1.

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.

2. Consider the equation X = Sales - [(CM/Sales) × (Sales)].

What is X?
a. net income
b. fixed costs
c. contribution margin
d. variable costs

3. 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.

4. 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.

5. 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

6. 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.

7. 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.

8. 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.

9. 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.

Problems 10-13
Claudine Corporation has the following standard costs associated
with the manufacture and sale of one of its products:

Direct material P3.00 per unit

Direct labor 2.50 per unit
Variable manufacturing overhead 1.80 per unit
Fixed manufacturing overhead 4.00 per unit
(based on an estimate of 50,000 units per year)
Variable selling expenses .25 per unit
Fixed SG&A expense P75,000 per year

During its first year of operations Claudine manufactured 51,000

units and sold 48,000. The selling price per unit was P25. All
costs were equal to standard.
10. Refer to Claudine Corporation. Under absorption costing,
the standard production cost per unit for the current year
was
a. P11.30
b. P 7.30
c. P11.55
d. P13.05

DM + DL + VFOH + FFOH = Standard Cost per Unit

 3.00 + 2.50 + 1.80 + 4.00 = P11.30

11. Refer to Claudine Corporation. The volume variance under

absorption costing is
a. $8,000 Favorable
b. $4,000 Favorable
c. $4,000 Unfavorable
d. $8,000 Unfavorable

1,000 favorable unit production variance * P4.00 fixed

factory overhead = P4,000 Favorable

12. Refer to Claudine Corporation. Under variable costing, the

standard production cost per unit for the current year was
a. P11.30
b. P7.30
c. P7.55
d. P11.55

DM + DL + VOH = Standard Production Cost per Unit

3.00 + 2.50 + 1.80 = P7.30

13. Refer to Claudine Corporation. Based on variable costing,

the income before income taxes for the year was
a. P570,600
b. P560,000
c. P562,600
d. P547,500

Sales: P1,200,000
Variable Expenses (362,400)
Contribution Margin 837,600
Fixed Expenses
Overhead (200,000)
(75,000)
Net Income P 562,600

14. Juan Company manufactures a western-style hat that sells

for P10 per unit. This is its sole product and it has
projected the break-even point at 50,000 units in the
coming period. If fixed costs are projected at P100,000,
what is the projected contribution margin ratio?
a. 80 percent
b. 20 percent
c. 40 percent
d. 60 percent

Fixed Costs = Contribution Margin at Breakeven Point

= P100,000
Breakeven Sales: P500,000
 CM Ratio: P(100,000/500,000) = 20%
15. The following information pertains to Jobelle Company’s
cost-volume-profit relationships:

Break-even point in units sold 1,000

Variable costs per unit P 500
Total fixed costs P150,000

How much will be contributed to profit before taxes by the

1,001st unit sold?
a. P650
b. P500
c. P150
d. P0

Fixed Cost = Contribution Margin = P150,000

Contribution Margin/Unit = Contribution Margin/Units
P150,000/1,000 units = P150/unit

16. Faith Company reported the following results from sales of

5,000 units of Product A for June:

Sales P200,000
Variable costs (120,000)
Fixed costs (60,000)
Operating income P 20,000

Assume that Ledbetter increases the selling price of

Product A by 10 percent in July. How many units of Product
A would have to be sold in July to generate an operating
income of P20,000?
a. 4,000 units
b. 4,300 units
c. 4,545 units
d. 5,000 units

If sales price per unit is increased by 10 percent, less

units will have to be sold to generate gross revenues of
$200,000.
Sales price per unit = P200,000/5,000 units = P40/unit
P40/unit * 1.10 = P44/unit
P(200,000 / 44/unit) = 4,545 units

17. The capital budgeting committee of the Lucky Steel

Corporation is evaluating the possibility of replacing its
old pipe-bending machine with a more advanced model.
Information on the existing machine and the new model
follows:

Existing machine New

machine
 Original cost P200,000
Market value now 80,000
Market value in year 5 0 20,000
Annual cash operating costs 40,000 10,000
Remaining life 5 yrs. 5 yrs.

The major opportunity cost associated with the continued

use of the existing machine is
a. P30,000 of annual savings in operating costs.
b. P20,000 of salvage in 5 years on the new machine.
c. lost sales resulting from the inefficient existing
machine.
d. P400,000 cost of the new machine.

18. Nel Industries is considering the purchase of a $100,000

machine that is expected to result in a decrease of $15,000
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

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

19. An investment project is expected to yield P10,000 in

annual revenues, has P2,000 in fixed costs per year, and
requires an initial investment of P5,000. Given a cost of
goods sold of 60 percent of sales, what is the payback
period in years?
a. 2.50
b. 5.00
c. 2.00
d. 1.25

Net cash flow = P10,000 - P6,000 - P2,000

Net cash flow = P2,000
Payback Period P5,000/P2,000 = 2.50 years

20. Sonjay Company has the following expected pattern of

collections on credit sales: 70 percent collected in the
month of sale, 15 percent in the month after the month of
sale, and 14 percent in the second month after the month of
sale. The remaining 1 percent is never collected.

At the end of May, Sonjay Company has the following

accounts receivable balances:
From April sales P21,000
From May sales 48,000
 Sonjay expected sales for June are P150,000. How much cash
will Sonjay Company expect to collect in June?

a. P127,400
b. P129,000
c. P148,600
d. P152,520
June sales (P150,000 * 70%) P105,000
May sales (160,000 *15%) 24,000
April sales (140,000 * 14%) 19,600
Total cash collections - June P148,600

21. Budgeted sales (in units) for the first six months for Mara
Corp. are listed below:

JANUARY FEBRUARY MARCH APRIL MAY JUNE

6,000 7,000 8,000 7,000 5,000 4,000

Mara Corp. has a policy of maintaining an inventory of

finished goods equal to 40 percent of the next month's
budgeted sales. If Mara Corp. plans to produce 6,000 units
in June, what are budgeted sales for July?
a. 3,600 units
b. 1,000 units
c. 9,000 units
d. 8,000 units

Beginning Inventory for June 1,600 units (4,000 * 40%)

Production in June 6,000 units
Deduct: June sales (4,000) units
Ending inventory for June 3,600 units
Budgeted Sales: 3,600/0.40 = 9,000 units

22. 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

23. 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

24. 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.

25. Which of the following costs should consider the tax shield
effect in computing the costs of capital?
a. Cost of debt
b. Cost of common stock
c. Cost of preferred stock
d. Cost of retained earnings

26. Profit under variable costing fluctuates with

a. Sales only
b. Production only
c. Both sales and production
d. Neither sales nor production

27. 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.

28. 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.
29. 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

30. 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.