GARCIA COLLEGE OF TECHNOLOGY

PRE-FINAL EXAMINATION
ACCTG 7

I. THEORY (2 POINTS EACH).

1. Determine the following statements as true or false.

Statement 1: Direct costing and variable costing are different terms that mean the same thing.
Statement 2: In a variable costing income statement, sales revenue is typically lower than in
absorption costing income statement.
Statement 1 Statement 2
a. False True
b. False False
c. True True
d. True False
2. The actual transfer price that a company sets
a. Nets out for the company as a whole
b. Can affect divisional behavior
c. can effect income taxes
d. all of the above
3. One of the assumptions limiting the reliability of break-even analysis is that
a. unit variable costs and total fixed costs will vary directly with the change in units sold.
b. there is a relevant range in which the various relationships are true for a given period of time.
c. productive efficiency will increase as more units are produced.
d. changes in inventory are significant in amount.
4. A number of techniques are commonly used in the analysis of capital budgeting decisions. Each
method involves the measurement of cash flows, except the:
a. Internal rate of return method
b. Payback period method
c. average rate of return method
d. net present value method
5. Other things being equal, income computed by the direct costing method will exceed that computed
by an absorption costing method if
a. fixed manufacturing cost increases
b. units sold exceed units produced
c. variable manufacturing costs increase
d. units produced exceed units sold
6. A sales budget is classified as
a. an operating budget
b. a financial budget
c. a flexible budget
d. a program budget
7. In capital expenditures decisions, the following are relevant in estimating operating costs except
a. Future costs
b. Cash costs
c. differential costs
d. historical costs
8. The criteria for evaluating the performance of responsibility centers should be carefully selected
because
a. The responsibility centers’ managers may find out what they are.
b. They must be approved by the BIR.
c. Shareholders’ require an explanation about such criteria.
d. The managers’ behavior can be affected by such criteria that are used to judge their performance.
 9. If sales exceed production, one would expect net income under the variable costing method to be
a. the same as net income under the absorption costing method
b. greater than net income under the absorption costing method
c. differing in as much as the difference between sales and production
d. less than net income under the absorption costing method
10. A flexible budget is
a. one that can be changed whenever a manager so desires
b. adjusted to reflect expected costs at the actual level of activity
c. one that uses the formula, total cost = cost per unit x units produced
d. the same as continuous budget
11. The capital budgeting model that is ordinarily considered the best model for long-range decision
making is the
a. Payback model
b. Accounting rate of return model
c. unadjusted rate of return model
d. discounted cash flow model
12. Identify the following statements as true or false
Statement 1: Reporting to various government agencies such as BIR, SEC, and SSS is a function of a
controller.
Statement 2: Interim financial reports issued by managerial accountants must conform to generally
accepted accounting principles.
Statement 3: The managerial accountant often deals with information that cannot be expressed in
numbers.
a. Statement 1 is true; Statement 2 is false
b. Statement 2 is true; Statement 1 is false
c. Statement 1 is true; Statement 2 is true
d. Statement 1 is false; Statement 3 is false
13. The objective of a transfer pricing system should be to
a. Maximize the transfer pricing
b. Minimize the transfer pricing
c. Maintain goal congruence between the divisions and the entire firm
d. None of the above
14. CVP analysis is more essential in the determination of the
a. relationship between revenues and costs at various levels of operations.
b. volume of operation in order to break-even.
c. variable costs necessary to equal fixed costs.
d. production level that is equal to sales.

For the next two items:

Profit Contribution
in P Margin Line

+ A

Volume
0 in units

B
 15. Point A on the profit-volume graph represents
a. the point where fixed costs equal sales.
b. the point where fixed costs equal variable costs
c. a volume level of zero units
d. the point where total costs equal total sales
16. The vertical distance from the dotted line to the contribution margin line denoted as B on the profit-
volume graph represents
a. the total contribution margin
b. the contribution margin per unit
c. the contribution margin rate
d. total sales
17. When an organization is operating above the break-even point, the degree or amount that revenues
may decline before losses are incurred is the
a. residual income rate
b. marginal rate of return
c. margin of safety
d. target rate of return
18. The preparation and translation of the plans and programs of a business into terms of the funds
needed to consummate such plans and programs, the subsequent determination of the most
economic ways to acquire such funds, the control over the use of funds and the appraisal of the results
of the expenditures is called
a. business forecasting
b. budgeting
c. flexible budgets
d. capital budgets
19. Which of the following is NOT correct?
At break-even,
a. profit equals zero
b. gross profit equals zero
c. sales equals total costs
d. fixed costs equals contribution margin
20. Which one of the following items would have to be included for a company preparing a schedule of
cash receipts and disbursements for the calendar year 2017?
a. A purchase order issued in December 2017 for items to be delivered in February 2018.
b. Dividends declared in November 2017 to be paid in January 2018 to shareholders of record as of
December 2017.
c. The amount of uncollectible customer accounts for 2017.
d. The borrowing of funds from a bank on a note payable taken out to pay the principal and interest
after a year, that is, June 2018.

II. SHORT PROBLEMS (3 POINTS EACH). SHOW YOUR COMPUTATION AND INDICATE YOUR LETTER ANSWER.

1. Gordon Company began its operations on January 1, 2019, and produces a single product that sells for
P10 per unit. Gordon uses an actual (historical) cost system. In 2019, 100,000 units were produced
and 80,000 units were sold. There was no work-in-process inventory at December 31, 2019.
Manufacturing costs and selling and administrative expenses for 2019 were as follows:
Fixed costs Variable costs
Raw materials P 2.00 per unit produced
Direct labor P 1.25 per unit produced
Factory overhead P 120,000 P 0.75 per unit produced
Selling and administrative P 70,000 P 1.00 per unit produced
What would be Gordon’s operating income for 2019 under the variable costing method?
a. P 114,000
b. P 210,000
c. P 234,000
d. P 330,000
2. Fely Company reported the following for the year just ended:
Budgeted sales P 3,000,000
Breakeven sales 2,100,000
Budgeted contribution margin 1,800,000
Cashflow breakeven 600,000
The company’s margin of safety is
a. P900,000
b. P2,400,000
c. P1,200,000
d. P1,500,000v

For the next 2 items

Hoopie Company sells a single product. The company’s sales and expenses for a recent month follow:
Total Per unit
Sales P 600,000 P 40
Less: Variable expenses 420,000 28
Contribution margin 180,000 P 12
Less: Fixed expenses 150,000
Net operating income P 30,000

3. What is the monthly break-even point in units sold?

a. 12,000 units
b. 12,500 units
c. 15,200 units
d. 11,000 units
4. How many units would have to be sold each month to earn a minimum target profit P18,000?
a. 14,500
b. 12,000
c. 14,000
d. 14,700

5. Diliman Republic Publishers Inc. is considering replacing an old press that cost P800,000 six years ago
with a new one that would cost P2,250,000. Shipping and installation would cost an additional
P200,000. The old press has a book value of P150,000 and could be sold currently for P50,000. The
increased production of the new press would increase inventories by P40,000, accounts receivable by
P160,000 and accounts payable by P140,000. Diliman Republic’s net initial investment for analyzing
the acquisition of the new press assuming a 35% income tax rate would be
a. P2,450,000
b. P2,425,000
c. P2,600,000
d. P2,250,000

6. During the year 2019, Catara Corporation manufactured 70,000 units of Product A, a new product.
Only 65,000 units were sold during the year. There was no beginning inventory. Manufacturing cost
per unit was P20.00 variable and P50.00 fixed. What would be the effect on net income if absorption
costing is used instead of variable costing?
a. Net income is P250,000 lower
b. Net income is P250,000 higher
c. Net income is P100,000 lower
d. Net income is P100,000 higher
7. Division Bah makes and sells a single product. Presently it sells 12,000 units per year to outside
customers at P24 per unit. The annual capacity is 20,000 units and the variable cost to make each unit
is P16. All selling expenses are fixed. Division Beh would like to buy 10,000 units a year from Division
Bah. The unit price that Division Bah should charge Division Beh, according to the transfer pricing
formula, is
a. P24.00
b. P21.40
c. P17.60
d. P16.00

8. A retail company determines its selling price by marking up variable costs by 60%. In addition, the
company uses frequent selling price markdown to stimulate sales. If the markdown average 10%, what
is the company contribution margin ratio?
a. 27.5%
b. 30.6%
c. 37.5%
d. 41.7%

9. The following results for the year pertain to the Western Division of Leopold Corporation.
Sales P 400,000
Taxes 60,000
Operating income after taxes 160,000
If Western’s average operating assets are P1,200,000 and their minimum required rate of return is 12
percent, what is Western Division’s return on investment?
a. 33.3%
b. 18.3%
c. 13.3%
d. 12.0%

10. Mark Company purchased a new machine on January 1 of this year for an amount of P90,000, with an
estimated useful life of 5 years and a salvage value of P10,000. The machine will be depreciated using
the straight-line method. The machine is expected to produce cash flows from operations, net of
income taxes, of P36,000 a year in each of the next 5 years. The new machine’s salvage value is
P20,000 in years 1 and 2, and P15,000 in years 3 and 4. What will be the bailout period for this new
machine?
a. 1.4 years
b. 2.2 years
c. 1.9 years
d. 3.4 years

11. B Corporation is preparing its factory overhead cost budget for third quarter. The management plans
to produce 200,000 units for the said quarter. Past experience has shown that the company’s product
is produced at the rate of 4 units per hour. Variable rates per direct labor are as follows:
Indirect materials P 0.76
Power 1.36
Repairs and maintenance 2.80
Other variable overhead 0.96
Total P 5.88
Total fixed overhead cost is budgeted at P147,200. For product costing purposes, a fixed factory
overhead rate of P3.20 per direct labor hour has been established.
How much is the total budgeted factory overhead for the quarter?
a. P417,680
b. P454,000
c. P441,200
d. P294,000
12. C Company is preparing its cash budget for next year. Budgeted sales for four months are as follows:
April P 80,000
May 160,000
June 240,000
July 80,000
Fifty percent of total sales is cash sales. The balance, or the credit sales, is collected in the following
manner:
70% in the month following the sale
20% in the second month following the sale
10% in the third month following the sale
How much is the budgeted cash receipts in July?
a. P144,000
b. P104,000
c. P288,000
d. P208,000

13. The Bravo, Inc. is considering the acquisition of a merchandise picking system to improve customer
service. Annual cash returns on investment cost P1.2million is P220,000. Useful life is estimated at 8
years. The company’s cost of capital is 14% and income tax rate is 35%. Calculate Bravo Inc.’s payback
reciprocal for this investment:
a. 20.50%
b. 18.3%
c. 11.9%
d. 22.2%

14. Budoy Company has developed a new project that will be marketed for the first time during the next
fiscal year. Although the Marketing Department estimates that 35,000 units could be sold at P36 per
unit, Budoy’s management has allocated only enough manufacturing capacity to produce a maximum
of 25,000 units of the new product annually. The fixed costs associated with the new product are
budgeted at P450,000 for the year, which includes P60,000 for depreciation on new manufacturing
equipment.
Data associated with each unit of product are presented below. Budoy is subject to a 30% income tax
rate.
Variable costs
Direct material P 7.00
Direct labor 3.50
Manufacturing overhead 4.00
Total variable manufacturing cost P 14.50
Selling expenses 1.50
Total variable cost P16.00
The maximum after-tax income that can be earned by Budoy Company from sales of the new product
during the next fiscal year
a. P35,000
b. P50,000
c. P110,000
d. P77,000
15. On January 1, Studios Company purchased a new machine for P100,000 to be depreciated over 5 years.
It will have no salvage value at the end of 5 years. For book and tax purposes, depreciation will be
P20,000 per year. The machine is expected to produce annual cash flow from operations, before
income taxes, of P40,000. Assume that Studios uses a discount rate of 12% and that its income tax rate
will be 40% for all years. The present value of P1 at 12% for five periods is 0.57, and the present value
of an ordinary annuity of P1 at 12% for five periods is 3.61. The NPV of the machine should be
a. P15,520 positive
b. P15,520 negative
c. P60,000 positive
d. P13,360 positive

16. Ahoo Company’s budget committee came up with the company’s budgeted sales for the first five
months of the budget year 2019:
January P 76,000
February 52,000
March 56,000
April 64,000
May 68,000
Ninety percent of total sales is on credit. Historically, Ahoo Company has had no significant bad debt
experience with its customers, and the receivables have been collected in the following manner:
40% in the month of sale
30% in the month following the sale
25% in the second month following the sale
5% in the third month following the sale
However, due to the deteriorating economic conditions brought about by the continuous increases in
oil prices and other external factors, the budget committee decided that the cash forecast should
include a provision for bad debts of 2% on credit sales beginning with the sales for the month of April.
Because of this change in collection policy, the total cash inflow from April sales will be
a. P62,720
b. P56,448
c. P62,848
d. P64,000

17. Yak Company produces and sells two types of deodorants: The Roll-on type and Spray type. For the
month of May, budgeted sales are:
Roll-on 5,000 boxes @ P500 per box
Spray 8,000 boxes @ P600 per box
The deodorants are sold through sales agents who receive sales commissions provided they meet their
sales quota for the month. The rates of commission and sales quota are as follows:
Rate of commission Sales quota
paid on total sales
Roll-on 5% P 2,000,000
Spray 6% 5,000,000
The sales commission that should be budgeted for the month of May is
a. P100,000
b. P125,000
c. P25,000
d. P400,000

18. An investment project is expected to yield P10,000 in annual revenues, will incur P2,000 in fixed cost
per year, and requires an initial inventory of P5,000. Given a cost of goods sold of 60% of sales and
ignoring taxes, what is the payback period in years?
a. 2.50
b. 5.00
c. 2.00
d. 1.25
19. The Hobbit Inc. is planning to spend P600,000 for a machine that it will depreciate on a straight-line
basis over a ten-year period with no terminal disposal price. The machine will generate cash flow from
operations of P120,000 a year. Ignoring income taxes, what is the accounting rate of return on the net
initial investment?
a. P5%
b. 12%
c. 10%
d. 15%

20. Sanofi Corporation invested P150,000 in a 3-year project. The company’s cost of capital is 10%. The
project’s cash flow, net income taxes, was P40,000 in the first year and P80,000 in the second year.
Information on present value and future value factors is as follows:
Period Present value of P1 at 10% Future value of P1 at 10%
1 0.909 1.10
2 0.826 1.21
3 0.751 1.33
If the rate of return were exactly 10%, what was the after-tax net cash inflow for the third year of the
project?
a. P35,717.56
b. P47,560.00
c. P63,328.89
d. P63,254.80