MODULE 6

INCREMENTAL ANALYSIS

THEORIES:
1. When discussing the pitfalls to be avoided in decision-making, four reminders
usually emerge. Which is NOT one of those reminders?
A. Ignore sunk costs.
B. Beware of allocated fixed costs; identify the avoidable costs.
C. Pay special attention to identifying and including opportunity costs.
D. Do not overlook the time value of money in short-run decisions.
2. Predicted future cost and revenue data that will differ among alternative courses
of action are known as
A. relevant information
B. direct information
C. marginal costs
D. incremental costs
3. Incremental analysis would not be appropriate for
A. a make or buy decision.
B. an allocation of limited resource decision.
C. elimination of an unprofitable segment.
D. analysis of manufacturing variances.
4. Which of the following is described as data that are pertinent to a decision?
A. qualitative characteristics
B. accurate information
C. timely information
D. relevant information
5. What is the first step in the decision making process?
A. Specify the criteria by which the decision is to be made.
B. Consider the strategic issues regarding the decision context.
C. Perform an analysis in which the relevant information is developed and
analyzed.
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INCREMENTAL ANALYSIS

D. Compare the alternatives.

6. Which of the following best describes relevant information?
A. Focused on the past and differs between the alternatives under
consideration.
B. Focused on the past and not related to the decision under consideration.
C. Focused on the future and differs between the alternatives under
consideration.
D. Focused on the future and not related to the decision under consideration.
7. A major accounting contribution to the managerial decision-making process in
evaluating possible courses of action is to
A. assign responsibility for the decision.
B. provide relevant revenue and cost data about each course of action.
C. determine the amount of money that should be spent, on a project.
D. decide which actions that the management should consider.
8. An analysis of relevant costs and relevant revenues
A. Will enable the decision maker to assess a decision's impact on profit
B. Is useful in assessing a variety of alternative decisions
C. Provides sufficient and complete evidence with which to make a decision
D. Answers a. and b. are correct
9. The kind of cost that can be ignored in a short-term decision making is a (an)
A. differential cost
B. incremental cost
C. sunk cost
D. joint cost
10. An important concept in decision making is described as "the contribution to
income that is forgone by not using a limited resource in its best alternative
use," This concept is called
A. Marginal cost
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INCREMENTAL ANALYSIS

B. Cost outlay
C. Incremental cost
D. Opportunity cost
11. An "opportunity cost" is
A. the difference in total costs that results from selecting one alternative
instead of another
B. the profit forgone by selecting one alternative instead of another
C. a cost that may be saved by not adopting an alternative
D. a cost that may be shifted to the future with little or no effect on current
operations
12. The best characterization of an opportunity cost is that it is
A. relevant to decision making but is not usually reflected in accounting
records
B. not relevant to decision making and is not usually reflected in accounting
records
C. relevant to decision making and is usually reflected in accounting records
D. not relevant to decision making and is usually reflected in accounting
Records
13. Which of the following is least likely to be a relevant item in deciding whether to
replace an old machine?
A. acquisition cost of the old machine
B. outlay to be made for the new machine
C. annual savings to be enjoyed on the new machine
D. life of the new machine
14. The Health Care Division of Piedmont Insurance employs three claims processors
capable of processing 5,000 claims each. The division currently processes
12,000 claims. The manager has recently been approached by two sister
divisions. Auto Division would like the Health Care Division to process
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INCREMENTAL ANALYSIS

approximately 2,000 claims. Property Division would like the Health Care
'Division to process approximately 5,000 claims. The Health Care Division would
be compensated by Auto Division or Property Division for processing these
claims. Assume that these are mutually exclusive alternatives. Claims processor
salary cost is relevant for
A. Auto Division alternative only
B. Property Division alternative only
C. both Auto Division and Property Division alternatives
D. neither Auto Division nor Property Division alternatives
15. A fixed cost is relevant if it is
A. future cost
B. sunk
C. avoidable
D. a product cost