gyu MCQs before midterm 2

Question 1

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

a. Variable costs are always relevant.
b. Fixed costs are never relevant.
c. Fixed costs are always relevant.
d. Both variable and fixed costs can be relevant

Answer 1

d. Both variable and fixed costs can be relevant

Question 2

A purchasing agent has two potential firms from which to buy materials for production. If both firms charge the same price, what is the material cost?

a. an irrelevant cost
b. a relevant cost
c. a sunk cost
d. an opportunity cost

Answer 2

a. an irrelevant cost

Question 3

If there is excess capacity, what must the minimum acceptable price for a special order cover?

a. variable costs associated with the special order
b. variable and fixed manufacturing costs associated with the special order
c. variable and incremental fixed costs associated with the special order
d. variable costs and incremental fixed costs associated with the special order plus the contribution margin usually earned on regular units

Answer 3

c. variable and incremental fixed costs associated with the special order

Question 4

What is a disadvantage of absorption costing?

a. It is not a useful format for decision making.
b. It encourages the dumping of inventory.
c. It reports a lower net income when production is less than sales.
d. It is difficult to gather the fixed and variable costing information.

Answer 4

a. It is not a useful format for decision making.

Question 5

All of the following are correct statements about the actual cost-based transfer price approach except that it

a. can understate the actual contribution to profit by the selling division.
b. can reduce a division manager’s control over the division’s performance.
c. bases the transfer price on standard cost instead of actual cost.
d. provides incentive for the selling division to control costs

Answer 5

d. provides incentive for the selling division to control costs

Question 6

All of the following are correct statements about the market-based approach except that it

a. assumes that the transfer price should be based on the most objective inputs possible.
b. provides a fairer allocation of the company’s contribution margin to each division.
c. produces a higher company contribution margin than the cost-based approach.
d. ensures that each division manager is properly motivated and rewarded.

Answer 6

c. produces a higher company contribution margin than the cost-based approach

Question 7

Variable cost-plus pricing is most effective when a company:

a. experiences high demand for its products.
b. produces a product over many years.
c. has excess capacity.
d. is operating at full capacity and receives a special order.

Answer 7

c. has excess capacity.