Acct 2020 chapter 8

Irrelevant costs are costs that do not affect short-term decisions

TRUE

Relevant information is future data that do not differ among alternatives.

FALSE

Management accountants gather and analyze relevant information to compare alternatives.

TRUE

One key to analyzing short-term business decisions is to focus on relevant revenues, costs and profits.

TRUE

One key to analyzing short-term business decisions is to use a contribution margin approach that separates variable costs from fixed costs

TRUE

Relevant information is expected future data that will not differ among alternatives

FALSE

Costs that differ between alternatives are irrelevant

FALSE

One cost that is irrelevant in decision making is a sunk cost

TRUE

Managers’ decisions are based solely on quantitative factors.

FALSE

Which of the following best describes a "sunk cost"?
A) Costs that were incurred in the past and cannot be changed
B) Benefits foregone by choosing a particular alternative course of action
C) A factor that restricts the production or sale of a product
D) Expected future data that differ among alternatives

A

An "opportunity cost" is best described by which of the following?
A) Benefits foregone by choosing a particular alternative course of action
B) Costs that were incurred in the past and cannot be changed
C) The distribution of all products to be sold
D) Expected future costs that differ among alternatives

A

A "relevant cost" is best described by which of the following?
A) A factor that restricts production or sales of a product
B) Cost of developing, producing, and delivering a product or service
C) Costs that were incurred in the past and can not be changed
D) Expected future costs that differ among alternatives

D

"Contribution margin per unit" is best described by which of the following?
A) Sales price per unit minus fixed cost per unit
B) Sales price per unit minus variable cost unit
C) Sales price per unit minus fixed and variable costs per unit
D) Units sold time contribution margin ratio

B

) Expected future data that differs among alternative courses of action are referred to as
A) relevant information.
B) historical information.
C) predictable information.
D) irrelevant information.

A

Which of the following is irrelevant when making a decision?
A) Fixed overhead costs that differ among alternatives
B) The cost of an asset that the company is considering replacing
C) The cost of further processing a product that could be sold as is
D) The expected increase in contribution margin of one product line as a result of a decision to discontinue a separate unprofitable product line

B

Fixed costs that do not differ between two alternatives are
A) irrelevant to the decision.
B) considered opportunity costs.
C) relevant to the decision.
D) important only if they represent a material dollar amount

A

Which of the following is a sunk cost?
A) Operating costs for a new vehicle
B) Trade in value of old vehicle
C) Purchase price of vehicle to be traded in
D) Purchase price of new vehicle

C

Fixed costs that may be avoided in the future are referred to as
A) relevant costs.
B) opportunity costs.
C) replacement costs.
D) sunk costs

A

A sunk cost is described as which of the following?
A) One that is relevant to a decision because it changes depending on the alternative course of action selected
B) A historical cost that is always irrelevant
C) An outlay expected to be incurred in the future
D) A historical cost that may be relevant

B

The effect of a plant closing on employee morale is an example of which of the following?
A) A qualitative factor
B) A quantitative factor
C) A sunk cost
D) A variable cost

A

The format of the income statement most useful in decision-making is which of the following?
A) Absorption costing format
B) Traditional format
C) Contribution margin format
D) Single-step format

C

Which of the information provided in the table is irrelevant to the replacement decision?
A) The annual operating cost of the old machine
B) The original cost of the old machine
C) The current disposal value of the old machine
D) Both A and C

B

All of the following are relevant to the decision to replace equipment except the
A) cost of old equipment.
B) selling price of old equipment.
C) future maintenance costs of old equipment.
D) cost of new equipment.

A

Which of the following is most important in making a short-term special decision?
A) Focus on total costs
B) Separate variable from fixed costs
C) Use a conventional absorption costing approach
D) Calculating the fixed cost per unit

B

Managers should consider ________ when making any sort of decision.
A) only fixed costs
B) sunk costs
C) only variable costs
D) revenues that differ among alternatives

D

A special order occurs when a customer requests a one-time order at an increased sales price

FALSE

Special orders increase income if the revenue from the order does not exceed the incremental variable and fixed costs incurred to fill the order

FALSE

In deciding whether to accept a special sales order, any fixed costs that would remain unchanged are considered relevant data

FALSE

Variable costs are irrelevant to a special decision when those variable costs differ between alternatives

FALSE

Managers should consider the potential effect of a special order on long-run profits and operations

TRUE

When deciding whether to accept a special order, managers need to consider whether they have available excess capacity

TRUE

If the expected increase in revenues from a special order is greater than the expected increase in variable and fixed costs, then the special order should be accepted

TRUE

In a special sales order decision, the special price must exceed the variable cost of filling the order. In other words, the special order must have ________.
A) sunk costs
B) a positive contribution margin
C) opportunity costs
D) a negative contribution margin

B

In a special sales order decision, incremental fixed costs that will be incurred if the special order is accepted are considered to be
A) opportunity costs.
B) irrelevant to the decision.
C) relevant to the decision.
D) sunk costs.

C

Managers should consider all of the following when deciding whether to accept a special order, except
A) available excess capacity.
B) the variable costs associated with the special order.
C) the effect of the order on regular sales.
D) fixed costs that will not be affected by the order.

D

A manager should always reject a special order if
A) the special order price is less than the variable costs of the order.
B) there is available excess capacity.
C) the special order price is less than the regular sales price.
D) the special order will require variable nonmanufacturing expenses

A

Which would be a consideration for making special orders?
A) Available capacity to fill the order
B) If price will cover incremental costs of filling the order
C) If the order will affect regular sales in the long run
D) All of the above

D

A company should ________ when making a short-term special decision.
A) focus on qualitative factors only
B) focus on quantitative factors only
C) separate variable costs from fixed costs
D) use a traditional direct costing approach

C

Companies operating in highly competitive industries are generally price-setters

FALSE

When setting prices, a company need not consider whether it is a price-taker or a price-setter for each product that it sells

FALSE

A price-setter company emphasizes a cost-plus approach to pricing

TRUE

For a product, revenue at market price plus desired operating profit equals target total cost.

FALSE

When a company is a price-setter, it emphasizes a target costing approach to pricing

FALSE

When making a pricing decision, it is not necessary to separate costs into fixed and variable

FALSE

Cost-plus price minus desired profit equals total cost

TRUE

When using a target costing approach, the company starts with revenue at market price, and then subtracts its desired profit, to yield the target total cost.

TRUE

Companies often try to gain more control over pricing by attempting to differentiate their products

TRUE

Product differentiation allows companies to become more of a price-setter, and less of a price-taker

TRUE

When setting prices, managers need to consider all costs

TRUE

Managers need to consider variable costs, fixed costs, inventoriable product costs and period costs when setting prices

TRUE

Cost-plus pricing is essentially the opposite of target-costing

TRUE

Which of the following best describes "target costing"?
A) An approach to pricing that begins with revenue at market price and subtracts desired profit to arrive at target total cost
B) A factor that restricts production or sales of a product
C) All costs incurred along the value chain in connection with the product or service
D) An approach to pricing that begins with the product’s total cost and adds desired profit

A

"Total cost of product or service" is best described as which of the following?
A) Benefits foregone by choosing a particular alternative course of action
B) A factor that restricts production or sales of a product
C) Costs that were incurred in the past and can not be changed
D) All costs incurred along the value chain in connection with the product or service

D

Which of the following describes the products and services of companies that are price-setters?
A) They tend to be unique.
B) They are priced by managers using a target-costing emphasis.
C) They tend to have a lot of competitors.
D) They tend to be commodities

A

Stockholders’ expectations of company profits are affected by which of the following?
A) Industry risk
B) Historical company earnings
C) General economic conditions
D) All of the above

D

The cost-plus price is described by which of the following?
A) Target total cost plus desired profit
B) Total cost plus desired profit
C) Revenue at market price plus desired profit
D) Variable cost plus desired profit

B

Target total cost is described by which of the following?
A) Total cost plus desired profit
B) Revenue at market price plus desired profit
C) Revenue at market price minus desired profit
D) Total cost minus actual cost

C

Managers must consider which of the following when pricing a product or service?
A) All costs
B) Only period costs
C) Only manufacturing costs
D) Only variable costs

A

Which of the following pairs are characteristics of price-takers?
A) Less competition and target pricing
B) Cost-plus pricing and less competition
C) Target costing and heavy competition
D) Cost-plus pricing and lack of product uniqueness

C

Which of the following pairs are characteristics of price-setters?
A) Less competition and target costing
B) Cost-plus pricing and less competition
C) Lack of product uniqueness and heavy competition
D) Less competition and lack of product uniqueness

B

) Big-box retailers such as Lowe’s are considered price-takers because
A) their products are not unique.
B) there is less competition in the home improvement retail sector.
C) their products are unique.
D) they emphasize cost-plus pricing.

A

Target total cost is defined as
A) cost of goods sold less desired profit.
B) revenue at market price less desired profit.
C) revenue at market price less variable costs.
D) revenue at market price less fixed costs.

B

Methods for a company to meet target total cost and the profit goals if the current cost of the product is higher than the target cost include which of the following?
A) Accept a lower profit
B) Cut fixed costs, cut variable costs
C) Cut fixed costs
D) Any of the above

D

In pricing a product, managers should consider which of the following?
A) Only fixed costs
B) Only variable costs
C) Only period costs
D) None of the above

D

All of the following factors affect the amount a customer is willing to pay for a product, except
A) the selling company’s costs.
B) the competition’s price.
C) the product’s uniqueness.
D) general economic conditions.

A

If a product line has a negative contribution margin, the product is not covering its fixed costs and should be discontinued

TRUE

If the cost savings from discontinuing a product exceed the lost revenues from discontinuing the product, it should be retained

FALSE

From a purely financial standpoint, if a product line has a negative contribution margin, the product line should be discontinued

TRUE

Fixed costs that exist even after a product is discontinued are called unavoidable fixed costs

TRUE

When deciding whether to discontinue a product, managers should only consider the costs that will be saved

FALSE

If a product has a negative contribution margin, it should not be discontinued

FALSE

Fixed costs that will continue to exist if a product is discontinued are relevant.

FALSE

Unavoidable fixed costs are
A) irrelevant to the decision of whether to discontinue a product line because they will differ between alternatives.
B) relevant to the decision of whether to discontinue the department.
C) irrelevant to the decision of whether to discontinue a product line because they will not differ between alternatives.
D) none of the above.

C

Common fixed costs that are allocated between departments are generally
A) direct fixed costs of the department.
B) relevant to the decision of whether to discontinue the department.
C) irrelevant to the decision of whether to discontinue the department.
D) direct fixed costs of other departments

C

Fixed costs that are allocated among all departments are known as
A) direct fixed costs.
B) relevant fixed costs.
C) general fixed costs.
D) common fixed costs

D

A company’s manager would consider which of the following in deciding whether to discontinue its electronics product line?
A) The costs it could save by discontinuing the product line
B) The revenues it would lose from discontinuing the product line
C) How discontinuing the electronics product line would affect sales of its other products (like CDs)
D) All of the above

D

All of the following are considerations for discontinuing a product or product line, except
A) whether the product has a positive or negative contribution margin.
B) not having any free capacity.
C) if discontinuing the product or product line will affect sales of remaining products.
D) determining if direct fixed costs could be avoided if the product or product line is discontinued

B

A drug store decides to discontinue its health and beauty section of products because it has been unprofitable. This strategy could backfire because
A) the store can readily fill the available space.
B) the store’s sales may suffer by not having this convenience category of products.
C) it has automatically saved that department’s fixed costs.
D) none of the above

B

Fixed costs that continue to exist even after a product line is discontinued are called
A) unavoidable fixed costs.
B) avoidable fixed costs.
C) variable fixed costs.
D) relevant fixed costs.

A

For some merchandisers, the primary constraint may be cubic feet of display space.

TRUE

A constraint is a factor that restricts production or sale of a product

TRUE

Fixed costs affect product mix considerations

TRUE

An example of an expansion constraint would be the size of the available labor pool.

TRUE

To maximize profits, produce the product with the lowest contribution margin per unit of the constraint

FALSE

When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales demand

FALSE

When making product mix decisions, companies are most profitable when they maximize production of the product with the greatest sales price.

FALSE

All of the following are product mix considerations except
A) What constraint(s) stops us from making (or displaying) all of the units we can sell?
B) Which products offer the highest contribution margin per unit of the constraint?
C) Would emphasizing one product over another affect fixed costs?
D) Which product has the most sunk costs?

D

The contribution margin per unit of constraint is calculated as
A) contribution margin per unit × constraint per unit.
B) contribution margin per unit × units per constraint.
C) contribution margin per unit ÷ units per constraint.
D) contribution margin per unit + constraint per unit

B

Companies with production constraints and irrelevant fixed costs will be most profitable when they maximize production of the product with the highest
A) sales price.
B) demand for the product.
C) contribution margin per unit of the constraint.
D) contribution margin per unit

C

The factor that restricts production or sale of a product is which of the following?
A) Demanding factor
B) Constraint
C) Sunk factor
D) Relevant factor

B

A "constraint" is best described by which of the following?
A) The distribution of all products to be sold
B) A factor that restricts production or sales of a product
C) Benefits foregone by choosing a particular alternative course of action
D) Expected future costs that differ among alternatives

B

A "sales mix" is best described by which of the following?
A) A factor that restricts production or sales of a product
B) Costs that were incurred in the past and cannot be changed
C) Expected future costs that differ among alternatives
D) The relative number of all products to be sold

D

Which of the following could be a constraint for selling a product?
A) Store hours
B) Available labor hours for employees
C) Shelf space
D) All of the above could be constraints

D

All of the following would be considered in evaluating product or sales mix allocations, except
A) deciding which product offers the lowest contribution margin per unit.
B) deciding whether fixed costs would change as a result of the product sales mix.
C) deciding upon any and all constraints associated with the product/sale mix.
D) deciding which products will contribute the highest contribution margin per unit

A

Changing the product mix emphasis in the short run will usually not affect
A) total variable costs.
B) both total variable and total fixed costs.
C) total fixed costs.
D) total contribution margin

C

When making outsourcing (make-or-buy) decisions, the focus is on how best to use available resources

TRUE

Make or buy decisions are often referred to as outsourcing decisions

TRUE

All other things being equal, if the incremental costs of outsourcing a product exceed the incremental costs of making a product, it should be outsourced

FALSE

In most circumstances, all fixed costs can be eliminated by outsourcing a product

FALSE

An opportunity cost is a past cost

FALSE

Qualitative factors play an important part in make or buy decisions.

TRUE

Outsourcing decisions are best made by comparing the total manufacturing costs, both fixed and variable, allocated to the product versus the total unit cost charged by the outsourcing company.

FALSE

The maximum outsourcing price a company is willing to pay can be found by solving for the company’s indifference point

TRUE

Opportunity costs should be factored into outsourcing decisions

TRUE

Companies often consider outsourcing so they can focus on their core competencies

TRUE

In deciding whether to outsource, managers must consider
A) relevant fixed and variable components.
B) sunk costs.
C) only variable costs.
D) none of the above

A

Outsourcing decisions are sometimes referred to as
A) make-or-buy decisions.
B) make decisions.
C) buy decisions.
D) none of the above

A

All of the following are outsourcing considerations, except
A) Are any fixed costs avoidable if we outsource?
B) How do our fixed costs compare to the outsourcing cost?
C) What could we do with the freed capacity?
D) How do our variable costs compare to the outsourcing cost?

B

If a company decides to outsource and then has freed capacity, the decision on what to do with that freed capacity would be based upon
A) avoidable fixed costs.
B) opportunity costs.
C) unavoidable fixed costs.
D) none of the above

B

Managers should consider which of the following when deciding whether to outsource a product or service?
A) Quality of the product or service
B) Delivery schedule of the product or service
C) Cost charged for the product or service
D) All of the above

D

Sunk costs should be considered when deciding whether to sell a product as is or process it further

FALSE

A decision must be made at the point in a process where a product can either be sold as is or processed further

TRUE

A sunk cost is a past cost that can be changed regardless of which future action is taken

FALSE

When the extra revenue from processing further is less than the extra cost of processing further, the best decision would be to

…

When the extra revenue from processing further is less than the extra cost of processing further, the best decision would be to
A) process further.
B) develop a new product.
C) not process further.
D) start over.

C

The benefit foregone by choosing a particular alternative course of action is referred to as a(n)
A) sunk cost.
B) opportunity cost.
C) variable cost.
D) incremental cost

B

In making the decision whether to sell a product as is or process the product further, the expected income from selling the product as is may be defined as which of the following?
A) The opportunity cost of processing the product further
B) A sunk cost of processing the product further
C) The opportunity cost of selling the product as is
D) A limiting factor in processing the product further

A

In a sell or process further decision, the company should process further if
A) the extra cost of processing further is the same as the extra revenue.
B) the extra revenue from processing further is less than the extra cost.
C) the extra cost of processing further is greater than the extra revenue.
D) the extra cost of processing further is less than the extra revenue

D

Which of the following would be a consideration for "sell as is or process further" decisions?
A) Revenue generated if sold "as is"
B) Revenue generated if "further processed"
C) Costs involved in further processing
D) All of the above

D

Bear Country Granola is considering selling premium granola. It already sells regular for $6.75/pound and would sell premium granola for $9.50/pound. The cost for organic grains for the premium granola would be $1.15/pound. A cost that would not be considered in this decision would be
A) the extra revenue generated by selling premium.
B) the cost of refining the regular granola.
C) the cost of further processing the regular granola into premium granola.
D) any of the above would be considered.

B