N12401 MAD II Self-Assessment Questions Relevant Costing

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These exercises are meant to confirm your understanding of the topic concerned. You are expected

to have gone through the class materials and directed readings thoroughly before attempting these

exercises. As you work through these questions, you may find new terminologies/ideas popping out

occasionally, dont get worried at all, as these are deliberate to trigger further exploration of the issues concerned. So be adventurous and have fun!

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1. The cost of a computer system installed last year is an example of:

a. a sunk cost

b. a relevant cost

c. a differential cost

d. an avoidable cost

2. Costs that cannot be changed by any decision made now or in the future are:

a. fixed costs

b. indirect costs

c. avoidable costs

d. sunk costs

3. For decision making, a listing of the relevant costs:

a. will help the decision maker concentrate on the pertinent data

b. will only include future costs

c. will only include costs that differ among the decision alternatives

d. should include all of the above

4. Which of the following costs are NEVER relevant in the decision-making process?

a. fixed costs

b. historical costs

c. relevant costs

d. variable costs

5. When deciding to purchase a new cutting machine or continue using the old machine, the

following costs are all relevant EXCEPT the:

a. $50,000 cost of the old machine

b. $20,000 cost of the new machine

c. $10,000 disposal value of the old machine

d. $3,000 annual savings in operating costs if the new machine is purchased

6. Relevant costs of a make-or-buy decision for a part include all of the following EXCEPT:

a. fixed salaries that will not be incurred if the part is outsourced

b. current direct material costs of the part

c. special machinery for the part that has no resale value

d. material-handling costs that can be eliminated if the part is outsourced

7. Which of the following would NOT be considered in a make-or-buy decision?

a. fixed costs that will no longer be incurred

b. variable costs of production

c. potential rental income from space occupied by the production area

d. unchanged supervisory costs

8. When deciding to accept a one-time-only special order from a wholesaler, management should do

all of the following EXCEPT:

a. analyze product costs

b. consider the impact of the special order on future prices of their products

c. determine whether excess capacity is available

d. verify past design costs for the product

N12401 MAD II Self-Assessment Questions Relevant Costing

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9. When there is excess capacity, it makes sense to accept a one-time-only special order for less

than the current selling price when:

a. incremental revenues exceed incremental costs

b. additional fixed costs must be incurred to accommodate the order

c. the company placing the order is in the same market segment as your current customers

d. None of the above is correct.

10. When deciding whether to discontinue a segment of a business, managers should focus on:

a. equipment used by the segment that could become idle

b. reallocation of corporate costs

c. how total costs differ among alternatives

d. operating income per unit of the discontinued segment

11. Carolyn has three divisions and the information for the year ended December 2008 is as follows:

Division C

000 Division R

000 Division L

000 Total

000

Sales 350 420 150 920

Variable costs 280 210 120 610

Contribution 70 210 30 310

Fixed overheads

General# 40 48 17 105

Specific 52.5 52.5 52.5 157.5

Net Profit -22.5 109.5 -39.5 47.5 # The general fixed overheads are allocated to each division on the basis of sales revenue.

Using the relevant costing approach, which division(s) should remain in operation if Carol Ltd

wishes to maximise profits?

a. Division R only.

b. Division C and R only.

c. Division R and L only.

d. Division C and L only.

12. The printing department of a university is considering whether to print brochure to promote a

charity function. The brochure requires 250 reams of a special type of paper. The department

currently holds 100 reams in inventory of which it bought at 15 per ream last year. These will have a resale value of 10 per ream. The current market price of the paper is 26 per ream. What is the relevant cost of the paper that the department should consider if it decides to print

the brochures?

a. 4,400. b. 4,900. c. 3,900. d. 5,400.

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 13 THROUGH 15.

Fair Engineering Company manufactures part QE767 used in several of its engine models. Monthly

production costs for 10,000 units are as follows:

Direct materials $ 80,000

Direct labor 20,000

Variable support costs 50,000

Fixed support costs 40,000

Total costs $190,000

It is estimated that 20% of the fixed support costs assigned to part QE767 will no longer be incurred

if the company purchases the part from the outside supplier. Fair Engineering Company has the

option of purchasing the part from an outside supplier at $16 per unit.

N12401 MAD II Self-Assessment Questions Relevant Costing

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13. If Fair Engineering Company accepts the offer from the outside supplier, the monthly avoidable

costs (costs that will no longer be incurred) total:

a. $ 32,000

b. $ 82,000

c. $ 158,000

d. $190,000

14. If Fair Engineering Company purchases 10,000 QE767 parts from the outside supplier per month,

then its monthly operating income will:

a. decrease by $2,000

b. increase by $30,000

c. decrease by $16,000

d. decrease by $58,000

15. The maximum price that Fair Engineering Company should be willing to pay the outside supplier

for each unit of part QE767 is:

a. $10

b. $15

c. $15.80

d. $16

16. CafNott Plc produces a special range of brewed coffee for the Asian market. The coffee is sold in

small packs for $12 each. The first stage in the production process is carried out in the Blending

Department which removes foreign objects from the raw materials and mixes them in the proper

proportions in large containers. The company uses the weighted-average method in its process

costing system. Details for the Blending Department for November 2008 are as below:

Work-in-process on 1 Nov was 30,000 units (90% materials, 80% conversion cost added last

month). 200,000 units were started into the production. 190,000 units were transferred to the

next department. Work-in-process on 30 Nov was 40,000 units (75% materials, 60% conversion

cost added this month).

Costs incurred for the WIP as at 1 Nov were $67,800 for materials and $30,200 for conversion.

Cost added during Nov were $579,000 for materials and $248,000 for conversion

Cost accounted for as follows:

Transferred to the next department $805,600

Work-in-process, 30 Nov $119,400

Total cost $925,000

Required:

(a) What is the cost per equivalent unit for material and for conversion for the month?

(b) A recent market survey shows that customers are willing to buy the product at $6.50 per

unit. Assuming the fixed production costs amount to about 20% of the total cost per unit

calculated in part (a), and assuming the company policy requires a minimum estimated

contribution to sales (C/S) ratio of 40% for its products. Should CafNott Plc continue with

the product?

(c) Once a company adopts the activity-based costing approach to treat the production costs,

these costs would be relevant for the decision-making process. Discuss.