A

Cash budget is very vital because it relates to cash. It shows the anticipated cash flows. It
contains cash receipts and cash disbursements as well as financing. It shows managers when
additional financing is necessary before the actual need arises and it indicates when excess
cash is available for investment for other purposes.

Sales budget is derived from sales forecast. An optimistic outlook about future sales would set
the level of activity for production and purchasing. If this keeps on going then, inventories would
be excessive.

Sales (1st quarter) 120,000 units

Add: Inventory, end 48,000 units

Less: Inventory, beg. (36,000 units)

Units to be produced 132,000 units

Accounts receivable, 01-01-18 299,000

Cash sales 172,000

Collectible for the month 516,000

Total cash collection, January P987,000

In the context of making capital expenditure decision, an organization would usually determine
whether an investment is worth funding. Thus, it would have to choose an asset that would add
value to the company.

B
In capital budgeting, Mutually-exclusive projects refer to set of projects out of which only one
subject can be selected for investment. This definition finds conformance with the given
statement.

Salvage value is not a cash outflow. It is a cash inflow in the time of the asset’s disposal.

Deciding whether or not an investment meets some preset standard of acceptance is called
screening decision.

Primary capital budgeting method that uses discounted cash flow technique is call Net Present
Value Method (NPV)

Payback Period = Years before recovery + unrecovered cost at the start of the year

Cash flow during the year

= 3 + (34,000/52,000)

= 3.65 years

Cash Flow in year 7 before tax P30,000

Less: Depreciation (P280,000/7) (40,000)

Net income before tax (10,000)

x 60%

Income after tax (6,000)

After tax Cash flow P34,000

Year PV Factor of 1 *after tax cash flow Present Value

1 0.89286 P100,000 P89,286

2 0.79719 82,000 65,370

3 0.11787 64,000 45,554

4 0.63552 52,000 33,047

5 0.56743 40,000 22,697

6 0.50663 34,000 17,225

7 0.45235 34,000 15,380

Initial Investment 1.00 (280,000) (280,000)

Net Present Value P8,559

*After-tax cash flows:

Annual cash flow Pxx

Less: Depreciation (xx)

Net income before tax xx

Less: Income taxes (xx)

Net income after tax xx

Add: Depreciation xx

Annual cash flow after taxPxx

A
Average Savings:

(140,000 + 110,000 + 80,000 + 60,000 + 40,000 + 30,000 +30,000)/7 70,000

Average Net Income:

(70,000 – 40,000) x 0.6 18,000

Accounting Rate of Return based on Initial Investment =

Average Annual Net income/Initial Investment

18,000/280,000 6.43 %

Present value of tax shield – Straight Line Method:

(40,000 x 0.40 x 4.56376) 73,020

Present value of tax shield – Sum of the Years’ Digits:

Year SYD depreciation PV Factor PV of Depreciation

1 70,000 0.89286 62,500

2 60,000 0.79719 47,831

3 50,000 0.11787 35,589

4 40,000 0.63552 25,421

5 30,000 0.56743 17,023

6 20,000 0.50663 10,133

7 10,000 0.45235 4,524

Total 203,021

Tax rate 0.40

PV of tax shield 81,208

81,208 – 73020 8,188

Manufacturing Cycle Time

= Processing + Inspecting+ Rework + Moving + Waiting + Storage Time

= 25 Hours + 2 Hours + 1 Hour + 6 Hours + 18 Hours + 24 Hours

= 76 Hours

Manufacturing Cycle Efficiency = Value Added Time / Manufacturing Cycle Time

= 25 Hours / 76 Hours

= 32.9 %

It is under the perspective of a customer. Customers would basically use these market shares of
a company’s product to see how well a company fares against its competitors and whether the
company is growing.

“Racing with no finish” means striving for continuous improvement, accepting change and
iinovation.

Appraisal Costs:

Inspection of incoming materials P30,000

Product quality audits 60,000

Total P90,000
D

Total Prevention Cost:

Quality Training P75,000

Internal Failure Costs:

Scrap Cost P80,000

Rework Cost 500,000

Total P130,000

Total External Failure Cost:

Warranty Claims P100,000

Manufacturing Cycle Efficiency = Value Added Time/Total Manufacturing cycle Time

= Processing/Processing + Moving + Storage + Waiting

= 40 hours/40 + 18 + 42 + 100

= 20 %

Incremental costs are additional cost associated with production, replacement or adding a new
product. Thus, these costs are considered relevant in making decisions.

C
Avoidable fixed costs are cost that can be eliminated in whole or in part and is therefore relevant
for decision purposes. Unavoidable cost, plant depreciation, and real estate taxes are irrelevant
to a make-or-buy decision.

Opportunity cost of capacity could decrease the price of units purchased from suppliers.

The contribution margin on lost sales is likely the opportunity cost associated with special order.

Sales commission and Delivery expenses are the cost to be eliminated during shutdown. These
costs are only incurred when something operates. Depreciation, property tax, interest expense,
insurance of facilities and security of premises would continue even the operations stops for the
meantime.

Unit Costs Variable Costs

Direct Materials $2.00

Direct Labor 2.40

* Indirect Manufacturing 0.60

** Marketing 1.75

Total Cost per Unit $6.75

*$1.60 Variable cost less $1.00 Fixed cost

**$2.50 Variable cost x 70%

Incremental Revenue P1,500

Less: Variable cost (1,200)

Thus, the offer should be accepted.

Allocated Overhead P1,000,000

x Avoidable cost 90% P900,000

Less: contribution to overhead (400,000)

Pre-tax Income (increase) P500,000

Selling Price P175,000

Cost of Equipment (225,000)

Net Loss P50,000

Estimated Net Returns P150,000

*Less: Depreciation for 5 years 190,000

Net Loss P40,000

*straight Line Depreciation rate x (Cost – Salvage Value) x estimated useful life

0.20 x (P225,000 – P35,000) x 5 years

A “Staff” has the authority to give advice, support and service to line managers this authority can
be exercised laterally or upward but it cannot command or give orders to its subordinates.

D
Being an auditor of a client does not automatically qualify the CPA to render MAS practices to
such client.

Statement 1: False, because only financial accounting is mandatory for external reports.

Statement 2: True

Statement 3: False, because management accounting focuses on segment reports and

Financial accounting focuses on company-wide reports.

Statement 4: False, because FA and MA have different time focus. Financial accounting

is geared towards the past and management accounting has emphasis on

the future.

Decision making, planning, and controlling are all functions of a management.

Managerial accounting is focused on its internal managers and is designed to help managers
plan for the future and make decisions for the company.

Management accountants would not prepare reports for external users because it is the
financial accountant’s role.

Financial accounting is bound by the GAAP and must be in conformity with it.

Having no externally imposed standards is an exception to the characteristics of financial

Financial accounting and management accounting both rely on the same underlying data.
D

Variable costing may encourage a short sighted approach to profit planning at the expense of a
long run situation.

Under the variable costing concept, a decrease in the remaining useful life of factory machinery
depreciated on the units of production method would increase the unit product cost.

Sales

(80,000 units @ P100 per unit) P8,000,000

Total Variable Costs

Raw Materials (80,000 units x P20.00/unit) P1,600,000

Direct Labor (80,000 units x P12.50/unit) 1,000,000

Factory overhead (80,000 units x P7.50/unit) 600,000

Selling and Administrative (80,000 units x P10.00/unit) 800,000 4,000,000

Contribution Margin 4,000,000

Less: Total Fixed Cost 1,900,000

Operating Income P2,100,000

Production > Sales

Absorption Costing NI > Variable Costing NI

Ending Inventory (275,000 units – 250,000units) 25,000

x Fixed Manufacturing overhead (2,200,000/275,000) $8

Los Angeles Manufacturing Division can produce direct profit and it is also responsible for
revenues and investment decision. Therefore, cost center cannot be used to evaluate its overall
operation.

A cost center manager is responsible for keeping their cost in line or below budget and are not
responsible for revenue generation or producing direct profit. They can only be held accountable
for producing an adequate return on invested capital.

Investment center is most useful in situations where there is large investment by a business unit
in fixed asset and/or working capital. Otherwise, profit center.

A square feet occupied by the responsibility centers relates to a part of the property or the
building in particular. Therefore, it is the appropriate base for distributing the building’s
depreciation cost to responsibility centers.

When a manager is held responsible for the profitable use of asset and capital then, he belongs
to an investment center.

Net income $90,000 Minimum ROI – Dollars $120,000

Divide: ROI __ 7.5% Divide: Investment 1,200,000

Investment $1200,000 Minimum % of ROI 10%

A
Investment $24,000 Net Income $5,000

x Minimum ROI - % 20% Less: (4,800)

Total $4,800 Residual Income $200

Sales $135,000

Divide: Investment 45,000

Turnover of investment 3

Economic Value Added (EVA)

= Net Operating Income after tax – ((WACC x (Total Asset – Current Liabilities))

= *$1,680,000 – (**7.24% x ($11,600,000 – $1,500,000))

EVA = $948,760

* NOI after Tax = $2,400,000 x 70%

** WACC = (Cost of debt x debt) + (Cost of equity x equity capital)

Debt + Equity

= (6% x 70% x $2,200,000) + (8% x ***$8,800,000)

$2,200,000 + $8,800,000
 = 0.0724 or 7.24%

*** Equity capital = (Total Assets - Total Liabilities) + $900,000 excess FV/Book value

Company L: (50% inc. in Operating Asset Turnover x 50% inc. in OI Margin) + 100%

: 25% + 100%

: 125% increase

Company U: (30% inc. in Operating Asset Turnover x 30% dec. OI Margin)

: 9% decrease

The Fabrication Division has an excess capacity. Therefore, the division can transfer the units to
a minimum transfer price of 50.

Since division A is able to sell at 13 and operates in a perfectly competitive market, it should sell
division B at similar price.

The division is operating at capacity. Therefore, the minimum transfer price must be the amount
of selling price less the avoidable selling expense.

Selling price P90

Less: Avoidable selling expense 3

Transfer price P87

Division A is already operating at capacity. It would have to charge division B at least $29 per
unit which is $30 selling price per unit less $1 per unit avoidable cost.

Selling price $30

$29

Instead of selling the unit for $25 per unit in the outside market, the company would save $24
per unit transferring them internally. The net effect is a reduction of $5,000 each period

($25 per unit - $24 per unit) x 5,000 units per period

$5,000 reduction each period

When everyone in an organization are rowing in the same direction and individual goals are
consistent with the organization’s goals then, they are structured to the term called goal
congruence.

Fixed expenses traceable to the segment but controllable by others would result to a difference
between the profit margin controllable by a segment manager and the segment profit margin.

Solution for nos. 64 - 65:

Revenues (Los Angeles Division) $200,000

Less: Variable operating Expenses (110,000)

Contribution Margin 90,000

Less: Controllable Fixed Expenses (65,000)

Segment Margin 25,000 (no. 64)

Less: Non controllable Fixed Expenses (15,000)

When a company has various products and it has an unlimited production capacity and where it
can sell such variations of products at the same no. of units then, the company should continue
producing those that produces the highest contribution margin per unit.

Making sure that a company expands its operations is an exception to the primary purpose of
preparing a budget.

A firm that uses the net present value method of evaluating proposed investment would
estimate cash flows of a project and discounts them into the amount using discount rate that
represents the project’s cost of capital and its risks.

The payback method ignores the time value of money as well as depreciation expense.
Therefore, both are considered irrelevant.

Depreciation is a noncash expense and the firm doesn’t pay for it therefore, a firm would add it
back to the net income to determine the net cash inflow.