[MASREV] MATERIAL 08: RELEVANT COSTING

1. Costs which can be eliminated in whole or in part if a particular business segment is discontinued are called:
a. sunk costs.
b. opportunity costs.
c. avoidable costs.
d. irrelevant costs.
2. Which of the following cash flows is relevant in a decision about accepting Alternative X or Alternative Y?
a. a cash inflow for Alternative X that is not a cash inflow for Alternative Y.
b. a cash inflow that is lost if Alternative X is accepted and is not lost if Alternative Y is accepted.
c. a cash outflow that is avoided if Alternative X is accepted and is not avoided if Alternative Y is accepted.
d. all of the above.
3. Which of the following best describes an opportunity cost:
a. it is a relevant cost in decision making, but is not part of the traditional accounting records.
b. it is not a relevant cost in decision making, but is part of the traditional accounting records.
c. it is a relevant cost in decision making, and is part of the traditional accounting records.
d. it is not a relevant cost in decision making, and is not part of the traditional accounting records.
4. Consider the following statements:
I. Division's net operating income, after deducting traceable and allocated common corporate costs, is negative.
II. The division's avoidable fixed costs exceed its contribution margin.
III. The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin.
Which of the above statements give an economic reason for eliminating the division?
a. Only I
b. Only II
c. Only III
d. Only I and II
5. The Jabba Company manufactures the “Snack Buster” which consists of a wooden snack chip bowl with an attached
porcelain dip bowl. Which of the following would be relevant in Jabba's decision to make the dip bowls or buy them
from an outside supplier?
Fixed overhead cost The variable
that can be eliminated if selling
the bowls are purchased cost of the
from the outside supplier Snack Buster
a) Yes Yes
b) Yes No
c) No Yes
d) No No
6. The acceptance of a special order will improve overall net operating income so long as the revenue from the special
order exceeds:
a. the contribution margin on the order.
b. the incremental costs associated with the order.
c. the variable costs associated with the order.
d. the sunk costs associated with the order.
7. 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. uses the lowest number of stamping machine hours.
b. generates the highest contribution margin per unit.
c. generates the highest contribution margin ratio.
d. generates the highest contribution margin per stamping machine hour.
MASREV MATERIAL
8. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed
further?
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.
a. Only I
b. Only III
c. Only I and II
d. Only I and III
9. Which of the following is a sunk cost?
a. Operating costs for a new vehicle
b. Trade in value of old vehicle
c. Purchase price of new vehicle
d. Purchase price of vehicle to be traded in
10. Fixed costs that may be avoided in the future are referred to as:
a. replacement costs.
b. opportunity costs.
c. relevant costs.
d. sunk costs.
11. Which of the following describes a sunk cost?
a. One that is relevant to a decision because it changes depending on the alternative course of action selected
b. An outlay expected to be incurred in the future
c. A historical cost that is always irrelevant
d. A historical cost that may be relevant
12. The effect of a plant closing on employee morale is an example of which of the following?
a. A quantitative factor
b. A qualitative factor
c. A sunk cost
d. A variable cost
13. In making a short-term special decision, which of the following is MOST important?
a. Separate variable from fixed costs
b. Focus on total costs
c. Use a conventional absorption costing approach
d. Calculating the fixed cost per unit
14. When making any sort of decision, managers should consider:
a. only fixed costs.
b. costs that remain constant among alternatives.
c. revenues that differ among alternatives.
d. only variable costs.
15. In a special sales order decision, incremental fixed costs that will be incurred if the special order
is accepted are considered to be:
a. relevant to the decision.
b. irrelevant to the decision.
c. opportunity costs.
d. sunk costs.
16. When deciding whether to accept a special order, managers should consider all of the following except:
a. available excess capacity.
b. the variable costs associated with the special order.
c. fixed costs that will be unaffected by the order.
MASREV MATERIAL
 d. the effect of the order on regular sales.
17. A manager should always reject a special order if:
a. there is available excess capacity.
b. the special order price is less than the variable costs of the order.
c. the special order price is less than the regular sales price.
d. the special order will require variable nonmanufacturing expenses
18. Which would be a consideration for making special orders?
a. Available capacity to fill the order
b. If price will cover incremental costs of filling the order
c. If the order will affect regular sales in the long run
d. All of the above
19. When making a short-term special decision, a company should:
a. focus on qualitative factors only.
b. focus on quantitative factors only.
c. separate variable costs from fixed costs
d. use a traditional direct costing approach.
20. Which of the following best describes a “relevant cost”?
a. A factor that restricts production or sales of a product
b. Cost of developing, producing, and delivering a product or service
c. Expected future costs that differs among alternatives
d. Costs that were incurred in the past and can not be changed
21. The cost of inventory currently owned by a firm is an example of a(n):
a. opportunity cost.
b. sunk cost.
c. relevant cost.
d. differential cost.
e. future cost.
22. The following costs are relevant to the decision situation cited except:
a. the cost of hiring a full-time staff attorney, in a decision to establish an in-house legal department or retain the
services of a prominent law firm.
b. the remodeling cost of existing office space, in a firm's decision to stay at its current location or move to a new
building.
c. the long-term salary costs demanded by Joe Torrez (a superstar) and Rip Moran (an average player) in baseball
contract negotiations, in a decision that determines the amounts by which ticket prices must be raised.
d. the cost to enhance an airline's Web site, in a decision to expand existing service to either Salt Lake City or
Phoenix.
e. the commissions that could be earned by a salesperson, in a decision that involves salesperson compensation
methods (i.e., commissions or flat monthly salaries)
23. A trade-off in a decision situation sometimes occurs between information:
a. accuracy and relevance.
b. relevance and uniqueness.
c. accuracy and timeliness.
d. sensitivity and accuracy.
e. sensitivity and relevance.
24. At which step or steps in the decision-making process do qualitative considerations generally have the greatest impact?
a. Specifying the criterion and identifying the alternatives.
b. Developing a decision model.
c. Collecting the data.
d. Making a decision.
e. Identifying the alternatives.
25. The City of Miami is about to replace an old fire truck with a new vehicle in an effort to save maintenance and other
operating costs. Which of the following items, all related to the transaction, would not be considered in the decision?
a. Purchase price of the new vehicle.

MASREV MATERIAL
 b. Purchase price of the old vehicle.
c. Savings in operating costs as a result of the new vehicle.
d. Proceeds from disposal of the old vehicle.
e. Future depreciation on the new vehicle.
26. Elegant, Inc., has P125,000 of inventory that suffered minor smoke damage from a fire in the warehouse. The
company can sell the goods "as is" for P45,000; alternatively, the goods can be cleaned and shipped to the firm's
outlet center at a cost of P23,000. There the goods could be sold for P80,000. What alternative is more desirable and
what is the relevant cost for that alternative?
27. In early July, Jim Lopez purchased a P70 ticket to the December 15 game of PBA. Parking for the game was expected
to cost approximately P22, and Lopez would probably spend another P15 for a souvenir program and food. It is now
December 14. However, due to some unforeseen circumstances, Jim therefore decided to skip the game and took his
wife to the movies, with tickets and dinner costing P50. The amount of sunk cost that should influence Jim’s decision
to take his wife to the movies and dinner is?
28. Susan is contemplating a job offer with an advertising agency where she will make P54,000 in her first year of
employment. Alternatively, Susan can begin to work in her father's business where she will earn an annual salary of
P38,000. If Susan decides to work with her father, the opportunity cost would be?
29. Hodge Inc. has some material that originally cost P74,600. The material has a scrap value of P57,400 as is, but if
reworked at a cost of P1,500, it could be sold for P54,400. What would be the incremental effect on the company's
overall profit of reworking and selling the material rather than selling it as is as scrap?
30. Hamby Corporation is preparing a bid for a special order that would require 780 liters of material W34C. The
company already has 640 liters of this raw material in stock that originally cost P8.30 per liter. Material W34C is used
in the company's main product and is replenished on a periodic basis. The resale value of the existing stock of the
material is P7.60 per liter. New stocks of the material can be readily purchased for P8.35 per liter. What is the relevant
cost of the 780 liters of the raw material when deciding how much to bid on the special order?
31. Beaver Company (a multi-product firm) produces 5,000 units of Product X each year. Each unit of Product X sells for
P8 and has a contribution margin of P5. If Product X is discontinued, P18,000 of fixed overhead would be eliminated.
As a result of discontinuing Product X, the effect on the company's overall operating income would be?
32. Milli Company plans to discontinue a division that generates a total contribution margin of P20,000 per year. Fixed
overhead associated with this division is P50,000, of which P5,000 cannot be eliminated. The effect of this
discontinuance on Milli's operating income would be an increase of?
33. Product U23N has been considered a drag on profits at Jinkerson Corporation for some time and management is
considering discontinuing the product altogether. Data from the company's accounting system appear below:
Sales .......................................................................................... P730,000
Variable expenses ................................................................... P350,000
Fixed manufacturing expenses ............................................. P234,000
Fixed selling and administrative expenses .......................... P161,000
In the company's accounting system all fixed expenses of the company are fully allocated to products. Further
investigation has revealed that P144,000 of the fixed manufacturing expenses and P93,000 of the fixed selling and
administrative expenses are avoidable if product U23N is discontinued. What would be the effect on the company's
overall net operating income if product U23N were dropped?
34. Supler Company produces a part used in the manufacture of one of its products. The unit product cost is P18,
computed as follows:
Direct materials ........................................................ P 8
Direct labor .............................................................. 4
Variable manufacturing overhead ......................... 1
Fixed manufacturing overhead.............................. 5
Unit product cost .................................................... P18
An outside supplier has offered to provide the annual requirement of 4,000 of the parts for only P14 each. It is
estimated that 60 percent of the fixed overhead cost above could be eliminated if the parts are purchased from the
outside supplier. Based on these data, the per-unit peso advantage or disadvantage of purchasing from the outside
supplier would be?
35. The Freed Company produces three products, X, Y, Z, from a single raw material input. Product Y can be sold at the
splitoff point for total revenues of P50,000, or it can be processed further at a total cost of P16,000 and then sold for
P68,000. Should Product Y be sold at split off or processed further?

MASREV MATERIAL
36. Pendall Company manufactures products Dee and Eff from a joint process. Product Dee has been allocated P2,500 of
the P20,000 in total joint costs associated with the production of 1,000 units each of Dee and Eff each year. Dee can
be sold at the split-off point for P3 per unit, or it can be processed further with additional costs of P1,000 and sold
for P5 per unit. If Dee is processed further and sold, the result would be?
37. Khiem, Inc. manufactures baseball gloves that normally sell for P55 each. Khiem currently has 400 defective gloves in
inventory that have P35 of materials, labor, and overhead assigned to each glove. The defective gloves can either be
completely repaired at a cost of P25 per glove or sold as is at a reduced price of P18 per glove. Should Khiem repair
or sell the defective gloves as is?
38. Two products, QI and VH, emerge from a joint process. Product QI has been allocated P9,600 of the total joint costs
of P12,000. A total of 9,000 units of product QI are produced from the joint process. Product QI can be sold at the
split-off point for P13 per unit, or it can be processed further for an additional total cost of P54,000 and then sold for
P18 per unit. If product QI is processed further and sold, what would be the effect on the overall profit of the
company compared with sale in its unprocessed form directly after the split-off point?
39. Kitchen Appliances Company manufactures two products: toaster ovens and bread machines:
Toaster Ovens Bread Machines
Sales price P100 P200
Variable costs P30 P150
The company can manufacture three toaster ovens per machine hour and two bread machines per machine hour. The
company’s production capacity is 1,200 machine hours per month. To maximize profits, what product and how many
units should the company produce in a month?
40. Compact Appliances uses a standard part in the manufacture of several of its air conditioners. The cost of producing
40,000 parts is P110,000, which includes fixed costs of P50,000 and variable costs of P60,000. By outsourcing the
part, the company can avoid 40% of the fixed costs. If Compact Appliances buys the part, what is the most Compact
Appliances can spend per unit so that operating income equals the operating income from making the part?
41. The Schmidt Corporation has in its inventory 4,000 damaged radios that cost P50,000. The radios can be sold in their
present condition for P32,000, or repaired at a cost of P43,000 and sold for P66,000. What is the opportunity cost of
selling the radios in their present condition?
42. Fine Pottery Processors manufactures two products, platters and tureens, from a joint process. Platters are allocated
P5,000 of the total joint costs of P25,000. There are 1,500 platters produced and 1,500 tureens produced each year.
Platters can be sold at the split-off point for P12 per unit, or they can be processed further into a deluxe platter for
additional processing costs of P5,000 and sold for P16 for each deluxe platter. If the platters are processed further
and made into deluxe platters, the effect on operating income would be?
43. JKL Company is considering replacing a machine with a book value of P100,000, a remaining useful life of 4 years,
and annual straight-line depreciation of P25,000. The existing machine has a current market value of P80,000. The
replacement machine would cost P160,000, have a 4-year useful life, save P50,000 per year in cash operating costs. If
the replacement machine would be depreciated using straight-line method and the tax rate is 40%, what would be the
increases in annual income taxes if the company replaces the machine?
44. McIntosh Enterprises produces giant stuffed bears. Each bear consists of P12 of variable costs, P9 of fixed costs, and
sells for P45. A wholesaler offers to buy 8,000 units at P14 each of which McIntosh has the capacity to produce.
McIntosh will incur extra shipping costs of P1.25 per bear. Determine the incremental income or loss that McIntosh
Enterprises would realize by accepting the special order.
45. Parino Company has three product lines in its retail stores: books, videos, and music. The allocated fixed costs are
based on units sold and are unavoidable. Demand of individual products is not affected by changes in other product
lines. Results of the fourth quarter are presented below:
Books Music Videos Total
Units sold 1,000 2,000 2,000 5,000
Revenue P24,000 P48,000 P32,000 P104,000
Variable departmental costs 15,000 22,000 23,000 60,000
Direct fixed costs 3,000 6,000 4,000 13,000
Allocated fixed costs 4,400 8,800 8,800 22,000
Net income (loss) P 1,600 P11,200 P (3,800) P 9,000
How much will be the increase or decrease to Parino Company by dropping Videos product line?

-END-
MASREV MATERIAL