MANAGEMENT ADVISORY SERVICES, Quizzes of Accounting

Download MANAGEMENT ADVISORY SERVICES and more Quizzes Accounting in PDF only on Docsity! CPAR CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a MANAGEMENT ADVISORY SERVICES MANAGEMENT ACCOUNTING & BASIC CONCEPTS; COST CONCEPTS & COST BEHAVIOR MANAGEMENT CONSULTANCY Management Consultancy can be described as an independent and objective advisory services provided by qualified persons to clients in order to help them identify and analyze management problems and opportunities. MANAGEMENT CONSULTANT is a person who is qualified by education, experience, technical ability, and temperament to advise or assist businessmen on a professional basis in identifying, defining, and solving specific management problems involving the organization, planning, direction, control, and operation of the firm. The client in MAS practice is the management. Managers are entrusted with the entity’s resources to safe keep and use it to increase entity’s wealth. The role of consultants is to provide technical advice and assistance to its clients on areas which needed development, solution or improvements. It involves the ability to find facts and define basic problems (not the symptoms), identify alternative solutions and recommend solutions under the circumstances. NOTE: Consultants are INDEPENDENT PERSON, AN OUTSOURCED PROVIDER and NOT AN INTERNAL EMPLOYEE of the organization. Thus, the advice provided by the consultant are mere guide only in decision making, the FINAL DECISION still rests with the MANAGEMENT. MANAGEMENT ACCOUNTING Functions of Management (a) Planning – involves setting of goals and objectives of the firm, whether short-term or long-term, evaluation and choosing of best alternatives in meeting the goals. (b) Organizing / Directing – these are known as tackling activities. It is a function through which management instructs, guides, and inspires the employees by communicating with them. (c) Controlling – involves evaluation of actual performance whether it conforms to the planned results. (d) Decision Making – involves determination of predictive information for making important business decisions. NOTE: Decision making is inherent in all management functions. FINANCIAL ACCOUNTING VS. MANAGEMENT ACCOUNTING Areas of Comparison Financial Accounting Management Accounting (1) Users of Information Internal & External (Primarily) Internal (Exclusively) (2) Restrictive Guidelines PFRS / PAS / GAAP None (3) Type of Information Monetary Monetary & Non-monetary (4) Emphasis of Report Reliability (Precision) Relevance (Timeliness) (5) Information Source Internal Data Internal & External Data (6) Focus of Analysis Business as a Whole Various Segments (7) Frequency of Reporting Periodic Whenever needed (8) Time Orientation Historical Projected (Primarily) & Historical MAS 9201 MAS 9201 MANAGEMENT ACCOUNTING Page 2 of 17 COST CONCEPTS & COST BEHAVIOR LINE VS. STAFF FUNCTIONS Line Authority Managers with line authority are those people in the organization who are directly responsible for achieving organizational goals. Line authority is represented by the standard chain of command starting with the board of directors and extending down activities of the organization that are carried out. Managers with line authority exercises downward authority or the authority to give command. Staff Authority Staff authority belongs to those individuals or groups in an organization who provide services and advice to line mangers. The concept of staff includes all elements of the organization that are not classified as line. Advisory staffs have been used by decision makers from emperors and kings to dictators and parliaments over the course of recorded history. Persons with staff authority exercise an upward or lateral authority. CONTROLLER VS. TREASURER Controllership is the practice of the established science of control which is the process by which management assures itself that the resources are procured and utilized according to plans in order to achieve the company’s objectives. Treasurership is concerned with the acquisition, financing and management of assets of a business concern to maximize the wealth of the firm for its owners. NOTE: Generally, the above functions should NOT be combined on the same person. Controller’s Functions Treasurer’s Function Reporting and Interpreting Data Provision of Capital Tax Administration Investor Relations Government Reporting Short-term Financing Management Audit Banking and Custody of Funds Internal Audit Credit and Collections Government Reporting Investments and Insurance Economic Appraisal Protection of Assets STANDARDS FOR ETHICAL CONDUCT FOR MANAGEMENT ACCOUNTANTS Practitioners of management accounting have an obligation to the organization they serve, their profession, the public and themselves to maintain the highest standard of ethical conduct. In recognition of this obligation, the Institute of Management Accountants has promulgated the following standards: I. COMPETENCE 1. Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and skills. 2. Perform professional duties in accordance with relevant laws, regulations, and technical standards. 3. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and help manage risk. II. CONFIDENTIALITY 1. Keep information confidential except when disclosure is authorized or legally required. 2. Inform all relevant parties regarding appropriate use of confidential information. Monitor to ensure compliance. 3. Refrain from using confidential information for unethical or illegal advantage. III. INTEGRITY 1. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts of interest. 2. Refrain from engaging in any conduct that would prejudice carrying out duties ethically. MAS 9201 MANAGEMENT ACCOUNTING Page 5 of 17 COST CONCEPTS & COST BEHAVIOR STEP 4: Formulate the cost equation that will be used in different level of activities WITHIN RELEVANT RANGE. (6) LEAST-SQUARE METHOD / LINEAR REGRESSION It is a statistical technique that may be used to estimate a linear total cost function for a mixed cost. This method is considered to be the most accurate since it derives the fixed and variable cost by means of statistical analysis. In using least-square method, the following equations are to be used: ∑y = n a + b ∑ x ∑xy = a ∑ x + b ∑ x2 CORRELATION ANALYSIS Correlation analysis is a method of statistical evaluation used to study the strength of a relationship between two, numerically measured, continuous variables Coefficient of correlation (r) – is a measure of the extent of linear relationship. The results extend from -1 to +1. If r is positive, there is a direct relationship between x and y. When r is negative, there is an inverse relationship between x and y. And when r is 0, there is no relationship at all between x and y. Coefficient of determination (r2) – represents the percentage of the total variation in the dependent variable. The results extend from 0 to +1. High r2 means that cost driver is highly related to the dependent variable. Standard Error of Estimate - is the measure of variation of an observation made around the computed regression line. EXERCISES: EXERCISE 1 (MULTIPLE CHOICE QUESTIONS FOR MANAGEMENT CONSULTANCY & MANAGEMENT ACCOUNTING) 1. Which of the following characterizes MAS? I. Broad and diversity in scope. III. Management is the main beneficiary of the service II. Limited to CPAs. A. I and II D. I, II and III B. II and III E. Answer not given C. I and III 2. A CPA should reject an MAS engagement if A. It would require him to make management decisions for an audit client. B. His recommendations are to be subject to review by the client. C. He audits the financial statements of a subsidiary of the prospective client. D. The proposed engagement is not accounting-related. 3. Managerial accounting: A. focuses only on historical data. B. is governed by GAAP. C. focuses primarily on the needs of personnel within the organization. D. provides information for parties external to the organization. E. focuses on financial statements and other financial reports. 4. Which of the following statements is (are) true regarding financial and managerial accounting? I. Both are mandatory. II. Both rely on the same underlying financial data. III. Both emphasize the segments of an organization, rather than just looking at the organization as a whole. IV. Both are geared to the future, rather than to the past. A. I, II, III, and IV C. Only II and III B. Only II, III and IV D. Only II MAS 9201 MANAGEMENT ACCOUNTING Page 6 of 17 COST CONCEPTS & COST BEHAVIOR 5. To distinguish between management accounting and financial accounting, the following statements are correct, except A. Management accounting, in view of its various integrated recipients should have a separate data recording and retrieval system from financial accounting. B. Financial accounting is bound by GAAP, and management accounting need not be in conformity with GAAP. C. Financial accounting can be regarded as the process while management accounting can be regarded as the product of the process. D. Management accounting output must be released on time so as not to erode its usefulness; Financial accounting output can still be useful even when delayed. 6. ______________ is an example of a line position. A. Controller for a merchandising company B. Chief financial officer of a merchandising company C. Store manager for Best Buy D. Human resources manager for a community college 7. Controllership has attained special recognition in corporate management as business expands in complexity and reach, and as the controller exerts influence for management to take organization’s goals. Controllership and treasurership constitute corporate finance. These are among the controller’s traditional functions: 1. Tax management. 5. Reporting to government regulatory agencies. 2. Financial reporting and interpretation. 6. Risk management. 3. Credit management. 7. Economic appraisal. 4. Sourcing and investing of funds. 8. Planning for control. A. All eight items. C. Items 1, 2, 3, 4, 5, 7, and 8 only. B. Items 1, 2, 5, 7, and 8 only. D. 2, 3, 5, and 7, and 8 only. 8. Which ethical standard has been violated if an accountant fails to disclose relevant information pertaining to a financial statement? A. Competence C. Integrity B. Confidentiality D. Credibility EXERCISE 2 (COST CLASSIFICATION) The following costs were presented by FURION INC. in relation to its production process: Direct Material Cost P450,000 Gas and Lubricants for Production Equipment 120,000 Gas and Lubricants for Delivery Truck 150,000 Salary of Assembly Line Workers 500,000 Salary of Maintenance Team of Factory Equipment 150,000 Fringe Benefits of Assembly Line Workers 45,000 Outgoing Inspection Cost 60,000 Utilities Expense (2/3 incurred by factory) 120,000 Property Taxes (1/4 for factory building) 100,000 Depreciation (2/5 for production process) 300,000 Other Factory Overhead 150,000 Freight Out 220,000 Abnormal Factory Losses 110,000 Wastage and Rework Cost (normal) 210,000 The company produced 300,000 units in relation to above costs and sold 90,000 units. REQUIREMENTS: Determine the total amount expensed in the income statement for the current year. MAS 9201 MANAGEMENT ACCOUNTING Page 7 of 17 COST CONCEPTS & COST BEHAVIOR EXERCISE 3 (COST BEHAVIOR PATTERNS) The MAGINA INC. reported the following Month 1 Month 2 Units sold 6,000 8,000 Cost A P35,000 P36,000 Cost B 16,000 16,000 Cost C 1,500 2,000 Cost D 12,000 16,000 Cost E 6,000 8,000 Cost F 2,000 2,000 Cost G 4,200 5,500 Cost H 37,300 44,600 Cost I 13,000 13,500 Cost J 10,000 12,200 REQUIREMENT: Indicate whether each of the costs above is probably a variable, mixed or fixed cost. Cost A ______________ Cost F ______________ Cost B ______________ Cost G ______________ Cost C ______________ Cost H ______________ Cost D ______________ Cost I ______________ Cost E ______________ Cost J ______________ EXERCISE 4 (COST BEHAVIOR PATTERNS) TERRORBLADE INC. has the details for its costs on different activity levels: Per Total: 2,000 units 2,500 units 3,000 units Variable Cost P10,000 Fixed Cost _____ _____ _____ Total Per Unit Variable Cost Fixed Cost P2.5 _____ _____ Total REQUIREMENT: Complete all the missing data on the table for TERRORBLADE INC. EXERCISE 5 (HIGH-LOW METHOD) A controller is interested in analyzing the fixed and variable costs of indirect labor as related to direct labor hours. The following data have been accumulated: Month Indirect Labor Cost Direct Labor Hours March P2,880 425 April 3,256 545 May 2,820 440 June 3,225 560 July 3,200 540 August 3,200 495 REQUIREMENT: Determine the amount of the fixed portion of indirect labor expense and the variable rate for indirect labor expense, using the high and low points method. EXERCISE 6 (HIGH-LOW METHOD) RIKIMARU CORP. has an average unit cost of P18.50 at a volume of 100,000 units. At 200,000 units the average unit cost is P14.25. REQUIREMENTS: (a) Compute the variable cost per unit (b) Compute the total fixed cost. MAS 9201 MANAGEMENT ACCOUNTING Page 10 of 17 COST CONCEPTS & COST BEHAVIOR 9. Which of the following is most associated with managerial accounting? A. Must follow generally accepted accounting principles. B. May rely on estimates and forecasts. C. Is prepared for users outside the organization. D. Always reports on the entire entity. 10. I. Management accounting uses the same underlying data as financial accounting. II. Internal financial statements must be prepared using generally accepted accounting principles. III. Published financial statements show costs classified by behavior. A. True, false, true D. True, false, false B. False, false, false E. False, true, true C. True, true, false 11. Evaluate whether the following statements are true or false: I. Managerial accounting is primarily concerned with managers and external users. II. Planning involves coordinating the diverse activities and human resources of a company to produce a smooth running operation. III. Controlling is the process of determining whether planned goals are being met. A. B. C. D. E. Statement I False True False True False Statement II False True True False False Statement III True False False True False 12. The informational needs of internal users/management: A. are historical in nature B. emphasize the company as a whole C. emphasize accuracy over timeliness D. may require more customized reports than external financial statements 13. Managerial accounting does not encompass A. calculating product cost. C. determining cost behavior. B. calculating earnings per share. D. profit planning. 14. Each of the following would be considered a staff function EXCEPT the: I. vice-president of finance III. vice-president of production II. plant foreman A. I and II D. I, II and III B. II and III E. Answer not given C. I and III 15. Which of the following exhibits a staff position? I. Chairman of the board of directors of San Miguel Corporation II. Cashier of a branch of McDonalds’ III. Bagger of Puregold Retail Store A. I and II D. I, II and III B. II and III E. Answer not given C. I and III 16. Which of the following functions are being done by a chief accountant? I. Investor relations III. Credit policy establishment II. Tax administration A. I and II D. I, II and III B. II and III E. Answer not given C. I and III 17. Which of the following is not a function of the treasurer? A. Safeguarding assets. B. Managing investments. C. Preparing financial statements. D. Being responsible for an entity's credit policy. E. Raising capital. MAS 9201 MANAGEMENT ACCOUNTING Page 11 of 17 COST CONCEPTS & COST BEHAVIOR 18. Which of the following is NOT one of the Institute of Management Accountants' five Standards of Ethical Conduct? A. Competence C. Independence B. Confidentiality D. Integrity 19. Which ethical standard of conduct requires the managerial accountant have to communicate information fairly and objectively? A. competence C. integrity B. confidentiality D. objectivity 20. Which of the following statements is correct? A. A certified public accountant can readily render management advisory services to the public. B. A CPA with MBA and DBM degrees is automatically qualified to render management advisory services. C. Competence as a standard in the rendition of management advisory services by a CPA may be equated to having excellent scholarly preparation to include the usual baccalaureate degree, an MBA and other post graduate studies. D. Adequate training and experience in both the analytical approach and process in a particular undertaking are requisites for the CPA to be involved in a management advisory service engagement. 21. The distinction between indirect and direct costs depends on: A. whether a cost differs between alternatives. B. whether a cost is variable or fixed. C. whether a cost is a product or a period cost. D. whether a cost can be easily traced to the cost object under consideration. 22. Which of the following is not an example of a committed fixed cost? A. Property taxes. D. Outlays for advertising programs. B. Depreciation on buildings. E. Equipment rental costs. C. Salaries of management personnel. 23. In the standard cost formula Y = a + bX, what does the “b” represent? A. total cost C. total variable cost B. total fixed cost D. variable cost per unit 24. Which of the following statements is false? A. At zero production level, fixed costs is also zero. B. At zero production level, fixed costs are positive. C. At zero production level, variable costs are usually zero. D. At zero production level, total costs equal total fixed costs. 25. Determine the true statement below: I. A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases. II. Within the relevant range, a change in activity results in a change in total variable cost and the per unit fixed cost. III. The cost formula used in estimating the cost of a company is applicable to all level of activities once determined. A. All statements are false C. None except III. B. Only statement II and III. D. Only I and II. 26. Which of the following correlations shows the strongest relationship? A. 0.85 C. -0.90 B. 1.01 D. -2.1 27. Statement 1: High-low method, as a means of segregating mixed cost, is known to give a precise estimate of cost. Statement 2: In applying high-low method, the two points needed to be known is the high and low of both the cost to be segregated and its cost driver, separately. A. Only the first statement is true. C. Both statements are true B. Only the second statement is true. D. Both statements are false. MAS 9201 MANAGEMENT ACCOUNTING Page 12 of 17 COST CONCEPTS & COST BEHAVIOR 28. The high-low method may give unsatisfactory results if A. the data points all fall on a line. C. the points are not representative. B. volume of activity is heavy. D. volume of activity is light. 29. Variable costs are all costs A. Of manufacturing incurred to produce units of output. B. That are associated with marketing, shipping, warehousing, and billing activities. C. That fluctuate in total in response to small changes in the rate of utilization of capacity. D. That do not change in total for a given period and relevant range but become progressively smaller on a per unit basis as volume increases. 30. If the coefficient of correlation between two variables is zero, how might a scatter diagram of these variables appear? A. Random points. B. A least squares line that slopes up to the right. C. A least squares line that slopes down to the right. D. Under this condition a scatter diagram could not be plotted on a graph. 31. Which of the following is not an example of a variable cost? A. Straight-line depreciation on a machine that has a five-year service life. B. Wages of manufacturing workers whose pay is based on hours worked. C. Tires used in the production of tractors. D. Aluminum used to make patio furniture. E. Commissions paid to sales personnel. Use the following information in answering the next item(s): SAND KING INC. is attempting to classify costs according to their cost behavior. Data concerning activity and costs are listed below: January February Sales in units 1,200 1,400 Maintenance P 600 P 700 Supplies 750 790 Insurance 800 800 Utilities 888 1,036 Lubrication 560 576 Advertising 900 1,050 Total P4,498 P4,952 32. The costs that SAND KING would classify as variable would be: A. maintenance and supplies. B. maintenance, supplies, utilities, lubrication and advertising. C. supplies and advertising. D. maintenance, utilities and advertising 33. The costs that St SAND KING would classify as mixed would be: A. lubrication and advertising. C. supplies and lubrication. B. maintenance and insurance. D. supplies and utilities. 34. The principal advantage of the scatter-diagram method over the high-low method of cost estimation is that the scatter-diagram method A. includes costs outside the relevant range. B. considers more than two points. C. can be used with more types of costs than the high-low method. D. gives a precise mathematical fit of the points to the line. 35. R-squared is a measure of A. the spurious relationship between cost and activity. B. the fixed cost component. C. the variable cost per unit of activity. D. how well the regression line accounts for the changes in the dependent variable. MAS 9201 MANAGEMENT ACCOUNTING Page 15 of 17 48. 49. 50. 51. 52. COST CONCEPTS & COST BEHAVIOR May 696 15,745 June 665 15,442 July 718 15,933 August 699 15,739 Management believes that inspection cost is a mixed cost that depends on units produced. Using the least-squares regression method, the estimate of the variable component of inspection cost per unit produced is closest to: A. P22.80 C. P8.27 B. P8.82 D. = P8.78 Using the least-squares regression method, the estimate of the fixed component of inspection cost per month is closest to: A. P9,608 C. P9,587 B. P15,640 D. P15,271 TRAXEX INC. uses regression analysis to develop a model for predicting overhead costs. Two different cost drivers (machine hours and direct materials weight) are under consideration as the independent variable. Relevant data were run on a computer using one of the standard regression programs, with the following results: Coefficient Machine hours Direct materials weight Y intercept 2,500 4,600 B 5.00 2.60 R2 0.70 0.80 What regression equation should be used? (M1) A. Y = 2,500 + 3.5X C. Y= 4,600 +1.3X B. Y= 2,500 + 5.0X D. Y= 4,600 + 2.6X A jewelry manufacturer incurred the following costs: 15,000 units produced with costs of P557,500, and 5,000 units produced with costs of P292,500. Which cost formula would you estimate using the high-low method? A. Y=P265,000+P37.17X C. Y=P265,000+P58.50X B. Y=P160,000+P17.67X D. Y=P160,000+P26.50X The following data have been provided by a retailer that sells a single product. This Year Last Year Units sold 200,000 150,000 Sales revenue P 1,000,000 P 750,000 Less cost of goods sold 700,000 525,000 Gross margin 300,000 225,000 Less operating expenses 222,000 210,000 Net income P 78,000 15,000 What is the best estimate of the company's variable operating expenses per unit? A. P0.24 per unit C. — -PO.90 per unit B. —-PO.71 per unit D. — P4.17 per unit Use the following information in answering the next item(s): BANE CORP. is preparing a flexible budget for next year and requires a breakdown of the factory maintenance cost into the fixed and variable elements. The maintenance costs and machine hours (the selected cost driver) for the past six months are as follows: Maintenance Costs Machine Hours January P15,500 1,800 February 10,720 1,230 March 15,100 1,740 April 15,840 2,190 May 14,800 1,602 June 10,600 1,590 MAS 9201 MANAGEMENT ACCOUNTING Page 16 of 17 53. 54. 55. COST CONCEPTS & COST BEHAVIOR If BANE uses the high-low method of analysis, the estimated variable rate of maintenance cost per machine hour is A. P7.23. Cc. P5.46. B. P8.73. D. — -P5.33. The average annual fixed maintenance cost amounts to A. P4,160. C. — P49,920. B. P8,320. D. —P5,120. What is the average rate per hour at a level of 1,500 machine hours? A. P5.33 Cc. P7.23 B. P8.11 D. = P5.46 Use the following information in answering the next item(s): 56. 57. 58. 59. IO CORP. asked for your help in analyzing the behavior of its monthly electricity cost. The following information was given to you to help you in your analysis. SUMMARY OF ELECTRICITY COST AND DIRECT LABOR HOURS Month Direct labor hour Cost of electricity January 28 P525 February 24 565 March 30 630 April 33 640 May 38 685 June 34 640 July 35 655 August 40 700 September 42 715 October 47 726 November 43 700 December 32 630 Using High-Low Method, what is the quarterly fixed cost of IO CORP.? A. 419 Cc. 1,257 B. 397 D. 1,191 Under the least-square method, what is the total electricity cost at 46 direct labor hours? A. 730.42 C. 564.00 B. 856.67 D. None from the choices Total production costs for RATTLETRAP CORP. are budgeted at P230,000 for 50,000 units of budgeted output and at P280,000 for 60,000 units of budgeted output. Because of the need for additional facilities, budgeted fixed costs for 60,000 units are 25% more than budgeted fixed costs for 50,000 units. How much is RATTLETRAP's budgeted variable cost per unit of output? A. P1.60. Cc. -P3.00. B. P 1.67. D. —-P5.00. In the INVOKER INC., at an activity level of 80,000 machine hours, total overhead costs were P223,000. Of this amount, utilities were P48,000 (all variable) and depreciation was P60,000 (all fixed). The balance of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine hours, maintenance costs were P130,000. Assume that all of the activity levels mentioned in this problem are within the relevant range. The total fixed overhead cost for INVOKER is: (E) A. P55,000. Cc. P115,000. B. P 60,000. D. —P130,000. MAS 9201 MANAGEMENT ACCOUNTING Page 17 of 17 COST CONCEPTS & COST BEHAVIOR 60. As part of a cost study, the cost accountant of PUDGE CORP. has recorded the cost of operations at seven different levels of material usage. This information is shown as follows: Kilos of Materials Cost of Operations 100 P1,000 75 600 25 400 150 1,500 175 1,600 50 600 125 1,300 Sum of the kilos (X) 700 Sum of the costs (Y) P7,000 Sum of kilos multiplied by costs ((XY)) P852,500 Sum of the kilos squared ((X)2) 87,500 Using the least squares method, the fixed portion of the cost is A. P109 C. P200 B. P129 D. P271 KEY ANSWER TO SELF-TEST 1. C 16. E 31. A 46. D 2. C 17. C 32. D 47. C 3. C 18. C 33. C 48. B 4. B 19. D 34. B 49. C 5. B 20. D 35. D 50. D 6. A 21. D 36. B 51. D 7. B 22. D 37. B 52. A 8. D 23. D 38. B 53. D 9. B 24. A 39. B 54. C 10. D 25. D 40. C 55. B 11. A 26. C 41. C 56. D 12. D 27. D 42. D 57. A 13. B 28. C 43. B 58. C 14. B 29. C 44. D 59. C 15. E 30. A 45. B 60. B - END -