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MODULE 6INCREMENTAL ANALYSISBasic concepts Steps in decision making process 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 rele...

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Incremental Analysis

MODULE 6

24. One of the behavioral problems with relevant cost analysis is the overemphasis on short-term goals, which can lead to neglect of: A. sales promotion C. quarterly net income results D. long-term strategic goals B. expense control

I N C R E M E N TAL AN ANA A LYS LYSII S B a s i c c o nc ncee p t s Steps in decision making process 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. D. Compare the alternatives.

Incremental analysis 25. Incremental analysis is the process of identifying the financial data that: A. do not change under alternative courses of action B. are mixed under alternative courses of action C. change under alternative courses of action D. no correct answer is given 48. Incremental analysis is most useful A. in evaluating the master budget. B. in choosing between the net present value method and the internal rate of return method. C. in developing relevant information for management decisions. D. as a replacement technique for variance analysis.

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.

Relevant information 2. Predicted future cost and revenue data that will differ among alternative courses of action are known as A. relevant information C. marginal costs B. direct information D. incremental costs

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

4. Which of the following is described as data that are pertinent to a decision? A. qualitative characteristics C. timely information B. accurate information D. relevant information

Pitfalls in decision making 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.

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.

19. Which one of the following is not a common mistake in a decision-making process? A. Considering sunk costs as relevant. B. Considering opportunity cost, an imputed cost, being relevant. C. Considering fixed costs as avoidable fixed costs. D. Unitizing fixed costs.

Application of incremental analysis 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. 11

Incremental Analysis

R e l e v a n t co coss t s 16. Relevant costs are A. all fixed and variable costs B. all costs that would be incurred within the relevant range of production C. past costs that are expected to be different in the future D. anticipated future costs that will differ among various alternatives

D. analysis of manufacturing variances. I r r e l e v an antt co coss t s Sunk costs 9. The kind of cost that can be ignored in a short-term decision making is a(an) C. sunk cost A. differential cost B. incremental cost D. joint cost

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 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

30. 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 33. A sunk cost is: A. a cost incurred in the past and not relevant to any future course of action. B. an opportunity cost. C. useful in analysis of alternative courses of action. D. relevant to current decision making.

Differential costs 31. The difference in cost between or among various alternative courses of action appropriately describes a(an): A. differential cost C. constraint B. ad hoc discount D. scarce resource

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

Opportunity 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 C. Incremental cost B. Cost outlay D. Opportunity cost

Unit costs 22. Unit costs can mislead decision makers. Which of the following situations dealing with unit costs are 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.

11. An A. B. C. D.

“opportunity cost” is the difference in total costs that results from selecting one alternative instead of another the profit forgone by selecting one alternative instead of another a cost that may be saved by not adopting an alternative 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 12

Incremental Analysis

B. II

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

29. 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 D. Costs that were incurred prior to making a decision

18. The potential benefit that may be obtained from following an alternative course of action is called A. opportunity benefit C. relevant cost B. opportunity cost D. sunk cost 26. Opportunity cost is the A. cash outlay required to implement an alternative. B. difference in total costs between the alternatives. C. maximum available contribution to profit that is given up when using limited resources for another purpose. D. fixed cost avoided when a product, department, or business unit is abandoned.

Out-of-pocket costs 23. Which of the following is a cost that requires a future outlay of cash that is relevant for future decision-making? C. Out-of-pocket cost A. Opportunity cost B. Relevant benefits D. Incremental revenue S e n s i t i vi vitt y aann a l y s i s 20. Sensitivity analysis is useful in decision making when: A. there is a degree of uncertainty about the relevant data. B. there is an opportunity cost included in the analysis. C. sunk cost is included in the analysis. D. the analysis is subject to a review by the management.

28. Opportunity 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

21. To determine the possible outcome in a decision analysis if a key prediction or assumption proves to be wrong, managers will use: A. sensitivity analysis. C. incremental analysis. B. total analysis. D. regression analysis.

27. Using opportunity cost to analyze the income effects of a given alternative is referred to as A. engineering analysis C. account analysis D. differential analysis B. mixed-cost analysis Avoidable 15. A fixed cost is relevant if it is A. future cost B. sunk

D. II and III

M a k e - o r - bu buyy d e c i s i o n Qualitative Considerations 38. Which of the following elements of the value chain should be considered when deciding whether to make or buy a component needed for production? A. Marketing C. Manufacturing D. all of these choices B. Distribution

C. avoidable D. a product cost

17. Which of the following is (are) a true statement(s) about cost behaviors in incremental analysis? I. Fixed costs will not change between alternatives. II. Fixed costs may change between alternatives. III. Variable costs will always change between alternatives. A. I C. III

Make decision 34. Manufacturing parts internally by a company causes: A. the company to be dependent upon suppliers for timely delivery of parts B. the quality of the parts to be under the control of the company 13

Incremental Analysis

D. Only conversion costs are relevant.

C. lower parts costs to be assured D. a company's operations to be more efficient than when the parts are purchased from suppliers

Opportunity costs 39. In a make-or-buy decision, which of the following is true? A. Variable costs are the only relevant costs. B. Allocated fixed costs are relevant. C. Alternative uses of space and machinery are relevant. D. Making the product is the correct decision when there is idle capacity.

44. A company should decide to make, rather than buy, a part required for their product, if A. The company’s production facility is at full capacity B. The relevant cost per-unit of making the part exceeds the per-unit relevant costs of purchasing the part C. The supplier of the part can produce a higher-quality part D. The supplier of the part has questionable reliability

40. 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.

Buy decision 35. In any make or buy decision confronting a company, which of the following factors should be considered? A. Can the supplier provide a sufficient quantity to meet the company's current and future needs? B. Do the supplier's items meet product and quality specifications? C. Is the supplier reliable? D. All of the above should be considered.

46. The cost of not receiving rent from a space because you decide to make the part rather than buying it from an outside supplier is considered a(an) A. sunk cost C. opportunity cost B. future cost D. fixed cost

41. Which of the following qualitative factors favors the buy choice in a make or buy decision for a part? A. maintaining a long-term relationship with suppliers B. quality control is critical C. utilization of idle capacity D. part is critical to product

47. 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

Relevant costs Fixed costs 36. Within the context of the make or buy decision, when are fixed costs relevant? A. Fixed costs are always relevant B. Fixed costs are never relevant C. Fixed costs are relevant when they differ among alternatives D. It cannot be determined without closely examining each particular situation

Decision rule 42. Haribon Company is faced with a make-or-buy decision. Haribon should agree to buy the part from a supplier provided the price is less than Haribon’s A. total costs B. variable production costs plus avoidable fixed production costs C. total manufacturing costs D. variable costs

37. In a make or buy decision: A. Only variable costs are relevant. B. Fixed costs that can be avoided in the future are relevant. C. Fixed costs that will continue regardless of the decision are relevant.

84. A company owns equipment that is used to manufacture important parts for its production process. The company plans to sell the equipment for P10,000 and to select one of the following alternatives: (1) acquire new equipment for P80,000 14

Incremental Analysis

B. Marketing costs

(2) purchase the important parts from an outside company at P4 per part. The company should quantitatively analyze the alternatives by comparing the cost of manufacture the parts A. Plus P80,000 to the cost of buying the parts less P10,000. B. to the cost of buying the parts less P10,000. C. Less P10,000 to the cost of buying the parts. D. To the cost of buying the parts.

D. All of the above

Opportunity costss 50. An opportunity cost commonly associated with a special order is A. the contribution margin on lost sales B. the variable costs of the order C. additional fixed cost that is related to the increased output D. any of the above

S p e c i a l or ordd e r d e c i s i o n Process 49. In making a special order decision, management should: A. compute a reasonable sales price for items not normally produced. B. consider additional overhead cost. C. consider normal and relevant costs. D. All of the above.

53. Operating at or near full capacity will require a firm considering a special order to recognize the: A. opportunity cost arising from lost sales B. value of full employment C. time value of money D. need for good management

52. Which of the following factors should be considered in deciding whether to accept a special order? A. the sales price of the product or service B. the production capacity of the company C. the impact on regular customers D. all of these choices

Decision rule 82. Production of a special order will increase gross profit when the additional revenue from the special order is greater than A. The nonvariable costs incurred in producing the order. B. The direct material and labor costs in producing the order. C. The fixed costs incurred in producing the order. D. The marginal cost of producing the order.

Irrelevant cost 83. In considering a special order that will enable a company to make a use of presently idle capacity, which of the following costs would be irrelevant. A. Materials C. Direct labor B. Depreciation D. Variable OH

51. If the firm is operating under capacity, the minimum special order price should be high enough to cover: A. all variable costs and incremental fixed costs associated with the special order minus foregone contribution margin on regular units not produced. B. variable and incremental fixed costs associated with the special order and a profit margin. C. limited variable costs associated with the special order. D. neither variable nor fixed costs associated with the special order.

54. Given the following list of costs, which one should be ignored in a decision to produce additional units of product for a factory that is operating at less than 100% capacity, and the additional business will not use up the remainder of the plant capacity? A. Direct material cost per unit C. Fixed selling expenses B. Direct labor cost per hour D. Variable selling expenses

57. Green Giant Foods has some excess manufacturing capacity that it can leave idle, use to produce its own boxes for frozen foods, or use to process another company’s frozen foods. It will be more profitable for Green Giant to process the competitor’s frozen foods as long as the net cost is A. greater than both the cost to buy the boxes and the cost to leave the plant idle. B. less than the cost to leave the plant idle and greater than the cost to buy the boxes. C. greater than the cost to leave the plant idle and lower than the cost to buy boxes from a

Relevant costs Long-run decision 58. The sales price of a product, in the long run, must be enough to cover what type of costs? A. Designing costs C. Servicing costs 15

Incremental Analysis

supplier. D. less than both the cost to leave the plant idle and the cost to make or buy the boxes.

desired profit. 62. Which of the following is NOT a cost concept commonly used in applying the cost-plus approach to product pricing? A. Total cost concept. C. Variable cost concept. D. Fixed cost concept. B. Product cost concept.

Minimum acceptable price With excess capacity 55. If there is excess capacity, the minimum acceptable price for a special order must cover A. variable costs associated with the special order. B. variable and fixed manufacturing costs associated with the special order. C. variable and incremental fixed costs associated with the special order. D. variable costs and incremental fixed costs associated with the special order plus the contribution margin usually earned on regular units.

63. The cost-plus pricing formula that takes into consideration all costs -- fixed, variable, and manufacturing, as well as selling and administrative costs -- is called the percentage of A. full costs. C. total variable costs. B. variable manufacturing costs. D. absorption costs.

At full capacity 56. If a firm is at full capacity, the minimum special order price must cover A. variable costs associated with the special order. B. variable and fixed manufacturing costs associated with the special order. C. variable and incremental fixed costs associated with the special order. D. variable costs and incremental fixed costs associated with the special order plus foregone contribution margin on regular units not produced. P r o d u c t liliff e c y c l e 45. A product life cycle includes the phases of A. research and development and design B. purchasing and production

Target pricing 43. The concept of target pricing is employed when: A. a company wishes to set price in order t...