THEORY

1. In the development of accounting data for decision-making, relevant costs are

A. Historical costs which are the best available basis for estimating future costs.
B. Future costs which will differ under each alternative course of action.
C. Budgetary costs authorized for the administrative year.
D. Standard costs developed by time and motion experts.

2. The term relevant cost applies to all of the following decision situations except the
A. Acceptance of special product order.
B. Manufacture or purchase of a component part.
C. Determination of product price.
D. Replacement of equipment.

3. The relevance of a particular cost to a decision is determined by

A. Riskiness of the decision. C. Amount of the cost.
B. Number of decision variables. D. Potential effect on the decision.

4. A fixed cost is relevant if it is

A. a future cost. B. avoidable. C. sunk. D. a product cost.

5. Management accountants are concerned with incremental unit costs. These costs are similar
to the following except
a. The economic marginal cost. c. The cost to produce an additional unit.
b. The variable cost d. The manufacturing unit cost.

6. The type of cost vital to decision making but not recorded in the accounting records
a. Sunk costs b. Opportunity costs c. Direct costs d. Out of pocket costs

7. What is the opportunity cost of making a component part in a factory given no alternative use
of the capacity?
a. The variable manufacturing cost of the component.
b. The total manufacturing cost of the component.
c. The total variable cost of the component.
d. Zero.

8. In analyzing whether to build another regional service office, the salary of the Chief
Executive Officer (CEO) at the corporate headquarters is
a. Relevant because salaries are always relevant.
b. Relevant because this will probably change if the regional service office is build.
c. Irrelevant because it is future cost that will not differ between the alternatives under
consideration.
d. Irrelevant since another imputed costs for the same will be considered.

9. Assume a company produces three products: A, B, and C. It can only sell up to 3,000 units of
each product. Production capacity is unlimited. The company should produce the product (or
products) that has (have) the highest
 a. contribution margin per hour of machine time.
b. gross margin per unit.
c. contribution margin per unit.
d. sales price per unit.

10. All of the following are examples of imputed costs except

A. The stated interest paid on a bank loan.
B. The use of the firm's internal cash funds to purchase assets.
C. Assets that are considered obsolete that maintain a net book value.
D. Decelerated depreciation.

11. The distinction between avoidable and unavoidable costs is similar to the distinction between
a. variable costs and fixed costs. c. step-variable costs and fixed costs.
b. variable costs and mixed costs. d. discretionary costs and committed costs.

12. Total unit costs are

a. Relevant for cost-volume-profit analysis.
b. Needed for determining product contribution.
c. Irrelevant in marginal analysis.
d. Independent of the cost system used to generate them.

13 If a cost is irrelevant to a decision, the cost could not be

a. a sunk cost. b. a future cost. c. a variable cost. d. an incremental cost.

14 Sunk costs
a. Are substitute for opportunity costs.
b. In and of themselves are not relevant to decision making.
c. Are relevant to decision making.
d. Are fixed costs.

15 The variable cost of a unit of product made yesterday is

a. An incremental cost. c. A differential cost.
b. An opportunity cost. d. A sunk cost.

16 The manner of determining whether favorable results of an alternative are sufficient to justify
the cost of taking that alternative
a. Cost behavior analysis c. Cost control analysis
b. Cost benefit analysis d. Cost center analysis

17. When there is one scarce resource, the product that should be produced first is the product
with
a. the highest contribution margin per unit of the scarce resource
b. the highest sales price per unit of scarce resource
c. the highest demand
d. the highest contribution margin per unit
18. Fixed costs are ignored in allocating scarce resources because
a. they are sunk.
b. they are unaffected by the allocation of scarce resources.
c. there are no fixed costs associated with scarce resources.
d. fixed costs only apply to long-run decisions.

19. Among the costs relevant to a make-or-buy decision include variable manufacturing costs as
well as
a. Unavoidable costs. c. Avoidable fixed costs.
b. Plant depreciation. d. Real estate taxes.

20. In a make or buy decision, the opportunity cost of capacity could

a. be considered to decrease the price of units purchased from suppliers.
b. be considered to decrease the cost of units manufactured by the company.
c. be considered to increase the price of units purchased from suppliers.
d. not be considered since opportunity costs are not part of the accounting records.

21. Which of the following activities within an organization would be least likely to be
outsourced?
a. accounting b. product design c. transportation d. data processing

22. Which of the following costs are relevant to a make-or-buy decision?

a. original cost of the production equipment
b. annual depreciation of the equipment
c. the amount that would be received if the production equipment were sold
d. the cost of direct materials purchased last month and used to manufacture the component

23. A purchasing agent has two potential firms to buy materials from for production. If both
firms charge the same price, the material cost is
a. an irrelevant cost b. a sunk cost c. a committed cost. d. an opportunity cost

24. Which of the following is NOT relevant in a make-or-buy decision about a part the entity
uses in some of its products?
a. The reliability of the outside supplier.
b. The alternative uses of owned equipment used to make the part.
c. The outside supplier’s per-unit variable cost to make the part.
d. The number of units of the part needed each period.

25. When only differential manufacturing costs are taken into account for special-order pricing,
an essential assumption is that
a. Manufacturing fixed and variable costs are linear.
b. Selling and administrative fixed and variable costs are linear.
c. Acceptance of the order will not affect regular sales.
d. Acceptance of the order will not cause unit selling and administrative variable costs to
increase.
26. If a firm is at full capacity, the minimum special order should be
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 foregone
contribution margin on regular units not produced
e. both c and d.

27. Idle capacity in the interim (normally temporary) will generate short-term benefit in
accepting sales at price that
a. Positively motivate employees.
b. Result in less than normal contribution margin.
c. Increase total fixed costs.
d. Reduce the overall operating income to sales ratio.

28. Pinoy Company temporarily has excess production capacity, the idle plant facilities can be
used to manufacture a low-margin item. The low-margin item should be produced if it can
be sold for more than its
a. Variable costs plus opportunity cost of idle facilities.
b. Indirect costs plus any opportunity cost of idle facilities.
c. Fixed costs.
d. Variable costs.

29. An opportunity cost commonly associated with a special order is

a. The contribution margin on lost sales.
b. The variable costs of the order.
c. Additional fixed costs related to the increased output.
d. Any of the above.

30. An increase in direct fixed costs could reduce all of the following except
a. product line contribution margin. c. product line operating income.
b. product line segment margin. d. corporate net income.

II.

1. High Class Townhouse, Inc. manages five upscale townhouse in Makati, Ortigas, and
Greenhills area. Shown below are the summary income statements for each complex:
In Thousand Pesos
One Two Three Four Five
Rent Income 10,000 12,100 23,470 18,780 10,650
Expenses 8,000 13,000 26,000 24,000 13,000
Profit 2,000 (900) (2,530) (5,220) (2,350
Included in the expenses is P12,000,000 of corporate overhead allocated to the townhouse
based on rental income. The complex that the company should consider selling is (are)
 a. Three, Four & Five. c. Two, Three, Four & Five.
b. Four & Five. d. Four.

One 10/75 x 12,000 = 1,600 + 2,000 + 3,600

Two 12.1/75 x 12,000 =1,936 - 900 = 1,036
Three 23.47/75 x 12,000 = 3,755 -2,530 = 1,225
Four 18.78/75 x 12,000 =3,005 – 5,220 ( 2,215 )
Five 10.65/75 x 12,000 = 1,704- 2,350 = ( 646)

2. The Table Top Model Corp. produces three products. “Tic,” “Tac.”, and “Toc.” The owner
desires to reduce production load to only one product line due to prolonged absence of the
production manager. Depreciation expense amounts to P600,000 annually. Other fixed
operating expenses amount to P660,000 per year. The sales and variable cost data of the
three products are (000’s omitted)
Tic Tac Toc
Sales P6,600 P5,300 P10,800
Variable costs 3,900 1,700 8,900
Which product must be retained and what is the opportunity cost of selecting such product
line?
a. Retain product “Tac”; opportunity cost is P4.6 million.
b. Retain product “Tac”; opportunity cost is P3.14 million.
c. Retain product “Tic”; opportunity cost is P4.04 million.
d. Retain product “Toc”; opportunity cost is P4.84 million.

Questions 3 and 4 are based on the following information.

Hermo Company has just completed a hydro-electric plant at a cost of $21,000,000. The plant
will provide the company's power needs for the next 20 years. Hermo will use only 60% of the
power output annually. At this level of capacity, Hermo's annual operating costs will amount to
$1,800,000, of which 80% are fixed.
Quigley Company currently purchases its power from MP Electric at an annual cost of
$1,200,000. Hermo could supply this power, thus increasing output of the plant to 90% of
capacity. This would reduce the estimated life of the plant to 14 years.

3. If Hermo decides to supply power to Quigley, it wants to be compensated for the decrease in
the life of the plant and the appropriate variable costs. Hermo has decided that the charge for
the decreased life should be based on the original cost of the plant calculated on a straight-
line basis. The minimum annual amount that Hermo would charge Quigley would be
A. $450,000. B. $630,000. C. $990,000. D. $800,000

4. The maximum amount Quigley would be willing to pay Hermo annually for the power is
A. $600,000. B. $1,050,000. C. $1,200,000. D. $1,000,000

Total cost at 60% capacity 1,800,000

Less : Fixed cost ( 80% ) 1,440,000
Variable cost 360,000
Variable cost at 100% capacity 360,000 / .6 = 600,000
X .9
Variable cost at 90 % capacity 540,000
Less present variable cost 360,000
Incremental variable cost 180,000
Add : Incremental depreciation
Proposed ( 21M / 14 yrs ) 1,500,000
Present ( 21M/20 yrs) 1,050,000 450,000
Minimum amount to charge Quigley 630,000