Management Advisory Services - J.

Rocabo, CPA

OVERVIEW COST-VOLUME-PROFIT ANALYSIS

Management Advisory Services Breakeven Point
1. The following characterize management advisory services except 5. Scrambled Brain Company has fixed costs of P90,000. At a sales volume of P300,000, return
A. involve decision for the future on sales is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
B. broader in scope and varied in nature volume?
C. utilize more junior staff than senior members of the firm A. P120,000 C. P225,000*
D. relate to specific problems where expert help is required B. P200,000 D. P450,000

2. Which of the following is not classifiable as a management advisory service by CPA? 6. Bush Electronics, Inc. had the following sales results for 2004:
A. Systems design. C. Make or buy analysis. TV sets CD player Radios
B. Project feasibility study. D. Assistance in budget preparation. Peso sales component ratio 0.30 0.30 0.40
Contribution margin ratio 0.40 0.40 0.60
Managerial Accounting Bush Electronics, Inc. had fixed costs of P2,400,000.
3. The following are inherent to either management accounting or financial accounting: The break-even sales in pesos for Bush Electronics, Inc. are:
1. External report TV sets CD player Radios
2. Historical information
A. P1,800,000 P1,800,000 P3,600,000
3. Contribution approach income statement
B P1,800,000 P1,800,000 P1,600,000
4. Generally accepted accounting principles
C. P1,500,000 P1,500,000 P2,000,000
5. Prospective financial statements
D. P1,531,915 P1,531,915 P2,042,553
Which of the foregoing are related to management accounting and financial accounting,
respectively?
7. Glareless Company manufactures and sells sunglasses. Price and cost data are as follows:
Management Accounting Financial Accounting
Selling price per pair of sunglasses P25.00
A. 1, 2, 5 3, 4 Variable costs per pair of sunglasses:
B. 3, 5 1, 2, 4 Raw materials P11.00
C. 2, 3 1, 4, 5 Direct labor 5.00
D. 3 1, 2, 4, 5 Manufacturing overhead 2.50
Selling expenses 1.30
COST BEHAVIOR Total variable costs per unit P19.80
4. Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000 units of budgeted Annual fixed costs:
output and P280,000 for 60,000 units of budgeted output. Because of the need for additional Manufacturing overhead P192,000
facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for Selling and administrative 276,000
P50,000 units. How much is Carera’s budgeted variable cost per unit of output? Total fixed costs P468,000
A. P1.60 C. P3.00 Forecasted annual sales volume (120,000 pairs) P3,000,000
B. P1.67 D. P5.00 Income tax rate 40%
Glareless Company estimates that its direct labor costs will increase 8 percent next year. How
many units will Glareless have to sell next year to reach breakeven?
A. 97,500 units C. 83,572 units
B. 101,740 units D. 86,250 units
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Management Advisory Services - J. Rocabo, CPA

8. Madel Company manufactures a single electronic product called Walastik. Walastik sells for 11. Gorilla, Co. provides two products, M and W. M accounts for 60 percent of total sales, variable
P900 per unit. In 2000, the following variable costs were incurred to produce each     Walastik cost as a percentage of selling price are 60% for M and 85% for W. Total fixed costs are
device. P225,000. If fixed costs will increase by 30 percent, what amount of peso sales would be
Direct labor P180 necessary to generate an operating profit of P48,000?
Direct materials 240 A. P1,350,000 C. P1,135,000
Factory overhead 105 B. P486,425 D. P910,000
Selling costs 75
Total variable costs P600 12. Mount Park, Inc. had the following economic information for the year 2002:
Madel is subject to 40 percent income tax rate, and annual fixed costs are P6,600,000. Except Sales(50,000 units @ P20) P1,000,000
for an operating loss incurred in the year of incorporation, the firm has been profitable over the Variable manufacturing costs 400,000
last five years. Fixed costs 250,000
In 2001, a significant change in Madel’s production technology caused a 10% increase in Income tax rate 40 percent
annual fixed costs and a 20% unit cost increase in the direct labor component as a result of Mount Park budgets its 2003 sales at 60,000 units or P1,200,000. The company anticipates
higher skilled direct labor. However, this change permitted the replacement of a costly increased competition; hence, an additional P75,000 advertising costs is budgeted in order to
imported component with a local component. The effect was to reduce unit material costs by maintain its sales target for 2003.
25%. There has been no change in the Walastik selling price. What is the amount of peso sales needed for 2003 in order to equal the after-tax income in
The annual sales units required for Madel to breakeven are: 2002?
A. B. C. D. A. P1,125,000 C. P1,187,500
B. P1,325,000 D. P1,387,500
2000 22,000 22,000 14,000 14,000
2001 20,840 22,407 22,407 20,840
13. Larz Company produces a single product. It sold 25,000 units last year with the following
results:
Profit Planning Sales P625,000
9. Signal Co. manufactures a single product. For 2000, the company had sales of P90,000, Variable costs P375,000
variable costs of P50,000, and fixed costs of P30,000. Signal expects its cost structure and Fixed costs 150,000 525,000
sales price per unit to remain the same in 2001, however total sales are expected to jump by Net income before taxes P100,000
20%. If the 2001 projections are realized, net income in 2001 should exceed net income in Income taxes 40,000
2000 by Net income P 60,000
A. 100% C. 20% In an attempt to improve its product in the coming year, Larz is considering replacing a
B. 80% D. 50% component part in its product that has a cost of P2.50 with a new and better part costing P4.50
per unit. A new machine will also be needed to increase plant capacity. The machine would
10. Six-Two Convenience Store currently opens only Monday through Saturday. Six-Two is cost P18,000 with a useful life of 6 years and no salvage value. The company uses straight-
considering opening on Sundays. The annual incremental fixed costs of Sunday openings are line depreciation on all plant assets.
estimated at P39,000. Six-Two’s gross margin on sales is 25 percent. Six-Two estimates that If Larz wishes to maintain the same contribution margin ratio after implementing the changes,
60 percent of its Sunday sales to customers would be made on other days if the stores were what selling price per unit of product must it charge next year to cover the increased material
not open on Sundays. The one-day volume of Sunday sales that would be necessary for Six- costs?
Two to attain the same weekly operating income as the current six-day week is A. P27.00 C. P32.50
A. P6,000 C. P7,500 B. P25.00 D. P28.33
B. P5,000 D. P4,500
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Management Advisory Services - J. Rocabo, CPA

Point of Indifference 16. BM Motors, Inc. employs 40 sales personnel to market its line of luxury automobiles. The
14. Ravine Ski Company recently expanded its manufacturing capacity to allow it to produce up to average car sells for P1,200,000 and a 6% commission is paid to the salesperson. BM Motors
15,000 pairs of cross-country skis of either the mountaineering model or the touring model. is considering a change to a commission arrangement that would pay each salesperson a
The sales department assures management that it can sell between 9,000 and 13,000 pairs salary of P24,000 per month plus a commission of 2% of the sales made by that salesperson.
(units) of either product this year. Because the models are very similar, Ravine Ski will produce The amount of total car sales at which BM Motors would be indifferent as to which plan to
only one of the two models. The information below was compiled by the accounting select is
department. A. P22,500,000 C. P24,000,000
Mountaineering Touring B. P30,000,000 D. P12,000,000
Selling price per unit P880.00 P800.00
Variable costs per unit P528.00 P528.00 17. Zapatero, Inc. operates a chain of shoe stores around the country. The stores carry many
Fixed costs will total P3,696,000 if the mountaineering model is produced but will be only styles of shoes that are all sold at the same price. To encourage sales personnel to be
P3,168,000 if the touring model is produced. Ravine Ski is subject to a 40% income tax rate. aggressive in their sales efforts, the company pays a substantial sales commission on each pair
The total sales revenue at which Ravine Ski Company would make the same profit or loss of shoes sold. Sales personnel also receive a small basic salary.
regardless of the ski model it decided to produce is The following cost and revenue data relate to Store 9 and are typical of the company’s many
A. P8,800,000 C. P9,240,000 sales outlets:
B. P4,224,000 D. P6,864,000 Selling price P800
Variable expenses:
15. Valley of Fire Corporation has one department that produces three replacement parts for the Invoice costs P360
company. However, only one part can be produced in any month because of the adjustments Sales commission 140
that must be made to the equipment. The department can produce up to 15,000 units of any P500
one of the three parts in each month. The company expresses the monthly after tax Fixed expenses per year:
cost/volume/profit relationships for each part using an equation method. The format of the Rent P1,600,000
equations and the equation for each replacement part are given below: Advertising 3,000,000
(ATR) X ((SP – VC) x (U) – FC) Salaries 1,400,000
ATR = after-tax rate VC = variable cost FC = fixed costs Total P6,000,000
SP = selling price U = units The company is considering eliminating sales commissions entirely in its stores and increasing
Part Part Equations fixed salaries by P2,142,000 annually.
If this change is made, what will be the number of pairs of shoes to be sold by Store 9 to be
AL45 .6 ((P4.00 – P1.25) (U) – P33,400)
indifferent to commission basis?
BT65 .6 ((P4.05 – P2.55) (U) – P15,000)
A. 25,300 C. 18,505
GM17 .6 ((P4.10 - P2.00) (U) - P22,365)
B. 15,300 D. 21,000
The production and unit sales volume level at which Valley will be indifferent as to whether Part
BT62 or GM17 is produced is Sensitivity Analysis
A. 7,365 C. 10,380 18. If fixed costs increase while variable cost per unit remains constant, the contribution margin will
B. 4,092 D. 12,275 be
A. lower C. unchanged
B. higher D. unpredictable

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Management Advisory Services - J. Rocabo, CPA

19. Firm D and Firm S are competitors within the same industry. Firm D produces its product using 23. Candyman Company is a wholesale distributor of candy. The company services grocery,
large amounts of direct labor. Firm S has replaced direct labor with investment in machinery. convenience, and drug stores in Metro Manila. Small but steady growth in sales has been
Projected sales for both firms are fifteen percent less than in the prior year. Which statement achieved by the company over the past few years while candy prices have been increasing.
regarding projected profits is true? The company is formulating its plans for the coming fiscal year. Presented below are the data
A. Firm D will lose more profit than Firm S. used to project the current year’s after-tax net income of P110,400.
B. Firm S will lose more profit than Firm D. Manufacturers of candy have announced that they will increase prices of their products an
C. Firm D and Firm S will lose the same amount of profit. average of 15% in the coming year due to increases in raw material (sugar, cocoa, peanuts,
D. Neither Firm D nor Firm S will lose profit. etc.) and labor costs. Candyman Company expects that all other costs will remain at the same
rates or levels as the current year. Candyman is subject to 40 percent tax rate.
20. Last month, Zamora Company had an income of P0.75 per unit with sales of 60,000 units. Average selling price P4.00 per box
During the current month when the unit sales are expected to be only 45,000, there is a loss of Average variable costs
P1.25 per unit. Both the variable cost per unit and total fixed costs remain constant. The fixed Cost of candy P2.00 per box
costs amounted to Selling expenses 0.40 per box
A. P80,000 C. P247,500 Total P2.40 per box
B. P360,000 D. P210,000 Annual fixed costs
Selling P169,000
21. The Liberal Marketing Co., is expecting an increase of fixed costs by P78,750 upon moving Administrative 280,000
their place of business to the downtown area. Likewise it is anticipating that the selling price Total P440,000
per unit and the variable expenses will not change. At present, the sales volume necessary to Expected annual sales volume (390,000 boxes) P1,560,000
breakeven is P750,000 but with the expected increase in fixed costs, the sales volume If net income after taxes is to remain the same after the cost of candy increases but no increase
necessary to breakeven would go up to P975,000. Based on these projections, what were the in the sales price is made, how many boxes of candy must Candyman sell?
total fixed costs before the increase of P78,750? A. 480,000 C. 27,600
A. P341,250 C. P183,750 B. 400,000 D. 29,300
B. P262,500 D. P300,000
Margin of Safety
22. Machan Co.’s year-end income statement is as follows: 24. Claremont Company had is a manufacturer of its only one product line. It had sales of
Sales (20,000 units) P360,000 P400,000 for 2002 with a contribution margin ratio of 20 percent. Its margin of safety ratio was
Variable costs 220,000 10 percent. What are the company’s fixed costs?
Contribution margin P140,000 A. P72,000 C. P288,000
Fixed costs 105,000 B. P80,000 D. P320,000
Net income P 35,000
Management is unhappy with the results and plans to make some changes for next year. If 25. Lemery Corporation had sales of P120,000 for the month of May. It has a margin of safety ratio
management implements a new marketing program, fixed costs are expected to increase by of 25 percent, and after-tax return on sales of 6 percent. The company assumes its sales
P19,200 and variable costs to increase by P1 per unit. Unit sales are expected to increase by constant every month. If the tax rate is 40 percent, how much is the monthly fixed costs?
15 percent. What is the effect on income if the foregoing changes are implemented? A. P36,000 C. P432,000
A. Decrease of P21,200 C. Increase of P13,800 B. P90,000 D. P360,000
B. Increase of P1,800 D. Increase of P14,800

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Management Advisory Services - J. Rocabo, CPA

Degree of Operating Leverage The only personnel directly employed by the Pediatrics Department are supervising nurses, nurses,
26. A very high operating leverage indicates that a firm and aides. The hospital has minimum personnel requirements based on total annual patient days.
A. has high fixed costs Hospital requirements beginning at the minimum, expected level of operation follow:
B. has a high net income Annual Patient Days Aides Nurses Supervising Nurses
C. has high variable costs 10,000 – 14,000 21 11 4
D. is operating close to its breakeven point 14,001 – 17,000 22 12 4
17,001 – 23,725 22 13 4
27. The Didang Company has an operating leverage of 2. Sales for 2001 are P2,000,000 with a 23,726 – 25,550 25 14 5
contribution margin of P1,000,000. Sales are expected to be P3,000,000 in 2002. Net income 25,551 – 27,375 26 14 5
for 2002 can be expected to increase by what amount over 2001? 27,376 – 29,200 29 16 6
A. P250,000 C. P500,000 The staffing levels above represent full-time equivalents, and it should be assumed that the
B. 200 percent D. 40 percent Pediatrics Department always employs only the minimum number of required full-time equivalent
personnel.
Situational Annual salaries for each class of employee follow: supervising nurses, P18,000; nurses, P13,000;
Questions 28 thru 34 are based on the following information: and aides, P5,000. Salary expense for the year ended June 30 for supervising nurses, nurses, and
Calamba Hospital operates a general hospital but rents space and beds to separate entities for aides was P72,000, P169,000, and P110,000, respectively.
specialized treatment such as pediatrics, maternity, psychiatric, etc. Calamba charges each The Pediatrics Department operated at 100% capacity during 111 days of the past year. It is
separate entity for common services to its patients like meals and laundry and for all administrative estimated that during 90 of these capacity days, the demand average 17 patients more than
services such as billings, collections, etc. All uncollectible accounts are charged directly to the capacity and even went as high as 20 patients more on some days. The hospital has an additional
entity. Space and bed rentals are fixed for the year. 20 beds available for rent for the coming fiscal year.
For the entire year ended June 30, the Pediatrics Department at Calamba Hospital charged each
patient an average of P65 per day, had a capacity of 60 beds, operated 24 hours per day for 365 28. The variable expense per patient day is
days, and had revenue of P1,138,800. A. P15.08 C. P15.00
Expenses charged by the hospital to the Pediatrics Department for the year ended June 30 were: B. P12.50 D. P50.00
Basis of Allocation
Patient Days Bed Capacity 29. The contribution margin per patient day is
Dietary P 42,952 A. P49.92 C. P50.00
Janitorial P 12,800 B. P52.50 D. P52.00
Laundry 28,000
Lab, other than direct charges to patients 47,800 30. How many patient days are necessary to cover fixed costs for bed capacity and for supervisory
Pharmacy 33,800 nurses?
Repairs and maintenance 5,200 7,140 A. 9,500 C. 12,500
General administrative services 131,760 B. 11,500 D. 10,500
Rent 275,320
Billings and collections 40,000 31. The number of patient days needed to cover total costs is
Bad debt expense 47,000 A. 14,200 C. 15,820
Other 18,048 . B. 15,200 D. 14,220
P262,800 P453,000
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Management Advisory Services - J. Rocabo, CPA

32. If the Pediatrics Department rented an additional 20 beds and all other factors remain the same Net income before taxes P21,125
as in the past year, what would be the increase in revenue? Income taxes (40%) 8,450
A. P99,450 C. P105,450 Net income P12,675
B. P87,750 D. P89,750 Note: The average pizza sells for P2.50.

33. Continuing to consider the 20 additional rented beds, the increase in total variable cost applied 35. What is the tax shield on the noncash fixed costs?
per patient day is A. P3,200 C. P3,400
A. P22,935 C. P22,965 B. P14,950 D. P5,400
B. P22,950 D. P23,935
36. What is the breakeven point in number of pizzas that must be sold?
34. What is the increased fixed cost applied for bed capacity, given the increased number of beds? A. 25,929 C. 18,150
A. P151,000 C. P147,000 B. 23,569 D. 42,114
B. P173,950 D. P152,000
37. What is the cash flow breakeven point in number of pizzas that must be sold?
Questions 35 thru 37 are based on the following information. A. 19,529 C. 12,990
Ms. Casserole started a pizza restaurant in 1998. For this purpose a building was rented for P400 B. 21,284 D. 10,773
per month. Two women were hired to work full time at the restaurant and six college students were
hired to work 30 hours per week delivering pizza. This level of employment has been consistent. VARIABLE COSTING VS. ABSORPTION COSTING
An outside accountant was hired for tax and bookkeeping purposes, for which Ms. Casserole pays Absorption Costing
P300 per month. The necessary restaurant equipment and delivery cars were purchased with cash. 38. When a firm prepares financial reports by using absorption costing, it may find that
Ms. Casserole has noticed that expenses for utilities and supplies have been rather constant. Ms. A. profits will always increase with increase in sales.
Casserole increased her business between 1998 and 2001. Profits have more than doubled since B. profits will always decrease with decreases in sales.
1998. Ms. Casserole does not understand why profits have increased faster than volume. C. profit may decrease with increased sales even if there is no change in selling price and
A projected income statement for the year ended December 31, 2002, prepared by the accountant, costs.
is shown below: D. decreased output and constant sales result in increased profit.

Sales P95,000 39. The Bush Company has provided information concerning its projections for the coming year as
Cost of food sold P28,500 follows:
Wages & fringe benefits: Net sales P10,000,000
Restaurant help 8,150 Fixed manufacturing costs P 1,000,000
Delivery help 17,300 Bush projects variable manufacturing costs of 60% of net sales. Assuming no change in
Rent 4,800 inventory, what will the projected cost of goods sold be?
Accounting services 3,600 A. P5,000,000 C. P7,000,000
Depreciation: B. P6,000,000 D. P8,000,000
Delivery equipment 5,000
Restaurant equipment 3,000 40. Colger Company manufactures a single product using standard costing. Variable production
Utilities 2,325 costs are P12 and fixed production costs are P125,000. Colger uses a normal activity of
Supplies 1,200 73,875 12,500 units to set its standard costs. Colger began the year with 1,000 units in inventory,
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Management Advisory Services - J. Rocabo, CPA

produced 11,000 units, and sold 11,500 units. The standard costs of goods sold under 43. Black Forest, Inc. began operations on January 3. Standard costs were established in early
absorption costing would be January assuming a normal production volume of 160,000 units. However, Black Forest
A. P115,000 C. P242,000 produced only 140,000 units of product and sold 100,000 units at a selling price of P180 per
B. P132,000 D. P253,000 unit during the year. Variable costs totaled P7,000,000, of which 60% were manufacturing and
40% were selling. Fixed costs totaled P11,200,000, of which 50% were manufacturing and
41. The Trinkets Company estimated the following data for the coming year: 50% were selling. Black Forest had no raw materials or work-in-process inventories at
Fixed manufacturing costs P565,000 December 31. Actual input prices and quantities per unit of product were equal to standard.
Variable production costs per peso of sales Using absorption costing, Black Forest’s income statement would show:
Materials P0.125 Cost of Goods Sold at Standard Cost Overhead Volume Variance
Direct labor 0.150 A. P8,200,000 P800,000 Unf
Variable overhead 0.075 B. P7,200,000 P800,000 Fav
Variable selling costs per peso of sales 0.150 C. P6,500,000 P700,000 Unf
Trinkets estimates its sales for the coming year to be P2,000,000. D. P7,000,000 P700,000 Fav
The expected cost of goods sold for the coming year is
A. P1,265,000 C. P1,115,000 Absorption Costing & Variable Costing
B. P1,565,000 D. P 700,000 44. Southseas Corp. uses a standard cost system. The standard cost per unit of one of its products
are as follows:
42. Nirvana Co. employs a normal (nonstandard) absorption cost system. The information below is Direct Materials P4.00
from the financial records of the company for the year. Direct labor 6.00
 Total manufacturing costs were P2,500,000. Factory overhead
 Costs of goods of manufactured was P2,425,000. Variable 3.00
 Applied factory overhead was 30 percent of total manufacturing costs. Fixed (based on a normal capacity of 10,000 units) 2.00
 Factory overhead was applied to production at a rate of 80% of direct labor cost. Total 15.00
 Work-in-process inventory at January 1 was 75% of work-in-process inventory at
December 31. Beginning inventory 2,000 units
What are the amounts/value of the following cost elements and inventory? Production 8,000 units
Direct labor Direct materials Work-in-process inventory Units sold (selling price P50) 7,000 units
A. P750,000 P750,000 P225,000
B. P937,500 P812,500 P225,000 Actual costs:
C. P937,500 P812,500 P300,000 Direct materials P 35,000
D. P750,000 P750,000 P300,000 Direct labor 50,000
Variable overhead 23,000
Fixed 18,000
Variable selling and adm. 60,000
Fixed selling and adm. 35,000

Variances are closed to cost of sales monthly

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Management Advisory Services - J. Rocabo, CPA

How much are the net income under absorption costing and variable costing methods? Setting Standards
A. B. C. D. 48. Which of the following statements about the selection of standards is true?
Absorption P144,000 P143,000 144,000 142,000 A. Ideal standards tend to extract higher performance levels since they give employees
Variable 143,000 144,000 142,000 144,000 something to live up to.
B. Currently attainable standards may encourage operating inefficiencies.
45. Lord Industries manufactures a single product. Variable production costs are P10 and fixed C. Currently attainable standards discourage employees from achieving their full performance
production costs are P75,000. Lord uses a normal activity of 10,000 units to set its standard potential.
costs. Lord began the year with no inventory, produced 11,000 units and sold 10,500 units. The D. Ideal standards demand maximum efficiency which may leave workers frustrated, thus
volume variance under each product costing are: causing a decline in performance.
A. B. C. D.
49. The per-unit standard cost for variable overhead is normally based on the
Under Absorption Costing P3,750 P3,750 P7,500 P7,500
A. standard quantity of an input factor used in a unit of product.
Under Variable Costing P 0 P7,500 P0 P0
B. actual variable overhead cost incurred at the achieved level of production.
C. budgeted total cost for variable overhead divided by the number of units expected to be
Absorption Costing Income vs. Variable Costing Income produced.
46. Simple Corp. produces a single product. The following cost structure applied to their first year D. ratio of fringe benefits to the basic cost of labor.
of operations, 2000:
Variable Costs per Unit Annual Fixed Costs 50. Relevant Company had the following flexible budget for 2003 at 100 percent capacity of 30,000
SG&A P2.00 P14,000 direct labor hours.
Production 4.00 P20,000 Direct materials P800,000
Assume that during 2000 Simple Corp. manufactured 5,000 units and sold 3,800. There was Direct labor 600,000
no beginning or ending work-in-process inventory. How much larger or smaller would Simple Variable manufacturing overhead 360,000
Corp.’s income be if it uses absorption rather than variable costing? Fixed manufacturing overhead 288,000
A. The absorption costing income would be P6,000 larger What is the total manufacturing overhead application rate if the Relevant Company has to
B. The absorption costing income would be P6,000 smaller operate at 80 percent of the stated capacity?
C. The absorption costing income would be P4,800 larger* A. P24.00 C. P24.60
D. The absorption costing income would be P4,000 smaller B. P27.00 D. P21.60

STANDARD COSTING & VARIANCE ANALYSIS

Basic Concepts
47. Which of the following is a difference between a static budget and a flexible budget?
A. A flexible budget includes only variable costs; a static budget includes only fixed costs.
B. A flexible budget includes all costs, a static budget includes only fixed costs.
C. A flexible budget gives different allowances for different levels of activity, a static budget
does not.
D. There is no difference between the two.

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