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  CPA REVIEW SCHOOL OF THE PHILIPPINESManilaMANAGEMENT ADVISORY SERVICESRELEVANT COSTINGTHEORY 1.In the development of accounting data for decision-making, relevant costs areA.Historical costs which are the best available basis for estimating future costs.B.Future costs which will differ under each alternative course of action..Budgetar! costs authori"ed for the administrative !ear.#.$tandard costs developed b! time and motion e%perts.&.'he term relevant cost applies to all of the following decision situations e%cept the A.Acceptanc e  of special product order.B.(anufacture or purchase of a component part..#etermination of product price.#.)eplacement of e*uipment.+.'he relevance of a particular cost to a decision is determined b! A. )iskiness of the decision. . Amount of the cost.B. umber of decision variables. #. otential effect on the decision. .A fi%ed cost is relevant if it isA.a future cost.B.avoidable..sunk.#.a product cost./.(anagement accountants are concerned with incremental unit costs. 'hese costs are similar to the following e%cept a.'he economic marginal cost.c.'he cost to produce an additional unit. b.'he variable costd.'he manufacturing unit cost.0.'he t!pe of cost vital to decision making but not recorded in the accounting records a.$unk costsb.pportunit! costsc.#irect costsd.ut of pocket costs2.3hat is the opportunit! cost of making a component part in a factor! given no alternative use of the capacit!4 a.'he variable manufacturing cost of the component. b.'he total manufacturing cost of the component.c.'he total variable cost of the component.d.5ero. 6.In anal!"ing whether to build another regional service office, the salar! of the hief 7%ecutive fficer 879 at the corporate head*uarters is a.)elevant because salaries are alwa!s relevant. b.)elevant because this will probabl! change if the regional service office is build.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.:.Assume a compan! produces three products; A, B, and . It can onl! sell up to +,<<< units of each product. roduction capacit! is unlimited. 'he compan! should produce the product 8or  products9 that has 8have9 the highesta.contribution margin per hour of machine time. b.gross margin per unit.c.contribution margin per unit.d.sales price per unit. MSQ-05 age 1  1<.All of the following are e%amples of imputed costs e%cept A. 'he stated interest paid on a bank loan. B. 'he use of the firm=s internal cash funds to purchase assets. . Assets that are considered obsolete that maintain a net book value.#. #ecelerated depreciation. 11.'he distinction between avoidable and unavoidable costs is similar to the distinction betweena.variable costs and fi%ed costs.c.step-variable costs and fi%ed costs. b.variable costs and mi%ed costs.d.discretionar! costs and committed costs.1&.'otal unit costs are a.)elevant for cost-volume-profit anal!sis. b.eeded for determining product contribution. c.Irrelevant in marginal anal!sis.d.Independent of the cost s!stem used to generate them.1+If a cost is irrelevant to a decision, the cost could not  bea.a sunk cost.b.a future cost.c.a variable incremental cost.1$unk costs a.Are substitute for opportunit! costs. b.In and of themselves are not relevant to decision making.c.Are relevant to decision making. d.Are fi%ed costs. 1/'he variable cost of a unit of product made !esterda! isa.An incremental cost.c.A differential cost. b.An opportunit! cost.d.A sunk cost.10'he manner of determining whether favorable results of an alternative are sufficient to >ustif! the cost of taking that alternative a.ost behavior anal!sisc.ost control anal!sis b.ost benefit anal!sisd.ost center anal!sis 12.3hen there is one scarce resource, the product that should be produced first is the product witha.the highest contribution margin per unit of the scarce resource b.the highest sales price per unit of scarce resourcec.the highest demandd.the highest contribution margin per unit 16.Fi%ed costs are ignored in allocating scarce resources becausea.the! are sunk. b.the! are unaffected b! the allocation of scarce resources.c.there are no fi%ed costs associated with scarce costs onl! appl! to long-run decisions.1:.Among the costs relevant to a make-or-bu! decision include variable manufacturing costs as well as a.?navoidable costs.c.Avoidable fi%ed costs. b.lant depreciation.d.)eal estate ta%es.&<.In a make or bu! decision, the opportunit! cost of capacit! considered to decrease the price of units purchased from suppliers. considered to decrease the cost of units manufactured b! the compan! considered to increase the price of units purchased from suppliers.d.not be considered since opportunit! costs are not part of the accounting records. MSQ-05 age &  &1.3hich of the following activities within an organi"ation would be leat li!el"  to be outsourced4a.accountingb.product design processing&&.3hich of the following costs are relevant to a make-or-bu! decision4a.original cost of the production e*uipment b.annual depreciation of the e*uipmentc.the amount that would be received if the production e*uipment were sold d.the cost of direct materials purchased last month and used to manufacture the component&+.A purchasing agent has two potential firms to bu! materials from for production. If both firms charge the same price, the material cost irrelevant costb.a sunk costc.a committed opportunit! cost&.3hich of the following is ' relevant in a make-or-bu! decision about a part the entit! uses in some of its products4a.'he reliabilit! of the outside supplier. b.'he alternative uses of owned e*uipment used to make the part.c.'he outside supplier@s per-unit variable cost to make the part. d.'he number of units of the part needed each period.&/.3hen onl! differential manufacturing costs are taken into account for special-order pricing, an essential assumption is that a.(anufacturing fi%ed and variable costs are linear. b.$elling and administrative fi%ed and variable costs are linear.c.Acceptance of the order will not affect regular sales.d.Acceptance of the order will not cause unit selling and administrative variable costs to increase. &0.If a firm is at full capacit!, the minimum special order price must cover a.variable costs associated with the special order  b.variable and fi%ed manufacturing costs associated with the special order c.variable and incremental fi%ed costs associated with the special order d.variable costs and incremental fi%ed costs associated with the special order plus foregone contribution margin on regular units not producede. both c and d. &2.Idle capacit! in the interim 8normall! temporar!9 will generate short-term benefit in accepting sales at price that a.ositivel! motivate emplo!ees. b.)esult in less than normal contribution margin.c.Increase total fi%ed costs.d.)educe the overall operating income to sales ratio.&6.ino! ompan! temporaril! has e%cess production capacit!, the idle plant facilities can be used to manufacture a low-margin item. 'he low-margin item should be produced if it can  be sold for more than its a.ariable costs plus opportunit! cost of idle facilities. b.Indirect costs plus an! opportunit! cost of idle facilities.c.Fi%ed costs.d.ariable costs.&:.An opportunit! cost commonl! associated with a special order isa.'he contribution margin on lost sales. b.'he variable costs of the order.c.Additional fi%ed costs related to the increased output.d.An! of the above. MSQ-05 age +  +<.An increase in direct fi%ed costs could reduce all of the following e#$e%t a.product line contribution margin.c.product line operating income. b.product line segment margin.d.corporate net income.+1.3hich of the following costs is ' relevant to a special order decision4a.the direct labor costs to manufacture the special order units b.the variable manufacturing overhead incurred to manufacture the special-order unitsc.the portion of the cost of leasing the factor! that is allocated to the special order d.All of the above costs are relevant. +&.'here is a market for both product  and product C. 3hich of the following costs and revenues would be most relevant in deciding whether to sell product  or process it further to make product C4 A. 'otal cost of making  and the revenue from sale of  and C. B. 'otal cost of making C and the revenue from sale of C. . Additional cost of making C, given the cost of making , and additional revenue from C. #. Additional cost of making , given the cost of making C, and additional revenue from C. ++.A manager is attempting to determine whether a segment of the business should be eliminated. 'he focus of attention for this decision should be ona.the net income shown on the segment=s income statement. b.sales minus total e%penses of the segment.c.sales minus total direct e%penses of the segment.d.sales minus total variable e%penses and avoidable fi%ed e%penses of the segment.+.A product should be dropped if a.It has negative incremental profit. b.It has a negative contribution margin.c.#ropping it will increase the total profit of the compan!.d.It is not essential to the compan!@s product line.+/.'he consulting firm of (agaling orporation is considering the replacement of their computer s!stem. 'aking into account the income ta% effect and considering the carr!ing value of the old s!stem 8$9 and the salvage value of the new s!stem 8$$9, which combination below applies to the decision making process4 A.B..#.$IrrelevantIrrelevant)elevant)elevant$$Irrelevant)elevantIrrelevant)elevant+0.In e*uipment-replacement decisions, which one of the following does not affect the decision-making process4 a.urrent disposal price of the old e*uipment. b.perating costs of the old e*uipment.c.riginal fair market value of the old e*uipment.d.ost of the new e*uipment.+2.'he (ark  orp. contemplates the temporar! shutdown of its plant facilities in a provincial area which is economicall! depressed due to natural disasters. Below are certain manufacturing and selling e%penses.1. #epreciation/. $ales commissions&. ropert! ta%0. #eliver! e%penses+. Interest e%pense2. $ecurit! of premises. Insurance of facilities3hich of the following e%penses will continue during the shutdown period4 a.All e%penses in the list.c.Items 1, & and + onl!. b.All e%cept / and 0.d.Items 1, &, +, , 0, and 2 onl!. MSQ-05 age   PRO&LEM 1.A proprietor who >ust inherited a building is considering using it in a new business venture. ro>ections for the business are; revenue of D1<<,<<<, fi%ed cost of D+<,<<<, and variable cost of D/<,<<<. If the business is not started, the owner will work for a compan! for a wage of D&+,<<<. Also, there have been two offers to rent the building, one for D1,<<< per month and one for D1,&<< per month. 3hat are the e%pected annual net economic profits 8losses9 to the owner if the new business is started4 A.D&<,<<<B.D8+,<<<9.D81/,<<<9#.D812,<<9&.Bolsa o. estimates that 0<,<<< special "ipper will be used in the manufacture of industrial  bags during the ne%t !ear. $ure 5ipper o. has *uoted a price of 0 per "ipper. Bolsa would  prefer to purchase /,<<< units per month but $ure is unable to guarantee this deliver! schedule. In order to ensure the availabilit! of these "ippers, Bolsa is considering the  purchase of all 0<,<<< units at the beginning of the !ear. Assuming that Bolsa can invest cash at 1&E, the compan!@s opportunit! cost of purchasing the 0<,<<< units are the  beginning of the !ear is a.&1,0<<b.+,&<<c.1:,6<< d.+:,0<<+.how Inc. has its own cafeteria with the following annual costsFood <<,<<<abor+<<,<<<verhead <,<<<apital1,1<,<<<'he overhead is <E fi%ed. f the fi%ed overhead, 1<<,<<< is the salar! of the cafeteria supervisor. 'he remainder of the fi%ed overhead has been allocated from total compan! overhead. Assuming the cafeteria supervisor will remain and that how will continue to pa! said salar!, the ma%imum cost how will be willing to pa! an outsider firm to service the cafeteria is a.1,1<,<<<b.1,<<,<<<c.2<<,<<< d.:0,<<<.isted below are a compan!@s monthl! unit costs to manufacture and market a particular  product. ?nit ostsariable ostFi%ed osts#irect materialsD&.<<#irect labor &.<Indirect (anufacturing 1.0<D1.<<(arketing &./< 1./<'he compan! must decide to continue making the product or bu! it from an outside supplier. 'he supplier has offered to make the product at the same level of *ualit! that the compan! can make it. Fi%ed marketing costs would be unaffected, but variable marketing costs would  be reduced b! +<E if the compan! were to accept the proposal. 3hat is the ma%imum amount per unit that the compan! can pa! the supplier without decreasing its operating income4 a.D6./<b.D0.2/c.D2.2/ d.D/.&//.icnic Items, Inc. manufactures coolers of 1<,<<< units that contain a free"able ice bag. For an annual volume of 1<,<<< units, fi%ed manufacturing costs of /<<,<<< are incurred. ariable costs per unit amount are direct materials G 6< direct labor G 1/, and variable factor! overhead G &<Bags orp. offered to suppl! the assembled ice bag for < with a minimum order of /,<<< units. If icnic accepts the offer, it will be able to reduce variable labor and overhead b! /<E. 'he direct materials for the free"able bag will cost icnic &< if it will produce it. onsidering Bags orp. offer, icnic should a.Bu! the free"able ice bag due to 1/<,<<< advantage. b.roduce the free"able ice bag due to &/,<<< advantage.c.roduce the free"able ice bag due to /<,<<< advantage. MSQ-05 age /
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