Ch 4 Decision Making (Cost Accounting) Flashcards
Which of the following statements is false?
A.
A cost driver is a measure of activity that is a causal factor in the incurrence of a particular cost in the organization.
B.
The cost of production is of particular concern to managers, for it determines whether a certain product or service is profitable, given market-determined selling prices.
C.
In a merchandising organization, inventory cost is the purchase price adjusted for freight costs and quantity discounts.
Correct D.
In a manufacturing company, the total cost of the finished product is a combination of direct materials and direct labor.
In a manufacturing company, the total cost of the finished product is a combination of direct materials, direct labor, and manufacturing overhead.
Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?
A.
$15
B.
$20
Correct C.
$25
D.
$40
At full operating capacity, Division A would be losing sales to the outside market if it chose to sell Product X to Division B. Therefore, the transfer pricing should be equal to Product X’s market price of $25.
At less than full operating capacity, Division A may choose to sell Product X to Division B for less than the market price, since Division B can further process that product into Product Y and create a profit for Spring Co.
Division A would not charge more than market price to Division B, since they are the same company.
In an activity-based costing system, what should be used to assign a department’s manufacturing overhead costs to products produced in varying lot sizes?
A.
A single cause and effect relationship
Correct B.
Multiple cause and effect relationships
C.
Relative net sales values of the products
D.
A product’s ability to bear cost allocations
Under conventional costing, all of a department’s overhead would be accumulated in a single overhead account (or cost pool). This overhead would then be applied to product based on a single driver such as labor hours or machine hours.
Activity-based costing systems identify several activities and the resources (i.e., overhead costs) related to those activities. Then, appropriate cost drivers are identified and activity costs calculated. These activity costs are then assigned to products based on the products’ consumption of activities.
The use of multiple activities results in multiple cause and effect relationships in activity-based costing in contrast to a single cause and effect relationship used in conventional costing.
Day Mail Order Co. applied the high-low method of cost estimation to customer order data for the first four months of the current year. What is the estimated variable order filling cost component per order?
Months Orders Cost
-------- ------ -------
January 1,200 $ 3,120
February 1,300 3,185
March 1,800 4,320
April 1,700 3,895
----- -------
6,000 $14,520
===== =======
Correct A.
$2.00
B.
$2.42
C.
$2.48
D.
$2.50
Note that based on the number of orders, March is the “high” month and January is the “low” month.
Variable
Rate Per = Change in cost / Change in orders
Order
= ($4,320 - $3,120) / (1,800 - 1,200)
= $1,200 / 600 orders
= $2.00 per order
Which one of the following costs would be relevant in short-term decision making?
A.
Incremental fixed costs
B.
Total variable costs that will not change with either alternative
C.
Costs of fixed assets to be used in the alternatives
Incorrect D.
Opportunity costs that are the same in the considered alternatives
Only incremental costs, whether fixed or variable, are relevant in decision making. Incremental costs represent the difference in the total cost between two alternatives. It is these future incremental costs that are important (“relevant”) to the decision-making process, the act of choosing between/among alternative courses of action.
Future costs, whether fixed or variable (or opportunity costs), that are the same for the considered alternatives (i.e., that will not change regardless of which alternative is chosen) are irrelevant to the decision.
Past costs, or sunk or historical costs, are costs that have already been incurred; these costs are irrelevant to the decision-making process because they will not change regardless of which decision is made.
Hoyt Co. manufactured the following units:
Salable 5,000 Unsalable (normal spoilage) 200 Unsalable (abnormal spoilage) 300 Manufacturing costs totaled $99,000. What amount should Hoyt debit to finished goods?
A.
$90,000
Correct B.
$93,600
C.
$95,400
D.
$99,000
The cost of normal spoilage should be absorbed by the good (saleable) units whereas the cost of abnormal spoilage is a loss to be recognized in the period during which the abnormal spoilage occurred.
Total units produced = 5,000 + 200 + 300 = 5,500
Total good units plus
normally spoiled units = 5,000 + 200 = 5,200
Cost to be allocated
to good units = (5,200 / 5,500) x $99,000 = $93,600
Cost to be allocated
to abnormal spoilage = (300 / 5,500) x $99,000 = $5,400
Asta, Inc., is a medical laboratory that performs tests for physicians. Asta anticipates performing between 5,000 and 12,000 tests during the month of April. Compared to industry averages, at the low range of activity Asta has a lower sales price per test, higher fixed costs, and the same breakeven point in number of tests performed. At the high range of activity, Asta’s sales price per test and fixed costs are the same as industry averages, and Asta’s variable costs are lower. At the low range of activity (0 to 4,999 tests performed) fixed costs are $160,000. At the high range of activity (5,000 to 14,999 tests performed) fixed costs are $200,000.
Sales price per test $60
Variable costs per test 20
How is the cost of lubricant used on laboratory equipment categorized?
A.
Direct material cost
B.
Fixed cost
Correct C.
Overhead cost for testing
D.
General and administrative cost
Lubricant used to maintain production equipment is not material used directly in production, and it is not a labor cost. Since it is a production cost and it is not direct material or direct labor, it must be a manufacturing overhead cost.
“Direct material cost” is incorrect because the lubricant is not used directly in production. “Fixed cost” is incorrect because increased production would result in increased lubricant cost. It is a variable overhead cost. “General and administrative cost” is incorrect because the lubricant is used in production, not in administration.
