Deck 2: Identifying and Estimating Costs and Benefits

Question 1

If only a portion of the cost or revenue pertains to a particular decision option, then it is referred to as a traceable cost or traceable revenue.

Answer 1

False

Question 2

Because they seek to maximize profit, commercial organizations measure the value of a decision option as the change in profit relative to change in revenue.

Answer 2

False

Question 3

In the short-run, organizations often are not able to substantially alter their abilities to deliver products or services, making levels of capacity resources non-controllable.

Answer 3

True

Question 4

The cost hierarchy divides costs into unit-, batch-, product-, and facility-level costs.

Question 5

The benefits and costs that arise from the decision-maker's choice of a particular option are controllable.

Question 6

The principle of relevance helps decision makers compare options by focusing on those costs and benefits that matter, and ignoring items that are common and irrelevant.

Question 7

Changing our minds about our choice for a long-term decision can be difficult and costly.

Question 8

The principle of variability means that, when estimating costs and benefits, the first step is to estimate the change in activity.

Question 9

Step costs change in proportion to the volume of activity.

Question 10

The principles of timeliness and traceability underlie the estimation of costs and benefits.

Question 11

Sunk costs influence value because they have already occurred.

Question 12

Few short-term decisions are recurring.

Question 13

The core idea underlying estimation is that costs and benefits are the result of performing activities.

Question 14

Many decisions are difficult to classify as they contain elements of both the short- and long-term.

Question 15

A fixed cost does not change as the volume of activity changes.

Question 16

Given a choice of using relevance or controllability to make effective decisions, when one wants to identify the best choice quickly and efficiently, relevance is the operative principle.

Question 17

A decision maker's control over costs and benefits decreases as the time horizon increases.

Question 18

Classifying all costs as fixed or variable with respect to sales volume is practical and frequently used, but the assumption often results in imprecise measurements.

Question 19

Step costs relate only to variable costs.

Question 20

Costs that do not vary at the unit level, the batch level, or the product level are administrative costs.

Question 21

Variable costs per unit are as follows:
Raw materials $2.15
Direct labor $1.45
Fixed costs are $5,000 per month
If the company produces 4,000 units in the month of March their total costs will be:

A)$14,400
B)$19,400
C)$13,600
D)$18,000

Question 22

Which of the following statements relating to relevance and controllability is not correct?

A)Using the concept of relevance does not reduce the number of costs and benefits to consider.
B)If the status quo is a feasible option, then all controllable costs and benefits are relevant.
C)When using the principle of controllability to identify the incremental costs and benefits relative to the status quo, calculate the value of each option, and choose the one with the lowest value.
D)Both A and C are incorrect.
E)A, B, and C are incorrect.

Question 23

When making decisions, a general rule would be:

A)Fixed costs are always relevant.
B)Variable (unit-level) costs are always irrelevant.
C)Future costs and revenues are always relevant.
D)Future costs and revenues which differ are always relevant.

Question 24

The Rich Company leases its copier on an annual basis.The lease fee is $1,600 per year plus $.01 per copy for any copies made over 750,000.If the company made 800,000 copies in 2008, its total cost was:

A)$1,600
B)$2,100
C)$2,400
D)$1,650

Question 25

Which of the following is the best example of a long-term capacity cost for a trucking company?

A)Performing tune-ups on older trucks.
B)Installing a GPS unit in each truck to monitor efficient routes and fuel efficiency in order to serve more customers on a daily basis.
C)Changing the oil annually in each delivery truck.
D)Replacing torn seats in several of the trucks in which truckers have complained

Question 26

Traceability is:

A)The degree to which we can directly relate a cost or benefit to a specific option.
B)How activities influence costs and benefits.
C)The result of performing activities.
D)The difference across decision options.
E)None of the above.

Question 27

Assume you are the owner of a video-rental store.Which of the following would be classified as a long-term decision?

A)Purchase of children's video inventory.
B)Purchase of cleaning supplies.
C)Deciding whether to purchase a new building.
D)Deciding whether to hire a new hourly employee for the summer.
E)None of the above is a long-term decision.

Question 28

Variability deals with:

A)The degree to which we can directly relate a cost or benefit to a specific option.
B)How activities influence costs and benefits.
C)The result of performing activities.
D)The difference across decision options.
E)None of the above.

Question 29

Which of the following is a not a correct statement?

A)A decision maker's control over costs and benefits decrease as the time horizon increases.
B)A decision maker's control over costs increases as the time horizon increases.
C)A decision maker's control over benefits increases as the time horizon increases.
D)Both B and C are incorrect statements.

Question 30

Steve Johnson has decided to lease a vehicle as opposed to purchasing it.The lease agreement calls for a monthly payment of $400.Any mile driven above 1,000 per month will cost an additional $.10 per mile.If Steve drives 1,240 miles in the month of January his total cost will be:

A)$400
B)$640
C)$524
D)$424

Question 31

Steve Johnson has decided to lease a vehicle as opposed to purchasing it.The lease agreement calls for a monthly payment of $400.Any mile driven above 1,000 per month will cost an additional $.10 per mile.Steve's lease cost in January can be considered to be:

A)Fixed.
B)Variable.
C)Mixed.
D)Both B and C

Question 32

A decision maker's control over costs and benefits:

A)Decreases as the time horizon increases.
B)Increases as the time horizon increases.
C)Does not change regardless of the time horizon.
D)Changes in proportion to the volume capacity.
E)None of the above.

Question 33

Which one of the following is the best example of a long-term decision for management of a manufacturing company?

A)Increasing the amount of caffeine in the company's soft drink products.
B)Eliminating excessive use of company supplies.
C)Building an assembly line for its energy drinks.
D)Removing manufacturing byproducts that are deemed hazardous for storage.

Question 34

Jason is going to play golf this afternoon and has to choose between two different golf courses.The greens fees to play each are both $18, the cart fees at each course is $9.One course, however, is located 20 miles further than the other.Therefore it would cost approximately an additional $4 in gas to play the course that is further away.Relevant costs total:

A)$18
B)$27
C)$9
D)$4

Question 35

The owner of Mom & Pop's Hardware Store purchased a knife sharpener last year in order to allow the store to offer services in sharpening all types of blades.The cost of the equipment was $5,200 but Pop now feels that the store needs to generate additional revenue of $200 per month in order to have made the purchase worthwhile.With regard to making the decision of whether to continue to offer the service, the original cost of the sharpener can be considered:

A)Controllable.
B)Mixed.
C)Sunk.
D)Relevant.

Question 36

It is important to keep the time horizon in mind when making decisions because:

A)Short term decisions are generally more costly than long term decisions.
B)We always want to identify choices quickly.
C)When making future decisions, costs incurred in the past must be considered.
D)The horizon affects whether a cost or benefit is controllable for the decision.
E)All of the above are important.

Question 37

A sunk cost is:

A)A cost that can be directly traced to a decision option.
B)A past expenditure that cannot be changed.
C)A cost that does not change as the volume of activity changes.
D)A controllable cost.
E)None of the above.

Question 38

Which of the following best represents a controllable cost for a manufacturing plant?

A)Reducing the number of pages in a product brochure.
B)Increasing the price of two of the best selling products.
C)Billing customers for delivery fuel surcharges.
D)Charging customers for additional production runs of a special ordered product.

Question 39

Relevant benefits are:

A)The controllable benefits that differ across decision options.
B)Past expenditures that cannot be changed.
C)Benefits that do not change as the volume of activity changes.
D)Always created by variable costs.
E)None of the above.

Question 40

The Criders Company has 12,000 units of obsolete inventory.The units originally cost $6,000.The company can either sell them for scrap at $.20 per unit or they can invest $2,000 to be able to sell them at a price of $.60 per unit.With regard to this decision, relevant costs or benefits include:

A)$6,000 only.
B)$2,000 and $.20 per unit only.
C)$.20 per unit, $.60 per unit, and $2,000.
D)$2,000 and $6,000 only.

Question 41

Suppose fixed costs are $500, variable cost is $5 per unit, and step costs are $50 for every 20 unit produced.What is the total cost of producing 25 units?

A)$675
B)$688
C)$725
D)$800
E)$625

Question 42

If a production facility increases its production by 1,500 units, its:

A)Variable (unit-level) cost per unit will increase.
B)Fixed cost per unit will increase.
C)Total fixed costs will decrease.
D)Fixed cost per unit will decrease.

Question 43

During the month of September the Gaffney Company, which operates one factory location and one administrative location, reported the following costs: $\begin{array}{ll}\text { Repair costs for the factory's air conditioning system } & \$ 3,500 \\\text { Property taxes on its administrative office building } & \$ 900 \\\text { Rent on factory building } & \$ 1,400 \\\text { Bonuses paid to a factory manager } & \$ 500\end{array}$ Facility costs total:

A)$5,300
B)$5,400
C)$2,800
D)$4,900

Question 44

A direct cost can be:

A)Only fixed.
B)Only variable (unit-level).
C)Either fixed or variable (unit-level).
D)Neither fixed nor variable (unit-level).

Question 45

The HomeAmour Company operates their production and administrative activities from a single facility.Which of the following would be an example of a facility-level cost?

A)Salary of the Chief Operating Officer.
B)Raw materials used to produce units.
C)Depreciation on the equipment used in the factory.
D)Freight paid on finished units shipped to customers.

Question 46

During the month of March the Richards Company, which operates one factory location and one administrative location, reported the following costs: $$\begin{array} { l l } \text { Postage on bills sent to customers } & \$ 100 \\\text { Rent on its factory building } & \$ 3,800 \\\text { Depreciation used on administrative office computers } & \$ 600 \\\text { Bonuses paid to the Vice-President of Sales } & \$ 1,500\end{array}$$ Indirect costs total:

A)$700
B)$3,800
C)$2,200
D)$2,100

Question 47

Which of the following statements describes how step costs relate to fixed and variable costs?

A)A step cost behaves more like a variable cost as the step size decreases.
B)A step cost behaves more like a fixed cost as the step size decreases.
C)A step cost behaves like a variable cost, but not like a fixed cost.
D)A step cost behaves like a fixed cost, but not like a variable cost.

Question 48

In June, Ace Manufacturing Plant produced 100 units of propane canisters for sale.The total variable costs were $5,000 and the fixed costs for the plant amounted to $3,000.How much is the unit variable cost for canisters if 120 canisters are produced?

A)$50.00
B)$66.67
C)$80.00
D)$41.67

Question 49

Considering only controllable costs and benefits in an analysis:

A)Always reduces the number of costs and benefits needing to be measured.
B)Never reduces the number of costs and benefits needing to be measured.
C)Reduces only the number of costs to be measured if they are controllable.
D)Will not reduce the number of costs and benefits to be measured if the status quo is an available option.

Question 50

Variable (unit-level) costs per unit:

A)Increase as production increases.
B)Decrease as production decreases.
C)Stay the same at any level of production.
D)Increase as production decreases.

Question 51

Organizations frequently refer to indirect costs as:

A)Volume costs.
B)Variable costs.
C)Common costs.
D)Special costs.
E)Fixed costs.

Question 52

A cost that is proportional to the volume of activity is a:

A)Mixed cost.
B)Fixed cost.
C)Variable cost.
D)Volume cost.
E)Break-even cost.

Question 53

Factory rent is an example of:

A)Product-level cost.
B)Facility-level cost.
C)Unit-level cost.
D)Batch-level cost.
E)None of the above.

Question 54

Advertising and research and development costs are examples of:

A)Product-level cost.
B)Facility-level cost.
C)Unit-level cost.
D)Batch-level cost.
E)None of the above.

Question 55

Which of the following will least likely be a variable cost for Pizza Hut?

A)Dough, sauce, and cheese.
B)Boxes for 'to go' pizza orders.
C)Cooking ovens.
D)Cashiers' hourly wages

Question 56

Production planning required to prepare the production process for the next product is an example of:

A)Product-level cost.
B)Facility-level cost.
C)Unit-level cost.
D)Batch-level cost.
E)None of the above.

Question 57

Which of the following items is not an example of a direct cost in the production of a refrigerator?

A)Raw materials.
B)The cost of a machine used only for manufacturing this line of refrigerators.
C)Salary of factory assembly line workers.
D)Maintaining the sales office.
E)All of the above could be direct costs.

Question 58

During May, Mayer Company's total fixed costs were $5,000 and variable costs were $7,000 when 500 units were produced.How much is total cost for June if 600 units are produced?

A)$13,400
B)$12,000
C)$7,000
D)$14,400

Question 59

Which of the following is the best example of product-level costs?

A)Property taxes of a factory.
B)Cost of plastic for bottled water.
C)Research and development costs.
D)Setup of machine drivers

Question 60

Which of the following is the best example of a variable cost?

A)Monthly loan payment on a plant generator.
B)Labor cost for plant employees.
C)Lease payment for the office copy machine.
D)General Manager's salary.

Question 61

Which one of the following is the best example of a step cost for Ace Manufacturing?

A)Paying a higher factory utility bill for the month of June.
B)Cutting back health care coverage for employees.
C)Terminating the manufacturing quality control employees.
D)Opening a new assembly line for one of the company's most popular products as a result of its original assembly line continually operating at capacity.