Managerial Accounting RQ Chapter 13 #1

The book value of an old machine is always considered an opportunity cost in a decision. True False

False

Variable costs are always relevant costs in decisions. True False

False

Sunk costs are never relevant in decision-making. True False

True

The manager of Hampton, Inc. is trying to decide whether to make or buy a component of the product it sells. Which of the following costs and benefits is not relevant to the decision? A) Direct labor cost involved in making the component B) The purchase price of the component if it is bought C) Variable manufacturing overhead involved in making the component D) The selling price of the product

D) The selling price of the product

A cost that is traceable to a segment through activity-based costing is always an avoidable cost for decision making. True False

False

An avoidable cost is a sunk cost that can be eliminated (in whole or in part) as a result of choosing one alternative over another. True False

False

Avoidable costs are irrelevant costs in decisions. True False

False

Consistency demands that a cost that is relevant in one decision be regarded as relevant in other decisions as well. True False

False

Fixed costs are irrelevant in decisions about whether a product should be dropped. True False

False

Fixed costs are sunk costs. True False

False

Future costs that do differ among the alternatives are not relevant in a decision. True False

False

The variable costs of a product are relevant in a decision concerning whether to eliminate the product. True False

True

A complete income statement need not be prepared as part of a differential cost analysis. True False

True

A cost that can be avoided by choosing one alternative over another is relevant for decision purposes. True False

True

Fixed costs may be relevant in a decision. True False

True

Which of the following statements about using different approaches to analyze alternatives is NOT true? a. Considering only the relevant costs gives results a different answer than that obtained when all costs are considered. b. Differential analysis focuses on the future costs and benefits that differ between any two alternatives. c. Mixing irrelevant costs with relevant costs may cause confusion and distract attention from the information that is critical. d. Costs and revenues that do not differ between alternatives are irrelevant to decision making.

a. Considering only the relevant costs gives results a different answer than that obtained when all costs are considered.

Costs that have been incurred and cannot be eliminated regardless of the alternative chosen are ________. a. sunk costs b. unavoidable costs c. relevant costs d. irrelevant costs

a. sunk costs

Prairie, Incorporated produces a single product. It has an annual capacity of 10,000 units, but currently uses only 80% of it. Each unit is sold for $50 and requires direct material worth $30 and direct labor worth $5.Manufacturing overhead cost is $10 per unit of which 70% is variable. What is Prairie's total incremental cost incurred to produce each unit? a. $30 b. $42 c. $35 d. $45

b. $42

High Roller Incorporated is trying to decide whether to buy a private jet or to lease one. The finder's fee is incurred only if the private jet is bought. The finder's fee is what type of cost for this decision? a. Sunk cost b. Unavoidable cost c. Relevant cost d. Irrelevant cost

c. Relevant cost

A company has three product lines, one of which reflects the following results: Sales $ 215,000 Variable expenses 125,000 Contribution margin 90,000 Fixed expenses 140,000 Net loss $ (50,000) If this product line is eliminated, 60% of the fixed expenses are traceable fixed expenses, which can be eliminated, and the other 40% are common fixed expenses that cannot be avoided. If management decides to eliminate this product line, the company's net income will ________. a. increase by $50,000 b. decrease by $90,000 c. decrease by $6,000 d. increase by $6,000

c. decrease by $6,000

The potential benefit that is given up when one alternative is selected over another is called ________. a. relevant cost b. avoidable cost c. differential cost d. opportunity cost

d. opportunity cost

In a decision to drop a product, the product should be charged for rent in proportion to the space it occupies even if the space has no alternative use and the rental payment is unavoidable. True False

False

A company with various segments (referred to as "divisions") is considering whether to drop its Orange County division. For each of the costs described below, indicate whether the cost is avoidable or unavoidable by choosing the related drop-down menu item. 1. Wages paid to the Orange County division employees who work directly for this division and will be discharged if the division is dropped. 2. General administrative expenses allocated to the Orange County division on the basis of sales dollars. 3. Depreciation expense on previously purchased machinery that is used in the Orange County division; the machinery will have no other use or resale value if the division is dropped. 4. Rent paid for the building that houses only the Orange County division. 5. The amount of rent paid to lease a private jet for use by the company's management that is allocated to the Orange County division.

Answer 1:Correct!Avoidable Answer 2:Correct!Unavoidable Answer 3:Correct!Unavoidable Answer 4:Correct!Avoidable Answer 5:Correct!Unavoidable

Opportunity costs represent costs that can be reduced by effective management of operations. True False

False

A relevant cost is: A) the foregone benefit of choosing to do one thing instead of another. B) a cost that differs across decision alternatives. C) a cost that has already been incurred. D) a cost that is the same regardless of the alternative the manager chooses.

B) a cost that differs across decision alternatives.

Which of the following steps in the managerial decision-making process involves differential analysis? A) Identify the decision problem. B) Determine the decision alternatives. C) Evaluate the costs and benefits of the alternatives. D) Make the decision.

C) Evaluate the costs and benefits of the alternatives.

Which of the following statements is false? A) Sunk costs are never relevant. B) Sunk costs are costs that occurred in the past. C) To be relevant, a cost must be an opportunity cost. D) To be relevant, a cost must occur in the future.

C) To be relevant, a cost must be an opportunity cost.

Sunk costs and future costs that do not differ between the alternatives may or may not be relevant in a decision. True False

False

Sunk costs are costs that have proven to be unproductive. True False

False

Future costs that do not differ between the alternatives in a decision are avoidable costs. True False

False

A cost that is assigned to a product using activity-based costing may or may not be a relevant cost in a decision involving that product. True False

True

A cost that will be incurred regardless of which alternative is selected is not relevant when choosing between the alternatives. True False

True

A product whose revenues do not cover its variable costs and its traceable fixed costs should usually be dropped. True False

True

What of the following forms the basis for a financial advantage when making a business decision? a. Whether opportunity costs are present b. Whether irrelevant costs and benefits arise c. Whether the differential benefits exceed the differential costs d. Whether alternatives exist

c. Whether the differential benefits exceed the differential costs