QUIZ

Relevant Costing
Prof. SIMANGAN

THEORIES. Write the letter of your choice in CAPITAL LETTERS.

1. Incremental analysis would not be appropriate for a (an):

a. Make or buy decision
b. Allocation of limited resource decision
c. Elimination of an unprofitable segment
d. Analysis of manufacturing cost variances
2. 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
d. Compare the alternatives
3. Which of the following best describes a 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
4. 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 action should the management consider
5. The best characterization of an opportunity cost is that it is
a. Relevant to decision making but is not usually reflected in the accounting records
b. Not relevant to decision making and is not usually reflected in the accounting records
c. Relevant to decision making and is usually reflected in the accounting records
d. Not relevant to decision making and is usually reflected in the accounting records
6. Which of the following is (are) a true statement(s) about cost behavior in incremental
analysis?
I. Fixed costs will not change between alternatives
II. Fixed costs may change between alternatives
III. Variable cost will always change between alternatives
a. I
b. III
c. II
d. II and III
7. Unit costs can mislead decision makers. Which of the following situations dealing with
unit costs is not expected to result in a faulty analysis?
a. Unit costs used in make-or-buy decisions might include costs such as avoidable fixed
costs
b. Variable unit cost directly varies with the changes in production units
c. Total fixed costs increase as more units are produced within the relevant range
d. Contribution margin on products that can be manufactured in using the freed capacity
is irrelevant in the decision
8. Avoidable costs are:
a. Costs that increase due to a higher volume of activity or the performance of an
additional activity
b. Costs that a company must incur to perform an activity at a given level, but will not
be incurred if a company reduces or discontinues the activity
c. The profits that a company forgoes by following a particular course of action

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 d. Costs that were incurred prior to making a decision
9. Sunk costs are:
a. Costs that increase due to a higher volume of activity or the performance of an
additional activity
b. Costs that a company must incur to perform an activity at a given level, but will not
be incurred if a company reduces or discontinues the activity
c. The profits that a company forgoes by following a particular course of action
d. Costs that were incurred prior to making a decision
10. The opportunity cost of making a component part in a factory with excess capacity for
which there is no alternative use is
a. The total manufacturing cost of the component
b. The total variable cost of the component
c. The fixed manufacturing cost of the component
d. Zero
11. Which of the following qualitative factors favors the buy choice in a make or buy
decision for a component?
a. Maintaining a long-term relationship with suppliers
b. Quality control is critical
c. Utilization of idle capacity
d. The component is critical to product
12. In a make-or-buy decision, an opportunity cost that should be considered is the:
a. Income that could be generated from idle production space
b. Total costs to produce the item
c. Variable costs to produce the item
d. Fixed costs to produce the item
13. A useful device for solving production problems involving multiple products and limited
resources is:
a. Gross sales per unit of product
b. Contribution per unit of scarce resource
c. Net profit per unit of product
d. Total benefit
14. A product mix decision involves:
a. Influencing the sales volume mix of the products to minimize cost
b. Influencing the sales volume mix of the products to maximize revenue
c. Producing the maximum amount of items that provide the highest contribution
margin
d. Producing the maximum amount of items that carry the lowest per-unit cost
15. Which of the following should not be considered in a decision of whether to drop a
product line?
a. Unavoidable costs
b. Avoidable costs
c. Revenue that would be lost
d. Nonfinancial impact of the decision
16. STATEMENT 1: Sunk costs are costs that have proven to be unproductive.
STATEMENT 2: All costs are avoidable in a decision except sunk costs and future costs
that do not differ between the alternatives at hand.
a. Only Statement 1 is TRUE
b. Only Statement 2 is TRUE
c. Both Statements are TRUE
d. Both Statements are FALSE
17. STATEMENT 1: Consistency demands that a cost that is relevant in one decision be
regarded as relevant in other decisions as well.
STATEMENT 2: A cost may be relevant for one decision making situation but irrelevant
for another situation.
a. Only Statement 1 is TRUE
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 b. Only Statement 2 is TRUE
c. Both Statements are TRUE
d. Both Statements are FALSE
18. STATEMENT 1: A future cost that does not vary among alternatives under consideration
is always irrelevant.
STATEMENT 2: Opportunity costs represent economic benefits that are forgone as a
result of pursuing some course of action.
a. Only Statement 1 is TRUE
b. Only Statement 2 is TRUE
c. Both Statements are TRUE
d. Both Statements are FALSE
19. STATEMENT 1: An existing asset should not be replaced until its original cost has been
fully recovered.
STATEMENT 2: Fixed costs are irrelevant in decisions about whether a product line
should be dropped.
a. Only Statement 1 is TRUE
b. Only Statement 2 is TRUE
c. Both Statements are TRUE
d. Both Statements are FALSE
20. STATEMENT 1: In a special order situation, any fixed cost associated with the order
would be irrelevant.
STATEMENT 2: When a company has a production constraint, total contribution margin
will be maximized by emphasizing the products with the highest contribution margin per
unit of the constrained resource.
a. Only Statement 1 is TRUE
b. Only Statement 2 is TRUE
c. Both Statements are TRUE
d. Both Statements are FALSE
PROBLEM SOLVING. Write the letter of your choice in CAPITAL LETTERS.

1. Blade Division of Dana Company produces harvested steel blades. One-third of the
Blades Division’s output is sold to the Lawn Products Division of Dana; the remainder is
sold to outide customers. The blade Division’s estimated sales and standard costs data for
the fiscal year ending June 30 are as follows:
Lawn Products Outsiders
Sales P15,000 P40,000
Variable costs (10,000) (20,000)
Fixed costs (3,000) (6,000)
Gross margin P2,000 P14,000
Unit sales 10,000 20,000

The Lawn Products Division has an opportunity to purchase 10,000 identical quality
blades from an outside supplier at a cost of P1.25 per unit on a continuing basis. Assume
that the Blade Division cannot sell any additional products to outside customers.

Should Dana allow its Lawn Products Division to purchase the blades from the outside
supplier, and why?
a. Yes, because buying the blades would save Dana Company P500
b. No, because making the blades would save Dana Company P1,500
c. Yes, because buying the blades would save Dana Company P2,500
d. No, because making the blades would save Dana Company P2,500

2. Calero Manufacturing Company can make 100 units of a necessary component part with
the following costs:
Direct materials P80,000
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 Direct labor 13,000
Variable overhead 40,000
Fixed overhead 27,000

If Calero Manufacturing Company purchases the component externally, P20,000. Of the

fixed costs can be avoided. At what external price for the 100 units is the company
indifferent between making or buying?
a. P160,000
b. P113,000
c. P153,000
d. P133,000

3. A company is deciding whether or not to eliminate a segment of its business. The

segment generates total sales of P104,000, its direct expenses are P22,000, and is indirect
expenses are P226,000. Its cost of goods sold is P64,000. Six thousand pesos of the direct
expenses and P8,000 of its indirect expenses are avoidable expenses. Which of the
following is not true?
a. This segment has a net loss of P8,000
b. This segment’s revenue is greater than its avoidable costs
c. This segment is a good candidate for elimination
d. This segment’s avoidable costs are greater than unavoidable costs

4. Malao Company makes bull-repellent scent according to a traditional Oriental recipe,

which normally sells at P90 per unit. Normal production volume is 10,000 ounces per
month. Average cost is P50 per ounce, of which P20 is direct material and P10 is variable
conversion cost. This product is seasonal. After July, demand for this product drops to
6,000 ounces monthly. In November, Verde Co. offers to buy 1,500 ounces for P60,000.
If Malao accepts the order, it must design a special label for Verde at a cost of P5,000.
Each label will cost P2.50 to make and apply. Malao should:
a. Accept the order, at a gain of P6,250
b. Reject the order, at a loss of P18,750
c. Reject the order, at a loss of P23,750
d. Accept the order, at a gain of P11,250

5. Isla Verde Company has only 25,000 hours of machine time each month to manufacture
its two products. Product X has a contribution margin of P50 and Product Y has a
contribution margin of P64. Product X requires 5 machine hours and Product Y, 8 hours.
If Isla Verde wants to dedicate 80% of its machine time to the product that will provide
the most oncome, it will have a total contribution margin of
a. P250,000
b. P240,000
c. P210,000
d. P200,000

6. Berberabe Manufacturing schedules a weekly production of P15,000 units of Product M

and 30,000 units of N for which P800,000 common variable costs are incurred. These
two products can be sold as is or processed further. Further processing of either product
does not delay the production of subsequent batches of the joint products. Below are
some of the information:
M N
Unit selling price without further processing P25 P19
Unit selling price with further processing P31 P23
Total separate weekly variable costs of further processing P100,000 P110,000

To maximize Berberabe’s manufacturing contribution margin, the total separate variable

costs of further processing that should be incurred each week are
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 a. P105,000
b. P100,000
c. P110,000
d. P210,000

7. The Alcantara Company produces three products with the following costs and selling
prices:
A B C
Selling price per unit P16 P21 P21
Variable cost per unit 7 11 13
Contribution margin per unit 9 10 8

Direct labor hours per unit 1.0 1.5 2.0

Machine hours per unit 4.5 2.0 2.5

In what order should the three products be produced if either the direct labor-hours or the
machine hours are the company’s production constraint?
Direct labor hours Machine hours
a. A,B,C B,C,A
b. B,C,A B,C,A
c. B,C,A A,C,B
d. A,B,C A,C,B

8. Hilltop Fabricators, Inc. estimates that 60,000 special components will be used in the
manufacture of a specialty steel window for the whole next year. Its supplier quoted a
price of P60 per component. Hilltop prefers to purchase 5,000 units per month, but its
supplier could not guarantee this delivery schedule. In order to ensure availability of
these components, hilltop is considering the purchase of all the 60,000 units at the
beginning of the year. Assuming Hilltop can invest cash at 8% the company’s
opportunity cost of purchasing all the 60,000 units at the beginning of the year is
a. P132,000
b. P150,000
c. P144,000
d. P264,000

9. MARY Manufacturing has assembled the following data pertaining to two popular
products.
Blender Electric mixer
Direct materials P6 P11
Direct labor 4 9
Factory overhead @16 per hour 16 32
Cost if purchased from an outsider supplier 20 38
Annual demand (units) 20,000 28,000

Past experience has shown that the fixed manufacturing overhead component included in
the cost per machine hour averages P10. Mary has a policy of filling all sales orders, even
if it means purchasing units from outside suppliers.

If 50,000 machine hours are available, and Mary Manufacturing desires to follow an
optimal strategy, it should
a. Produce 25,000 electric mixers, and purchase all other units as needed
b. Produce 20,000 blenders ad 15,000 electric mixers, and purchase all other units as
needed
c. Produce 20,000 blenders and purchase all other units as needed
d. Produce 28,000 electric mixers and purchase all other units as needed

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Use the following to answer questions 10-11:

The Disk Division of Systems Specialist Company produces a high quality computer disks. Unit
production costs (based on capacity production of 100,000 units per year) follow:

Direct materials P50

Direct labor 20
Overhead (20% variable) 10

Other information:
Sales price 100
SG & A costs (40% variable) 15

10. The Disk Division is operating at a level of 70,000 chips per year. What is the minimum
price that the division would consider on a “special order” of 1,000 disks to be distributed
through normal channels?
a. P72
b. P78
c. P81
d. P6
11. Assuming that the Disk Division is producing and selling at capacity. What is the
minimum selling price that the division would consider on a “special order” of 1,000
chips on which no variable period costs would be incurred?
a. P100
b. P72
c. P94
d. P90

12. Bautista Corporation, presently operating at 90% of capacity, has been offered a new
order at a special price of P7.90 per unit, requiring 25% of capacity. At present, there is
no other use for the idle capacity of 10%, but if the special order were accepted, the
additional 15% capacity required shall be subcontracted at a cost of P8.00 per unit, that
is, P0.50 more than the company’s variable manufacturing cost.
Should the special order be accepted?
a. Yes, because the special order has a positive contribution margin of P0.10 per unit
b. Yes, because the special order has a positive contribution margin of P0.15 per unit
c. No, because the special price of P7.90 is lower than the subcontracting cost of P8.00
d. No, because the special order cannot be produced entirely using the company’s plant
capacity
Use the following to answer questions 13-14:

Case Corporation produces cellular phone cases. Each case requires a keypad which it also
manufactures at a cost of P20 per unit, inclusive of fixed overhead cost of P5.

Case Corporation needs 50,000 units of this keypad annually. A supplier, Keypad Corp., has
offered to sell to Case Corp. its keypad requirements at P24 per unit. If Case decides to buy the
keypads, P2 per unit of the fixed overhead based on the annual estimate could be eliminated, and
the facility previously used to produce the keypad could be rented to another company.

13. If Case Corp. outsources the keypads but does not rent the unused facility, it would
a. Save P4 per unit
b. Save P2 per unit
c. Lose P4 per unit
d. Lose P7 per unit
14. If the keypads were purchased and the facility rented, how much must the annual rent on
the facility be if Case Corporation wishes to realize annua savings of P80,000?
a. P270,000
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 b. P430,000
c. P280,000
d. P380,000

15. Otool Inc. is considering using stocks of an old raw material in a special project. The
special project would require all 240 kilograms of the raw material that are in stock and
that originally cost the company $2,112 in total. If the company were to buy new supplies
of this raw material on the open market, it would cost $9.25 per kilogram. However, the
company has no other use for this raw material and would sell it at the discounted price
of $8.35 per kilogram if it were not used in the special project. The sale of the raw
material would involve delivery to the purchaser at a total cost of $71.00 for all 240
kilograms. What is the relevant cost of the 240 kilograms of the raw material when
deciding whether to proceed with the special project?
a. 1,933
b. 2,004
c. 2,220
d. 2,112

16. Schickel Inc. regularly uses material B39U and currently has in stock 460 liters of the
material for which it paid 3,128 several weeks ago. If this were to be sold as is on the
open market as surplus material, it would fetch 5.95 per liter. New stocks of the material
can be purchased on the open market for 6.45 per liter, but it must be purchased in lots of
1,000 liters. You have been asked to determine the relevant cost of 760 liters of the
material to be used in a job for a customer. The relevant cost of the 760 liters of material
B39U is:
a. 4,902
b. 4,672
c. 4,522
d. 6,450

Use the following to answer questions 17-18:

The following are Silver Company's unit costs of making and selling an item at a volume of
8,000 units per month (which represents the company's capacity):

Manufacturing:
Direct materials 4
Direct labor 5
Variable overhead 2
Fixed overhead 8
Selling and administrative:
Variable 1
Fixed 6

Present sales amount to 7,000 units per month. An order has been received from a customer in a
foreign market for 1,000 units at a price of 20 per unit. The order would not affect regular sales.
Fixed costs, both manufacturing and selling and administrative, are constant within the relevant
range between 6,000 and 8,000 units per month. The variable selling and administrative costs
would have to be incurred for this special order as well as all other sales.

17. If the company accepts the special order, the effect on total operating income will be a:
a. 1,000 increase
b. 9,000 increase
c. 6,000 decrease
d. 8,000 increase

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 18. The company has 100 defective units of Product X left over from last year which will
have to be sold as scrap at reduced prices. The sale of these units would have no effect on
the company's other sales. The cost figure that is relevant as a guide for setting a
minimum price on these units is:
a. 7
b. 1
c. 19
d. 12
Use the following to answer questions 19-20:

Ahron Company makes 80,000 units per year of a part it uses in the products it manufactures.
The unit product cost of this part is computed as follows:

Direct materials 14.90

Direct labor 17.50
Variable manufacturing overhead 1.90
Fixed manufacturing overhead 21.10
Unit product cost 55.40

An outside supplier has offered to sell the company all of these parts it needs for 46.60 a unit. If
the company accepts this offer, the facilities now being used to make the part could be used to
make more units of a product that is in high demand. The additional contribution margin on this
other product would be 560,000 per year.

If the part were purchased from the outside supplier, all of the direct labor cost of the part would
be avoided. However, 13.60 of the fixed manufacturing overhead cost being applied to the part
would continue even if the part were purchased from the outside supplier. This fixed
manufacturing overhead cost would be applied to the company's remaining products.

19. What is the net total dollar advantage (disadvantage) of purchasing the part rather than
making it?
a. 560,000
b. 704,000
c. 176,000
d. (384,000)

20. What is the maximum amount the company should be willing to pay an outside supplier
per unit for the part if the supplier commits to supplying all 80,000 units required each
year?
a. 7.00
b. 62.40
c. 48.80
d. 55.40

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