Cabrera Chapter-18-Multiple-Choice-Answers-With-Explanation PDF

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CHAPTER 18 – MULTIPLE CHOICE (p-795) Cost that do not appear in accounting records and that do not require peso outlays but do involve a forgone opportunity by the entity whose costs are being measured are: a. Conversion Costs – are part of COGS. b. Differential Costs The difference between the cost...

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CHAPTER 18 – MULTIPLE CHOICE (p.783-795) 1. Cost that do not appear in accounting records and that do not require peso outlays but do involve a forgone opportunity by the entity whose costs are being measured are: a. Conversion Costs – are part of COGS. b. Differential Costs The difference between the cost of two alternative decisions. Also known as incremental cost, it can be a fixed or variable cost. The difference in revenue of two alternatives is known as differential revenue. Information presented in alternative decisions require cash outlays in the near future as a decision is made. c. Imputed Costs The cost incurred during the period when an asset is employed for a particular use, rather than redirecting the asset to a different use. They are hypothetical costs and are not recorded in the books of accounts. Imputed costs and opportunity costs may be used interchangeably. d. Prime Costs – are part of COGS. 2. Pear Company temporarily has unused production capacity. The idle plant facilities can be used to manufacture a low-margin item. The low-margin item should be produced if it can be sold for more than its: a. Fixed costs – if the low-margin item is sold for more than its fixed cost (allocated portion of idle capacity), gross profit would decrease as variable costs is not considered. b. Variable costs – if the low-margin item is sold for more than its variable cost, net profit would not move (or move minimally) since profit is only enough to cover the variable cost. The potential profit that the idle capacity can generate is disregarded. c. Variable costs plus any opportunity cost of the idle facilities. The potential profit that the idle facility can generate are considered plus the variable cost of the low-margin item. d. Indirect costs plus any opportunity cost of the idle facilities. – not variable cost considered. 3. As part of the data presented in support of a proposal to increase the production of clock-radios, the sales manager of Whittaker Electronics reported the total additional cost required for the proposed increased production level. The increase in total cost is known as: a. Controllable Cost – can be altered in the short-run. Increasing production capacity is not a short-term decision. b. Direct Cost Costs presented by the sales manager are costs to be incurred in increasing production level. Thus, the costs are direct in relation to the cost object. c. Opportunity Cost – no hypothetical situations and conditions presented in the problem. Opportunity costs arise when the asset is used for something else rather than upgrading it. d. Out-of-Pocket Cost – costs that refers to expenses incurred by employees that requires reimbursement. There is direct payment of cash. 4. An item whose entire amount is usually a differential cost is: a. Factory Overhead – can be a prime or conversion cost problem. b. Direct Cost Differential cost are two sets of costs in relation to a particular decision. For example, increasing production capacity may have two alternatives. All costs in each alternative are direct costs to the cost object. Hence, in deciding for alternatives, differential costs are all direct costs. c. Conversion Cost – can be a direct material problem d. Period Cost – can be a product related problem. Period costs are mostly fixed costs. 5. In the development of accounting data for decision-making purpose, relevant costs are defined as: a. Future costs which will differ under each alternative course of action. b. The change in prime cost under each alternative course of action. – relevant costs are not exclusively prime costs. c. Standard costs which are developed by time and motion study techniques because of their relevance to managerial control. d. Historical costs which are the best available basis for estimating future costs. – historical costs or sunk costs are irrelevant.

6. Which of the following costs are always irrelevant in decision making? a. Avoidable Costs b. Sunk Costs Historical costs. Already incurred and not relevant. c. Opportunity Costs d. Fixed Costs – fixed costs in general may or may not be relevant. Depreciation is irrelevant since it is a sunk cost but other fixed costs may be relevant. 7. Consider the following statements: I. Assemble all costs associated with each alternative being considered. II. Eliminate those costs that are sunk. III. Eliminate those costs that differ between alternatives. Which of the above statements does not represent a step in identifying the relevant costs in a decision problem? a. Only I b. Only II c. Only III Steps: i) Determine all costs associated with each alternative being considered ii) Drop those costs that are sunk iii) Drop those costs that do not differ between alternatives d. Only I and III 8. The acceptance of a special order will improve overall net operating income so long as the revenue from the special order exceeds: a. The contribution margin on the order – revenue and CM are theoretically the same b. The incremental costs associated with the order In computing for the special order pricing through differential approach: Incremental Revenue – Incremental Costs = Incremental Profit c. The variable costs associated with the order – hmmmm Special orders are accepted given that there is excess or idle facilities. Hence, fixed costs are disregarded. Only variable costs associated with the order are considered. In pricing special orders through total project approach (p.753), revenue from special order should exceed variable costs to improve net operating income. d. The sunk costs associated with the order 9. Allocated common fixed costs: a. Can make a product line appear to be unprofitable b. Are always incremental costs– they are not incremental costs. c. Are always relevant in decisions involving a product line– allocated common fixed costs are never relevant in decisions involving dropping of products because these costs will incur regardless if a product is dropped or not. d. A, B, and C are all correct 10. Consider the following statements: I. A division’s net operating income, after deducting both traceable and allocated common corporate costs is negative. II. The division’s avoidable fixed costs exceed its contribution margin. III. The division’s traceable fixed costs plus its allocated common corporate costs exceed its contribution margin. Which of the above statements give an economic reason for eliminating the division? a. Only I – allocated common costs can make a product/segment unprofitable b. Only II Avoidable fixed costs are controllable (since it is avoidable) hence, it means that the division is not planning or using its fixed costs well. c. Only III– there is profit d. Only I and II

11. In a make or buy decision: a. Only the variable costs are relevant b. Only the fixed costs are relevant c. Both the variable costs and the fixed costs which will continue regardless of the decision are relevant– variable costs must be subject to the decision. d. Both the variable costs and the fixed costs which are avoidable are relevant Idle capacity (fixed) and variable costs are considered in a make or buy decision. Example, car manufacturers might use its idle capacity (fixed) to manufacture its own stock of shock absorbers (composed of variable costs) instead of buying them from a supplier. 12. Which of the following best describes an opportunity cost? a. It is relevant cost in decision making, but it is not part of the traditional accounting records They are hypothetical costs that is important in decision making but are not recorded in the books of accounts. Imputed costs and opportunity costs may be used interchangeably. (see question 1) b. It is not a relevant cost in decision making but it is part of the traditional accounting records c. It is a relevant cost in decision making, and is part of the traditional accounting records. d. It is not relevant cost in decision making, and is not part of the traditional accounting records. 13. The opportunity cost of making a component part in a factory with excess capacity for which there is not alternative use is: a. The variable manufacturing cost of the component b. The total manufacturing cost of the component c. The fixed manufacturing cost of the component d. Zero Because the excess capacity has no alternative use. Hence, there is no possible opportunity for which the excess capacity can be used for. 14. In a sell or process further decisions, consider the following costs: I. A variable production cost incurred prior to split-off. II. A variable production cost incurred after split-off III. An avoidable fixed production cost incurred after split-off. Which of the above costs is (are) not relevant in a decision regarding whether the product should be processed further? a. Only I Costs incurred prior split-off are joint costs. What matters in a sell or process further decision are selling price at split-off point and incremental costs and revenue after further processing. b. Only III c. Only I and II d. Only I and III 15. Consider the following statements: I. A firm that decides to produce its own parts runs the risk of destroying long-run relationships with suppliers. II. An integrated firm is less dependent in its suppliers. III. Changing technology often makes continued production of one’s own parts costlier than buying them from the outside. Which of these statements indicate hazards to a firm that arise from being vertically integrated? a. Only I b. Only II c. Only I and II d. Only I and III Vertical Integration is an arrangement in which the supply chain of a company is owned by that company. Statement II indicates the benefit of vertical integration while statement I and III indicates the disadvantages.

16. Kala Company prepared the following tentative forecast concerning product A for 2018 Sales 500,000 Selling price per unit 5 Variable costs 300,000 Fixed costs 150,000 Study made by the sales manager disclosed that the unit selling price could be increased by 20% with an expected volume decrease of only 10%. Assuming that Kala incorporates these changes in its 2018 forecast, what should be the operating income from product A? a. 66,000 b. 90,000 c. 120,000 Sales [(100,000 x 90%) x (5 x 120%)] 540,000 Less: Variable costs (300,000 x 90%) 270,000 CM 270,000 Less: Fixed Costs 150,000 Operating Income 120,000 d. 145,000 17. Wiggle Company sells product A at a selling price of 21 per unit. Wiggle’s cost per unit based on the full capacity of 200,000 is as follows: Direct materials 4 Direct labor 5 Overhead (2/3 of which is fixed) 6_ 15 A special order affecting to buy 20,000 units was received from a foreign distributor. The only selling costs that would be incurred on this order would be 3 per unit for shipping. Wiggle has sufficient existing capacity to manufacture the additional units. In negotiating a price for the special order, wiggle should consider that the minimum selling price per unit should be: a. 14 DM 4 DL 5 Overhead (6 x 1/3) 2 Selling Cost 3_ Minimum selling price per unit 14 b. 15 c. 16 d. 18 18. Plainfield Company manufactures Part G for use in production cycle. The costs per unit for 10,000 units for Part G are as follows: Direct materials 3 Direct labor 15 Variable overhead 6 Fixed overhead 8_ 32 Verona Company has offered to sell Plainfield 10,000 units of Part G for 30 per unit. If Plainfield accepts Verona’s offer, the released facilities could be used to save 45,000 in relevant costs in the manufacture of Part H. In addition, 5 per unit of the fixed overhead applied to Part G would be totally eliminated. What alternative is more desirable and by what amount is it more desirable? Alternative Amount a. Manufacture 10,000 b. Manufacture 15,000 c. Buy 35,000 Relevant cost to make (10,000 x 24) 240,000 Purchase cost 300,000 Less: Savings in manufacturing cost 45,000 Avoidable fixed overhead 50,000 95,000 Net purchase price 205,000 Difference in favor of buy alternative 35,000 d. Buy 65,000

19. Relic Corporation manufactures batons. Relic can manufacture 300,000 batons a year at a variable cost of 750,000 and a fixed cost of 450,000. Based on Relic’s predictions, 240,000 batons will be sold at the regular price of 5 each. In addition, a special order was placed for 60,000 batons to be sold at a 40% discount off the regular price. By what amount would income before taxes be increased or decrease as a result of the special order? a. 60,000 decrease b. 30,000 increase a) Variable cost/unit at special price (5 x 60%) 3 Variable cost/unit at regular price (750,000/300,000) 2.5___ Difference in variable cost 0.5 Multiplied by special order qty 60,000 30,000 b) Increase in sales (60,000 x 3) 180,000 Less: Increase in variable cost (60,000 x 2.5) 150,000 Net increase in income 30,000 c. 36,000 increase d. 180,000 increase 20. Three companies are each manufacturing and selling annually 10,000 units of a similar product at a sales price of 20 per unit. The companies have fixed and variable costs as follows: Company Fixed Cost Variable Cost per Unit R 40,000 12 S 80,000 8 T 120,000 4 Each company contemplates a price decrease from 20 to 16 per unit in the expectation that sales will increase from 10,000 to 15,000 units per year. The contribution margin for each company at the present sales level is: a. R = 80,000, S = 80,000, T = 80,000 b. R = 160,000, S = 120,000, T = 80,000 c. R = 80,000, S = 120,000, T = 160,000 R S T Sales (10,000 x 20) 200,000 200,000 200,000 Variable Cost 120,000 80,000 40,000 CM 80,000 120,000 160,000 d. R = 40,000, S = 40,000, T = 40,000 21. Refer to No. 20. The operating income for each company at the contemplated price and sales level are: a. R = 60,000, S = 120,000, T = 80,000 b. R = 60,000, S = 60,000, T = 80,000 c. R = 40,000, S = 40,000, T = 40,000 d. R = 20,000, S = 40,000, T = 60,000 R S T Sales (15,000 x 16) 240,000 240,000 240,000 Variable Cost 180,000 120,000 60,000 CM 60,000 120,000 180,000 Fixed Cost 40,000 80,000 120,000 Net income 20,000 40,000 60,000 e. None of the above 22. Refer to No. 20. The increase (decrease) in operating income for R Company resulting from the price decrease and the sales volume increase is: a. (20,000) decrease 10,000 at 20 15,000 at 16 Sales 200,000.00 240,000.00 Variable Cost 120,000.00 180,000.00 CM 80,000.00 60,000.00 Fixed Cost 40,000.00 40,000.00 Net Income 40,000.00 20,000.00 (20,000.00) b. 20,000 increase c. 5,000 increase...