Advanced analysis and appraisal of performance: financial and non-financial

THEORIES

1. A major accounting contribution to the managerial decision-making process in

evaluating possible courses of action is to
a. assign responsibility for the decision
b. provide relevant revenue and cost data about each course of action
c. determine the amount of money that should be spent on a project
d. decide which actions that management should consider

2. Which of the following stages of the management decision-making process is

improperly sequenced?
a. Evaluate possible courses of action → Make decision.
b. Assign responsibility for decision → Identify the problem
c. Identify the problem → Determine possible courses of action
d. Assign responsibility for decision → Determine possible courses of action

3. Internal reports that review the actual impact of decisions are prepared by
a. department heads
b. the controller
c. management accountants
d. factory workers

4. Which of the following steps in the management decision-making process does not
generally involve the managerial accountant
a. Determine possible courses of action
b. Make the appropriate decision based on relevant data
c. Prepare internal reports that review results of decisions
d. None of the above

5. The process of evaluating financial data that change under alternative courses of
action is called
a. double entry analysis
b. contribution margin analysis
c. incremental analysis
d. cost-benefit analysis

6. Non-financial information that management might evaluate in making a decision

would not include
a. employee turnover
b. contribution margin
c. the environment
d. the corporate profile of the company

7. Incremental analysis is synonymous with

 a. difficult analysis
b. differential analysis
c. gross profit analysis
d. derivative analysis

8. In incremental analysis
a. only costs are analyzed
b. only revenues are analyzed
c. both costs and revenues may be analyzed
d. both costs and revenues that stay the same between alternate courses of
action will be analyzed

9. Incremental analysis is most useful

a. in developing relevant information for managerial decisions
b. in choosing between the net present value method and the internal rate of
return method
c. in evaluating the master budget
d. as a replacement technique for variance analysis

10. The source of data to serve as inputs in incremental analysis is generated by

a. market analysts
b. engineers
c. accountants
d. all of these

11. Which of the following is not a true statement?

a. Incremental analysis might also be referred to as differential analysis
b. Incremental analysis is the same as CVP analysis
c. Incremental analysis is useful in making decisions
d. Incremental analysis focuses on decisions that involve a choice among
alternative courses of action

12. Incremental analysis would not be appropriate for

a. a make or buy decision
b. an allocation of limited resource decision
c. elimination of an unprofitable segment
d. analysis of manufacturing variances

13. Incremental analysis would be appropriate for

a. acceptance of an order at a special price
b. retain or replace equipment
c. sell or process further
d. all of these

14. Which of the following is a true statement about cost behaviors in incremental
analysis
 1. Fixed costs will not change between alternatives
2. Fixed costs may change between alternatives
3. Variable costs will change between alternatives

a. 1
b. 2
c. 3
d. 2 and 3

15. A company is considering the following alternatives

Alternative 1 Alternative 2
Revenues P 120,000 P 120,000
Variable costs 60,000 70,000
Fixed costs 35,000 35,000
Which of the following are relevant in choosing between the alternatives?
a. variable costs
b. revenues
c. fixed costs
d. variable costs and fixed costs

16. In incremental analysis

a. costs are not relevant if they change between alternatives
b. all costs are relevant if they change between alternatives
c. only fixed costs are relevant
d. only variable costs are relevant

17. If a plant is operating at full capacity and receives a one-time opportunity to accept
an order at a special below its usual price, then
a. only variable costs are relevant
b. fixed costs are not relevant
c. the order will likely be accepted
d. the order will likely be rejected

18. If a company must expand capacity to accept a special order, it is likely that there
will be
a. an increase in unit variable costs
b. no increase in fixed costs
c. an increase in variable and fixed costs per unit
d. an increase in fixed costs

19. Which of the following is true if a company can accept a special order without
affecting its regular sales and is within plant capacity
a. Net income will not be affected
b. Net income will increase if the special sales price per unit exceeds the unit
variable costs
c. Net income will decrease
 d. Additional fixed costs will probably be incurred

20. If a company anticipates that other sales will be affected by the acceptance of a
special order, then
a. lost sales should be considered in the incremental analysis
b. lost sales should not be considered in the incremental analysis
c. the order should not be accepted
d. the order will only be accepted if the plant is below capacity

21. An opportunity cost

a. should be initially recorded as an asset
b. is the cost of a new product proposal
c. is the potential benefit that may be obtained by following an alternative course
of action
d. is classified as manufacturing overhead

22. Opportunity costs must be considered in decisions involving

a. Budgeting
b. Financial accounting
c. CVP analysis
d. Resources that have alternative uses

23. The opportunity cost of an alternate course of action that is relevant to a make-or-
buy decision is
a. subtracted from the “make” costs
b. added to the “make” costs
c. added to the “buy” costs
d. none of these

24. Opportunity cost is usually

a. a standard cost
b. a potential benefit
c. a sunk cost
d. included as part of cost of goods sold

25. The focus of a sell or process further decision is

a. incremental revenue
b. incremental cost
c. both incremental revenue and incremental cost
d. neither incremental revenue nor incremental cost

26. All costs incurred prior to the split-off point are called
a. relevant costs
b. split-off costs
c. opportunity costs
d. joint costs
27. Each of the following statements about the amount of joint costs allocated to
multiple products is correct except that it is
a. a sunk cost
b. irrelevant in deciding whether to sell or process further
c. allocated to the individual products based on their relative sales value
d. each of the options is correct

28. Each product produced from a single raw material and a common production
process are referred to as
a. final products
b. joint products
c. split-off products
d. common products

29. A company is considering replacing old equipment with new equipment, which of the
following is a relevant cost for incremental analysis?
a. annual depreciation charge on the equipment
b. book value of the old equipment
c. estimated annual depreciation of the new equipment
d. cost of the new equipment

30. In a retain or replace equipment decision, trade-in allowance available on old

equipment
a. increased the cost of the new equipment
b. is relevant because it will not be realized if the old equipment is retained
c. is not relevant to the decision
d. reduces the cost of the old equipment’

31. Which of the following is not relevant information in a decision whether old
equipment presently being used should be replaced by new equipment?
a. the cash of the new equipment
b. the salvage value of the old equipment
c. the book value of the old equipment
d. the cost savings if the new equipment is purchased

32. Book value of old equipment is considered to be a

a. relevant cost
b. semi-relevant cost
c. sunk cost
d. cost that can be changed by a present or a future decision

33. A company is deciding on whether to replace some old equipment with new
equipment. Which of the following is not a relevant cost for incremental analysis?
a. annual operating cost of the new equipment
b. annual operating cost of the old equipment
 c. net cost of the new equipment
d. accumulated depreciation on the old equipment

34. Which of the following is a sunk cost in a retain or replace equipment decision?
a. cost of the new equipment
b. cost savings from the purchase of the new equipment
c. salvage value of the old equipment
d. cost of the old equipment

35. A company is considering eliminating a product line. The fixed costs currently
allocated to the product line will be allocated to other product lines upon discontinuance.
If the product line is discontinued,
a. total net income will increase by the amount of the product line’s fixed costs
b. total net income will decrease by the amount of the product line’s fixed costs
c. the contribution of the product line will indicate the net income increase or
decrease
d. the company’s total fixed costs will decrease

36. In deciding whether to eliminate an unprofitable business segment, the key is to

focus on
a. fixed costs
b. opportunity costs
c. relevant costs
d. sunk costs

37. in deciding on the future of an unprofitable segment, management should compare

the last contribution margin to the segment’s
a. variable costs
b. fixed costs
c. sunk costs
d. opportunity costs

38. Total contribution margin divided by the number of units in the sales mix is the
a. contribution margin per unit
b. contribution margin ratio
c. weighted average unit contribution margin
d. weighted average contribution margin ratio

39. The break-even point in units for multiple products is computed by dividing fixed
costs by the
a. contribution margin per unit
b. contribution margin ratio
c. weighted average unit contribution margin
d. weighted average contribution margin ratio

40. Which of the following is correct?

 a. CVP analysis cannot be used if there is more than one product
b. A shift form low margin sales to high margin sales will increase net income
only if sales volume increases
c. A shift from high to low margin sales may result in a decrease in net income
even if total sales volume increases
d. The weighted average contribution margin is greater than the individual
contribution margins of each product in the sales mix.

41. If a company has limited resources, the key factor in performing incremental
analysis is
a. contribution margin
b. limited resources required
c. contribution margin per unit of limited resources
d. none of these

42. Limited resources of a manufacturing company include all of the following except
a. direct labor hours
b. floor space
c. machine capacity
d. raw materials

43. When a company has limited resources, management must decide which products
to sell in order to maximize
a. contribution margin per unit
b. contribution margin ratio
c. net income
d. weighted average unit contribution margin

PROBLEMS

44. Adler Company manufactures a product with a unit variable cost of P50 and a unit
sales price of P88. fixed manufacturing costs were P240,000 when 10,000 units were
produced and sold. The company has a one-time opportunity to sell an additional 3,000
units at P70 each in a foreign market which would not affect its present sales. If the
company has sufficient capacity to produce the additional units, acceptance of the
special order would affect net income as follows:
a. Income would decrease by P12,000
b. Income would increase by P12,000
c. Income would increase by P210,000
d. Income would increase by P60,000

Use the following information for questions 45-46.

Sam’s Manufacturing Company can make 100 units of a necessary component part with
the following costs:
Direct materials P80,000
 Direct labor P13,000
Variable overhead P40,000
Fixed overhead P27,000

45. If Sam’s Manufacturing Company purchases the component externally, P20,000 of

the fixed costs can be avoided. At what external price for the 100 units is the company
indifferent between making or buying?
a. P160,000
b. P113,000
c. P153,000
d. P133,000

46. If Sam’s Manufacturing Company can purchase the component externally for
P145,000 and only P4,000 of the fixed costs can be avoided, what id the correct “make
or buy” decision?
a. make and save P8,000
b. buy and save P8,000
c. make and save P20,000
d. buy and save P20,000

47. Cole’s Company can make 1,000 units of a necessary component with the following
costs:
Direct materials P64,000
Direct labor P16,000
Variable overhead P8,000
Fixed overhead P?

The company can purchase the 1,000 units externally for P104,000. The unavoidable
fixed costs are P5,000 if the units are purchased externally. An analysis shows that a
this external price, the company is indifferent between making or buying the part. What
are the fixed overhead costs of making the component?
a. P21,000
b. P16,000
c. P11,000
d. Cannot be determined.

Use the following information for question 48-49.

May Company produces 1,000 units of a necessary component with the following costs:
Direct materials P48,000
Direct labor P32,000
Variable overhead P8,000
Fixed overhead P14,000

48. May Company could avoid P6,000 in fixed overhead costs if it acquires the
components externally. If cost minimization is the major consideration and the company
would prefer to buy the components, what is the maximum external price that May
Company would accept to acquire the 1,000 externally?
a. P102,000
b. P94,000
c. P96,000
d. P88,000

49. None of May Company’s fixed overhead costs can be reduced, but another product
could be made that would increase profit contribution by P16,000 if the components
were acquired externally. If cost minimization is the major consideration and the
company would prefer to buy the components, what is the maximum external price that
May Company would be willing to accept to acquire the 1,000 units externally?
a. P86,000
b. P110,000
c. P96,000
d. P104,000

50. A company has a process that results in 9,000 pounds of Product A that can be sold
for P8 per pound. An alternative would be to process Product A further at a cost of
P60,000 and then sell it for P14 per pound. Should management sell Product A now or
should Product A be processed further and then sold? What is the effect of the action?
a. Process further, the company will be better off by P6,000
b. Sell now, the company will be better off by P6,000
c. Process further, the company will be better off by P54,000
d. Sell now, the company will be better off by P60,000

51. The decision rule on whether to sell or process further

a. varies form situation to situation
b. is process further as long as total revenue exceeds present revenues
c. is process further if incremental revenue form such processing exceeds
incremental fixed costs
d. is process further if incremental revenue form such processing exceeds the
incremental processing costs

52. Beal Company is starting business and is unsure of whether to sell its product
assembled or unassembled. The unit cost of the unassembled product is P40 and Beal
Company would sell it for P90. The cost to assemble the product is estimated at P18
per unit and Beal Company believes the market would support a price of P116 on the
assembled unit. What is the correct decision using the sell or process further decision
rule?
a. Sell before assembly, the company will be better off by P18 per unit
b. Sell before assembly, the company will be better off by P26 per unit
c. Process further, the company will be better off by P26 per unit
d. Process further, the company will be better off by P8 per unit.
53. Kimble Company gathered the following data about the three products that it
produces:
Present Estimated Additional Estimated Sales
Product Sales Value Processing Costs if Processed Further
A P9,000 P6,000 P16,000
B 15,000 5,000 18,000
C 11,000 3,000 16,000

Which of the following products should not be processed further?

a. Product A
b. Product B
c. Product C
d. Product A and C

54. A company has three product lines, one of which reflects the following results:
Sales P170,000
Variable expenses 100,000
Contribution margin 70,000
Fixed expenses 110,000
Net loss P(40,000)

If this product line is eliminated, 60% of the fixed expenses can be eliminated and the
other 40% will be allocated to other product lines. If management decides to eliminate
the product line, the company’s net income will
a. increase by P40,000
b. decrease by P70,000
c. decrease by P4,000
d. increase by P4,000

A segment has the following data:

Sales P420,000
Variable expenses 180,000
Fixed expenses 330,000

55. What will be the incremental effect on net income if this segment is eliminated,
assuring the fixed expenses will be allocated to profitable segments?
a. P240,000 increase
b. P240,000 decrease
c. P330,000 decrease
d. Cannot be determined form the data provided

56. Barkley Company sells two products with the following per unit data:
Standard Deluxe
Selling price/unit P75 P120
Variable cost per/unit 45 60
Contribution margin/unit P40 P60
 Sales mix 3 2

If costs are P630,000, the number of standard and deluxe units that Barkley must sell to
break even is
a. 1,800 standard and 1,200 deluxe
b. 3,600 standard and 2,400 deluxe
c. 9,000 standard and 6,000 deluxe
d. 21,000 standard and 14,000 deluxe

57. Logan Company sells two products, A and B. The contribution margins per unit are
P60 and P120 respectively, and their sales mix is 3:1. What is Logan’s weighted
average unit contribution margin?
a. P300
b. P150
c. P90
d. P75

58. Klesko Company developed the following information for the year ended December
31, 2002:
Product A Product B Total
Units sold 4,000 6,000 10,000
Sales P12,000 P27,000 P39,000
Variable costs 6,000 15,000 21,000
Contribution margin P 6,000 P 12,000 P18,000
Fixed costs 12,600
Net income P5,400

If the sales mix changes in 2003 to 5,000 units of product A and 5,000 units of product
B, the effect on the company’s break-even point would be
a. to increase it by 200 units
b. to decrease it by 200 units
c. to increase it by 1,200 units
d. no change

59. A company can sell all the units it can produce of either Product A or Product B but
not both. Product A has a unit contribution margin of P36 and takes two machine hours
to make and Product B has a unit contribution margin of P45 and takes three machine
hours to make. If there are 1,000 machine hours available to manufacture a product,
income will be
a. P3,000 more if Product A is made
b. P3,000 less if Product B is made
c. P3,000 less if Product A is made
d. The same if either product is made

60. A company can produce and sell only one of the following two parts:
Machine Contribution
 Hours required Margin per unit
Product 1 3 P30
Product 2 2 25

If the company has machine capacity of 4,000 hours, what is the total contribution
margin of the product it should produce to maximize net income?
a. P40,000
b. P48,000
c. P50,000
d. P32,000

KEY ANSWERS: Advanced analysis and appraisal of performance: financial and

non-financial

1. B 11. B 21. C 31. C 41. C 51. D 61. 71. 81. 91.

2. B 12. D 22. D 32. C 42. B 52. D 62. 72. 82. 92.

3. C 13. D 23. B 33. D 43.C 53 .B 63. 73. 83. 93.

4. B 14. B 24. B 34. D 44. D 54. C 64. 74. 84. 94.

5. C 15. A 25. C 35. C 45.C 55. D 65. 75. 85. 95.

6. B 16. B 26. D 36.B 46.A 56. C 66. 76. 86. 96.

7. B 17. D 27. D 37. B 47.A 57. D 67. 77. 87. 97.

8. C 18. D 28. B 38. C 48.B 58. A 68. 78. 88. 98.

9. A 19. B 29. D 39. C 49.D 59. A 69. 79. 89 . 99.

10. D 20.A 30. B 40. C 50.B 60. C 70. 80. 90. 100.