THEORY

1) Which of the following is NOT a strategic issue related to Cost centers?

a. Dual allocation.
b. Budget slack.
c. Cost shifting.
d. Excessive short term focus.
(Blocher, 6th Ed)

2) Although a retail or service company may use either a cost center or a profit center for performance
evaluation, a not-for-profit organization is more likely to use be a cost center because:
a) revenue is difficult to measure.
b) profit is not permitted or possible
c) the cost center is easier to implement.
d) the organization is likely to focus on managing costs so as not to exceed revenues
(Blocher, 6th Ed)

3) Statement 1: Different companies, having different strategies, should have different balanced scorecard
even if they are in the same industry.
Statement 2: A balanced scorecard contains both customer and internal business process performance
measures since improvements in customer satisfaction should result in improvements in internal
business processes.
a) Statement 1 is True, Statement 2 is False
b) Statement 1 is False, Statement 2 is True
c) Both Statements are True
d) Both Statement are False
(Garrison, 12th Ed)

4) Which of the following would not be included in operating assets in return on investment calculations?
a) Cash
b) Accounts Receivable
c) Equipment
d) Factory building rented to another company
(Garrison, 12th Ed)

5) Which of the following is not true of a good balanced scorecard?

a) It tells the story of a company's strategy by articulating a sequence of cause-and-effect
relationships.
b) It helps to communicate corporate strategy to all members of the organization.
c) It identifies all measures, whether significant or small, that help to implement strategy.
d) It uses nonfinancial measures to serve as leading indicators of future financial performance.
(Horngren, 9th Ed)

6) Successful implementation of a cost leadership strategy will result in:

a) large favorable growth and price-recovery components
b) large favorable productivity and growth components
c) large favorable price-recovery and productivity components
d) only a large favorable growth component
(Horngren, 9th Ed)

7) Which of the following is a key factor to consider in deciding whether to make internal transfers, and,
if so, in setting the transfer price?
a) Is the selling unit operating at full capacity?
b) Is there an outside supplier?
c) Is the seller's variable cost less than the market price?
d) All of the above
(Blocher, 6th Ed)
8) Which of the following would produce a labor rate variance?
a) Selling expenses to sales ratio
b) Order processing time
c) Training dollars per employee
d) Customer retention
(Blocher, 6th Ed)

9) Which of the following is a measure for the learning and growth perspective of the balanced
scorecard?
a) An unfavorable variable overhead spending variance
b) Poor quality materials causing breakage and work interruptions
c) Use of persons with high hourly wage rates in tasks that call for low hourly wage rates
d) Excessive number of hours worked in completing a job
(Garrison, 12th Ed)

10) Statement 1: The price-recovery component of a change in operating income from one year to the next
measures the increase in operating income from selling more units of the product
Statement 2: The growth component of a change in operating income measures the effect of price
changes on revenues and costs
a) Statement 1 is True, Statement 2 is False
b) Statement 1 is False, Statement 2 is True
c) Both Statements are True
d) Both Statement are False
(Horngren, 9th Ed)

11) Identify the best description of the balanced scorecard's internal business processes perspective. To
achieve our firm's vision and strategy:
a) how do we lower costs?
b) how do we motivate employees?
c) how can we obtain greater profits?
d) what processes will increase value to customers?
(Horngren, 9th Ed)

12) An unfavorable production-volume variance:

a) measures the total economic gain or loss due to unused capacity
b) measures the amount of extra fixed costs planned for but not used
c) takes into account the effect of additional revenues due to maintaining higher prices
d) is not a good measure of a lost production opportunity
(Horngren, 9th Ed)

13) Division A of the Hickory Company, which is considered an investment center for performance
measurement purposes, has the following information pertaining to the current year:

The desired minimum rate of return for Division A is 15 percent.

a) Yes, because the project's ROI is equal than the division's current ROI
b) No, because the project's ROI is greater than the division's current ROI.
c) No, because the project's ROI is less than the division's current ROI.
d) Yes, because the project's ROI exceeds the desired minimum rate of return.
(Blocher, 6th Ed)
14) Which of the following statements is a good description of the variances that should be investigated
under the management by exception concept?
a) all variances should be investigated.
b) only unfavorable variances should be investigated
c) a small random sample of all variances should be investigated
d) unusually large favorable and unfavorable variances should be investigated
(Garrison, 12th Ed)

15) Poor quality materials could have an unfavorable effect on which of the following variances?
Labor Efficiency Variance Materials Quantity Variance
a) Yes Yes
b) Yes No
c) No Yes
d) No No
(Garrison, 12th Ed)

16) Successful implementation of a product differentiation strategy will result in:

a) a large favorable growth and price-recovery components
b) a large favorable price-recovery and productivity components
c) a large favorable productivity and growth components
d) only a large favorable growth component
(Horngren, 9th Ed)

17) Allocating service department costs to revenue-producing departments is an alternative to

a) responsibility accounting
b) the use of profit centers
c) the use of cost centers.
d) a transfer pricing system.
(Raiborn, 2nd Ed)

18) A favorable price variance for direct manufacturing labor might indicate that:
a) employees were paid more than planned
b) budgeted price standards are too tight
c) under skilled employees are being hired
d) an efficient labor force
(Horngren, 9th Ed)

19) Which of the following is NOT a method for developing or estimating the current market value of
assets for purposes of calculating return on investment (ROI)?
a) Gross Book Value.
b) Liquidation Value.
c) Replacement Cost.
d) All of the above
(Blocher, 6th Ed)

20) The fixed overhead production volume variance represents

a) a rough estimate of the cost under- or over-utilization of facilities or capacity
b) money lost or gained because of achieved production levels
c) information useful for short-term cost control
d) Both A and B
(Blocher, 6th Ed)

21) A national retail company has segmented its income statement by sales territories. If each sales
territory statement is further segmented by individual stores, which of the following will most likely
occur?
 a) some common fixed expenses in the sales territory segmented statement will become traceable
fixed expenses in the individual store segmented statement.
b) some traceable fixed expenses in the sales territory segmented statement will become common
fixed expenses in the individual store segmented statement.
c) the sum total of the individual stores' segment margins in each sales territory will be equal to the
segment margin for the sales territory.
d) both A and C are correct
(Garrison, 12th Ed)

22) Which of the following would produce a materials price variance?

a) an excess number of direct labor-hours worked in completing a job
b) an excess quantity of materials used
c) shipping materials to the plant by air freight rather than by truck
d) breakage of materials in production.
(Garrison, 12th Ed)

23) A transfer pricing system is also known as

a) investment center accounting.
b) a revenue allocation system
c) a charge-back system
d) responsibility accounting.
(Raiborn, 2nd Ed)

24) When analyzing the change in operating income, the strategy component of price-recovery will
increase when:
a) capacity is reduced
b) production efficiencies are successfully implemented
c) more units are sold
d) selling prices are increased
(Horngren, 9th Ed)

25) External factors considered in setting transfer prices in multinational firms typically do not include
a) actions of competitors of foreign subsidiaries
b) environmental policies of the host countries of foreign subsidiaries
c) the corporate income tax rates in host countries of foreign subsidiaries
d) foreign monetary exchange risks
(Raiborn, 2nd Ed)

26) Which of the following is a measure of the financial performance perspective of the balanced
scorecard?
a) Number of new manufacturing processes developed
b) Gross margin
c) Manufacturing defects
d) Customer satisfaction with speed of service
(Blocher, 6th Ed)

27) Controllable revenue would be included in a performance report for a:

Profit Center Cost Center
a) Yes Yes
b) Yes No
c) No Yes
d) No No
(Garrison, 12th Ed)
28) Variance analysis should be used:
a) as the sole source of information for performance evaluation
b) to encourage employees to focus on meeting standards
c) to understand why variances arise
d) to punish employees that do not meet standards
(Horngren, 9th Ed)

29) The market size variance and market share variance measure, respectively, the effect on operating
income of changes:
a) in the total market sizes of the firm's product and of a firm's proportion of the total market
b) of a firm's proportion of the total market and in the total market sizes of a firms product
c) in managements strategy
d) in percentage and in dollars
(Blocher, 6th Ed)

30) Statement 1: Under a responsibility accounting system, fewer expenses are charged against managers
the higher one moves upward in an organization.
Statement 2: If transfer prices are to be based on cost, then the costs should be actual costs rather than
standard costs
a) Statement 1 is True, Statement 2 is False
b) Statement 1 is False, Statement 2 is True
c) Both Statements are True
d) Both Statement are False
(Garrison, 12th Ed)

PROBLEM

Hoppen Corporation produces two products that it sells to the same market. Excerpted below are its
budgeted and actual operating results for the year just completed.

Industry volume was estimated to be 1,875,000 units at the time the budget was prepared. Actual industry
volume for the period was 2,500,000 units.

1. The market size variance is:

a. $167,500 favorable
b. $135,725 favorable
 c. $213,000 favorable
d. $173,240 favorable
(Blocher, 6th Ed)

2. The market share variance is

a. $119,280 unfavorable
b. $159,040 unfavorable
c. $124,600 unfavorable
d. $93,450 unfavorable
(Blocher, 6th Ed)

3. JKR, Inc. ends the month with a volume variance of $6,360 unfavorable. If budgeted fixed factory
O/H was $480,000, O/H was applied on the basis of 32,000 budgeted machine hours, and budgeted
variable factory O/H was $170,000, what were the actual machine hours (AH) for the month?
a. 32,424 b. 32,000 c. 31,687 d. 31,576

(CPAR Reviewer)

The Mileva Division of Einstein Company makes and sells only one product. Annual data for 2017 on the
Mileva Division's single product follow:
Unit selling price P50
Unit variable cost P30
Total fixed costs P200,000
Operating assets, 2016 P700,000
Newly acquired equipment P100,000
Minimum required rate of return 12%

4. If TR sells 20,000 units per year, the return on investment for the year should be
a. 28.57%
b. 25%
c. 26.67%
d. 12%
(Garrison, 9th Ed)

5. If TR sells 15,000 units per year, the residual income should be

a. P4,000
b. P9,000
c. P16,000
d. P12,000
(Garrison, 9th Ed)

6. Suppose the manager of Mileva desires an annual residual income of P50,000. In order to achieve this,
Mileva should sell how many units per year?
a. P17,000
b. P16,900
c. P17,300
d. P16,700
(Garrison, 9th Ed)

Hampton Manufacturing has one plant located in Belgium and another plant located in the U.S. The
Belgium plant manufactures a component used in a finished product manufactured at the U.S. plant.
Currently, the Belgium plant is operating at 70 percent capacity. In Belgium the income tax rate is 30
percent; in the U.S. the corporate income tax rate is 35 percent.

The market price of the component is $140 and the Belgium plants costs to manufacture the component
are as follows:
 Direct materials $15
Direct labor 25
Variable overhead 6
Fixed overhead 28

7. What is the minimum transfer price that the Belgium division would be willing to accept?
a. $ 140
b. $ 74
c. $ 68
d. $ 46
(Hansen & Mowen)

8. What is the maximum transfer price that the U.S. division would be willing to pay?
a. $ 140
b. $ 74
c. $ 68
d. $ 46
(Hansen & Mowen)

9. Which transfer price would be in the best interest of the overall corporation?
a. $ 140
b. $ 74
c. $ 68
d. $ 46
(Hansen & Mowen)

The CHAYA Company has been selling various notebooks and paper pads in the Philippines for its 30
years of existence. As part of the 30th anniversary of the company, Royce Dy, the CEO of the company,
wanted to improve its operations so that it may expand out to other ASEAN countries. With that, he
instructed Mig Sablay, the CFO of the company, on how the company can improve its operations.

Mr. Sablay ordered his staff to gather the information needed. The company has two divisions, the NB
Division and the PP Division. According to the data gathered, the NB Division is the major division of the
company and Mr. Dy wanted to know the reason of the decrease of its profit so that they may be able to see
whether the current strategy for NB division is still applicable. Mr. Dy had ordered Mr. Sablay to create a
detailed report regarding the matter on hand.

Mr. Dy had heard some discussions inside the office regarding the proper costing of the products. It was
known that the standard cost per pound of material was sixty pesos and this cost is being used for over 10
years already. It was also known that the standard cost per labor hour was eighty pesos and this cost was
just implemented a couple of years ago. According to Mr. Sablay, these standard costs seemed to be
appropriate enough to be used for years to come. With the information that Mr. Sablay had gathered, he
was very confident that he would easily be able to create a report that he could present to the board of
directors.

On the day of the report, tragedy has struck the company, as there was a major memory wipe that was
experienced by the companys servers. It was done by a past employee who had a grudge against Mr. Dy
after he terminated his job for simply not being able to create a nice cup of joe. Luckily, the IT department
was able to salvage some of the data of the previous month. With only a few hours left, Mr. Sablay needed
to recreate some of the lost information given the remaining salvaged data and create a new report that he
would present. If he would fail in creating the new reports, he would definitely be terminated.

Here are the information on April that were salvaged:

Materials:
Actual cost of direct material purchased and used: P624,000
Material price variance: P48,000 unfavorable
Total materials variance: P144,000 unfavorable

Labor:
Actual direct labor hours: 3,800 hours
Standard number of direct labor hour per unit of product: 2
Labor efficiency variance: P16,000 favorable
Total labor variance: P6,800 unfavorable

10. The total number of units produced during April was:

a. 8,000 units
b. 12,000 units
c. 2,000 units
d. 3,800 units
(Garrison, 12th Ed)

11. The standard quantity of material allowed to produce one unit of product was:
a. 1 pound
b. 4 pounds
c. 6 pounds
d. 2 pounds
(Garrison, 12th Ed)

12. The actual material cost per pound was:

a. P65
b. P60
c. P50
d. P72
(Garrison, 12th Ed)

13. The actual direct labor rate per hour was:

a. P160
b. P65
c. P80
d. P86
(Garrison, 12th Ed)

14. The labor rate variance was:

a. P22,800 favorable
b. P22,800 unfavorable
c. P9,200 favorable
d. P9,200 unfavorable
(Garrison, 12th Ed)

15. Luke Company has two divisions Green and Blue. During 2017, the contribution margin in Green was
P30, 000. The contribution margin ratio in Blue during 2017 was 40%, its sales were P125, 000 and its
segment margin was P32, 000. The common fixed expenses in the company were P40, 000 and the
companys net income for the year was P18, 000. The segment margin for Division Green for 2017
was
a. P26, 000
b. P32, 000
c. P8, 000
 d. P58, 000
(Past CPA Exam)

Following are data about Augusta Co.'s three service departments and two operating departments.

16. Augusta allocates costs of its service departments using the direct method of allocation. Find the total
cost that will be allocated to Dept. X.
a. $500.00
b. $477.50
c. $509.29
d. $322.50
(Louderback, 2002)
17. Augusta allocates the costs of its service departments using the step-down method, beginning with
Dept. A followed by Dept. B. Find the total amount of cost that will be allocated to Dept. X.
a. $500.00
b. $477.50
c. $509.29
d. $322.50
(Louderback, 2002)

JMC Company has two stores: S and T. During November, JMC Company reported a net income of
P30,000 and sales of P450,000. The contribution margin in Store S was P100,000. Variable cost ratio is
20% greater than the contribution margin ratio for Store S. The segment margin in Store K was P30,000, or
15% of sales. Total common fixed cost is P100,000 and it can be traced to Store S and T in the ratio of 3:2.

18. Sales in Store S:

a. P400,000 b. P250,000 c. P150,000 d. P100,000
(Garrison, 9th Ed)
19. Variable Expenses in Store T:
a. P70,000 b. P110,000 c. P130,000 d. P200,000
(Garrison, 9th Ed)

20. Segment Margin Ratio of Store S:

a. 16% b. 24% c. 40% d. 60%
(Garrison, 9th Ed)

Solutions
1. Budgeted CM = [(22,500 x $2.40) + (90,000 x $6.50)]/(22,500+90,000)
= $5.68
Budgeted market share = (22,500+90,000) / 1,875,000 = 6%
Market size variance = (2,500,000 1,875,000) x 6% x $5.68 = $213,000 (F)

2. Actual market share = (42,000 + 80,000) / 2,500,000 =4.88%

Market share variance = (4.88% - 6%) x 2,500,000 x $5.68 = $159,040 (U)

3. Budgeted Price: ($480,000/32,000) = $15

Standard: ($480,000 6,360) / $15 = 31,576 units

4. Average Operating Asset: (700,000+800,000)/2 = P750,000

ROI = [(20,000*(P50 -30) 200,000]/ 750,000
= 26.67%

5. Residual Income = [(15,000*(P50 -30) 200,000] (750,000 x 12%)

= P9,000

6. Operating Income = 50,000 + (750,000 x 12%) = 140,000

CM = 140,000+200,000 = 340,000
Units to be sold = 340,000/ (50-30)
= 17,000 units

7. Variable: P15 + P25 + P6 =P46

8. Market price: P140

9. Market price: P140

10. Budgeted Labor (SP x AQ) = 3,800 x 80 = 304,000

Budgeted Labor (SP x SQ) = 304,000 + 16,000

Number of products = 320000/80 = 4,000
Number of units = 4,000/2 = 2,000
11. Standard Materials = 624,000 144,000 = 480,000
Number of products = 480,000/60 = 8,000
Number of materials to produce one unit = 8,000/2,000 = 4
12. Actual Cost per unit = 624,000/(2000*4.8)
= P 65
13. Budgeted Labor (SP x AQ) = [(3800 x 80) + 22800]/3800 = P 86
14. Labor Rate Variance: 6800+16000 = P22800 (U)
15. Segment Margin: (P18, 000+40,000) 32,000 = P 26,000
16. Allocated to X: $509.29 {$150 x [40/(40 + 10)] + $300 x [50/(50 + 20)] + $350 x [15/(15 +
15)]}
17.

A B C X Y

A's direct cost $150

A's cost allocated (150) $ 30 $ 45.00 $ 60.00 $ 15.00
B's direct cost 300
B's costs allocated (330) 73.33 183.34 73.33
C's direct cost 350.00
C's costs allocated (468.33) 234.16 234.16
Allocated to X $477.50
Allocated to Y $322.50

18. CM ratio for S: X+20%+X=1 X= 40%

Sales: 100,000/40% = P250,000

19. Traceable Cost: S = 100,000 x 60% = 60,000 T = 100,000 x 40% = 40,000

Sales of T: 30,000/0.15 = 200,000
Variable Expenses = 200,000 (40,000 + 30,000) = P 130,000

20. Segment Margin: 100,000 60,000 = 40,000

Segment Margin Ratio: 40,000/250,000 = 16%