In a quality control program, which of the following is(are) categorized as internal

failure costs?
I.               Rework.
II.             Responding to customer complaints.
Statistical quality control procedures – I only

Which of the following is a characteristic of total quality management (TQM)? Education

and self-improvement.
Education and self-improvement
is incorrect because management by objectives (MBO) uses only quantitative
measures, primarily financial in nature, in evaluating performances which concept
may not truly discern real operational results and status or may not unfold the
potentials of activities just initiated to improve systems and processesis incorrect
because on-the-job training is a costly exercise that involve a great waste of time
and inefficiencies that may not be beneficial to the operationsis incorrect because
quality by final inspection emphasizes product quality and not process quality
which should be the concern of quality managers to avoid errors, spoilages,
defects, scrap, and other costly exercises is correct. One of the characteristics of
TQM is continuous training and education to keep its personnel abreast with
changes in the market, technology, new members of the team, and other
organizational dynamics. Self-improvement is an adjunct to education and
training where skills are honed and expertise are developed, new methods are
learned, and different fields of interests are explored for better understanding in
the proximate and far environment.

Characteristics of TQM – Management by objectives, OJT by the workers, Quality

bi final inspection

The quantity of output divided by the quantity of one input equals – Partial
productivity

The Plan-Do-Check-Act (PDCA) Cycle is a quality tool devised by W.E. Deming.

It is best described as? - A “management by fact” approach to continuous
improvement.
The Plan-Do-Check-Act (PDCA) cycle is devised to identify possible area of
improvement, develop possible systems improvement, check the effectiveness by
testing the proposed improvement in small (or pocket) situation, and if proven
effective would be implemented in a larger scale, hence, called as management
by fact. PDCA is used in relation to the principle of continuous improvement (i.e.,
kaizen) where there should always be a craving for improving systems and
customer satisfaction.
is incorrect because it refers to benchmarkingis incorrect because it relates to
design engineeringis incorrect because it relates to the formation of
manufacturing cell
The four categories of costs associated with product quality costs are - External
failure, internal failure, prevention, and appraisal
Quality costs are classified as conformance costs and non-conformance costs.
Conformance costs include prevention costs and appraisal costs. While non-
conformance costs include internal failure costs and external failure costs. In
summary, the four quality costs are prevention costs, appraisal costs, internal
failure costs, and external failure costs.

Prevention costs include those incurred to prevent errors such as design

engineering, suppliers management, equipment maintenance program, and
personnel training. Appraisal costs are those incurred to test processes such as
testing costs and statistical quality control systems. Internal failure costs are
those incurred to correct failure in product quality which are detected before
delivery to customers such as costs of spoilage, rework, and tooling changes.
External failure costs are those incurred to rectify failure in product quality after
delivery to customers are made such as product warranty costs, costs of recall,
parts replacement, repairs, estimated customer losses and similar costs.

Nonfinancial performance measures are important to engineering and operations

managers in assessing the quality levels of their products Which of the following
indicators can be used to measure product quality? I and II only

I. Returns and allowances.

II. Number and types of customer complaints.

III. Production cycle time.

Nonfinancial measures are also used in assessing system quality and product
quality. System quality is measured by the quality of the product which in turn is
measured by the customer. Sales returns and allowances and number of types of
customer complaints are nonfinancial measures of product quality. Production
cycle time is not a measure of product quality since customers are not directly
involved in assessing production cycle time and are not therefore measured in
terms of quality but in terms of efficiency.

A company produces stereo speakers for automobile manufacturers. The

automobile manufacturers emphasize total quality control (TQC) in their
production processes and reject approximately 3% of the stereo speakers
received as being of unacceptable quality. The company inspects the rejected
speakers to determine which ones should be reworked and which ones should be
discarded. The discarded speakers are classified as? Spoilage
Spoilage
is incorrect because waste is input material that is either lost in the production
process or has no sales valueis incorrect because scrap is input material that has
a relatively minor sales value at the end of the production processiis correct.
Rejected units that are discarded are classified as spoilage. Spoilage is
separated into abnormal or normal spoilage. Normal spoilage is an inherent result
of the normal production process. Abnormal spoilage is spoilage that is not
expected to occur under normal, efficient operating conditions.is incorrect
because rework costs are incurred to make unacceptable units appropriate for
sale or use.

Yahoo Corporation is a highly automated manufacturing firm. The Vice-President

of Finance, Ferdinand, has decided that traditional standards are inappropriate for
performance measures in an automated environment. Labor is insignificant in
terms of the total cost of production and tends to be fixed. Materials quality are
considered more important than minimizing material cost, and customer
satisfaction is the number one priority. As a result, delivery performance
measures have been chosen to evaluate performance. The following information
is considered typical of the time involved to complete orders:

Wait time:

– from order being placed to start of production 10.0 days

– from start of production to completion 5.0 days

Inspection time 1.5 days

Process time 3.0 days

Move time 2.5 days

What is the manufacturing cycle efficiency for this order? 25%

manufacturing cycle efficiency = manufacturing or process time/time from start of

manufacturing to delivery
3 days/(5 days of 1.5 days + 3 days + 2.5 days)
= 3 days/ 12 days = 25%

The following information is available for Rocky Company for its 2 fiscal years:
 
  Year 1  Year 2
Statistical process control P     70,000 P    100,000
Quality audits 35,000 50,000
Training 40,000 80,000
Inspection and testing 100,000 150,000
Rework 90,000 50,000
Spoilage 80,000 55,000
Warranties 180,000 80,000
Estimated customer losses 800,000 450,000
Net sales 3,000,000 3,200,000
 
In its cost of quality report for year 2,  Rocky will disclose that the ratio of -
Conformance costs to total quality costs increased from 17.56% in year 1 to
37.44% in year 2.

Conformance costs include prevention costs and appraisal costs.   Specifically,

statistical process control, quality audits, training, and inspection and testing are
conformance costs.  Total quality costs include the conformance costs and rework,
spoilage, warranties, and estimated customer losses. The ratio of conformance costs to
total quality costs are computed as follows:
 
    Year 1 Year 2
Conformance costs    
  (P70,000 + P35,000 + P40,000 + P100,000) P  245,000  
  (P100,000 + P50,000 + P80,000 + P150,000)   P  380,000
       
÷ Total quality costs    
  (P245,000 + P90,000 + P80,000 + P180,000 + 1,395,000  
P800,000)
  (P380,000 + P50,000 + P55,000 + P80,000 +   1,015,000
P450,000)
Ratio of conformance costs over total quality costs 17.56% 37.44%

is correct, conformance costs over total quality costs increased from 17.56% to
37.44%.is incorrect because the non-conformance costs over total quality costs in
year 1 is 82.44% (i.e., P1,150,000/P1,395,000) and in year 2 is 62.56% (i.e.,
P635,000/P1,015,000)is incorrect because the ratio of nonconformance costs to
net sales in year 1 is 38.33% (i.e., P1,150,000/P3,000,000)is incorrect because the
ratio of conformance costs to net sales in year 2 is 11.88% (i.e.,
P380,000/P3,200,000).

Which of the following is not a characteristic of an innovative manufacturing

company? – Emphasis on existing products

An innovative manufacturing company measures its success in terms of degree of

satisfying its customers. It emphasizes process, improvement in processes, and
continuous improvement in processes as its strategic response to the changing
market and manufacturing environment. The plain old concept of emphasizing
systems on existing products does not amount to a healthy business response
where output is no longer designed by the maker but by the user. Product
definition is the domain of customers, whereas product process should the
expertise of a business.
incorrect because they are characteristics of an innovative manufacturing
companyincorrect because they are characteristics of an innovative
manufacturing companyincorrect because they are characteristics of an
innovative manufacturing company

Comparing one’s own product, service or practice with the best known similar
activity is? Benchmarking

CIA 1195 III-84

Productivity is defined as the ratio of outputs of a production process to the inputs
that are used. Consider a process that currently produces 2,000 units of output
with 500 hours of labor per day. This process can be redesigned to produce 2,520
units of output requiring 600 labor hours per day. The percentage change in
productivity from redesigning the process is – 5%

Before redesign, productivity equaled 4 units per hour (2,000 units ・ 500 hours).
After redesign, productivity equaled 4.2 units per hour (2,520 units ・ 600 hours).
Thus, the percentage change in productivity was 5% [(4.2 - 4.0) ・ 4.0]. is
incorrect because a 10% change requires output of 2,640 units. is incorrect
because 20% is the percentage change in labor hours per day. is incorrect
because 26% is the percentage change in units of output per day.

An example of an internal nonfinancial benchmark is? - The percentage of

customer orders delivered on time at the company’s most efficient plant
becoming the benchmark for the company’s other plants.

Management of a company is attempting to build a reputation as a world-class

manufacturer of quality products. Which of the following measures would not be
used by the firm to measure quality? – The number of parts shipped per day

Quality is achieved more economically if the company focuses on? – prevention

cost

All of the following would generally be included in a cost-of-quality report except: -

Lost contribution margin
Cost of quality report identifies, classifies, summarizes and provides information
on the amount of costs incurred in a given production level and period. The
quality costs included in the cost of quality report are the prevention costs,
appraisal costs, internal failure costs, and external failure costs. Warranty claims
are external failure costs. Design engineering and supplier evaluations are
included in the prevention costs. Lost contribution margin is not a quality cost but
is an opportunity cost.

Under a total quality management (TQM) approach? - Measurement occurs

throughout the process and errors are caught and corrected at the source
ne of the key principles of TQM is to prevent errors and ensure precision from the
very start. This entails more money set aside to prevent errors, avoid customer
complaints, and heighten customer satisfaction. When the production process is
improved, quality output is expected to come out of the process.
is incorrect because performing inspection at the end of the production does not
engage measurement of quality because errors are not caught at the start and
may result to a very costly rejection of goods already processed and subjected for
final inspection.is incorrect because lower-level managers have been given the
power to decide on the production setup, process, and activities and are therefore
held responsible for the results of their decisionsis incorrect because under the
total quality system suppliers tend to reduce to relatively few reliable and
dependable ones who would also crave for quality.

CIA 0596 III-90

A manufacturing cell's partial productivity can be measured using data on? –
Direct material usage

 In 2013, a manufacturing company instituted a total quality management (TQM)

program producing the following report:
 
Summary Cost of Quality Report
(in thousands)
  2012 2013 %
Change
Prevention costs P     200 P     300 +50
Appraisal costs 210 315 +50
Internal failure costs 190 114 -40
External failure costs 1,200 621 -48
Total Quality Costs P  1,800 P  1,350 -25
On the basis of this report, which one of the following statements is most likely
correct? - An increase in conformance costs resulted in a higher-quality product
and a decrease in nonconformance costs

An increase in conformance costs resulted in a higher-quality product and a

decrease in nonconformance costs
Conformance costs include prevention costs and appraisal costs.
Nonconformance costs include internal failure costs and external failure costs.
By interpreting the data contained in the cost of quality report, as conformance
costs increased by 50%, nonconformance costs decreased from 40% to 48%. In
effect, there is an inverse relationship between conformance costs and
nonconformance quality costs. That is, a high conformance costs will lead to low
nonconformance costs, and a low conformance costs would lead to a high
nonconformance costsis incorrect because inspection cost is only one of those
included in the conformance costs and is not solely responsible for the decrease
in quality costs. Choice-letter “c” is incorrect becauseis incorrect because costs
of scrap and rework are internal failure costs and not external failure costsis
incorrect because returns and warranty are included as external failure costs, not
internal failure costs.
CMA 1294 3-26 to 30
Water Control Inc. manufactures water pumps and uses a standard cost
system.  The standard factory overhead costs per water pump are based on
direct labor hours and are as follows:
 
 
 
Variable overhead (4 hours of P8/hour) P  32
Fixed overhead (4 hours at P5*/per hour 20
Total overhead cost per unit P  52
* Based on a capacity of 100,000 direct labor hours per month.
 
The following additional information is available for the month of November.
Ø  22,000 pumps were produced although 25,000 had been scheduled for
production.
Ø  94,000 direct labor hours were worked at a total cost of P940,000.
Ø  The standard direct labor rate is P9 per hour.
Ø  The standard direct labor time per unit is 4 hours.
Ø  Variable overhead costs were P740,000.
Ø  Fixed overhead costs were P540,000.
 
The direct labor price variance for November was? 94,000 unfavorable
P54,000 unfavorable is incorrect because it is the direct labor efficiency
variance.P94,000 unfavorable is correct. The direct labor price variance equals
actual labor hours times the difference between standard and actual labor rates.
The actual labor cost was P940,000 for 94,000 hours, or P10 per hour. The
standard rate was P9 per hour. Thus, the variance is P94,000 [94,000 hours x
(P10 - P9)]. The variance is unfavorable because the actual rate paid was higher
than the standard rate.P60,000 favorable is incorrect because it is equals the
actual rate times the difference between capacity and actual hours. P148,000
unfavorable is incorrect because it is the total direct labor variance.

Which one of the following is true concerning standard costs? If properly used,
standards can help motivate employees.

The following information is available from the Faith Company:

            Actual factory overhead                                    P15,000
            Fixed overhead expenses, actual                      P7,200
Fixed overhead expenses, budgeted                            P7,000
            Actual hours                                           3,500
            Standard hours                                                         3,800
             Variable overhead rate per DLH                           P2.50
  
Assuming that Faith uses a three-way analysis of overhead variances, what is the spending variance?
750 favorable

Which one of the following statements about ideal standards is incorrect? Ideal
standards can be used for cash budgeting or product costing

800

CIA 0597 III-90

The standard direct labor cost to produce one pound of output for a company is presented
below. Related data regarding the planned and actual production activities for the current
month for the company are also given below:
 
NOTE:  DLH = Direct labor hours  
Direct labor standard:  0.4 DLH @ P12.00 P  4.80
per DLH
Planned production  15,000
pounds
Actual production 15,500
pounds
Actual direct labor costs (6,250 DLH) P 75,250
 
The company's direct labor efficiency variance for the current month is? 600 UF
P600 unfavorable
is correct. The direct labor efficiency variance equals the standard direct labor
rate times the difference between the actual DLH and the standard DLH allowed
for the actual output, or P600 unfavorable {P12 x [6,250 actual DLH - (.4 DLH x
15,500 pounds actually produced)]}. is incorrect because P602 unfavorable is
based on the actual direct labor rateis incorrect because P2,400 unfavorable
equals the standard direct labor rate times the difference between the DLH
allowed for the planned output and the DLH allowed for the actual outputis
incorrect because P3,000 unfavorable equals the standard direct labor rate times
the difference between the DLH allowed for the planned output and the actual
DLH.

SanBox Company is choosing new cost drivers for its accounting system.   One
driver is labor hours; the other is a combination of machine hours for unit variable
costs and number of setups for a pool of batch-level costs.   Data for the past year
follow.
 
  Budget Actual  
Labor hours 200,000 200,000
 Machine hours 360,000 450,000
Number of setups 3,000 3,300
Unit variable cost pool $1,600,000 $2,000,000
Batch-level cost pool $900,000 $990,000
 
            Assume that both cost pools are combined into a single pool, and labor hours is
the driver.  The total flexible budget for the actual level of labor hours and the total
variance for the combined pool are:
            1)   Flexible Budget
            2)   Variance

Ans. 2,500,00 and 490,000

RPCPA 1096
X’OR Co. uses a standard cost system, and data for its direct labor costs are summarized below:
 
Actual direct labor hours 72,500
Standard direct labor hours 75,000
Total direct labor payroll P 275,500
Direct labor rate variance – favorable 14,500
Direct labor efficiency variance – 10,000
favorable
 
The standard direct labor rate per hour is? P4

RPCPA 580

The Willard Manufacturing Co., Inc. uses standard cost systems in accounting for manufacturing
costs.  On June 1, 19x9, it started the manufacture of a new product known as “Whippy.”   The
standard costs of a unit of “Whippy” are:

Raw materials 3 kilos @ P1.00 per kilo P   3.00

Direct labor 1 hour @ P4.00 per hour 4.00

Overhead 75% of direct labor cost     3.00

    P 10.00

The following data were obtained from Willard’s records for the month of June:
 

Actual production of “Whippy” 2,000 units

Units sold of “Whippy” 1,250 units

  Debit Credit

Sales   P 25,000

Purchases P 13,650  

Materials price variance 650  

Materials quantity variance 500  

Direct labor rate variance 380  

Direct labor efficiency variance   400

Manufacturing overhead total 250  

variance

The amount shown above for the materials price variance is applicable to raw materials
purchased during June.

The actual hours worked for the month of June is? 1,900 hrs

Troop Company had budgeted 50,000 units of output using 50,000 units of raw
materials at a total material cost of P100,000.  Actual output was 50,000 units of
product requiring 45,000 units of raw materials at a cost of P2.10 per unit.   The
direct material price variance and usage variance were:
1)   Price
2)   Usage
Ans. 4,500 UF and 10,000 F

RPCPA 0583
  Edsol Company uses flexible budget in its standard cost system to develop variances.   The
following selected data are given.
 
Data on standard costs:  
Raw materials per unit 5 lbs. at P1.00/lb., P5.00
Direct labor per unit 8 hrs. at P3.00/hr., P24.00
Variable factory overhead per unit P3.00 per direct labor hour, P24.00
Fixed factory overhead per month P25,000
Normal activity per month 8,000 direct labor hours
 Units produced in April 1,000 units
Costs incurred for April  
Raw materials 5,000 lbs. at P1.10/lb.
Direct labor 7,000 lbs. at P3.10/hr.
Variable factory overhead P27,000
Fixed factory overhead P28,000
 
The labor efficiency variance for April is? 3,000 F

The efficiency variance for either labor or materials can be into a - Yield variance and a
mix variance.
RPCPA 1088
MAXIM MFG CO., which uses a standard cost system, manufactures one product with the
following standard costs:
 
 
Direct materials 2 Kilos at P10 P  20.00
Direct labor 1 hour at P8 8.00
Factory overhead 80% of direct labor 6.40
TOTAL STANDARD UNIT COST P  34.40
 
Total production in units 10,000 units
Direct materials purchased 22,000 kilos at P11
Actual quantity of materials used 21,000 kilos
Actual labor cost 9,500 at P7.50
Factory overhead total variance P1,000 unfavotable
 
The direct labor efficiency variance for April was? 800

CIA 0595 III-81 & 82

A company manufactures a machine component called Omega. The following relates to
manufacturing operations in May.

Planned production  2,000 units of  

Omega

Actual production 2,100 units of  

Omega

Standard costs per unit of    

Omega

Direct materials P 20 (5 lbs. @ P4)

Direct labor  P 10 (1 hr. @ P10)

 Actual costs incurred    

Direct materials purchased and P 44,772 (10,920 lbs. @

used P4.10)

Direct labor  P 20,500 (2,000 hr. @

P10.25)

The direct labor flexible budget variance was? 500F

 DIGITAL Products produces a product, Digit, and uses standard costing methods.   The standard
direct labor cost of Digit is one and one-half hours at P180 per hour.   During October, 19x7, 500
Digit units were produced in 1,000 hours at P176 per hour.  The direct labor efficiency variance is
a favorable (an unfavorable) P(45,000)

The direct labor standards for producing a unit of a product are two hours at P10 per hour.  
Budgeted production was 1,000 units.  Actual production was 900 units, and direct labor cost
was P19,000 for 2,000 direct labor hours.  The direct labor efficiency variance was: 2,000 UF ( x
= P10 [2,000 - (900 x 2))

Under the two-variance method for analyzing factory overhead, the difference between
the actual factory overhead and the factory overhead applied to production is the – Net
overhead Variance

CMA 0692 3-18 to 21

Jackson Industries, which employs a standard cost system in which direct materials inventory is
carried at standard cost.  Jackson has established the following standards for the prime
costs of one unit of product.  During May, Jackson purchased 125,000 pounds of direct
materials at a total cost of P475,000.  The total factory wages for May were P364,000, 90% of
which were for direct labor.

Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.

  Standard Standard Standard

Quantity Price Cost

Direct 5 pounds P3.60/ P18.00

materials pound

Direct labor 1.25 hours P12.00/hr.    15.00

       P33.00

The direct labor price (rate) variance for May is? 8,400F

CIA 1191 IV-15

The total budgeted direct labor cost of a company for the month was set at P75,000 when
5,000 units were planned to be produced. The following standard cost, stated in terms of
direct labor hours (DLH), was used to develop the budget for direct labor cost:
 
1.25 DLH x P12.00/DLH = P15.00/unit produced
 

The actual operating results for the month were as follows:

Actual units produced 5,200

Actual direct labor hours worked 6,600
Actual direct labor cost P 77,220
 

The direct labor efficiency variance for the month would be? 1,200UF

AICPA 1186 II-21

Tub Co. uses a standard cost system.  The following information pertains to direct labor for
product B for the month of October:
 
Standard hours allowed for actual 2,000
production
Actual rate paid per hour P  8.40
Standard rate per hour P  8.00
Labor efficiency variance P 1,600 U
 
What were the actual hours worked? 2,200
is incorrect because the 200-hour difference between AH and SH should be added to, not
subtracted from, the standard hours allowedis incorrect because the difference between
AH and SH must be determined using the standard rate per hour. The efficiency variance
was also incorrectly treated as favorable and subtracted from the SHis incorrect because
the difference between AH and SH must be determined using the standard rate per
hourThe standard hours allowed equaled 2,000, and the labor efficiency variance was
P1,600 unfavorable; i.e., actual hours exceeded standard hours. The labor efficiency
variance equals the standard rate (P8 per hour) times the excess hours. Given that the
variance is P1,600, 200 excess hours (P1,600 ¸ P8) must have been worked. Thus, 2,200
actual hours (2,000 standard + 200 excess) were worked.

Below are Russel Corporation’s standard costs to produce one concrete table:
Direct raw 2 kgs.@ P375 per kg

materials
Direct labor 30 minutes @ 31.25 per hour
 

In September, Russel produced 250 concrete tables. Five hundred twenty (520) kgs of
raw materials were used at a total costs of P193,440.  A total of 128 direct labor hours
were used at a cost of P4,096. The direct labor rate variance is: P96.00

The Dillon Company makes and sells a single product and uses a flexible budget
for overhead to plan and control overhead costs. Overhead costs are applied on
the basis of direct labor-hours. The standard cost card shows that 5 direct labor-
hours are required per unit. The Dillon Company had the following budgeted and
actual data for March:

                                                          Actual                 Budgeted

Units produced                             33,900                   30,800

Direct labor-hours                     161,800                 154,000

Variable overhead costs       $140,500               $123,200

Fixed overhead costs              $80,000                  $77,000

The fixed overhead volume variance for March is: 7750F

If factory overhead is applied on the basis of units of output, the variable factory
overhead efficiency variance will be – Zero

For the month of April, Thorp Co.'s records disclosed the following data relating to direct labor:
 
Actual cost P  10,000
Rate variance P 1,000 favorable
Efficiency variance P 1,500
unfavorable
 
For the month of April, actual direct labor hours amounted to 2,000. In April,
Thorp's standard direct labor rate per hour was: P5.50

AICPA 1192 II-21

Yola Co. manufactures one product with a standard labor cost of 4 hours at P12.00 per hour.  
During June 1,000 units were produced using 4,100 hours at P12.20 per hour.   The unfavorable
direct labor efficiency variance was? 1,200UF

CMA 1294 3-26 to 30

Water Control Inc. manufactures water pumps and uses a standard cost
system.  The standard factory overhead costs per water pump are based on
direct labor hours and are as follows:
 
 
 
Variable overhead (4 hours of P8/hour) P  32
Fixed overhead (4 hours at P5*/per hour 20
Total overhead cost per unit P  52
* Based on a capacity of 100,000 direct labor hours per month.
 
The following additional information is available for the month of November.
Ø  22,000 pumps were produced although 25,000 had been scheduled for
production.
Ø  94,000 direct labor hours were worked at a total cost of P940,000.
Ø  The standard direct labor rate is P9 per hour.
Ø  The standard direct labor time per unit is 4 hours.
Ø  Variable overhead costs were P740,000.
Ø  Fixed overhead costs were P540,000.
 
The direct labor price variance for November was? 94,000UF

Based on a month’s normal volume of 50,000 units (100,000 direct labor hours),
Raff’s standard cost system contains the following overhead costs:
                        Variable                                  P6 per unit

                        Fixed                             8 per unit

The following information pertains to the month of March 2013:

Units actually produced                                         38,000

Actual direct labor hours worked                        80,000

Actual overhead incurred:

            Variable                                  P250,000

            Fixed                                          384,000

            For March 2013, the fixed overhead volume variance was 96,000UF

RPCPA 1088
  MAXIM MFG CO., which uses a standard cost system, manufactures one product with the
following standard costs:
 
Direct materials 2 Kilos at P10 P  20.00
Direct labor 1 hour at P8 8.00
Factory overhead 80% of direct labor 6.40
TOTAL STANDARD UNIT COST P  34.40
 
Total production in units 10,000 units
Direct materials purchased 22,000 kilos at P11
Actual quantity of materials used 21,000 kilos
Actual labor cost 9,500 at P7.50
Factory overhead total variance P1,000 unfavotable
 
 
The direct labor efficiency variance is? 4,000F

CIA 0590 IV-15

A manager prepared the following table by which to analyze labor costs for the month:
 

Actual Hours at Actual Rate P10,000

Actual Hours at Standard P  9.800

Rate

Standard Hours at Standard P  8,820

Rate

What variance was P980? Labor efficiency variance

RPCPA 0584
Ipil-ipil Woods Inc. grants bonus to its plant employees equal to 50% pay for the time saved in
production.  The company has set up a standard rate of production of 200 units of cutting
board per hour.  The standard pay per labor hour is P8.  Factory overhead varies at the rate of
P2.50 per hour.
 
During the month of June, the employees worked a total of 25,000 direct labor hours and
produced 6,000,000 units of cutting boards.  The total variable factory overhead amounted to
P62,500.  Bonus checks are issued to employees in the month following the month in which
the standards are exceeded.
 
The total net savings to the company for the month of June after deducting the bonus is? 32,500

CMA 1291 3-1 to 4

Arrow Industries employs a standard cost system in which direct materials inventory is carried at
standard cost. Arrow has established the following standards for the prime costs of one unit
of product.

  Standard Standard Price Standard

Quantity Cost

Direct 8 pounds P1.80 per P 14.40

materials pound

Direct labor . 25 hour 8.00 per hour      2.00

      P 16.40

 
During November, Arrow purchased 160,000 pounds of direct materials at a total cost of
P304,000. The total factory wages for November were P42,000, 90% of which were for direct
labor. Arrow manufactured 19,000 units of product during November using 142,500 pounds of
direct materials and 5,000 direct labor hours.
 

The direct labor price (rate) variance for November is? 2,200F

CMA 0696 3-22 to 25

Ardmore Enterprises uses a standard cost system in its small appliance division.   The standard
cost of manufacturing one unit of Zeb is as follows:
Materials = 60 pounds at P1.50 per P  90
pound
Labor = 3 hours at P12 per hour 36
Factory overhead – 3 hours at P8 per 24
hour
   Total standard cost per unit P150
 
The budgeted variable factory overhead rate is P3 per labor hour, and the budgeted fixed factory
overhead is P27,000 per month.  During May, Ardmore produced 1,650 units of Zeb compared
with a normal capacity of 1,800 units.  The actual cost per unit was as follows:
 
Materials (purchased and used) 58 pounds at P1.65 per P    95.70
pound)
Labor = 3.1 hours at P12 per hour 37.20
Factory overhead – P39,930 per 1,650 units 24.20
   Total actual cost per unit P 157.10
 
 
The labor rate variance for May is? -0-

Which department is customarily held responsible for an unfavorable materials usage

variance? Production

CMA 0692 3-15 to 17

An organization that specializes in reviewing and editing technical magazine articles. It set the
following standards for evaluating the performance of the professional staff:

Annual budgeted fixed costs for normal capacity level   P600,000

of 10,000 articles reviewed and edited

 Standard professional hours per 10 articles 200 hours

Flexible budget of standard labor costs to process P 10,000,000

10,000 articles

 
The following data apply to the 9,500 articles that were actually reviewed and edited during the
current year.
 
Total hours used by professional staff 192,000 hours

Flexible costs P 9,120,000

Total cost  9,738,000

The labor efficiency variance for the year is? 100,000 UF

Product-quality related costs are part of a total quality control program.   A product-
quality related cost incurred in detecting individual products that do not conform to
specifications is an example of a(n)? Appraisal Cost
Appraisal costs include those that are incurred in detecting individual products that do not
conform to specifications as well as those incurred in detecting the effectiveness of the quality
systems in ensuring that customer’s design are met precisely and punctually.

One of the main reasons that implementation of a total quality management program
works better through the use of teams is? -Teams are natural vehicle for sharing ideas,
which leads to process improvement.
eams are association of personnel from different fields of specialization created to
produce faster and accurate services for more customer satisfaction. Given the
right environment, teams are expected to generate effective business solutions,
serve as a natural vehicle for sharing ideas, and generate commitment and
empowerment leading to process improvement.

A manufacturing cell’s partial productivity can be measured using data on. Direct
Material Usage

The cost of statistical quality control in a product quality cost system is categorized as a
(an)?  Appraisal Cost
Statistical quality control costs are incurred to appraise quality systems and the product
of the quality systems. Examples of statistical quality controls are bar graphs, regression
charts, (e.g., yield rates), Pareto law, learning curves, fishbone analysis (e.g., cause-and-
effect analysis), and linear programming.

CIA 1195 III-84

Productivity is defined as the ratio of outputs of a production process to the
inputs that are used. Consider a process that currently produces 2,000 units of
output with 500 hours of labor per day. This process can be redesigned to
produce 2,520 units of output requiring 600 labor hours per day. The percentage
change in productivity from redesigning the process is -5%
Before redesign, productivity equaled 4 units per hour (2,000 units ・ 500 hours).
After redesign, productivity equaled 4.2 units per hour (2,520 units ・ 600 hours).
Thus, the percentage change in productivity was 5% [(4.2 - 4.0) ・ 4.0]

Focusing on customers, promoting innovation, learning new philosophies, driving out

fear, and providing extensive training are all elements of a major change in
organizations.  These elements are aimed primarily at -Focusing on the total quality of
products and services
hange is inevitable in a dynamic world of business. To institute change, the focus
should always be at the customer, his demands and desired products and services.
Since customers measure what is acceptable and not, what is of quality and what
is not, the focus of change should be to conform in accordance with quality as a
matter of long-term strategy.
CMA 0696 3-16
The series of activities in which customer usefulness is added to the product is
the definition of?  A value chain

CIA 1194 III-46

 
A company produces stereo speakers for automobile manufacturers. The automobile
manufacturers emphasize total quality control (TQC) in their production processes and
reject approximately 3% of the stereo speakers received as being of unacceptable
quality. The company inspects the rejected speakers to determine which ones should be
reworked and which ones should be discarded. The discarded speakers are classified
as?  Spoilage

given level quality. One example of a quality cost index, which uses a direct labor
base, is computed as
 
Quality cost index   =  (Total quality costs / Direct labor costs) x 100
 
The following quality costs data were collected for May and June:
 
  May June
Prevention costs P  4,000 P    5,000
Appraisal costs      6,000 5,000
Internal failure    12,000 15,000
costs
External failure    14,000 11,000
costs
Direct labor costs    90,000 100,000
 
Based upon these cost data, the quality cost index -Decrease 4 points from May
to June

The quality cost index (QCI) based on DL costs is total quality costs divided by DL costs.   Total quality costs include
prevention costs, appraisal costs, internal failure costs, and external failure costs.   By comparison, we may derive the
following information for the months of May and June, as follows:
 
  May June
Total quality costs P  36,000 P  36,000
DL costs 90,000 100,000
QC index     (P36,000/P90,000)       40%  
                     (P36,000/P100,000)   36%
Decrease in QC index (40% - 36%)   4%
If a company is customer-centered, its customers are defined as - Anyone external to
the company and those internal who rely on its product to get their job done.
In a customer-oriented company (or TQM-based company), customers are
classified as either external customers or internal customers. External customers
are those that make use of the final output of the business operations. Internal
customers refer to the departments, sections, or any business units within an
organization that are involved in a quality process and of which they received
inputs from other departments, etc., in the performance of their functions. In short,
even within the organization itself, there exists a supplier-customer relationship.
For example, timekeeping department provides the summary of time tickets to the
payroll department who in turn provides the payroll register to the accounting
department who provides the voucher to the cash department who releases the
cash or check to production personnel. A department may be a vendor at a time
and a customer at another within the process link. Customer satisfaction should
be guaranteed both to external and internal customers.

CIA 0596 III-95

A company's accounts receivable department processed 33,000 invoices during a
6-month period with a billing error rate of 3%. Each billing error cost $110 to
correct. In addition, 15% of contract cancellations during this period were
attributed to billing errors, resulting in estimated lost total contribution margins of
$75,000 from dissatisfied customers who canceled their contracts. If the number
of invoices issued and the costs per billing error remain unchanged, the annual
savings available for funding of a quality improvement program to lower the
company's billing error rate by 1% (i.e., from 3% to 2%) would be? -122,600
-The assumption is that a third of the costs can be eliminated if the error rate is cut
by a third. Moreover, the study covered only a 6-month period, but annual savings
are requested. The savings for 6 months is $61,300 {[33,000 invoices × $110 per
invoice × (.03 – .02)] + [$75,000 × (1% ÷ 3%) reduction in lost CMs]}. Accordingly,
the projected annual savings is $122,600 ($61,300 × 2).

A traditional quality control process in manufacturing consists of mass inspection of

goods only at the end of a production process.  A major deficiency of the traditional
control process is that? -t does not focus on improving the entire production process.

CMA 0692 3-18 to 21

Jackson Industries, which employs a standard cost system in which direct materials inventory is
carried at standard cost.  Jackson has established the following standards for the prime
costs of one unit of product.  During May, Jackson purchased 125,000 pounds of direct
materials at a total cost of P475,000.  The total factory wages for May were P364,000, 90% of
which were for direct labor.
 

Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.

  Standard Standard Standard

Quantity Price Cost

Direct 5 pounds P3.60/ P18.00

materials pound

Direct labor 1.25 hours P12.00/hr.    15.00

      P33.00

The direct labor usage (efficiency) variance for May is? 6,000UF

RPCPA 0597
BINGO Co. uses a standard cost system.  Direct labor statistics for the month of May, 19x7
follows:
 
 
 
 
Actual rate per hour P 152.50
Standard rate per hour P 150.00
Labor efficiency variance – unfavorable P 15,000
Standard hours allowed for actual 37,500
production
 
What was the actual number of hours worked? 37,600

All of the following are methods that aid management in analyzing the expected result of
capital budgeting decisions, except: - Future value cash flow
The choice "future value cash flow analysis" is the correct because it is not used
the capital budgeting decision analysis. Cash inflows derived from investments
are still to be discounted to their present values for better project analysis and
evaluation.

Capital budgeting is concerned with -Analysis of long-range decisions

The choice "analysis of long-range decisions" is correct. Capital budgeting is
concerned with long-range decisions, such as whether to add a product line, to
build new facilities, or to lease or buy equipment. Any decision regarding cash
inflows and outflows over a period of more than 1 year probably needs capital
budgeting analysis.

In equipment-replacement decisions, which one of the following does not affect the
decision-making process? – Original fair market value of the old equipment
Those that do not impact capital budgeting decisions are the accrual profit or loss
and sunk costs.

All relevant costs should be considered when evaluating an equipment

replacement decision. These include the cost of the new equipment, the disposal
price of the old equipment, and excess cost or savings from operating costs of the
new equipment. The original cost or fair market value of the old equipment is a
sunk cost and is irrelevant to future decisions.

Malen Movers, Inc. is planning to purchase equipment to make its operations more
efficient. This equipment has an estimated useful life of six years. As part of this
acquisition, a P150,000 investment in working capital is required. In a discounted cash
flow analysis, this investment in working capital?  -Should be treated as an immediate
cash outflow that is recovered at the end of 6 years
Working capital is an outflow at the date of the investment and is expected to be
recovered at the end of the investmet period.

Capital budgeting techniques are least likely to be used in evaluating the -Adoption of a
new method of allocating non-traceable cost to product lines.
Capital budgeting evaluates long-term investment opportunities using the cost-
benefit analysis model. It essentially sets the direction of what the business will
be doing in the incoming years. Some of its specific applications are acquisition of
a new aircraft by a cargo company, design and implementation of a new major
advertising program, and sale by a conglomerate of an unprofitable division.

The choice "adoption of a new method of allocating non-traceable cost to product

lines" is correct because it refers to a method used in allocating non-traceable
costs which is a function more related to management accounting and not to
financial management and is least likely to be used in capital budgeting
techniques.

The capital budget is a (n) -Plan that assesses the long-term needs of the company for
plant and equipment purchases.
A capital budget maps the long-term of an enterprise to best carry its strategic
growth and survival. Capital budgeting is a technique that assesses the long-term
need and direction of an organization. It defines the business of the enterprise,
involves a huge amount of resources needed, covers a long stretch of time, and the
decision to be made is feasibly irreversible. Some of the applications of capital
budgeting is the selection of new business, replacement or retention of plant
assets, introduction of new product line, construction or lease of long-term assets,
tapping current channels of distribution or creating a new one, issuance of bonds
certificates or shares of stock, internally develop a strategic marketing program or
externally outsource, and the like.

Capital budgeting is used for the decision analysis of -All of the answers are correct
The capital budgeting process is a method of planning the efficient expenditure of
the firm's resources on capital projects. Such long-term planning is essential in
view of the rising costs of scarce resources.

The choice "adding product lines or facilities" is correct because decisions

concerning product lines or product facilities normally involve long-term period,
and therefore, covered in the capital budgeting analysis.
The choice "multiple profitable alternatives" is correct because it is relatively long-
term in nature.
The choice "lease-or-buy decisions" because the lease-or-buy decision is just one
specific example of an appropriate use of capital budgeting techniques.
All the choices given are correct.

As a capital budgeting technique, the payback period considers depreciation expense

(DE) and time value of money (TVM) as follows: -both irrelevant
Payback period measures the number of times before the net cost of investment in
recovered. At the payback time (or breakeven time), the total amount of cash
inflows is equal to the net cost of investment.
The choice is correct. Depreciation expense is not relevant in the cash inflow
computation, hence, not used in payback analysis. Also, payback period is a
traditional method and does not use the time value of money in the analysis.

High-Tech Industries is considering the acquisition of a new state-of-the-art

manufacturing machine to replace a less efficient machine. Hi-Tech has completed a net
present value analysis and found it to be favorable. Which one of the following factors
should not be of concern to Hi-Tech in its acquisition considerations? -The investment
tax credit
The choice "the investment tax credit" is correct. The investment tax credit is of no
concern because it no longer exists. The 1986 Tax Reform Act eliminated the
investment tax credit.
 In capital budgeting decisions, the following items are considered among others:
1.       Cash outflow for the investment.
2.       Increase in working capital requirement.
3.       Profit on sale of old asset.
4.       Loss on write-off of old asset.
 
For which of the above items would taxes be relevant? -items 3 and 4 only
Taxes are relevant with respect to profit and loss. Taxes are also relevant with
respect to revenues and expenses. Hence, taxes are relevant in profit of sale of old
asset and loss on write-off of old asset.

Item 1, cash outflow for the investment is not subject to taxation. Item 2, increase
in working capital, also has no tax implication.

The choice "items 3 and 4 only" is correct.

The consulting firm of Magaling Corporation is considering the replacement of their

computer system. Taking into account the income tax effect and considering the
carrying value of the old system (CVOS) and the residual value of the new system
(RVNS), which combination below applies to the decision making process? -CVOS,
irrelevant and RVNS, relevant.
The correct combination on how the carrying value of the old system (CVOS) and
the residual value of the new system (RVNS) are considered in deciding whether to
replace the old computer system or not.
This choice is correct, CVOS is irrelevant while RVNS is relevant in deciding
whether to replace or not the old system.

In capital expenditures decisions, the following are relevant in estimating operating

costs except: -Historical cost
A cost to be relevant must be incurred in the future (i.e., future costs) and that it
changes from one alternative to another (i.e., differential costs).

Future costs and differential costs are relevant costs. Cash costs are particularly
relevant in capital budgeting decisions.
The choice "future costs" is incorrect because it is used in the capital budgeting
decisions analysis.
The choice "cash costs" is incorrect because it is also used in the capital budgeting
analysis.
The choice "differential costs" is incorrect because it is likewise used in the capital
budgeting analysis.
The choice "historical costs" is correct because historical costs (i.e., suck costs,
past costs) are irrelevant in capital budgeting decisions and also in other business
decisions.

Key Corp. plans to replace a production machine that was acquired several years ago.
Acquisition cost is P450,000 with residual value of P50,000. The machine being
considered is worth P800,000 and the supplier is willing to accept the old machine at a
trade-in value of P60,000.  Should the company decide not to acquire the new machine, it
needs to repair the old one at a cost of P200,000. Tax wise, the trade-in transaction will
not have any implication but the cost to repair is tax-deductible. The effective corporate
tax rate is 35% of profit subject to tax. For purposes of capital budgeting, the net
investment in the new machine is -610,000
Acquisition of new machine, net of trade-in value of old machine (800,00-60,000) 740,000
Savings from avoided cost of repair, net of tax (200,000 * 65%) (130,000)
610,000
Kline Corporation is expanding its plant, which requires an investment of $8 million in
new equipment. Kline's sales are expected to increase by $6 million per year as a result
of the expansion. Cash investment in current assets averages 30% of sales, and
accounts payable and other current liabilities are 10% of sales. What is the estimated
total cash investment for this expansion? -9.2 million

Acquisition cost 8,000,000

Additional working capital:
Cash investment in current assets (6,000,000 * 30%) 1,800,000
Accounts payable and other current liab (6,000,000*10%) (600,000)
Total Cash Investment 9,200,000

Diliman Republic Publishers, Inc. is considering replacing an old press that cost
P800,000 six years ago with a new one that would cost P2,250,000. Shipping and
installation would cost an additional P200,000. The old press has a residual value of
P150,000 and could be sold currently for P50,000. The increased production of the new
press would increase inventories by P40,000, accounts receivable by P160,000 and
accounts payable by P140,000. Diliman Republic’s net initial investment for analyzing the
acquisition of the new press assuming a 35% income tax rate would be? -2,425,000

Solution:
Purchase price of new press 2,250,000
Shipping and installation 200,000
Proceeds from sale of old press (50,000)
Tax savings due to loss on sale[(50k-150k)*35%] (35,000)
Additional working capital (40K+160K-140K) 60,000
Net investment 2,425,000
Regal Industries is replacing a grinder purchased 5 years ago for P15,000 with a new  
one costing P25,000 cash. The original grinder is being depreciated on a straight-line
basis over 15 years to a zero residual value.  Regal will sell this old equipment to a third
party for P6,000 cash. The new equipment will be depreciated on a straight-line basis
over 10 years to a zero residual value. Assuming a 40% marginal tax rate, Regal’s net
cash investment at the time of purchase if the old grinder is sold and the new one
purchased is? -17,400
The net cost of investment, for capital budgeting purposes, includes the following
items:
 
Net purchase price P 25,000
Net proceeds from the sale of old grinder (   6,000)
Tax savings from the loss on sale of old (   1,600)
grinder (P4,000 x 40%)
Net cost of investment P 17,400
   
The purchase price should always be reflected at net of discount, whether taken
or not taken.  The net proceeds from the sale of old grinder is a cash inflow, so
deducted from cost of investment.  A loss of P4,000 resulted from the sale of the
old grinder.  That is, net sales price of P6,000 less the carrying value of P10,000
(i.e., P15,000 10/15).  The gain or loss on disposal of an old asset, by itself, has
nothing to do with the computation of net cost of investment.   The tax effects of
gain or loss on sale, however, affects in the computation of net cost of
investment.  The tax savings of P1,600 (i.e., P40,000 x 40%) generated from the
loss on sale of old equipment is an inflow, hence, a deduction from the net cost of
investment.  In case, there is a gain on sale of old asset, this will result to
additional tax payment, which shall be added to the cost of new investment.

Which of the following statements is false? - Other things held constant, a decrease in
the cost of capital (discount rate) will cause an increase in a project’s internal rate of
return (IRR)
The false statement among the choices given.

because the internal rate of return is not affected by a change in the cost of the capital.
Internal rate of return is the rate determined in the capital investment analysis while the
cost of capital is the hurdle rate determined in the financing analysis.

Lawson Inc. is expanding its manufacturing plant, which requires an investment of P4

million in new equipment and plant modifications. Lawson’s sales are expected to
increase by P3 million per year as are a result of the expansion. Cash investments in
current assets average 30% of sales; accounts payable and other current liabilities are
10% of sales.  What is the estimated total investment for this expansion? 4.6Million
&            The
cost associated in capital budgeting decisions includes not only
outlay costs but opportunity costs as well, together with the effects of taxes on
related transactions.  Outlay costs include investments in working capital
The net cost of investment is enumerated and totaled below:

New equipment and plant P4,000,000

modifications
Investment in current assets (P3 900,000
million x 30%)
Increase in current liabilities (P3 (  300,000)
million x 10%)
Net cost of investment P4,600,000
   

Karen Company is considering replacing an old machine with a new machine. Which of
the following items is economically relevant to Karen’s decisions? Ignore income tax
consideration. - Carrying amount of old machine – No Disposal value of old machine –
Yes

In equipment replacement decisions, which one of the following does not affect the
decisions–making process? -Original costs of the old equipment

In order to increase production capacity, Gunning Industries is considering

replacing an existing production machine with a new technologically improved
machine effective January 1. The following information is being considered by
Gunning Industries:
ｷ The new machine would be purchased for $160,000 in cash.  Shipping, installation, and
testing would cost an additional $30,000.
ｷ The new machine is expected to increase annual sales by  20,000 units at a sales price
of $40 per unit.  Incremental operating costs include $30 per unit in variable costs and
total fixed costs of $40,000 per year.
ｷ The investment in the new machine will require an immediate increase in working
capital of $35,000.  This cash outflow will be recovered at the end of year 5.ｷ Gunning
uses straight-line depreciation for financial  reporting and tax reporting purposes.  The
new machine has  an estimated useful life of 5 years and zero salvage value. ｷ Gunning is
subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the
following factors and rates:
 
  Present Present Value of an
Value Ordinary
Period of $1 at Annuity of $1 at
10% 10%
1 .909 .909
 2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791
 
Gunning Industries' net cash outflow in a capital budgeting decision is -225,000
The machine costs $160,000 and will require $30,000 to install and test. In addition, the
company will have to invest in $35,000 of working capital to support the production of
the new machine. Thus, the total investment necessary is $225,000.
The choice "$190,000" is incorrect because $190,000 ignores the investment in working
capital.

The Dickins Corporation is considering the acquisition of a new machine at a cost of

$180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the
machine will cost an additional $18,000. It has a 10-year life and is expected to have a
salvage value of $10,000. Furthermore, the machine is expected to produce 4,000
units per year with a selling price of $500 and combined  direct materials and direct
labor costs of $450 per unit. Federal tax regulations permit machines of this type to be
depreciated using the straight-line method over 5 years with no estimated salvage
value. Dickins has a marginal tax rate of 40%.
 What is the net cash flow for the tenth year of the project that Dickins should use
in a capital budgeting analysis? 126,000
-The company will receive net cash inflows of $50 per unit ($500 selling price - $450 of
variable costs), a total of $200,000 per year for 4,000 units. This amount will be subject
to taxation, as will the $10,000 gain on sale of the investment, resulting in taxable
income of $210,000. No depreciation will be deducted in the tenth year because the asset
was fully depreciated after 5 years. Because the asset was fully depreciated (book value
was $0), the $10,000 received as salvage value is fully taxable. At 40%, the tax on
$210,000 is $84,000. After subtracting $84,000 of tax expense from the $210,000 of
inflows, the net inflows amount to $126,000.

Arlene Inc. currently has annual cash revenues of P2,400,000 and annual operating costs
of P1,850,000 (all cash items except depreciation of P350,000). The company is
considering the purchase of a new machine costing P1,200,000 that would increase cash
revenues to P2,900,000 and operating costs (including depreciation) to P2,050,000.   The
new machine would increase depreciation to P500,000 per year.  Revenues are expected
to increase to 2,900,000 and assuming a 35% income tax rate, Arlene’s incremental after
tax cash flows from the machine would be: 345,000
Incremental sales (P2,900,000 – P2,400,000) P 500,000
Incremental costs (P2,050,000 – P1,850,000) ( 200,000)
Incremental profit before tax 300,000
Incremental tax (35%) ( 105,000)
Incremental profit 195,000
Add:Increase in depreciation expense (P500,000 – P350,000) 150,000
Incremental cash inflows P 345,000
 The Moore Corporation is considering the acquisition of a new machine. The machine
can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and
$9,000 to install. It is estimated that the machine will last 10 years, and it is expected
to have an estimated salvage value of $5,000. Over its 10-year life, the machine is
expected to produce 2,000 units per year with a selling price of $500 and combined
material and labor costs of $450 per unit. Federal tax regulations permit machines of
this type to be depreciated using the straight-line method over 5 years with no
estimated salvage value. Moore has a marginal tax rate of 40%.
 What is the net cash flow for the tenth year of the project that Moore Corporation should
use in a capital budgeting analysis? -63,000
The company will receive net cash inflows of $50 per unit ($500 selling price - $450
of variable costs), or a total of $100,000 per year. This amount will be subject to
taxation, as will the $5,000 gain on sale of the investment, bringing taxable income
to $105,000. No depreciation will be deducted in the tenth year because the asset
was fully depreciated after 5 years. Because the asset was fully depreciated (book
value was zero), the $5,000 salvage value received would be fully taxable. After
income taxes of $42,000 ($105,000 x 40%), the net cash flow in the tenth year is
$63,000 ($105,000 - 42,000).

Waltz Co. is considering the acquisition of a new, more efficient press. The cost
of the press is P360,000, and the press has an estimated 6-year life with zero
residual value.  Waltz uses straight-line depreciation for both financial reporting
and income tax reporting purposes and has a 40% corporate income tax rate. In
evaluating equipment acquisitions of this type, Waltz uses a goal of a 4-year
payback period. To meet Waltz desired payback period, the press must produce a
minimum annual before-tax operating cash savings of -110,000
The amount to be determined is the cash flows from operations before taxes.  
The format in computing the net cash inflows after tax starts from cash flows
from operations, as follows:
Cash flows before taxes (unknown) P110,000 
Depreciation expense (P360,000/6 60,000
yrs.)
Profit before income 50,000
tax(P30,000/60%)
Income tax (P50,000 x 40%) 20,000
Profit 30,000
+  Depreciation expense 60,000
Net cash inflows  (P360,000/4 yrs.) P 90,000
The cash flows before taxes are computed by moving backwards.  First, we compute
the net cash inflows by dividing the cost of investment over the payback period.  
 Second, we deduct from net cash inflows the depreciation expense to arrive at the
profit of P30,000.  Since there is a 40% tax rate, it follows that profit is 60% of the
 profit before income tax (PBIT).  Hence, PBIT is profit divided by 60%.  Then move
back further by adding the depreciation expense of P50,000 to determine the cash
flows before taxes of P110,000.

Garfield, Inc. is considering a 10-year capital investment project with forecasted

revenues of P40,000 per year and forecasted cash operating expenses of P29,000
per year. The initial cost of the equipment for the project is P23,000, and Garfield
expects to sell the equipment for P9,000 at the end of the tenth year. The
equipment will be depreciated over 7 years. The project requires working capital
investments of P7,000 at its inception and another P5,000 at the end of year 5.
Assuming a 40% marginal tax rate, the expected net cash flows from the project
in the tenth year is? 24,000
&            The net cash flows in the tenth year are presented as follows:
Sales P 40,000
Operating expenses  ( 29,000)
Profit before income tax    11,000
- Income tax (40%)      4,400
Cash inflows before tax savings  6,600
Proceeds from sale of old equipment      9,000
Tax paid to gain on sale of old equipment   (   3,600)
(P9,000 x 40%)
Recovery of working capital (P5,000 +    12,000
P7,000)
Net cash inflows – 10th year P 24,000
   
There is no depreciation expense recorded in the tenth year because the old equipment is
depreciated over seven years only.  The working capital totals P12,000.  This amount was
an outflow when infused in the operations and are expected to be recovered back to cash
when the project terminates.  The recovery of working capital is not subject to tax.
There are 3 sources of cash in the last year of the project, namely: (1) after cash flows
from operations; (2)residual value, net of tax; and, (3) recovery of working capital.

Kore Industries is analyzing a capital investment proposal for new equipment to

produce a product over the next 8 years. The analyst is attempting to determine
the appropriate "end-of-life" cash flows for the analysis. At the end of 8 years, the
equipment must be removed from the plant and will have a net book value of zero,
a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of
$10,000. Kore's effective tax rate is 40%. What is the appropriate "end-of-life"
cash flow related to these items that should be used in the analysis?  -12,000

-The key to solving this problem is separating the cash flow items from the
noncash items. The $40,000 cost to remove the asset is a cash outflow. The scrap
salvage value of $10,000 is a cash inflow. Both of these items are also part of the
net income upon which tax must be computed. The $75,000 loss that will result
from the disposal is also part of the net income upon which tax must be computed.
However, the loss is not a cash outflow. What is a cash flow is the tax or tax
savings in the net income or loss. The "end-of-life" cash flow may be calculated as
follows:

Outflow: Cost to remove ($ 40,000)

Inflow: Salvage value $ 10,000

Inflow: Tax savings from

net loss $ 42,000 *

----------

Net cash inflow $ 12,000

* The tax savings is calculated on a net loss of $105,000. The loss is a result of the
$65,000 tax loss on the asset disposal ($75,000 tax basis offset by $10,000 scrap
value) and the $40,000 cost to remove the asset.
Which of the following statements concerning cash flow determination for capital
budgeting purposes is not correct? -Book depreciation is relevant because it
affects profit.

Jasper Company has a payback goal of 3 years on new equipment acquisitions. A

new sorter is being evaluated that costs $450,000 and has a 5-year life. Straight-
line depreciation will be used; no salvage is anticipated. Jasper is subject to 40%
income tax rate. To meet the company's payback goal, the sorter must generate
reductions in annual cash operating costs of -190,000
The payback period is calculated by dividing cost by the annual cash inflows, or
cash savings. To achieve a payback period of 3 years, the annual increment in net
cash inflow generated by the investment must be $150,000 ($450,000 ・ 3-year
targeted payback period). This amount equals the total reduction in cash operating
costs minus related taxes. Depreciation is $90,000 ($450,000 ・ 5 years). Because
depreciation is a non-cash deductible expense, it shields $90,000 of the cash
savings from taxation. Accordingly, $60,000 ($150,000 - $90,000) of the additional
net cash inflow must come from after-tax net income. At a 40% tax rate, $60,000 of
after-tax income equals $100,000 ($60,000 ・ 60%) of pre-tax income from cost
savings, and the outflow for taxes is $40,000. Thus, the annual reduction in cash
operating costs required is $190,000 ($150,000 additional net cash inflow required
+ $40,000 tax outflow).

Whatney Co. is considering the acquisition of a new, more efficient press. The
cost of the press is $360,000, and the press has an estimated 6-year life with zero
salvage value. Whatney uses straight-line depreciation for both financial reporting
and income tax reporting purposes and has a 40% corporate income tax rate. In
evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year
payback period. To meet Whatney's desired payback period, the press must
produce a minimum annual before-tax operating cash savings of -110,000

In order to increase production capacity, Gunning Industries is considering replacing

an existing production machine with a new technologically improved machine
effective January 1. The following information is being considered by Gunning
Industries:
 ｷ The new machine would be purchased for $160,000 in cash.  Shipping, installation, and
testing would cost an additional $30,000.
ｷ The new machine is expected to increase annual sales by  20,000 units at a sales price
of $40 per unit.  Incremental operating costs include $30 per unit in variable costs and
total fixed costs of $40,000 per year.
ｷ The investment in the new machine will require an immediate increase in working
capital of $35,000.  This cash outflow will be recovered at the end of year 5.ｷ Gunning
uses straight-line depreciation for financial  reporting and tax reporting purposes.  The
new machine has  an estimated useful life of 5 years and zero salvage value. ｷ Gunning is
subject to a 40% corporate income tax rate.
Gunning uses the net present value method to analyze investments and will employ the
following factors and rates:  
  Present Present Value of an
Value Ordinary
Period of $1 at Annuity of $1 at
10% 10%
1 .909 .909
2 .826 1.736
3 .751 2.487
4 .683 3.170
5 .621 3.791
 
The acquisition of the new production machine by Gunning Industries will
contribute a discounted net-of-tax contribution margin of  -454,920
The new machine will increase sales by 20,000 units a year. The increase in the
pretax total contribution margin will be $200,000 per year [20,000 units x ($40 SP -
$30 VC)], and the annual increase in the after-tax contribution margin will be
$120,000 [(1.0 - .4) x $200,000]. 

The present value of the after-tax increase in the contribution margin over the 5-year
useful life of the machine is $454,920 ($120,000 x 3.791 PV of an ordinary annuity for 5
years at 10%). 
The Moore Corporation is considering the acquisition of a new machine. The machine
can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and
$9,000 to install. It is estimated that the machine will last 10 years, and it is expected
to have an estimated salvage value of $5,000. Over its 10-year life, the machine is
expected to produce 2,000 units per year with a selling price of $500 and combined
material and labor costs of $450 per unit. Federal tax regulations permit machines of
this type to be depreciated using the straight-line method over 5 years with no
estimated salvage value. Moore has a marginal tax rate of 40%.
 What is the net cash flow for the third year that Moore Corporation should use in
a capital budgeting analysis? -68,400
The company will receive net cash inflows of $50 per unit ($500 selling price - $450
of variable costs), or a total of $100,000 per year. This amount will be subject to
taxation, but, for the first 5 years, there will be a depreciation deduction of $21,000
per year ($105,000 cost divided by 5 years). Therefore, deducting the $21,000 of
depreciation expense from the $100,000 of contribution margin will result in
taxable income of $79,000. After income taxes of $31,600 ($79,000 x 40%), the net
cash flow in the third year is $68,400 ($100,000 - $31,600).

A company considers a project that will generate cash sales of P50,000 per year.
Fixed costs will be P10,000 per year, variable costs will be 40% of sales, and
depreciation of the equipment in the project  will be P5,000 per year. Taxes are
40%. The expected annual cash flow to the company resulting from the project is?
-14,000
Net cash inflows are profit add back depreciation expense, as follows:
Contribution margin (P50,000 x 60%) P30,000
Fixed costs 10,000
 Depreciation expense     5,000
Profit before income taxes 15,000
Income tax (40%)     6,000
Profit     9,000
Add back :  Depreciation expense     5,000
Net cash inflows P14,000
 The depreciation expense is assumed to have not been included in the fixed cost.  
Alternatively, net cash inflows are equal to:
Cash flows before tax P20,000
(P30,000 – P10,000)
 - Tax [(P20,000 – P5,000)     6,000
x 40%]
Cash flows after tax P14,000
   
Also, the net cash flows are computed as follows:

Operating cash after   P12,000

tax (P20,000 x 60%)
Tax savings from (P500 x 40%) 2,000
depreciation expenses
Net cash flows after   P14,000
tax
     

The following selected data pertain to a 4-year project being considered by Metro
Industries:
 
 ｷ A depreciable asset that costs $1,200,000 will be acquired on January 1.   The asset,
which is expected to have a $200,000salvage value at the end of 4 years, qualifies as 3-
year property under the Modified Accelerated Cost Recovery System (MACRS).
ｷ The new asset will replace an existing asset that has a tax basis of $150,000 and can be
sold on the same January 1 for $180,00
ｷ The project is expected to provide added annual sales of 30,000 units at $20.  
Additional cash operating costs are: variable, $12 per unit; fixed, $90,000 per year.
ｷ A $50,000 working capital investment that is fully recoverable at the end of the fourth
year is required Metro is subject to a 40% income tax rate and rounds all computations to
the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the
year in which it occurred. The company uses the net present value method to analyze
investments and will employ the following factors and rates.
 
  Present Present  
Value Value of
Period of $1 at $1 Annuity MACRS
12% at 12%
1 0.89 0.89 33%
2 0.80 1.69 45
3 0.71 2.40 15
4 0.64 3.04 7
 
The discounted, net-of-tax amount that relates to disposal of the existing asset
is? -169,320
$169,320
because $168,000 fails to discount the outflow for taxes. The cash inflow from
the existing asset is $180,000, but that amount is subject to tax on the $30,000
gain ($180,000 - $150,000 tax basis). The tax on the gain is $12,000 (40% x
$30,000). Because the tax will not be paid until year-end, the discounted value is
$10,680 ($12,000 x .89 PV of $1 at 12% for one period). Thus, the net-of-tax inflow
is $169,320 ($180,000 - $10,680). NOTE: This asset was probably a Section
1231asset, and any gain on sale qualifies for the special capital gain tax rates.
Had the problem not stipulated a 40% tax rate, the capital gains rate would be
used. An answer based on that rate is not among the options.  because $180,000
ignores the impact of income taxes. because the discounted present value of the
income taxes is an outflow and is deducted from the inflow from the sale of the
asset.
 CMA 0693 4-22
The discounted cash flow for the fourth year MACRS depreciation on the new asset is -
21,504
The overall discounted-cash-flow impact of the working capital investment on
Metro's project is? –(18,000)
The expected incremental sales will provide a discounted, net-of-tax contribution
margin over 4 years of -437,760

A depreciation tax shield is ? Is -A reduction in income taxes

Metrejean Industries is analyzing a capital investment proposal for new

equipment to produce a product over the next 8 years. At the end of 8 years, the
equipment must be removed from the plant and will have a net book value of $0, a
tax basis of $150,000, a cost to remove of $80,000, and scrap salvage value of
$20,000. Metrejean's effective tax rate is 40%. What is the appropriate "end-of-
life" cash flow related to these items that should be used in the analysis?  -24,000

Which one of the following statements concerning cash flow determination for
capital budgeting purposes is not correct? - Book depreciation is relevant
because it affects net income.

If income tax considerations are ignored, how is depreciation used in the

following capital budgeting techniques? - Internal Rate of Return, Excluded;
Accounting Rate of Return, Included.

An organization has four investments proposals with the following costs and
expected cash inflows:
        Expected cash
Inflows
     End of End of End of
Project Cost Year 1 Year 2 Year 3
A Unknown P10,000 P10,000 P10,000
B P20,000 P  5,000 P10,000 P15,000
C P25,000 P15,000 P10,000 P  5,000
D P25,000 P20,000 Unknown P20,000
         
 
Additional Information
                                                                       
                       
      Present Value of
      an Annuity of
  Number of Present Value of P1 Due P1 Due at the
Discount Periods at the End of n Periods End of n
Rate (PVF) Periods (PVFA)
        5%                                 1                                        0.9524                                  
      0.9524
        5%                                 2                                        0.9070                                  
      1.8594
        5%                                 3                                        0.8638                                  
      2.7232
        10%                              1                                        0.9091                                  
      0.9091
        10%                              2                                        0.8264                                  
      1.7355
        10%                              3                                        0.7513                                  
      2.4869
        15%                              1                                        0.8696                                  
      0.8696
        15%                              2                                        0.7561                                  
      1.6257
        15%                              3                                        0.6575                                  
      2.2832
 If the discount rate is 5% and the discounted payback period of Project D is exactly 2
years, then the year 2 cash inflow for Project D is -12,075
The cost of project D is P30,000.  The total of the discounted cash inflows should
also be P30,000.  Therefore, the net cash inflow in year 2 is:

Present value of all cash inflows P30,000

Present value of cash inflows – year 1 ( 19,048)
(P20,000 x 0.9524)
Present value of cash inflows – year 2 P10,952
using the discounted payback period
    
Net cash inflows – 2nd year P12,075
(P10,952/0.9070)

Lor Industries is analyzing capital investment proposals for new machinery to produce a
new product over the next 10 years. At the end of 10 years, the machinery must be
disposed of with a net zero carrying value but with a residual value of P20,000. It will
require some P30,000 to remove the machinery. The applicable tax rate is 35%. The
appropriate “end-of-life” cash flow based on the foregoing information is: -outflow of
6,500
The appropriate end-of-life cash flows are:

Net residual value P13,000

(P20,000 x 65%)
Net removal costs   (19,500)
(P30,000 x 65%)
Net relevant “end-of- P( 6,500
life” cash outflows

The Apex Company is evaluating a capital budgeting proposal for the current year.  
The relevant data follow:
 
Present value of an Annuity of P1
Year                                        in Arrears at 15%
                  1                                                            P0.870
                  2                                                              1.626
                  3                                                              2.284
                  4                                                              2.856
                  5                                                              3.353
                  6                                                              3.785
 
The initial equipment investment would be P30,000.  Apex would depreciate the
equipment for tax purposes on a straight-line basis over six years with a zero
terminal disposal price.  The before-tax annual cash inflow arising from this
investment is P10,000.  The income tax rate is 40%, and income tax is paid the
same year as incurred. The after-tax required rate of return is 15%.

What is the after-tax accrual accounting rate of return on Apex’s initial equipment
investment? -10%
ARR is profit divided by the amount of investment. The profit is determined as
follows:
 Cash flows before tax P10,000
- Depreciation expense     5,000
(P30,000/6 yrs.)
Income before tax P  5,000
- Tax (40%)     2,000
Profit P  3,000
The ARR on original investment is 10% (i.e., P3,000 / P30,000).
The choice "10 %" is correct.

Mark Company purchased a new machine on January 1 of this year for an amount of
P90,000, with an estimated useful life of 5 years and a residual value of P10,000. The
machine will be depreciated using the straight-line method. The machine is expected to
produce cash flows from operations, net of income taxes, of P36,000 a year in each of
the next 5 years.  The new machine’s residual value is P20,000 in years 1 and 2, and
P15,000 in years 3 and 4  What will be the bailout period (rounded) for this new machine?
-1.9 years
The payback bailout period is computed as follows:

  Net cash Cash to Salvage   Payback

Period inflows date value Total cash bailout years
1 P36,000 P36,000 P20,000 P56,000 1
2 36,000 72,000 20,000 90,000 0.9
Total         1.9 yrs
The fraction of the payback period in the second year of operations is computed as
[(P90,000 – P36,000 – P20,000)/P36,000].  This indicates that the needed cash in the
second year amounting to P54,000 (i.e., P90,000 – P36,000) is taken first from the
residual value, then the balance of P34,000 (i.e., P54,000 - P20,000) is recovered from
the cash streams of the second year.

CMA 0691 4-18

The accounting rate of return  - Focuses on income as opposed to cash flows

When using one of the discounted cash flow methods to evaluate the desirability of a
capital budgeting project, which of the following factors generally is not important? - The
method of financing the project under consideration.

A company purchased a new machine to stamp the company logo on its products.   The
cost of the machine was P250,000, and it has an estimated useful life of 5 years with an
expected residual value at the end of its useful life of P50,000.  The company uses the
straight-line depreciation method.
 The machine is expected to save P125,000 annually in operating costs.   The company’s tax

rate is 40%, and it uses a 10% discount rate to evaluate capital expenditures.  

    Present Value of an
Ordinary Annuity of P1
Year Present value of  P1

1 .909 .909

2 .826                 1.735

3 .751                 2.486

4 .683                 3.169

5 .621                 3.790

  

What is the accounting rate of return based on the average investment in the new stamping
machine? -34.0%

Accounting rate of return on average investment is profit divided by average

investment.  The amount of average investment is original cost plus residual
value, divided by 2.  The average investment is measured over the entire life of the
asset.  The ARR is computed as follows:

Profit P  51,000
/  Average investment   150,000
[(P250,000 + P50,000) /
2]
Accounting rate of return          34%
   
   
The choice "34.0%" is correct.

Which one of the following statements about the payback method of investments
analysis is correct?  - Does not consider the time value of money.

CMA 0696 4-26

Which one of the following capital investment evaluation methods does not take
the time value of money into consideration? -Accounting Rate of return
CMA 0695 4-6
 McLean Inc. is considering the purchase of a new machine that will cost $160,000. The
machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base
will be depreciated in the first year, 40% in the second year, and 30% in the third year.
The new machine will have a $10,000 resale value at the end of its estimated useful life.
The machine is expected to save the company $85,000 per year in operating expenses.
McLean uses a 40% estimated income tax rate and a 16% hurdle rate to  evaluate capital
projects.  
Discount rates for a 16% rate are as
follows:
  Present Present Value of
Value of $1 an Ordinary
Annuity of $1
Year .862 .862
1
Year .743 1.605
2
Year .641 2.246
3
 The payback period for this investment would be? -2.23 years
The payback period is the number of years required for the cumulative net cash inflows
to equal the original investment. The future net cash inflows consist of $69,000 in years
one and three, $75,000 in year two, and $10,000 upon resale. After 2 years, the
cumulative undiscounted net cash inflow equals $144,000. Thus, $16,000 ($160,000 -
$144,000) is to be recovered in the third year, and payback should be complete in
approximately 2.23 years [2 years + ($16,000 ・$69,000 net cash inflow in third year)].

Depreciation tax shield is -A reduction in income tax

Henderson Inc. has purchased a new fleet of trucks to deliver its merchandise. The
trucks have a useful life of 8 years and cost a total of $500,000. Henderson expects its
net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2,
$125,000 in Year 3, and $100,000 in each of the remaining years.  
Assume the net cash flow to be $130,000 a year. What is the payback time for the
fleet of trucks? -3.85 years

Lin Co. is buying machinery it expects will increase average annual operating income by
P40,000. The initial increase in the required investment is P60,000, and the average
increase in required investment is P30,000. To compute the accrual accounting rate of
return, what amount should be used as the numerator in the ratio? -40,000

CMA 1294 4-24

The method that divides a project's annual after-tax net income by the average
investment cost to measure the estimated performance of a capital investment is
the -Accounting rate of return method
CMA 0692 4-21
The technique that measures the estimated performance of a capital investment
by dividing the project's annual after-tax net income by the average investment
cost is called the  -Accounting rate of return method

CMA 1294 4-25

The capital budgeting model that is generally considered the best model for long-
range decision making is the -Discounted cash flow model

Nakane Company is planning to purchase a new machine for P500,000.  The new
machine is expected to produce cash flows from operations, before income taxes, of
P135,000 a year in each of the next five years. Depreciation of P100,000 a year will be
charged to income for each of the next five years.  Assume that the income tax rate is
40%.  The payback period would be approximately 4.1 years
When cash flows are uniform, payback period is computed by dividing the cost of
investment over the annuity cash inflows.  Since, the given cash flows are before
taxes, the after-tax cash inflows are calculated as follows:
 
        Cash flows before taxes                                   P135,000
                -  Depreciation expense                               100,000
        Profit before income tax                                       35,000
        -  Income tax (40%)                                                14,000
        Profit                                                                         21,000
        +  Depreciation expense                                     100,000
        Annual cash inflows                                          P121,000

The payback period is 4.1 years (i.e., P500,000/P121,000).

The payback capital budgeting technique considers

Income over entire life of Project                         Time value of money
          No                                                                                       No

Which one of the following methods of evaluating potential capital projects would take
into account depreciation expense that was nondeductible for tax purposes? -
Accounting rate of return approach.

CMA 1295 4-13

 Willis Inc. has a cost of capital of 15% and is considering the acquisition of a new
machine which costs $400,000 and has a useful life of 5 years. Willis projects that
earnings and cash flow will increase as follows: 
  Net After-Tax
 Year Earnings Cash
Flow
1 $100,000 $160,000
2 100,000 140,000
3 100,000 100,000
4 100,000 100,000
5 200,000 100,000
 What is the payback period of this investment? -3 years

The method of project selection which considers the time value of money in a capital
budgeting decision is accomplished by computing the -Discounted cash flow

`A proposed investment is not expected to have any salvage value at the end of
its 5-year life. For present value purposes, cash flows are assumed to occur at
the end of each year. The company uses a 12% after-tax target rate of return.  
  Purchase Annual Net Annual
Cost After
Year and Book Tax Cash Net
Value Flows Income
0 $500,000 $      0 $      0
1 336,000 240,000 70,000
2 200,000 216,000 78,000
3 100,000 192,000 86,000
4 36,000 168,000 94,000
5 0 144,000 102,000
 
Discount Factors for a 12% Rate of Return
     Present    Present Value of
Value of $1 at an Annuity of
Year the End of $1 at the End of
Each Period Each Period
1 .89 .89
2 .80 1.69
3 .71 2.40
4 .64 3.04
5 .57 3.61
6 .51 4.12
 The net present value is  -212,320 (smaller font)
How long must one wait (to the nearest year) for an initial investment to triple in value if the
investment earns 9% compounded annually? -13
The tripling occurs when the factor on an amount-of-one table reaches 3.0. At 9%,
this first occurs at 13 years. is incorrect because it takes 16 years to triple at 7.5%.
is incorrect because it takes 17 years to triple at 7%is incorrect because it takes 22
years to triple at 5 ｼ % interest.

Which of the following changes would result in the highest present value? -A P100 decrease in
taxes each year for four years.

Which of the following is a series of equal payments at equal intervals of time with each payment
made (received) at the beginning of each time period? -Annuity due

Assume your uncle recorded his salary history during a 40-year career and found that it had
increased ten-fold. If inflation averaged 5% annually during the period, how would you describe
his purchasing power, on average? -He "beat" inflation by nearly 1% annually.

Which one of the following sets of interest (or discount) rates will give the greater
present value of P1.00 and greater future value of P1.00?
                Greater                  Greater
Present Value      Future Value
8% 10%

The net present value and internal rate of return methods of capital budgeting are
superior to the payback method in that they: -consider the time value of money

Pole Co. is investing in a machine with a three-year life. The machine is expected
to reduce annual cash operating costs by P30,000 in each of the first two
years and by P20,000 in year 3. Present values of an annuity of P1 at 14%
are:
Period        1              0.88
                    2              1.65
                    3              2.32
 
Using a 14% cost of capital, what is the present value of these future savings? -62900

Your real estate agent mentions that homes in your price range require a payment of
approximately $800 per month over 30 years at 10% interest. What is the approximate size of the
mortgage with these terms? -91,20 0

For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500
per annum, before adjusting for $5,000 per annum tax basis lease amortization, and a
40% tax rate.  The present value of an ordinary annuity of $1 per year at 10% for 2 years
is 1.74.  What is the lease’s after-tax present value using a 10% discount factor? -11,310
Which of the following statements is most correct? (M) -The MIRR method uses a more
reasonable assumption about reinvestment rates than the IRR method.

Projects A and B have the same expected lives and initial cash outflows. However, one
project’s cash flows are larger in the early years, while the other project has larger cash
flows in the later years.  The two NPV profiles are given below:
Which of the following statements is most correct? -Project A has the larger cash flows
in the later years.

If the tax law were changed so that owners of apartment buildings had to depreciate
them over 50 years instead of the current 31.5 years -Rents would rise

Polo Company requires higher rate of return for projects with a life span greater than 5
year. Projects extending beyond 5 years must earn a higher specified rate of
return.  Which of the following capital budgeting techniques can readily accommodate
this requirement? -No,Yes

Which of the following statements is most correct?

The weighted average cost of capital for a given capital budget level is a weighted average of
the marginal cost of each relevant capital component that makes up the firm’s target capital
structure.
The weighted average cost of capital is calculated on a before-tax basis. An increase in the
risk-free rate is likely to increase the marginal costs of both debt and equity financing.
Statements a and c are correct.