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Quality Costs
1. The following activities are typical in production management:
1. Warranty work
2. Labor and overhead incurred for rework of defective products
found by an inspector
3. Quality training program
4. The costs of a consumer complaint department
5. In-process inspection costs
6. Reinspection of reworked products
7. Downtime attributed to quality problems
8. Product recalls
9. Lower sales due to poor product performance
10.Quality audits
To what classification of quality costs do the foregoing described
costs belong?
Prevention
Appraisal
Internal Failure External
Failure
A.
3,7,10
3,5
2
1,4,8,9
B.
3,10
5
2,6,7
1,4,8,9
C.
10
3
2,5,6
1,4,7,8,9
D.
3,10
5
1,2,10
4,7,8,9
Pre-week Quizzer
Page 1 of 36
2002
84,000
P25
4,000
3,250
P5.50
P7.50
5. What are the materials productivity, and labor productivity ratio for
2001?
A.
B.
C.
D.
Materials
20.00
100.00
25.00
20.00
Labor
25.00
95.45
24.00
24.00
6. By how much did profits change as a result of changes in
productivity related to materials, and labor, respectively?
A.
B.
C.
D.
Materials
P(1,100)
P1,100
P(625)
P625
May 9, 2004
Labor
Pre-week Quizzer
P (825)
P 825
P 625
P625
Activity-Based Costing
7. Designing and changing are activities that are classified as:
A. Unit-level
C. Product-level
B. Batch-level
D. Facility-level
8. How are the following activities classified using ABC system?
1. Security
2. Product inspections
3. Insurance on the plant
4. Materials handling
5. Modifications made by engineering to the product design of
several products
6. Machine-related overhead
7. Set-ups
8. Providing space and utilities
9. Moving of inventory
Unit Level
Batch Level
Product Level Facility Level
A.
4,6,8
2,4,7
1,3
10
B.
2,6
4,5
1,7
3,10
C.
6
2,4,7,10
5
1,3,8
D.
2
1,6,7
10
3,4,5,8
9. Protex Company makes two products, X and Z. X is being
introduced this period, whereas Z has been in production for 2
years. For the period about to begin, 1,000 units of each product
are to be manufactured. The only relevant overhead item is the
cost of engineering change orders. X and Z are expected to require
eight and two change orders, respectively. X and Z are expected to
require 2 and 3 machine hours, respectively. The cost of a change
orderis P600.
If Protex applies engineering change order cost on the basis of
machine hours, the overhead cost per unit to be assigned to X and
Z, respectively, are
A. P2.40 and P3.60, respectively C. P4.80 and P3.60, respectively
B. P3.60 and P2.40, respectively D. P3.60 and P4.80, respectively
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analysis of the
estimates the
the individual
Special
windows
Units produced
25
25
Material moves per product line
5
15
Direct labor hours per unit
200
200
Budgeted materials handling costs
P50,000
Under each of the systems of costing, how much materials handling
costs should be allocated to one unit of wall mirrors?
A.
B.
C.
D.
Based on direct labor
P1,000
P 500
P2,000
P5,000
hours
Under activity-based
P 500
P1,000
P1,500
P2,500
costing
Life-Cycle Costing
11.Richards, Inc. developed the following budgeted life-cycle income
statement for two proposed products. Each products life cycle is
expected to be two years.
Product Product
Total
X
Y
Sales
P200,000 P200,0
P400,000
00
Cost of goods sold
( 120,00
(130,0
( 250,000)
0)
00)
Gross Profit
P 80,000
P
P150,000
70,000
Period expenses:
Research & development
( 70,000)
Marketing
( 50,000)
Life-cycle income
P 30,000
May 9, 2004
Pre-week Quizzer
Page 3 of 36
Pre-week Quizzer
units)
Cost of sales
Variable costs
P 2,000,000
Fixed costs
3,000,000
5,000,000
Income
before
P 3,000,000
taxes
Maddens net assets are P36,000,000. The peso sales that must be
achieved for Madden to earn a 10 percent after tax return on assets
would be
A. P8,800,000
C. P12,000,000
B. P16,000,000
D. P6,880,000
17.The following data relate to Homer Company which sells a single
product:
Unit selling price
P 20.00
Purchase cost per unit
11.00
Sales commission, 10% of selling price
2.00
Monthly fixed costs
P80,000
The firms salespersons would like to change their compensation
from a 10 percent commission to a 5 percent commission plus
P20,000 per month in salary. They now receive only commission.
The change in compensation plan should change the monthly
breakeven point by
A. 1,071 Increase
C. 1,538 Increase
B. 1,071 Decrease
D. 1,538 Decrease
18.Brunei Corp. is developing a new product, surge protectors for highvoltage electrical flows. The cost information for the product are:
Direct materials, P3.25 per unit; Direct labor, P4.00 per unit;
Distribution, P0.75 per unit. The company will also be absorbing
P120,000 of additional fixed costs associated with this new product.
A corporate fixed charge of P20,000 currently absorbed by other
products will be allocated to this new product.
How many surge protectors (rounded to the nearest hundred) must
Brunei sell at a selling price of P14 per unit to increase after-tax
income by P30,000? (effective income tax rate is 40%)
A. 10,700
C. 20,000
Page 4 of 36
19.A manufacturer produces a product that sells for P10 per unit.
Variable costs per unit are P6 and total fixed costs are P12,000. At
this selling price, the company earns a profit equal to 10% of total
peso sales. By reducing its selling price to P9 per unit, the
manufacturer can increase its unit sales volume by 25%. Assume
that there are no taxes and that total fixed costs and variable costs
per unit remain unchanged. If the selling price were reduced to P9
per unit, the profit would be
A. P3,000
C. P5,000
B. P4,000
D. P6,000
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May 9, 2004
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Advertising
3,000,000
Salaries
1,400,000
Total
P6,000,000
The company is considering paying the store manager a P60
commission on each pair of shoes sold in excess of break-even
point. If this change were made, what will be the stores before tax
profit or loss assuming 23,500 pairs of shoes are sold in a year?
A. P(360,000)
C. P840,000
B. P2,930,000
D. P1,330,000
Administration
Total fixed costs
Net income before income taxes
Income taxes (40%)
Net income after income taxes
Pre-week Quizzer
45,000
247,500
P157,500
(63,000)
P 94,500
Page 6 of 36
25.If the sales volume is estimated to be 2,100 tons in the next year,
and if the prices and costs stay at the same levels and amounts
next year, the after-tax net income that Davao can expect for the
next year is
A. P135,000
C. P110,25
B. P283,500
D. P184,500
26.Davao has a potential foreign customer that has offered to buy
1,500 tons at P450 per ton. Assume that all of Davaos costs would
be at the same levels and rates as last year. What net income after
taxes would Davao make if it took this order and rejected some
business from regular customers so as not to exceed capacity?
A. P297,500
C. P252,000
B. P211,500
D. P256,500
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Page 7 of 36
A. 10,000
B. 12,000
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C. 8,000
D. 10,500
Page 8 of 36
Pre-week Quizzer
42. STA Companys standard fixed overhead cost is P3 per direct labor hour
based on budgeted fixed costs of P300,000. The standard allows 2 direct labor
hours per unit. During 2001, STA produced 55,000 units of product, incurred
P315,000 of fixed overhead costs, and recorded 106,000 actual hours of direct
labor. What are the fixed overhead variances?
Fixed OH spending (budget)
variance
Fixed OH Volume variance
May 9, 2004
A.
P15,00
0U
P30,00
0F
B.
P33,00
0U
P30,00
0F
C.
D.
P15,00 P33,000
0U
U
P18,00 P18,000
0F
F
Page 9 of 36
Pre-week Quizzer
May 9, 2004
Page 10 of 36
Pre-week Quizzer
P405,000
P122,000
40,500 machine hours
Page 11 of 36
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Relevant Costing
56.An important concept in decision making is described as the
contribution to income that is forgone by not using a limited
resources in its best alternative use. This concept is called
A. Marginal cost
C. Potential cost
B. Opportunity costs
D. Relevant cost
57.If revenues are P210,000 under alternative A and P216,000 under
alternative B, and costs are P190,000 for A and P204,000 for B,
then using the basic approach in incremental analysis, incremental
revenues, costs, and net income, in comparing B to A are
respectively
A. P6,000, P(14,000), P(8,000)
C. P6,000, P14,000, P8,00
B. P(6,000), P14,000, P8,000
D. P(6,000), P(14,000), P(8,000)
58.For the year ended April 30, 2003, Leba Company incurred direct
costs of P800,000 based on a particular course of action. Had a
different course of action been taken, direct costs would have been
P650,000. In addition, Lebas fixed costs during the fiscal year were
P110,000.
The incremental (decremental) costs was:
A. P40,000
C. P(40,000)
B. P150,000
D. P(150,000)
59. Wallace Company produces 15,000 pounds of Product A and 30,000 pound of
Product B each week by incurring a common variable costs of P400,000.
These two products can be sold as is or processed further. Further processing
of either product does not delay the production of subsequent batches of the
joint product. Data gathering there two products are as follows:
Product Product
A
B
Selling price per pound without further
P
P 9.00
Processing
12.00
Selling price per pound with further
P
P 11.00
Processing
15.00
Total separate weekly variable costs of P50,00 P45,000
Further processing
0
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Pre-week Quizzer
May 9, 2004
Pre-week Quizzer
fixed
10,00
0
P 14,000
6,00
0
P24,000
P
(10,000)
One-fourth of each stores direct fixed expenses would continue
through December 31, 2001, if either store were closed.
Management estimates that closing the Town Store would result in
a ten percent decrease in Hall Store. Hall Store would not affect
Town Store sales. The operating results for November 2000 are
representative of all months.
A decision of Cosmo, Inc. to close the Town Store would result in a
monthly increase (decrease) in Cosmos operating income during
2001 of
A. P4,000
C. (P800)
B. (P10,800)
D. (P6,000)
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Page 15 of 36
Fixed costs
Profit
Investment:
Plant equipment
Working capital
Pre-week Quizzer
12.00
P 7.84
P19.51
14.88
P34.39
ROI P7.84/P34.39
22.80%
The division has a target ROI of 30 percent, and the manager has
asked you to determine how much sales volume the division would
need to reach that. He states that the sales mix is relatively
constant so variable costs should be close to 60 percent of sales,
fixed cost and plant and equipment should remain constant, and
working capital (cash, receivables, and inventories) should vary
closely with sales in the percentage reflected above. The peso
sales that the division needs in order to reach the 30 percent ROI
target is
A. P19,829,032
C. P57,590,322
B. P44,373,871
D. P59,510,000
78.Ace Division of Card, Inc. expects the following result for 2004:
Unit sales
70,000
Unit selling price
P
10
Unit variable cost
P
4
Total fixed costs
P 300,000
Total investment
P 500,000
The minimum required ROI is 15 percent, and divisions are
evaluated on residual income. A foreign customer has approached
Houstons manager with an offer to buy 10,000 units at P7 each.
Houston Division has capacity of 75,000 units and the foreign
customer will not accept fewer than 10,000 units. Accepting the
order would increase fixed costs by P10,000 and investment by
P40,000.
At the price of P7 offered by foreign customer, what is the
maximum number of units in regular sales that Houston could
sacrifice and still maintain its expected residual income?
A. 2,333
C. 2,667
B. 3,333
D. 3,667
Page 16 of 36
79. Family Company has two division, Ma and Pa. Information for each division
is as follows:
Ma
P20,000
P50,000
15%
10%
12%
Pa
P65,000
P300,000
18%
20%
12%
Pre-week Quizzer
May 9, 2004
Page 17 of 36
Direct materials
10,000
Direct labor
20,000
Variable Overhead
5,000
Fixed Overhead
2,500
Market price
P45,500
What is the best transfer price to avoid transfer price problems?
A. P45,500
C. P35,000
B. P30,000
D. P37,500
Pre-week Quizzer
P500,000
300,000
P200,000
75,000
P125,000
D.
166.7%
185.7%
500.0%
Master Budget
85.The method of budgeting which adds one months budget to the
end of the plan when the current months budget is dropped from
the plan refers to
A. Long-term budget
C. Incremental budget
B. Operations budget
D. Continuous budget
86.Jakarta Corporation plans to sell 200,000 units of Batik products in
October and anticipates a growth in sales of 5 percent per month.
The target ending inventory in units of the product is 80% of the
next months estimated sales. There are 150,000 units in inventory
as of the end of September. The production requirement in units of
Batik for the quarter ending December 31 would be
May 9, 2004
Page 18 of 36
Pre-week Quizzer
May 9, 2004
Credit Sales
Page 19 of 36
P 80,000
100,000
90,000
120,000
110,000
Pre-week Quizzer
Collection pattern is: 40% percent in the month of sale, 45% in the
month following the sale, and 10% two months following the sale.
The remaining 5% is expected to be uncollectible. The companys
total budgeted collection from April to June amounts to
A. P1,090,000
C. P1,468,500
B. P1,325,500
D. P1,397,500
91.Beta Co. has the following sales forecasts for the selected threemonth period in 2004
April
P120,000
May
70,000
June
80,000
Seventy percent of sales are collected in the month of the sale, and
the remainder are collected in the following month.
Accounts receivable balance (April 1, 2004)
P100,000
Cash balance (April 1, 2004)
50,000
Minimum cash balance is P50,000. Cash can be borrowed in
P10,000 increments from the local bank (assume no interest
charges).
What is the cash balance at the end of April, assuming that cash is
received only from customers and that P200,000 out during April?
A. P34,000
C. P54,000
B. P50,000
D. P55,000
Capital Budgeting
92.Which of the following would decrease the net present value of a
project?
A. A decrease in the income tax rate
B. A decrease in the initial investment
C. An increase in the useful life of the project
D. An increase in the discount rate
93.A weakness of the internal rate of return method for screening
investment projects is that it:
A. does not consider the time value of money
B. implicitly assumes that the company is able to reinvest cash
flows from the project at the companys discount rate
May 9, 2004
Page 20 of 36
Pre-week Quizzer
May 9, 2004
Page 21 of 36
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May 9, 2004
Page 22 of 36
1.33
1.464
1.611
2.100
3.310
4.641
6.105
P75,820
P122,100
Pre-week Quizzer
discount rate, the net present value of the cash flows associated
with just the tangible costs and benefits is a negative P184,350.
How large would the annual net cash inflows from the intangible
benefits have to be to make this a financially acceptable
investment?
A. P18,435
C. P35,000
B. P30,000
D. P37,236
Questions 105 thru 107 are based on the following information.
A firm must choose between leasing a new asset of purchasing it with
funds from a term loan. Under the purchase option, the firm will pay
five equal principal payments of P1,000 each and 6% interest on the
unpaid balance. Principal and interest are due at the end of each year
for five years. Alternatively, the firm can lease the asset for five years
at an annual rental cost of P1,400 with payments due at the beginning
of each year. The corporate tax rate is 35% and the appropriate after
tax cost of capital is 12%.
Page 23 of 36
B. 3.0 years
Pre-week Quizzer
D. 5.0 years
Page 24 of 36
98)
Profitability index
98%
101%
Internal rate of
11%
13%
return
Which project(s) should Investors, Inc. select
year under each budgeted amount of funds?
No
Budget P600,000 Available
Restriction
Funds
A. Projects 2, 3 & 4
Projects 3 & 4
B. Projects 1, 2 & 3
Projects 2, 3 & 4
C. Projects 1, 3 & 4
Projects 2 & 3
D. Projects 3 & 4
Projects 2 & 4
Pre-week Quizzer
106%
14%
105%
15%
113.Investors Inc. uses a 12% hurdle rate for all capital expenditures
and has done the following analysis for four projects for the
upcoming year.
Project Project 2 Project 3 Project
1
4
Initial cash outlay
P200,0
P298,00 P248,000 P272,0
00
0
00
Annual net cash
inflows
Year 1
P
P100,00 P 80,000
P
65,000
0
95,000
Year 2
70,000
135,000
95,000 125,00
0
Year 3
80,000
90,000
90,000 90,000
Year 4
40,000
65,000
80,000 60,000
Net present value (
3,7
4,276
14,064 14,662
May 9, 2004
Page 25 of 36
B. P16,762
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D. P22,800
Page 26 of 36
Pre-week Quizzer
cost of sales)
8 times
40%
were
C. P1,200,000
D. P672,000
Page 27 of 36
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May 9, 2004
Page 29 of 36
15 percent
1.5
Risk-free rate
The required market return is
A. 13.0 percent
B. 25.0 percent
Pre-week Quizzer
9.0 percent
C. 18.0 percent
D. 16.0 percent
140. The Taurus Companys last dividend was P3.00; its growth rate
is 6 percent and the stock now sells for P36. New stock can be sold
to net the firm P32.40 per share.
What is the Taurus Companys cost of retained earnings?
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
141. The Leonard Companys last dividend was P3.00; its growth rate
is 6 percent and the stock now sells for P36. New stock can be sold
to net the firm P32.40 per share.
A. 14.83 percent
C. 15.81 percent
B. 15.26 percent
D. 9.69 percent
142.Williams Co. is interested in measuring its overall cost of capital
and has gathered the following data. Under the terms described
below, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling P1,000, 8%, 20-year bonds
with annual interest payments. In selling the issue, an average
premium of P30 per bond would be received, and the firm must
pay flotation costs of P30 per bond. The after-tax cost of funds
is estimated to be 4.8%.
Williams can sell 8% preferred stock at P105 per share. The cost
of issuing and selling the preferred stock is expected to be P5
per share.
Williams common stock is currently selling for P100 per share.
The firm expects to pay cash dividends of P7 per share next
year, and the dividends are expected to remain constant. The
stock will have to be underpriced by P3 per share, and flotation
costs are expected to amount to P5 per share.
Williams expects to have available P100,000 of retained
earnings in the coming year; once these retained earnings are
Page 30 of 36
exhausted, the firm will use new common stock as the form of
common stock equity financing.
Williams preferred capital structure is
Long-term debt
30%
Preferred stock
20%
Common stock
50%
What are the corresponding weighted-average cost of capital under
each financing needs?
A.
B.
C.
D.
P200,000
6.5%
6.8%
4.5%
7.3%
P1,000,000
6.8%
4.8%
6.5%
9.1%
Pre-week Quizzer
what is the expected cost of
Inc.?
16.30 percent
17.44 percent
Quantitative Methods
145.Reina, Inc. has a target total labor cost of P3,600 for the first four
batches of a product. Labor is paid P10 an hour. If Soft expects an
80% learning curve, how many hours should the first batch take?
A. 360 hours
C. 140.63 hours
B. 57.6 hours
D. 230.4 hours
143. If the firms beta is 1.75, the risk-free rate is 8 percent, and the
average return on the market is 12 percent, what will be the firms
cost of equity using the CAPM approach?
A. 16.05 percent
C. 15.00 percent
B. 14.27 percent
D. 14.00 percent
147.
Page 31 of 36
Pre-week Quizzer
May 9, 2004
Page 32 of 36
path from a single time estimate for each event in a project. The
critical path:
A. Is the shortest path from the first event to the last event for a
project.
B. Is an activity within the path that requires the most number of
time.
C. Is the earliest time to complete the project.
D. Is the maximum amount of time an activity may be delayed
without delaying the total project beyond its target time.
Pre-week Quizzer
May 9, 2004
Page 33 of 36
Answer Key
1. B
11. D
2. B
12. A
3. B
13. A
4. B
14. D
5. A
15. B
6. B
16. C
7. C
17. A
8. C
18. D
9. A
19. A
10. A
20. B
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
C
B
A
B
A
C
A
D
D
A
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
A
B
B
A
A
C
A
D
B
A
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
C
A
B
C
C
B
C
A
B
A
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
B
A
D
A
D
C
D
B
D
C
91. C
92. D
93. C
94. C
95. D
96. C
97. B
98. A
99. B
100. D
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
A
B
A
B
A
B
A
B
A
C
C
D
A
B
B
A
C
D
C
D
151. C
May 9, 2004
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
111.
112.
113.
114.
115.
116.
117.
118.
119.
120.
A
A
C
B
B
C
B
C
D
B
C
C
A
D
A
D
C
A
B
C
152. D
121.
122.
123.
124.
125.
126.
127.
128.
129.
130.
C
A
B
D
A
C
A
A
A
D
153. A
131.
132.
133.
134.
135.
136.
137.
138.
139.
140.
A
C
A
D
A
C
D
A
A
A
141.
142.
143.
144.
145.
146.
147.
148.
149.
150.
B
A
B
A
B
B
B
C
A
B
C
A
C
D
C
D
D
C
B
C
Pre-week Quizzer
COMPREHENSIVE:
1. Gasco Co. is a very large company with common stock listed on the
Philippine Stock Exchange and bonds traded over the counter. As
of the current balance sheet, it has three bond issues outstanding:
P150 million of 10 percent series
2013
P50 million of 7 percent series
2007
P75 million of 5 percent series
2004
The vice president of finance is planning to sell P75 million of bonds
next year to replace the debt due to expire in 2004. Present
market yields on similar Baa-rated bonds are 12.1 percent. Gasco
also has P90 million of 7.5 percent noncallable preferred stock
outstanding, and it has no intentions of selling any preferred stock
at any time in the future. The preferred stock is currently priced at
P80 per share, and its dividend per share is P7.80.
The company has had very volatile earnings, but its dividends per
share have had a very stable growth rate of 8 percent and this will
continue. The expected dividend is P1.90 per share, and the
common stock is selling for P40 per share.
The companys
investment banker has quoted the following flotation costs to
Gasco: P2.50 per share for preferred stock and P2.20 per share for
common stock.
On the advice of its investment banker, Gasco has kept its debt at
50 percent of assets and its equity at 50 percent. Gasco sees no
need to sell either common or preferred stock in the foreseeable
future as it generated enough internal funds for its investment
needs when these funds are combined with debt financing. Gascos
corporate tax rate is 40 percent.
Compute the cost of capital for the following:
1. Bond (debt)
2. Preferred stock
3. Common equity in the form of retained earnings
4. New common stock
5. Weighted average cost of capital
2. Andres Company has a single product called Kad. The company
normally produces and sells 60,000 Kads each year at a selling
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price of P32 per unit. The companys unit costs at this level of
activity are given below:
Direct materials
P10.00
Direct Labor
4.50
Variable manufacturing overhead
2.30
Fixed manufacturing overhead
5.00 (P300,000 total)
Variable selling expenses
1.20
Fixed selling expenses
3.50 (P210,000 total)
Pre-week Quizzer
May 9, 2004
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Pre-week Quizzer
May 9, 2004
Page 36 of 36