TRUE OR FALSE – Absorption and Variable Costing & Incremental Analysis

1. An important step in management’s decision-making process is to determine and evaluate

possible courses of action.
TRUE
2. In making decisions, management ordinarily considers both financial and nonfinancial
information.
TRUE
3. In incremental analysis, total variable costs will always change under alternative courses of
action, and total fixed costs will always remain constant.
FALSE
4. Accountants are mainly involved in developing nonfinancial information for management’s
consideration in choosing among alternatives.
FALSE
5. Decision-making involves choosing among alternative courses of action.
TRUE
6. Financial data are developed for a course of action under an incremental basis and then
compared to data developed under a differential basis before a decision is made.
FALSE
7. In incremental analysis, total fixed costs will always remain constant under alternative courses
of action.
FALSE
8. A special one-time order should never be accepted if the unit sales price is less than the unit
variable cost.
TRUE
9. If a company has excess capacity and present markets will not be affected, it would be profitable
to accept an order at a special unit price even though the price is less than the unit variable cost
to manufacture the item.
FALSE
10. A company should never accept an order for its product at less than its regular sales price.
FALSE
11. If a company is operating at less than capacity, the incremental costs of a special order will likely
include variable manufacturing costs, but not fixed costs.
TRUE
12. An incremental make-or-buy decision depends solely on which alternative is the lowest cost
alternative.
FALSE
13. A decision whether to continue to make a product or buy it externally depends on the external
price and the amount of variable and fixed costs that can be eliminated assuming no alternative
uses of resources.
TRUE
14. An opportunity cost is the potential benefit obtained by using resources in an alternative course
of action.
TRUE
15. If an incremental make or buy analysis indicates that it is cheaper to buy rather than make an
item, management should always make the decision to choose lowest cost alternative.
FALSE
16. In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing exceed the incremental variable costs.
FALSE
17. It is always better to sell now rather than process further because of the time value of money.
FALSE
18. The basic decision rule in a sell or process further decision is: process further if the incremental
revenue from processing exceeds the incremental processing costs.
TRUE
19. In a decision concerning replacing old equipment with new equipment, the book value of the old
equipment can be considered an opportunity cost.
FALSE
20. In a decision concerning replacing old equipment with new equipment, the book value of the old
equipment can be considered a sunk cost.
TRUE
21. In a decision to retain or replace old equipment, the salvage value of the old equipment is
relevant in incremental analysis.
TRUE
22. It is better not to replace old equipment if it is not fully depreciated.
FALSE
23. From a quantitative standpoint, a segment should be eliminated if its contribution margin is less
than the fixed costs that can be eliminated.
TRUE
24. The elimination of an unprofitable product line may adversely affect the remaining product
lines.
TRUE
25. Many of the decisions involving incremental analysis have qualitative features, but since they
are not easily measured they should be ignored.
FALSE
26. Accounting contributes to management’s decision-making process through internal reports that
review the actual impact of the decision.
TRUE
27. The process used to identify the financial data that change under alternative courses of action is
called allocation of limited resources.
FALSE
28. If a company is operating at full capacity, the incremental costs of a special order will likely
include fixed manufacturing costs.
TRUE
29. The basic decision rule in a sell or process further decision is: sell without further processing as
long as the incremental revenue from processing exceeds the incremental processing costs.
FALSE
30. In deciding on the future status of an unprofitable segment, management should recognize that
net income could decrease by eliminating the unprofitable segment.
TRUE
31. Determining and evaluating possible courses of action is a step in the management's decision-
making process.
TRUE
32. In incremental analysis fixed costs may not change under alternative courses of action, while
variable costs may change.
TRUE
33. The relevant data to consider in accepting an order at a special price are the additional
manufacturing costs incurred and expected revenues.
TRUE
34. The basic decision rule to sell or process further is: process further as long as the incremental
revenue from such processing exceeds the incremental processing costs.
TRUE
35. Book value is a sunk cost and is therefore relevant in incremental analysis of retain or replace
equipment.
FALSE
36. Fixed manufacturing costs will never be relevant in a make or buy decision.
FALSE
37. Opportunity costs are costs that have already been incurred and will not be avoided by any
future decision.
FALSE
38. In deciding on the future status of an unprofitable segment, management should consider the
effect of elimination on the remaining product lines.
TRUE
39. Joint product costs are relevant for any sell-or-process further decisions.
FALSE
40. Any trade-in allowance or cash disposal value of the old asset is relevant in a retain or replace
equipment decision.
TRUE
41. Decision-making involves reviewing the results of a decision once the decision has been made.
TRUE
42. In incremental analysis, total fixed costs will always remain constant under alternative courses
of action. FALSE
43. Decisions made using incremental analysis focus on the amounts which differ among the
alternatives. TRUE
44. Sunk costs are considered relevant when choosing among alternatives because they are
differential. FALSE
45. Max company has excess capacity. A customer processes to buy 400 widgets at a special unit
price even though the price is less than the unit variable cost to manufacture the widget. Max
should accept the special order if demand for other products is unaffected.
FALSE
46. A company should accept an order for its product at less than its regular price if the incremental
revenue exceeds the incremental costs.
TRUE
47. A decision whether to continue to buy a product instead of producing it internally depends on
the incremental costs and incremental revenues making the change.
FALSE
48. It is better to process further rather than sell now if the price increases.
FALSE
49. An opportunity cost is the potential benefit given up by using resources in an alternative course
of action.
TRUE
50. An incremental make-or-buy decision depends solely on which alternative is the lowest cost
alternative.
FALSE
51. In a sell or process further decision, management should process further as long as the
incremental revenues from additional processing are greater than the incremental costs.
TRUE
52. In a decision-making concerning replacing old equipment with new equipment, the book value
of the old equipment can be considered an opportunity cost.
FALSE
53. In deciding the future status of an unprofitable segment, management should recognize that net
income will increase by eliminating the unprofitable segment.
FALSE
54. If an unprofitable product is eliminated, fixed expenses allocated to the eliminated segment will
likely be eliminated.
FALSE
55. A company should eliminate any segment in which the contribution margin is less than the fixed
costs that are unavoidable.
FALSE
56. Manufacturing cost per unit will be higher under variable costing than under absorption costing.
FALSE
57. Some fixed manufacturing costs of the current period are deferred to future periods through
ending inventory under variable costing.
FALSE
58. When units produced exceed units sold, income under absorption costing is higher than income
under variable costing.
TRUE
59. When absorption costing is used for external reporting, variable costing can still be used for
internal reporting purposes.
TRUE
60. When absorption costing is used, management may be tempted to overproduce in a given
period in order to increase net income.
TRUE
61. Variable costing is the approach used for external reporting under generally accepted
accounting principles.
FALSE
62. The difference between absorption costing and variable costing is the treatment of fixed
manufacturing overhead.
TRUE
63. Selling and administrative costs are period costs under both absorption and variable costing.
TRUE
64. Manufacturing cost per unit will be higher under variable costing than under absorption costing.
FALSE
65. Some fixed manufacturing cost of the current period are deferred to future periods through
ending inventory under variable costing.
FALSE
66. When units produced exceeds units sold, income under absorption costing is higher than
income under variable costing.
TRUE
67. When units sold exceed units produced, income under absorption costing is higher than income
under variable costing.
FALSE
68. When absorption costing is used for external reporting, variable costing can still be used for
internal reporting purposes.
TRUE
69. When absorption costing is used, management may be tempted to overproduce in a given
period in order to increase net income.
TRUE
70. The use of absorption costing facilitates cost-volume-profit analysis.
FALSE