Name__________________________________Course & Year___________________________

1. Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced
by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of
P1,019, a selling price of P1,850 based on that figure, and a newly computed activity-
based total cost of P1,215. Which of the following statements is true?
a. All other things being equal, the company should consider a drop in its sales
price.
b. The company may have been extremely competitive in the marketplace from a
price perspective.
c. Product no. 519 could be labeled as being overcosted by the firm’s traditional
costing procedures.
d. If product no. 519 is undercosted by traditional accounting procedures, then all of
the company’s other products must be undercosted as well.
e. Generally speaking, the activity-based cost figure is “less accurate” than the
traditionally-derived cost figure.

2. Vanguard combines all manufacturing overhead into a single cost pool and allocates this
overhead to products by using machine hours. Activity-based costing would likely show
that with Vanguard’s current procedures,
a. All of the company’s products are undercosted.
b. The company’s high-volume products are undercosted.
c. All of the company’s products are overcosted.
d. The company’s high-volume products are overcosted.
e. The company’s low-volume products are overcosted.

3. Jackson manufactures products X and Y, applying overhead on the basis of labor hours.
X, a low-volume product requires a variety of complex manufacturing procedures. Y, on
the other hand, is both a high-volume product and relatively simplistic in nature. What
would an activity-based costing system likely disclose about products X and Y as a result
of Jackson’s current accounting procedures?
X Y
a. Undercosted Undercosted
b. Undercosted Overcosted
c. Overcosted Undercosted
d. Overcosted Overcosted
e. Costed Correctly Costed Correctly

4. Koski Manufactures products J and K, applying overhead on the basis of labor hours. J, a
low-volume product, requires a variety of complex manufacturing procedures. K, on the
other hand, is both a high-volume product and relatively simplistic in nature. What
would an activity-based costing system likely disclose about products J and K as a result
of Koski’s current accounting procedures?
Undercosted Overcosted
a. J,K -
b. - J,K
 c. J K
d. K J

5. Consider the following statements;

I. Product diversity creates costing problems because diverse products tend to utilize
manufacturing activities.
II. Overhead costs that are not incurred at the unit level create costing problems
because such costs do not vary with traditional application bases such as direct
labor hours or machine hours.
III. Product diversity typically exists when a single product is made in different
colors.
Which of the above statements is (are) true?
a. I only b. II only c. I and II d. I and III e. II and III

6. Consumption ratios are useful in determining:

a. The existence of product-line diversity.
b. Overhead that is incurred at the unit level.
c. If overhead-producing activities are being utilized effectively.
d. If overhead costs are being applied to products.
e. If overhead-producing activities are being utilized efficiently.
A
7. Widely varying consumption ratios;
a. Are reflective of product-line diversity.
b. Indicate an out-of-control production environment.
c. Dictate a need for traditional costing systems.
d. Work against the implementation of activity-based costing.
e. Create an unsolvable product-costing problem.

8. Moon Bay Manufacturing uses machine hours to apply manufacturing overhead to

products. This method of costing would likely be acceptable if the company has:
a. A large proportion of unit-level activities.
b. A large proportion of unit-level activities and fairly identical consumption ratios
among product lines.
c. A large proportion of unit-level activities and widely varying consumption ratios
among product lines.
d. A large proportion of nonunit-level activities.
e. A large proportion of nonunit-level activities and fairly identical consumption
ratios among product lines.

9. In comparison with a system that uses a single, volume-based cost driver, an activity-
based costing system is preferred when a company has:
a. A large proportion on nonunit-level activities.
b. Product-line diversity or a large proportion of nonunit-level activities.
c. Minimal product-line diversity and a small proportion of nonunit-level activities.
d. Existing variances from budgeted amounts.
e. A situation other than those noted above.
10. Consider the following factors:
I. The degree of correlation between consumption of an activity and consumption of
a particular cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of
measurement.
Which of these factors should be consider of a cost driver?
a. I only b. I and II c. I and III d. II and III e. I, II and III

11. If a firm has been experiencing increased sales while its inventory levels have decreased,
then
a. Its inventory turnover is decreasing, and its average age of inventory is increasing.
b. Its inventory turnover is decreasing and its average age of inventory is decreasing.
c. Its inventory turnover is increasing and its average age of inventory is increasing.
d. Its average turnover is increasing and its average age of inventory is decreasing.

12. Which of the following, considered independently of the others, would increase the cash
conversion cycle?
a. An increase in inventory turnover.
b. An increase in accounts receivable turnover.
c. An increase in accounts payable turnover.
d. A decrease in average age of inventory.

13. A negative cash conversion cycle basically means

a. The firm is illiquid, with serious cash flow problems
b. The firm collects on sales more slowly than it pays its payables.
c. The firm collects on sales more quickly than it pays its payables.
d. The firm’s current cash balance is negative.

14. A firm that moves from traditional inventory stocking methods to a just-in-time system
should expect to see
a. Reduced inventory levels.
b. Funds released for alternative uses.
c. Potentials for production halts.
d. All of the above.

15. If a firm is contemplating a relaxation of its credit standards, which of the following
might be expected to result?
a. Decreased unit sales.
b. Increased contribution margin.
c. Increased investment in accounts receivable.
d. Decreased bad debts expense.

16. Smart Products is considering changing its credit terms from net 30 to 2/10 net 30. The
firm’s financial managers need to evaluate.
 a. The increased investment in accounts receivable due to increased sales.
b. The reduced level of bad debt expense as customers pays sooner.
c. The increased contribution margin as customers pay sooner
d. All of the above

17. If Polyana were to increase its gross profit margin during the previous year, without
changing its accounts receivable level, then what would have happened to Polyana’s cash
conversion cycle?
a. Decrease.
b. Remain the same.
c. Increase
d. It is impossible to tell without more information.

18. A firm is trying to determine the optimum level for an operating asset which will have an
effect on financing costs as well as lost sales cost. The optimum level is that which
a. Minimizes the financing costs.
b. Minimizes the lost sales costs.
c. Minimizes the total amount of financing and lost sales costs.
d. It is impossible to determine without knowing more.

19. If we can ignore marketing and production costs, the firm can increase inventory
management efficiency by;
a. Increasing inventory levels.
b. Decreasing inventory levels.
c. Increasing a firm’s investment in inventory.
d. None of the above.

Problems: ABC Costing;

1. A company has identified the following overhead costs and cost drivers for the coming
year:
Overhead Item Cost Driver Budgeted Cost Budgeted Act. Level
Machine set up No. of setups P20,000 200
Inspection No. of inspections 130,000 6,500
Material Handling No. of materials moves 80,000 8,000
Engineering Engineering hours 50,000 1,000

The following information was collected on three jobs that were completed during the
year: Job 101 Job 102 Job 103
Direct Materials P5,000 P12,000 P8,000
Direct Labor P2,000 P 2,000 P 4,000
Units Completed 100 50 200
Number of setups 1 2 4
Number of Inspections 20 10 30
Number of Material Move 30 10 50
 Engineering hours 10 50 10

Budgeted direct labor cost was P100,000 and budgeted direct material cost was
P280,000.
a. If the company uses activity-based costing, how much overhead cost should be
allocated to Job 101?______________________
b. If the company uses activity-based costing, compute the cost of each unit of Job
102._____________________________

2. Action Company has two products: A and B. The annual production and sales of Product
A is 800 units and of Product B is 500 units. The company has traditionally used direct
labor-hours as the basis for applying all manufacturing overhead to products. Product A
requires0.3 direct labor hours per unit and Product B requires 0.2 direct labor hours per
unit. The total estimated overhead for next period is P92,023. The company is
considering to an activity-based costing system would have three overhead activity cost
pools—Activity 1, Activity 2 and General Factory—with estimated overhead costs and
expected activity as follows:
Estimated Expected Activity ‘
Activity Cost Pool Overhead Costs Product A Product B Total ‘
Activity 1 P14,487 500 600 1,100
Activity 2 64,800 2,500 500 3,000
General Factory 12,736 240 100 340

Note: The General Factory activity cost pool’s costs are allocated on the basis of direct
labor hours.
a. The predetermined overhead rate under the traditional costing system is
__________________
b. The overhead cost per unit of Product B under the traditional costing system
is_______________________
c. The predetermined overhead rate for Activity 1 under the activity-based costing
system is_______________________
d. The overhead cost per unit of Product A under the activity-based costing system
is______________________

3. Alaire Corporation manufactures several different types of printed circuit boards:

however, two of the boards account for the majority of the company’s sales. The first of
these boards, a Television (TV) circuit board, has been a standard in the industry for
several years. The market for this type of board is competitive and therefore price-
sensitive. Alaire plans to sell 65,000 of the TV boards in 2015 at a price of P150 per unit.
The second high volume product, a personal computer (PC) circuit board, is a recent
addition to Alaire’s product line. Because the PC board incorporates the latest
technology, it can be sold at a premium price, plans include the sale of 40,000 PC boards
at P300 per unit.
Alaire’s management group is meeting to discuss strategies for 2015, and the
current topic of conversation is how to spend the sales and promotion dollars for next
year. The sales manager believe that the market share for the TV board could be
expanded by concentrating Alaire’s promotional efforts in this area. In response to this
suggestion, the production manager said, “why don’t you go after market for the PV
board? The cost sheets that I get show a premium price for the PC board, selling it
should help overall profitability.”
Alaire uses a standard cost system, and the following data apply to the TV and PC
boards. TV Board PC Board
Direct Materials P80 P140
Direct Labor 1.5 hours 4.0 hours
Machine time 0.5 hours 1.5 hours

Variable factory overhead is applied on the basis of direct labor hours. For 2015,
variable factory is budgeted at P1,120,000, and direct labor hours are estimated at
280,000. The hourly rates for machine time and direct labor are P10 and P14
respectively. Alaire applies a material handling charge at 10% of material cost, thus
materials handling charge is not included in variable factory overhead. Total 2015
expenditures for materials are budgeted at P10,600,000.
Ed Welch, Alaire’s controller, believes that the management group proceeds with
the discussion about allocating sales and promotional dollars to individual products, they
should consider the activities involved in production. As Welch explained to the group,
“Activity-based costing integrates the cost of all activities, known as cost drivers, into
individual product costs rather than including these costs in overhead pools.” Welch has
prepared the schedule shown below to help the management group understand this
concept. Using this information,” Welch explained, “we can calculate an activity-based
cost for each TV board and each PC board and then compare it to the standard cost we
have been using. The only cost that remains the same for both cost methods is the cost of
direct materials. The cost drivers will replace the direct labor, machine time, and
overhead costs in the standard cost.”
Budgeted Cost Cost Driver Annual Act. for cost
driver
Materials overhead:
Procurement P400,000 No. of parts 4,000,000 parts
Production scheduling 220,000 No. of boards 110,000 boards
Packaging & Shipping 440,000 No. of boards 110,000 boards
P1,060,000
==========
Variable overhead:
Machine setup P446,000 No. of setups 278,750 setups
Hazardous waste disposal 48,000 Lbs. of waste 16,000 lbs.
Quality control 560,000 No. of inspections 160,000 inspections
General supplies 66,000 No. of boards 110,000 boards
P1,120,000
==========
Manufacturing:
Machine insertion P1,200,000 No. of parts 3,000,000 parts
Manual insertion 4,000,000 No. of parts 1,000,000 parts
Wave soldering 132,000 No. of boards 110,000 boards
 P5,332,000
=========
Required Per unit TV Board PC Boards
Parts 25 55
Machine insertions 24 35
Manual insertions 1 20
Machine setups 2 3
Hazardous waste 0.02 lbs. 0.35 lbs
Inspections 1 2

a. On the basis of standard costs, the total contribution budgeted for the TV board
is_______________________
b. On the basis of activity-based costs (ABC), the total contribution budgeted for the TV
is_______________________
c. On the basis of standard costs, the total contribution budgeted for the PC board
is_____________________
d. On the basis of activity-based costs, the total contribution budgeted for the PC board
is__________________________

Conditions under uncertainty and certainty:

1. A wine maker must decide whether to harvest grapes now or four weeks. Harvesting
now will yield 100,000 bottles of wine netting P2 per bottle. If the wine make waits and
the weather turns cold (probability 0.2), the yield will be cut in half but net P3 per bottle.
If the weather does not turn cold, the yield will depend on rain. With rain (probability
0.5), a full yield netting P4 per bottle will result. Without rain (probability 0.5), there
will still be a full 100,000-bottle yield, but the net will be only P3 per bottle.
a. The optimal expected value is __________________
b. If the wine maker decides to wait, what is the probability that the yield would be
less than harvesting now?_________________

2. A construction contractor has been invited to submit a bid on a large and complicated
construction project. The preparation of the bid proposal will cost about P20,000.
Management feels that if the company bids low enough to result in a net profit of
P50,000, there would be a 60% chance of getting the job. If the company bids high
enough to result in a P100,000 net profit, the chance of getting the contract would be only
20%. What should the company do.
a. Bid only high enough to allow for a P50,000 profit because the expected value of
the payoff is P22,000.
b. Bid high enough to allow for a P100,000 profit because the expected value of the
payoff is P4,000.
c. Bid high enough to allow for a P100,000 profit because the expected value of the
payoff is P20,000.
d. Make no bid.
3. Olex Company is considering proposal to introduce a new product Vee. An outside
marketing consultant prepared the following probability distribution describing the
relative likelihood of monthly sales volume levels and related income (loss) for Vee;
Monthly sales volume Probability Income (loss)
6,000 .10 P(70,000)
12,000 .20 10,000
18,000 .40 60,000
24,000 .20 100,000
30,000 .10 140,000
If Olex decides to market Vee, the expected value of the added monthly income will
be:______________________

4. Which of these is the perspective of the balanced scorecard that is at the top of a non-
profit organizations mission statement?
a. Financial perspective.
b. Internal business and production process perspective.
c. Learning and growth perspective.
d. Customer perspective.

5. Which of these is the perspective of the balanced scorecard that indicates whether the
company’s strategy and operations add value to shareholders?
a. Financial perspective
b. Internal business and production process perspective.
c. Learning and growth perspective.
d. Customer perspective.

6. Lanedo Company is a manufacturer of electronic components. The following

manufacturing information is available for the month of May.
Goods units manufactured 40,000
Value-added hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000
What is the throughput per hour?____________________
What is the process quality yield?____________________

7. Does operating income best measure a subunit’s financial performance? This question is
considered part of which step in designing an accounting-based performance measure?
a. Choose performance measures that align with top management’s financial goals.
b. Choose the time horizon of each performance measure.
c. Choose a definition for each performance measure.
d. Choose a measurement alternative for each performance measure.

8. The purpose of the balanced scorecard is best described as helping an organization.

 a. Develop customer relations.
b. Mobilize employee skills for continuous improvements in processing capabilities,
quality, and response times.
c. Introduce innovative products and services desired by target customers.
d. Translate an organization’s mission and strategy into a set of performance
measures that help to implement the strategy.

9. Which of these is the perspective of the balanced scorecard that is at the top of a non-
profit organizations mission statement?
a. Financial perspective.
b. Internal business and production process perspective.
c. Learning and growth perspective.
d. Customer perspective.

10. Which of these is the perspective of the balanced scorecard that indicates whether the
company’s strategy and operations add value to shareholders?
a. Financial perspective.
b. Internal business and production process perspective.
c. Learning and growth perspective.
d. Customer perspective.

11. Which of the following statements is false regarding financial and nonfinancial measures
of performance?
a. Nonfinancial measures may help to anticipate and explain financial results.
b. Financial results include aggregate measures.
c. Nonfinancial results may help to identify the causes of financial results.
d. Financial results are lead indicators of future success.

12. To discover where to make improvements in productivity, managers might do all of the
following except:
a. Calculate the ratio of output over input.
b. Compare return on sales to a competitor’s return on sales.
c. Use trend analysis.
d. Compare the asset turnover ratio for this accounting period to an industry norm.

13. All of the following are true regarding productivity except:

a. That an example of raw material productivity is weight of the final product to the
weight of the raw materials.
b. That the most widely accepted definition of productivity is the ratio of operating
income over sales.
c. That an example of machine productivity is a machine’s output per hour.
d. Machine productivity is an effective method of relating process results with
financial results.

14. Does operating income best measure a subunit’s financial performance? This question is
considered part of which step in designing an accounting-based performance measure?
 a. Choose performance measures that align with top management’s financial goals.
b. Choose the time horizon of each performance measure.
c. Choose a definition for each performance measure.
d. Choose a measurement alternative for each performance measure.

15. Engaging in which of the following will result in radical changes being made to an
organization’s processes?
a. Continuous improvement.
b. Benchmarking
c. Reengineering
d. Mass customization.

16. Of the following, which is the best reason for using activity-based costing?
a. To keep better track of overhead costs.
b. To more accurately assign overhead costs to cost pools so that these costs are
better controlled.
c. To better assign overhead costs to products.
d. To assign indirect service overhead costs to direct overhead cost pools.

17. Traditional overhead allocations result in which of the following situations?

a. Overhead costs are assigned as period costs to manufacturing operations.
b. High-volume products are assigned too much overhead, and low-volume products
are assigned too little overhead.
c. Low-volume products are assigned too much, and high-volume products are
assigned too little overhead.
d. The resulting allocations cannot be used for financial reports.

18. Activity-based costing (ABC) can eliminate cost distortions because ABC;
a. Develops cost drivers that have a cause-and-effect relationship with the activities
performed.
b. Establishes multiple cost pools.
c. Eliminates product variations.
d. Recognizes interactions between different departments in assigning support costs.

19. Which of the following is a sign that an ABC system may be useful?
a. There are small amounts of indirect costs.
b. Products make diverse demands on resources because of differences in volume,
process steps, batch size or complexity.
c. Products of company is less suited to produce and sell show small profits.
d. Operations staff agrees with accountants about the costs of manufacturing and
marketing products and services.

20. The primary benefit of ABC is it provides;

a. Better management decisions.
b. Enhanced control over overhead costs.
c. More cost pools.
 d. More accurate product costing.

21. Which of the following statements about activity-based costing is not true?
a. Activity-based costing is useful for allocating marketing and distribution costs.
b. Activity-based costing is more likely to result in major differences from
traditional costing systems if the firm manufactures only one product rather than
multiple products.
c. Activity-based costing seeks to distinguish batch-level, product-sustaining, and
facility-sustaining costs, especially when they are not proportionate to one
another.
d. Activity-based costing differs from traditional costing systems in that products are
not cross-subsidized.

22. HE Company has produced a pilot run of 50 units of a recently developed cylinder used in its
finished products. The company expects to produce and sell 800 units. The pilot run required
14.25 direct-labor hours for the 50 cylinders, averaging 0.285 direct-labor hours per cylinder. He
has experienced a significant learning curve on the direct labor hours needed to produce new
cylinders. As cumulative output doubles, say from 25 to 50 units for example, the average labor
time per unit declines by 20 percent. Past experience indicates that learning tends to cease by the
time 800 parts are produced. HE’s manufacturing costs for cylinders are as follows:
Direct Labor P120.00 per hour
Variable overhead 100.00 per direct labor hour
Fixed overhead 166.00 per direct labor hour
Direct material 40.50 per unit
HE has received a quote of P75 per unit from the LM Company for the additional 750 cylinders
needed. HE frequently subcontracts this type of work and has always been satisfied with the
quality of the units produced by LM. Recently, HE Company has been operating at considerably
less than full capacity.
a. How many total direct-labor hours for 800 cylinders (including the pilot run) are
expected?_______________________
b. What is the total incremental cost for HE to produce the 800 cylinders required (including
the pilot run)?_________________
c. The effect on profit of producing 750 units instead of buying them from LM Company
is?___________________