Question 1

Additional power for operating machines,extra supplies,and added cleanup costs are examples of incremental overhead costs.

Accepted Answer

Incremental overhead costs refer to additional costs incurred due to increased production or usage of resources, such as power, supplies, and cleanup. Therefore, the statement is true.

Question 2

Costs already incurred in manufacturing the units of a product that do not meet quality standards are relevant costs in a scrap or rework decision.

Accepted Answer

Costs already incurred are considered sunk costs and are not relevant to future decisions such as whether to scrap or rework a product.

Question 3

Markup percentage equals total costs divided by desired profit.

Accepted Answer

Markup percentage equals (desired profit/total costs) multiplied by 100.

Question 4

Contribution margin lost from a decline in sales is an opportunity cost.

Accepted Answer

Contribution margin is the difference between total sales revenue and total variable costs. When sales decline, the contribution margin also decreases, resulting in a loss of potential profits. This loss of potential profits is considered an opportunity cost, as it represents the forgone opportunity to earn additional revenue through increased sales.

Question 5

Sales mix refers to the combination of products sold by a company.

Accepted Answer

Sales mix refers to the combination of products sold by a company, including the quantity and proportion of each product sold. This mix can have a significant impact on a company's overall profitability and revenue.

Question 6

If accepting additional business would cause existing sales to decline,the offer should always be declined.

Accepted Answer

This is a false statement. Accepting additional business can sometimes lead to a decrease in existing sales temporarily, but it can also lead to long-term growth and increased revenue. Each situation should be carefully evaluated to weigh the potential risks and benefits.

Question 7

To maximize profit when a constrained resource exists,management should produce the sales mix that has the highest contribution margin per unit of scarce resource.

Accepted Answer

This statement is true. By producing and selling the products that generate the highest contribution margin per unit of the constrained resource, management can maximize profit within the limits of the resource constraint.

Question 8

Assuming a company has excess operating capacity,a special order should be accepted if its incremental revenues exceed the incremental costs,and the special order does not negatively impact existing business.

Accepted Answer

If the incremental revenues from a special order exceed the incremental costs and the order does not negatively impact the existing business, then accepting the order can help the company utilize its excess capacity and generate additional profits. However, if the special order negatively impacts the company's existing business, such as by cannibalizing existing customer orders, then it may not be worth accepting even if the incremental revenues exceed the incremental costs.

Question 9

A cost that requires a future outlay of cash,and is relevant for current and future decision making,is a(n):

Accepted Answer

Out-of-pocket costs are future cash outlays that are relevant for current and future decision making. Sunk costs are past costs that are not relevant for decision making, opportunity costs are the value of the next best alternative forgone, operating costs are ongoing expenses related to the operation of a business or project, and uncontrollable costs cannot be influenced or changed by management decisions.

Question 10

An opportunity cost:

Accepted Answer

Opportunity cost is the potential benefit that is lost by choosing one alternative over another. It is an important factor to consider in decision making as it helps to weigh the benefits and drawbacks of each alternative. Option A is incorrect as opportunity cost is not an unavoidable cost, but rather a potential benefit that is lost. Option B is incorrect as it refers to an actual cost, not an opportunity cost. Option C is incorrect as opportunity cost is not related to past managerial decisions. Option E is incorrect as opportunity cost is relevant in decision making as it helps to evaluate the potential benefits and drawbacks of each alternative.

Question 11

A company's best sales mix is determined using contribution margin per unit of scarce resource.

Accepted Answer

To maximize profits, a company must use its scarce resources (such as labor, raw materials, production capacity) in the most effective way. One way to do this is by analyzing the contribution margin (sales price minus variable costs) per unit of scarce resource required for each product in the company's portfolio. This helps the company identify the products with the highest profit potential and allocate its resources accordingly.

Question 12

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as a(n):

Accepted Answer

The potential benefits lost by taking a specific action when two or more alternative choices are available is known as an opportunity cost. It is important to consider opportunity cost when making decisions to ensure that we are making the most advantageous choice. It helps in evaluating the potential benefits of various options available and choosing the best one. Therefore, the best choice is to consider the opportunity cost while making any decision.

Question 13

The total cost method determines a selling price equal to a product's total costs plus a desired profit on the product.

Accepted Answer

The statement accurately describes the total cost method of determining a selling price.

Question 14

The decision to accept additional business should be based on a comparison of the incremental costs of the added production with the additional revenues to be received.

Accepted Answer

This statement is true. Businesses should always consider the costs and benefits of accepting additional business before making a decision. Incremental costs include any additional costs associated with producing more products or providing more services, such as hiring more staff or purchasing more supplies. Additional revenues are any income generated from the added business, such as sales or service fees. By comparing the incremental costs with the additional revenues, businesses can determine whether it is profitable to accept the additional business or not.

Question 15

If the cost to buy a part is less than the direct material,direct labor,and incremental overhead cost of making the part,the company should buy the part.

Accepted Answer

If the cost to buy a part is less than the direct material, direct labor, and incremental overhead cost of making the part, it is more cost-effective for the company to purchase the part rather than making it. This decision is based on the economic concept of opportunity cost, where choosing one option (making the part) means sacrificing the benefits of the other option (buying the part). Therefore, it is more beneficial for the company to choose the cheaper alternative if it satisfies the same requirements and specifications.

Question 16

Additional costs incurred if a company pursues a certain course of action are sunk costs.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered regardless of which course of action is taken. They are not additional costs that will be incurred in the future.

Question 17

Employee morale,timeliness of delivery,and the reactions of customers are examples of nonfinancial factors that should be considered when making a managerial decision.

Accepted Answer

Nonfinancial factors such as employee morale, timeliness of delivery, and customer reactions can have a significant impact on the success of a managerial decision and should be taken into consideration.

Question 18

Incremental costs are also called out-of-pocket costs.

Accepted Answer

Incremental costs refer to the additional costs incurred from making a decision, while out-of-pocket costs are direct payments made, which can include but are not limited to incremental costs.

Question 19

A special order of goods or services should be accepted when the incremental revenue exceeds the normal revenue.

Accepted Answer

A special order should be accepted when the incremental revenue exceeds the incremental costs, not necessarily the normal revenue.

Question 20

The decision to sell or process a product further is analyzed by identifying the incremental costs and benefits of further processing.

Accepted Answer

This statement is true. The decision to sell or process a product further typically involves analyzing the incremental costs and benefits of processing that product further, such as the additional costs of processing and the potential increase in revenue or profitability from selling a higher-value product.

Quiz 23: Relevant Costing for Managerial Decisions