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? Description of Total Unit Cost

The documents discuss various costs that are relevant or irrelevant to different business decisions. Relevant costs for a make-or-buy decision include variable manufacturing costs and avoidable fixed costs. Total unit costs are irrelevant for marginal analysis. The best short-term profit maximizing approach is to maximize contribution per unit times units sold.

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Jerome Eziekel Posada Panaligan
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77 views

? Description of Total Unit Cost

The documents discuss various costs that are relevant or irrelevant to different business decisions. Relevant costs for a make-or-buy decision include variable manufacturing costs and avoidable fixed costs. Total unit costs are irrelevant for marginal analysis. The best short-term profit maximizing approach is to maximize contribution per unit times units sold.

Uploaded by

Jerome Eziekel Posada Panaligan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Those considered as relevant or differential cost.

 Choice-letter “a is correct because differential costs are those that change with
each decision alternative. Choice-letter “b” is incorrect because not only variable
cost changes but fixed costs changes as well.
Choice-letter “c” is not acceptable because a change in cost although has an
effect or change in net income may not necessarily always refer to optimum
change in net income.

3. Which one of the following is most relevant to a manufacturing equipment-


replacement decision?
A. Original cost of the old equipment.
B. Disposal price of the old equipment.
C. Gain or loss on the disposal of the old equipment.
D. A lump-sum write-off amount from the disposal of the old equipment. (cma)

4. B
? Among the given, the most relevant to a manufacturing equipment-replacement
decision.
 In a manufacturing equipment-replacement decision, relevant costs include those
that have direct cash flows, savings, and related transactional tax effects. Choice-
letter “b” is correct because the disposal price of the old equipment is an inflow and
reduces the net cash needed to replace the equipment.
Choice-letter “a” is incorrect because the original cost of the old equipment is a
sunk cost and can no longer change. Choice-letter “c” is incorrect because gain or
loss does not have a direct impact on cash flows. However, tax effects of gains or
losses are relevant and included in this decision. Choice-letter “d” is definitely
incorrect because a write-off entails a sunk cost that is perceived to be irrelevant
and is expunged from the record; write-off costs are sunk costs, past costs, and do
not change from an alternative to another and are always irrelevant.

5. Total unit costs are


A. Relevant for cost-volume-profit analysis.
B. Irrelevant in marginal analysis.
C. Independent of the cost system used to generate them.
D. Needed for determining product contribution. (cma)

5. B
? Description of total unit cost.
 Choice-letter “a” is incorrect because what is relevant in cost-volume-profit analysis
is the segregated amount of fixed cost and variable cost and not the total unit cost.
This makes choice-letter “b” correct.
Choice-letter “c” is incorrect because unit costs are dependent on the cost
system used to generate them such as job order costing, process costing, activity-
based costing, prime costing, life cycle costing, and others. The concept and
process applied in a costing method have direct bearings on the computed unit
costs.
6. In a manufacturing environment, the best short-term profit-maximizing approach is
to
A. Maximize unit gross profit times the number the units sold.
B. Minimize variable costs per unit times the number of units produced.
C. Minimize fixed overhead cost per unit produced at full capacity.
D. Maximize contribution per unit times the number of units sold. (cma)

6. D
? The best short-term profit maximizing approach.
 The better way to predict profit is by using the marginal costing approach. In this
approach, profit is determined as contribution margin less fixed costs and
expenses. This means that a peso increase in contribution margin is a peso
increase in profit. Considering that fixed costs are constant, to maximize profit
means maximizing contribution margin per total and per unit.

Make or buy
7. Among the costs relevant to a make-or-buy decision, include variable
manufacturing costs as well as
A. Unavoidable costs. C. Avoidable fixed cost.
B. Plant depreciation. D. Real estate taxes. (rpcpa)

7. C
? The choice that is also included as a relevant cost in the make-or-buy decision.
 Relevant costs include those that change from one alternative to another
(differential costs) and those that pertain to the future (future costs). The following
relevant costs are considered in the make-or-buy decisions:
 Variable costs of production
 Variable costs of administration and selling
 Avoidable fixed costs and expenses
 Opportunity costs such as:
 Possible rental income when production facilities are released, deduct from
the cost to buy.
 Possible contribution margin from the production of new product(s) when
facilities are released, deduct from the cost to buy.
 Savings in the overall production costs if a part is not produced and instead
is bought from an outside supplier, deduct from the cost to buy.
 Lost contribution margin from regular sales due to the acceptance of the
special sales order, add to the cost to buy.
Choices “a”, “b”, and “d” are incorrect because all of them are unavoidable
fixed costs.

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

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