Chap 3 Costs Concepts PDF

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MULTIPLE CHOICECosts classification The term relevant cost applies to all the following decision situations except the A. Acceptance of a special order.. B. Determination of a product price. C. Replacement of equipment. D. Addition or deletion of a product line. (cma) B ? A situation where the term ...

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MULTIPLE CHOICE Costs classification 1. The term relevant cost applies to all the following decision situations except the A. Acceptance of a special order. . B. Determination of a product price. C. Replacement of equipment. D. Addition or deletion of a product line. (cma) 1. B ? A situation where the term relevant cost does not apply.  Relevant costs are those used in making decision. These costs have two characteristics – differential costs and future costs. The term relevant costs applies to the acceptance or rejection of a special sales order, replacement or retention of equipment, addition or deletion of a product line, and even in the determination of a product price. Among the choices given, however, choice-letter “b” is the best answer because relevant cost is least applied in the determination of regular selling price. 2. A decision-making concept, described as “the contribution to income that is foregone by not using a limited source for its best alternative use,” is called A. Marginal Cost. C. Potential Cost. B. Incremental Cost. D. Opportunity Cost. (cma) 2. D ? The term used to describe the contribution to income that is foregone by not using a limited source for its best alternative use.  The benefit foregone or sacrificed for not using a limited resource for its best alternative use is called an opportunity cost, hence, choice-letter “d” is correct. Choice-letter “a” is incorrect because marginal cost is the increase in cost per unit of product. Choice-letter “b” is incorrect because incremental cost is the total increase in cost from an alternative to another. Choice-letter “c” is incorrect because potential cost may refer to future cost that may arise if an alternative is chosen. 3. In a decision analysis situation, which one of the following costs is not likely to contain a variable cost component? A. Labor C. Depreciation B. Overhead D. Selling. (cma) 3. C ? The cost that is not likely to contain a variable cost component.  Choice-letter “c” is the correct answer. Depreciation expense, if the problem is silent, is a fixed cost, and therefore, not variable neither would contain a variable component. Choice-letter “a”, labor is academically treated as a variable cost. Choice-letter “b”, overhead, has both the variable and fixed cost components. Choice-letter “d”, selling expense, also has both the variable and fixed cost components.

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4. The term that refers to costs incurred in the past that are not relevant to a future decision is A. Full absorption cost. C. Sunk Cost. B. Under-allocated indirect cost. D. Incurred marginal cost. (cma) 4. C ? The term that refers to costs incurred in the past that are not relevant to a future decision.  Choice-letter “c” is the correct choice. Sunk costs are those already incurred, cannot be avoided, refer to the past, and are therefore, irrelevant in making decisions. Choice-letter “a”, full absorption cost refers to the total costs of production without regard to whether fixed or variable as long as the costs are necessary in the manufacture of a product. Choice-letter “b” is incorrect because under-allocated indirect cost relates to the amount of allocation and not to the period of time, either past or otherwise. Choice-letter “d” is an inferior choice because incurred marginal cost although a past cost and, therefore, not relevant to future decisions is only an example of the more generic term sunk cost which aptly describes the phrase to be completed. Questions 5 to 7 are based on the following information. Management accountants are frequently asked to analyze various decision situations including the following: I. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. III. Joint production cost incurred, to be considered in a sell-at-split versus a process-further decision. IV. The cost of alternative use of plant space to be considered in a make-orbuy decision. V. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus-disposal decision. 5. The costs described in situations I and IV are A. Prime costs. C. Relevant costs. B. Discretionary costs. D. Differential costs. 5. ? 

(cma)

C The costs described in situations I and IV. The costs described in situations I and IV are relevant costs, choice-letter “c” is the best answer. Item I, the cost of a special device that is necessary if a special order is accepted is an incremental cost of accepting the order and is a relevant cost. Item IV, the cost of alternative use of plant space to be considered in a make-or-buy decision, is an opportunity cost and, is relevant in making decision.

6. The costs described in situations III and V are A. Prime costs. C. Discretionary costs. B. Sunk costs. D. Relevant costs.

(cma)

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6. B ? The costs described in situations III and V.  Item III, joint production cost already incurred, and item V would no longer be avoided whether the products are sold at split-off point or not. The cost of obsolete inventory acquired several years ago in relation to the decision whether to keep or dispose the inventory is already incurred, a sunk cost. In both situations, the costs described are sunk costs and are irrelevant in decision-making. Hence, choice-letter “b” is correct. 7. The cost described in situation II is a A. Prime costs. C. Relevant costs. B. Discretionary costs. D. Differential costs.

(cma)

7. B ? The cost described in situation II.  The cost described in situation II is more accurately a discretionary cost, choice-letter “d” is correct. Choice-letter “a” is incorrect because prime costs refer to direct materials and direct labor. Choice-letter “c” is incorrect because relevant costs are determined when decisions are to be made, and not merely a proposal, which may be decided to be incurred or not. Choice-letter “d” is also incorrect because differential cost is a quality of a relevant cost which is determinable only at a time a decision is to be made. 8. Management accountants are concerned with incremental unit costs. These costs are similar to the following, except A. The economic marginal cost. C. The cost to produce an additional unit. B. The variable cost. D. The manufacturing unit cost. (rpcpa) 8. D ? The cost that is not similar to incremental unit costs.  The best choice among the given should be choice-letter “d”. A manufacturing unit cost may include a fixed cost that is not incremental in nature. Choice-letter “a” is incorrect because marginal cost is the increase in cost per unit of increase in production and is similar to incremental costs that also indicate an increase. Choiceletter “b” is incorrect because variable cost normally is an incremental cost. Choiceletter “c” is also incorrect because the cost to produce an additional unit is the same as the marginal cost. Technically speaking, incremental costs are the total increase in costs from one production level to another, from an option to another, or from an event to another. 9. Opportunity costs are A. Costs irrevocably incurred by past actions B. The difference between actual and standard costs A. Not recorded in the accounting records B. Partly fixed costs and partly variable costs 9. C ? The best statement about opportunity costs.

(rpcpa)

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Opportunity costs are those benefits foregone in favor of the alternative chosen. They are sacrificed benefits, not incurred but is implied, and not recorded in the accounting books because they are theoretical. Hence, choice-letter “c” is correct. Choice-letter “a” is incorrect because costs incurred by past actions are past cost or sunk costs. Choice-letter “b” is incorrect because the difference between actual and standard cost is called a cost variance. Choice-letter “d” is incorrect because costs that are partly fixed and partly variable are called mixed costs.

10. Cost of goods sold is a component of the income statement. In a merchandising establishment, this refers to purchases adjusted for changes in inventory. In a manufacturing company, what replaced purchases to arrive at cost of good sold? A. Finished goods. C. Work in process inventory. B. Fixed manufacturing overhead. D. Cost of good manufactured. ( rpcpa)

10. D ? 

The account that replaces purchases to arrive at cost of goods sold in a manufacturing company. Choice-letter “d” is correct. In the computation of cost of goods sold, net purchases is replaced by the cost of goods manufactured (CGM) in a manufacturing company. Just like merchandise purchases, CGM is added to finished goods-beginning and then finished goods-ending is deducted to get the cost of goods sold. Choice-letter “a” is incorrect because finished goods inventories are added to or deducted from CGM to arrive at CGS. Choice-letter “b” is incorrect because fixed manufacturing overhead is directly used in the computation of total factory costs. Choice-letter “c” is incorrect because work-in-process inventory is used in the computation of CGM, not in CGS.

11. The salaries you could be earning by working rather than attending college is an example of A. Outlay costs. C. Sunk costs. B. Misplaced costs. D. Opportunity costs (rpcpa) 11. D ? The classification of the salaries you could be earnings by working rather than attending college.  The salaries that should have been earned by working rather than attending college is an example of an opportunity cost. It is a profit, savings, or benefit foregone in favor of the alternative chosen. Choice-letter “a” is incorrect because outlay costs may refer to the amount of fund used to finance an acquisition or operations. Choice-letter “b” is incorrect because a misplaced costs is an irregular description of costs and has not found great usage and acceptance in the management accounting literature. Choice-letter “c” is incorrect because sunk costs are those that are already incurred in the past and can no longer be changed, and are always irrelevant. 12. In analyzing whether to build another regional service office, the salary of the Chief Executive Officer (CEO) at the corporate headquarters is

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A. Relevant because salaries are always relevant. B. Relevant because this will probably change if the regional service office is built. C. Irrelevant because it is future cost that will not differ between the alternatives under consideration. D. Irrelevant since another imputed costs for the same will be considered. (rpcpa) 12. C ? The treatment of the salary of the Chief Executive Officer (CEO) at the corporate headquarter in deciding whether to build another regional office or not.  In deciding on whether to build another regional office or not, the salary of the CEO does not change and, therefore, is irrelevant although it is a future costs (choice-letter “c” is correct). A cost to be relevant in decision-making must differ from one alternative to another (differential costs) and must deal with the future (future cost). Both conditions must be met. A cost may be relevant in one decision-making exercise but is irrelevant in the other. 13. Sunk costs A. Are substitutes for opportunity costs. B. Are relevant to long-term decisions but not to short-term decisions. C. Are relevant to decision making. D. In themselves are not relevant to decision making.

(rpcpa)

13. D ? A correct description of sunk costs.  Sunk costs are past costs, historical, already incurred, and can no longer be changed or affected by future decisions. These costs are always irrelevant in making a decision (choice-letter “d” is correct). Choice-letter “a” is incorrect because sunk costs are not, and would never be substitutes for opportunity costs. Sunk costs are recorded in the accounting books while opportunity costs are not recorded in the accounting books. Choice-letters “b” and “c” are incorrect because sunk costs are never relevant to decision-making, both long-term and short-term decisions. 14. When all manufacturing cost used in production are attached to the products, whether direct, or indirect, variable of fixed, this is called A. Process costing . C. Variable costing. B. Absorption costing. D. Job order costing. (rpcpa)

14. B ? 

A costing system that includes all manufacturing costs used in the production as product costs, whether direct or indirect, variable or fixed. Choice-letter “b”, absorption costing, is the correct answer. Absorption costing includes all manufacturing costs whether direct or indirect, variable or fixed, in the determination of product costs. This is the traditional concept of cost determination, is in accordance with the generally accepted accounting principles, and includes all manufacturing costs as inventoriable costs because they are all relevant expenditures in the manufacturing process.

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Choice-letter “a”, process costing, is incorrect because it relates to the model of accumulating production costs by following the departmentalized transfer of units in the production process. Choice-letter “c”, variable costing, is incorrect because it assigns only variable production cost as product cost. Choice-letter “d”, job order costing, is incorrect because it refers to the model of accumulating production per order made by customers. High-low method 15. Mine and Yours Company uses a regression equation to analyze the behavior of its transportation costs (T) as a function of travel time (H). They developed the following equation using two years’ observation with a related coefficient of determination of . 85: T = 100,000 + P50H If 500 hours of travel time were logged in one period, the related point estimate of total transportation costs would be A. P110,000 C. P106,250 B. P121,250 D. P125,000 (rpcpa) 15. D ? The related point estimate of transportation costs  Total costs equal fixed costs plus variable costs. The fixed costs and the variable rate per hour are given. Therefore, Fixed costs P100,000 Variable costs (P50 x 500 hours) 25,000 Total costs P125,000 16. These are among the methods of segregating fixed cost and variable costs except A. Breakeven method. C. Scattergraph method. B. Simple regression analysis. D. High-low method. (rpcpa) 16 A ? A method which is not used in segregating fixed and variable costs.  The methods used in separating the fixed and variable costs elements are: practical method (e.g., historical records), simple average high-low method, weighted average high-low method, scattergraph method, and least-squares method. Choice-letter “a” is the correct choice. The breakeven method is not used in segregating fixed into variable costs but is instead used in analyzing the potential profitability and areas of sensitivity in controlling profit. 17. Jackson, Inc, is preparing a flexible budget for next year and requires a breakdown of the cost of steam used in its factory into the fixed and variable elements. The following data on the cost of steam used and direct labor hours worked are available for the last 6 months of this year. Month July August September

Cost of Steam P 15,850 13,400 16,370

Direct Labor Hours 3,000 2,050 2,900

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19,800 17,600 18,500 P101,520

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3,650 2,670 2,650 16,920

Assuming that Jackson uses the high-low method of analysis. The estimated variable cost of steam per direct labor hour is. A. P4.00 C. P5.82 B. P5.42 D. P6.00 17. A ? Using the high-low method, (HLM), the estimated variable cost of steam per direct labor hour.  The high-low method relates to range analysis where in a range there is the highest point and the lowest point. The high-low method identifies the highest observation and the lowest observation and getting their differences both in units and in amount. The highest observation is the month of October while the lowest observation is the month of August. Tabulating the data of the highest and the lowest occurrences, we have: Direct labor hours Cost Highest (October) 3,650 P19,800 Lowest (August) 2,050 13,400 Difference 1,600 P 6,400 VCR =  in Costs /  in Units = P6,400 / 1,600 = P4 / DLH Under the HLM, the variable cost rate is equal to the change in costs over the change in units. This high-low method of computing the variable cost per unit rests on the principle that a change in cost is attributed to variable, since total fixed cost remains unchanged. The HLM is used when there is a positive relationship between costs and units. That is, if total unit increases, total cost also increases and if total unit decreases, total costs also decreases. Otherwise, HLM is not applicable, and the scattergraph method and least squares method are to be used in segregating the variable costs from the fixed costs. 18. In the Timbugan County, Inc., a maintenance cost is partly fixed and partly variable in nature. At the low level of activity (150 direct labor hours), maintenance costs total P2,100. At high level of activity (270 direct labor hours), maintenance costs are P3,000. Using the high-low method, what is the variable maintenance cost per unit and the total fixed maintenance cost? Variable Fixed maintenance cost maintenance cost A. P 7.50 P 975 B. P 7.50 P2,100 C. P10.00 P 600 D. P10.00 P2,100 18. A ? The variable cost per unit and the total fixed costs using the high-low method.

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Variable cost per unit may be determined by dividing the change in costs over the change in units. The change in costs is P900 (i.e., P3,000 – P2,100) and the change in units is 120 (i.e., 270 –150). The variable cost rate is P7.50 (i.e., P900/120). The fixed cost is the difference between total costs and variable costs, as follows: @ 270 DLH @ 150 DLH Total costs P 3,000 P 2,100 - Variable costs (P7.50 x DLH) 2,025 1,125 Fixed costs P 975 P 975

19. Mat Company estimates its material handling costs at two activity levels as follows: Kilos handled Cost 80,000 P 160,000 60,000 132,000 What is Mat’s estimated cost of handling 75,000 kilos? A. P 150,000 C. P 157,500 B. P153,000 D. P132,000

(rpcpa)

19. B ? The estimated costs of handling 75,000 kilos.  The estimated costs of handling 75,000 kilograms is composed of variable costs and fixed costs. The variable cost is determined by first establishing the variable cost rate. The variable cost rate is computed as follows: Variable cost rate = Δ in Costs / Δ in Sales = (P160,000 – P132,000) / (80,000 – 60,000) = P28,000 / 20,000 = P1.40/kg Given the variable cost rate, the fixed cost is calculated as: 80,000 kgs. 60,000 kgs. Total costs P160,000 P132,000 - Variable costs (80,000 x P1.40) 112,000 84,000 (60,000 x P1.40) Fixed costs P 48,000 P 48,000 Given the variable cost rate and the fixed costs, the estimated cost of handling 75,000 kilograms shall be: Variable cost (75,000 kgs. x P1.40) P105,000 Fixed costs 48,000 Total estimated costs at 75,000 kgs. P153,000 20. The total production cost for 20,000 units was P21,000 and the total production cost for making 50,000 units was P34,000. Once production exceeds 25,000 units, additional fixed costs of P4,000 were incurred. The full production cost per unit for making 30,000 units is: A. P 0.30 C. P 0.84 B. P 0.68 D. P 0.93 (rpcpa) 20. D ? The full production cost per unit for making 30,000 units.

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