Relevant Costing

1. All relevant costs refer to

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

3. The term that best refers to past costs that have been incurred and are not relevant to any future decision is
a. Discretionary costs
b. Sunk costs
c. Full absorption costs
d. Incurred marginal costs

4. Which one of the following costs would be relevant in short-term decision making
a. Total variable costs that are the same in the considered alternatives
b. Incremental fixed costs
c. All costs of inventory
d. Opportunity costs that are the same in the considered alternatives

5. When making a decision to increase the robotic automation equipment in an existing facility, a firm takes all of
the following into consideration except
a. Technology efficiency
b. Opportunity cost
c. Economies of scale
d. The initial cost of the current facility

6. In a make-versus-buy decision, the relevant costs include variable manufacturing costs as well as
a. General office costs
b. Factory management costs
c. Avoidable fixed costs
d. Depreciation costs

7. When management must decide to accept or reject a one-time-only special order, given sufficient idle capacity,
which one of the following is not relevant to the decision?
a. Variable costs
b. Absorption costs
c. Differential costs
d. Direct costs

8. Which costs are relevant to the decision to further process a product beyond its current state?
a. Fixed factory overhead
b. Absorption costs
c. Joint costs
d. Incremental costs
9. A printing company is considering replacing an old printing press. The old printing press has a book value of
P24,000 and a trade-in value of P14,000. A new printing press would cost P85,000 after trade-in of the old press.
It is estimated that the new printing press would reduce operating costs by P20,000 per year. If the company
decides not to purchase the new press, the P85,000 could instead be used to retire debt that is currently costing
P9,000 per year in interest. Which of the given amounts is an example of a sunk cost?
a. The trade-in value of the old printing press.
b. The book value of the old printing press
c. The estimated reduction in operating costs
d. The interest on the existing debt

10. The loss of a key customer has temporarily caused Bedford Machining to have some excess manufacturing
capacity. Bedford is considering the acceptance of a special order, one that involves Bedford’s most popular
product. Consider the following types of costs.
I. Variable costs of the product
II. Fixed costs of the product
III. Direct fixed costs associated with the order
IV. Opportunity cost of the temporary idle capacity

Which cost types should be considered in the special order acceptance decision?

Answer: I, III, IV

11. Baras Co. has considerable excess manufacturing capacity. A special job order's cost sheet includes the following
applied manufacturing overhead costs:
Variable costs P56,250
Fixed costs 45,000

The fixed costs include a normal P6,800 allocation for in-house design costs, although no in-house design will be
done. Instead, the special job will require the use of external designers costing P13,750. What is the minimum
acceptable price for the job?

Answer: 70,000

12. A business is operating at 90% of capacity and is currently purchasing a part which is being used in its
manufacturing operations for P15 per unit. The unit cost for the business to make the part is P20, including fixed
costs, and P12, not including fixed costs. If 30,000 units of the part are normally purchased during the year but
could be manufactured using unused capacity, what would be the amount of differential cost, increase or
decrease, from making the part rather than purchasing it?

Answer: 90,000 cost decrease

13. San Isidro Co. manufactures ballpoint pens. Another manufacturer has offered to supply San Isidro with the
5,000 ink cartridges that it needs annually. The cost to buy the cartridges would be P15 each. In producing its
own cartridges, San Isidro has incurred P10 in fixed costs and P8 in variable costs. If San Isidro buys the
cartridges, its net income will increase (decrease) by:

Answer: decrease by 35,000

14. The Lilingiwan Company has received a special order for 300 units of product X for P6 a unit. It usually sells for
P9.50 a unit with a cost of P7.50 a unit inclusive of 75 centavos a unit as sales commission that will not be paid
on this order. The cost also includes P3 in manufacturing overhead, two-third of which is for the fair share of
depreciation, rent, utilities and supervisor's salary. The latter's (supervisor's salary) accounts for one-half of this
 amount. Assuming that excess capacity is available, and this order requires a mold that costs P150, accepting the
order will increase loss or gain by:

Answer: gain by 225

15. A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a
unit contribution margin of P36 and takes two machine hours to make and Product B has a unit contribution
margin of P45 and takes three machine hours to make. If there are 1,000 machine hours available to
manufacture a product, income will be
a. P3,000 more if Product A is made.
b. P3,000 more if Product B is made.
c. P2,000 less if Product A is made.
d. the same if either product is made.

16. Sales of 25,000 units at P7.20 per unit are made monthly. The unit cost is P5.90. Incremental costs of P1.35 per
unit to further process the units will result in the 25,000 units being sold for P8.75 each. Which course of action
should the company take?
a. Commit its resources to a different product
b. Sell the units at the current stage of completion
c. Do further processing and sell the units at P8.75
d. Do further processing on only one-half of the units

17. Dalig Company produces a product that can be sold for P250,000 at an intermediate stage. If Dalig finishes the
product, they will incur P75,000 of additional material costs and another P15,000 in labor and overhead costs.
When finished, Dalig will be able to sell the product for P350,000. Which of the following answers is correct?
a. Sell now
b. Finish the product because profits will increase by P25,000
c. Finish the product because profits will increase by P12,500
d. Finish the product because profits will increase by P10,000

18. Wawa Enterprises has the capacity to produce 10,000 bearings, but operates at 90% of capacity. Bearings
normally sell for P60 each, and cost an average of P50 to make, including a share of the monthly fixed costs of
P180,000. Libjo Corporation has offered to buy 1,000 bearings at P40 each.
What is the relevant cost per unit?

Answer: 30

19. Cuta Company plans to discontinue a department that has a contribution margin of P240,000 and P480,000 in
fixed costs. Of the fixed costs, P210,000 can be avoided. The effect of this discontinuance on Cuta's overall net
operating income would be a(an) increase or decrease of

Answer: decrease of 30,000

20. A company is deciding whether or not to eliminate a segment of its business. The segment generates total sales
of P104,000, its direct expenses are P22,000, and its indirect expenses are P26,000. Its cost of goods sold is
P64,000. Six thousand pesos of the direct expenses and P8,000 of its indirect expenses are avoidable expenses.
Which of the following is not true?
a. This segment has a net loss of P8,000.
b. This segment's revenue is greater than its avoidable costs.
c. This segment is a good candidate for elimination.
d. This segment's avoidable costs are greater than unavoidable costs.