EASTERN SAMAR STATE UNIVERSITY

College of Business Management and Accountancy

Borongan City, Eastern Samar

MIDTERM EXAM
MANAGEMENT ACCOUNTING, PART 1
Student Number: __________________________________

I. Designate the best answer for each of the following questions and write it beside each item number using
permanent ink. Use CAPITAL LETTERS and strictly no erasures. GOD BLESS!

1. One of the ways managerial accounting differs from financial accounting is that managerial accounting
a. is bound by generally accepted accounting principles. c. classifies information in different ways.
b. does not use financial statements. d. deals only with economic events.
2. Which activity is NOT normally performed by managerial accountants?
a. Assisting managers to interpret data in managerial accounting reports.
b. Designing systems to provide information for internal and external reports.
c. Gathering data from sources other than the accounting system.
d. Deciding the best level of inventory to be maintained.
3. Which statement is true for a manufacturer?
a. It cannot use the contribution-margin format of the income statement.
b. Many costs vary with production activities, not with sales.
c. The concepts of fixed and variable costs do not apply.
d. Cost-volume-profit analysis is not appropriate.
4. Which cost is NOT subtracted from selling price to calculate contribution margin per unit?
a. Variable manufacturing overhead. c. Variable selling expenses.
b. Direct labor. d. Fixed manufacturing overhead.
5. Which cost is most likely to be avoidable in deciding whether to shut down one of the four assembly lines in a factory?
a. Depreciation on the factory building.
b. Salaries of maintenance workers who service all assembly lines.
c. Power used to operate equipment on the assembly line.
d. Heat and light for the building.
6. Managerial accounting applies to each of the following types of businesses except
a. service firms. c. merchandising firms.
b. Managerial accounting applies to all types of firms. d. manufacturing firms.
7. A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant
capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of
product?
a. Variable selling expenses c. Fixed factory overhead
b. Direct labor d. Contribution margin of additional units

8. In determining whether planned goals are being met, a manager is performing the function of
a. planning. b. follow-up. c. directing. d. controlling.

9. Two costs at Watson, Inc. appear below for specific months of operation.
Month Amount Units Produced
Delivery costs January P 40,000 40,000
February 55,000 60,000
Utilities January P 84,000 40,000
February 126,000 60,000
Which type of costs are these?
a. Delivery costs and utilities are both variable. c. Delivery costs and utilities are both mixed.
b. Utilities are mixed and delivery costs are variable. d. Delivery costs are mixed and utilities are variable.

10. The increased use of automation and less use of the work force in companies has caused a trend towards an increase
in
a. both variable and fixed costs. c. fixed costs and a decrease in variable costs.
b. variable costs and a decrease in fixed costs. d. variable costs and no change in fixed costs.

11. Which of the following costs are variable?

Cost 10,000 Units 30,000 Units
1. P100,000 P300,000
2. 40,000 240,000
3. 90,000 90,000
4. 50,000 150,000
a. 1 and 2 b. 1 and 4 c. only 1 d. only 2

12. Why is identification of a relevant range important?

a. It is required under GAAP.
b. Cost behavior outside of the relevant range is not linear, which distorts CVP analysis.
c. It directly impacts the number of units of product a customer buys.
 d. It is a cost that is incurred by a company that must be accounted for.

13. Wynne Company's high and low level of activity last year was 60,000 units of product produced in May and 20,000
units produced in November. Machine maintenance costs were P78,000 in May and P30,000 in November. Using
the high-low method, determine an estimate of total maintenance cost for a month in which production is expected
to be 45,000 units.
a. P67,500 b. P72,000 c. P58,500 d. P60,000
14. Which of the following is not true about the graph of a mixed cost?
a. It is possible to determine the amount of the fixed cost from the graph.
b. There is a total cost line on the graph.
c. The fixed cost portion of the graph is the same amount at all levels of activity.
d. The variable cost portion of the graph is rectangular in shape.

Use the following information for questions 1517.

Month Miles Total Cost
January 80,000 P 96,000
February 50,000 80,000
March 70,000 94,000
April 90,000 130,000
15. In applying the high-low method, which months are relevant?
a. January and February c. January and April
b. February and April d. February and March

16. In applying the high-low method, what is the unit variable cost?
a. P1.44
b. P1.25
c. P1.60
d. Cannot be determined from the information given.

17. In applying the high-low method, what is the fixed cost?

a. P17,500 b. P36,000 c. P14,000 d. P50,000

18. A division sold 200,000 calculators during 2008:

Sales P2,000,000
Variable costs:
Materials P380,000
Order processing 150,000
Billing labor 110,000
Selling expenses 60,000
Total variable costs 700,000
Fixed costs 1,000,000
How much is the contribution margin per unit?
a. $1.00 b. $3.50 c. $8.50 d. $6.50
19. At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are $32,000. How much is the
selling price per unit?
a. $43.50 b. $11.50 c. $16.00 d. Not enough information

20. Select the correct statement concerning the cost-volume-profit graph at right:
a. The point identified by "B" is the break-even point.
b. Line F is the variable cost line.
c. At point B, profits equal total costs.
d. Line E is the total cost line.

21. A cost that does not affect a decision is called an

a. opportunity cost.
b. incremental cost.
c. avoidable cost.
d. irrelevant cost.
22. Which of the following describes one aspect of incremental analysis?
a. Both costs and revenues that stay the same between alternate courses of action will be analyzed.
b. Both costs and revenues that differ between alternate courses of action will be analyzed.
c. All costs and revenues, regardless if they stay the same or differ between alternate courses of action, will be
analyzed.
d. Only costs relating to the decisions at hand are analyzed.
23. For which of the following is incremental appropriate?
a. Acceptance of a special order and a make-or-buy decision
b. A retain or replace equipment decision and CVP analysis
c. A sell or process further decision and allocation of indirect costs
d. Elimination of an unprofitable segment and allocation of indirect costs

24. Specik, Inc. is considering the following alternatives:

Alternative 1 Alternative 2
Revenues $120,000 $120,000
 Variable costs 60,000 70,000
Fixed costs 35,000 39,000
Which of the following are relevant in choosing between the alternatives?
a. Variable costs c. Revenues
b. Fixed costs d. Variable costs and fixed costs
25. Sorrento Companys plant is operating at less than full capacity. The company just received a one-time opportunity to
accept an order at a special price below its usual price. The special price exceeds its variable costs. Therefore,
which statement is true?
a. Fixed costs are relevant.
c. The order will likely be accepted.
b. The order will likely be rejected.
d. Sorrento should expand its plant capacity before accepting the order.
26. For which of the following decisions are
The decision to make or The decision to keep or opportunity costs relevant?
buy the needed part drop a product line
a. Yes Yes
b. Yes No
c. No Yes
d. No No

27. The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use
is:
a. the variable manufacturing cost of the component. c. the total manufacturing cost of the component.
b. the fixed manufacturing cost of the component. d. zero.

Fixed overhead that will Freight charges paid by 28. In deciding whether to manufacture a part or buy
continue even if the part the purchaser if the part it from an outside supplier, which of the following
is bought from an is bought form an outside costs are irrelevant?
outside supplier supplier
a. Yes Yes
b. Yes No
c. No Yes
d. No No

29. Sheela Dairy Corporation buys unprocessed cows' milk from local farmers. At the dairy, this unprocessed milk is
broken down into cream and low-fat milk. The cream can be sold at this point or can be further processed into butter.
Which of the following would be relevant in the decision to further process the cream into butter?

a. the amount paid to the farmers to purchase the unprocessed milk.

b. the cost of breaking down the unprocessed milk into cream and low-fat milk.
c. the portion of corporate fixed expenses that are currently being allocated to cream.
d. none of these.

30. In a plant operating at capacity:

a. every machine and person in the plant is working at the maximum possible rate.
b. only some specific machines or processes are operating at the maximum rate possible.
c. profits are maximized.
d. managers should produce those products with the highest contribution margin in order to deal with the
constrained resource.

31. Vanikoro Corporation currently has two divisions which had the following operating results for last year:

Cork Division Rubber Division

Sales P600,000 P300,000
Variable Costs 310,000 200,000
Contribution Margin 290,000 100,000
Fixes Cost for the Division 110,000 60,000
Segment Margin 180,000 40,000
Allocated Corporate Fixed Costs 100,000 50,000
Net Operating Income(Loss) P80,000 P(10,000)

Since the Rubber Division sustained a loss, the president of Vanikoro is considering the elimination of this division. All of
the fixed costs for the division could be eliminated if the division was dropped. If the Rubber Division was dropped at the
beginning of last year, how much higher or lower would Vanikoro's total net operating income have been for the year?
a. P10,000 higher b. P40,000 lower c. P50,000 higher d. P100,000 lower
32. A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The
contribution margin in the department is P50,000 per year. Fixed expenses charged to the department are P65,000 per
year. It is estimated that P40,000 of these fixed expenses could be eliminated if the department is discontinued. These
data indicate that if the department is discontinued, the company's overall net operating income would:
a. decrease by P25,000 per year c. increase by P25,000 per year
b. decrease by P10,000 per year d. increase by P10,000 per year

33. It costs Fortune Company P10 of variable and P4 of fixed costs to produce one bathroom scale, which normally sells
for P28. A foreign wholesaler offers to purchase 1,000 scales at P12 each. Fortune would incur special shipping costs
of P1 per scale if the order were accepted. Fortune has sufficient unused capacity to produce the 1,000 scales. If the
special order is accepted, what will be the effect on net income?
a. P1,000 increase c. P1,000 decrease
b. P2,000 decrease d. P12,000 increase

Use the following information for questions 34 and 35

A companys unit costs based on 100,000 units are:

Variable costs P50
Fixed costs 20
The normal unit sales price per unit is P110. A special order from a foreign company has been received for 5,000 units at
P90 a unit. In order to fulfill the order, 3,000 units of regular sales would have to be foregone.

34. The opportunity cost associated with this order is

a. P150,000. b. P330,000. c. P180,000. d. P270,000.

35. The incremental profit (loss) from accepting the order would be
a. P20,000. b. P(100,000). c. P120,000. d. P(60,000).

Use the following information for two questions 35 and 36.

Martin Company incurred the following costs for 50,000 units:

Variable costs P180,000
Fixed costs 240,000
Martin has received a special order from a foreign company for 5,000 units. There is sufficient capacity to fill the order
without jeopardizing regular sales. Filling the order will require spending an additional P8,500 for shipping.

35. If Martin wants to break even on the order, what should the unit sales price be?
a. P10.10 b. P5.30 c. P3.60 d. P8.40

36. If Martin wants to earn P8,000 on the order, what should the unit price be?
a. P3.30 b. P11.70 c. P5.20 d. P6.90

37. What of the following would not be relevant in a make-or-buy decision?

a. Unavoidable variable costs c. Incremental fixed costs
b. Opportunity costs d. Avoidable fixed cost

38. What is the nature of an opportunity cost?

a. It is always variable. c. It is a potential benefit.
b. It is included as part of cost of goods sold. d. It is a sunk cost.

Use the following information for questions 39 and 40.

Hermantic, Inc. can produce 100 units of a component part with the following costs:
Direct Materials P45,000
Direct Labor 20,000
Variable Overhead 48,000
Fixed Overhead 33,000

39. If Hermantic, Inc. purchases the components externally for P120,000, by what amount will its total costs change?
a. An increase of P120,000 c. An increase of P7,000
b. An increase of P26,000 d. A decrease of P33,000

40. If Hermantic, Inc. can purchase the components externally for P132,000 and only P12,000 of the fixed costs can
be avoided, what is the correct make-or-buy decision?
a. Make and save P2,000 c. Buy and save P2,000
c. Make and save P7,000 d. Buy and save P20,000

41. Which of the following is NOT a type of absorption costing?

a. Direct costing. b. Actual costing. c. Normal costing. d. None of the above.

42. Variable costing is UNACCEPTABLE for

 a. managerial accounting. c. financial accounting.
b. transfer pricing. d. reporting by product lines for internal purposes.

43. A criticism of variable costing for managerial accounting purposes is that it

a. is not acceptable for product line segmented reporting.
b. does not reflect cost-volume-profit relationships.
c. overstates inventories.
d. might encourage managers to emphasize the short term at the expense of the long term.

44. Absorption costing differs from variable costing in that

a. standards can be used with absorption costing, but not with variable costing.
b. absorption costing inventories are more correctly valued.
c. production influences income under absorption costing, but not under variable costing.
d. companies using absorption costing have lower fixed costs.

45. Which method gives the lowest inventory cost per unit?
a. Variable costing.
b. Absorption costing using normal activity to set the standard fixed cost.
c. Absorption costing using practical capacity to set the standard fixed cost.
d. Actual absorption costing.

46. Calculating income under variable costing does NOT require knowing
a. unit sales.
b. unit variable manufacturing costs.
c. selling price.
d. unit production.

47. Inventoriable costs under absorption costing include

a. both fixed and variable production costs.
b. only variable production costs.
c. all production costs plus variable selling and administrative costs.
d. all production costs plus all selling and administrative costs.

48. Inventoriable costs under variable costing include

a. fixed and variable production costs.
b. variable production costs.
c. all production costs plus variable selling and administrative costs.
d. all production costs plus all selling and administrative costs.

49. Which of the following statements is true for a company that uses variable costing?
a. The unit product cost changes as a result of changes in the number of units manufactured.
b. Both variable selling costs and variable production costs are included in the unit product cost.
c. Net operating income moves in the same direction as sales.
d. Net operating income is greatest in periods when production is highest.

50. The gross margin for a manufacturing company is the excess of sales over:
a. cost of goods sold, excluding fixed manufacturing overhead.
b. all variable costs, including variable selling and administrative expenses.
c. cost of goods sold, including fixed manufacturing overhead.
d. variable costs, excluding variable selling and administrative expenses.

51. Weber Company computes net operating income under both the absorption costing approach and the variable costing
approach. For a given year the absorption costing net operating income was greater than the variable costing net
operating income. This fact suggests that:
a. variable manufacturing costs were less than fixed manufacturing costs.
b. more units were produced during the year than were sold.
c. more units were sold during the year than were produced.
d. common costs were greater than variable costs for the year.

52. Net operating income computed using variable costing would exceed net operating income computed using
absorption costing if:
a. units sold exceed units produced. c. units sold are less than units produced.
b. units sold equal units produced. d. the average fixed cost per unit is zero

53. The costing method that can be used most easily with break-even analysis and other cost-volume-profit techniques is:
a. variable costing. b. absorption costing. c. process costing. d. job-order costing.

54. ABC Company had 15,000 units in ending inventory. The total cost of those units under variable costing is
a. less than it is under absorption costing. c. the same as it is under absorption costing.
b. more than it is under absorption costing. d. any of the above.

55. York Company had P200,000 income using absorption costing. York has no variable manufacturing costs. Beginning
inventory was P15,000 and ending inventory was P22,000. Income under variable costing would have been
a. P178,000. b. P193,000. c. P200,000. d. P207,000.
56. Which variance CANNOT arise under variable costing?
a. variable overhead budget variance. c. variable overhead efficiency variance.
b. fixed overhead budget variance. d. fixed overhead volume variance.

57. Under variable costing there can be no

a. fixed overhead variances. c. fixed overhead budget variance.
b. fixed overhead volume variance. d. no fixed overhead

58. Rounder Industries manufactures a single product. Variable production costs are P20 and fixed production costs are
P300,000. Rounder uses a normal activity of 20,000 units to set its standard costs. Rounder began the year with
no inventory, produced 22,000 units, and sold 21,000 units. The volume variance under variable costing would be
a. P0. b. P20,000. c. P30,000. d. some other number.

59. Rounder Industries manufactures a single product. Variable production costs are P20 and fixed production costs are
P300,000. Rounder uses a normal activity of 20,000 units to set its standard costs. Rounder began the year with
no inventory, produced 22,000 units, and sold 21,000 units. The volume variance under absorption costing would
be
a. P0. b. P20,000. c. P30,000. d. some other number

60. Madison Industries manufactures a single product using standard costing. Variable production costs are P26 and fixed
production costs are P250,000. Madison uses a normal activity of 12,500 units to set its standard costs. Madison
began the year with 1,000 units in inventory, produced 11,000 units, and sold 11,500 units. Ending inventory under
variable costing would be
a. P10,000. c. $13,000.
c. P23,000. d. cannot be determined without further information.

II. Compute the requested information for each of the following situations (present supporting calculations in
good form).

1. Bach Inc. makes a single product that sells for P40. The standard variable manufacturing cost is P22 and the standard
fixed manufacturing cost is P8, based on producing 30,000 units. During the year Bach produced 28,000 units and
sold 26,000 units. Actual fixed manufacturing costs were P235,000; actual variable manufacturing costs were
P595,000. Selling and administrative expenses were P95,000. There were no beginning inventories.

a. Prepare a standard absorption costing income statement. (2 points)

b. Prepare a standard variable costing income statement. ( 2 points)

2. A recent accounting graduate from Duke University evaluated the operating performance of Fane Company's three
divisions. The following presentation was made to Fane's Board of Directors. During the presentation, the accountant
made the recommendation to eliminate the Southern Division, stating that total net income would increase by P20,000 as
shown in the analysis below.
Other Two Divisions Southern Division Total
Sales P1,000,000 P300,000 P1,300,000
Cost of Goods Sold 650,000 200,000 850,000
Gross Profit 350,000 100,000 450,000
Operating Expenses 100,000 120,000 220,000
Net Income P 250,000 P (20,000) P 230,000

Cost of goods sold is 75% variable and operating expenses are 70% variable. If the division is eliminated, 40% of the
fixed costs will be eliminated.

Instructions
Do you concur with the new accountant's recommendation? Present a schedule to support your answer.
(5 points)