C7: Differential Cost Analysis

Question 1

Which statement is true about relevant costs in incremental analysis?

A. All costs are relevant if they change between alternatives
B. Only fixed costs are relevant
C. Only variable costs are relevant
D. Relevant costs should be ignored

Answer 1

A. All costs are relevant if they change between alternatives.

Question 2

A company’s plant is operating at less than full capacity, The company just received a one-time opportunity to accept an order at a special proce below its usual price. The special price exceeds its variable costs. Which statement is true?

A. Fixed costs are relevant
B. The order will likely be accepted
C. The order will likely be rejected
D. The company should expand its plant capacity before accpeting the order

Answer 2

B. The order will likely be accepted.

Question 3

A company was able to determine that it must ecpand its capacity to accept a special order. Which situation is likely?

A. Unit variable costs will increase
B. Fixed costs will not be relevant
C. Both variable and fixed costs will be relevant
D.The company should accpet the order

Answer 3

C. Both variable and fixed costs will be relevant.

Question 4

A company is within plant capacity. It is contemplating whether a special order shoould be accepted. The order will not impact regular sales. If the company accepts a special order, what will occur?

A. Incremental costs will not be affected
B. Net income will increase if the special sales price per unit exceeds the unit variable costs
C. There are no incremental revenues
D. Both fixed and variable costs will increase

Answer 4

B. Net income will increase if the special sales price per unit exceeds the unit variable costs.

Question 5

A compan anticipates that other slaes will be affcted by the acceptance of a special order. What should the company do?

A. Reject the order
B. Consider the opportunity cost of lost sales in the incremental analysis
C. Accept the order
D. Accept the order if the plant is below capacity

Answer 5

B. Consider the opportunity cost of lost sales in the incremental analysis

Question 6

Which statement is true of an opportunity costs?

A.It is the costs of a special order option
B. It reduces the possibility of accepting a particular course of action
C. It is the potential benefit as a result of following alternative course of action
D. It is a variable cost

Answer 6

C. It is the potential benefit as a result of following an alternative course of action.

Question 7

In which situation should opportunity costs be considered?

A. Decision making that involves alternative uses
B. Forecasting sales
C. Financial accounting
D. Break-even analysis

Answer 7

A. Decision making that involved alternative uses.

Question 8

What is the nature of an opportunity cost?

A. It is always variable
B. It is a potential benefit
C. It is included as part of costs of goods sold
D. It is a sunk cost

Answer 8

B. It is the potential benefit.

Question 9

Which statement is true concerning the decision rule on whether to make or buy?

A. The company should buy if the cost of buying is less than the cost of producing
B. The company should buy if the incremental revenue ixceeds the incremental costs
C. The company should buy as long as total revenue exceeds present revenues
D. The company should buy assuming no additional fixed costs are incurred

Answer 9

A. The company should buy if the cost of buying is less than the cost of producing.

Question 10

Which of the following is relevant information in a decision whether old equipment presently used should be replaced by new equipment?

A. The cost of the old equipment
B. The salvage value of the old equipment
C. The book value of the old equipment
D. The accumulated depreciation of the old equipment

Answer 10

B. The salvage value of the old equipment.

Question 11

A company is deciding whether or not to replace some old equipment with new equipment. Which of the following is not considered in the incremental analysis?

A. Annual operating cost of the new equipment
B. Annual operating cost of the old equipment
C. Net cost of the new equipment
D. Book value of the old equipment

Answer 11

D. Book value of the old equipment.

Question 12

A company is considering replacing old equipment with new equipment. Which of the following is a relevant cost for incremental analysis?

A. Total accumulated depreciation of the old equipment
B. Cost of the old equipment
C. Annual operating cost of the new equipment
D. Book value of the old equipment

Answer 12

D. Book value of the old equipment.

Question 13

What role does a trade-in allowance on old equipment play a decision to retain or replace equipment?

A. It is relevant since it increases the cost of the new equipment
B. It is not relevant since it reduces the cost of the old equipment
C. It is not relevant to the decision since it does not impact the cost of the new equipment
D. It is relevant since it reduces the cost of the new equipment

Answer 13

D. It is relevant since it reduces the cost of the new equipment.

Question 14

A company is considering eliminating one of its product lines. The fixed costs currently allocated to the product line will be allocated to other product lines upon discontinuance. What financial effects occur if the product line is discontinued?

A. Net income will decrease by the amount of the contribution margin of the product line being discontinued
B. The company’s total fixed costs will increase
C. Total fixed costs will decrease by the amount of the product line’s fixed costs
D. Net income will decrease by the amount of the product line’s fixed costs

Answer 14

A. Net income will decreased by the amount of the contribution margin of the product line being discontinued.

Question 15

Bucks Coffee can sell all the units it can produce of either latte or cappucino but not both, Latte has a unit contribution margin of P45 and takes two machine hours to make. There are 1,200 machine hours available to manufacture a product. What should the company do?

A. Make latte which creates P13 more profit per unit than cappucino does
B. Make cappucino which creates P1 more profit per constraint than latte does
C. Make cappusino because more units can be made and sold the latte
D. The same total profits exists regardless of which product is made

Answer 15

B. Make cappucino which creates a P1 more profit per constraint than latte does.

Question 16

What is the key factor in performing incremental analysis if a company has limited resources?

A. Contribution margin per unit of limited resource
B. The amount of fixed costs per unit
C. Total contribution margin
D. The cost of limited resources

Answer 16

A. Contribution margin per unit of limited resource.

Question 17

What will likely occur if a company eliminates an unprofitable segment when a portion of fixed costs are unavoidable?

A. All expense of the eliminated segment will be eliminated
B. Net income will decrease
C. Net income will increase
D. The company’s variable costs will increase

Answer 17

B. Net income will decrease.

Question 18

A company has excess capacity. Under what situations should the company accpet a special order for less than the current selling price?

A. Never
B. When additional fixed costs must be incurred to accomodate the order
C. When the company thinks it can use cheaper materials without the customer’s knowledge
D. When incremental revenues exceeds incremental costs

Answer 18

D. When incremental revenues exceed incremental costs

Question 19

A factory is operating at less than 100% capacity. Potential additional business will not use up the remainder of the plant capacity. Given the following list of costs, which one should be ignored in a decision to produce additional units of product?

A. Variable selling expenses
B. Fixed factory overhead
C. Direct labor
D. Contribution margin of additional units

Answer 19

B. Fixed factory overhead

Question 20

Which of the following is a major accounting contribution to the management decision-making process in evaluating possible courses of action?

A. Determine who is responsible for the decision
B. Prepare internal reports that review the actual impact of a decision made
C. Calculate how much should be invested for each potential project
D. Select possible actions that management should consider

Answer 20

B. Prepare internal reports that review the actual impact of a decision made

Question 21

Which of the following stages of the management decision-making process is properly sequenced?

A. Evaluate possible courses of action. Make decision
B. Review the actual impact of the decision. Determine possible courses of action
C. Assign responsibility for the decision. Identify the problem
D. Make a decision. Assign responsibility

Answer 21

A. Evaluate possible courses of action. Make decision

Question 22

Who prepares relevant revenue and cost data for the decision making process?

A. Department heads
B. Controller
C. Management accountants
D. Factory supervisors

Answer 22

C. Management accountants

Question 23

Which of the following steps in the management decision-making process generally involves the managerial accountant?

A. Determine possible courses of action
B. Make appropriate decision based on relevant data
C. Prepare internal reports that review the impact of decision
D. Assign responsibility

Answer 23

C. Prepare internal reports that review the impact of decisions

Question 24

What is the process of evaluating financial data that charges under alternative courses of action called?

A. Incremental analysis
B. Decision-making analysis
C. Contribution mahin analysis
D. Cost-benefit analysis

Answer 24

A. Incremental analysis

Question 25

Which one of the following is non-financial information that management might evaluate in making a decision?

A. Opportunity costs of a decision
B. Contribution margin
C. The effect of profit of a decision
D. The corporate profile in the community

Answer 25

D. The corporate profile in the community

Question 26

Which of the following describes one aspect of incremental analysis?

A. Both costs and revenues that stay the same between alternate courses of actions will be analyzed
B. Both costs and revenues that differ between alternate courses of action will be analyzed
C. All costs and revenues, regardless if they staty the same or differ between alternate courses of action, will be analyzed
D. Only costs relating to the decisions at hand are analyzed

Answer 26

B. Both costs and revenues that differ between alternate courses of action will be analyzed

Question 27

Which of the following is a true statement about cost behaviours in incremental analysis?

A. Total variable costs do not change between alternatives
B. Fixed costs and variable costs will always change between alternatives
C. Variable costs per unit will always change between alternatives
D. Fixed costs will generally not change between alternatives

Answer 27

D. Fixed costs will generally not change between alternatives

Question 28

All of the following costs are relevant in a make or buy decision except:

A. Opportunity cost of space
B. Costs that are avoidable by “buying” rather than “making”
C. Variable costs of producing the item
D. Costs that are differential between the “make” and “buy” alternatives

Answer 28

NO ANSWER ALL OF THEM ARE RELEVANT

Question 29

Allocated common costs:

A. Are necessarry in order to determine the profitability of a product line
B. Are always relevant in decision making
C. Are sometimes relevant in decision making
D. Are never relevant in decision making

Answer 29

D. Are never relevant in decision making

Question 30

Product A has a contribution margin of P8 per unit, a contribution margin ration of 50%, and requires 4 machine-hours to produce. Product B has a contribution margin of P12 per unit, a contribution margin ration of 40%, and requires 5 machine-hours to produce. If the company has limited machine-hourse avaiable, then it should produce and sell:

A. Product A since it has the highest contribution margin ratio
B. Product B since it has the highest contribution margin per machine-hour
C. Product A since it requires fewer machine-hours per unit than does Product B
D. Product B since it has the highest contribution per unit

Answer 30

B. Product B since it has the highest contribution margin per machine-hour

Question 31

Product A and B are joint products. Product A can be sold for P1,200 at the split off point, or be processed further at a cost of P600 and then sold for P1,700. Product B can be sold for P3,000 at the split-off point, or be processed further at a cost of P800 and then sold for P4,000. The company should process further

Answer 31

B. Product B

Question 32

In a make or buy decision

A. Only variable costs are relevant
B. Fixed costs that can be avoided in the future are relevant
C. Fixed costs that will continue regardless if the decision are relevant
D. Only conversion costs are relevant

Answer 32

B. Fixed costs that can be avoided in the future are relevant

Question 33

In deciding whether to manufacture a part or buy it from an outside vendor, a cost that is irrelevant to the short-run decision is:

A. Direct labor
B. Variable overhead
C. Fixed overhead that will be avoided if the part is bought from an outside vendor
D. Fixed overhead that will continue even if the part is bought from an outside vendor

Answer 33

D. . Fixed overhead that will continue even if the part is bought from an outside vendor

Question 34

The measurable value of an alternative use of resources is referred to as a (an)

A. Opportunity cost
B. Differential cost
C. Imputed costs
D. Sunk cost

Answer 34

A. Opportunity cost

Question 35

Which type of cost is a vital part of decision-making, but ommitted from conventional accounting periods?

A. Out of pocket cost
B. Sunk cost
C. Opportunity cost
D. Direct cost

Answer 35

C. Opportunity cost

Question 36

When faced with making a decision about which products to produce and sell at current prices, the most important decision criterion is

A. The CM per unit
B. The CM per unit of constrained resources
C. The overall profit margin per unit
D. The overall profit margin per unit of constrained resources

Answer 36

B. The CM per unit of constrained resources

Question 37

Which of the following statements is correct?

A. Variable costs are always relevant
B. Fixed costs are always relevant
C. Sunk costs are always irrelevant
D. Fixed costs are always irrelevant

Answer 37

C. Sunk costs are always irrelevant

Question 38

If a company discontinues a product, which one of the following is not likely to decrease?

A. Fixed overhead costs
B. Total sales revenues
C. Total variable costs
D. Total contribution margin

Answer 38

A. Fixed overhead costs