and approved. For the current year, the controller was instrumental in the approval of
a particular line manager’s budget without modification, even though significant reductions were
made to the budgets submitted by other line managers. As a token of appreciation, the line manager
in question has given the controller a gift certificate for a popular local restaurant. In considering
whether or not to accept the certificate, the controller should refer to which section of the
Statement of Ethical Professional Practice for Management Accountants?
a. Competence
b. Confidentiality
c. Integrity
d. Credibility

ANSWER: c

EXTRA QUESTIONS:

11. A company with a high level of operating leverage will

a. experience fewer fluctuations in income as sales fluctuate than a company with a low level
of operating leverage.
 b. experience wider fluctuations in income as sales fluctuate than a company with a low level
of operating leverage.
c. earn higher profits than a company with a low level of operating leverage.
d. earn lower profits than a company with a low level of operating leverage.

ANSWER: b

12. The method of least squares was used to develop a cost equation to predict the cost of purchasing
goods. Eighty data points were used for the regression. The following output was received:
Intercept P 30,500
Slope P 10
Coefficient of correlation 0.05
Standard error P 1,500

The driver used was “number of purchase orders”. What is the cost of purchasing if 10,000 orders
are processed?

ANSWER: P130,500

Difficult Round 5 points each Theory – 20 seconds

Problem – 60 seconds

1. A company experienced a machinery breakdown on one of its production lines. As a consequence of

the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime
to return manufacturing to schedule. Which one of the following methods is the proper way to
account for the overtime paid to the direct laborers?
a. The overtime hours times the sum of the straight-time wages and overtime premium would
be charged entirely to manufacturing overhead.
b. The overtime hours times the sum of the straight-time wages and overtime premium would
be treated as direct labor.
c. The overtime hours times the overtime premium would be charged to repair and
maintenance expense, and the overtime hours times the straight-time wages would be
treated as direct labor.
d. The overtime hours times the overtime premium would be charged to manufacturing
overhead, and the overtime hours times the straight-time wages would be treated as direct
labor.

ANSWER: d

2. The production manager of the Super T-shirt Company is responsible for the activity of her
department and the costs associated with production. Super T adheres to a responsibility centered
budget process, and the manager’s performance is measured by how well she performs to budget.
Recently, the dark horse team won the local college basketball tournament. As a result, the sales
department, which operates as a profit center, received an order for 10,000 t-shirts, but only if they
could be delivered in three days. The production manager said she could meet the schedule, but
only by incurring overtime pay that would cause her to be over budget for hourly wages paid. What
would be the best course of action for the sales department and the production manager to
undertake in this case?
a. Accept the order and overrun the production manager’s budget.
b. Refuse the overtime and produce only what the production department is capable of while
staying within the budget.
 c. Accept the order and ignore the effect on the production department budget when
conducting the performance review.
d. Charge the overtime to the sales department’s budget.

ANSWER: d

3. Identify which of the following statement(s) is/are true:

Statement I: When reconciling variable costing and absorption costing net operating income, fixed
manufacturing overhead costs released from inventory under absorption costing should be added
to variable costing net operating income to arrive at the absorption costing net operating income.
Statement II: When the number of units in work in process and finished goods inventories
increase, absorption costing net operating income will typically be greater than variable costing net
operating income.
Statement III: Under variable costing it may be possible to report a profit even if the company sells
less than the break-even volume of sales.

ANSWER: (Statement) II only

4. Honey Company’s sales are forecasted to increase from P1,000,000 in 2011 to P2,100,000 in 2021.
Honey’s balance sheet as of December 31, 2020 is shown on the below:

Honey’s fixed assets were used to only 50 percent of capacity during 2020, but its current assets
were at their proper levels. All assets and spontaneous liabilities increase at the same rate as sales.
Honey’s after-tax profit margin is forecasted to be 5 percent, and its dividend payout ratio will be
60 percent.

In the company’s pro-forma financial statements for 2021, what amount would appear in the
balance sheet as the balance of Fixed Assets account?

ANSWER: P525,000

5. Buzz Uréro Printing Company is considering the purchase of a new printing press. The total
installed cost of the press is P2.2 million. This outlay would be partially offset by the sale of an
existing press. The old press has zero book value, cost P1 million 10 years ago, and can be sold
currently for P1.2 million before taxes. As a result of acquisition of the new press, sales in each of
the next 5 years are expected to increase by P1.6 million, but product costs (excluding
depreciation) will represent 50% of sales. The new press will not affect the firm’s net working
capital requirements. The new press will be depreciated using straight line method.
 The firm is subject to a 40% tax rate on both ordinary income and capital gains. Buzz Uréro
Printing Company’s cost of capital is 11%. What is the initial investment for this printing press?

ANSWER: P1,480,000

EXTRA QUESTIONS:

6. Lipa Company currently has annual sales of P2,000,000. Its average collection period is 40 days,
and bad debts are 5 percent of sales. The credit and collection manager is considering instituting a
stricter collection policy, whereby bad debts would be reduced to 2 percent of total sales, and the
average collection period would fall to 30 days. However, sales would also fall by an estimated
P250,000 annually. Variable costs are 60 percent of sales and the cost of carrying receivables is 12
percent. Assume a tax rate of 40 percent and 360 days per year. What would be the incremental
investment in receivables if the change were made?

ANSWER: (P45,833.33) or (P45,833)

7. Jack Blaze wants to rent store space in a new shopping mall for the three month holiday shopping
season. Blaze believes he has a new product available which has the potential for good sales. The
product can be obtained on consignment at the cost of ₱20 per unit and he expects to sell the item
for ₱100 per unit. Due to other business ventures, Blaze’s risk tolerance is low. He recognizes that,
as the product is entirely new, there is an element of risk. The mall management has offered Blaze
three rental options: (1) a fixed fee of ₱8,000 per month, (2) a fixed fee of ₱3,990 per month plus
10% of Blaze’s revenue, or (3) 30% of Blaze’s revenues. Which option would you recommend Jack
Blaze to take?

ANSWER: Option 3

8. Identify how many of the following statement(s) is/are correct.

I. The component cost of preferred stock is expressed as k p(1 - T). This follows because
preferred stock dividends are treated as fixed charges, and as such they can be deducted by
the issuer for tax purposes.
II. A cost should be assigned to retained earnings due to the opportunity cost principle, which
refers to the fact that the firm’s stockholders would themselves expect to earn a return on
earnings that were distributed rather than retained and reinvested.
III. No cost should be assigned to retained earnings because the firm does not have to pay
anything to raise them. They are generated as cash flows by operating assets that were
raised in the past; hence, they are “free”.
IV. Suppose a firm has been losing money and thus is not paying taxes, and this situation is
expected to persist into the foreseeable future. In this case, the firm’s before-tax and after-
tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate
on the firm’s currently outstanding debt, provided that debt was issued during the past 5
years.

ANSWER: Only one statement or 1

9. The Mango Company is preparing its cash budget for the month of May. The following information
is available concerning its accounts receivable:
Estimated credit sales for May P 200,000
Actual credit sales for April 150,000
Estimated collections in May for credit sales in May 25%
Estimated collections in May for credit sales in April 70%
Estimated collections in May for credit sales prior to April P 15,000
 Estimated write-offs in May for uncollectible credit sales 8,000
Estimated provision for bad debts in May for credit sales in May 7,000

What are the estimated cash receipts from accounts receivable collections in May?

ANSWER: P170,000

10. Kell Inc. is analyzing an investment for a new product expected to have annual sales of 100,000
units for the next 5 years and then be discontinued. New equipment will be purchased for
₱1,200,000 and cost ₱300,000 to install. The equipment will be depreciated on a straight-line basis
over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth
year, it will cost ₱100,000 to remove the equipment, which can be sold for ₱300,000. Additional
working capital of ₱400,000 will be required immediately and needed for the life of the product.
The product will sell for ₱80, with direct labor and material costs of ₱65 per unit. Annual indirect
costs will increase by ₱500,000. Kell’s effective tax rate is 40%.

In a capital budgeting analysis, what is the expected total cash flow at the fifth year of operations
that Kell should use to compute the net present value?

ANSWER: P1,120,000

11. Determine how many statement(s) below is/are true:

Statement I: If a firm finances with only debt and common equity, and if its equity multiplier is 3.0,
then its debt ratio must be 0.667.
Statement II: One problem with ratio analysis is that relationships can be manipulated. For
example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the
funds to build up our cash account would cause the current ratio to increase.
Statement III: Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its
debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this
information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

ANSWER: Only one statement

12. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be
P301,770, operating costs to be P266,545, assets to be P200,000, and its tax rate to be 35%. Under
Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be
8.8%, but the TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that
met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest
rate, and the tax rate would all remain constant, by how much would the ROE change in response to
the change in the capital structure?

ANSWER: 3.83%

Clincher Round Theory – 20 seconds

Problem – 30 seconds

1. Which of the following activity bases would be the most appropriate for gasoline costs of a delivery
service?
a. Number of trucks employed
b. Number of miles driven
c. Number of trucks in service
d. Number of packages delivered
ANSWER: b

2. Which of the following describes the behavior of the fixed cost per unit?
a. Decreases with increasing production
b. Decreases with decreasing production
c. Remains constant with changes in production
d. Increases with increasing production

ANSWER: a

3. Ingram Co. manufactures office furniture. During the most productive month of the year, 3,500
desks were manufactured at a total cost of P84,400. In its slowest month, the company made 1,100
desks at a cost of P46,000. Using the suitable method of cost estimation, total fixed cost is
____________.

ANSWER: P28,400