Question 1

In a sell or process further decision, which of the following costs is relevant? I. A variable production cost incurred after split-off.
II) A fixed production cost incurred prior to split-off.
A)Only I
B)Only II
C)Both I and II
D)Neither I nor II

Accepted Answer

In a sell or process further decision, only the variable production cost incurred after split-off is relevant because it represents the additional cost that will be incurred if the product is processed further. The fixed production cost incurred prior to split-off is not relevant because it represents a sunk cost that has already been incurred and will not change regardless of the decision to sell or process further.

Question 2

In a factory operating at capacity, not every machine and person should be working at the maximum possible rate.

Accepted Answer

Operating at maximum possible rate can lead to inefficiencies, breakdowns, and reduce the overall effectiveness and productivity of the factory. It is important to find the optimal rate at which each machine and person can work efficiently without risking quality or burnout.

Question 3

When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on:
A)selling price per unit
B)contribution margin per unit
C)contribution margin per unit of the constraining resource
D)unit sales volume

Accepted Answer

The best ranking criteria for a multi-product factory operating at full capacity is the contribution margin per unit of the constraining resource. This helps to ensure that the products with the highest contribution margin per unit of the limited resource are given priority, maximizing the factory's profitability. Option A (selling price per unit) does not take into account the production costs and profitability of the product, while option B (contribution margin per unit) does not consider the limited resource. Option D (unit sales volume) does not account for profitability and ignores the factory's full capacity.

Question 4

Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision?
A)absorption costing unit product costs
B)variable costs
C)incremental costs
D)differential costs

Accepted Answer

Absorption costing unit product costs are not relevant in making the decision for a one-time-only special order as they include fixed manufacturing overhead costs that have already been incurred and cannot be changed in the short term. Variable costs, incremental costs, and differential costs are all relevant to determine the profitability of the special order, as they directly affect the short-term decision-making process.

Question 5

Opportunity costs are:
A)not used for decision making.
B)the same as variable costs.
C)the same as historical costs.
D)relevant in decision making.

Accepted Answer

Opportunity costs are relevant in decision making as they represent the value of the next best alternative foregone. It helps in weighing the options and choosing the most optimal one. Therefore, option D is the correct choice.

Question 6

Consider the following statements: I. A division's net operating income, after deducting both traceable and allocated common fixed costs, is negative.
II) The division's avoidable fixed costs exceed its contribution margin.
III) The division's traceable fixed costs plus its allocated common corporate costs exceed its contribution margin.
Which of the above statements is a valid reason for eliminating the division?
A)Only I
B)Only II
C)Only III
D)Only I and II

Accepted Answer

Statement II is a valid reason for eliminating the division as it indicates that the division's contribution towards covering its avoidable fixed costs is not sufficient, leading to a negative net operating income. Statement I may also be a reason for eliminating the division, but it is not necessarily always the case since a negative net operating income could be due to other factors as well, such as uncontrollable external factors. Statement III does not provide a clear reason for eliminating the division.

Question 7

The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint products.

Accepted Answer

Joint costs are incurred before the split-off point in a process involving joint products, not after.

Question 8

Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it.

Accepted Answer

Defective units can cause delays and disruptions in the bottleneck operation, reducing overall productivity. Therefore, it is more efficient to detect and scrap or rework them before they reach the bottleneck operation. This ensures that only quality products are processed at the bottleneck and maximizes throughput.

Question 9

Joint products are products that are sold to customers as a set or as part of a group of products.

Accepted Answer

Joint products are products that are produced simultaneously from a common process or raw material, not necessarily sold as a set.

Question 10

Two or more products produced from a common input are called:
A)common costs.
B)joint products.
C)joint costs.
D)sunk costs.

Accepted Answer

Joint products are two or more products derived from a common input, and they have significant sales values compared to the input cost. Joint costs are the costs incurred in producing joint products until the split-off point. Common costs are costs that cannot be traced to any particular product or service, while sunk costs are costs that have already been incurred and cannot be recovered.

Question 11

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Accepted Answer

Discarding defective units at final inspection may increase productivity in the short term, but it is not a sustainable solution. It is more effective to focus on preventing defects in the first place through process improvements and quality control measures. This will not only reduce waste and improve efficiency but also improve customer satisfaction and long-term profitability.

Question 12

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college?
A)the cost of the textbooks
B)the cost of the cola that Hal will consume during class
C)Hal's lost wages at Burger Haven
D)the cost of commuting to the Burger Haven job

Accepted Answer

The opportunity cost of attending college would be the income that Hal would have earned from working at Burger Haven if he had not quit to attend college. This income is lost and cannot be recovered. The other options, such as the cost of textbooks, cola, or commuting, are expenses that Hal will incur regardless of whether he attends college or not. They are not opportunity costs.

Question 13

Joint costs are relevant in the decision to sell a product at the split-off point or to process the product further.

Accepted Answer

Joint costs are sunk costs and do not affect the decision to sell at the split-off point or process further; only incremental costs and revenues are relevant.

Question 14

Moyer Corporation is a specialty component manufacturer with idle capacity. Management would like to use its extra capacity to generate additional profits. A potential customer has offered to buy 2,300 units of component TIB. Each unit of TIB requires 9 units of material F58 and 7 units of material D66. Data concerning these two materials follow:  Material F58 is in use in many of the company's products and is routinely replenished. Material D66 is no longer used by the company in any of its normal products and existing stocks would not be replenished once they are used up. What would be the relevant cost of the materials, in total, for purposes of determining a minimum acceptable price for the order for product TIB?
A)$189,290
B)$174,215
C)$168,533
D)$200,905

Accepted Answer

The relevant cost of materials for this order would include only the cost of acquiring additional units of material F58 since it is routinely replenished. The cost of using material D66 is irrelevant since the company will not replenish it once it is used up.

Total units of material F58 required for the order: 9 x 2,300 = 20,700 units
Total cost of material F58: 20,700 x $7.95 = $164,265

Therefore, the total relevant cost of materials for this order is $164,265. Adding any additional costs (such as labor or overhead) to this amount would give the minimum acceptable price for the order.

The closest option to this amount is option B, $174,215.

Question 15

Eliminating nonproductive processing time is particularly important in work stations that do not contain bottlenecks.

Accepted Answer

The answer of Eliminating nonproductive processing time is particularly important...

Question 16

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products are sent to separate customers.

Accepted Answer

The split-off point is the point in the manufacturing process where the joint products become separate and identifiable. At this point, the joint products are not yet sent to separate customers.

Question 17

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource.

Accepted Answer

Total contribution margin is maximized by emphasizing products with the highest contribution margin per unit of the constrained resource, not the lowest.

Question 18

Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck)?
A)Reduce the number of defective units produced at the bottleneck.
B)Pay overtime to workers assigned to the bottleneck.
C)Pay overtime to workers assigned to work stations located after the bottleneck in the production process.
D)Subcontract work that would otherwise require use of the bottleneck.

Accepted Answer

Paying overtime to workers assigned to work stations located after the bottleneck in the production process will not effectively address the production constraint as it does not alleviate the bottleneck itself. The other options address the bottleneck directly, either by reducing defective units, utilizing overtime at the bottleneck, or outsourcing work that would otherwise require the use of the bottleneck.

Question 19

In a make-or-buy decision, relevant costs include:
A)unavoidable fixed costs
B)avoidable fixed costs
C)fixed factory overhead costs applied to products
D)fixed selling and administrative expenses

Accepted Answer

Relevant costs in a make-or-buy decision should only include avoidable costs, which are costs that can be eliminated if the company chooses a certain alternative. Avoidable fixed costs, such as salaries of employees who would no longer be needed if the company decides to outsource a job, would be considered relevant in this decision. Unavoidable fixed costs, fixed factory overhead costs applied to products, and fixed selling and administrative expenses would not be relevant in a make-or-buy decision.

Question 20

Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept or reject a special offer for a company's product.

Accepted Answer

Depreciation expense on existing factory equipment is a sunk cost and should not be considered in a decision of whether to accept or reject a special offer for a company's product. The decision should be based on incremental costs and revenues that are directly affected by the special offer.

Quiz 9: Differential Analysis: the Key to Decision Making

In a sell or process further decision, which of the following costs is relevant? I. A variable production cost incurred after split-off. II) A fixed production cost incurred prior to split-off.

In a factory operating at capacity, not every machine and person should be working at the maximum possible rate.

When a multi-product factory operates at full capacity, decisions must be made about which products to emphasize. In making such decisions, products should be ranked based on:

Management is considering a one-time-only special order. There is sufficient idle capacity to fill the order without affecting any normal sales. Which one of the following is NOT relevant in making the decision?

Opportunity costs are:

The term joint cost is used to describe the costs incurred after the split-off point in a process involving joint products.

Defective units should be detected and scrapped or reworked before the bottleneck operation rather than after it.

Joint products are products that are sold to customers as a set or as part of a group of products.

Two or more products produced from a common input are called:

One way to increase the effective utilization of a bottleneck is to put less emphasis on preventing defects and simply discard defective units at final inspection before sending them to customers.

Hal currently works as the fry guy at Burger Haven but is thinking of quitting his job to attend college full time next semester. Which of the following would be considered an opportunity cost of attending college?

Joint costs are relevant in the decision to sell a product at the split-off point or to process the product further.

Eliminating nonproductive processing time is particularly important in work stations that do not contain bottlenecks.

The split-off point in a process that produces joint products is the point in the manufacturing process at which the joint products are sent to separate customers.

When a company has a production constraint, total contribution margin will be maximized by emphasizing the products with the lowest contribution margin per unit of the constrained resource.

Which of the following is not an effective way of dealing with a production constraint (i.e., bottleneck) ?

In a make-or-buy decision, relevant costs include:

Depreciation expense on existing factory equipment is usually irrelevant in a decision of whether to accept or reject a special offer for a company's product.