Cost Accounting Chapter 13 Mel

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 (Total incremental cost = $42 = $30 + $5 + ($10 × 70%)

Lusk Corporation produces and sells 14,800 units of Product X each month. The selling price of Product X is $30 per unit, and variable expenses are $24 per unit. A study has been made concerning whether Product X should be discontinued. The study shows that $74,000 of the $112,000 in monthly fixed expenses charged to Product X would not be avoidable even if the product was discontinued. If Product X is discontinued, the monthly financial advantage (disadvantage) for the company of eliminating this product should be: A. ($61,200) B. ($50,800) C. $61,200 D. $23,200

B. ($50,800)

Which of the following types of decisions involves deciding whether to accept or reject an order that is outside the scope of normal sales? A. Make or buy B. Special order C. Sell or process further D. Keep or drop

B. Special order (A special order decision involves deciding whether to accept or reject an order that is outside the scope of normal sales.)

Costs that can be eliminated in whole or in part if a particular business segment is discontinued are called: A. irrelevant costs. B. sunk costs. C. avoidable costs. D. opportunity costs.

C. avoidable costs.

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. (One approach considers only the relevant costs, while the other approach considers all costs, both those that were relevant and those that were not. We obtain the same answer using both the approaches. Mixing irrelevant costs with relevant costs might cause confusion and distract attention from critical information; as a result, considering only relevant costs is the better approach.)

In a sell or process further decision, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off. III. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? A. Only I B. Only III C. Only I and II D. Only I and III

A. Only I

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 (A sunk cost is a cost that has already been incurred and does not affect the decision.)

Nakatomi Corporation produces 10,000 units of Product A at a cost of $20 per unit. A detailed breakdown of the cost is below. Per UnitVariable costs = $12 Allocated manufacturing overhead costs = 3 Allocated general administrative costs = 5 $20 Outside supplier's offer $17 What are the total relevant cost of producing the units internally? A. $150,000 B. $120,000 C. $200,000 D. $170,000

B. $120,000 (Total relevant cost of producing the units internally will be the costs that can be avoided by opting to purchase the products externally. Nakatomi can avoid the variable costs of $12 per unit ($120,000 for 10,000 units).

Superware, Incorporated produces multiple products out of a common input. Geratin is one such product, which has a sales value of $15,000 at the split-off point. Joint costs allocated to Geratin are $12,000. Sales value of Geratin increases to $25,000 after further processing, and this processing will cost $7,000. What is the net profit or loss if Superware processes the product further? A. ($3,000) loss B. $3,000 profit C. $20,000 profit D. $18,000 profit

B. $3,000 profit (Incremental revenues = Sales value after further processing of $25,000 − Sales value at split-off point of $15,000 = $10,000 Net profit if the product is processed further = Incremental revenues of $10,000 − Incremental costs of $7,000 = $3,000)

The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service is called ________. A. opportunity cost B. vertical integration C. relevant cost D. avoidable cost

B. vertical integration (The involvement by a company in more than one of the activities in the entire value chain from development through production, distribution, sales, and after-sales service is called vertical integration.)

When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, this leads to ________. A. keep or drop decisions B. volume trade-off decisions C. sell or process further decisions D. make or buy decisions

B. volume trade-off decisions (When a company does not have enough capacity to produce all of the products and sales volume demanded by their customers, it is called volume trade-off decisions.)

Hodge Incorporated has some material that originally cost $74,600. The material has a scrap value of $57,400 as is, but if reworked at a cost of $1,500, it could be sold for $54,400. What would be the financial advantage (disadvantage) of reworking and selling the material rather than selling it as is as scrap? A. $52,900 B. ($79,100) C. ($4,500) D. ($21,700)

C. ($4,500) (Sales value of reworked material = $54,400 Less: Cost to rework material = 1,500 Net sales value = 52,900 Current scrap value = 57,400 Financial advantage (disadvantage) of reworking rather than selling as scrap$ (4,500)

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 (The finder's fee is incurred only if the private jet is bought. Because this cost varies between the alternatives, it is a relevant cost.)

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 (In business decisions, a financial advantage exists if pursuing an alternative passes the cost/benefit test. The financial advantage exists if the differential benefits (future cash inflows) exceed its differential costs (its future cash outflows).

Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that: A. generates the highest contribution margin per unit. B. generates the highest contribution margin ratio. C. generates the highest contribution margin per stamping machine hour. D. uses the least amount of stamping time.

C. generates the highest contribution margin per stamping machine hour.

All of the following are relevant to the sell or process further decision except _______. A. costs incurred beyond the split-off point B. revenues at the split-off point C. joint costs incurred before the split-off point D. revenues beyond the split-off point

C. joint costs incurred before the split-off point (Joint costs already incurred up to the split-off point are always irrelevant in decisions concerning what to do from the split-off point forward. This is because once the split-off point is reached, the joint costs have already been incurred and nothing can be done to avoid them.)

Which of the following costs are always irrelevant in decision making? A. opportunity costs B. avoidable costs C. sunk costs D. fixed costs

C. sunk costs

Sharp Corporation produces 8,000 parts each year, which are used in the production of one of its products. The unit product cost of a part is $36, computed as follows: Variable production cost = $16 Fixed production cost = $20 Unit product cost = $36 The parts can be purchased from an outside supplier for only $28 each. The space in which the parts are now produced would be idle and fixed production costs would be reduced by one-fourth. Based on these data, the financial advantage (disadvantage) of purchasing the parts from the outside supplier would be: A. $24,000 B. ($24,000) C. $56,000 D. ($56,000)

D. ($56,000) (Variable production cost (8,000 units × $16 per unit) = $128,000 Avoidable fixed production cost (8,000 units × 25% × $20 per unit) = 40,000 Relevant cost to make = $168,000 Cost to buy (8,000 units × $28 per unit) = 224,000 Increase in cost if the parts are purchased = $(56,000)

Which of the following would be relevant in the decision to sell or throw out obsolete inventory? Direct material cost assigned to the inventory Fixed overhead cost assigned to the inventory A)Yes Yes B)Yes No C)No Yes D)No No A. Choice A B. Choice B C. Choice C D. Choice D

D. Choice D

The Freed Corporation produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the split-off point for total annual revenues of $50,000, or it can be processed further at a total annual cost of $16,000 and then sold for $68,000. Which of the following statements is true concerning Product Y? A. The annual financial advantage from processing Product Y further is $18,000. B. Product Y should be sold at the split-off point rather than processed further. C. The annual financial advantage from processing Product Y further is $68,000. D. The annual financial advantage from processing Product Y further is $2,000.

D. The annual financial advantage from processing Product Y further is $2,000. (Final sales value after further processing =$68,000 Less sales value at split-off point = $50,000 Incremental revenue from further processing = $18,000 Less cost of further processing = 16,000 Financial advantage (disadvantage) from further processing =$2,000

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 (Opportunity cost is the potential benefit that is given up when one alternative is selected over another.)