Deck 11: Relevant Costs for Decision Making

Question 1

Non routine operating decisions focus on making use of existing capacity.

Answer 1

A

Question 2

It is usually necessary to trade-off between qualitative and quantitative factors.

Answer 2

A

Question 3

The first step in the relevant analysis technique is to identify input variables.

Answer 3

A

Question 4

Qualitative analysis aims to identify how the organisation's debt ratio will change as a consequence of the decision to be made.

Question 5

Because non-routine operating decisions are common, managers use a standard decision process for addressing them.

Question 6

An opportunity cost is the benefit foregone when one alternative is chosen over the next best alternative.

Question 7

Positive financial outcomes should always override qualitative factors.

Question 8

Ethical standards are not a factor in non-routine operating decisions.

Question 9

Existing variable costs are irrelevant in special order decisions.

Question 10

An example of a non-routine operating decisions is whether to sell or process further.

Question 11

Analysing the impact of the decision on quality is an example of considering qualitative factors.

Question 12

The process for making non-routine operating decisions starts with special orders.

Question 13

Relevant costs/revenues are those that arise in the future and vary with the action taken.

Question 14

Make or buy decisions refer to choosing between outsourcing or utilising internal resources.

Question 15

Non-routine operating decisions are often tactical decisions.

Question 16

Types of qualitative analysis include CVP and regression.

Question 17

The effect of production practices on the customer quality is an example of a qualitative factor to be considered in a non-routine operating decision.

Question 18

The purpose of strategic decisions is to enhance the organisations' competitive advantage.

Question 19

Strategic decisions do not include decisions that impact beyond the current accounting period.

Question 20

Direct fixed costs are irrelevant in outsourcing decisions.

Question 21

The general rule for special order decisions is being at least as well off after the decision as before it.

Question 22

Qualitative factors are not relevant for special orders.

Question 23

A special order occurs when an existing or new customer places a one off request for a product or service.

Question 24

If idle capacity exists, special orders replace regular business.

Question 25

Special orders may stipulate requirements such as reduced price or additional customisation.

Question 26

Special orders require idle capacity.

Question 27

Cash flow analysis can be used in non-routine operating decision making.

Question 28

Average costs are used to make decisions about keeping or dropping product or segments.

Question 29

The loss of the contribution margin supplied by regular customers is the opportunity cost of accepting a special order when there is no idle capacity.

Question 30

There are no opportunity costs in keep or drop decisions.

Question 31

Products should be dropped when its total contribution margin does not cover avoidable fixed costs.

Question 32

The relevant fixed costs for a keep or drop decision are the unavoidable fixed costs.

Question 33

If there is no idle capacity then opportunity costs should be considered.

Question 34

The incremental cost of a special order does not include incremental fixed costs.

Question 35

When idle capacity exists the minimum acceptable price for the special order is equal to the incremental cost of the order.

Question 36

Opportunity costs can be a factor in special order decisions if there is insufficient capacity to meet the special order.

Question 37

Differential analysis focuses on the full effect of the decision on the statement of profit or loss.

Question 38

Avoidable fixed costs are those that can be eliminated if the product or segment is dropped.

Question 39

A fixed cost that remains when a product or segment is dropped is called an unavoidable fixed cost.

Question 40

If a service organisation is at capacity, it would not accept a special order for service.

Question 41

Opportunity costs for insourcing include the contribution margin foregone from using the capacity for a new product.

Question 42

The number of customers willing to purchase the product is an example of a capacity constraint.

Question 43

When there are no capacity constraints managers should always emphasise products with the highest contribution margin per unit.

Question 44

Potential cost savings are not relevant in make or buy decisions.

Question 45

Constraints are limits on capacity, materials or labour.

Question 46

Existing fixed costs that can be avoided through outsourcing are relevant to the decision making process.

Question 47

Outsourcing refers to the practice of finding outside vendors to supply products and services.

Question 48

Rapid growth may require a company to outsource certain products or services.

Question 49

Product quality should be considered in make or buy decisions.

Question 50

The number of babysitters available could be a constraint for a nanny service.

Question 51

In multi-product firms, managers need to consider the effect on demand for other products when they make a keep or drop decision about one product.

Question 52

Emphasising products with higher contribution margins assumes that fixed costs are unaffected by product mix.

Question 53

The general rule for make or buy decisions is to choose the option with the lowest relevant cost.

Question 54

For manufacturers make or buy decisions are also known as activity sourcing.

Question 55

In multi-product firms the variable costs of other product are relevant for keep or drop decisions.

Question 56

Managers may choose to outsource activities or products unrelated to their core organisational competencies.

Question 57

A shortage of raw material to manufacture a product would be a capacity constraint.

Question 58

The general rule for choosing the product mix under constraints is to emphasise products with the highest contribution margin per unit of the constrained resource.

Question 59

One way to deal with capacity constraints is to incur additional costs to relax the constraint.

Question 60

Managers should consider potential benefits from using released capacity for other purposes when making keep or drop decisions.

Question 61

Access to timely information is not important in manufacturing firms because their infrastructure is fixed.

Question 62

Decisions which have a short time horizon typically have less uncertainties than decision that have a longer impact.

Question 63

The general rule for relaxing a short term constraint for direct materials is that managers would be willing to pay what they are already paying as well as some or all of the contribution margin per unit of the constrained resource.

Question 64

An important uncertainty to be considered in regards to outsourcing decisions is whether the vendor or supplier is reliable.

Question 65

By-products have lower sales values compared to other joint products.

Question 66

The timeliness of information can affect decision quality in non-routine operating decisions.

Question 67

Relationships with resource suppliers should be analysed in constrained resource decisions.

Question 68

A process that restricts overall capacity is known as a bottle limit.

Question 69

When a product emerges as a result of making another product these are called joint products.

Question 70

Joint costs are common to all of the joint products.

Question 71

Joint products fall into two categories; by-products and split products.

Question 72

Decision maker bias means that decision makers should rely solely on quantitative data as there is less uncertainty associated with it.

Question 73

Uncertainties about future revenues and costs affect non-routine operating decisions.

Question 74

Sensitivity analysis can be used to determine how quantitative results would change due to changes in the inputs.

Question 75

The general rule for relaxing capacity constraints assumes that sales of one product do not affect sales of another product.

Question 76

Qualitative factors can be disregarded for decisions relating to relaxing constraints.

Question 77

Managers should prioritise qualitative factors over strategic goals.

Question 78

Sometimes qualitative factors are more important that maximising short term profitability.

Question 79

New fixed costs incurred to relax a constraint are irrelevant.

Question 80

Sensitivity analysis can be used to manipulate the degree of risk in various options.