Professional Documents
Culture Documents
Standard Costing
Standard Costing
failure costs?
I. Rework.
II. Responding to customer complaints.
Statistical quality control procedures – I only
The quantity of output divided by the quantity of one input equals – Partial
productivity
Wait time:
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.
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).
Comparing one’s own product, service or practice with the best known similar
activity is? Benchmarking
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.
Which one of the following is true concerning standard costs? If properly used,
standards can help motivate employees.
Which one of the following statements about ideal standards is incorrect? Ideal
standards can be used for cash budgeting or product costing
800
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
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:
P 10.00
The following data were obtained from Willard’s records for the month of June:
Debit Credit
Sales P 25,000
Purchases P 13,650
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
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
Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.
The direct labor price (rate) variance for May is? 8,400F
The direct labor efficiency variance for the month would be? 1,200UF
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:
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
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
Variable P250,000
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
Rate
Rate
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
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
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
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.
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.
Jackson manufactured 22,000 units of product during May using 108,000 pounds of direct
materials and 28,000 direct labor hours.
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.
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.
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 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.
Item 1, cash outflow for the investment is not subject to taxation. Item 2, increase
in working capital, also has no tax implication.
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
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.
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
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.
-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:
----------
* 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.
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
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:
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
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.
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:
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:
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:
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
What is the accounting rate of return based on the average investment in the new stamping
machine? -34.0%
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.
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
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
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.
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